Internal Revenue Service
Revenue Ruling

TaxLinks.com   sm

 Rev. Rul. 56-36

1956-1 C.B. 455

Section 6011 -- Return Filing Requirement

IRS Headnote

A beneficiary (a cestui que trust) who manages trust property on behalf of himself and the other beneficiary thereof is not an employee of the trust company which acts as trustee and holds title to the property, where the trustee has no right to control or manage the property.

Full Text

Rev. Rul. 56-36

The Internal Revenue Service has been requested to determine, for Federal employment tax purposes, the status of a managing beneficiary of trust property held by a trust company as trustee.

A trust company holds legal title to a building which was conveyed to it as trustee by A and B for their benefit. Under the terms of the trust agreement A and B , as beneficiaries, have the sole right to control and manage the property, including the collection and disposition of the rents. The trust company is required, under the terms of the trust agreement, to dispose of the property remaining in the trust at the end of the trust period and to divide the proceeds among those entitled to receive them under such agreement. The trust company receives a fixed annual fee for its services.

A manages the property under an agreement with B . He hires all necessary labor, contracts for repairs, collects the rents, deposits them in a checking account in his name, and pays all expenses in connection with the management of the property. A receives a commission of five percent of the gross rents collected. At the end of each month, A and B divide the net income from the property on the basis of their respective interests in the trust.

Section 3121(d) of the Federal Insurance Contributions Act (chapter 21, subtitle C, of the Internal Revenue Code of 1954) provides, among other things, that the term `employee' means any individual who under the usual common rules applicable in determining the employer-employee relationship has the status of an employee. Whether the relationship of employer and employee exists under the usual common law rules is largely a question of fact to be determined upon the particular facts of each case. Generally, such relationship exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished.

In the instant case, the facts show that the trust company, acting in its capacity as trustee, does not exercise or have the right to exercise any control over the services performed by A in connection with the management of the trust property. It is concluded, therefore, that the relationship of employer and employee, for Federal employment tax purposes, does not exist between the trust company as trustee and A with respect to such services. Accordingly, the trust company incurs no liability, for such purposes, with respect to the remuneration received by A for managing the trust property.