Sun First National Bank of Orlando v. United States

On rehearing, the opinion of the court of November 15, 1978, is withdrawn, and the following opinion is substituted:

FRIEDMAN, Chief Judge,

delivered the opinion of the court:

This case, before us on cross-motions for summary judgment, presents a difficult question involving the federal income tax liability of a trust for capital gains it received after the death of the settlor who was the income beneficiary of the trust during her lifetime: whether the gains were "income in respect of a decedent” under section 691 of the Internal Revenue Code of 1954, so that the trust was entitled to a deduction for the estate taxes that were attributable to the gains. We answer that question affirmatively and grant the plaintiffs’ motion for summary judgment.

I.

In March 1941, Jeanette Andersen established an inter vivos trust. The trust income was to be paid to her for life and then to her daughter.¹ Upon the daughter’s death, the corpus of the trust was to be distributed to the daughter’s children. The principal asset she transferred to the trust was shares of Orlando Daily Newspapers, Inc., the publisher of two daily newspapers in Orlando, Florida, which her husband, Martin Andersen, had given her in 1936. Although the record does not show the value of the stock when Mrs. Andersen transferred it to the trust in 1941, it was valued at $11,000 in the gift tax returns filed in connection with Mr. Andersen’s transfer of the stock to his wife in 1936. Estate of Andersen v. Commissioner, 32 T.C.M. (CCH) 1164 (1973).

Orlando Newspapers prospered, and in 1965, the trust sold its Orlando stock for more than $6,000,000. The sale price consisted of $1,557,441 in cash and 15 promissory notes payable annually from 1966 through 1980. Each of the first 14 notes was for $242,179.50, and the final note was for $1,453,077. The trustee treated the gain on the sale as income to the trust and reported it on the installment basis, pursuant to section 453 of the Code.

Because of the large increase in the value of the stock between the creation of the trust in 1941 and the sale in 1965, substantial capital gain was realized upon sale of the stock. The trustee treated this gain as income rather than as an addition to the corpus. He paid most of this income to Jeanette Andersen, as income beneficiary. In 1967, a Florida court, in reviewing an accounting Martin Andersen made upon his resignation as trustee, ruled that under Florida law this treatment of the gain was correct.² For federal tax purposes the trust reported the entire capital gain from the notes as income for the years 1966 through 1972, and the grantor reported amounts received as income from the trust.

Jeanette Andersen died in December 1968. In her federal estate tax return, her executrix did not include the value of the corpus of the trust. On audit, however, the Commissioner of Internal Revenue included the corpus on the ground that Jeanette Andersen’s retention of a life interest in the property she had transferred to the trust made that property part of her estate under section 2036 of the Code. The Tax Court upheld that determination. Estate of Andersen, supra.³

The trust then filed claims for refund for the years 1969 through 1972. Its theory was that Jeanette Andersen was the constructive owner of the trust property during her lifetime; and that the gain on the sale of the notes that were paid after her death was income in respect of a decedent, so that the recipient of such income (the trust) was entitled under section 691 of the Code to a deduction covering the estate tax paid on that income. The Internal Revenue Service rejected the claim for refund on the ground that the gain on the notes was not income in respect of a decedent. This suit followed.

II.

A. Section 691(a) of the Code generally provides that "income in respect of a decedent” that is not part of the decedent’s taxable income in the year of his death is taxable to the recipient of such income in the year of receipt if certain specified conditions are met.⁴ Section 691(c) of the Code provides that the recipient of income in respect of a decedent is entitled to a deduction reflecting estate taxes paid by the decedent’s estate on any items constituting such income.⁵

In most cases that have arisen under these provisions the government has contended that particular items were income in respect of a decedent and therefore taxable to their recipients, and the recipients have denied that the items were in that category. The present case is the converse situation. Here the recipient (the trust) of the income (the gain on the notes) contends that the gain is income in respect of a decedent so that it may obtain a deduction for the estate taxes paid on the notes, and the government denies that the gain on the notes was income in respect of the decedent.

