*1027 LOSSES - SALE OF CAPITAL ASSETS BY TRUST - WHETHER DEDUCTIBLE BY FIDUCIARY OR BENEFICLARY. - Petitioners were beneficiaries under a trust and also the remaindermen. During the taxable years the sole income of the trust was distributed to the beneficiaries. During the same years the trust sold certain capital assets at a loss. The trust is still in existence. Held, petitioners are not entitled to deduct such losses on their individual income tax returns.
*1286 In these proceedings, which have been consolidated, the respondent has determined deficiencies in income taxes, as to each petitioner, in the amounts of $733.83 for the year 1925 and $656.67 for the year 1927.
The only issue involved is whether the petitioners, as beneficiaries and remaindermen of a trust, are entitled to deduct capital losses sustained by the trust on their individual income tax returns. The facts were stipulated.
*1287 FINDINGS OF FACT.
Petitioners are the children of Ross J. Beatty, and reside with him in Highland Park, Illinois.
On April 30, 1917, Ross*1028 J. Beatty made and executed a certain indenture of trust. Among other things, the trust provided "That said Ross J. Beatty, for and in consideration of the sum of One Dollar in hand paid, receipt whereof is hereby acknowledged, and for love and natural affection, does hereby sell, assign, transfer, set over, convey and quit claim unto John T. Beatty * * * as Trustee * * * (8500) shares of the capital stock of the Inland Steel Company, a corporation * * * To have and to hold the same subject to the following trusts, purposes and conditions, to-wit * * *."
The "trusts, purposes and conditions" were that the trustee was to manage the trust estate and collect the income therefrom; that he was to hold the principal of the trust estate "in its present form of investment" and was not to convert the same except with the written approval of the grantor; that he was to apply the income received from the trust estate, first, toward the education and maintenance of the three beneficiaries therein named, secondly, toward the maintenance and operation of the home and in addition thereto the maintenance and support of the grantor and his wife "so long as they shall choose to occupy the*1029 said home site," thirdly, toward the payment to the grantor the sum of $30,000 "which is the cost to said grantor to date of the land or home site on which said home is to be erected" and in addition thereto "any and all taxes, assessments or other outlays made by said grantor" thereafter but without interest thereon and, fourthly, toward the erection of a suitable home, the entire cost of said site and buildings not to exceed $150,000; that if so directed in writing by the grantor, the trustee was to invest said income or any part thereof in securities or property to be approved in writing by the grantor "before the payment of all or any part of the things hereinbefore provided to be paid" if, in the discretion of the grantor it seemed wise so to do; that the trustee was to procure the written approval of the grantor before any sale or disposition of trust property could be made; and that the stock of all corporations held by the trustee was to be voted "in accordance with the written instructions of the grantor * * *." Paragraphs 13, 14 and 15 of the trust agreement provided as follows:
(13) That it is hereby declared that the following persons shall and do have the following*1030 beneficial interests in said trust property, to-wit:
John T. Beatty, an undivided one-third (1/3) interest.
T. Rosslyn Beatty, an undivided one-third (1/3) interest.Mildred Veronese Beatty, an undivided one-third (1/3) interest.
*1288 (14) That each of said beneficiaries shall have an undivided one-third (1/3) interest in and to any property of whatsoever nature and description purchased by said trustee from said trust estate or the income therefrom, in whatever manner derived or held.
(15) That any investment of principal or income of said estate made hereafter shall vest in said beneficiaries an undivided one-third (1/3) interest therein.
he trust agreement further provided that the trustee should, until each of the beneficiaries attained the age of 21 years, provide and pay for all reasonable necessaries, subject to the approval of the grantor; that "as each of said beneficiaries attains the following ages, said Trustee shall pay to him or her, as and for his or her absolute property, the sums of money in cash as hereinafter stated, and such beneficiary shall thereupon have the absolute discretion as to the expenditure or disposition thereof", namely, $3,000*1031 at the age of 21, $5,000 at the age of 25, $10,000 at the age of 30, and $15,000 at the age of 35; that "in addition to sums of money hereinbefore provided to be paid said beneficiaries, said Trustee shall pay to each of said beneficiaries between the following ages the following sums quarter yearly", namely, $600 between the ages of 21 and 24, $900 between the ages of 25 and 29, $1,500 between the ages of 30 and 35, and $2,000 between the ages of 36 and 40; and that "All the foregoing payments to be made from the income, so far as possible, and if the income be not sufficient, then to be paid from the principal of said trust estate."
