*28 Decision will be entered under Rule 50.
The business and assets of the insolvent New York Title & Mortgage Co., which had sold over $ 700,000,000 face value guaranteed first mortgage certificates in series, each series being secured by a mortgage or mortgages, were taken over in 1933 by the Superintendent of Insurance of New York as statutory receiver. Under the Schackno Act (legislation enacted to alleviate economic disaster and to protect the great number of certificate holders of title and mortgage companies in financial difficulties) series Q and series F-1 trusts were in 1935, with the consent of certificate holders, created as independent instrumentalities, subject only to the supervision of the New York Supreme Court, for the conservation, management, and liquidation of the portfolio of collateral securing each series. The portfolio of each series was transferred to the trust by the Superintendent of Insurance. As beneficiaries of the trusts the certificate holders were entitled to receive the entire proceeds, less expenses. The trustees were to determine the reserves necessary for certain enumerated expenses and to withhold them from distribution. In the taxable years*29 the trustees of each trust distributed only part of the income, and retained the remainder as a reserve for the payment of tax arrears, maintenance, and other expenses. Held:
(1) Each trust was a taxable entity and not in the nature of a receiver of a part only of the property of an insolvent corporation.
(2) Sections 166 and 167, 1934 and 1936 Acts, are not applicable to the trusts, they not being the type of trust, and the certificate holders not being grantors, within the intendment of such sections.
(3) The undistributed income was not income "which is to be distributed currently" within the meaning of section 161 (a) (2), 1934 and 1936 Acts, and hence is not allowable as a deduction to the trusts under section 162 (b).
(4) In computing taxable net income of the trusts, amounts paid by trustees for attorney fees, accounting fees, mortgage assignment fees, and expense for stationery and printing are deductible under section 121 (a) (2), 1942 Act, but no deduction for depreciation is allowable, there being no provision in the trust indentures requiring the trustees to keep the trust corpus intact.
*991 The Commissioner determined income tax deficiencies as follows:
| Year ended | ||
| Petitioner | Oct. 31 -- | Deficiency |
| Series Q Trust | 1936 | $ 54,262.15 |
| Series F-1 Trust | 1935 | 174,239.77 |
| Series F-1 Trust | 1936 | 175,830.67 |
The petitioners contend (1) that the trusts are not taxable entities; (2) that, if they are, the undistributed income is not taxable to them; and (3) that, if it is, they are entitled to certain deductions which have not been allowed.
FINDINGS OF FACT.
The New York Title & Mortgage Co., hereinafter referred to as the Title Co., was organized under the insurance law of the State of *992 New York. It sold mortgages to investors, with its guarantee of payment of principal and interest. It was also engaged in the title insurance business. It issued and guaranteed certificates of participation in single mortgages as well as in group series. The aggregate amount of such certificates sold and issued by such company exceeded $ 700,000,000.
Under an agreement dated October 1, 1923, between the Title Co. and the American Trust Co. (later Bank of Manhattan Trust Co.), as depositary, the Title Co. *31 deposited with the depositary a group of mortgages covering properties in Queens and Nassau Counties, New York, against which it issued to investors "Guaranteed First Mortgage Certificates" designated "Series Q." The Title Co. sold and assigned to the holder of the certificate an "undivided coordinate share * * * in the principal sum secured by the bonds and mortgages or in the moneys secured to the Company in the bonds and mortgages deposited" and guaranteed to the holder payment of the amount invested, together with interest at 5 1/2 percent per annum payable semiannually ten years after first interest date. The Title Co. was the exclusive agent of the certificate holders to collect the principal and interest of the deposited mortgages, and otherwise service the mortgage collateral.
Pursuant to a similar agreement dated February 21, 1927, with the same depositary, the Title Co. deposited certain mortgages covering properties in the Boroughs of Bronx and Manhattan, New York City, against which it issued similar guaranteed first mortgage certificates designated "Series F-1."
