*248 Decision will be entered under Rule 50.
1. Petitioner was to receive income from certain property placed n a testamentary trust, to be paid by the executor until such time as the property was distributed to the trustee. Under the terms of the will, income from the trust was to be applied to any family allowance paid petitioner during the administration of the estate. Held, income from such property during the taxable years in question in amounts equal to the family allowance paid to petitioner was not distributable to petitioner and, under section 162 (b) of the Internal Revenue Code, is not taxable to petitioner.
2. Held, further, until such time as the trust properties were distributed to the trustee, section 23 (l) (2) of the Internal Revenue Code is not applicable, and petitioner is not entitled to any depreciation for buildings on the trust property prior to such distribution.
*617 The Commissioner determined deficiencies in income tax for the years 1944 and 1945, in the amounts of $ 15,179.49 and $ 3,150.95, respectively, and a deficiency in income and victory tax of $ 8,048.48 for the year 1943.
Two issues are involved (1) whether the Commissioner was correct in requiring petitioner to include as income for the taxable years in question during the administration of the estate, all the income (with exceptions not here important) of a testamentary trust established for the widow petitioner on the grounds that said income was distributable*250 to petitioner under section 162 (b), I. R. C., during said period of administration; and (2) whether petitioner is entitled to deduct some depreciation on buildings which were a part of said trust while the estate was in process of administration and prior to the time the executor distributed the assets to the trustee.
Some of the facts were stipulated.
FINDINGS OF FACT.
The stipulated facts are so found and are incorporated herein.
Petitioner is the widow of James E. MacMurray, and resides in Pasadena, California. Federal income tax returns for 1943, 1944, and 1945, were filed with the collector of internal revenue for the sixth district of California.
James E. MacMurray died on July 1, 1943, leaving a gross estate of over four million dollars. On August 3, 1943, the Superior Court, Los Angeles, California, ordered his will admitted to probate, appointed Herbert L. Hahn executor of the estate, and ordered a family allowance of $ 1,750 per month, commencing July 1, 1943, paid petitioner. The estate consisted of certain trusts, one of which was for petitioner, and a residue, two-sixteenths of which was to go to petitioner outright, and two-sixteenths of which was to go to the trust*251 set *618 up for petitioner. Provisions of the will applicable in this action are as follows:
SECOND: * * * If my wife, KATHYRN MacMURRAY, shall not, prior to probate of this Will, have elected whether she shall take under this Will or the rights given her by law, she shall in due course make such election. She shall, in any event be entitled to a family allowance out of my estate. * * *
* * * *
SIXTH: To my wife, KATHRYN MacMURRAY, in trust, to hold, manage and distribute as herein provided, I give [two specific pieces of business realty and all improvements thereon] * * *.
(a) There shall be first paid out of the income all interest and required periodical principal payments except the last principal payment due on any encumbrance existing on the trust property at the date of my death or placed on said property thereafter. The balance of the net income available for distribution shall be paid in quarterly or other convenient installments to my wife, KATHRYN MacMURRAY, during her life.
(b) Upon the decease of my wife, KATHRYN MacMURRAY, this trust shall terminate, and the trust estate, and all accumulations thereon, shall go and be distributed as follows: * * *
* * * *252 *
ELEVENTH: All the residue of my estate I give, devise and bequeath as follows:
(a) TWO-SIXTEENTHS (2/16ths) thereof to my wife, KATHRYN MacMURRAY, if she survives me. * * *.
(b) TWO-SIXTEENTHS (2/16ths) thereof shall be added to and become a part of the gift in trust set forth in article SIXTH hereof.
* * * *
TWELFTH: The following provisions shall apply to each of the trusts created in article SIXTH * * * of this Will:
(a) The interests of beneficiaries in principal or income shall not be subject to claims of their creditors or others nor to legal process, and may not be voluntarily or involuntarily alienated or encumbered.
(b) Each is a trust for maintenance, and I direct that the income from each trust estate be paid to the beneficiaries hereunder by my Executor, beginning from the date of my demise and continuing until distribution of each trust estate to the Trustee; provided, however, that as to any income from my estate payable to my said wife, the same shall be applied upon any family allowance that may be granted her to the end that if the income to which she is entitled is less than said family allowance then from the principal of my estate there shall only be*253 paid upon said family allowance the difference between the said income and said family allowance, and if said income payable to her exceeds said family allowance then none of said family allowance shall be paid from the principal.
Petitioner filed her election to take under the will on January 24, 1944.
