69 T.C. 165">*166 OPINION

Respondent determined the following deficiencies in the petitioners' Federal income taxes:

The issues before us are:

(1) Whether the decedent's estate properly claimed distributions deductions in respect of amounts received by a charitable foundation on the grounds either (a) that such amounts constituted1977 U.S. Tax Ct. LEXIS 28">*38 distributions to a marital trust created under decedent's last will and testament or (b) that, since the foundation succeeded to the interests in the marital trust, such amounts should be treated as distributions to a beneficiary under said last will and testament;

(2) If the estate is entitled to such distributions deductions on the ground that they were made to the marital trust, whether 69 T.C. 165">*167 the marital trust is entitled to distributions deductions in respect of the amounts received by such charitable foundation;

(3) Whether certain distributions by the estate to the beneficiaries of residuary trusts under the decedent's last will and testament were required distributions of current income and, in any event, the amount of such distributions includable in gross income by such beneficiaries; and

(4) Whether a portion of the executors' commissions paid by the decedent's estate are allocable to tax-exempt income and, therefore, nondeductible.

Respondent concedes that any assessment against the marital trust for the taxable year ended December 31, 1969, is barred by the statute of limitations.

This case was submitted to the Court upon a full stipulation of facts, which, together1977 U.S. Tax Ct. LEXIS 28">*39 with the exhibits, is incorporated herein by this reference.

A. Lindsay O'Connor (decedent) died on May 9, 1968, a resident of Delaware County, N. Y. His last will and testament, dated December 11, 1957, was admitted to probate by decree of the Surrogate's Court, County of Delaware, N. Y., dated May 20, 1968, and letters testamentary and letters of trusteeship were issued to Dermod Ives and United States Trust Co. of New York authorizing them to act as executors and trustees under the will. A joint petition was filed herein by Dermod Ives and United States Trust Co. of New York as executors and trustees and by Olive B. Price, Robert L. and Lucille S. Bishop, and Donald F. and Edna G. Bishop, individually. The United States Trust Co., a corporation organized under the banking laws of the State of New York, maintained its principal office in New York, N. Y., at the time of filing said petition. ¹

1977 U.S. Tax Ct. LEXIS 28">*40 The executors filed an estate tax return on June 24, 1969. They elected a fiscal year ending October 31 for income tax reporting purposes. A short-period income tax return was filed by the estate for the period from the date of decedent's death to October 31, 1968. Thereafter, income tax returns for the estate were duly filed for the taxable years ending October 31, 1969, October 31, 1970, and October 31, 1971. The trustees elected the calendar year for income tax purposes and duly filed forms 1041 69 T.C. 165">*168 for the marital trust and for each of the other trusts for 1969, 1970, and 1971.

The dispositive provisions of the decedent's will basically provided for the division of his estate into two shares. ² The first share, consisting of one-half of the entire net estate, was bequeathed in trust (marital trust) for his widow, Olive B. O'Connor, who was given the income therefrom, coupled with a general testamentary power of appointment over corpus in favor of "such persons and/or corporations as she may appoint" and a power to withdraw at any time (including the year of death) any or all of the corpus by a written election to be filed with the trustees. As to the second share, 1977 U.S. Tax Ct. LEXIS 28">*41 the decedent made some specific pecuniary bequests and directed that the balance be divided into three equal parts, to be held in trust, with income from each part to be paid or applied for the benefit of Olive B. Price, Donald F. Bishop, and Robert L. Bishop (niece and nephews of the widow), respectively.

On May 23, 1968, the decedent's widow, Olive B. O'Connor (Mrs. O'Connor), notified the executors and trustees in writing that she elected to have all of the principal of the marital trust paid to her. By instrument, executed the same day and entitled "Gift Assignment of Interest in Estate of A. Lindsay O'Connor," Mrs. O'Connor assigned all of her right, title, and interest to the marital trust, together with any income from such property, to the A. Lindsay and Olive B. O'Connor Foundation (hereinafter the foundation). The foundation had been created by Mrs. O'Connor in 1965 and was, at all times material herein, recognized by the1977 U.S. Tax Ct. LEXIS 28">*42 Internal Revenue Service as a charitable foundation within the meaning of section 501(c)(3). ³ For the year 1968, Mrs. O'Connor filed a gift tax return in which she reported the assignment of her interest in the marital trust to the foundation; the value of such interest in both income and corpus was estimated to be $ 25 million.

