*2936 1. Where petitioner filed her petition within the time prescribed by section 274(a) of the Revenue Act of 1926, and therein referred to a letter which was not a final determination of a deficiency, and where an amended petition referring to the proper deficiency letter was subsequently filed, and where the deficiency appealed from in both petitions was the same in amount, held, that the Board has jurisdiction. The Peruna Company,11 B.T.A. 1180">11 B.T.A. 1180.
2. Where the executors of an estate, during the period of settlement and administration, paid or credited to a residuary legatee certain income of the estate, and where such action was subsequently approved by the proper court, and where during the taxable year the estate suffered a capital loss, held, that the amount of income so paid or credited to such legatee was returnable by her for tax, and, further, that she should not be permitted to deduct any part of the capital loss of the estate.
*709 This proceeding involves the redetermination of deficiencies in income taxes*2937 for the years 1920 and 1921 in the respective amounts of $259.39 and $1,037.42. Petitioner is a residuary beneficiary under the will of her father to the extent of 27 per cent of the residuary. The *710 above deficiencies arose by reason of the inclusion by respondent in petitioner's geoss income, without any deduction for capital losses, of 27 per cent of all dividends received by the estate during the taxable years, and also the inclusion in gross income of 27 per cent of all other income of the estate, less expenses, interest and taxes.
Respondent asserts the Board is without jurisdiction because this proceeding is not based upon any final determination made by him. The facts are stipulated and in accordance therewith, we make the following findings of fact.
FINDINGS OF FACT.
Petitioner is a beneficiary under the will of her father, Ralph L. Shainwald, who died testate, a resident of the State of New York, on December 10, 1919. The will of said Ralph L. Shainwald was admitted to probate by the Surrogate's Court of the County of New York, State of New York, January 7, 1920. The will provides for the payment of testator's debts and funeral expenses and contains*2938 bequests of specific articles of personalty. By the fifth article testator devised to his executors certain real estate and improvements thereon, upon the following trusts:
To receive the rents and profits therefrom for and during the minority of my grandsons, James and Donald Dreicer, or the survivor of them, and during such period to apply such part thereof as to my said executors and trustees may seem proper for the support, maintenance and education of my grandsons, James and Donald Dreicer, and Ralph L. Shainwald, 3rd, and to accumulate the remainder of all such rents and profits for the benefit of my said grandchildren and the survivor or survivors of them, and upon either of my said grandsons, James or Donald Dreicer, attaining the age of twenty-one(21) years, I direct my said executors to transfer and convey the said lots, with any buildings and improvements erected thereon, to my said grandsons, James and Donald Dreicer and Ralph L. Shainwald, 3rd, and the survivor or survivors of them, as tenants in common, and to pay over to them in equal shares the accumulated rents and profits in such manner that each of my said grandsons then surviving shall, after the proper allowance*2939 has been made for any of such rents and profits devoted to his support, maintenance and education as hereinabove directed, share in such rents, profits and accumulations thereof equally. I do further authorize and empower my said executors and trustees to sell the aforesaid lots together or in parcels, and any improvements and buildings thereon, at public or private sale, at such times and on such terms as to my said executors shall seem proper, and to make, execute and acknowledge proper deeds of conveyance therefor; and I do further direct that the proceeds of any such sale shall be thereafter held by my said executors and trustees for the term and upon the trusts hereinabove directed in this article of my will.
By the sixth, seventh and eighth clauses testator bequeathed in all 150 shares of the capital stock of the Standard Paint Co. of New Jersey upon trusts for other grandchildren. By the ninth *711 clause he bequeathed to his wife, Riette, $50,000 to be disbursed among such charities as should be approved by her. The tenth, eleventh, twelfth, thirteenth, fourteenth and fifteenth clauses read:
TENTH: I give to my sister, Seville Rich, fifty (50) shares of the capital*2940 stock of the Standard Paint Company, and, in the event of her death before my decease, I give said shares to her daughter, Alice Rich.
ELEVENTH: I give to Rocelia Hart, my wife's sister, fifty (50) shares of the capital stock of the Standard Paint Company.
TWELFTH: I give to Estelle M. Johnson the sum of ten thousand dollars ($10,000) in lawful money of the United States as a recognition of her many years of faithful and helpful service.
