*2171 The petitioners are beneficiaries of a certain trust and entitled to the income thereof. The trustee, in computing the net income of the trust for 1921 to 1926, inclusive, deducted certain amounts for exhaustion, wear and tear of the trust property, but distributed among the petitioners the amounts deducted for exhaustion, wear and tear, together with the net income so computed. Subsequently a court of competent jurisdiction, in a proper suit brought by the remaindermen, decided that the trustee should have retained the amounts for exhaustion, wear and tear of the trust property and ordered the petitioners to repay said amounts to the trustee. Held, that the amounts deducted for exhaustion, wear and tear of the trust property in the years 1921 to 1926, inclusive, were not income to the petitioners.
*119 These proceedings, which were duly consolidated for hearing and decision, are for the redetermination of deficiencies in income tax which the respondent has asserted as follows:
| 1921 | 1922 | 1923 | 1924 | 1925 | 1926 | |
| Marguerite T. Whitcomb | $524.78 | $562.61 | $401.95 | $373.43 | $303.83 | $494.25 |
| Louise A. Whitcomb | 524.78 | 562.61 | 401.95 | 373.43 | 303.83 | 494.25 |
| Lydia L. Whitcomb | 524.78 | 562.61 | 401.95 | 373.43 | 303.83 | 494.25 |
| Estate of Louise P. V. Whitcomb | 902.12 | 406.96 | 281.92 | 262.57 | 251.27 | |
| Charlotte A. W. Lepic | 2,416.21 | 2,909.40 | 2,399.50 | 2,757.60 | 2,006.36 | 3,278.99 |
*2172 The petitioners allege that the respondent erred in adding to their respective incomes as returned by them for the years mentioned, the depreciation sustained during those years by a certain trust estate of which they were beneficiaries.
FINDINGS OF FACT.
Louise P. V. Whitcomb was from some time in 1889 until her death on June 14, 1921, the widow of A. C. Whitcomb, deceased. The petitioner Charlotte A. W. Lepic is the daughter of the said A. C. Whitcomb, deceased. The petitioners, Marguerite T. Whitcomb, Louise A. Whitcomb, and Lydia L. Whitcomb, are the widow and two children of Adolph Whitcomb, deceased, who was the son of A. C. Whitcomb, deceased.
The said A. C. Whitcomb died in the year 1889, a resident of the State of California, leaving a last will and testament which was duly admitted to probate and record by the Superior Court of the State of California, in and for the City and County of San Francisco. Said last will and testament provided, among other things, as follows:
7th: I give to my hereinafter named Executor, Jerome Lincoln of said San Francisco, all the rest of my property, real, personal or mixed, except what I may have in France, of every kind and*2173 nature and not hereinbefore disposed *120 of, after the payment of my debts, in Trust, nevertheless, to pay over to my said wife, Louise Palmyre Vion Whitcomb one-third part of the interest thereon or income therefrom, for and during her natural life, and the other two-thirds parts to my two children, born of her: one Adolph, born on or about the 23rd day of February, 1880, and the other Charlotte Andree, born on or about the 4th day of December 1882, with the revesion or remainder of the whole three-thirds parts to the descendants "per stirpes" of the said two children, if any be alive at the time of the death of the said two children; and if none be alive at that time, to Harvard College, in conformity with the provisions named or indicated in Section Six (6) of this Will, having reference to said Harvard College.
The said will contained no directions in regard to the manner in which the income from the trust should be computed, accounts kept, or depreciation provided for.
James Otis was appointed a trustee of said trust on February 23, 1896. He has acted as such trustee continuously since that date, and since the year 1905 he has been the sole trustee of said trust.
