OPINION
Tannenwald, Judge:Respondent determined the following deficiencies in the petitioners’ Federal income taxes:
TYE Oct. 31-Deficiency
Estate of A. Lindsay O’Connor. .1969 $275,443.00
1970 255,603.90
1971 174.335.76
TYE Dec. 31-Deficiency
Marital trust under will of of A. Lindsay O’Connor.1969 $276,752.00
1970 294,027.90
1971 157.938.76
Olive Price.1970 70,460.50
1971 62,283.11
Robert L. and Lucille S. Bishop.1970 74,122.65
1971 41,496.34
Donald F. and Edna G. Bishop.1970 76,580.90
1971 41,565.09
The issues before us are:
(1) Whether the decedent’s estate properly claimed distributions deductions in respect of amounts received by a charitable foundation on the ■ grounds either (a) that such amounts constituted distributions to a marital trust created under decedent’s last will and testament or (b) that, since the foundation succeeded to the interests in the marital trust, such amounts should be treated as distributions to a beneficiary under said last will and testament;
(2) If the estate is entitled to such distributions deductions on the ground that they were made to the marital trust, whether the marital trust is entitled to distributions deductions in respect of the amounts received by such charitable foundation;
(3) Whether certain distributions by the estate to the beneficiaries of residuary trusts under the decedent’s last will and testament were required distributions of current income and, in any event, the amount of such distributions includable in gross income by such beneficiaries; and
(4) Whether a portion of the executors’ commissions paid by the decedent’s estate are allocable to tax-exempt income and, therefore, nondeductible.
Respondent concedes that any assessment against the marital trust for the taxable year ended December 31,1969, is barred by the statute of limitations.
This case was submitted to the Court upon a full stipulation of facts, which, together with the exhibits, is incorporated herein by this reference.
A. Lindsay O’Connor (decedent) died on May 9, 1968, a resident of Delaware County, N. Y. His last will and testament, dated December 11, 1957, was admitted to probate by decree of the Surrogate’s Court, County of Delaware, N. Y., dated May 20, 1968, and letters testamentary and letters of trusteeship were issued to Dermod Ives and United States Trust Co. of New York authorizing them to act as executors and trustees under the will. A joint petition was filed herein by Dermod Ives and United States Trust Co. of New York as executors and trustees and by Olive B. Price, Robert L. and Lucille S. Bishop, and Donald F. and Edna G. Bishop, individually. The United States Trust Co., a corporation organized under the banking laws of the State of New York, maintained its principal office in New York, N. Y., at the time of filing said petition.1
The executors filed an estate tax return on June 24, 1969. They elected a fiscal year ending October 31 for income tax reporting purposes. A short-period income tax return was filed by the estate for the period from the date of decedent’s death to October 31, 1968. Thereafter, income tax returns for the estate were duly filed for the taxable years ending October 31, 1969, October 31, 1970, and October 31,1971. The trustees elected the calendar year for income tax purposes and duly filed forms 1041 for the marital trust and for each of the other trusts for 1969, 1970, and 1971.
The dispositive provisions of the decedent’s will basically provided for the division of his estate into two shares.2 The first share, consisting of one-half of the entire net estate, was bequeathed in trust (marital trust) for his widow, Olive B. O’Connor, who was given the income therefrom, coupled with a general testamentary power of appointment over corpus in favor of “such persons and/or corporations as she may appoint” and a power to withdraw at any time (including the year of death) any or all of the corpus by a written election to be filed with the trustees. As to the second share, the decedent made some specific pecuniary bequests and directed that the balance be divided into three equal parts, to be held in trust, with income from each part to be paid or applied for the benefit of Olive B. Price, Donald F. Bishop, and Robert L. Bishop (niece and nephews of the widow), respectively.
On May 23, 1968, the decedent’s widow, Olive B. O’Connor (Mrs. O’Connor), notified the executors and trustees in writing that she elected to have all of the principal of the marital trust paid to her. By instrument, executed the same day and entitled “Gift Assignment of Interest in Estate of A. Lindsay O’Connor,” Mrs. O’Connor assigned all of her right, title, and interest to the marital trust, together with any income from such property, to the A. Lindsay and Olive B. O’Connor Foundation (hereinafter the foundation). The foundation had been created by Mrs. O’Connor in 1965 and was, at all times material herein, recognized by the Internal Revenue Service as a charitable foundation within the meaning of section 501(c)(3).3 For the year 1968, Mrs. O’Connor filed a gift tax return in which she reported the assignment of her interest in the marital trust to the foundation; the value of such interest in both income and corpus was estimated to be $25 million.
