Dusek v. Commissioner

Raymond Dusek (plaintiff) established a trust for the benefit of his wife, Velma (plaintiff). The trust was to last for 10 years and a month and allowed net income to be distributed to Velma when her needs required. Net income was all income less necessary costs and expenses, which also provided that depreciation and depletion were to be reserved out of income. Another provision allowed the trustee—Raymond—to apportion and allocate between the trust and Velma all tax deductions, including depletion or depreciation. Raymond paid funds to the trust, which purchased and kept rental property. For the tax years 1959 through 1961, net income before depreciation was $5,100 to $15,800 per year, with depreciation ranging from $4,500 to $11,000. Regardless, every year, Raymond distributed $100 to Velma and allocated her all the depreciation deductions, which were promptly claimed in their joint federal income-tax returns. Ultimately, the Commissioner of Internal Revenue (the commissioner) (defendant) disallowed the deductions and assessed deficiencies, and the Duseks filed suit. The commissioner argued that the controlling provision was the item indicating that depreciation should be reserved out of income, while the Duseks claimed that the controlling provision was the one allowing the trustee to allocate deductions. The tax court ruled for the commissioner, and the Duseks appealed.