*1098 The petitioner and her five sisters were named residuary legatees under the will of their brother who died in 1917, a resident of the State of New Jersey. The residuary estate consisted principally of real estate situated in New York. The petitioner and one sister were citizens of the United States, while the other four sisters were subjects of Germany and were alien enemies at the time of the decedent's death. The petitioner and her American sister claimed, and the courts of the State of New York later held, that the foreign sisters, being alien enemies, were barred from taking title to the real estate situated within the State of New York. Prior to such judicial determination, the petitioner and the other legatees and the executor of the decedent's estate entered into a written agreement that the real estate or proceeds from the sale thereof should be distributed among the legatees in certain proportions. In an action brought by the petitioner and others for a distribution of the estate, the Supreme Court of the State of New York entered an interlocutory judgment directing that the proceeds from the sale of the real estate be distributed in accordance with the said agreement. *1099 The distributions were so made and the report of the executor and others showing such distributions was approved by the court. Held, that the petitioner is taxable upon such portions of the profits from the sales of the real estate as are attributable to her proportionate ownership of the properties sold.
*560 The respondent has asserted deficiencies in petitioner's income tax for the calendar years 1925 and 1928 in the amounts of $437.41 and $3,763.08, respectively, and a delinquency penalty for 1925 in the amount of $109.35. The only question at issue is the amount of taxable gain derived by the petitioner upon the sales in those years of certain interests in real estate which she acquired under the will of her brother, who died in 1917.
FINDINGS OF FACT.
The petitioner is one of the devisees under the last will and testament of Godfrey Knoche, who died November 18, 1917, a resident of the State of New Jersey. The decedent's will, a copy of which was received in evidence in this proceeding as exhibit No. *1100 1, was duly admitted to probate by the surrogate's court of Bergen County, New Jersey, on December 3, 1917. Henry Seib and Ott Onken were named and duly appointed as executors. Ott Onken died February 20, 1920, and since that date Henry Seib has been the sole surviving executor.
By his will, Godfrey Knoche - after making certain bequests and devises not material here - bequeathed and devised or sought to bequeath and devise all of the residue of his estate, both real and personal, in certain proportions to his six sisters, of whom petitioner herein and one Elfriede Siebrecht were citizens and residents of the United States and the remaining four, Louise Lueckhoff, Adelheid Knoche, Auguste Mosler, and Anna Schnitzer (Roth), were German subjects and nonresident alien enemies at the time of the death of Godfrey Knoche.
Shortly after the death of Goldfrey Knoche, the United States Alien Property Custodian served demands upon the executors of the estate of Godfrey Knoche that the executors convey, transfer, assign and deliver to the Alien Property Custodian every right, title, and interest of the four alien enemies, sisters of the decedent, in the estate of Godfrey Knoche. Neither*1101 the executors nor the devisees nor anyone else ever complied with these demands to convey to the Alien Property Custodian any interest in the decedent's real estate and the Alien Property Custodian did not make actual seizure of the real estate, and in 1927 withdrew all claims thereto previously made by him and the United States Government.
After the death of their brother, the American sisters claimed that their nonresident alien sisters were not entitled to take real *561 estate by inheritance or devise and that therefore the petitioner and her sister, Elfriede Siebrecht, were entitled to the entire real estate of the decedent to the exclusion of their nonresident alien sisters. The foreign sisters disputed the claim of their American sisters.
During the year 1923 the sister, Anna Schnitzer (Roth), for a valuable consideration conveyed to Elfriede Siebrecht all her right, title, and interest in and to the real properties left by her brother and also assigned to Elfriede Siebrecht all her right, title, and interest in and to the estate of Godfrey Knoche.
