*2205 1. Where respondent determines a tax on the income received by a trustee under a will from property coming into such trustee's hands under the will, but sends a deficiency notice to the executor, who was a different person from the trustee, and the trustee files with the Board a petition from such notice, the proceeding will be dismissed for lack of jurisdiction.
2. Held that the trusts here involved are not exempt from taxation under the provisions of section 231(6) of the Revenue Act of 1921.
3. Held that the petitioners are not entitled to the deductions taken in their returns for income claimed to have been permanently set aside for charitable and educational purposes under the provisions of sections 219(b) and 214(a)(11) of the Revenue Act of 1921.
4. Where petitioner at the time of filing its return contended that its income was either exempt from tax under section 231 of the Revenue Act of 1921, or was deductible under the provisions of sections 219(b) and 214(a)(11), and did not report any tax on the return, held that it is entitled to have the profits on the sale of corporate stock held for profit or investment for a number of years taxed under the*2206 provisions of section 206, although not so claimed in its original return.
5. The action of the respondent in disallowing a deduction taken for executor's commission approved for lack of evidence.
*89 These proceedings which were consolidated for hearing are for the redetermination of deficiencies as follows:
| Abbreviated title | Docket | ||
| No. | Year | Deficiency | |
| Trust Fund No. 1340 | 26127 | 1922 | $ 705.27 |
| Charlotte R. Schmidlapp fund | 26128 | 1922 | 667.53 |
| 36836 | 1923 | 14,341.83 | |
| Fund No. 1163 | 26129 | 1922 | 29.30 |
| Estate Jacob G. Schmidlapp | 26130 | 1922 | 88.68 |
| 1923 | 36.26 |
The matters in controversy are (1) whether the Board has jurisdiction of the proceeding in Docket No. 26127, (2) whether the petitioners are exempt from taxation under the provisions of section 231(6) of the Revenue Act of 1921, (3) if the petitioners are not exempt from taxation, then whether their entire income during the years involved has been paid or permanently set aside for charitable or educational purposes*2207 and is deductible in accordance with the provisions of section 214(a)(11) and 219(b) of the Revenue Act of 1921, (4) if the Charlotte R. Schmidlapp Fund is not exempt from taxation and its entire net income is not deductible, then whether the respondent erred in not computing the tax on the profit from the sale of certain corporate stock in 1923 under the capital net gain provisions of section 206 of the Revenue Act of 1921 and (5) whether the amount of $5,880.04 taken as a deduction in the 1923 return of the estate for executor's commission is allowable.
FINDINGS OF FACT.
By a trust agreement dated February 18, 1907, Jacob G. Schmidlapp created a trust fund known as the Charlotte R. Schmidlapp *90 Fund. The Union Savings Bank & Trust Co. of Cincinnati, Ohio (now the Fifth Third Union Trust Co.), which was made trustee, designated this fund as Trust No. 774. The trust agreement is in part as follows:
I, Jacob G. Schmidlapp, in consideration of the duties and obligations hereby imposed upon and assumed by The Union Savings Bank and Trust Company, of Cincinnati, Ohio, as Trustee, in memory of my daughter, Charlotte, hereby give, transfer and deliver to said The Union*2208 Savings Bank & Trust Company the following personal property, to-wit:
Five hundred (500) shares of the Preferred Stock of The National Water Company,
Five hundred (500) shares of the Common Stock of The National Water Co.,
One hundred and seventy-five (175) shares of the Preferred Stock of The American Hominy Company,
Five hundred and twenty-five (525) shares of the stock of The North American Company,
Fifty thousand ($50,000) Dollars of The Cincinnati, Lawrenceburg and Aurora Electric Railroad Company 5% First Mortgage Bonds,
Thirty thousand ($30,000) Dollars of The Havana Electric Railroad Company 5% Consolidated Gold Bonds,
To have and to hold the same, with any additions thereto, in trust, for the following uses and purposes; to collect any and all income thereon; to sell and transfer any part or all of said property, at such time and price as, in its judgment, will be to the advantage of said trust estate; to invest and reinvest, from time to time, the proceeds of such sales, or any additions thereto, in such property, real or personal, as, in its discretion, it may deem best, and, generally, to exercise full and absolute power and control over said property, and*2209 to pay the net income thereof as herein provided.
