Mott v. United States

462 F.2d 512, 199 Ct. Cl. 127, 30 A.F.T.R.2d (RIA) 5193, 1972 U.S. Ct. Cl. LEXIS 191

• Court: United States Court of Claims
• Decided: July 14, 1972
• Docket: No. 390-69
• Status: Published

Opinion

Cowen, Chief Judge,

delivered tbe opinion óf the court1:

*

■ ■ This tax case,^apparently one of -first impression, comes before tbe court -on tbe parties’ -cross-motions; for ¡suibmary judgment. Tbe. issue is whether ;an .estatqis. entitled, to a deduction from its ;gross income,pursuant .to1 Section '661(a) (2) of the Internal Revenue- Code of >1964:,¹ -when it makes a distribution of corpus of an estate to a qualified charitable beneficiary pursuant to a general pecuniary bequest. We have concluded that the claimed deduction is not available.

The pertinent facts, which have been stipulated, are as follows: Walter C. Teagle died on January 9, 1962, leaving a gross estate in excess of $36,000,000. Under the terms of his will, two-thirds of the estate, after payment of debts, expenses, and specific bequests, was left to the Teagle Foundation, a tax-exempt charitable corporation. The residue of the estate, including all income earned during its administration, was left in trust for the benefit of Jane W. Teagle, an alternate life beneficiary, with specified remainders over.

The years involved in this suit are the estate’s taxable years ending July 31,1963,1964, and 1965. During this period, the executors of the estate made the following payments out of the corpus of the estate in partial satisfaction of the bequest to the Teagle Foundation:

1963_ $18,166,676.75

1964_ 405,379.02

1965_ 375,000.00

The executors also made several distributions of income to Jane during the administration period before the trust came into operation, including during the years involved here, a $100,000 payment in 1963.

In computing Mr. Teagle’s taxable estate, the executors were allowed an estate tax deduction of $14,107,420.90 for the charitable bequest to the Teagle Foundation. They now assert that they are also entitled to a deduction, in computing the estate’s taxable income for the years involved here, for the payments described above which they made in satisfaction of the charitable bequest. Briefly stated, they contend that such a deduction is permitted by the plain terms of Section 661(a) (2), which provides in pertinent part that:

In any taxable year there shall be allowed as a deduction in computing the taxable income of an estate * * * any * * * amounts properly paid * * * for such taxable year * * *.

The Government, while conceding that a literal reading of Section 661(a) (2) would permit plaintiffs to prevail, maintains that that section cannot properly be interpreted without reference to its purpose, and that when the provision is read in the context of the entire statutory scheme of Subchapter J of 'Chapter 1 of the Code, it is clear that the distribution to the charitable organization in this case cannot qualify for the deduction permitted by Section 661 (a) (2).

Before reaching the merits of this case, we think it is important to summarize briefly some of the basic principles of Subchapter J which relate to distributions by estates. Since the enactment of the Revenue Act of 1913,² the value of “property acquired by gift, bequest, devise or inheritance”³ has been excluded from gross income. The exclusion is not absolute, however, since income from such property, including income realized by an estate during its administration,⁴ is subject to tax.⁵ Similarly, a bequest of income from property is not within the statutory exclusion.⁶ It has therefore become necessary to develop a system of rules which would determine the proper amounts of estate income subject to tax and, more importantly for purposes of this case, a system which would determine who should bear the burden of that tax. In making this latter determination, Congress has adopted the “conduit principle” of taxing estates (and trusts as well), through which an estate is treated as a taxable entity and is taxed, in general, on income which it realizes but which it does not distribute, or is not deemed to have distributed, to its beneficiaries. Where income is distributed to a beneficiary, or is deemed to be so distributed, that income would not be taxable to the estate but instead would be taxable to the beneficiary, a result which is accomplished by permitting the estate a deduction for the amount of the distribution and by requiring the beneficiary to include that amount in his gross income. In this manner, the conduit principle serves to effectuate a Congressional policy to tax estate income once, and only once, by allocating , the tax between; estate and beneficiary.⁷ - • -

