*276 Decision will be entered under Rule 50.
Although the trustees directed that income from trust funds be distributed to three minor beneficiaries, who directed, in writing, that such income be retained by the trustees and held for the account of such beneficiaries, and the books of the trustees reflected such transactions in their accounts payable to these beneficiaries, held, this income is taxable to the trust and not the beneficiaries because, since none of the income was expended for the support, maintenance, or education of the beneficiaries, the trustees were mandatorily required to accumulate it by the provisions of the trust and, therefore, it was not "properly paid or credited" to the beneficiaries under section 162, I. R. C.
*368 Respondent has determined a deficiency of $ 12,987.39 in income tax for the calendar year 1940. The error assigned is respondent's action in disallowing as a deduction for the year 1940, $ 30,000 asserted by petitioner to have been "properly paid or credited during such year" to certain beneficiaries of the trust, under section 162 (c) of the Internal Revenue Code. The parties have stipulated certain facts, which are so found. Facts hereinafter set out which are not included in the stipulation are found upon evidence presented at the hearing.
FINDINGS OF FACT.
The petitioner is a trust created by Cecelia K. Frank in 1931. Its office and place of business is at Pittsburgh, Pennsylvania, and its return for the calendar year 1940 was filed with the collector for the twenty-third district of Pennsylvania, *278 at Pittsburgh, Pennsylvania. Petitioner keeps its books of account and files its income tax returns on a cash and calendar year basis.
By deed of trust dated December 31, 1931, Cecelia K. Frank transferred to Robert J. Frank, Frank R. S. Kaplan, William K. Frank, and S. J. Anathan, as cotrustees, certain securities to be held for the uses and purposes set forth in the deed of trust. All of the four cotrustees named accepted the trust. In 1937 S. J. Anathan resigned as cotrustee and since such time the three remaining named trustees have been the sole qualified and acting trustees of the trust.
The trust instrument contains, inter alia, the following provisions:
II. * * * (b) After deducting all expenses incident to the management of the trust, to pay over the net income of this trust estate to my children, now *369 living or hereafter born, in equal shares, for and during the full term of their natural lives, at such times as my Trustees may deem fit and proper, at least annually during minority and quarterly thereafter, subject, however, to all the provisions hereinafter contained.
Article II (c) to (f) prescribes how the income shall be distributed in the event of the*279 death of settlor's children.
Article II (g) provides that where the provisions of the trust conflict with the rule against perpetuities, the trust shall cease as to particular beneficiary or beneficiaries and their proportionate share of principal and accumulated income shall be distributed to them.
Article III prescribes the term of the trust and for the distribution of the principal at its termination or in the event the trust fails by reason of the death of all the beneficiaries provided for.
Article IV gives power to the settlor's children by their last will to rearrange the percentages or proportions of income or principal provided for by the trust agreement.
The trust instrument also provides:
V. I hereby authorize and empower my said Trustees in their discretion to expend such part of the income of the trust estate as they may deem fit and proper for the maintenance, support and education of my children, and to reinvest (without being limited to trust investments under the laws of the State of Pennsylvania) such portions of the income of this trust as said Trustees may in their discretion determine are not needed by my respective children or their survivors or survivor during*280 their minority. Upon each child's attaining the age of twenty-one (21) years, all income theretofore payable to such child which shall have been retained and/or reinvested by the Trustees shall immediately become payable to such child so attaining the age of twenty-one (21) years.
VI. Anything hereinbefore to the contrary notwithstanding, said Trustees, by majority vote, but during the lifetime of Robert J. Frank only with his consent, whether or not he be acting as Trustee, shall have the right and power at any time and from time to time, in their own uncontrolled discretion, to make distribution of the principal of this trust, in whole or in part, as well as of any or all undistributed income, to any of my children or any of the other beneficiaries mentioned in Items II and III above; to vary or change and fix the share of the income and/or principal of, and the manner of paying the same to, any of the beneficiaries hereinbefore mentioned, in such manner as they shall deem right and proper, or to eliminate entirely any of said beneficiaries from participation in the income and/or principal of the trust estate; and to choose beneficiaries, whether they be individuals (excluding *281 therefrom, however, the Donor) or organizations, associations, corporations or bodies maintained for religious, charitable, philanthropic, educational or other public uses and purposes, to participate in the income and/or principal of the trust estate, at such time or times, for such term or terms, and in such manner, proportions, percentages or amounts as they shall deem right and proper.
