*753 1. Payments of specific annuities under a testamentary trust the corpus of which will ultimately pass to a charitable corporation, are not amounts "to be used exclusively for * * * charitable * * * purposes" and are not deductible from gross income under section 162(a) of the Revenue Act of 1934.
2. Under the terms of decedent's will, profits resulting from the sale of assets became part of the corpus. If net income should be insufficient to pay certain annuities created by the will, the corpus might be invaded. A charitable corporation was the remainderman. Capital gains were realized from the sale of securities during taxable years. Held, that the probability of their being required to pay any part of the annuities was, under the circumstances, so remote that such gains are deductible from the petitioners' gross income under section 162(a).
*1085 This proceeding was brought to redetermine deficiencies in the income taxes of the petitioners for the years*754 1934 and 1935 in the amounts of $590,715.35 and $153,237.63, respectively. The petitioners also claim overpayments for such years in the sums of $97.17 and $17,924.81, respectively. The respondent concedes that the deficiency for the year 1934 should be reduced to $541,926.80 and for the year 1935 to $151,905.11.
Certain issues were settled by stipulation or conceded by the respondent. The questions now in controversy are:
(1) When the remainderman of a testamentary trust is a taxexempt charitable corporation, does that part of the gross income of the trust which is used to pay annuities and thus free the corpus of charges therefor come within the meaning of the phrase "to be used exclusively for charitable purposes" contained in section 162(a) of the Revenue Act of 1934?
(2) Under such circumstances, where ordinary income is used to pay annuities but the charge therefor may be met by invading corpus, which is augmented by capital gains, are such gains permanently set aside for or to be used exclusively for charitable purposes within the meaning of the statute, where the probability of such invasion is remote?
*1086 The facts material to the issues were stipulated*755 substantially as follows:
FINDINGS OF FACT.
The petitioners are trustees under the will of F. G. Bonfils, deceased. The petitioners, the Denver National Bank and the First National Bank of Kansas City, have their principal offices in Denver, Colorado, and Kansas City, Missouri, respectively.
The Frederick G. Bonfils Foundation, hereinafter called the foundation, was and is a charitable corporation within the definition and meaning of section 23(o)(2) of the Revenue Act of 1934.
F. G. Bonfils, a resident of Denver, Colorado, died February 2, 1933, and his will, dated February 4, 1930, was duly admitted to probate on March 27, 1933, in the County Court of the City and County of Denver, where the estate is still in the course of administration.
In his will the testator first provided many specific bequests. He then bequeathed to the Denver National Bank and to the First National Bank of Kansas City, Missouri, all the residue of his estate in trust to manage the estate and to pay therefrom certain annuities, including $50,000 per year to his wife, Belle Bonfils, and further sums to his children and other relatives. The petitioners were also directed to pay not exceeding*756 $10,000 for the education of two minor children of a nephew.
Paragraphs 15, 16, 18, and 19 of article IV of the will are as follows:
15. To pay over all of the remainder of the net income of this trust estate, at least as often as in semi-annual instalments, to The Frederick G. Bonfils Foundation, a corporation not for profit organized and existing under the laws of the State of Colorado, until the death of the last survivor of the annuitants * * *, and thereafter to pay over all of the net income of this trust estate, at least as often as in semi-annual instalments, to said The Frederick G. Bonfils Foundation until said trust estate is finally and fully distributed as provided in the next succeeding paragraph hereof.
16. After the death of the last survivor of the annuitants * * * The Frederick G. Bonfils Foundation shall have the right and power to expend all or any part of the corpus of this trust estate on such specific, public, educational, charitable or benevolent project or projects as it may determine to be for the promotion of the general well-being of mankind, and, upon the written demand of said Foundation, said Trustees are authorized and directed to pay over*757 to said Foundation, from time to time, all or such part of the corpus of this trust estate as may reasonably be required for the financing of any such project or projects, with proper endowment thereof, (after making due provision for the bequests * * *), provided, however, and I hereby direct that all of the corpus of this trust estate (after making due provision for the bequests * * *) shall be paid over and delivered to said Foundation by said Trustees and shall be expended and paid out by said Foundation for the project or projects aforesaid within ten (10) years after the death of the last survivor of said annuitants.
