## Facts

- A decedent’s will left his widow, Rebekah Harkness, one-half of the residuary estate and the remaining half to four equal trusts for his children.
- The will directed that death taxes would not be charged against the widow’s one-half share, effectively placing those taxes on the other half.
- In 1955, the estate distributed $27,467,768.51 to Rebekah and $8,436,295.75 to the four trusts (collectively).
- The estate reported distributable net income (DNI) of $1,005,682.94, consisting of $826,758.68 taxable income and $178,924.26 tax-exempt income.
- Total distributions exceeded DNI, triggering the federal rule allocating DNI among beneficiaries in proportion to each beneficiary’s share of total distributions.
- Using that ratio method, the government treated Rebekah as receiving 76.2907% of all distributions and therefore 76.2907% of the estate’s taxable DNI ($630,740.04).
- Rebekah reported only one-half of the estate’s taxable DNI ($413,379.34), arguing she was a one-half residuary beneficiary.
- Rebekah asserted a “tracing” theory: executors made near-simultaneous payments of large death taxes and comparable payments to her that she characterized as corpus, so most of her receipts should not drive DNI allocation.
- After the IRS assessed a deficiency, Rebekah paid, sought a refund, and sued the United States in the Court of Claims.

## Issues

1. Whether, when an estate’s distributions exceed DNI, a beneficiary’s taxable share must be computed by the Internal Revenue Code’s pro rata ratio method based on total distributions, rather than by tracing and recharacterizing particular distributions as corpus.
2. Whether the pro rata allocation rule violates due process because a beneficiary’s taxable share is determined in part by distributions made to other beneficiaries.

## Decision

- Judgment was entered for the United States, and Rebekah’s refund claim was denied.
- The court held that the Code required application of the pro rata ratio formula to allocate taxable DNI when total distributions exceed DNI.
- The court rejected Rebekah’s attempt to trace specific receipts and rely on state-law income/corpus concepts to alter the federal allocation.
- The court upheld the constitutionality of the statutory allocation method and rejected the due process challenge.

## Legal Principles

- When an estate’s total distributions to beneficiaries exceed its DNI, federal tax law allocates DNI among beneficiaries by a mandatory pro rata formula based on each beneficiary’s total distributions divided by aggregate distributions.
- Beneficiaries may not trace particular dollars or reclassify distributions as corpus under state fiduciary rules to reduce their federally determined share of DNI once the pro rata regime applies.
- A statutory allocation formula does not violate due process merely because it uses total distributions to all beneficiaries to apportion a single pool of estate income among recipients.

## Conclusion

The Court of Claims held that, because the estate’s distributions exceeded DNI, Rebekah Harkness’s taxable income from the estate had to be determined by the Code’s pro rata allocation formula, not by tracing or will-based tax-burden allocations, and it upheld that formula against a due process challenge.


Harkness v. United States, 469 F.2d 310 (Ct. Cl. 1972)