In this and the succeeding chapter will be considered the tax liability of the fiduciary. The tax liability of the beneficiary and the creator of a trust or estate is discussed in Chapter 28.

Fiduciary defined.

LAW. Section 200. ... (b) The term "fiduciary" means a guardian, trustee, executor, administrator, receiver, conservator, or any person acting in any fiduciary capacity for any person.

REGULATION. "Fiduciary" is a term which applies to persons that occupy positions of peculiar confidence toward others, such as trustees, executors, and administrators. A fiduciary for income tax purposes is a person who holds in trust an estate to which another has the beneficial title or in which another has a beneficial interest, or receives and controls income of another, as in the case of receivers. A committee or guardian of the property of an incompetent person is a fiduciary. . . . . (Art. 1521.)

A father and son, having acquired from an intestate a life estate and vested remainder respectively in real property in New York, made a joint conveyance of the property for an amount in excess of its value when acquired by them. The proceeds of the sale were placed in a bank in the father's name and they agreed that the father should have the income from the fund for life and upon his death that the principal should go to the son. It was held that the father

was a trustee for the son.

RULING. Under the laws of the State of New York and by the weight of authority generally, where a life estate with remainder over is created in personal property, the life tenant is entitled to possession, and upon possession becomes a trustee for the remainderman. . . . . The profit derived from the sale therefor represents the undistributable income of a trust entity. . . . . (C. B. 5, 186; O. D. 1040.)

Trustees in bankruptcy and receivers for individuals are classed as fiduciaries under the law. For a discussion of their responsibilities, see page 1282 et seq.

A trustee appointed by an Admiralty Court to hold for the benefit of claimants a vessel against which a libel has been filed, is a fiduciary. (C. B. V-1, 279; S. M. 5245.)

RULING. . . . The status of the fiduciary as a citizen or an alien, a resident or a nonresident, has nothing to do with the status of the trust. In case of a trust which is treated as a taxable entity the tax is imposed upon the income of the trust, not of the trustee, although the trustee is required to pay it on behalf of the trust for which he acts. The status of such a trust depends upon where it was created. If it owes its existence to the laws of a foreign country or of a political subdivision

thereof, it is to be regarded as a nonresident alien entity. . . . . (C. B. II-2, 164; I. T. 1885.)

FIDUCIARIES DISTINGUISHED FROM AGENTS.-An agent may be defined as a representative vested with authority to bring his constituent, called the principal, into contractual relations with others [Mechem Agency (2d Ed.), page 13]. This authority may be either general or special. If an agent's powers are limited to the performance of specified acts, he is a special agent, while if he has authority to transact generally the business of the principal in regard to which he is employed, he is a general agent.

REGULATION. There may be a fiduciary relationship between an agent and a principal, but the word "agent" does not denote a fiduciary. A fiduciary relationship can not be created by a power of attorney. An agent having entire charge of property, with authority to effect and execute leases with tenants entirely on his own responsibility and without consulting his principal, merely turning over the net profits from the property periodically to his principal by virtue of authority conferred upon him by a power of attorney, is not a fiduciary within the meaning of the statute. In cases where no legal trust has been created in the estate controlled by the agent and attorney the liability to make a return rests with the principal. (Art. 1522.)

The distinction made by the Department between an agent and a fiduciary may be illustrated by typical rulings. Where one of a number of tenants in common (C. B. 2, 198; O. D. 425) or one of several owners of a royalty interest (C. B. 4, 14; O. D. 875) acts for all in managing the property, or in receiving its income, he has been held to be an agent and not a trustee. In the case of an ex

ecutor managing on behalf of the heirs or distributees part of the property included in the gross estate, the rulings have not been uniform. Where an executor retained possession of securities by agreement of the legatees, and distributed the income in agreed proportions, it was held that he was merely an agent (C. B. II-1, 4; I. T. 1585). But where an administrator collected rents on behalf of the heirs, he was held to be a fiduciary (C. B. II-1, 130; I. T. 1596). Again, where executors on behalf of residuary legatees carried on a business conducted by the decedent in his lifetime, and employed certain real estate in the business under the powers given them by the legatees, the Solicitor held that the executors in continuing the business were not acting as agents, though they were so acting in taking charge of the real estate. (C. B. III-1, 218; S. M. 1709.) The ruling also considered the question of whether or not the estate was in the process of administration. For discussion see page 1247.

Both of these rulings seem unsound. Without the power of attorney the executors had no jurisdiction either to continue the business or to take possession of the realty. If the power of attorney created an agency with respect to the realty, then logically, it must have created an agency with respect to the carrying on of the business. While it is true, as stated by the Solicitor, that "under the decisions in numerous jurisdictions it is held that the persons interested in an estate may authorize an executor to carry on a testator's business," the fact is that in continuing a business, under authority from the heirs, the executors act as agents rather than as fiduciaries. executor's authority is in every case the will of the decedent.2 can derive no authority as an executor from the heirs; whatever authority the heirs give him, he must therefore take as an agent. The distinguishing characteristic of a fiduciary is his responsibility to exercise the utmost care and this is the real reason for discouraging the unauthorized use of estate assets in business. In executing the power of attorney, the heirs removed this distinguishing characteristic and made the executor their agent in the business enterprise.