* * *
18. *1087 It is my will and I direct that the annuities created * * * shall be paid in monthly instalments accruing from the first day of the calendar month succeeding the month of my death, and that in the event the net income from this trust estate is insufficient to pay all of said annuities in full, then such additional amounts as may be required from time to time shall be paid out of the corpus of this trust estate.
19. It is my will and I direct that the income payable to The Frederick G. Bonfils Foundation * * * shall accrue from the*758 first day of the fourteenth calendar month succeeding the month of my death.
Article IX provides:
My said Executors and said Trustees, hereinbefore named, shall not be required to amortize the premium or to accumulate the discount from the income upon any bonds, debentures or notes held as part of my residuary estate, or in any way to provide for the gradual extinction of the difference between the original cost of any such securities and their respective face values. Any dividends declared upon the stock of any corporation constituting part of my estate, in stock of such corporation, and all rights to subscribe to additional securities of any corporation, one or more of whose classes of securities constitute part of my estate, shall be deemed principal and not income. Profits or losses resulting from the sale of any part of my estate shall be credited to, or charged against, principal and shall not be deemed income or deductible from income. Except as hereinbefore provided, my said Executors and said Trustees shall have power to determine, in their full and absolute discretion, whether any property or money received by them shall be treated as capital or income.
Bell Bonfils, *759 widow of the decedent, declined the benefits of the will and duly elected to take one-half of her husband's estate, both real and personal, as provided by the statutes of Colorado.
The gross estate of the decedent was $14,300,326.01, with charges and costs of administration against it amounting to $822,517.81, leaving a net estate of $13,477,808.20 before the deduction of charitable bequests. The one-half of the net estate passing under the will to the testamentary trustees after deducting expenses, debts, and taxes amounted to $5,498,003.67. Of this amount the respondent, for Federal estate tax purposes, allowed $4,781,840.79 as the value of charitable bequests and taxed $1,216,162.88 as the value of the annuities.
The amounts of the annuities paid and payable for 1934 to 1938, inclusive, were as follows:
| 1934 | $62,035.48 |
| 1935 | 90,150.00 |
| 1936 | 110,600.00 |
| 1937 | 110,200.00 |
| 1938 | 110,200.00 |
During 1934 the petitioners paid $5,116.66 of such annuities and the executors of the estate paid the remainder.
The undistributed assets in the estate have a fair market value of not less than $1,563,666, subject to an income tax adjustment. It is *1088 expected*760 that not less than $679,000 of these assets will be distributed to the petitioners.
The current (November 18, 1938) fair market value of the assets owned directly or indirectly by petitioners and the ordinary income therefrom are substantially as follows:
| Assets | Fair market value | Income | |
| Cash: | |||
| Directly | $79,897.02 | ||
| Indirectly | 83,971.51 | ||
| Estate | 43.67 | ||
| $163,912.20 | |||
| U.S. Government bonds, etc.: | |||
| Directly | 2,550,300.58 | $59,021.25 | |
| Indirectly | 125,155.63 | 3,729.37 | |
| Estate | 334,357.50 | 6,948.75 | |
| 3,009,813.71 | |||
| Municipal bonds: | |||
| Directly | 597,169.37 | 25,660.00 | |
| Indirectly | 1,006.20 | 35.00 | |
| 598,175.57 | |||
| Corporate bonds | 387,590.00 | 13,150.00 | |
| Corporate stocks: | |||
| Post Printing & Publishing Co. - | |||
| 718.451 shares - Directly | 1,977,740.00 | 273,011.00 | |
| 87.61766 shares - Indirectly | 240,948.56 | 33,294.71 | |
| 125.4 shares - estate | 344,850.00 | 47,652.00 | |
| 2,563,538.56 | |||
| Other stocks and miscellaneous: | |||
| Directly | |||
| Indirectly | 1,147,330.59 | 57,781.88 | |
| 5,292.76 | 1,152,623.35 | 391.85 | |
| Total | 7,875,653.39 | 520,675.81 |
During the years 1934 to 1937, inclusive, the petitioners received from property distributed to and held by them income, *761 less expenses other than income taxes and exclusive of capital, gains, as follows:
| 1934 | $168,747.22 |
| 1935 | 345,669.92 |
| 1936 | 380,573.55 |
| 1937 | 377,504.52 |
Property which they will ultimately receive produced additional net income (exclusive of capital gains) for those years as follows:
| 1934 | $398,847.00 |
| 1935 | 142,834.21 |
| 1936 | 172,766.62 |
| 1937 | 139,455.40 |
The property owned both directly and indirectly by petitioners produced recurrent net income as follows:
| 1934 | $567,594.22 |
| 1935 | 488,504.13 |
| 1936 | 553,340.17 |
| 1937 | 516,959.92 |
During 1934 and 1935 the petitioners actually received gross income of $168,632.83 and $307,069.69, respectively. In 1934 they had no allowable deductions and in 1935 deductions of $17,507.86; irrespective of the deductions under section 162. During 1934 and 1935 they derived capital gains of $793,284.59 and $70,995.23, respectively.