Default on its guarantees occurred prior to March 1933, when the Title Co. was unable to meet its obligations. *32 On August 4, 1933, the Supreme Court of New York, by its order of rehabilitation, appointed the Superintendent of Insurance of the State of New York rehabilitator, authorizing and directing him:
forthwith to take possession of the property of the New York Title and Mortgage Company and to conduct the business thereof as authorized and empowered by law and under and pursuant to the provision of this order and take such steps towards the removal of the causes and conditions which have made this proceeding necessary, as the Superintendent of Insurance shall consider wise, subject to the directions of the Court, pursuant to the provisions of Article XI of the Insurance Law of the State of New York, and all other provisions of law applicable thereto, and the Superintendent of Insurance of the State of New York and his successors in office be, and he is and they are hereby directed to deal with the property and business of the New York Title and Mortgage Company in the name of the New York Title and Mortgage Company.
The order also directed the Title Co. and all persons having any property or records belonging to it to transfer the same to the Superintendent of Insurance; and it restrained*33 creditors, policyholders, and holders of mortgage participation certificates guaranteed by the company, *993 and all other persons, from dealing with the assets of the Title Co., and forbade the obtaining of preferences, judgments, attachments, or other liens, and any suit or proceeding against the Title Co. or against the Superintendent of Insurance, or from interfering with his possession, control and management of the property or the discharge of his duties under the provisions of article XI of the insurance law of the State of New York.
A plan for the reorganization of the rights of the holders of series Q first mortgage certificates, and a trust indenture, were promulgated in April 1934 by the Superintendent of Insurance, as provided by the laws of New York (ch. 745, Laws of 1933, known as the Schackno Act). The plan as modified, upon the consent thereto of two-thirds of the holders in principal amount of series Q certificates, was finally approved by the Supreme Court of New York by its order entered September 5, 1935, which declared the plan and trust indenture to be binding upon all holders of series Q certificates, the Title Co. and all other parties interested. The*34 court thereafter designated Armin H. Mittlemann, Joseph D. Nunan, Jr., and Harry V. Hoyt, as trustees of series Q mortgage certificates, a group issue of $ 10,259,974.66, 1 comprising a part of the assets of the Title Co.
The plan disclosed that as of December 31, 1933, there were 3,248 holders of series Q certificates, aggregating $ 10,205,307.08 1 in principal amount. The plan provided, inter alia, for the transfer to trustees upon the execution of the trust indenture of all the rights of the holders of series Q first mortgage certificates and of the Title Co. and of the Manhattan Co., the depositary, in and to the property constituting the security against which such series Q first mortgage certificates had been issued, and that:
The Certificate-holders will*35 receive everything, including principal, collected by the Trustees, less necessary expenses and compensation. The Trustees agree (as Trustees and not individually) to pay 4% interest to the Certificate-holders, but if more interest is collected by the Trustees it will be distributed to the Certificate-holders in reduction of the face amount of their certificates.
The trust indenture was signed by the trustees about October 25 1935, the agreement stating that:
the holders of more than two-thirds (2/3) in principal amount of outstanding Series Q Certificates (exclusive of any part thereof held by New York Title and Mortgage Company) have by their consents entered in the foregoing proceeding pending in the Supreme Court of the State of New York, County of New York, become parties hereto with the same force and effect as though they had individually executed and acknowledged this agreement, and the remaining holders of Series Q Certificates have become parties hereto by virtue thereof and of said Plan and of the order of the Supreme Court of the State of New York entered *994 in said proceeding pursuant to said Chapter 745 as amended of the Laws of the State of New York of 1933.
*36 The trust indenture provides in part as follows:
Article II
The Certificate-holders, in consideration of the covenants and agreements of the Trustees hereinafter set forth, do hereby transfer, assign and convey unto the Trustees and their successors in trust, all of their right, title and interest in and to the Trust Estate, In Trust to manage and liquidate the same, collect the income thereof and pay the net income and proceeds thereof in accordance with the obligations assumed by the Trustees in Article IV hereof and, after payment of the said obligations, to distribute the net income and proceeds remaining, equally and ratably among the Certificate-holders, all subject to the provisions of this indenture.
