## Facts

- Christopher and Gloria Stone were financially stable parents whose minor children attended private school.
- The children’s private-school attendance began before any trust planning and was based on the family’s ability and preference, not on special educational needs or a specific benefit sought.
- After the children had already attended private school for two or three years, the Stones created trusts for their minor children.
- The stated purpose of the trusts was to pay the children’s education expenses through college.
- The Stones’ attorney served as trustee of the children’s trusts.
- In 1981 and 1982, the trustee made distributions from the trusts to pay the children’s private high-school tuition.
- The IRS determined that the trust income used to pay the private-school tuition was taxable to the Stones because it discharged the Stones’ legal obligation to support their minor children, including providing education.
- The Stones petitioned the U.S. Tax Court for redetermination and also argued that the notice of deficiency did not properly place the Commissioner’s theory at issue.

## Issues

1. Whether the IRS’s notice of deficiency was sufficient to permit the Tax Court to consider the Commissioner’s theory that trust-paid tuition was income to the parents.
2. Whether trust income used to pay minor children’s private high-school tuition is includible in the parents’ gross income when the payments satisfy the parents’ legal duty of support.

## Decision

- The Tax Court held that the notice of deficiency was sufficient and did not prevent the court from considering the Commissioner’s theory regarding the trust-paid education expenses.
- The Tax Court held that trust income used to pay the Stones’ minor children’s private high-school tuition was taxable to the Stones because the payments satisfied the Stones’ legal obligation to support their children, including education.
- The court sustained the IRS’s deficiency determination on that basis.

## Legal Principles

- A notice of deficiency is generally adequate if it determines a deficiency and provides fair notice of the items adjusted; it need not set out a detailed legal theory or trial brief.
- The Tax Court’s jurisdiction in a deficiency case rests on the Commissioner’s determination of a deficiency and the taxpayer’s timely petition; imperfect articulation of the legal rationale in the notice does not, by itself, bar consideration of the Commissioner’s position.
- Amounts paid by a third party (including a trust) to satisfy a taxpayer’s legal obligation are treated for federal income tax purposes as income to the taxpayer to the extent of the obligation discharged.
- Parents’ legal duty to support minor children typically includes providing education consistent with the family’s circumstances; when trust distributions are used for that purpose, the resulting economic benefit is attributed to the parents rather than shifted to the trust or children.
- In Tax Court deficiency litigation, taxpayers generally bear the burden to show the Commissioner’s determinations are incorrect and to support any contrary treatment of the payments.

## Conclusion

In *Stone v. Commissioner*, the Tax Court rejected the Stones’ argument that the notice of deficiency was too deficient to allow litigation of the IRS’s theory, and it sustained the deficiency by holding that trust income used to pay the Stones’ minor children’s private high-school tuition was includible in the Stones’ income because it discharged their legal support obligation.


Stone v. Commissioner, T.C. Memo 1987-454 (1987)