With respect to its 3 taxable years involved herein, the parties have stipulated that “the estate made the following distributions to the beneficiaries thereof”:
For fiscal year ended Oct. 31, 1969
To the marital trust:
Income cash .$500,000.00
Principal cash .0
Securities from principal account having a market value of . 499,625.00
Total . 999,625.00
For fiscal year ended Oct. 31, 1970
To the marital trust:
Securities from principal account
having a market value of .$18,222,981.00
Principal cash .6,238.22
Income cash . 210,533.41
Total . 18,439,752.63
To the residuary trusts under the will for the benefit of Olive B. Price, Robert L. Bishop, and Donald F. Bishop, respectively: $2,000 each in cash from principal account
To Olive B. Price:
Income cash in the amount of .181,708.17
To Robert L. Bishop:
Income cash in the amount of . 181,708.18
To Donald F. Bishop:
Income cash in the amount of .181,708.18
For fiscal year ended Oct. 31, 1971
To marital trust:
Securities from principal account
having a market value of .$1,013,661.00
Income cash in the amount of ..... 252,957.69
Total . 1,266,618.69
To Olive B. Price:
Income cash in the amount of .84,319.22
To Robert L. Bishop:
Income cash in the amount of .84,319.22
To Donald F. Bishop:
Income cash in the amount of .84,319.23
The total value of such distributions in each case exceeded the distributable net income of the estate as reflected in its income tax returns for each of its taxable years in issue. The parties further stipulated that the marital trust distributed all that it received from the estate to the foundation shortly after receipt.4
The parties have further stipulated that the administration of the estate continues pending the outcome of this proceeding; that the trustees continue to administer the marital trust, receiving estate assets from time to time, and in general turning over the assets received to the foundation shortly after receipt by the trust; that a small balance of principal cash is now maintained by the trust; and that, when the controversies involved in this proceeding are finally determined and the trustees have received from the executors all property passing under the will to the marital trust (which must be distributed to the trustees, despite Mrs. O’Connor’s assignment, under New York law), they will make a final judicial accounting to the Surrogate’s Court and only after that accounting proceeding is completed and all assets remaining in their possession thereafter have been distributed can the administration of the trust be considered completed.
For its taxable years at issue, the estate claimed distributions deductions under section 661(a)(2)5 against its reported distributable net income as follows:
Fiscal Year Ended Oct. 31—
1969 1970 1971
Distributable net income (DNI). $997,410-96 $512,425.56 $290,605.13
Tax-exempt interest .618,364.21 129,384.67 0
DNI less tax-exempt interest .379,046.75 383,040.89 290,605.13
Distributions to marital trust .999,625.00 18,439,752.63 1,266,618.69
Distributions to Olive B. Price Trust. 0 2,000.00 0
Distributions to Robert L. Bishop Trust. 0 2,000.00 0
Distributions to Donald F. Bishop Trust.0 2,000.00 0
Distributions to Olive B. Price . 0 181.708.17 84,319.22
Distributions to Robert L. Bishop . 0 181.708.18 84,319.22
Distributions to Donald F. Bishop . 0 181,708.18 84,319.23
Total distributions .999,625.00 18,990,877.16 1,519,576.36
Claimed distributions deduction .379,046.75 383,040.89 290,605.13
Reported taxable income .... 0 0 0
For its taxable years in question, returns were filed for the marital trust on which the amounts distributed from the estate and passed through6 to the foundation in accordance with the election and assignment executed by Mrs. O’Connor were reported and deducted under section 661(a).
As noted in the above table, the estate also made income distributions directly to the beneficiaries of the residuary trusts prior to the transfer of the underlying assets to such trusts. On the premise that such distributions were not required to be made currently by the estate, each of the individual beneficiaries computed his respective tax liability in accordance with section 662(a)(2).7
On its income tax return for the taxable year ending October 31, 1971, the estate claimed a deduction for the payment of executors’ commissions in the amount of $55,674.04. The commissions were computed on the basis of the estate’s aggregate gross income earned from the date of death to May 8, 1970 (the intermediate accounting period), or $1,391,851.25. Of this amount, $703,759.65 was tax-exempt income. No tax-exempt income was earned in the taxable year ending October 31,1971.
Respondent made three primary determinations in respect of the above-outlined distribution plan:
(1) The marital trust was not a recognizable tax entity because it was a passive trust under New York law;
(2) Section 661(a) does not permit a deduction to an estate or trust for distributions to charitable entities where such distributions do not qualify for deduction under section 642(c); and
(3) The income paid to the residuary trust beneficiaries was required to be distributed currently by the residuary trusts.
The frame of reference for issues posed by respondent’s determinations can be simply stated: Who is taxable, and to what extent, on income earned and distributed by the decedent’s estate during its period of administration? Resolution of the issues is not as simply divined.
The core questions with respect to the amounts received by the foundation are (a) to what extent should the marital trust be recognized for the purposes of this proceeding; (b) should section 1.663(a)-2, Income Tax Regs.,8 be given effect; and (c) if the regulation is not given effect, should the foundation be treated as a “beneficiary” for the purposes of the distributions deduction?