With respect to its 3 taxable years involved herein, the parties have stipulated that "the estate made the following distributions to the beneficiaries thereof": 69 T.C. 165">*169

1977 U.S. Tax Ct. LEXIS 28">*43 69 T.C. 165">*170 The total value of such distributions in each case exceeded the distributable net income of the estate as reflected in its income tax returns for each of its taxable years in issue. The parties further stipulated that the marital trust distributed all that it received from the estate to the foundation shortly after receipt. ⁴

The parties1977 U.S. Tax Ct. LEXIS 28">*44 have further stipulated that the administration of the estate continues pending the outcome of this proceeding; that the trustees continue to administer the marital trust, receiving estate assets from time to time, and in general turning over the assets received to the foundation shortly after receipt by the trust; that a small balance of principal cash is now maintained by the trust; and that, when the controversies involved in this proceeding are finally determined and the trustees have received from the executors all property passing under the will to the marital trust (which must be distributed to the trustees, despite Mrs. O'Connor's assignment, under New York law), they will make a final judicial accounting to the Surrogate's Court and only after that accounting proceeding is completed and all assets remaining in their possession thereafter have been distributed can the administration of the trust be considered completed.

For its taxable years at issue, the estate claimed distributions 69 T.C. 165">*171 deductions under section 661(a)(2)⁵ against its reported distributable net income as follows:

For its taxable years in question, returns were filed for the marital trust on which the amounts distributed from the estate and passed through ⁶ to the foundation in accordance with the election and assignment executed by Mrs. O'Connor were reported and deducted under section 661(a).

1977 U.S. Tax Ct. LEXIS 28">*46 As noted in the above table, the estate also made income distributions directly to the beneficiaries of the residuary trusts prior to the transfer of the underlying assets to such trusts. On the premise that such distributions were not required to be made currently by the estate, each of the individual beneficiaries computed his respective tax liability in accordance with section 662(a)(2). ⁷

1977 U.S. Tax Ct. LEXIS 28">*47 69 T.C. 165">*172 On its income tax return for the taxable year ending October 31, 1971, the estate claimed a deduction for the payment of executors' commissions in the amount of $ 55,674.04. The commissions were computed on the basis of the estate's aggregate gross income earned from the date of death to May 8, 1970 (the intermediate accounting period), or $ 1,391,851.25. Of this amount, $ 703,759.65 was tax-exempt income. No tax-exempt income was earned in the taxable year ending October 31, 1971.

Respondent made three primary determinations in respect of the above-outlined distribution plan:

(1) The marital trust was not a recognizable tax entity because it was a passive trust under New York law;

(2) Section 661(a) does not permit a deduction to an estate or trust for distributions to charitable entities where such distributions do not qualify for deduction under section 642(c); and

(3) The income paid to the residuary trust beneficiaries was required to be distributed currently by the residuary trusts.

The frame of reference for issues posed by respondent's determinations can be simply stated: Who is taxable, and to what extent, on income earned and distributed by the decedent's estate1977 U.S. Tax Ct. LEXIS 28">*48 during its period of administration? Resolution of the issues is not as simply divined.

The core questions with respect to the amounts received by the foundation are (a) to what extent should the marital trust be recognized for the purposes of this proceeding; (b) should section 1.663(a)-2, Income Tax Regs., ⁸ be given effect; and (c) if the regulation is not given effect, should the foundation be treated as a "beneficiary" for the purposes of the distributions deduction?