THIRTEENTH: I devise and bequeath all the rest, residue and remainder of my estate, of whatsoever kind or character and wheresoever situated, as follows:
(1) Forty per cent (40%) thereof to my dear wife, Riette Shainwald;
(2) Twenty-seven per cent (27%) thereof to my daughter, Marion Shainwald;
(3) Eighteen per cent (18%) thereof to my daughter, Maisie Dreicer;
(4) Fifteen per cent (15%) thereof to my wife, Riette Shainwald, and my son-in-law, Michael Dreicer, as trustees, in trust, for the following purposes: Said trustees shall hold, manage, invest and reinvest said trust property and the proceeds thereof, in such manner and in such investments as to them shall seem for the best interests of the beneficiaries herein named; and, as*2941 incidental to the trust, the trustees are vested with full power to sell, lease, mortgage and pledge the whole or any part of the trust property, or any property into which it may be converted, in such manner as may be permitted by law, and on such terms and conditions as in their judgment shall seem proper. The trust shall last during the lives of my grandchildren, Ralph L. Shainwald, 3rd, and James Huntington Dreicer. During the life of my son, Ralph L. Shainwald, Jr., my trustees shall, from time to time, and, as nearly as may be convenient, in monthly installments, pay to my said son the net income from the trust estate. Upon the death of my said son Ralph L. Shainwald, Jr., the trustees shall, thereafter, during the continuance of the trust, hold the trust property for the surviving child or children, as the case may be, of my said son, and shall distribute said property and the net income thereof, in the manner herein provided. If my said son shall leave a child or children him surviving, the interest or "proper share" of each child in the trust property and the net income thereof, shall be such part thereof as shall be represented by a fraction whose numerator is one, and*2942 whose denominator shall be the number indicating the number of surviving children of my said son. The trustees shall apply so much of the net income of the trust estate to the support, maintenance and education of such child or children of my said son as the Trustees shall deem proper, and they shall accumulate the remainder of the net income during the minority of such child or children, except as herein otherwise provided. Whenever such child, if only one, or, if more than one, then whenever one of them, shall reach the age of majority, such child reaching the age of majority shall thereupon receive its proper share of the accumulated income, after making suitable deductions and allowance for the portion of the net income which shall have been devoted to its support, maintenance and education, as herein provided; and such child, thereafter, during the existence of the trust, shall receive, at such regular intervals as may be convenient, its proper share of the net income of the trust property. And as often as a child shall reach the age of majority it shall receive, in like manner, its proper share of the undistributed *712 accumulations, and, thereafter, at such regular*2943 intervals as may be convenient, its proper share of the net income of the trust property.
Whenever a child of my said son shall reach the age of thirty (30) years, it shall receive its proper share of the principal of the trust property, and the trustee shall transfer and deliver the same accordingly. If, however, during the trust period, any child of my said son shall die before arriving at the age of thirty years, leaving issue surviving, then such issue shall immediately thereupon become vested with the share its parent would have taken if such parent had lived to reach the age of thirty years; and if any such child of my said son shall die before arriving at the age of thirty years without issue surviving, then its proper share shall immediately thereupon become vested in the surviving child or children of my said son, if any, the issue of any deceased child taking the share its parent would have taken if living. If my son, Ralph L. Shainwald, Jr., shall die without leaving any child surviving, or if all children who survive him shall die before reaching the age of thirty years, without leaving issue surviving, then the trust property, and all undistributed accumulations, *2944 shall vest immediately in my daughters, Maisie Dreicer and Marion Shainwald, and their issue, in equal shares, per stirpes, and not per capita.
If my grandchildren, Ralph L. Shainwald, 3rd, and James Huntington Dreicer, shall both die before all the surviving children of my son, Ralph L. Shainwald, Jr., shall have reached the age of thirty years, then, thereupon, anything herein contained to the contrary notwithstanding, the trust shall immediately terminate, and the trust property with all undistributed accumulations shall immediately vest in the issue then living, of my son, Ralph L. Shainwald, Jr., per stirpes, and not per capita, provided, however, that if any child, or issue of a deceased child, of my said son, shall therefore have received its proper share of the trust property, then the trust estate on such final distribution, shall be credited with the value of such proper share, to the end that equality among the children of my said son may be preserved; but if there be no such issue of my said son, then the trust property shall vest in Maisie Dreicer and Marion Shainwald, and their issue then living, per stirpes and not per capita.
I hereby authorize*2945 my trustees, in their discretion, during the continuance of the trust, to advance and pay over to any of the children of Ralph L. Shainwald, Jr., after such child shall have attained the age of twenty-three years, such portion of its proper share of the trust estate as in the absolute and unrestricted discretion of the trustees they shall deem wise.
The trustees shall have absolute and unrestricted discretion in making all adjustments for income advanced to any child of my son, Ralph L. Shainwald, Jr., and also in transferring and paying to any such child its proper share of the trust estate.
