*2717 Evidence held insufficient to show a state of facts permitting the petitioners herein, who were legatees and life beneficiaries under a decedent's will, to deduct in their individual income returns a proportionate share of the net capital loss suffered by the estate during the taxable year 1923.
*1160 The above cases, which were consolidated for hearing by agreement of counsel, are proceedings for the redetermination of deficiencies in income tax of the petitioners for the calendar year 1923 in the following amounts:
| Samuel Riker, Jr | $1,053.70 |
| John J. Riker | 1,106.73 |
| Charles L. Riker | 26,301.04 |
| Lavinia R. Strong | $1,056.80 |
| Mary J. Riker | 1,054.96 |
| Margaret Riker Haskell | 1,151.00 |
*1161 It is alleged that the Commissioner erred in increasing the income of each petitioner by disallowing as a deduction the loss allocable to and sustained by the petitioners on the sale of securities by the estate of John L. Riker. An allegation in the case of Charles L. Riker that the Commissioner erred in refusing*2718 to allow as a deduction from net income a loss of $101,925 sustained through the dissolution of J. L. & D. S. Riker, Inc., was disposed of at the hearing by a stipulation wherein the parties agreed that this petitioner was entitled to deduct a loss in the amount of $101,933.12 from the gross income on which the deficiency was based. The parties further stipulated that the income of each of the petitioners should be increased in the amount of $93.75. In addition the respondent claimed an increased deficiency at the hearing on the ground that he had erroneously allowed each of the petitioners to deduct from income the amount of $251.38, being a proportionate share of taxes paid during the taxable year by the estate of John L. Riker.
FINDINGS OF FACT.
The following stipulation was filed:
It is hereby stipulated and agreed by and between the above-named petitioners and the Commissioner of Internal Revenue acting by their respective counsel of record, that the following statement of facts be taken by the Board to be true, with the right reserved to all parties to introduce further testimony in addition thereto.
1. John L. Riker, now deceased, died a resident of the City and*2719 State of New York on the 6th day of July, 1909, leaving a last will and testament which was duly admitted to probate by the Surrogates Court of the County of New York on the 3rd day of August, 1909 and letters testamentary on said will were duly issued to John J. Riker, Margaret Riker Haskell, Lavinia R. Strong, Samuel Riker, Jr., and Charles L. Riker. A copy of said last will and testament is attached hereto marked Exhibit "A."
2. Under the said will of John L. Riker, the above-named petitioners and Martha R. Proctor during the year 1923, were the beneficiaries of the residue of the said Estate, said residue being held in trust by the above-named Samuel Riker, Jr., as Trustee. By the provisions of Paragraphs 7 and 8 of said will (seven children having survived the testator) said residue was divisible into fifteen parts, of which eight were payable to the petitioners and Martha R. Proctor (testator's wife having predeceased him) outright and seven were directed to be held in trust for said petitioners and Martha R. Proctor, the income only payable to them during their lives. On December 31, 1923, the terms of the will had not been carried out in that no substantial distribution*2720 of the eight-fifteenths of the residue had actually been made to the beneficiaries. On December 31, 1923 substantially all the residue, both the part left outright to the beneficiaries and the part left in trust for them was held by the said trustee. No separate trust accounts had been set up on the books and records of the estate. By practice losses have been applied in the computation *1162 of income to the portion of income specified by the will to be paid to these petitioners and Martha R. Proctor, by the trustee, while income realized by way of capital gains has been added to the portion intended to be paid outright to the beneficiaries but which in fact has been held by the trustee.
3. During the year 1923, the said Estate of John L. Riker owned stock of the Metropolitan Trust Company of New York, which had a March 1, 1913 value of $49,280 and sold said stock for the sum of $28,000, resulting in a loss to the said Estate in the sum of $21,280. Due to small gains realized by said Estate by reason of the sale of other securities during the year 1923, said Estate suffered a total loss on the sale of securities in the sum of $20,659.01.
4. In filing their income*2721 tax returns for the said year 1923, and pursuant to practice as aforesaid, each of the said petitioners claimed as a deduction from gross income the sum of $2,951.29, constituting one-seventh of the said loss suffered by the said Estate in the sum of $20,659.01. Each of said petitioners included in their tax returns, income from the Estate of the said John L. Riker.
5. In computing the deficiency due from each of the petitioners as is shown by the deficiency letters attached to the petitions, the Respondent has disallowed as a deduction in their said income tax returns the said sums of $2,951.29, and has not allowed as a deduction from income any portion of said sums.
6. Subsequent to the date of the deficiency letter, the Commissioner through a Revenue Agent examined the books and records of the Estate and increased the income thereof by the sum of $656.26, holding said sum to be distributable to these petitioners and Martha R. Proctor, making an increase in income to each of these petitioners in the sum of $93.75, which increase is hereby assented to by these petitioners.