1977 U.S. Tax Ct. LEXIS 28">*49 69 T.C. 165">*173 Before turning to these questions, we deem it appropriate to deal with an addendum to one of petitioners' briefs in which an attempt is made to support the proposition that the distributions to the foundation qualify for the charitable deduction provided for in section 642(c). One of the critical requirements of that section is that the amount in question be paid "pursuant to the terms of the governing instrument." Petitioners seek to bring the payments to the foundation within section 642(c) by latching on to the provision in the decedent's will granting Mrs. O'Connor a general power of appointment "to such persons and/or corporations" as she sees fit. Aside from the fact that Mrs. O'Connor in form never exercised her power of appointment in favor of anyone, the mere reference to "corporations," even if coupled with decedent's knowledge of the existence of the foundation, simply does not meet the test of section 642(c), namely, that the governing instrument (in this case, decedent's will) must contain some manifestation of charitable intent. See Ernest & Mary Hayward Weir Found. v. United States, 362 F. Supp. 928, 939 (S.D.N.Y. 1973), affd. 1977 U.S. Tax Ct. LEXIS 28">*50 per curiam 508 F.2d 894">508 F.2d 894 (2d Cir. 1974). Cf. Estate of Pickard v. Commissioner, 60 T.C. 618">60 T.C. 618, 60 T.C. 618">622 (1973), affd. without opinion 503 F.2d 1404">503 F.2d 1404 (6th Cir. 1974). Accordingly, we now turn to the core questions.

We first direct our attention to the estate's claimed distributions deductions for amounts passed through the marital trust to the foundation. This issue involves an initial determination of whether the marital trust should be recognized for purposes of this proceeding. ⁹

Although respondent has, by virtue of various parts of the stipulation of facts, conceded that the marital trust existed in the sense that distributions from the estate were required, 1977 U.S. Tax Ct. LEXIS 28">*51 by virtue of New York law, to be made to and through the trustees, he nevertheless contends that the trust was passive under section 7-1.2, New York Estates, Powers & Trusts Law, and is not recognizable for tax purposes.

We find it unnecessary to resolve the status of the marital trust for State law purposes. Even assuming arguendo that throughout the years in question a valid trust ¹⁰1977 U.S. Tax Ct. LEXIS 28">*52 existed for 69 T.C. 165">*174 purposes of State law, it does not follow that it was a recognizable tax entity. Indeed, we think that by virtue of the operation of section 678 it was not. ¹¹

When a grantor or other person has certain powers in respect of trust property that are tantamount to dominion and control over such property, the Code "looks through" the trust form and deems such grantor or other person to be the owner of the trust property and attributes the trust income to such person. See secs. 671, et seq. By attributing such income directly to a grantor or other person, the Code, in effect, disregards the trust entity. ¹² Income is deemed, therefore, to have been received by the "owner" of the property.

1977 U.S. Tax Ct. LEXIS 28">*53 The circumstances in which a person other than a grantor is considered the owner of trust property are set forth in section 678, which provides in part as follows:

SEC. 678. PERSON OTHER THAN GRANTOR TREATED AS SUBSTANTIAL OWNER.

(a) General Rule. -- A person other than the grantor shall be treated as the owner of any portion of a trust with respect to which:

(1) such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself, or

(2) such person has previously partially released or otherwise modified such a power and after the release or modification retains such control as would, within the principles of sections 671 to 677, inclusive, subject a grantor of a trust to treatment as the owner thereof.

Scott, J., dissenting: I respectfully disagree with the conclusion of the majority that the provisions of section 678, I.R.C. 1954, result in the grantor or other person who has certain powers in respect of trust property being the owner of that "property" so that the "trust entity" is disregarded. To do this would effectively1977 U.S. Tax Ct. LEXIS 28">*75 cause the trust entity of many marital trusts to be disregarded since in many marital trusts the beneficiary has the power to vest "the corpus or income therefrom" in herself. Secondly, the statutes (sec. 671, etc.) refer to including 69 T.C. 165">*184 in the income of the grantor, or other person to whom the income is taxed under subpart E, the "income * * * of the trust." The regulations follow this same pattern.

Section 1.671-1(a), Income Tax Regs., states in part:

(a) Subpart E (section 671 and following), part I, subchapter J, chapter 1 of the Code, contains provisions taxing income of a trust to the grantor or another person under certain circumtances * * * [Emphasis added.]

Section 1.671-2(a), Income Tax Regs., states in part:

(a) Under section 671 a grantor or another person includes in computing his taxable income and credits those items of income, deduction, and credit against tax which are attributable to or included in any portion of a trust of which he is treated as the owner. * * * [Emphasis added.]

