Goldsby v. Comm'r , 92 T.C.M. 529 ( 2006 )

T.C. Memo. 2006-274
UNITED STATES TAX COURT
THOMAS B. GOLDSBY, JR. AND SANDRA C. GOLDSBY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8232-05. Filed December 27, 2006.
Scott F. May, for petitioners.
Edsel Ford Holman, Jr., for respondent.
MEMORANDUM OPINION
KROUPA, Judge: Respondent determined a $124,662 deficiency
in petitioners’ Federal income tax for 2002 by denying a $390,629
charitable contribution pass-through deduction petitioners
carried over from 2000 regarding conservation easements on real
estate owned by the Goldsby-Matthews Trust (the trust). We are
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asked to decide as a threshold issue whether petitioners may
deduct the charitable contribution. We conclude that they may
not.
Background
The parties fully stipulated the facts regarding the
threshold issue in this case under Rule 122.1 The stipulation of
facts and the accompanying exhibits are incorporated by this
reference, and the stipulated facts are so found. Petitioners
lived in Memphis, Tennessee, at the time they filed the petition.
References to petitioner are to Thomas B. Goldsby, Jr.
Petitioner and the Trust
Petitioner’s father, Thomas B. Goldsby, Sr., an Arkansas
resident, created the trust in 1976 as the settlor. The trust
agreement provides that the settlor’s son, petitioner, is the
sole income beneficiary and is entitled to all the net income.
The net income is to be paid quarterly if convenient but at least
annually. Petitioner’s children, the settlor’s grandchildren,
are the remainder beneficiaries under the trust agreement.
Pursuant to the trust agreement, the grandchildren shall receive
the trust corpus once petitioner dies.
1
All Rule references are to the Tax Court Rules of Practice
and Procedure, and all section references are to the Internal
Revenue Code in effect for the year at issue, unless otherwise
indicated.
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Petitioner as Trustee
The settlor also named his son, petitioner, trustee of the
trust. Petitioner was the initial trustee of the trust and
served until 1985. Petitioner served as trustee again from 1986
through at least the date the petition was filed. An unrelated
person was trustee in the brief interim.
The trustee has general authority to manage and distribute
the trust’s assets and income. The trust agreement obligates the
trustee to manage the corpus in a manner that would satisfy the
purpose of allowing a distribution of the corpus to the settlor’s
grandchildren after petitioner dies. All the powers the trustee
has are subject to fiduciary duty limitations and subject to the
limitations of the trust agreement.
The trustee is restricted in dealing with the corpus and
income by the prudent investor rule, is not allowed to engage in
speculation, and is required to seek long-term growth and
appreciation of the trust property, considering income production
as well as the safety of the corpus. The trust agreement
restricts each beneficiary from disposing of his or her interest
in the trust. Arkansas law governs the interpretation of the
trust agreement.
Undistributed Net Income and Deemed Distributions
Petitioner chose not to make or accept the mandated annual
distributions of net income despite the requirement in the trust
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agreement. Some years, petitioner left a portion of the trust
income with the trust assets. This undistributed net income,
which amounted to approximately $2.2 million by January 1, 2000,
was noted in the trust’s books and records. Although petitioner
intentionally did not pay himself the trust’s net income, he
never intended to relinquish his claim to this undistributed
income. Petitioners reported all of the trust’s income (both
distributed and undistributed) on their tax returns in the
respective years the trust earned the income.
The trust and petitioner treated certain transactions
involving the trust’s donations to charity as deemed
distributions to petitioner over the years. A financial
spreadsheet prepared by the trust’s certified public accountant
(CPA) indicates that the trust treated $46,465 as deemed
distributions to petitioner during 2000.
Land in the Trust
The trust acquired significant real estate over the years.
The trust acquired approximately 3,000 acres of land in Tunica
County, Mississippi, which we refer to as the Duck Lake property.
The trust also acquired several thousand additional acres of
contiguous property in Mississippi, north of the Duck Lake
property and between the Mississippi River and Tunica Cutoff
Lake. This property north of the Duck Lake property is referred
to as the Riverbend/M’hoons Bend property.