FOURTEENTH: I direct that the provisions herein made for the benefit of my wife, Riette Shainwald, shall be accepted by her in bar and in lieu of all dower and right of dower in my estate. I direct that all legacies and bequests, whether the same are made absolutely or in trust, are to be free of any legacy or succession tax, and that every such tax shall be paid out of my residuary estate.
FIFTEENTH: My wife and children know the deep interest that I have always taken in the affairs of the Standard Paint Company, which was founded by me, and how I have devoted the best years of my life*2946 to building it up; and I hope, therefore, that they will always find it consistent with their interests, to continue to hold their stock in the Standard Paint Company, or act together *713 in the event of disposal thereof; and that they will always consult among themselves about its affairs, and that they will cooperate harmoniously in promoting its welfare. I hope that its good name and prosperity will always be a matter of family pride with them.
The sixteenth and last clause nominates his wife, Riette, and his son-in-law, Michael L. Dreicer, as executors.
On November 13, 1926, petitioner married Granville Sevier.
The estate of Ralph L. Shainwald was in course of administration in the Surrogate's Court of New York County during and subsequent to the taxable years 1920 and 1921. On April 4, 1922, the Surrogate's Court entered a decree of accounting, in which it was recited, among other things, that the executors were charged with income in the amount of $120,630.68 and credited with income disbursed in the amount of $76,622.54. This accounting was approved and the disbursements allowed.
The executors filed an income-tax return for the year 1920 on Form 1040. *2947 This return reported the following amounts of gross income: interest, $3,627.64; dividends, $47,464.25; and interest on Liberty bonds $50.67, and a loss resulting from the sale of securities belonging to the estate in the amount of $20,537.38. In the return there was deducted the amount of $18,500 paid to beneficiaries; interest paid $2,288.45; taxes paid, $847.97; and expenses, $150. The return reported net income in the amount of $8,818.76, no part of which was subject to the normal tax and a surtax in the amount of $74.56. The sum of $18,650 returned as paid to beneficiaries was paid out of dividends received by the estate to the residuary legatees and as follows: Riette H. Shainwald, $4,500; Marion Shainwald, $7,500; Ralph L. Shainwald, Jr. (trust) $6,500, and Maisie Dreicer nothing, making a total of $18,500.
Respondent, after an examination by a revenue agent, accepted as correct all the amounts of income, losses and deductions as reported, but determined that the estate was not taxable as an entity, with the result that no tax was found due.
Petitioner reported in her individual return for 1920 the amount of $7,500 dividends received from her father's estate. Respondent*2948 has determined that to this should be added the amounts of $5,315.35 and $92.13, or a total of $5,407.48. The amount of $5,315.35 represents 27 per cent of the total amount of dividends received by the executors ($47,464.25) less $7,500 returned, and the amount of $92.13 represents 27 per cent of the difference between all other gross income reported, except interest on Liberty bonds, and the deductions for interest, taxes and expenses.
For the year 1921, the executors reported on Form 1041, the following amounts of gross income: interest received, $4,933.76; dividends from domestic corporations, $52,324.95; dividends from foreign *714 corporations, $3,000, and took the following deductions: - loss on sale of securities owned by the estate, $31,562.19; taxes paid, $361.58; expenses paid, $758.75. The return contains the following:
| BENEFICIARIES' SHARES OF INCOME AND CREDITS | |||
| 1. Name and Address of Each Beneficiary. (Designate nonresident aliens.) | 2. Percentage of Beneficial Interest. | 3. Dividends (Item 7 above). | 4. Other income (Item 17 minus item 7) |
| Riette Shainwald, 66 Madison Avenue, New York City | 40 | $20,929.98 | 1 $9,899.50 |
| Marion Shainwald, 667 Madison Avenue, New York City | 27 | 14,127.73 | 1 6,682.16 |
| Maisie Dreicer, 1046 Fifth Avenue, New York City | 18 | 9,418.49 | 1 4,454.78 |
| Ralph L. Shainwald, 318 Center Avenue, New Rochelle, N.Y | 15 | 7,848.75 | 1 3,712.32 |
| $52.324.95 | 1 $24,748.76 |
Respondent, after an examination by a revenue agent, accepted as correct all of the above amounts of gross income and deductions, except that he determined that the loss arising from the sale of securities amounted to $18,579.36, which is the correct amount of said loss, and, further, that no tax was due from the estate. He determined that the income of the estate was distributable to the residuary legatees as follows:
| DISTRIBUTION OF INCOME, YEAR ENDED DECEMBER 31, 1921 | ||||
| Name and address | Per cent | Cash dividends | Other income | Total |
| Riette H. Shainwald, 677 Madison Avenue, New York City | 40 | $20,929.87 | $2,725.37 | $23,655.35 |
| Marion Shainwald, 677 Madison Avenue, New York City | 27 | 14,127.73 | 1,839.63 | 15,967.36 |
| Maisie S. Dreicer, 1046 Fifth Avenue, New York City | 18 | 9,418.49 | 1,226.42 | 10,644.91 |
| Ralph L. Shainwald, Jr., 718 Center Avenue, New RochelleN.Y | 15 | 7,848.75 | 1,022.01 | 8,870.76 |
| Total | 100 | 52,324.95 | 6,813.43 | 59,138.38 |
The amount of $52,324.95 represents a total amount received by the estate in the shape of dividends from domestic corporations. The amount of $6,813.43 represents*2950 the difference between all other gross income received by the estate and the deductions for taxes and expenses.
