## Facts

- Lindsay O’Connor died in 1968.
- His will placed one-half of his net estate into a marital trust for his widow, Olive O’Connor.
- Olive was entitled to the marital trust’s annual income and held a full testamentary power of appointment over the trust corpus.
- Olive also had a right to withdraw any or all of the marital trust corpus at any time by giving written notice to the trustees and executors.
- Approximately two weeks after Lindsay’s death, Olive executed a document transferring all of her interest in the marital trust to the A. Lindsay and Olive B. O’Connor Foundation.
- The foundation had been created in 1965 and was a qualifying charitable organization under I.R.C. § 501(c)(3).
- Olive filed a gift tax return reporting the value of the transferred income and corpus interests as approximately $25 million.
- The remaining portion of Lindsay’s estate (after bequests) was divided into three trusts for his niece and nephews.
- For tax years 1969, 1970, and 1971, distributions from the estate to beneficiaries exceeded the estate’s distributable net income (DNI).
- The estate claimed distribution deductions for those years, including amounts distributed to the marital trust that were then passed on to the foundation.
- Returns were also filed for the marital trust, claiming deductions for amounts received from the estate and paid onward to the foundation.
- The government challenged the treatment of the marital trust as a separate taxable entity and challenged deductions on the theory that charitable deductions were not allowable under I.R.C. § 642(c) for payments not directed by the governing instruments.

## Issues

1. Whether, for Subchapter J purposes, the estate could claim distribution deductions for amounts distributed to the marital trust where Olive had assigned her entire marital-trust interest to a § 501(c)(3) foundation, so that the foundation was the party entitled to the economic benefit of those distributions.
2. Whether the marital trust should be treated as a separate taxable entity for federal income tax purposes, given Olive’s broad withdrawal and appointment powers and her assignment of her trust interest to the foundation.
3. Whether the estate or marital trust could claim a charitable contribution deduction under I.R.C. § 642(c) for amounts reaching the foundation when the will and trust instruments did not themselves direct payments to charity.

## Decision

- The Tax Court treated the post-death transfer to the foundation as an assignment of Olive’s beneficial interest in the marital trust, so that the foundation (rather than Olive) was the party entitled to receive the trust benefits for income-tax allocation purposes.
- The court rejected the attempt to treat the amounts paid over to the foundation as deductible charitable contributions under I.R.C. § 642(c) where the charitable recipient’s rights flowed from Olive’s assignment rather than from the governing instruments.
- To the extent the marital trust’s income was attributable directly to the person treated as holding the relevant beneficial rights (including rights tied to the power to vest property in oneself), the court addressed taxability by looking through the trust mechanics to identify the proper taxpayer under Subchapter J’s allocation rules.

## Legal Principles

- A fiduciary charitable deduction under I.R.C. § 642(c) generally depends on a payment of gross income to charity that is authorized by, and made pursuant to, the terms of the governing instrument; a charity’s receipt that occurs only because a beneficiary assigns or donates an interest is not, by itself, enough.
- For Subchapter J, when a beneficiary validly assigns an entire beneficial interest, the assignee may be treated as the party entitled to the income for purposes of determining who is allocated taxable income from fiduciary distributions under I.R.C. §§ 661–662.
- Where a person other than the grantor holds an unrestricted power to vest trust income or corpus in themselves, ownership concepts reflected in I.R.C. § 678 may affect whether trust income is taxed at the trust level or is attributed directly to the holder (or successor holder) of that power.
- Distribution deductions and corresponding income inclusions are determined by the statutory framework of DNI and the character of the payment (income vs. corpus), rather than by the taxpayer’s label (for example, calling a beneficiary-driven payment “charitable” does not make it deductible under § 642(c)).

## Conclusion

In *Estate of O’Connor*, the Tax Court analyzed how estate and trust income should be taxed when a surviving spouse with extensive marital-trust rights assigned her entire interest to a charitable foundation, and it concluded that Subchapter J taxability and deductions turn on who is entitled to the distributions under the assignment and the governing instruments, while denying § 642(c) charitable-deduction treatment where the charity’s receipt was not directed by the will or trust terms.


Estate of O'Connor, 69 T.C. 165 (1977)