*1369 A testamentary trustee, pursuant to authority vested in her by the will, erected a building on real estate acquired from the testator, and paid for it out of trust funds and borrowed money, and continuously reserved from the rentals sufficient amounts to establish a fund to replace in the corpus so much of such investment as is lost by depreciation. The amounts so reserved should not be included in the distributable income of the beneficiaries where since the erection of the building they have acquisced in the action of the trustee and where the will required, or was at least susceptible of, the construction placed upon it.
*102 The Commissioner has determined the following deficiencies in income tax for the following years:
| Taxpayer | 1923 | 1924 | 1925 |
| Mollie Netcher Newbury | $20,891.87 | $5,587.29 | |
| Townsend Netcher | 3,398.00 | 2,668.65 | |
| Ethel Netcher Vaillant | $10,008.32 | 8,700.33 | |
| Mollie Netcher Newbury, Trustee of Irving Netcher, Separate Trust Fund No. 4 | 10,008.32 | 6,232.08 | 2,329.00 |
| Charles Netcher | 9,085.04 | 10,069.89 | 2,931.18 |
*1370 Charles Netcher died November 4, 1931, and his executrix, Gladys Oliver Netcher, now appears on his behalf.
FINDINGS OF FACT.
The parties have filed a stipulation of facts as follows:
1. Each of the petitioners is a beneficiary under the principal trust created by the will of Charles Netcher. Attached and marked Exhibit "A" is a true and correct copy of the said will of Charles Netcher.
2. Each of your petitioners, Charles Netcher, Townsend Netcher, Ethel Netcher Vaillant and Irving Netcher are children of the said Charles Netcher, who became the beneficiaries of the Trust Estates created under and by virtue of the said Last Will and Testament of Charles Netcher, deceased. All of them had reached the age of twenty-five years prior to January 1, 1923, except Irving Netcher, who was twenty-five years old May 13, 1926.
3. At the death of the said Charles Netcher, which occurred on June 19, 1904, he was the owner and possessed of certain real estate in Block 58, Original Town of Chicago, in the City of Chicago, State of Illinois. The said real estate at the time of the death of Charles Netcher was improved with obsolete buildings, the income of which was not sufficient*1371 to pay the carrying charges. The title to said property under and by virtue of said Will passed to Mollie Netcher Newbury (then known as Mollie Netcher) as the Trustee appointed under and by virtue of the said Will, and said Mollie Netcher Newbury has ever since acted as the Trustee of said estate.
4. Under authority of the said Will the Trustee, prior to 1923, borrowed money on the security of the said real property and erected thereon a modern steel and tile fire-proof store and office building seventeen stories high and having three basements. The building yielded an annual net profit which was treated as part of the funds belonging to the trusts provided for by the said Will and was distributed to the life beneficiaries as follows: one-third to Mollie Netcher Newbury, one-sixth in trust for each of the said Charles Netcher, Townsend Netcher, Ethel Netcher Vaillant and Irving Netcher, until they respectively attained twenty-five years, after which the said net income was paid direct to said persons in the same proportions as theretofore credited to them in trust.
5. In computing the distributable income of the trust the trustee has continuously deducted from the gross*1372 income of the trust estate an allowance for the loss sustained through exhaustion, wear and tear of the said improvements and *103 has retained the same in the funds of the corpus of the trust estate as a reserve to cover the loss sustained through such exhaustion, wear and tear of the said improvements.
6. No part of the amount retained has been distributed to the beneficiaries under the said trust.
7. In computing the distributable income of the said trust for the years 1923 to 1925, inclusive, the trustee has deducted the amount of the said allowance for exhaustion, wear and tear, and in computing their respective taxable incomes the petitioners have included therein only the amounts of their respective shares of the distributable income thus determined by the trustee.
