*784 Federal estate taxes and interest thereon, assessed against the estate of the decedent and paid by the beneficiaries after administration of the estate had been closed and the executors discharged, are not allowable as deductions from income of the beneficiaries.
*1093 These are consolidated proceedings for the redetermination of deficiencies in income tax for the year 1929 as follows:
| Docket No. | Petitioner | Deficiency |
| 63636 | Helen B. Sulzberger | $1,394.36 |
| 63637 | Kate F. Becker | 4,910.89 |
| 72976 | James R. Becker | 1,469.18 |
Each petitioner claims an overpayment for the taxable year. The issues are (1) whether Federal estate taxes, assessed against the estate and paid by the beneficiaries after administration of the estate had *1094 been closed and the executors discharged, are deductible from gross income of the beneficiaries, and (2) whether interest thereon is also deductible by the beneficiaries.
FINDINGS OF FACT.
The facts were all stipulated by the parties, *785 which stipulation is here adopted in full as our findings of fact, omitting only the exhibits incorporated by reference, as follows:
1. Abraham G. Becker died testate on May 14, 1925, survived by his widow Kate F. Becker, his son James H. Becker, and his three daughters Helen B. Sulzberger, Margtret B. Friedlich and Louise B. Shire. A copy of the last will and testament of said Abraham G. Becker is attached hereto as Exhibit A and by express reference thereto is made a part hereof. Said will was duly admitted to probate in the Probate Court of Lake County, Illinois, on June 6, 1925, and the Executors named in said will were duly qualified.
2. The residuary legatees under said will and the share of each in the residue of the estate of said Abraham G. Becker, deceased, were as follows:
Kate F. Becker, one-third; James H. Becker, one-sixth; Helen B. Sulzberger, one-sixth; Margaret B. Friedlich, one-sixth; Louise B. Shire, one-sixth.
3. On January 5, 1926, a partial distribution was made by said executors under said will to said residuary legatees of the following shares of stock in Quotation Securities Corporation, on which date said shares of stock for the purposes of*786 this proceeding may be considered to have had a fair market value of approximately $30.0667 per share:
| Name | Number of shares | Value |
| Kate F. Becker | 13,233 1/3 | $397,882.67 |
| James H. Becker | 6,616 2/3 | 198,941.33 |
| Helen B. Sulzberger | 6,616 2/3 | 198,941.33 |
| Margaret B. Friedlich | 6,616 2/3 | 198,941.33 |
| Louise B. Shire | 6,616 2/3 | 198,941.33 |
| 39,700 | 1,193,647.99 |
On March 4th and 5th, 1926, a partial distribution was made by said executors under said will to said residuary legatees of the following shares of preferred and common stock of A. G. Becker & Co., on which dates said shares of preferred and common stock for the purpose of this proceeding may be considered to have had a fair market value of approximately $100 per share for the preferred stock and approximately $34.215 per share for the common stock:
| Number of shares | |||
| Name | Preferred | Common | Approximate value |
| Kate F. Becker | 5,133 1/3 | 13,233 1/3 | $966,111.83 |
| James H. Becker | 2,566 2/3 | 6,616 2/3 | 483,055.92 |
| Helen B. Sulzberger | 2,566 2/3 | 6,616 2/3 | 483,055.92 |
| Margaret B. Friedlich | 2,566 2/3 | 6,616 2/3 | 483,055.92 |
| Louise A. Shire | 2,566 2/3 | 6,616 2/3 | 483,055.92 |
| 15,400 | 39,700 | 2,898,335.52 |
*787 *1095 Substantially all of the balance of the assets of said decedent's estate, consisting of cash and securities, was distributed to the said residuary legatees on or before July 20, 1926, and amounted to sums approximately as follows:
| Kate F. Becker | $700,000.00 |
| James H. Becker | 350,000.00 |
| Helen B. Sulzberger | 350,000.00 |
| Margaret B. Friedlich | 350,000.00 |
| Louise A. Shire | 350,000.00 |
| $2,100,000.00 |
The final account of the Executors under said will was filed and approved by the Probate Court of Lake County, Illinois, and the Executors were discharged on January 13, 1927.
