*1321 1. Where a widow elects to become beneficiary of a trust created by the will of her deceased husband, in lieu of her statutory rights in his estate, the income paid to her from such trust is taxable to her as ordinary income without regard to the value of her marital interests surrendered. Commissioner v. Butterworth,290 U.S. 365">290 U.S. 365.
2. Held, that payments made to decedent taxpayer by a trust established by a will were not, in view of the terms of the will, impressed with any further or additional trust requiring her to share them with minor children, but that they constituted sole and separate income, taxable to her as such.
3. Payments made by decedent to a daughter in consideration of the latter's agreement not to contest a will creating a trust of which both were beneficiaries, held not to constitute legal deductions from the taxable income of decedent.
4. Claims for income tax deductions representing depreciation of trust assets, made by a life beneficiary who drew income only and owned no remainder interest in its corpus, disallowed.
*462 The respondent has determined deficiencies for each of the years under review as follows:
| Docket No. | Year | Deficiency |
| 14139 | 1920 | $13,485.62 |
| 22308 | 1921 | 10,753.68 |
| 34670 | 1922 | 25,940.48 |
| Do | 1923 | 18,244.60 |
| 42624 | 1924 | 22,309.66 |
| 42624 | 1925 | $12,622.18 |
| Do | 1926 | 14,055.72 |
| 49028 | 1927 | 12,652.60 |
| Do | 1928 | 5,363.62 |
In each of the proceedings, a defense of mixed facts and law is pleaded, based upon contentions: First, that the legal basis for determining decedent's taxable income, for reasons assigned, is governed by the laws of the Republic of France; second, that decedent's benefits under the O'Connor will were purchased by her in exchange for her marital interests in his property, and that, if taxable at all, only so much of them as exceeded in value the value of her interest surrendered may be so subjected; third, that payments made by decedent to a daughter in consideration of the latter's agreement not to contest the will creating a trust of which both were beneficiaries are deductible from the income of decedent as and when paid; fourth, that all payments received by decedent from the O'Connor estate were impressed*1323 with an oral trust which obligated her to share with the three minor daughters of herself and him, in virtue of which she acquired only a one-fourth interest in said income; and, fifth, the petitioner claims in behalf of decedent's estate the right to take annual deductions from its gross income on account of depreciation sustained by the physical assets belonging to the trust, and also for payments made by the trustees in compromising claims against the estate and to prevent threatened litigation involving the will. The several proceedings were consolidated for hearing and report.
The parties have filed a stipulation which we accept and incorporate herein by reference. In addition to the stipulation certain depositions were received in evidence, subject to objections by counsel contained therein.
FINDINGS OF FACT.
Mrs. Ivor O'Connor Drake, hereinafter sometimes referred to as the decedent, and her predeceased husband, James C. O'Connor, were at all times citizens of the United States. They were married January 23, 1900, at Washington, D.C., but a few days thereafter went to Paris, France, where they resided continuously, except during visits to the United States in 1907*1324 and 1909, until O'Connor's death in Paris on January 23, 1913. Three daughters were born to O'Connor and decedent: viz., Ivor Elizabeth O'Connor, April 1901; Margaret *463 Cornelia O'Connor, May 1902; and Eleanor O'Connor, June 1903.
For many years O'Connor was successfully engaged in banking at Dallas, Texas, and elsewhere in the United States. In his business operations he amassed a fortune in real, personal, and mixed property, which at the date of his death was inventoried by appraisal officers appointed by the county court of Dallas County, Texas, at $2,536,135.68. The parties to these proceedings have stipulated that this inventory included real estate and bank stock, valued respectively at $527,700 and $249,700, which O'Connor owned prior to his marriage to decedent; and also personal property of the value of $1,691,235.68 which was acquired by him at dates unknown.
At the time of his death O'Connor left a will executed October 14, 1910, at Paris, in which he bequeathed all of his property, except certain personal effects and household goods located in Paris, in trust for the benefit of his surviving wife and three minor daughters under terms briefly stated as*1325 follows: The trustees were directed to divide the property in the estate into three equal parts, one part for each of the three daughters, to be held in separate trusts. The income, however, of all the trusts was to be paid to the widow during her life, except that each child upon arriving at the age of 25 years was to receive thereafter $1,500 per annum of such income until she became 30 years of age and thereafter the sum of $2,500 per annum. Upon the death of the widow all net income from each trust was to be applied, respectively, by the trustees to the maintenance, support, and education of the daughter who was the beneficiary thereof; and, upon the death of such daughter, its corpus was to be distributed to her lawful issue, if any, or, if not, to her legatees by will.
