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'Textron' Makes for Mischief: Tax Court Opens a Pandora's Box

by Howard J. Levine
Published: Taxation of Global Transactions, January 15, 2002

In Textron Inc. v. Commissioner,(1) the Tax Court considered whether the gross income of Textron for 1989 through 1992 included the "Subpart F income" of Avdel PLC ("Avdel"), the stock of which was held through a domestic voting trust (the "Voting Trust"). The Court required inclusion by Textron, but it is the Court's reasoning, rather than the result, that merits particular attention.

First, the Court assumed without discussion that the Voting Trust constituted a trust for Federal income tax purposes, and treated the Voting Trust as a grantor trust owned entirely by Textron. Second, the Court held that the Avdel stock held by the Voting Trust was not required to be treated as owned by Textron for purposes of applying Subpart F, which requires current inclusion only by "United States shareholders" (as explained below) who own shares of a controlled foreign corporation ("CFC") shares directly or through a foreign entity. Third, the Court determined that Textron nevertheless was required to include Avdel's Subpart F income, because it held that the Voting Trust had to include the Subpart F income and that, as the owner of the Voting Trust, all of the Voting Trust's income was includible by Textron.

The Tax Court's view, i.e., that Textron did not directly own the Avdel shares for Subpart F purposes, is not fully explored or justified by the Court, and may permit taxpayers a planning tool they did not previously have.

Background: Textron's Acquisition of Avdel

Avdel was a public limited company formed under the laws of the United Kingdom. Textron acquired more than 95 percent of Avdel's stock. On February 21, 1989, however, the Federal Trade Commission (the "FTC") filed a complaint in the U.S. District Court for the District of Columbia, seeking to enjoin Textron's acquisition and control of Avdel pending resolution of certain restraint of trade issues. The following day, the District Court issued a temporary restraining order (the "TRO"), enjoining Textron from assuming or exercising any form of direction or control over the assets or operations of Avdel, and a preliminary injunction was issued later.

The TRO provided that all rights to exercise voting power with respect to Textron's Avdel shares would be vested in a court-appointed trustee pursuant to a voting trust agreement. The TRO expressly barred Textron from exercising any voting rights with respect to its Avdel shares. The preliminary injunction order similarly enjoined Textron from voting its Avdel shares and provided that such shares would be vested in a court-appointed trustee pursuant to a voting trust agreement, which was entered into on March 13, 1989. Textron retained all economic rights with respect to the shares, including the right to receive any dividends. These facts remained unchanged throughout the period at issue. During this period, no director, officer, employee, agent or representative of Textron was a member of Avdel's board of directors or an officer of Avdel at any time.

Overview of Subpart F

Although United States persons generally are not subject to U.S. tax on income earned through foreign corporations until they sell their shares or receive dividends, Subpart F sets forth special rules applicable to "United States shareholders" of a "controlled foreign corporation" ("CFC").(2) For this purpose, a United States shareholder is a United States person that owns (within the meaning of Section 958(a)) or is considered to own (pursuant to certain constructive ownership rules set forth in Section 958(b)), stock possessing at least 10 percent of the voting power of the foreign corporation.(3) A CFC is a foreign corporation a majority of the shares of which (measured by either vote or value) are owned (within the meaning of Section 958(a)) or considered owned (pursuant to certain constructive ownership rules set forth in Section 958(b)) by United States shareholders.(4)

Pursuant to Section 951(a), each United States shareholder who owns (within the meaning of Section 958(a)) stock of the CFC generally must include in his income each year the CFC's "Subpart F income" attributable to such shares.(5) Subpart F income attributable to shares considered to be owned solely under the attribution rules of Section 958(b) (which apply for purposes of determining United-States-shareholder or CFC status) is not included in a United States shareholder's income under Section 951(a).

Status of a Voting Trust

Before determining the appropriate treatment of a voting trust under the grantor trust rules, a threshold question arises as to whether such a trust should be treated as a trust for tax purposes at all. As one commentator pointed out recently, there is a line of cases holding that voting trusts are not trusts.(6) Since that commentator was also counsel of record for Textron, the Tax Court undoubtedly was advised of these cases. Tax Court implicitly characterized the Voting Trust as a trust for tax purposes, however, without explicitly addressing the issue.