4. On or about April 30, 1926, the executors filed the original estate tax return and paid an estate tax thereon at the time of the filing of said return of $313,446.89, which payment was net after the proper deduction of the credit for State inheritance taxes of $214,809.34.
5. Subsequent to the filing of said estate tax return and after the said executors had been discharged, the respondent made an audit of said estate tax return and proposed a deficiency thereon in a substantial amount, as shown by a notice of deficiency addressed to the Executors of the Estate. Hearings*788 were had in the Estate Tax Unit wherein an agreement was reached that the correct deficiency in Federal Estate Tax was $330,981.16.
The assessment roll, June, 1929, List F-304, L-2, shows an assessment of additional estate taxes of $330,981.16, and interest thereon (after credit) of $57,805.83, said assessment roll reading as follows:
Estate of Abraham G. Becker, James H. Becker, et al, Executors
Respondent, however, in view of the fact that said Executors had been theretofore discharged, refused to enter into a settlement agreement with said former Executors, but required that such settlement agreement be entered into by the individual legatees under said will. Pursuant thereto, on August 30, 1929, the said individual residuary legatees entered into an "Agreement as to Final Determination of Tax Liability (Form 866)" with the then acting Commissioner of Internal Revenue, a copy of said agreement being attached hereto as Exhibit "B" and by express reference thereto made a part hereof. On September 10, 1929, and petitioners and the other residuary beneficiaries under the Will of Abraham G. Becker paid the aggregate amount of $388,786.99 in full of said deficiency and interest*789 thereon. For the convenience of said legatees, each such legatee paid to A. G. Becker & Co. his pro-rata share of such deficiency and interest and said Company issued its check for the full amount of said deficiency and interest, and at the request of the legatees said check was delivered to said Collector in full payment of said deficiency and interest thereon. The contribution of each of said legatees to such total payment was based on a statement rendered to each of said residuary legatees by A. G. Becker & Co., showing the proportionate amount of tax and interest on each as follows:
| Tax | Interest | Total | |
| Kate F. Becker | $110,327.05 | $19,268.61 | $129,595.66 |
| Helen B. Sulzberger | 55,163.53 | 9,634.30 | 64,797.84 |
| Margaret B. Friedlich | 55,163.53 | 9,634.31 | 64,797.83 |
| Louise B. Shire | 55,163.52 | 9,634.31 | 64,797.83 |
| James H. Becker | 55,163.53 | 9,634.30 | 64,797.83 |
| 330,981.16 | 57,805.83 | 388,786.99 |
*1096 6. On September 10, 1929, the properties of each of the petitioners consisted sisted of the property which they had received as a residuary legatee under the will of Abraham G. Becker as aforesaid and a comparatively small amount of property which*790 they each had in their own right prior to the receipt of the said legacies, together with an increment therein which had accrued from a rise in the market value of said property and an excess of income received from said property over expenses. The taxable incomes of each of the petitioners for the year 1929, exclusive of income from personal services, were each largely derived from property received under the will of Abraham G. Becker.
7. During the year 1929 the petitioner, James H. Becker, Docket No. 72976, made contributions or gifts to or for the use of organizations named in Section 23(n) of the Revenue Act of 1928, in the amount of at least $16,000.00, and it is stipulated that said petitioner is entitled and shall be limited to a deduction for contributions in the year 1929 to the extent of 15% of said petitioner's ordinary net income as finally determined by the Board, plus 15% of capital net gain of $3,190.39, said 15% to be computed before any deduction for contributions.
8. Petitioner James H. Becker is a resident of Highland Park, Illinois. Said petitioner's income tax return for the year 1929 was filed on a cash receipts and disbursements basis and said return*791 was filed in the office of the Collector of Internal Revenue at Chicago, Illinois. The tax shown on said return was paid by said petitioner as follows:
| March 8, 1930 | $1,902.28 |
| June 6, 1930 | 1,902.28 |
| Sept. 12, 1930 | 1,902.28 |
| December 5, 1930 | 1,902.27 |
| 7,609.11 |
9. On Janury 23, 1932, petitioner, James H. Becker, filed a claim for refund of the said amount of income taxes paid by him for the year 1929, said claim being based on the fact that said petitioner did not deduct the aforesaid federal estate tax paid by him in 1929 in the sum of $55,163.53.
