*2436 The petitioner is a Pennsylvania trust estate, and during the years 1920 to 1923, both inclusive, the income was distributed in part and accumulated in part. However, under the law of Pennsylvania, the entire income was distributable. Held that said income is taxable only to the beneficiaries under section 219(d) of the Revenue Acts of 1918 and 1921.
*1164 These are proceedings for the redetermination of deficiencies in income tax as follows: $1,950.44 for 1920; $3,240.93 for 1921; and $9,124.92 for 1922; $6,638.36 for 1923. The only error alleged by the petitioner which has not been settled by stipulation, is whether the respondent erred in holding that the petitioner was a discretionary trust, and in taxing the income to it instead of to the beneficiaries. The proceedings were consolidated for hearing and decision.
FINDINGS OF FACT.
The petitioner is a trust estate created by the last will and testament of Henry Mayer, deceased, who died at the City of Erie, Erie *1165 County, Pa., in 1915. Martin C. Mayer, James Ross Mayer, *2437 Henry E. Mayer, and Joseph G. Mayer are the duly appointed and acting trustees of said estate, having been appointed executors and trustees under the last will and testament of said Henry Mayer, deceased, and bring these proceedings in behalf of said trust estate. The will of said decedent, which was dated August 22, 1910, after making certain specific bequests, provided in material part as follows:
All of the residue and remainder of my Estate, real personal and mixed of what kind soever the same may be, and wheresoever the same may be found or located, I give, devise and bequeath to my Executors and Trustees hereafter named, in this my last will, for the following uses, trusts and purposes, namely: -
A majority of said Executors and Trustees, or their survivors, shall have the right to manage, operate, use, convey, control, sell, lease, mortgage, assign, invest or reinvest, or in any manner to dispose of any and all of my real, personal and mixed property, of which I may die seized or possessed, and to give good and sufficient deed or deeds therefor, mortgage or mortgages thereon, or assignments or leases in any wise relating to the same, and to invest and reinvest the assets*2438 and property of my estate during the continuation of the trust herein mentioned; to keep the buildings insured when deemed best by them so to do, and to make all such improvements and repairs thereto as may in their opinion be advisable, and to purchase additional real or personal estate as may be deemed advisable by them in the interests of my Estate.
Said Executors and Trustees shall continue to exercise the duties of their office so long as at least two of my said sons and Executors and Trustees remain alive, unless said trust is sooner terminated (which I hereby authorize) by the unanimous consent of all of my Executors and Trustees alive at the time of such termination; and unless sooner terminated, and when only one of my said sons and Executors and Trustees remains alive, said trust shall terminate. Upon the termination of said Trust Estate as hereinbefore provided, all real, personal and mixed property then remaining in said Trust Estate shall be equally divided absolutely and in fee simple, to and among my son or sons then surviving, his or their heirs and assigns, and the child or children of such of my other sons as may have left children, if any, then living, such children*2439 then living, if any, their heirs and assigns taking such a portion as their father would have taken if then living, subject to the payment of One-third of the net income thereof to the widow, of any such deceased son, leaving a child or children, during her life and widowhood, as provided in this my last will. In making such division, at the date of the expiration of said Trust as aforesaid, each of my sons then living, or the children of each son then deceased, shall be charged with any amounts which my respective sons or their children may have theretofore received from my Estate after my decease.
A majority of my Executors and Trustees, then living may from time to time, during the continuation of this Trust, cause a complete or partial division or divisions, of any or all of the real, and personal property, to be made, in which event such and only such of my said sons then living, shall be entitled to receive absolutely, in fee simple, equal portions of any of my said real, personal or mixed property so divided by a majority of my said Executors and Trustees, then living as aforesaid; and in case at the time of any such partial or complete partition or division, referred to*2440 in this will, any child or children may have then been left surviving, by any of my sons which *1166 may then be deceased, such surviving child, or children, their heirs and assigns shall be entitled to receive, absolutely, and in fee simple, the share which their father would have been entitled to if then living, subject to the net income of one-third thereof to the widow, if any, of such deceased son leaving a child or children, during her life and widowhood, as provided herein in this will, and in any such partial or complete division, or partition, each son then living or the share of the children, if any, then living, of each deceased son, shall be charged with any sums which have theretofore been paid to each of my sons or their respective children, after my decease.
* * *
I hereby nominate, constitute and appoint my four beloved sons, Martin C. Mayer, Henry E. Mayer, James Ross Mayer and Joseph G. Mayer, Executors and Trustees of this my last will and testament without Bond and without compensation, as said Executors and Trustees, * * *.
Among the assets of the said Henry Mayer, deceased, were 192 unimproved building lots, lying between 26th and 28th Streets, *2441 Reed Street and Wayne Street, in said City of Erie, Pa.