The will made the widow's provision under it conditional upon her waiving all dower and other marital interests in the testator's property, and, respecting all payments or benefits, provided as follows:
Third, I further expressly direct that all sums payable to my said wife and to my daughters under this will shall be made as their separate property, upon their sole receipt, free from the claims of any*1326 creditors or the control of any person and shall not be subject to assignment or anticipation.
The widow and two former business associates of O'Connor, being respectively at Dallas, Texas, and New York City, were made trustees under the will, all of whom accepted the trust and qualified under it.
The will was duly probated in the county court of Dallas County, Texas, on May 5, 1913. The decedent accepted the terms thereof and from January 23, 1913, to December 31, 1919, inclusive, there was paid by the trustees from income of the trusts established under *464 it a total of $778,407.50. Thereafter, during the tax years under review, decedent received payments from the trustees as follows:
| 1920 | $881,383.95 |
| 1921 | 133,095.25 |
| 1922 | 133,248.57 |
| 1923 | 123,015.88 |
| 1924 | 122,803.96 |
| 1925 | $115,088.14 |
| 1926 | 115,598.04 |
| 1927 | 119,251.74 |
| 1928 | 78,373.61 |
In and during the year 1922, Ivor Elizabeth Trezevant, one of the three surviving daughters of O'Connor, hereinbefore mentioned, having married, became dissatisfied with the provisions made for her in her father's will and threatened to bring suit to contest its legality. The trustees of the estate settled*1327 her claims against the estate in a contract made with her and her husband on November 6 of that year, which provided for a sale, transfer, and release by her to them of all of her one-third interest in and to the corpus of the estate and the trust created for her benefit, for a cash consideration of $30,000. Simultaneously with the execution of this contract, and supplemental to it, petitioner Francis E. Drake and decedent entered into another contract with Ivor Elizabeth Trezevant and her husband, in words and figures as follows:
WHEREAS, Ivor Elizabeth Trezevant, joined by her husband, Robert M. Trezevant and Ivor Tate Drake, E. O. Tenison and Harry Adams Kahler, Trustees under the will of James Charles O'Connor, deceased, probated by the County Court of Dallas County, Texas, on May 5, 1913, in cause numbered 5652 on the docket of said court, have this day finally settled and compromised a controversy between them involving the validity and construction of aforesaid will, as per the terms of a written contract between them of even date herewith, which contract is made a part hereof as fully as if here set out at length; and whereas said Ivor Elizabeth Trezevant made and entered*1328 into aforesaid contract with said trustee upon the condition and for the further consideration that her mother, said Ivor Tate Drake, should at the same time make with her, the said Ivor Elizabeth Trezevant, the following contract:
NOW, THEREFORE, in consideration of the making of aforesaid contract between said trustees and said Ivor Elizabeth Trezevant, it is hereby mutually agreed by and between the said Ivor Elizabeth Trezevant, joined herein by her husband, Robert M. Trezevant, and Ivor Tate Drake, joined by her husband herein, Francis E. Drake, as follows:
(1) The said Ivor Tate Drake, joined by her husband, Francis E. Drake, does hereby covenant and agree to pay said Ivor Elizabeth Trezevant from the income of said Ivor Tate Drake as it may accrue during the joint lives of the said Ivor Tate Drake and the said Ivor Elizabeth Trezevant, the full sum of Twelve Thousand Dollars ($12,000) per annum, beginning September 1st, 1922, until the said Ivor Elizabeth Trezevant receives annually under the terms of the said will of James Charles O'Connor, deceased, the sum of Fifteen Hundred Dollars ($1500) and thereafter the sum of Ten Thousand Five Hundred Dollars ($10,500) per annum*1329 until the said Ivor Elizabeth Trezevant receives annually the sum of Twenty Five Hundred Dollars ($2,500), and, thereafter, the sum of Ninety-Five Hundred Dollars per annum, the purpose being to make the annual income for the period aforesaid of the said Ivor Elizabeth *465 Trezevant the sum of Twelve Thousand Dollars ($12,000) per annum; and the said Ivor Tate Drake authorizes, empowers and directs her agents, E. O. Tenison and the City National Bank of Dallas, Texas, to pay the said Ivor Elizabeth Trezevant, or her assigns, the payments hereinbefore specified in as nearly quarterly installments as may be possible.