VII. * * * (c) The Trustees herein named, by unanimous action, shall have the right and power to appoint an additional Trustee, either a corporation or an individual, with such powers (including, if so desired, all of the powers contained in Item VI above) as they shall deem fit and proper, and to fix the *370 compensation and the manner of removal of such additional Trustee, with the same force and effect as if such additional Trustee were provided for at the creation of this trust. The Trustees shall not be liable for any neglect or wrongdoing of such additional Trustee, provided reasonable care shall have been exercised in the selection of such additional trustee.
(d) On the failure of any of the Trustees herein named, by reason of death, resignation, incapacity or otherwise, to act as such*282 Trustee, the surviving Trustees, or the sole Trustee, as the case may be, shall have the right and power to select a successor or successors, with such powers (including, if so desired, all of the powers contained in Item VI above) as they shall deem fit and proper. In the event such surviving Trustees desire to choose a new Trustee but cannot agree upon such successor Trustee, then and in that event the vote of the majority in interest of the then beneficiaries sui juris shall control in the selection of the Trustee. There shall always be at least two qualified and acting Trustees, and in the event that a sole surviving Trustee does not appoint one additional Trustee, the majority in interest of the then beneficiaries sui juris shall control in the selection of such Trustee. Said Trustee must and shall have all the powers of the other Trustee, so that at all times there shall be at least two Trustees having equal powers.
* * * *
(j) All payments of income and distributions authorized to be made by the Trustees hereunder shall be for the use of the cestui que trustents, and the said cestui que trustents shall not have the right in anticipation to sell or assign said payments or*283 distributions or have the power to dispose thereof by anticipation or otherwise, nor shall said income or distributions authorized or directed as herein provided be liable for any of the debts or engagements of said cestui que trustents, nor be subject to attachment therefor. This restriction shall not apply to any payments or distributions after the same shall have been received by the parties entitled thereto under this deed of trust. No beneficiary shall be permitted to appoint any agent or attorney-in-fact except as permitted specifically by the Trustees, to collect or receive such income or principal, if such agent or attorney-in-fact has, directly or indirectly, made any advances of money or other consideration to such beneficiary, with the agreement or expectation of having the same recognized as a claim, so as to collect any part of said income or principal from said Trustees.
(k) No title in the said trust estate hereby created or in the income accruing therefrom or in its accumulation shall vest in any beneficiary prior to the actual distribution thereof by said Trustees to said beneficiary.
The trust maintains regular books of account and minutes recording the action *284 of the trustees under the provisions of the trust. It was the practice in years prior to 1940 that the distributions of income to the beneficiaries, who are minors, be paid by check and the amounts so distributed which were not used for the education and maintenance of the beneficiaries be invested for them, usually in government bonds.
In the calendar year 1940 the beneficiaries of the trust were the three minor children of the trustor, Cecelia K. Frank, and the trustee, Robert J. Frank. At the time of the transactions hereinafter detailed *371 the ages of these children, Barbara Ann Frank, Joan Betty Frank, and Alan I. W. Frank, were 16, 14, and 8 years, respectively.
On October 31, 1940, the trustees of petitioner met and adopted and signed the following resolution:
After reviewing the statement as of October 31, 1940, it was
Resolved that distributions be made to the beneficiaries of the Cecelia K. Frank Trust of 1931 for the year 1940 as follows:
| Barbara Ann Frank | $ 10,000.00 |
| Joan Betty Frank | $ 10,000.00 |
| Alan I. W. Frank | $ 10,000.00 |
such distributions to be made before the end of the year. * * *
At the time of the adoption of the above resolution, the cash *285 balance of petitioner was $ 201.61. Its estimated cash income from October 31 until December 31, 1940, was approximately $ 11,000. Among its assets were certain accounts receivable representing advances made by it to another family trust created by Robert J. Frank, of which his three children were beneficiaries. These advances were in excess of the sum of $ 20,000 and at the time of the adoption of the resolution by the trustees the anticipated income of the Robert J. Frank trust, between that date and the close of the year, was in excess of $ 20,000, which would be available for repayment to petitioner upon the advances made by it. The trustees of the Robert J. Frank trust were Cecelia K. Frank, Frank R. S. Kaplan, and William K. Frank, the last two named being also trustees of petitioner. At the time of the adoption of the resolution by the trustees of petitioner, it was their idea and intention that payment of the amounts set out in the resolution would be made as provided therein.
In the evening of the same day in which the above resolution by the trustees was adopted, Robert J. Frank advised his wife and their three children of the action taken that day by the trustees of*286 the Cecelia K. Frank trust, petitioner, directing the distribution of $ 10,000 to each of the three beneficiaries. It was thereupon suggested by Cecelia K. Frank, the mother, that, instead of making payment into a bank account or purchasing bonds for the children with this $ 30,000 giving rise to the present question, the amount be retained by the petitioner trust for the children and loaned by it to the Robert J. Frank trust. The latter trust was engaged at the time in financing the construction of an expensive home for occupancy by the family. Thereupon, Robert J. Frank inquired of the children as to whether or not it was their wish that this $ 30,000 be retained by the trust for their account and, upon their assent being given, he prepared for their signature a letter *372 to the trustees directing this action. This letter, signed by the three beneficiaries of the trust, was as follows:
November 1, 1940.
