## Facts

- F. Paul Duffy and his wife purchased improved real estate in Cincinnati for use in Dr. Duffy’s medical practice.
- The Duffys conveyed the property to a bank as trustee under a trust agreement creating four separate trusts for their children.
- The trusts were irrevocable for 10 years and 30 days, and amendable and revocable thereafter.
- During each child’s minority, the trustee had discretion to distribute income or principal for the child’s education, maintenance, or welfare; undistributed income was accumulated.
- The property was leased back to Dr. Duffy for five years (renewable for another five) at an annual rent of $8,650, stipulated as reasonable; Dr. Duffy continued using the property in his practice and paid rent to the trustee.
- For tax years 1963–1966, the Duffys did not include the rent paid to the trust in their taxable income.
- The IRS assessed deficiencies, treating the Duffys as owners of the trust for federal income tax purposes under the grantor-trust rules, and included the trust income in their taxable income.
- The Duffys paid the deficiencies and sued for a refund; the district court entered judgment for the taxpayers on stipulated facts and cross-motions for summary judgment, and the United States appealed.

## Issues

1. Whether the Duffys were treated as owners of the trust property under I.R.C. §§ 671–677 such that rent paid to the trustee was includible in their taxable income for 1963–1966.
2. Whether an irrevocability period of 10 years and 30 days insulated the trust from grantor-trust treatment during that period, despite retained powers and the lease-back arrangement.

## Decision

- The Sixth Circuit reversed the district court and ruled for the United States.
- The court held the Duffys were properly treated as owners of the trust property under the grantor-trust provisions, requiring inclusion of the rental income in their taxable income for 1963–1966.
- The deficiency assessments were upheld, and the taxpayers were not entitled to a refund.

## Legal Principles

- Under I.R.C. §§ 671–678, when a grantor is treated as the owner of any portion of a trust, the trust’s income attributable to that portion is taxed to the grantor.
- The grantor-trust provisions are construed to prevent family income-splitting devices associated with short-term and Clifford-type trusts, focusing on retained control and economic benefit rather than formal labels.
- A trust’s stated irrevocability for slightly more than ten years does not preclude grantor-trust treatment when the overall arrangement reflects continued economic ownership and benefit within the family unit, including through lease-back structures and retained powers effective after the term.

## Conclusion

The court treated the family trust and lease-back as an arrangement that left the grantors with sufficient retained control and continuing economic benefit to be taxed as owners under the grantor-trust rules, making the rental income includible in their taxable income despite the trust’s 10-year-and-30-day irrevocability period.


Duffy v. United States, 487 F.2d 282 (6th Cir. 1973)