Duffy v. United States

F. Paul Duffy (plaintiff) and his wife Virginia bought a piece of real estate for Paul to use in his medical practice. Paul executed a trust agreement in which the property would be held in trust with Provident Bank as trustee. Four different trusts were established for the benefit of each of four Duffy children. The trust agreements indicated that a beneficiary could receive trust principal or income for education, maintenance, and welfare, with that determination made solely by the trustee. The trusts were to be irrevocable for 10 years and 30 days and then would be amendable and revocable. At the age of majority, each child was to have that child’s share of the trust income made part of the corpus. Each child’s share of the trust income thereafter would be distributed to the child. Unless the trust was amended or revoked, when the youngest child reached 25, the principal and income would then be distributed among the adult children. Paul signed a lease with Provident Bank in which he paid an annual rent of $8,650 for the real estate held by the bank. Paul and Virginia did not include those rent payments to the trust in their taxable income from 1963 to 1966. Paul defended this by arguing that the code’s provisions regarding control of trust property being equated to ownership were excepted by a provision that indicated that Paul would be owner if his interest in any trust corpus was to take effect within 10 years of transfer. Paul maintained that because the period in which he could not take trust property was longer than 10 years, he thus could not be owner. The government (defendant) audited Paul’s income taxes and disagreed, finding that the rent payments should have been included in Paul’s income. The government argued that the 10-year provision was intended to make sure that a power over trust income received after 10 years would not be disassociated from the income and that Paul retained control over the income. A district court found for Paul, and the government appealed.