8. In computing the distributable income of the trust for the years 1923 to 1925, inclusive, the Commissioner has not allowed as a deduction any amount for the exhaustion, wear and tear of the said improvements, and in computing the taxable net income of each of the petitioners upon which the alleged deficiencies have been determined he has included the proportionate share of each petitioner of*1373 the amount retained by the trustee for the purpose of replacing the loss sustained through such exhaustion, wear and tear of the said improvements.
9. Should the Board hold that in determining the distributable income of the trust there should be deducted a reasonable amount for the exhaustion, wear and tear of the said improvements, it is agreed that for the purpose of determining such reasonable allowance the depreciable value of the said improvements was $5,714,759.52 for each of the years in question, and that for the purpose of computing the loss on the said improvements sustained by exhaustion, wear and tear thereof, the life of the said improvements is sixty-six and two-thirds years.
10. The amount that was borrowed by the Trustee and invested in the improvements set forth in Paragraph 4 hereof was $4,973,680.59.
Exhibit A referred to in paragraph 1 of the above stipulation contains the following pertinent provisions:
SECOND: - All the rest, residue and remainder of my estate of whatever nature and wherever situate, I give, bequeath and devise to my said wife, Mollie Netcher, in trust (in this will otherwise described as the principal trust estate) for the uses*1374 and purposes following, to wit: -
(a) One third of the entire net income of said principal trust estate shall be paid over by said trustee, annually or oftener as to said trustee shall seem fit, and as the said income accrues, until the termination of this trust as hereinafter provided, to my said wife, Mollie Netcher, during her life and after her death until the termination of this trust to such person, persons, corporation or corporations and for such purposes as my said wife may be deed or will direct. If my said wife should did before the termination of this trust as hereinafter provided and without directing the disposition of said one-third of the thereafter accruing net income of said principal trust estate by deed or will as hereinabove authorized, then said one-third of the said income shall thereafter be disposed of in the same manner as hereinafter provided for the disposition of the remaining two-thirds of the net income of said principal trust estate.
(b) The remaining two-thirds of the entire net income of said principal trust estate, shall be divided by said trustee annually or oftener as to said trustee shall seem fit, and as said income accrues, until the termination*1375 of this trust as hereinafter provided, into equal shares, one such share to be thereafter held in trust by said trustee as a separate trust fund for each of my children, now or hereafter born to me, who is living at the time of my death or who has died *104 before my death leaving a widow, or child or children living at the time of my death. Each such separate trust fund shall be subject to the provisions, limitations, and conditions hereinafter provided with respect to the same.
(c) Until each of my said children attain the age of twenty-five (25) years, respectively, the said trustee shall use and expend so much of the said separate trust fund, so held for each such child respectively as aforesaid, for the education and support of such child as to said trustee shall seem best for the interest of said child and in such amounts and at such times and in such manner as to said trustee shall seem best. When each such child shall attain the age of twenty-five (25) years, said trustee shall thereafter pay over to such child, during the life of said child, semi-annually or oftener as may seem best to said trustee, the net income from said separate trust fund and the accumulations*1376 thereof, and also in like manner the thereafter accruing share or portion of the said two-thirds of the net income of said principal trust estate provided for such child under the preceding paragraph "b" of this will, it being my will that until the termination of this trust as hereinafter provided, each of my said children shall, after reaching the age of twenty-five (25) years, receive thereafter, during the life of such child, his or her equal share of the said two-thirds of the net income of the said principal trust estate divided as provided in the said preceding paragraph "b". At any time after the attainment of the age of twenty-five (25) years by any of my said children, the said trustee may, in her discretion, pay over to any such child, in addition to the expenditures and payments hereinabove provided, the sum of twenty-five thousand dollars ($25,000) or such part thereof as to said trustee may seem fit, and at any time, from and after the attainment of the age of thirty (30) years by any of my said children, the said trustee may, in her discretion, pay over to any such child, for the purpose of enabling such child to engage in business, or for any other purpose which said*1377 trustee may deem for the best interests of such child, the additional sum of one hundred thousand dollars ($100,000) or such part thereof as to said trustee may seem fit. Both of said payments of twenty-five thousand dollars ($25,000) and of one hundred thousand dollars ($100,000) shall be made out of the separate trust fund hereinabove provided for the benefit of the child to whom such payments are made, or if said separate trust fund be not sufficient for said payments, then out of the principal of said principal trust estate, provided it be not necessary to sell any of my real estate in block fifty-eight (58) of the original town of Chicago, in Cook County, Illinois, for the purpose of making such payments, it being my wish that said real estate in said block fifty-eight (58) shall be held together for the benefit of my entire estate and the beneficiaries thereunder, subject to the power of sale or other disposition hereinafter given to the executor or executors, trustee or trustees under this will.