Article III
The Trustees hereby declare that all property constituting the Trust Estate received by them, whether under said Plan or this indenture or otherwise, will be held by them In Trust to manage and liquidate the same, collect the income thereof and pay the net income and proceeds thereof in accordance with the obligations assumed by the Trustees in Article IV hereof and, after payment of the said obligations, to distribute the net income and proceeds remaining, equally*37 and ratably among the Certificate-holders, all subject to the provisions of this indenture.
Article IV
The Trustees, in consideration of the assignment to them by the Certificate-holders set forth in Article II hereof, in their capacity as Trustees and not individually, hereby agree to pay the face amount of each Series Q Certificate to the registered holder thereof on or before January 1, 1945 with interest on the unpaid portion thereof at 4% per annum, subject to the following terms and conditions:
(a) * * * To determine whether funds are available for an interest payment, the Trustees on each 15th day of December and June shall deduct from the total gross income theretofore collected and received by them the sum of (a) all expenses of the trust, including Trustees' compensation, (b) all payments of interest theretofore made by the Trustees to the Certificate-holders, and (c) a cash reserve for the administration of the trust for the subsequent six months in an amount to be estimated and determined by the Trustees in their discretion; the difference, if any, shall be the amount available for payment of interest on the following 1st day of January or July respectively.
* * * *
Article*38 IX
Without in any manner limiting or abrogating the powers of the Trustees herein set forth, it is expressly declared to be the intent and purpose of this trust solely to liquidate the Trust Estate in an orderly and businesslike manner, having due regard to the present depressed condition of the real estate market, so as not to sacrifice the interests of the Certificate-holders, but to yield to them as large a proportion of their original investment as is reasonably possible, and not to embark the trust upon any other business or venture. Third parties, however, dealing with the Trustees shall be under no duty or obligation to ascertain whether or not the conditions or provisions of this article or any other article of this indenture have been and are being complied with.
* * * *
*995 Article XI
(a) No Certificate Holder or Beneficial Certificate-holder shall have, as such, any right or power of any kind whatsoever with respect to the property, whether real or personal, in the Trust Estate, all of such rights and powers being vested exclusively in the Trustees to be held in trust upon the terms and exercised as provided in this indenture. No Certificate Holder or Beneficial*39 Certificate-holder shall have any right to call for any partition of the Trust Estate during the continuance of the Trust. No transfer by operation of law of the interests of a Certificate-holder or Beneficial Certificate-holder during the continuance of this Trust shall operate to terminate the Trust nor shall such transfer alone entitle a legal representative of a deceased Certificate-holder or Beneficial Certificate-holder to an accounting or to take any action in the courts or otherwise against the Trust Estate or the Trustees. * * *
Article XIII
The Trustees shall make payments on account of the principal face amount of Series Q Certificates as often and in such amounts as the collections of cash shall warrant, after setting up such reserves for interest payments, taxes, expenses, charges and compensation of the Trustees, as they shall deem reasonable.
Article XVIII
This trust shall continue until the Trust Estate has been fully liquidated in accordance with the foregoing provisions, at which latter date this trust shall terminate, except that at any time prior thereto this trust may be modified, amended, or terminated with the approval of the Court when consented to by the *40 holders of two-thirds (2/3) in principal amount of the outstanding Series Q Certificates. Upon the termination of the trust any money held by the Trustees for the account of any Certificate-holder which they may have been unable to pay over to him shall be disposed of as the Court shall direct.