Early in the year 1924 the petitioner and her sisters, Elfriede Siebrecht, Louise Lueckoff, Adelheid Knoche, and*1102 Auguste Mosler, entered into an agreement, a copy of which was introduced in evidence as petitioner's exhibit No. 2. This agreement provided in part as follows:
WHEREAS, it is the wish of the American Heirs that their interest in the estate of the said Godfrey Knoche shall not be increased because of the status of the foreign heirs, as alien enemies, and at the expense of said foreign heirs, but that except for the claim of the Alien Property Custodian the foreign heirs should take the same proportion of the estate of said Knoche that they would have taken if they had not been alien enemies; and
WHEREAS, it is the wish and intent of Adelheid Knoche that her brother's wishes set forth in the letter above referred to should be complied with and that out of the nine-twenty-seconds devised to her by her brother's will three-twenty-seconds should go to her sister, Marie C. Clausen.
Now, in order to facilitate a sale or sales of such real property and to adjust and compromise all outstanding questions and claims between the parties hereto, and in consideration of the mutual covenants herein contained, the parties hereto covenant and agree as follows:
* * *
SECOND: In the event*1103 that the Alien Property Custodian or any other person, court or other tribunal having jurisdiction shall determine that the said foreign heirs were not legally entitled to take by bequest or devise under the will of said Knoche and that the American Heirs were entitled to take the shares of said estate which the provisions of said will attempted to bequeath and devise to the foreign heirs, then the American Heirs and each of them for herself agrees to transmit, pay or turn over, or cause to be transmitted, paid or turned over to the said foreign heirs or their attorneys in fact or their assignees, that part of the proceeds of the sale of all or any part of said real estate which such American Heir may receive by reason of the inability of the foreign heirs to take under said will, and if the real estate or any part thereof is not sold each American Heir, for herself, agrees to deliver to the foreign heirs a deed of that part of said unsold real estate to which such American Heir became entitled by reason of the inability of the foreign heirs to take under said will, each foreign heir to receive her ratable portion of such proceeds of her ratable interest in said real estate in accordance*1104 with the provisions of the said will less her proportionate share of the expenses of any sale or sales and of the expenses of administering said property and of the transfer and other taxes which were required to be paid out of the estate of said Knoche, and less such mortgages and interest thereon as may have *562 been paid, and provided further that the share of said Adelheid Knoche shall not be nine-twenty-seconds as provided in said will, but six-twenty-seconds and no more, and that the other three-twenty-seconds of the nine-twenty-seconds devised or attempted to be devised to said Adelheid Knoche shall belong to said Marie C. Clausen pursuant to the letter of the said Godfrey Knoche above recited.
On July 25, 1925, the undivided one-half interest owned by Godfrey Knoche at his death in certain premises in the Borough of Manhattan, County and State of New York, known as Lot 14, § 5, Block 1484, and as street numbers 521-523 East 72d Street and 520-522 East 73d Street, was sold to the 521 East 72d Street Corporation for $120,000 and at a net profit, as computed by the respondent, of $32,604.02
In determining the deficiency due from petitioner for the calendar year 1925, *1105 set forth in the formal notice of deficiency attached to the petition, the respondent included in petitioner's income the sum of $14,079 as profit realized by petitioner in 1925 upon the sale of her share of the undivided one-half interest owned by the decedent at death in the premises set forth above, said $14,079 being 92,340/213,840 of the profit of $32,604.02 computed upon the sale of the one-half interest.
On or about the first day of October 1925, the petitioner as plaintiff brought a suit in the Supreme Court of the State of New York for the partition or sale of the real estate left under the residuary clauses of the will of Godfrey Knoche, and for judicial settlement of the accounts of Henry Seib as agent of the devisees of Godfrey Knoche in the administration and management of the known real estate of which Godfrey Knoche died seized, and for the interpretation and construction of certain wills and agreements affecting the interests of the parties to the real property and the property included in such accounts.
