*1014 Under the will of Otto Ernst Isenberg, deceased, his remainder estate was left in trust, one-third for the benefit of his widow for life and two-thirds for the benefit of his children. The two-thirds part was to be divided into as many equal portions as there were living children at the time of his death and one such portion paid to each child having then arrived at the age of 25 years. One other such portion was to be held in trust for each of the other children, the income thereof to be distributed to such child annually or oftener until he or she arrived at the age of 25 years, when the corpus likewise was to be distributed. Upon the death of the widow the one-third portion of decedent's estate held for her benefit was to be administered in the same manner as the other two-thirds portion. The undistributed trust estates of the widow and two of the children were seized by the Alien Property Custodian in 1918 and final distribution thereof has not yet been made. Held, that under decedent's will ten separate trusts were created, one for his widow and one for each of his nine living children; held, further, that the petitioner herein as successor trustee of the estate*1015 of Otto Ernst Isenberg, deceased, is not liable for the deficiencies for the years 1918 to 1929, inclusive, as determined by the respondent.
*587 The respondent determined the following deficiencies in income tax and penalties against the petitioner:
| Year | Deficiency | 25% penalty |
| 1918 | $107.55 | $26.89 |
| 1924 | 85.08 | 21.27 |
| 1925 | 73.55 | 18.38 |
| 1926 | 67.65 | 16.91 |
| 1927 | $211.41 | $52.85 |
| 1928 | 119.97 | 30.00 |
| 1929 | 86,113.63 | 21,528.41 |
| Total | 86,778.84 | 21,694.71 |
This proceeding is before the Board for a reconsideration on the merits pursuant to order of the Board entered September 27, 1937, granting petitioner's motion of May 6, 1937, to vacate the Board's opinion (), promulgated April 27, 1937, and to grant a reconsideration on the basis of an amended petition filed therewith.
In its order of September 27, 1937, the Board stated:
* * * The purport of said motion is for a reconsideration of the Board's opinion and for*1016 leave to file the amended petition, raising certain questions which were not decided in said opinion due to the conclusion that they were not raised by the original petition. As the evidence on the additional issues *588 is already in the record, and the original petition is susceptible of being construed as raising those issues, which are more definitely set forth in the amended petition, it is
ORDERED: That the petitioner's motion, in so far as it requests reconsideration of the opinion promulgated April 27, 1937, and the filing of the amended petition, be and the same is hereby granted.
The opinion of the Board embraced two other proceedings, Docket Nos. 71373 and 71374, which were consolidated with the instant proceeding. Those proceedings were closed by orders of no deficiency entered on April 29, 1937, and were not incorporated in the motion and order for reconsideration filed in this proceeding.
The amended petition filed in this proceeding sets forth the following allegations of error:
(a) The respondent erred by failing to determine that as the income of the trust is distributable annually or oftener, the said income, dividends, interest and earnings of*1017 the trust for the years 1918, 1919, 1920, 1921, 1922, 1923, 1924, 1925, 1926, 1927, 1928 and 1929 are deductible by the trust and taxable to the beneficiaries.
(b) The respondent erred by including as part of taxable income damages received in the year 1929 in the amount of $287,323.40.
(c) If the respondent did not err as alleged in paragraph (b), then he erred by failing to determine that as the income of the trusts is distributable annually or oftener the damages of $287,323.40 and the interest paid thereon in the sum or $100,083, together with other income collected in 1929, is deductible by the trusts and taxable to the beneficiaries.
(d) If the respondent did not err in taking the taxable income for the years 1918 to 1929, inclusive, to one trust, then he erred by failing to determine that the income in question is taxable to ten separate trusts.
(e) The respondent erred by failing to determine that a certain number of shares of Kekaha Sugar Company, Ltd., and Pioneer Mill Company, Ltd., stock were the separate and private property of Paul Otto Isenberg, deceased, and were acquired by purchases out of income and by stock dividends declared out of earnings, and that*1018 these shares of stock represented income which was distributable under the will, and that the income from these stocks including any damages and interest paid on the failure of the Trent Trust Company to restore these shares to the trust, should be taxed to their separate estates.
(f) The respondent has erred by failing to show as a deduction from gross income in the year 1929 litigation expenses in the amount of $108,202.38.
(g) The respondent has erred by failing to allow as a deduction from gross income in the year 1929 trustee's commission in the amount of $473.20.
(h) In determining deficiencies for a number of the years involved the respondent erred by failing to give credit for taxes paid by the Alien Property Custodian to the Collector at Baltimore as follows:
| Year | Amount |
| 1919 | $691.87 |
| 1920 | 102.55 |
| 1921 | 288.49 |
| 1922 | 38.51 |
| 1923 | 28.92 |
| 1924 | 26.68 |
(i) The respondent has erred in determining that penalties of 25% should be collected for the several years stated in the deficiency notice.
*589 The above allegations of error and the respondent's answer thereto put in issue all of the matters decided in the Board's prior opinion. The*1019 opinion above referred to is vacated in its entirety in so far as it relates to the petitioner, Charles S. Davis, successor trustee, under the will and of the estate of Otto Ernst Isenberg.
FINDINGS OF FACT.
The petitioner, Charles S. Davis, is a resident of Honolulu, Hawaii, and is the successor trustee under the will and of the estate of Otto Ernst Isenberg, deceased. He received his appointment as such trustee by order of the Circuit Court of the First Judicial Circuit, Territory of Hawaii, on June 21, 1929, to succeed to the trusteeship of the Trent Trust Co., Ltd.
