*194 Decisions will be entered for the respondent.
The income of a trust created by petitioner which remained after the payment of the expenses of administering and managing the properties which comprised the trust corpus was to be used to pay insurance premiums on petitioner's life, to pay personal obligations of petitioner, and to pay petitioner not more than $ 6,000 per year for her support and maintenance. Held: The income of the trust which remained after the payment of the expenses of administering and operating the trust properties was distributable for the benefit of petitioner and is includible in her net income under section 167 (a). Held, further: Any net operating loss which may have been suffered by the trust in 1941 does not reduce the income of the trust which is distributable under the trust instrument for the benefit of petitioner in 1942 and 1943.
*1041 These proceedings were consolidated for trial and opinion. The Commissioner has determined a deficiency in the income and victory *1042 tax liability of Margaret C. Vreeland for the year 1943 in Docket No. 24942 in the amount of $ 2,076.52, and he has determined a deficiency in the income and victory tax liability of George W. Vreeland, the husband of*196 Margaret C. Vreeland, for the year 1943 in Docket No. 24941 in the amount of $ 587.29. The year 1942 is also involved because of the provisions of the Current Tax Payment Act of 1943.
The issues in this proceeding are (1) whether the income of a trust created by Margaret C. Vreeland is includible in her net income under section 167 (a) of the Internal Revenue Code; and (2) if the trust income is so includible, whether the trust suffered a net operating loss in 1941 which reduces the income of the trust which is includible in the income of Margaret C. Vreeland during 1942 and 1943.
The petitioners filed a joint return for the year 1942 with the collector for the first district of California. George W. Vreeland is involved in these proceedings as a result of the filing of the joint return. For the year 1943 each of the petitioners filed a separate return with the collector for the first district of California.
FINDINGS OF FACT.
The facts which have been stipulated are so found.
Margaret C. Vreeland, who will hereinafter be referred to as the petitioner, is the daughter of Delana B. Curtis and the granddaughter of Margaret A. Harrington. Prior to May 13, 1931, petitioner owned the*197 following interests in real property, which she had inherited from Delana B. Curtis, Margaret Harrington, and George W. Corliss:
(1) Curtis-Corliss property -- an undivided one-half interest in fee simple which was subject to a $ 25,000 mortgage.
(2) Curtis-Straw property -- a life estate in one-half of the property.
(3) Curtis Inn -- a life estate in the entire property. Eleven-eighteenths of this interest was subject to a mortgage of $ 23,000.
(4) Curtis-Elliott property -- a life estate in one-half of the property.
The petitioner also owned a life estate in various securities, which she had inherited from Margaret A. Harrington, prior to May 13, 1931.
By 1931 the above-listed real estate had become encumbered with mortgages imposed to secure personal obligations of petitioner. The properties were in disrepair, and real estate taxes and interest on the mortgages were in arrears. As a result, the contingent remainderwoman under the will of Delana B. Curtis had complained that her remainder interest was being dissipated. Petitioner, therefore, decided to borrow $ 35,000 from the Amoskeag Savings Bank with which to make repairs and to pay insurance premiums and the taxes and *198 interest which were in arrears on the properties. She also decided to place her interests in the realty and in the securities *1043 in which she had a life interest in trust for her own benefit. Accordingly, petitioner borrowed $ 35,000 from the Amoskeag Savings Bank, which was secured by additional mortgages on the real estate owned by petitioner and by the assignment as collateral security of a $ 35,000 insurance policy on petitioner's life, payable to her estate, which the bank had required that she secure. And on May 13, 1931, petitioner transferred her interests in real estate and various securities and the $ 35,000 which she had borrowed from the bank to L. Ashton Thorp and Robert A. Riedel "for and in consideration of a certain Declaration of Trust." Thorp and Riedel then made a declaration of trust which covered the property which petitioner had transferred to them and named themselves as trustees.
The declaration of trust provided that the objects and purposes of the trust were to be as follows:
1. To manage, control, rent, lease and release, mortgage, sell and convey, insure and keep insured, repair, and maintain the property belonging to said estate; demand, collect*199 and receive all rents and income therefrom.