The value of said lots at the time of the death of said decedent, for the purpose of determining Federal taxes due to profits arising from subsequent sales thereof, was in the aggregate $90,000, or $468.75, each.
Included in the estate of said decedent, was a property known as the "Mayer Block," the income from which was, under the provisions of a codicil to the last will and testament of said decedent which was executed January 27, 1914, distributable to the beneficiaries periodically.
The correct net income of the petitioner for each of the taxable years, exclusive of the income from the said "Mayer Block," with adjustments on the basis of the lot values above stated, is as follows:
| Year | Net income exclusive of Mayer Block | Income from Mayer Block |
| 1920 | $21,849.26 | $7,303.26 |
| 1921 | 28,692.37 | 8,274.84 |
| 1922 | 52,030.76 | 10,346.26 |
| 1923 | 46,038.12 | 3,023.51 |
The amounts distributed during the taxable years to each of the four beneficiaries in cash from the income of the trust estate, including the "Mayer Block," except with respect to 1923, as noted below, were as follows:
| Year | J. R. Mayer | M. C. Mayer | H. E. Mayer | J. G. Mayer |
| 1920 | $1,484.38 | $1,333.77 | $289.90 | $1,845.79 |
| 1921 | 1,808.70 | 2,444.44 | 1,858.38 | 1,822.52 |
| 1922 | 4,192.77 | 4,425.01 | 4,253.05 | 4,426.91 |
| 1923 | 6,876.24 | 6,956.01 | 6,569.00 | 6,934.65 |
| Total | 14,362.09 | 15,159.23 | 12,970.33 | 15,029.87 |
*2442 *1167 The amounts shown above as distributions to the beneficiaries for the years 1920, 1921, and 1922 consisted of cash income. The distributions shown for the year 1923 included cash income in the following amounts: J. R. Mayer, $1,501.24; M. C. Mayer, $1,581.01; H. E. Mayer, $3,194; and J. G. Mayer, $1,559.65. The balance of said distributions for 1923 consisted of stock of Union Trust Co. and Wesleyville bonds.
A profit and loss account was carried on the books of the trust estate showing as credits items of income such as rents, interest received and profits on sales of miscellaneous capital assets, and as charges thereto expenses such as manager's salary, upkeep of buildings, pay roll, taxes and so forth. At the close of each year the balance of the profit and loss account, representing the accumulation of earnings, was carried forward to the following year as a surplus account. No entries were made at the close of any year crediting the net profit to the accounts of the beneficiaries. No ledger accounts of the beneficiaries were carried on the books during the taxable years.
The estate did not keep a journal. Receipts and disbursements of cash were recorded*2443 in the cash book, and columns were kept to reflect separately the income and expenses of each building to the extent that such division was practicable. One column, however, was kept for miscellaneous items. The disbursements of cash to the beneficiaries were not classified, but were recorded in the miscellaneous column of the cash book. With the exception of the canceled checks, the cash book and the check book stubs constituted the only records made by the trust estate showing any claimed distribution to the beneficiaries. The income of the "Mayer Block" was combined with the other income of the estate.
OPINION.
TRAMMELL: The petitioner in its pleadings called in question the correctness of the net income for the taxable years as computed by the respondent, and alleged that the respondent erred in the calculation of rentals received and in determining the amount of profit derived from the sale of real estate. These issues were settled by virtue of a stipulation of the parties, filed at the hearing, wherein was set forth the amount of the correct net income for each taxable year. The amounts so stipulated we have adopted and set out in our findings of fact above, and the*2444 redetermination of the deficiencies, if any, should be based thereon.
The only issue remaining for consideration here is one of law, namely, whether the amount of the net income, so stipulated for each of the years involved, is taxable to the trust estate, or whether it is taxable to the beneficiaries as distributable income.
*1168 The Revenue Act of 1918 provides:
SEC. 219. (a) That the tax imposed by sections 210 and 211 shall apply to the income of estates or of any kind of property held in trust, including -
* * *
(3) Income held for future distribution under the terms of the will or trust; and
(4) Income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals, * * *
* * *
(c) In cases under paragraph * * * (3) of subdivision (a) the tax shall he imposed upon the net income of the estate or trust and shall be paid by the fiduciary, * * *
(d) In cases under paragraph (4) of subdivision (a) * * * the tax shall not be paid by the fiduciary, but there shall be included in computing the net income of each beneficiary his distributive share, whether distributed or not, of the net income of the estate or trust for the*2445 taxable year * * *.
The Revenue Act of 1921 contains substantially similar provisions in so far as material here.