Otto Ernst Isenberg, hereinafter referred to as the testator, died a resident of Honolulu, Hawaii, on November 4, 1902, leaving surviving him a widow, Helen L. Isenberg, and nine children, seven of whom were minors. The testator directed in his will that the executors and trustees named therein should hold the remainder of his estate in trust, one-third for the benefit of his widow and two-thirds, plus the remainder of the one-third after the death of the widow, for the benefit of his nine children. The second, third, and fourth paragraphs of the will read as follows:
Second: To set apart one-third of the*1020 remainder, after paying such debts and expenses, for the use and benefit of my wife, Helen L. Isenberg, and annually or oftener, to pay to her the net income, issues and profits thereof so long as she shall live. And at her death to hold and apply the principal of said one-third (or so much thereof as shall then remain) together with all unapplied income thereof, as hereinafter set forth.
Third: To divide the remaining two-thirds into as many equal portions as I shall have children then living, and pay over one such portion (or the proceeds thereof) to each of said children who has then arrived at the age of twenty-five years, and hold one of such portions for each of the remaining children respectively and annually or oftener pay the net income, issues or profits thereof to the child for whom the same is so held as aforesaid. And as such remaining children shall each successively arrive at the age of twenty-five years to pay to him or her the portion so held for him or her respectively (or so much thereof as shall remain) together with the unapplied income thereof.
Provided, however, that should any of my said children die before my decease leaving lawful issue surviving, *1021 such issue shall be deemed to represent the deceased parent and shall be entitled to the same portion as the parent would have been entitled to had he or she survived me, and such remaining two-thirds of the trust property shall be divided accordingly.
And such issue shall annually or oftener receive the net income of such portion or portions, respectively, until the youngest of my surviving children shall reach the age of twenty-five years, when the portion or portions (or the proceeds thereof) so held for the issue of any deceased child or children shall thereupon be paid over to such issue.
*590 Fourth: Upon the death of my said wife, the principal of the one-third of the trust property so set apart for her as aforesaid, or so much thereof as shall then remain, together with the unapplied income thereof, shall be divided in the manner and held upon the same trusts as hereinbefore directed to be done with the other two-thirds of the trust property, provided always, that none of my said children shall receive his or her portion of the principal trust property until arriving at the age of twenty-five years, and the issue of any deceased child shall not receive any of such*1022 principal until my youngest child shall reach such age.
And it is hereby declared that my Trustees shall have the power and authority from time to time and at all times in their discretion, to sell and dispose of any or all of the trust property and convert the same into money and hold such money upon the same trusts, and invest the same, with power to vary such investments.
The testator's will was duly admitted to probate and letters testamentary were issued to William Pfotenhauer and Hermann Schultze, named as executors and trustees in the will, who were also appointed guardians of the persons and estates of the testator's five minor children.
On September 18, 1905, the probate of the estate was closed and Pfotenhauer and Schultze were discharged as executors and were appointed trustees of the estate by order of the probate court. The assets of the estate at that time consisted of a small amount of real estate located in Honolulu and shares of stock of the Kekaha Sugar Co., Ltd., and Pioneer Mill Co., Ltd., Hawaiian corporations.
On September 20, 1905, the court issued an order directing that the assets of the trust estate be apportioned among the beneficiaries. The*1023 apportionment was made in accordance with a plan to which the widow, the nine children, and their guardians consented. Two of the children had received advancements from their father during his lifetime and one of these agreed that she was not entitled to any apportionment; the other received a smaller apportionment than the remaining seven children. There were set apart for the benefit of the widow 236 shares of Kekaha stock, 149 shares of Pioneer stock, and the real estate located in Honolulu. Two of the children had arrived at the age of 25 years and by order of the court the trustees made a distribution to them of their shares. The balance of the shares were apportioned to the six children entitled to receive an apportionment and to each of five of them were apportioned 68 shares of Kekaha stock and 42 shares of Pioneer stock.
Under the terms of the decedent's will the widow was to receive the "net income, issues and profits" from the property set apart for her for life, and the income of all of the trust property was to be paid over to the beneficiaries "annually or oftener." In order to perform these duties the trustees kept separate accounts of the trust property of which*1024 the widow was the life beneficiary and of the trust *591 property apportioned to each child. They "annually or oftener" paid over to each the income belonging to each. As each of the children arrived at the age of 25 years the corpus of the trust established for him or her was paid over to the beneficiary and the accounts of the trustee for such child were closed.
In 1903 the widow and seven of the children took up their residence in Germany, where they lived until after the termination of the World War.
William Pfotenhauer died April 14, 1913, and George Rodiek was, on April 25, 1913, appointed as successor trustee.
By 1917 all of the children except Dorothea and Paul had arrived at the age of 25 years and the trustees had delivered to them all the income and corpus of the trust established for each.
After the United States declared war against the German Government on April 6, 1917, and after the Trading with the Enemy Act was approved, October 6, 1917, the Alien Property Custodian, on January 21, 1918, appointed the Trent Trust Co., Ltd., of Honolulu, Hawaii, depositary for all enemy property located in the Hawaiian Islands. On January 29 and February 2, 1918, the*1025 trustee, Schultze, who had possession of the trust property (Rodiek being a resident of San Francisco), voluntarily turned over to the Trent Trust Co., as depositary, the trust assets in his hands, which included certain accumulated income. These assets were turned over as constituting the assets and accumulated income of three trust funds, namely, (1) the property of which the widow was the life beneficiary, including accumulated income; (2) the trust of property belonging to Dorothea; and (3) the trust of property belonging to Paul. Dorothea arrived at the age of 25 years on November 16, 1917, but her property had not been distributed to her. Paul, the youngest of the children, was born in 1895. He died in Germany November 16, 1918, intestate, and unmarried.