Section 1.671-2(b), Income Tax Regs., states in part:

(b) Since the principle underlying subpart E (section 671 and following), part I, subchapter J, chapter 1 1977 U.S. Tax Ct. LEXIS 28">*76 of the Code, is in general that income of a trust over which the grantor or another person has retained substantial dominion or control should be taxed to the grantor or other person rather than to the trust which receives the income * * * [Emphasis added.]

Section 1.671-4, Income Tax Regs., states as follows:

Sec. 1.671-4 Method of reporting.

Items of income, deduction, and credit attributable to any portion of a trust which, under the provisions of subpart E (section 671 and following), part I, subchapter J, chapter 1 of the Code, are treated as owned by the grantor or another person should not be reported by the trust on Form 1041, but should be shown on a separate statement to be attached to that form.

In my view, section 1.671-4, Income Tax Regs., requires the filing of a return by the trust to show on a statement attached to that return that the "income of the trust" is taxed to the grantor or another person. If section 678 is applicable here, I would conclude that, if the trust is not for other reasons to be ignored for tax purposes, it remains a viable trust with its income taxable to the grantor or another person.

Fay, J., dissenting: I respectfully dissent1977 U.S. Tax Ct. LEXIS 28">*77 in the conclusions reached herein by the majority. Specifically, I believe the opinion to be faulty in its reasoning and holding regarding the tax status of so-called grantor trusts.

As its main contention for ignoring the trust created under 69 T.C. 165">*185 the will of A. Lindsay O'Connor, the majority makes the bold assertion that: "By attributing such income directly to a grantor or other person [via secs. 671, et seq.], the Code, in effect, disregards the trust entity." Devoid of any articulation of rationale for its holding, the logical result of the majority's opinion is that a grantor trust has no separate transactional existence under the Internal Revenue Code. I cannot agree. ¹

1977 U.S. Tax Ct. LEXIS 28">*78 Sections 673 through 678 enumerate certain situations where a grantor or other person will "be treated as the owner of any portion of a trust" over which he possesses a proscribed power or beneficial interest. ² Reference as to the tax consequences of being so treated, however, must be made to section 671 which provides:

Where it is specified in this subpart that the grantor or another person shall be treated as the owner of any portion of a trust, there shall then be included in computing the taxable income and credits of the grantor or the other person those items of income, deductions, and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under this chapter in computing taxable income or credits against the tax of an individual. Any remaining portion of the trust shall be subject to subparts A through D. No items of a trust shall be included in computing the taxable income and credits of the grantor or of any other person solely on the grounds of his dominion and control over the trust under section 61 (relating to definition of gross income) or any other provision of this1977 U.S. Tax Ct. LEXIS 28">*79 title, except as specified in this subpart. [Emphasis added.]

It is clear that the statute in its wording presupposes the existence of a valid trust. It is equally clear that the purpose of the statutory scheme of subpart E of subchapter J is merely to identify the person responsible for reporting certain income and deduction items realized by a trust. Nowhere does the statute state, much less "require," as the majority maintains, ³ that the trust not be recognized for tax purposes. Indeed, the regulations take a position to the contrary.

1977 U.S. Tax Ct. LEXIS 28">*80 In discussing the concept of what is a "trust" for Federal tax 69 T.C. 165">*186 purposes, section 301.7701-4(a), Proced. & Admin. Regs., in an obvious reference to a grantor trust, states as follows:

Usually the beneficiaries of * * * a trust do no more than accept the benefits thereof and are not the voluntary planners or creators of the trust arrangement. However, the beneficiaries of * * * a trust may be the persons who create it and it will be recognized as a trust under the Internal Revenue Code * * * as * * * if the trust had been created by others for them. [Emphasis added.]

I believe the majority in its opinion, if not expressly, has effectively invalidated this regulation altogether.