Before turning to these questions, we deem it appropriate to deal with an addendum to one of petitioners’ briefs in which an attempt is made to support the proposition that the distributions to the foundation qualify for the charitable deduction provided for in section 642(c). One of the critical requirements of that section is that the amount in question be paid “pursuant to the terms of the governing instrument.” Petitioners seek to bring the payments to the foundation within section 642(c) by latching on to the provision in the decedent’s will granting Mrs. O’Connor a general power of appointment “to such persons and/or corporations” as she sees fit. Aside from the fact that Mrs. O’Connor in form never exercised her power of appointment in favor of anyone, the mere reference to “corporations,” even if coupled with decedent’s knowledge of the existence of the foundation, simply does not meet the test of section 642(c), namely, that the governing instrument (in this case, decedent’s will) must contain some manifestation of charitable intent. See Ernest & Mary Hayward Weir Found. v. United States, 362 F.Supp. 928, 939 (S.D.N.Y. 1973), affd. per curiam 508 F.2d 894 (2d Cir. 1974). Cf. Estate of Pickard v. Commissioner, 60 T.C. 618, 622 (1973), affd. without opinion 503 F.2d 1404 (6th Cir. 1974). Accordingly, we now turn to the core questions.
We first direct our attention to the estate’s claimed distributions deductions for amounts passed through the marital trust to the foundation. This issue involves an initial determination of whether the marital trust should be recognized for purposes of this proceeding.9
Although respondent has, by virtue of various parts of the stipulation of facts, conceded that the marital trust existed in the sense that distributions from the estate were required, by virtue of New York law, to be made to and through the trustees, he nevertheless contends that the trust was passive under section 7-1.2, New York Estates, Powers & Trusts Law, and is not recognizable for tax purposes.
We find it unnecessary to resolve the status of the marital trust for State law purposes. Even assuming arguendo that throughout the years in question a valid trust10 existed for purposes of State law, it does not follow that it was. a recognizable tax entity. Indeed, we think that by virtue of the operation of section 678 it was not.11
When a grantor or other person has certain powers in respect of trust property that are tantamount to dominion and control over such property, the Code “looks through” the trust form and deems such grantor or other person to be the owner of the trust property and attributes the trust income to such person. See secs. 671, et seq. By attributing such income directly to a grantor or other person, the Code, in effect, disregards the trust entity.12 Income is deemed, therefore, to have been received by the “owner” of the property.
The circumstances in which a person other than a grantor is considered the owner of trust property are set forth in section 678, which provides in part as follows:
SEC. 678. PERSON OTHER THAN GRANTOR TREATED AS SUBSTANTIAL OWNER.
(a) General Rule. — A person other than the grantor shall be treated as the owner of any portion of a trust with respect to which:
(1) such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself, or
(2) such person has previously partially released or otherwise modified such a power and after the release or modification retains such control as would, within the principles of sections 671 to 677, inclusive, subject a grantor of a trust to treatment as the owner thereof.
There can be no doubt that, prior to her election to withdraw corpus and her assignment thereof, Mrs. O’Connor’s powers over the trust property were sufficiently extensive to cause her to be the owner thereof under section 678 for Federal income tax purposes.13 By her withdrawal of corpus and her assignment, Mrs. O’Connor relinquished all powers in respect of the trust property and was no longer the owner thereof within the meaning of section 678.
By that assignment, however, the foundation had an immediate right to all income and corpus as it filtered into the marital trust.14 Indeed, the nature of the foundation’s rights in respect of the trust property was so extensive so as to necessarily include the somewhat lesser rights spelled out in section 678(a)(1). Thus, it is clear that, within the meaning of that section, the foundation was the “owner” of all of the trust property (both income and corpus)15 passing from the estate to the marital trust. We recognize that the only function of section 678 is to tax income to the person having the power to vest either trust corpus or trust income in himself, but the means Congress has employed to do this (attribution of ownership) routes income from its source directly to the “owner” as though no trust exists.16 We think it anomalous to view the estate as making distributions to the marital trust for tax purposes when the statute requires us to view the foundation as receiving distributions from the estate.17
As further support for the position that the marital trust was • not a recognizable entity for tax purposes, we would add that it does not fall within the definition of trusts which clearly contemplates more activity on the part of a trust than the simple conduit role assumed herein. Section 301.7701-4(a), Proced. & Admin. Regs., provides:
In general, the term “trust” as used in the Internal Revenue Code refers to an arrangement created either by a will or by an inter vivos declaration whereby trustees take title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery or probate courts. * * * [Emphasis added.]
Even assuming the trustees took legal title under State law, it is clear that their activity in respect of the marital trust property failed to rise to the level of protection or conservation.18
In sum, we think that, because of the operation of section 678, the marital trust was not a recognizable tax entity and the foundation should be treated as the owner of the trust property.19 Accordingly, the estate must be deemed to have made its distributions directly to the charitable foundation.
