## Facts

- Two Texas-domiciled married men became beneficiaries of the same trust during their marriages.
- Each husband’s beneficial interest in the trust arose by gift.
- The trust held interests in Texas oil and gas properties.
- During the husbands’ marriages, the trust paid them amounts characterized as:
  - delay rentals (payments under oil and gas leases for additional time to postpone drilling or exploration, not payments for oil produced); and
  - proceeds from royalty oil sold (payments attributable to oil that was produced and sold).
- The Commissioner of Internal Revenue treated the distributions as community income under Texas law, taxing each husband on only his one-half share.
- The Board of Tax Appeals agreed that both the delay-rental payments and the royalty-oil proceeds were community property.
- The husbands sought review, arguing that the distributions were their separate property because their trust interests were acquired by gift.

## Issues

1. Under Texas community-property law, are trust distributions received during marriage from a trust interest acquired by gift classified as the husband’s separate property or as community property?
2. Specifically, are (a) delay rentals and (b) proceeds from royalty oil sold—paid from Texas oil and gas properties held in trust—community income when distributed to married beneficiaries?

## Decision

- The Fifth Circuit affirmed the Board of Tax Appeals.
- The court treated the husbands’ beneficial interests in the trust as separate property because they were acquired by gift, but held that the distributions at issue were community property when received during marriage.
- The court upheld taxation on a community basis, with each husband taxable on only one-half of the distributions.

## Legal Principles

- Under Texas law, property acquired during marriage by gift is separate property; however, property acquired during marriage is generally presumed to be community property unless shown to fall within a separate-property category.
- Texas community-property law distinguishes between ownership of the underlying property (the separate-property corpus) and receipts generated from it during marriage.
- Income paid out to a married beneficiary from a trust may be classified as community property even if the beneficiary’s equitable interest in the trust corpus is separate property.
- Delay rentals paid to extend an oil and gas lease are treated as rent-like receipts for the privilege of postponing development and, when received during marriage, are community property.
- Proceeds from royalty oil sold, when distributed as trust income to married beneficiaries, are treated as community property upon receipt during marriage for federal income-tax reporting purposes in accordance with Texas community-property classification.

## Conclusion

In *Commissioner v. Wilson*, the Fifth Circuit held that although the husbands’ beneficial interests in a gifted trust were separate property under Texas law, the trust’s distributions to them during marriage—both delay rentals and proceeds from royalty oil sold—were community property, so federal income tax was properly computed by allocating only one-half of the distributions to each husband.


Commissioner v. Wilson, 76 F.2d 766 (1935)