T.C. Memo. 1996-481

UNITED STATES TAX COURT

ARVID E. JACKSON, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 3682-95. Filed October 24, 1996.

Theodore K. Jackson III, for petitioner.

Charles Pillitteri, for respondent.

MEMORANDUM OPINION

SCOTT, Judge: Respondent determined deficiencies in

petitioner's Federal income taxes for the calendar years 1991 and

1992 in the amounts of $7,276.01 and $7,070.43, respectively.

All section references are to the Internal Revenue Code in

effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise indicated.

The issue for decision is whether petitioner is entitled to

amortize a life interest in a trust established for her benefit

incident to a divorce.

All of the facts have been stipulated and are found

accordingly.

Petitioner's legal residence was in Mobile, Alabama, at the

time of the filing of her petition in this case. She timely

filed her Federal income tax returns for the taxable years 1991

and 1992.

Petitioner and Mr. T. K. Jackson III (Mr. Jackson) were

divorced on December 5, 1990. On December 4, 1990, 1 day before

the entry of the divorce decree, Mr. Jackson, as settlor and the

trustee of the AEJ Life Trust (the trust), executed an

irrevocable trust agreement. Approximately 1 month after the

date of the divorce, Mr. Jackson funded the trust with various

securities which had both a cost basis and fair market value of

$598,720.80. The trustees of the trust are petitioner, Mr.

Jackson, Laura H. Jackson, and Ted K. Jackson IV.

 The trust agreement, which was incorporated into the

judgment of divorce, provided that petitioner was to receive all

the income of the trust in monthly installments of $3,000 during

her lifetime, if sufficient trust income existed, and any income

in excess of $3,000 per month, semiannually. Upon petitioner's

death, the entire remaining principal of the trust was to be paid
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over and distributed in equal shares to the children of Mr.

Jackson. Mr. Jackson's children are: Laura H. Jackson (Laura),

Ted K. Jackson IV (Ted), and Caroline A. Jackson (Caroline).

Laura and Ted are the children of Mr. Jackson and petitioner. 

Caroline is the daughter of Mr. Jackson, but she is not the

daughter of petitioner.

On her Federal income tax return for each of the taxable

years 1991 and 1992, petitioner claimed $23,664.74 as a deduction

for amortization of her life interest in the trust. She

calculated this amount by subtracting from the basis of the trust

the fair market value of the remainder interest in the trust,

$60,584.56, to arrive at the value of her life interest in the

trust, $538,136.24, and dividing the value of her life interest

by her life expectancy, which she incorrectly determined to be

22.74 years. Petitioner's correct life expectancy at the time

the trust was established was 33.9 years, which would result in a

yearly amortization amount of $15,874. 

In the notice of deficiency, respondent disallowed the

amortization deductions claimed by petitioner for 1991 and 1992,

stating that the life interest petitioner received was a property

settlement and, therefore, not amortizable. Petitioner contends

that she received the life interest in exchange for her marital

rights and, therefore, it is amortizable.

Generally, a taxpayer may amortize his cost basis in a

purchased life interest over his life expectancy. See Gist v.
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1 SEC. 167. DEPRECIATION.

(a) General Rule.--There shall be allowed as a 

depreciation reduction a reasonable allowance for the

exhaustion, wear and tear (including a reasonable allowance

for obsolescence)--

 

 * * * * * * *

(2) of property held for the production of 

income. 

 

2 SEC. 273. HOLDERS OF LIFE OR TERMINABLE INTEREST.

 Amounts paid under the laws of a State, the

District of Columbia, a possession of the United

States, or a foreign country as income to the holder of

a life or terminable interest acquired by gift,

bequest, or inheritance shall not be reduced or

diminished by any deduction for shrinkage (by whatever

name called) in the value of such interest due to the

lapse of time.

United States, 423 F.2d 1118, 1120 (9th Cir. 1970); Gordon v.