An

He

Where a testator gave lands to his daughters, but placed the right of control in trustees, the Solicitor properly held the latter to be fiduciaries and not agents. (C. B. V-1, 68; S. M. 4945.)

RULING. Where a person receives money from a corporation, deposits it in his name as trustee, and lends it in behalf of the corporation to another corporation, collecting interest thereon and paying it to the lending corporation, no fiduciary relationship is created for income tax purposes. (C. B. III-1, 11; I. T. 1942.)

The Commissioner held in at least one case that if a taxpayer received property by deed under an injunction to transfer it to someone else, and did so transfer it, he realized taxable income to the extent of the value of the property. The Board, however, overruled the Commissioner [Capps' Appeal, 2 B. T. A. 1271 (A)] since, whether the taxpayer received the property charged with a trust (as the Board held) or as an agent for the ultimate transferee, it was not income to him.

The Attorney General has held that the Alien Property Custodian is an agent for the President of the United States and not a

2

"His (an executor's)

powers are derived from the will"-Bush v. Ware, 15 Pet. 93, 10 L. Ed. 672. "The will of the testator is in itself a law to the which . to the extent in which it is not repugnant to the law of the State, he must strictly observe"-Woerner-American Law of Administration, 2nd Edition, Section 171.

executor

....

trustee for the aliens whose property he holds. Consequently, the Custodian is not required to pay any tax on the income derived from such property. This does not necessarily mean that the income will escape taxation; when and if the property is returned to the alien, the government may require the alien to pay any taxes due on the income received therefrom while in the Custodian's possession. (C. B. 3, 199; Op. A. G. 2; 32 Op. A. G. 249. See also C. B. 3, 203; O. D. 598, and 33 Op. A. G. 511.)

In U. S. v. Chemical Foundation [71 L. Ed. 12 (Adv. Op.)] the Supreme Court held that the former enemy owners of property seized by the Alien Property Custodian have no claim against the seized property or the proceeds of its sale. In effect, the decision holds that the property was confiscated and that any action by Congress to return the property would be a matter of grace and not of duty. It would seem, therefore, that unless and until Congress sees fit to return the property, it belongs to the United States and no tax should be imposed. When and if the property is returned to the former owners, the latter will take it not as a matter of right but as a gratuity from Congress. It is doubtful, therefore, whether the former owner can be required to pay a tax on income accrued prior to the return of the property to him.

Of course, if the theory that the return of the property is gratuitous, is sound, the former owner cannot demand more than Congress sees fit to give. For example, if the income from the property while in the custody of the Alien Property Custodian was $10,000 and the income tax on that income would have been $1,000, Congress may, if it sees fit, give the former owner only $9,000.

WHAT CONSTITUTES AN ESTATE OR TRUST?

RULINGS. While it is essential to the creation of a trust that there be an explicit declaration of trust, or circumstances which show beyond reasonable doubt that a trust was intended to be created, no formal or particular words are necessary, but it is sufficient if an intention to create a trust and the subject matter, purpose, and beneficiary are stated with reasonable certainty. Neither is it necessary in all cases that the creator of a trust constitute a third person trustee and transfer the legal title to him, for it is well settled that one may create a trust in his own property by constituting himself trustee, provided his words and acts clearly and unequivocally denote an intention to hold henceforth as trustee for the benefit of another. (C. B. 4, 108; A. R. R. 492.)

The will of A, who died on April —, 191—, directs that the residue of the estate shall be held in trust until November, 192-; that on that date all of the estate, both corpus and accumulations, was to be

divided into three equal parts-one-third absolutely to the wife and onethird to each of the two sons. Each son was to receive one-half of his portion at the time of distribution and the other one-half five years thereafter.

Held, that there came into existence on November, 192—, two new taxable entities, each having its own corpus and its own income. (C. B. III-2, 171; S. M. 2157.)

Where under the inheritance laws of a State an intestate's estate which has not been probated within four years after the intestate's death passes to the heirs in joint ownership, and where such estate is managed by one of the heirs, no final settlement being contemplated until two of the heirs who are minors reach their majority, such estate is neither an estate in process of administration nor a partnership, but a tenancy in common. Each of the several owners should include in his gross income his proportionate share of the income of the tenancy in common and should take as a deduction his proportionate share of the deductions. (C. B. III-2, 176; I. T. 2082.)

Associations distinguished from trusts.-A discussion of the distinction between associations and trusts will be found in Chapter I, page 14-15.

How Estates and Trusts are Taxed 3

LAW. Section 219. (a) The tax imposed by Parts I and II of this title shall apply to the income of estates or of any kind of property held in trust, including

(1) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust;

(2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct;

(3) Income received by estates of deceased persons during the period of administration or settlement of the estate; and

(4) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.

Even though the same person acts as trustee for several trusts, the income of each trust will be taxable as an entity. (C. B. 1, 175; O. D. 316.) So where a testator directed that his residuary estate be held in trust until a certain date; then to be divided into thirds, one to his widow absolutely, and one each to his two sons; one-half of his portion to be paid to each son at that time, and the balance five years later, it was held that prior to the division into thirds there

* [Former Procedure] See Income Tax Procedure, 1926, page 1699.