Appeal from a Judgment of the United States Tax Court, Nims. J., Which Adjudged that Appellants' Decedent Failed to Report $136,547 of Taxable Trust Income for 1975 and that Petschek was thus Deficient in His Income Tax in the Amount of $98,222. The Taxability of Trust Income to the Beneficiary is Governed by the Conduit Theory. Therefore, if a Taxpayer Surrenders His United States Citizenship Before the End of His Taxable Year, the Income Received by a Trust From Sources Without the United States for the Period of that Year that He was a United States Citizen is Taxable.
Kaufman, Meskill and Newman, Circuit Judges.
This is an appeal from the judgment of the United States Tax Court, Nims, J., 81 T.C. 260, which held that appellants' decedent Petschek failed to report $136,547 of taxable trust income for 1975 and that Petschek was thus deficient in his income tax paid in the amount of $98,222.
We affirm the decision of the tax court.
Appellants are the executors of the estate of the decedent Ernst N. Petschek. For many years prior to 1975, Petschek resided in France as a United States citizen. From January 1, 1975 to November 23, 1975, Petschek retained his non-resident citizen status. On November 24, 1975, however, Petschek renounced his United States citizenship and became a citizen of the Republic of France, where he lived for the remainder of 1975.
During 1975, Petschek was the sole income beneficiary of the Ernst Petschek Trust (Trust 5A). Trust 5A was part of an inter vivos trust established in 1955 by Petschek's father. Under the trust terms, the trustee was to distribute Trust 5A's net income at least annually to Petschek. The trustee could invade the corpus of the trust at his discretion for the use of Petschek, his spouse or issue.
Both Petschek and Trust 5A were calendar year, cash basis taxpayers in 1975. During 1975, Trust 5A realized $152,415 net dividend and interest income ($152,482 gross income less $67 actual expenses). No part of this income was derived from sources within the United States, nor was any part connected with the conduct of any business or trade within the United State. During 1975, the trustee distributed only current income. The trust, therefore, was a simple trust for that year within the purview of sections 651 and 652 of the Internal Revenue Act of 1954.
In 1975 Petschek paid $133,500 with respect to his estimated tax liability. Having relinquished his citizenship, however, Petschek reported no income from Trust 5A on his 1975 income tax return and sought a refund of the entire amount paid. The Commissioner issued a statutory notice of deficiency for 1975, contending that Petschek should have reported $136,547 taxable income from Trust 5A. This represented the net income realized by Trust 5A in 1975 prorated over the number of days in 1975 that Petschek was a United States citizen. Appellants petitioned the tax court for a redetermination of the deficiency and a refund of the 1975 taxes retained by the Commissioner.*fn1 In his brief to the tax court, the Commissioner claimed that in 1975 Petschek was required to report $136,657 taxible income from Trust 5A, a different amount than was claimed in the deficiency notice. This figure was the trust's income of $136,717, actually received by Trust 5A between January 1, 1975 and November 23, 1975, less stipulated allocable expenses of $60. The Commissioner alternatively claimed that Petschek should have reported at least the $132,841 actual trust income distributed to him during the period in 1975 when he was a United States citizen.
Appellants contend that Petschek received no taxable income in 1975 from Trust 5A while he was a United States citizen and thus was not required to report any income from Trust 5A on his 1975 tax return.
The tax court, in its September 7, 1983 opinion, determined that the beneficiary of a simple trust receives trust income simultaneously with the trust's receipt of income. The court found Petschek liable for taxes on the income Trust 5A received in 1975 prior to Petschek's abandonment of his United States citizenship. Although the court stated that Petschek should have reported $136,657, it noted that the Commissioner failed to make a formal request for an increase of the amount claimed in its notice of deficiency. Under I.R.C. § 6214(a), the Commissioner was bound to the deficiency notice amount of $136,547. The court thus entered judgment for the Commissioner for $98,222, the amount of tax due on additional income of $136,547.
Appellants now claim that the tax court erred in determining that Petschek received taxable income from Trust 5A in 1975. They again argue that Petschek received taxable trust income only after he ...