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The trust conveyed conservation easements on the Duck Lake
property and the Riverbend/M’hoons Bend property to the
Mississippi Land Trust in 2000. Respondent acknowledges that the
Mississippi Land Trust is a qualified charitable organization
under section 501(c)(3). The trust obtained appraisals of the
Duck Lake property and the Riverbend/M’hoons Bend property both
before and after the conservation easements that indicated the
value of the conservation easements was $5,640,000.
Tax Reporting of the Conservation Easement Donations
The trust reported its donation of the conservation
easements on its Form 1041, U.S. Income Tax Return for Estates
and Trusts, for 2000 and reported that the charitable
contribution was allocated to the sole income beneficiary,
petitioner. The Schedule K-1, Beneficiary’s Share of Income,
Deductions, Credits, etc., attached to the trust’s Form 1041
reported the entire $5,640,000 claimed charitable contribution
deduction as passing through to petitioner as the sole income
beneficiary. Petitioners deducted a portion of the trust’s
charitable contribution on their Federal income tax return for
2000 and carried over the balance subject to the adjusted gross
income limitations of section 170(b). Petitioners carried over
and deducted portions of the trust’s charitable contribution on
their Federal income tax returns for 2001, 2002, 2003, and 2004.
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Petitioners’ charitable contribution carryover deduction for 2002
is at issue.
Respondent’s Examination
Respondent sent two letters to petitioners requesting
information about their carryover deduction for charitable
contributions on their return for 2002, but petitioners failed to
respond. Instead, an employee of the trust received the letters
and filed them without bringing the letters to petitioners’
attention. Having received no response, respondent issued a
deficiency notice to petitioners in which he disallowed
petitioners’ charitable contribution deduction for 2002.
Respondent challenged the value of the conservation easements
that the trust donated as well as petitioners’ eligibility for
any deduction at all. Petitioners timely filed a petition.
The parties filed, and the Court granted, a joint motion to
sever the threshold issue of who is the proper party to claim the
charitable contribution from the valuation issue of the
conservation easements. Because we conclude that petitioners are
not the proper party to claim the charitable contribution
deduction, no trial will be necessary to determine the valuation
issue.
Discussion
We are asked to decide whether petitioners may deduct on
their individual joint return a charitable contribution the trust
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made with respect to the trust’s property. We conclude that
petitioners may not deduct the charitable contribution in 2002.
We begin with the burden of proof.
I. Burden of Proof
In general, the Commissioner’s determinations in the
deficiency notice are presumed correct, and the taxpayer bears
the burden of proving that the Commissioner’s determinations are
in error. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115
(1933). The burden of proof may shift to the Commissioner under
certain circumstances, however, if taxpayers introduce credible
evidence and establish that they substantiated items, maintained
required records, and fully cooperated with the Commissioner’s
reasonable requests. Sec. 7491(a)(1) and (2)(A) and (B).2
Petitioners admitted that they failed to respond to
respondent’s two letters seeking information about their
deduction. In addition, petitioners have not argued that the
burden of proof should shift to respondent. Accordingly, we find
that the burden of proof remains with petitioners.
2
Sec. 7491 is effective with respect to court proceedings
arising in connection with examinations by the Commissioner
commencing after July 22, 1998, the date of enactment of the
Internal Revenue Service Restructuring and Reform Act of 1998,
Pub. L. 105-206, sec. 3001(a), 112 Stat. 726.
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II. Ownership of a Portion of the Trust Under Grantor Trust
Rules
Petitioners argue that petitioner is the owner of a portion
of the trust under the grantor trust rules and should therefore
be allowed to deduct the value of the conservation easements the
trust contributed to charity. We agree that petitioner is the
owner of the income portion of the trust, but we do not find that
petitioner is the owner of the corpus portion. Moreover,
petitioners have not proven that the charitable contribution was
made from the income portion of the trust, and petitioners are
thus not entitled to the deduction. We consider each of these
issues in turn.
A. Treating Petitioner as Owner of the Income Portion of
the Trust Under Grantor Trust Rules
A person is treated as the owner of any portion of a trust
with respect to which that person has the power, solely
exercisable by himself or herself, to vest the corpus or the
income in himself or herself. Sec. 678; Mallinckrodt v. Nunan,
146 F.2d 1 (8th Cir. 1945), affg. 2 T.C. 1128 (1943). When a
person is treated as the owner of a portion of a trust under
section 678, special rules apply to not tax the trust directly.