Having decided that the marital trust should not be recognized for tax purposes, we are still left with the question whether the amounts received by the foundation constitute distributions deductible by the estate.
We turn first to the principal question on which the parties have locked horns, namely, the effect which should be given to the following provision of section 1.663(a)-2 of respondent’s regulations (see also n. 8 supra).
Amounts paid, permanently set aside, or to be used for charitable, etc., purposes are deductible by estates or trusts only as provided in section 642(c).
Respondent argues that, since the distributions to the foundation do not qualify under section 642(c), the above-quoted regulation precludes their deductibility under section 661(a)(2) (see n. 5 supra).
Petitioners contend that respondent’s regulation is without statutory support and is invalid. Their reasoning is that: (a) Section 661(a)(2) permits an estate a deduction for “any other amounts properly paid or credited or required to be distributed for such taxable year,” subject, however, to the exclusions enumerated in section 663(a); (b) the latter section simply precludes a distributions deduction for charitable distributions that qualify for the section 642(c) deduction; and (c) because the statute does not exclude nonqualifying charitable dispositions from section 661, the distributions to the foundation must be deductible thereunder.
The validity of respondent’s regulation has been considered and sustained by the Court of Claims. In Mott v. United States, 462 F.2d 512 (Ct. Cl. 1972), the testator left two-thirds of his residuary estate to charity and one-third of such residuary estate plus all income earned during administration to an individual; the estate claimed a section 661 distributions deduction for corpus distributed to the charitable beneficiary. Because the charitable bequest did not include any income, no deduction was available under section 642(c). The issue was whether the charitable disposition was otherwise deductible under section 661 since none of the express statutory exclusions was applicable.20 The Government relied upon section 1.663(a)-2 of the regulations to challenge the claimed deduction.
The Court of Claims upheld the Government’s position on the ground that, although there was no express statutory provision to support it, the regulation was valid, citing Commissioner v. South Texas Lumber Co., 333 U.S. 496, 501 (1948), in which the Supreme Court stated that respondent’s regulations must be sustained unless “unreasonable and plainly inconsistent with the revenue statutes.” See 462 F.2d at 517. Carefully examining the purpose and operation of subchapter J, the Court of Claims found that, under the facts before it, the regulation was “in accord with what we believe to be an implied Congressional intent to prevent all charitable distributions, whether or not deductible under Section 642(c), from entering into the operation of the distribution rules.”
While we recognize that Mott is distinguishable from the situation existing herein in that we are concerned with distributions of income (as well as corpus) while, in that case, only a distribution of corpus was involved, we consider such factual distinction insufficient to justify not applying the test of Commissioner v. South Texas Lumber Co., supra.21 In so stating, we find it unnecessary to go as far as the Court of Claims did and hold that any rule, other than that embodied in respondent’s regulation, would be unreasonable. Nor can we refuse to sustain the validity of respondent’s regulation simply because, had we been charged with responsibility for writing the regulation, we might have constructed a different provision.22 We go no further than to conclude that a literal interpretation of section 661(a)(2), which would permit (subject to the distributable net income ceiling) the deductibility of all amounts distributed and not otherwise expressly disallowed (see Mott v. United States, supra at 517) would be inconsistent with the statutory framework and overall legislative objectives of subchapter J and that, as applied to the circumstances herein, respondent’s regulations should be sustained.23 Admittedly there are two provisions (secs. 661(a) and 642(c)) which can be said to bear on the instant case. But one (sec. 642(c)) is specific and the other (sec. 661(a)) is general. The situation, if not precisely within the ejusdem generis rule, at least falls within the principles embodied in that rule. Cf., e.g., State Mutual Life Assur. Co. v. Commissioner, 246 F.2d 319 (1st Cir. 1957), affg. 27 T.C. 543 (1956); Essenfeld v. Commissioner, 37 T.C. 117 (1961), affd. 311 F.2d 208 (2d Cir. 1962). Cf. also United States v. Knapp Bros. Shoe Manufacturing Corp., 384 F.2d 692 (1st Cir. 1967); Crosby Valve & Gage Co. v. Commissioner, 380 F.2d 146 (1st Cir. 1967), affg. 46 T.C. 641 (1966).
Casco Bank & Trust Co. v. United States, 406 F. Supp. 247 (D. Me. 1975), and Bank of America Nat. Trust & Sav. Assn. v. United States, 203 F. Supp. 152 (N.D. Cal. 1962), affd. on this issue 326 F.2d 51 (9th Cir. 1963), relied on by petitioners, which involved the status of amounts concededly constituting distributions deductions to an estate, but “trapped” as principal in the hands of the recipient trustee, are inapposite to the case at bar. The same is true of Harkness v. United States, 469 F.2d 310 (Ct. Cl. 1972), which dealt with the allocation as between beneficiaries of income that clearly qualified as distributions deductions to the estate.