I am not proposing that a grantor trust's existence should always be recognized for tax purposes; rather, I am merely contending that an examination should be made in each case to determine if some other congressional tax policy would best be served by not regarding the trust as a separate transactional entity. If such a policy does not exist, then, absent other reasons, I would not ignore the trust. My point can be illustrated by an examination of the two main cases which have addressed1977 U.S. Tax Ct. LEXIS 28">*81 this issue. ⁴

In Swanson v. Commissioner, 518 F.2d 59">518 F.2d 59 (8th Cir. 1975), affg. a Memorandum Opinion of this Court, G created an irrevocable trust in which he had no beneficial interest. However, the trust instrument did permit him to amend the trust so long as such amendment did not vest in G any right to the trust's income or corpus. The trust purchased an insurance policy on G's life from a related corporation. Subsequently, G died and the trust collected approximately $ 914,000 compared with its total investment in the policy of about $ 208,000. We stated the issue as follows:

Section 101(a) states that * * * amounts received under a life insurance policy are not includable in gross income. Section 101(a)(2)(B) provides that life insurance proceeds are includable in gross income in the case of a transfer for valuable consideration unless the transfer is to the insured * * *. The issue is whether1977 U.S. Tax Ct. LEXIS 28">*82 the exception to the transfer for valuable consideration rule of section 101 is applicable to the transfer of life insurance policies to the Swanson Trusts. [T.C. Memo. 1974-61. Fn. ref. omitted.]

The taxpayer argued that because under section 674, G was treated as the "owner" of the entire trust and because he was 69 T.C. 165">*187 also the insured under the policy, the proceeds received by the trust were excludable from its gross income under the general rule of section 101(a). The respondent, on the other hand, argued that the policies were transferred to the trust and not to G. In short, although G was the "owner" of the entire trust by virtue of section 674, respondent argued that the trust's existence should not be ignored for purposes of section 101. ⁵

The Eighth Circuit held as follows:

We cannot accept the government's contention that in this case Swanson, the grantor1977 U.S. Tax Ct. LEXIS 28">*83 of the grantor-trusts, is not deemed the owner of the trusts for any purpose other than that of taxing trust income to him, and the trusts, therefore, retain their identity as a separate tax entity under Section 101(a)(2)(B). The provision in each trust instrument that it shall be subject to interpretation or amendment by the maker (except with respect to vesting property, income or corpus in himself as an individual) gave the grantor complete control over the insurance policies in question. Through his control over the trusts, he could exercise all of the incidents of ownership over the policies. He could, among other things, cause (1) a change in beneficiaries, (2) loans to be secured on the policies, or (3) even have the policies cancelled.

* * * *

The mere fact that the legislative history of Section 674 and related statutes indicates that the purpose of the legislation was to tax the income of grantor-trusts to the grantor does not require the strained construction of Section 101(a) urged by the government.

We hold that in this case, since Swanson owned and controlled the trusts, the policies were transferred to the "insured" within the meaning of Section 101(a)(2)(B) and 1977 U.S. Tax Ct. LEXIS 28">*84 the net proceeds are therefore excludable from gross income under Section 101(a)(1). [518 F.2d 59">518 F.2d at 63-64.]

The result reached in Swanson seems premised on the congressional policy behind section 101 rather than on the operation of sections 671 and 674. Section 101(a)(2)(B) permits the nongratuitous transfer of a life insurance policy to an insured. Whether the transfer was made to the "insured" is a factual question, the answer to which is dependent upon the insured's relationship to the policy subsequent to the transfer. Because G had the power to control the beneficial enjoyment of the policy, his relationship to the policy was sufficient to bring into play the congressional purpose of section 101(a). Surely, it cannot be said that G's interest in the policy arose from the operation of the grantor trust rules. In other words, sections 67169 T.C. 165">*188 and 674 will not provide the answer to whether "transfer [was made] to the insured" within the meaning of section 101(a)(2)(B). Rather, that determination is primarily one of fact.

In W & W Fertilizer Corp. v. United States, 527 F.2d 621">527 F.2d 621 (Ct. Cl. 1975), cert. denied 425 U.S. 974">425 U.S. 974 (1976),1977 U.S. Tax Ct. LEXIS 28">*85 the taxpayer was a subchapter S corporation from 1965 to 1970. The corporation had two shareholders, Lemuel, who owned 47 percent of the company's stock, and his brother, Fred, who owned 53 percent. In 1970 Lemuel transferred his entire 47-percent stock interest to a trust which he created. As the grantor, Lemuel reserved in himself the right to revoke the trust and revest its assets in himself at any time. There was no question that Lemuel was the "owner" of the entire trust under section 676(a) and therefore responsible for reporting all of its income and deductions under section 671.