The net income derived from said property, as herein provided, or any contribution thereto by said Jacob G. Schmidlapp, shall be used in aiding young girls in the preparation for womanhood, by bringing their minds and hearts under the influence of education, relieving their bodies from disease, suffering or constraint, and assisting them to establish themselves in life, and
Beginning January 1st., 1908, three thousand ($3,000) dollars per annum of the net income shall be used for such purpose, the balance of the income to be added to the principal. The amount of the income to be applied each year to the purposes of this trust is to be increased at the rate of Five hundred ( $500) dollars per year, until the amount to be used shall reach Six thousand ($6,000) dollars per year, after which the amount of the income to be distributed each year shall not be increased until the amount of the principal fund reaches Four hundred thousand ($400,000) dollars, after which, Ten thousand ($10,000) dollars per year shall be distributed for the purposes of this trust, and thereafter, as the principal fund is increased by One hundred thousand*2210 ($100,000) dollars, the amount of the income distributed shall be increased by Twenty-five hundred ($2500) dollars. In each case, all excess of income over the amount distributed shall be added to the principal fund, until the principal fund shall reach the sum of Two million ($2,000,000) dollars, after which the Committee may, at its discretion, distribute the total annual income thereof as herein provided, or it may continue to increase the amount to be distributed at the rate of Twenty-five hundred ($2500.) dollars per year, as the principal fund is increased by One hundred thousand ($100,000) Dollars, adding the surplus income from year to year to the principal fund.
*91 A Committee, consisting of five of the Directors of The Union Savings Bank & Trust Company, to be appointed yearly, or as vacancies may occur, by the Board of Directors of said The Union Savings Bank and Trust Company, together with the Mayor of the City of Cincinnati, and the President of the University of said city, shall have control of the distribution of said income. And said Committee and its successors shall adopt such rules and regulations as it may, from time to time, deem necessary to properly*2211 govern and carry out the charity herein established.
Said Jacob G. Schmidlapp hereby reserves the right, at any time or from time to time, during his life, to change or amend the conditions of this agreement as to the use and disposition of the income derived from said trust fund; such changes or amendments shall be in writing, and shall take effect upon receipt of the same by The Union Savings Bank and Trust Company, as Trustee.
* * *
The Union Savings Bank & Trust Company, as Trustee, shall not be responsible for any depreciation in any of the securities herein mentioned, or securities or property in which funds derived from the sale thereof may be reinvested by it from time to time in good faith, or for any loss of any kind not occasioned by its own gross negligence or bad faith. Purchasers, corporations and transfer agents are not required to look beyond the authority hereby given to said Trustee, nor to the proper disposition or disposal of the funds, proceeds or property herein referred to.
On May 23, 1910, Schmidlapp amended the trust agreement as follows:
I, Jacob G. Schmidlapp, in pursuance of the right reserved in the Trust Agreement between myself and The Union*2212 Savings Bank and Trust Company, under date of February 18th, 1907, establishing The Charlotte R. Schmidlapp Fund, and in order to render the same more definite and certain, do hereby declare that all salaries, expenses and costs incurred in the distribution of said Fund, and in carrying out the trust established, shall be paid out of the amounts which said agreement specifies shall be set aside each year, to be used for the purposes of said trust. Furthermore, it is my desire, without, however, making it mandatory, that the expenses of administration in any year shall not exceed ten (10) per cent of the amount set aside in that year for distribution.
The total net income of this trust fund was $22,527.05 for 1922 and $80,328.61 for 1923.
By an agreement dated July 3, 1916, Schmidlapp placed another trust fund in the hands of the Union Savings Bank & Trust Co. of Cincinnati as trustee. The trustee designated this fund as Trust No. 1163. The trust agreement reads in part as follows:
This Indenture made this 3rd day of July 1916, between Jacob G. Schmidlapp of Cincinnati, Hamilton County, Ohio, party of the first part hereinafter called the Donor, and The Union Savings Bank*2213 and Trust Company, a corporation organized and existing under the laws of the State of Ohio, having its principal place of business at Cincinnati, Ohio, hereinafter called the Trustee, Witnesseth:
That the Donor in consideration of the sum of one dollar to him in hand paid by the Trustee, the receipt whereof is hereby acknowledged, and in *92 consideration of the mutual covenants hereinafter set forth, has sold, assigned, transferred and set over and by these presents does sell, assign, transfer and set over unto the Trustee and its successors and assigns the following described property, to wit:
Twelve hundred and thirteen (1213) shares of the Capital Stock of the North American Company, of a par value of One hundred ($100.00) dollars per share.
TO HAVE AND TO HOLD the same, together with any and all other property that may hereafter be added hereto, unto the Trustee, its successors and assigns.
IN TRUST NEVERTHELESS, and for and upon, the following uses and purposes, and subject to the terms, conditions, powers and agreements hereinafter set forth and declared.
