## Facts

- Edward Fabrice created five irrevocable inter vivos trusts for family beneficiaries.
- Fabrice served as a trustee of each trust.
- The trustees had discretion to either distribute trust income to beneficiaries or accumulate it and add it to trust principal.
- During Fabrice’s life, some trust income was accumulated and added to corpus pursuant to this discretionary power.
- After Fabrice’s death, the Commissioner of Internal Revenue included in the gross estate both the original trust corpus and the amounts representing accumulated income added to principal.
- Lower courts held the original corpus includable but excluded the accumulated income from the gross estate.

## Issues

1. Whether accumulated trust income, added to principal under a decedent grantor-trustee’s discretionary power to distribute or accumulate income, constitutes property “transferred” and is includable in the gross estate under I.R.C. § 811(c)(1)(B)(ii) of the 1939 Code.

## Decision

- The Supreme Court reversed.
- The Court held that the accumulated income was includable in the decedent’s gross estate under § 811(c)(1)(B)(ii).
- The decedent’s discretionary power to distribute or accumulate income was a retained power to “designate the persons who shall possess or enjoy” the income.
- The combination of the original trust transfer and the later accumulation of income under the reserved power satisfied the statute’s “transfer” requirement as to the accumulated income.

## Legal Principles

- Under I.R.C. § 811(c)(1)(B)(ii) (1939 Code), property is includable in a decedent’s gross estate when the decedent made an inter vivos transfer and retained, alone or with another, the right to designate who will possess or enjoy the property or its income.
- A retained discretionary power to decide whether trust income will be currently distributed or accumulated for later enjoyment constitutes a power to designate possession or enjoyment within § 811(c)(1)(B)(ii).
- Accumulated trust income added to corpus pursuant to such a retained power is treated as having been “transferred” for purposes of § 811(c)(1)(B)(ii) and is includable in the gross estate when the power persists until death.

## Conclusion

The Court held that where a grantor creates irrevocable trusts but retains, as trustee, discretionary control to distribute or accumulate income, the accumulated income added to principal is treated as transferred under § 811(c)(1)(B)(ii) and must be included in the grantor’s gross estate.


United States v. O’Malley, 383 U.S. 627 (1966)