Secs. 671-678; Estate of O’Connor v. Commissioner, 69 T.C. 165,
174 (1977). Instead, the person treated as the owner takes into
account the trust’s items of income, deduction, and credit
attributable to that portion of the trust. Sec. 671.
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If the trust makes a donation to charity from that portion
of the trust, the person who is treated as the owner of that
portion may cumulate those charitable donations with the person’s
own charitable donations and deduct them under section 170.3
Sec. 1.671-2(c), Income Tax Regs.
We look to State law to examine the nature of rights and
interests in a trust. Estate of Nicholson v. Commissioner, 94
T.C. 666, 672-673 (1990). Arkansas courts consider the four
corners of the governing instrument to ascertain the intention of
the settlor regarding the nature of interests in a trust. Estate
of Whiting v. Commissioner, T.C. Memo. 2004-68 (citing Aycock
Pontiac, Inc. v. Aycock, 983 S.W.2d 915, 919-920 (Ark. 1998));
Gregory v. Moose, 590 S.W.2d 665, 667-668 (Ark. Ct. App. 1979).
We look to the provisions of the trust agreement to
determine whether petitioner is treated as the owner of any
portion of the trust under section 678. We find that petitioner
is treated as the owner of the income portion of the trust under
section 678. Petitioner has significant powers with respect to
the trust income on account of his dual role as trustee and sole
3
Scholars have suggested that this provision might be
intended to permit a deduction even when the trust’s charitable
contribution was not from income. E.g., Blattmachr & Michaelson,
Income Taxation of Estates and Trusts, sec. 3:3.3 n.48 (14th ed.
1999). Trusts themselves ordinarily may deduct contributions
under sec. 642(c) only if they are made from income. We need not
consider this point further because we conclude that petitioner
is not treated as the owner of any portion of the trust other
than the income portion.
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income beneficiary. He was able to, was required to, and did
vest the income of the trust in himself. Petitioner as trustee
was required to cause the trust periodically to pay him (as
income beneficiary) the entire net income of the trust.
Petitioner, as trustee, owed fiduciary duties with respect to the
income only to himself, the sole income beneficiary.
Accordingly, we conclude that petitioner has the sole power
to vest the trust’s income in himself and is treated as the owner
of the income portion of the trust.4
B. Petitioner Is Not the Owner of the Trust Corpus Despite
the Undistributed Net Income
Petitioners argue that they are also the owners of the trust
corpus, or at least a portion of it, because petitioner left
undistributed net income with the other trust assets and it
became commingled with the trust corpus. Accordingly, they
reason, they are entitled to the deduction for the charitable
contribution no matter the source of the charitable contribution.
We disagree.
There are several fundamental problems with petitioners’
argument regarding ownership of the trust corpus. An examination
of the trust agreement indicates that the settlor did not intend
petitioner to have any rights with respect to the corpus, other
4
The unique circumstances require a finding that petitioner
should be treated as the owner of the trust’s income portion. We
note, and petitioners acknowledge on brief, that this finding
does not apply in every situation involving a simple trust.
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than to manage it as trustee for the benefit of the remaindermen,
petitioner’s children. Petitioner has no right under the trust
agreement to vest corpus in himself. The trust agreement
strongly shows the settlor’s intent for the trustee to act to
preserve the corpus for eventual distribution to the settlor’s
grandchildren. Petitioner, as trustee, has fiduciary duties to
these remainder beneficiaries and must act for their benefit when
dealing with the corpus.
Further, the undistributed income never became part of the
trust corpus nor commingled with the trust corpus.5 Petitioner
never relinquished his claim to the undistributed net income.
Moreover, the trust’s books and records showed the amount of
undistributed net income due petitioner. The undistributed net
income, unlike the trust corpus, was subject to petitioner’s
withdrawal at any time. The undistributed net income was not
held subject to the trust agreement, not required to be invested
for the benefit of the remaindermen, and therefore, not part of
the corpus.
Petitioners have also failed to prove the conservation
easements were donated from the undistributed net income
5
We note that, if the undistributed net income did become
part of the corpus, the trust agreement would impose fiduciary
obligations on petitioner with respect to it. Any donation of
the undistributed net income, if it became part of corpus, would
be a violation of petitioner’s fiduciary duties to maintain the
corpus for the benefit of the remaindermen, his children.
