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Nonadverse party

The Internal Revenue Code defines a nonadverse party by reference to the term adverse party.

Section 672 of the Internal Revenue Code defines a nonadverse party as a person who is not an adverse party. It defines an adverse party by whether a substantial beneficial interest in the trust would be harmed by exercising or not exercising a power that person holds.[1]

A general power of appointment over trust property is treated as a beneficial interest for that definition. A related or subordinate party is a narrower category, because it must first be a nonadverse party and then meet one of the listed relationships or roles.[1]

The listed categories include a grantor's spouse living with the grantor, specified family members, an employee of the grantor, and certain people connected to a corporation. For sections 674 and 675 and subsection 672(f), such a related or subordinate party is presumed subservient to the grantor unless the evidence shows otherwise by a preponderance.[1]

The term matters because the surrounding provisions use a person's status, along with the person's powers and any required consent, to determine whether the grantor is treated as owner of a trust portion.[2]

Section 674 addresses powers over beneficial enjoyment. Its general rule treats the grantor as owner when disposition power is exercisable by the grantor, a nonadverse party, or both, without an adverse party's approval or consent.[2]

That section lists exceptions for certain powers, including powers subject to stated standards and specified trustee powers. One trustee exception applies when no more than half of the trustees are related or subordinate parties who are subservient to the grantor, subject to the section's conditions.[2]

Section 675 uses the same nonadverse-party formulation for certain administrative powers. It covers a power that can permit dealing with trust property for less than adequate consideration, or borrowing by the grantor without adequate interest or security, subject to the stated lending exception.[3]

Sections 676 and 677 use the related term non-adverse party with a hyphen. Under section 676, the grantor is treated as owner when that party can exercise a power to return title to the grantor. Under section 677, income available for the grantor or spouse can trigger ownership treatment, with an exception for powers affecting enjoyment only after a qualifying event.[4]

These provisions also state conditions and exceptions. For example, section 677 excludes income merely available for support of a beneficiary whom the grantor is legally obligated to support, except to the extent the income is actually applied or distributed for that support.[5]

Section 678 concerns a person other than the grantor who holds a power to vest trust property or income in that person. It has exceptions, including when the grantor or a transferor is otherwise treated as owner under another provision in the subpart. This neighboring rule shows that ownership treatment depends on the particular power and statutory conditions, not only the label assigned to its holder.[6]

Questions and answers

How does the Code define a nonadverse party?

Section 672 defines the term as any person who is not an adverse party. The adverse-party definition turns on whether the person's substantial beneficial interest would be adversely affected by exercise or nonexercise of a power held by that person.[1]

How does the term affect the beneficial enjoyment rule?

Section 674 includes a power exercisable by the grantor or a nonadverse party, without an adverse party's approval or consent. Its subsections set out exceptions for specified powers and conditions.[2]

Does the Code use a hyphenated form of the term?

Yes. Section 676 says "non-adverse party" in its rule about a power to revest title in the grantor. Section 677 uses the same hyphenated form in its provision about income that may benefit the grantor or spouse.[4]

What other trust rule refers to a nonadverse party?

Section 675 refers to a nonadverse party in provisions about powers involving trust property and borrowing. Section 678 addresses a different holder, a person other than the grantor who can vest trust property or income in themselves.[3]

  • Power to control beneficial enjoyment: Section 674 describes when control over trust benefits causes a grantor to be treated as owner of a trust portion. The rule concerns beneficial enjoyment.
  • Adverse party: Section 672 defines an adverse party by reference to a substantial beneficial interest in a trust and the effect of a power held over it in the trust.
  • Administrative powers (grantor trust): Section 675 of the Internal Revenue Code describes administrative powers that can cause a grantor to be treated as owner of a trust portion, with limits.
  • Related or subordinate party: Section 672 defines a related or subordinate party as a nonadverse party in specified relationships to the grantor. It covers family members and employees.

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Sources and data notes
  1. Internal Revenue Service, 26 U.S.C. 672. https://uscode.house.gov/us/usc/119-118/t26/s672/. Retrieved .
  2. Internal Revenue Service, 26 U.S.C. 674. https://uscode.house.gov/us/usc/119-118/t26/s674/. Retrieved .
  3. Internal Revenue Service, 26 U.S.C. 675. https://uscode.house.gov/us/usc/119-118/t26/s675/. Retrieved .
  4. Internal Revenue Service, 26 U.S.C. 676. https://uscode.house.gov/us/usc/119-118/t26/s676/. Retrieved .
  5. Internal Revenue Service, 26 U.S.C. 677. https://uscode.house.gov/us/usc/119-118/t26/s677/. Retrieved .
  6. Internal Revenue Service, 26 U.S.C. 678. https://uscode.house.gov/us/usc/119-118/t26/s678/. Retrieved .

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