* * * *
A plan for the reorganization of the rights under the series F-1 guaranteed first mortgage certificates issued and guaranteed by the Title Co. and a declaration of trust were promulgated in October 1934 by the Superintendent of Insurance of New York. The plan as modified was finally approved by the Supreme Court of New York by its order entered April 8, 1935. The plan and declaration of trust are substantially similar to the plan and trust indenture for series Q certificates, except that they fix no date for the payment of the certificates or rate of interest. They provide for the semiannual distribution to certificate holders, beginning June 30, 1935, of "all income collected and moneys derived from the liquidation of the Trust Estate * * * in accordance with their respective interests after the deduction of expenses and such sums as the Trustees deem necessary as reserves for improvements, *41 repairs, taxes, assessments and water rates and interest, amortization and other obligations with respect to any funds that may be borrowed * * * until the termination of the trust." In May 1935 the Supreme Court of New York designated Aaron Rabinowitz, James L. Clare, and Lawrence N. Martin as trustees of series F-1 *996 certificates, a group issue of $ 27,910,858.52, comprising part of the assets of the Title Co. Thereafter, the trustees took over the assets underlying such certificates. Subsequently, Lawrence N. Martin died and the Supreme Court appointed Adrian P. Burke as successor trustee. At the time the trustees took over the assets about 6,500 certificates were issued and outstanding held by about 5,000 persons.
The trustees for series Q filed in the first district of New York a Federal income tax return on Form 1040, captioned "Amended Return," for the fiscal year ended October 31, 1936, in which they reported no taxable net income. On January 15, 1937, they filed in the second district for New York a fiduciary return on Form 1041, for the fiscal year ended October 31, 1936, on which the net income reported was $ 328,463.66. Attached to this return was a rider *42 stating that the income was being collected for the benefit of the Title Co. in liquidation, subject to claims of certificate holders, and that therefore the trust was not subject to income tax. The net income which was distributed to the certificate holders in that fiscal year was $ 202,865.83. The respondent determined undistributed income of Series Q Trust as follows:
| Income as shown on Form 1041 | $ 328,463.66 | |||
| Add: | ||||
| (1) Interest income | $ 5,086.42 | |||
| (2) Expenses disallowed: | ||||
| Legal fees | $ 28,881.34 | |||
| Accounting fees | 3,000.00 | |||
| Stationery, printing, etc | 2,209.59 | |||
| Assignment of mortgages | 3,039.55 | |||
| Mortgage commission charges | 12,245.34 | |||
| Furniture and fixtures | 3,233.75 | 52,609.57 | $ 57,695.99 | |
| Less: | ||||
| (e) Advances recovered | 31,868.86 | |||
| (4) Loss on H. O. L. C. refundings | 10,671.11 | 42,539.97 | ||
| 15,156.02 | ||||
| Net income adjusted | 343,619.68 | |||
| Less distributions to certificate holders | 202,865.83 | |||
| Net undistributed income as adjusted | 140,753.85 |
The respondent allowed no deduction for depreciation on real property owned by the Series Q Trust. It was stipulated that if the trust is held to be entitled to a deduction for*43 deprecation a reasonable allowance for the year ended October 31, 1936, is $ 23,566.89, to be used in the computation of net income.
The amount ($ 140,753.85) of the undistributed income of the Series Q Trust for the fiscal year ended October 31, 1936, was withheld by the trustees for the payment of tax arrears, maintenance, and other expenses.
*997 The books of Series Q Trust were kept and its 1936 return was filed on the cash receipts and disbursements basis.
During the fiscal year ended October 31, 1936, the Series Q Trust paid out $ 28,881.34 as legal fees, $ 3,000 as accounting fees, $ 2,209.59 for stationery and printing, and $ 3,039.55 for assignments of mortgages. The attorney fees were paid pursuant to court order and provisions of the trust indenture for services rendered in connection with the proceedings required for the formulation, promulgation and approval of the plan and creation of Series Q Trust. The accounting fees were paid for an examination of the books of the Title Co. and services rendered in taking over the underlying assets from the Mortgage Commission and Superintendent of Insurance and others. The $ 2,209.59 was expended for the printing of the *44 plan of reorganization and trust indenture, trustees' certificates, court orders, and stationery. The $ 3,039.55 was paid for the assignment of mortgages from the Mortgage Commission to the trustees.
