Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 75-61

1975-1 C.B. 180

Sec. 641
Sec. 7701

IRS Headnote

Fiduciary returns; realty income. A Fiduciary Income Tax Return must be filed by an executor with respect to the income from realty subject to administration prior to its transfer to the decedent's widow in satisfaction of her dower interest and by a trustee under a power in trust created by the will with respect to income he received from realty to which the beneficiaries held legal title; S.M. 4945 and Rev. Rul. 59-154 superseded.

Full Text

Rev. Rul. 75-61 [fn1]

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the positions set forth in S.M. 4945, V-1 C.B. 68 (1926), and Rev. Rul. 59-154, 1959-1 C.B. 160.

The questions presented involve the manner in which the income generated by the corpus of an estate should be reported under the circumstances described below.

A died testate in 1963. His will provided that after the payment of his just debts and funeral expenses one-third of the estate be "alloted and assigned" to his wife, B, as satisfaction of her dower interest. Real property was transferred by the executor of A's estate to B in 1964 to carry out this provision in the will. Under local law, real property and income therefrom is subject to administration.

A's will further provided that the income from certain property, comprising one-third of the estate, was to be paid to his son, C, for life and at C's death, such property was to be distributed to those of C's children living at the time of his death. In the event any portion of such property should vest in any person before such person attained his or her majority, then such portion would be retained by a trustee under a power in trust to invest and reinvest the principal, to collect the income and apply the net income, or as much thereof as the trustee should in his sole discretion determine, to the support and maintenance of such person during his or her minority.

C died in the year 1971 leaving only a minor child, D. Under the laws of the appropriate jurisdiction legal title to property held under a power in trust is in the beneficiaries, in this case D.

The final third of the estate consisted of real estate and under the will was to be held by A's daughter, E, in fee simple, with the limitation that she would have no right to sell, convey, mortgage, incumber or dispose of, in any way, the real estate or rights therein before January 1, 1971, or to control, receive, or collect income from such real estate before January 1, 1967, unless permitted to do so at an earlier date by the action of the trustee. On and after January 1, 1967, however, she could lease the real property and receive the income from it.

The specific issues are whether the income derived from the property held by the executor and ultimately distributed to B is income to B or to the executor; whether the income derived from the property held subject to the power in trust is income of a trust or of C's child; and whether income derived from the property conveyed to A's daughter is her income or income of a trust.

Section 641 of the Internal Revenue Code of 1954 provides, in part, that the taxes imposed on individuals shall apply to the taxable income of any kind of property held in trust, including income accumulated in trust for the benefit of persons with contingent interests, income accumulated or held for future distribution under the terms of a will or trust and income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated. The tax on such taxable income shall be paid by the fiduciary. See section 1.641(a)-2 of the Income Tax Regulations.

Section 1.641(a)-2 of the regulations provides, in part, that the gross income of an estate or trust is determined in the same manner as that of an individual. Thus, the gross income of an estate or trust consists of all items of gross income received during the taxable year, including:

(a) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests;

(b) Income accumulated or held for future distribution under the terms of the will or trust;

(c) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct;

(d) Income received by estates of deceased persons during the period of administration or settlement of the estate; and

(e) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.

The several classes of income enumerated above do not exclude others that also may come within the general purposes of section 641 of the Code.

Section 301.7701-4 of the regulations provides, in part, that generally, an arrangement will be treated as a trust under the Code if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business for profit.

Section 301.7701-6 of the regulations provides, in part, a definition of the term "fiduciary." Fiduciary is a term which applies to persons who occupy positions of peculiar confidence toward others, such as trustees, executors, and administrators. A fiduciary is a person who holds in trust an estate to which another has the beneficial title or in which another has beneficial interest or receives and controls income of another, as in the case of receivers.

Section 301.7701-7 of the regulations provides, in part, that there may be a fiduciary relationship between an agent and a principal, but the word "agent" does not denote a fiduciary. An agent having entire charge of property, with authority to effect and execute leases with tenants entirely on his own responsibility and without consulting his principal, merely turning over the net profits from the property periodically to his principal by virtue of authority conferred upon him by a power of attorney, is not a fiduciary within the meaning of the Code. In cases where no legal trust has been created in the estate controlled by the agent and attorney, the liability to make a return rests with the principal.

A "power in trust" involves a form of express fiduciary obligation similar to that of an express trust, and it therein differs from a mere agency, revocable at pleasure, which imposes no duty, but merely grants authority to act. A power in trust places on the grantee a duty to execute a trust in favor of a person or persons other than himself and involves the idea of a trust as much as does a trust estate. See Brooklyn Trust Company, 295 N.Y.S. 1007.

The will, in the instant case, passed legal title to one-third of the estate to B, one-third to D, and one-third to E. However, it is manifest that complete control over the realty conveyed to D and E was given to the trustee. D and E could not collect the rental income themselves regardless of where the bare legal title to the real estate might vest. It was A's intent that the income from the real estate held by D should be received by C, until C's death, then controlled by the trustee for the benefit of D until such time as D reached his majority, then to D. Furthermore, it was A's intent that the income from the real estate held by E should be controlled by the trustee until January 1, 1967, and the power to convey the real estate was to be withheld until January 1, 1971.

Thus, the trustee of the properties of D and E is vested with the responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of the responsibility.

Accordingly, it is held that the trustee must file U.S. Fiduciary Income Tax Returns (Form 1041) reporting therein the income from the property held under the power in trust for the benefit of D, for the taxable years in which he, as trustee, received such income. It is further held that the trustee must also report the income received from the real property left by A for the benefit of E for the taxable years in which such income was received by the trustee. Furthermore, it is noted that the dower interest of B has been satisfied by the transfer to her of real property of the estate by the executor, since under local law the property and income therefrom was subject to administration during that period. Rev. Rul. 57-133, 1957-1 C.B. 200. The income from such property that was received prior to the transfer to B is held to be income to the estate and reportable by the executor. After the transfer of the real estate to B, the income is held to be the personal income of B.

Also, see section 661 and 662 of the Code and section 1.662(a)-4 of the regulations, relating to the deduction for trusts accumulating income or distributing corpus, and the inclusion of amounts in gross income of beneficiaries of trusts accumulating income or distributing corpus.

S.M. 4945 and Rev. Rul. 59-154 are superseded since the positions set forth therein are restated under current law in this Revenue Ruling.

[fn1] Prepared pursuant to Rev. Proc. 67-6, 1967-1 C.B. 576.