2. To pay out of said sum of thirty-five thousand (35,000) dollars this day paid said trustees by said Bank, all arrears of taxes on said properties and arrears in interest on the existing mortgages thereon, together with any premiums that may be due on the fire or liability policies covering said properties; to pay the expenses incidental to the creation of this trust, and apply the balance to satisfy the claims of creditors of the said Margaret M. Curtis [petitioner], according to the list of liabilities this day duly attested by her and filed with said trustees.
3. To hereafter pay all taxes and assessments levied on said properties not later than December 1 in any year.
4. To pay the premiums as they fall due on the $ 35,000 insurance policies on the life of the said Margaret M. Curtis, procured for the purpose of securing said loan.
5. To pay the interest on said thirty-five thousand (35,000) dollar loan to said Bank as it falls due and make such principal payments as said Bank may require.
6. To pay the interest on all other outstanding mortgages on any of the foregoing real estate; the interest on the outstanding personal loans of*200 the said Margaret M. Curtis at the Manchester National Bank, and make such principal payments as may be necessary.
7. To pay said trustees 5% commission on the gross income of said trust estate, together with the expenses and reasonable charges for administering the same.
8. To pay to the said Margaret M. Curtis for her support and maintenance not more than six thousand (6,000) dollars per year, by such monthly installments as the income of said trust estate may warrant, provided however, if in any year the said Margaret M. Curtis shall not receive the said sum of six thousand (6,000) dollars, said trustees may make up any balance in any succeeding years, if the income from said trust estate shall warrant their so doing.
9. To perform all other duties necessary and incidental to the objects and purposes of said trust.
* * * *
*1044 12. It being necessary, in order to obtain said loan at said Amoskeag Savings Bank, for the said Margaret M. Curtis to insure her life for $ 35,000, and said insurance having been made payable on her death to her estate and by her assigned to said Bank as collateral security for said loan, it is understood and expressly agreed that if the said Virginia*201 V. (Hart) Horner shall pay said loan or any portion thereof, she shall be subrogated to the interest of said Bank in said life insurance to the extent of the amount so paid by her, and when the note of said Bank shall have been paid, said policies shall be forthwith assigned to the said Horner by said trustees as collateral security for any payment on said $ 35,000 loan made by her, and for that purpose said trustees and their successors in office are hereby constituted and appointed attorneys for the said Margaret M. Curtis with full and irrevocable power to make such assignment. Any balance of the proceeds of said life insurance, not needed to pay said bank and/or the said Virginia V. (Hart) Horner, shall be payable upon the death of the said Margaret M. Curtis to her estate.
13. When said $ 35,000 loan shall have been paid in full, said trustees shall reconvey to the said Margaret M. Curtis her undivided half of the Curtis-Corliss property owned by her in fee, by a good and sufficient trustees' deed, subject to any incumbrance thereon, and shall further release unto her the gross income from the Margaret A. Harrington estate, together with her Manchester Opera House stock; provided, *202 however, that if the anticipated net income from the remaining real estate known as the Delana B. Curtis properties, will not, in the judgment of said trustees, be sufficient to guarantee the payment of the premiums on the life insurance policies of the said Margaret M. Curtis as they fall due, then in that event said trustees shall retain control of sufficient property and income to guarantee the payment of said premiums; but any net income from such of said Harrington properties as said trustees shall continue to control for the aforesaid purpose shall be paid to the said Margaret M. Curtis annually.
14. When said $ 25,000 loan [another loan] shall have been paid in full said trustees shall continue to retain control of the 11/36 interest which the said Delana B. Curtis owned at the time of her decease in the real estate situate at the southwesterly corner of Elm and Central Streets in Manchester and in the Curtis-Straw Block on Hanover Street, said Manchester, and the 11/18 interest which the late Delana B. Curtis owned at the time of her decease in the Curtis Inn property, so called, on Manchester Street, said Manchester, in trust for the following objects and purposes, to wit: *203
(1) To control, manage, rent, lease and release, insure and keep insured, repair and maintain the same, demand, collect, and receive all rents and income therefrom, mortgage, sell and convey the same, and with respect to said Curtis interests said trustees shall continue vested with all the powers hereinbefore conferred upon them.
