Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 58-53

1958-1 C.B. 152

Sec. 212

Sec. 671

IRS Headnote

Where a grantor-beneficiary of a revocable trust, who keeps his accounts and files his income tax returns on the cash method, pays in one year to a trustee as compensation for management of the trust the entire commission to which the trustee would be entitled for five years, the grantor may deduct in each of the five taxable years that part of the total commission which is attributable to the services performed by the trustee in each such year. However, that part of the commission attributable to each year which is allocable to the production or collection of any trust income which is exempt from Federal income tax, or to the management, conservation, or maintenance of property, the income from which is tax exempt, would not be deductible by the grantor for such year.

Full Text

Rev. Rul. 58-53

Advice has been requested as to the taxable year in which a grantor of a revocable trust may deduct trustee's commissions which the grantor paid in advance.

A grantor established a revocable trust, the net income to be distributed to himself during his lifetime. The trustees of the trust are the grantor and a certain bank. Under the trust agreement, the bank is entitled for its services in managing the trust to a commission of one-half of one percent per annum upon and chargeable against the principal of the trust estate for a period of five years. The grantor paid to the bank the entire amount of the commission in the first year of the trust and claimed the amount paid as a deduction in his Federal income tax return for that taxable year. The grantor keeps his accounts and files his income tax returns on the cash receipts and disbursements method.

Section 212 of the Internal Revenue Code of 1954 provides, in part, that in the case of an individual there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income.

Section 671 of the Code provides, in part, that where the grantor is considered to be the owner of any portion of a trust, there shall be included in computing the taxable income and credits of the grantor those items of income, deductions, and credits against the tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account in computing taxable income or credits against the tax of an individual.

The deductions under section 212 of the Code are not allowable with respect to any amount which is allocable to the production or collection of one or more classes of income which are not includible in gross income, or for any amount allocable to the management, conservation or maintenance of property held for the production of income which is not included in gross income.

Where, as in the instant case, the taxpayer reports income on the cash receipts and disbursements method, prepaid compensation for personal services is deductible only in the taxable year the services are actually rendered. See Rev. Rul. 170, C.B. 1953-2, 141.

Accordingly, it is held, that where a grantor-beneficiary of a revocable trust, who keeps his accounts and files his income tax returns on the cash method, pays in one year to a trustee as compensation for management of the trust the entire commission to which the trustee would be entitled for five years, the grantor may deduct in each of the five taxable years that part of the total commission which is attributable to the services performed by the trustee in each such year. However, that part of the commission attributable to each year which is allocable to the production or collection of any trust income which is exempt from Federal income tax, or to the management, conservation or maintenance of property, the income from which is tax exempt, would not be deductible by the grantor for such year.