*2014 1. The respondent's determination that the entire income received by the petitioner was as a life beneficiary of a testamentary trust sustained.
2. A life beneficiary of trust income can not reduce gross income because of the depreciation of trust assets, even though under the laws of the State the depreciation deduction is distributable among those entitled to receive the trust income.
*880 These proceedings, which were consolidated for hearing and decision, involve deficiencies in income taxes for the calendar years 1923 and 1924 in the amounts of $13,771.05 and $16,403.15, respectively. The same allegations are contained in each petition, namely, that respondent failed to rule that:
(a) The sums received by the petitioner by reason of the agreement of compromise and settlement which settled the contest on the probate of the will of Maria P. Codman, were received in exchange for the sums to be paid to her as beneficiary under said will, and, *881 being an exchange of one kind of property for another kind of the same value, resulted in no*2015 income.
(b) The sums received by Catherine A. Codman by reason of the agreement of compromise and settlement which settled the contest over the probate of the will of Maria P. Codman were received by reason of a contract, and only the difference between the amounts paid in 1903 and the amounts paid in 1924 was income subject to tax.
(c) In 1913 the contractual right of the petitioner to receive the net income during her life had a value which suffered exhaustion each year. The Department has failed to allow any deduction from the sums received in the years 1923 and 1924 by the petitioner from Codman and Lazenby on account of this exhaustion.
(d) The Department has taxed the sums received by the petitioner from Codman and Lazenby at rates other than the 12 1/2 per cent.
(e) Before determining the net income from the property managed by Edmund D. Codman and John R. Lazenby a deduction on account of depreciation of buildings held by Codman and Lazenby was made. By the law of Massachusetts such capital as is represented by depreciation is to be distributed among those who are entitled to the net income. In determining the amount of income received by the petitioner for the*2016 year 1924 the Department has failed to allow the deduction of the petitioner's share of that depreciation.
FINDINGS OF FACT.
On or about August 6, 1902, Maria P. Codman, formerly of Boston, Mass., and at the time of her death of Bristol, R.I., died leaving a last will and testament, bearing date of May 26, 1898, which provided in part as follows:
FIRST. I nominate and appoint William S. Dexter of said Boston, Esquire, to be the executor of this my Will and if he shall fail, or at any time cease, to act in that capacity, then I nominate and appoint his son, Philip Dexter, to be such executor, and I do order and request that either of them who may at any time so act be exempt from giving any surety or sureties upon his official bond.
* * *
EIGHTH. All the residue of my property and estate of every kind and wherever situate, and of all the property and estate which I shall at my decease have any right or power to dispose of or appoint, whether under any of the trust deeds hereinbefore mentioned or under the will of my said sister, or however otherwise any such right or power may be derived, I do give, devise, bequeath and appoint unto the said William S. Dexter and Philip*2017 Dexter, to have and to hold unto them and their assigns and the survivor of them and his heirs and assigns, but in trust nevertheless to hold, manage, invest and re-invest the same at discretion, with full power at any and all times to sell, transfer and convey any or all of the property, whether real or personal, at any time held in trust, *882 either by public or private sale, without the aid of any Court, and to make all requisite deeds and transfers thereof, and the proceeds of all such sales to invest in any real or personal property, and the same to change at discretion. And to make leases of any of the real property at any time held by them, for such terms of time as they shall think best, notwithstanding that such terms may extend beyond the life or lives of some or all the beneficiaries interested therein. And to divide the net income of the trust premises as often as semi-annually equally between such as shall survive me of the following three persons, viz.; my aforesaid neice, Martha Catherine Codman, and the aforesaid Leslie Codman and Catherine Amory Codman. At the death of each one of the recipients of such income, to set off a share of the principal or capital*2018 of the trust premises as then existing, proportionate to the share of income theretofore payable to such recipient, and the same to convey, transfer and pay over unto the issue of such recipient, if any shall be living at her decease, and if none, to such persons and to such uses as she shall have appointed by her last will, if any, and if none, to the same persons and in the same proportions as would have taken the same if such recipient so dying had then owned the same property in her own right and died intestate. And the rest of the trust premises to continue to hold as before, and to pay the net income as aforesaid until the decease of the last survivor of the said three persons, and then to convey, transfer and pay over what may then remain of the said principal or capital unto her issue, if any shall then be living, and if none, to such persons and to such uses as she shall have appointed by her last will, if any, and if none, then to the same persons and in the same proportions as would have taken the same if such last survivor had owned the same in her own right and died intestate. And it is my will that all income that may be payable to any person under any provision hereof, *2019 shall be paid only as the same shall accrue, and never by anticipation, and none of such income shall be capable of assignment or alienation or liable to the claims or control of any husband or of any creditor or representative of creditors of any person herein mentioned as the recipient thereof.
