                        T.C. Memo. 2006-274



                      UNITED STATES TAX COURT



  THOMAS B. GOLDSBY, JR. AND SANDRA C. GOLDSBY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8232-05.                Filed December 27, 2006.



     Scott F. May, for petitioners.

     Edsel Ford Holman, Jr., for respondent.



                        MEMORANDUM OPINION


     KROUPA, Judge:   Respondent determined a $124,662 deficiency

in petitioners’ Federal income tax for 2002 by denying a $390,629

charitable contribution pass-through deduction petitioners

carried over from 2000 regarding conservation easements on real

estate owned by the Goldsby-Matthews Trust (the trust).   We are
                                - 2 -

asked to decide as a threshold issue whether petitioners may

deduct the charitable contribution.     We conclude that they may

not.

                             Background

       The parties fully stipulated the facts regarding the

threshold issue in this case under Rule 122.1    The stipulation of

facts and the accompanying exhibits are incorporated by this

reference, and the stipulated facts are so found.     Petitioners

lived in Memphis, Tennessee, at the time they filed the petition.

References to petitioner are to Thomas B. Goldsby, Jr.

Petitioner and the Trust

       Petitioner’s father, Thomas B. Goldsby, Sr., an Arkansas

resident, created the trust in 1976 as the settlor.     The trust

agreement provides that the settlor’s son, petitioner, is the

sole income beneficiary and is entitled to all the net income.

The net income is to be paid quarterly if convenient but at least

annually.    Petitioner’s children, the settlor’s grandchildren,

are the remainder beneficiaries under the trust agreement.

Pursuant to the trust agreement, the grandchildren shall receive

the trust corpus once petitioner dies.




       1
      All Rule references are to the Tax Court Rules of Practice
and Procedure, and all section references are to the Internal
Revenue Code in effect for the year at issue, unless otherwise
indicated.
                                 - 3 -

Petitioner as Trustee

     The settlor also named his son, petitioner, trustee of the

trust.   Petitioner was the initial trustee of the trust and

served until 1985.   Petitioner served as trustee again from 1986

through at least the date the petition was filed.     An unrelated

person was trustee in the brief interim.

     The trustee has general authority to manage and distribute

the trust’s assets and income.    The trust agreement obligates the

trustee to manage the corpus in a manner that would satisfy the

purpose of allowing a distribution of the corpus to the settlor’s

grandchildren after petitioner dies.     All the powers the trustee

has are subject to fiduciary duty limitations and subject to the

limitations of the trust agreement.

     The trustee is restricted in dealing with the corpus and

income by the prudent investor rule, is not allowed to engage in

speculation, and is required to seek long-term growth and

appreciation of the trust property, considering income production

as well as the safety of the corpus.     The trust agreement

restricts each beneficiary from disposing of his or her interest

in the trust.   Arkansas law governs the interpretation of the

trust agreement.

Undistributed Net Income and Deemed Distributions

     Petitioner chose not to make or accept the mandated annual

distributions of net income despite the requirement in the trust
                                - 4 -

agreement.   Some years, petitioner left a portion of the trust

income with the trust assets.   This undistributed net income,

which amounted to approximately $2.2 million by January 1, 2000,

was noted in the trust’s books and records.   Although petitioner

intentionally did not pay himself the trust’s net income, he

never intended to relinquish his claim to this undistributed

income.   Petitioners reported all of the trust’s income (both

distributed and undistributed) on their tax returns in the

respective years the trust earned the income.

     The trust and petitioner treated certain transactions

involving the trust’s donations to charity as deemed

distributions to petitioner over the years.   A financial

spreadsheet prepared by the trust’s certified public accountant

(CPA) indicates that the trust treated $46,465 as deemed

distributions to petitioner during 2000.

Land in the Trust

     The trust acquired significant real estate over the years.

The trust acquired approximately 3,000 acres of land in Tunica

County, Mississippi, which we refer to as the Duck Lake property.

The trust also acquired several thousand additional acres of

contiguous property in Mississippi, north of the Duck Lake

property and between the Mississippi River and Tunica Cutoff

Lake.   This property north of the Duck Lake property is referred

to as the Riverbend/M’hoons Bend property.
                                - 5 -

     The trust conveyed conservation easements on the Duck Lake

property and the Riverbend/M’hoons Bend property to the

Mississippi Land Trust in 2000.    Respondent acknowledges that the

Mississippi Land Trust is a qualified charitable organization

under section 501(c)(3).    The trust obtained appraisals of the

Duck Lake property and the Riverbend/M’hoons Bend property both

before and after the conservation easements that indicated the

value of the conservation easements was $5,640,000.

