*1008 Petitioner, being the residuary legatee under his mother's will, the beneficiary under a real estate trust created by her, and one of the principal beneficiaries under a trust created by her to hold corporate stocks, used a portion of his share of the income, distributed to his guardian by the trustee of the last-mentioned trust, for the payment of additional state inheritance taxes assessed against the estate by reason of the inclusion of the property contained in the real estate trust in the mother's gross estate. The trustee did not include the amount paid to petitioner's guardian in its gross income, but included only the amount remaining in its hands after distribution to the beneficiaries. Held, the entire amount of the distribution made to petitioner's guardian was properly included in petitioner's gross income for the taxable year. Helvering v. Butterworth,290 U.S. 365">290 U.S. 365.
*637 This is a proceeding for the redetermination of a deficiency in income tax for the year 1931 in the amount of $4,298.59. *1009 Respondent disallowed the deduction of $23,710.48 claimed in petitioner's return of income as taxes paid. Petitioner, while conceding that he is not entitled to the deduction, contends that the sum was erroneously included in his gross income.
FINDINGS OF FACT.
Petitioner, a resident of Gates Mills, Ohio, filed an income tax return for the year 1931 with the collector of internal revenue for the eighteenth Ohio district at Cleveland, Ohio. He reported a gross income of $88,047.22, which included $79,799.83 received by him from the trustee of a trust created by his mother, Sarita Oglebay Russel, and deducted as "Taxes Paid" $23,942, which included the amount of $23,710.48 here in controversy.
Sarita Oglebay Russel, hereinafter referred to as the settlor or the decedent, died testate July 10, 1930. Her estate was duly administered in the Probate Court of Cuyahoga County, Ohio. Petitioner was the only child who survived her.
The decedent, under date of May 31, 1922, executed a trust agreement by which she conveyed to the predecessor of the Central United Bank of Cleveland, Ohio, certain real estate in said city. The trust instrument provided that the income was to be*1010 paid to her for and during her life and after her death to her children. Provision was made for the distribution of the corpus of the estate to the "living issue" of the settlor and, in the event that no issue survived, certain churches and hospitals were to have the corpus in the proportions enumerated in the trust instrument. This trust will be referred to as the real estate trust. Crispin Oglebay, a cousin of petitioner, was a cotrustee under this trust after the death of the decedent.
Under date of July 6, 1927, the decedent created another trust, which hereinafter will be referred to as the 1927 trust. To the trustees therein named - the Central United National Bank, her husband, Albert W. Russel, Crispin Oglebay, and two others - she transferred 5,000 shares of stock in the E. W. Oglebay Co. The net income was to be paid to the settlor for her life and after her death the trustees were to "pay all taxes and assessments that may from time to time be levied or imposed upon the principal or income of the said Trust Estate, including any inheritance, succession and estate taxes that may be levied or assessed in respect of the Trust Estate or any part thereof, * * *." After*1011 the death of the settlor - provided the trust, which was revocable, had not been terminated - 15 percent of the net income was to be paid to Albert W. Russel for his life and 15 percent of the net income was to be paid to Crispin *638 Oglebay for his life. The remainder, or 70 percent, of the income was to be held and distributed to the children of the settlor living at the time of her death, share and share alike, subject, however, to the provision that, until the beneficiary should have reached the age of 25 years, "the Trustees shall pay so much of his or her share as in their judgment is reasonable and necessary for the maintenance, support and education of such beneficiary."
Albert W. Russel and Crispin Oglebay were named as executors in the will of the decedent. In her will the decedent specifically ratified and confirmed the 1927 trust agreement and provided that, if for any reason any property held under it at the time of her death should become a part of her estate, then she gave, devised, and bequeathed all of such property to the trustees named therein in trust under the terms and conditions set forth therein. The will provided that all of decedent's just debts, *1012 funeral expenses, inheritance taxes on all legacies and devises and Federal estate tax should be paid as soon after her decease as convenient and also provided for the payment of certain specific legacies. The rest and residue of the estate, whether real, personal or mixed, was devised and bequeathed to the petitioner.
At the time of the death of decedent the petitioner was 18 years of age. Crispin Oglebay was, during the year 1931, as well as prior thereto and thereafter, the guardian of the estate of the petitioner.