I give unto my said trustees, and to such one of them as may at any time be acting under any of the trusts herein created, and to all their and his successors in any of the said trusts, all the powers and discretion hereinbefore set forth. And also full power, whenever any portion of the trust premises shall have to be set off or conveyed, upon the decease of any recipient of the aforesaid income or for any other cause, to set off the same or any part thereof in real or personal property or cash, upon and at the discretion and valuation of such trustees or trustee, and no court or person shall be entitled to interfere with or object to such discretion or valuation.
I order and request that my trustees aforesaid and such one of them as may at any time act as trustee under any of the provisions of this my will, be exempt from giving any surety upon their or his official bond; and that*2020 every successor to them or him be likewise exempt upon the request of all those persons of full age and legal capacity who shall be then interested therein.
Leslie Codman, one of the beneficiaries under the testamentary trust of the above will, predeceased the testator.
On or about September 1, 1902, William S. Dexter, the executor named in the aforesaid will, petitioned the court of probate of the town of Bristol, to approve, allow, and record said will, and to *883 grant letters testamentary on the estate of the decedent. At the hearing of this petition on October 6, 1902, the said Martha Catherine Codman, sole heir at law and only next of kin, appeared and objected to the proving, allowing, and recording of said instrument as the last will and testament of the decedent. This controversy was determined pursuant to an agreement of compromise and settlement entered into between the heir at law, the said William S. Dexter, and all persons claiming any interest in and to the estate of the decedent, whether under the will or adversely thereto, as provided by section 22, chapter 212, General Laws of Rhode Island. The parties to the agreement of compromise and settlement, *2021 dated January 22, 1903, agreed:
* * * That said instrument in writing, purporting to be the last will and testament of said Maria P. Codman, be modified as follows, to wit: By substituting for the first item thereof the following words, to wit:
"FIRST. I nominate and appoint Robert M. Morse and Edmund D. Codman executors of this my will and request that both of them may be exempt from giving surety or sureties upon their official bonds."
And by substituting in place of the eighth item thereof, being the residuary clause of the same, the following words, to wit:
"EIGHTH. All the residue of my property and estate of every kind and wherever situate, and of all the property and estate which I shall at my decease have any right or power to dispose of or appoint, whether under any of the trust deeds hereinbefore mentioned or under the will of my said sister, or however otherwise any such right or power may be derived, I do give, devise, bequeath and appoint unto the said Robert M. Morse and Edmund D. Codman to have and to hold unto them as joint tenants in fee simple, but in trust nevertheless to hold, manage, invest and reinvest the same at discretion, with full power at any and*2022 all times to sell, transfer, convey, pledge and mortgage any or all of the property, whether real or personal, at any time held in trust, either by public or private sale, without the aid of any court, and to make all requisite deeds and transfers thereof, and the proceeds of all such sales to invest in any real or personal property and the same to change at discretion. And to make leases of any of the real property at any time held by them, for such terms of time as they shall think best, notwithstanding that such terms may extend beyond the life or lives of some or all of the beneficiaries interested therein, and after first paying all the expenses or managing said trust and of repairing, maintaining and insuring the trust property, and a reasonable compensation for the services of said trustees, to pay over one-half of the net income of said trust to said Martha Catherine Codman and one-half of said net income to Catherine Amory Codman.