FIRST: To hold, manage and control, invest and reinvest, the same and any other properties, securities*2214 or monies which may be held hereunder as hereinafter provided for, collecting the income thereof and after payment of all charges and expenses of administration of said Trust, to use the net income thereof for educational and charitable purposes as the Trustee by its duly authorized officers, may deem advisable and proper, and pay the same or any part or portion thereof from time to time to such person, persons, charitable organizations, associations, or corporations duly organized for charitable or educational purposes, for relief in sickness, suffering and distress, the care of young children and the aged or the helpless and afflicted, for the promotion of education, to improve living conditions and/or for the good and welfare of State or Nation in emergencies. SECOND: Injudicious charity having a tendency to take from men the incentive of self-support, making of such pensioners on the bounty of others, and desiring as much as possible to avoid such abuse, it is hereby mutuallyagreed that the Trustee or its successors has full power, authority and discretion in the use of the income, and may from time to time withhold all or any portion of said income or accumulate the same and*2215 add to the principal fund such portion, portions, or all of said income as it may deem advisable.
THIRD: The Trustee may at any time cause to be formed a corporation if it so desires, for the purpose of following the conditions of this Trust, and transfer thereto, all the securities, monies or property held hereunder subject to the Trusts herein expressed, but in case such corporation shall be formed, the Directors from time to time, of The Union Savings Bank and Trust Company, or its successor or successors, shall with such other person or persons if any, as may be required by law, be Trustees or Directors of said Corporation.
FOURTH: The Trustee shall at all times, and from time to time, have full power and authority, and entirely in its discretion, by its duly authorized officers, to sell, assign and transfer, exchange, invest or reinvest, any or all of the above mentioned stock, or any other property that at any time may be taken under the terms of this Trust, to convert personal property into real estate and real estate into personal property; and to execute and deliver sufficient assignments, releases or satisfaction of bonds and mortgages or other securities; to sell and*2216 convey and or to lease for a term with or withot privilege of purchase, or in perpetuity any real estate at any time held under this Trust, and to execute, acknowledge and deliver good and sufficient deed or deeds of conveyance, or lease or leases therefor, and no purchaser, corporation, transfer agent or person, need look beyond the authority herein given it for power so to act, nor look to the proper application of the purchase money, property or securities, nor look to the proper disposition of the division or *93 disposal of fund or property, nor inquire into the validity, expediency or propriety of any such sale, lease, exchange or assignment.
The Trustee is further authorized and empowered to vote in person or by proxy, all shares of stock held hereunder whenever occasion may arise or consent to the reorganization and consolidation of any corporation, or sale to any other corporation or person of the property of any corporation, the stocks, bonds or securities of which are held hereunder, and to do any act with reference to said stocks, bonds or other securities necessary or proper to enable the Trustee to obtain the benefit of any such reorganization, consolidation*2217 or sale for such stocks, bonds or other securities so held, and in case any stocks, bonds or other securities shall contain options to holders thereof, to convert the same into other stocks, bonds or securities, or in case the right shall be given to any of the holders of stocks, bonds or securities, to subscribe for additional stocks, bonds or other securities, the Trustee is hereby authorized and empowered to exercise such option and to make any necessary payments therefor, and to hold such securities as investments of such Trust Fund, or to take advantage of any rights in any manner which to it seems for the best interest of the Trust Estate.
The Donor expressly reserves to himself the privilege of increasing the principal of the Trust Estate at any time by adding thereto such stocks, bonds, securities, monies or real property as he may elect, and the same are to be held, managed and controlled as provided herein.
In case of securities taken or purchased for said Trust Fund at a premium, the Trustee shall not be bound to set aside any part of the income thereof as a sinking fund to retire or absorb such premium, nor be liable for the loss or depreciation of any securities*2218 held hereunder, nor be liable or responsible for the loss or depreciation of any fund or securities received, or investments and reinvestments made hereunder, and shall not be liable for any mistake in judgment, or decrease in value of the Trust Property, or for any acts or omissions done or permitted to be done by it in good faith, but shall be liable only for acts or omissions done or permitted to be done by it in bad faith or through its gross negligence.
FIFTH: The Donor further expressly reserves to himself the privilege at any time or times during his life, to designate to whom, or for what purpose, and the amount that payments of the income shall be made.
