1976 U.S. Tax Ct. LEXIS 72">*72
66 T.C. 761">*761 OPINION
This case is now before us on remand from the Fifth Circuit Court of Appeals. Our original opinion,
In 1925, Alfred I. duPont organized Nemours, Inc., a corporation. In exchange for all of the corporation's stock he transferred to it full title to his elaborate1976 U.S. Tax Ct. LEXIS 72">*76 Delaware residential estate known as "Nemours" (consisting of a mansion and some 300 acres of surrounding grounds on which were located various other buildings and structures). Mr. duPont and his wife, Jessie Ball duPont, thereafter leased Nemours from the corporation, for the term of their joint lives plus the life of the survivor, for an annual rental of $ 1. Subsequently, Mr. duPont transferred securities valued at $ 2 million to the corporation in return for its further agreement to pay all taxes assessed against Nemours as 66 T.C. 761">*762 well as the expenses of maintaining the grounds (including the mansion's exterior). The expenses incurred inside the mansion house and the salaries of the duPonts' personal employees remained the responsibility of the lessees.
Mr. duPont and his wife resided at Nemours until 1926 when they acquired a second home, Epping Forest, in Jacksonville, Fla., which became their principal residence. 1 They used Nemours about 2 months a year until 1935 when Mr. duPont died; thereafter Mrs. duPont continued to use it also about 2 months a year until 1962. In that latter year, while in Delaware, Mrs. duPont broke a leg and remained at Nemours until her death1976 U.S. Tax Ct. LEXIS 72">*77 in 1970 when she was 86 years old. As the result of a second accident in 1966, she was confined almost entirely to a wheelchair. She was an invalid, and made very little use of the elaborate facilities at Nemours, although they were available to her.
Mr. duPont's will made certain specific bequests (including the contents of the Nemours mansion to his wife) and then established a testamentary trust, the petitioner herein, to which he gave the remainder of his estate, which included all of the stock of Nemours, Inc. The trustees were directed to pay out of income the first $ 200,000 a year to Mrs. duPont, then to pay certain enumerated annuities, after which any remaining income was to be paid to Mrs. duPont. (During each of the tax years the total income of the trust was in excess of $ 13 million and the amount payable to Mrs. duPont was in excess1976 U.S. Tax Ct. LEXIS 72">*78 of $ 11 million.) The will further provided that upon Mrs. duPont's death the trustees were to cause to be organized a charitable corporation to be known as "The Nemours Foundation" in honor of certain ancestors of Mr. duPont and to transfer to it the Nemours property.
Upon Mr. duPont's death, in 1935, title to the stock of Nemours, Inc., passed, according to the directions of his will, to the executors of his estate. The stock was held by Mr. duPont's executors from the time of his death in 1935 until 1937, when they liquidated the corporation and transferred its assets (consisting of Nemours and certain securities) to the testamentary trust, subject to the continuing obligation to maintain the grounds and pay the taxes during Mrs. duPont's life 66 T.C. 761">*763 tenancy. Prior to its liquidation the corporation had paid the maintenance expenses and taxes; thereafter the charges of both categories were paid by the testamentary trustees.
As indicated above, Mrs. duPont resided at Nemours from 1962 until her death in 1970. The trust spent $ 255,753 in 1966 and $ 274,451 in 1967 for general maintenance of the Nemours estate; it expended an additional $ 114,284 during 1967 for improvements1976 U.S. Tax Ct. LEXIS 72">*79 thereon, including the paving of certain roadways, the restoration of ornamental stonework, and the purchase of certain vehicles for use in connection with the estate. On the Federal fiduciary income tax returns for 1966 and 1967 the trustees claimed deductions in respect of these amounts. The Commissioner disallowed these deductions in their entirety.
In our earlier opinion we held that the trust could not deduct, under section 212, the expenses of maintaining Nemours either as expenses proximately related to property held for the production of income or as expenses incurred in the management of trust property. And we held further that the trust was not entitled to a charitable deduction under section 642(c) in respect of these expenditures.
The Court of Appeals affirmed our resolution of both of these issues.
Pursuant to the remand, a hearing was held by this Court on March 3, 1976. No additional evidence was presented apart from a "Second Supplemental Stipulation of Facts," to which petitioner objected as irrelevant, and which established merely that Mrs. duPont had not included as income on her 1966 and 1967 returns any portion of the amounts paid by the trust for maintenance and improvements of Nemours which are the subject of the present controversy. We are inclined to agree with petitioner that Mrs. duPont's treatment of these amounts on her 1966 and 1967 returns is irrelevant, but we received the stipulation because the Court of Appeals appeared to think that the record was incomplete without evidence as to that matter.
Although the parties have not presented us with any evidence or arguments as to "whether1976 U.S. Tax Ct. LEXIS 72">*82 limitations would bar the present assessment or allocation of such amounts to her personally" (
1976 U.S. Tax Ct. LEXIS 72">*83 Also, the parties have not presented any additional materials on the remand relating to the so-called maintenance reserve or the Commissioner's failure to challenge the deductions for the years preceding 1966 after the reserve had been depleted. We 66 T.C. 761">*765 have no further enlightenment on these matters than was available to the Court of Appeals when the case was before it, and, of course, to the extent that the record is deficient in this or any other respect, petitioner must bear the consequences since the burden of proof was upon it. However, in our judgment, the manner of treating these deductions in earlier years is wholly irrelevant, since it has been firmly established that the Commissioner's erroneous treatment of an item in earlier years or his failure to challenge a taxpayer's erroneous treatment does not preclude an examination of the correctness of the treatment of such item for the tax years in issue.