*2174 The original trust estate consisted largely of cash, bonds, stocks and notes. On February 23, 1906, the trust estate consisted of bonds, corporate stocks, cash and promissory notes secured by mortgages, of a total value of more than $3,000,000, and certain parcels of real estate, most of which were in San Francisco. On April 18, 1906, the San Francisco earthquake and fire occurred. All of the improvements on the San Francisco real estate owned by the trust were destroyed by the fire, including those on the large parcel at Eighth and Market Streets which the trust still owns, and on which the Hotel Whitcomb now stands. Some time after the San Francisco fire the trustee of the said trust adopted the policy of improving the real estate owned by the trust, and of converting the other assets of the estate to accomplish that purpose. As a result of said policy and of the acquisition of additional parcels of real estate, the assets of the trust for several years prior to 1921, and during the years 1921 to 1926, inclusive, consisted almost entirely of improved real estate, including the Whitcomb Hotel and its furniture and equipment. The last item represented an investment of more*2175 than $2,000,000.
During the years 1921 to 1926, inclusive, the trust estate suffered exhaustion, wear and tear as follows:
| 1921 | $43,003.16 |
| 1922 | 39,408.00 |
| 1923 | 39,408.00 |
| 1924 | $39,258.00 |
| 1925 | 39,108.00 |
| 1926 | 55,833.00 |
The trustee or trustees of said trust made payments of the income from the trust in equal shares to the widow and two children of A. C. Whitcomb, until the death of his son Adolph, which occurred on September 5, 1914. The testator's widow, Louise P. V. Whitcomb, died on June 14 ,1921. During the years 1921 to 1926, inclusive, the income from said estate was paid as follows:
*121 1921 - 1/3 to Louise P. V. Whitcomb until her death on June 14, 1921, and thereafter 1/9 to her estate; 1/3 to Charlotte A. W. Lepic until June 14, 1921, and thereafter 4/9; 1/3 to the widow and two children of Adolph Whitcomb, namely Marguerite T. Whitcomb, Lydia L. Whitcomb and Louise A. F. E. Whitcomb, until June 14, 1921, and thereafter 4/9. 1922, 1923 - 1/9 to the estate of testator's widow, Louise P. V. Whitcomb. 1924 and 1925 - 1/9 to the testator's daughter, Charlotte A. W. Lepic; 4/9 to the widow and two children of the testator's son, namely, *2176 Marguerite T. Withcomb, Lydia L. Whitcomb and Louise A. F. E. Whitcomb. 1926 - 1/2 to testator's daughter, Charlotte A. W. Lepic; 1/2 to the widow and two children of the testator's son, namely, Marguerite T. Whitcomb, Lydia L. Whitcomb, and Louise A. F. E. Whitcomb.
The trustee of said trust filed fiduciary returns for the years 1921 to 1926, inclusive, and deducted in computing the net income of the trust for each year, the respective amounts above set forth, representing exhaustion, wear and tear sustained by the trust. The trustee, however, did not withhold from the beneficiaries to whom income payments were being made the amounts represented in the depreciation deduction, and each of said beneficiaries received her ratable share thereof during the years involved herein, as well as in preceding years.
From 1903 to 1928, inclusive, the trustee, or trustees of said trust presented an annual account to the beneficiaries entitled to income payments, but did not file any account in the Superior Court of California, which has jurisdiction over the trust until its termination for the settlement of accounts and for other purposes.
On September 5, 1928, James Otis, as trustee*2177 of said trust, filed with the Superior Court in San Francisco his account accompanied by a petition for its allowance. The account covered the period from February 23, 1903, to February 23, 1928, and it set out all of the payments made to the beneficiaries of said trust during that period.
