Decision will be entered for the respondent.
Petitioner, Brad Love Sneed, is one of the income beneficiaries of a testamentary trust created by the will of her deceased husband. The income of the trust during the taxable years 1953, 1954, and 1955 was from the ranching and cattle business which it conducted and from oil royalties and bonuses from leases executed by decedent during his lifetime and also from leases executed by the trustees after decedent's death. The will of decedent directed that income from oil royalties and bonuses be accumulated and invested for remaindermen named in the will and that only the income from such investments should be distributed. Held, that no part of the depletion allowable on the oil royalties and bonus income received by the estate during the taxable years is allocable to petitioner under section 23(m) of the Internal Revenue Code of 1939 and similar provisions in the 1954 Code.
*477 The Commissioner has determined deficiencies in petitioner's income tax as follows:
| Year | Deficiency |
| 1953 | $ 1,658.93 |
| 1954 | 1,663.93 |
| 1955 | 2,159.81 |
The *133 deficiencies are due to one common adjustment made to the income reported on petitioner's returns. The adjustment for 1953 will suffice to explain those which were made for all three of the taxable years. That adjustment for 1953 was "(a) Depletion on trust income [disallowed] $ 4,120.88." The adjustment is explained in the deficiency notice as follows:
(a) It is determined that the distributions received by you from the Trust Estate of J. T. Sneed, Jr., in 1953 may not be reduced by a depletion deduction of $ 4,120.88, as it has not been shown that this income is of a type subject to a depletion allowance, nor has it been shown that you are entitled under the internal revenue laws to claim an allocable portion of any depletion allowance to be deducted from royalty income received by the trust estate.
By appropriate assignments of error petitioner contests these adjustments for each of the taxable years.
FINDINGS OF FACT.
Some of the facts are stipulated and are incorporated herein by this reference.
*478 Petitioner resides in Amarillo, Texas. She filed her income tax returns for the years 1953, 1954, and 1955 with the district director of internal revenue at Dallas, Texas.
Petitioner is *134 the widow of J. T. Sneed, Jr., hereinafter referred to as the decedent. Decedent died testate on October 15, 1940. His last will and testament, with codicil attached, was duly admitted to probate in the County Court of Potter County, Texas, on November 4, 1940, and the executors named therein were thereafter duly qualified as such.
Prior to the marriage of decedent to petitioner, and after the death of his former wife, decedent executed a will dated October 5, 1936, which contained the following:
FOURTH:
1. I desire and direct that my Executors shall as rapidly as can be done after my death, in the exercise of their sound discretion, convert the personal property of my estate into cash or into bonds, and other securities of such nature as they shall deem advisable. All such cash, bonds and/or securities, as well as all moneys derived from royalties, rentals and leases of oil and gas lands, rentals, lease and sale of lands, or from whatever source obtained which shall come into the hands of my said Executors, shall be held, managed, invested and reinvested by them, and after payment of taxes, fixed charges, operating expenses and the expenses of administration, my said Executors shall *135 then pay over the net income from my said estate to my daughter, Elizabeth Sneed Pool during her lifetime, should she survive me. * * *
* * * *
SIXTH:
1. I hereby give to the Executors and Trustees herein named full and complete right and unrestricted authority to hold, manage, operate, lease, exchange, mortgage and/or sell, all or any portion of the lands or personal property belonging to my estate, for such price and upon such terms as they shall deem proper and to the best interests of my said estate.
2. As to any of said lands which are already proved or hereafter are considered to be oil and/or gas bearing, or to contain other minerals, I hereby give to my said Executors full and complete right and unrestricted authority to hold, manage, operate, drill, lease, exchange, mortgage and/or sell said lands, in whole or in part, in fee simple, or as to surface rights, or as to leasehold and/or royalty interests therein, as they shall deem proper and to the best interest of my estate, and my Executors shall be the sole judge of such matters. * * *
On November 16, 1938, after his marriage to petitioner, decedent executed a codicil to his will in which appear the following provisions:
I do *136 hereby give and bequeath to my beloved wife, BRAD LOVE SNEED, should she survive me, and for so long as she lives and remains my widow unmarried, in cash the sum of Fifteen Thousand ($ 15,000.00) Dollars per year, to be paid to her by my Executors and Trustees out of my estate as a fixed charge and before the distribution and payment of the net income of my estate as in my said Will provided.
