## Facts

- John Brockman created a California trust in 1922, reserving a life estate and power of revocation; on his death in 1925, the trust continued for named relatives, including Phillip Bruchmann.
- Under the trust terms as applied to Phillip’s share: income was to be held for Phillip for life, then paid to his widow, and after the widow’s death or remarriage, paid to Phillip’s “issue.”
- Phillip died in 1940; his widow, Elizabeth, died in 1949 without remarrying.
- Mildred Bruchmann, adopted by Phillip and Elizabeth in 1912, was adjudicated incompetent in 1949; a bank served as conservator (1952) and later administrator of her estate after her death in 1959.
- In 1952, the trustee sought a California court decree on whether Mildred, as an adopted child, qualified as “issue” (income beneficiary) and as “lawful issue of the bodies” (residuary beneficiary).
- In 1956, the California court ruled Mildred was “issue” entitled to income, but not “lawful issue of the bodies” for residuary purposes.
- While the construction proceeding was pending, the trustee withheld income payments; after the appeal period expired, the trustee paid the estate a lump sum in 1962 of $23,573.92, representing accumulated income (net of expenses, fees, and taxes related to administration and litigation).
- In 1964, the administrator filed cash-basis federal income tax returns for Mildred for 1949–1955 reporting none of the trust income; the Commissioner assessed deficiencies for those years on the theory the income was currently taxable as earned.

## Issues

1. Whether trust income earned during 1949–1955, but withheld during a dispute and paid in a lump sum in 1962 after a state-court construction decree, was taxable to the beneficiary in 1949–1955 or only upon receipt in 1962.
2. If taxable in 1949–1955, whether litigation and related expenses withheld from the 1962 distribution reduced the amount includible in the beneficiary’s income for those prior years.

## Decision

- The Tax Court held the beneficiary was taxable in 1949–1955 on her share of trust income earned in those years, even though the trustee did not distribute the income until 1962.
- The court held the trustee’s withholding of income during the entitlement dispute did not change the trust’s character as requiring current distribution of income to the proper beneficiary.
- The court held expenses associated with the construction proceeding and charged against the 1962 payout did not reduce the beneficiary’s includible trust income for 1949–1955.
- The Commissioner’s deficiencies for 1949–1955 were sustained, subject to computational adjustments.

## Legal Principles

- When a trust is required to distribute income currently, the beneficiary is taxable on income currently distributable for the year it is earned, even if payment is delayed.
- A state-court construction decree determining beneficial rights is treated as declaring the meaning of the trust instrument, confirming the beneficiary’s pre-existing entitlement rather than creating a new right solely from the decree date.
- The beneficiary’s use of the cash method does not override the federal trust taxation rules allocating currently distributable trust income to the beneficiary.
- Expenses incurred in trust administration or litigation, even if netted from a later lump-sum payment, do not retroactively reduce the beneficiary’s prior-year income inclusions; such expenses are addressed at the trust level in the appropriate year(s).

## Conclusion

The Tax Court held that trust income required to be distributed currently was includible in the beneficiary’s income for the years the income was earned, notwithstanding delayed distribution during litigation over entitlement, and that later litigation-related expenses withheld from the eventual payment did not reduce the beneficiary’s prior-year taxable trust income.


Estate of Bruchmann v. Commissioner, 53 T.C. 403 (1969)