The series F-1 trustees filed a fiduciary return for 1935 on Form 1041 in the third district of New York. The respondent determined undistributed net income for 1935 of such trust as follows:
| Income as shown on return Form 1041 | $ 840,005.86 | |
| Add: | ||
| Deductions disallowed: | ||
| Depreciation | $ 63,391.57 | |
| Appraisal fees | 2,136.00 | |
| Recording fees | 702.20 | 66,229.77 |
| 906,235.63 | ||
| Less distributions to certificate holders | 558,219.07 | |
| Net undistributed income as adjusted | 348,016.56 |
The series F-1 trustees filed a fiduciary return for 1936 on Form 1041 in the third district of New York. The respondent determined undistributed net income of such trust for 1936, as follows:
| Income as shown on return Form 1041 | $ 1,150,608.31 | |
| Add: | ||
| (1) Attorneys' fees | $ 115,788.55 | |
| (2) Accounting fees | 11,898.30 | |
| (3) Depreciation | 156,044.18 | 283,731.03 |
| 1,434,339.34 | ||
| Less distributions to certificate holders | 1,116,438.38 | |
| Undistributed net income as adjusted | 317,900.96 |
*45 Each return contained a note stating that the net income was "income taxable if at all to the" Title Co. "for which the trustees have been ruled to be a substituted liquidating agency."
*998 It was stipulated that if the trust is held to be entitled to a deduction for depreciation, a reasonable allowance for depreciation for 1935 is $ 63,391.57 and for 1936 is $ 156,044.18, and such sums are to be used in the computation of income.
The amounts of undistributed net income of the Series F-1 Trust for 1935 and 1936 were withheld by the trustees for the payment of tax arrears, maintenance and other expenses.
The attorney fees of $ 115,788.55 were paid in 1936 pursuant to court order and declaration of trust for services rendered in connection with the proceedings required for the formulation, promulgation and approval of the plan and creation of Trust F-1 over a period beginning some time in 1934 up to the time of the creation of the Series F-1 Trust in the proceeding under the Schackno Act. The accounting fees of $ 11,898.30 were paid for the examination of the books of the Title Co. for the purpose of ascertaining the assets underlying the series F-1 issue.
The books of Series*46 F-1 Trust were kept and its 1935 and 1936 returns were filed on the cash receipts and disbursements basis.
OPINION.
1. The Commissioner determined that each of the petitioners was "a strict trust," taxable upon "the portion of the income which was not distributed to the Beneficiaries." The petitioners contest this, and each contends that it is in the nature of a receiver of a part of the assets of an insolvent corporation and therefore not taxable. This is their first and main point, the other points being stated in the alternative in the event that petitioners are held to be taxable entities. The respondent does not argue the question whether petitioners are receivers, but, upon the assumption that they are "strict trusts," argues the question whether petitioners are properly taxable upon the undistributed net income.
It is true that the trustee of each series received only "a part of the assets of an insolvent corporation," the Title Co. The Title Co. had issued certificates in excess of $ 700,000,000 against mortgages. Series Q had certificates outstanding in the face amount of $ 10,205,307.08 and series F-1 had $ 27,463,985.28 of certificates outstanding, and the trustees *47 of each series received only such mortgages and other assets as were in the series portfolio. Prior to the transfers to the trusts the Title Co. was the "owner" of the mortgages and other portfolio assets. However, such ownership was "subject to the collateral lien of the certificate holders." ; . The relation between the Title Co. and the certificate holders was that of debtor and creditor (), the Title Co. being "the primary debtor, assigning the mortgages only as collateral security for the debt." ; . In other words, the certificate holders were secured creditors or claimants of the Title Co. ; .*48
The Superintendent of Insurance of New York became the statutory receiver of the Title Co. ;; ; ; ; affd., . As such, he segregated the collateral security of the several series portfolios. Each certificate holder was entitled to share equally in the proceeds from the assets in the portfolio of his particular series. As a lien holder he had the right to have the collateral subject to his lien reduced to his possession or applied upon his claim. If there had been but one or a few certificate holders, instead of 3,000 to 5,000, an assignment by the Superintendent of Insurance of the collateral would have been practical.