Under the present rules of Subchapter Jythe allocation described abbve is- accomplished through the combined operation of the'concept of “distributable met income,” ór “D.N.I. ” and the statutory distribution rules applicable to estates and complex trusts, which* are- set- out in Sections '661-63.-With regard to; distributable-net-income', we limit-our discussion here’ to only-a few -salient; aspects -of -that1- concept;¡since -we previously- examined ¡it in detail-in Manufacturers Hanover Trust Co. v. United States, 160 Ct. Cl. 582, 312 F. 2d 785, cert. denied, 375 U.S. 880 (1963). What is'impórtant to moté Iteré is1 that D.N.I.; which isessenti allydhe estate’s taxable income (with some modifications), serves generally as a ceiling on the combined--tax-liability of--the estate and beneficiary:, -and limits the amount-taxable to the beneficiary and deductible by the estate. -

In addition, we¡should also, note-that.D.N.I. is expressed in terms of taxable income, and that in computing-taxable; income Section 642(c),-in general,.allows an estate ;(or trust) an: unlimited charitable .deduction, for,¡^mounts of.-“gross ipcome” which, pursuant to the,governing instrumentáis paid, permanently- pet aside, or. to,be ;us,e¡d.fo.r charitable purposes. Thus, a charitable, distribution. which is .deductible; raider Section 642(c) ,has the effect of rédpcing .the maximum aggregate, amount taxable to the estate and beneficiary be-, cause.it reduces D.N.I.⁸

The distribution' rules of ' Sections 661-63, provide, the mechanism for allocating D.NX between estate and beneficiary. Since frequently an estáte makes distributions to more than one beneficiary'during'a particular taxable yéár, and since some beneficiaries' llave "greater rights to income than do othets, the distribution rules provide for priorities of tax-ability tby establishing, A?hat is known, as the,“tier-system.” Through this, system, D.N.I. is allocated tinder Section 662 (a) (1) .first to beneficiaries who.haye rights to current.income;,,.based. upon ,a conclusive presumption that “any distribution, is cozisidered a distribution of the trust, or ¿gate’s current income, to. the. extent of its taxable income for the year.”⁹ .By, presuming,that.such .distributions are income, Subchapter J, eliminates the need for “tracing” tfie, source of distributions, as was necessary under prior law, fo,,deter-mine what,¡portion,, if., apy,,constitutes,.amounts■ of current income.¹⁰

After;allocating|I).]^,I. among the “first-tier” beneficiaries described, ^boye,, any. D.NJ>, .remaining would, be .allocated among i‘secpndrtipt”, beneficiaries, according ¡to.¡.Section 662;(a), (2),.,,.'I;heoretically,. all distributiopg except,first-tier distributions fall Afithin, the.sec,ond,.tier,..whiphjs defined as “all other .amounts, property pafifi credited, .or .Required, to fie distributed, to such, beneficiary., fim .the, .taxable,¡year.”.,The term “amounts,”.Avhich,is,central,bp,,the controversy, ¡here, is. broad enough to encompass non-fipst-tipr ..distributions from .either principal,or .income* whether of money, or spe^ cific. property. Again* this.eliminat.es the necessity for .tracing,, since, .the statute assumes that second-tier.distributions diminish whateyer;D.N.I.- remains after allocations to ¡first-tier distributees. . ; ,; . . , ,,,

By defining, second-tier distributions as any “amounts,’’..the sweep of Section .662(a) (2) is so broad that, if left unqualified, bequests excluded under Section 102(a) could become taxable to beneficiaries under Section..662. To preserve.the exemption for bequests, Section 663 (a) (d); excludes from the operation of the distribution rules any amount which is.not payable solely out.of income and “which, under the terms of the governing.instrument,,is properly paid or credited as,a gift or bequest of a specific sum of money or of specific property and which is paid or credited all at once or in not more than three installments.”-If a,. distribution meets, these, requirements, it will be considered a bequest excluded, uh'der Section. 102(a). If it fails to meet them, it will be considered a bequest of income from property under Section 102(b)'(2) ,¹¹ and will be taxed according to the distribution rules. Of course, the amount taxable under the distribution rules is circumscribed by the estate’s D.N.I., so that amounts distributed in excess of D.N.I. would still be considered as a bequest excluded under Section 102(a), whether or not the distribution meets the specific requirements of Section 663(a) (l).¹²