The allowance and approval of said account was opposed by Napoleon Charles Louis Lepic and Charlotte de Rochechouart, children of Charlotte A. W. Lepic, one of the beneficiaries herein, who are two of the remaindermen entitled to part of the corpus of the trust upon the termination thereof, if they be then living. In their objections, which were duly filed with the Superior Court of the State of California, in and for the City and County of San Francisco, they allege that the trust property had sustained depreciation during the years 1913 to 1927, inclusive, in the amount of $622,434.11; that no reserve or other provision for such depreciation had been made from the gross income of the trust estate; that said amount of $622,434.11 had been paid by the trustee to the beneficiaries of the trust entitled to the income therefrom, as income, thus impairing the trust property by that amount, and they*2178 prayed that the trustee be charged with that amount. All of the parties interested in said trust estate, including Harvard College, were notified *122 of the filing of said account of said trustee, and of said objections, and were represented by counsel at the hearing held thereon. On September 19, 1928, the Superior Court of the State of California, in and for the City and County of San Francisco, entered a decree in said matter, which is in part as follows:
It is hereby ORDERED, ADJUDGED, and DECREED that the objection of said Napoleon Charles Louis Lepic and Charlotte de Rochechouart to said account that no reserve or other provision for annual depreciation for the years 1913 to 1927, both inclusive, as set forth in said objections, has been made, be, and the same is hereby, sustained; that the amount specified in said objections for each of said respective years from 1913 to 1927 is a proper amount to be allowed for depreciation, said amount for each of said respective years being as follows, to-wit:
| Year | Amount |
| 1913 | $23,751.00 |
| 1914 | 23,070.00 |
| 1915 | 23,748.00 |
| 1916 | 31,248.00 |
| 1917 | 41,222.83 |
| 1918 | 55,302.96 |
| 1919 | 56,273.93 |
| 1920 | 55,585.23 |
| 1921 | $43,003.16 |
| 1922 | 39,408.00 |
| 1923 | 39,408.00 |
| 1924 | 39,258.00 |
| 1925 | 39,108.00 |
| 1926 | 55,833.00 |
| 1927 | 56,214.00 |
*2179 that James Otis, the said Trustee, made the disbursements as stated in his said fourteenth account without deduction of reserves or other provision for depreciation, under and pursuant to the advice of counsel learned in the law and retained by said Trustee, to the effect that under and by virtue of the terms of said Trust it was the duty of said Trustee to make such disbursements without such deduction; that said Trustee in making said disbursements without such deduction was entitled to rely upon said advice of the said counsel, and that said disbursements were so made by said Trustee in good faith and without objection on the part of either the said Napoleon Charles Louis Lepic and/or the said Charlotte de Rochecheouart, or any other person interested in said trust, and that no personal liability of any kind or nature should or does attach to said Trustee or to said James Otis by reason of having made such disbursements, or any of them, without deductions.
It is further ORDERED, ADJUDGED and DECREED that the recipients of the income of said trust estate during the period from February 23, 1913, to February 23, 1927, repay to the said Trustee the respective amounts received*2180 by them during the years 1913 to 1927, both inclusive, as set forth in said objections of the said Napoleon Charles Louis Lepic and Charlotte de Rochechouart as the respective amount which should have been retained by said Trustee as a reserve for depreciation for each said years 1913 to 1927, both inclusive.
It is further ORDERED, ADJUDGED and DECREED that from and after the year ending February 23, 1927, and until the termination of said trust, the said Trustee withhold annually as a reserve for depreciation from the income from the trust property such an amount as may be proper according to the rules and regulations prescribed by the Government of the United States in connection with income tax returns, and if there be no such rules or regulations then such an amount as may be reasonable and proper.
On January 17, 1929, Louise A. Whitcomb, Marguerite T. Whitcomb, Lydia L. Whitcomb, Charlotte A. W. Lepic, Napoleon Charles Louis Lepic, and Charlotte de Rochechouart executed and delivered *123 to the said James Otis, as trustee of said trust, their promissory notes for the amounts by which the distributions made to them exceeded the distribution which would have been made*2181 had the trustee retained a reserve for depreciation of the trust property. Charlotte A. W. Lepic, Napoleon Charles Louis Lepic, and Charlotte de Rochechouart executed a joint note. The other notes were separate notes of the individuals concerned. These notes bear no interest and by their terms are payable at the termination of the trust, which will be upon the death of Charlotte A. W. Lepic. A payment of $10,700 has been made to the trust by the estate of Louise P. V. Whitcomb.
