*1881 Where the terms of a will, under which a trust is created, do not authorize the withholding of a part of the income from the trust property for the purpose of replacing wasting assets on the termination of the trust, the amount so withheld by the trustees is distributable to the life beneficiaries of such trust and therefore taxable to them.
*391 These proceedings were consolidated for hearing and involve deficiencies in income tax determined by the Commissioner as follows:
| 1923 | 1924 | |
| Rita M. Kohler White | $2,525.46 | $1,088.76 |
| Vera M. Kohler Alker | 2,518.18 | |
| Orga K. Miglietta | 2,377.58 | 844.43 |
*392 In Docket No. 36113, the original petition was filed in the name of Rita M. Kohler Erbe, but she has since married a second time and, by proper motion, a substitution has been made in order to show the name assumed under her second marriage.
The only question involved is whether there should be added to the income of the petitioners, who are beneficiaries of three trusts created by the will*1882 of their father, certain amounts which were retained by the trustees out of the gross receipts of the trusts to make good the exhaustion of two leaseholds comprising a part of the principal of the trust property. A stipulation was entered into between the parties, from which, and from certain facts admitted in the answer of the Commissioner, we make the following findings.
FINDINGS OF FACT.
The petitioners are individuals residing in New York City.
Charles Kohler, father of the petitioners, died on June 4, 1913, having made his last will and testament on July 15, 1912. He left him surviving Veronica M. Kohler, his widow, and three daughters, Olga V., Vera M., and Rita M., then aged, respectively, about nineteen, twelve, and ten years. During the time intervening between the date of decedent's death and the commencement of these proceedings the daughters have reached maturity, have married, and are now Olga K. Miglietta, Vera M. Kohler Alker (Vera M. Kohler Erbe by first marriage) and Rita M. Kohler White.
Decedent left a large estate and provided for its disposition in the will referred to above. The portion of the will providing for the trusts here in question follows:
*1883 Eighth: All the rest, residue and remainder of my estate, both real and personal, and of whatsoever description and wheresoever situated, I give, devise and bequeath unto my trustees hereinafter named, in trust, as follows:
First: To set aside out of my said residuary estate a share or portion thereof sufficient for the purpose, and to hold the same in trust, for my daughter, Olga V., investing and reinvesting the same from time to time and paying over the sum of Twenty-Five Thousand Dollars ($25,000) per annum, payable semi-annually during her natural life, and in addition thereto when she arrive at the age of twenty-five (25) to pay over to her the sum of One Hundred Thousand Dollars ($100,000); when she arrive at the age of thirty-five (35), a further sum of One Hundred Thousand Dollars ($100,000); and when she arrive at the age of forty-five (45), a further sum of One Hundred Thousand Dollars ($100,000), and upon her death, to pay over the balance remaining unpaid of the share or portion of my said residuary estate so set aside for her benefit as aforesaid, to such of her issue as shall be living at her death, share and share alike. Should any of her issue die before her, *1884 leaving issue at her death, then such issue shall take in equal shares the share the parent would have received had he or she survived her death. Should my said daughter, Olga, die leaving no issue surviving her, then, in that event, the said share or portion herein provided for her shall pass into and become part of my residuary estate.
*393 (Then followed a second and a third subdivision exactly the same in every respect as the first subdivision quoted above except that the second provides for a like trust for his daughter Vera M., and the third for a like trust for his daughter Rita M., instead of his daughter Olga V.)
Fourth: To set aside out of my said residuary estate, a share or portion thereof sufficient for the purpose, and to hold the same in trust for my wife, Veronica M. Kohler, investing and reinvesting the same from time to time and paying over the sum of Twenty-Five Thousand Dollars ($25,000) per annum payable semi-annually during her natural life.
The residuary clause in the will reads as follows:
Eighteenth: Should there be any balance or residuary estate remaining after the bequests hereinbefore provided for, including the trusts also hereinabove*1885 created, then, I give, devise and bequeath the same to my said children to be divided between them share and share alike.