Overview of Grantor Trust Rules

If the grantor of a trust retains certain interests in or powers over a trust, the grantor is generally treated as the owner of a portion or all of the trust (and the trust is referred to as a "grantor trust"). For example, under Section 677, the grantor of a trust "shall be treated as the owner of any portion of a trust ... whose income without the approval of an adverse party is, or in the discretion of the grantor or a nonadverse party, or both, may be" distributed to the grantor. According to the Tax Court in Textron, the Voting Trust was considered a grantor trust, and Textron was considered the sole owner of the trust, since all of the Voting Trust's income (e.g., sales proceeds or dividends received with respect to the Avdel shares) could be distributed to Textron without the consent of an adverse party.

What it means to "own" a portion of a trust, however, is apparently not self-evident. In particular, where there is a single grantor, the grantor is not necessarily considered to own the trust property for all Federal income tax purposes.

In most circumstances, no issue arises at all, because the same result will be reached regardless of whether the grantor is considered to own the underlying trust property for all income tax purposes (the "look-through approach") or whether the trust is treated as a separate entity for all income tax purposes prior to attribution of its income to the grantor under Section 671 (the "non-look-through approach").(7) For example, a dividend paid on stock held by a grantor trust would be includible in the grantor's income under either approach; yet the status of the dividend recipient may be meaningful (e.g., where the recipient could be entitled to a dividends received deduction).

Thus, as another example, if the owner of an installment obligation in form sells the obligation to his wholly owned grantor trust, will he recognize gain pursuant to Section 453B? It would under the non-look-through approach, but not under the look-through approach.

Treasury Regulations Section 1.671-3(a)(1) provides that if a grantor (or other person) is treated as the owner of an entire trust, he takes into account in computing his income tax liability "all items of income, deduction, and credit (including capital gains and losses) to which he would have been entitled had the trust not been in existence during the period he is treated as owner."(8) The reference to all items to which the owner would have been entitled "had the trust not been in existence" appears to support the look-through approach, but may be viewed as ambiguous since it does not expressly state that the owner of the trust owns the trust property for tax purposes.

An example in the Section 1001 regulations is quite clear on this issue.(9) In the example, an individual, C, is the owner of grantor trust T, which owns a interest in partnership P with an adjusted tax basis of 1200. C renounces certain powers over T, with the result that T ceases to be a grantor trust. The example expressly adopts the look-through approach:

"Since prior to the renunciation C was the owner of the entire trust, C was considered the owner of all the trust property for Federal income tax purposes, including the partnership interest. Since C was considered to be the owner of the partnership interest, C not T, was considered to be the partner in P during the time T was a 'grantor trust'. However, at the time C renounced the powers that gave rise to T's classification as a grantor trust, T no longer qualified as a grantor trust with the result that C was no longer considered to be the owner of the trust and trust property for Federal income tax purposes. Consequently, at that time, C is considered to have transferred ownership of the interest in P to T, now a separate taxable entity, independent of its grantor C. On the transfer, C's share of partnership liabilities (11,000) is treated as money received. Accordingly, C's amount realized is 11,000 and C's gain realized is 9,800 (11,000-1,200)." [emphasis added]

Regulations proposed under Section 671 in 1999 would similarly treat the trust owner as the owner of all trust property for Federal income tax purposes.(10)

The Tax Court's Opinion in Textron

Textron moved for partial summary judgment, arguing that, because it could not vote its Avdel shares,(11) it was not a United States shareholder. Presumably, this argument was premised upon the view the Voting Trust was not a trust for tax purposes (since it was merely a voting trust), so that the trustee's voting power could not be attributed to Textron under Section 958(b).

The Internal Revenue Service (the "IRS") also moved for partial summary judgment, arguing that, pursuant to the look-through approach, the Voting Trust should be disregarded and Textron should be considered the owner of the Voting Trust's Avdel shares. Under the IRS's view, Textron clearly would own such shares within the meaning of Section 958(a), and inclusion of substantially all of Avdel's Subpart F income in Textron's income pursuant to Section 951(a) would be unavoidable.

Alternatively, the IRS argued that the Voting Trust was a United States shareholder required to include in its income substantially all of Avdel's Subpart F income and that, pursuant to the grantor trust rules, Textron, as the sole owner under those rules, was required to include in its own gross income the Subpart F income earned by the Voting Trust. The Tax Court granted partial summary judgment to the IRS based upon this argument.