However, concerted action by the large number of certificate holders involved in series Q and series F-1 and many others was not obtainable. The existing*49 remedies of the certificate holders, and particularly of the large groups, were inadequate. . This was recognized by the Legislature of New York and it was declared in the Schackno Act, chapter 745, Laws of 1933:
to be essential for the public interest to provide a procedure under which such bonds, mortgages or other security may be liquidated in an orderly manner and under which the assets of the guaranty corporations may be administered and conserved equally and ratably in the interests of holders of mortgage investments.
The Superintendent of Insurance of New York was not sufficiently equipped to administer the collateral security consisting of thousands of mortgages and parcels of realty. Certificate holders objected on the ground that he represented other and conflicting interests.
As a means of adequately protecting the rights of groups of certificate holders, a trust was devised, primarily at the instance of the Superintendent, as an entity which could take possession and efficiently administer and liquidate the assets in the portfolio of each series and which would represent*50 and act in the interests of the certificate holders. As representative of the certificate holders, the trustees were authorized "to enforce the common claims of the holders of the contracts of guaranty against the obligor," the Title Co. They were not *1000 required to account to the Superintendent of Insurance or to the Title Co. All they acquired, less expenses, was distributable to the certificate holders. After the mortgages and other assets had been transferred to the trustees, the Title Co. was no longer the owner of such assets and the trustees did not hold them as "part of the property" of the Title Co. They held them as technical owners for the benefit of the certificate holders. Had there been but one certificate holder and the assets underlying his certificate had been transferred to him to be applied upon the obligation of his debtor, there could have been no question of a partial receivership or part ownership of all the debtor's property. Such holder would have been subject to income taxes upon the income thereafter received from the assets which he held. We are of opinion*51 that the trusts are entities separate and distinct from the Superintendent of Insurance as statutory receiver and from the Title Co., and that they are taxable trusts under section 161, Revenue Acts of 1934 and 1936. They were not in the nature of receivers of the series Q and series F-1 assets. Such assets had been entirely separated from the receivership. There was no subordinate relation between the trustees and the Superintendent, who alone was the statutory receiver of the Title Co.'s assets. Petitioners were not receivers of part of the Title Co.'s property.
The trustees were not paying the obligations of the Title Co., as contended by petitioners. The obligation of the Title Co. to holders of series Q and series F-1 certificates was paid pro tanto when the assets were transferred to the trusts. Thereafter the Title Co. was liable only upon its guaranty for any deficiency. The trustees were distributing the net amount of income or proceeds of the trusts, above expenses, to the certificate holders, who were entitled thereto as beneficiaries of the trust. Prior to the creation of the trusts the certificate holders had a right of lien; thereafter they became the equitable*52 owners of the trust assets and the net income. There was no constructive receipt by the Title Co. as in , and .