Letters testamentary were issued to the executors named in the will, who duly entered upon their duties as such. By decree entered in the Surrogate's Court in the City of New York on March 16, 1915, the trustees appointed under the will received property having a value of $4,756,384.71. On March 16, 1916, the trustees caused to be entered on their books four items as follows:
| Veronica M. Kohler | $881,821.24 |
| Olga V. Florman (now Olga K. Miglietta) | 1,182,028.89 |
| Vera M. Kohler | 1,182,028.89 |
| Rita M. Kohler | 1,182,028.89 |
| Total | 4,427,907.91 |
Subsequent to the making of the foregoing bookkeeping entries proceedings were commenced in the Surrogate's Court in New York City, first, for a construction of the will, and, second, for an accounting by the executors and trustees, which proceedings were consolidated. Appeal was taken from the decision of the Surrogate's Court in such proceeding to the New York Supreme Court, Appellate Division, which modified and affirmed the decision of the lower court, the opinion of the Appellate Division being officially*1886 reported as . A further appeal was then taken to the Court of Appeals of the State of New York, which rendered its decision on May 31, 1921, reversing the decree of the lower courts. The case was then returned to the Surrogate's Court, which on August 12, 1921, entered its order of final judgment and directed the trustees to establish separate trusts as directed by the Court of Appeals in its opinion and to submit to an accounting. The Court of Appeals, in its opinion, held that the mere bookkeeping entries which had theretofore been made upon the books of the trustees were insufficient to establish the trusts required under the *394 will, and directed that the duty of forming the trusts should now be performed as of March 16, 1915. The court further held:
The testator has clearly directed that there shall be set aside for his daughters respectively an amount sufficient for the purpose of producing $25,000 per annum payable to them semi-annually during their lives respectively, and also in addition thereto $100,000 to be paid to them as they respectively arrive at the age of twenty-five years, and again when they arrive at*1887 the age of thirty-five years, and again when they arrive at the age of forty-five years.
* * *
It cannot, it seems to me, be said that the testator intended that the amounts set aside out of the gross residuary estate, as the shares or portions thereof sufficient for the purpose of producing the income to be paid to the daughters, as provided by the eighth paragraph of the will, should remain uncertain, varying or shifting amounts. Sufficient amounts should be set aside for the purposes, as provided by the eighth paragraph of the will, and the amounts, so set aside, are by the testator given upon the death of his daughters respectively, to their issue respectively, share and share alike. It is only when an amount so set aside is, through fraud, inequity or mistake, found to be too small or too large that it can be changed, and then only through an application to the court to have the decree, pursuant to which the amount was originally fixed and determined, changed after due hearing of all persons interested. (; *1888 .) The principal of such trust funds when set aside, will, subject to the trusts, become vested in those to whom the residue thereof is given under the will. Unless the excess of principal, if any, set aside in the several trusts as provided by the eighth paragraph of the will, remains the property of the residuary legatees under the eighteenth paragraph of the will, I see no basis for holding that any excess of income on such trusts funds should be payable to such residuary legatee.
The trusts were established, as of March 16, 1915, as directed by the Court of Appeals of New York, and on May 23, 1927, the Surrogate's Court entered its decree of accounting and approved the accounts of the trustees as therein stated, which decree was the final decree entered in the proceeding. The seven trusts thus created were designated as follows:
Trust A, Olga V. Kohler.
Trust B, Vera M. Kohler.
Trust C, Rita M. Kohler.
Trust D, Veronica M. Kohler.
Trust No. 1, Olga V. Kohler.
Trust No. 2, Vera M. Kohler.
Trust No. 3, Rita M. Kohler.
Trusts A, B, C and D were the four trusts created to pay to the widow and each of the*1889 three daughters the annual sum of $25,000. Trusts Nos. 1, 2 and 3 were the trusts created to pay to each of the three daughters the sum of $100,000 when they reached the ages of 25, 35 and 45, respectively.