* * * *
*479 I desire and direct that the bequests hereinabove provided shall be paid out of my estate from time to time and in the amounts herein provided, as a fixed charge and before the distribution and payment of net income of my estate as provided in my said Will of October 5, 1936 hereto attached; and it is my desire, and I here direct, that this Codicil be annexed to and made a part of my said Will of October 5, 1936 to all intents and purposes.
In compliance with the terms of the will and codicil, the executors paid to petitioner the sum of $ 15,000 for each of the calendar years 1953, 1954, and 1955. Petitioner reported in her respective income tax returns for those years as income the $ 15,000 received in each year from the fiduciaries under the codicil to the will.
As an outcome of certain *137 proceedings brought by petitioner against the executors and trustees of decedent's estate in the case of Sneed v. Pool, 228 S.W. 2d 913, the Court of Civil Appeals at Amarillo, Texas, sustaining the District Court below, held that the amounts annually payable to petitioner were payable out of gross income and that petitioner was liable for any and all tax upon such distributions.
In the case of Sneed v. Commissioner, 220 F.2d 313">220 F. 2d 313, affirming this Court in the case of Estate of J. T. Sneed, Jr., 17 T.C. 1344">17 T.C. 1344, and the case of Brad Love Sneed, Memorandum Opinion of this Court, the United States Court of Appeals for the Fifth Circuit held that a determination of the Court of Civil Appeals, Amarillo Division, in the case of Sneed v. Pool, supra, that moneys distributable to petitioner pursuant to the terms of codicil to the will of decedent constituted income to her, was controlling.
The gross income and expenses of the trust estate of decedent during the fiscal years ended June 30, 1953, to June 30, 1956, inclusive, as shown by the books and records of the trust estate were as follows:
| Fiscal year ended June 30, 1953 | |
| Distributable | |
| income | |
| Income: | |
| Royalties | |
| Oil and gas lease bonus -- Dallam County | |
| Delay rentals -- Moore County | |
| Grass lease -- Dallam County | |
| Surface rental and damages -- Moore County | |
| Gross profit on commercial cattle | $ 94,713.04 |
| Gross profit (loss) breeding herd | (239.05) |
| Dividends | 200.00 |
| Interest -- U.S. Treasury -- 1941 tax recovery | 22.57 |
| Total income | 94,696.56 |
| Expenses: | |
| Brad Love Sneed distribution | $ 15,000.00 |
| Ad valorem taxes | 2,795.06 |
| Gross production taxes | |
| Engineering fees | |
| Ranch expenses | 104,040.21 |
| Depreciation | 19,343.88 |
| Depletion | |
| Indirect expenses allocated on basis of total income: | |
| Office expense, legal and audit, and trustees' fees | 8,776.41 |
| Total expense | 149,955.56 |
| Net income | (55,259.00) |
| Fiscal year ended June 30, 1953 | |
| Corpus | |
| Income: | |
| Royalties | $ 243,720.85 |
| Oil and gas lease bonus -- Dallam County | 2,658.52 |
| Delay rentals -- Moore County | 1,486.86 |
| Grass lease -- Dallam County | 4,800.56 |
| Surface rental and damages -- Moore County | 297.20 |
| Gross profit on commercial cattle | |
| Gross profit (loss) breeding herd | |
| Dividends | |
| Interest -- U.S. Treasury -- 1941 tax recovery | |
| Total income | 252,963.99 |
| Expenses: | |
| Brad Love Sneed distribution | |
| Ad valorem taxes | $ 4,690.28 |
| Gross production taxes | 12,090.06 |
| Engineering fees | 3,100.00 |
| Ranch expenses | |
| Depreciation | 532.25 |
| Depletion | 67,754.32 |
| Indirect expenses allocated on basis of total income: | |
| Office expense, legal and audit, and trustees' fees | 23,442.41 |
| Total expense | 111,609.32 |
| Net income | 141,354.67 |
| Fiscal year ended June 30, 1953 | |
| Total income | |
| Income: | |
| Royalties | $ 243,720.85 |
| Oil and gas lease bonus -- Dallam County | 2,658.52 |
| Delay rentals -- Moore County | 1,486.86 |
| Grass lease -- Dellam County | 4,800.56 |
| Surface rental and damages -- Moore County | 297.20 |
| Gross profit on commercial cattle | 94,713.04 |
| Gross profit (loss) breeding herd | (239.05) |
| Dividends | 200.00 |
| Interest -- U.S. Treasury -- 1941 tax recovery | 22.57 |
| Total income | 347,660.55 |
| Expenses: | |
| Brad Love Sneed distribution | $ 15,000.00 |
| Ad valorem taxes | 7,485.34 |
| Gross production taxes | 12,090.06 |
| Engineering fees | 3,100.00 |
| Ranch expenses | 104,040.21 |
| Depreciation | 19,876.13 |
| Depletion | 67,754.32 |
| Indirect expenses allocated on basis of total income: | |
| Office expense, legal and audit, and trustees' fees | 32,218.82 |
| Total expense | 261,564.88 |
