*2402 1. Gain realized by an estate upon the sale of securities is taxable to it where there is no provision directing the distribution thereof.
2. A loss sustained by the estate in the sale of securities is not allowable to the individual beneficiaries of the estate.
*1334 These proceedings, which were consolidated for hearing and decision, are for the redetermination of deficiencies in income taxes for the calendar years 1921, 1922, and 1923, in the amounts hereinbelow set forth:
| 1921 | 1922 | 1923 | |
| William H. Hotchkiss Estate | $173.74 | $278.04 | |
| Mary B. Hotchkiss | $2,013.62 | 177.99 | 57.96 |
| Eleanor H. Potter Estate | 1,101.15 | 72.63 | 73.12 |
| Roderick Potter | 561.43 | 5.43 | 752.69 |
| Margaret H. Streit | 1,061.00 | ||
| Raymond E. Streit | 545.25 |
The errors alleged to have been committed by the respondent in these various proceedings are:
1. In his determination that $5,171.75 and $7,452.44 of the net income of the estate of William H. Hotchkiss for the years 1922 and 1923, respectively, representing profit on the sale of stock, was taxable*2403 to the petitioner as executor of said estate.
2. His action in allowing a loss to the estate on the sale of securities for the year 1921 amounting to $12,515.24 and disallowing any apportionment of said loss to the beneficiaries of the estate.
3. His incorrect determination of the net income of the estate distributable to certain beneficiaries, and the distributive share of each of said beneficiaries, in the following particulars:
(a) He incorrectly disallowed legal expenses of $1,950 and repairs of $5,105.02 in the computation of the estate's net income for 1921, and
(b) He determined the net income of said estate for the year 1922 to be $73,005.96, and in doing so he eroneously disallowed as a deduction in the computation of net income certain legal fees paid by the petitioner, amounting to $2,855.75, and
*1335 (c) He, having erroneously taxed to the executor for the years 1922 and 1923 net profit from the sale of stocks referred to in allegations of error numbered 1 and 2, has thereby in respect to those items of profit incorrectly computed the amount of net income distributable to each of the beneficiaries of said estate, and
(d) He, having determined the*2404 net income of the estate for the year 1923 to be $73,768.80, erred in the disallowance of certain repairs in the amount of $16,385.09 to real estate from which rentals are derived by said estate and of certain legal fees amounting to $310.
FINDINGS OF FACT.
William H. Hotchkiss died November 30, 1918, leaving the following last will and testament and letters testamentary were issued December 10, 1918:
FIRST: I direct that my just debts and funeral expenses and the expenses connected with the administration of my estate, including the payment of any and all transfer or succession taxes be settled and discharged out of my estate.
SECOND: I give, devise and bequeath to my wife, MARY B. HOTCHKISS, the dwelling house and lot known as No. 173 Summer Street, Buffalo, New York, free from all mortgage or other liens or incumbrances, together with the contents of said dwelling house, of every name and nature; also any automobiles which I may own at the time of my death.
THIRD: All the rest, residue and remainder of my estate, I direct my Executors hereinafter named to divide into eighteen equal parts:
(a) Six of said parts, I give, devise and bequeath to my wife, MARY B. HOTCHKISS, *2405 to have and to hold the same absolutely and forever. These provisions in my said will for the benefit of my wife, MARY B. HOTCHKISS, if accepted by her, shall be in lieu of dower in my said estate.
(b) Four of said parts, I give, devise and bequeath to my daughter, ELEANOR H. POTTER, to have and to hold the same absolutely and forever.
(c) Four of said parts, I give, devise and bequeath to my daughter, MARGARET H. STREIT, to have and to hold the same absolutely and forever.
(d) Two of said parts I give, devise and bequeath to my son-in-law, RODERICK POTTER, to have and to hold the same absolutely and forever. In case of the death of said RODERICK POTTER prior to my death, I direct that the bequest herein made to him shall at my death pass to and vest absolutely in, and I give, devise and bequeath the same to the children of said RODERICK POTTER living at the time of my death, in equal shares.
(e) Two of said parts I give, devise and bequeath to my son-in-law, RAYMOND E. STREIT, to have and to hold the same absolutely and forever. In case of the death of said RAYMOND E. STREIT prior to my death, I direct that the bequest herein made to him shall at my death pass to and*2406 vest absolutely in, and I give devise and bequeath the same to the children of said RAYMOND E. STREIT living at the time of my death, in equal shares.
FOURTH: I nominate and appoint my son-in-law RODERICK POTTER, and my son-in-law, RAYMOND E. STREIT, Executors of this my last will and testament, giving and granting to said Executors full power and authority to sell and convey any and all real estate of which I may die seized or possessed, at such price and upon such terms as to them may seem proper.
I further given and grant to my said Executors full power and authority to compromise and settle any claims in favor of or against my estate, in such *1336 manner as to them may seem best; to hold existing investments of any character and to make and change investments at will; to purchase real or personal property; to make, execute and deliver mortgages or leases of or upon any or all of my said property, and to borrow money and incur indebtedness upon the faith and credit of my said estate, whenever, in their judgment, the best interests of my said estate shall demand the same, and generally to manage my said estate for its best interests in their judgment, to the same estent*2407 as I might were it not for the intervention of death.
