*2613 An overdistribution by trustees under a trust debenture to the life tenant in 1920 does not justify the reduction of the taxable income properly distributable to said life tenant in 1921.
*218 This proceeding is for the redetermination of a deficiency in income tax of $842.86 for the calendar year 1921, and the sole question for determination is whether the respondent erred in disallowing a deduction of $10,637.56, representing an overpayment on account of income to the petitioner in 1920, not discovered by the trustees of the estate of William Scott Pyle until 1921, which said amount when discovered by the said trustees was withheld by them from the petitioner's income for 1921 in order to correct said error.
FINDINGS OF FACT.
The last will and testament of William Scott Pyle, deceased husband of the petitioner, provided, in so far as applicable here:
THIRD: I give, devise and bequeath unto my Executors hereinafter named, all the rest, residue and remainder of my property real and*2614 personal of whatever nature and wherever situated, to have and to hold the same in TRUST during the life of my wife Mary Vanderhoef Pyle and also until my son William Scott Plye attains the age of twenty-five years or during his life if he should fail to attain the age of twenty-five years, for the following purposes, to collect the rents, profits and income arising therefrom and to pay the same to my said wife in quarter-yearly installments. * * *
*219 The decedent nominated and appointed his wife and his brother, James Tolman Pyle, executors and trustees under his will.
Samuel W. Fairchild, who succeeded James Tolman Pyle, trustee, and Mary V. Pyle, as trustees under the will of the decedent, and Adelaide McAlpin Pyle, individually, entered into an agreement under date of January 28, 1920, with Adolph Pricken for the sale to said Pricken of certain land and buildings located at 132-8 King Street, New York City, for $1,000,001, with the understanding:
* * * That within the parcel above described there are certain strips of land which the Title Guarantee and Turst Company reports in exceptions I, J, K, and L of their report #748131, outstanding in the City of New York, *2615 and it is agreed that Sellers will, at their own expense, with all reasonable effort and speed, endeavor to acquire title to said strips. It Sellers are unable to acquire such title within six months they shall notify Purchaser in writing, which must, within ten days thereafter, elect whether it will take title to said parcels on the terms herein stated, but without title to said strips or refuse to take title, in which latter event, Sellers will return the deposit made hereunder with interest at 2% per annum from date of deposit to date of return, and shall also pay the reasonable costs of the examination of the title to the said premises, but not to exceed the rate charged by the Title Guarantee and Trust Company for such services where no policy of title insurance is issued, and contract then shall be cancelled and become null and void, and neither party shall be liable to the other for any damages, costs and expenses whatsoever except as above set forth.
The deposit specified in the foregoing agreement was $25,000. The sellers were unable to secure title as required in the foregoing understanding within the period of time stipulated and the purchaser thereupon exercised his*2616 option and agreed to cancel the contract. The $25,000 was not returned to Pricken, however, in accordance with the terms of the contract, for the reason that said Pricken had been a tenant of one of the buildings on King Street and had not paid rent for several months, with the result that he owed the sellers approximately $21,000. The sellers deducted from the $25,000 the amount of Pricken's indebtedness and gave him a check for the balance amounting to $4,459.26.
Under date of September 1, 1920, Adelaide McAlpin Pyle, individually, and Mary V. Pyle and Samuel W. Fairchild, as trustees aforesaid, entered into an agreement with one Theodore Southard, a dummy for Pricken, for the sale to the latter of the same properties provided for in the agreement with Pricken under date of January 28, 1920, for $1,100,000, payable $25,000 in cash upon signing the contract, with the understanding "that the said Twenty-five thousand Dollars ($25,000) is a part of the consideration for this contract and that the Sellers are under no obligation to return it in case the purchaser refuses or fails to take title hereunder through his fault;" and the balance as therein specifically mentioned.
*220 *2617 Pricked paid the $25,000 required under the foregoing contract.