Having reached the conclusion that, by virtue of section 1.663(a)-2 of respondent’s regulations, the estate herein should not be allowed distributions deductions for amounts distributed to the foundation, we find it unnecessary to deal with the question whether, in any event, the foundation qualifies as a “beneficiary” of decedent’s estate so as to permit the deduction of distributions to it under section 661(a). See Mott v. United States, supra at 517-518; United States v. James, 333 F.2d 748, 750 (9th Cir. 1964); duPont Testamentary Trust v. Commissioner, 66 T.C. 761, 767 (1976). Cf. Nemser v. Commissioner, 66 T.C. 780 (1976), affd. 556 F.2d 558 (2d Cir. 1977); Sletteland v. Commissioner, 43 T.C. 602 (1965); compare Cummings v. United States, an unreported case (C.D. Cal. 1969, 23 AFTR 2d 69-1322, 69-1 USTC par. 9359); Estate of McCoy v. Commissioner, 50 T.C. 562 (1968).24 Similarly, we find it unnecessary to deal with the question as to whether, assuming the foundation qualifies as a “beneficiary,” deductions should be denied for amounts distributed to it because section 661(a) permits deductions only for distributions to taxable beneficiaries. See Mott v. United States, supra at 518.
Although we have determined that amounts distributed to the foundation are not deductible by the estate, we do not agree with respondent that such nondeductible distributions work an allocable reduction in the estate’s claimed distributions deductions for years in which the estate made other distributions that do qualify for deduction.25 The operation of subchapter J permits an estate to take deductions under section 661 for all qualifying distributions up to but not exceeding the amount of its distributable net income. For its 1970 fiscal year, the estate made otherwise qualifying distributions in excess of its distributable net income and respondent does not contend to the contrary. Consequently, the amount of its distributions deduction for that year remains unaffected. The same considerations apply to the estate’s 1971 fiscal year. However, in that year, the estate made qualifying distributions in an amount less than its distributable net income and it is entitled to deduct only the amount of such distributions.26
The next question posed herein is the amount includable in the income of each of the residuary trust income beneficiaries from the estate distributions to them in 1970 and 1971. Respondent does not contend that the income beneficiaries of the residuary trust were first-tier beneficiaries of the estate, i.e., that the estate was required to distribute income currently to them, and that, therefore, the income beneficiaries were required to include the distributions to them in gross income in accordance with section 662(a)(1). Rather, he argues that, although the estate was not required to distribute income currently to such beneficiaries,27 such distributions were made by the executors in their capacity as trustees, that the residuary trusts required that income be currently distributed under section 652, and that, therefore, the same result should obtain. The arguments of the parties in respect of this question are intertwined with the proper treatment to be accorded the payments by the estate to the foundation; the result is that the focus of their arguments is distorted and they are not as helpful as they might otherwise be.
Taxation of estate beneficiaries is prescribed in section 662(a) and, because that section complements section 661(a), the tax liabilities for amounts distributed by the estate are allocated among the beneficiaries of section 661(a) distributions. Because the parties are in agreement that the estate was not required to make any current distributions of income, it is clear that all of the recipients of the estate’s section 661(a) distributions were second-tier beneficiaries under section 662(a)(2); they must include in income that portion of their respective distributions which constitutes their allocable share of the estate’s distributable net income. An allocable share under section 662(a) is the fraction of the estate’s aggregate section 661(a) distributions received by the respective beneficiary.
For 1970, the estate made distributions of $2,000 to each of the three residuary trusts and of $181,708 to each income beneficiary of the residuary trusts, distributions which, in the aggregate, exceeded the estate’s distributable net income. In apportioning such distributable net income among such distributees under section 662(a), we must choose between two possible modes of allocation.
One alternative would treat each of the residuary trusts28 and the income beneficiaries thereof as beneficiaries of the estate. In such event, a portion of the estate’s distributable net income would be allocable in respect of the $2,000 principal distribution to each trust for that year and a portion would be allocable to the amounts distributed to each of the income beneficiaries. Cf. Harkness v. United States, supra; Casco Bank & Trust Co. v. United States, supra. The other alternative would treat the amounts distributed to the trusts’ income beneficiaries as having first been constructively distributed to the residuary trusts and by the trusts to such beneficiaries.29 In such event, there would only be three beneficiaries of the estate, i.e., the trusts, among whom the estate’s distributable net income would be allocated, and the amounts to be reported by the income beneficiaries would depend upon their respective trust’s distributable net income. We find it unnecessary to choose between the two alternatives30 because of the stipulation of the parties'that the distributions set forth in our findings of fact (see pp. 168-170 supra) were made by the estate “to the beneficiaries thereof ’ (see p. 169 supra ). (Emphasis added.) We think this stipulation, agreed to by respondent, is of a different quality than the various stipulations regarding the marital trust (see p. 173 and n.11 supra) and that respondent should be held bound thereby. We do not think that the mere fact that the executors and trustees were one and the same is sufficient to overcome the effect of respondent’s stipulation and to justify the adoption of a theory of constructive receipt and distribution by the residuary trusts of the amounts distributed directly to the income beneficiaries. As a consequence of the foregoing, we conclude that each of the residuary trusts and each of the income beneficiaries thereof should be treated as beneficiaries of the estate for purposes of determining the allocation of the estate’s distributable net income, that any theory of constructive distributions to them as first-tier beneficiaries of the residuary trusts should be rejected, that the income beneficiaries should be treated as second-tier, and not first-tier, beneficiaries of the estate (see pp. 180-181 supra), and that the includability of the distributions in their income should be governed by section 662(a).31
For 1971, the estate’s only distributions were to the residuary trusts’ income beneficiaries and such distributions did not, in the aggregate, exceed distributable net income. Under section 662(a)(2) each distributee must include in income the full amount received.