The Tax Court's Analysis

The Tax Court implicitly concluded, without discussion, that the Voting Trust must be considered a trust for income tax purposes, notwithstanding the cases that have disregarded voting trusts in other contexts. This was sufficient to prevent Textron from sustaining its principal argument, namely that it was not a United States shareholder, since attribution of the Voting Trust's voting power to Textron was thus unavoidable.(12)

Indeed, the Court effectively considered the only issue to be whether Textron should be viewed as owning the Avdel shares within the meaning of Sections 951(a) and 958(a). Accordingly, the Court first addressed the IRS's look-through argument, namely that Textron should be treated as the owner of the Avdel shares under the grantor trust rules.

For purposes of Section 951(a), ownership is determined under Section 958(a). For purposes of Section 958(a), stock is owned only if it is owned "directly," or "indirectly," under Section 958(a)(2). Pursuant to Section 958(a)(2), stock owned, directly or indirectly, by or for a foreign corporation, foreign partnership, or foreign trust or foreign estate "shall be considered as being owned proportionately by its shareholders, partners, of beneficiaries[.]" CFC shares held through a domestic trust, however, would not be considered owned indirectly by a beneficiary pursuant to Section 958(a)(2).

Observing that Section 951(a) requires a United States shareholder to include in gross income only Subpart F income attributable to shares owned within the meaning of Section 958(a), and that the constructive ownership rules of Section 958(b) were intentionally excluded for this purpose, the Tax Court concluded that "Congress prescribed a specific meaning for the term 'owns' in Section 951(a)." Accordingly, the Tax Court concluded that Section 677(a) did not operate to treat Textron as the owner of the Avdel shares for purposes of Section 951(a).(13)

Notably, the Tax Court's opinion does not appear to rely upon any special feature of Section 951(a), other than the deliberate omission of the constructive ownership rules of Section 958(b). Thus, Textron apparently adopts the non-look-through approach for grantor trusts for all income tax purposes, at least in the absence of a Code provision (or perhaps a regulation) to the contrary.(14)

Despite its adoption of the non-look-through approach to the grantor trust rules, the Tax Court nevertheless required Textron to include in its gross income all of the Subpart F income attributable to the Avdel shares held in the Voting Trust. The Court reasoned that the Voting Trust qualified as a United States shareholder. Therefore, the Voting Trust was required to include in its gross income all of the Subpart F income attributable to its (directly held) Avdel shares; and pursuant to Section 671, the Court concluded, Textron must include all of the Subpart F income in its gross income as the sole grantor of the Voting Trust.

Critique of the Tax Court's Analysis

Treatment of a Voting Trust

As a threshold matter, it is unclear why the Tax Court declined to address the cases disregarding voting trusts for tax purposes. Perhaps the court was unwilling to acknowledge even the possibility that a voting trust might be used to divorce a foreign corporation's voting power from its equity, for fear that taxpayers might attempt to structure clever voting trust arrangements to avoid United States shareholder status.

On the facts presented, however, there appears to be a strong reason why Textron should not have been treated as a United States shareholder of Avdel. In particular, Subpart F is premised upon the view that United States shareholders should not be permitted to defer U.S. tax on certain classes of portable income that they have the power to withdraw as dividends from the CFC, even if they choose not to exercise that power. Since Textron had no voting power during the years at issue, treating Textron as a member of such a control group seems inappropriate. If the Tax Court considered this result to be unavoidable, because it was obliged to recognize the Voting Trust for tax purposes (and to attribute the Voting Trust's voting power to Textron), an explanation of the Court's reasoning would have been helpful.

It may be worth noting that the Court's implicit holding that Textron was a United States shareholder is not inherently taxpayer-unfavorable, since United States shareholder status is sometimes advantageous. In particular, a U.S. multinational corporation selling shares of its foreign subsidiary normally desires United States shareholder status in order to take advantage of Section 1248, which may recharacterize all or a portion of any gain on the sale of CFC shares by its United States shareholders as a dividend, potentially giving rise to indirect foreign tax credits under Section 902.(15)

Whatever the arguments, the discussion is based on the Court's approach of recognizing the Voting Trust for income tax purposes and recognizing Textron as a United States shareholder of Avdel.

Treatment of a Grantor Trust

The Tax Court clearly was correct in declining to read into Section 951(a), which requires ownership within the meaning of Section 958(a), a reference to the considerably broader constructive ownership rules of Section 958(b). Moreover, since the grantor trust rules do not expressly provide that the owner of a grantor trust must be treated as the owner of the underlying trust property for all income tax purposes, the Tax Court's refusal to treat Textron as the owner of the Avdel shares under Section 677 is not necessarily incorrect.

