*3879 1. Charitable contributions are not deductible by estates in the computation of net income unless paid or permanently set aside pursuant to the terms of the will.
2. The value of depreciable assets at the date of decedent's death should be used as the basis for determining the depreciation deductible by his estate.
3. The petitioners paid certain legacies from the income of the decedent's estate, the will making no provision as to the source from which the payments should be made. Held, that the amounts of said payments are not deductible under section 219(c) of the Revenue Act of 1921 in the computation of the net income of the estate. Appeal of Estate of W. S. Tyler,9 B.T.A. 255">9 B.T.A. 255.
*30 This is a proceeding for the redetermination of a deficiency in income tax of $270.29 asserted by the respondent for the calendar year 1923.
The allegations of error upon which the parties joined issue are:
1. Whether the respondent erred in disallowing a deduction of $120 claimed by the petitioners, representing a contribution to*3880 the Near East Relief;
2. Whether the respondent's method of computing depreciation on assets of the estate, resulting in an addition to net income of $2,216.90, was correct; and
3. Whether error was committed by respondent in his refusal to allow a deduction of $9,712, representing income received by the estate during the period of administration and settlement and paid during 1923 to certain legatees under the decedent's will.
The case was submitted for consideration on the admitted facts in the pleadings and stipulation entered into by counsel.
FINDINGS OF FACT.
The petitioners herein are the duly qualified executors of the estate of Abbot R. Heywood, who died on January 8, 1923, leaving the following will:
OLIGRAPHIC WILL.
I, ABBOT R. HEYWOOD, born September 16, 1855, of Ogden, Weber County, Utah do make publish and declare this my last Will and Testament.
I.Weber Lodge No. 6, F. and A.M. shall have charge of my funeral.
II.I devise and bequeath to my wife, Elizabeth Guthrie Heywood, and to my son, John Guthrie Heywood, each the sum of Fifty Thousand Dollars.
III.I bequeath to my own Cousin Mrs. Lucretia Heywood Kimball of Salt Lake City*3881 Utah the sum of Fifteen Thousand Dollars.
IV.I bequeath to Agnes and to Rose Daughters of my deceased brother Edward W. Heywood late of Boston, Massachusetts, each the sum of Five Thousand Dollars.
V.I bequeath to my own Cousin Leighton Baker of New York City the sum of Five Thousand Dollars.
*31 VI.
I direct that foregoing devises and bequests be paid in order named, prior ones being paid in full before the next following takes.
VII.I bequeath to Thomas R. O'Connally of said Ogden my gold watch and chain.
VIII
I give, devise and bequeath all the rest residue and remainder of my estate to my said wife Elizabeth and to my said son John share and share alike.
Lastly
I nominate and appoint my wife Elizabeth Guthrie Heywood and my son John Guthrie Heywood Executrix and Executor of this will.
Witness my hand at Ogden aforesaid January 30, 1919.
ABBOT R. HEYWOOD
Oligraphic Codicil.
My executors shall have three years in which to make payment of foregoing bequests in the mean time paying interest out of the net income at rate of 6% pr annum on the bequests in the order named and manner designated in Section VI.
ABBOT R. HEYWOOD.
*3882 JANUARY 30, 1919.
OLIGRAPHIC CODICIL
Section III is revoked and in place thereof insert following
III
I bequeath to Leland H. Kimball, Florence Kimball and Alice G. Kimball (Children of my deceased Cousin Lucretia Heywood Kimball) all of Salt Lake City the sum of Five Thousand Dollars each.
After Section V and prior to Section VI insert
V 1/2
I bequeath to my Grand Daughter Nancy Heywood the sum of ($10000) Ten Thousand Dollars.
ABBOT R. HEYWOOD
FEBRUARY 26, 1920
IX
Any sums paid or advanced or given by me subsequent to January 1, 1923 to either of the Legatees mentioned in section III on this page above, shall be held as an advancement and charged against the respective legacy.
ABBOT R. HEYWOOD.
DECEMBER 28, 1922.
In 1923 the petitioners paid to the Near East Relief the sum of $120 not provided for by the decedent in his will which was an amount pledged by him to that organization prior to his death. The petitioners deducted that amount in the computation of net income for 1923, which the respondent disallowed for the reason that *32 the amount so paid was not provided for in the terms of the decedent's will.
The petitioner claimed $4,290*3883 as a deduction for depreciation in the computation of net income for 1923, based upon the cost to the decedent of certain depreciable assets taken over by the petitioners. The respondent has allowed only $2,073.10 as a depreciation deduction in that year, thereby increasing the net income returned by $2,216.90.
Respondent concedes that there should be allowed to the petitioners as a deduction for depreciation, the sum of $2,469.96 instead of the sum of $2,073.10, heretofore allowed as a deduction in the deficiency letter, such greater depreciation deduction being based on a value reached by him for the depreciable property as of the date of decedent's death, whereas petitioners claim that the correct amount of depreciation allowable as a deduction is the sum of $3,500, which is based on the cost of said depreciable property to the deceased. This issue in this case is whether, as a matter of law, cost to the decedent or value as of the date of decedent's death is the proper basis for computing depreciation.