A second modification to the distribution rules which is pertinent to this case is contained in Section 663(a)'(2). It provides that “amounts” do not include “[a]ny amount paid or permanently set aside or otherwise qualifying for the [charitable] deduction provided in Section 642(c) * * The purpose of this provision, as explained 'by the committee reports, is that “since the estate or trust is allowed a deduction under Section 642(c) for amounts paid, permanently set aside, or otherwise qualifying for the deduction provided in that section, such amounts are not allowed as an additional deduction for distributions, nor are they treated as amounts distributed for purposes of Section 662 in determining the amounts includible in gross income of the beneficiaries.” ¹³

As mentioned above, amounts distributed which are in-cludible in the gross income of a beneficiary would, in general, not be taxable to the estate. This is accomplished by Section 661, which provides for a deduction, up to the estate’s distributable net income, for amounts distributed to its beneficiaries. The language and framework of this section corresponds to that of Section 662. An estate can deduct amounts “required to be distributed currently” (first-tier distributions) under Section 661(a)(1), as well as “any other amounts properly paid or credited or required to be distributed” (second-tier distributions) under Section 661 (a) i(2).

The foregoing discussion of the distribution scheme of Subchapter J, although considerably simplified, provides an adequate framework within which to decide whether, as plaintiffs contend, the estate is entitled to a deduction under Section 661'(a) (2) for the amounts paid to the Teagle Foundation. Both parties agree that the amount of the payments, although made to a charitable organization, are not deductible under Section 642(c) in computing the estate’s taxable income. Mr. Teagle’s will did not provide, as Section 642(c) requires, that the payments be made out of the estate’s gross income. In fact, the payments here were made out of the corpus of the estate.

In addition, the parties seem to agree that none of the provisions of Section 663(a) expressly excludes the payments here from the operation of Section 661. The exception of Section 663(a) (1), for gifts or bequests of a specific sum or of specific property which is paid or credited all at once or in not more than three installments, is not applicable here because the bequest has not been satisfied in three installments or less. Moreover, it is not a bequest of a specific sum of money since its amount, expressed as a percentage of the estate after payment of administrative expenses and other charges, was not ascertainable at the time of Mr. Teagle’s death. See Treas. Beg. § 1.663(a)-1(b) (1) (1956). Section 663(a) (2), which provides that an estate may not deduct under Section 661 any amount paid, permanently set aside, or otherwise qualifying for the charitable deduction permitted by Section 642(c), would also seem to be inapplicable because the amounts here, as noted above, do not qualify under Section 642(c) for the charitable deduction.¹⁴

Plaintiffs contend that since none of the express exceptions to Section 661 applies here, the amounts paid to the Teagle Foundation are properly deductible under that section because they constitute “amounts properly paid * * * for such taxable year * * *.” The Government contends that “amounts” cannot be read literally and that Section 661(a)‘(2) dpes not apply 'to' tMse charitable distributions. It relies principally'óií |.Sectibh 1.663(á)-2 "of the Eégulá-tipnswhichprovidfesinl)ertinentpart: ,n'v' '

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" width="1095"/>

We do not adopt plaintiff’s argument that Section 661(a) (2) must be read according to its literal terms. If an estate were entitled to a distribution deduction for “any other amounts properly paid,” ,as that section provides, thep, all payments made by an estate, whether.or not to a beneficiary, wbuld.be deductible.. For example,." contrary to Thomas Lonergan Trust, 6 T.C. 715 (1946),. an" estate would be allowed a distribution deduction when it makes payments to a’creditor in satisfaction of a judgment against "the estate.. Moreover, under a literal interpretation of Section 661(a) (2), in many instances an. éstate would be entitled to a double deduction! Thus, expenses which "are deductible under Section 212 would be deductible again uncler Section 66l.

Obviously, the phrase “any other amounts" paid” should not be read as broadly "as its literal terms suggest. It must be interpreted'in its own particular context,, with reference to its relationship with the other provisions of Subchapter, J, and in accordance with.the consequences which Congress sought to achieve when it enacted Section 661 in 1954.

