Rule: IRC Sections 671-679 control the taxation of grantor trusts when the grantor of the trust retains the beneficial enjoyment or substantial control over the trust property or income. In that case, the grantor is taxed on the trust income. The trust is disregarded for income tax purposes. The grantor is taxed on the income if he/she retains (1) the beneficial enjoyment of the corpus or (2) the power to dispose of the trust income without the approval or consent of any adverse party.

Choice "c" is correct. Income earned by the grantor trust is taxable to the grantor (Mackenzie) since he/she retained discretionary power to receive the taxable income from the trust. The fact that the discretionary power may not actually be exercised is irrelevant.

Choice "a" is incorrect. Income earned by a grantor trust is taxable even if it is not distributed by the trust.

Choice "b" is incorrect. Income earned by a grantor trust is taxable to the grantor of the trust, not to the beneficiary, to the extent that the grantor has retained discretionary power to receive the taxable income from the trust.

Choice "d" is incorrect. Income earned by a grantor trust is not allocated to the grantor (Mackenzie) and the beneficiary (Kelly) of the trust based on the amount of distributions paid to the parties.