## Facts

- Larry and June Benson owned and operated an appliance business conducted through a wholly owned corporation that leased business real estate.
- Larry created a short-term irrevocable trust and, with June, transferred the business real estate (land, building, improvements) to the trust; June served as trustee.
- The trust required annual payment of net income to the Bensons’ four children; on termination, undistributed income went to the children and the corpus reverted to Larry.
- The trustee had broad administrative powers, including the power to lend trust property and to borrow using trust property as security.
- June, as trustee, made four unsecured demand loans to Larry totaling about $50,000, at 8% interest; Larry made no payments until late 1977, when he repaid in full.
- Until November 1, 1974, essentially all net trust receipts (largely rental income) were loaned to Larry, and the children received no cash distributions during the years at issue.
- The trust reported no taxable income for 1973–1975 by claiming distribution deductions as if income had been distributed to the children.
- The Commissioner determined that Larry was taxable on trust income under the grantor-trust rules, primarily I.R.C. § 675(3), due to borrowing of trust income without adequate security and not on a bona fide basis.
- The Bensons conceded § 675(3) applied but disputed how to measure the “portion” of the trust treated as owned by Larry; the Commissioner argued for all (or a larger share) of the trust.

## Issues

1. Whether Larry’s unsecured borrowing of trust income caused him to be treated as the owner of any portion of the trust under I.R.C. § 675(3).
2. If so, how to determine the “portion” of the trust treated as owned by Larry for income tax purposes.

## Decision

- The Tax Court held that Larry’s unsecured demand borrowing of trust income fell within I.R.C. § 675(3), causing him to be treated as the owner of a portion of the trust while the loans were outstanding.
- The court rejected treating Larry as the owner of the entire trust solely because borrowing occurred.
- The court also rejected the taxpayers’ proposed narrow limitation that failed to reflect Larry’s effective control over trust income.
- The court concluded the owned portion corresponds to the part of trust income (and related trust property slice) actually subject to Larry’s borrowing power as exercised, requiring recomputation of deficiencies on that basis.

## Legal Principles

- Under I.R.C. § 675(3), a person is treated as the owner of any portion of a trust if the person directly or indirectly borrows trust corpus or income and the loan is not adequately secured or not made on a bona fide basis.
- “Portion” in the grantor-trust rules permits fractional ownership attribution and is determined by the extent of the prohibited power or benefit, rather than automatically encompassing the entire trust.
- For § 675(3), ownership attribution should track the scope of control actually exercised through borrowing, particularly where trust income is effectively placed at the borrower’s disposal.

## Conclusion

The Tax Court held that unsecured, effectively non-bona-fide borrowing of trust income triggered grantor-trust treatment under § 675(3), but only for the portion of the trust corresponding to the income Larry actually drew from the trust through the loans, not the entire trust.


Benson v. Commissioner, 76 T.C. 1040 (1981)