FIFTH: Should either of the Executors above named fail to qualify or be unable to act, or should either die before the administration of my estate shall be fully completed, I nominate and appoint CARL H. SMITH, of Buffalo, New York, in the place and stead of the one so failing to qualify, or unable to act, or the one so dying, as the case may be, giving and granting to said substitute Executor all the power and authority relative to the management of my said estate which I have herein granted to those first nominated as Executors, or either of them.
SIXTH: I expressly direct that the several bequests herein made to my Executors, RODERICK POTTER and RAYMOND E. STREIT, shall be in full of and in lieu of all commissions to which they or either of them shall be entitled by law for their services as such Executors as aforesaid.
* * *
All of the debts of the decedent owing at his death (exclusive of indebtedness on realty or Federal income taxes in excess of the amounts originally assessed) were fully paid and discharged within one year from the issuance of the letters above set forth, and all obligations of said estate incurred*2408 in the operation thereof since said date have been paid and discharged within the year in which contracted.
Roderick Potter, as executor of the estate of William H. Hotchkiss, filed a fiduciary return of income for the calendar year 1921 on Form 1041, showing therein gross income less losses of $130,163.65 and net income of $100,774.64 and the shares of the following beneficiaries of the estate to be the amounts set opposite their respective names:
| Beneficial interest | Dividends | Other income | |
| Mary B. Hotchkiss | 3/9 | $13,818.68 | $19,772.88 |
| Estate of Eleanor H. Potter | 2/9 | 9,212.44 | 13,181.92 |
| Roderick Potter | 1/9 | 4,606.22 | 6,590.96 |
| Margaret H. Streit | 2/9 | 9,212.44 | 13,181.92 |
| Raymond E. Streit | 1/9 | 4,606.22 | 6,590.96 |
In computing its net income the following deductions were claimed:
| Loss on sale of stocks and bonds | $12,515.24 |
| Interest paid | 1,491.95 |
| Taxes paid | 2,788.05 |
| Sales commissions | 11,893.00 |
| Administration expenses | 13,216.01 |
| Total | 41,904.25 |
*1337 The said Potter as executor of the estate aforesaid filed a fiduciary return of income on Form 1041 for the calendar year 1922, showing therein gross income of $68,880.08*2409 and net income of $43,606.21, distributable to the beneficiaries in the following manner:
| Percentage | Capital | Dividends | Other income | |
| age of | net gain | attributable | attributable | |
| beneficial | able to 1922 | to 1922 | ||
| interest | (losses) | |||
| Per cent | ||||
| Mary B. Hotchkiss | 33 1/3 | $7,109.00 | $16,413.00 | $1,878.27 |
| Estate Eleanor H. Potter | 22 2/9 | 4,740.00 | 10,942.00 | 1,252.17 |
| Roderick Potter | 11 1/9 | 2,369.00 | 5,472.00 | 626.09 |
| Margaret H. Streit | 22 2/9 | 4,740.00 | 10,942.00 | 1,252.17 |
| Raymond E. Streit | 11 1/9 | 2,369.00 | 5.472.00 | 626.09 |
In computing the net income in said 1922 return the following deductions were claimed:
| Interest paid | $1,690.78 |
| Taxes paid | 8,571.23 |
| Administration expenses | 15,011.86 |
| Total | 25,273.87 |
The said Potter as executor of the estate aforesaid filed a fiduciary return of income on Form 1041, for the calendar year 1923, showing therein gross income of $93,427.37 and net income of $63,677.85, distributable as follows:
| Percentage of | Dividends | Other income | |
| beneficial interest | |||
| Per cent | |||
| Mary B. Hotchkiss | 33 1/3 | $17,259.84 | $3,966.11 |
| Estate Eleanor H. Potter | 22 2/9 | 11,506.55 | 2,644.08 |
| Roderick Potter | 11 1/9 | 5,753.28 | 1,322.44 |
| Margaret H. Streit | 22 2/9 | 11,506.55 | 2,644.88 |
| Raymond E. Streit | 11 1/9 | 5,753.28 | 1,322.04 |
| Total | 51,779.50 | 11,898.35 |
*2410 The following deductions were claimed in the computation of the net income for 1923:
| Interest paid | $1,879.00 |
| Taxes paid | 8,166.40 |
| Administration expenses | 19,704.12 |
| 29,749.52 |
The estate of William H. Hotchkiss filed no returns of Form 1040 nor 1040-A for the years 1921, 1922, and 1923, and paid no tax as such.
*1338 In addition to the other facts hereinabove found, the parties stipulated further:
That attorney's fees for the years 1921, 1922 and 1923, amounting to a total of $5,115.75, appearing as disbursements upon the reports of the estate of William H. Hotchkiss for the years named, as follows, viz:
| 1921 | $1,950.00 |
| 1922 | 2,855.76 |
| 1923 | 310.00 |
| 5,115.75 |
heretofore entirely disallowed, be and the same hereby are allowed in full as proper operating expense deductions on the estate reports for the years named.