It is apparent, therefore, that in order to decide the issue presented, we must first determine whether or not the income in question was properly distributable to the beneficiaries. If the income was properly distributable, whether or not it was actually distributed, it is taxable to the beneficiaries under section 219(d), supra.If the income was not properly distributable, the tax must be paid by the fiduciaries. ; ; . See also .
The will which created the trust estate contains no provision respecting the disposition of the income in controversy. A codicil to the will directs that the income from the "Mayer Block" should be distributed, and the respondent has conceded that said income is taxable to the beneficiaries. However, there is no instruction otherwise regarding the disposition of income. The decedent neither directed that the income be distributed*2446 nor that it be accumulated. Accordingly, we must look to the law of Pennsylvania to determine this question.
The Pennsylvania statute - Act of April 18, 1853, P9 (P.L. 503) - provides as follows:
No person or persons shall, after the passing of this act, by any deed, will or otherwise, settle or dispose of any real or personal property, so and in such manner that the rents, issues, interest or profits thereof, shall be wholly or partially accumulated for any longer term than the life or lives of any such grantor or grantors, settler or settlers, or testator, and the term of twenty-one years from the death of any such grantor, settler or testator, that is to say, only after such decease during the minority or respective minorities, with allowance for the period of gestation of any person or persons, who under the uses or *1169 trusts of the deed, will, or other assurances directing such accumulation, would, for the time being, if of full age, be entitled unto the rents, issues, interests, and profits so directed to accumulate, and in every case where any accumulation shall be directed otherwise than as aforesaid, such direction shall be null and void in so far as it shall*2447 exceed the limits of this act, and the rents, issues, interests and profits, so directed to be accumulated contrary to the provisions of this act, shall go to and be received by such person or persons as would have been entitled thereto if such accumulation had not been directed, * * *.
The Supreme Court of Pennsylvania has held in numerous cases that, under the statute above quoted, if a will creating a trust provides for the accumulation of income beyond the period specified, or if under the provisions of the will the income might possibly be accumulated beyond said period, such provision is null and void in toto, and the income is distributable to those who would be entitled to receive it if there had been no such provision in the will. See ; ; ; ; ; ; ; and cases cited.
It further appears that, under decisions of the Pennsylvania courts, if the will contains no specific provision relating to the disposition of the income, *2448 it must be regarded as forming a part of the corpus of the estate and distributable in the same manner. In other words, in the absence of specific directions in the will, the income accumulates as part of the corpus, unless such accumulation violates the act of April 18, 1853, supra, in which latter event the income is distributable to the beneficiaries.
In the instant case, the will provides that the trust estate may continue during the lives of any three of the trustees, who are also the principal beneficiaries. It is obvious, therefore, that the life of the trust is indefinite and may continue beyond the period of 21 years from the death of the testator, with allowance for the period of gestation, as provided in the statute. Hence, under the rule of the Pennsylvania courts above referred to, any accumulation of the income in excess of the necessities of the trust itself would be unlawful, and the income would be regarded as distributable to the beneficiaries to the same extent as if an affirmative provision to that effect were contained in the will.
In *2449 , the decedent in his will made no provision for disposition of the income. He devised his house to his widow for life, together with an annuity of $2,000, and directed that upon her death the residue of his estate should be divided equally among his children. In considering the status of the income of the estate, the Supreme Court of Pennsylvania, in its opinion, said:
Frederick McKee died on the 21st of March 1865, leaving to survive him a widow and two children, one of whom is the petitioner. By his will he devised *1170 his mansion house to his wife for life, and also bequeathed to her, for a like period, an annuity of $2000. He then made the following direction: "And upon her decease I will and bequeath said house, as also all the rest of my worldly estate, to my children in equal shares, and in default of children or lineal heirs of my body, at the time of her decease, I will and bequeath all my worldly estate to my brothers and sisters in equal shares." In this we have a precedent estate so limited as to determine on an event which must certainly happen, that is, the death of the widow, and the remainder so limited to ascertained*2450 persons in esse, Frederick and Melissa McKee, that the preceding estate may determine before the estate limited in remainder. It follows that this is a vested remainder - an estate vested in praesenti, but enjoyable in futuro; that is, upon the mother's death.
The corpus of the estate is thus easily disposed of, for of that the testator determined that it should not go to his children until the death of his widow. But since his death there have been large accumulations arising from rents, issues and profits; accumulations which exceed the original estate, and the necessities of the trust, and the serious question is, what disposition shall be made of them? Were we allowed to dispose of the matter, as we may suppose the testator would have disposed of it, had he known the facts as they now exist, we would say, without hesitation, these accumulations shall go to his children, for so he would have directed. But as it is obvious that he did not anticipate an increase so large to his estate after his decease, so it is just as obvious that he entertained no intention concerning it. Hence, of such intention we can predicate nothing. On the other hand, were it not for*2451 the eighth section of the Act of 18th April 1853, the question would not be difficult of solution; for, before that act, accumulations as necessarily and naturally formed part of the original estate as vegetable accretions form part of the growing plant. In such case, as the children must wait for the possession of the corpus of the estate until the time fixed for the expiration of the precedent trust, so must they wait for the accretions which by natural growth form part of the corpus. But the Act of 1853 has altered this, and made such accumulations unlawful and void, unless, with relation to them, its terms and conditions are strictly followed.