The final question presented herein is whether the estate improperly claimed a deduction on its income tax return for the year ending October 31,1971, for executors’ commissions paid in the amount of $55,674.04 in respect of estate income earned from the date of death to May 8, 1970 (the intermediate accounting period). Respondent determined that a portion of such commissions ($28,150.38) must be allocated to tax-exempt income earned during the accounting period and that the portion so allocated is nondeductible under section 265.
Petitioners, in their petition, claimed entitlement to the deduction in full for the reason that the estate had no tax-exempt income for the year in which the commissions were paid and claimed. However, petitioners have made no argument in respect of this issue on brief and we therefore consider it abandoned. As a consequence, the estate’s distributable net income for its 1971 fiscal year should be increased by $28,150.38, i.e., from $290,605.13 to $318,755.51. See and compare Whittemore v. United States, 383 F.2d 824 (8th Cir. 1967). See also Fabens v. Commissioner, 519 F.2d 1310 (1st Cir. 1975), affg. in part 62 T.C. 775 (1974).
Decision will be entered under Rule 155.
Reviewed by the Court.
Goffe, J., did not participate in the consideration or disposition of this case.The record does not disclose the residences of Dermod Ives, Olive B. Price, Robert L. and Lucille S. Bishop, and Donald F. and Edna G. Bishop at the time of the filing of the petition, although it creates the inference that all were then domiciled and residing in the State of New York.
After the disposition of decedent’s real property and tangible personal property.
Unless otherwise stated, all section references are to the Internal Revenue Code of 1954, as amended and in effect during the years at issue.
The executors and trustees prepared intermediate accounts of their respective activities as such executors and trustees for the period beginning with the date of decedent’s death and ending on May 8, 1970; on June 11, 1970, they petitioned the Surrogate’s Court of Delaware County for a judicial settlement of such accounts. By decree dated Nov. 23, 1970, the accounts were so settled. The accounting was for the estate and marital trust, but not for the residuary trusts. Pending settlement of the accounts, securities distributed to the foundation were held in escrow. After the accounting decree was signed, all of the escrowed securities were turned over to the foundation.
SEC. 661. DEDUCTION FOR ESTATES AND TRUSTS ACCUMULATING INCOME OR DISTRIBUTING CORPUS.
(a) Deduction. — In any taxable year there shall be allowed as a deduction in computing the taxable income of an estate or trust (other than a trust to which subpart B applies), the sum of—
(1) any amount of income for such taxable year required to be distributed currently (including any amount required to be distributed which may be paid out of income or corpus to the extent such amount is paid out of income for such taxable year); and
(2) any other amounts properly paid or credited or required to be distributed for such taxable year;
but such deduction shall not exceed the distributable net income of the estate or trust.
“Plus relatively small amounts of income earned on the funds distributed from the estate before disposition to the foundation.
SEC. 662. INCLUSION OF AMOUNTS IN GROSS INCOME OF BENEFICIARIES OF ESTATES AND TRUSTS ACCUMULATING INCOME OR DISTRIBUTING CORPUS.
(a) Inclusion. — Subject to subsection (b), there shall be included in the gross income of a beneficiary to whom an amount specified in section 661(a) is paid, credited, or required to be distributed (by an estate or trust described in section 661), the sum of the following amounts:
(1) Amounts required to be distributed currently. * * *
(2) Other amounts distributed. — All other amounts properly paid, credited, or required to be distributed to such beneficiary for the taxable year. If the sum of—
(A) the amount of income for the taxable year required to be distributed currently to all beneficiaries, and
(B) all other amounts properly paid, credited, or required to be distributed to all beneficiaries exceeds the distributable net income of the estate or trust, then, in lieu of the amount provided in the preceding sentence, there shall be included in the gross income of the beneficiary an amount which bears the same ratio to distributable net income (reduced by the amounts specified in (A)) as the other amounts properly paid, credited or required to be distributed to the beneficiary bear to the other amounts properly paid, credited, or required to be distributed to all beneficiaries.