(2) In consideration of the premises, said Ivor Elizabeth Trezevant, joined by her husband, Robert M. Trezevant, does hereby release and discharge said Ivor Tate Drake from any and all claims said Ivor Elizabeth Trezevant may now have, if any, against said Ivor Tate Drake for any rent, revenue or income heretofore issuing out of or received from the properties or any part thereof, at any time heretofore constituting the Estate of the said James Charles O'Connor, deceased, or the Trust Estate created by his will. This instrument is executed in triplicate original.
*1330 Under the terms of the second contract, the decedent paid to Ivor Elizabeth Trezevant $4,000 in the year 1922; $12,000 in each of the years 1923 to 1927, inclusive; and $9,000 in 1928.
During the years indicated in the following table, the buildings owned by the O'Connor estate and the trusts suffered depreciation as follows:
| 1920 | $6,512.83 |
| 1921 | 6,654.53 |
| 1922 | 6,654.96 |
| 1923 | 6,904.96 |
| 1924 | $8,844.42 |
| 1925 | 8,844.42 |
| 1926 | 8,844.42 |
| 1927 | 8,694.42 |
On September 25, 1918, Francis E. Drake and the decedent were married at Paris, France, and after such date to and including September 22, 1928, the date of decedent's death, maintained their residence in that city. The decedent left a will naming Francis E. Drake as the sole beneficiary, in virtue of which at its final settlement he received cash and other property of the value of $50,717.31.
In each year during their married life petitioner and Drake made and filed separate income tax returns on the community basis, dividing the gross income of the marital community equally between them in their several and respective income tax returns. Upon audit of such returns the respondent determined that each of*1331 the payments made to the decedent from the estate of J. C, O'Connor in the taxable years, as hereinabove set forth, less legal deductions, was taxable to her as separate income for the year of its receipt by her, and determined the deficiencies under review.
The parties have stipulated, as follows:
No part of the receipts of and from the estate of J. C. O'Connor for any year belonged to Francis E. Drake, surviving spouse of the decedent, and none of said receipts for any year were or are taxable to said Francis E. Drake.
OPINION.
LANSDON: The petitioner contends that the decedent's surrender, by waiver, of her dower and other interests in O'Connor's estate, to *466 take under the trust provisions of his will, made her purchaser of the payments made to her at the price or value of her interests so surrendered, and that except and until she has first had returned to her payments equal in amount to those interests she cannot be held to have received any taxable income in virtue of them. He also contends that the decedent's interest in that estate is determinable by the laws of the Republic of France, in virtue of an alleged marital domicile there established and maintained*1332 by O'Connor to the date of his death.
Although no sufficient proof has been introduced by petitioner to convince us that O'Connor ever abandoned his domicile in Dallas, Texas, that question is of no importance here in view of the law which controls the issue, as recently declared in , in a decision of the Supreme Court holding contrary to the contention of the petitioner. That decision overrules, by specific reference, ; ; and , supporting petitioner's view. In its decision the Supreme Court pointedly states and answers this issue as follows:
Is a widow who accepts the provisions of her husband's will and receives part or all of the income from an established trust in lieu of her statutory rights a beneficiary within the ambit of the statute? We think she is. It is unnecessary to discussed her rights or position under other circumstances. We are dealing with a tax statute and seeking to determine the will of Congress.
When she makes her election*1333 the widow decides to accept the benefits of the will with the accompanying rights and liabilities. In no proper sense does she purchase an annuity. For reasons satisfactory to herself, she expresses a desire to occupy the position of a beneficiary and we think she should be so treated.
Upon authority of that decision we hold that the payments here in dispute were properly included in the decedent's taxable income. .
The petitioner's contention that the payments to decedent from the o'Connor estate were impressed with an oral trust which obliged her to share it with the minor children is without merit, in view of the written terms of the will above quoted in our findings of fact, which makes it her separate property, free from all claims. Upon this issue the respondent is affirmed.
The next contention made by petitioner is that deductions should be allowed from the decedent's income for the sums paid to Ivor Elizabeth Trezevant, in compromise of claims made against the O'Connor estate and to prevent a suit in the courts contesting the will.