In the itemized statement of assets and liabilities filed in the probate court with the application for determination of state inheritance tax October 17, 1930, there were included, as a part of the estate of the decedent, in addition to cash, accounts receivable, real estate, jewelry, and miscellaneous items, the 5,000 shares of stock of the E. W. Oglebay Co. held in trust under the 1927 trust. Such statement contained a note to the effect that the value of the corpus of the real estate trust was not included therein for the reason that it did not constitute a part of the estate of the decedent. The estate as therein listed was appraised and there was assessed*1013 against it a tax in the aggregate amount of $149,633.22, of which $130,589.14 was assessed on the value of the succession to the property contained in the 1927 trust. The tax on the succession to the property contained in the 1927 trust, after deducting exemptions and discount for prompt payment, amounted to $120,142.29, and was paid in 1930 by the trustees.
Subsequently a supplemental itemized statement of assets and liabilities and application for determination of inheritance tax was filed, in which the real estate comprising the corpus of the real estate trust was listed, with the notation that it constituted no part of the decedent's estate and therefore was not subject to inheritance tax in Ohio. However, on or about the 10th day of December 1930 the *639 Probate Court of Cuyahoga County, Ohio, found, among other things, that the conveyance to the trustees of the real estate "was made in contemplation of death or to take effect in possession or enjoyment at or after death of the" decedent, and the court thereupon determined that an additional tax of $24,698.42 was due. Twenty thousand one hundred and twenty dollars of the additional tax was assessed upon the petitioner's*1014 succession and the balance was assessed against other legatees. The court found that the tax accrued on the 10th day of July 1930 and that it should be paid by the executors of the estate.
Thereafter the executors of the estate, the trustees of the two trusts, and the guardian of the petitioner had numerous conferences with reference to the payment of the additional inheritance tax. At that time the value of the assets in the estate, exclusive of the property held by the two trusts, was sufficient to pay all specific legacies and administration and other expenses, but not to pay the inheritance taxes. The property in the real estate trust consisted largely of vacant real estate used for parking purposes and for a gasoline station. The net income from that trust for 1930 was $1,125.17 and for 1931, $4,490.71. There was practically no cash available in the trust for the payment of the additional inheritance taxes, and the guardianship estate did not have sufficient cash on hand to pay them. While the trustees of the 1927 trust had ample cash, they did not feel that they were authorized to use it in the payment of the inheritance taxes. The trustees, executors, and guardian*1015 finally worked out an agreement under which the guardian was to pay the additional inheritance taxes and be reimbursed out of the share of the petitioner in the net income of the 1927 trust. Inasmuch as he did not at that time have sufficient cash on hand, the Central United National Bank, the corporate trustee, loaned him, as guardian, $10,000 on his promissory note. On March 9, 1931, therefore, the guardian used the sum borrowed and part of a distribution which he had received from the trustees of the 1927 trust in January 1931, to pay the additional inheritance taxes in the amount of $24,698.42, less discount of $987.94, or $23,710.48, to the treasurer of Cuyahoga County. The receipt therefor, issued by the county treasurer, acknowledges receipt of such payment from the executors of the estate of the decedent.
On April 13, 1931, the guardian of petitioner, having received a distribution of $16,524.83 from the 1927 trust, paid the note in the amount of $10,000 plus interest thereon in the amount of $48.62. The trustees of the 1927 trust distributed to the guardian of petitioner during 1931 a total of $79,799.83. In its Federal fiduciary return for 1931 the trustee of the*1016 1927 trust reported the net income of the trust *640 for 1931 to be $161,447.36, and the "Beneficiaries Shares of Income and Credits" to be the following:
| Courtney Burton | $79,799.83 |
| Albert W. Russel | 24,224.96 |
| Crispin Oglebay | 24,224.96 |
| Sarita Oglebay Russel Trust | 33,197.61 |
No claim was made in this return for the deduction of any inheritance taxes paid. The books of the trustee contained no notation that any part of the distribution made to petitioner in 1931 was for reimbursement imbursement of inheritance taxes paid by his guardian, or as a payment of taxes.
