In the years in question, the only revenues of a testamentary trust were from non-exempt sources. However, the trustees made distributions to the income beneficiary out of undistributed tax-free bond interest that had been received in previous years. In finding that these distributions were exempt in the income beneficiary’s hands as “income derived” from Dominion bonds, Thorson P stated (at p. 1082):
[T]he word ‘derived’…cannot be limited to income from income tax exempt bonds immediately or directly received by the owners thereof as interest thereon, but must include income that has its source in such bonds even although there may be intervening channels through which it flows from such source to its final destination.