| Net income | 86,095.67 |
*139 *480 We have given in detail above the income and expenses for the fiscal year ended June 30, 1953. The income and expenses in detail for the fiscal years ended June 30, 1954, June 30, 1955, and June 30, 1956, are given in the same way in exhibits which were introduced in evidence at the hearing. It is not deemed necessary to set these out in detail -- we think the following is sufficient:
| Fiscal year ended June 30, 1954 | |||
| Distributable | Corpus | Total income | |
| income | |||
| Total income | $ 68,331.69 | $ 240,859.27 | $ 309,190.96 |
| Total expenses | 119,639.41 | 110,756.58 | 230,395.99 |
| Net income | (51,307.72) | 130,102.69 | 78,794.97 |
| Fiscal year ended June 30, 1955 | |||
| Total income | $ 97,860.56 | $ 286,307.26 | $ 384,167.82 |
| Total expenses | 115,621.33 | 138,701.83 | 254,323.16 |
| Net income | (17,760.77) | 147,605.43 | 129,844.66 |
| Fiscal year ended June 30, 1956 | |||
| Total income | $ 101,031.40 | $ 272,028.21 | $ 373,059.61 |
| Total expenses | 130,742.69 | 140,824.90 | 271,567.59 |
| Net income | (29,711.29) | 131,203.31 | 101,492.02 |
The trust estate deposited all its receipts classified on its books as "Distributable Income" in one bank account and deposited all its receipts classified as "Corpus" in another bank account. Classified as corpus by the trust estate during the periods here involved were all royalties, *140 bonus payments, delay rentals, and other proceeds received from the trust lands. Classified as distributable gross income by the trust estate during the periods here involved were gross profits from its cattle operations, interest, dividends, and other receipts from its investments.
The annual distribution of $ 15,000 made to petitioner during each of the calendar years 1953, 1954, and 1955 was paid by the trust estate in equal monthly installments of $ 1,250. All of the monthly payments for the years here in question were paid from the distributable income bank account; no payments made by the trust estate to petitioner during these years were made from royalties or from the proceeds from oil and gas properties.
Petitioner used the cash method of accounting and reported her income on a calendar year basis for the years 1953, 1954, and 1955. The trust estate employed an accrual method of accounting and reported its income on a fiscal year basis for the year ended June 30 for all of the years 1953 to 1956, inclusive.
*481 The bonuses and royalties received by the trust estate during the periods here in question were from leases and producing properties held by decedent prior to his death *141 and, also, from leases made, and producing properties acquired, subsequent to the death of decedent.
Elizabeth Sneed Pool was the daughter of decedent, but she was not the daughter of petitioner. Elizabeth qualified as one of the three executors and trustees under the will of decedent.
In each of its fiscal years ended June 30, 1953, 1954, 1955, and 1956, the trust estate charged its distribution of $ 15,000 to petitioner against its distributable gross income, and it charged to corpus all depletion, production taxes, engineering fees, and gas well expenses.
The distributable gross income of the trust estate for each of its fiscal years 1953, 1954, 1955, and 1956 was sufficient to cover the $ 15,000 payment to the petitioner and its net income from all sources was in excess of the amount of the payment.
Petitioner reported as income in her tax returns for those years the $ 15,000 received in each year from the fiduciaries under the codicil to the will. Petitioner claimed on her returns percentage depletion for the years 1953, 1954, and 1955 in the respective amounts of $ 4,120.88, $ 3,710.06, and $ 4,125.
The administration of the estate of decedent has been determined to have ended *142 in 1942.
OPINION.
Pursuant to the terms of the will and codicil to the will of decedent, petitioner received from the trust estate of decedent the sum of $ 15,000 for each of the calendar years 1953, 1954, and 1955. This sum was paid to petitioner in monthly installments of $ 1,250 each by the trust estate from the distributable income of the trust as shown by its books, which consisted primarily of income from commercial cattle. None of the payments made by the trust estate to petitioner during the years here in question were made from royalties or from other proceeds of oil and gas properties.
The issue which we have to decide is: Is the petitioner entitled to deductions for depletion on any part of the distributions made to her from the trust estate during the taxable years involved?
