*202 Decision will be entered for the petitioner in Docket No. 34038.
Decision will be entered under Rule 50 in Docket No. 34039.
Petitioners, beneficiaries of an estate, for 3 years prior to the taxable year authorized the executors-trustees to withhold distribution to them of income to which they were then entitled, to create a fund from which to pay certain anticipated tax liabilities with respect to non-income producing real estate held as assets of the estate in trust for petitioners and which taxes the estate would be unable to pay from current income. This income was in each year reported on her return by the individual as in fact distributed. Held, that the petitioners were entitled to deduct on their individual returns in the taxable year, as taxes paid by them, their proportionate part of such fund used in the taxable year by the executors to pay such taxes.
*391 Respondent has determined deficiencies in income tax for the year 1945 of $ 1,488.26 with respect to the Estate of Mary Rumsey Movius and $ 1,213.38 with respect to Evelyn Rumsey Lord. The proceedings were consolidated for hearing. The question presented in each case was the same, namely, whether the petitioners, both beneficiaries of the same estate, are entitled to deduct the amount of certain real estate taxes assessed against the estate and paid in that year.
FINDINGS OF FACT.
Certain of the facts were stipulated and are so found. Other facts not stipulated but hereinafter set out are found upon evidence presented at the hearing.
Petitioner's decedent in Docket No. 34038 and petitioner in Docket No. 34039 filed returns for the calendar year 1945 with the collector of internal revenue at Buffalo, New York.
*392 Bronson C. Rumsey died in March 1902, a resident of Buffalo, New York, leaving a will which was duly admitted to probate. A large part*204 of his estate consisted of various parcels of real property, some of which were income producing, but many of them being unimproved properties at various locations produced no revenue.
By his will Rumsey left the aforementioned real estate to his executrices and executors thereinafter named, "in trust nevertheless, to convert the same into money when and as in the judgment of my executrices and executors such conversion shall be most judicious, and to divide the proceeds thereof into as many parts as I shall leave children me surviving." He was survived by two sons and two daughters hereinafter mentioned.
The will directed that one such part should be distributed to his son Lawrence D. Rumsey and one part to his son Bronson Rumsey, "to be held by him absolutely." It further directed that one such part should "be held by my executrices and executors in trust" for his daughter Mary Lovering Movius, and one part for his daughter Evelyn Rumsey Cary, to be invested and reinvested in interest bearing securities and the income therefrom paid to said daughter "quarterly during her natural life." Each daughter was empowered to dispose, by will, of the share so set apart for her.
The will of*205 Bronson C. Rumsey further provided that, "Pending the conversion of my residuary estate as directed in this Article, I direct that the net income derived therefrom after my decease be divided equally between the children entitled to share therein by the terms hereof."
Evelyn Rumsey Cary died in 1924, prior to the taxable year in question, and part of her interest in the trust for her benefit and in the Rumsey estate passed through the exercise of her power of appointment to her niece, the petitioner Evelyn Rumsey Lord. Mary Lovering Movius died in 1948, subsequent to the taxable year in question.
A large amount of the real estate holdings of the Rumsey estate was difficult to dispose of to advantage by the executors who were charged by the will to liquidate these holdings in order to build up the corpora of the two trusts provided for, and they continued the administration of the estate for many years in an attempt to work out the disposition of these various pieces of real estate. In the year 1945 the executors had not yet filed a final account with the probate court. It had been the custom each year to furnish a report to the beneficiaries and receive from them an approval of*206 the actions taken. Prior to 1945 the two sons of the decedent, Bronson C. Rumsey, each possessing a one-fourth interest in the estate, were settled with in full by the executors, and thereafter the only two remaining interests were those of the two daughters of that decedent.
*393 For many years, up to and including the taxable year 1945, George T. Ballachey represented the executors and trustees as agent for the estate and the trusts created under the will of Bronson C. Rumsey. He was also one of three executors-trustees appointed under the will of Evelyn Rumsey Cary. All of the affairs of the estate and of the trusts in question were handled by Ballachey in the same office. Separate books of account were maintained for the estate and for each of the trusts and income tax returns were prepared and filed each year by Ballachey for the estate and also for each of the trusts. In addition to acting for the estate and the two trusts, Ballachey also represented both of the beneficiaries of the trusts under the will and the petitioner, Evelyn Rumsey Lord, after her acquisition of part of one of those interests, in all of their personal financial affairs, including the preparation*207 and filing of their income tax returns.
Early in the year 1942 it became apparent to the executors of the Rumsey estate that they would experience considerable difficulty in keeping title to various pieces of real estate through continuing payments of taxes assessed. Certain pieces of this property had accumulated assessed taxes in an amount which in all probability would not justify an expenditure necessary to save them from delinquent tax sale.
