## Facts

- In March 1941, Jeanette Andersen created an inter vivos trust that paid income to Jeanette for life, then to her daughter for life; on the daughter’s death, the trust corpus would pass to the daughter’s children.
- Jeanette transferred to the trust shares of Orlando Daily Newspapers, Inc., stock her husband had given her in 1936 (valued at $11,000 for gift-tax reporting at the time of the gift).
- The trust’s principal asset was this closely held newspaper stock.
- In 1965, the trust sold the stock for more than $6 million.
- The sale price consisted of $1,557,441 in cash plus 15 promissory notes payable annually from 1966 through 1980 (fourteen notes of $242,179.50 and a final note of $1,453,077).
- The trustee treated the gain on the stock sale as income of the trust (rather than corpus) and elected installment reporting under I.R.C. § 453, recognizing capital gain as payments were received.
- During Jeanette’s lifetime, trust income (including the capital-gain amounts realized on the installment payments) was distributed to her, and she reported those distributions on her individual income-tax returns.
- Jeanette died in 1968. Her executrix did not include the trust corpus in Jeanette’s gross estate.
- The Commissioner later determined that, because Jeanette retained a life income interest, the trust property (including the unpaid installment notes) was includible in her gross estate, and the estate paid federal estate tax based on that inclusion.
- For tax years 1969–1972, after Jeanette’s death, the trust received installment payments and reported the resulting capital gains. The co-trustees filed refund claims asserting that the post-death gains were “income in respect of a decedent” (IRD) under I.R.C. § 691(a), entitling the trust to a deduction under § 691(c) for the portion of estate tax tied to that IRD.
- The IRS disallowed the refund claims, and the co-trustees (Sun First National Bank of Orlando and Marcia Andersen Murphy) brought a refund suit in the U.S. Court of Claims, which was decided on cross-motions for summary judgment (after the court withdrew an earlier opinion on rehearing and issued a substituted opinion).

## Issues

1. Whether the trust’s post-death capital gains recognized on installment payments from the 1965 stock sale were “income in respect of a decedent” under I.R.C. § 691(a).
2. If so, whether the trust could claim a § 691(c) income-tax deduction for the portion of federal estate tax attributable to the inclusion of the installment obligation/right to receive those payments in Jeanette’s gross estate.

## Decision

- The Court of Claims held that the trust’s post-death installment-sale capital gains were IRD under I.R.C. § 691(a).
- The court held that, because the right producing that income was included in Jeanette’s gross estate and bore estate tax, the trust was entitled to the § 691(c) deduction for the estate tax attributable to the IRD.
- The court granted plaintiffs’ motion for summary judgment and denied the government’s cross-motion.

## Legal Principles

- IRD under I.R.C. § 691(a) covers amounts to which a decedent had a right at death (or that are tied to the decedent’s pre-death transaction or property) that would have been includible in the decedent’s gross income had the decedent lived to receive them.
- IRD treatment turns on the source and timing of the right to the income; it is not limited to wages, interest, or other ordinary-income items, and can include capital gains in appropriate circumstances.
- When a completed pre-death sale is reported under the installment method, later payments can represent deferred recognition of gain from that pre-death transaction; the installment method affects timing of recognition, not the character of the underlying right.
- If the government includes the relevant right or property in the decedent’s gross estate (because of a retained life interest) and imposes estate tax, § 691(c) is designed to reduce double taxation by allowing the income recipient a deduction for estate tax attributable to the IRD.
- In applying § 691, courts consider the statute’s function of coordinating estate and income tax so that the same economic gain is not effectively taxed twice without the § 691(c) offset.

## Conclusion

The Court of Claims ruled that the trust’s post-death capital gains from collecting the installment notes on the 1965 stock sale were IRD because they flowed from a pre-death transaction and a right included in Jeanette Andersen’s taxable estate; therefore, the trust could deduct under § 691(c) the portion of estate tax allocable to that IRD, and the trustees were entitled to refunds for 1969–1972.


Sun First National Bank v. United States, 221 Ct. Cl. 469 (1979)