                         T.C. Memo. 1998-411



                       UNITED STATES TAX COURT



                      SUSAN L. BAY, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 16877-96.                Filed November 16, 1998.



       Garry M. Cox, for petitioner.

       Lisa K. Hartnett, for respondent.


               MEMORANDUM FINDINGS OF FACT AND OPINION


       CARLUZZO, Special Trial Judge:   This case was heard pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.    Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the years 1993 and 1994.

Rule references are to the Tax Court Rules of Practice and

Procedure.
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     Respondent determined deficiencies in petitioner's 1993 and

1994 Federal income taxes in the amounts of $3,370 and $1,196,

respectively.   The issue for decision is whether certain

miscellaneous itemized deductions attributable to a grantor trust

are subject to section 67(a).

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

Petitioner filed timely 1993 and 1994 Federal income tax returns.

She resided in Omaha, Nebraska, at the time the petition was

filed.

     Petitioner is a grantor and beneficiary of the Jay Newlin

Trust (the trust).   The trust was created on December 11, 1976,

in order to preserve financial security for the grantors, more

efficiently manage their investments, and gain financial

advantages for the beneficiaries.   Although certain restrictions

apply to distributions of corpus, for Federal income tax

purposes, the trust is what is commonly referred to as a grantor

trust.   See generally sections 671 through 679.

     During the years at issue, the trust corpus was valued at

approximately $200 million, of which petitioner's interest was

approximately 2.9 percent.    The trust was administered by three

trustees, none of whom had any expertise in the management of a

large investment portfolio.   In order to assist them in making

financial and other investment decisions, the trustees retained
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investment management companies, accountants, and attorneys.       The

trust paid or incurred the expenses related to such services.

Petitioner's proportionate shares of these expenses amounted to

$19,274 for 1993 and $28,984 for 1994.

     In computing her taxable income for each year in issue,

petitioner elected to itemize her deductions.     On Schedules A

included with her 1993 and 1994 Federal income tax returns,

petitioner claimed her proportionate shares of the trust expenses

as "Other Miscellaneous Deductions" as detailed below:


                                           1993        1994
     Misc. expenses                         $19          $9
     Rent expense                           106         374
     Investment fees                     10,335      15,323
     Travel expense                          36       1,066
     Investment custodial fees            2,683       3,494
     Professional fees                    6,080       1,701
     Telephone expense                      ---          64
     Atty. and acct. fees                   ---       6,836
     Other depreciation                      15         117
     Total                               19,274      28,984


     In the notice of deficiency, respondent reduced the totals

of the above deductions by 2 percent of petitioner's adjusted

gross income for the appropriate year, made other computational

adjustments, and determined the deficiencies here in dispute

accordingly.
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                              OPINION

     The dispute between the parties centers around the

application of section 67.   In support of the adjustments

reducing the amounts of the deductions attributable to the trust,

respondent relies upon section 67(a), which states:

     SEC. 67(a).   General Rule.--

          In the case of an individual, the miscellaneous
     itemized deductions for any taxable year shall be allowed
     only to the extent that the aggregate of such deductions
     exceeds 2 percent of adjusted gross income.

Petitioner argues that section 67(e) controls, which states, in

relevant part:

     SEC. 67(e). Determination of Adjusted Gross Income in
Case of Estates and Trusts.--

          For purposes of * * * [section 67] the adjusted
     gross income of an estate or trust shall be computed in
     the same manner as in the case of an individual, except
     that

          (1) the deductions for costs which are paid or
     incurred in connection with the administration of the
     estate or trust and which would not have been incurred
     if the property were not held in such trust or estate,
     and

          (2) * * *

     shall be treated as allowable in arriving at adjusted
     gross income. * * *


     According to petitioner, the expenses that gave rise to the

deductions attributable to the trust were paid or incurred in

connection with the administration of the trust.   Relying upon
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O'Neill v. Commissioner, 994 F.2d 302 (6th Cir. 1993), revg. 98

T.C. 227 (1992), and pointing out the fiduciary obligations

imposed upon the trustees, petitioner contends that the expenses

would not have been incurred if the property were not held by the

trust.    Under petitioner's theory of the case, because pursuant

to section 67(e) the expenses are taken into account in computing

adjusted gross income, the provisions of section 67(a) are not

applicable.

