*1556 The petitioners are life beneficiaries under certain trusts created pursuant to the will of a decedent who died a resident of the State of New York. Included in the trusts so created were two leaseholds on property in New York. Protracted litigation ensued on account of the administration of the estate and the setting up of the trusts provided by the will. After the highest court of New York had rendered its decree, requiring that specific property be set aside in the trusts in question to produce the requisite income for the beneficiaries, the final judgment was entered by the surrogate's court on the basis of an accounting by the trustees in which an amount was reserved by them from the income of the trusts on account of the exhaustion of the leaseholds included in the trusts. The amounts so set aside by the trustees have never been distributed to the beneficiaries, but have been considered a part of the corpus of such trusts. Held, that the amounts so retained by the trustees do not constitute taxable income to the beneficiaries.
*244 These proceedings were consolidated for hearing and involve deficiencies in income tax as determined by the Commissioner as follows:
| Petitioner | 1923 | 1924 |
| Rita M. Kohler White | $2,525.46 | $1,088.76 |
| Vera M. Kohler Alker | 2,518.18 | |
| Olga K. Miglietta | 2,377.58 | 844.43 |
In Docket No. 36113, the original petition was filed in the name of Vera M. Kohler Erbe, but she has since married a second time, and, by proper motion, a substitution has been made in order to show the name assumed under her second marriage.
The only question involved is whether there should be added to the income of the petitioners, who are beneficiaries of three trusts created by the will of their father, certain amounts which were retained by the trustees out of the gross receipts of the trusts to make good the exhaustion of two leaseholds comprising a part of the principal of the trust property. A stipulation was entered into between the parties, from which, and from certain facts admitted in the answer of the Commissioner, we make the following findings.
FINDINGS OF FACT.
The petitioners are individuals residing in New York City.
Charles Kohler, father*1558 of the petitioners, died on June 4, 1913, having made his last will and testament on July 15, 1912. He left him surviving Veronica M. Kohler, his widow, and three daughters, Olga V., Vera M., and Rita M., then aged, respectively, about nineteen, twelve and ten years. During the time intervening between the date of decedent's death and the commencement of these proceedings the daughters have reached maturity, have married, and are now Olga K. Miglietta, Vera M. Kohler Alker (Vera M. Kohler Erbe by first marriage) and Rita M. Kohler White.
Decedent left a large estate and provided for its disposition in the will referred to above. The portion of the will providing for the trusts here in question follows:
Eighth: All the rest, residue and remainder of my estate, both real and personal, and of whatsoever description and wheresoever situated, I give, devise and bequeath unto my trustees hereinafter named, in trust, as follows:
First: To set aside out of my said residuary estate a share or portion thereof sufficient for the purpose, and to hold the same in trust, for my daughter, Olga V., investing and reinvesting the same from time to time and paying over the sum of Twenty-Five*1559 Thousand Dollars ($25,000) per annum, payable semiannually during her natural life, and in addition thereto when she arrive at the age of twenty-five (25) to pay over to her the sum of One Hundred Thousand *245 Dollars ($100,000); when she arrive at the age of thirty-five (35), a further sum of One Hundred Thousand Dollars ($100,000); and when she arrive at the age of forty-five (45), a further sum of One Hundred Thousand Dollars ($100,000), and upon her death, to pay over the balance remaining unpaid of the share or portion of my said residuary estate so set aside for her benefit as aforesaid, to such of her issue as shall be living at her death, share and share alike. Should any of her issue die before her, leaving issue at her death, then such issue shall take in equal shares the share the parent would have received had he or she survived her death. Should my said daughter, Olga, die leaving no issue surviving her, then, in that event, the said share or portion herein provided for her shall pass into and become part of my residuary estate.
[Then followed a second and a third subdivision exactly the same in every respect as the first subdivision quoted above except that*1560 the second provides for a like trust for his daughter Vera M., and the third for a like trust for his daughter Rita M., instead of his daughter Olga V.]
Fourth: To set aside out of my said residuary estate, a share or portion thereof sufficient for the purpose, and to hold the same in trust for my wife, Veronica M. Kohler, investing and reinvesting the same from time to time and paying over the sum of Twenty-Five Thousand Dollars ($25,000) per annum payable semi-annually during her natural life.
The residuary clause in the will reads as follows:
Eighteenth: Should there be any balance or residuary estate remaining after the bequests hereinbefore provided for, including the trusts also hereinabove created, then, I give, devise and bequeath the same to my said children to be divided between them share and share alike.
Letters testamentary were issued to the executors named in the will, who duly entered upon their duties as such. By decree entered in the surrogate's court in the city of New York on March 16, 1915, the trustees appointed under the will received property having a value of $4,756,384.71. On March 16, 1916, the trustees caused to be entered on their books four*1561 items as follows:
| Veronica M. Kohler | $881,821.24 |
| Olga V. Florman (now Olga K. Miglietta) | 1,182,028.89 |
| Vera M. Kohler | 1,182,028.89 |
| Rita M. Kohler | 1,182,028.89 |
| Rita M. Kohler | 1,182,028.89 |
| Total | 4,427,907.91 |
Subsequent to the making of the foregoing bookkeeping entries proceedings were commenced in the surrogate's court in New York City, first, for a construction of the will, and, second, for an accounting by the executors and trustees, which proceedings were consolidated. Appeal was taken from the decision of the surrogate's court in such proceeding to the New York Supreme Court, Appellate Division, which modified and affirmed the decision of the lower court, the opinion of the Appellate Division being officially reported as . A further appeal was then taken *246 to the Court of Appeals of the State of New York, which rendered its decision on May 31, 1921, reversing the decree of the lower courts. The case was then returned to the surrogate's court, which on August 12, 1921, entered its order of final judgment and directed the trustees to establish separate trusts as directed by the Court of Appeals*1562 in its opinion and to submit to an accounting. The Court of Appeals, in its opinion, held that the mere bookkeeping entries which had theretofore been made upon the books of the trustees were insufficient to establish the trusts required under the will, and directed that the duty of forming the trusts should now be performed as of March 16, 1915. The court further held:
The testator has clearly directed that there shall be set aside for his daughters respectively an amount sufficient for the purpose of producing $25,000 per annum payable to them semi-annually during their lives respectively, and also in addition thereto $100,000 to be paid to them as they respectively arrive at the age of twenty-five years, and again when they arrive at the age of thirty-five years, and again when they arrive at the age of forty-five years.