"Upon the death of either said Martha Catherine Codman or of Catherine Amory Codman, said trustees shall set off one equal half part of the principal or capital of the said trust premises and estate and the same convey, transfer and pay over*2023 unto such persons and to such uses as the person dying shall have appointed by her last will, if any, and if none, to such persons as would be entitled thereto had the person so dying owned the same in fee simple in her own right. Said trustees in setting off said one equal half of the real estate may set the same off in divided or undivided shares.
*884 "And upon the death of the survivor of said Martha Catherine Codman and Catherine Amory Codman, said trustees shall convey, transfer and pay over the remaining one-half of the principal or capital of the said trust premises and estate unto such persons and to such uses as such person shall have appointed by her last will, if any, and if none, to such persons as would be entitled thereto had such survivor owned the same in fee simple in her own right.
"In case of the death or resignation of either of said trustees his place shall be filled by the appointment of a suitable person by the probate court for the county of Suffolk in the state of Massachusetts.
"I give unto my said trustees, and to such one of them at any time acting under any of the trusts herein created, and to all their successors in any of said trusts, *2024 all the powers and discretion hereinbefore set forth.
"I order and request that my said trustees aforesaid, and such one of them as may at any time act as trustee under any of the provisions of this my will, be exempt from giving any surety upon their or his official bond, and that every successor of them or him be likewise exempt upon the request of all those persons of full age and legal capacity who shall be then interested therein."
And this agreement further witnesseth, that said instrument in writing, so modified, may be finally proved as the last will and testament of said Maria P. Codman and that immediately after this agreement is signed, the parties hereto will begin suitable proceedings in equity to have the same properly retified, proved and recorded, as provided by statute.
The agreement was signed on January 22, 1903, and thereafter the Supreme Court, Appellate Division, of the State of Rhode Island, in the case of Martha Catherine Codman v. William S. Dexter et al., in equity No. 5910, entered a final decree wherein it was ordered, adjudged, and decreed that the written agreement of compromise and settlement "is found by this Court under the circumstances*2025 to be just and reasonable in relation to the parties in being and to its effect upon any future contingent interests that might arise under said will, and any and all gifts to charities in the same, and the said agreement of compromise and settlement is hereby sanctioned and approved." It was further ordered by the court that the "instrument propounded for probate is hereby modified, as to all parties hereto, so as to conform with said agreement of compromise and settlement." It was further ordered that the probate court of Bristol should proceed with the probating of the will as modified by the agreement of compromise and settlement. This decree of the Supreme Court was entered of record March 2, 1903, and on the same date the will as modified by the agreement of compromise and settlement was proved and allowed as such by the probate court of Bristol, and the same was recorded and letters testamentary on the estate were granted to Robert M. Morse and Edmund D. Codman, as executors, in accordance with the said will as modified.
Thereafter, Morse and Codman applied for letters testamentary from the probate court of Suffolk County, Massachusetts, which letters *885 were issued*2026 under date of April 16, 1903. In giving bond as executors Morse and Codman listed the estate and effects of the decedent with the probate court of Suffolk County as:
| Real estate (assessed value) | $1,618,000 |
| Personal estate | 500,000 |
Under the same date each of the executors gave a bond of $2,000,000 for the faithful performance of their duties as trustees of decedent's residuary estate. These bonds declared the value of the estate in trust to be as follows:
| Real estate (assessed value) | $1,618,800 |
| Personal estate | 350,000 |
On or about May 25, 1921, John R. Lazenby was appointed trustee under the will of decedent to succeed Robert M. Morse, deceased, and gave bond for the faithful performance of his duties as trustee.
The real estate taken over by the trustees as a part of decedent's residuary estate was located in Boston, or Roxbury, a suburb of Boston, and the appraisers appointed by the probate court valued the real estate as follows:
| Washington St. estate | $1,100,000 |
| West Street estate | 100,000 |
| Tremont Street estate | 350,000 |
| Columbus Ave., Roxbury | 60,000 |
| Total | 1,610,000 |
The personal property, including mortgages, stocks, *2027 and bonds, had an appraised value of $403,240.12.
