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Revenue Ruling

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 Rev. Rul. 64-62

1964-1 C.B. 221

Sec. 652

IRS Headnote

An individual who makes a clear and irrevocable disclaimer, effective under Pennsylvania law, of her right to income which she is entitled to receive from a simple Pennsylvania spendthrift trust, is not required, under section 652(a) of the Internal Revenue Code of 1954, to include in gross income the income accruing to the trust subsequent to her disclaimer.

I.T. 4035, C.B. 1950-2, 60, distinguished.

Full Text

Rev. Rul. 64-62

Advice has been requested whether an individual who irrevocably disclaimed her interest in the trust income of a Pennsylvania spend-thrift trust, under the circumstances described below, is taxable on income accruing to the trust subsequent to her disclaimer.

The taxpayer's father died in 1960 leaving a will which established a simple spendthrift trust under the laws of the Commonwealth of Pennsylvania. The will provides that the net income from this trust is to be paid to the taxpayer for and during her natural life. Upon the death of the taxpayer, the trust is to continue with the income therefrom to be paid in equal amounts to all of her children during the life or lives of such children living at the time of the taxpayer's father's death. After the termination of the life estates, the remainder is to go to the taxpayer's descendants.

Prior to the time the Pennsylvania court awarded the accrued trust income, the taxpayer made a clear and irrevocable disclaimer of her income, so that the income would be payable, from the inception of the trust, to her children in equal parts.

Section 301.3 of Title 20 of Purdon's Pennsylvania Statutes Annotated, as amended by the Act of February 17, 1956, Public Law (1955), 1073, provides, in part, as follows:

(a) POWERS AND INTERESTS RELEASABLE.-Any power of appointment, or power of consumption, whether general or special, other than a power in trust which is imperative, and any interest in, to, or over real or personal property held or owned outright, or in trust, or in any other manner which is reserved or given to any person by deed, will or otherwise, and irrespective of any limitation of such power or interest by virtue of any restriction in the nature of a so-called spendthrift trust provision, or similar provision, may be released or disclaimed, either with or without consideration, by written instrument signed by the person possessing the power or the interest and delivered as hereinafter provided, but nothing in this section shall authorize an income beneficiary of a spendthrift trust to release or disclaim his right to such income, unless as a result of the release or disclaimer the released or disclaimed income will pass to one or more of the beneficiary's descendants.

Section 652(a) of the Internal Revenue Code of 1954 provides, in part, that the amount of income for the taxable year required to be distributed currently by a trust shall be included in the gross income of a beneficiary to whom the income is required to be distributed, whether distributed or not.

In the case of the First National Bank of Portland, Executor, Estate of L. B. Stearns, deceased v. Commissioner , 39 B.T.A. 828 (1939), acquiescence, C.B. 1939-2, 13, the taxpayer orally, and later by written instrument, disclaimed his beneficial interest in a trust before distributions were made to his as beneficiary. The state court had already decreed that the taxpayer had by a valid and legal instrument in writing disclaimed and renounced all his rights, title, and interests in or to the trust estate and the income therefrom. The United States Board of Tax Appeals concluded that the taxpayer was no more a beneficiary of the trust after an effective disclaimer than he would have been after an effective assignment. The Board held that the taxpayer had no right to receive the trust income in the taxable years in question and that the trust income was not taxable to him as amounts distributable to a beneficiary under section 162 of the Revenue Act of 1934.

Section 301.3 of Title of the Pennsylvania Statutes, supra , permits an income beneficiary of a Pennsylvania spendthrift trust to release or disclaim his right to income from the trust, provided that such released or disclaimed income passes to one or more of the beneficiary's descendants. The trust income disclaimed by the taxpayer in the instant case passes to her children pursuant to the testator's will.

Accordingly, it is held that, since the disclaimer of trust income by the taxpayer is effective and irrevocable under local law, the taxpayer is not required to include in her gross income, under section 652(a) of the Code, the income subsequently accruing to the trust. However, any distributable income accrued to the trust prior to the disclaimer is includible in the taxpayer's gross income, notwithstanding the fact that it is actually paid to her children. See Annie I. Grant v. Commissioner , 174 Fed.(2d) 891 (1949).

The instant case is distinguishable from I.T. 4035, C.B. 1950-2, 60. That ruling holds that an income beneficiary of a Pennsylvania spendthrift trust who assigns the right to receive the income from such trust is, notwithstanding the assignment, liable for Federal income tax with respect to such income. Under the laws of Pennsylvania, the beneficiary of a spendthrift trust has the power to revoke an assignment of future trust income at any time. See In re Keeler's Estate , 334 Pa. 225, 3 Atl.(2d) 413 (1939).

I.T. 4035 was concerned with an assignment of trust income by an income beneficiary of a Pennsylvania spendthrift trust, the assignment being revocable and ineffective under local law, whereas here the release or disclaimer is irrevocable and effectively divests the beneficiary of her beneficial interest in the trust.