Section 1371(a)(2), which contained one of the prerequisites for subchapter S status, provided that a "small business corporation" may not "have as a shareholder a person * * * who is not an individual." Respondent argued that because the trust was not an "individual" the corporation's subschapter S status should be terminated. The corporation, on the other hand, argued that because Lemuel was treated as the "owner" of the entire trust under section 676(a), the trust should be disregarded for tax purposes. The Court of Claims framed the issue as follows:

Hence, the resolution of this case turns1977 U.S. Tax Ct. LEXIS 28">*86 on whether the revocable inter vivos trust described herein is to be accorded recognition for Federal tax purposes as a shareholder in taxpayer, or, instead, whether the grantor-beneficiary is to be so recognized and the trust disregarded. [527 F.2d 621">527 F.2d at 623.]

In addressing the taxpayer's argument that Lemuel, because of the operation of the grantor trust rules, was the "owner" of the stock, the court held as follows:

Taxpayer's third contention is that because Lemuel, as grantor of the Woods Trust, is taxed on the trust income under the "grantor trust rules" of section 671 et seq., the trust should be ignored. The argument is that it would be inconsistent not to consider him the owner of the shares for Subchapter S eligibility purposes and yet tax him as their "owner" on the income they produce. Taxpayer, however, misconceives the manner in which the "grantor trust rules" operate. They do not, as taxpayer urges, recognize the grantor as the legal "owner" of the property placed in trust. On the contrary, the rules arose under the Code because it was recognized by Congress that taxation of income is not concerned so much with refinements of title1977 U.S. Tax Ct. LEXIS 28">*87 as it is with actual 69 T.C. 165">*189 command over the property taxed. Corliss v. Bowers, 281 U.S. 376">281 U.S. 376 * * * (1930). The "grantor trust rules" treat the grantor as if he were the owner in cases where he has reserved to himself some of the powers normally attendant to outright ownership. Thus, their design is to expand the coverage of the taxing statute. On the other hand, Subchapter S was enacted as a remedial measure to relieve qualifying small business corporations of a tax otherwise payable. Section 1371(a)(2) limits the benefits of the Act to corporations whose stock is owned solely by individuals or estates. Where such a deliberately specific qualification is imposed, we must strictly apply it lest the narrow benefit intended by Congress be unduly broadened. Hence, the "grantor trust rules," with the very purpose of expansion, and the qualification requirements of section 1371(a), with their restrictive purpose, are not analogous, and their comparison is not supportive of the taxpayer in this case.

Moreover, in making an argument based upon the applicability of the "grantor trust rules" taxpayer, in effect, concedes the existence and recognition1977 U.S. Tax Ct. LEXIS 28">*88 of the Woods Trust for tax purposes because the rules themselves address taxation of trust income. If there were no trust for tax purposes, the rules would not apply. The applicability herein of the "grantor trust rules" embodied in section 671 et seq., therefore, reinforces, rather than refutes, the argument that the Woods Trust must be recognized as the owner of taxpayer's stock. [527 F.2d 621">527 F.2d at 627-628.]

Even though the result in W & W Fertilizer Corp. would be different in light of the amendment made to section 1371(a)(2) and the addition of section 1371(f) by the Tax Reform Act of 1976, the case appears to be correctly decided in view of the court's discussion of the remedial purpose of subchapter S. ⁶

1977 U.S. Tax Ct. LEXIS 28">*89 Under the facts of Swanson and W & W Fertilizer Corp., the grantor was treated as the "owner" of the entire trust; nevertheless, as to the issue of whether the trusts should be ignored for Federal income tax purposes, the two courts reached opposite results. In my opinion, however, the two cases are not inconsistent. A careful reading of each case shows that the 69 T.C. 165">*190 underpinning for each decision was not on the operation of sections 671, et seq.; rather, the crucial factor in both cases was the effectuation of a congressional policy expressed through another Code section when that section operated simultaneously with the grantor trust rules. ⁷