2. The petitioners contend that if they be held to be trusts, as the Commissioner has determined, they are nevertheless not properly taxable upon the income of the trusts because the trusts are revocable and the income is therefore taxable to the certificate holders as grantors (sec. 166), and also because the income may within the discretion of the grantor, be held or accumulated for him (sec. 167). This is based upon the proposition that the certificate holders are the grantors. The Commissioner's counsel in argument concedes this proposition, but it is a proposition of law we are unable to adopt. The trusts were set up under the Schackno Act, not as a private transfer of property *1001 by the owners, but as a means prescribed by the legislature for alleviating the economic disaster. The transfer was by the Superintendent of Insurance, the statutory receiver, and not by the Title Co. or the certificate holders. The consent*53 given by the certificate holders did not make them grantors within the contemplation of section 166 or 167. Those sections were to check tax avoidance by taxpayers setting up private trusts while retaining substantial control, a field not touched upon by the present trusts. Mertens, Law of Federal Income Taxation, vol. 6, § 37.01. Even if these trusts were literally within the provisions of sections 166 and 167, they would clearly not be within their intendment. The question is also suggested whether the State Supreme Court, under whose direction and control the trusts are administered, has an interest in the trusts but not a substantial interest adverse to the grantor. We think there is no ground for the suggestion, since the Court can not be regarded as having any interest whatever in the trusts. Its function and relation to the trusts is entirely judicial, and to treat it as having a substantial interest in them is to misconceive its nature. We think sections 166 and 167 are entirely inapplicable to the petitioners and do not require that the tax upon the undistributed trust income be levied against the certificate holders or the Title Co. as grantors.
3. The trustees contend*54 that the undistributed income is not taxable to them, but to the certificate holders, under sections 161 (a) (2) and 162 (b), 1934 and 1936 Acts, for the reason that it was distributable "periodically." Under section 161 (a) (2) income "which is to be distributed currently * * * to the beneficiaries" is included in the gross income of the trust and under section 162 (b) it is allowed as a deduction to the trust and is included in the net income of the beneficiaries "whether distributed to them or not."
Series F-1 Trust agreement authorizes the distribution of "all income collected and moneys derived from the liquidation of the Trust Estate * * * after the deduction of expenses and such sums as the Trustees deem necessary as reserves" for certain enumerated items, "the income distributable * * * to be paid over to the Certificate Holders semiannually beginning June 30, 1935." Series Q Trust agreement authorizes the trustees to pay 4 percent interest per annum semiannually, any income in excess of 4 percent to be distributed in reduction of the face amount of the certificates, provided, however, "that if sufficient funds shall not be available for the payment of any such installment*55 of interest, the Trustees shall apply all funds available therefor to a pro rata payment on account of such interest installment." The funds available for that purpose were determinable by the trustees on each 15th of December and June by deducting from gross income theretofore collected (a) all expenses, *1002 (b) interest theretofore paid to certificate holders, and (c) a reserve for the administration of the trust for the subsequent six months "in an amount to be estimated and determined by the Trustees in their discretion." In the year ended October 31, 1936, Series Q Trust distributed less than 2 percent of the face amount of outstanding certificates. Under the terms of the trust agreements the beneficiaries were entitled to only the net income determined by the trustees. Where the trust instrument requires the trustee to pay expenses and set up reserves out of trust income, the beneficiary is taxable only upon the net amount actually distributed to him. ; affd., ; ; .*56 In the Plimpton case the court said:
The scheme of the statute is to allow deductions to a fiduciary as to income which he is under an absolute obligation to pay to a beneficiary, whether he has in fact done so or not, and to tax such income to the beneficiary, but, by a similar technique of deduction, not to tax income to a beneficiary which he is not entitled to receive as of right until such income has been actually received.
Since the certificate holders had a right to only the distribution of the balance of the income after deduction of expenses and reserves, the undistributed income, representing reserves for taxes, maintenance, and other expenses, is not deductible by the trusts as income currently distributable to the beneficiaries.