Under date of March 28, 1927, the court rendered an interlocutory judgment in said action, which provided in part as follows:
FOURTH: The defendants Louise*1106 Lueckhoff, Auguste Mosler and Anna Schnitzer Rothe and Adelheid Knoche (now deceased), four of the said devisees of Godfrey Knoche, deceased, were at the time of the death of said Godfrey Knoche, alien enemies and were incapable of inheriting or holding real estate, either by devise or inheritance, under the laws of the State of New York, and all the provisions for their benefit in the Will of Godfrey Knoche, deceased, are, therefore, void and of no effect.
FIFTH: Upon the death of said Godfrey Knoche, all of this interest in the real property, which is the subject of this action, passed absolutely to the plaintiff, Marie Clausen, and to Elfriede Siebrecht (now deceased).
SIXTH: The rights, title, shares and interests of the several parties to this action in and to the real property, described as parcel #1 in the "EIGHTEENTH" paragraph of this interlocutory judgment, hereby are adjudged and declared to *563 be as follows, and the rights of the parties to this action therein are hereby adjudged and determined to be as follows, to wit:
* * *
3. The plaintiff, Marie Clausen, is seized in fee simple and possessed of ninety-two thousand three hundred and forty undivided*1107 four hundred and twenty-seven thousand six hundred and eightieth (92340/427680) parts of said premises.
* * *
SEVENTH: The rights, title, shares and interest of the several parties to this action in and to the real property, described as parcel #2 in paragraph "EIGHTEENTH" of this interlocutory judgment, hereby are adjudged and declared to be as follows, and the rights of the parties to this action therein are hereby adjudged and determined to be as follows, to wit:
* * *
NINTH: Under a certain contract to which the plaintiff, Marie Clausen, Elfriede Siebrecht, deceased, Louise Lueckhoff, Auguste Mosler, and Adelheid Knoche, deceased, were parties, the following defendants are entitled to share in one-half of the proceeds of the sale of the real property described in Parcel #1 of paragraph "EIGHTEENTH" and in all of the proceeds of the sale of the real property described in Parcel #2 of paragraph "EIGHTEENTH" of this interlocutory judgment, in the following proportions:
| Louise Lueckhoff | Eighteen undivided one hundred |
| thirty-second (18/132) parts; | |
| Auguste Mosler | Twenty-four undivided one hundred |
| thirty-second (24/132) parts; | |
| Otto C. Sommerich, as | Thirty-six undivided one hundred |
| Ancillary Administrator | thirty-second (36/132) parts. |
| with the Will annexed of | |
| Adelheid Knoche, deceased |
*1108 During the year 1928 the one-half interest owned by the decedent at the time of his death in real estate in the Borough of Manhattan, described in the interlocutory judgment of March 28, 1927, as parcel #1, was sold for $377,500 and at a net profit, as computed by the respondent, of $94,113.94, and the real estate owned by the decedent at the time of his death in the Borough of Brooklyn, described as parcel #2, was sold for $24,000 and at a loss, as computed by the respondent, of $1,900.
Under date of August 23, 1928, the Supreme Court of the State of New York rendered its final judgment in the action entitled Marie Clausen v. Fred J. Siebrecht et al., referred to above.
In determining the deficiency due from the petitioner for the calendar year 1928, set forth in the formal notice of deficiency attached to the petition, the respondent included in the petitioner's net income the sum of $39,819.66 as profit realized by petitioner in 1928 upon the sale of her share of the interest owned by the decedent at death in *564 the premises described as parcels #1 and #2. The profit so attributed to the petitioner was computed as follows:
| Profit on sale of parcel #1, 92,340/ | $40,640.11 |
| 213,840 x $94,113.94 (profit on sale of | |
| decedent's interest) equals | |
| Loss on sale of parcel #2, 57/132 X | (820.45) |
| $1,900 (loss on sale of decedent's | |
| interest) equals | |
| Corrected profit | $39,819.66 |
*1109 The petitioner filed no Federal income tax return for 1925 but did file a tentative Federal income tax return for the calendar year 1928 with the collector of internal revenue, third district of New York, on March 14, 1929.
