*1068 1. INCOME - TRUSTS - DISTRIBUTED CURRENTLY. - Income paid to a beneficiary under a provision to "pay over the net income thereof in semiannual or other convenient payments * * * or in the uncontrolled discretion of the Trustees to apply the same to her use and benefit", and under the provision of another trust to "pay over the net income to the child for whom the trust is held during the term of his or her natural life", is income to be distributed currently within the meaning of section 162(b), Revenue Act of 1936, and is taxable to the beneficiary even though it was not paid to her until shortly after the close of the taxable year. Section 162(c) is inapplicable.
2. DEDUCTION - EXPENSES - BUSINESS. - Deduction for expenses under section 23(a) denied to petitioner, who merely handled her own securities, upon authority of Higgins v. Commissioner,312 U.S. 212">312 U.S. 212, and similar cases.
3. EXCLUSION FROM INCOME. - An amount withdrawn from trusts to pay office expenses of an office maintained for the trusts was improperly included in the petitioner's income as trustee commissions.
*827 The Commissioner determined a deficiency of $12,131.25 in income tax for the calendar year 1937. The petitioner assigns as error the action of the Commissioner in including in her income the income of two trusts of which she was beneficiary. The Commissioner claims that he erred in allowing certain deductions as ordinary and necessary expenses of the petitioner's business.
FINDINGS OF FACT.
The petitioner is married and resides at Bernardsville, New Jersey. She filed her individual income tax return for the calendar year 1937 with the collector of internal revenue for the third district of New York. Her books are kept and her income is reported on the basis of cash receipts and disbursements.
The petitioner is one of the children of Percy R. Pyne who died in August 1929, a resident of New Jersey. Her father created an irrevocable inter vivos trust for her benefit on July 31, 1923. The original trustees were the grantor and a trust company. Percy R. Pyne, Jr., became trustee in place of his father after the latter's death. The trust instrument provided in part:
During*1070 the lifetime of my daughter Mary Pyne Filley to hold, invest and reinvest the Trust Fund, and to receive and collect the income therefrom, and to pay over the net income thereof in semi-annual or other convenient payments to said Mary Pyne Filley, or in the uncontrolled discretion of the Trustees to apply the same to her use and benefit, and upon her death to pay over the Trust Fund absolutely to her lawful issue * * *.
There were similar trusts for other of the children of Percy R. Pyne. Those Pyne children decided in 1936 to discontinue the practice of paying the income within the year and they notified the trust company to retain the income of the trust for each year and not to pay it out until after the close of the year. The income of the trust for 1937 was paid to the petitioner on January 3, 1938.
The trustees filed a fiduciary income tax return for this trust for the calendar year 1937, showing that all of the income of the trust, *828 save a small amount, was distributable to the beneficiary, Mary P. Filley, and showing no tax due.
A separate testamentary trust was set up under the will of Percy R. Pyne for the benefit of each of his children. The pertinent*1071 provision of the will was as follows:
The other equal part or share into which my residuary estate is to be divided I direct my trustees to divide into as many separate equal shares or parts as shall be equal to the number of my children who shall survive me and of those who may have died before me leaving issue me surviving, one of such shares for each of my children so surviving me and one share for the issue collectively of each child of mine who shall have died before me leaving issue me surviving; and as to the share for each child of mine surviving me, to hold the same on similar but several trusts, one for the benefit of each of the said children, and to invest and reinvest the same, collect the income thereof, and pay over the net income to the child for whom the trust is held during the term of his or her natural life; * * *.
The trust for the petitioner under this provision of the will was set up prior to the beginning of the calendar year 1937. It has been the practice of the trustees of these trusts to retain the income of the trust for each year until after the close of that year and pay it over to the beneficiary early in the following year. The income of this*1072 trust for 1937 was paid to the petitioner in January 1938.
The trustees of this turst filed a fiduciary income tax return for the calendar year 1937, showing all of the income taxable to the trust. They paid the tax shown on that return.
The petitioner did not report in her individual income tax return for 1937 any income from either of the trusts above mentioned.
Percy R. Pyne had maintained an office in New York during his lifetime for his convenience in conducting his business affairs. The employees consisted of a manager and four subordinates. The children of Percy R. Pyne were cotrustees under the trusts created by their father. They continued his New York office after his death for their convenience in carrying out their duties as trustees. They also used it in looking after their individual affairs. They set up a bank account known as the "Pyne Trustees' Commission Account" and paid the general expenses of the office from that account. Sufficient amounts were withdrawn from the testamentary trusts of Percy R. Pyne and deposited in that account to pay those expenses. There were only three surviving children in 1937. The petitioner, who was one of those children, *1073 deducted $8,502.91 on her individual return for 1937, representing one-third of the total office expenses for the year. She reported on that return $8,505.84 as trustees' commissions from the trusts created by the will of Percy R. Pyne. She did not receive the $8,505.84, but that was one-third of the amount which was withdrawn from the trusts druing 1937 to pay the office expenses. Neither *829 the petitioner nor any of her three brothers ever received any commission as trustee under the trusts created by their father.
The petitioner on her return claimed a deduction which included the following items:
| Custodian Fees, City Bank Farmers Trust Co | $750.00 |
| Office Miscellaneous Expenses | 4.50 |
| Accountants' Fees | 750.00 |
| Security Management Services | 2,650.00 |
| Wire charges | 3.39 |
The first item is the amount she paid to the bank to hold her securities and keep them in negotiable form. The third is the amount which she paid for accounting and service in connection with her income tax return. The fourth item is the amount paid to a firm of investment counsel who advise her on the purchase and sale of securities. The two small items are for stationery and*1074 other small items incident to her use of the office. None of those items relates to any of the trusts.