The book value of real estate, mortgages, stocks, etc., held by Morse and Codman, as trustees, and the March 1, 1913, value thereof, are shown by the following statement:
| Book value | Mar. 1, 1913 value | |
| Real estate | 1 $1,592,025.21 | 1 $2,253,700.00 |
| Mortgages | 135,500.00 | 135,500.00 |
| Shares | 282,181.63 | 2 271,474.50 |
| 2,010,706.84 | 2,660,674.50 | |
| Less cash over invested | 9,670.91 | 9,670.91 |
| Total | 2,000,035.93 | 2,651,003.59 |
Under and by virtue of the provisions of the decedent's will as modified by the agreement of compromise and settlement, the petitioner *886 herein received the following amounts for each year from April 16, 1903, to December 31, 1924:
| Period | Amount | Total for year |
| Apr. 16 to June 30, 1903 | $27,961.44 | |
| June 30 to Dec. 31, 1903 | 12,000.00 | $39,961.44 |
| Jan. 1 to June 30, 1904 | 21,180.19 | |
| June 30 to Dec. 31, 1904 | 12,000.00 | 33,180.19 |
| Jan. 1 to June 30, 1905 | 18,086.10 | |
| June 30 to Dec. 31, 1905 | 18,000.00 | 36,086.10 |
| Jan. 1 to June 30, 1906 | 22,811.85 | |
| June 30, to Dec. 31, 1906 | 18,000.00 | 40,811.85 |
| Jan. 1 to June 30, 1907 | 23,069.69 | |
| June 30 to Dec. 31, 1907 | 18,000.00 | 41,069.69 |
| Jan. 1 to June 30, 1908 | 23,902.86 | |
| June 30 to Dec. 31, 1908 | 18,000.00 | 41,902.86 |
| Jan. 1 to June 30, 1909 | 24,526.49 | |
| June 30 to Dec. 31, 1909 | 18,000.00 | 42,526.49 |
| Jan. 1 to June 30, 1910 | 24,698.06 | |
| June 30 to Dec. 31, 1910 | 18,000.00 | 42,698.06 |
| Jan. 1 to June 30, 1911 | 26,175.91 | |
| June 30 to Dec. 31, 1911 | 18,000.00 | 44,175.91 |
| Jan. 1 to June 30, 1912 | 24,958.49 | |
| June 30 to Dec. 31, 1912 | 18,000.00 | 42,958.49 |
| Jan. 1 to June 30, 1913 | 25,144.64 | |
| June 30 to Dec. 31, 1913 | 18,000.00 | 43,144.64 |
| Jan. 1 to June 30, 1914 | $23,223.05 | |
| June 30 to Dec. 31, 1914 | 24,000.00 | $47,223.05 |
| Jan. 1 to June 30, 1915 | 33,900.67 | |
| June 30 to Dec. 31, 1915 | 28,074.00 | 61,974.67 |
| Jan. 1 to June 30, 1916 | 29,520.70 | |
| June 30 to Dec. 31, 1916 | 33,392.65 | 62,913.35 |
| Jan. 1 to June 30, 1917 | 35,776.84 | |
| June 30 to Dec. 31, 1917 | 35,179.42 | 70,956.26 |
| Jan. 1 to June 30, 1918 | 36,239.83 | |
| June 30 to Dec. 31, 1918 | 34,492.13 | 70,731.96 |
| Jan. 1 to June 30, 1919 | 1 36,341.33 | |
| June 30 to Dec. 31, 1919 | 33,733.76 | 2 70,075.09 |
| Jan. 1 to June 30, 1920 | 35,162.79 | |
| June 30 to Dec. 31, 1920 | 2 37,501.49 | 1 72,664.28 |
| Jan. 1 to June 30, 1921 | 34,437.82 | |
| June 30 to Dec. 31, 1921 | 2 30,555.71 | 1 64,993.53 |
| Jan. 1 to June 30, 1922 | 34,879.80 | |
| June 30 to Dec. 31, 1922 | 2 32,235.78 | 1 67,115.58 |
| Jan. 1 to June 30, 1923 | 35,698.16 | |
| June 30 to Dec. 31, 1923 | 2 32,940.10 | 1 68,638.26 |
| Jan. 1 to June 30, 1924 | 34,685.55 | |
| June 30 to Dec. 31, 1924 | 46,204.32 | 1 80,889.87 |
In reporting income for the calendar years 1923 and 1924 the petitioner failed to include in her gross income any amount representing income received from the aforesaid trust. Respondent, upon auditing the returns for the said years, held that petitioner had received income from the trust for 1923 in the amount of $73,149.71 and for 1924 in the amount of $80,889.87 and determined the deficiencies here in question.