Commissioner, 85 T.C. 309, 322-323 (1985); Early v. Commissioner,

52 T.C. 560, 566 (1969) (noting that section 167(a)(2)1 provides

the authority for such a deduction), revd. on another issue 445

F.2d 166, 169 (5th Cir. 1971). However, section 2732 disallows

deductions for amortization of a life interest acquired by gift,

bequest, or inheritance.
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3 SEC. 1041. TRANSFERS OF PROPERTY BETWEEN SPOUSES OR 

 INCIDENT TO DIVORCE.

(a) General Rule.--No gain or loss shall be 

recognized on a transfer of property from an individual to

(or in trust for the benefit of)--

(1) a spouse, or

(2) a former spouse, but only if the transfer

is incident to divorce.

(b) Transfer Treated As Gift; Transferee Has 

Transferor's Basis.--In the case of any transfer of 

property described in subsection (a)--

(1) for purposes of this subtitle, the 

property shall be treated as acquired by the 

transferee by gift, and

(2) the basis of the transferee in the 

property shall be the adjusted basis of the transferor.

(c) Incident To Divorce.--For purposes of 

subsection (a)(2), a transfer of property is incident to the

divorce if such transfer--

(1) occurs within 1 year after the date on 

which the marriage ceases, * * *

Section 10413 provides that for purposes of the income tax

provisions of the Code, property transferred by an individual to

or in trust for the benefit of a spouse or former spouse incident

to divorce is treated as acquired by the transferee by gift. 

Sec. 1041(b)(1).

Section 1041(c)(1) provides that a transfer of property

between former spouses is incident to divorce when the transfer

occurs not more than 1 year after the date on which the marriage

ceases. Because petitioner acquired her life interest in the
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trust in accordance with the provisions of the judgment of

divorce, and also in accordance with that judgment approximately

1 month thereafter the trust was funded by the transfer of assets

from Mr. Jackson for the benefit of petitioner, petitioner's

interest in the trust was a transfer of property to a former

spouse incident to divorce.

Respondent contends that because petitioner acquired her

life interest in the trust from Mr. Jackson incident to divorce,

section 1041 requires that petitioner's life interest in the

trust be treated as if she acquired it by gift. Respondent

argues that section 273 applies to disallow the deductions taken

by petitioner in 1991 and 1992 for amortization of her life

interest in the trust.

Petitioner argues that she acquired her life interest in the

trust by purchase and not by gift since she relinquished her

marital rights in exchange for her life interest in the trust. 

She therefore contends that section 273 does not prohibit her

deduction of amortization of her life interest in the trust. 

Petitioner states that under Alabama law the life interest in the

trust was transferred to her for valuable consideration, the

relinquishment of her marital rights.

In United States v. Davis, 370 U.S. 65 (1962), the Court

held that the transferor spouse recognized gain when he

transferred appreciated property to his spouse in exchange for

her marital rights, and the transferee spouse took a fair-market-
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4 Sec. 167(e) does not apply to any term interest to which

sec. 273 applies. Sec. 167(e)(2). Thus, because we hold that

(continued...)

value basis in the transferred property. This holding would

support petitioner's position based on Alabama law.

Section 1041 was enacted specifically to change the law as

announced in the Davis case for Federal income tax purposes. H.

Rept. 98-432 (Vol. II), at 1491 (1984). H. Rept. 98-432 (Vol.

II), supra at 1492, states that "Thus, uniform Federal income tax

consequences will apply to these transfers notwithstanding that

the property may be subject to differing state property laws."

Under section 1041(b)(1), it is clear that petitioner is to

be treated for Federal income tax purposes as acquiring her life

interest in the trust by gift. Under section 273, an

amortization deduction of a life interest acquired by gift,

bequest, or inheritance is not allowed as a reduction of income

from the trust. Therefore, we hold that petitioner is not

entitled to any amortization deduction for the value of her life

interest in the trust for either of the calendar years 1991 and

1992. See Staff of Joint Comm. on Taxation, General Explanation

of the Revenue Provisions of the Deficit Reduction Act of 1984,

at 711 (J. Comm. Print 1984).