Cash, notes receivable and stocks were placed in Trusts Nos. 1, 2 and 3, the total amount of each of such trusts as of March 16, 1915, being $310,119. The four trusts A, B, C and D received as of March 16, 1915, the following assets:
| Nature of asset | Trust A | Trust B | Trust C | Trust D | Total |
| Cash | 507.02 | 605.01 | 490.31 | 1,916.52 | 3,518.86 |
| 2,800 shares Kohler & Campbell, Inc | 103,068.08 | 103,068.08 | 103,068.07 | 103,068.08 | 412,272.31 |
| 4,205 shares Auto Pneumatic Action Co | 155,548.00 | 155,548.00 | 155,548.00 | 155,696.00 | 622,340.00 |
| 7,420 shares Autopiano Co | 225,753.50 | 225,753.50 | 225,753.50 | 225,753.50 | 903,014.00 |
| 570 shares Brambach Piano Co | 10,725.00 | 10,725.00 | 10,650.00 | 10,650.00 | 42,750.00 |
| 1,008 shares Milton Piano Co | 32,256.00 | 32,256.00 | 32,256.00 | 32,256.00 | 129,024.00 |
| 2,800 shares Standard Pneumatic Action Co | 87,500.00 | 87,500.00 | 87,500.00 | 87,500.00 | 350,000.00 |
| Leaseholds owned: | |||||
| South side of West 51st St | 25,000.00 | 25,000.00 | 25,000.00 | 25,000.00 | 100,000.00 |
| Northeast corner 12th Ave. & West 51st St | 46,250.00 | 46,250.00 | 46,250.00 | 46,250.00 | 185,000.00 |
| Total | 686,607.60 | 686,705.59 | 686,515.88 | 688,090.10 | 2,747,919.17 |
*1890 *395 The lease referred to above as covering property on the south side of West 51st Street expired February 1, 1927, and the lease referred to as covering property on the northeast corner of 12th Avenue and West 51st Street expired October 1, 1930. The two leases had values of $100,000 and $185,000, respectively, at the date of decedent's death and at the time when distributed to the trustees. The trustees amortized the value of such leases over the remaining life thereof, the amount of such amortization reflected by their books during each of the years 1923 and 1924 being $20,324.52. By December 31, 1925, the total amortization or exhaustion thus charged off on the leaseholds amounted to $219,335.45, and on that date the assets of the four trusts (A, B, C and D) were as follows:
| Nature of asset | Trust A | Trust B | Trust C | Trust D | Total |
| Cash | 589.96 | 687.80 | 422.79 | 2,865.87 | 4,566.42 |
| 2,750 shares Kohler & Campbell, Inc | 101,160.75 | 101,160.75 | 101,308.00 | 101,308.00 | 404,937.50 |
| 4,205 shares Auto-Pneumatic Action Co | 155,548.00 | 155,548.00 | 155,548.00 | 155,696.00 | 622,340.00 |
| 6,420 shares Autopiano Co | 195,328.50 | 195,328.50 | 195,328.50 | 195,328.50 | 781,314.00 |
| 570 shares Brambach Piano Co | 10,725.00 | 10,725.00 | 10,650.00 | 10,650.00 | 42,750.00 |
| 1,008 shares Milton Piano Co | 32,256.00 | 32,256.00 | 32,256.00 | 32,256.00 | 129,024.00 |
| 2,800 shares Standard Pneumatic Action Co | 87,500.00 | 87,500.00 | 87,500.00 | 87,500.00 | 350,000.00 |
| Leaseholds owned: | |||||
| South side of West 51st St | 2,280.85 | 2,280.84 | 2,280.84 | 2,280.84 | 9,123.37 |
| Northeast Corner 12th Ave. & West 51st St | 14,135.29 | 14,135.30 | 14,135.30 | 14,135.29 | 56,541.18 |
| 190,000 participation in 5% mortgage certificate of New York Title & Mortgage Co | 45,000.00 | 45,000.00 | 45,000.00 | 55,000.00 | 190,000.00 |
| 20 shares Auto-Pneumatic Action Co | 550.00 | 550.00 | 550.00 | 550.00 | 2,200.00 |
| 1,000 shares Autopiano Co | 26,992.50 | 26,992.50 | 26,992.50 | 26,992.50 | 107,970.00 |
| Total | 672,066.85 | 672,164.69 | 671,971.93 | 684,563.00 | 2,700,766.47 |
*1891 In the decree of the Surrogate's Court (heretofore referred to as entered on May 23, 1927, and as being the final decree in the State court proceeding) the accounts of the trustees, including provision for the amortization of the leaseholds and the reservation of such amortization as a part of the principal of the four trusts, were approved.