(2) To pay all taxes and assessments levied on said undivided interests.
(3) To pay the interest on the Curtis Inn mortgage now held by the Manchester Savings Bank.
(4) To pay the premiums as they fall due on the insurance policies on the life of the said Margaret M. Curtis.
(5) To receive their commission on the gross income on the Curtis interests in said properties, together with the expenses and reasonable charges for administering said Trust.
(6) To pay the net income to the said Margaret M. Curtis.
* * * *
16. When said creditors and said Bank shall have been paid in full, said trust shall still continue to be irrevocable for the lifetime of the said Margaret M. *1045 Curtis as to the aforesaid properties or interest in properties which were owned by the said Delana B. Curtis at the time of her decease.
The debts and obligations referred *204 to in the declaration of trust, whether secured or unsecured, represented personal debts and obligations of petitioner.
Charles D. Barnard and Charles H. Barnard were appointed trustees of the trust on December 5, 1940. They did not have an interest substantially adverse to that of petitioner during 1941, 1942, and 1943. During each of those years the debts and obligations of petitioner included $ 25,000 owed to the Amoskeag Savings Bank, $ 22,900 owed to the Manchester Savings Bank, and $ 19,500 owed to the Hillsborough County Savings Bank, which amounts were secured by mortgages on the real properties which petitioner had placed in trust, and the undistributed income of the trust could have been used by the trustees to make payments on these debts and obligations of petitioner. The trustees could also have paid the undistributed income to petitioner for her support and maintenance.
During 1941, the trust received gross income of $ 20,358.08 from the real estate which it owned. It paid total expenses of $ 24,956.49 in connection with this income, primarily for real estate taxes, interest on the mortgages, insurance, repairs, and commissions to the trustees. It suffered a net *205 loss from the operation of the real estate of $ 4,598.41. The trust had other income from dividends and interest in the amount of $ 1,079.01 during the year, and it incurred other expenses of $ 1,953.43. The trust suffered a total loss during the year of $ 5,472.83. The trust also sold the Curtis-Elliott property during the year. The building, which had a basis of $ 4,760, was sold for $ 2,596.43. The land, which had a basis of $ 24,000, was sold for $ 10,358.70.
During 1942, the trust received gross income of $ 18,498.03 from the real estate which it owned. It had total expenses in connection with the property of $ 18,097.98, primarily for real estate taxes, interest on the mortgages, depreciation, repairs, insurance, and trustees' commissions. The trust had other income from dividends and interest in the amount of $ 3,106.47 during the year, and it incurred other expenses of $ 900.90. The trust had a net income of $ 2,605.62 during 1942. It disposed of its net income for that year as follows:
| Life insurance premiums on policy described in trust | |
| instrument | $ 1,303.25 |
| Payment to George W. Vreeland as agent of petitioner to be applied | |
| against the latter's individual income tax liability | 179.79 |
| Undistributed cash available for trust purposes -- included | |
| in trust's | |
| "income" account as distinguished from trust's "corpus" | |
| account | 1,122.58 |
| Total | $ 2,605.62 |
*206 No cash distribution was made directly to petitioner during 1942.
*1046 During 1943, the trust received gross income of $ 19,019.25 from the real estate which it owned. It had total expenses of $ 15,595.64 in connection with this income, primarily for real estate taxes, interest on the mortgages, depreciation, repairs, insurance, and commissions to the trustees. The trust had other income from dividends and interest in the amount of $ 2,264.02 during the year, and it incurred other expenses of $ 750.34. The trust had a net income of $ 4,937.29 for the year 1943. It made the following distribution of this income:
| Cash distribution to petitioner | $ 600.00 |
| Life insurance premiums on policy described in trust instrument | 1,291.50 |
| Payments to collector of internal revenue in connection with income | |
| tax liability of Margaret C. Vreeland Trust | 736.86 |
| Undistributed cash available for trust purposes -- included | |
| in trust's | |
| "income" account as distinguished from trust's | |
| "corpus" account | 2,308.93 |
| Total | $ 4,937.29 |
During 1941, 1942, and 1943 the activities of the trust, which consisted of collecting interest, dividends, and rents, paying expenses, and operating*207 and managing the real properties, were conducted from the law office of the trustees. The only employee of the trust was a part time janitor for one of the real estate properties. No claim was made by the trustees in the fiduciary income tax returns filed by them for the trust for 1941, 1942, and 1943 that the trust was engaged in or had a net profit or loss from a trade or business during any of those years.