The petitioner is the owner and lessor of a house in New York City. She makes all decisions in connection with this property. She deals through a real estate agent in renting the property. The income is collected through the Pyne office. The gross income from the property for 1937 amounted to $8,083.31. She reported net income from the property of $5,073.31 for that year and claimed a separate deduction for taxes on the property in the amount of $6,900.
The petitioner has an estate in her own name, including a large number of securities from which she derived income in 1937 of about $34,000. She made a number of purchases and sales of securities during 1937. She attends tp her own financial affairs and makes all decisions in regard thereto, including all decisions relating to the purchase and sale of securities. She went to the Pyne office occasionally and was in communication with that office by telephone or by other means of communication on an average of two or three times a week. She came to the office whenever her presence was necessary.
The petitioner was*1075 not engaged in carrying on any trade or business during 1937.
OPINION.
MURDOCK: It is provided in section 162(b) of the Revenue Act of 1936 that a trust shall be allowed a deduction of the amount of the income of the "trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries", and in section 162(c) that "in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated", the amount which is properly paid or credited during such year to the beneficiary *830 shall be allowed as a deduction. The amount allowed as a deduction under either of the above provisions is required to be included in computing the net income of the beneficiary. The Commissioner has made his determination upon the theory that the income of each trust was taxable to the beneficiary under section 162(b) as income which was to be distributed currently by the fiduciary to the beneficiary. Actual receipt by the beneficiary during the taxable year is not essential under that provision. Cf. *1076 ; . The petitioner contends that the trustee had the discretion to accumulate the income of this trust or to distribute it to the beneficiary, consequently, (c) applies, and, since none of the income was actually paid to the beneficiary during the year, none of it is taxable to the petitioner. Although the proof does not show that the income was not properly credited to the petitioner during the year, decision need not turn upon this failure of proof.
"Accumulated" in (c) is used in opposition to "distributed currently" in (b). The latter is intended to cover all cases where the trust instrument imposes a duty upon the trustee to make a prompt or periodic distribution of the trust income to the beneficiary. ; , affirming ; ;*1077 . Cf. . (c), by its express terms, covers only those cases where the fiduciary has the right and the duty to choose between prompt distribution and accumulation beyond the time when a prompt distribution would normally have been made. Discretion requires the exercise of judgment and reason. It involves consideration of whether, on the one hand, there is good reason to distribute and no justification for withholding, or whether, instead, he should deliberately refrain from distributing at the usual time and withhold for some definite reason which, in his opinion, better carries out the purpose of the trust than would a current distribution. A provision for the distribution of "net" income does not make (b) inapplicable. This is so even though distribution is not to be made until after the close of the year in which the income is earned by the trust. Income which is distributed annually is being distributed currently, as well as promptly and periodically, and comes within (b), upon authority of the cases above cited. The grantor in the present case did not*1078 intend that the income of either trust should be accumulated within the meaning of that word as it is used in (c), but intended that the income should be distributed currently to the beneficiary within the meaning of (b). This is apparent from the words he used in the trust instruments. *831 Similar words have been similarly interpreted. Cf. ; affd., ; ; . The only discretion given under the two trusts here in question was a discretion to the trustees of the inter vivos trust to pay the income directly to the beneficiary or to apply the same to her use and benefit. That is not a discretion to accumulate within the trust and is not the kind of discretion which brings the case within (c). The income was not to be accumulated, but was to be distributed currently, either directly to the beneficiary or for her use and benefit. It is taxable to the beneficiary.
The commissioner, by an amended answer, raises the issue that he erred in allowing the petitioner a deduction*1079 of $12,660.80 under section 23(a). That amount included the office expenses, fees for investment counsel, for custodian, and for accounting, as well as two other small charges. Recent decisions hold that merely keeping records, collecting interest and dividends, and keeping funds invested, with or without the aid of investment counsel, and regardless of the size of the estate, do not constitute carrying on a trade or business within the meaning of section 23(a). ; ; ; ; ; ; and . The facts in the present case, when considered in the light of the foregoing cases, permit no other finding than that the petitioner was not engaged in any trade or business during 1935.
It is unnecessary to decide whether the activities of the petitioner relating to the rental*1080 of one house in New York City constituted the operation of a business or whether a proportionate part of the expeses properly allocable thereto should be allowed as a deduction. The general office expenses are not deductible in any event, since they were not paid by the petitioner. See further discussion in the last paragraph of this opinion. Obviously, no part of the investment counsel fees or the custodian fees could be allocated to the real estate. No basis for allocation of any of the other expenses to the real estate is shown in the record and, furthermore, any part which might properly be allocable thereto is too insignificant for further consideration.
The petitioner contends that, if the office expenses are to be disallowed as a deduction, then she erred in including in her income the amount of $8,505.84 described as trustees' commission. This point is well taken. She never received any commission for her services. She and her brothers intended to contribute their services to the trusts under their father's will without charge. The money in question was *832 withdrawn directly from the testamentary trusts to pay office expenses for the office from which the*1081 affairs of those trusts were conducted. It was merely intended to pay the office expenses of the trusts from the trust funds. The withdrawal of the money from the trusts did not benefit the petitioner personally and the fact that she called it trustees' commission in her return does not make it so. She erred in including it as part of her gross income.
Decision will be entered under Rule 50.