Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 59-99

1959-1 C.B. 158

Sec. 641

IRS Headnote

Where, in a court proceeding under a Michigan statute, a court-appointed trustee receives the proceeds of a sale of real estate (the court permitting the life tenant in the first instance to sell the property), such a trustee should report the gain from the sale on a U.S. Fiduciary Income Tax Return, Form 1041, and pay the tax thereon in the year of the sale, since section 641(a)(1) of the Internal Revenue Code of 1954 comprehends income realized on a sale of property when such income is held for future distribution.

Full Text

Rev. Rul. 59-99

Advice has been requested as to whether the gain from the sale of real estate must be reported in the year of sale and, if so, whether the life tenant or the court-appointed trustee should be required to pay the tax under the circumstances described below.

An individual received, under the will of his father, a life estate in a farm located in the State of Michigan. The remainder in the estate was given by the will to the son's surviving children. The farm has barely returned sufficient income to pay the real estate taxes.

The laws of Michigan provide that a life tenant in land may file a petition in a chancery court of the county in which land is situated asking for authority to sell the property, have the court appoint a trustee to take charge of the proceeds received from the sale, and have such proceeds reinvested by the trustee under the order of the court.

In the instant case, the life tenant filed such a  petition and the court entered an order authorizing him to sell the property. After the sale, the court appointed a trustee to receive the funds from the sale of the farm.

Section 641 of the Internal Revenue Code of 1954, relating to the imposition of tax on the income of estates and trusts, provides, in part as follows:

(a) APPLICATION OF TAX.-The taxes imposed by this chapter on individuals shall apply to the taxable income of estates or of any kind of property held in trust, including-

(1) income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust; * * *

It has been held under similar circumstances that a court-appointed trustee charged with reinvesting the funds, paying the income therefrom to a life tenant, and finally distributing the principal to the remaindermen (unascertainable at the time of filing of the petition) should file and pay the tax on the gain, if any, from the sale of the property. See United States v. National City Bank of New York, et al. , 21 Fed.Supp. 791. In that case, the court held that the term `including' as used in section 219 of the Revenue Act of 1926, which is similar to section 641 of the 1954 Code, was a term of enlargement and that, therefore, the section required the person holding the income for future distribution under the terms of the will or trust to pay the tax, regardless of whether the trust existed at the time of sale from which the income was realized. Thus, the section was held to apply both to the income of an estate or trust and income held for future distribution under the terms of a will or trust. The income being held in the instant case is considered to be income held for future distribution under the terms of the will. The effect of section 641(a)(1) of the Code is to tax the holder of such property as if such holder was a trustee or fiduciary regardless of whether the local law constituted the holder of the income as a trustee or fiduciary.

In view of the foregoing, it is held in the instant case that the trustee should report the gain from the sale of the property on a U.S. Fiduciary Income Tax Return, Form 1041, and pay the tax due thereon in the year of sale. Payment of the tax should not be made by the life tenant nor should it await distribution of the estate to the remaindermen.