## Facts

- A New York decedent’s will created a testamentary trust requiring the trustee to distribute all net income to the surviving spouse at least annually for life; principal could be invaded for support, but no principal was distributed to her in 1981.
- The trust was a “simple trust” for federal income tax purposes because it did not provide for charitable payments and was required to distribute income currently.
- In the estate’s fiscal year ending June 30, 1980, the estate had distributable net income (DNI) that included taxable and tax-exempt items.
- The estate distributed assets to the trust as principal (taxable common stock and tax-exempt municipal bonds); for tax purposes, the distribution operated as a “trapping distribution” that carried estate income into the trust’s income/DNI.
- In addition to the trapped income, the trust had its own taxable dividends and tax-exempt interest and paid trustee commissions and New York state income tax.
- The beneficiary reported her 1981 trust income by characterizing taxable versus tax-exempt amounts using only the trust’s internally generated income and allocating trustee commissions accordingly, ignoring income components attributable to the estate’s trapping distribution.
- The Commissioner determined a deficiency, asserting the beneficiary had to include the trapping-distribution income components when determining the taxable and tax-exempt character of amounts carried out to her.

## Issues

1. Whether the taxable versus tax-exempt character of a simple trust beneficiary’s reportable income is determined only from the trust’s internally generated income, or also from income included in trust DNI due to an estate-to-trust trapping distribution.
2. Whether, absent direction in the trust instrument or local law, the beneficiary must take a pro rata share of each class of income in the trust’s total DNI (and allocate deductions consistently) when reporting amounts required to be distributed currently.

## Decision

- The Tax Court held for the Commissioner.
- The beneficiary could not determine character by looking only to internally generated trust income and excluding income attributable to the trapping distribution.
- The beneficiary’s reportable income had to reflect the same proportion of each class of income constituting the trust’s income for tax purposes as each class bore to the trust’s total income/DNI, including items attributable to the estate distribution.
- Deductions (including trustee commissions and state tax) had to be allocated among the classes of income consistent with the DNI character rules, using the full income pool that included the trapped-income components.
- The deficiency determination was sustained, with computations to be made consistent with the opinion.

## Legal Principles

- In a simple trust, amounts required to be distributed currently carry out the trust’s DNI to the beneficiary, and the beneficiary’s income retains the character of the underlying DNI items.
- Income treated as received by a trust for tax purposes due to an estate-to-trust trapping distribution is included in the trust’s income/DNI even if treated as principal for fiduciary accounting.
- Absent a specific directive in the governing instrument or applicable local law requiring a different tax allocation, a beneficiary’s distributable share is characterized by pro rata allocation across all classes of income in the trust’s total DNI.
- Deductions affecting DNI (including expenses allocable to tax-exempt and taxable income) must be allocated consistently across the same classes of income used to characterize DNI carried out to the beneficiary.

## Conclusion

The Tax Court ruled that a simple trust beneficiary must determine the taxable and tax-exempt character of required distributions using the trust’s total DNI, including income components imported through an estate-to-trust trapping distribution, with related deductions allocated on the same pro rata basis absent contrary direction in the trust instrument or local law.


Van Buren v. Commissioner, 89 T.C. 1101 (1987)