City Bank Farmers Trust Co. v. Helvering

Background

Two trusts were created by a will in 1923 to benefit two minor sons, holding stocks and bonds worth millions. The trustee was to use income for the sons’ support and education, accumulate surplus income, and keep the principal in trust. By 1931 the trusts totaled about $10,000,000. A New York court allowed trustee commissions of about $77,000 to be paid from principal. The trustee later tried to deduct those commissions on the trusts’ income tax return and the tax board denied the deduction, saying the trusts were not carrying on a business.

Reasoning

The central question was whether these trusts were "carrying on any trade or business" under the Revenue Act of 1928 so that trustee commissions could be deducted. The Board found the trustee’s actions were passive: reviewing investments a few times a year, collecting interest and dividends, occasional sales and reinvestments, bookkeeping, filing returns, and distributing income. The Court applied the same test to trusts and individuals under the statute, found the trusts were passive investors rather than businesses, rejected the trustee’s argument about administrative practice, and affirmed the denial of the deduction.

Real world impact

The decision means trustees of similar passive, testamentary investment trusts generally cannot deduct trustees’ commissions as business expenses for federal income tax purposes. Large family trusts holding stocks and bonds will be treated as passive for this issue, limiting tax deductions for trustee fees. This ruling follows existing interpretations applied to individuals with similar investment activity.