The petitioner was born on January 27, 1857, and had an expectancy of life, according to the American Experience Table on Mortality, of 16.72 years on March 1, 1913.
OPINION.
MORRIS: The principal measure of relief sought by these proceedings is set forth by the petitioner in issues lettered (a) to (d), both inclusive, all of which pertain to the single question of whether the respondent's determination respecting the income received by the petitioner pursuant to a compromise agreement entered into by the interested parties under the last will and testament of Maria P. Codman was correct. It is the contention of the petitioner that under the decided cases*2029 in Massachusetts she received the income in dispute by virtue of the said compromise agreement and not by the will and that the agreement was income-producing property which may be exhausted for tax purposes over the period of her life expectancy at March 1, 1913, based upon the fair market value of such property at that date.
*887 The petitioner cites Baxter v. Stevens,209 Mass. 459">209 Mass. 459, as authority for the proposition which she urges, which is that under the law she took by the compromise agreement and not by will. Conceding that that case holds that a compromise agreement entered into does not modify nor become a part of the will and that the parties take by the compromise agreement in lieu of the will, no attempt has been made to show that applicability of the law of that State to the instant case.
The testatrix died in 1902 and, although previously a resident of Massachusetts, was then domiciled in Rhode Island. Thereafter the probate court of Bristol, R.I., was petitioned to approve the will of the testatrix and to grant letters testamentary upon her estate. It was at the hearing of the said petition that objection to the will was raised, resulting*2030 in the compromise agreement and settlement here in question. Upon application to the Appellate Division of the Supreme Court of Rhode Island for approval of the said agreement of compromise and settlement, that court said in its decree: "For the purpose of carrying into effect said agreement of compromise and settlement, and as a part thereof, said Probate Court of Bristol is ordered to proceed with the probating of said instrument as modified by said agreement of compromise and settlement and in pursuance of the statutes in such case made and provided." The decree of the probate court intered in accordance with that of the supreme court said: "That the aforesaid instrument purporting to be the last will and testament of Maria P. Codman, deceased, and as so modified is proved and allowed as such, and it is ordered that the estate * * * be disposed of and administered according to the provisions of said instrument in writing * * * as modified * * *."
In view of the fact that the testatrix was domiciled in the State of Rhode Island at her death; that her last will and testament was offered for and was finally probated in that State; that it was in that State that the will was contested*2031 and the compromise agreement and settlement was finally approved by its courts, we are of the opinion that we should look to the law and the decisions of that State in order to determine whether the petitioner here actually took under the compromise agreement, as contended, or under the will as modified thereby.
The question of whether the parties take by the compromise agreement rather than by will, under circumstances similar to those hereinbefore related, has been decided by the Supreme Court of Rhode Island in the negative in Barber v. Westcott,21 R.I. 355">21 R.I. 355; 43 Atl. 844. The court there said: "The effect of the provisions of section 26 is to embody the award or compromise in the will, and *888 to give effect to it as if originally a part of the will." In Chase National Bank of New York v. Sayles, 11 Fed.(2d) 948, the court said, respecting this question: "The nature of Mrs. Sayles' right, though the result of a statutory compromise, is the same as it would have been had the will originally included such provision in her favor. She takes as a legatee." and it added, "This is the meaning of the statutes of Rhode Island, *2032 as construed by its courts. Gen. Laws of R.I. (1909) c. 312, § 23; Barber v. Westcott,43 Atl. 844; 21 R.I. 355">21 R.I. 355."
Since all of the first four specifications of error are predicated upon the premise that the petitioner received the sums in question by reason of the compromise and settlement agreement, and since we are of a different opinion in the matter, the petitioner's contentions in this particular must fail completely.