In accordance with the decision of the Court of Appeals of the State of New York (heretofore referred to) the trustees have paid *396 to each of the petitioners during each of the years here in question not only the amount of $25,000 as required under the will which provided for the creation of trusts A, B and C, but also the excess of such income (exclusive of the amount retained for the amortization of leaseholds) produced by such trusts over the said $25,000. The excess of income over $25,000 produced by the trust created for the testator's widow has likewise been paid to the daughters, petitioners herein. The petitioners received taxable income from the estate in question and included the same in their income-tax returns for 1923 and 1924 as follows:
| 1923 | 1924 | |
| Rita M. Kohler White | $102,187.94 | $43,732.14 |
| Vera M. Kohler Alker | 101,945.27 | |
| Olga K. Miglietta | 95,272.65 | 34,660.44 |
*1892 Fiduciary returns were filed by the trustees for each of the years 1923 and 1924, and upon such returns deductions from gross income were claimed in the amount of $20,324.52, representing the exhaustion or amortization of leaseholds heretofore referred to. Each of the petitioners also filed income-tax returns for 1923 and 1924, reflecting therein the distributive income as shown by the fiduciary returns, together with their separate incomes and deductions. None of the petitioners claimed deductions on their returns for said years of any amount for exhaustion or amortization of said leaseholds, though, as indicated above, the amount returned by them was determined by the trustees by taking such deduction. Upon an audit of the returns of the trustees and of the three petitioners, the Commissioner disallowed as a deduction from the gross income shown by the fiduciary return in each of the years 1923 and 1924 the amounts claimed on account of exhaustion or amortization of leaseholds hereinabove referred to in the amount of $20,324.52 and added to the income shown by the individual returns of each of the petitioners the amount of $6,774.84 for each of the years here involved.
OPINION.
*1893 SEAWELL: The issue with which we are concerned arises on account of the trusts referred to in our findings as A, B, C and D, which were created under the terms of the will of Charles Kohler. The decedent died on June 4, 1913, leaving a large estate, and by the terms of his will provided that a portion thereof should be set aside which would be sufficient to produce income for each of the petitioners during the life of each of them in the amount of $25,000. A similar provision was made for his widow, who is not a petitioner in *397 this proceeding. The trusts were not created until after extended court proceedings which terminated in 1921 with a decision by the Court of Appeals of the State of New York. The trusts were then created and the trustees received property on account of each trust of some $680,000. Included in the property so received were two leaseholds of the respective values of $100,000 and $185,000, and one-fourth of the value of each leasehold was included in the trust for each daughter and one-fourth for the widow. One lease expired in 1927 and the other in 1930. The remaindermen with respect to each of the trusts for the petitioners were the issue*1894 of the respective daughters. While we are not shown in detail the amount produced by each trust and the exact disposition thereof, our understanding is that substantial amounts were produced by each trust (computed by taking as a deduction the amount retained for amortization of the leaseholds) in excess of that required to pay the annual amount of $25,000 to each of the daughters (petitioners herein) and that pursuant to the decision of the Court of Appeals of New York (hereinbefore referred to) such excesses were paid to the respective daughters. And we understand further that similar excesses were produced by the trust for the widow and that these excesses were likewise paid to the daughters. In the fiduciary returns as filed by the trustees, the amount retained as amortization of the leaseholds was claimed as a deduction and the petitioners as beneficiaries reported in their returns the amounts so shown by the trustees, which were likewise the amounts distributed to them.
Our question is whether the action of the trustees in claiming a deduction for amortization of leaseholds was correct in arriving at the amount distributable to the petitioners and therefore taxable to them. *1895 The fact that the petitioners have reported in their returns the amounts distributed to them by the trustees is not conclusive as to the amounts upon which they are to be taxed, since the controlling statute (section 219(a)(4) and (d) of the Revenue Act of 1921 and corresponding provisions of the Revenue Act of 1924) provide that the amount to be returned is that which, "pursuant to the instrument or order governing the distribution, is distributable to such beneficiary, whether distributed or not." Since the decision in (certiorari denied, ), many cases have arisen before the Board with respect to the income upon which a life beneficiary is to be taxed, and we have held that where the trustees create an unauthorized reserve out of income to replace depreciable assets of the corpus of a trust estate, the amount so withheld is distributable and taxable to the life beneficiaries. , and *1896 ; aff'd., ; certiorari denied, . While the foregoing cases *398 dealt with depreciation of tangible assets, whereas the case at bar deals with exhaustion of leaseholds, we can see no difference in the principle which should be applied on account of the income withheld in either case. Unless, therefore, it can be said that the instrument providing for the distribution of the income authorized the trustees to retain an amount on account of the exhaustion of the leaseholds, the amount retained for that purpose would be taxable to the petitioners.