Tax Reporting of the Conservation Easement Donations

     The trust reported its donation of the conservation

easements on its Form 1041, U.S. Income Tax Return for Estates

and Trusts, for 2000 and reported that the charitable

contribution was allocated to the sole income beneficiary,

petitioner.    The Schedule K-1, Beneficiary’s Share of Income,

Deductions, Credits, etc., attached to the trust’s Form 1041

reported the entire $5,640,000 claimed charitable contribution

deduction as passing through to petitioner as the sole income

beneficiary.    Petitioners deducted a portion of the trust’s

charitable contribution on their Federal income tax return for

2000 and carried over the balance subject to the adjusted gross

income limitations of section 170(b).    Petitioners carried over

and deducted portions of the trust’s charitable contribution on

their Federal income tax returns for 2001, 2002, 2003, and 2004.
                                - 6 -

Petitioners’ charitable contribution carryover deduction for 2002

is at issue.

Respondent’s Examination

     Respondent sent two letters to petitioners requesting

information about their carryover deduction for charitable

contributions on their return for 2002, but petitioners failed to

respond.   Instead, an employee of the trust received the letters

and filed them without bringing the letters to petitioners’

attention.   Having received no response, respondent issued a

deficiency notice to petitioners in which he disallowed

petitioners’ charitable contribution deduction for 2002.

Respondent challenged the value of the conservation easements

that the trust donated as well as petitioners’ eligibility for

any deduction at all.   Petitioners timely filed a petition.

     The parties filed, and the Court granted, a joint motion to

sever the threshold issue of who is the proper party to claim the

charitable contribution from the valuation issue of the

conservation easements.    Because we conclude that petitioners are

not the proper party to claim the charitable contribution

deduction, no trial will be necessary to determine the valuation

issue.

                             Discussion

     We are asked to decide whether petitioners may deduct on

their individual joint return a charitable contribution the trust
                                - 7 -

made with respect to the trust’s property.    We conclude that

petitioners may not deduct the charitable contribution in 2002.

We begin with the burden of proof.

I.   Burden of Proof

     In general, the Commissioner’s determinations in the

deficiency notice are presumed correct, and the taxpayer bears

the burden of proving that the Commissioner’s determinations are

in error.    See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933).   The burden of proof may shift to the Commissioner under

certain circumstances, however, if taxpayers introduce credible

evidence and establish that they substantiated items, maintained

required records, and fully cooperated with the Commissioner’s

reasonable requests.   Sec. 7491(a)(1) and (2)(A) and (B).2

     Petitioners admitted that they failed to respond to

respondent’s two letters seeking information about their

deduction.   In addition, petitioners have not argued that the

burden of proof should shift to respondent.    Accordingly, we find

that the burden of proof remains with petitioners.




     2
      Sec. 7491 is effective with respect to court proceedings
arising in connection with examinations by the Commissioner
commencing after July 22, 1998, the date of enactment of the
Internal Revenue Service Restructuring and Reform Act of 1998,
Pub. L. 105-206, sec. 3001(a), 112 Stat. 726.
                                - 8 -

II.   Ownership of a Portion of the Trust Under Grantor Trust
      Rules

      Petitioners argue that petitioner is the owner of a portion

of the trust under the grantor trust rules and should therefore

be allowed to deduct the value of the conservation easements the

trust contributed to charity.   We agree that petitioner is the

owner of the income portion of the trust, but we do not find that

petitioner is the owner of the corpus portion.     Moreover,

petitioners have not proven that the charitable contribution was

made from the income portion of the trust, and petitioners are

thus not entitled to the deduction.     We consider each of these

issues in turn.

      A.   Treating Petitioner as Owner of the Income Portion of
           the Trust Under Grantor Trust Rules

      A person is treated as the owner of any portion of a trust

with respect to which that person has the power, solely

exercisable by himself or herself, to vest the corpus or the

income in himself or herself.   Sec. 678; Mallinckrodt v. Nunan,

146 F.2d 1 (8th Cir. 1945), affg. 2 T.C. 1128 (1943).      When a

person is treated as the owner of a portion of a trust under

section 678, special rules apply to not tax the trust directly.

