*2970 1. The will of the decedent provided that his executors should continue his busienss, "the net profits thereof to be paid to my wife for the support of herself and my children during her natural life." Held, that under the laws of Pennsylvania, the widow was entitled to receive the net profits of the business. Such profits are taxable as her income whether distributed or not.
2. A return filed by the executors and trustees of an estate is not the return of the beneficiary thereof for the purposes of the statute of limitations, although such beneficiary is entitled to receive the net profits of the business conducted by the estate.
3. The petitioner and others purchased property which was necessary to gain access to property which they owned and used as a place of business and immediately conveyed such purchased property to the city as a public thoroughfare. Held, that the amount so paid is not deductible as an ordinary and necessary expense of the business of the year when paid or as a loss.
*489 In Docket*2971 No. 14063 the petitioner seeks the redetermination of deficiencies for the years and in the amounts as follows:
| 1917 | $61.06 |
| 1918 | 9,041.24 |
| 1919 | 5,384.55 |
| 1920 | $271.28 |
| 1921 | 321.81 |
| 1922 | 2,906.75 |
In Docket No. 25751 petitioner seeks a redetermination of the deficiency of $2,938.79. The errors assigned in the petition are numerous but are summarized in the petitioner's brief into the following:
(1) That petitioner should be taxed upon one-seventh of the entire income of the estate of her deceased husband, Jacob Haller, instead of the entire income of the estate as proposed by the Commissioner.
(2) That determination of a deficiency against the petitioner is barred by the statute of limitations.
(3) That petitioner was entitled to deduct from her income charitable contributions made solely on her behalf.
(4) That for the year 1917 the net income and excess-profits taxes of the estate of Jacob Haller and the distributive share of petitioner in such estate was erroneously computed in the following particulars:
(a) in refusing to allow as a deduction from income an amount of $5,737.71;
(b) by including an item of $716.52; and
(c) in determining*2972 an excess-profits tax against such estate.
FINDINGS OF FACT.
The petitioner is an individual residing in Erie, Pa. She is the widow of Jacob Haller who was a citizen of the United States and a resident of Erie, Pa. Jacob Haller (hereinafter sometimes referred to as the decedent) died on July 1, 1895. His will, with codicil attached, was filed with the Registrar for the Probate of Wills for the County of Erie, Pennsylvania, on July 9, 1895. The will of Jacob Haller, dated December 13, 1893, provided in part as follows:
Secondly. I order and direct my Executors hereinafter named, to sell and dispose of my wholesale and retail grocery business, as soon as may conveniently be after my decease, and also to collect all outstanding accounts and settle up my business as soon as possible; and when the whole is converted into money I give and bequeath all my personal property, as follows:
One third part thereof I give & bequeath unto my beloved wife, Mary Haller and the other two third parts thereof I give and bequeath unto my seven (7) children, Charles J. Haller, Frank A. Haller, Edward W. Haller, Cora E. Haller, Otto Haller, Leah O. Haller and Alma C. Haller, share and share*2973 alike.
Thirdly, I give, devise and bequeath my three story brick building, situate on the East side of State Street, between 12th and 13th Streets, Erie, Pa., unto my wife, Mary Haller, for and during her natural life, provided she does not marry again, but should she marry again then I only give and bequeath unto her from that time on only such an interest therein as she would have, had I died intestate. This devise to her is also made subject to the payment of all taxes by her, she is also to keep the building in good repairs and keep the same insured in a reasonable amount, during said period. And from and immediately *490 after her decease or in case of remarriage from that time, I give and devise the same including the land or ground lying immediately south thereof, unto my seven children, to-wit, Charles J. Haller, Frank A. Haller, Edward W. Haller, Cora E. Haller, Otto Haller, Leah O. Haller and Alma C. Haller, share and share alike, and to their heirs and a assigns forever.
Fourthly. All the rest, residue and remainder of my real estate, including the land or ground lying immediately North of above stated brick building, I order and direct to be converted into*2974 money as soon as the same can conveniently be done after my decease, and for that purpose, I do hereby authorize and empower my said Executors, hereinafter named, and the survivor of them, to sell and dispose of my said residuary real estate, either by public or private sale or sales, for the best price or prices that can be gotten for the same and on such terms and conditions as to them or the survivor of them may seem best. And by proper deed or deeds, conveyances or assurances in the law, to be duly executed, acknowledged, and perfected, to grant, convey and assure the same to the purchaser or purchasers thereof in fee simple. And when the whole of my said residuary estate shall be converted into money as aforesaid, I give and bequeath the same unto my seven children. Charles J. Haller, Frank A. Haller, Edward W. Haller, Cora E. Haller, Otto Haller, Leah O. Haller, and Alma C. Haller, share & share alike, and to their heirs & assigns forever. And until said sale or sales are made I give and bequeath the use thereof unto my wife, Mary Haller.