7. The Commissioner through the said Revenue Agent further in such examination disallowed as a deduction*2722 in computing income the sum of $1,759.66 claimed as taxes paid by the estate, said sum having been used to decrease the income of these petitioners and Martha R. Proctor. Said sum represents real estate taxes paid by the estate for a corporation known as Riker Homestead Estates, of which corporation the estate of John L. Riker was a stockholder, said corporation having no income with which to pay such taxes and the only property held by such corporation being real estate on Long Island which constituted a part of the estate left by the decedent John L. Riker. In the event the Board holds that such taxes were a proper deduction to be made by the estate and properly applied in computing the distributive shares of these petitioners and Martha R. Proctor, no change is necessary with respect to this item in the deficiency as computed by the respondent; but if the Board holds that such deduction was not properly made by the estate, or not properly deducted in computing the income of these petitioners and Martha R. Proctor, then the income of each of these petitioners should be increased in the sum of $251.38 over and above the amounts used by the respondent in determining the deficiencies*2723 asserted by him.
The material portions of the will of John L. Riker were as follows:
SEVENTHLY. I direct my executors hereinafter named or such of them as shall qualify, the survivors and survivor of them, to divide all the rest, residue and remainder of my property or the proceeds of sale thereof, and the property or interest therein mentioned in the fourth paragraph of this my will whenever the rights of my said wife therein shall terminate, or the proceeds of sale thereof, into as many equal parts or shares as shall exceed by one double the number of children of mine living at the time of my death and children of *1163 mine then dead leaving lawful issue then living, and I give, devise and bequeath unto my said wife one of such equal parts or shares absolutely forever and in the event of her dying before me then I give, devise and bequeath such part or share unto my children living at my death and the lawful issue then living of my children then dead, such issue taking by representation the share or portion only which such child, if living, would have taken. I also give, devise and bequeath unto each child of mine living at the time of my death one of such first mentioned*2724 parts or shares and unto the lawful issue then living of each child of mine dying before me, two of such first mentioned parts or shares, such issue taking the same by representation.
EIGHTHLY. I give, devise and bequeath one of said first mentioned parts or shares unto my said executors or such of them as shall qualify the survivors and survivor of them; in trust nevertheless for the benefit of each child of mine living at my death, as follows, that is to say: to hold so much thereof as may be real property until the same shall be sold and to invest and keep invested so much thereof as may be personal property and the proceeds of sale of any real property, and to receive the rents, interest and income of all the property constituting such share, and after paying therefrom all taxes, assessments, premiums of insurance and necessary expenses for repairs or otherwise, to pay the net rents, interest and income unto the child for whose benefit the same shall be so held in trust, for and during his or her natural life, and on his or her death to convey, assign, transfer and pay over the capital or such share unto such person or persons, corporation or corporations as such child shall*2725 in and by his or her last will and testament, direct limit and appoint, and in default of such appointment by will, then to convey, assign, transfer and pay over such capital unto the lawful issue of such child, such issue taking the same by representation; and in default of such appointment by will and of such lawful issue, then unto my children then living and the lawful issue of my children then dead leaving lawful issue then living, such issue taking by representation the share or portion only which their parent, if living, would have taken.
* * *
TENTHLY. I constitute and appoint my said wife Mary J. Riker, my daughters Margaret Riker Haskell, and Lavinia R. Strong, and my sons John J. Riker and Samuel Riker, Jr., and Charles L. Riker the executors of this my will, * * *
A fiduciary return of income for the calendar year 1923 was filed on Form 1041 by Samuel Riker, Jr., Executor. Upon this return there was deducted from income under a heading "Loss from Sale of Real Estate, Stocks, Bonds, Etc." the amount of $20,659.01, and the net income reported was shown thereon to be distributable in approximately equal amounts to the petitioners and Martha R. Proctor.
OPINION.
*2726 MURDOCK: Each of the petitioners in these proceedings is a life beneficiary and a legatee under the will of John F. Riker, deceased. By the terms of the will and by reason of the fact that the testator's wife had predeceased him, each petitioner was entitled to receive outright 8/105 of the residuary estate and was also a life beneficiary of *1164 1/15 or 7/105 thereof. Each petitioner alleges that the Commissioner erred in increasing his taxable income for the year 1923 by disallowing a claimed deduction of 1/7 or 15/105 of the amount by which the loss sustained upon the sale during the year of certain stock which was a part of the estate, exceeded the gain realized from the sale of other securities of the estate.