In the notice of deficiency, the respondent explained his determinations as follows:
It has been determined that the net income of the Margaret C. Vreeland Trust (formerly the Margaret M. Curtis Trust) under Declaration of Trust dated May 13, 1931, for the calendar year 1942 in the amount of $ 2,605.62 is taxable in full to you under the provisions of section 167 of the Internal Revenue Code. Since you reported nothing in the joint return filed by you and your husband, George W. Vreeland, for the calendar year 1942 as having been received through the said trust, there has been added to your taxable income of the year 1942 the amount of $ 2,605.62.
It has further been determined that you are not entitled to any deduction, as beneficiary of the said Margaret C. Vreeland Trust, *208 in the calendar year 1942 for any carry-over net operating loss of that trust from the calendar year 1941.
* * * *
It has been determined that the net income of the Margaret C. Vreeland Trust (formerly the Margaret M. Curtis Trust) under Declaration of Trust dated May 13, 1931, for the calendar year 1943 in the amount of $ 4,937.29 is taxable in full to you under the provisions of section 167 of the Internal Revenue Code. Since you reported but $ 600.00 in your separate return for the calendar year 1943 as having been received through the said trust, there has been added to your taxable income for the year 1943 the amount of $ 4,337.29.
OPINION.
Some of the facts material to this proceeding have been stipulated. Additional evidence was adduced through the testimony *1047 of one of the trustees of the trust and from examination of the exhibits. The facts have been found from the entire record.
In 1931, the petitioner created a trust, the corpus of which consisted of real properties and securities in which the petitioner either owned a life estate or an outright interest. The trustees were instructed to collect and receive the rents, dividends, and interest from the properties*209 comprising the corpus of the trust and to pay the expenses of administering the properties, including the interest on the mortgages of the real estate and commissions to the trustees. After the payment of the expenses in 1942 and 1943, the trust had remaining net income of $ 2,605.62 and $ 4,937.92, respectively. The issue in this proceeding is whether the above amounts are includible in the net income of the petitioner under section 167 (a) 1 of the Internal Revenue Code. 2
It is clear from the trust agreement that after the payment of the expenses of administering the trust properties, the remaining income of the trust was to be used (1) to pay insurance premiums on petitioner's life, (2) to pay personal obligations of petitioner, and (3) to pay petitioner not more than $ 6,000 per year for her support and maintenance, with the provision that if in any year petitioner does not receive $ 6,000, the trustees may make up the balance in any succeeding year out of income of the trust. Thus, it is clear that the remaining income of the trust was to be used for the benefit of petitioner who was the grantor of the trust. Such income, therefore, is includible in petitioner's net income under section 167 (a) (2) and (3). Of the remaining income of $ 2,605.62 in 1942, $ 1,303.23 was used to pay the premiums on an insurance policy on petitioner's life, payable upon her death to her estate; and of the remaining*211 income of $ 4,937.92 in 1943, $ 1,291.50 was similarly used. Subsection 3 of section 167 (a) expressly provides that where any part of the income of a trust is used to pay the premiums on a policy of insurance on the life of the grantor, such part of the income of the trust shall be included in the grantor's net income. The amounts of $ 1,303.23 and $ 1,291.50 used to pay premiums on policies of insurance on petitioner's life during the years 1942 and 1943, *1048 respectively, are, therefore, includible in petitioner's net income for those years. See, also, Burnet v. Wells, 289 U.S. 670">289 U.S. 670; Arthur Stockstrom, 3 T.C. 664">3 T. C. 664.