It having been provided in the agreement of September 1, 1920. that the deed to the premises should be delivered upon the receipt of specified payments on December 1, 1920, and it having been understood and agreed that time was of the essence of the contract, the same parties entered into another agreement on November 30, 1920, extending the date for said delivery:
* * * In consideration of the payment by the Purchaser of the additional sum of Twelve thousand ($12,000) Dollars on account of the purchase price of said property, receipt whereof is hereby acknowledged (Five thousand ($5,000.) Dollars of which said sum the Sellers shall be under no obligation to return in case the Purchaser refuses or fails to take title under said contract as hereby amended) said sum of Five thousand ($5,000.) Dollars and the Twenty-five thousand ($25,000.) Dollars paid on signing of said agreement of September 1st, 1920 being liquidated damages in case the Purchaser refuses or fails to take title hereunder through his fault, and in further consideration of the payment of the sum of Ten thousand ($10,000.) Dollars on January 15th, 1921*2618 in cash or by certified check, said sum of Ten thousand ($10,000.) Dollars to be credited against the purchase price of said contract, and the further agreement by the Purchaser that upon the sale of certain warehouses on Washington and West Streets which he is endeavoring to sell, that he will pay to the Sellers under this contract on the passing of the title to said Washington and West Streets properties the further sum of Fifteen thousand ($15,000.) Dollars or Twenty-five thousand ($25,000.) Dollars in cash or by certified check, said amount to be credited against the purchase price as agreed. * * *
The contract of September 1, 1920, and the modifying agreement of November 30, hereinabove, were further modified by agreement under date of January 25, 1921, by which, in consideration of further promises on the part of the purchasers, the sellers agreed to adjourn the time for closing title to the properties until April 1, 1921. They further agreed that in the event the purchaser failed to take title on said date, through his fault, the sums of $25,000 and $5,000 mentioned in the two preceding contracts should be liquidated damages and be retained by the sellers.
Pricken was*2619 finally unable to take title and the $30,000 deposit was forfeited.
Samuel W. Fairchild, trustee, petitioned the court on or about February 1, 1921, to relieve him of his duties as trustee, and he was succeeded by George Leask.
When the trust property was taken over by the said Leask and his cotrustee, Mary V. Pyle, it was divided into three groups, (1) that real and personal property which the estate owned outright, and (2) that property owned by James T. and William Scott Pyle, referred to as the joint account, consisting of real property valued at approximately $750,000, and (3) property owned by the heirs of James Pyle and the William Scott Pyle estate, successors to the *221 rights of William Scott Pyle. The estate's interest in the first group was 100 per cent, the second group 50 per cent, and in the third group 25 per cent.
Upon the resignation of Fairchild as trustee an accounting was rendered to the Surrogate's Court for the period March 1, 1919, the date of the preceding accounting, to January 15, 1921, in which the transaction growing out of the contract of January 28, 1920, with Adolph Pricken hereinbefore referred to was recorded as "Rent, 132-8 King*2620 Street, to July 31, 1920, Adolph Pricken (see refund August 4, $4,459.26) $25,000." That accounting was duly approved by decree of the Surrogate's Court on March 9, 1921.
The trustees filed a fiduciary return of income for the calendar year 1920 showing the total distributable income to the petitioner to be $28,220.44 which she duly reported in her individual tax return for that year.
The trustees prepared and duly filed a fiduciary return of income for the calendar year 1921, in which it deducted $10,637.56 in computing the beneficiary's distributable income, to which return there was a note appended, in explanation of said deduction, as follows:
Owing to the fact that in the year 1920 a contract was made for the sale of a large block of property, in which this estate had 1/2 undivided interest, and in accordance with the terms of the contract certain money was paid in and out of this money expenses in connection with this proposed sale and also alterations in the nature of betterments to the property were made, the adjustments made when this contract failed in its consummation showed there had been an overpayment on the books of income to the extent of $10,637.56 on which*2621 an income tax was paid by the life tenant, Mrs. William Scott Pyle in 1920. This item is therefore deducted from the income received during the year 1921.
