*1864 Decedent by his will directed that his residuary estate be divided into six equal shares, two of which shares he bequeathed and devised to his executors and trustees to hold in trust for his daughters, and the remaining shares he bequeathed and devised to his four sons. Decedent appointed his wife and sons executors and trustees, vesting in them full management and control of said estate to pay over the income to his children, with discretionary power to sell and convey the real estate if they might think proper. Held, decedent did not, under the laws of Pennsylvania, create a legal trust in respect of the shares in the residuary estate devised to his sons, but the executors and trustees were merely agents of such devisees, who are taxable upon the income derived from the residuary estate and are entitled to deduct in their individual returns their proportionate shares of allowances for depreciation and loss on sale of capital assets.
*478 These are proceedings for the redetermination of deficiencies in income tax determined by the respondent*1865 as follows:
| Petitioner | Docket No. | Year | Deficiency |
| James W. Arrott, jr | 39465 | 1924 | $830.96 |
| 1925 | 2,921.16 | ||
| Charles F. Arrott | 39466 | 1924 | 5,522.86 |
| 1925 | 2,142.55 | ||
| Albert E. Arrott | 39467 | 1924 | 244.04 |
| 1925 | 3.066.33 |
*479 The petitioners allege that in determining said deficiencies the respondent erred:
(1) In holding that a trust was cerated by the will of James W. Arrott, deceased, affecting the estates of the petitioners;
(2) In failing, refusing, or neglecting to allow as a deduction from the gross income of each of the petitioners for the year 1924 the sum of $2,087.13 representing depreciation sustained on certain properties known as the Arrott Office Building and the Arrott Power Building;
(3) In holding that the trustees under the will of James W. Arrott, deceased, had any title to or estate in the Arrott Building property or other real property of the said decedent affecting the estates and interests therein devised to the petitioners;
(4) In holding that the trustees under the will of James W. Arrott, deceased, acted or had power to act in any trust capacity for the petitioners with respect to the decedent's real*1866 estate except to rent and operate the same and collect and distribute the income therefrom; and
(5) In increasing the net income of each of the petitioners for the year 1925 by disallowing a capital net loss of $16,195.44, which was the loss sustained on the sale of the Arrott Office Building during that year.
The proceedings were consolidated for hearing and decision.
FINDINGS OF FACT.
James W. Arrott, Jr., is a citizen of the United States, residing at 921 Beaver Street, Sewickley, Pa.; Charles F. Arrott is a citizen of the United States, formerly residing at 600 South Negley Avenue, Pittsburgh, Pa., and now residing at Amberson Avenue, Pittsburgh, Pa.; and Albert E. Arrott is a citizen of the United States, formerly residing at 401 South Aiken Avenue, Pittsburgh, Pa., and now residing in Chautauqua County, New York.
James W. Arrott, a citizen of the United States, a resident of the Borough of Osborne, County of Allegheny, State of Pennsylvania, father of petitioners, died on December 29, 1902, having theretofore, on July 10, 1902, made his last will and testament, reading in matcrial part as follows:
I, James W. Arrott, of Osborne Borough, Allegheny County, Pennsylvania, *1867 being of sound and disposing mind, do make, publish and declare this my last will and testament, hereby revoking any former will by me at any time heretofore made.
* * *
SEVENTH: To the rest, residue and remainder of my estate, real, personal and mixed, wheresoever situate, shall be added, merely for the purpose of calculating an equal division thereof, and as if it were a part thereof, the *480 sum of eighty-five thousand ($85.000.00) dollars, that being the total amount, which, in property or money, I have given either in my lifetime or by the foregoing legacies and devises of this will, to my several children, on account of their respective shares of my estate, and I direct that the entire residuary estate or sum thus ascertained shall be divided into six (6) equal shares which I dispose of as follows: -
One of said shares, less the sum of ten thousand ($10,000.00) dollars, I give, devise and bequeath to my executors hereinafter named the survivor and successor of them, in trust for my daughter, Jennie, to invest the principal in good and approved interest-bearing securities and pay over the interest to her, my said daughter, as same is got in and received, for and*1868 during the term of her natural life, said interest or income not to be liable or subject in any manner to attachment or seizure for any debt or debts of her, my said daughter, nor to be assigned, transferred, pledged or parted with by way of anticipation, and upon her death to divide the said share equally among any children of hers should she die leaving children who may then survive her, the issue of any deceased child to represent and take the share of such deceased child; and in the event of her death without leaving child or children or the issue of any deceased child, then surviving her, then to divide the said corpus or principal equally among her then surviving brothers and sisters and the issue of any who may then be deceased, such issue also to represent and take the share of their deceased parent.