Faced with this situation, the executors decided that it would be best to survey the condition of the various properties and decide which of them justified an attempt to retain them for the estate. To do this would require funds for the payment of taxes. Some of the properties of the estate were income producing, this income, as directed in the will of Bronson C. Rumsey, being distributable currently to the two beneficiaries of the estate. It was decided that the best course of action would be to accumulate this income in order to have the funds to meet these tax payments. This situation was taken up by the executors with the two beneficiaries and they in turn authorized and directed the executors not to pay over to them the income in*208 question but to hold it for the payment of the taxes on such of the properties as the executors should decide should be retained. Such distributable income was not credited to the beneficiaries on the books and records of the Estate of Bronson C. Rumsey, but their proportionate shares of such income so withheld each year were included, in the year withheld, in the Federal income tax returns of the two beneficiaries for the years 1942, 1943, and 1944.
In the year 1945 the executors of the Rumsey estate made payments of taxes on certain of the properties standing in the name of the estate, which taxes had been assessed against the estate, using therefor the funds accumulated under the direction of the two beneficiaries, and these beneficiaries in turn took deductions on their personal returns *394 of the amount of the funds so used and which had been reported by them as income over the prior 3 years. The disallowance by respondent of these deductions gives rise to the deficiencies here in question.
OPINION.
In each of the statements accompanying the notices of deficiencies herein, respondent explained the adjustments giving rise to the deficiencies as follows:
It is held that*209 no deduction is allowable under Section 23 (c) of the Internal Revenue Code for taxes paid on real property held in trust for you, legal title to which is in the trustees.
Petitioners contend that the funds accumulated for the payment of taxes under the permission and direction of the two beneficiaries, being distributable to them and being applied by their direction to payment of taxes to protect properties of which they were the direct beneficiaries, constitute payments of taxes by them individually from these funds and that they are entitled to their deduction as taxes paid.
It is respondent's contention that the Rumsey estate had never been settled and was still a taxable entity, and that payment of the taxes was actually made by the executors of the estate and made from income of the estate and consequently deduction could be taken only by the estate and not by the beneficiaries.
The rule appears to be clear that one owning a beneficial interest in property who pays taxes thereon to protect such interest may deduct the payment so made, even though the legal title to the property is in another against whom the tax is assessed. Cornelia C. F. Horsford, 2 T. C. 826;*210 Martin Thomas O'Brien, 47 B. T. A. 561; Estate of John Edgerly Morrell, 43 B. T. A. 651; Hord v. Commissioner, 95 F.2d 179">95 F. 2d 179.
We think, under the facts here presented, the payment of the taxes in question must be held to have been by the two beneficiaries of the estate. The funds in question were ones to which they were entitled and were withheld from actual distribution to them, under their direction, to be used for the specific purpose of protecting their individual interests in the real property of the estate. Without such withholding and payment the property thus saved for the estate, and consequently for the benefit of petitioners, would have been lost through tax sales, as indeed several pieces of property on which the taxes were not paid by the estate or by petitioners were lost. The payment of the taxes by the executors-trustees in the circumstances of this case must be regarded as the equivalent of payment by the petitioners.
This income had been treated by the beneficiaries as realized and distributed to them, as it was included in the income reported by them on *395 their*211 returns for the three years. The manner in which the use of these funds was effected appears to be no more than one of convenience. Ballachey was agent of the estate and of the trusts, and personal agent of the two individual beneficiaries. We think to hold that this income was never realized and used by the beneficiaries is to overlook the realities of the situation.
Petitioners, by amended petitions, have raised an alternative issue. This is that the administration of the Rumsey estate having been prolonged for many years after all debts were paid, and for the one purpose of liquidating the real estate holdings, it should be considered as in fact terminated and the executors as holding the real estate merely as trustees in the interests of the two trusts; that consequently the real estate should be considered as trust assets and the separate accounts of the estate and the two trusts be consolidated and the income or loss determined as that of the trusts; thus, in that event, the expenditures of the estate would be offset against incomes of the trusts and the items here in question should be given effect as deductions in the computing of net income of the petitioners as beneficiaries. *212 In view of our holding on the primary contention the alternative issue is not considered.
Respondent is reversed upon his holding that petitioners are not entitled to deductions representing taxes paid on estate property from income withheld from distribution to them at their direction for use for this purpose. Petitioners on brief have waived claims asserted for findings of overpayment. In Docket No. 34038 the figures of petitioners and respondent are in accord, but in Docket No. 34039 there is a slight discrepancy in the figures which is not explained by the record.
Decision will be entered for the petitioner in Docket No. 34038.
Decision will be entered under Rule 50 in Docket No. 34039.