*851 1. By his will the decedent left his property in trust, the income to be paid to his widow for life, and in the event the income was insufficient to provide for her suitable support, comfort, and maintenance the trustee was authorized to invade the corpus for such purpose. The trustee was also authorized to pay her $25,000 per annum from the corpus of the trust to be used by her for charitable purposes or for the support of relatives. Upon her death the trust estate remaining was to be divided into two parts, one of which was to pass under the widow's will or to her next of kin and out of the remaining half specific bequests aggregating $100,000 were to be paid to the decedent's relatives. If that half was insufficient to pay such bequests in full, they were to be ratably abated. If there was a surplus it was to be divided into two equal parts, one of which was to go to decedent's relatives and the other to charity. During the taxable years the petitioner realized capital gains which under Ohio law became a part of the trust corpus. Held, no part of such capital gains was "permanently set aside" for charitable purposes within the meaning of section 162(a) of the Revenue*852 Act of 1934, and petitioner is entitled to no deduction thereunder.
2. Petitioner properly ascertained certain debts to be worthless in the taxable years and is entitled to the deductions claimed.
*600 The respondent determined deficiencies in income tax for the years 1935 and 1936 in the respective amounts of $323.40 and $300.24. The petitioner claims an overpayment of tax. The issues are (1) whether any part of capital gains realized by petitioner during the taxable years, which under Ohio law became a part of the trust corpus, was permanently set aside for charitable purposes within the meaning of section 162(a) of the Revenue Acts of 1934 and 1936 so as to entitle petitioner to deductions from gross income, and (1) whether petitioner is entitled to deductions for certain debts ascertained to be worthless in the taxable years.
*601 FINDINGS OF FACT.
The decedent, Edward A. Langenbach, a resident of Canton, Ohio, died testate on September 8, 1934, and was survived by his wife, Rosa Langenbach. The petitioner is executor of the decedent's*853 estate and testamentary trustee under his last will and testament. It filed income tax returns for 1935 and 1936 with the collector for the eighteenth district of Ohio.
By his last will and testament the decedent directed that his property be set up in a trust for certain specific uses and purposes. Item IV of his will provided in part as follows:
The trustee is directed, after deducting its proper and necessary expenses in connection with the administration of the trust estate, ot pay and apply the net income thereof to my beloved wife, Rosa Langenbach, in quarterly installments or oftener per annum, during the term of her natural life and in addition thereto, the trustee is authorized and empowered to pay to her from the principal of the trust estate, such sum or sums at any time or times as it shall deem necessary or proper to provide for her suitable support, comfort and maintenance, should her income from this or from other sources, prove in the judgment of the trustee, inadequate for such purposes. * * *
The trustee was also authorized and empowered to pay to Rosa Langenbach from the principal of the trust estate not to exceed $25,000 per annum to be used by her for*854 any charitable purposes or for the comfort, support, education and maintenance of any of her or the testator's relatives as she in her discretion desired. Upon the death of Rosa Langenbach the trust estate remaining was to be divided into two equal shares, one of which was to be paid and distributed to such persons and upon such terms and conditions as Rosa Langenbach provided in her last will and testament, and in default of the exercise of such power, such share was to vest in her next of kin. Out of the remaining share (representing one-half of the trust estate) the decedent made specific bequests to brothers and sisters aggregating $100,000, with the provision that if said share was insufficient to pay such bequests in full, then they would be ratably abated or diminished. Then the will provided:
If this said share of my estate which represents one-half (1/2) of the trust estate remaining at the time of my wife's decease shall prove more than sufficient to pay all of the legacies and bequests above mentioned, then one-half (1/2) of such over-plus shall be paid and distributed, share and share alike to my brother and sister, Raymond Langenbach and Olivia Falla. Or, in event*855 they predecease me to such person or persons and upon such terms and conditions as he or she may or shall provide by Last Will and Testament and in default of the exercise of such power of testamentary disposition, or insofar as the same shall be void or fail to take effect, to his or her issue, PER STIRPES and in default of issue, to his or her next of kin, under the laws and statutes of the State of Ohio relating to descent and distribution, in force and effect at the time of my decease.
The remaining one-half (1/2) of such surplus shall be set saide and effect the trustee in trust, to pay and distribute the same both as to principal and *602 income to such charitable institutions and for such charitable purposes as the trustee and my advisors hereinafter named or their successors shall in their absolute discretion deem to be of the greatest importance in maintaining the sound health and general welfare of the citizens of Canton and its immediate environs.
As of September 8, 1934, the date of death, the net value of the estate of Edward Langenbach was appraised for estate tax purposes at $1,111,517.90 and there was no depreciation in the value of the corpus of the estate*856 from that date until December 31, 1936.
Rosa Langenbach had a claim against her husband's estate and in 1936 received in settlement thereof the sum of $872,984.71. She also received the amount of $202,150.33 as proceeds from life insurance on his life. On December 31, 1936, she was the owner of three farms located in Stark County, Ohio, on which there were two producing gas wells. On December 31, 1936, the value of her personal estate, consisting of cash deposits in seven different banks, common and preferred stock, various bonds, and similar investments, based on prevailing market prices on that date, was more than $1,000,000.