One other of said shares, less the sum of ten thousand ($10,000.00) dollars, I give, devise and bequeath to my executors hereinafter named, the survivor and successor of them, in trust for my daughter, Bella, to invest the principal in good and approved interest bearing securities and to pay over the interest to her, my said daughter, as same is got in and received, for and*1869 during the term of her natural life, said interest or income not to be liable or subject in any manner to attachment or seizure for any debt or debts of her, my said daughter, nor to be assigned, transferred, pledged or parted with by way of anticipation, and upon her death to divide the said share equally among any children of hers, should she marry and die leaving children who may then survive her, the issue of any deceased child to represent and take the share of such deceased child and in the event of her death unmarried or having married, without leaving child or children, or the issue of any deceased child, then surviving her, then to divide the said corpus or principal equally among her then surviving brothers and sisters and the issue of any who may then be deceased, such issue also to represent and take the share of their deceased parent.
One other of said shares less the sum of twenty-five thousand ($25,000.00) dollars, I give, devise and bequeath to my son, William.
One other of said shares less the sum of fifteen thousand ($15,000.00) dollars, I give, devise and bequeath to my son, James.
One other of said shares less the sum of ten thousand ($10,000.00) dollars, *1870 I give, devise and bequeath to my son, Charles.
One other of said shares less the sum of fifteen thousand (15,000.00) dollars, I give, devise and bequeath to my son, Albert.
I direct, however, that the general settlement and division of my residuary estate shall not be made before January first, nineteen hundred and ten (1910). During the interval which may occur between my death and the general settlement and division of my residuary estate, my executors hereinafter named, the survivor and successor of them, shall have full management and control of said estate, in trust, to pay over the income derived therefrom as the same is got in and received, less necessary expenses, in equal shares to my said *481 children, the issue of any deceased child to represent and take the share of such deceased child.
And while I have provided above for the division of my said residuary estate into shares and the investment of certain said shares, I do not intend by this to compel or require the conversion of any part of the residuary estate into cash at an earlier period than my executors should think proper; on the contrary, should they think it wise to do so, they may divide my investments*1871 and personal property in specie, making an equal allotment to each interest and may in like manner divide or apportion the rentals of real estate until the time arrives, when in their judgment the real estate should be sold or disposed of.
EIGHTH: I appoint my wife, Bella Arrott, and my four sons, William Arrott, Charles F. Arrott, James W. Arrott, and Albert Arrott, executors of and trustees under this will, with power to sell and convey the real estate not hereinbefore specifically devised, upon such terms, at such prices as they may think proper, and to make, execute and deliver good and proper deeds therefor, without any liability on the part of the purchaser to see to the application of the purchase money. But, while I do not positively direct, I most strongly urge and advise my said executors not to sell or dispose of the property at the corner of Wood Street and Fourth Avenue, Pittsburgh, on which the Arrott Building is erected for years after my decease, unless for the most urgent and important reasons, as for example a merger of interests with the owners of the buildings immediately adjoining, and even then only upon the advice of the attorney hereinafter designated*1872 to act as attorney for my estate. Out of the rents, issues and profits arising from said Arrott Building property at the corner of Fourth Avenue and Wood Street, Pittsburgh, my executors and trustees are authorized and directed to pay to my wife, Bella Arrott, the annuity of Five Thousand ($5,000.00) Dollars, provided for in the second paragraph of this will. Inasmuch as the trusts provided for in this will may run during a considerable period and the number of the testamentary trustees herein appointed be reduced by death in the meantime, I direct that my executors and trustees, in the event of the reduction of their number by death or otherwise to less than three, shall apply to the Orphans' Court of Allegheny County for the appointment of a suitable person or persons to act with them in the said trust and so on from time to time as occasion may require, so that, as far as possible, there shall always be three persons acting as trustees for my estate.