The principal assets of the trust estates turned over by Schultze to the Trent Trust Co. consisted of shares of stock of the two sugar companies above named. As a result of purchases of additional shares and of stock dividends the original shares apportioned to the widow and to Dorothea and Paul had been increased in the case of the widow, Helen L. Isenberg, from 236 shares to 500 shares of Kekaha Sugar Co. stock and*1026 from 149 to 1,353 shares of Pioneer Mill Co. stock. At the same time Dorothea and Paul were each the owners of 170 shares of Kekaha Sugar Co. stock and 381 shares of Pioneer Mill Co. stock.
Of the 500 shares of Kekaha Sugar Co. stock 314 shares were principal and part of the corpus of the trust estate of Otto Ernst Isenberg, deceased, and 186 shares were stock dividends; of the 1,353 *592 shares of Pioneer Mill Co. stock 1,065 shares were principal and part of the corpus of the trust estate of Otto Ernst Isenberg, deceased, and 288 shares were stock dividends.
Of the 170 shares of Kekaha Sugar Co. stock belonging to Paul 106.76 shares were principal and part of the corpus of the trust estate of Paul and 63.24 shares were stock dividends; of the 381 shares of Pioneer Mill Co. stock 210 shares were principal and 171 shares were stock dividends.
On August 23, 1918, the trustees, Schultze and Rodiek, having rendered a final accounting, were discharged as trustees under the will and of the estate of Otto Ernst Isenberg by order of the Circuit Court of the First Judicial Circuit. On the same date, Schultze, by order of the probate court, was discharged as guardian of Paul*1027 Otto Isenberg, whose property had all been turned over to the Trent Trust Co. as depositary of the Alien Property Custodian (Rodiek was never made a guardian for any of the children of the testator).
Since the trust provisions of the will of the testator had not been fully carried out, the Trent Trust Co. in October 1918 petitioned the court to be appointed trustee of the estate of Otto Ernst Isenberg in place of Schultze and Rodiek. This petition was granted by the court on October 31, 1918.
The capacity of the Trent Trust Co. as depositary of the Alien Property Custodian was separate from its capacity as trustee for the estate of the testator. The trust company did not assume trusteeship of the assets paid into it by Schultze as depositary except upon the order of the Alien Property Custodian.
During the latter part of 1918 or the early part of 1919 the Alien Property Custodian proposed to sell the shares of stock of the Kekaha Sugar Co. and Pioneer Mill Co. held by the Trent Trust Co. as its depositary. The Trent Trust Co. in its capacity as trustee consented to the sale and the 840 shares of Kekaha Sugar Co. stock and all of the stock of the Pioneer Mill Co. held by*1028 the Trent Trust Co. were sold on January 17, 1919. The average price obtained for the Kakaha Sugar Co. shares was $158.30 per share. The proceeds of the sale of the shares belonging to Dorothea and all the other assets belonging to her were forwarded to the Alien Property Custodian at Washington, D.C., shortly after the sale. The Trent Trust Co., as trustee, on November 4, 1918, received from the Alien Property Custodian for Dorothea Isenberg $5,362.63 cash. This cash was, however, repaid to the Alien Property Custodian by the Trent Trust Co. on February 26, 1919, and February 24, 1921.
The proceeds from the sale of the shares of stock in which the widow, Helen L. Isenberg, had a life interest and also the proceeds from the sale of Paul's shares were turned over to the Trent Trust *593 Co. as trustee. The Trent Trust Co., with the approval of the Alien Property Custodian, invested these proceeds in Liberty bonds. In 1921 the Alien Property Custodian demanded from the trustee the payment to him of all of the assets belonging to Paul, and those assets, which included a certain amount of income which had been received by the Trent Trust Co. as trustee, were paid over to*1029 the Alien Property Custodian in 1921.
A portion of the income received upon the assets in which the widow had a life interest was paid over by the trustee to the Alien Property Custodian. On May 24, 1921, that official returned to the widow, who at that time had taken up her residence in Honolulu, $15,500 Oahu Sugar Co. 6 percent bonds. From May 24, 1921, to February 10, 1931, he also paid over to the widow or to her legal representative cash and United States Treasury interest earned on cash held by the Custodian in the amount of $23,506.61.
During its entire trusteeship the Trent Trust Co. kept separate accounts of the principal and income of the three trust estates; viz., (1) that in which the widow had a life interest, (2) that belonging to Dorothea, and, (3) that belonging to Paul. The Trent Trust Co., as trustee, never received any income upon the property belonging to Dorothea and never held any of her property except the deposit of $5,362.63 made by the Alien Property Custodian on November 4, 1918, and later returned to that official.