That estate report "Repairs" for the year 1921, involving the sum of $5,105.02, less $155.15 allowable as a depreciation, and "Repairs" for the year 1923, involving the sum of $16,385.09, heretofore totally disallowed, amounting to the aggregate sum of $21,334.96, all heretofore claimed as capital improvements by*2411 the respondent, are hereby allocated as follows:
| For the year 1921 - Repairs | $3,446.75 |
| Capital improvements | 1,403.12 |
| For the year 1923 - Repairs | $6,015.24 |
| Capital improvements | 10,369.85 |
The estate of William Hotchkiss derived profits of $5,171.75 in 1922 and $7,452.44 in 1923 for the sale of stock, which the respondent taxed to said estate in those years.
OPINION.
MORRIS: Briefly stated, the sole question remaining for consideration after all others have been stipulated and agreed to by the parties, is whether certain profits are taxable to and certain losses deductible by the estate of William H. Hotchkiss, or whether said profits are taxable to and the losses deductible by the individual beneficiaries.
The position taken by the petitioners is that the profits should not have been taxed to the estate, but to each of the several beneficiaries, and that the losses should not be attributed to the estate as a taxable entity but should be apportioned among said beneficiaries.
Section 219 of the Revenue Act of 1921, in so far as applicable here, provides:
(a) That the tax imposed by sections 210 and 211 shall apply to the income of estates or of any*2412 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;
(2) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests:
*1339 (3) Income held for future distribution under the terms of the will or trust; and
(4) Income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals, and the income collected by a guardian of an infant to be held or distributed as the court may direct.
(b) 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*2413 in paragraph (11) of subdivision (a) of section 214. * * *
(c) In cases under paragraph (1), (2), or (3) 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 or credited to any legatee, heir, or other beneficiary. In such cases the estate or trust shall, for the purpose of the normal tax, be allowed the same credits as are allowed to single persons under section 216.
(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*2414 or order governing the distribution, is distributable to such beneficiary, whether distributed or not * * *.
The will, after providing for the payment of all expenses connected with the administration of the estate and devising a certain dwelling house and automobiles owned by the testator at the time of his death to the widow of the testator, directed the executors to "divide" the residue of the estate into 18 parts - 6 to Mary B. Hotchkiss, 4 to Eleanor H. Potter, 4 to Margaret H. Streit, 2 to Roderick Potter, or to his children in the event that he predeceased the testator, and 2 to Raymond E. Streit, or, in the event he predeceased the testator, then to the children of said Streit.
It is clear that the estate here is not governed by subsections (a)(2) and (3) of section 219, supra. The respondent contends that because the will of Hotchkiss empowered the executors to hold existing investments and manage the estate as he, the testator, might have if still alive, and because the petitioners and the respondent have, as he states, treated the income of the estate as distributable periodically, although not at regular intervals, the case falls within subsection (a)(4), supra,*2415 that is, that all the income is taxable to the *1340 beneficiaries. We can not agree with this contention. It is true that the instrument creating the estate gave the executors almost unlimited powers and discretion in the management of the estate properties, but there is no direction in the will of the testator for the distribution of income, either periodically or otherwise. The testator's express direction to the executors was that the estate be divided into 18 stated parts, and we construe the word "hold" used by the testator, which the respondent stresses in his argument, to mean during the time necessary to properly conduct the administration and settlement of the estate.
It will be noted that the only controversy in connection with income items arises over the sale by the estate in 1922 and 1923 of certain securities. The proposed deficiencies against the estate for those years are based upon those transactions. In view of that fact we are unable to understand the above argument of the respondent and the concluding clause of his brief "that the distributees should be required to include in their incomes for 1922 and 1923 the gains on sales of securities, because*2416 distributable to the beneficiaries under the will." We agree, however, with the respondent's action in taxing to the estate the gains derived by it upon the sale of securities. .
We are also of the opinion, notwithstanding attempted distinctions by counsel for the petitioners, that the loss on the sale of securities is governed by , and other cases therein cited, and that said loss is not allowable to the beneficiaries. In that case we said:
Petitioner contends that she has the right to deduct from her gross income 27 per cent of the capital loss of the estate. It is clear that section 219 imposed a tax upon an estate in the process of administration as a distinct taxable entity, separate and apart from its beneficiaries, and it is further clear that the estate had the right to take such capital loss as a deduction. So far as the deductibility of capital losses is concerned, we can see no distinction with respect to income taxation between an estate in the process of administration and a trust. Both are treated as taxable entities by section 219. *2417 Further, the capital loss of the estate did not arise out of any trade or business carried on by petitioner nor in any transaction entered into by her for profit. (Section 214(a)(1) and (4). This contention must be decided adversely to the petitioner on the authority of , ; ; Baltzell v. Mitchell, supra; and . See also in this connection, and (writ of certiorari denied by the Supreme Court April 8, 1928).
Judgment will be entered under Rule 50.