*1357 A testator's will provided for the distribution of one-half of the "net interest and income" of the residue of his estate to petitioner's decedent. Held, no part of additional estate tax paid by the executor during the taxable year should be deducted from the gross income in ascertaining such "net interest and income" of the residue of the estate.
*181 This proceeding involves the redetermination of the income tax of Sophia Curtiss, deceased, for the year 1923. The deficiency in tax alleged amounts to $1,865.25 and arises from the determination of the Commissioner that the decedent's estate should pay surtax on one-half of certain dividends distributable from the estate of Frank Curtiss, deceased, without allowing a claimed deduction for estate tax paid by the executor of the estate of Frank Curtiss.
FINDINGS OF FACT.
The facts were stipulated and are as follows:
Sophia Curtiss, who during 1923 was a resident of Sheffield, Berkshire County, Mass., died on September 4, 1928, leaving a last will which was admitted to probate in the Probate*1358 Court of Berkshire County, Mass., on October 18, 1928, under which letters testamentary were on said date duly issued to Everett J. Esselstyn of New York as sole executor, and he thereupon duly qualified as such executor and at all times since said date has been, and now is, executor of said estate which is in process of administration.
Decedent was one of the beneficiaries of the residuary estate of Frank Curtiss, deceased, and as such, under the will, was entitled to one-half of the distributable income of his residuary estate under a clause in said will reading in part as follows:
All the rest, residue and remainder of my estate, * * * I direct to be divided into two (2) equal parts, and * * *
(1) One (1) of said two (2) equal parts I give * * * to my said trustees * * * to have and to hold the same * * * in trust, * * * for the following uses and purposes, to wit:
(a) to invest safely, reinvest and to keep the same safely invested and to pay over the net interest and income arising therefrom, semiannually or quarter-yearly, to and for the use of my said daughter, Sophia Curtiss, during the term of her natural life.
*182 The specific legacies had all been*1359 paid before the year 1923, and the estate during that year consisted only of the residuary estate. The items of income as shown by the return of the estate for 1923 were:
| Interest | $2,331.90 | |
| Profit from sale of rights | 3,238.54 | |
| Dividends | 109,024.90 | |
| Total gross income | 114,595.34 | |
| Less deductions as follows: | ||
| Interest paid | $2,134.75 | |
| Massachusetts income tax | 3,862.51 | |
| Addl. Federal estate tax | 25,723.54 | |
| Expenses | 1,140.88 | |
| Distributable to beneficiaries | 79,423.80 | |
| Total deductions | 112,285.48 | |
| Net income | $2,309.86 |
The estate filed an information return for 1923. Sophia Curtiss, petitioner's decedent, also filed an income-tax return for the year 1923.
On the foregoing net income the estate paid an income tax. The item of $3,238.54 was a capital gain, and became a part of the corpus of the estate and was not distributable. The distributable income was determined by the estate by deducting a proportionate part of the total deductions (exclusive of the deduction for distributable income) from each item of gross income, and follows:
| Interest | $2,331.90 | less | $668.70, | leaving | $1,663.20 |
| Profit | 3,238.54 | less | 928.61, | leaving | 2,309.86 |
| Dividends | 109,024.90 | less | 31,264.30, | leaving | 77,760.60 |
| $114,595.34 | $32,861.68 | $81,733.66 |
*1360 The estate distributed the item of $77,760.60 to the beneficiaries as "dividends" and the item of $1,663.20 as "other income." The petitioner's decedent reported as her gross income one-half of these distributable amounts ($38,880.30 as dividends and $831.60 as interest), that is, a total gross income of $39,711.90, and from this amount she took deductions for interest and taxes in the respective amounts of $82.50 and $609.14, leaving net income in the amount of $39,020.26.
The Commissioner, in his deficiency notice, changed the income as reported by the petitioner in the following manner:
| Net income reported on return | $39,020.26 | |
| Add (1) Dividends | 15,632.15 | |
| 54,652.41 | ||
| Less: | ||
| (2) Interest | $831.60 | |
| (3) Fiduciary Income | 2,403.12 | 3,234.72 |
| Corrected net income | 51,417.69 |
The trusts provided by the will of Frank Curtiss for Sophia Curtiss and Roy Curtiss, his daughter and son, were not separately *183 set up during the year 1923, but were administered as a part of the administration of the estate of Frank Curtiss, deceased, which administration was in the year 1923 still in process. These trusts were separately set up subsequent to the*1361 year 1923 after the death of Roy A. Curtiss, one of the beneficiaries.
