The Interplay of Kenan V. Commissioner and Section 663(A)(1)

Abstract

Kenan v. Comr. is the leading case for the proposition that a distribution of appreciated non-cash assets by a fiduciary in satisfaction of a pecuniary obligation triggers realization of gain by the trust or estate. The case is but a particular application of the more general principle (applicable to all taxpayers, not just fiduciaries) that a transfer of non-cash property to discharge an indebtedness results in gain or loss to the transferor, just as if the transferor had satisfied the indebtedness with cash and immediately thereafter sold the non-cash asset to the transferee. The Kenan doctrine - which applies only obligations to distribute a pecuniary amount - is often confused with subsection 663(a)(1) of the Code, under which an amount distributed by a fiduciary in satisfaction of a gift or bequest of a specific sum of money or specific property is excluded as an amount described in subsection 661(a) (for purposes of the distribution deduction) and subsection 662(a) (for purposes of computing the taxable income of the beneficiary). Some distributions by fiduciaries implicate both Kenan and subsection 663(a)(1). Some distributions implicate only one doctrine or the other, and some implicate neither doctrine. This commentary provides a roadmap for distinguishing the two doctrines and for understanding the interplay between them. The commentary begins by considering Kenan. It then considers several rulings that elaborate on the Kenan principle. The commentary next considers rulings in which both Kenan and subsection 663(a)(1) are implicated. The commentary concludes with an attempt to harmonize the two doctrines.