Van Buren v. Commissioner

Caroline Van Buren (plaintiff) was the beneficiary of a testamentary trust created by her late husband, Maurice Van Buren. Under the trust, Caroline was to receive all net income to or for her benefit annually. The trustee could distribute from the principal if necessary, although no such deductions took place in the tax year in question, ending June 30, 1980. Since the trust lacked an authorization for amounts to be paid or set aside for charitable purposes, it was a simple trust. In the tax year ending June 30, 1980, Maurice’s estate had $110,491 of distributable net income, which consisted of dividends, taxable interest, tax-exempt interest, and other income. The estate also made a distribution of principal to the trust, consisting of (taxable) common stocks and tax-exempt municipal bonds. This income was labeled as attributable to the trapping distribution of principal from the estate, which is a distribution of principal from an estate to a simple trust so that part of the income flows to the trust. Outside of the income from the trapping distribution, the trust had $7,648 of taxable dividends and $41,450 of tax-exempt interest, for a total of $49,098 in other income. The trust paid $3,977 in trustee commissions and $333 of New York state income tax. Accordingly, Caroline reported $44,788 of income for the calendar year 1981. She had arrived at this figure by dividing the $41,450 in tax-exempt income by the $49,098 in total income, then multiplying the result by the full $3,977 in trustee fees, for a tax-exemption portion of $3,358 of the trustee commissions. The remaining commission fees and taxes were deducted from taxable dividend income, leaving a total income of $44,788, with $38,092 attributable to tax-exempt income and $6,696 attributable to taxable income. However, the Commissioner of Internal Revenue (the commissioner) (defendant) found that Caroline should have included the trapping distribution income ($26,253 in dividends and $40,523 in other taxable income) in her calculation. Doing so would have produced significantly more taxable income, so the commissioner found a deficiency of $15,316.07. Caroline filed suit to seek relief from the commissioner’s finding.