Trustees of the Cecelia K. Frank Trust of 1931
Robert J. Frank
Wm. K. Frank
Frank R. S. Kaplan
Pittsburgh, Pa.
Gentlemen:
It is our understanding that at a meeting of the Trustees held yesterday, a distribution of $ 10,000.00 was declared to each of us for the year 1940.
*287 It is our desire that the Trustees retain these funds as an account to be paid to us at a future date.
Yours very truly,
[Signed] Barbara Ann Frank
Barbara Ann Frank
Joan Betty FrankJoan Betty Frank
Alan I. W. FrankAlan I. W. Frank
Thereupon the bookkeeper in charge of the accounts of petitioner entered upon its books three debit items as recording distributions of $ 10,000 each to these three beneficiaries and three credit items of $ 10,000 each as accounts payable by petitioner to each of the beneficiaries.
Each of the above named beneficiaries included in his or her return for 1940 $ 10,000 income received from petitioner. Subsequently, but after the close of the year 1940, payment was made in full of the $ 10,000 account on the books of petitioner recorded as due Barbara Ann Frank and several thousand dollars was paid by petitioner upon each of the outstanding accounts due the other two beneficiaries, $ 3,000 being due and unpaid on each of these latter accounts at the time of the hearing. The advances by the petitioner trust to the Robert J. Frank trust, above mentioned, were repaid in full to petitioner. The Federal income tax return of the petitioner trust *288 for the year 1940 discloses a total net income of $ 52,776.24. Of this amount, $ 18,879.29 was derived from capital gains, which under the trust deed are to be added to principal. The return shows that during 1940, the sum of $ 10,000 was allocated to each of the settlor's three children; $ 10,156.25 to the United Jewish Fund; and $ 500 to the American Red Cross.
OPINION.
Petitioner trust, in computing the income tax of the trust estate for the taxable year 1940, deducted the amount of $ 30,000 as distributions to the beneficiaries within the meaning of section 162 *373 of the Internal Revenue Code. 1 Respondent disallowed this deduction as not having been "properly paid or credited during such year to any * * * beneficiary." The propriety of that action is the only issue submitted.
*289 To entitle a trust estate to a deduction under the provisions of such section, the trust agreement must either require the trustees to distribute the income currently, or must authorize the trustees to distribute or accumulate the income in their discretion. In the former case, the income is taxable to the beneficiary in the year earned, whether distributed or not; and, in the latter case, the beneficiary is taxable on such part of the income as is actually "properly paid or credited during such year to" him, and the trust estate upon the remainder. (Emphasis supplied.) Cf. Commissioner v. Stearns, 65 Fed. (2d) 371; certiorari denied, 290 U.S. 670">290 U.S. 670; Urquhart v. Commissioner, 125 Fed. (2d) 701; Estate of Austin C. Brant, 44 B. T. A. 1306.
We think this trust, as respects the beneficiaries who are minors, does not come within either of the classes, distributions to which are deductible by the trust. The primary beneficiaries of the trust were the children of the settlor. Their benefit was the obviously paramount purpose of the trust. Not only the children*290 of the settlor then in being, but all afterborn children, were to benefit thereunder. At the time of the execution of the trust and during the taxable year in question, all of settlor's children were minors.
Article II (v) directs the trustees to pay over the income to the settlor's children "now living or hereafter born" in equal shares during the term of their natural lives. But this direction is made subject "to all the provisions hereinafter contained."
Article V of the trust agreement relates exclusively to that period of time when the settlor's children are minors. It "[authorizes]" and "[empowers]" the trustees to reinvest such portions of the income not needed during their minority, which are to be paid over to them *374 upon reaching the age of 21 years. By the same article, the trustees are "[authorized] and [empowered]" to expend such part of the income as they may deem "fit and proper for the maintenance, support and education" of settlor's children.
