Benson v. Commissioner

Larry Benson and his wife, June (plaintiffs), opened a home-appliance center. Larry and June bought two tracts of land, set up a building, and used the property for the appliance business. The Bensons leased the property to Benson’s Maytag, Inc., which was entirely owned by Larry. Larry and June transferred the property to the L. William Benson Short Term Irrevocable Trust. June was the trustee, and the trust was to last 10 years and 10 days from the last contribution to the trust. All net income was to be paid annually to the Bensons’ four children, and, when the trust ended, any undistributed income was to go to the children, with the trust principal reverting to Larry. Under the trust documents, June, as trustee, could invest, sell, or exchange trust property and was also allowed to loan trust property to any person with provision for interest and security. In the trustee position, June made four unsecured loans to Larry totaling nearly $50,000. The trust reported no taxable income for the years 1973, 1974, and 1975, with distribution deductions being taken for each year. That said, the children received no money, and all net trust receipts until November 1, 1974, were loaned to Larry. Larry did not make any payments to repay the loans until the end of 1977, when he repaid them in full. The issue is that by borrowing the money, Larry subjected himself to being construed as the owner of some part of the trust over which he exercised control via the loan. The Bensons argued that Larry should be construed as owner only of the portion of the trust borrowed compared to the entire trust. The trust property (which was solely the land, building, and improvements) was valued at $325,000 on January 1, 1975. The Commissioner of Internal Revenue (defendant), having issued a notice of deficiency, argued that Larry should be construed as owning either the entire trust, because he could borrow it all, or the portion of the amount borrowed divided by the trust’s income for the year calculated without any distribution deductions.