After the payment of the premiums on the life insurance policy, the trust had remaining income of $ 1,302.39 in 1942 and $ 3,646.12 in 1943. These amounts are also includible in petitioner's net income under section 167 (a) (2), which provides that "where any part of the income of a trust * * * may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor * * * then such part of the*212 income shall be included in computing the net income of the grantor." The income of the trust which remained after the payment of the life insurance premiums could have been distributed directly to petitioner under that provision of the declaration of trust which provided for the payment to petitioner of not more than $ 6,000 for her support and maintenance, or it could have been distributed indirectly to her through the payment by the trustees of her debts and obligations which were outstanding in 1942 and 1943. It is immaterial that only $ 179.79 was used by the trust to pay debts of petitioner in 1942 and that it retained $ 1,122.58 which it did not distribute to petitioner, and that in 1943 it distributed to petitioner only $ 600 of the $ 3,646.12 remaining after the payment of the life insurance premiums. Taxability of trust income to the grantor under section 167 (a) (2) turns on whether it might have been distributed to the grantor in the discretion of one lacking a substantial adverse interest, not whether it is actually distributed. Oleta A. Ewald, 2 T. C. 384, affd., 141 F. 2d 750; Frease v. Commissioner, 150 F. 2d 403;*213 Clifton B. Russell, 5 T. C. 974; Herbert A. Loeb, 5 T. C. 1072, affd., 159 F 2d 549; see H. Rept. No. 871, 78th Cong., 1st Sess., p. 51 (1943). And a trustee is not a person having a substantial adverse interest within the meaning of the statute. Reinecke v. Smith, 289 U.S. 172">289 U.S. 172; Sterling Morton, 38 B. T. A. 1283, affd. (C. A. 7), 109 F.2d 47">109 F. 2d 47. The income in question, therefore, is properly includible in petitioner's net income for the years 1942 and 1943.
The petitioner makes the contention that "an involuntary, irrevocable trust, even though voluntary in form, should escape the provisions of Sec. 167." However, not only does the evidence indicate that the trust was voluntary 3 rather than involuntary, but neither the statute nor the decided cases make any such distinction as a basis for *1049 taxability or nontaxability. There was nothing to prevent the trustees from distributing the remaining income of the trust to petitioner. Such income, therefore, is properly includible in petitioner's net*214 income.
The petitioner also contends that even if the income of the trust is includible in her net income under section 167 (a), the trust suffered a net operating loss in 1941 which, under the provisions of section 170, may be carried over to 1942 and 1943 to reduce the income of the trust which is includible in her income for those years. Assuming that the trust was engaged in a trade or business*215 in 1941 from which it suffered a net operating loss, it does not follow that the income of the trust which was distributable for the benefit of petitioner in 1942 and 1943, and which, therefore, is includible in her net income, may be reduced by the carry-over to the later years of such loss.
Section 167 prescribes that the income of a trust shall be taxed to the grantor because of the interest which he has retained in such income. It differs from section 166 which bases taxation of the grantor on the interest which he has retained in the corpus of a trust and, in effect, disregards the creation of the trust. Section 166; Regs. 111, sec. 29.166-1 (c); Everett D. Graff, 40 B. T. A. 920, affd. (C. A. 7), 117 F.2d 247">117 F. 2d 247. Under section 167, however, the trust remains as a separate entity, and its creation is not disregarded. Under section 167, the income of the trust which is distributable for his benefit is included in the income of the grantor because of the interest which he has retained in such income. Since the basis of taxation under section 167 is the interest which is retained by the grantor in the income of the trust, *216 the grantor is "allowed those deductions with respect to such income as he would have been entitled to had such income been distributable currently to him." Regs. 111, section 29.167-1 (c). Manifestly, a net operating loss suffered by the trust in 1941 does not reduce the income of the trust which under the trust instrument is distributable to or may be used for the benefit of its grantor, the petitioner, in 1942 and 1943. The loss is the loss of the trust, which is not the taxpayer involved in this proceeding, and may be carried over to a future year only in the computation of the taxable net income of the trust under section 162. But the taxable income of the trust is not necessarily the same as the distributable income of the trust under the trust instrument and local law. The rights of petitioner in the trust of which she is the beneficiary are not measured in terms of the taxable income of the trust under section 162; they depend on the terms of the trust agreement and the applicable state law. The trust is a separate entity for tax purposes even though petitioner is taxable under section 167 (a) on the income which is distributable for her benefit. The excess of the taxable*217 net income *1050 of the trust over the income distributable for the benefit of petitioner, if any, will be taxable to the trust under section 162, and the trust will receive the benefit of any net loss carry-over in the computation of its taxable net income.