*1089 The petitioners have kept and now keep their books and file their income tax returns on the calendar year and cash receipts and disbursements bases.
For the years 1934 and 1935 the respondent allowed no deductions for any amounts distributed, distributable, *762 or accumulated for ultimate distribution to the foundation.
OPINION.
VAN FOSSAN: As to the first of the remaining issues, the petitioners base their contention on the proposition that they are entitled "to deduct any part of their gross income which, pursuant to the terms of F. G. Bonfils' will was 'to be used exclusively for religious, charitable, scientific, literary or educational purposes,'" citing section 162(a). 1
*763 It will be noted that the petitioners do not claim the deduction by virtue of section 162(b). 2 See , where the principle laid down in , was applied and it was held that payments to the beneficiaries were not distributions of income but were in discharge of a gift or legacy and, hence, not deductible from income. See also . Nor do they claim the deduction as an amount "paid or permanently set aside" for the purposes and in the manner specified in section 23(o) as provided in section 162(a). They suggest and urge that it comes within the last provision of section 162(a) as an amount which "is to be used exclusively for * * * charitable * * * purposes," the reasoning being that since the corpus ultimately will go to a charitable organization, the income used to pay the annuities frees the corpus of a proportionate burden and is to be used exclusively for charitable purposes within the meaning of section 162(a).
*764 We must confess that on careful study we are unable to follow the purported logic of petitioners' argument. The payments were *1090 actually made to the annuitants and inured to their exclusive benefit. That they were in point of fact made out of income and not out of corpus can not be controlling. See The legal character of the payments is established by the provision of the will that the corpus might be invaded. We are unable to perceive how the payment of the annuities, which actually lessened the amount ultimately available for distribution to the charitable foundation, can by any stretch of logic or imagination be said to be payments "to be used exclusively for * * * charitable purposes." The income which was used in payment of the annuities was thereby used in fact, and it can not be said in the language of section 162(a) that it is "to be used" at some future time. Albeit the Congress and the courts agree that gifts to charity should be encouraged, it is equally well established that deductions are a matter of legislative grace and a taxpayer must bring his claim clearly within the permissive provision of the statute. *765 This petitioners have not done. The respondent is sustained.
The second issue presents the same question as that decided by us in , promulgated this day. There we held that capital gains which pursuant to the will became a part of the corpus and thus subject to the charge of annuities in case the ordinary income of the estate is insufficient to meet such charges, were deductible under section 162(a), the facts proving that the probability of the invasion of corpus is so remote as to be negligible. Practically the same facts and figures are present in the case at bar as appeared in the estate case and, if anything, they are more favorable to the petitioners. Therefore, such capital gains are deductible from the petitioners' gross income for the taxable years under consideration.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 162. NET INCOME.
The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that -
(a) There shall be allowed as a deduction (in lieu of the deduction for charitable, etc., contributions authorized by section 23(o)) any part of the gross income, without limitation, which pursuant to the terms of the will or deed creating the trust, is during the taxable year paid or permanently set aside for the purposes and in the manner specified in section 23(o), or is to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, or for the establishment, acquisition, maintenance or operation of a public cemetery not operated for profit; ↩
2. (b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year. ↩