In the income tax return of the corporate trustee for 1931 it reported only the $33,197.61 which was not distributed to the beneficiaries of the trust. In the Federal income tax return filed by the guardian of petitioner for 1931 there was reported and included in taxable income the distributions received from the 1927 trust in the aggregate amount of $79,799.83 and the amount of the additional inheritance taxes of $23,710.48 was deducted from taxable income as taxes paid. The respondent disallowed this deduction.
OPINION.
*1017 MELLOTT: Petitioner concedes that he is not entitled to the deduction claimed in his return. The law is well settled that a deduction for estate, inheritance, legacy, or succession taxes may be allowed "only to the estate." (Sec. 23(c), Revenue Act of 1928) , affirming ; . The sole issue submitted for our determination, as set out in the petition and argued upon brief, is whether or not the amount was properly included in petitioner's gross income for the taxable year.
The applicable statute is section 162 of the Revenue Act of 1928, a portion of which is shown in the margin. 1
*1018 *641 The gist of petitioner's argument is that since "the $23,710.48 came into the hands of petitioner's guardian for the agreed and specific purpose in part to apply on the inheritance tax and in part to repay a loan applied on said tax as a method of paying said tax out of the income from said stock trust, none [of it] * * * came into said guardian's hands as income to petitioner's estate because all thereof went through the guardianship estate merely as an instrumentality for getting the tax paid out of the trust stock income", the trust instrument (1927 trust) having provided that the trustees should pay all taxes levied or imposed upon the principal or income of the trust estate, including inheritance, succession, and estate taxes which might be levied against it.
In , we had before us the question whether or not the amount of the inheritance and succession taxes paid by the trustees of the 1927 trust was taxable to the beneficiaries as income received by them during the year in which the payment was made. We ruled that such amount was not income because of the fact that the trust instrument did not give the beneficiaries*1019 a present right to the portion of the income required for the payment of such taxes. But we have no such question here. The real estate trust did not require that the income from it be used to pay the inheritance and succession taxes and the payment in question was not made by the trust which acquired the property, the transmission of which gave rise to the tax. Nor was the tax in question paid by the 1927 trust. It owed none of the additional tax, the entire amount thereof being assessed against the estate by reason of the inclusion of the real estate in it. Petitioner, not as a beneficiary under the 1927 trust, but only as a beneficiary under the real estate trust and as a legatee under his mother's will, was interested in having the additional tax paid in order to protect his real estate. The executors did not wish to use the funds in the general estate to pay the additional tax, since to do so would have necessitated either the deferring of, or the reducing of, the payments to the specific legatees under the will of the decedent. The 1927 trust, having paid the inheritance and succession taxes due by virtue of including the corpus in the estate of the decedent, naturally*1020 did not wish to pay the additional tax upon the real estate. The most reasonable thing to do was just what was done, namely, to call upon the one who was most interested in preserving the corpus of the real estate trust to pay the tax due. The modus operandi adopted for that purpose is fully shown in our findings.
Under the circumstances we think it must be held that the amount distributed to petitioner's guardian constituted income. The whole scheme of the taxing act, as pointed out by the Supreme Court in , is "to tax in some way the whole income of all trust estates. If nothing was payable to beneficiaries, *642 the income without deduction was assessable to the fiduciary. But he was entitled to credit for any sum paid to the beneficiary within the intendment of that word, and this amount then became taxable to the beneficiary. Certainly, Congress did not intend any income from a trust should escape taxation unless definitely exempted." The 1927 trust had an income of $161,447.36. It reported and included in its taxable income $33,197.61, deducting not only the amounts paid to the beneficiaries Russel*1021 and Oglebay, each of whom received 15 percent, but also the $79,799.83 paid to petitioner's guardian. The act (sec. 162, supra ) clearly justifies the inclusion of the entire amount received by petitioner in his gross income, and, since he is not entitled to the deduction claimed, the deficiency determined by the respondent must be approved.
It would serve no useful purpose to discuss or decide what the tax situation would have been if the executor of the decedent's estate, the trustee of the 1927 trust, or the trustee of the real estate trust had paid the additional taxes. Cf. ; Blanch A. ; ; affd., ; the ; affd., ; (on appeal to C.C.A., 6th Cir.); .
Judgment will be entered for the respondent.
Footnotes
1. 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. ↩