## Facts

- A taxpayer created four separate 10-year trusts in 1959, one for each of his four minor children, naming corporate trustees.
- Each trust provided that corpus would revert to the taxpayer at the end of the term.
- Trust income was generally to be accumulated during each child’s minority, but the trustee had discretion to use income during minority to pay private-school and college expenses, including room, tuition, books, and travel.
- During 1959–1961, the children attended private schools and colleges, and trustees paid certain room and tuition charges from trust income.
- For two colleges, the taxpayer signed agreements expressly assuming responsibility for his children’s educational charges.
- For other schools, bills were sent directly to the taxpayer; he paid some items personally and directed the trustee to pay room and tuition from trust income, with both checks sent to the schools.
- The taxpayers did not report the trust income on their federal returns for 1959–1961.
- The IRS assessed deficiencies on the theory that trust income used to pay the children’s room and tuition discharged the taxpayer’s legal obligations and was taxable to him under the grantor-trust rules.
- The taxpayers paid the assessments and sued for refunds; the case was tried on stipulated facts.

## Issues

1. Whether, under I.R.C. § 677(a), trust income used by a trustee to pay minor children’s room and tuition at private schools and colleges is taxable to the grantor as income applied to discharge the grantor’s legal obligations.
2. Whether the result differs where the taxpayer had express contractual liability to certain schools versus no written contract with others, given the billing and payment practice.

## Decision

- The court held that the trust income used to pay the children’s tuition and room was taxable to the grantor under I.R.C. § 677(a).
- The court concluded that these payments satisfied the grantor’s legal duty to support his minor children, including appropriate educational expenses under applicable state law.
- For schools where the taxpayer expressly assumed payment responsibility, the trustee’s payments directly discharged the taxpayer’s personal contractual obligations.
- For schools without written contracts, the court treated the taxpayer as having a legal obligation for the expenses based on the parental support duty and the fact that bills were sent to him and he directed payment.
- Judgment entered for the United States; the refund claims were denied.

## Legal Principles

- Under I.R.C. § 677(a), a grantor is treated as the owner of trust income to the extent the income is, or may be, applied (without an adverse party’s consent) to the support or maintenance of the grantor’s minor children or to satisfy the grantor’s obligations.
- When trust income is used to pay expenses that fall within a parent’s legal duty of support under state law, those payments are treated as discharging the parent’s legal obligation for federal tax purposes.
- Trust payments that satisfy a grantor’s personal contractual liabilities are treated as payments of the grantor’s obligations and are taxable to the grantor as if the grantor received the income and paid the debt.
- The absence of a formal written contract with a service provider does not prevent treating trust-funded payments as satisfaction of the grantor’s obligations where the grantor bears a support duty and the payment practice reflects responsibility for the charges.

## Conclusion

The court denied a tax refund, holding that trust income used to pay minor children’s room and tuition at private schools and colleges was taxable to the grantor because the payments satisfied the grantor’s support obligations and, in some instances, direct contractual liabilities under I.R.C. § 677(a).


Morrill v. United States, 228 F. Supp. 734 (D. Me. 1964)