Petschek v. Comm'r of Internal Revenue (In re Estate of Petschek)
| Decision Date | 07 September 1983 |
| Docket Number | Docket No. 9428–80. |
| Citation | 81 T.C. No. 20,81 T.C. 260 |
| Parties | ESTATE OF ERNST N. PETSCHEK, DECEASED, THOMAS H. PETSCHEK AND ASHER LANS, EXECUTORS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Throughout 1975, D resided in France. From January 1, 1975, to November 23, 1975, D was an American citizen. On November 24, 1975, D became a citizen of France and remained so through the end of 1975. During 1975, D was the income beneficiary of a simple trust earning all its income from foreign sources. Held, under section 652(a), I.R.C. 1954, in 1975, D is subject to Federal income tax on the net income realized by the trust in that part of the year during which D was an American citizen. Asher B. Lans, Robert A. Manning and Edgar J. Royce, for the petitioners.
David M. Brandes, for the respondent.
Respondent determined a deficiency in the Federal income tax of petitioner's decedent for the taxable year 1975 of $98,222. Due to concessions, the issue for decision is the amount of gross income petitioner's decedent should have reported by virtue of having been during 1975 the income beneficiary of a simple trust earning only foreign source income.
All of the facts have been stipulated and are found accordingly.
Thomas H. Petsmhek resided at London, England, and Asher B. Lans resided at New York, New York, at the time the petition was filed.
For many years prior to 1975, petitioner's decedent, Ernst N. Petschek (hereinafter “Petschek”), was an American citizen residing in France. From January 1, 1975, to November 23, 1975, Petschek continued to be an American citizen residing in France. On November 24, 1975, he became a citizen of the Republic of France and thereby became and remained a nonresident alien for the balance of the calendar year 1975.
In December, 1955, decedent's father established an inter vivos trust at New York, New York. Upon the death of decedent's father, this trust was divided into two equal parts, each of which became a separate trust. During 1975, Petschek was the sole income beneficiary of one of these trusts, the Ernest Petschek Trust 5A (“Trust 5A”).
The trustee of Trust 5A was required to distribute its net income “at least annually” to Petschek. Further, the trustee had complete discretion to invade the corpus of the trust for the use of Petschek, his spouse or issue. Finally, Petschek possessed a testamentary special power of appointment over the corpus of Trust 5A.
During 1975, Petschek's cousin was the trustee of Trust 5A.
In 1975, Trust 5A was a simple trust within the purview of Subpart B, Part I, Subchapter J, Chapter 1, of the Internal Revenue Code of 1954.
Trust 5A was a calendar year, cash basis taxpayer. During the calendar year 1975, Trust 5A had the following income and deductible expenses:
From January 1, 1975, to November 23, 1975, Trust 5A had the following income and deductible expenses:
In 1975, Trust 5A had no income from sources within the United States and no part of its income was effectively connected with the conduct of a trade or business in the United States.
Between January 1, 1975, and November 23, 1975, inclusive, the trustee distributed $132,841 from Trust 5A to Petschek.
Petschek was alive for all of 1975. He reported his 1975 income on the cash basis using a calendar year. On his 1975 nonresident alien income tax return, Petschek reported no income from Trust 5A.
In his statutory notice of deficiency, respondent determined that Petschek was required to report $136,547 as taxable income from Trust 5A in 1975. This figure was calculated by prorating the entire amount of income (less expenses) realized by Trust 5A in calendar year 1975 over the number of days in 1975 when Petschek was an American citizen.
On brief, respondent contends that Petschek was required to report $136,657 as taxable income from Trust 5A in 1975. This figure represents the amount of income (less expenses) actually realized by Trust 5A between January 1, 1975, and November 23, 1975, inclusive. Alternatively, respondent contends that decedent was required to report $132,841 as taxable income from Trust 5A in 1975. This alternative figure represents the amount of money the trustee distributed to Petschek during the portion of 1975 when Petschek was an American citizen.
