## Facts

- Edward L. Stephenson created two trusts in 1972 with Girard Bank as trustee: a “Simple Trust” and an “Accumulation Trust.”
- The Simple Trust was funded with 5,000 shares of Procter & Gamble stock and was required to distribute all income currently.
- The Simple Trust provided for mandatory and discretionary income distributions primarily benefiting Stephenson’s daughter, Amy, and another individual.
- Any Simple Trust income not distributed to the individual beneficiaries was required to be distributed to the Accumulation Trust.
- The Accumulation Trust received income from the Simple Trust and allowed that income either to be distributed to Amy or accumulated and added to corpus.
- Amy could demand part of the Simple Trust corpus but had no comparable corpus rights in the Accumulation Trust.
- The trustee filed separate fiduciary income tax returns for each trust for 1974 and 1975, treating each as a separate taxable entity.
- The IRS disregarded the Accumulation Trust as a separate entity and aggregated the trusts as a single simple trust, increasing tax liability by about $7,000 for 1974–1975.
- The trustee paid the asserted deficiencies and petitioned the Tax Court; petitioners sought summary judgment, while the Commissioner relied on a Treasury regulation authorizing aggregation of multiple trusts formed principally to avoid tax.

## Issues

1. Whether the Treasury regulation permitting aggregation of multiple trusts created by the same grantor for the same or similar beneficiaries, when principally for tax avoidance, is valid under the Internal Revenue Code.
2. Whether, under that regulation, the Commissioner could aggregate the Simple Trust and the Accumulation Trust for 1974–1975 and disregard the Accumulation Trust’s separate tax status.
3. Whether earlier Tax Court authority precluded consideration of tax-avoidance motive in deciding whether multiple trusts should be recognized as separate taxpayers.

## Decision

- The Tax Court upheld the validity of the multiple-trust Treasury regulation as a reasonable exercise of regulatory authority.
- The court held the Commissioner properly aggregated the two Stephenson trusts and treated them as a single trust for federal income tax purposes for the years at issue.
- The court denied petitioners’ summary judgment request and sustained the Commissioner’s deficiencies.
- The court distinguished prior precedent as not barring aggregation where a valid regulation expressly makes tax-avoidance purpose relevant.

## Legal Principles

- Treasury regulations issued under statutory authority are sustained if they reasonably implement the Code and are not inconsistent with statutory text or purpose.
- Under the multiple-trust regulation, the IRS may treat separate trusts as one taxpayer when they share a common grantor, substantially similar beneficiaries and terms, and are established or maintained principally to avoid federal income tax through income splitting.
- A taxpayer’s tax-avoidance purpose may be considered when a valid statute or regulation expressly makes motive relevant; prior case law rejecting motive-only disregard does not foreclose later anti-avoidance rules.
- Interlocking trust arrangements that route income between instruments and primarily function to reduce marginal rates may be aggregated despite some differences in beneficiary rights, when the overall structure falls within the regulation’s scope.

## Conclusion

The Tax Court held that the Treasury’s multiple-trust regulation was valid and allowed the IRS to aggregate the Stephenson Simple Trust and Accumulation Trust because their integrated design, common grantor and beneficiary, and lack of a substantial non-tax justification showed a principal purpose of avoiding income tax through income splitting.


Edward L. Stephenson Tr. v. Comm’r, 81 T.C. 283 (1983)