On October 26, 1621, the Trent Trust Co. filed its report and account in the Circuit Court of the First Judicial Circuit and asked*1030 for approval thereof. These accounts showed that the Trent Trust Co. at that time had no property belonging to Dorothea or to Paul, but that it had the proceeds from the sale of 500 shares of Kekaha Sugar Co. stock and 1,353 shares of Pioneer Mill Co. stock in which the widow had the life interest, together with investments and accumulated income. It reported that it had on hand for the "Otto Ernst Isenberg Trust Estate" $129,734.75. Objections to the approval of the report by the court were filed on behalf of the widow and her children in so far as it related to the sale of the 500 shares of Kekaha Sugar Co. stock and the 170 shares of the same stock which had been sold by the Trent Trust Co. for the account of Paul. The objectors contended that the Trent Trust Co. should have had those shares of stock on hand at the time and that the Trent Trust Co. had been remiss in failing to object to the sale of the shares by the Alien Property Custodian and in failing to assert the objectors' interest therein. No objections were filed to the sale of the Pioneer Mill Co. stock or to the sale of the 170 shares of Kekaha Sugar Co. stock, the property of Dorothea. A hearing was had on these*1031 objections and on August 24, 1923, the matter was referred to a "master", who was directed to ascertain and report *594 the then value of the 670 shares of Kekaha Sugar Co. stock with all intervening dividends, together with interest thereon, and to ascertain and report:
* * * the value of said Estate as it would be if it now contained said 670 shares of the capital stock of Kakaha Sugar Company, Limited, together with the dividends and interest which the Trustee should now posses, as compared with the value of said Estate as it now is in the hands of said Trustee.
The master found that the value of the 670 shares of Kekaha Sugar Co. stock at the time of the trial was $380 per share, or a total of $254,600 for the 670 shares, and that the Trent Trust Co. should have had on hand for the estate of the testator $287,323.40 more than it had on hand. The revenue agent's report, upon the basis of which the deficiencies were determined for the years 1918, and 1924 to 1929, inclusive, stated that the computation of the amount of the judgment and interest thereon as computed by the master was as follows:
| Value of Helen L. Isenberg share as of date of reference (Sept. 10, 1923, inventory taken as showing values on Aug. 24, 1923) | 127,532.85 |
| Deducting that portion of said value due to proceeds of sale of Kekaha Stock | 68,189.71 |
| 59,343.14 | |
| Value 670 shares Kekaha Stock as of date of reference 670 X $380.00 | 254,600.00 |
| Dividends paid on 670 shares of Kekaha Stock from Dec. 1, 1918 to Aug. 24, 1923 | 117,250.00 |
| Interest on said dividends from date of payment thereof to Aug. 31, 1923 | 19,602.45 |
| Proceeds sale of 381 shares of Pioneer Co. Stock of so called Paul Otto Isenberg share lost to estate | 12,110.33 |
| 462,905.92 | |
| Less: Dividends property payable to Alien Property Custodian together with interest thereon of $1,076.68 | $7,876.68 |
| 455,029.24 | |
| Deduct value of estate as it was Aug. 24, 1923 including disbursements | 127,532.85 |
| 327,496.39 | |
| Less: Allowable income disbursements made by trustee (Trent Co.) | 44,766.10 |
| Difference in value between Trust Estate as it was on Aug. 24, 1923 and as it should have been if property administered | 282,697.19 |
| Commission of trustee claimed on capital receipts and disbursements | 3,003.03 |
| Commissions claimed on income receipts and disbursements | 1,623.08 |
| Total | $287,323.40 |
*1032 On April 7, 1924, the Circuit Court of the First Judicial Circuit entered a decree removing the Trent Trust Co., Ltd., as trustee of the trust estate of Otto Ernst Isenberg and appointing the petitioner, *595 Charles S. Davis, as its successor. The decree ordered the Trent Trust Co. immediately to pay over to the petitioner all of the assets of the Otto Ernst Isenberg trust estate held by it and in addition to restore and transfer to the petitioner 670 shares of the capital stock of Kekaha Sugar Co., Ltd., plus $32,723.40 representing dividends and interest thereon, or, failing to restore the shares, to pay over to the petitioner $287,323.40 together with interest at the rate of 6 per centum per annum from August 31, 1923.
On April 2, 1923, the widow, Helen L. Isenberg, died testate, a resident of Honolulu, Hawaii. The Henry Waterhouse Trust Co., Ltd., was made the executor of the last will and testament of the widow. By the terms of her will Helen L. Isenberg gave and bequeathed all of her real, personal, and mixed property unto such of her children as should survive her. She was survived by seven of her children.
The Trent Trust Co. appealed from this judgment*1033 to the Supreme Court of the Territory of Hawaii. That court modified the decision of the trial court. The objectors then appealed to the Circuit Court of Appeals for the Ninth Circuit, which reversed the Supreme Court of the Territory of Hawaii and affirmed the decision of the trial court. . The Ninth Circuit, on a rehearing on the measure of damages on March 4, 1929, affirmed its previous decision, . The Trent Trust Co. then petitioned the Supreme Court of the United States for a writ of certiorari, but its petition was denied. Thereupon the Trent Trust Co. signified to the trial court its readiness to pay the Judgment in the amount of $287,323.40 and interest thereon from August 31, 1923. The trial court on June 21, 1929, entered its decree:
(1) That the legal title in and to all trust property in the above entitled estate in the Territory of Hawaii be and the same is hereby vested in the said Charles S. Davis as trustee under the will and of the estate of the above named Otto Ernst Isenberg, deceased. * * *
The Trent Trust Co. was ordered to*1034 pay over to the petitioner all of the assets in its hands belonging to the estate of Otto Ernst Isenberg and in addition to pay $287,323.40 together with interest thereon at the rate of 6 per centum per annum from August 31, 1923.