The said will and testament of James W. Arrott was admitted to probate in the Orphans' Court of the County of Allegheny, State of Pennsylvania, on the third day of January, 1903, when the testator's widow, Bella Arrott, and his*1873 four sons, William Arrott, Charles F. Arrott, James W. Arrott, Jr., and Albert E. Arrott, having been named in the will, were duly qualified and they and their successors acted as executors and trustees thereunder.
In the year 1916, in accordance with the terms of the will, the Orphans' Court of Allegheny County, Pennsylvania, appointed the Union Trust Company of Pittsburgh as one of the trustees to fill the vacancy created by the resignation of Charles F. Arrott. The said Union Trust Company of Pittsburgh remained a trustee throughout the year 1925.
*482 The executors and trustees, prior to 1910, paid all the debts, funeral expenses, administration expenses and legacies, and prior to 1924, there had been distributed by decrees of the Orphans' Court of Allegheny County to the residual legatees substantially all the testator's property with the exception of the Arrott Office Building, hereinafter described, and a building known as the Arrott Power Building.
Bella Arrott, widow of James W. Arrott, who was entitled under the provisions of his will to $5,000 income per year for her life out of the rent of the Arrott Office Building, died in November, 1915. Annie Hogg, *1874 sister of James W. Arrott, who was entitled under his will to a $300 annuity, died in the year 1903.
The property of James W. Arrott included, in addition to personal property inventoried at $774,350.18, certain real estate situate at the northwest corner of Fourth Avenue and Wood Street in the first ward, city of Pittsburgh, Pa., on which was erected an eighteen-story brick office building known as the Arrott Office Building. This building was rented by the executors and trustees under the will from 1903 to January 23, 1925, and the net income from the rents of said building was distributed in equal shares to the four sons and trustees for the two daughters of the deceased.
Prior to the sale of the Arrott Office Building in the year 1925, the devisees did not jointly or separately request a partition of the property.
In computing the net income of the estate of James W. Arrott, Sr., for the year 1924 the trustees deducted depreciation in the amount of $11,095. The respondent in the audit of the 1924 return increased the depreciation deduction for the estate to $12,522.80. This increase was due to the allowance of depreciation on capital additions $28,556.10 not included*1875 in the estate's original computation. Each of the petitioners in computing his taxable income with respect to his share of the net income from rents of the Arrott Office Building and the Arrott Power building reported his distributable share of the rents less $1,849.17 which item represents one-sixth of $11,095, the depreciation deducted ty the estate for the year 1924. In the sixy-day letters mailed to each of these petitioners the respondent has disallowed depreciation in the amount of $2,087.13, said item representing the above-mentioned $1,849.17 plus $237.96 (one-sixth of $1,427.80) the additional depreciation allowed the estate for the year 1924.
On or about January 23, 1925, the property hereinabove referred to, known as the Arrott Office Office Building, was sold for the sum of $800,000, and the expenses of the said sale amounted to $10,525. In the preparation of their individual income-tax returns, each of the *483 petitioners herein deducted from gross income for the year 1925 the sum of $17,140.38, claimed to represent his proportionate share (one-sixth) of the loss sustained on the sale of the said Arrott Office Building.
The accounts of all the petitioners*1876 herein are kept on the basis of cash receipts and disbursements and for the years 1924 and 1925 the returns of income were filed upon that basis.