The Tax Court's opinion is ultimately unpersuasive, however, for several reasons. First, the opinion fails to address an existing regulation that unambiguously adopts the look-through approach "for Federal income tax purposes[.]"(16) Although the regulation is not necessarily controlling, because it was issued under Section 1001 rather than Section 671, the Court's failure to address and to distinguish that authority is disappointing. The Court's failure to discuss the proposed regulation under Section 671 is also unfortunate, but this omission is less significant since proposed regulations are not entitled to judicial deference.(17)

The Tax Court's opinion also fails to address a substantial body of administrative guidance and case law that supports the look-through approach.

In its published and private rulings, the IRS has almost uniformly adopted the look-through approach, treating the owner of a grantor trust as the owner of the trust property for a variety Federal income tax purposes.(18) Revenue rulings are not entitled to deference,(20) but the Tax Court's adoption of a contrary view without discussion is peculiar.

Even more troubling is the Tax Court's failure to address case law, including its own precedent, supporting the look-through approach.

Estate of O'Connor v. Commissioner,(21) involved a testamentary marital trust in which the surviving spouse held certain rights that caused the trust to be a grantor trust, and later assigned those rights to a charitable foundation, causing the foundation to be the owner of the marital trust under Section 678. The Tax Court considered whether distributions by the estate to the marital trust should be considered made to the marital trust or to the foundation. This determination was critical, because the deduction would have been permitted only if the distribution had been considered made to the marital trust.(22)

As framed by the Tax Court, "[t]his issue involve[d] an initial determination of whether the marital trust should be recognized for purposes of this proceeding."(23) The IRS argued that no trust existed for State law purposes, but since the Court adopted the look-through approach, it was unnecessary to address this issue.

"We find it unnecessary to resolve the status of the marital trust for State law purposes. Even assuming arguendo that throughout the years in question a valid trust existed for purposes of State law, it does not follow that it was a recognizable tax entity. Indeed we think that by virtue of Section 678 it was not."(24)

The Tax Court emphasized that its holding dealt solely with the impact of Section 678 on other provisions of Subchapter J, but it is not clear on what principled basis the court might decline to extend the same analysis to other situations.(25)

In Madorin v. Commissioner,(26) the Tax Court upheld the validity of Treasury Regulations Section 1.1001-2(c), example (5), described above. Rejecting the taxpayers' contention that the example is inconsistent with Section 671, the Tax Court again adopted the look-through approach.

"The Supreme Court has ruled that statutory terms should be given their 'usual, ordinary and everyday meaning.' Old Colony Railroad Co. v. Commissioner, 284 U.S. 552, 561 (1932). We agree with respondent's contention that defining 'owner . . . of a trust' under section 674 (and section 671) to mean owner of the trust's assets is consistent with the usual, ordinary, and everyday meaning of the word. Application of the grantor trust provisions generally results in nonrecognition of the trust (or a portion thereof) as an entity separate from the grantor. See Estate of O'Connor v. Commissioner, 69 T.C. 165, 174 (1977)."(27)

In addition, the weight of authority outside the Tax Court also supports the look-through approach.(28) The Tax Court's failure to consider these authorities is disappointing.

The Tax Court's adoption of the non-look-through approach in Textron may embolden taxpayers to engage in various forms of tax planning mischief. For example, under the Tax Court's non-look-through approach, a United States person might transfer CFC shares to a foreign grantor trust with an unrelated foreign beneficiary and take the position that he is not subject to current tax on the Subpart F income attributable to the transferred shares. Textron holds that the owner of a grantor trust is not treated as the direct owner of CFC shares held by the trust; and although Section 958(a)(2) provides an indirect ownership rule for shares held through a foreign trust, such shares are attributed to the beneficiary of the foreign trust, not the owner; so the grantor trust owner could claim that he or she does not own the CFC shares within the meaning of Section 951(a); he or she would be required to include the CFC's Subpart F income only if such income were first includible in the income of the trust, but a foreign trust cannot be a United States shareholder and therefore cannot earn any Subpart F income that could be attributed to the trust owner. In light of the relative ease with which such a foreign trust can be formed,(29) this result appears too good to be true and one suspects that a court would find a way to avoid it. How this might be done without repudiating (or ignoring) Textron, however, is unclear.