SIXTH: Notwithstanding anything to the contrary herein contained, the Donor at any time or times during the continuance of the Trust herein provided for, may, by instrument in writing, executed and acknowledged or proved by him, in the manner required for a deed of real estate (so as to enable such deed to be recorded in the State of Ohio) delivered to the Trustee or its successors, modify or alter in any manner, or revoke in whole or in part, this indenture, and estates and interest in property hereby created and provided*2219 for, and in case of such revocation, said instrument shall direct the disposition to be made of the Trust Funds affected by such revocations, and upon delivery of such instrument to the Trustee or its successors, the said instrument shall take effect according to its provisions and the Trustee or its successors shall make and execute all such instruments, if any, and make such conveyances, transfers or deliveries of property as may be necessary or proper in order to carry the same into effect, and no one born or unborn, corporation, association or organization, shall have any right, interest or estate under this indenture.
* * *
EIGHTH: The Trustee by joining in the execution of this instrument, signifies its acceptance of the Trust hereby created, and covenants and agrees to, *94 and with the Donor, that it will faithfully execute the Trust herein created, according to the best of its skill, knowledge and ability.
NINTH: It is mutually agreed that this indenture shall extend to and be obligatory upon the executors, administrators and successors respectively of the parties hereto.
The total net income of this trust fund was $12,760.49 for 1922.
Schmidlapp died*2220 December 18, 1919, leaving a will dated January 12, 1911. Under this will another trust fund was created and the Union Savings Bank & Trust Co. of Cincinnati was made trustee. This fund has been designated Trust No. 1340 by the trustee. The provisions of the will creating this trust fund are as follows:
Item One. I direct that my debts be paid by my Executor, hereinafter named.
Item Two. Having heretofore provided for my children by a certain Trust agreement with The Union Savings Bank & Trust Co., of Cincinnati, Ohio, as Trustee, bearing date of June 20th, 1905, which Trust Agreement I do hereby confirm and ratify, and having also provided for others of my family, I give, devise and bequeath to my children or child surviving me and their or his heirs and assigns forever, my residence property known as "Kirchheim," situated on Grandin Road, Walnut Hills, Cincinnati, Ohio, together with all the Furniture, Pictures, Books, Bric-a-brac, Silverware, China and all other household goods contained in and used in connection with said residence, and also all of my Carriages, Horses, Harness, Automobiles, Stable and garden tools and equipments, and other belonging used in connection*2221 with my said residence, and I direct that no inventory or appraisement be made of the same.
Item Three. * * * As I have followed this idea and have retained out of my estate, barely enough to produce income sufficient to meet my expenses, including my yearly charities, I hereby give, devise and bequeath to The Union Savings Bank & Trust Co., a corporation organized under the laws of the State of Ohio, and having its principal office in the City of Cincinnati, in said state, all the rest, residue and remainder of my remaining estate, both real and personal, of whatever nature, and wherever situate, to have and to hold the same to it and its successor and assigns forever, in trust, nevertheless, for the following uses and purposes:
1st. To hold, manage and control the same, collecting the income thereof, and paying all charges, taxes, assessments, repairs, insurance premiums and other expenses of administration of said trust. I empower said Trustee to sell the property of said trust, both Real and Personal, or any property at any time held hereunder, or any part or parts thereof, at public or private sale, in such lots or parcels, at such time or times, at such place or places, *2222 or places, for such prices and on such terms, as said Trustee may deem advisable; and to lease the same, or any part thereof, for any term of years or perpetually, with or without privilege of purchase, and with such other covenants and provisions, and upon such rents, as said Trustee may deem advisable; and to make, execute and deliver any and all deeds, conveyances, assignments, transfers and other instruments necessary or proper to carry out any such sales or leases. Receipts signed by said Trustee for all or any portion of any purchase money, shall be good and sufficient discharges for the sums therein stated to have been received, and no purchaser, corporation or transfer Agent, shall be concerned to inquire as to the occasion of any sale, or to see to the *95 application of the proceeds of said sale or purchase money. I further empower said Trustee to invest any and all money which may come into its hands as Trustee, as part of said trust, in such form of property, real or personal, or in improving other property of said trust, as said Trustee may deem fit, and such investments from time to time to vary, alter and transpose at pleasure, converting realty into personalty, *2223 and personalty into realty, as often as said Trustee deem proper, and said Trustee shall not be held responsible for any depreciation in any of the property or securities held hereunder, or in which said funds may be invested, and re-invested by it from time to time, in good faith, or for loss of any kind whatsoever, not occasioned by its own gross negligence or bad faith.
