## Facts

- Alfred I. duPont created and improved the “Nemours” estate in Delaware, including a mansion and extensive grounds and structures.
- In 1925, duPont transferred title to Nemours to Nemours, Inc. in exchange for all its stock, and he and his wife leased Nemours at a nominal $1 annual rent for their joint lives plus the survivor’s life.
- In 1929, duPont transferred additional stock to Nemours, Inc., and the corporation assumed obligations to pay taxes, insurance, and maintenance for Nemours.
- After duPont’s death (1935), his will directed creation of the Alfred I. duPont Testamentary Trust, whose corpus included the Nemours, Inc. stock and other securities; the will also directed Nemours be maintained and gave Jessie Ball duPont a lifetime right to occupy it.
- During 1966 and 1967, the trust earned roughly $13 million annually and distributed about $11 million annually to Jessie as the principal life income beneficiary.
- Through Nemours, Inc., the trust paid substantial maintenance and rehabilitation costs for Nemours (approximately $255,753 in 1966; $274,451 plus $114,284 for paving/rehabilitation in 1967).
- The trust claimed deductions for these costs under I.R.C. § 212 as expenses of rental property, property held for production of income, or trust-property management and conservation; the Commissioner disallowed the deductions and the Tax Court sustained the disallowance.

## Issues

1. Whether Nemours-related expenditures were deductible under I.R.C. § 212 as expenses of rental property, property held for production of income, or management/conservation/maintenance of trust property.
2. Whether the trust–corporation arrangement made Nemours part of an “income-producing entity” so that its maintenance expenses were deductible under § 212.
3. Whether the expenditures could be deductible as distributions to the beneficiary under I.R.C. §§ 651 or 661 (raised on appeal).

## Decision

- The Fifth Circuit affirmed the Tax Court’s denial of deductions under I.R.C. § 212.
- The court held Nemours was not rental property in any commercial sense and was not held for the production of income; the expenses therefore did not qualify under § 212.
- The court rejected the argument that Nemours was part of an “income-producing entity” for § 212 purposes.
- The court remanded for the Tax Court to consider, in the first instance, whether the expenditures might be deductible under §§ 651 or 661 as distributions to the beneficiary.

## Legal Principles

- I.R.C. § 212 permits deductions for ordinary and necessary expenses incurred for producing or collecting income, or for managing, conserving, or maintaining property held for producing income.
- Property used as a beneficiary’s personal residence, maintained for personal or testamentary reasons and not for an income-producing purpose, is not “rental property” and is not “held for the production of income” under § 212.
- A testamentary directive to maintain property does not, by itself, transform personal-residence upkeep into deductible trust administration expenses under § 212.
- The existence of corporate or trust formalities does not convert non-income-producing personal-use property into an income-producing asset for § 212.

## Conclusion

The Fifth Circuit held that the trust could not deduct Nemours maintenance and rehabilitation expenses under I.R.C. § 212 because the estate functioned as the life beneficiary’s personal residence rather than income-producing property, and it remanded for consideration of whether the expenses could instead be treated as deductible distributions under I.R.C. §§ 651 or 661.


Alfred I. duPont Testamentary Trust v. Comm’r, 514 F.2d 917 (5th Cir. 1975)