Paragraphs 21 and 22 of the trust agreement provided as follows:
(21) As each beneficiary attains the age of forty (40) years, the principal of said trust estate to which such beneficiary is then entitled shall be turned over and delivered to such beneficiary as and for his or her absolute property forever, but said Trusteeship shall continue in force until said youngest beneficiary shall attain the age of forty (40) years, at which time it shall terminate.
(22) If either of said beneficiaries shall die leaving no widow or husband or issue him*1032 or her surviving, then his or her portion of said trust estate, including any accumulated income therefrom, shall go to the surviving beneficiary or beneficiaries; if a deceased beneficiary shall leave a husband or widow or issue or both a husband or a widow and issue, the portion of said trust estate that would have gone to such deceased beneficiary shall go to his or her widow or husband or/and issue, the husband or widow or/and issue of such beneficiary to take per stirpes and not per capita.
The original corpus of the trust consisted of 8,500 shares of stock of Inland Steel Co. and nothing else. Several years after the creation of the trust additional stocks in other concerns were purchased and held as capital assets of the trust. The trust is still in existence.
During the years 1925 and 1927 the sole income of the trust consisted of $85,000 in dividends received, which the trust reported as income from dividends in each of those years on fiduciary return *1289 Form 1041, and in the returns allocated one third thereof, or $28,333.34, to each of the beneficiaries, the petitioners herein.
During 1925 the trustee sold certain stock at a loss of $51,147.68, and during*1033 1927 certain other stock at a loss of $36,000. Such losses were reported on the fiduciary returns for 1925 and 1927, respectively, and were allocated in the returns one third thereof, or $17,049.23 and $12,000, respectively, to each of the beneficiaries, the petitioners herein.
For the year 1925 each petitioner reported in his or her Federal income tax return as dividends received the amount of $28,333.34 as distributable from the trust, and deducted from such income as a loss the amount of $17,049.23.
For the year 1927 each petitioner reported in his or her Federal income tax return as dividends received the amount of $28,333.34 as distributable from the trust, and deducted from such income as a loss the amount of $12,000.
The respondent, in determining the deficiencies herein, disallowed the losses of $17,049,23 and $12,000 claimed by each petitioner for the years 1925 and 1927, respectively.
The concluding paragraph of the stipulation is as follows:
Petitioners contend that the title to the securities sold in 1925 and 1927 was vested in them by virtue of said trust agreement and that therefore the losses caused by the sale of said securities are deductible from their*1034 income and the respondent denies that such losses are deductible. If said losses are deductible, then there is no deficiency. If said losses are not so deductible, then the determination of the Commissioner is correct.
OPINION.
BLACK: The question we have to decide in these proceedings is whether losses resulting from the sale of capital assets of a trust may be deducted from the income of the beneficiaries of the trust, who are also the remaindermen. The facts have already been fully stated any need not be repeated here.
There can be no question that the trust established by Ross J. Beatty held the legal title to the securities which were sold during each of the taxable years. In selling them, the trust did not have to consult the beneficiaries, who are the petitioners in this proceeding. It seems to us that the losses on the sale of the securities, so far as the right to take such losses as deductions in figuring income taxes is concerned, are the losses of the trust and not of the beneficiaries.
It has been stipulated that the trust was in existence during each of the taxable years and unquestionably it was a separate taxable entity. Section 219 of the Revenue*1035 Act of 1926, which is the revenue act applicable to each of the years involved in this proceeding, makes *1290 trusts of the kind we have in this proceeding separate taxable entities. Section 219(b) expressly provides: "Except as otherwise provided in subdivision (g) and (h), the tax shall be computed upon the net income of the estate or trust and shall be paid by the fiduciary." We pause to remark that subdivisions (g) and (h) referred to have no application to the facts of the instant case.