The several petitioners in their returns of income for the years mentioned did not include the amounts paid to them in those years by the trustee representing their proportionate share of the depreciation sustained and deducted on the fiduciary return of the estate. The respondent increased the income shown on the several returns by said proportionate share of said depreciation, and determined deficiencies in tax as hereinabove set forth.
OPINION.
MARQUETTE: The sole question presented by the record herein is whether, under the circumstances set forth in the findings of fact, the petitioners in computing their respective incomes for the years 1921 to 1926, inclusive, should include therein that*2182 part of the amounts distributed to them by the trustee of the trust created by the last will and testament of A. C. Whitcomb, representing amounts deducted by the trustee in his fiduciary return on account of depreciation of the trust property.
The pertinent statutory provisions are sections 219(d) of the Revenue Act of 1921; 219(b)(2) of the Revenue Act of 1924, and 219(b)(2) of the Revenue Act of 1926.
1921 Act - Section 219(d):
* * * there shall be included in computing the net income of each beneficiary that part of the income of the estate or trust for its taxable year which, pursuant to the instrument or order governing the distribution, is distributable to such beneficiary, whether distributed or not, or, if his taxable year is different from that of the estate or trust, then there shall be included in computing his net income his distributive share of the income of the estate or trust for its taxable year ending within the taxable year of the beneficiary.
1924 and 1926 Acts - Section 219(b)(2):
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*2183 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.
*124 The intent of Congress in enacting the sections of law quoted was to tax each year to the beneficiary of any trust the share of the trust income which was distributable to him in that year, and to tax to the trustee in his fiduciary capacity any income which was not to be distributed. . We must therefore look to the will of A. C. Whitcomb to determine what part of the income of the trust under consideration was distributable to the petitioners.
The trust which produced the income in question was created by the last will and testament of A. C. Whitcomb, and it and its trustee or trustees are within the jurisdiction of the Superior Court of the State of California, in and for the City and County of San Francisco, and the decree of that Court respecting the trust, when not*2184 reversed or modified by a tribunal having appropriate appellate jurisdiction, is binding upon all the parties interested in the trust. Its decrees with respect to the trust are also binding on the several Federal courts. . That Court has determined and decreed that the trustee should have, prior to 1927, deducted from the gross income of the trust and retained in his possession amounts adequate to offset the depreciation of the trust property, and the trustee has been directed to deduct and retain amounts for depreciation in 1928 and thereafter. While the proceeding before the Superior Court may have been a friendly one, as is urged by counsel for the respondent, neverthless all parties interested in the trust, including Harvard College, the contingent remainderman, were notified and appeared in person or by counsel and the decree is binding on all of them and fixes the amount of income distributable to each beneficiary. . And the judgment of the Court is that during the years 1921 to 1926, inclusive, the petitioners were entitled only to the income of the*2185 trust after deducting and setting aside adequate amounts for depreciation of the trust property, and that they should repay to the trustee what they had received in excess of the proportionate share of the income so computed. In other words, no part of the payments made to them out of the amount deducted for depreciation belonged to them.
In the case of , we said in discussing a situation similar to the one here presented:
We must, therefore, look to the will of L. A. Brenneman to discover what was the distributable share of income of each of the petitioners. See Estate of Virginia I. Stern, supra. Paragraph (a) of the third clause of the will directs the trustees to "invest and from time to time reinvest the said trust estate * * *." And, in the same paragraph, it is provided that "the said trustees shall collect and receive the income or interest from said trust estate and pay out and disburse the same as hereinafter provided * * *." Paragraph (b) of the third clause directs the trustees "to set aside exclusively *125 for the use of my wife, one-third of said trust estate * * * and to pay her annually during*2186 her natural life the net income or interest therefrom * * *." Paragraph (g) of the third clause directs that "when my son and daughter arrive at the age of twenty-one years the trustees shall annually thereafter pay to each of them his or her share of the income and interests on the trust estate the payment to each to be proportionate to his or her share in said trust estate itself."
