## Facts

- Edward L. Hay and Elise W. Hay, beneficiaries of the Guy Waggoner testamentary trust, sought a federal income-tax refund for 1962 under 28 U.S.C. § 1346(a)(1).
- The trust instrument required that trust corpus remain intact for future distribution and authorized trustees to continue ranching, oil, and gas operations, distributing only “income” to beneficiaries.
- The trust used a fiscal year ending November 30; the beneficiaries used the calendar year.
- For the trust fiscal year ending November 30, 1962, the trustees distributed trust income to the Hays by checks dated December 1, 1962, and February 1, 1963.
- The trust had substantial oil and gas income and followed a practice of retaining 27.5% of that income as an addition to corpus (described as a depletion reserve), distributing the remainder as income.
- For that fiscal year, the trust claimed an I.R.C. § 611 depletion deduction of $300,499.73 and allocated $293,996.04 to the trust and $6,503.69 to beneficiaries; Elise W. Hay was allocated $1,726.28.
- The Hays argued (1) the distributions should be reported in their 1963 tax year, and (2) Elise should receive a larger depletion allocation (they asserted $17,854.46) based on income distributed to her.

## Issues

1. Whether distributions attributable to the trust’s fiscal year ending November 30, 1962, but partly paid by a check dated February 1, 1963, must be included in the beneficiaries’ 1962 or 1963 calendar-year income.
2. Whether depletion must be apportioned to beneficiaries based on income distributed to them, or may be allocated largely to the trust where trustees retain 27.5% of oil and gas income as an addition to corpus.

## Decision

- The court entered judgment for the United States and denied the requested refund.
- The beneficiaries were required to include the distributions attributable to the trust fiscal year ending November 30, 1962, in their 1962 calendar-year income.
- The trustees’ depletion allocation—predominantly to the trust and only a small portion to beneficiaries—was upheld; beneficiaries were not entitled to a larger share based on distributions received.

## Legal Principles

- Under I.R.C. §§ 661–662, a beneficiary includes in income trust amounts required to be taken into account for the trust taxable year ending within the beneficiary’s taxable year; a distribution date crossing into the next calendar year does not shift inclusion when the underlying trust year ended within the earlier year.
- I.R.C. § 662(c) operates as a timing coordination provision and does not permit reclassification of income from a trust taxable year ending within the beneficiary’s year into the beneficiary’s following year.
- Depletion allocation between a trust and its beneficiaries follows the economic allocation of the depletable interest and the governing instrument’s treatment of retained amounts; where trustees validly retain a portion of oil and gas receipts to corpus as a depletion-related reserve, the trust may claim the corresponding share of depletion rather than passing that share through to income beneficiaries.
- A beneficiary cannot require depletion to be allocated solely in proportion to cash distributions when the trust retains a portion of receipts as corpus consistent with the trust instrument.

## Conclusion

The court held that trust distributions attributable to a trust fiscal year ending within the beneficiaries’ 1962 tax year were taxable to them in 1962 even if one check was dated in 1963, and it upheld allocating most of the trust’s depletion deduction to the trust because trustees retained 27.5% of oil and gas receipts as an addition to corpus.


Hay v. United States, 263 F. Supp. 813 (N.D. Tex. 1967)