The purpose of these statutory provisions is explained in part in our summary of their legislative history in Estate of Davison v. United States, 155 Ct. Cl. 290, 292 F.2d 937, cert. denied, 368 U.S. 939 (1961). The income-in-respect-of-a-decedent provision first appeared in the 1939 Code. Prior to 1934, neither a cash basis taxpayer nor his estate was subject to federal income taxes on income he had earned and accrued but not received prior to his death. Congressional dissatisfaction with the discrimination between accrual and cash basis taxpayers and the concomitant loss of revenue from cash basis taxpayers resulted in section 42 of the Revenue Act of 1934.⁶ This provision required the decedent to include in his final return income that otherwise would have been reported over several years, and thus subjected such income to higher marginal rates of taxation than if the decedent had lived to receive the income.⁷

Section 126 of the Internal Revenue Code of 1939, added in 1942,⁸ eliminated the inequitable pyramiding effect of the accrual-at-death income concept of the prior law by incorporating in the Code the concept of'"income in respect of a decedent.” Congress understood that term to include items of income that, at the time of death, the decedent had earned or accrued but not yet received. Grill v. United States, 157 Ct. Cl. 804, 813, 303 F.2d 922, 927 (1962); Keck v. Commissioner, 415 F.2d 531, 534-35 (6th Cir. 1969); Trust Co. of Georgia v. Ross, 392 F.2d 694, 696 (5th Cir. 1967), cert. denied, 393 U.S. 830 (1968); Estate of Sidles v. Commissioner, 65 T.C. 873, 880 (1976), aff'd mem., 553 F.2d 102 (8th Cir. 1977), acq. 1976-2 Cum. Bull. 2. The purpose of section 126 was to shift the income tax liability for income that the decedent had earned or accrued but not received before death from the decedent to the person who received payment after death,

The shifting of income tax liability to the income recipient would have resulted in a significant difference between the tax treatment of income (1) received after the decedent’s death and (2) received by the decedent prior to death and passed through the estate. In the latter situation, the income subject to tax under section 2036 of the Code would be the net amount after income taxes. By shifting income tax liability to the income recipient, section 126 created the likelihood of double taxation. This would result because the gross income the decedent had accrued but not yet received would be included in the estate, and an estate tax would be levied on that amount. The recipient of that income then would pay a tax on the entire income. Thus, the gross amount of income would be subjected to both an estate tax and an income tax. In effect, an income tax would be imposed without any adjustment to reflect the estate taxes already paid upon the income.

Section 691(c) of the Code provides some relief from this double taxation and reduces the disparity in treatment between income received by the decedent and income received directly by his successor. It does this by allowing the income recipient a deduction for estate taxes paid by the estate that are attributable to income received "by reason of the death of decedent.” Ferguson, Income and Deductions in Respect of Decedents and Related Problems, 25 Tax L. Rev. 5, 146-48 (1969).

B. This case also involves the grantor trust provisions of subpart E of subchapter J of the Code, I.R.C. §§ 671-78. Those provisions enumerate several circumstances in which the general rule that a trust is to be taxed as a separate entity is "departed from on the theory that to apply [the rule] would improperly permit the grantor or other person who has substantial ownership of the trust property or income to escape tax on income which should rightfully be taxed to him.” 6 Mertens § 37.01; Treas. Reg. §§ 1.671-2(a) and (d), 1.671-3. In effect, the grantor is treated for federal income tax purposes as the owner of the trust property because he has retained a substantial beneficial interest in, or substantial control over, the property.

A grantor is treated under subpart E as the owner of the trust corpus to the extent of his retained interest in the trust. I.R.C. § 671.⁹ Section 677 of the Code provides that a trust shall be treated under section 671 to the extent that the grantor has retained a right to income.¹⁰ The regulations further provide that in computing taxable income the grantor, not the trust, should include the portion, of the trust income to which the grantor retains the right. Treas. Reg. § 1.671-3(a).