The total distributable income and credits to the petitioner according to that return amounted to $21,477.83, which sum agrees substantially with the amount reported by her in her individual income-tax return for the calendar year 1921.
In preparing the accounting of the estate for the period January 15, 1921, the date of the preceding accounting, to January 1, 1924, it became necessary to refer to the last accounting made by the trustees, and in doing so it was discovered that because of a discrepancy arising out of the Pricken and Southard transactions hereinbefore discussed, the petitioner's distributable income for the calendar year 1920 had been overstated, and an adjustment was made in said accounting "to correct overdraft of payment on account of income during the year 1920 $10,913.63." That accounting was duly approved by decree of the Surrogate's Court on May 5, 1924.
Upon audit of the books of the fiduciary for the taxable year 1921 the deduction of $10,637.56 was disapproved by the revenue agent *222 *2622 saying, "The deduction of $10,637.56, for an overpayment of cash to the beneficiary out of the income account of the estate in 1920, is not a proper deduction. The net income of the estate for 1920, was audited and adjusted to show the amounts of the various classes of income earned and distributable to the beneficiary in 1920. Therefore, the amount of actual cash paid to the beneficiary, whether more or less than her distributive share, does not affect her income tax liability in any year," which finding was approved by the respondent on the ground that that amount "represented an investment in the corpus of the estate by the trustee."
OPINION.
MORRIS: The facts briefly restated are that the petitioner's distributive income from the estate of William Scott Pyle was, through error, overstated for 1920 by $10,637.56, which error, when discovered by the trustees, was corrected by withholding that amount from the normally distributable income to the petitioner for the year 1921. The petitioner contends, in effect, that, because the Surrogate's Court of New York approved the accounting of the trustees for 1921, in which the sum in question was transferred to the corpus of the estate*2623 instead of being paid to the petitioner, it did not constitute income distributable to her within the meaning of section 219 of the Revenue Act of 1921, and, therefore, was not subject to income tax under that section. Section 219 of the Revenue Act of 1921, in so far as applicable to the question here at issue, provides:
(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 -
* * *
(4) Income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals * * *.
* * *
(d) In cases under paragraph (4) of subdivision (a), and in the case of any income of an estate during the period of administration or settlement permitted by subdivision (c) to be deducted from the net income upon which tax is to be paid by the fiduciary, the tax shall not be paid by the fiduciary, but there shall be included in computing the net income of each beneficiary that part of the income of the estate or trust for its taxable year which, pursuant to the instrument or order governing the distribution, is distributable to such beneficiary, whether distributed or not, * * *.
Since*2624 the Act provides that there shall be included in computing the beneficiary's net income that part of the income of the trust, which, "pursuant to the instrument or order governing the distribution, is distributable to such beneficiary," and since the provision of the will under which the petitioner became beneficiary provided for the payment to her of all the profits and income arising from the *223 properties held in trust, in quarter-yearly installments, there can be no question but that the entire income and profits of the estate, undiminished in any manner whatsoever, should have been included in computing the petitioner's net income for 1921. Merely because the amount in question was not paid or distributed or, as the petitioner contends, was not "distributable" because of the overpayment in 1920 does not render it any the less income within the meaning of section 219, supra, and, therefore, taxable as such. The trustees simply erred in distributing to the petitioner a greater amount in 1920 than she was rightfully entitled to under the provisions of the trust indenture, which for our purpose must be regarded as creating an obligation on the part of the petitioner*2625 to reimburse the estate, out of future "distributable" income, the amount which had been erroneously credited or distributed to her. The error sought to be rectified occurred in 1920 and it is in that year, at least for income-tax purposes, that it must be corrected. We must, therefore, for the reasons stated, approve the findings of the respondent.
Judgment will be entered for the respondent.