1977 U.S. Tax Ct. LEXIS 28">*90 In the instant case, the decision as to whether the trust established under the will of A. Lindsay O'Connor should be recognized for Federal income tax purposes should not be made as the majority does, on the basis of an examination of section 678. The majority essentially disregards the trust for purposes of determining whether the estate should be allowed a deduction under section 661. The proper inquiry in deciding this issue should be whether there is any overriding congressional policy embodied in section 661 which would mandate our disregarding the trust in this case. Under the facts of this case, the answer to this question clearly lies in the negative.

Section 661 essentially allows a trust or estate a deduction for distributions made to its beneficiaries. The regulations under section 643 provide that "A trust created under a decedent's will is a beneficiary of the decedent's estate." Sec. 1.643(c)-1, Income Tax Regs. The mere fact that a trust is also one governed by subpart E should be of no consequence, and indeed that appears to be the position of the Service in Rev. Rul. 57-214, 1957-1 C.B. 203, which involves a trust governed, 1977 U.S. Tax Ct. LEXIS 28">*91 as is the case here, by the provisions of section 678. This result should follow whether the beneficiary of a trust assigns her rights under the trust to her children, her corporation, her bank, to a charity, or to whomever. In light of the fact that no congressional policy would be served by ignoring the trust for purposes of the estate's section 661 deduction, I would accordingly not disregard its existence. ⁸

69 T.C. 165">*191 As its 1977 U.S. Tax Ct. LEXIS 28">*92 second ground for ignoring the marital trust, the majority holds that the trust fails to meet the definition of a "trust" as set forth in section 301.7701-4(a), Proced. & Admin. Regs.

Under his will, A. Lindsay O'Connor made provision for the creation of a trust for the benefit of his wife. The trustees, under the will, were charged with various duties which included payment of the trust income to the widow for her life and the payment of the trust corpus at her direction. Exercising this latter right, decedent's wife completely assigned her interest in the trust to the O'Connor Foundation. Thereafter, approximately $ 20 million in property was distributed from decedent's estate to the trust over the next 3 years. Shortly after its receipt of the property, the trust, pursuant to the widow's directions, distributed this property to the foundation.

The majority in reaching its conclusions herein reasons that the trust's level of activity was so low as not to be recognizable for tax purposes. I cannot agree.

In my opinion, resolution of whether a distinct jural entity under State law may be ignored for tax purposes requires a determination of many factors. Certainly, the level of1977 U.S. Tax Ct. LEXIS 28">*93 activity performed by the entity is an important consideration; however, in the absence of a tax avoidance scheme, ⁹ I believe the quantum of activity only need be "minimal." See Strong v. Commissioner, 66 T.C. 12">66 T.C. 12, 66 T.C. 12">24 (1976), affd. 553 F.2d 94">553 F.2d 94(2d Cir. 1977).

In the instant case, the activity of the trust under any reasonable interpretation of the facts was sufficient to exceed that standard. The trustees were under a duty to receive the property from the executors of the estate and administer the same until the appropriate time for distribution to the beneficiary. Specifically, they were required to collect1977 U.S. Tax Ct. LEXIS 28">*94 the full share of principal and income allocable to the marital trust from the estate, which requirement could not be completed until the administration of the estate had been completed. In view of the fact that the trustees ultimately collected in excess of $ 20 million in cash and property from the estate, and because they 69 T.C. 165">*192 could be surcharged for their failure to perform properly, I believe it cannot reasonably be said that the activity of the trust was so low as not to meet the definition of a trust within the Code. Accordingly, I would recognize the marital trust as the recipient of the distributions made by the estate.

Adoption of my approach would not necessitate reaching the issue raised by Mott v. United States, 462 F.2d 512">462 F.2d 512 (Ct. Cl. 1972), and the regulations under section 663.