Prior to the years in question the trustees, with the acquiescence of the beneficiaries, interpreted the directions of the decedent to mean that only "net income" of the trust estate, as that term is used in the taxing statutes, should be distributed to the beneficiaries. Accordingly, they set up reserves to conserve the corpus of the trust. In 1917 and 1918, as well as the years in question, the trustees took deductions for depreciation and depletion of the oil-producing property and distributed to the beneficiaries only the net income so determined.
It is strenuously urged by the petitioners that the interpretation thus placed on the will cannot be collaterally attacked. It is undoubtedly true that as between the parties in interest an interpretation of long standing placed on the instrument*2187 by them will not be disturbed and the courts of Pennsylvania have so held. ; . We are not inclined therefore lightly to cast aside or disregard the interpretation placed upon the trust instrument by the parties thereto and adopt a contrary view as a basis for the taxes in question. See . We think that the decedent's will is susceptible of the interpretation placed thereon by the parties in interest and, consequently, we hold that the deductions for depreciation and depletion, the amounts of which are not in dispute, were properly taken by the trustees and do not constitute income to the beneficiaries. The respondent's action in restoring the amounts so taken as deductions by the trustees to taxable income of the respective beneficiaries is, therefore, reversed.
See also , ; and
In the present proceeding the facts are much more favorable to the contention of the petitioners than were the*2188 facts in the Brenneman case, because in that case amounts for depreciation and depletion of the trust property were deducted and retained by the trustee pursuant to a construction placed upon the will by the beneficiaries, while in the instant proceeding the will was construed by the courts and a decree entered announcing such construction and fixing the rights of the parties thereunder.
It is also urged by counsel for the respondent that the beneficiaries have not repaid to the trustee the amounts which according to the decree of the Court were overpaid to them, but have given notes payable at the termination of the trust. This, however, does not in our opinion change the situation. The amounts in question did not belong to the petitioners, and in our theory of the law can not be income to them. Whether the petitioners ever repay such amounts to the trustee is a matter between them and the trustee and the other parties interested in the trust.
*126 It is our opinion that under the terms of the last will and testament of A. C. Whitcomb the amount distributable annually to the petitioners herein during the years 1921 to 1926, inclusive, was the income of the trust*2189 computed by deducting from gross income amounts for depreciation of the trust property, and that the respondent erred in taxing to the petitioners more than their proportionate share of the net income of the trust so computed.
Reviewed by the Board.
Judgment will be entered under Rule 50.
MURDOCK, dissenting: The decedent died in 1889 and the trust in question, so far as we know, began to function shortly thereafter. The account which was objected to covered only the period from February 23, 1903, to February 23, 1928. Prior accounts must have been approved in which there was no deduction for depreciation. Wear, tear and exhaustion of property, sometimes called depreciation, does not depend upon revenue acts. Yet, we see that the objection of those opposing the account related to depreciation which had been sustained from 1913 to 1927 only. Nineteen hundred and thirteen was the first year that there was an income tax act which might affect these petitioners. We must assume that during all of the years that the trust existed, up to the year 1928, the income from the trust property, undiminished by any amount representing depreciation, had been paid*2190 regularly to those having life estates. During the taxable years here in question no one made any objection to this action of the trustee, and he had the advice of counsel that under the terms of the trust it was his duty to distribute the full amount to those having life estates. The will made no specific provision for depreciation, and the general rule in such cases is that the life beneficiaries take all income undiminished by depreciation. In re Hoyt,160 N.Y. 607">160 N.Y. 607; 55 N.E. 282">55 N.E. 282; Devenney v. Devenney,74 Ohio St. 96">74 Ohio St. 96; 77 N.E. 688">77 N.E. 688; Old Colony Trust Co. v. Smith (Mass.), 165 N.E. 657">165 N.E. 657; Blair v. Blair, 82 Kans. 464; 108 Pac. 827; Reed v. Longstreet,71 N.J.Eq. 37; 63 Atl. 500; Dooley v. Penland (Tenn.), 300 S.W. 9">300 S.W. 9.