The March 1, 1913, fair market value of the property known as the Arrott Office Building, situated at the corner of Fourth Avenue and Wood Street, Pittsburgh, Pa., was not less than $977,400. A fair apportionment as of March 1, 1913, of the said valuation as between building and land is $625,000 for the building and $352,400 for the land. A fair rate of depreciation on the said office building is 1 1/2 per cent per annum.
During the period from March 1, 1913, to January, 1925, improvements and capital additions to the Arrott Office Building hereinbefore referred to amounted to $28,556.10, and a fair rate of depreciation on said improvements is 5 per cent per annum.
Under date of January 21, 1925, a deed purporting to convey to the Arrott Land Company, a Pennsylvania corporation, a fee simple title to the property known as the "Arrott Building" was executed by the Union Trust Company, James W. Arrott, Jr., and Albert E. Arrott, acting in their capacity as executors and trustees under the decedent's will, and on the same date, the*1877 devisees and heirs of the decedent, including these petitioners, executed a quitclaim deed to the same property in favor of the same grantee.
OPINION.
TRAMMELL: The facts in these proceedings were stipulated by the parties, and a single issue of law is presented involving the right of the petitioners to certain deductions from gross income claimed by them in their respective returns for the taxable years.
In computing the net income of the decedent's estate for the year 1924, the trustees deducted depreciation on the Arrott Office Building and Arrott Power Building in the amount of $11,095, which was increased by the respondent to $12,522.80 on account of capital additions not included in the trustees' original computation. The amount of the allowable deduction for depreciation is not here in dispute.
Each of the petitioners in reporting his taxable income deducted one-sixth of the depreciation claimed by the trustees of the estate. Each petitioner also deducted from gross income for 1925 an amount claimed to represent his proportionate share of the loss sustained on the sale of the Arrott Office Building in said year. The amount of this loss likewise is not in dispute*1878 here, but the question is whether *484 a trust estate was created by the decedent's will, and if so, whether the deductions are allowable to the estate or to the devisees under the will.
The respondent disallowed the said deductions claimed by the petitioners, on the following grounds:
It is evident * * * that a legal trust was created as to the decedent's residuary estate; that up to January 1, 1910 the executors (also trustees) were expressly prohibited from distributing the residuary estate and that subsequent to January 1, 1910 the distribution of the residuary estate which constituted the corpus of the said trust, was left entirely to the discretion of the trustees of the said trust. The facts also disclose that the executors (also trustees) exercised the power granted to them by the decedent's will and retained title in trust to the Arrott Office Building, the only remaining undistributed asset of the trust, until the year 1925 when such property was sold at a loss by them as such trustees and not as devisees. During the interval between decedent's death in 1902 and 1925, the year in which the said Arrott Office Building was sold, the rental net income only from*1879 this property was distributed to the residuary beneficiaries. * * *
It is therefore held that the rights of the beneficiaries of this trust until the termination of the said trust subsequent to the sale of the corpus of the trust in 1925, was in the income only. Accordingly, the action of the Bureau in disallowing the deductions in question is sustained * * *.
The Revenue Acts of 1924 and 1926 contain the following identical provisions:
SEC. 219. (a) The tax imposed by Parts I and II of this title shall apply to the income of estates or of any kind of property held in trust, including -
(1) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust;
(2) Income which is to be distributed currently by the fiduciary to the beneficiaries, * * *
(3) Income received by estates of deceased persons during the period of administration or settlement of the estate; and
(4) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.
It is further provided in subdivision (b) *1880 of section 219, with exceptions not material here, that the tax shall be computed on the net income of the estate or trust, and shall be paid by the fiduciary. However, the net income taxable to the fiduciary is computed by deducting the amount of the income which is properly paid or accrued during the taxable year to the beneficiary, and the amount so paid or accrued is taxable to the latter.
As between the fiduciary and the beneficiary, deductions for depreciation and loss on sale of capital assets are allowable to the one to whom the income is taxable and who holds the legal title to the property which produces the income. Stated conversely, the beneficiary is not entitled to such deductions in respect of property comprising the corpus where he has no presently existing interest therein.