The court, on April 3, 1944, entered an order continuing the family allowance to petitioner of $ 1.750 per month. In its "Order Settling Second Account Current of Executor and Supplement. Thereto, and For Partial Distribution and Modification of Family Allowance" of August 30, 1944, the court ordered distribution of the realty passing under the testamentary trust created by article Sixth of the will to *619 petitioner as trustee. It also reduced the family allowance paid to petitioner to $ 400 a month commencing September 1, 1944.
The order for final distribution of the estate was entered March 28, 1946.
In determining the amount of income distributable to petitioner during the years that the estate was in the process of administration, the executor subtracted from the income attributable to the property passing to petitioner under articles Sixth and Eleventh of the will, *254 an amount equal to the money paid petitioner as her family allowance. Until distribution of the realty to the trustee, the amount equal to the family allowance was first charged against income received from the real property given in trust under article Sixth of the will. Any deficit was then charged against four-sixteenths of the residuary income, since, for purposes of accounting until distribution, the executor treated as a single item the two-sixteenths of the residue which under article Eleventh (b) passed to the trust established for petitioner under article Sixth and the two-sixteenths of the residue going to petitioner outright under article Eleventh (a). In those cases where such a deficit did exist, it was less than income of the two-sixteenths of the residuary estate passing to the trust.
After the realty was distributed and the family allowance reduced to $ 400 per month, the family allowance was charged against the income of the residuary. Again in all instances it was less than the income of two-sixteenths of the residuary. The excess of the trust income over the family allowance was distributed to petitioner under appropriate court orders. She reported such excess, *255 together with other income from the estate, not material here, in her Federal income tax returns for 1943, 1944, and 1945. The executor included the income equal to the amount paid to petitioner as family allowance in the Federal income tax returns of the estate for each of the years and paid tax on it.
All cash of the estate, whether corpus or income, was placed in a single bank account. All drawings were made against this account.
Petitioner claimed no depreciation for the buildings upon the land placed in trust under article Sixth of the will in her Federal income tax returns for 1943 or 1944, prior to their distribution to the trust, but now maintains she is entitled to some depreciation on such buildings. Prior to such distribution, the executor deducted the entire depreciation in determining net taxable income for the estate, but did not subtract it in determining the net distributable income to the petitioner
The income from the trust properties withheld by the executor during the taxable years in question was not distributable and therefore not taxable to petitioner.
*620 Prior to the qualification of the trustee and distribution of the assets of the trust to the trustee, *256 petitioner is not entitled to depreciation on the trust realty.
OPINION.
The first issue is whether, while the estate was in the process of administration, the executor, for the purpose of determining the amount of trust income distributable to petitioner pursuant to the terms of the will, properly arrived at the amount of income so distributable by subtracting from the income of the testamentary trust created for petitioner (which was a part of the gross estate) an amount equal to the family allowance awarded her by the California court. Respondent's contention is that such a reduction to determine net distributable income to petitioner was erroneous and income equal to such an amount was currently distributable to, and therefore taxable to, petitioner under section 162 (b) of the Internal Revenue Code1 for each of the years in controversy. Petitioner maintains that such a reduction was correct, and that the estate properly reported such amount as estate income and paid Federal income tax thereon.
*257 It is well settled that a family allowance paid the widow of a California decedent is not taxable to her as income nor deductible by the estate for Federal income tax purposes. Cf. Title Insurance & Trust Co., Executor, 25 B. T. A. 805 (1932). While petitioner cites cases to the effect that during the administration of an estate only section 162 (c) 2 of the Internal Revenue Code applies, to the exclusion of section 162 (b), such cases are distinguishable from the instant case. In none of those cases was the executor, under the terms of the will, to pay the trust income to the beneficiary in the interim *621 between the testator's death and the distribution of the trust res to the trustee. Cf. Estate of Peter Anthony Bruner, 3 T. C. 1051 (1944); The First National Bank of Memphis, Tennessee, Executor, 7 T. C. 1428 (1946), affd. (CA-6, 1948), 168 Fed. (2d) 431; Marie B. Hirsch, 9 T. C. 896 (1947).
*258 Since, here, the will in article Twelfth (b) specified that the executor was to pay the income from the trust property to petitioner until the assets were distributed to the trustee, section 162 (b) is applicable. Estate of Austin C. Brant, 44 B. T. A. 1306 (1941). We must determine, therefore, whether it was erroneous to subtract the family allowance from the income of the trust to determine the net distributable income to the petitioner. If it were erroneous, then an amount equal to it was currently distributable and therefore taxable to petitioner. It would be immaterial whether it was or was not so distributed; it would still be deductible in the estate Federal income tax return and includible in petitioner's. Regulations 111, Section 162-1 (b). Estate of Peter Anthony Bruner, supra.