OPINION.
SEAWELL: Much confusion exists in the record as to the specific action of the Commissioner which is complained of by the petitioner, but from an analysis of the data submitted the following computations will show the situation as we understand it. In the first place, the income of the estate which was considered distributable and taxable to the petitioner is shown as follows:
| Income: | ||
| Interest | $2,331.90 | |
| Dividends | 109,024.90 | |
| $111,356.80 | ||
| Expenses: | ||
| Interest | $2,134.75 | |
| Massachusetts income tax | 3,862.51 | |
| Administration expenses | 1,140.88 | |
| 7,138.14 | ||
| Total distributable income | 104,218.66 |
Since under the terms of the will in question one-half of the income was distributable to the petitioner, the income upon which the Commissioner determined the deficiency with which we are concerned is shown as follows:
| Total income (1/2 of $104,218.66) | $52,109.33 | |
| Less: | ||
| Interest | $82.50 | |
| Taxes | 609.14 | |
| 691.64 | ||
| Net income (subject to surtax) | 51,417.69 |
A comparison of the distributable income as determined above for the estate with that shown*1362 by the petitioner's decedent in her return shows, in effect, only two changes, namely, the item referred to as "Profit from sale of rights" in the amount of $3,238.34 is eliminated from the income items, and the deduction claimed in the amount of $25,723.54 on account of "Addl. Federal estate tax" has been disallowed. The parties are agreed that the former item was properly eliminated from the distributable income, since it represented a capital gain which became a part of the corpus and therefore was not distributable as income of the estate.
*184 The disagreement relates entirely to the latter item, and the parties are agreed that the sole question to be answered is whether in determining the distributable income for 1923 from the residue of the estate of Frank Curtiss such income should be reduced by an additional Federal estate tax which was paid by the executor of the said estate in 1923. The contention of the Commissioner is that the petitioner is taxable upon the income distributable to her under the terms of the will and that since the Federal estate tax is deductible only by the estate, the amount distributable can not be reduced on account of the payment of such*1363 tax. The petitioner controverts the position of the Commissioner and says the executor could deduct from income estate taxes paid by him, and that to the extent that he did so the distributable net income to the beneficiaries was legally and properly reduced, and the "net interest and income" under the will is the amount remaining of income after payment of the estate tax and deductions not contested.
At the outset it should be observed that we are concerned with the return of a beneficiary and not with that of a fiduciary. Admittedly, where during the process of administration we are seeking to determine the income of an estate which is subject to income tax, estate tax paid or accrued during a given year is a proper deduction from the gross income of the estate. It is a charge on the estate and is to be paid by the administrator or executor in a similar manner to that in which other charges are paid, that is, out of any available funds, or if there be none, from money secured by the conversion of other property for that purpose. *1364 .
But does the fact that the fiduciary is entitled under the revenue acts to a deduction of estate tax for income-tax purposes necessarily affect or serve to reduce the distributable income to which the beneficiary is otherwise entitled and on which he is required to pay an income tax? We think not. Of course, in the instant case the payment of the estate tax reduced the residue or remainder from which income would be derived, but what we are concerned with is income which has been earned by the remainder or residue of the estate. As to this income, the will specifically provides that such income, after deducting all necessary and proper charges and expenses, shall be paid over to the beneficiaries named, one of whom was the petitioner's decedent. The Federal estate tax paid was not a charge or expense incident to the earning of the income which would be distributed, but was a tax imposed on the transfer of the estate and as such was a charge against the estate rather than a charge against the income which the will provided should be distributed to the beneficiaries.
*1365 *185 The principle involved is not unlike that heretofore considered by the courts and the Board on many occasions where conclusions adverse to that contended for by the petitioner have been reached. ; ; ; ; and . The action of the Commissioner in refusing to allow the Federal estate tax as a deduction in determining the income distributable and taxable to the petitioner's decedent is accordingly sustained.
Judgment will be entered for the respondent.