And lastly, I do nominate, constitute and appoint my wife, Mary Haller and my bookkeeper, John M. Miller, Executors of this my last*2975 will and testament.
The codicil to said will, dated May 18, 1895, provided as follows:
I, Jacob Haller the within named testator, do hereby make and publish this codicil to be added to my last will and testament, bearing date the thirteenth day of December A.D. 1893 in manner following: I hereby revoke that part of my will and testament marked "Secondly" disposing of my wholesale and retail grocery business and further revoke the nomination and appointment of Mary Haller and John M. Miller as executors and instead thereof, I order and direct my executors hereinafter named to continue my wholesale and retail grocery business for and during such period of time as the same shall be carried on at a reasonable profit. The net profits thereof to be paid to my wife for the support of herself and my children during her natural life; but in case she should marry again, then said profits shall be paid by my executors to my children or their legal representatives for their maintenance and support. Whenever said business shall cease to be carried on at a profit, I order and direct my executors to dispose of said business and the "good will" thereof to the best advantage and invest the proceeds*2976 thereon in real estate first mortgage securities and pay the interest arising therefrom to my wife for the support of herself and my children remaining at home for and during her natural life or while she remains my widow. At the death of my wife I will, order and direct that said business be sold by my executors if same has not been disposed of before and that the money received by my executors therefor be divided equally among my children. And I nominate, constitute and appoint my bookkeeper John M. Miller, my son Charles J. Haller and Albert M. Doll Executors of my last will and testament and of this codicil thereto attached.
From 1873 to the time of his death the decedent was engaged in the retail grocery business in the City of Erie. In connection with *491 such business he also did a small wholesale fruit and produce business.
The petitioner and the decedent were married in 1881. At that time petitioner had no children. The decedent had three children by a former marriage, Charles, Frank, and Edward. The petitioner and the decedent had four children, cora, Otto, Leah, and Alma. At the time of the death of the decedent the ages of the children were: Charles, *2977 20; Frank, 18; Edward, 16; Cora, 13; Otto, 11; Leah, 7; and Alma, 5. Charles Haller left school in 1891 and was thereafter engaged with his father in the conduct of the business. Prior to 1891 he had helped about the store after school and on holidays. Jacob Haller was in poor health during the last four years of his life and on his doctor's advice spent a part of his time in the South. During his absence the business was operated by Charles Haller and John M. Miller, who was an old employee in the store and one of the executors named in the will and codicil.
Frank Haller was also working in his father's business at the time of the father's death. Edward Haller was attending school at that time but worked about the business in his spare time. The other children and the widow took no active part in the business. None of the children were married and all lived at home with their parents. The relationships between Jacob Haller and his wife, between the father and his children, and between Mary Haller and her children and step-children were very cordial. The boys worked in the store without any salary but were given spending money from time to time. Prior to the decedent's*2978 death he had indicated to Charles that it was his intention to make him a partner in the business when he should arrive at the age of 21 and also to make the other boys partners as they became of age, if they would all work together in the store. At the time of the decedent's death the business was not large.
Otto Haller died before the taxable years here in question without having attained the age of 21, leaving no widow or children.
After the death of Jacob Haller, his will was discussed between his widow and the older sons. The sons agreed to continue to operate the business and to do the best they could for the widow and for their brothers and sisters as well. The widow assured them that she did not want anything that did not belong to her, that she hoped there would be enough for all, and that if the business grew she knew there would be. The three older sons continued in the operation of the business and about a year after the death of the decedent changed it from a retail to wholesale business. At about the same time Edward left school and devoted his entire time to the business. All of the children continued to live at home with the petitioner. The three sons drew*2979 small salaries from the business *492 and paid monthly board to the petitioner. Sums were withdrawn from the business by the petitioner as she needed them. Charles Haller assumed the management of the business as the active head and money would be paid from time to time to the children or for their account as needed. Whenever any money was withdrawn by either the widow or the children, Charles was consulted about the matter. Such sums so drawn out or paid for the account of the widow or children were charged to them on the books of the business. In 1914 each of the children was credited with $4,000 and in 1920 each of them was credited with $5,000. This was done at the suggestion of Charles and with the consent of the petitioner in order to write off the charges against the children and establish a credit against which they could draw. During the taxable years here involved some or all of the children had married and established homes of their own.
