Rev. Rul. 66-159

Advice has been requested whether the gain realized from the sale by a trust of residential property, used by the grantor and his family as their principal residence, will be taxable to either the trust or grantor, in view of the provisions of section 1034 of the Internal Revenue Code of 1954.

In 1955, an individual created a trust under the terms of which he, as grantor, reserved the right to receive 3 x dollars annually from the income or principal of the trust property. The trust agreement provides that in addition to the payment of 3 x dollars annually to the grantor, the trustee may from time to time in its discretion pay to or apply to the use of grantor such additional part of the next income and/or principal of the trust property as it deems necessary, advisable or expedient for the care, comfort or support of the grantor and his wife and issue or for the payment of any taxes which may be assessed against the grantor, grantor's wife and their issue.

During 1960, at the request of the grantor, the trustee purchased residential property, title to which was taken in the name of a nominee of the trustee. This property was then occupied by the grantor and his family until sold by the trust. The property has never been rented and the grantor has never paid rent to the trustee.

In 1965 the trustee sold the property at a price substantially in excess of its adjusted basis. Shortly thereafter the entire proceeds of the sale were reinvested in other property which the grantor and his family immediately occupied and continued to occupy, as their principal residence.

Section 671 of the Code provides the general rule that, in cases where the grantor or another person is regarded as the owner of any portion of a trust, there shall be included in computing his taxable income and credits those items of income, deductions, and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account in computing taxable income, or credits against the tax of an individual.

The conditions under which a grantor is regarded as owner of a portion of a trust are set forth in sections 673 through 677, inclusive, of the Code.

Under the general rule provided in section 676(a) of the Code, the grantor is treated as the owner of any portion of a trust where at any time the power to revest in the grantor title to such portion is exercisable by the grantor or a nonadverse party, or both.

In this case the grantor is treated as the owner of the entire trust under section 676(a) of the Code, inasmuch as the trustee (a nonadverse party) holds a power whereby it may, in its sole discretion, pay to or apply to the use of the grantor all of the principal of the trust.

Under section 1034 of the Code, gain is not recognized where the taxpayer sells property used as his principal residence, if, within a period beginning 1 year before the date of sale and ending one year after such date, the taxpayer purchases property at a price equal to or in excess of the selling price of the old property and uses it as his principal residence.

An item of income, deduction, or credit included in computing the taxable income and credits of a grantor of a trust under section 671 of the Code is treated, for Federal income tax purposes, as if it had been received or paid directly by the grantor. See section 1.671-2(c) of the Income Tax Regulations.

Accordingly, the sale of the old residence and the purchase of the new residence by the trust will be treated for Federal income tax purposes as if made by the grantor. Therefore, any gain realized will not be taxed to either the trust or the grantor, since the new residence was purchased at a cost equal to or in excess of the selling price of the old residence, and the new residence was used as the grantor's principal residence, within one year from the date of the sale.