The deductions here contended for were payments made pursuant to the terms of the*1334 contract set out in our findings of fact. Under this contract the decedent obligated herself to make the payments *467 here in issue from her income during their joint lives, through her agents, E. O. Tenison and the City National Bank of Dallas, Texas, after it had accrued to her. It is obvious, under this agreement, that there was no assignment of income such as would transfer title before it was earned, as obtained in , which the petitioner has cited as authority for his contentions. In the Shellabarger case two sisters, sole beneficiaries under their father's will, made a settlement between themselves respecting the distribution of their father's estate before the will was admitted to probate. Their settlement agreement allowed the will to stand, but in consideration for such concession the favored sister under it agreed to divide equally with the other the cash legacy and benefits from trusts created of the residuum of the estate. Although in that case one sister, Maude, was allowed to collect the income, the court found as a matter of law that, because of the nature of the settlement and the rights*1335 surrendered by the other, without which the will would not have been probated, an assignment was effected, and that she received half of the income as trustee. The language of the court in explaining its basis for that conclusion is as follows:
While the whole of the net income from the trusts was received by Maude, the half did not accrue to her as income but on the instant of receiving it she held it in trust for Georgia and the bank, and it was in good faith paid over as received, pursuant to her vested and binding contract.
Other decisions cited by petitioner are ; ; . See also on this point .
In all of the cases relied upon by the petitioner to sustain his contentions, the courts found that a novation in ownership of the income before its accrual had been effected; but in no case, so far as we can find, have the courts or this Board held that the title to income in any respect was affected where its owner merely obligated himself, in a simple contract, *1336 to pay it, or part of it, over to another after it accrued to him. ; ; ; ; ; ; ; ; .
Respecting the case at bar, it is obvious that under the terms of the will the decedent was without power to assign or transfer the income in issue to her daughter. The recitals from the will hereinabove quoted show that the testator intended that all sums payable to the widow and daughters should be their separate property and not subject to assignment or anticipation. In this situation a novation such as is here contended for could not be effected, even if the *468 parties so intended. ; *1337 ; affd., .
The payments here involved were properly included in the decedent's gross income, and since they do not fall within any deductible class provided for in the statutes, we must hold that they do not constitute allowable deductions in any of the years in review. ; . On this issue the contention of the petitioner is denied.
During the years 1920 to 1927, inclusive, buildings and other physical assets belonging to the three trusts suffered depreciation, which the petitioner contends should be allowed as deductions from the decedent's taxable income in the years to which they relate. The respondent has rejected these claims under authority of , and other court and Board cases cited in his brief.
The petitioner contends that ; affirmed in *1338 , supports his contention. In that case the court reversed this Board's decision on an issue involving depletion of a mining lease and held that the beneficiaries whose income was from royalties on production from a reserve, certainly recoverable before the expiration of a lease, were, in fact, the equitable owners of the reserve and as such were therefore entitled to the depletion deductions allowed mine properties as worked out. To the same effect, under similar facts, was our decision in ; Cf. . These decisions are based on facts which show that the taxpayers owned economic interests in mineral reserves and that proceeds from such reserves therefore constituted a return of capital. This is the controlling principle also in , and . In the Falk case, supra, the Supreme Court, in discussing section 219(b) of the Revenue Act of 1921, said: "But we cannot accept the view that this was intended to impose a tax upon*1339 the part of the proceeds which represents the return of capital assets." In the instant proceeding the petitioner has no economic interest in the depreciable assets in question. The income is not proceeds from the disposition of any part of the property, but arises solely from the use thereof. The cases cited relate only to allowance for the depletion of assets in which taxpayers own economic interests. They do not overrule , where deduction for depreciation is denied to a taxpayer who had made no capital investment in the property nor sustained any loss in connection with its use.
The rule respecting depreciation claims where a beneficiary receives income only with no remainder interest in the producing corpus *469 is that he owns no interest subject to depreciation. ;; ; ; *1340 ; ; affd., ; . Clearly the issue here is within the latter class of cases and the petitioner's contention must, therefore, be denied.
The petitioner further contends that, in any event, the decedent's three children, under the laws of France, would be entitled to a three-fourths interest in all of their deceased father's property; and that in view of such facts we should now hold that the decedent received only one fourth of the income paid to her in her own right and the rest in trust for the children. In our opinion the laws of France have no application here. The will of O'Connor was duly probated by a court of competent jurisdiction in the State of Texas, in a proceeding to which the decedent was a party and which we have no jurisdiction to review. In this appeal we are concerned only with the taxability of the income from the trust in the hands of the decedent, and not in the question whether or not the trustees properly paid it to her. *1341 ; ;; ; ; .
The respondent has stipulated that deductions from the decedent's income should be allowed as follows: $13,561.37 as additional losses from stock sales in 1920; $600 on account of undistributable gain from O'Connor's estate in 1924; $3,668.22 representing drainage taxes paid in 1926; $2,257.81 as overstatement of Liberty Bond interest in 1927.
Reviewed by the Board.
Decision will be entered under Rule 50.