The most logical reference point in attempting to delineate the scope of Section 661 is the corollary provision of Section 662. That the, two sections' should be read together is not only implicit from the fact that they are similarly structured and in some instances identically worded, but also explicit from Section 662’s express reference to Section 661. Thus, Section 662 (a), inimposing "its tax on distributees, states that “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 * * * the sum of the following amounts * * By this reference, we, think it’ is proper to confine Section 661 to distributions to beneficiaries of the estáte, even though Section 661(a) does not specifically so provide.¹⁶ Such a construction, implied in Se.ction 662(a), prevents the absurd results mentioned above which would occur if the phrase “any other amounts properly paid” in Section 661(a) (2) were applied literally.

Of course, an interpretation which limits Section 661 to distributions to beneficiaries does not put an end to the matter here, since the Teagle Foundation is a beneficiary of the estate. Therefore, the Government also asks us to interpret Section 661(a) as permitting a deduction only for distributions to taxable beneficiaries, based upon its argument that Section 661 must be read as interdependent with Section 662. That is, as we understand the Government’s argument, the incidence of the tax on the income of an estate must be allocated between estate and beneficiary, and to the extent that the beneficiary is exempt from the tax imposed by Section 662, any distributions to that beneficiary would not be deductible by the estate under Section 661.

The Government’s position seems to be correct in the context of this case, but we do not hold that it is a general rule which may be applied in every conceivable situation that may arise under the provisions of the Code here considered. We think it is sufficient to say that, under the facts of this case, the Government’s position accords with the general intent of Congress in enacting the distribution rules¹⁷ and, as we discuss below, is 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.

As we noted above, when Congress enacted the present distribution rules its primary purpose was to eliminate the necessity for tracing the source of distributions. Under prior law, in general, beneficiaries were taxed only on amounts of current income distributed by an estate or trust. Such a simple rule led to manipulation,¹⁸ and in 1942 Congress attempted to tighten up the statute by enacting the 65-day rules of Section 162(d) of the 1939 Code. The end result was that the distribution rules became so difficult to apply, and so entrenched in the tracing requirements, that Congress ■abandoned the old system in favor of the present scheme.¹⁹ Tracing was eliminated by providing in Section 662 that all amounts distributed to beneficiaries would be considered to be distributions of income, subject to the modifications of Section 663 and the quantitative limitation of D.N.I. Consistent with the conduit principle, an estate or trust making such distributions would be entitled to a deduction under Section 661.

As we read Sections '661 (a) and 662(a), Congress intended to do nothing more than combine the conduit principle with a conclusive presumption that distributions subject to the operation of those sections are distributions of income. Such a presumption is, we think, inapplicable to charitable distributions. As Section 642(c) provides, a charitable deduction is available only if the source of the distribution is gross income. Tracing of charitable distributions is still required under Section 642(c),²⁰ and to the extent that a charitable distribution is not paid out of gross income in accordance with the requirements of Section 642(c), then we think that Congress intended that no deduction is allowable.

Without the distinction between charitable and nonchari-table distributions, Congress’ general intent in enacting the present provisions — to prevent manipulative distributions— would be seriously thwarted. The facts of this case are a good illustration. Both the Teagle Foundation and Jane, the sole income distributee, would be second-tier beneficiaries. If the estate could deduct under Section 661(a) (2) the payments made out of the corpus of the estate in satisfaction of the charitable bequest, then the following will result: the estate will pay no tax on the income which it accumulates, because that income will be offset by deductions for its distributions of corpus to the Teagle Foundation. Later on, the estate can distribute : tbe accumulated' income to Jabe- tas-frfee.: With! regard to current payments to Jane, coiicededly'but of estáte income,-Her tar wduld be -greatly reduced! Thus, in 1963, she received '$ÍO0',ODb: wllilé tbfe Teagle Foundation' ‘received approximately'$13,200^000. If both, amounts'were bbrisiderfed distributions ’ tó beneficiaries within the1 iriéáning' o'f Section 662,' then Jáíie Would be taxable on only '1/133' Of ‘the estate’s D.N.I: for 1963,; up'to the arnount of'her distribution. ■