Similar mischief might arise under the foreign personal holding company ("FPHC") rules. In general terms, a foreign company is a FPHC if (1) it satisfies a gross income requirement and (2) more than 50% of its stock (measured by either vote or value) is owned, directly or indirectly, by 5 of fewer U.S. persons (the "United States group").(30) Pursuant to the relevant constructive ownership rules, "[s]tock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by its shareholders, partners, or beneficiaries."(31) This rule does not, however, provide for attribution from a grantor trust to the owner of the trust. Query whether the use of a revocable foreign grantor trust with an unrelated foreign beneficiary would be effective to remove a shareholder from the United States group and/or destroy FPHC status.

The constructive ownership rules of Section 267(c) similarly do not apply to owners of grantor trusts; again they merely attribute stock from a trust to its beneficiaries. Thus, under the Tax Court's non-look-through approach, an aggressive taxpayer might attempt to sell depreciated property to corporation wholly-owned by his grantor trust in order to avoid Section 267.(32)

Notwithstanding such potential for aggressive tax planning, the Tax Court's adoption of the non-look-through approach may ultimately do taxpayers significantly more harm than good. As noted above, the IRS has issued numerous published and private rulings, almost uniformly adopting the look-through approach. In many of these rulings, e.g., those involving the exclusion under Section 121 and deferral under Section 1033, this approach favors the taxpayer. If the IRS withdraws these rulings, as it understandably might to avoid being whipsawed, a wide variety of transactions with previously settled tax consequences (e.g., securitizations) may suddenly become highly uncertain.

Conclusion

While the Tax Court's adoption of the non-look-through approach was not necessarily incorrect as a matter of law, its opinion lacks compelling justification. As described above, the court failed to address case law disregarding voting trusts entirely, as well as numerous authorities adopting the look-through approach to grantor trusts.

In addition, the Tax Court's opinion may encourage aggressive taxpayers to implement various structures in an attempt to avoid a variety of constructive ownership provisions scattered throughout the Code. At the same time, the case may cause the IRS to reassesses several of its taxpayer-favorable positions based upon its historic look-through approach to grantor trusts.

Perhaps most vexing is that the Tax Court could have avoided opening this particular pandora's box. As noted above, the court ultimately held for the IRS on the ground that the Voting Trust earned Subpart F income which was attributed to Textron pursuant to Section 671. In light of this conclusion, the Tax Court could have merely adopted the non-look-through approach arguendo, without passing upon the issue.

Unfortunately, the IRS cannot appeal the Tax Court's adoption of the non-look-through approach, since it ultimately prevailed on its alternative argument. The authors are hopeful, however, that Textron will appeal, so that the appellate court can limit some of the mischief wrought by the Tax Court.

FOOTNOTES__________________

1. 117 T.C. No. 7 (2001).

2. Other "anti-deferral" regimes, such as that applicable to U.S. persons owning shares of a passive foreign investment company, are not addressed herein.

3. Sec. 951(b) of the Internal Revenue Code of 1986, as amended (the "Code"). Except as otherwise indicated, all Section references herein are to the Code.

4. Sec. 957(a).

5. Sec. 951(a). The term "Subpart F income" includes, among other things, most passive income (e.g., interest, dividends, and capital gains). See Secs. 952(a)(2) and 954(c).

6. James P. Fuller, "U.S. Tax Review," 23 Tax Notes International 1487, 1490 (Sept. 24, 2002) (citing A&N Furniture and Appliance Co. v. United States, 271 F.Supp. 40 (S.D. Ohio 1967) (voting trust disregarded and thus not considered an impermissible shareholder of an S corporation) and Lafayette Distributors, Inc. v. United States, 397 F.Supp. 719 (W.D. La. 1975) (same)).

7. Section 671 provides that the grantor of a grantor trust must take into account in computing its tax liability all items of income, deduction and credit of the trust attributable to the portion owned by the grantor.

8. If the portion owned consists of specific trust property and its income, "all items directly related to that property are attributable to the portion." Treas. Reg. Search7RH1.671-3(a)(2). In the event that the portion owned by the grantor (or another person) consists of an undivided fractional interest in the trust, "a pro rata share of each item if income, deduction, and credit is normally allocated to the portion." Treas. Reg. Search7RH1.671-3(a)(3).

