## Facts

- A, a U.S. citizen, created and funded an irrevocable inter vivos trust for A’s descendants with an independent trustee (not related or subordinate to A under I.R.C. § 672(c)).
- A retained no powers or interests that would make the transfer incomplete for gift tax purposes or cause estate tax inclusion under I.R.C. §§ 2036 or 2038.
- A was treated as the owner of the trust for income tax purposes under the grantor trust rules (I.R.C. §§ 671–679), making A liable for income tax on items attributable to the trust.
- The ruling considered three variants regarding reimbursement of A’s income tax attributable to trust income:
  - No trust instrument or local-law provision allowing or requiring reimbursement.
  - The trustee has discretion to reimburse A, with no preexisting arrangement or understanding that reimbursement would occur.
  - The trust instrument or local law requires reimbursement of A.

## Issues

1. Whether a grantor’s payment of income tax attributable to grantor-trust income constitutes a taxable gift to the trust beneficiaries.
2. Whether a discretionary trustee power to reimburse the grantor for such taxes causes estate tax inclusion of trust assets under I.R.C. § 2036.
3. Whether a mandatory reimbursement obligation causes estate tax inclusion of trust assets under I.R.C. § 2036.

## Decision

- The grantor’s payment of income tax attributable to grantor-trust income is not a gift for federal gift tax purposes when the trust has no reimbursement provision.
- A discretionary power in an independent trustee to reimburse the grantor (absent any arrangement or understanding) does not, by itself, cause inclusion of the trust assets in the grantor’s gross estate under § 2036.
- A mandatory reimbursement provision (by instrument or local law) may cause inclusion of the trust assets in the grantor’s gross estate under § 2036.

## Legal Principles

- Payment of income tax imposed on the grantor under the grantor trust rules is a discharge of the grantor’s own legal obligation and is not a “transfer of property” for gift tax purposes.
- For § 2036(a)(1) purposes, the mere existence of a discretionary reimbursement power held by an independent trustee does not create a retained right in the grantor to trust property or income where the grantor lacks an enforceable right to reimbursement.
- A requirement that trust assets be used to satisfy or reimburse the grantor’s personal income tax liability can constitute a retained economic benefit—i.e., a retained right to have trust property applied to discharge the grantor’s obligation—supporting potential § 2036 inclusion.

## Conclusion

The ruling treats the grantor’s income-tax liability on grantor-trust income as personal to the grantor (no gift when paid), distinguishes discretionary reimbursement by an independent trustee as estate-tax neutral absent an enforceable grantor right, and warns that mandatory reimbursement can create a retained benefit that may pull trust assets into the grantor’s gross estate under § 2036.


Rev. Rul. 2004-64, 2004-2 C.B. 7 (2004)