If, in the present case, we compare the provisions of the will with the terms of the act, we will find that not only were the latter not complied with, but the testator, as we have already said, not having any such accumulations in view, never intended to comply with them. The extreme period allowed for accumulations by the act is twenty-one years, with the additional allowance of the ordinary time for gestation. Here the time is indefinite, it may be much more than twenty-one years, for it depends upon the life of Mrs. McKee.
*2452 In , the decree of the orphans' court was affirmed by the Supreme Court of Pennsylvania in a per curiam decision, and the appeal dismissed. In the opinion of the orphans' court, thus approved by the Supreme Court, it was said:
The accumulation of one-half of the income, as provided in the first codicil, is void, and Rollin takes the same for life, as provided in the original will. The accumulation, as provided in said codicil, is to continue during Rollin's life and the life of any widow he may leave, and so this provision is void in toto. ; ; ; .
*1171 In , the Supreme Court of Pennsylvania reviewed at some length its prior decisions on this question, and in the course of its opinion said:
The first and principal contention of the trustee is that "the trust for accumulations is valid during the minority of the children of George J. Edwards"; that "it is not void in toto, but*2453 only pro tanto." , is cited as authority for this position. But it is not, in any essential particular, distinguishable from . It was not in any degree affected by the act of April 18, 1853, nor was it decided therein that the trust was transgressive. In , it was held that, under the act of 1853, the direction for accumulation was void, because it was declared to be for the benefit of the testator's estate, although it was provided by him that, after his daughter, Anna, reached full age, all the excess of income of his estate beyond the annuities to her and his mother and sister should be paid to his said daughter, "for her sole and separate etate, in addition to the annuity of fifteen hundred dollars she would then be entitled to receive". His daughter, Anna, was his only child, and the accumulations therefore belonged to, and were paid to, her. In , it was held that the direction to accumulate was void on the ground that the time allowed for*2454 accumulation was indefinite, being for the lifetime or widowhood of the widow, and permitting a longer period than that allowed by the act of 1853. The learned judge of the orphans' court said: "The extreme time allowed for accumulations by the act of April 18, 1853 (P.L. 503), is 21 years, with the additional allowance for the ordinary period of gestation. In this case it is indefinite, depending on the one hand, upon the 'life or widowhood of the widow'. It may be for a longer or shorter period than 21 years. The possibility of its being for a longer period renders the provisions in the will void and of no effect. . So, also, on the other hand, these accumulations are for a period longer and other than during the minority of the children." This court, on appeal, approved the conclusion of the court below, and held that the principle on which it was based was undoubtedly sound. , was likened by this court to , in which the direction to accumulate was held to be illegal and void, and the accumulations passed under the intestate laws to*2455 the widow and next of kin, in equal moities.
In view of the decisions of the Pennsylvania courts all of the income involved in these proceedings must be regarded as distributable to the beneficiaries. Under the law of Pennsylvania it clearly could not legally be held for future distribution. The beneficiaries had the legal right to receive it. In fact, a portion of the income was actually distributed. The fact that there was no specific provision of law or a valid provision of the trust instrument for any particular periods at which distribution should be made, we think, is not important.
In our opinion Congress clearly did not intend that income of a trust which could not be accumulated, but which was required to be distributed, should escape taxation entirely merely by the manner of its distribution. If the income did not come within any of the other subsections of section 219 and was to be distributed to beneficiaries, *1172 we think that it was taxable to the beneficiaries as income under subsection (a)(4) of section 219. Omitting the income coming within subsections (a)(1) and (a)(2) of section 219 as not applicable, income was either to be held for future*2456 distribution or was to be distributed. If it was not one it was the other. The provision "whether or not at regular intervals" clearly indicates that the times or periods of the distribution were not the determining factors. But here we have income which the trust had the right to receive. The trust had the right and duty imposed on it to incur and pay necessary and proper expenses in carrying on the business. With such duties to perform, clearly, accounting was necessary to determine the income before it could be distributed. At such periods as income was determinable, it was to be distributed. Income which is to be so distributed we think comes within subsection (a)(4) of section 219 and is taxable to the beneficiaries.
Reviewed by the Board.
Judgment will be entered for the petitioner.