The opinion of the court was delivered by: GOURLEY
This is a suit for the refund of federal income taxes assessed against and collected from the taxpayers for the calendar years 1955 and 1956 in the amounts of $ 8,677.65 and $ 6,912.21 respectively.
1. Whether the costs of maintaining a personal residence occupied by the sole income beneficiary, rent free are deductible in determining the net distributable income of a trust, or whether the amounts so expended for maintenance constitute taxable income to said beneficiary.
2. Whether the taxpayer may transfer her personal residence to a trust created by another of which taxpayer is a beneficiary as a means of reducing her taxable income.
3. Whether the taxpayer, the beneficiary of a trust, realizes income from the trust to the extent of the fair rental value of a residence owned and maintained by the trust and occupied by the beneficiary free of rent.
Robert J. Frank, a very wealthy man, in 1931 created a trust for his wife and among the assets was a mansion house which cost in the vicinity of one-half million dollars. After the trust became effective, and consistent with the provisions thereof, the property became vested in the taxpayer in the instant suit. Subsequently, due to the cost of maintenance, the mansion house was reconveyed to the trust.
Subsequent to reconveyance due to the inability of taxpayer to pay the cost of maintenance and operation, the trust paid said expenses. The payments made in the years 1955 and 1956 are the subject of this proceeding.
Internal Revenue Code of 1954:
' § 261. General rule for disallowance of deductions
'In computing taxable income no deduction shall in any case be allowed in respect of the items specified in this part.
(26 U.S.C. 1958 ed., § 261.)
' § 262. Personal, living, and family expenses
'Except as otherwise expressly provided in this chapter, no deduction shall be allowed for personal, living, or family expenses.
(26 U.S.C. 1958 ed. § 262.)
' § 643. Definitions applicable to subparts A, B, C, and D
'(b) Income. -- For purposes of this subpart and subparts B, C, and D, 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. Items of gross income constituting extraordinary dividends or taxable stock dividends which the fiduciary, acting in good faith, determines to be allocable to corpus under the terms of the governing instrument and applicable local law shall not be considered income.
(26 U.S.C. 1958 ed., § 643.)
' § 651. Deduction for trusts distributing current income only
'(a) Deduction. -- In the case of any trust the terms of which --
'(1) provide that all of its income is required to be distributed currently, and
'(2) do not provide that any amounts are to be paid, permanently set aside, or used for the purposes specified in section 642(c) (relating to deduction for charitable, etc., purposes), there shall be allowed as a deduction in computing the taxable income of the trust the amount of the income for the taxable year which is required to be distributed currently. This section shall not apply in any taxable ...