*485 In ; certiorari denied, , it was held that the beneficiary of a life estate was taxable on the income actually received by or distributable to him without deduction for losses to the capital of the estate incurred during the year. See also *1881 .
In , the decedent bequeathed and devised the residue of his estate directly to trustees named in his will, such property to be held in trust by them for specified purposes and upon stated conditions. The beneficiaries having no present interest in the trust corpus, we held that they were not entitled to deduct pro rata in their individual tax returns a net operating loss of the trust.
Applying the same principle in ; affd., , we held that the beneficiaries who were life tenants only, under a testamentary trust, were not entitled to deductions for depreciation of capital assets of the trust estate.
In , the petitioner and others, being owners of undivided interests in a patent and licenses issued thereunder, transferred their interests to a trustee for the purpose of collecting royalties, paying expenses and turning over the net income to the same persons who had theretofore owned the patent and licenses, and who continued to own them beneficially*1882 to the same extent. Thus, the beneficiaries were also the remaindermen. The petitioner there was the real owner of property which she had merely placed in the hands of another to manage for her. We held that she was entitled to deductions for exhaustion of her interest in the patent. Cf. ; .
In the instant case, then, the issue raised suggests the following questions: Did the decedent by the provisions of his will create a legal trust, and, if so, did the petitioning beneficiaries have such present rights in the corpus of the trust estate as to entitle them to the deductions claimed? Who were the real owners of, and who held the legal title to, the decedent's residuary estate at the time of the sale of the Arrott Office Building in 1925?
The issue is ruled by the laws of Pennsylvania, and for the answers to these questions we must look to those laws as declared by the Supreme Court of that State.
By the provisions of his will, the decedent directed that his entire residuary estate should be divided into six equal shares. Two of said shares the decedent*1883 specifically devised and bequeathed to his executors therein named to be held in trust by them for his two daughters during their natural lives. In respect of these two shares *486 in the residuary estate, it seems clear that a legal trust was created, and no question on this point is here raised. However, the four remaining shares the decedent did not expressly devise and bequeath to his executors, but, subject to certain limitations to which further reference will be made, he gave, devised and bequeathed the same to his four sons, William, James, Charles and Albert, of whom the last named three are petitioners herein.
The shares in the residuary estate devised by the decedent to his sons were subject to the following provisions of the will:
I direct, however, that the general settlement and division of my residuary estate shall not be made before January first, nineteen hundred and ten (1910). During the interval which may occur between my death and the general settlement and division of my residuary estate, my executors hereinafter named, the survivor and successor of them, shall have full management and control of said estate, in trust, to pay over the income*1884 derived therefrom as the same is got in and received, less necessary expenses, in equal shares to my said children, the issue of any deceased child to represent and take the share of such deceased child. * * *
I appoint my wife * * * and my four sons * * * executors of and trustees under this will, with power to sell and convey the real estate not hereinbefore specifically devised, upon such terms, at such prices as they may think proper, and to make, execute and deliver good and proper deeds therefor, without any liability on the part of the purchaser to see to the application of the purchase money.
At and for a long time prior to the decedent's death, the law was well settled in Pennsylvania that neither an administrator nor an executor, unless authorized by the will of his testator or, in the absence of a will, by the heirs, had any right of control or management of real estate which descended to the heirs or was devised, and if such personal representative collected the rents arising from real estate, he acted either as an intermeddler, or, if authorized, as the agent of the heirs or devisees, as the case might be. *1885 , citing: ; ; ; ; ; ; ; ; ; ; ; . See also .
It follows that, in the case at bar, the provision of the will that the executors should have full management and control of the residuary estate to pay over the income therefrom to the decedent's children constituted the executors agents of the devisees for the purposes stated, and did not otherwise affect the title to the real estate devised to and vested in the devisees by the seventh section of the will.