Section 680 3 of the California Probate Code provides for a family allowance to a widow "out of the estate." The right to such an allowance is purely statutory. In re King's Estate, 19 Cal. (2d) 354, 121 P. (2d) 716 (1942). Under section 750 4 of the California Probate Code, the testator*259 may designate which parts of his estate shall be used for any such allowance and if they are sufficient only those will be so used. Here, decedent in article Twelfth (b) of his will specified that the income of the trust established for petitioner should be used to pay the family allowance and, since it was part of decedent's estate, under section 750 of the California Probate Code he could so specify. While article Sixth provided all the income, except for certain amounts not important here, he paid petitioner, it must be read together with article Twelfth (b) as regards the qualification existing during the period of estate administration.
*622 The fact that the family allowance might have been paid out of income does not make it taxable to petitioner. In Buck v. McLaughlin (CA-9, 1931), 48 Fed. (2d) 135,*261 it was held that the family allowance paid to decedent's widow whether paid out of corpus or income of the estate was not taxable as "income" under California law. The court said:
The money paid by the estate to the widow as a family allowance is quite distinct from her rights, if any, in and to the corpus or income of the estate. It is awarded to her by reason of her widowhood for her support during the administration of the estate and she is entitled to the same regardless of whether or not she has any right in and to the corpus of the estate or its income. Her right to the family allowance is purely statutory. Estate of Dargie, 162 Cal. 51, 121 P. 320. Under the law of California all the property of the decedent, whether income or corpus of the estate, is liable for the payment of family allowance. * * * [p. 135]. [Emphasis added.]
Since the executor, in subtracting the amount paid as family allowance to petitioner was merely following a direction by decedent in his will, and since such direction was valid, it follows that the executor did not err in so doing and therefore such an amount was not distributable as income to petitioner*262 in each of the years 1943, 1944, and 1945. We therefore uphold petitioner on this point.
The second issue is whether, during administration of the estate, petitioner is entitled to deduct depreciation for the buildings passing under article Sixth of the will. The applicable provision of the Internal Revenue Code is section 23 (l) (2), which reads as follows:
Sec. 23. In computing net income there shall be allowed as deductions:
* * * *
(l) Depreciation. -- A reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) --
* * * *
(2) of property held for the production of income. * * * In the case of property held in trust the allowable deduction shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allocable to each.
The provision relating to trusts first appears in the Revenue Act of 1928. A careful study of the legislative history and the committee reports shows no indication that the term "trust" used in this section was intended to embrace estates as well*263 as trusts. It is not within the power of this Court to read the word "estate" into this provision. That is a function of the Congress. Until such time as the trust res was distributed to the trustee, therefore, petitioner is not entitled to a depreciation deduction.Decision will be entered under Rule 50.
Footnotes
1. Sec. 162. 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 legatees, heirs, or beneficiaries, but the amount so allowed as a deduction shall be included in computing the net income of the legatees, heirs, or beneficiaries whether distributed to them or not. As used in this subsection, "income which is to be distributed currently" includes income for the taxable year of the estate or trust which, within the taxable year, becomes payable to the legatee, heir, or beneficiary. 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;↩
2. (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;↩
3. § 680. Right to allowance; Preference. The widow and minor children are entitled to such reasonable allowance out of the estate as shall be necessary for their maintenance according to their circumstances, during the progress of the settlement of the estate, which, in case of an insolvent estate, must not continue longer than one year after granting letters. Such allowance must be paid in preference to all other charges, except funeral charges, expenses of the last illness and expenses of administration, and may, in the discretion of the court or judge granting it, take effect from the death of the decedent.
[Enacted 1931.]↩
4. § 750↩. Order of resort to estate assets for payment of debts, expenses, etc. If the testator makes provision by his will, or designates the estate to be appropriated, for the payment of his debts, the expenses of administration, or family allowance, they must be paid according to such provision or out of the estate thus appropriated, so far as the same is sufficient. If insufficient, that portion of the estate not disposed of by the will, if any, must be appropriated for that purpose; and if that is not sufficient, the property given to residuary legatees and devisees, and thereafter all other property devised and bequeathed is liable for the same, in proportion to the value or amount of the several devises and legacies, but specific devises and legacies are exempt from such liability if it appears to the court necessary to carry into effect the intention of the testator, and there is other sufficient estate. [Enacted 1931.]