More specifically, in the instant case, the estate would be allowed a section 661 deduction for any distributions it made to the marital trust. Since the marital trust, by virtue of the wife's power and subsequently the foundation's power over its corpus, is a section 678 trust, its taxation would be governed by section 671. Section 671 says that where a1977 U.S. Tax Ct. LEXIS 28">*95 person is treated as the "owner" of a portion, all income and expenses of the trust attributable thereto are directly reportable by that person. The statute goes on to provide that any other portion of the trust not within the reach of sections 671 through 678 will be governed by sections 641 through 669. Because the wife and subsequently the foundation are treated as the "owner" of the entire trust, sec. 1.671-3(b)(3), Income Tax Regs., there is no "portion" of the trust that is governed by sections 641 through 669 and, accordingly, we need not decide the section 642(c), 661, 662, 663(a)(2), and Mott issue. ¹⁰

1977 U.S. Tax Ct. LEXIS 28">*96 Sterrett, J., dissenting: I respectfully dissent from the 69 T.C. 165">*193 majority's conclusion that "a literal interpretation of section 661(a)(2), which would permit (subject to the distributable net income ceiling) the deductibility of all amounts distributed and not otherwise expressly disallowed (see Mott v. United States, 462 F.2d 512">462 F.2d 512, 462 F.2d 512">517 (Ct. Cl. 1972)) would be inconsistent with the statutory framework and overall legislative objectives of subchapter J and that, as applied to the circumstances herein, respondent's regulations should be sustained." In my view, analysis of the applicable statutes and legislative history amply supports the opposite result.

Although the majority's view that the marital trust should not be recognized for Federal income tax purposes seems questionable, in any event, resolution of the alleged conflict between sections 642(c) and 661(a)(2) must be determined. ¹ This is so because even if the marital trust is recognized for Federal tax purposes, section 661 permits the estate a deduction for all amounts distributed by it (subject to the D.N.I. ceiling), and then upon distribution by the trust to the foundation, the sections1977 U.S. Tax Ct. LEXIS 28">*97 642(c) and 661(a)(2) issue must be scrutinized.

The legislative history under subchapter J, part I, provides us with three general principles relating to distributions by estates and trusts, to wit: (1) While estates and trusts are to be treated as separate taxable entities, they are treated substantially 1977 U.S. Tax Ct. LEXIS 28">*98 as conduits through which income passes to the beneficiary; (2) all distributions are deductible by the estate or trust and are taxable to the beneficiaries to the extent of the estate's or trust's current income; and (3) under the concept of distributable net income, the tracing of such distributions is not required. S. Rept. 1622, 83d Cong., 2d Sess. (1954), U.S. Code Cong. & Adm. News 4715-4717; see also H. Rept. 1337, 83d Cong., 2d Sess. (1954), U.S. Code Cong. & Adm. News 4086-4087.

Implementation of these principles, for the estate and trusts herein, is accomplished by sections 661 and 662. Section 661(a) allows a deduction by an estate or trust, not exceeding D.N.I., 69 T.C. 165">*194 for any amount of income "required to be distributed currently" (sec. 661(a)(1)) and "any other amounts properly paid or credited or required to be distributed" (sec. 661(a)(2)). Then, with some limitations, section 662(a) includes in "the gross income of a beneficiary" amounts "paid, credited or required to be distributed" as specified in section 661(a).

In addition to the distribution deduction, Congress has provided in section 642(c) that an estate or trust shall be allowed a deduction, in computing1977 U.S. Tax Ct. LEXIS 28">*99 its taxable income (in lieu of a section 170(a) deduction), for any amounts of gross income paid, permanently set aside, or otherwise used exclusively for charitable purposes. Therefore, "a trust or estate is allowed an unlimited deduction for charitable contributions and is not subject to the limitation imposed on the charitable contributions of individuals." H. Rept. 1337, supra, U.S. Code Cong. & Adm. News at 4332. See also S. Rept. 1622, supra, U.S. Code Cong. & Adm. News at 4982. In view of this broad deduction Congress enacted section 663(a)(2) as follows:

(a) Exclusions. -- There shall not be included as amounts falling within section 661(a) or 662(a) --

* * * *

(2) Charitable, etc., distributions. -- Any amount paid or permanently set aside or otherwise qualifiying for the deduction provided in section 642(c) * * *