The parties agree that, since Jeanette Andersen was entitled to the entire income from the trust (see infra p. 472), the trust was a grantor trust governed by subpart E. The trust therefore should not have reported the gain reflected in the installment payments as income to the trust; it should simply have attached to the trust’s income tax return an informational statement to show receipt of the income and disbursements to the grantor. Treas. Reg. § 1.671-4. Similarly, in her federal income tax return Jeanette Andersen should have reported that income as received not from the trust but directly from the maker of the notes.

C. Finally, this case involves the question whether the election of the trust to report the gain on the sale of the stock in 1965 on the installment basis, as section 453 authorized, resulted in an immediate realization of that gain and a deferral only of its receipt and taxation until each of the notes was paid, or a deferral of both realization and receipt until payment.

If the section 453 election deferred realization of the income until actual receipt of payment, then the installment payments in question were amounts realized after termination of the grantor’s interest in the trust. To the extent those payments were allocable to income, they would be directly payable to the grantor’s daughter as income beneficiary at the time of realization. Thus, despite the grantor’s retained interest and constructive ownership under subpart E, she would have no right to the payments in question and would not be treated as owner of the corpus which produced those payments. If, however, the section 453 election deferred only the taxation of gain, then gain on the stock sale was fully realized in 1965, when Jeanette Andersen had a right to trust income and was constructive owner of the income-producing corpus.

III.

The result in this case turns upon the answers to the following questions: (1) was the entire gain on the sale of the stock in 1965 realized at that time rather than realized pro tanto as each installment note was paid; (2) did the trust properly treat the entire gain on sale of the stock as allocable to income rather than to corpus, so that under the grantor trust provisions Mrs. Andersen, the income beneficiary, was viewed as the owner of that portion of the trust, the "income” of which was distributed to her; and (3) was the gain income in respect of a decedent for which the trust was taxable and entitled to a deduction for corresponding estate taxes, because the decedent was constructive owner of the corpus under subpart E? We discuss each of these questions in turn.

A. Section 453 of the Code "was enacted ... to relieve taxpayers who adopted [the installment basis of reporting] from having to pay an income tax in the year of sale based on the full amount of anticipated profits when in fact they had received in cash only a small portion of the sales price.” Commissioner v. South Texas Lumber Co., 333 U.S. 496, 503 (1948). The provision permits a taxpayer under specified circumstances to “return as income” the amount actually received in the taxable year of receipt. The section enables a taxpayer to defer paying the tax on gain from a sale made on the installment basis until the year in which he receives payment of each installment. The section appears in subchapter E, a part of the Code generally concerned with the timing and method of accounting for income.

Generally, gain realized on a sale of assets is gross income under section 61(a) of the Code. The amount of that gain realized for federal income tax purposes includes any money "received” plus the fair market value of other property "received.” I.R.C. § 1001(b). Section 1001(c) of the Code states that, unless otherwise provided in the Code, the amount realized is also the amount recognized. I.R.C. § 451(a) provides that a taxpayer must account for any amount "received” in the year of receipt unless the taxpayer adopts an alternative method of accounting. The installment obligations in question were received, and their value was fully ascertainable, at the time of sale. The question therefore arises whether section 453 provides an alternative accounting method, an exception to the realization rule, or an exception to the rule for recognition of gain.

The government makes what it concedes to be the novel argument that section 453 of the Code creates an exception to the general rule that income is realized when it is received, so that the gain reflected in each note was neither realized nor recognized until the particular note was paid. The plaintiffs answer that section 453 defers only the recognition of income, not its realization, until the installment obligation is paid; and that the entire gain on the sale of the stock was fully realized in the year of the sale.

We agree with the plaintiffs that section 453 defers the taxation of gain but does not defer the realization of that gain. The language of the section, its place in subchapter E, which is the part of the Code that generally governs the timing and method of accounting, and the elective and remedial nature of the provision all indicate that section 453 was not intended to alter so basic a tax concept as the date of realization of income. 2 Mertens § 15.01. The Commissioner has concurred in this view; he has stated that section 453 "provides an elective method for reporting the income from installment sales of property. That section does not postpone the date of realization of the income but serves merely to postpone the taxation thereof.” Rev. Rul. 60-68, 1960-1 Cum. Bull. 152.