Sections 661 and 662,
1976 U.S. Tax Ct. LEXIS 72">*87 (1) In the first place, it must be remembered that the obligation to make these expenditures had for many years been that of Nemours, Inc., the corporation to which Mr. duPont had transferred Nemours in 1925. That obligation arose when in 1929 he transferred $ 2 million of securities to the corporation in 66 T.C. 761">*767 a transaction that we previously regarded as in effect a contribution to capital. When Mr. duPont died, his stock in Nemours, Inc., passed to his executors, who dissolved the corporation and thereby received its assets while they at the same time assumed its obligations and liabilities. Thereafter, when the executors transferred Nemours (which they had received upon liquidation of the corporation) to the testamentary trust, the trust, petitioner herein, took the property subject to the same obligations and liabilities formerly incurred by the corporation and subsequently assumed by the executors. Of those obligations and liabilities the one which concerns us here was the duty to maintain Nemours throughout the remainder of Mrs. duPont's life.
Accordingly, even if the payments here in issue be regarded as having been made primarily for Mrs. duPont's benefit, she received1976 U.S. Tax Ct. LEXIS 72">*88 the benefit thereof
To be deductible by the trust under section 661 (or section 651), a distribution must be made to a beneficiary in his status as a beneficiary, not as a creditor or in some other capacity.
1976 U.S. Tax Ct. LEXIS 72">*90 (2) Relying upon
To be sure, expenditures may be deductible as distributions to a beneficiary, even though the amounts are not paid directly to the beneficiary.
The decedent in
In spite of the fact that the taxpayer received some benefit from the expenditures at Eastern Point which he might have avoided by abandoning his right to occupy the premises, we do not regard the income thus expended as "distributed" to him as that word is used in the Revenue Act.
The instant case, with its unusual facts, is comparable. From 1926 to 1962 Nemours was not Mrs. duPont's principal1976 U.S. Tax Ct. LEXIS 72">*93 residence, although she did spend about 2 months a year there. As the result of an accident in 1962 while in Delaware, she remained at Nemours for the rest of her life. During the tax years she was an invalid, and the record shows that she made but scant use of its elaborate facilities. And, insofar as the record reveals, none of the expenses here in controversy were incurred in connection with the inside of the mansion house or with Mrs. duPont's personal employees.
In our earlier opinion we made reference by the way of dictum to the fact that, notwithstanding Mrs. duPont's failure to take advantage of all that Nemours offered, the expenditures in question could be considered as her nondeductible (sec. 262) personal living expenses.
But despite any distinctions apparently raised by the language of the two opinions, the facts of the two cases are virtually indistinguishable. 1976 U.S. Tax Ct. LEXIS 72">*94 If anything, the expenditures in
1. Title to Epping Forest was vested in an estate by the entireties in Alfred and Jessie duPont so upon Alfred's death, it would by operation of law, pass to Mrs. duPont.↩
2. The so-called maintenance reserve fund and the Commissioner's action referred to are described in the findings which we made when the case was previously before us.
3. This issue is further complicated by Mrs. duPont's death in 1970. Additional problems would be presented in asserting liability against her estate or against various transferees of the assets thereof in the event her estate has already been distributed.↩
4. Likewise secs. 651 and 652 apply the conduit principle to the income taxation of "simple" trusts. In general, a simple trust is one that is required to distribute all of its income currently, whose terms do not provide for any amounts to be paid or permanently set aside for charitable purposes, and which does not make any distribution other than of current income.
5. Sec. 661 provides in part:
SEC. 661. DEDUCTION FOR ESTATES AND TRUSTS ACCUMULATING INCOME OR DISTRIBUTING CORPUS.
(a) Deduction. -- In any taxable year there shall be allowed as a deduction in computing the taxable income of an estate or trust (other than a trust to which subpart B applies), the sum of -- (1) any amount of income for such taxable year required to be distributed currently (including any amount required to be distributed which may be paid out of income or corpus to the extent such amount is paid out of income for such taxable year); and (2) any other amounts properly paid or credited or required to be distributed for such taxable year;
Sec. 662 provides in part:
SEC. 662. INCLUSION OF AMOUNTS IN GROSS INCOME OF BENEFICIARIES OF ESTATES AND TRUSTS ACCUMULATING INCOME OR DISTRIBUTING CORPUS.
(a) Inclusion. -- Subject to subsection (b), there shall be included in the gross income of a beneficiary to whom an amount specified in section 661(a) is paid, credited, or required to be distributed (by an estate or trust described in section 661), the sum of the following amounts: (1) Amounts required to be distributed currently. -- The amount of income for the taxable year required to be distributed currently to such beneficiary, whether distributed or not. * * * (2) Other amounts distributed. -- All other amounts properly paid, credited, or required to be distributed to such beneficiary for the taxable year. * * *↩
6. The conclusion that Mrs. duPont's rights stemmed from these contractual obligations is in no way inconsistent with our previous determination that the expenses incurred by the petitioner were not deductible under sec. 212. That determination rested on our view that the lease and its amendment were not profit-seeking transactions. And this view was affirmed by the Court of Appeals.
7. See description of the Plant estate in