Nor did the use of the words "in trust" in connection with the "full management and control" clause create a legal trust or vest *487 title*1886 to the residuary real estate in the executors. In , the court pointed out that the words "in trust" may not import a strictly technical trust, but a mere confidence, and in ; , the Supreme Court of Pennsylvania held that a "trustee" appointed by the will to collect rents to be applied to the support and maintenance of the decedent's family was a mere agent in whom no title vested.
In addition to management and control of the residuary estate, decedent also provided in his will that the executors and trustees should have "power to sell and convey the real estate not hereinbefore specifically devised, upon such terms, at such prices as they may think proper, and to make, execute and deliver good and proper deeds therefor."
The Arrott Office Building was not specifically devised in the will, and the foregoing provision, whatever may be its effect, is therefore applicable to this property. Did the decedent's executors and trustees thereby acquire the legal title?
The general rule, which also obtains in Pennsylvania, is thus stated at 24 Corpus Juris, sec. 595:
*1887 Where the testator authorizes or directs the executor to sell the land, this gives him, according to the preponderance of authority, only the naked power of sale and does not vest in him the title.
This question has been before the Supreme Court of Pennsylvania in numerous cases, and that court has uniformly held that where power is merely granted to the executors to sell real estate, but they are not specifically directed to sell, and there is no absolute necessity of sale in order to carry out the provisions of the will, the executors may not exercise such power.
In ; , where the executors were "authorized and empowered" to sell at public or private sale all or any part of the real or personal estate, not specifically bequeathed or devised, and to execute and deliver good and sufficient deeds for all real estate sold, the court held that in the absence of any necessity to sell the real estate, the executors could not make title. And in , the court held that the power to sell, under such circumstances, must be limited to the ordinary purposes incident*1888 to the settlement of the estate.
In ; , the court said:
Testator in authorizing a sale of the realty provided at most simply a means that might be employed to produce equal division, not an object to be attained, and there is no conversion.
In , the heirs brought suit in equity for partition. The decedent had provided in his will that the executors might sell his real estate and make deeds to the *488 purchasers. The court held that the heirs were entitled to partition, saying:
Admittedly there is no positive direction to sell. The will says: "My executors may sell my real estate." A direction to the executor to make division of the estate does not take away the right to demand partition * * *. Nor does it appear here that there is any absolute necessity for the executors to sell in order to carry out the provisions of the will.
In the instant case the decedent appointed his wife and four sons executors of and trustees under this will, "with power to sell and convey the real estate." Clearly this language did not constitute a positive*1889 direction to sell, nor at the time of the sale of the property was it in any wise necessary for the executors to sell the real estate in order to carry out the provisions of the will or to attain any object contemplated therein.
The stipulated facts show that the Arrott Office Building was sold in 1925, and that prior to 1910 the executors had paid all the debts, funeral expenses, administration expenses and legacies and that prior to 1924, substantially all the testator's property had been distributed to the residuary legatees, with the exception of the office and power building.
Under the cited decisions of the Supreme Court of Pennsylvania, and particularly , the executors, in the circumstances shown, had no title to the Arrott Office Building in 1925, and transferred no interest therein by their deed of January 21, 1925, to the Arrott Land Company. In respect of the property here in question, namely, the respective shares of the petitioners in the residuary real estate, the executors were merely agents of such devisees with authority to collect and distribute the rental income after payment of necessary expenses. The income received*1890 by the executors as such agents was income received by their principals, the petitioners herein, and they are entitled to the deductions claimed.
However, even if the provisions of the decedent's will could properly be construed as creating a legal trust, nevertheless, the petitioners were the sole beneficiaries of and entitled to receive the income derived from their respective shares in the residuary estate which constituted the corpus of the trust, and were at its termination entitled to the reversions. They were not only the beneficiaries under the trust, if any, but also the remaindermen. They were the real owners of the property, the only persons having any interest therein, either present or prospective, and as such, under our decisions in , and , they are entitled to the deductions claimed on account of depreciation and loss on sale of the capital assets.
The action of the respondent is reversed.
Judgments will be entered under Rule 50.