*782 Where under the state law capital gain from the sale of stock becomes part of the corpus and is not distributable to the beneficiaries as income from the trust estate, and under the terms of the will corpus is distributable only at the discretion of the trustees, capital gain so realized is taxable to the trust estate whether distributed or not.
*1125 These proceedings involve a deficiency in income tax in the amount of $200.69 for the taxable year 1930. The question for determination is whether the gain realized from the sale of certain securities is taxable to the fiduciaries as income of the trust estate.
FINDINGS OF FACT.
The facts are stipulated as follows:
Fred N. Chambers died on May 3, 1918, a resident of Pennsylvania. His will was probated in Venango County, Pennsylvania. Petitioners in this case are the Trustees under said will. A copy of said testator's will, identical with the copy admitted in evidence as Petitioners' Exhibit 1 at the trial of the petitioner's cases before the Board of Tax Appeals on October 10, 1932, under*783 Docket Nos. 55713 and 64538, is attached to the petition filed in this case and the same is made a part of this stipulation by reference.
That said Testator left to survive him his widow, Anna M. Chambers and a daughter, Thalia Lee Chambers. The daughter became of age in the year 1919. and her married name is Thalia C. Taylor. The said widow and daughter are the same persons named under the trust created by said testator in his will.
That the will of the decedent, Fred N. Chambers, referred hereinabove in Paragraph 1, was previously considered by the U.S. Board of Tax Appeals in the cases of Anna M. Chambers and Thalia C. Taylor, Docket Nos. 17686, 17799 and 26057, and that the Board's opinions and decisions in those cases are published in U.S.B.T.A. Reports, Vol. 17, page 820.
For the year 1930, petitioners filed a Federal income tax return for the estate of Fred N. Chambers, a photostatic copy of which, marked Exhibit "A", is attached hereto and made a part hereof. In Schedule C of said return, petitioners reported a profit of $9,773.57 from the sale of the certain securities, which securities, or the securities from which they were exchanged, comprised a portion of*784 the Estate of Fred N. Chambers at the time of testator's death and the value shown in column headed "cost" are the appraised values as fixed for Federal Estate Tax purposes.
In auditing the return, the Commissioner determined the profit from the sale of the said securities to be $9,913.85.
* * *
*1126 There is no dispute between the parties that the correct amount of profit from the sale of the assets in question is $9,913.85. This profit of $9,913.85 has been arrived at by both the petitioners and the respondent, by the use of the same figures, to-wit, the difference between the respective values of said assets, as appraised by the Treasury Department for estate tax purposes, which were accepted by all parties in interest, and the sale price of said assets; and said values are deemed to have been no different at the time of their distribution to petitioners under the terms of testator's will.
In the individual income tax returns of Anna M. Chambers and Thalia C. Taylor for the calendar year 1930, each of them reported one-half of the net income as shown in Exhibit "A" of this stipulation.
* * *
During the year 1930 the trustees of said trust estate actually*785 distributed and paid to Thalia C. Taylor one of the beneficiaries of said trust estate the sum of $10,500.00 in cash or the equivalent thereof.
During the year 1930 the trustees of said trust estate actually distributed and paid to Anna M. Chambers, one of the beneficiaries of said trust estate, the sum of $10,500.00 in cash or the equivalent thereof. For the year 1930, the total net income of the trust estate from all sources was the sum of $16,967.28.
Under the will of Fred N. Chambers his residuary estate was devised and bequeathed to Anna M. Chambers and William J. Gealy, petitioners here, and the survivor of them to have and to hold jointly, in trust for the following uses and purposes:
THIRD. - * * *
b. To keep said estate together and intact as to principal except as hereinafter provided, and the income thereof to divide into two equal portions; one-half of said income, or so much thereof as may be necessary, is to be used by said trustees for the support and education of my daughter, Thalia Lee Chambers, until she shall arrive at full age, and after she shall be of full age, said trustees shall pay over to her, the said Thalia Lee Chambers, during her natural life, *786 so much of the income from said one-half of my said residuary estate, as in the discretion of said trustees may be proper and necessary for her proper use and maintenance in a suitable manner; said estate and income, however, not to be liable in any was for the debts, contracts, or liabilities of my said daughter, Thalia Lee Chambers, or any husband she may have; provided, however, that said trustees, should they deem said income not sufficient for the proper education or maintenance of my said daughter, may use so much as may be necessary of the principal for said purposes; and further, said trustees, after my said daughter shall be of full age may allow her such control over said estate or any part thereof as in their judgment may be to her best interests, and may after she becomes of full age, assign or pay over to her, absolutely, a part or all of the principal of her share of said estate; any income from said half of said estate, not used for my daughter nor paid over to her, shall be kept separated and invested for her benefit and shall not go in any way to increase the remaining one-half of said estate; at the death of my said daughter, all of said one-half of said residuary*787 estate and accumulated income not distributed shall be paid to the lawful issue of said Thalia Lee Chambers, if she leave any to survive her, and if she leave no lawful issue then it shall be paid to my said wife, Anna M. Chambers.
c. The income from the remaining one-half of said residuary estate is to be paid by said trustee at least semi-annually, to my said wife, Anna M. Chambers, *1127 during her natural life, and at her death the undistributed principal from which said income is derived, is to be paid as she may by her will direct, and if she leave no will to the persons who under the intestate laws of the State of Pennsylvania would be entitled to her estate, and in the same proportion as they would take under said intestate laws; neither said principal however nor income shall be liable to attachment in the hands of said trustees, for any debts, contracts or liabilities of my said wife, Anna M. Chambers; after my daughter becomes of full age, however, and should at any time thereafter said trustees, or the survivor of them, determine to pay over and distribute to my said daughter any share of the principal of my said estate as hereinbefore provided, then they shall*788 at the same time likewise pay and distribute to my said wife a like part of her share of my estate, so that the principal of said estate in the hands of said trustees, or the survivor, shall always be held by them, one-half for my said daughter and one-half for my said wife, and no distribution of said principal shall be made to one of the two, without the making of a like distribution to the other.