It has been stipulated that in each of the years involved in this proceeding the trust has income of $85,000. Undoubtedly this income would be taxable to the trust except for the fact that it was an allowable deduction to the trust by reason of the provisions of section 219(b)(2), which reads in part: "There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, * * * but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them*1036 or not." The trust would also be entitled to take as a deduction from its gross income for each of the taxable years any losses resulting from the sale of capital assets. This by reason of section 214(a)(4), (5), Revenue Act of 1926.
While the trust, which was the legal owner of these capital assets during each of the taxable years in question, could take as a deduction from its gross income losses resulting from the sale of these assets, we know of no provision of law which would permit petitioners, who are the beneficiaries of the trust, to take such losses as deductions from their gross income, even though they were also remaindermen under the terms of the trust indenture. The trust set up by the indenture was a separate taxable entity from petitioners and one taxpayer cannot deduct from his gross income another's losses.
Petitioners urge as their principal authority in support of their contention our decision in . An examination of that case will show that our decision was grounded upon our holding therein that James W. Arrott, Sr., decedent, did not under the laws of Pennsylvania create a legal trust in respect of the*1037 shares in his residuary estate devised to his sons, but that the executors and trustees were merely agents of such devisees. Under such circumstances we held that the sons were the legal owners and holders of their part of the real estate in their own right and were entitled to deduct in their individual returns their proportionate shares of allowances for depreciation and loss on sale of capital assets. We have no such situation as that in the instant case.
The trust involved in these proceedings was more than the mere agent of the beneficiaries. It was the holder of the legal title of the trust corpus, and the trustee was not to turn over this trust *1291 corpus to the beneficiaries until they each reached the age of forty years.
It is true that in , there are some expressions in the concluding paragraph of the opinion which support the contentions now made by petitioners. These expressions, however, are obiter dicta and not necessary to the conclusions therein reached and seem to be in conflict with other decisions of the Board. Cf. *1038 ; ; ; ; certiorari denied, .
The Supreme Court of the United States recently decided an issue somewhat similar to the one which we now have before us in . In that case the Court stated the issue thus: "The question to be decided is whether the difference between the value of real estate at the death of a testator and the proceeds realized thereafter under a sale by the trustees may be deducted as a loss by the taxpayer, the beneficial owner of the proceeds, upon his return to the collector for the income of the year." The Supreme Court answered the question in the negative and held that the beneficiaries of the trust could not take any part of the loss resulting from the sale of capital assets by the trust as deductions on their individual income tax returns. However, it is only fair to state that the Supreme Court, in reaching this conclusion, did so upon the basis that under the laws of the State of*1039 New York the fee title to the real estate in question passed to the executors and the beneficiaries owned, not a beneficial interest in the real estate, but a beneficial interest in the proceeds resulting from the sale of the real estate when it was sold.
Under such circumstances the Court held that when the real estate was sold at a loss it was the loss of the estate and not of the beneficiaries of the estate, who were interested only in the proceeds, and the beneficiaries could not take any of the losses as deductions on their returns. The Court took pains to say, however: "Whether the result would be the same if the beneficiaries had been the owner of future estates in remainder, we are not required to determine. Cf. ."
So it must be admitted that the Supreme Court did not decide the precise question now under review. However the Court did go on and say, after announcing its above stated ruling: "In so ruling we do not forget that the trust is an abstraction, and that the economic pinch is felt by men of flesh and blood. Even so, the law has seen fit to deal with this abstraction for income tax purposes as*1040 a separate existence, making its own return under the hand of the fiduciary and claiming and receiving its own appropriate deductions." (Italics supplied.)
*1292 We conclude, as we have stated elsewhere, by saying that we known of no statute which would grant to the beneficiaries of a trust the right to take proportionate losses which have resulted from the sale of capital assets, the legal title to which at the time of sale was vested in a trust, itself a separate taxable entity. Under the authorities above cited,
Decision will be entered for the respondent.