Petitioner in her individual return for 1921 reported as income the dividends received by her from the estate in the amount of $14,127.73, and took as a loss the amount of $6,682.16, these being the amounts shown on the returns of the executors as attributable to her. Respondent disallowed the loss of $6,682.16 and added to gross income of petitioner the amount of $1,839.63, being the amount of "other income" above determined by respondent to have been distributable to petitioner from her father's estate.
*715 OPINION.
MILLIKEN: We will first dispose of the question of jurisdiction raised by respondent. The record discloses the following situation: On February 25, 1926, the day before the Revenue Act of 1926 was approved, the following letter was mailed from respondent's office to petitioner:
MISS MARION SHAINWALD,
667 Madison Avenue, New York, New York.
MADAM:
In accordance with the provisions of Section 274(d) of the Revenue Act of 1924, there has been assessed against you an income and profits tax amounting to $1,296.81, for the taxable years*2951 1920 and 1921, the details of which are set forth in the attached statements.
Under the provisions of Section 279(a) of the Act you have the right to file with the Collector of Internal Revenue, within ten days after notice and demand for payment, a claim for abatement of this tax or any part thereof. The claim should have attached to it all evidence and data upon which you rely in support thereof, and should be accompanied by a bond not exceeding double the amount of the claim, with such sureties as the Collector deems necessary. When the claim is received by the Collector it will be transmitted to the Commissioner of Internal Revenue, Washington, D.C., who will notify you of the action taken.
Respectfully,
C. R. NASH,Assistant to the Commissioner.
By (Signed) A. LEWIS,
Head of Division.
On April 21, 1926, respondent mailed to petitioner the following letter:
Miss MARION SHAINWALD,
667 Madison Avenue, New York, N.Y.
MADAM:
In accordance with the provisions of Section 279(a) of the Revenue Act of 1926, there has been assessed against you an income and profits tax amounting to $1,296.81 for the taxable years 1920 and 1921, the details of which*2952 are set forth in the attached statement.
In accordance with the provisions of Section 274(a) of the same Act, you are allowed sixty days (not counting Sunday as the sixtieth day) from the date of the mailing of this letter within which to file a petition with the United States Board of Tax Appeals, contesting in whole or in part the correctness of this determination.
Respectfully,
D. H. BLAIR, Commissioner.
On April 24, 1926, petitioner filed her petition with the Board. The petition contains the following allegations:
(2) The notice of deficiency (copy of which is attached) dated February 25, 1926, was mailed to the petitioner and was received subsequent to February 25, 1926, and states a deficiency of $1,296.81.
*716 (3) The taxes in controversy are income taxes for the calendar years 1920 and 1921 and are less than $10,000, to wit:
| For 1920 | $259.39 |
| For 1921 | 1,037.42 |
| Total | 1,296.81 |
On October 28, 1926, respondent filed his answer, which went only to the merits. The proceeding was, by an order dated February 20, 1928, placed on the day calendar for hearing on April 19, 1928. On the latter date the case was called for hearing, whereupon*2953 respondent moved that the proceeding be dismissed on the ground that the appeal was prosecuted from the letter of February 25, 1926, which was not a final determination. Thereupon the following order was entered:
This proceeding having come on for hearing before Division #11, on April 19, 1928, and counsel for the respondent having moved to dismiss for lack of jurisdiction, and counsel for the petitioner having requested leave to file an amended petition, without objection by counsel for the respondent, it is hereby
ORDERED that the proceeding be and the same is hereby continued to the Day Calendar of May 21, 1928, for further hearing; and that the counsel for the petitioner be and is hereby granted leave to file an amended petition.
