## Facts

- John M. Carson (a dentist) and Jean Carson created an inter vivos trust in 1981 and jointly funded it with property used in John’s dental practice.
- Jean served as sole trustee; the couple’s two sons were the income beneficiaries.
- The trust required that all net income be distributed at least annually to the beneficiaries, but did not require equal distributions between them.
- The trust property was leased to a corporation connected to John’s dental practice, generating rental income received by the trust.
- Jean, as trustee, made annual income distributions that were in fact unequal in multiple years.
- The trust provided for reversion of trust property to the grantors after 10 years and one month.
- The Carsons filed fiduciary returns reporting the trust income and did not include that income on their joint individual returns.
- The IRS determined income tax deficiencies for 1982–1984, asserting the trust income was taxable to the Carsons under the grantor-trust rules.

## Issues

1. Whether the trust was a grantor trust under I.R.C. § 674(a) because the grantor-trustee had discretion to allocate distributable income unequally among the beneficiaries.
2. Whether I.R.C. § 672(e) attributed the grantor-trustee spouse’s discretionary power to the other spouse, causing both spouses to be treated as owners of the trust income.
3. Whether the trust’s reversion provision (10 years and one month) prevented grantor-trust treatment for the years at issue.

## Decision

- The Tax Court sustained the Commissioner’s deficiency determinations for 1982–1984.
- The court held the Carsons were treated as owners of the trust income under I.R.C. § 674(a).
- The court concluded that the trustee’s discretionary authority to vary distributions between the sons was a power to control beneficial enjoyment of trust income.
- Under I.R.C. § 672(e), Jean’s power was attributed to John, so both spouses were treated as owners of the trust income for federal income tax purposes.
- The reversion timing did not prevent grantor-trust treatment because § 674(a) independently applied.

## Legal Principles

- Under I.R.C. § 674(a), a grantor is treated as the owner of a trust if the grantor (or a nonadverse party) holds a power to control beneficial enjoyment of trust income or corpus, unless a statutory exception applies.
- A trustee power to “sprinkle” income—i.e., to decide the proportions in which distributable income is allocated among beneficiaries—constitutes a power to control beneficial enjoyment under § 674(a).
- When a trust instrument permits unequal allocations among beneficiaries, such unequal distributions reflect a legally effective discretionary power rather than mere misadministration.
- I.R.C. § 672(e) attributes certain powers held by a grantor’s spouse to the grantor, potentially causing both spouses to be treated as owners when one spouse holds the dispositive power.
- A reversion provision designed to avoid § 673 does not preclude grantor-trust status where another grantor-trust provision (such as § 674(a)) applies.

## Conclusion

The Tax Court treated the trust as a grantor trust because the grantor-trustee’s discretion to allocate distributable income unequally between the beneficiaries was a power to control beneficial enjoyment under § 674(a), and that power was attributed to the other spouse under § 672(e), making the trust income taxable to the Carsons for 1982–1984.


Carson v. Commissioner, 92 T.C. 1134 (1989)