Secs. 671-678; Estate of O’Connor v. Commissioner, 69 T.C. 165,

174 (1977).   Instead, the person treated as the owner takes into

account the trust’s items of income, deduction, and credit

attributable to that portion of the trust.     Sec. 671.
                               - 9 -

     If the trust makes a donation to charity from that portion

of the trust, the person who is treated as the owner of that

portion may cumulate those charitable donations with the person’s

own charitable donations and deduct them under section 170.3

Sec. 1.671-2(c), Income Tax Regs.

     We look to State law to examine the nature of rights and

interests in a trust.   Estate of Nicholson v. Commissioner, 94

T.C. 666, 672-673 (1990).   Arkansas courts consider the four

corners of the governing instrument to ascertain the intention of

the settlor regarding the nature of interests in a trust.     Estate

of Whiting v. Commissioner, T.C. Memo. 2004-68 (citing Aycock

Pontiac, Inc. v. Aycock, 983 S.W.2d 915, 919-920 (Ark. 1998));

Gregory v. Moose, 590 S.W.2d 665, 667-668 (Ark. Ct. App. 1979).

     We look to the provisions of the trust agreement to

determine whether petitioner is treated as the owner of any

portion of the trust under section 678.   We find that petitioner

is treated as the owner of the income portion of the trust under

section 678.   Petitioner has significant powers with respect to

the trust income on account of his dual role as trustee and sole


     3
      Scholars have suggested that this provision might be
intended to permit a deduction even when the trust’s charitable
contribution was not from income. E.g., Blattmachr & Michaelson,
Income Taxation of Estates and Trusts, sec. 3:3.3 n.48 (14th ed.
1999). Trusts themselves ordinarily may deduct contributions
under sec. 642(c) only if they are made from income. We need not
consider this point further because we conclude that petitioner
is not treated as the owner of any portion of the trust other
than the income portion.
                              - 10 -

income beneficiary.   He was able to, was required to, and did

vest the income of the trust in himself.   Petitioner as trustee

was required to cause the trust periodically to pay him (as

income beneficiary) the entire net income of the trust.

Petitioner, as trustee, owed fiduciary duties with respect to the

income only to himself, the sole income beneficiary.

     Accordingly, we conclude that petitioner has the sole power

to vest the trust’s income in himself and is treated as the owner

of the income portion of the trust.4

     B.   Petitioner Is Not the Owner of the Trust Corpus Despite
          the Undistributed Net Income

     Petitioners argue that they are also the owners of the trust

corpus, or at least a portion of it, because petitioner left

undistributed net income with the other trust assets and it

became commingled with the trust corpus.   Accordingly, they

reason, they are entitled to the deduction for the charitable

contribution no matter the source of the charitable contribution.

We disagree.

     There are several fundamental problems with petitioners’

argument regarding ownership of the trust corpus.   An examination

of the trust agreement indicates that the settlor did not intend

petitioner to have any rights with respect to the corpus, other


     4
      The unique circumstances require a finding that petitioner
should be treated as the owner of the trust’s income portion. We
note, and petitioners acknowledge on brief, that this finding
does not apply in every situation involving a simple trust.
                               - 11 -

than to manage it as trustee for the benefit of the remaindermen,

petitioner’s children.    Petitioner has no right under the trust

agreement to vest corpus in himself.    The trust agreement

strongly shows the settlor’s intent for the trustee to act to

preserve the corpus for eventual distribution to the settlor’s

grandchildren.   Petitioner, as trustee, has fiduciary duties to

these remainder beneficiaries and must act for their benefit when

dealing with the corpus.

     Further, the undistributed income never became part of the

trust corpus nor commingled with the trust corpus.5   Petitioner

never relinquished his claim to the undistributed net income.

Moreover, the trust’s books and records showed the amount of

undistributed net income due petitioner.    The undistributed net

income, unlike the trust corpus, was subject to petitioner’s

withdrawal at any time.    The undistributed net income was not

held subject to the trust agreement, not required to be invested

for the benefit of the remaindermen, and therefore, not part of

the corpus.

     Petitioners have also failed to prove the conservation

easements were donated from the undistributed net income



     5
      We note that, if the undistributed net income did become
part of the corpus, the trust agreement would impose fiduciary
obligations on petitioner with respect to it. Any donation of
the undistributed net income, if it became part of corpus, would
be a violation of petitioner’s fiduciary duties to maintain the
corpus for the benefit of the remaindermen, his children.
                               - 12 -

regardless of whether the undistributed net income was part of

the corpus.   Petitioners have not introduced evidence indicating

that the trust’s donation of the conservation easements came from

the undistributed net income belonging to petitioner.    We also

note that petitioners have not offered any explanation how $2.2

million in undistributed net income relates to the $5.6 million

charitable contribution the trust made, and we decline to

speculate.