However, in the computation of the income which is distributable for the benefit of petitioner under the trust instrument and upon which she is taxable, a net operating loss which may have been suffered by the trust in 1941 may not be carried over to 1942 and 1943 in order to reduce the distributable income of the trust for those years. Such loss is not a charge under trust principles against future income, but, instead, it is a charge against the corpus of the trust in the year of loss. Uniform Principal and Income Act, section 7; Restatement of Trusts, section 233, comment (c). As grantor of the trust, petitioner is taxable under section 167 (a) on the income of the trust which is distributable for her benefit because of the interest which she has retained in such income, not because she is considered to be, in substance, the owner of the corpus. She is taxable on the distributable income of the trust, not on its taxable*218 income. Therefore, she is not entitled to take all the deductions to which the trust is entitled in the calculation of its taxable income under section 162, just as she is not required to include in her income all of the taxable income of the trust, whether or not it is distributable for her benefit. Thus, in Edith W. Balch, 44 B. T. A. 269, affd. (C. A. 6), 129 F. 2d 472, and Loeb v. Commissioner (C. A. 2), 113 F. 2d 664, 667, affirming 40 B. T. A. 517, it was held that capital losses suffered by a trust are not deductible by the grantor in calculating the income of the trust which is taxable to the grantor under section 167 (a). Cf. Anderson v. Wilson, 289 U.S. 20">289 U.S. 20. Similarly in this proceeding, where nothing in the trust instrument authorizes the reduction of income which is distributable for the benefit of petitioner by a net operating loss suffered in a prior year, the income of the trust which is includible in petitioner's net income may not be so reduced. Cf. sec. 162 (d) (1); Regs. 111, sections 29.162-2 (a) and 29.24-8; *219 Theodore D. Buhl, 45 B. T. A. 274; Busch v. Commissioner, 50 F. 2d 800; Brigham v. United States, 38 F. Supp. 625">38 F. Supp. 625.
Disallowance of the benefit of a net operating loss carry-over to petitioner does not deny such benefit to every trust whose entire income is distributable to its beneficiaries, as petitioner contends. As we have already pointed out, the taxable income of a trust and the distributable income under the trust agreement and state law are not the same. If taxable income should exceed distributable income, a trust whose entire income is distributable to its beneficiaries would be able to apply a net operating loss carry-over against the excess of the taxable income over the distributable income, and thus secure the benefits of the loss carry-over. See sections 162, 170.
*1051 It is held that any net operating loss which may have been suffered by the trust in 1941 does not reduce the income of the trust which is distributable for the benefit of petitioner in 1942 and 1943 and includible in her net income under section 167 (a). The respondent's determination is sustained.
*220 Decisions will be entered for the respondent.
Footnotes
1. SEC. 167. INCOME FOR BENEFIT OF GRANTOR.
(a) Where any part of the income of a trust --
(1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor; or
(2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or
(3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23 (o), relating to the so-called "charitable contribution" deduction);↩
then such part of the income of the trust shall be included in computing the net income of the grantor.2. The respondent has not sought to tax the income in question to petitioner under section 162(b), and no issue has been raised as to the applicability of that section.↩
3. Petitioner's affidavit attached to the declaration of trust declares "I have voluntarily created the trust as therein set forth and declare the same to be my free act and deed." The fact that among the purposes of the trust was the payment of real estate taxes, interest, and fire insurance premiums on property of which petitioner was the life tenant in order to avoid charges of waste by the remaindermen does not make the trust involuntary. The payment of these obligations was the duty of the life tenant and the creation of a trust to perform the obligations of its grantor does not constitute the trust an involuntary one.↩