In compliance with said decree the Trent Trust Co. paid over to the petitioner on June 21, 1929, $97,709.74 as the balance of cash on hand belonging to the trust estate, plus:
$2,450 par value Liberty bonds, first 3 1/2%
27,350 per value Liberty bonds, fourth 4 1/4%
2,000 par value Hawaii Consolidated Railway Co., Ltd., 5% bonds
2,000 par value California and Hawaiian Sugar Refining Corp. 7% bonds
9,500 par value Mutual Telephone Co. 6% bonds
10,000 par value T. H. Davies & Co. 6% bonds
15,000 par value Hawaiian Electric Co. 6% bonds 118 shares preferred A, 7% stock of Hawaii Consolidated Railway, Ltd.
*596 It also paid over to Davis the amount of the judgment, $287,323.40, plus interest accrued thereon in the amount of $100,083.
The decree of the court entered June 21, 1929, provided:
(4) That said Charles S. Davis as trustee as aforesaid shall receive, hold and retain in his possession and control all of the properties and*1035 money of said trust estate so transferred, delivered and paid to him by said Trent Trust Company, Limited, as aforesaid, without any distribution, payment or other disposition thereof, to said objectors, or any of them, or otherwise, until the said objectors and each of them shall have executed and delivered to said Trent Trust Company, Limited, the assignment release and conveyance provided to be made and given by them to said Trent Trust Company, Limited, under the terms of paragraph 8 of said decree, nor until distribution or other disposition thereof shall be approved and authorized by this court in the matter of the trust in said estate.
Paragraph 8 of the decree referred to in the above excerpt is paragraph 8 of the original decree entered by the trial court on April 7, 1924. That paragraph reads as follows:
8. IT IS FURTHER ORDERED, ADJUDGED AND DECREED, that the said Helen Zur Helle, Anna Wiehen, Hans O. C. Isenberg, Darling Pohlman, Countess Agnes von Koenigsmarck, Carl H. W. Isenberg, Countess Dorothea von Koenigsmarck and Carl Laschinsky, and Henry Waterhouse Trust Company, Ltd., Executor of the Estate of Helen L. Isenberg, deceased, and Henry Waterhouse Trust Company, *1036 Ltd., administrator of the Estate of Paul Otto Isenberg, deceased, and each of them, upon payment and delivery to the said Charles S. Davis as successor trustee under the will and of the estate of said Otto Ernst Isenberg, deceased, of all the property and assets of said estate as provided in paragraphs 3 and 4 hereof, shall execute and deliver to said Trent Trust Company, Ltd., a good and sufficient assignment, release and conveyance of all their respective right, title, interest, claim and demand of every nature in and to all the property belonging to and composing any part of the estate of Otto Ernst Isenberg, deceased, and the estate of Paul Otto Isenberg, deceased, remaining in the hands of said Alien Property Custodian, namely: (1) The sum of Twenty-six Thousand Eight Hundred Ninety-four and 77/100 ($26,894.77) Dollars, being the proceeds of the sale of One hundred seventy (170) shares of Kekaha Sugar Company, Ltd., stock, or the securities, if any representing the investment of such proceeds, (2) the sum of Eleven Thousand Five Hundred Fifty and 81/100 ($11,550.81) Dollars, being the proceeds of the sale of Three hundred eighty-one (381) shares of Pioneer Mill Company, Ltd.*1037 , stock, or the securities, if any, representing the investment of such proceeds, (3) the sum of Eleven Thousand sixty-one and 55/100 ($11,061.55) Dollars, being income disbursements on account of Paul Otto Isenberg paid by Trent Trust Company, Ltd., Trustee, to the Alien Property Custodian (said amount having been surcharged against said Trent Trust Company, Ltd., Trustee) or the securities, if any, in which said sum has been invested by said Alien Property Custodian;
Together with all the interest and income which has accrued or shall accrue on or from all of said sums of moneys or securities.
Since most of the parties referred to in paragraph 8 of the decree entered April 7, 1924, were residents of Germany, it was not possible *597 to obtain the required assignments of interest during the year 1929. Accordingly it was impossible for the petitioner to execute the trusts in that year.
By an order of the trial court entered July 10, 1930, approving and settling the final account of the Trent Trust Co. as former trustee of the estate of Otto Ernst Isenberg, the Trent Trust Co. paid over to the petitioner the following further sums of money, as and for money to which the*1038 said trust estate was entitled:
| (a) For commissions surcharged | $2,934.59 |
| (b) Additional 2 percent interest on said money judgment of $287,323.40 for the period from April 25, 1927, to June 21, 1929, in the sum of | 12,386.77 |
| (c) Interest on daily balances of trust funds from August 19, 1921, to June 1, 1926, in the sum of | 793.34 |
| (d) Interest at 5 percent on the above sums of $2,934.59, $12,386.77, and $793.34, in the sum of | 848.87 |
| Total | 16,963.57 |
This additional sum of money was paid to the petitioner on July 10, 1930.
On July 31, 1930, the petitioner filed in the Circuit Court of the First Judicial Circuit a bill for instructions and construction of the will of Otto Ernst Isenberg, deceased. He specifically asked instructions upon the following points:
(1) Whether or not a total or partial distribution of the trust assets in his hands may now be made;
(2) And if so to what persons and in what amounts;
(3) As to whether or not petitioner should be authorized and directed to pay Federal Income Taxes;
(4) As to whether or not this trust is liable for any Territorial Taxes and if so should petitioner be authorized to pay the same.
(5) As to whether*1039 or not petitioner should be authorized to pay the claim or fees of J. Francis Neylan.