2nd. The net income of said trust estate or of any property at any time held hereunder is to be used for charitable purposes, as the Trustee may deem advisable and proper, and I hereby authorize and direct the Trustee hereunder, to pay the net income of said estate, or any part of portion thereof, from time to time, to such person or persons, charitable organizations or associations, or to corporations duly organized for charitable purposes, as said Trustee may deem advisable, for relief in sickness, suffering and distress, the care of young children, or the helpless and afflicted. Believing as I do that it is every man's duty, as far as it is in his power, to prevent those of his own blood from becoming a charge on the state and a burden to society, I request that the Trustee at all times give preference to*2224 any of my brothers and sisters, and the brothers and sisters of my deceased wife, Emelie Balke Schmidlapp, and the children of any of them, and any of my friends whom in the judgment of the Trustee, I would assist if living, and who may at any time be in suffering, sickness or distress, and without the means to provide for themselves in reasonable comfort.
3rd. Injudicious charity tends to take from men, the incentive to self-support, making of such, pensioners on the bounty of others, rather than self-supporting men and women, and desiring as far as possible to avoid such abuse, I hereby give the Trustee, full power, authority and discretion, in the use of the income of said trust estate, to pay out for such charitable purposes, in the relief of suffering and distress, all or any portion of said income, at such time or times as it may deem best, or from time to time to withhold all or any portion of said income, or to accumulate and add to the principal fund, such portion or portions of said income as it may deem advisable.
Item Four. Said Trustee may at any time cause to be formed a charitable Corporation, if it so desires, for the purpose of following the conditions of*2225 this trust, and transfer thereto, all the property, real and personal, held hereundrer, subject to the trusts herein expressed, but in case such a corporation shall be formed, the Directors of The Union Savings Bank & Trust Co., of Cincinnati, Ohio, or its successor, and the Mayor of the City of Cincinnati, Ohio, from time to time, shall Ex-Officio, together with such other person or persons as may be required by law, be the Trustees or Directors of said Corporation.
The total net income of this trust was $24,060.05 for 1922.
Edgar Stark, who for the past eleven years has been vice president of the now Fifth Third Union Trust Co., and for 20 years its trust officer, and who was close to Schmidlapp in a business way, was named executor by Schmidlapp in his will. Real property placed in trust under the will vested in the trustee immediately upon Schmidlapp's death and was never under the control of the executor. *96 On account of certain litigation not having been finally determined, the administration of the estate has not been completed by the executor. The executor has not turned over the personal property to the trustee under the will, since administration of the*2226 estate has not been completed, but when it is completed he will do so. The income from the personal property is, however, now being turned over to the trustee. No payments for charitable purposes are to be made by the executor from the personal property, but only the necessary administration expenses.
The proceeding in Docket No. 26130 arises from the respondent's determination of deficiencies against the executor on income from the property of the estate in his hands. The executor's account is carried on the books of the Fifth Third Union Trust Co. under the designation of Trust No. 1335. The total income of the estate was $31,375.12 for 1922 and $17,332.81 for 1923.
Pursuant to the terms of the trust agreement, the distribution of the income from the Charlotte R. Schmidlapp Fund, Trust No. 774, is controlled by a committee. The money available for distribution from this fund is not actually paid over to the committee, but is set aside and carried by the trustee in a "Distribution Fund" and paid out on the requisition of a "director," who is a woman employed by the committee to make investigations for it. The committee meets from time to time and passes on cases to which*2227 a distribution of the income is being considered and which have been investigated by the "director." In cases where prompt action is necessary, the committee has instructed the trustee to make payment from the income of the trust fund on the requisition of the "director." The distributions under this trust have in general been made to individuals, such as assisting young women in obtaining an education, in paying hospital bills, and for operations and helping invalids. Disbursements were also made to movements having charitable objects, such as for the benefit of the blind and for institutions for certain cures. Distributions of income of this trust began to be made in 1908 and have continued since then.
The Fifth Third Union Trust Co., as trustee, has the sole control of the trust fund created by the trust agreement of July 3, 1916, and designated Trust No. 1163. The executive committee of the board of directors of the Trust Co. sets aside the income from this trust fund and, as applications for assistance to individuals are approved by the committee after having been investigated by an investigator employed by it for that purpose, the income is distributed upon the instructions*2228 of the committee. From the creation of this trust until the time Schmidlapp's will became effective, practically all of the distributions made from this trust were made for the *97 benefit of individual cases. Since that time distributions have been made largely along educational lines. However, there are a number of cases in which distributions are being made for the benefit of individual cases. Under this trust large appropriations have been made to the Cincinnati Museum of Fine Arts and for the purpose of endowing a chair of aeronautics at the University of Cincinnati. A distribution was also made to the Palestine Relief Fund, and for two years a subscription was made to the Community Chest.