In making all payments, however, hereinabove or hereinafter provided, as well as in all other expenditures for the support or benefit of my said children, or any of them, or of any*1378 of their children, it is my wish that the then existing size and income of my estate and of their respective interests therein shall be carefully considered, and that while my said children and grandchildren should be encouraged and assisted in all habits of thrift and industry, they should not be given the means for extravagance or idleness.
The will then provides for the termination of the separate trusts upon conditions not here pertinent, and continues:
(g) The said principal trust Estate, and each and every of the separate trust funds hereinabove created, shall wholly cease and determine (unless *105 terminated earlier under the foregoing provisions of this will) when all of my said children have died, and the youngest living child of any of my said living hildren has reached the age of twenty-one (21) years, and the said trustee shall thereupon convey to my said wife, Mollie Netcher, if she be then living, or if she be dead, to such person, persons, corporation or corporations and for such purpose as she may have by her deed or will designated or provided, one-third of the then existing principal and accumulations of said Principal Trust Estate, and if my wife be*1379 then dead and has failed or neglected to provide by deed or will for the disposition of the said share of said principal trust estate, then the said one-third of the said principal trust estate shall be divided equally among my grandchildren who are then living and the child or children of any of my grandchildren who have died leaving a child or children then living, division to be made per stirpes and not per capita. The remaining two-thirds of said Principal trust estate shall, upon the termination of said principal trust estate, as aforesaid, be divided equally among my grandchildren who are then living, division to be made per stirpes and not per capita.
* * *
Third: I do hereby appoint my said wife, Mollie Netcher, as the executrix of this my last will and testament, and I request that she be not required to furnish sureties upon her bond either as executrix or as trustee. In case of the nonacceptance, resignation or death of my said wife, or of any contingency rendering my said wife unable or unwilling to perform her duties as such trustee or executrix, the Northern Trust Company of Chicago, Illinois, shall act as such executor and as trustee of the said Trust estate, *1380 but my said wife shall have the power to designate or appoint, by will or deed, an additional trustee to act jointly with the said The Northern Trust Company; said Executor, trustee or trustees shall have all the rights, powers and authority hereby given to my said wife as executrix and trustee, respectively, and I hereby fully authorize and empower the said executrix or executor and said trustee or trustees hereinabove provided for to sell and dispose of, either at public or private sale, any property real or personal which may be included in said principal trust estate or in any of said separate trust funds above described, and to invest and reinvest from time to time the income and proceeds thereof, either in real or personal property, in such manner as they may deem best; to continue the business in which I may be engaged at the time of my death, to lease, convey, exchange, re-exchange, invest, reinvest the same or the proceeds thereof, to sign, seal, acknowledge, and deliver proper and valid instruments for the conveyance, transfer, exchange or other disposition of any or all of my said property, either real or personal, and of every sort and nature, to improve the same, borrowing*1381 money therefor; to encumber or pledge the same for any loan or loans; to subdivide or plat any real estate, to build or re-build thereon and generally to sell, lease, manage and control all of said trust property and the accumulations thereof and to invest and reinvest from time to time the same and all the income and proceeds thereof either in real or personal property, and all investments and re-investments to be in the absolute discretion of such executrix, executor, trustee or trustees and without limitation as to the character thereof, with all powers in regard to said property and all investments or re-investments and the management and control thereof that I myself would have, were I then living, without obligation on the part of any vendee, grantee, lessee, obligee and the encumbrance or any other person claiming under them or their successor or successors in trust to see to the application of the purchase money or avails of any such, or other disposition.