By an order of the court entered January 12, 1931, the court answered the questions as follows:
AND the Court now specifically answering the questions propounded by the said Trustee in his said Bill for Instructions, ORDERS, ADJUDGES and DECREES as follows:
(a) In answer to question I, towit: Whether or not a total or partial distribution of the trust assets in his hands may now be made. The Court orders and directs the said Trustee to make a total distribution save and except the sum of $38,000.00 which said sum the Trustee is authorized to withhold for the purposes aforesaid.
(b) In answer to question II, towit: and if so, to what persons and in what amounts. The Court orders and directs the said Trustee as follows:
(1) To pay to the Administratrix de bonis non with the Will annexed of the Estate of Helen L. Isenberg, Deceased, all the securities held by the Trustee, as set forth in the Inventory attached to his Amended and Supplemental Account, *598 (the beneficiaries having agreed upon this disposition of the said securities and upon their acceptance by the said Administratrix*1040 at their inventoried value, towit: $40,281.00), and the sum of $164,610.09. The said securities and cash represent the separate estate of the said Helen L. Isenberg, Deceased.
(2) To pay to the Administratrix de bonis non of the Estate of Paul Otto Isenberg, Deceased, the sum of $110,488.44, which represents the separate estate of the decedent.
(3) [To pay to each of the nine children of Otto Ernst Isenberg, deceased, or his or her legal representatives the sum of $11,429.39.]
* * *
(c) In answer to question III as to whether or not petitioner should be authorized to pay Federal Income Tax. The Court orders and directs the said Trustee to pay such income taxes as may be finally determined as due from the Estate out of the funds retained by him as herein provided for that purpose.
(d) In answer to question IV as to whether or not this Trust is liable for any Territorial Taxes and if so should the petitioner be authorized to pay the same. The Court holds and finds that the said Trust Estate is not liable for any Territorial Taxes.
(e) In answer to question V with reference to the payment of the fee of John Francis Neylan. The said fee having been paid, during the*1041 pendency of this Bill, the same is disposed of and the Trustee has no further duty in the premises.
The court also authorized the petitioner to reimburse the beneficiaries for litigation expenses of $108,202.38 which the widow and the nine children had paid in the recovery of the judgment against the Trent Trust Co. The court further ordered the petitioner to retain in his possession $38,000 for the purpose of paying any income taxes which he might be liable to pay out of the proceeds in his hands.
On October 10, 1930, the Alien Property Custodian paid over to the Trent Trust Co. certain of the property which he held for the estate of Paul.
The Trent Trust Co. never filed any Federal income tax returns for the trust estate of Otto Ernst Isenberg or for the beneficiaries thereof, either as trustee or as depositary of the Alien Property Custodian. On September 15, 1930, the petitioner, after various conferences and correspondence with the collector at Honolulu, filed income tax returns for the estate of Otto Ernst Isenberg for the years 1918 to 1929, inclusive.
On behalf of Paul Otto Isenberg individual income tax returns for the years 1919, 1920, 1921, 1922, and 1924 were*1042 prepared by the respondent from the records of the Alien Property Custodian and filed with the collector of internal revenue at Baltimore, Maryland. The Alien Property Custodian paid all income taxes shown to be due and owing in accordance with the said returns, including the profits derived from the sale of the 170 shares of Kekaha Sugar Co. stock and the 381 shares of Pioneer Mill Co. stock on January 17, *599 1919, the property of Paul. The taxes so paid for the years 1919 to 1924, inclusive, were as follows:
| 1919 | $691.87 |
| 1920 | 102.55 |
| 1921 | 288.49 |
| 1922 | 38.51 |
| 1923 | 28.92 |
| 1924 | 26.68 |
The Alien Property Custodian still holds certain property of Paul Otto Isenberg's estate. This property is claimed by the executrix of the estate of Paul.
The Alien Property Custodian also still holds the property of Dorothea. But that property is not involved in this proceeding.
OPINION.
SMITH: The issues presented in this proceeding all arise from the administration of the trust estates created under the will of Otto Ernst Isenberg, who died in 1902. A portion of the assets of the trust estates fell into the hands of the Alien Property Custodian during the*1043 World War and have not yet been released.
The decedent's will is clearly drawn and the provisions creating the trust estates are not complicated or ambiguous. The testator left the residue of his estate in trust, one-third to be set apart for the benefit of his widow for life and the other two-thirds to be apportioned to his surviving children, or their survivors, in equal shares. Each child was to receive the income from his portion annually or oftener and at the age of 25 years was to receive the corpus. Upon the death of the widow the one-third share of the corpus and undistributed income set apart for her benefit was to be divided and administered in the same manner as the other two-thirds part of the trust estate.
At the time of the World War all but two of the children had arrived at the age of 25 years and had received their distributable portions of the two-thirds part of the corpus of the trust apportioned to them. One of these, Dorothea, arrived at the age of 25 on November 16, 1917, but her portion was not paid over to her because she was in Germany and an "enemy" within the meaning of the Trading with the Enemy Act of October 6, 1917. The other, Paul, born in*1044 1895, was also an enemy. He died in Germany on November 16, 1918. During 1917 the trustees under the will of Otto Ernst Isenberg held the undistributed assets of the estate in three separate trust funds: (1) The property of which the widow was the life beneficiary together with accumulated income, (2) the property of Dorothea, and (3) the property of Paul.
