## Facts

- A trust created by Silas Llewellyn gave his granddaughter, Mary Isabelle Llewellyn, a contingent remainder interest that depended on specified survivorship conditions within the family.
- In 1946, Mary sold and assigned her entire remainder interest to three investors; one investor acquired a four-ninths share.
- Later in 1946, that investor sold to Alan Nemser, for $3,000, a fractional portion of the four-ninths share (about 9.52% of Mary’s original remainder interest).
- In 1968, an Illinois court determined Nemser was entitled to his share of the trust remainder upon termination.
- After trust fees and expenses, Nemser received $55,788.16 from the trust corpus.
- In the trust’s final taxable year (1968), deductible expenses exceeded gross income, creating terminal-year “excess deductions.”
- Nemser’s pro rata share of those excess deductions was $14,394.12, which he claimed on his 1968 individual return under I.R.C. § 642(h)(2).
- The Commissioner disallowed the deduction on the ground that Nemser, as a purchaser of a trust interest, was not a “beneficiary succeeding to the property” within the meaning of § 642(h)(2).
- The case was submitted on a stipulation presenting a single legal issue.

## Issues

1. Whether a purchaser of a remainder interest who receives trust property upon termination is a “beneficiary succeeding to the property of the … trust” under I.R.C. § 642(h)(2) and may deduct a pro rata share of the trust’s terminal-year excess deductions.

## Decision

- The Tax Court held for Nemser.
- A purchaser who succeeds to trust property on termination may be a “beneficiary” for purposes of § 642(h)(2).
- Nemser was entitled to deduct $14,394.12 as his pro rata share of the trust’s terminal-year excess deductions.

## Legal Principles

- Under I.R.C. § 642(h)(2), terminal-year deductions in excess of gross income are allowed to the beneficiaries who succeed to the property upon termination of the trust.
- “Beneficiaries succeeding to the property” is not limited to individuals who take by gift, inheritance, or original designation; it includes a transferee who owns the beneficial interest and takes the distribution at termination.
- The relevant inquiry is whether the distributee’s share of the terminating trust property was reduced by the trust’s final-year expenses; the associated excess deductions follow that beneficial interest absent a statutory limitation.
- A purchaser of a beneficial interest stands in the transferor-beneficiary’s position for purposes of allocating terminal-year excess deductions tied to that interest.

## Conclusion

The Tax Court construed § 642(h)(2) to allow terminal-year excess deductions to the person who actually succeeds to the trust property at termination, including a purchaser of a remainder interest, because that person’s distributive share bears the economic burden of the trust’s final-year expenses.


Nemser v. Comm'r, 66 T.C. 780 (1976)