The Fifth Third Union Trust Co., as trustee, has sole control of the trust created by Schmidlapp's will and administers the trust in the same manner as that created by the trust agreement dated July 3, 1916. It was a considerable time after the will became effective that distributions from the income from the trust created by it were made, the first being made in May, 1927, to the American Red Cross for the Mississippi flood relief. A distribution was also made from the income*2229 of this trust to the Palestine Relief Fund. Distributions have been made from the income of this trust and the one created on July 3, 1916, to committees organized for such purposes as giving relief to flood sufferers in Kentucky and rebuilding school buildings destroyed there. In addition to he foregoing, a contribution has been made to a boys' home. At the time of the hearing all appropriations for relief in the case of individuals were being made from the income of this fund.
On March 15, 1924, an income-tax return was filed by the Fifth Third Union Trust Co., as trustee of the Charlotte R. Schmidlapp Fund, covering the income of that fund for 1923. The total income shown on the return was $83,470.98, against which a deduction of the same amount was taken. The deduction was composed of $3,142.37 as representing salaries of employees, administration expense, etc., and $80,328.61 as representing the amount paid or permanently set aside for charitable or educational purposes. Included in the items of income was an amount of $60,605 representing the profit from the sale in 1923 of certain capital stock of the North American Co. This stock was part of the securities turned*2230 over to the trust fund at the time of its creation in 1907 and has been held for profit or reinvestment since that date.
On February 8, 1927 the respondent addressed a notice of deficiency to "Mr. Edgar Stark, Executor, Estate of Jacob G. Schmidlapp, deceased, P.O. Box 1462, Cincinnati, Ohio." This notice proposed a deficiency in income tax of $705.27 for 1922. The tax was on income received by the trustee from property received under Schmidlapp's will and not income received by Stark as executor, a separate deficiency notice having been sent Stark with respect to the tax on that income. From this notice of deficiency a petition *98 was filed with the Board on April 7, 1927, by the Fifth Third Union Trust Co., trustee under Schmidlapp's will.
The pertinent portions of the petition are:
THE FIFTH THIRD UNION TRUST COMPANY, Trustee under the Will of Jacob G. Schmidlapp, deceased, Trust Fund #1340, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.
PETITION
The above named petitioner hereby petitions for a redetermination of the deficiency set forth by the Commissioner of Internal Revenue in his notice of deficiency dated February 8, 1927, bearing the*2231 Bureau symbols IT:PA; 2 60D RKJ, and as a basis of this proceeding alleges as follows:
(1) The petitioner is The Fifth Third Union Trust Company, as Trustee under the will of Jacob G. Schmidlapp, deceased of a fund designated "Trust Fund #1340", with its principal office at Nos. 14-18 West Fourth Street, Cincinnati, Hamilton County, Ohio. At the time of the execution of the said Will, said petitioner Company operated under the name of The Union Savings Bank & Trust Company; its name was subsequently changed, by proceedings had in accordance with the laws of Ohio, to The Union Trust Company, which name has, since the determination of the deficiency by the Commissioner of Internal Revenue, been changed, by proceedings had in accordance with the laws of Ohio, to The Fifth Third Union Trust Company.
* * *
5. * * * (a) Under the last will and testament of Jacob G. Schmidlapp, dated, January 12, 1911, all of the Estate, both real and personal of the said Jacob G. Schmidlapp, with the exception of his residence property, is devised and bequeathed to The Union Savings Bank & Trust Company, a corporition, (later known as The Union Trust Company and at the present time as The Fifth*2232 Third Union Trust Company), as Trustee, in trust for the uses and purposes set out in said Will * * *.
This petition was verified by Edgar Stark as "Vice-President and Trust Officer of The Fifth Third Union Trust Company, Trustee under the Will of Jacob G. Schmidlapp, deceased, for the fund - known and designated as 'Trust Fund #1340.'" The petition was given Docket No. 26127.
OPINION.
TRAMMELL: At the hearing counsel for the petitioners moved that the proceeding in Docket No. 26127 be dismissed on the ground that the Board does not have jurisdiction, since the respondent addressed and sent to Edgar Stark, executor of the estate of Jacob G. Schmidlapp, the notice of a deficiency determined against the trustee under Schmidlapp's will.
Section 283 (a) of the Revenue Act of 1926 provides in part as follows:
*99 If after the enactment of this Act the Commissioner determines that any assessment should be made in respect of any income, war-profits, or excessprofits tax imposed by the * * * Revenue Act of 1921, * * * or by any such Act as amended, the Commissioner is authorized to send by registered mail to the person liable for such tax notice of the amount proposed*2233 to be assessed, which notice shall, for the purposes of this Act, be considered a notice under subdivision (a) of section 274 of this Act.