*600 Early in 1918 the Alien Property Custodian, through his depositary, the Trent Trust Co., Ltd., of Honolulu, took over all of the trust assets then in the hands of the trustees, thereby preventing them from administering the trust estates in accordance with the provisions of the testator's will. On its application to the court made in 1918 the Trent Trust Co. was, on October 31, 1918, named trustee of the estate of Otto Ernst Isenberg, deceased. After that date it represented the trust estates in dual capacities, first, as depositary of the Alien Property Custodian, and, secondly, as trustee. The courts later held that it was improper for it to act as trustee while it was still the depositary of the Alien Property Custodian.
Certain of the trust assets were sold by the Alien Property Custodian in 1919.
When*1045 the trust company, as trustee, undertook to make its final report in 1921 the beneficiaries objected and claimed that the Trent Trust Co. was liable for damages for its failure as trustee to have in its possession certain shares of stock (670 shares of Kekaha Sugar Co. Ltd., stock) which had been sold by the Alien Property Custodian in 1919 and in the interim had greatly increased in value. A judgment was finally obtained against the Trent Trust Co. for $287,323.40, which amount represented the difference in the value of the trust estates at the date of reference to a master for the purpose of determining the facts, August 24, 1923, and the value that the trust estates (exclusive of that of Dorothea) would have had if properly administered by the Trent Trust Co. as trustee.
By decree of the trial court entered April 7, 1924, the Trent Trust Co. was removed from its position as trustee and Charles S. Davis, the petitioner herein, was named successor trustee under the will and of the estate of Otto Ernst Isenberg, deceased. By reason of an appeal from the decision of the trial court the decree did not become effective until 1929.
The judgment of $287,323.40 plus interest of $100,083, *1046 or a total amount of $387,406.40, was paid over to the petitioner trustee by the Trent Trust Co. on June 21, 1929.
The principal dispute in this proceeding is over this item of $387,406.40. The respondent has determined that it is all taxable income to the petitioner as trustee under the will and of the estate of Otto Ernst Isenberg for 1929, while the petitioner contends that none of it is taxable income to him as such trustee for 1929 or any other year.
In paragraph (d) of the amended petition filed herein the contention is made that the income in dispute, if taxable at all, is taxable to ten separate trusts rather than to the petitioner as trustee of a single trust.
*601 The Board held in its prior opinion that under the will of Otto Ernst Isenberg there was created only one trust and that such trust was liable to income tax on all of the taxable income received by it in the taxable years under consideration. We are now of the opinion, however, after a careful review of the evidence and the law bearing on the question, that our prior ruling was erroneous in this regard.
We think it is apparent from the provisions of the will of Otto Ernst Isenberg that he intended*1047 to and did create one trust for the benefit of his widow and a trust for each of his children.
Paragraph second of the will directs that one-third of the remainder of the estate be "set apart" for the "use and benefit of my wife * * * to pay to her the net income, issues and profits thereof so long as she shall live." No clearer words than those are needed to create a separate trust estate in such one-third interest for the benefit of the widow. The income on the widow's portion was to be paid to her "annually or oftener."
Paragraph third of the will directs that the remaining two-thirds of the estate be divided into "as many equal portions as I shall have children then living" and that one "such portion" shall be paid over to each child at the age of 25 years. The issues or profits thereof, that is, the issues or profits from such portion was to be paid over annually or oftener to the child for whom it was held. This language is equally plain in its requirement for the setting aside of a one-ninth interest in the two-thirds of the testator's remainder estate at the time of his death in trust for each of his nine living children. Furthermore, the evidence conclusively shows*1048 that the trustees, Schultze and Rodiek, interpreted the will as creating a trust estate for the benefit of the widow and separate trust estates for the benefit of the children. In 1917 the trustees were trustees of three trusts: (1) The property held for the benefit of the widow; (2) the property constituting the separate estate of Dorothea; and (3) the property constituting the separate estate of Paul. The examining revenue agent stated in his report of March 25, 1931, covering the "Estate of Otto Ernst Isenberg, Deceased", for the years 1918 to 1929, inclusive, that "the income and disbursements of each separate share of the estate were kept separate on the records of both the Trustee and the Alien Property Custodian."
On October 31, 1918, the Circuit Court of the First Judicial Circuit, Territory of Hawaii, entered an order appointing the Trent Trust Co. as "trustee of the estate of Otto Ernst Isenberg, deceased." We do not think, however, that this appointment was intended to merge the three trust estates turned over to it by the former trustees into a single trust estate. The Trent Trust Co., as had the predecessor trustees, kept separate accounts for each trust estate received*1049 by it. *602 It received incoem upon the trust estates for the widow and for Paul, but never received any income on the trust estate of Dorothea. As trustee of Dorothea's estate, the Trent Trust Co. received on November 4, 1918, a deposit by the Alien Property Custodian of $5,362.63, which amount was thereafter returned to the Alien Property Custodian without any accretion thereto. The trust estate of Dorothea is not involved in any way in this proceeding. In 1921 the Trent Trust Co. paid over to the Alien Property Custodian all property belonging to Paul and thereafter never received any of the income or of the assets belonging to Paul. The petitioner never received from the Trent Trust Co. or from the Alien Property Custodian any of the assets of Paul's estate. From 1918 the Trent Trust Co. received income upon the assets constituting the trust estate of the widow, Helen L. Isenberg, and it is these assets which were paid over to the petitioner, Davis, on June 21, 1929, in the amount of $97,709.74 cash, plus bonds and shares of stock.