     We turn our attention first to the status of the trust for

Federal income tax purposes.    In petitioner's brief, as a general

criticism of respondent's position, and with reference to the

trust restrictions on the distribution of corpus, petitioner

states:    "[respondent] fails to note that in the instant case

although the form of * * * [the trust] is that of a grantor's

trust, in substance it is similar to an irrevocable trust or

mutual fund."    According to petitioner, we should consider the

trust as other than a grantor trust.    Petitioner's reliance upon

section 67(e) and O'Neill v. Commissioner, supra, is consistent

with treating the trust as other than a grantor trust.    However,

such treatment is inconsistent with the stipulation of facts, in

which petitioner agreed not only that the trust "is a grantor

trust", but further, in apparent reliance upon section 671, that

"each item of income and expense [of the trust] is reported

individually by the grantor".    Considering the trust as other
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than a grantor trust is also inconsistent with the manner in

which petitioner reported the items of income and deductions

attributable to the trust on her 1993 and 1994 Federal income tax

returns.    Furthermore, the restrictions on the distribution of

trust corpus, do not, as petitioner suggests, remove the trust

from the provisions of section 671.     See sec. 677.    The trust is

a grantor trust, and the positions of the parties will be

considered accordingly.

     Contrary to petitioner's argument, section 67(e) does not

and cannot apply to grantor trusts.1    Because the items of income

and deductions are passed through to the grantor, the adjusted

gross income of a grantor trust, in effect, is not a viable

notion either conceptually under the relevant statutory scheme,

or for reporting purposes.    Pursuant to section 671, petitioner,

as a grantor of the trust, is required to include in the

computation of her taxable income, the items of income,

deductions and credits of the trust that are attributable to her

proportionate share of the trust.    See sec. 1.671-4, Income Tax

Regs.    This, in fact, is what she did on her 1993 and 1994

Federal income tax returns.    These items are treated as though

received or paid by her, instead of by the trust.       Sec. 1.671-

     1
      Consequently, we need not address the controversy between
the parties regarding whether the type of expenses here in
question would not have been incurred but for the fact that the
property was held in trust. See O'Neill v. Commissioner, 994
F.2d 302 (6th Cir. 1993), revg. 98 T.C. 227 (1992).
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2(c), Income Tax Regs.   Because the deductions here under

consideration constitute "Miscellaneous Itemized Deductions"

within the meaning of section 67(b), the provisions of section

67(a) are applicable.

     The applicability of section 67(a) is further supported by

section 67(c), which prohibits the indirect deduction through a

pass-through entity of amounts which would not be allowable as a

deduction if paid or incurred directly by an individual.     The

trust is a "pass-through entity".   See sec. 1.67-2T(g)(1)(i),

Temporary Income Tax Regs., 53 Fed. Reg. 9878 (Mar. 28, 1988).

As stated in sec. 1.67-2T(b)(1), Temporary Income Tax Regs., 53

Fed. Reg. 9877 (Mar. 28, 1988), "the [sec. 67(a)] limitation

applies to the grantor * * * of a grantor trust with respect to

items that are paid or incurred by a grantor trust and are

treated as miscellaneous itemized deductions of the grantor".      If

the expenses were directly paid or incurred by petitioner, the

amounts of the deductions would have to be reduced in accordance

with section 67(a).   Petitioner cannot deduct a greater amount

merely because the deductions were passed through to her from the

trust.

     Accordingly, we hold that section 67(a) is applicable to the

deductions attributable to the trust, and respondent's

adjustments in this regard are sustained.

     In order to reflect the foregoing,
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             Decision will be

        entered for respondent.