Section 219 of the Revenue Act of 1921 provides that the individual normal tax and surtax imposed by the Act shall apply to the income of estates or of any kind of property held in trust, including inter alia:
(1) Income received by estates of deceased persons during the period of administration or settlement of the estate. and,
(4) Income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals, * * *
The*2727 fiduciary is held responsible for making a return of income for the estate or trust for which he acts. In the case of an estate during the period of administration or settlement he is permitted to deduct from its taxable income, the amount of any income properly paid or credited to any legatee, heir, or other beneficiary. In computing the net income of the estate or trust the fiduciary may also deduct that part of its income of the class described in paragraph (4) above which, pursuant to the instrument or order governing the distribution, is distributable during its taxable year to the beneficiaries, and in such case it is provided that there shall be included in computing the net income of each beneficiary that part of the income of the estate or trust which, pursuant to the instrument or order governing the distribution, is distributable during the taxable year to such beneficiary.
Section 214 of the Act allows the individual to deduct in computing net income losses sustained during the taxable year and not compensated for by insurance or otherwise if incurred in trade or business, and losses sustained during the taxable year and not compensated for by insurance or otherwise*2728 if incurred in any transaction entered into for profit though not connected with the trade or business.
In a number of cases arising under the Revenue Acts of 1918 and 1921 involving the taxable income of beneficiaries of trusts the Board and the courts have held that capital losses suffered by the trust are not allowable deductions from the income payable to the beneficiaries by the terms of the instrument or order creating the trust, and we need not further discuss that question here. See , and cases cited therein; ; ; ; *1165 ; . In the case of , it was held that capital losses of an estate during the period of administration were not allowable deductions to a legatee or beneficiary thereof.
The petitioners seek to distinguish their situation from the Widener case and similar cases on the ground that the terms of*2729 the will of John L. Riker were not strictly carried out but were modified by consent of the beneficiaries in such a manner that capital losses should be permitted to be deducted from income otherwise taxable to them. To sustain this contention they point particularly to that portion of the agreed statement of facts which reads as follows:
By practice losses have been applied in the computation of income to the portion of income specified by the will to be paid to these petitioners and Martha R. Proctor, by the trustee, while income realized by way of capital gains has been added to the portion intended to be paid outright to the beneficiaries but which in fact has been held by the trustee.
This statement is vague and ambiguous. When it is read in connection with other portions of the stipulation our uncertainty as to the true situation and as to the method by which the residuary estate was being administered during the taxable year and prior years is increased. From the statement that "by practice losses have been applied in the computation of income," we do not know whose computation is indicated or how, why, or by whom such losses have been applied, nor does the phrase necessarily*2730 indicate that there has been any fixed method of operation or administration of the estate by agreement of the petitioners, as contended in their brief. Another reason why this statement is ambiguous is that while we can understand how capital losses of the entire estate could be deducted from the income of each of the beneficiaries as is here attempted to be done, we are at a loss to understand how any capital gains could be added as the stipulation recites "to the portion intended to be paid outright to the beneficiaries but which in fact has been held by the trust," when, as the stipulation further recites, "no separate trust accounts had been set up on the books and records of the estate." In addition to these ambiguities the record is silent as to certain matters which if shown might clarify the situation. We are not told whether or not the debts and expenses have been paid and we do not know when or under what circumstances the executors to whom letters were issued ceased to act as such or in what manner the residuary estate came into the hands of Samuel Riker, Jr., as trustee. The stipulation states that the securities were sold by the "estate of John L. Riker" but it also*2731 shows that the whole of the residuary estate was held by a trustee. Also none of the returns of the petitioners for the taxable year are *1166 before us and we do not know how much income was returned by any of them nor how much was paid to them.
Having in mind the decisions referred to, holding that neither the beneficiary of a trust nor the beneficiary of an estate in process of administration can deduct capital losses suffered by the estate or trust, we are unable to find, from a careful study of the record in these cases, facts which convince us that the petitioners are entitled to deduct any part of the net losses suffered on the sale of the estate securities. The action of the respondent in this respect must be sustained.
The only remaining question is whether or not each of the petitioners can deduct from his income a proportionate share of $1,759.66, the amount of real estate taxes paid by the estate for a corporation of which the estate was a stockholder, when such corporation had no income but held title to certain real estate. Section 214(a)(3) of the Revenue Act of 1921 permits a taxpayer to deduct from gross income certain taxes, but the taxes deductible*2732 are those imposed upon and paid by the taxpayer. See ; . Since it has not been shown that the taxes paid by the estate were imposed upon such estate, but from the stipulation it appears that such taxes were real estate taxes imposed upon the corporation itself, this would not be an allowable deduction to the estate itself. Certainly it can not be allowed to the petitioners.
Judgment will be entered under Rule 50.