Article V clearly indicates that it was settlor's intention that such income as the trustees did not expend for the purposes therein specifically mentioned must be accumulated. True, the term "accumulated" is*291 not mentioned. But it is not essential that directions to accumulate be expressed; they may be implied from the language used. Eberley's Appeal, 110 Pa. 95">110 Pa. 95; 1 Atl. 330; Commissioner v. Estate of Newbold, 158 Fed. (2d) 694. After the children reach their majority, article V of the trust agreement has no further application, since by article II (b) all the income of the trust is to be distributed at least quarterly. Subdivision (k) of article VII provides that "no title in said trust estate hereby created or in the income accruing therefrom or in its accumulation shall vest in any beneficiary prior to its actual distribution thereof by said Trustees to said beneficiary." (Emphasis supplied.) The only provision in the trust instrument having any bearing on the power to "accumulate" is that contained in article V directing the retention and reinvestment of income during the minority of the beneficiaries. It seems clear that it was the intention of the settlor that the income retained pursuant to article V shall be distributed as corpus when the child shall attain the age of 21. The minor*292 beneficiaries have no control over the income retained unless and until he or she reaches the age of 21 years. In case of his or her death during minority it is to go to the substituted beneficiaries under the various contingent provisions. It would seem certain that it was not the intent of the settlor that the income retained under article V should belong absolutely to the minor beneficiaries, subject to only delayed possession. Furthermore, the agreement contains a spendthrift clause. In article VII (j) it is provided that the beneficiaries "shall not have the right in anticipation to sell or assign said payments or distributions or have the power to dispose thereof by anticipation or otherwise * * *."
Under article III the trust is to continue for the period of 3 lives in being, the life of any child born within 9 months, and 21 years thereafter. Since the income only was to be paid to the children, the real objects of the settlor's bounty, it would appear to be natural and reasonable that settlor protect the interests of her minor children by providing for the accumulation of the income not needed for their maintenance, support, and education, so that in arriving at their*293 majority they would be in better position to undertake the responsibilities of adult life.
That, we think, was the intent of the settlor as revealed by the valid provisions of the trust when considered as a whole. See In Re Hirsh's *375 , 334 Pa. 172">334 Pa. 172; 5 Atl. (2d) 160; 54 Am. Jur., § 17 et seq. The provision set out in paragraph VI of the trust is, in our opinion, invalid. It leaves to a majority of the trustees, with the consent of the settlor's husband, Robert J. Frank, during his lifetime and without his consent after his death, 2 absolute control and discretion over the distribution of the trust fund, including income. It permits them thus to select, without limitation, those who shall take. They may select charities, but are not required so to do. The trust is, therefore, so indefinite and uncertain as to be incapable of enforcement and thus invalid. In re Kinike's Estate, 155 Pa. 101">155 Pa. 101; 25 Atl. 1016; Beck's Appeal, 116 Pa. 547">116 Pa. 547; 9 Atl. 942; Union Trust Co. of Pittsburgh v. McCaughn, 24 Fed. (2d) 459;*294 Restatement of the Law of Trusts, § 122. And, since the function of this provision is not necessary in effectuating the valid provisions of the agreement and is entirely independent of the paramount purpose of the settlor in creating the trust for the benefit of her children, the invalidity of article VI does not invalidate the trust agreement. Landram v. Jordan, 203 U.S. 56">203 U.S. 56; Culross v. Gibbons, 130 N.Y. 447">130 N. Y. 447; 29 N. E. 839; Oliver v. Wells, 254 N. Y. 451; 173 N. E. 676; 54 Am. Jur., § 24.
If then, it was the duty of the trustees to accumulate the income not needed for maintenance, support, and education of the minor beneficiaries, any attempted distribution for other purposes was unlawful and no proper credit could and did occur. And, of course, no bookkeeping entries could affect that conclusion. It is not the beliefs of the*295 interested parties which control, but the terms of the trust instrument and the lawful acts of the fiduciary under it. Commissioner v. Guitar Trust, 72 Fed. (2d) 544; see 34 B. T. A. 857, on remand.
Here the petitioner trust obviously did not "expend" the three items of $ 10,000 each, giving rise to the present dispute, "for the maintenance, support and education" of the children. These sums, as was required by the trust, were retained by the trustees and invested in loans to the other trust. We attach no significance to the letter of November 1, 1940, signed by the infant beneficiaries and addressed to the trustees. That letter confirms the trustees' determination that no part of the income for the taxable year was needed for the maintenance, support, and education of the children of the settlor. It merely directed the trustees to reinvest the amount of income allocated to them for that year, which is precisely what the trust instrument required the trustees to do under those circumstances.
The conclusion necessarily follows that none of the amount in controversy was "properly paid or credited during * * * [the taxable] *296 year to any * * * beneficiary," and none of it was, therefore, deductible by the petitioner trust. Respondent is affirmed.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 162. NET INCOME.
The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that --
* * * *
(b) 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, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year;
(c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, 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 properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary.↩
2. See article VII (c) and (d).↩