Based upon bur reading of the distribution sections of Sub-chapter J and'their legislative'history, avc conclude that Sec-tioiri‘1.663 (a)-2 of the' Regulations;’ -which' provides that amounts distributed by an estate or trust to a charitable organization' are deductible drily under Section 642 (c) , is consistent' with ‘the statutory ‘scheme arid á 'reasonable interpretation theréóf. It necessarily fblhywS that plaintiffs áíe not erititled tb’'a deduction pursuanttb Section'661 (a)(2) fór the amounts of corpus-distributed in satisfaction, of the charitable bequest. Accordingly, defendant’s motion for Summary judgment is granted, plaintiff's motion for summary judgment is denied, and the petition is dismissed. ' "

: APPENDIX'

InternalBevenue!Code.of;1954.(26.U.S.C.i}■■ ■ ■. v> ; -

Sec. 642. Special Rules for Credits and Dedutctions.

■"’(c) Deduction ' for Amounts Paid or Permanently' Set Aside‘for- a Okaritable Purjwse. — In the case'of an estate or trust (other than -a trust- meeting the specifications of subpart B)' there sháll be allowed as' a deduction! in computing its taxable income (in lieu-of-the-deductions-allowed' by sectionA70'(:a:).; relating - to deduction - for 'charitable; etc., contributions 'and-gifts)' áhy amount-óf the gross income; without limitation; which pursuant to :thfe''terms'of'the governing instrument is; during-the' taxable'year,1 paid'or permanently set .aside, for a purpose sp.ecified in.section 170 (c), or -is1 to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention-of cruelty to ' children or animals,' or, for: the establishment, ácquisitioíí, maintenance or operation- ofta public cemetery hot Operated for profit.**-*.,,

■to',’,V-‡ , j.m '-....orf-.: - r‘-:- -br

Seo. 661J - ■ Deduction1 eok Estates and Trusts 'Accumtulat- ¡\¡ -1: , ;ÍNé"Income bR'Di^TRiátJTiNb 'PófepxjsC1''''’-11."

DC. w) :h<; 1, i ;U: " CCJC) V,.!'- .-'ii.i

(■a) Deduction. — In any taxable year there-shall be allowed as; á deduction in computing' thé ta!fdble'in<5oiiie' of an estate of trust' (other than a trtísfc'f'to Vljí^JBbip'áxfc'í,iaípp^éá)', the sum of— , ¡ ,- „

'(1) any'" Amount1 of "income for ‘ ‘such' taxable year required to bp distributed currently. (including any amount ■reqúired'tó’.be‘distributed,"which may be paid out of incbnie oí corpus to' thé éxtent such amount is paid out of' income" for stich' taxable year) ; and ‘ ’ •"

(2) any other ’ amounts' properly paid'or credited or .required to be distributed for stichfaxáblé 'yfeaf';' ■; i ■ ■ ,- i . ' 1 ■, I >’ - • ;! -i I->,1 -! i

but. sucli < deduction: shallr uot) exceed- the distributable net income of tbe estate or trust;1: -5- ■. í. > ^' ■■ í (

1 • *

Seo. 662. Inclusion oe. .Amop^ts;. in,-CrRqss.,Income oe 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 )y the sum of the1 following amounts: ■ i ■

- (1) Amounts- required 'to be.,distributed currently . The amount, of income for the, taxable ..year required to '.be:,distributed,,currently..to., sucji benefuiiary, whether distributed qr not. If)the ampunt qf.income required to be distribiited.currently.tp all beneficiaries; qxceeds the ,¡distributable net,incpRQ,e',(ppmputed-witliput the deduc',tion allowed,by'sectaQn...,642,'(c),;',relating, tó. dedpetion for charitable, etc.j purposes) of the.estatep.r trpst,ithen, in lieu of the amount provided in the preceding sentence, there.shall- be included in the grops income of the beneficiary an amount which'bears the same ratio to distributable net income (as so computed) as the amount of income required to be distributed currently to such beneficiary bears to the amount required to be distributed currently to all beneficiaries. For purposes of this section, the phrase “the amount of income for the taxable year required to be distributed currently” includes any amount required to be paid out of income or corpus to the extent such, amount is paid out of income for such taxable year.