Section 453 may be held to "postpone the taxation” of income either by deferring the recognition of gain or by providing an alternative method of accounting. We need not decide this question since, under either theory, all the gain on sale of the stock was fully realized in 1965, when Jeanette Andersen was the income beneficiary of the trust governed by section 677 of the Code.

B. The income-in-respect-of-a-decedent provision applies to installment obligations "received by a decedent on the sale or other disposition of property.” I.R.C. § 691(a)(4) (emphasis added). The next question, therefore, is whether the gain realized in 1965 was received by the trust or by Mrs. Andersen at that time. Application of the grantor trust provisions to the facts of this case leads us to conclude that the settlor, rather than the trust, received the gain at the time of sale, and that within the meaning of section 691, the trust "acquired” the remaining installment obligations from the grantor at the time of her death.

The grantor trust provisions were designed to implement and codify the decision of the Supreme Court in Helvering v. Clifford, 309 U.S. 331 (1940) and the regulations the Commissioner adopted after that decision. In the Clifford case, the Court held that where a husband had created a trust to pay the income to his wife for 5 years and had retained broad powers of control and management of the corpus and over distribution of the income to the wife, the income from the trust was taxable to the husband. The Court stated the issue as "whether the grantor after the trust had been established may still be treated, under this statutory scheme, as the owner of the corpus.” Id. at 334. It indicated that, in the "absence of more precise standards or guides supplied by statute or appropriate regulations, the answer to that question must depend on an analysis of the terms of the trust and all the circumstances attendant on its creation and operation.” Id. at 334-35 (footnote omitted).

Subpart E, like the prior regulations, represents an attempt to implement the rationale of the Clifford decision in a manner which would provide greater certainty and predictability in administration of the Code. 6 Mertens § 37.01. Subpart E, like the regulations, defines specific circumstances in which state law and the trust form are disregarded, and the grantor is taxed because he is the real owner of the corpus or some portion thereof. See Treas. Reg. §§ 1.671-1(a) and 1.671-3; Rev. Rul. 79-84, 1979-10 I.R.B. 18; Rev. Rul. 77-402, 1977-2 Cum. Bull. 222; Rev. Rul. 76-100, 1976-1 Cum. Bull. 123; Rev. Rul. 74-613, 1974-2 Cum. Bull. 153.

One of the specific circumstances in which the grantor "shall be treated as the owner of any portion of a trust” is with respect to the portion of the trust corpus whose income "may be distributed” to him in the discretion of a nonadverse party. I.R.C. § 677(a). There is no claim that the trustees in this case were adverse parties. The gain on sale of the stock was income under section 61(a) of the Code. The question therefore arises whether the gain was income that the trust could properly distribute to Jeanette Andersen so that under the grantor trust provisions she would be the owner of the portion of the trust corpus which produced the gain represented by the notes.

The Florida circuit court determined that under the trust instrument Martin Andersen as trustee properly had treated the gain on the sale of the stock as income and distributed it to Jeanette. See p. 473, supra, note 2. The government correctly tells us that under Commissioner v. Estate of Bosch, 387 U.S. 456 (1967), the state court decision does not bind us. The government has not shown, however, that the Florida court erred. Moreover, Estate of Bosch indicates that, in the absence of a ruling of the highest state court, we should decide this question of Florida law as would a state court, giving proper regard to the decision of the lower Florida court. Id. at 465. Our analysis of the Florida law and application of that law to the Jeanette Andersen trust causes us to reach the same conclusion as did the Florida court.