In 1908 the property in which the business was carried on was destroyed by fire. The loss was covered by insurance to the extent of over 92 per cent of the value of the investment in the business. After the fire the three*2980 boys determined to continue the business and to use the insurance money for that purpose. This determination was communicated to the petitioner, who readily consented.
The Commissioner determined that for the year 1917 the petitioner was taxable upon so much of the income as was distributed to her and that for the remaining years the petitioner was taxable upon all of the net income of the business.
During the years 1917 to 1923, inclusive, there were paid from the business operated by the estate of Jacob Haller to various charitable organizations the following amounts:
| 1917 | $1,247.19 |
| 1918 | 2,254.78 |
| 1919 | 449.19 |
| 1920 | $667.98 |
| 1921 | 654.10 |
| 1922 | 941.28 |
Such payments were made with the knowledge and consent of the petitioner. The Commissioner has refused to allow such amounts as deductions in computing the distributable income of the estate taxable to the petitioner or as contributions made by the petitioner.
During 1917 the estate of Jacob Haller owned certain premises at 1221-1225 State Street, which abutted upon an alley way. A pavement had been laid upon an adjoining street and an assessment was foreclosed on the alley way and purchased by one*2981 Hewes, who threatened to close the alley way and prevent the abutting property owners, including the estate of Jacob Haller, from using it. Suit was instituted and carried to the Supreme Court of the State, which decided in favor of Hewes who immediately put a fence across both ends of the alley. The property owners required such alley way for loading and unloading in the rear of their buildings and in 1917 *493 acquired it from Hewes. The estate of Jacob Haller paid as its share of the purchase price $5,737.71 during 1917. This amount included legal fees incurred in the prosecution of the suit. The owners immediately transferred the alley way to the City of Erie to be used as a public street or highway, which conveyance was accepted by the city. In computing the income of the estate of Jacob Haller for 1917 the Commissioner refused to allow any part of said payment of $5,737.71 as a deduction.
Previous to 1910 the estate of the decedent accepted a piece of real estate in payment of an account which seemed uncollectible. In 1910 the estate entered into an agreement to sell it to one Rafolowski, who made a present payment of $50 and agreed to pay $50 every six months*2982 thereafter with interest, with the privilege of paying the balance at any time. The total sales price was $1,250. Payments were made until 1917 when there was a balance still due of $750. This amount with interest of $30 was paid on March 16, 1917. The Commissioner determined that such payments represented a gain of $716.52 and included such amount in computing the taxable income of the estate. Rafolowski went into possession of the property in 1910. The deed was not delivered to him until payment was made in full in 1917.
OPINION.
PHILLIPS: Several errors were assigned in the petition and urged in the brief filed by petitioner. It is the contention of the petitioner that under the will of Jacob Haller, construed in the light of the surrounding circumstances at the time of his death, one-seventh of the income is distributable to her and one-seventh to each of the children who were living during the taxable years. With this contention we can not agree. The courts of Pennsylvania, in construing similar language in other wills, have held that there was created a life estate in the person designated to receive the income for the benefit of himself and others. *2983 In re Paisley's Appeal,70 Pa.St. 153; Appeal of Mazurie,132 Pa.St. 157; 19 Atl. 29; In re Cressler's Estate,29 Atl. 90. Under these decisions of the Supreme Court of Pennsylvania the children would not have been in any position, by reason of the provisions of the will of the decedent, to require any accounting from their mother.
It is urged that the circumstances surrounding the decedent at the time he executed the codicil and at the time of his death indicate that he intended his wife and his children to share equally in the profits of the business. With this we can not agree. We find nothing which would indicate that he intended the mother to be accountable to the children for a seven-eighths or a six-sevenths interest in *494 the profits of the business. All of the children were living at home and none of them were of age. The business was not very large but apparently sufficiently large for the comfortable support of the family as a unit. Everything indicates that while the decedent desired his sons to continue in the business, and eventually desired his children to own it, it was also his intention, *2984 so long as the mother lived, that she should remain the head of the household and in a position to control the income and its distribution. There is no basis on which we can say that it was the intention of the testator that his widow should be under the duty to pay over to the children any part of the income which, under the will, was payable to her. Nor is there any evidence sufficiently definite to permit us to determine that the operation of the business was continued under any agreement which superseded the provisions of the will. It is true that the widow did not withdraw all of the profits from the business but only withdrew those sums which she needed, leaving the balance in the business. It is also true that the children withdrew certain sums from the business from time to time in addition to the salaries which were paid to the sons who were actively engaged in the business, but this was done at the suggestion of one of such sons and with the consent of all concerned. The picture presented is one of a united family working harmoniously together to build up a business, the widow being content to receive a comfortable livelihood from its operation and the sons being satisfied*2985 to work for a meager salary, knowing that sooner or later they would become entitled to receive their share of the enlarged business. It may be a matter of regret that the Government is required to step into such a peaceful picture and raise the question of the precise legal rights of each of the parties, but taxes must be collected and the taxes with which we are here concerned are levied upon those who are entitled to receive the income. We are of the opinion that the determination of the Commissioner that all of the income of the business was distributable to the petitioner must be affirmed.