“That section of the regulations provides in pertinent part as follows:
“Any amount paid, permanently set aside, or to be used for the charitable, etc., purposes specified in section 642(c) and which Is allowable as a deduction under that section is not allowed as a deduction to an estate or trust under section 661 or treated as an amount distributed for purposes of determining the amounts includible in gross income of beneficiaries under section 662. Amounts paid, permanently set aside, or to be used for charitable, etc., purposes are deductible by estates or trusts only as provided in section, 642(c). [Emphasis added.]”
There is no doubt that if the marital trust is a viable tax entity, the estate is entitled to a sec. 661(a) deduction in respect of its distributions thereto and the issue then becomes whether the trust is entitled to a distributions deduction for amounts paid to the foundation.
We have no doubt that a valid trust existed from the time of decedent’s death until Mrs. O’Connor’s election to withdraw corpus and her assignment to the foundation. However, the only duty of the trustees thereafter was to transfer property received from the estate to the foundation. Whether this singular duty suffices to constitute an active trust is not free from doubt under New York law. See I. Glasser, “Trust, Perpetuities, Accumulations and Powers under the Estates, Powers, and Trusts Law,” 33 Brooklyn L. Rev. 551,555-556 (1967).
We do not believe the stipulation to which respondent agreed (see p. 170 supra) precludes us from considering the legal issue of the application of sec. 678. See also n. 19 infra.
The trust is not required to report income attributed to another on its Form 1041, but should show such income on a separate statement attached thereto. Sec. 1.671-4, Income Tax Regs. To the extent that a trust does not have any taxable income and does not have gross income in excess of $600, however, it need not file a Form 1041. Sec. 6012(a)(4).
indeed, petitioners acknowledge the applicability of sec. 678 to Mrs. O’Connor albeit in another context. Petitioners opine that Mrs. O’Connor was a “beneficiary” of the estate; that, by operation of that section, she was the “owner”; and that, upon her assignment, the foundation stepped into her shoes and became a “beneficiary” of the estate, thus entitling the estate to a sec. 642(c) deduction for distributions thereto. See p. 174 supra,.
“At the time of the assignment, the marital trust was not funded. From the moment the estate passed any assets to the marital trust (the entity that the parties stipulated to be the proper estate distributee under State law), the foundation had an immediate right to the same.
Sec. 678 can apply to either all or part of trust property depending upon the extent of the “owner’s” rights over such property. See sec. 671.
See generally H. Rept. 1337, to accompany H.R. 8300 (Pub. L. 591), 83d Cong., 2d Sess. A211-218 (1954). The legislative history clearly indicates an intent to disregard the trust form when ownership is attributed to a grantor or other person in that, along with ownership, all items of tax significance (income, deductions, and credits) are likewise attributed to such persons. E.g., when ownership of trust property is attributed under secs. 671, et seq., income is included in the income of the “owner” and he is allowed deductions for expenses “which he would have been entitled to if the trust had not been created.” H. Rept. 1337, supra at A212 (emphasis added). See also sec. 1.671-3, Income Tax Regs.
If sec. 678 were construed otherwise so that a trust existed, at least insofar as the estate was concerned, the estate would get a sec. 661 deduction for amounts passed to such trust and a share of its distributable net income would be allocated to the trust. But, as between the trust and the foundation, sec. 678 would come into play to attribute all trust income to the foundation. Because of the operation of sec. 678 at this level only, the issue of whether or not the trust may claim a sec. 661 deduction for its distributions to the foundation is mooted because the trust would have no income to offset with a sec. 661 deduction.
We think it incongruous to say that, on the one hand, the trust could be allocated income from the estate and, on the other hand, the trust could not have any income.
We also note that, in the context of this case, we are dealing solely with the impact of sec. 678 insofar as other provisions of subch. J are concerned. We do not in any way imply that a similar analysis would necessarily obtain in situations where there is an interplay between sec. 678 and provisions of the Code outside of subch. J, such as are involved, for example, in the cases discussed in Judge Fay’s dissenting opinion.
“Even accepting respondent’s stipulation as to the continued administration of the marital trust under State law, it might also be argued that the level of trust activity was so low that the trust lacked economic substance for tax purposes. See and compare Furman v. Commissioner, 45 T.C. 360, 364 (1966), affd. per curiam 381 F.2d 22 (5th Cir. 1967).
“The fact that respondent has not argued the applicability of sec. 678 does not preclude our reaching a conclusion in his favor on the basis of the purely legal issue involved. See Smith v. Commissioner, 56 T.C. 263, 291 and n.17 (1971), and cases cited therein.
“The bequest was neither a specific bequest under sec. 663(aXl) nor a qualified charitable distribution for purposes of sec. 663(a)(2). See Mott v. United States, 462 F.2d 512, 516 (Ct. Cl. 1972).