Exclusive of capital gains and losses, the income of Rosa Langenbach for the years 1935 through 1940, from her personal estate and from petitioner as trustee of the estate of Deward A. Langenbach, was as follows:
| Year | Personal income | Income from trust estate | Total |
| 1935 | $10,645.83 | $83,554.00 | $94,199.83 |
| 1936 | $38,812.84 | 169,741.91 | 203,554.75 |
| 1937 | 31,225.08 | 134,370.89 | 165,595.97 |
| 1938 | 16,850.14 | 40,108.12 | 56,958.26 |
| 1939 | 30,964.82 | 120,295.38 | 151,260.20 |
| 1940 | 38,569.92 | 155,515.18 | 194,085.10 |
| Total | 162,068.63 | 703,585.48 | 864,654.11 |
*857 Under that provision of the decedent's will directing that the trustee of his estate pay to Rosa Langenbach an amount not to exceed $25,000 per year from the principal of the trust estate to be used by her for charitable purposes or for the support and maintenance of relatives as she in her discretion desired, the said Rosa Langenbach up to the date of hearing had received $25,000 on January 2, 1936, $25,000 on January 7, 1936, $25,000 in 1937, $25,000 in 1938, $25,000 in 1939, and $25,000 in 1940.
For the years 1935 through 1939 Rosa Langenbach paid Federal income taxes as follows:
| 1935 | $3,078.14 |
| 1936 | 52,683.26 |
| 1937 | 63,340.91 |
| 1938 | 13,298.91 |
| 1939 | 38,947.23 |
*603 At the time of the decedent's death Rosa Langenbach was 62 years of age. For many years prior to his death the decedent and his wife occupied a suite of rooms at the Courtland Hotel, Canton, Ohio, which have since been occupied by , mrs. Langenbach. The rental for the rooms has been approximately $100 per month. Their manner of living was not extravagant. They kept no servants during their joint lifetime and Mrs. Langenbach has had none since the decedent's death. On December 1938*858 Mrs. Langenbach fell and suffered a fracture of her hip and since that time has been a semiinvalid, spending a great deal of time in hospitals.
During the taxable years 1935 and 1936 the petitioner sold certain assets of the trust estate from which it realized capital gains in the respective amounts of $98,366.63 and $54,611.50, of which $90,391.44 was taxed to the petitioner as income in 1935 and $47,226.87 in 1936. The parties have stipulated that such capital gains were not distributable to the life beneficiary under the law of the State of Ohio. Petitioner paid Federal income taxes for the years 1935 and 1936 in the respective amounts of $25,978.31 and $8,230.08.
Petitioner's decedent was an endorser on a certain promissory note dated October 20, 1933, payable to the George D. Harter Bank, Canton, Ohio, on December 31, 1933, in the principal amount of $2,350, the maker of the note being Francis D. Headley. The bank advised petitioner that Headley could not pay the note and requested petitioner to pay it. Petitioner made an investigation of Headley's financial responsibility and concluded that he was unable to pay the debt. He was a man between 65 and 70 years of age*859 and the only assets owned by him were a residence which was heavily mortgaged and some stock in an insurance agency operated in the City of Canton, which stock was pledged on another obligation of $4,000 held by the First National Bank of Canton, Ohio. On November 27, 1935, petitioner paid the Harter Bank the sum of $2,473.20 in full payment of the principal and interest due on the note. The petitioner properly ascertained the debt to be worthless when the payment was made in 1935.
Petitioner's decedent was an endorser on a certain promissory note dated April 19, 1933, payable to the George D. Harter Bank, Canton, Ohio, on July 18, 1933, in the principal amount of $160, the maker of the note being Emma R. Marshall. The bank advised petitioner that the maker could not pay the note and requested petitioner to make payment thereof. Emma R. Marshall died in the spring of 1935, leaving no estate whatever. On September 10, 1935, petitioner paid the bank the sum of $169.85 in full payment of the principal and interest due on the note. Petitioner properly ascertained the debt to be worthless when the payment was made in 1935.
*604 Petitioner's decedent was an endorser on*860 a certain promissory note dated June 10, 1933, payable to the First National Bank, Canton, Ohio, on August 10, 1933, in the principal amount of $1,300, the makers of the note being Gladys H. Danford and D. C. Danford, her husband. This note was secured by 3/1000 interest in a certain land trust certificate on property on Chester Avenue, Cleveland, Ohio. Prior to the decedent's death the First National Bank tried to collect the note from the makers, but but was unable to do so. At that time D.C.Dandford was an employee in the decedent's office. Since the decedent's death in 1934 Danford has been employed only occasionally. In 1935 the bank requested petitioner to pay the note. After an investigation petitioner concluded that the makers were unable to pay the note and had no financial responsibility. On July 13, 1935, petitioner paid the bank the sum of $1,329.25, being the entire balance of principal and interest due on the note. The bank turned over to petitioner the land trust certificate which had been put up as collateral, at which time said certificate had a fair market value of $180. The Danfords were divorced in 1937 and sometime thereafter Gladys H. Danford remarried*861 and is now living in Cleveland. Direct contact with her has failed to secure any payment on the debt. The petitioner property ascertained that in 1935 the debt, minus the fair market value of the collateral acquired, was worthless.