The trustee petitioner filed the petition based on the notice sent to the executor. The determination of a deficiency against the trustee and the sending of notice thereof to the executor does not meet the requirement of the Act that notice is to be sent to the person liable for the tax. . Since the proceeding in Docket No. 26127 was not based upon a notice by the respondent to the petitioner as required by the Act we do not have jurisdiction and the proceeding will be dismissed. See ; , and .
The respondent does not contend that the Charlotte R. Schmidlapp trust and the one created by the instrument of July 3, 1916, were not for charitable and educational purposes, and that the one created under the will was not for charitable purposes. The manner in which these trusts are administered and the income therefrom distributed is set*2234 forth in our findings of fact. The respondent concedes that the bequest in the will establishing the testamentary trust that friends and relatives be given preference does not deprive it of its otherwise charitable character. He also concedes that the trusts established by Schmidlapp are primarily for the public generally rather than for the benefit of needy friends and relatives.
The petitioners contend that the trusts are exempt from taxation under the provisions of section 231(6) of the Revenue Act of 1921. That section provides in part as follows:
That the following organizations shall be exempt from taxation under this title -
(6) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scienific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any privata stockholder or individual.
The petitioners urge that the trusts are each a fund or foundation within paragraph 6 of section 231 of the Act. The respondent contends that in the phrase "any community chest, fund or foundation" the word "community" *2235 relates to and modifies the three words "chest," "fund" and "foundation" and describes the manner of creation and not the manner of distribution of the trust. His contention is that a fund or foundation, to be exempt under the provisions *100 of section 231(6), must be one created by community contributions and not by a single individual.
In , the question of the deductibility, under section 214(a)(11) of the Revenue Act of 1921, of contributions or gifts to a "community chest, fund or foundation" was considered. There the court said:
This brings us to the fundamental question in the case. Were the plaintiff's gifts to or for the use of a "corporation or community chest, fund, or foundation"? If the instrument effectuating the gift be examined, it is at once apparent that, whatever else it does, it certainly creates a trust. Gifts to trusts, eo nomine, are not included in the provisions for deductions in Section 214 of the Act of 1921, nor are they expressly excluded. Is the plaintiff's gift properly described by any term of the clause above quoted?
The immediate donee in this case is not a corporation in*2236 the ordinary sense. * * * It is not a community chest. In my opinion, the word "community" plainly means raised or contributed by a community, and not, for the benefit of a community. Community chests are well known and extensively adopted vehicles of charity. The name implies a method of raising and administering funds for the benefit of all organized charities in a single community. One of the essential ideas involved is that the contributions should be from the whole community or from as many members of it as possible. The aim in every case is to induce every member of the community to contribute according to his means. I can not conceive of the contribution of a single individual being called a community chest and it had not been suggested that the plaintiff's gift here for example can be described as such.
Does the word "community" also modify either or both of the words "fund" and "foundation"? The plaintiff's gift is a gift to a fund or a foundation. It is not a gift to a community fund or a community foundation. The plaintiff's position is that the word "community" modifies only the word "chest", and he bases this upon the argument that the word "chest" would be*2237 meaningless without the additional descriptive term, which is perfectly true, but it has very little bearing upon the question whether the word "community" also applies to the other two words in the phrase. The defendant's position is that a consideration of all the Revenue Acts since and including the Act of 1917 down to date, clearly indicates that Congress intended to exclude gifts to trusts, and that Congress would simply be nullifying its own scheme and purpose if funds and foundations generally were exempt, because there can scarcely be a charitable fund or foundation which is not a trust.
* * *
A strongly suggestive enactment having a direct bearing upon the question is Section 706 of the Revenue Act of 1928, which retroactively allows a deduction in case of gifts to trusts for charitable purposes, but limits such deductions to cases where such gifts were made during the taxable year of 1923, and were followed in the following year by gifts of substantially the same amount to the same trust. The amount allowed as a deduction is limited to $50,000. Now what possible reason could there be for this provision, unless Congress recognized the fact that the law prior to the*2238 inclusion of trusts by the Act of 1924 was not intended to cover trusts? If the words "fund or foundation" meant funds or foundations generally, most trusts could have been placed under these terms, and there would have ben no need for the retroactive provisions for the Act of 1928. The only conclusion *101 that can be drawn is that Congress was legislating retroactively to permit the use of gifts to trusts as deductions, in view of the change of policy of the later acts, at the same time by implication reaffirming its own understanding that the Act of 1921 allowed deduction only in case of community chests, community funds, or community foundations. I therefore conclude that the funds and foundations intended by the phrase being considered are community funds or community foundations, in the sense of being raised or contributed by the community generally * * *. (Italics supplied.)
