*867 During the year 1935 executors of decedent's estate distributed certain property to a trust for his widow. During that same year the trust realized income on the property distributed to it. It filed a return and paid the tax on the income thus received. Subsequent to the taxable year the widow elected to take under the law rather than under the terms of the will. A portion of the trust property and the income therefrom were distributed to the widow. The remainder of the trust property was paid over to a trust for the decedent's daughter, the terms of that trust being identical with the remainder provisions of the widow's trust. Held, the tax on the income received by the widow's trust during 1935 was properly paid by that trust and no part of that income was taxable either to the decedent's estate or to the daughter's trust.
*436 Respondent determined a deficiency of $144,247.08 in income tax for the year 1935 against the estate of George W. Crawford, Annie Laurie Crawford and the Union Trust Co. of pittsburgh, *868 executors, petitioners in Docket No. 104196, hereinafter referred to as petitioner estate. At the hearing respondent filed an amended answer asking for a total deficiency of $240,585.12. Petitioner estate contests the entire deficiency and claims that it has overpaid its tax and is entitled to a refund of $44,851.79.
Respondent determined a deficiency of $67,105.63 in income tax for the year 1935 against the Martha Sharp Crawford trust, Annie Laurie Crawford and the Union Trust Co. of Pittsburgh, trustees, petitioners in Docket No. 104197, hereinafter referred to as petitioner trust. Petitioner trust contests the entire deficiency and claims that it has overpaid its tax and is entitled to a refund of $20,595.61.
*437 FINDINGS OF FACT.
The facts are stipulated and we hereby adopt them as our findings of fact. They may be summarized as follows:
George W. Crawford, a resident of Pittsburgh, Pennsylvania, died April 6, 1935, survived by his widow, Annie Laurie Crawford and by one minor child, Martha Sharp Crawford. He left a last will, a copy of which is contained in the record, in which he appointed as executors Annie Laurie Crawford and the Union Trust Co. of Pittsburgh, *869 who acted in such capacity at all times here involved.
In article 8 of his will George W. Crawford devised and bequeathed the residue of his property to trustees and directed them to divide the property into four equal shares. With respect to three of the four equal shares he directed that the property should be held in trust by the trustees, "who shall invest and reinvest the same and collect the income thereof and pay the net income, from time to time as received, to my said wife during her life." Thereafter the property was to go to his child as provided below with respect to the other share. He appointed Annie Laurie Crawford and the Union Trust Co. of Pittsburgh trustees of that trust, hereinafter referred to as the Annie Laurie Crawford trust. With respect to the other share he directed that the property should be held in a separate trust fund from which the income was to be paid to his child during her life, with provision for accumulation of unexpended income during her minority. Thereafter the property was to go equally to her appointees and to her issue, or in default of issue the income was to go to testator's wife. He appointed as trustees of that trust, hereinafter*870 referred to as the Martha Sharp Crawford trust or petitioner trust, Annie Laurie Crawford and the Union Trust Co. of Pittsburgh who acted in such capacity at all times here involved.
On June 29, 1935, the executors made distributions out of the principal of the estate in their hands to the Annie Laurie Crawford trust and to the Martha Sharp Crawford trust. Such distributions were effected by the delivery to the Annie Laurie Crawford trust of securities which the executors had valued at $7,939,253.75 in their inventory filed with the Orphans' Court of Allegheny County, Pennsylvania, and by the delivery to the Martha Sharp Crawford trust of securities which the executors had valued at $2,645,902.28 in their inventory. Thereupon Annie Laurie Crawford and the Union Trust Co. of Pittsburgh, as trustees, of both trusts, executed and delivered to the executors a refunding bond, a copy of which is a part of the record.
During the year 1935, subsequent to June 29, 1935, the Annie Laurie Crawford trust realized income which it computed to be in *438 the amount of $582,637.96. The Annie Laurie Crawford trust kept its books and filed its income tax returns on the cash receipts*871 and disbursements basis for the calendar year. On March 16, 1936, the Annie Laurie Crawford trust filed its income tax returns for the year 1935, in which it reported the income in the amount of $582,637.96 and claimed as deductions the amount of $2,864.88 as trustees' commissions and the amount of $140,290.20 as income distributable (being all of the net income other than capital gains) to Annie Laurie Crawford, leaving net income in the amount of $439,482.88 (being capital gains not distributed to Annie Laurie Crawford). On the said net income it computed income tax due in the amount of $228,589.73, which it paid on the quarterly due dates.
The petitioner estate and the petitioner trust kept their books and filed their income tax returns on the cash receipts and disbursements basis for the calendar year with the collector of internal revenue for the twenty-third district of Pennsylvania. On March 16, 1936, the petitioner estate and the petitioner trust filed their income tax returns for the year 1935 and reported net income on Form 1040 in the respective amounts of $1,336,331.66 and $181,876.33, but reported no part of the said amount of $582,637.96 received and reported by*872 the Annie Laurie Crawford trust. The petitioner estate and the petitioner trust computed income tax due in the respective amounts of $744,774.58 and $75,807.06, which they paid on the quarterly due dates. No part of such amounts has ever been refunded or in any manner repaid.
