Scully v. United States

Michael and Peter Scully (plaintiffs) were brothers who were trustees of a pair of trusts established for the benefit of various Scully family members. Michael and Peter’s father, Thomas, established two trusts (the Buying Trusts), one each for the benefit of Michael’s and Peter’s children. Some family land holdings were placed in each trust, with two-thirds of the annual income to go to Michael or Peter’s children when they reached age 21, with the rest to corpus. The trusts were to terminate 10 years after the death of the last surviving child of Michael and Peter living in 1959 (when the trusts were created). On Thomas’s death in 1961, he left a marital trust for his wife, Violet, which included a general power of appointment. On Violet’s death in 1976, she left two more trusts (Selling Trusts) for the benefit of Peter and Michael’s children. All income from the Selling Trusts was to be distributed to the children at age 21. Similarly, the trusts were to end 10 years after the last death of Peter’s and Michael’s children who were living in 1961. The Selling Trusts were to pay all taxes, administration expenses, and estate costs, but the trusts lacked cash to make the payments. Michael and Peter, as trustees of the Selling Trusts, sold 980 acres of land to the Buying Trusts. The price was $1,550 per acre, set by an appraisal to value Violet’s estate property. The Selling Trusts reported no gain or loss, claiming that their basis in the 980 acres was $1,550 an acre (fair market value at Violet’s death). The government (defendant) disagreed. Michael and Peter later agreed to revalue the land at $2,075 per acre and filed claims for refunds for the Selling Trusts’ returns, noting their basis was $2,075 per acre, so the trusts lost $525 per acre. The government denied the claim for a refund, and the brothers filed suit. At trial, the parties filed cross-motions for summary judgment. The government argued that the Selling Trusts’ loss was disallowed according to the Internal Revenue Code section denying deductions for losses from the sale of property between related parties, a position later abandoned by the government. On appeal, the government argued that the losses should be disallowed because the sale was “indirectly” between the fiduciary of a trust and beneficiary of a trust and because the sale included no genuine economic loss. The brothers disputed each contention, arguing that theirs was an arms-length transaction without tax-avoidance motives and that there was no such thing as an indirect sale between a fiduciary and beneficiary of a trust.