In the alternative, respondent contends under section 167(e)

that the amortization deductions claimed by petitioner would be

disallowed in full, even if section 273 were inapplicable to the

circumstances here.4
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4(...continued)

sec. 273 applies to disallow the amortization deductions claimed

by petitioner for her life interest in the trust, sec. 167(e)

does not apply to petitioner. 

 

5 SEC. 167(e). Certain Term Interests Not Depreciable.--

(1) In general.--No depreciation deduction shall 

be allowed under this section (and no depreciation or

amortization deduction shall be allowed under any other

provision of this subtitle) to the taxpayer for any

term interest in property for any period during which

the remainder interest in such property is held

(directly or indirectly) by a related person.

(2) Coordination with section 273.--This

subsection shall not apply to any term interest to

which section 273 applies.

* * * * * * *

(5) Definitions.--For purposes of this 

subsection--

(A) Term interest in property.--The term 

"term interest in property" has the meaning given

such term by section 1001(e)(2).

(B) Related person.--The term "related

person" means any person bearing a relationship to

the taxpayer described in subsection (b) or (e) of

section 267.

Section 167(e)5 provides that no amortization deduction

shall be allowed under any income tax provision for any term

interest in property for any period during which the remainder

interest in such property is held by a related person. The

remainder interests in the trust are held by Laura, Ted, and

Caroline. Laura and Ted are the daughter and son of petitioner. 

 Caroline is Mr. Jackson's daughter, but she is not petitioner's

daughter.
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6 Sec. 1001(e)(2) provides:

Term interest in property defined.--For purposes of

paragraph (1), the term "term interest in property" means--

(A) a life interest in property,

(B) an interest in property for a term of years, 

or

(C) an income interest in a trust.

 

7 Sec. 267 provides in part--

(b) Relationships.--The persons referred to in 

subsection (a) are:

(1) Members of a family, as defined in subse

ction

(c)(4

);

* * * * * * *

(6) A fiduciary of a trust and a beneficiary 

of such trust;

* * * * * * *

(c) Constructive Ownership of Stock.--

* * * * * *

(4) The family of an individual shall include

only his brothers and sisters (whether by the

whole or half blood), spouse, ancestors, and

lineal descendants * * *

 Section 167(e)(5)(A) refers to section 1001(e)(2)6 for the

definition of "term interest in property", and section

167(e)(5)(B) refers to section 267(b)7 for the definition of a 

"related person".
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Section 1001(e)(2)(A) provides that a "term interest in

property" includes a life interest in property. Because

petitioner has a life interest in the trust, she has a "term

interest in property".

 Section 267(b)(1) provides that a "related person" includes

members of an individual's family. Section 267(c)(4) provides

that the family of an individual includes his lineal descendants. 

Because Laura and Ted are lineal descendants of petitioner, they

are "related persons" with respect to petitioner for purposes of

section 167(e).

Section 267(b)(6) provides that "related persons" include a

fiduciary of a trust and a beneficiary of such trust. Section

7701(a)(6) provides that a trustee is a fiduciary. As a trustee

of the trust, petitioner is a fiduciary of the trust. As the

holder of a remainder interest in the trust, Caroline is a

beneficiary of the trust. Because petitioner is a fiduciary of

the trust and Caroline is a beneficiary of the trust, they are

"related persons" for purposes of section 167(e).

Because petitioner holds a term interest in the trust and

all of the remainder interests in the trust are held by related

persons, it is clear that section 167(e) applies to disallow the

amortization deductions claimed by petitioner if section 273 is

not applicable to the facts here present.

 Since we have held that section 273 is applicable to the

facts here, we will not discuss section 167(e) other than in the
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summary fashion set forth above. In our view, if section 273

were not applicable to the facts here present, under section

167(e) petitioner would not be entitled to any amortization

deduction with respect to her life interest in the trust.

 

Decision will be entered

for respondent.