CASCO BANK & TRUST COMPANY v. United States
| Decision Date | 02 December 1975 |
| Docket Number | Civ. No. 75-5 SD. |
| Citation | 406 F. Supp. 247 |
| Parties | CASCO BANK & TRUST COMPANY, Trustee u/w Arthur Clifford Bunker, Plaintiff, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — District of Maine |
Thomas J. Van Meer, Portland, Me., for plaintiff.
Peter Mills, U. S. Atty., Portland, Me., Daniel J. Dinan, Trial Atty., Tax Div., U. S. Dept. of Justice, Washington, D. C., for defendant.
This is an action for refund of $15,519.93 federal income taxes, plus statutory interest, alleged to have been erroneously assessed to and paid by plaintiff Casco Bank & Trust Company, trustee under the will of Arther Clifford Bunker, for the years 1966, 1967 and 1968. The sole issue presented is whether, on its income tax return for each of the years in question, the Arthur Clifford Bunker trust properly claimed a deduction under Section 642(c) of Subchapter J of the Internal Revenue Code of 1954, 26 U.S.C. § 642(c) ("the Code"), for amounts permanently set aside for charitable purposes. The facts have been stipulated, and the case is before the Court on cross-motions for summary judgment.
The pertinent statutes are set forth in an appendix. In material part, they provide as follows.
Section 641(a) of the Code imposes a tax upon the taxable income of trusts and estates. The taxable income of an estate or trust is determined in essentially the same manner as that of an individual. According to Treas.Reg. (Income Tax) § 1.641(b)-1, 26 CFR § 1.641(b)-1:
Generally, the deductions and credits allowed to individuals are also allowed to estates and trusts. However, there are special rules for the computation of certain deductions and for the allocation between the estate or trust and the beneficiaries of certain credits and deductions . . . . In addition, an estate or trust is allowed to deduct, in computing its taxable income, the deductions provided by sections 651 and 661 and regulations thereunder, relating to distributions to beneficiaries.
Section 661(a) of the Code provides that in computing the taxable income of an estate or trust in any taxable year there shall be allowed as a deduction for distributions to beneficiaries the sum of: (1) the amount of income for the taxable year which is required to be distributed currently, and (2) any other amounts properly paid or credited or required to be distributed for such taxable year; but such deduction shall not exceed the distributable net income of the estate or trust.1 Section 661(b) of the Code provides that the deduction allowed by Section 661(a) shall be allocated pro rata among the different classes of income that comprise the distributable net income of the estate or trust, unless the will or trust instrument specifically provides for a different allocation.
The term "beneficiary" is defined in Section 643(c) of the Code to include heirs, legatees and devisees. The applicable regulation makes it clear that a "trust created under a decedent's will is a beneficiary of the decedent's estate." Treas.Reg. (Income Tax) § 1.643(c)-1, 26 CFR § 1.643(c)-1.
Section 662(a) of the Code requires a beneficiary of an estate or trust described in Section 661 to include in gross income the amount of income for the taxable year required to be distributed currently to such beneficiary, whether distributed or not, and any other amounts properly paid or credited or required to be distributed to such beneficiary for the taxable year; but not in excess of the distributable net income of the estate or trust. Section 662(b) provides that the amounts determined under Section 662(a) shall have the same character in the hands of the beneficiary as in the hands of the estate or trust.
Section 643(b) of the Code defines the term "income" for the purposes of the sections of the Code relating to the taxation of estates and trusts. Section 643(b), in part, provides:
The term "income", when not preceded by the words "taxable", "distributable net", "undistributed net", or "gross", means the amount of income of the estate or trust for the taxable year determined under the terms of the governing instrument and applicable local law.
Finally, Section 642(c) of the Code provides that an estate or trust shall be allowed as a deduction in computing its taxable income any amount of gross income which pursuant to the terms of the governing instrument, during the taxable year, is paid or permanently set aside for charitable purposes. Specifically, Section 642(c), in pertinent part, provides:
(c) Deduction for amounts paid or permanently set aside for a charitable purpose.—In the case of an estate or trust . . . there shall be allowed as a deduction in computing its taxable income . . . any amount of the gross income, without limitation, which pursuant to the terms of the governing instrument is, during the taxable year, paid or permanently set aside for a purpose specified in section 170(c) . . ..