The petitioner also alleges that error was committed in failing to allow as a deduction certain contributions made to charitable organizations. The amount of the contributions and the character of the organizations to which the contributions were made are not in question, the deduction having been disallowed solely on the ground that the contributions were made by the estate and not by the petitioner. The evidence discloses, however, that they were made with her knowledge and consent and charged against her income. Inasmuch as she is entitled to the entire income of the business, it*2986 makes little difference whether the amounts are paid directly from income by the estate or distributed to her by the estate and then *495 paid over to the charitable organizations by her. In either case it is her income that is used to make the contributions. We are satisfied that the payments made by the estate were for the account of the petitioner and should be deducted in computing her taxable net income.
The petitioner claims that assessment and collection of the taxes here in controversy are barred by the period of limitations set out in the statutes. There is no evidence that this petitioner ever filed any income-tax returns for any of the taxable years here involved, although it does appear that for some of such years the executors of the estate filed returns showing the income of the estate. Under the law the estate is a separate and distinct taxable entity from the beneficiary of beneficiaries. It must account for capital gains and losses which are not distributable to or borne by the beneficiary and for net income which is not distributable under the terms of the will, while the beneficiary is charged with the duty of returning distributable income. Section*2987 219, Revenue Acts of 1918 and 1921; Baltzell v. Mitchell, 3 Fed.(2d) 428; Willcuts v. Ordway, 19 Fed.(2d) 917; Mary P. Eno Steffanson,1 B.T.A. 979">1 B.T.A. 979; Louise P. V. Whitcomb,4 B.T.A. 80">4 B.T.A. 80; Elizabeth S. Sprague,8 B.T.A. 173">8 B.T.A. 173, and cases there cited. Returns filed by the executors of the estate of this decedent can not serve to start running the period in which assessments of tax may be made against this petitioner.
The petitioner claims that in computing the net income of the estate for 1917 the Commissioner erred in refusing to allow as a deduction $5,737.71 expended to secure title to an alley way which had been used as such for some 30 years by the owners of the property abutting on it but which had been sold under the lien of an assessment for paving. Immediately upon acquisition the alley way was conveyed to the city as a public thoroughfare, apparently for the purpose of making certain that it should always be available. The question then presented is whether when an owner of property conveys a portion of such property to the city for the purpose of a public thoroughfare which will be*2988 of benefit to his remaining property, he has incurred a loss or expense to the extent of the cost of the property so conveyed. We do not conceive that he has. We are rather of the opinion that in such circumstances the cost of the property so conveyed is to be added as a part of the cost of the property benefited by such conveyance. Upon this assignment of error the determination of the Commissioner is approved.
The petitioner alleges that the Commissioner committed error in determining that the estate realized a gain of $716.52 from the receipt of $780 from one Rafolowski in 1917, the details of which are set forth in the findings of fact. Inasmuch as Rafolowski went into *496 possession of the property in 1910, it would appear that under the decisions of the Pennsylvania courts the contract to sell ripened into a sale at that time and that legal title was held by the estate only as security for payment of the purchase price. If this be so, the estate in 1917 did not sell the property and did no more than collect an indebtedness due it for a sale which took place in 1910. It is not clear how this petitioner would be affected by the question whether or not the estate*2989 realized a gain from this transaction, for such a gain would not constitute profits of the business which would be distributable to the life beneficiary, but rather a gain taxable to the estate. Section 2(b), Revenue Act of 1916 and decisions cited above. We are of the opinion that the Commissioner committed error in including in the distributable income of the estate more than $30 which represented the interest paid by Rafolowski in 1917.
The petitioner further alleges that the Commissioner erroneously computed her income from the estate of Jacob Haller for 1917 in determining that such estate was subject to excess-profits taxes or, in the alternative, that if such estate is subject to such taxes, error was committed in determining the amount thereof and the allocation thereof between the estate and petitioner. In his brief the respondent admits that he was in error in determining that there was any excess-profits tax due from the estate or from Mary Haller. See also Reinecke v. Gardner,277 U.S. 239">277 U.S. 239; *2990 48 Sup.Ct. 472; 6 Am.Fed.Tax.Rep. 7794. The deficiency for 1917 should be computed accordingly.
Decisions will be entered under Rule 50.