There is no reason to suppose that this testator in 1889 intended that the income from his estate should be reduced by depreciation before being distributed to the life beneficiaries. *2191 . No reserve for depreciation was established or provided for by the trustee until several years after the taxable years involved. Then, apparently by mutual consent, a retroactive order of a court was obtained as a result of which the trustee in January, 1929, for the first time, was enable to show a reserve for depreciation of $622,434.11 on his books, although he had in his possession only *127 $10,700 returned by the estate of Louise P. V. Whitcomb. Others to whom distributions had been made, including those who objected to the account, gave the trustee their notes bearing no interest and payable only at the termination of the trust. These notes were supposed to restore to the trustee the balance of the amounts which had been distributed by him which in reality represented depreciation.
Louise P. V. Whitcomb, Charlotte A. W. Lepic, and Marguerite T. Whitcomb were the petitioners in the case of . That case involved the years 1917 to 1920. The petitioners there contended that, under the same will which is involved in this case, the net income of the trust, the distributable*2192 share of which was taxable to the beneficiaries, was the statutory net income divided into the number of shares provided in the will. We there held, on April 23, 1926, that the life beneficiaries were taxable with their full distributable share of the income of the trust undiminished by depreciation. Marguerite T. Whitcomb appealed from the decision of the Board in that case as to the year 1918, to the Court of Appeals of the District of Columbia. The facts as to that year were similar to the facts before the Board in the present case. The Court, in affirming the Board's decision, stated:
The appellant as life tenant in the trust estate was entitled to receive the full one-ninth of the income therefrom without regard to exhaustion or wear and tear of the corpus of the estate, and that is what appellant actually received from the trustee as her distributive share of the income. The trustee was not entitled to withhold any part of the income of the trust estate in order to make good the exhaustion or wear and tear of the capital assets of the estate; nor did the trustee in fact do so. Capital losses in such cases fall upon the reversioners or remaindermen, and not upon the life*2193 tenant. Therefore, the payment made by the trustee to appellant was in fact and law the distributive share of the income to which she was entitled as life tenant, and consisted in no part of capital depreciation restored to her. It was therefore taxable in her hands. This conclusion is not negatived by the fact that the trustee was entitled to enter deductions for capital losses or gains in his return for the trust estate as a single entity.
This decision of the court was rendered on April 2, 1928. Prior thereto, on January 14, 1925, the Circuit Court of Appeals, First Circuit, had decided similarly in ; certiorari denied, . Thereafter, on September 5, 1928, the trustee filed the account and the question of his duty to reserve depreciation was raised for the first time. There was a close family relation between the life beneficiaries and the remainder men who made the objections to the account. It is easily conceivable that the only benefit sought from the probate court proceeding was support for the position taken by the life beneficiaries in excluding *128 from their income tax returns*2194 the amounts representing depreciation, and thus avoidance of the effect of the adverse decisions of this Board and of the Court of Appeals of the District of Columbia on their income tax liability for other years. During all of those years the petitioners actually received and enjoyed the amounts here in controversy, and during those years they had no reason to suppose that their enjoyment of these amounts would ever be questioned. The only reason that even a semblance of question arose was because some of those persons who were enjoying the amounts, in effect, asked the probate court to hold that they had no right to enjoy them, and nobody objecting, the court so held. Under such circumstances, I do not believe that they should be relieved from including as a part of their gross income the full amount which they received and enjoyed during each of the taxable years in question. Cf. ; .lucas v. ; . If the trustee erred in failing to deduct depreciation before distributing the income of this trust, the error*2195 had its inception long prior to the taxable years in question and long prior to 1913. The amount returned to the trustee in 1928 and the amount of the notes delivered to him at that time, then represent only a part of the amounts erroneously distributed, and there was no reason for holding that it was the amounts they received in the taxable years which they returned. The order of the court will, of course, have its effect prospectively upon distributions, but under the circumstances of this case I do not think it should be given retroactive effect to accomplish the purpose sought by these petitioners. Cf. ; .
SMITH, STERNHAGEN, PHILLIPS, ARUNDELL, and BLACK agree with this dissent.