## Facts

- Elizabeth Clem died owning income-producing real property.
- Clem’s will contemplated that the property would ultimately be placed into a testamentary trust, with designated beneficiaries entitled to receive the income from that property.
- During estate administration, before the trust was actually established and funded, the estate continued to hold the property and collect the property’s income.
- The executors distributed the property’s income during this interim period to the individuals who would later be the trust’s income beneficiaries.
- Clem’s will neither required nor forbade these interim income distributions, and no state law required the estate to retain income in a depreciation reserve.
- On its fiduciary income tax return, the estate claimed the full depreciation deduction for the real property.
- The IRS determined that, under I.R.C. § 167(h), a pro rata portion of depreciation had to be allocated to the individuals who received the property income and assessed a deficiency against the estate.
- The estate paid the deficiency and filed a federal tax refund suit.
- The district court (W.D. Texas) granted summary judgment for the United States, and the estate appealed to the Fifth Circuit.

## Issues

1. Whether the individuals who received interim distributions of income from estate-held depreciable property—though identified in the will as future beneficiaries of a not-yet-established testamentary trust—qualify as “heirs, legatees, and devisees” for purposes of the depreciation apportionment rule in I.R.C. § 167(h).
2. Whether, in the absence of any legal or testamentary direction to retain income in a depreciation reserve, the estate could claim the entire depreciation deduction instead of allocating depreciation pro rata to the income recipients.

## Decision

- The Fifth Circuit affirmed the summary judgment for the United States.
- The court upheld the IRS’s allocation of a pro rata share of the depreciation deduction to the individuals who received the income from the depreciable property during administration.
- The court rejected the estate’s argument that the interim income recipients were outside the statutory categories of “heirs, legatees, and devisees” simply because the testamentary trust had not yet come into existence.
- Because neither applicable law nor the will required retention of income for a depreciation reserve, the estate could not keep the full depreciation deduction while distributing the related income to others.
- The estate was not entitled to a refund.

## Legal Principles

- I.R.C. § 167(h) provides that when depreciable property is held by an estate, the allowable depreciation deduction must be apportioned between the estate and the estate’s “heirs, legatees, and devisees” based on the income allocable to each.
- For § 167(h) purposes, persons who in fact receive estate income from depreciable property during administration may be treated as “heirs, legatees, and devisees” when the will identifies them as the intended recipients of the property’s income, even if a contemplated testamentary trust has not yet been created.
- The statute aims to align depreciation with the party enjoying the economic benefit of the income from the depreciable asset; an estate generally may not take all depreciation while passing out the corresponding income.
- The Code’s allowance for an estate or trust to claim depreciation without allocation applies when the governing instrument or applicable law directs the fiduciary to retain income as a depreciation reserve; where no such requirement exists, depreciation follows the allocation rule tied to income distributions.
- Timing and labels (estate administration versus later trust administration) do not control where the same persons are receiving the income from the same depreciable property and no reserve requirement shifts depreciation away from the income recipients.

## Conclusion

Lamkin v. United States held that when an estate distributes income from estate-held depreciable real property to the individuals designated to receive that income under the decedent’s will, I.R.C. § 167(h) requires depreciation to be apportioned pro rata between the estate and those income recipients, and the estate cannot claim the entire depreciation deduction absent a required depreciation reserve.


Lamkin v. United States, 533 F.2d 303 (1976)