We think the question must be answered in the negative and the Commissioner's determination sustained. There is no doubt but that the payments made to petitioner were actually made from gross income of the trust estate which was realized in each of the taxable years from the cattle business and other sources which had nothing to do with oil and gas leases, bonuses, or royalties. Our Findings of Fact *143 make that clear.
*482 The trustees of the trust estate interpreted the will and codicil of decedent to require the income from oil and gas royalties and bonuses to be treated as corpus and not distributable under the terms of the will but should be accumulated for the benefit of the remaindermen. Thus, interpreting the will, the trust estate had two bank accounts. In one of them, income from the cattle business and other sources was deposited; in the other bank account, income from oil and gas royalties and bonuses was deposited. The payments made to petitioner were made from the first-named bank account. That fact is firmly established. But it is the argument of petitioner that there was no requirement in the will and codicil that oil and gas bonuses and royalties should be treated as corpus and accumulated for the benefit of the remaindermen and therefore the interpretation of the trustees was wrong and the mere fact that the payments to petitioner were made out of a bank account where no oil and gas royalties had been deposited could not interfere with petitioner's right to her allocable part of depletion deductions under section 23(m), 1939 Code, and section 611(b)(3), 1954 Code. *144 Petitioner claims that her allocable part of the depletion under the statutes named for each of the taxable years is as follows:
| Year | Amount |
| 1953 | $ 3,007.60 |
| 1954 | 3,015.35 |
| 1955 | 2,887.23 |
She now claims these deductions for depletion instead of the somewhat larger deductions which she took on her returns.
We think that if the interpretation given the will and codicil by the trustees was wrong, petitioner would be right in her argument that she could not be deprived of her allocable part of the depletion deduction merely because the payments made to her were out of a certain particular bank account. However, we do not think the trustees were wrong in their interpretation of the will and codicil.
The term "allocable" used in section 23(m), 1939 Code, has been construed to mean "distributable," Fleming v. Commissioner, 121 F. 2d 7 (C.A. 5, 1941). Therefore, in order for petitioner to be entitled to an allocable part of the percentage depletion deduction she must establish that the royalties and bonuses are distributable to her in part under the terms of the will and codicil of the decedent, the governing trust instrument. We do not think that petitioner has established such a fact.
The rules followed *145 in Texas in construction of a testamentary trust on the precise issue of whether oil and gas royalties are corpus to be retained for the remaindermen or income distributable to life beneficiaries *483 have been set forth by the Supreme Court of Texas in its two opinions in Mitchell v. Mitchell, 303 S.W. 2d 352 (1957), 244 S.W. 2d 803 (1951). The Supreme Court of Texas held in both opinions that the intention of the testatrix was controlling in the construction of her will. Her intent was determined from construction of the will as a whole, circumstances surrounding the execution of the will, and knowledge imputed to the testatrix of decisions in Texas defining the meaning of the legal terms used in the will. Applying these rules of construction, the Supreme Court in the Mitchell case held it was the intent of the testatrix that royalties were to form a part of the corpus of the trust estate.
The will of decedent explicitly directs the retention of royalties in the trust estate for management and investment in the following paragraph:
FOURTH:
1. I desire and direct that my Executors shall as rapidly as can be done after my death, in the exercise of their sound discretion, convert the personal *146 property of my estate into cash or into bonds, and other securities of such nature as they shall deem advisable. All such cash, bonds and/or securities, as well as all moneys derived from royalties, rentals and leases of oil and gas lands, rentals, lease and sale of lands, or from whatever source obtained which shall come into the hands of my said Executors, shall be held, managed, invested and reinvested by them, and after payment of taxes, fixed charges, operating expenses and the expenses of administration, my said Executors shall then pay over the net income from my said estate to my daughter, Elizabeth Sneed Pool during her lifetime, should she survive me. * * *
In effect, an investment trust is thereby created. Designated to be retained for management and investment are the proceeds from the conversion of personalty and all moneys received from the decedent's lands, whether from royalties, leases, rentals, sales, or whatever source. The proceeds themselves are not to be distributed. Only the income arising from the management and investment of the proceeds is to be distributed.
Of course, it goes without saying that the income from bonuses and oil royalties represents taxable *147 income, reduced by depletion deductions but that income was taxable to the trust estate and not to petitioner and the estate is the one which is entitled to the depletion deduction. Income from bonuses and royalties, for reasons we have already stated, was not distributable income under the terms of the will and we do not see where petitioner is entitled to any depletion deduction on the payments which she received.
Respondent's determination is sustained.
Decision will be entered for the respondent.