As previously noted (supra note 2), Florida law required that gain realized on the sale of corpus be allocated to corpus unless the trust instrument indicated a contrary intent by the settlor. The Jeanette Andersen trust stated that, "It is my intention that in the management of the Trust Estate the Trustees shall have as full and complete power, authority and discretion as they would have if they were the actual owners thereof.” Paragraph 8 of the trust instrument provided that the proceeds the trust received upon certain specified dispostions of trust property (which did not include the 1965 sale of the Orlando Daily Newspapers stock) "be deemed to be principal and corpus of the Trust Estate, and not as income thereof.”

A fair reading of these two provisions is that the settlor intended, as the Florida court held, that amounts the trust received under the dispositions that paragraph 8 covers were to be treated as corpus, and left it to the discretion of the trustee to decide how to treat the receipts on other dispositions of trust property. The trustee, Martin Andersen, treated the gain on sale of Orlando Daily Newspapers stock as income rather than corpus. The Florida court approved that treatment in a proceeding in which the settlor appeared and signed the consent decree approving the trustee’s accounting. If this treatment of the gain on the sale of the stock was not in accord with Jeanette Andersen’s intentions when she established the trust, presumably she would have made this known at .the accounting proceeding. Instead, she acquiesced in and thereby approved the allocation of the gain as income rather than corpus.

This case is unlike the situation in Estate of Bosch, where the state court proceeding that resulted in a ruling favorable to the taxpayer’s position was initiated only after the federal tax controversy had arisen. Here there is no indication or even suggestion that the 1967 Florida court accounting proceeding, which was brought to discharge Martin Andersen as trustee, was in any way motivated by the possibility that treatment of the gain as income rather than corpus might have favorable tax consequences.

C. Our rulings on the two prior issues lead us to conclude that the gain represented by the installment notes was income in respect of a decedent, on which the trust was required to pay the income tax, and that under section 691(c) of the Code the trust was entitled to deduct the portion of the estate tax that was attributable to the gain.

1. Section 691(a)(1)(B) of the Code provides that "the amount of all items of gross income in respect of a decedent” shall be included in the gross income, for the taxable year when received, of "the person who, by reason of the death of the decedent acquires the right to receive the amount. . . .” Section 691(a)(4) provides that the gain on "an installment obligation received by a decedent on the sale or other disposition of property, the income from which was properly reportable by the decedent on the installment basis under section 453” is, "if such obligation is acquired ... by any person by reason of the death of the decedent,” income in respect of the decedent for purposes of I.R.C. § 691(a)(1).

As explained in point III. B, supra, under the grantor trust provisions Jeanette Andersen was treated as the owner of the corpus of the trust. Under I.R.C. § 691(a)(4), therefore, she "received” the installment obligations when the stock was sold. The gain on that sale "was properly reportable by the decedent on the installment basis under section 453.” Since under the grantor trust provisions Jeanette Andersen was viewed during her life as the owner of the installment obligations for federal tax purposes, those notes were "acquired by” the trust (which was within the statutory category of "any person”) "by reason of the. death of the decedent.”

In other words, even though state law treated the trust as the owner of the notes, under federal tax law Jeanette Andersen was viewed as the owner during her life.¹¹ The trust therefore acquired the notes from her at the time of, and because of her death. Thus, under section 691(a)(4) of the Code the gain upon the installment obligations as they matured was, for purposes of I.R.C. § 691(a)(1), "considered as an item of gross income in respect of the decedent.”

Under I.R.C. § 691(a)(1)(B), the gain reflected in the unpaid installment notes was gross income not properly includible in the decedent’s final return because of the section 453 election. The trust "acquired” the right to receive those amounts by reason of the death of the decedent. Had Jeanette Andersen lived, the trust would have distributed to her all the gain on the installment sale as the notes were paid, in accordance with the decree of the Florida court. As long as the grantor lived, the trust was merely a conduit through which the gain on the sale was distributed to Jeanette Andersen, the person entitled to that gain.

Since the trust properly included those items in its gross income, I.R.C. § 691(c) entitled it to deduct the portion of the estate tax attributable to those gains.