*106 It is my will, however, that in case the said The Northern Trust Company or any corporation or person, except my said wife, Mollie Netcher, is acting as executor or trustee under this will, such corporation*1382 or person shall present and file in the Probate Court of Cook County, Illinois, annually during the period of Administration of my estate, and in the Circuit Court of Cook County, Illinois, annually thereafter during the continuance of said trust, an accurate account of so much of said principal trust estate or separate Trust Funds as is invested and employed by said executor or trustee in the continuance or conduct of any active manufacturing or merchandising business in which I may be engaged at the time of my death, and that if from any such accounting it appears that the said business has not been profitably conducted during the twelve months preceding any such accounting, it shall be in the power of the said courts, respectively, to order the said executor or trustee to sell out such business, and thereupon said executor or trustee shall sell out such business, within such reasonable time as may be fixed by the said court, it being my opinion that any active manufacturing or merchandising business in which I may be engaged, at the time of my death, should be sold or discontinued as soon as this can be done without undue prejudice to the interests of my said estate.
OPINION.
*1383 MURDOCK: The only question in these proceedings is to determine the amount of income of the trust which is taxable to the beneficiaries. Its solution depends upon the rights of these beneficiaries under the will of Charles Netcher. They claim the trustee had a right and a duty to retain enough from the annual income from rents to offset depreciation on the building. The Commissioner maintains that he made no mistake in adding this retained amount to the income of the beneficiaries.
Where a trustee makes investments with the corpus of an estate, he is duty bound to see that, so far as reasonably may be, the corpus always includes the equivalent of the amount invested. If bonds belong to a testator and are worth more than par at his death, the trustee may not have to retain any of the interest. But courts have frequently held, for example, that a trustee who buys bonds at a premium, should retain the equivalent of the premium from interest and pay only the excess to the life tenants. ; *1384 ; ; ; ; ; ; ; ; ; ; ; affd., ; . Might he accomplish a contrary result by simply erecting a building with corpus or borrowed funds and paying all of the rents to life tenants? He could if he had authority from the grantor expressed in the instrument creating the trust. Here the will gave no such authority.
*107 This case is distinguishable from those where the exhausting property was originally a part of the trust estate. The building in question was not in existence when the testator died, but was built at some later date. The principal part of the cost was paid from borrowed funds. The balance came from the corpus of the estate. The building was erected on land in Block 58 of*1385 the original town of Chicago. The will gave the trustee authority to thus borrow and build. There is nothing in the will indicating that the testator intended the trustee should not deduct depreciation on any buildings she might erect. In the only provision of the will specifically referring to this property, the testator indicated a wish that the real estate in this Block 58 should be held together for the benefit of his entire estate and the beneficiaries thereunder. Had the trustee made no provision for replacing the building or paying off the mortgage from the income of the building, obviously the testator's wish could have been carried into effect only at the expense of other property constituting corpus of the estate in violation of the rights of remaindermen. If the language of the will is not clear on this point, the interpretation placed upon it by the parties may be the decisive factor. ; ; ; *1386 Kate M. Simon, Supra;; ; . The trustee retained a part of the income for the purpose of maintaining the corpus whole. The life beneficiaries not only made no objection to this action, but now insist it was proper. The will required, or was at least susceptible of, the construction which the trustee and the beneficiaries placed upon it. This construction was adverse to the interests of these petitioners. We think that they had no right under the will to have the annual income from the building distributed to them except as it exceeded an appropriate amount to restore the cost of the building at the end of its estimated life.
Reviewed by the Board.
Judgment will be entered under Rule 50.