On March 30, 1936, Annie Laurie Crawford executed and filed with the executors her election to take against the will of George W. Crawford, thereby becoming entitled to one-half part of the real and personal estate of the said George W. Crawford remaining after payment of all just debts and legal charges. At no time prior to March 30, 1936, had Annie Laurie Crawford determined to make such election, nor had the executors or trustees any knowledge or expectation that she would make such election.
On June 16, 1936, Annie Laurie Crawford, the executors and the trustees entered into a tripartite agreement, a copy of which is made a part of the record. Pursuant to such agreement, the Annie Laurie Crawford trust on that date turned over to Annie Laurie Crawford, free of all trusts, two-thirds of the part of the estate of George W. Crawford theretofore distributed to it or the proceeds of two-thirds thereof, *873 aggregating the amount of $5,424,494.43. Further, the Annie Laurie Crawford trust on that date turned over to the Martha Sharp Crawford trust one-third of the part of the estate of George W. Crawford theretofore distributed to it or the proceeds of one-third thereof, aggregating the amount of $2,692,015.18.
*439 On February 4, 1938, the executors filed their first account with the Orphans' Court of Allegheny County, Pennsylvania. The account showed receipts of principal in the amount of $27,432,820.37 and disbursements of principal in the amount of $10,586,629.60. It further showed securities advanced to the Annie Laurie Crawford trust on account of distribution in the amount of $7,939,253.75 and securities advanced to the Martha Sharp Crawford trust on account of distribution in the amount of $2,645,902.28.
On February 4, 1938, the Annie Laurie Crawford trust filed its first and final account with the said Orphans' Court. The account showed the amount of $7,939,253.75 as a receipt of principal on June 29, 1935, from the executors as an advancement on account of distribution. It further showed the amount of $5,424,494.43 as a distribution of principal on June 16, 1936, to*874 Annie Laurie Crawford by reason of the election of Annie Laurie Crawford to take against the will of George W. Crawford and pursuant to the agreement of June 16, 1936. It further showed the amount of $2,692,015.18 as a distribution of principal on June 16, 1936, to the Martha Sharp Crawford trust, stating that the transfer by it was made subsequent to the election of Annie Laurie Crawford to take against the will of George W. Crawford, inasmuch as by reason of such election the property was held subject to the same trusts as one-fourth of the residue under the will of George W. Crawford. The account further showed the receipt of income at various dates from July 15, 1935, to June 15, 1936, the payment out of income of various administration expenses, and a balance of income in the amount of $291,236.50, which it showed to be distributed as follows: to Annie Laurie Crawford, on March 11, 1936, $158,022.69, and on January 21, 1938, $36,134.98; to the Martha Sharp Crawford trust, on January 21, 1938, $97,078.83. Included in receipts of principal and income were the amounts of capital gain and ordinary income, respectively, making up the amount of $582,637.96.
On February 4, 1938, the*875 Martha Sharp Crawford trust filed its first account with the Orphans' Court. The account showed the receipt of the amount of $2,645,902.28 on June 29, 1935, from the executors as an advancement on account of distribution. It further showed the receipt of the amount of $2,692,015.18 on June 16, 1936, from the Annie Laurie Crawford trust.
Upon the filing of the said accounts the Orphans' Court appointed W. Denning Stewart as trustee ad litem for unborn persons to examine the accounts and report on them to the court. Stewart thereupon devoted much time to examining the accounts, together with the books and records of all the parties, and orally examined the parties with reference to the transactions and studied the law with respect thereto. On completion of such work he filed a lengthy report with the court, discussing many issues raised by the accounts and finding *440 all of the transactions above referred to to be unobjectionable. The court on September 30, 1938, thereupon entered a decree in the case of the account filed by the executors directing that, of the funds deemed to be in the hands of the executors in that their distribution had not previously been approved*876 by the court, the amount of $7,939,253.75 should be paid by the executors to the Annie Laurie Crawford trust and the amount of $2,693,424.91 should be paid by the executors to the Martha Sharp Crawford trust. The court on August 24, 1938, entered decrees confirming absolutely the accounts filed by the Annie Laurie Crawford trust and the Martha Sharp Crawford trust. All of the decrees became final upon the expiration of ten days without exceptions having been filed thereto.
On March 3, 1939, the Annie Laurie Crawford trust filed with the collector of internal revenue for transmission to the Commissioner of Internal Revenue a precautionary claim for refund of income tax in the event that it should be determined that all or any part of the income reported by it was not taxable to it by reason of the election of Annie Laurie Crawford to take against the will of George W. Crawford. No part of the tax paid has ever been refunded or in any manner repaid.