10. During the year 1929, the petitioner, Kate F. Becker, Docket No. 63637, made contributions or gifts to or for the use of organizations named in Section 23(n) of the Revenue Act of 1928, in the amount of $18,048.00 and it is stipulated that said petitioner is entitled and shall be limited to a deduction for contributions in the year 1919, to the extent of 15% of said petitioner's ordinary net income as finally determined by the Board, plus 15% of capital net gain of $5,728.88, said 15% to be computed before any deduction for contributions.
11. In the case of petitioner Kate F. Becker, the respondent concedes*792 that the adjustment made by him in the notice of deficiency attached to the petition whereby said petitioner's income is increased for capital gain in the sum of $10,589.59 is erroneous and that said amount of $10,589.59 should be excluded from the taxable income and/or capital gain of the petitioner for the year 1929.
12. Petitioner, Kate F. Becker, is a resident of Highland Park, Illinois. Said petitioner's income tax return for the year 1929 was filed on a cash receipts and disbursements basis and said return was filed in the office of the Collector of Internal Revenue, Chicago, Illinois. The tax shown on said return was paid by said petitioner as follows:
| March 8, 1930 | $2,344.09 |
| June 13, 1930 | 2,344.09 |
| September 12, 1930 | 2,344.09 |
| December 12, 1930 | 2,344.03 |
| 9,376.30 |
*1097 13. On January 23, 1932, petitioner Kate F. Becker filed a claim for refund of the said amount of income tax paid by her for the year 1929, said claim being based on the fact that said petitioner did not deduct the aforesaid Federal Estate Tax paid by her in 1929, in the sum of $110,327.05.
14. During the year 1929, the petitioner Helen B. Sulzberger, Docket No. 63636, *793 made contributions of gifts to or for the use of organizations named in Section 23(n) of the Reveue Act of 1928, in the amount of $5,405.40 and it is stipulated that said petitioner is entitled and shall be limited to a deduction for contributions in the year 1929, to the extent of 15% of said petitioner's taxable net income as finally determined by the Board, said 15% to be computed before any deductions for contributions.
15. In the case of Petitioner, Helen B. Sulzberger, respondent concedes that the adjustment made by him in the notice of deficiency attached to the petition whereby petitioner's income in increased for profit from liquidation of stock in the sum of $5,614.87 is erroneous to the extent of $5,294.03 and that said amount of $5,294.03 should be excluded from the taxable income of the petitioner for the year 1929.
16. Petitioner, Helen B. Sulzberger is a resident of Chicago, Illinois. Said petitioner's income tax return for the year 1929 was filed on a cash receipts and disbursements basis and said return was filed in the office of the Collector of Internal Revenue, Chicago, Illinois. The tax shown on said return of $586.39 was paid by said petitioner on March 12, 1930.
*794 17. On January 23, 1932, petitioner Helen B. Sulzberger filed a claim for refund of the said amount of income taxes paid by her for the year 1929, said claim being based on the fact that said petitioner did not deduct the aforesaid Federal Estate Tax paid by her in 1929, in the sum of $55,163.53.
OPINION.
TRAMMELL: The first question presented here is whether Federal estate taxes, assessed against the estate of the decedent and paid by the beneficiaries after administration of the estate had been closed and the executors discharged, are deductible from gross income of the beneficiaries.
The applicable statute is the Revenue Act of 1928. In determining the net income of a beneficiary for years prior to 1928, that is, under the Revenue Act of 1926 and prior acts, the amount of estate taxes paid and claimed as a deduction, by a beneficiary, is allowable as a deduction to the beneficiary. See the retroactive provisions of section 703 of the 1928 Act. However, a different rule was adopted for computing net income for 1928 and succeeding years, as follows:
SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
* * *
(c) *795 *1098 Taxes generally - Taxes paid or accrued within the taxable year, except -
* * *
For the purpose of this subsection, estate, inheritance, legacy, and succession taxes accrue on the due date thereof, except as otherwise provided by the law of the jurisdiction imposing such taxes, and shall be allowed as a deduction only to the estate.
Petitioners contend that since their income for the taxable year was derived largely, if not entirely, from the property distributed to them from the estate of their decedent, the word "estate" as used in the above quoted statute may be fairly construed to mean their respective estates in the property after distribution, and that therefore the taxes in controversy are allowable as deductions to them under this statute.