OPINION.
ARNOLD: The question here before us is whether the capital gain of $9,913.85 from the sale of securities is taxable to the petitioners. This question is controlled by the will of Fred N. Chambers and the laws of Pennsylvania applicable thereto.
The petitioners considered that the entire net income of the estate - including the gain from the sale of corpus - was yearly distributable to the two beneficiaries in equal amounts and they made the return for the estate on that basis, using form 1041.
The respondent considered that the profits from the sale of the corpus of the estate were not part of the income of the estate which was distributable, and that such gains were taxable to the estate since they were accumulated to and became a part of the corpus of the estate.
*789 These questions were raised and were considered by us in ; affd., , which involved the same will, and gain from the sale of capital assets by the same trust estate in 1927 and 1929. We there held that where, under the state law of Pennsylvania, capital gain from the sale of stock becomes a part of the corpus and is not distributable to the beneficiaries as income from the trust estate, and under the terms of the will corpus is distributable only at the discretion of the trustees, capital gain so realized and not distributed is taxable to the fiduciary. In our opinion in that case, after reviewing the law and some of the applicable decisions of the Supreme Court of Pennsylvania, we said:
Clearly, under the laws of Pennsylvania, capital gain from the sale of stock becomes a part of the corpus and is not distributable to the life tenant as income from the estate. Only where such gain is shown to represent income is it distributable to the life beneficiaries. Here there is no showing that any of the gain in question represents income. * * *
*790 *1128 Admitting that all income from the trust estate was distributable to the beneficiaries, and taxable to them whether distributed or not, the corpus, or any part of it, was distributable only at the discretion of the trustees. The capital gain which became a part of the corpus of the trust is not income distributable under the will to the beneficiaries, and is not taxable to them. Cf. ; . The petitioners have failed to show that any part of the gain here in question was from income or that it was actually distributed.
There is no controversy concerning the ordinary net income of the trust, arising from rents, interest, dividends, etc., which were currently distributable to the beneficiaries.
The capital gain in question must be taxed to petitioners unless the statute authorizes its deduction in computing the taxable income of the trust estate. The applicable sections of the Revenue Act of 1928 are set out in the margin. 1 In *791 , we held that such capital gains are not deductible under section 162(b). It remains to be determined whether they are deductible under section 162(c).
*792 We think the word "income" as used in section 162(c) includes gain from the sale of corpus which is distributed as income but does not apply when under the laws of the state it is a part of the corpus of the estate and is not distributable as income. This construction is, we think, further justified when we examine the whole section, which must be considered in its relation to other sections of the act in arriving at the content of the word "income." It is provided in (c) that "the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary" but under section *1129 22(b)(3) of the Revenue Act of 1928 2 a legatee, heir, or beneficiary is not taxable on the corpus of an estate which is distributed to him under the provisions of the will. Cf. . He is, however, taxable upon amounts paid to him as an ordinary beneficiary of income. Cf. ; . The fact that under the revenue laws capital net gain is taxable income does not prevent such gain from becoming a part of*793 the corpus of the estate immediately upon its realization nor change its character to income when distributed by the trustees under a power given them by the will to distribute corpus. If, as here, such gain is in fact distributed by the trustees under their discretionary power to distribute corpus, it is a distribution of corpus to the heirs, legatees, or beneficiaries under the will, and is not deductible by the fiduciary, cf. .
In , the Court held that payments of an annuity given to the testator's wife, payable at all events, and so not dependent upon the income of the trust estate, were not deductible from the income of the trust estate and were taxable to the fiduciary. In holding she took as an ordinary legatee*794 the Court said, "Paytments to her were not distribution of income but in discharge of a gift or legacy."
We think the capital gain here in question was distributed to the beneficiaries as legatees of the decedent. It was a distribution of corpus of the estate, and, following the reasoning of , and , is not deductible in determining the net income of the petitioners.
Reviewed by the Board.
Decision will be entered under Rule 50.
STERNHAGEN and MURDOCK concur in the result.
Footnotes
1. SEC. 161. IMPOSITION OF TAX.
(a) Application of tax. - The taxes imposed by this title upon individuals shall apply to the income of estates or of any kind of property held in trust, including - (1) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust; (2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct; (3) Income received by estates of deceased persons during the period of administration or settlement of the estate; and (4) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.
(b) Computation and payment. - The tax shall be computed upon the net income of the estate or trust, and shall be paid by the fiduciary, except as provided in section 166 (relating to revocable trusts) and section 167 (relating to income for benefit of the grantor). For return made by beneficiary, see section 143.
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 -
* * *
(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;
(c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, 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 properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary. ↩
2. SEC. 22. GROSS INCOME.
(b) Exclusions from gross income. - The following items shall not be included in gross income and shall be exempt from taxation under this title:
(3) GIFTS, BEQUESTS, AND DEVICES. - The value of property acquired by gift, bequest, devise, or inheritance (but the income from such property shall be included in gross income). ↩