## Facts

- A settlor created an inter vivos trust in 1935 funded with 100 shares of Linden Associates, a Massachusetts business trust.
- The trustees were directed to pay the net income monthly to the settlor’s widow for life, with the remainder to named remaindermen.
- The trust anticipated Linden’s possible liquidation during the widow’s life and provided that trustees would receive the trust’s allocable share of liquidation assets and continue paying net income to the widow for life.
- In 1961, Linden was liquidated after selling its assets to Broad Street Investing Corporation, an open-end investment company; the trust received 55,434 Broad Street shares in exchange for its Linden shares.
- Broad Street paid the trustees two cash dividends “from income,” which the trustees paid to the widow (net of expenses and taxes).
- Broad Street later issued 1,463 additional shares to the trustees as “distributions of gain” (capital-gain distributions), distinct from dividends from income; shareholders could elect cash or shares, and the trustees elected shares.
- The trustees treated the 1,463 shares as principal and refused to distribute them to the widow; the widow claimed the distribution was income payable to her as life beneficiary.
- The trust instrument did not expressly address how to allocate mutual-fund capital-gain distributions between income and principal.

## Issues

1. Whether a trustee must allocate an open-end investment company’s capital-gain distribution (“distribution of gain”) to income or principal when the trust instrument is silent.
2. Whether the settlor’s use of investment-trust shares as original corpus and the trust’s liquidation clause indicated an intent to treat such gain distributions as principal rather than income.

## Decision

- The Supreme Judicial Court of Massachusetts held that the “distribution of gain” must be allocated to income, not principal, and belongs to the life beneficiary.
- The court ordered the 1,463 shares (or their cash equivalent), less properly allocable expenses and taxes, to be treated as trust income payable to the widow.
- The court concluded that the trustees’ election to receive the distribution in shares rather than cash did not change its character for trust-accounting purposes.

## Legal Principles

- Absent contrary trust language, capital-gain distributions paid by an open-end investment company to a trustee are allocable to income for the life tenant rather than to principal for remaindermen.
- Labels used by the distributing entity and federal income tax treatment do not control state-law classification of receipts as income or principal for trust accounting.
- Capital-gain distributions from an investment company are not treated like stock dividends or recapitalization-type transactions that may warrant principal treatment; they reflect realized gains regularly distributed as part of the investment company’s operations.
- A trustee’s receipt of the distribution in additional shares instead of cash is a matter of form and does not convert an income allocation into principal.

## Conclusion

The court treated mutual-fund capital-gain distributions as trust income where the instrument was silent, requiring payment of the distribution (in shares or cash equivalent, net of expenses and taxes) to the life beneficiary rather than adding it to corpus for the remaindermen.


Tait v. Peck, 346 Mass. 521, 194 N.E.2d 707 (Mass. 1963)