9. Treas. Reg. Search7RH1.1001-2(c), example (5).

10. "For purposes of subtitle A of the Internal Revenue Code [the income tax], a person that is treated as the owner of any portion of a trust under subpart E is considered to own the trust assets attributable to that portion of the trust." Prop. Treas. Reg. Search7RH 1.671-2(f).

11. As explained above, the TRO, preliminary injunction order and voting trust agreement prohibited Textron from voting its Avdel shares during the years at issue.

12. As noted above, a United States shareholder is a U.S. person who owns (within the meaning of Section 958(a)) or is considered to own (pursuant to the constructive ownership rules of Section 958(b)) stock possessing at least 10% of the voting power of a foreign corporation. The Section 958(b) constructive ownership rules incorporate (with changes not here relevant) the rules set forth in Section 318. Pursuant to Section 318(a)(2)(B), any stock owned by a grantor trust is treated as owned by the owner of the grantor trust. Thus, if the Voting Trust is recognized as a trust for Federal income tax purposes, its Avdel voting shares would be considered constructively owned by Textron for purposes of characterizing Textron as a United States shareholder.

13. The Tax Court recognized that, pursuant to Section 677, Textron's right to receive distributions from the Voting Trust without the consent of an adverse party caused Textron to be the owner of the Voting Trust under the grantor trust rules.

14. Had the Tax Court contemplated some other analysis (e.g., a test dependent upon the purpose of the substantive provisions involved), one might fairly expect the Tax Court to have said so expressly.

15. Query whether Textron would be entitled to indirect foreign tax credits, however, in light of the Tax Court's conclusion that Textron did not directly own the Avdel shares held by the Voting Trust under the grantor trust rules.

16. Treas. Reg. Search7RH1.1001-2(c), example (5).

17. See Prop. Treas. Reg. Search7RH 1.671-2(f).

18. See, e.g., Rev. Rul. 74-613, 1974-2 C.B. 153 (transfer of an installment obligation to a grantor trust not a taxable disposition); Rev. Rul. 77-402, 1977-2 C.B. 222 (grantor's renunciation of certain trust powers, causing the grantor trust to become a non-grantor trust, constituted a disposition of a partnership interest held by the trust);(19)

19. Rev. Rul. 77-402, 1977-2 C.B. 222. - - - - - - - - ' - -

20. E.g., McLaulin v. Commissioner, 115 T.C. No. 18 (2000).

21. 69 T.C. 165 (1977) (reviewed opinion).

22. Although an estate's current distributions generally are deductible under Section 661, distributions to a charity are deductible only if the requirements of Section 642(c) are satisfied, pursuant to Treas. Reg. Search7RH1.663(a)-2. The requirements of Section 642(c) were not satisfied in this case.

23. Id. at 174.

24. Id. at 174-175 (footnotes omitted). Section 678 provides that if a person other than the grantor has the power to vest trust corpus in himself (or certain other powers), such person will be treated as the owner of the trust.

25. Id. at 176 n.17.

26. 84 T.C. 667 (1985).

27. Id. at 671. Cf. also American Nurseryman Publishing Co. v. Commissioner, 75 T.C. 271 (1980); Estate of Gregg v. Commissioner, 69 T.C. 468 (1977).

28. E.g., Swanson v. United States, 518 F.2d 59 (8TH Cir. 1975); Ringwalt v. United States, 549 F.2d 89 (8th Cir. 1977); Sun First National Bank of Orlando v. United States, 607 F.2d 1347 (Ct. Cl. 1979); Terriberry v. United States, 74-2 USTC 13,002 (M.D. Fla, 1974), rev'd 517 F.2d 286 (5th Cir. 1975). Contra Rothstein v. United States, 84-1 USTC 9606 (2d Cir. 1984); cf. also W & W Fertilizer, 527 F.2d 621 (Ct. Cl. 1976).

29. Pursuant to Section 7701(a)(31), a foreign trust need not be formed under the laws of another jurisdiction. Rather, a trust will be foreign if U.S. persons do not have the authority to control all substantial decisions of the trust.

30. Sec. 552(a).

31. Sec. 554(a)(1).

32. Section 267(a) would disallow any loss realized from a sale between an individual and a corporation more than 50% of the value of which is owned, directly or indirectly, by or for such individual. See Sec. 267(b)(2). If the grantor is not related to the beneficiary, however, he would not be considered to own any shares owned by the trust.