     C.   Failure To Prove That the Charitable Contribution Was
          Made From the Income Portion

     Although we treat petitioner as the sole owner of the income

portion of the trust, petitioners may not deduct the value of the

conservation easements the trust contributed to charity because

they have not proven that the trust’s contribution was from the

income portion.   In general, status as owner of one portion of a

trust does not permit a person to include income or take

deductions not attributable to that portion.    See sec. 1.671-

3(b), Income Tax Regs.    Petitioners have failed to introduce any

evidence linking the $5,640,000 conservation easements to the

trust’s income.

     Petitioners have introduced no evidence to prove that the

conservation easements transferred were part of the income

portion of the trust.    Petitioner is entitled to take into

account only those items included in computing the income of a

current income beneficiary, and petitioner has failed to show
                              - 13 -

that the $5,640,000 conservation easements meet this standard.6

Absent proof that the trust donated the conservation easements

from its income (rather than from the corpus), we cannot allow

petitioners to deduct the trust’s charitable contribution.     The

failure of a party to introduce evidence which, if true, would be

favorable to that party gives rise to the presumption that the

evidence would be unfavorable if produced.   Wichita Terminal

Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162

F.2d 513 (10th Cir. 1947).

     Petitioners argue that the donation must have come from

income because the trust agreement obligates the trustee to hold

the corpus for the benefit of the remaindermen, his children.

While we agree that petitioner was obligated to hold the corpus

for the benefit of the remaindermen, this does not dictate that

the conservation easements are part of the income portion of the

trust.   We note that petitioner did not comply with other

directives in the trust agreement, such as the requirement to

distribute net income at least annually.



     6
      Charitable contributions deductible by a trust under sec.
642(c) would generally be used in computing distributable net
income and would therefore be included in income by a person
treated as the owner of the trust’s income. See secs. 643,
642(c); sec. 1.671-3(b)(1) and (c), Income Tax Regs. The
charitable contribution at issue, however, would not be
deductible by the trust under sec. 642(c) because the trust
agreement does not authorize charitable contributions. The
charitable contribution thus would not be used in computing the
trust’s distributable net income or taxable income.
                               - 14 -

     In sum, although we treat petitioner as the owner of the

income portion of the trust, petitioners are not entitled to

deduct the value of the conservation easements because

petitioners have not proven that the trust’s contribution was

from the income portion of the trust.

III. Deemed Distributions of Net Income

     Petitioners argue in their reply brief that, alternatively,

the trust’s charitable contributions were actually deemed

distributions to petitioner followed by charitable contributions

by petitioner.   We refuse to find the facts as petitioners argue.

     The evidence in the record suggests that the trust and

petitioners did not account for the charitable contribution as a

deemed distribution.   Although charitable contributions were made

in the past that the trust and petitioners did account for in

this manner, this particular contribution does not appear to be

one of them.   The trust’s financial spreadsheet prepared by the

trust’s CPA indicates that only $46,465 was accounted for as a

deemed distribution in 2000.   Petitioners’ argument therefore

contradicts the trust’s own books and records.   Moreover,

petitioners did not treat themselves on their income tax returns

as directly contributing the conservation easements.   They

claimed pass-through deductions, not direct deductions under

section 170.   We decline to find the transaction was a deemed
                                 - 15 -

distribution to petitioner followed by a direct charitable

contribution by petitioner.

IV.   Conclusion

      We conclude that petitioners are not entitled to a deduction

for the trust’s charitable contribution of the conservation

easements.   While petitioner is treated as the owner of the

income portion of the trust, petitioners have failed to prove

that the conservation easements were made from the income portion

of the trust.      The mere fact that petitioner failed to withdraw

approximately $2.2 million of income due him does not cause

petitioner to be the owner of the corpus because the trust income

he was owed was wholly separate from the corpus.     Petitioners

also have not proven that the trust’s distributions to charity

were deemed distributions to petitioner, followed by his

contribution of the easements to charity.

      No further trial will be necessary concerning the valuation

issue because we have found for respondent on the threshold

issue.

      In reaching our holding, we have considered all arguments

made, and, to the extent not mentioned, we conclude that they are

moot, irrelevant, or without merit.

           To reflect the foregoing,


                                           Decision will be entered

                                       for respondent.