Urban C. Schwertner and Charlotte J. Schwertner were the makers of a certain promissory note in the face amount of $5,000, dated February 21, 1934, and payable to the order of the Dime Savings Bank of Canton, Ohio. Petitioner's decedent executed and delivered to the Dime Savings Bank an instrument guaranteeing the payment of the note. Following the decedent's death his estate held a claim against the bank in the amount of $124,669.34 and in the settlement of that claim in 1936 the principal amount of the note was deducted in satisfaction of the obligation incurred by decedent on said guaranty. Shortly prior to the settlement of the claim Urban C. Schwertner died, leaving no estate from which the debt could be paid, and it could not be collected from Charlotte J. Schwertner. Petitioner properly ascertained the debt to be worthless when the settlement was made in 1936.
OPINION.
TURNER: The petitioner, relying particularly on *862
*863 Petitioner interprets the will to say that upon the death of Rosa Langenbach the estate is to be divided into halves, one of which is to pass under her will, otherwise to her relatives, while the other half is to be further divided into two equal parts, one such part, or 25 percent of the whole estate, to be used in paying specific legacies, and the remaining part, or 25 percent of the whole, to go to charity. On brief, it is stated: "Of great significance is the provision following the bequests of the specific legacies for the testator there provided that if one fourth of the corpus of his estate was not sufficient to pay the legacies in full, then the specific bequests were to be ratably abated or diminished in certain proportions. There was to be no diminution of the amount going to charity. We submit that the testator could not have been more specific and more clear in giving expression to an intention that 25 percent of the corpus of his estate was to go for charitable purposes." The petitioner argues that the probability of invading the trust corpus to supply support, comfort, and maintenance for Rosa Langenbach is too remote to be of any moment, *864
A major difficulty with the petitioner's claim and the argument thereon is that it is predicated upon an erroneous interpretation or impression of the terms of the will. Under the will the trustee is authorized and empowered to pay to Rosa Langenbach such sum or sums as it deems necessary or proper "to provide for her suitable support, comfort and maintenance, should her income from this or from other sources prove, in the judgment of the trustee, inadequate *606 for such purposes." The trustee is also authorized and empowered to pay to Rosa Langenbach from the principal of the trust estate $25,000 per annum to be used by her for any charitable purpose or for the support and maintenance of relatives as she in her discretion determines. Upon her death the trust estate remaining is to be divided into two equal*865 parts, one of which is to pass according to the terms of her will, otherwise to relatives, while the remaining one-half is to be applied in the payment of specific bequests to the decedent's brothers and sisters. If such remaining one-half of the trust estate is insufficient to pay the said legacies, then the legacies are to be ratably abated or diminished, in which case no amount goes to charity. If, however, the said remaining one-half of the trust estate is more than sufficient to pay such legacies, then the "over-plus" is to be divided in two equal shares, one of which is to go to the decedent's brothers and sisters and the other for charitable purposes as specified.
It is apparent therefore that we may not without qualifications say that any part or percentage of the trust corpus has been permanently set aside or will ever be used for charitable purposes. Before that may be said a number of contingencies and conditions must be met. The petitioner, due possibly to its erroneous reading of the will, deals with only one of those contingencies, namely, the likelihood or probability of invasion of the trust corpus for the purpose of providing for the support, comfort, and maintenance*866 of Rosa Langenbach, and assumes that except for that contingency 25 percent of the estate is, under the terms of the will, definitely marked for charity. If that were so, we might be able to conclude, as the petitioner contends, that the probability of invading corpus for that purpose is so remote that
With respect to the issues involving the bad debt deductions, we think the petitioner's contentions must be sustained. The facts show that petitioner was required to make good the decedent's guaranty on the four notes and without any extended discussion of the facts we think it will suffice to say that the record convinces us that the petitioner properly ascertained the debts to be worthless when the notes were paid off. We accordingly hold that, except for the collateral received on the Danford note, petitioner is entitled to the deductions claimed.
The parties have stipulated that for 1935 and 1936 there should be excluded from the income of the petitioner the respective amounts of $435 and $180, said amounts representing the reduction of decedent's liability as guarantor or endorser of notes of Mercy Hospital, Canton, Ohio; further that for 1935 there should be excluded from petitioner's income the sum of $225 representing the excess of decedent's liability as guarantor or endorser on the notes of Kenneth Miller over the appraised value of the estimated recovery on said note.
Decision*869 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. ↩