On March 3, 1939, the executors, the Annie Laurie Crawford trust, and the Martha Sharp Crawford trust filed with the collector of internal revenue for transmission to the Commissioner of Internal Revenue claims for refund of income*877 taxes paid on the ground that the basis for determining gain or loss from the sale of property acquired by bequest or devise, sold by them, respectively, during the year 1935, should be the value as of the date of death of George W. Crawford as appraised for the purpose of the Federal estate tax. In his notices of deficiency the Commissioner adjusted the basis of property so sold in accordance with the claims.
On November 2, 1939, the executors filed their second account with the Orphans' Court and on February 1, 1940, a final decree was entered directing the distribution of the amount of $1,977,610.31 each to Annie Laurie Crawford and the Martha Crawford trust, and further directing the executors to retain for future accounting the amount of $574,256.60.
On June 20, 1940, the Commissioner of Internal Revenue mailed notices of deficiency in income tax for the year 1935 to the executors and to the Martha Sharp Crawford trust. In such notices he determined that the income reported in the 1935 income tax return of the Annie Laurie Crawford trust in the amount of $582,637.96 had been overstated in the amount of $112,500 by reason of the adjustment of basis and by the amount of*878 $64.77 on other grounds, leaving a corrected income in the amount of $470,073.19. In the notice he further determined that no part of the amount of $470,137.96 was taxable to *441 the Annie Laurie Crawford trust or to Annie Laurie Crawford, but that two-thirds thereof, or $313,392.50, was taxable to the petitioner estate, and that one-third thereof, or $156,680.69, was taxable to the petitioner trust. In an amended answer filed at the hearing in Docket No. 104196 respondent asks that the entire amount of $470,073.19 be included in the income of the petitioner estate.
OPINION.
VAN FOSSAN: The problem before us is to determine the effect of Annie Laurie Crawford's election to take under the law rather than under the will of her deceased husband George W. Crawford. Prior to the election the executors had distributed the assets, from which the income here in question was derived, to a trust for the widow. The trust filed a return and paid the tax on the income from the property distributed to it. Respondent now contends that, by reason of the fact that under Pennsylvania law the widow's election related back to the time of the death of the husband, *879 ; , the trust became a nullity ab initio and the entire amount of the income should be taxed to the petitioner estate.
The widow's election and the distribution of a portion of the assets to her did not render the trust a complete nullity. The remainderman, Martha Sharp Crawford, still had an interest in the property which was not distributed to Annie Laurie Crawford. Because the remaining property was held in a trust identical in its terms with the Martha Sharp Crawford trust, the agreement of June 16, 1936, provided that the two should be consolidated. Until that agreement there was a valid separate trust as to the daughter's portion of the property even after the widow's election to take under the law and the distribution of two-thirds of the trust corpus to her. ; . Accordingly, there is no basis for respondent's contention that one-third of the trust income, or $156,680.69, should be taxed to petitioner estate or for respondent's earlier contention that it should be taxed to petitioner trust. That income was income of*880 the Annie Laurie Crawford trust and the tax thereon was properly paid by that trust.
As to the remaining two-thirds of the income, petitioners argue that during the taxable year 1935 the Annie Laurie Crawford trust was a valid existing taxable entity and that income taxes are not to be determined upon the basis of evidence taking place subsequent to the taxable year. We are of the opinion that petitioners' contention must be sustained. During 1935 the trust was in existence and through the sale of certain property it received income in the form of capital gains. What it did with that income or with its property *442 in a later year is immaterial in determining the tax liability for the year 1935.
Respondent, while conceding that ordinarily income tax liability must be determined for annual periods on the basis of facts as they existed in each period, claims that the Annie Laurie Crawford trust never held the income in question free from restriction as to its disposition. In support of his position respondent cites *881 , and G. A. Buder, Executor v.United States (E. Dist. Mo., 1941, unreported). Both of those cases are distinguishable on the ground that the taxpayers therein never had a right to the income in question, whereas in the cases at bar the Annie Laurie Crawford trust had a right to the income, subject to the contingency that the widow might elect to take under the law and the further contingency in the case of such election that her statutory half might be taken out of the property distributed to the trust. At the time the income was received and the tax return was filed there was no reason to believe that the widow would elect to take against her husband's will. Furthermore, it was impossible to tell at that time what portion of the widow's share would be taken out of the trust in the event that she should elect to take under the law.
It is true, as respondent points out, that under Pennsylvania law the executors could not have been required to distribute the property to the Annie Laurie Crawford trust at the time the distribution was made and that the distribution without audit of their accounts was at the*882 executors' own risk. Title 20, Purdon's Penna. Stats. Anno., secs. 861 and 862. The executors, however, had a full right to make the distribution and in fact the distribution to the trust was subsequently approved by the Orphans' Court of Allegheny County, which had jurisdiction over the administration of the estate.
Since we have reached the conclusion that the tax was properly paid by the Annie Laurie Crawford trust, it follows that respondent's determination of deficiencies against the petitioner estate and petitioner trust was erroneous.
Decisions will be entered under Rule 50.