We are unable to agree with this contention for several reasons. In the first place, the phrase "shall be allowed as a deduction only to the estate", is plainly intended to apply as a restriction. If Congress had intended thereby to permit the deduction to be taken in 1928 and subsequent years either by the estate of the decedent or by the beneficiaries, according to whether the tax was paid and the deduction*796 claimed by the one or the other, as specifically authorized for the years prior to 1928, the quoted phrase would have effected no restriction in the allowance of the deduction and would have made no change in the existing law. Indeed, under the construction urged by the petitioners, it would be difficult to perceive why this particular language was used; no effect or meaning could be given to it, since the deduction would be allowable either to the estate of the decedent or to the beneficiary if the provision quoted had not been included in the act.
We think it is plain, therefore, that the legislative intent was to change the existing law and to restrict the allowance to the estate of a deduction which theretofore had been allowable either to the estate of the decedent or to the beneficiaries, under certain circumstances. This conclusion is supported by the report on the Revenue Bill of 1928 by the Senate Committee on Finance, 70th Congress, First Session, which reads as follows:
SEC. 23(C). DEDUCTION FOR TAXES.
Section 23(c) of the House Bill provides that estate, inheritance, legacy and succession taxes shall be allowed as deductions only to the decedent's estate and*797 not to the beneficiary. This is a change in existing law and is a substantial simplification. Furthermore, there is no sound policy which requires the deduction to be allowed to the beneficiary. The distributions of corpus which he receives are not treated as income and the tax which he is required to pay in effect is merely a decrease in the corpus transmitted to him.
*1099 In , we held that a California inheritance tax paid in January 1928 by a beneficiary of the estate was not deductible by him in computing his taxable net income for 1928. There the taxpayer made substantially the same contention that is urged here. In affirming our decision () the court said:
* * * Such deductions are ordinarily matters of grace and a statute which only allows them to estates could not seem to involve an arbitrary classification. Essentially they are carved out of the estates of decedents prior to devolution of the property and beneficiaries get nothing but what is left. *798 , supra. There can be no objection to depriving a legatee of a deduction of inheritance taxes from his income for naturally they are not payable by him but from his legacy which properly he only receives less the taxes. If he gets the gross amount and has to pay the tax personally, it is not the fault of the taxing system * * *.
Respondent's action on the first issue is approved.
The second issue is whether interest on Federal estate taxes, assessed against the estate and paid by the beneficiaries after administration had been closed and the executors discharged, is deductible by the beneficiaries. Section 23(b) of the Revenue Act of 1928 provides that in computing net income there shall be allowed as a deduction "all interest paid or accrued within the taxable year on indebtedness", with exceptions not material here.
Petitioners contend that they are entitled to deduct from their gross income, under the above quoted statute, the amount of the interest computed on the Federal estate taxes paid by them. The reasons hereinabove stated which preclude the allowance to the petitioners of a deduction for the taxes paid by them also*799 impel us to the conclusion that they may not deduct the interest.
Obviously, the deduction claimed by the petitioners, in order to be allowable under the statute, must represent interest paid by them as such on their own indebtedness, that is, on indebtedness for which they were liable. The statutory deduction does not embrace amounts paid to or for another to discharge the other's interest obligation. , and authorities cited. The indebtedness involved here was a liability of the estate of the decedent, and not of the beneficiaries. It was the duty of the executors to pay the interest, as well as the taxes, and the petitioners, as beneficiaries, were entitled to receive only what thereafter remained of the property of the estate. If they received the gross amount, without the payment of the taxes and interest due, they were liable therefor as transferees to the extent of the property so received. The amount would be collectible only out of the property, and thus the final position of the beneficiaries would be the *1100 same as if the taxes and interest had been paid by the executors prior to distribution. *800 The voluntary payment of the taxes and interest by petitioners amounted only to the discharge of an obligation of the decedent's estate. Such expenditures are not deductible. (and authorities cited); affd., ; certiorari denied, .
Respondent did not err in denying the deductions claimed.
In the stipulation filed by the parties, it is agreed that certain adjustments shall be made to the taxable income of the petitioners. Such adjustments will be given effect under Rule 50.
Judgment will be entered under Rule 50.