During the year 1923 the petitioners paid, in accordance with the will and codicil of the decedent, to Leland H. Kimball and Alice Kimball Wadleigh (named in codicil as Alice*3884 G. Kimball) the sums of $4,916.51 and $4,795.49, respectively, aggregating the sum of $9,712, such constituting payments on their legacies. These sums were not deducted in the original return filed by petitioners, although paid out of income, and the deficiency is based on the original return, the tax due on the original return having been paid. Amended returns for the year 1923 have been filed by the said Leland H. Kimball and Alice Kimball Wadleigh, including the amounts so set forth above as received from the petitioners as income. On said amended return Alice Kimball Wadleigh has paid the tax shown to be due, no tax whatsoever being paid on the return of Leland G. Kimball, due to it showing on its face no tax due. Petitioners now claim that said $9,712 should be allowed as a deduction from the income of the estate for the year 1923, which is denied by by respondent.
OPINION.
MORRIS: The first allegation of error is that the respondent erred in disallowing as a deduction in the computation of net income for 1923 an amount paid to the Near East Relief. The respondent contends that this amount is not an allowable deduction within the meaning of the law, for the reason that*3885 it was not provided for in the last will and testament of the decedent. Therefore, our question is one of law as to whether the executors of the estate may take as *33 a deduction, in the computation of net income, contributions of the nature herein, which were pledged by the decedent during his lifetime but which were not provided for in the will.
Section 219(b) of the Revenue Act of 1921 provides:
The fiduciary shall be responsible for making the return of income for the estate or trust for which he acts. The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212, except that (in lieu of the deduction authorized by paragraph (11) of subdivision (a) of section 214) there shall also be allowed as a deduction, without limitation, any part of the gross income which, pursuant to the terms of the will or deed creating the trust, is during the taxable year paid or permanently set aside for the purposes and in the manner specified in paragraph (11) of subdivision (a) of section 214. * * *
Section 212 referred to in section 219(b) above, insofar as it is pertinent to the issue raised herein, simply defines net*3886 income to mean "the gross income as defined in section 213, less the deductions allowed by section 214."
Section 214(a)(11) referred to in section 219(b) above provides for the deduction of:
Contributions or gifts made within the taxable year to or for the use of: * * * (B) any corporation, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, * * *
Thus it will be seen that in determining net income as defined in section 212, supra, the fiduciary may deduct any part or all of the gross income which has been set aside or paid for the purposes and in the manner specified in section 214(a)(11), supra, provided, however, that said sums are paid or set aside "pursuant to the terms of the will or deed creating the trust." While the sum here in question was pledged by the decedent during his lifetime, there was no permanent setting aside nor was any provision made for this pledge in the decedent's will. We must, therefore, sustain the action of the respondent in disallowing this amount as a deduction in 1923 See *3887 .
The second allegation of error urged by the petitioners is that the respondent erred in his computation of depreciation, in that he used the fair market value of the property on the date of the decedent's death, instead of cost of said property to the decedent, as the basis for such computation. In the , where the question of exhaustion of royalty rights was in controversy, the Board, after determining that such rights were subject to exhaustion under the law, held that the basis for determining such exhaustion was the value at the date of *34 death of the decedent, and not cost, as was contended by the respondent. Therefore, following the conclusion reached in that case and in the , we approve the action of the respondent in the instant case in using as a basis for the computation of depreciation the value of the depreciable property at the date of death of the decedent instead of cost of said property to the decedent. *3888
The third question presented for consideration is whether the petitioners are entitled to deduct the sum of $9,712 in the computation of net income for 1923, representing amounts paid to legatees under the decedent's will during the period of administration and settlement. The petitioners contend that, as the legacies were paid from the income of the estate, the deduction falls squarely within section 219(c) of the Revenue Act of 1921. The pertinent provisions of section 219 are:
(a) That the tax imposed by sections 210 and 211 shall apply to the income of estates or of any kind of property held in trust, including -
(1) Income received by estates of deceased persons during the period of administration or settlement of the estate;
* * *
(c) In cases under paragraphs (1), * * * of subdivision (a) or in any other case within subdivision (a) of this section except paragraph (4) thereof the tax shall be imposed upon the net income of the estate or trust and shall be paid by the fiduciary, except that in determining the net income of the estate of any deceased person during the period of administration or settlement there may be deducted the amount of any income properly paid*3889 or credited to any legatee, heir, or other beneficiary. * * *.
In the , we considered the question whether, under section 219(c) of the Revenue Act of 1918, that estate was entitled to deduct certain legacies paid in 1918, under a will which did not specify whether said payments were to be made from the corpus or the income of the estate. The language of the section under which that decision was made is the same as in the 1921 Act. We held that in order to determine whether that petitioner was entitled to the deduction we must inquire as to whether the legacy was, by the terms of the will made payable out of the income of the testator's estate, and being unable to find any authority in the decedent's will for holding that the legacies were intended by the decedent to be paid out of the income rather than the corpus of his estate, reached the conclusion that they were not deductible in determining the net income of the estate. As the legacies in the instant proceeding were not, by the terms of the will, made payable out of the income of the testator's estate, that decision *35 is controlling of the issue presented*3890 herein. We therefore sustain the respondent in denying the deduction of $9,712.
Judgment will be entered on 15 days' notice, under Rule 50.