2. The result we reach in this case furthers the basic policy of section 691(c) of the Code. That section is designed to provide relief from what many would view as the unfair situation of fully subjecting to income tax gain that is earned or accrued but not received by a decedent during his lifetime, where that gain has already been subjected fully to an estate tax. That is precisely the situation in this case. For under the decision of the Tax Court, the total value of the installment payments, most of which constituted gain, were included in Jeanette Andersen’s taxable estate.

The effect of our decision here is to avoid the unfairness and harshness which would result if the entire gross amount of gain on the sale of Orlando Daily Newspapers stock was subjected first to the estate tax and then to the income tax without any deduction to reflect the prior estate tax levy on the same amount.¹²

The defendant’s motion for summary judgment is denied, the plaintiffs’ motion for summary judgment is granted, and the case is remanded to the Trial Division to determine the amount of recovery pursuant to Rule 131(c).

1 The trust agreement provided that following the death of Jeanette Andersen, the income was to be paid to her husband, Martin Andersen, for his life and then to her daughter. Martin Andersen renounced his life interest in the trust in 1967.

2 Under Florida law, gain on the sale of corpus was to be allocated to corpus, unless the trust instrument indicated a contrary intent on the part of the settlor. Fla. Stat. Ann. § 690.04. The Florida court construed the trust instrument in this case as giving the trustee discretion to allocate between corpus and income. Martin Andersen, as Trustee, No. 67-1052 (Aug. 8, 1967) at 5. All the interested parties, including Jeanette Andersen, the contingent income beneficiary (her daughter), and the contingent remaindermen (her daughter’s children), were represented in the proceeding.

3 In the estate tax case before the Tax Couirt, the estate contended that Martin Andersen had continued to be the real owner of the stock even after he .had given it to Jeanette in 1936, so that he, rather than Jeanette, was the settlor of the trust. The Tax Court, however, found that Martin had made an effective gift of the stock to Jeanette and that the corpus of the trust therefore was a part of her estate because of the life interest she retained in the trust.

4 I.R.C. § 691(a) provides in pertinent part:

"(1) General Rule. — The amount of all items of gross income in respect of a decedent which are not properly includible in respect of the taxable period in which falls the date of his death or a prior period (including the amount of all items of gross income in respect of a prior decedent, if the right to receive such amount was acquired by reason of the death of the prior decedent or by bequest, devise, or inheritance from the prior decedent) shall be included in the gross income, for the taxable year when received, of:

"(A) the estate of the decedent, if the right to receive the amount is acquired by the decedent’s estate from the decedent;

"(B) the person who, by reason of the death of the decedent, acquires the right to receive the amount, if the right to receive the amount is not acquired by the decedent’s estate from the decedent; or "(C) the person who acquires from the decedent the right to receive the amount by bequest, devise, or inheritance, if the amount is received after a distribution by the decedent’s estate of such right.

"(4) Installment Obligations Acquired From Decedent. — In the case of an installment obligation received by a decedent on the sale or other disposition of property, the income from which was properly reportable by the decedent on the installment basis under section 453, if such obligation is acquired by the decedent’s estate from the decedent or by any person by reason of the death of the decedent or by bequest, devise, or inheritance from the decedent—

"(A) an amount equal to the excess of the face amount of such obligation over the basis of the obligation in the hands of the decedent (determined under section 453(d)) shall, for the purpose of paragraph (1), be considered as an item of gross income in respect of the decedent; and "(B) such obligation shall, for purposes of paragraphs (2) and (3), be considered a right to receive an item of gross income in respect of the decedent, but the amount includible in gross income under paragraph (2) shall be reduced by an amount equal to the basis of the obligation in the hands of the decedent (determined under section 453(d)).”

5 I.R.C. § 691(c) provides in pertinent part:

"(1) Allowance of Deduction.—

"(A) General rule. — A person who includes an amount in gross income under subsection (a) shall be allowed, for the same taxable year, as a deduction an amount which bears the same ratio to the estate tax attributable to the net value for estate tax purposes of all the items described in subsection (a)(1) as the value for estate tax purposes of the items of gross income or portions thereof in respect of which such person included the amount in gross income (or the amount included in gross income, whichever is lower) bears to the value for estate tax purposes of all the items described in subsection (a)(1).

