## Facts

- Raymond J. Dusek created and funded an inter vivos trust for his wife, Velma W. Dusek, with a term of 10 years and one month; Raymond served as both grantor and trustee.
- The trust provided that net income could be distributed to Velma in the trustee’s discretion based on her needs.
- “Net income” was defined as income after payment of management expenses and certain adjustments, including a requirement that depreciation and depletion be reserved out of income.
- A separate clause authorized the trustee to apportion and allocate among the trust and Velma appropriate tax deductions for depreciation and depletion as the trustee saw fit.
- Raymond transferred more than $100,000 to the trust, which was used to purchase rental real estate.
- For 1959–1961, the trust had substantial net income before depreciation and substantial depreciation deductions on the rental property.
- In each of those years, the trustee distributed only $100 to Velma but allocated to her all depreciation deductions on the trust property.
- The Duseks filed joint returns claiming the full depreciation amounts as deductions; the Commissioner disallowed the deductions (without disputing the depreciation calculations).
- The Tax Court sustained the deficiencies; the Duseks petitioned for review.

## Issues

1. Under I.R.C. § 167(h), whether the trust instrument permitted allocating all depreciation deductions on trust rental property to the income beneficiary when the instrument required depreciation to be reserved out of trust income and distributions to the beneficiary were minimal.

## Decision

- The Tenth Circuit affirmed the Tax Court.
- Velma, as income beneficiary, was not entitled to deduct all depreciation on the trust property.
- For § 167(h), the “pertinent provisions” were the trust’s accounting and distributive provisions requiring depreciation to be reserved out of income, not the trustee’s general discretionary tax-allocation clause.
- Depreciation had to be apportioned in a manner consistent with the trust’s treatment of depreciation as a charge reducing distributable income, which placed the deduction primarily at the trust level rather than entirely with Velma.

## Legal Principles

- Under I.R.C. § 167(h), depreciation on property held in trust is apportioned between trustee and income beneficiaries according to the trust instrument’s pertinent provisions; absent such provisions, apportionment follows trust income allocable to each.
- Trust provisions that determine how income is computed and what is available for distribution (including reserving depreciation out of income) govern the depreciation apportionment under § 167(h).
- A clause authorizing discretionary allocation of tax deductions cannot control where it conflicts with substantive trust accounting rules that allocate the economic burden of depreciation to the trust by reducing distributable income.
- Depreciation apportionment should track the trust’s economic and accounting treatment of depreciation rather than a tax-driven allocation inconsistent with that treatment.

## Conclusion

Because the trust required depreciation to be reserved out of income—thereby reducing the income available for distribution—the beneficiary could not claim all depreciation deductions merely because the trustee purported to allocate them to her; § 167(h) required apportionment consistent with the trust’s accounting and distributive provisions.


Dusek v. Comm'r, 376 F.2d 410 (10th Cir. 1967)