However, even assuming that the law of Massachusetts applies and that the petitioner took under the compromise agreement and not under the will, we are still unable to agree with the conclusion which the petitioner would have us reach. If there had been no contest over the will and the will had been probated and the property administered in accordance with its terms, there could be no possible doubt that the income received by the petitioner thereunder would have been subject to the tax imposed by the revenue statutes. Then, why should the settlement agreement, provided for by law in order to effect harmony and accord among heirs and legatees and for the amicable settlement of their disputed claims, affect the rights of*2033 the Government to collect taxes rightfully due it under normal circumstances. The character of the thing received, or to be received, does not suddenly change from income to something that is not income and make that which is taxable under the law nontaxable merely because the disputants under the will happen to have been mollified by a compromise agreement adjusting or modifying their rights under the will. Such a rule would "not only defeat the reiterated purpose of Congress as expressed in various provisions of the Act, but would invite as well as permit, to an unlimited extent, subterfuges whereby those entitled to large incomes could avoid their just obligations to the government." Codman v. Miles, 28 Fed.(2d) 823; certiorari denied, 278 U.S. 654">278 U.S. 654.
If the petitioner had relinquished her rights under the will and had entered into a contract with the other beneficiaries whereby she would receive other and different property from them in lieu of that willed her, or had she bartered away her right to receive under the will for a right to an annuity, the situation would be similar to *2034 Florence L. Klein et al.,6 B.T.A. 617">6 B.T.A. 617, and other cases *889 relied upon by the petitioner, but such was not the case. Here, the petitioner relinquished nothing. Had the compromise agreement, although fully executed by the parties thereto, failed to receive the sanction of the Appellate Division of the Supreme Court of Rhode Island, the petitioner's rights under the will would still have subsisted. Her substantive rights were the same under the compromise agreement as under the will. In either event she was entitled to a share of the "net income" of the trust estate, which she in fact received.
In Codman v. Miles, supra, Martha C. Codman, sole heir at law and next of kin of Maria P. Codman, the testatrix in this proceeding, sued the collector of internal revenue for the district of Maryland for the refund of taxes paid upon the income which she received under the same will here in question, contending "that, because the income ceased with her death, even though she had the right of appointment as to the principal, she was entitled to have a deduction from the tax because of exhaustion." In defining the taxable character of the property*2035 received under the will, the court said:
In section 219 of the Revenue Acts governing this case, subdivision a4, it is provided that the interest to be distributed to beneficiaries periodically, whether or not at regular intervals, and income collected by a guardian of an infant to be held or distributed as the court may direct, is made subject to the tax. It is true that in a sense the income conveyed to the plaintiff for life is properly designated as property, but it clearly retains its character as taxable income, and there is no provision in the law, nor any terms employed in the statute, to indicate an intention upon the part of Congress to relieve such income from the normal tax livied upon incomes merely because its payment ceased after a term of years.
And, speaking specifically of the right to a deduction for exhaustion, the court said:
* * * The contention that the value of the estate was each year depleted by exhaustion is intriguing rather than logical. What the plaintiff received and was entitled to receive was not the corpus of the property but the increment annually accruing therefrom. It is nowhere suggested that the corpus of the property, from which the*2036 income was derived, was in any way depleted. There is no destruction or dimunition by use of the property which furnishes the source of the income, and to allow an abatement for any portion of the taxes accruing each year because of the limited time of the plaintiff's enjoyment of the income would not only defeat the reiterated purpose of Congress as expressed in various provisions of the act, but would invite as well as permit, to an unlimited extent, subterfuges whereby those entitled to large incomes could avoid their just obligations to the government.
The respondent's determination with respect to the foregoing is approved.
The one remaining question is whether the petitioner is entitled to reduce the income which she received from the trust by her proportionate share of the allowable depreciation on the trust assets. *890 This question has been decided adversely to the petitioner by the Board and the courts. See Commissioner v. Widener, 33 Fed.(2d) 833, and the cases therein cited; also section 215(b) of the Revenue Acts of 1921 and 1924. In so concluding we are not unmindful of the recent ruling of the United States Circuit Court of Appeals, *2037 Second Circuit, in Merle-Smith v. Commissioner of Internal Revenue, 42 Fed.(2d) 837, which is clearly distinguishable from the instant case.
Decision will be entered for the respondent.