"(B) Estates and trusts. — In the case of an estate or trust, the amount allowed as a deduction under subparagraph (A) shall be computed by excluding from the gross income of the estate or trust the portion (if any) of the items described in subsection (a)(1) which is properly paid, credited, or to be distributed to the beneficiaries during the taxable year.”

6 Ch. 277, 48 Stat. 680, 694.

7 H.R. Rep. No. 2333, 77th Cong., 2d Sess. 48, 83-84, reprinted in 1942-2 Cum. Bull. 372, 411, 435-36; S. Rep. No. 1631, 77th Cong., 2d Sess. 100, reprinted in 1942-2 Cum. Bull. 504, 579-80.

8 Revenue Act of 1942, ch. 619, 56 Stat. 798, 831.

9 I.R.C. § 671 provides:

"Where it is specified in this subpart that the grantor or another person shall be treated as the owner of any portion of a trust, there shall then be included in computing the taxable income and credits of the grantor or the other person those items of income, deductions, and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under this chapter in computing taxable income or credits against the tax of an individual. Any remaining portion of the trust shall be subject to subparts A through D. No items of a trust shall be included in computing the taxable income and credits of the grantor or of any other person solely on the grounds of his dominion and control over the trust under section 61 (relating to definition of gross income) or any other provision of this title, except as specified in this subpart.”

10 I.R.C. § 677 provides in pertinent part:

"(a) General Rule. — The grantor shall be treated as the owner of any portion of a trust, whether or not he is treated as such owner under section 674, whose income without the approval or consent of any adverse party is, or, in the discretion of the grantor or a nonadverse party, or both, may be—

"(1) distributed to the grantor or- the grantor’s spouse;

"(2) held or accumulated for future distribution to the grantor or the grantor’s spouse; or

"(3) applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor’s spouse (except policies of insurance irrevocably payable for a purpose specified in section 170(c) (relating to definition of charitable contributions)).”

11 The dissenting opinion argues that in W & W Fertilizer Corporation v. United States, 208 Ct. Cl. 443, 527 F.2d 621 (1975), cert. denied, 425 U.S. 974 (1976), we held that in a similar situation, the trust and not the settlor was the owner of stock in the trust and therefore subject to income tax. In that case one of two stockholders in a subchapter S corporation had transferred his stock to a grantor trust. The Commissioner ruled that this action terminated the subchapter S status of the corporation because it resulted in a corporation having as a stockholder a person who was not an individual, i.e., the trust. The corporation contended that because under the grantor trust provisions the stockholder was taxed on the trust income the stock produced, he also should be treated as the owner of the stock for subchapter S purposes.

The court rejected the argument. It pointed out that in subchapter S, Congress had imposed the "deliberately specific qualification” that the benefits of that provision would be available only "to corporations whose stock is owned solely by individuals or estates” and it concluded that "[wjhere such a deliberately specific qualification is imposed, we must strictly apply it lest the narrow benefit intended by Congress be unduly broadened.” Id. at 455, 527 F.2d at 628.

The present case, however, involves no comparable attempt by a taxpayer to use the grantor trust provisions to avoid a "deliberately specific qualification” such as that in subchapter S. To the contrary, as we discuss in the text below, it involves the type of situation that the income-in-respect-of-a-decedent and the grantor-trust provisions were designed to cover. The effect of those provisions is that even though under state law a trust owns property that the grantor has transferred to it, for federal tax purposes the grantor will be treated as the owner of the property.

12 In view of our decision on this issue there is no occasion to reach plaintiffs’ alternative contention that, if the gain on the installment notes were not income in respect of a decedent, the trust was entitled to a stepped-up basis for the property under I.R.C. §§ 1014(a) and (b)(9).