(2) Other amoimts 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.

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Sec. 663. Special Rules Applicable to Sections 661 and 662.

(a) Exclusions. — -There shall not be included as amounts falling within section -661(a) or 662(a)—

(1) Gifts, bequests, etc. — Any amount which, under the terms of the governing instrument, is properly paid or credited as a gift or bequest of a specific sum of money or of specific property and which is paid or credited all at once or in not more than 3 installments. For this purpose an amount which can be paid or credited only from the income of the estate or trust shall not be considered as a gift or bequest of a specific sum of money.

(2) Charitable, etc., distributions. — Any amount paid or permanently set aside or otherwise qualifying for the deduction provided in section 642(c) * * *.

Treasury Regulations on Income Tax (26 C.F.R.) : Sec. 1.663 (a)-2. Charitable, etc., distributions.

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). * * *

This opinion contains nil the essential fact.s as.stipulated-by ;the, , parties:

2 Revenue Act of 1913 § IIB, 38 Stat. 114.

3 Int. Rev. Code of 1954, § 102(a).

4 See id., § 641(a).

5 Id., § 102(b) (1) ; cf., Revenue Act of 1916 § 4, 39 Stat. 756.

6 Int. Rev. Code of 1954, § 102(b) (2) ; cf., Irwin v. Gavit, 268 U.S. 161 (1925).

7 See generally Holland, Kennedy, Surrey, & Warren, A Proposed Revision of the Federal Income Tax Treatment of Trusts and Estates-American Law Institute Draft, 53 Colum. L. Rev. 316, 318 (1953) ; 6 Mertens, Law of Federal Income Taxation § 36.01 (rev. ed. 1968) : Ferguson, Freeland, & Stephens, Federal Income Taxation of Estates and Beneficiaries 382 et seq. (1970).

8 However,' first-tier beneficiaries are-tated'under'’Section'662(a) (1) up’to the estate’s D.N.I. undiminished by the deduction provided in Section 642(c). Section 642(c).

9 S.Rep. No. 1622, 83d Cong., 2d Sess. 349 (1954), 10 Id.,

10 see Int. Rev. Com of 1939, § 162 (b)

11 See Int. Rev. Code of 1954, § 102 (last sentence); Treas. Reg. § 1.102-1(d) (1956).

12 It should be noted that the “throwback rules” of Section 665-69 do not apply to estates. Thus, current D.N.I. Is the maximum taxable amount.

13 . S. Rep. No. 1622, 83d Cong., 2d Sess. 354 (1954). See also H.R. Rep. No. 1337, 83d Cong., 2d Sess. A205 (1954).

14 Section 663(a)(3), which precludes a double distribution deduction where an amount required to be distributed is accumulated and distributed in a later year, is by its terms inapplicable to this case.

16 This construction is confirmed by the legislative bistory of Section 661. See H.R. Rep. No. 1337, 83d Cong., 2d Sess. A198 (1954) ; S. Rep. No. 1622, 83d Cong., 2d Sess. 347 (1954) :

“Section 661. Deductions for estates and trusts accumulating income or distxibuting corpus. . ' .,

. “This se'ction (subject to tbe. limitations discussed.below) allows, an additional deduction to estates or trusts for amounts ■ paid, credited, or required to be distributed tp beneficiaries. * * * [Emphasis added]’,’, ,

17 See H.R. Rep. No. 1337, 83d Cong., 2d Sess. 60 (1954); S. Rep. No. 1622, 83d Cong., 2d Sess. 82 (1954) :

“The bill adopts the general principle that to the extent of the trust’s current Income all distributions are deductible by the estate or trust and taxable to the beneficiaries.”

18 See, e.g., Commissioner v. Dean, 102 F. 2d 699 (10th Cir.1939).

19 See Kamln, Surrey, & Warren, The Internal Revenue Code of 1954: Trusts, Estates and Beneficiaries, 54 Colum. L. Rev. 1237, 1246-48 (1954).

20 Riggs National Bank v. united States, 173 Ct. Cl. 479, 352 F. 2d 812 (1965).