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regardless of whether the undistributed net income was part of
the corpus. Petitioners have not introduced evidence indicating
that the trust’s donation of the conservation easements came from
the undistributed net income belonging to petitioner. We also
note that petitioners have not offered any explanation how $2.2
million in undistributed net income relates to the $5.6 million
charitable contribution the trust made, and we decline to
speculate.
C. Failure To Prove That the Charitable Contribution Was
Made From the Income Portion
Although we treat petitioner as the sole owner of the income
portion of the trust, petitioners may not deduct the value of the
conservation easements the trust contributed to charity because
they have not proven that the trust’s contribution was from the
income portion. In general, status as owner of one portion of a
trust does not permit a person to include income or take
deductions not attributable to that portion. See sec. 1.671-
3(b), Income Tax Regs. Petitioners have failed to introduce any
evidence linking the $5,640,000 conservation easements to the
trust’s income.
Petitioners have introduced no evidence to prove that the
conservation easements transferred were part of the income
portion of the trust. Petitioner is entitled to take into
account only those items included in computing the income of a
current income beneficiary, and petitioner has failed to show
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that the $5,640,000 conservation easements meet this standard.6
Absent proof that the trust donated the conservation easements
from its income (rather than from the corpus), we cannot allow
petitioners to deduct the trust’s charitable contribution. The
failure of a party to introduce evidence which, if true, would be
favorable to that party gives rise to the presumption that the
evidence would be unfavorable if produced. Wichita Terminal
Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162
F.2d 513 (10th Cir. 1947).
Petitioners argue that the donation must have come from
income because the trust agreement obligates the trustee to hold
the corpus for the benefit of the remaindermen, his children.
While we agree that petitioner was obligated to hold the corpus
for the benefit of the remaindermen, this does not dictate that
the conservation easements are part of the income portion of the
trust. We note that petitioner did not comply with other
directives in the trust agreement, such as the requirement to
distribute net income at least annually.
6
Charitable contributions deductible by a trust under sec.
642(c) would generally be used in computing distributable net
income and would therefore be included in income by a person
treated as the owner of the trust’s income. See secs. 643,
642(c); sec. 1.671-3(b)(1) and (c), Income Tax Regs. The
charitable contribution at issue, however, would not be
deductible by the trust under sec. 642(c) because the trust
agreement does not authorize charitable contributions. The
charitable contribution thus would not be used in computing the
trust’s distributable net income or taxable income.
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In sum, although we treat petitioner as the owner of the
income portion of the trust, petitioners are not entitled to
deduct the value of the conservation easements because
petitioners have not proven that the trust’s contribution was
from the income portion of the trust.
III. Deemed Distributions of Net Income
Petitioners argue in their reply brief that, alternatively,
the trust’s charitable contributions were actually deemed
distributions to petitioner followed by charitable contributions
by petitioner. We refuse to find the facts as petitioners argue.
The evidence in the record suggests that the trust and
petitioners did not account for the charitable contribution as a
deemed distribution. Although charitable contributions were made
in the past that the trust and petitioners did account for in
this manner, this particular contribution does not appear to be
one of them. The trust’s financial spreadsheet prepared by the
trust’s CPA indicates that only $46,465 was accounted for as a
deemed distribution in 2000. Petitioners’ argument therefore
contradicts the trust’s own books and records. Moreover,
petitioners did not treat themselves on their income tax returns
as directly contributing the conservation easements. They
claimed pass-through deductions, not direct deductions under
section 170. We decline to find the transaction was a deemed
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distribution to petitioner followed by a direct charitable
contribution by petitioner.
IV. Conclusion
We conclude that petitioners are not entitled to a deduction
for the trust’s charitable contribution of the conservation
easements. While petitioner is treated as the owner of the
income portion of the trust, petitioners have failed to prove
that the conservation easements were made from the income portion
of the trust. The mere fact that petitioner failed to withdraw
approximately $2.2 million of income due him does not cause
petitioner to be the owner of the corpus because the trust income
he was owed was wholly separate from the corpus. Petitioners
also have not proven that the trust’s distributions to charity
were deemed distributions to petitioner, followed by his
contribution of the easements to charity.
No further trial will be necessary concerning the valuation
issue because we have found for respondent on the threshold
issue.
In reaching our holding, we have considered all arguments
made, and, to the extent not mentioned, we conclude that they are
moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered
for respondent.