Rev. Rul. 61-102

Advice has been requested whether a taxpayer who has a life interest in property is taxable, either as an individual or as a fiduciary, on gain realized from the sale of the property under the circumstances described below.

The taxpayer has a life interest in certain property devised by her deceased husband. Under the terms of the deceased husband's will, the taxpayer was to hold the property during her life or until her remarriage. Upon the taxpayer's death or remarriage, the property is to vest in certain specified remaindermen. The will further provides that the taxpayer is empowered to sell the property, if she believes it necessary, and to convey it in fee simple to the purchaser; however, the taxpayer is required, under the terms of the will, to reinvest and conserve the proceeds of such a sale for future distribution to the remaindermen.

During the year 1960 the taxpayer sold the property in which she held a life interest. The proceeds of the sale were substantially in excess of the basis of the property.

The specific question in this case is whether the taxpayer is required to report the gain from the aforementioned sale for Federal income tax purposes, and, if so, whether she should report the gain on her individual income tax return, Form 1040, or on a fiduciary income tax return, Form 1041.

Section 61 of the Internal Revenue Code of 1954 provides, in part, that gross income means all income from whatever source derived, including gains derived from dealings in property.

Section 641(a) of the Code provides, in part, that the taxes imposed on individuals by chapter 1 of the Internal Revenue Code shall apply to the taxable income of estates or of any kind of property held in trust, including income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests, and income accumulated or held for future distribution under the terms of a will or trust. The tax imposed upon the taxable income of an estate or trust is required to be paid by the fiduciary. See also sections 1.641(a)-1 and 1.641(a)-2 of the Income Tax Regulations.

Section 7701(a) of the Code provides, in part, that the term `fiduciary' means a guardian, trustee, executor, administrator, receiver, conservator, or any person acting in any fiduciary capacity for any person.

In G.C.M. 14693, C.B. XIV-1, 197 (1935), A died in the year 1908 leaving certain real property to his wife, B , for life with a remainder interest in the property to his four daughters. B , the life tenant, received the income from the property so devised until October, 1929, when the property was taken by the United States Government under condemnation proceedings. B and her four daughters were a warded 15 x dollars as full compensation to all of them, which amount was paid to B , the life tenant, with the consent of all parties concerned. B immediately invested the proceeds of the award in certain bonds and in a savings account. This personal property was held in the name of B , who received the income therefrom.

The primary issue in G.C.M. 14693 was whether the tax due on the net profit from the disposition of the property should be assessed against B as trustee. That ruling holds that the profit from the sale of the property was derived by the life tenant and the remaindermen from the sale of their individual legal interests in the real estate and was taxable to them in their individual capacities, rather than to the life tenant as trustee. In arriving at this conclusion, G.C.M. 14693 states that each of the parties involved could have sold her interest separately and would have been taxable on the gain derived from the sale. The fact that a joint sale of all of the interests was made does not shift the liability for the tax on the profit from the sale of each interest from the owner of such interest to any other owner either as an individual or as a trustee. It is further stated that even though it could be said that the life tenant became a trustee for the remaindermen upon the payment of the cash to her, nevertheless at the time of the sale she clearly was not a trustee and could not have acted in such a capacity.

However, in United States v. National City Bank of New York, et al. , 21 Fed.Supp. 791, it was held that a court-appointed trustee charged with reinvesting the proceeds of a sale of real estate, paying the income therefrom to the life tenant of the estate, and finally distributing the principal to remaindermen should file a fiduciary return and pay the tax on the gain from the sale of the property. In that case, the court held that the term `including' as used in section 219 of the Revenue Act of 1926, which is similar to section 641 of the 1954 Code, was a term of enlargement and that, therefore, the section required the person holding the income for future distribution under the terms of the will or trust to pay the tax, regardless of whether the trust existed at the time of the sale from which the income was realized. Thus, the section was held to apply both to the income of an estate or trust and to income held for future distribution under the terms of a will or trust.

In Juliette G. Weil v. United States , 180 Fed.Supp. 407, certiorari denied, 364 U.S. 822, the taxpayer was the life tenant, by will, of the entire residuary estate of her deceased husband, with contingent remainders to their children. The will provided that the taxpayer had the right, in her absolute discretion, to sell, mortgage, pledge, or dispose of all or any of the estate in any manner that she might see fit. However, any amounts collected by the taxpayer from the sale of part or all of the estate were to be reinvested in a specified manner, such reinvestments to take the place of and stand as a substitute for the assets of the estate sold by her.

During the calendar years 1952-1955, the taxpayer sold various securities held by her as life tenant under the will. Net capital gains were realized on these sales and were reported on income tax returns for the years involved in the name of the estate of the deceased husband. The taxpayer subsequently filed claims for refund of these taxes on the ground that she was not taxable either as an individual or as a fiduciary on the gain from the sale of the securities held by her as life tenant. In that case, the court held that the income involved was taxable under section 161 of the 1939 Code, now section 641 of the 1954 Code, as income of property held in trust and that the taxpayer was required to pay the tax in her capacity as a fiduciary. In so holding, the court stated that the term `property held in trust' in section 161 of the 1939 Code does not refer solely to a technical trust but refers, instead, to relationships which are clothed with the characteristics of a trust. See also United States v. Dale K. DeBonchamps , 278 Fed.(2d) 127.

As noted above, section 641(a) of the Code applies to the income of an estate or trust and also applies to income accumulated or held for future distribution under the terms of a will or trust. This is true whether or not the local law applicable in a given case provides that the holder of such income is a trustee or fiduciary. The effect of section 641(a) is to tax the holder of such property as if he were a trustee or fiduciary.

In the instant case, the taxpayer individually holds merely a life interest in the property involved. Under the terms of the will creating her life interest, however, she is required to hold and conserve the property, or the proceeds of the sale thereof, for future distribution to the remaindermen.

The instant case is distinguishable from G.C.M. 14693, supra , since in that ruling, no words of the testator can be pointed to for the purpose of justifying holding the life tenant as a trustee, for Federal income tax purposes. In the instant case, a trust relationship exists as a result of the terms of the will.

Accordingly, based on the foregoing, it is held that the proceeds of the sale of property constitute income accumulated or held for future distribution under the terms of a will, within the meaning of section 641(a) of the Code, and that the taxpayer is acting in a fiduciary capacity with respect to such proceeds. Therefore, the taxpayer must report the gain from such sale on a U.S. Fiduciary Income Tax Return, Form 1041, and pay the tax due thereon.