In the computation of the deficiencies for all of the years 1918 to 1929, inclusive, the revenue agent determined the amount of income*1050 attributable to the trust estate of which the widow had the life interest and the amount of the income received both by the Trent Trust Co. and by the Alien Property Custodian upon Paul's estate. After 1921 all of the income received on Paul's estate was received by the Alien Property Custodian. The respondent in the determination of the deficiencies has added together the income received by the trust estates of the widow and Paul by both the Trent Trust Co. and the Alien Property Custodian, and has taxed it to the petitioner as the trustee of a single trust.
We are of the opinion that the respondent was clearly in error in taxing to a single trust the income for 1918. The income received in that year and involved in this proceeding was upon the separate trust estates for the widow and Paul. It was currently distributable to the beneficiaries, the widow and Paul, under the terms of the will of Otto Ernst Isenberg, and is therefore taxable to them. They and not the trustee for the estate of Otto Ernst Isenberg are taxable upon the income received. Cf. *1051 . There is no deficiency in tax due from the petitioner for 1918.
The income received by the Alien Property Custodian for Paul's estate for the years 1924 to 1929, inclusive, was the income of Paul's estate. It was never the income of the Trent Trust Co. or of the petitioner. Neither received the income and neither was the trustee of his estate.
There remains for our determination the liability of the petitioner for income taxes due upon certain income received for the years 1924 to 1929, inclusive. The petitioner is successor trustee "under the *603 will and of the estate of Otto Ernst Isenberg." Petitioner contends that any such income received by him was income "currently distributable" to the beneficiaries or else that it was income taxable to ten separate trusts, namely, the estate of the widow, Helen L. Isenberg, who died April 2, 1923, and the nine children or their legal representatives. Under the terms of the will of Otto Ernst Isenberg the entire trust estate in which the widow had a life beneficial interest became distributable upon her death.
The Supreme Court of the Territory of Hawaii stated in its*1052 opinion of September 1, 1925, as follows:
All of the nine children of the testator survived him. All of them except Paul Otto who reached the age of twenty-five. Paul Otto died November 16, 1918, and had he lived would have been twenty-five on November 10, 1920. In our opinion each of these nine children was given by the will a vested one-ninth interest in the two-thirds of the property referred to in the third clause of the will and also in the one-third of the property referred to in the second and fourth clauses. By this we mean that each, immediately upon the death of the testator, became definitely and certainly the owner of a one-ninth interest in the property, vested in right, with merely the possession and the enjoyment of the principal itself deferred until the time stated, that is, when each became twenty-five or would arrive at the age of twenty-five if living. The same was as true in the case of Paul Otto as in the cases of the others. Paul Otto's interest as well as the interest of each of the others was descendible, devisable and alienable.
We thus see that after the death of the widow on April 2, 1923, each of the nine children or his or her legal representatives*1053 had a distributable share in the trust estate created by Otto Ernst Isenberg for the life of the widow. Although the interests were not immediately paid over to the children by reason of the pending litigation, we think it clear that the trustee held the undivided interests for the children and that each interest constituted a separate trust estate. In , where it was held that three separate trusts were created rather than a single trust, the court said:
* * * Moreover, as we have seen, a separate account has been set up for the portion of the income withheld from each grandchild and the investment thereof by the trustees. This method would naturally be adopted by any one who wished to insure to each grandchild his equal share in the estate. The amounts withheld in the discretion of the trustees were of necessity unequal, by reason of the difference in the ages of the grandchildren, a situation which the testator must have had in mind. It would have been well-nigh impracticable to have ascertained accurately at any particular time the respective percentage to which each grandchild would have*1054 been entitled in a common fund, in view of the constant additions of varying sums and the changing valuations of the real and personal property constituting the corpus, involving as it would, the uncertainty of frequent appraisals. * * *
The facts here are substantially the same as those in . There, the *604 trust instrument as amended provided that the trust estate should be divided into separate equal shares for each of three beneficiaries and further provided from the disposition of the income of each separate share. The Supreme Court held, reversing the , and affirming the Board, that under the trust agreement there were three separate trusts. In its opinion the Court said:
* * * If the various securities had been divided physically, if new certificates of stock had been obtained for the several beneficiaries, and such certificates and specific bonds and cash had been set aside for each, there would be no room for argument that three separate trusts were not created. But it was not necessary to have such*1055 a physical division in order to carry out the clear intention of the parties. An undivided interest in property may constitute the corpus of a trust. * * * Where there is an intention to create separate trusts, the fact that "the trusts" are "kept in one fund" does not necessarily defeat the intention and require the conclusion that there is but a single trust. . "In many cases," said the Court of Appeals of New York in , where "income and principal were given in equal shares, although out of one fund kept in solido for convenience of investment, a severance of the trust into its component parts has been adjudged. * * * The shares and interests are several, although the fund remains undivided." See, also, .
We are of the opinion that, under the Supreme Court's decision in the case above cited, the interests of the widow and of the nine children in the testator's estate were separate trust entities and must be so treated for tax purposes. The*1056 property in the hands of the Trent Trust Co. after the death of the widow was distributable to the estate of the widow and to the nine children or their legal representatives. Any income received on their distributable shares was taxable to the distributees and not to the estate of Otto Ernst Isenberg, the probate of which was closed in 1905.
We do not have before us in this proceeding the separate trusts. We are not therefore called upon to determine the tax liability of any of them. We determine as to the petitioner that he is not liable to any deficiencies in income tax as the trustee of the estate of Otto Ernst Isenberg for any of the years 1918 to 1929, inclusive, involved in this proceeding.
Reviewed by the Board.
Judgment of no deficiencies will be entered.
MELLOTT dissents.