We think the construction given by the court to the words "community chest, fund, or foundation" is sound and correct. Since the trusts here being considered were not "raised or contributed to" by the community generally, but were created by one person, Schmidlapp, we are of the opinion*2239 that they are not exempt from taxation under the provisions of paragraph (6) of section 231.
In the respective petitions in these proceedings it is alleged that the respondent erred in refusing to allow as deductions the following indicated amounts as taken in the returns of the respective petitioners:
| Year | Deduction | |
| Trust No. 1340 (testamentary trust) | 1922 | $24,060.05 |
| Charlotte R. Schmidlapp fund | 1922 | 22,527.05 |
| 1923 | 80,328.61 | |
| Trust fund No. 1163 (trust created July 3, 1916) | 1922 | 12,760.49 |
| Estate of Jacob G. Schmidlapp | 1922 | 31,375.12 |
| 1923 | 17,332.81 |
The petitioners contend that the foregoing respective amounts, which constituted the entire income of each, were allowable deductions under sections 219(b) and 214(a)(11) of the Revenue Act of 1921.
Section 219(b) of the Revenue Act of 1921 provides in part as follows:
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*2240 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 in paragraph (11) of subdivision (a) of section 214.
Section 214 provides:
(a) That in computing net income there shall be allowed as deductions:
* * *
(11) Contributions or gifts made within the taxable year to or for the use of: (A) The United States, any State, Territory, or any political subdivision thereof, or the District of Columbia, for exclusively public purposes; (B) any corporation, or community chest, fund, or foundation, organized and operated *102 exclusively, for religious, charitable, scientific, literary, or educational purposes, including posts of the American Legion or the women's auxiliary units thereof, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual * * *.
The position of the petitioners is that all the income of the trusts, whether distributed or set aside for addition*2241 to the principal fund of the trusts, is deductible under sections 219 and 214(a)(11) as contributions or gifts to a community chest, fund, or a foundation organized exclusively for charitable or educational purposes. Contributions or gifts made by the trusts to or for the use of any corporation, community chest, fund or foundation as provided in section 214(a)(11) or permanently set aside therefor are deductible, regardless of the exempt status of the petitioner trusts, but we have no evidence that any amounts were during the taxable year paid out by the trustee to or were permanently set aside for the use of any corporation, community chest, fund or foundation organized or operated exclusively for the purposes set out in section 214, unless it be held that the mere accumulation of funds by the trusts themselves comes under that classification. It is contended that the trusts, even though they did not actually pay out funds for such purposes, by actually accumulating such funds, permanently set them aside as that expression is used in the statute for a corporation or community trust fund or foundation, since the trusts themselves were such organizations. We have held above on the*2242 question as to the exemption of the trusts that they are not corporations, community chests, funds or foundations, as provided in section 231(6).
In our opinion, therefore, there is no merit in the petitioner's contention in this respect.
In determining the deficiency in Docket No. 36836 the respondent has subjected to both normal and surtax the profit of $60,605 realized by the Charlotte R. Schmidlapp Fund on the sale in 1923 of certain corporate stock which has been held by the trust for profit or reinvestment since its creation in 1907. The petitioner contends that the tax on this profit should be computed under the capital net gain provision of section 206 of the Revenue Act of 1921. It urges that in filing its return it reported no tax liability because it contended that it was exempt under section 231, or that its entire income was permanently set aside for charitable or educational purposes under sections 219 and 214. The petitioner also urges that in view of this there was no occasion for it to make an election or claim as to the benefits of section 206.
The respondent, while not denying that the petitioner is otherwise entitled to the benefits of section 206, contends*2243 that, since it did not make an election or request that the profit on the sale of the stock *103 be taxed under that section until the filing of an amended petition shortly before the date of the hearing, it is not now entitled to have its tax computed under that section.
The act does not restrict the time of election, and it is our opinion that under the circumstances here presented the capital net gain provision is still available to the petitioner. .
It is alleged in the petition in the case of the estate of Jacob G. Schmidlapp that the respondent erred in finding that an amount of $5,880.04 deducted in the 1923 return as executor's commission is not deductible. In his answer the respondent denied this allegation of error. Since no mention is made of this alleged error in the brief of the petitioners, and as no evidence was submitted with respect to it, the respondent's action is sustained.
In Docket No. 26127 an order will be entered dismissing the proceeding. In Docket Nos. 26128, 26129, 26130, and 36836, judgment will be entered under Rule 50.