Hay v. United States

Guy Waggoner provided for a trust in his will. The trust indicated that the principal should be intact until it was distributed to his great-grandchildren and that no part of the corpus should be distributed to his son. He gave the trustees authority to utilize the trust corpus to continue his ranching, oil, and gas operations, with only the income of the trust to be distributed to the trust beneficiaries. The trust received annual oil and gas income, with the receipts being allocated 27.5 percent to the corpus and the balance to income. This retained amount, sometimes referred to as a depletion reserve, was neither expressly required nor prohibited by Waggoner’s will. During 1962, the trust had a depletion deduction of $300,499.73 for oil and gas income realized. The trustees allocated that deduction $293,996.04 to the trustees for the fiduciary return and $6,503.69 to the beneficiaries. Of that amount, $1,726.28 was allocated to beneficiary Elise Hay (plaintiff), who filed suit with her husband (plaintiff) to recover an overpayment. Hay argued that she should have been allocated $17,854.46 of the deduction. Hay argued that the will, by its silence but also by its underlying purpose, allowed apportionment of the depletion deduction between beneficiaries and trustees. She also argued that a Texas statute applied that mandated the 27.5 percent reserve in the absence of other direction. Finally, she also submitted that depletion reserves authorized by local law would indeed be entitled to tax-deduction status.