OPINION.
SMITH: By the interlocutory decree of the Supreme Court of the State of New York held in and for the County of New York, dated March 21, 1927, the petitioner is declared to be seized in fee simple and possessed of 92,340/427,680 parts of certain premises in the Borough of Manhattan and of 57/132 parts of certain premises in the Borough of Brooklyn, which were devised to her by her brother. The decedent owned a one-half interest in the first described premises. These premises were sold at a profit. No question is raised in this proceeding as to the amount of the profit realized upon the sale of the decedent's interest therein. By virtue of the agreement which the petitioner had entered into with her sisters in 1924, the court decreed that the petitioner should receive only 4/22 of the proceeds from the sale of the property and that the balance of the proceeds should be distributed in accordance with the terms of the agreement. Petitioner therefore*1110 contends that she is taxable upon only 4/22 of the profits realized from the sales, while the respondent contends that the petitioner is taxable upon 92,340/213,840 of the profit realized upon the sale of decedent's interest.
The petitioner was the owner in her own right of an undivided 92,340/427,680 interest in the Manhattan properties, for under the decree of the Supreme Court of New York her foreign sisters were alien enemies and incapable of inheriting or holding New York real estate and the provisions of the brother's will for their benefit were void and of no effect. The interest of the deceased brother passed absolutely to the petitioner and her American sister, Elfriede Siebrecht. In the collateral agreement of 1924 between the sisters, after the official conclusion of peace between the United States and Germany on July 2, 1921, the petitioner agreed to keep 4/22 of the proceeds of the sale of her brother's estate and further agreed that the balance of her share should be paid to her sisters in Germany, or their heirs. This agreement, so far as it concerns the profits *565 subsequently realized on the sale of the particular properties in the Borough of Manhattan*1111 with which we are concerned, was but an attempt to assign the petitioner's future profits. If it had been more than that deeds from the German sisters or their heirs would have been necessary when the properties were sold. There were none. The German sisters had no vestige of title. They held a contract, much as the mother in ; affd., , held assignments for love and affection from her son of specified entities "out of my share of the rents, income, and profits from my interest in all the property, real and personal, conveyed or to be conveyed" by a certain company named to another company. The court said:
* * * The deeds were assignments of or from future net income, and made without valuable consideration. * * * For the question presented is not whether, as between grantor and grantee, the assignment is effective and enforceable, but whether the assignment, even if enforceable as against the grantor * * * prevents the entire gross income from being income taxable as against the grantor.
* * *
To permit the assignor of future income from his own property to escape taxation thereon by a gift*1112 grant in advance of the receipt by him of such income would by indirection enlarge the limited class of deductions established by statute. As long as he remains the owner of the property, the income therefrom should be taxable to him as fully, when he grants it as a gift in advance of its receipt, as it clearly is despite a gift thereof immediately after its receipt.
In , the court said:
* * * the mere equitable ownership of the wife in the partnership interest standing in the name of her husband by reason of an agreement on the part of her husband to transfer the property to her would not prevent the application of the rule recently announced by the Supreme Court in , where the husband transferred to his wife one-half his interest in the partnership, and the husband nevertheless remained the ostensible and active partner in the business.
See also , and *1113 , both decided by the United States Circuit Court of Appeals for the Second Circuit; ; affirmed and appeal dismissed without opinion, .
By the agreement of January 16, 1924, the petitioner did not make a valid gift of any portion of her interest in the property acquired by her from her deceased brother to her sisters residing in Germany. The effect of the agreement was simply that the petitioner's interest in the properties should be sold and a portion of the proceeds distributed to her sisters in Germany. For reasons above stated, we are of the opinion that this did not have the effect of freeing the *566 petitioner from tax upon the profit realized on the sale of her interests in the properties.
The assertion of the delinquency penalty for failure to file an income tax return for 1925 is sustained.
Reviewed by the Board.
Judgment will be entered for the respondent.