4 (a). The petitioners contend that they are entitled under section 121 of the Revenue Act of 1942 to the deduction of the attorney and accounting fees, assignment fees, and stationery and printing expense stated in the findings. The Commissioner disallowed the deductions upon the ground that the amounts were not ordinary and necessary business expenses within the meaning of section 23 of the 1934 and 1936 Acts, prior to its amendment by*57 section 121 of the 1942 Act. The respondent argues that such expenses were in the nature of capital expenditures and therefore not deductible. In , it was said that, "It is obvious * * * that Congress intended [in the 1942 Act] that some expenditures pertaining to assets of a purely capital nature were to be allowed as deductions from gross income." Therein the deduction of attorney fees, paid for services rendered in a proceeding requiring a corporation, merging or consolidating with another, to pay dissenting shareholders, including the taxpayer, the fair market value of their stock, was allowed as a nontrade or nonbusiness expense.
Section 121 of the 1942 Act provides for the allowance of:
all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income.
*1003 The legislative reports state that the expenses "must bear a reasonable and proximate relation to the production or collection of income, or to the management, conservation, or maintenance of*58 property held for that purpose." Report of Committee on Ways and Means, No. 2333, p. 75, and Report of Committee on Finance, No. 1683, p. 88.
The property taken and held by the trusts was income-producing property, and had been a part of the business assets of the Title Co. This was the property from the income of which the certificate holders had received the interest on their investments. This was the property, and perhaps the only property, from which they could hope again to receive interest and a return of their principal investment, depending upon the proper and businesslike management of the trusts and the properties. This was the property from which they did receive income in the taxable years. The expenses were not incurred to determine title, but were incurred to procure and set up an instrumentality for the "management," the "conservation," and the "maintenance" of the property, and the liquidation "in an orderly and businesslike manner, having due regard to the present depressed condition of the real estate market." The trusts were liquidating trusts and it was the duty of the trustees to postpone disposal of the properties until better prices could be obtained and*59 meanwhile to see that the properties produced income. The expenses of the trusts bore a reasonable and proximate relation to the management, conservation, or maintenance of property held for the production of income. Therefore, series Q trustees are entitled to the deduction in the year ended October 31, 1936, of attorney fees of $ 28,881.34, accounting fees of $ 3,000, fees for the assignment of mortgages of $ 3,039.55, and stationery and printing expense of $ 2,209.59, and series F-1 trustees are entitled to the deduction in the year 1936 of attorney fees of $ 115,788.55 and accounting fees of $ 11,898.30, as nontrade or nonbusiness expenses.
(b) The petitioners further contend that they are entitled to deductions for depreciation. In the absence of a provision in the trust instrument authorizing and directing the trustees to keep the trust corpus intact the trust is not entitled to a deduction for depreciation. ; . Upon the application of the trustees of series F-1 for instructions as to methods of treating receipts and disbursements, the court*60 in ; , said:
In the absence of a specific provision on the subject in the trust indenture, the trustees should not create a reserve for depreciation or withhold any moneys from distribution on the basis of such a theoretical reserve. The indentures contemplate that certificate holders will ultimately receive all of the funds *1004 coming into the hands of the trustees by way of principal or interest and there is therefore no need or justification for a depreciation reserve -- the trusts being liquidating in nature.
Since the trust instruments have no provision authorizing the trustees to withhold amounts for depreciation, the petitioners are not entitled to any deduction for depreciation.
In summary, the petitioners are held to be taxable; are not free from tax by reason of section 166, 167, or 162; the Commissioner is sustained in determining that petitioners are taxable upon the undistributed income of the trusts; the petitioners are entitled to deductions of the amounts paid in the respective years for attorney fees, accounting fees, mortgage assignment*61 fees, and expenses for stationery and printing, and are not entitled to any deduction for depreciation.
Decision will be entered under Rule 50.
Footnotes
1. In the stipulation the amount is stated to be $ 10,259,974.66. However, in the plan the principal amount of certificates is given as $ 10,205,307.08 and the figure of $ 10,259,974.66 as the principal amount of the mortgages underlying certificates.↩
1. In the stipulation the amount is stated to be $ 10,259,974.66. However, in the plan the principal amount of certificates is given as $ 10,205,307.08 and the figure of $ 10,259,974.66 as the principal amount of the mortgages underlying certificates.↩