In the instant case, plaintiff is the trustee of a testamentary trust established under the will of Arthur Clifford Bunker, who died on April 27, 1965, a resident of Harpswell, Maine. The will provided that the trustee was to hold and manage the corpus of the trust estate and pay the income thereof to Mr. Bunker's daughter, Ruth, for life. After Ruth's death, the trust income was to go to her brother, Paul, for his life, and after Paul's death, the income was to be paid, in perpetuity, equally to the Maine Institution for the Blind and the New York Association for the Blind. It is stipulated that these organizations are qualified Section 170(c) charities.
For each of the years in issue, distributions from the estate to the trust and from the trust to the current income beneficiaries (Ruth and Paul) followed the same pattern. In each year the estate received gross income, consisting of interest and dividends, which the estate returned on a fiscal year basis ending March 31. After claiming allowable deductions, the estate offset the balance of its income by a distribution to the trust deductible under Section 661(a) (2). The property distributed to the trust, however, was corpus (stock and securities) of the estate, not income earned by the estate.2
The distributions of corpus from the estate to the trust for each year exceeded the estate's distributable net income. Consequently, pursuant to Section 662 (a), the trust included in its gross income only the portion of the distributions equal to the estate's distributable net income.3 Since, as the government agrees, the stock and securities distributed by the estate to the trust constituted corpus of the trust under Maine law, the trustee, following the instructions of the will, held these assets as principal and distributed no portion of them to the income beneficiaries. The trust then claimed a Section 642(c) deduction therefor as gross income permanently set aside for charitable purposes.
The treatment of the specific amounts for each year in issue by the estate was as follows:
F/Y/E 3-31-66 F/Y/E 3-31-67 F/Y/E 3-31-68
Gross income
(dividends and
interest ........ $25,113.53 $26,311.29 $24,509.08
Allowable
deductions ...... 12,068.84 11,977.82 506.25
Distribution
deduction ....... 13,044.69 14,333.47 24,002.83
__________ __________ ___________
Taxable income .... -0- -0- -0-
========== ========== ===========
The treatment of the specific amounts for each year shown on the trust's returns was as follows:
C/Y 1966 C/Y 1967 C/Y 1968
Dividends and
interest ............. $ 720.00 $ 1,703.55 $ 4,151.64
Gross income under
Code § 662 ...... 13,044.69 14,333.47 24,002.83
__________ ___________ __________
Total gross income .... $13,764.69 $16,037.02 $28,154.47
========== =========== ==========
Charitable deduction
under § 642(c) .. $13,044.69 $14,333.47 $24,002.83
Distribution
deduction ............ 720.00 1,581.34 3,855.72
Trustee's expenses .... -0- 122.21 295.92
__________ ___________ ___________
Taxable income ........ -0- -0- -0-
========== =========== ===========
III
Section 642(c) of the Code provides for the deduction by an estate or trust of "any amount of the gross income" which "pursuant to the terms of the governing instrument" is permanently set aside for charitable purposes. The Commissioner does not contest that the amounts deducted by the trust pursuant to Section 642(c) were permanently set aside for legitimate charitable purposes. His assertion is that the deduction for each year was properly disallowed because it was not for an "amount of the gross income" of the trust which was permanently set aside "pursuant to the terms of the governing instrument." The Court is persuaded that the Commissioner erred in so concluding.
Both prerequisites to the Section 642(c) deduction have been met in this case. Section 662(a)(2) of the Code requires an estate beneficiary to include in gross income any amounts paid to the beneficiary for the taxable year up to the amount of the distributable net income of the estate; and this is so even though the amount distributed to the beneficiary is corpus under local state fiduciary accounting law. United States v. Bank of America National Trust & Savings Ass'n, 326 F.2d 51, 54 (9th Cir. 1963). Thus, in each year at issue, the stock and securities received by the...
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