Even though the distributions herein included income, the consequence of invalidating respondent’s regulation invites the same abuse as where no income is in fact distributed to charity. In such a case, applying see. 661 would allocate to the charity and therefore make nontaxable an amount of income bearing no relationship to the amount of income actually distributed to the charity.
“The opinion in Mott v. United States, supra, has been criticized. See M. Ferguson, J. Freeland, & R. Stephens, Federal Income Taxation of Estates and Beneficiaries 88 (1976 Supp.). See also, A. Michaelson, Income Taxation of Estates and Trusts 57 and n. 70 (1974 rev.).
Cf. Jeffers v. United States, 556 F.2d 986 (Ct. Cl. 1977).
Like the Court of Claims in Mott (see 462 F.2d at 518), we do not rule out the possibility that there may be a situation where the mechanical application of respondent’s regulation would be unwarranted.
The parties did not focus on the issue thus framed, although petitioners, in a passing reference, appear to assume that the foundation was a beneficiary, citing Blair v. Commissioner, 300 U.S. 5 (1937), as authority. We note that that case involved a completely different issue, namely, whether the assignor of an income interest in a trust continued to be liable for the tax upon the income or whether the assignees were so liable. The statements by the Supreme Court were made in the context of resolving that issue and are arguably inapposite to the issue of the definition of a beneficiary for the purposes of subch. J.
For its 1969 fiscal year, the estate’s only distributions were to the foundation, and no question of allocation is involved.
“The estate made the following qualifying distributions in those years:
1970 1971
To residuary trusts .$6,000.00 0
To residuary trust beneficiaries . 546,124.53 $252,957.67
Total distributions . 551,124.53 252,957.67
The estate’s distributable net income was $512,425.36 for its 1970 fiscal year (including tax-exempt interest) and $318,755.51 for its 1971 fiscal year (including an upward adjustment for disallowed commissions, see p. 183 infra).
No such requirement appears in the decedent’s will. Under New York law, the right to receive the income earned during estate administration arises at the date of decedent’s death, in the absence of contrary testamentary provisions. See sec. 11-2.1(d), N. Y. Est., Powers & Trusts Law (McKinney 1967). However, that does not mean that such income is required to be currently distributed. We have previously held that the statutory predecessor of sec. ll-2.1(d) (sec. 17-b, N. Y. Pers. Prop. Law) did not require current distribution. Estate of Igoe v. Commissioner, 6 T.C. 639, 645-646 (1946). The current law does not hint of any change requiring current distribution. See G. Barclay, “The I rincipal and Income Act,” 33 Brooklyn L. Rev. 489, 491 (1967). Cf. Hill v. Commissioner, 24 T.C. 1133, 1137 (1955).
The residuary trusts are not parties to this proceeding.
The necessity for making a choice for the 1970 fiscal year arises because the amounts distributed by the estate for purposes of secs. 661 and 662 were in excess of its distributable net income, a situation which does not exist with respect to the 1971 fiscal year because the amounts distributed by the estate did not exceed, in the aggregate, the amount of its distributable net income (see n.26 supra). Moreover, no distributions were made to the residuary trusts in 1971.
The choice is not without its troublesome aspects involving the extent to which sec. 11-2.1(c)(1) and (d)(2), N. Y. Est., Powers & Trusts Law, accords an income beneficiary of a testamentary trust independent status as a beneficiary of an estate or derivative status through the trust (see also n. 27 supra) and whether, if such independent status is accorded under New York law, the application of the concept of constructive receipt by the trust, for Federal income tax purposes, of amounts distributed by the estate directly to such income beneficiary is thereby precluded. Compare Lamkin v. United States, 533 F.2d 303 (5th Cir. 1976), and In re Nissen’s Estate, 345 F.2d 230 (4th Cir. 1965). Some commentators have assumed that independent status can be conferred, for Federal income tax purposes, by local law. See H. Conway & N. Hale, 302 T.M., A-21, A-23 (BNA 1976); H. Levine, “Timing and Effect of Distributions by Executors and Trustees: Allocations Among Beneficiaries,” 27th Ann. N.Y.U. Tax Inst. 287,296-297 (1969); Fremont-Smith, “Techniques for Controlling Income Tax Consequences of Trusts and Estates and Their Beneficiaries,” 25th Ann. N.Y.U. Tax Inst. 1019, 1036-1037 (1967). Compare In re Missett’s Will, 218 N.Y.S.2d 393 (Westchester County Surr. Ct. 1961), where an executor wrongfully bypassed a trust in distributing income because the amount to be distributed was left to the trustee’s discretion by the terms of the decedent’s will.
The consequence of these conclusions is that each income beneficiary will include in income (adjusted for tax-exempt interest, see sec. 662(b)) amounts calculated on the basis of the figures shown in n. 26 supra, and in accordance with the following formula:
Amount of distributions received Total qualifying distributions Estate’s x distributable net income