In pursuance to said order, petitioner, on May 10, 1928, filed her amended petition which contains the following:
(2) The notice of deficiency dated April 21, 1926 (copy of which is attached and marked Exhibit "A") was received by the petitioner April 23, 1926
(3) The taxes in controversy are income taxes for the calendar years 1920-1921 and are to wit:
| For 1920 | $259.39 |
| For 1921 | 1,037.42 |
| Total | 1,296.81 |
It will be observed*2954 that the original petition was filed three days after the letter of April 21, 1926, was mailed. It was therefore filed within the time prescribed by section 274(a) of the Revenue Act of 1926. The deficiency therein appealed from is precisely the same in amount as that set forth in the letter of April 21, 1926, and also in the amended petition. The only error in the original petition is that it referred to letter of February 25, 1926. This error was cured by the allegations of the amended petition. The situation presented is squarely within the rule laid down in , and for the reasons there given the motion to dismiss must be overruled.
We now proceed to the discussion of the merits. In their returns for the year 1920, the executors of the estate of Ralph L. Shainwald reported that they had paid petitioner $7,500 in the shape of dividends *717 received by them from corporations, and petitioner included these dividends in her return for the same year. The executors also took deduction for a loss arising from the sale of securities owned by the estate. Respondent has determined that to the amount returned by petitioner there*2955 should be added 27 per cent of all other dividends received by the estate and also 27 per cent of all other income of the estate less deductions other than capital losses. He has in fact disregarded the estate as a taxable entity in so far as income is concerned, and treated it as such as entity with respect to capital losses. Section 219 of the Revenue Act of 1918 in effect provides that the income of an estate in the process of settlement is taxable to the fiduciary, subject to the provision that such fiduciary may deduct the amount of any income "properly paid or credited to any legatee, heir or other beneficiary." It is not all income that is credited or paid to a legatee that may be deducted. Cf. , and . Such income to be deductible must be "properly" paid or credited. In the instant proceeding we have no bequest of income to the petitioner but only the devise and bequest of 27 per cent of what remained of the estate after the payment of all charges, including all death taxes, debts and legacies. There is no provision in the will of Ralph L. Shainwald*2956 which creates, in so far as the residuary beneficiaries are concerned, the right to any income which would separate such income from the income of the estate and make it taxable to the residuary beneficiaries, whether received by them or not and irrespective of the fact that such income might exceed the taxable income of the estate. Cf. .
Petitioner has reported for the year 1920 all the income she received from the estate and the deficiency for that year arises solely from the inclusion by respondent in her gross income of amounts of income of the estate which were not bequeathed to her as income and which were not during the taxable year paid to her or credited to her under any order of court. In so doing respondent erred. See .
We next take up the deficiency for the year 1921. Petitioner is required by section 219(d) of the Revenue Act of 1921, to include in her return for the year 1921 that part of the income of her father's estate "which pursuant to the instrument or order governing the distribution is distributable" to her. A distribution was made to her by*2957 the executors and we must presume, the contrary not appearing from the terms of the will or from the evidence of record, that the executors acted in the matter of distribution pursuant to the general powers conferred upon them and that the decree of the Surrogate's Court of April 4, 1922, whereby the distribution of the executor *718 of $76,622.54 was approved, was simply another step in affirming the acts of the executor. Such ratification was tantamount to previous authority. Under these circumstances, respondent's action in including in petitioner's gross income the amount of income paid or credited by the estate to her and which she concluded in her return was proper.
Petitioner contends that she has the right to deduct from her gross income 27 per cent of the capital loss of the estate. It is clear that section 219 imposed a tax upon an estate in the process of administration as a distinct taxable entity, separate and apart from its beneficiaries, and it is further clear that the estate had the right to take such capital loss as a deduction. So far as the deductibility of capital losses is concerned, we can see no distinction with respect to income taxation between*2958 an estate in the process of administration and a trust. Both are treated as taxable entities by section 219. Further, the capital loss of the estate did not arise out of any trade or business carried on by petitioner nor in any transaction entered into by her for profit. (Section 214(a)(1) and (4). This contention must be decided adversely to the petitioner on the authority of ; ; ; ; and . See also in this connection, , and ; .
Lastly, we are of the opinion, for the reasons above given, that the respondent erred in including in petitioner's gross income for the year 1921 the amount of $1,839.63, which was income of the estate and which was not credited or paid to petitioner during that year.
Judgment will be entered for petitioner, with respect to the year 1920. Judgment will*2959 be entered under Rule 50, with respect to the year 1921.
Footnotes
1. Denotes figures appearing in red ink on return. ↩