Tucker v. Commissioner

Marcia Tucker (plaintiff) was the income beneficiary of a trust created under the will of her father. Each year, the annual net income from the trust, except any capital gains, was payable to her for the duration of her life. In 1955, the trust had income of $380,122.21 of tax-exempt municipal-bond interest, $607,497.84 of taxable dividends and interest, and $1,408,887.31 of net long-term capital gains. Trust expenditures not directly attributable to any specific income totaled $148,817.36, which was paid from the trust. The issue was the allocation of those expenditures between tax-exempt and taxable trust income. Tucker included capital gains, calculating as follows: $380,122.21 of tax-exempt interest divided by that same $380,122.21 of tax-exempt interest plus $607,497.84 of taxable dividends and interest plus $1,408,887.31 of long-term capital gains. She multiplied that product (approximately 0.158) by the trust expenditures of $148,817.36, and arrived at totals of $23,464.09 attributable to tax-exempt income and $125,353.27 attributable to taxable income. The government (defendant) did not include capital gains, calculating as follows: $380,122.21 of tax-exempt interest divided by that same $380,122.21 of tax-exempt interest plus $607,497.87 of taxable dividends and interest. The government multiplied that product (approximately 0.385) by the trust expenditures of $148,817.36, and reached totals of $56,456.84 attributable to tax-exempt income and $92,360.52 attributable to taxable income. Accordingly, the difference between the calculations was $32,992.77 of the distribution that the government argued should be included in the taxpayer’s gross income. Tucker sued, and the tax court ruled for the government. At issue was whether or not capital gains should be included in the pro rata calculations. The government argued that because the capital gains were not distributed to the beneficiary and therefore were not distributable net income, they did not factor in the apportionment between tax-exempt income and taxable income. Tucker argued that another Internal Revenue Code section controlled and that the expense should be proportionally allocated between exempt and nonexempt income, including the capital gains.