The instrument which provided for the distribution of income to the petitioners was the will of the decedent and, as we said in , it is to this writing which we must look in determining what was distributable to them. When we come to look at the will we are unable to find any provision which would show authority for the retention of the amount in question by the trustees. What the will provided was that a portion of the decedent's estate should be*1897 set aside sufficient to produce $25,000 annually for each of the daughters during their respective lives and that upon their respective deaths the residuary estate should go to their issue. The Circuit Court of Appeals of New York, in interpreting the will, recognized that it would be practically impossible for the trustees to set aside property which would produce exactly the amount required of $25,000 in each instance and that the trustees were justified in setting aside an amount which would be sufficient under all reasonable circumstances to produce the desired income. The said court held further, in effect, that since the daughters were the residuary legatees under the decedent's will to whom all property, other than that required for the creation of trusts therein named and for the satisfaction of certain specific bequests not here material, passed immediately and absolutely, the excess of any income produced by such trusts should be paid to the daughters. Under such circumstances, we fail to see authorization on the part of the trustees to provide for replacing exhausting or wasting corpus for the benefit of the remaindermen. As the court said in *1898 :
* * * The beneficiary is not interested in the capital of the trust, but only in the income. If there are accretions to the capital, these are not distributable as income, so that the beneficiary may receive any part of them; and if there are capital losses they cannot be made good out of the income. The capital may be depleted by such losses; but the income for that taxable year is not. It may in future years be diminished because of the diminution of the capital.
To a similar effect see (affirming ), where the court held that the trustee of a testamentary trust can not withhold any part of the life tenant's share of income of the trust estate in order *399 to make good exhaustion or wear and tear of capital assets, since losses in such cases fall on the reversioners or remaindermen. See also , and *1899 . The situation here involved is to be distinguished from the one considered in , where the life beneficiaries had an interest in the corpus as remaindermen and a depletion deduction was allowed. In that case the court distinguished the case of , in which a depreciation deduction was not allowed on the ground that the life beneficiary had no interest in the corpus and "was merely a beneficiary entitled only to income of the trust created for her life."
In the foregoing cases where the deduction was not allowed, the income from the trust was to be paid to the life beneficiary during his natural life with remainder over (usually to his issue), and the same is true of the case at bar, except that the life beneficiary is to receive a sum certain each year in the amount of $25,000 and whatever additional amount is produced by the trust, that is, the entire income produced by the trust. But we fail to see that the provision for the payment of at least a certain amount changes the principle to be applied and authorizes*1900 the trustees to set aside a fund to replace wasting assets and turn them over to the remaindermen; their duty was to set aside property which would produce at least a certain amount of income, pay the income therefrom to the life beneficiaries and, when the property has served the purpose for which it was set aside, release it for the benefit of the remaindermen. The petitioners call our attention to the rule laid down in ; , to the effect that "where trustees or executors find a portion of the estate invested in what are termed 'wasting' securities, they should pay to the life beneficiary only so much of the income as represents a fair return upon the capital value, accumulating and retaining the residue for the benefit of the remaindermen, unless a contrary intention is evidenced from the will itself, read in the light of surrounding circumstances," but it is likewise true that a trustee is not permitted to retain an allowance for depreciation of wasting assets where the declaration of trust merely directs that the trustee pay over to the life beneficiary the income from such property. *1901 ; and . See also , and . We think the intention here shown was that the remaindermen should receive only that which was left after it had been used for the benefit of the life beneficiary, and under such circumstances, even if the leaseholds were entirely exhausted, the remaindermen have no *400 right to complain because the testator saw fit to leave his property in such a way that they only have the possible chance of taking what might be left after their use by the life beneficiary. Perry on Trusts and Trustees, vol. 2, p. 895. The trustees in this instance were, of course, charged with the duty of maintaining an amount of property sufficient to produce $25,000 for each of the petitioners, but there was no provision in the will which required them to make the leaseholds a part of the trusts for the benefit of the daughters, nor, if they did make such assets a part of such trusts, that the value of such property should be kept unimpaired. What the trustees*1902 did was to retain a part of the income produced by the trusts in order that the trust property might remain unimpaired, thus seeking to create corpus from income. Since we find no authorization for such action under the will, we are of the opinion that the action of the Commissioner in adding such amount to the income of the petitioners should be sustained.
Nor do we think it material that the accounts of the trustees, showing the amounts in question retained as amortization of leaseholds, were approved by the Surrogate's Court, since it does not appear that an issue was raised as to the correctness of the trustees' action. The parties who might have complained were the petitioners and, as the petitioners suggest, they may have acquiesced in such procedure, but we do not think that acquiescence on their part can render nontaxable to them income which they were entitled to receive.
Judgment will be entered for the respondent.