Petitioner, on the other hand, argues that Petschek did not receive any taxable income from Trust 5A while Petschek was an American citizen in 1975. Consequently, petitioner contends, decedent did not have to report any income from Trust 5A in 1975.
An American citizen who resides abroad for the entire taxable year is generally3 taxable on his worldwide income. Section 1.1–1(b), Income Tax Regs.; Cook v. Tait, 265 U.S. 47 (1924); Cinelli v. Commissioner, 502 F.2d 695, 697 (6th Cir. 1974), affg. a Memorandum Opinion of this Court; Filler v. Commissioner, 74 T.C. 406, 410 (1980).4 Conversely, an individual who is a nonresident alien throughout the taxable year is taxable only on gross income derived from sources within the United States or gross income which is effectively connected with the conduct of a trade or business within the United States. Section 872(a).
A beneficiary of a trust is deemed to be engaged in a trade or business within the United States if the trust is engaged in a trade or business within the United States. Section 875(a); Di Portanova v. United States, 690 F.2d 169, 172 (Ct. Cl. 1982).5 Similarly, a beneficiary receives income derived from sources within the United States to the extent that the trust receives income from sources within the United States. Section 652(b); section 1.652(b)-(1), Income Tax Regs.; Bence v. United States, 84 Ct.Cl. 605, 18 F.Supp. 848 (1937); Isidro Martin-Montis Trust v. Commissioner, 75 T.C. 381 (1980); Muir v. Commissioner, 10 T.C. 307 (1948), affd. and remanded 182 F.2d 819 (4th Cir. 1950).
Applying the above principles to the instant case, it is clear that if Petschek had been alive and an American citizen throughout 1975, he would have been taxable on the full amount of distributable income (to the extent of distributable net income) received by Trust 5A in 1975. Section 652(a). On the other hand, since Trust 5A engaged in no trade or business within the United States and received no income from sources within the United States in 1975, if Petschek had been alive and a nonresident alien throughout 1975, he would have been taxable on none of Trust 5A's distributable income.
Section 1.871–13(a), Income Tax Regs., requires that when an individual changes his status from nonresident United States citizen to nonresident alien during the taxable year, the individual's taxable year is to be divided into two separate periods:6 During the first period, he is taxable under rules applicable to United States citizens; during the second period, which commences on the day United States citizenship is renounced, the individual is taxable under rules applicable to nonresident aliens.7
Section 1.871–13(c), Income Tax Regs., further provides.
(c) Abandonment of U.S. citizenship or residence. Income from sources without the United States which is not effectively connected with the conduct by the taxpayer of a trade or business in the United States is not taxable if received by an alien individual while he is not a resident of the United States, even though he earns the income earlier in the taxable year while he is a citizen or resident of the United States. However, income from sources without the United States which is not effectively connected with the conduct by the taxpayer of a trade or business in the United States is taxable if received by an individual while he is a citizen or resident of the United States, even though he abandons his U.S. citizenship or residence after its receipt and before the close of the taxable year.
The question we must decide therefore is how much, if any, of Trust 5A's income Petschek “received,” within the meaning of section 652 and section 1.871–13(c), Income Tax Regs., while he was still an American citizen in 1975. It is only on any such amount of income that Petschek is taxable.8
Respondent argues that the conduit theory of trust taxation requires that Petschek be treated as receiving income from Trust 5A at the moment Trust 5A received income. He analogizes the instant situation to cases where a trust beneficiary either renounces an interest in a trust or dies prior to the end of the trust's taxable year. Further, respondent points to cases where, despite the apparently unambiguous language of the Code that an entity's full-year income is includable in the income of a taxpayer, an allocation of such income has been made for change-of-status taxpayers.9
Petitioner, on the other hand, contends that a beneficiary of a trust cannot receive trust income until the end of the trust's taxable year since it is only at that time that the trust's distributable net...
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