* * *
It cannot, it seems to me, be said that the testator intended that the amounts set aside out of the gross residuary estate, as the shares or portions thereof sufficient for the purpose of producing the income to be paid to the daughters, as provided by the eighth paragraph of the will, should remain uncertain, varying or shifting amounts. *1563 Sufficient amounts should be set aside for the purposes, as provided by the eighth paragraph of the will, and the amounts, so set aside, are by the testator given upon the death of his daughters respectively, to their issue respectively, share and share alike. It is only when an amount so set aside is, through fraud, inequity or mistake, found to be too small or too large that it can no changed, and then only through an application to the court to have the decree, pursuant to which the amount was originally fixed and determined, changed after due hearing of all persons interested. (; .) The principal of such trust funds when set aside, will, subject to the trusts, become vested in those to whom the residue thereof is given under the will. Unless the excess of principal, if any, set aside in the several trusts as provided by the eighth paragraph of the will, remains the property of the residuary legatees under the eighteenth paragraph of the will, I see no basis for holding that any excess of income on such trusts funds should be payable to such residuary legatee.
The trusts*1564 were established, as of March 16, 1915, as directed by the Court of Appeals of New York, and on May 23, 1927, the surrogate's court entered its decree of accounting and approved the accounts of the trustees as therein stated, which decree was the final decree entered in the proceeding. The seven trusts thus created were designated as follows:
Trust A, Olga V. Kohler.
Trust B, Vera M. Kohler.
Trust C, Rita M. Kohler.
Trust D, Veronica M. Kohler.
Trust No. 1, Olga V. Kohler.
Trust No. 2, Vera M. Kohler.
Trust No. 3, Rita M. Kohler.
Tursts A, B, C and D were the four trusts created to pay to the widow and each of the three daughters the annual sum of $25,000. *247 Trusts Nos. 1, 2 and 3 were the trusts created to pay to each of the three daughters the sum of $100,000 when they reached the ages of 25, 35 and 45, respectively.
Cash, notes receivable and stocks were placed in Trusts Nos. 1, 2 and 3, the total amount of each of such trusts as of March 16, 1915, being $310,119. The four trusts A, B, C and D received as of March 16, 1915, the following assets:
| Value | |||||
| Assets | Trust A | Trust B | Trust C | Trust D | Total |
| Cash | $507.02 | $605.01 | $490.31 | $1,916.52 | $3,518.86 |
| 2,800 shares Kohler & Campbell, Inc | 103,068.08 | 103,068.08 | 103,068.07 | 103,068.08 | 412,272.31 |
| 4,205 shares Auto Pneumatic Action Co | 155,548.00 | 155,548.00 | 155,548.00 | 155,696.00 | 622,340.00 |
| 7,420 shares Autopiano Co | 225,753.50 | 225,753.50 | 225,753.50 | 225,753.50 | 903,014.00 |
| 570 shares Brambach Piano Co | 10,725.00 | 10,725.00 | 10,650.00 | 10,650.00 | 42,750.00 |
| 1,008 shares Milton Piano Co | 32,256.00 | 32,256.00 | 32,256.00 | 32,256.00 | 129,024.00 |
| 2,800 shares Standard Pneumatic Action Co | 87,500.00 | 87,500.00 | 87,500.00 | 87,500.00 | 350,000.00 |
| Leaseholds owned: | |||||
| South side of West 51st St | 25,000.00 | 25,000.00 | 25,000.00 | 25,000.00 | 100,000.00 |
| Northeast corner 12th Ave. & W. 51st St | 46,250.00 | 46,250.00 | 46,250.00 | 46,250.00 | 185,000.00 |
| Total | 686,607.60 | 686,705.59 | 686,515.88 | 688,090.10 | 2,747,919.17 |
*1565 The lease referred to above as covering property on the south side of West 51st Street expired February 1, 1927, and the lease referred to as covering property on the northeast corner of 12th Avenue and West 51st Street expired October 1, 1930. The two leases had values of $100,000 and $185,000, respectively, at the date of decedent's death and at the time when distributed to the trustees. The trustees amortized the value of such leases over the remaining life thereof, the amount of such amortization reflected by their books during each of the years 1923 and 1924 being $20,324.52. By December 31, 1925, the total amortization or exhaustion thus charged off on the leaseholds amounted to $219,335.45, and on that date the assets of the four trusts (A, B, C and D) were as follows:
| Value | |||||
| Assets | Trust A | Trust B | Trust C | Trust D | Total |
| Cash | $589.96 | $687.80 | $422.79 | $2,865.87 | $4,566.42 |
| 2,750 shares Kohler & Campbell, Inc | 101,160.75 | 101,160.75 | 101,308.00 | 101,308.00 | 404,937.50 |
| 4,205 shares Auto-Pneumatic Action Co | 155,548.00 | 155,548.00 | 155,548.00 | 155,696.00 | 622,340.00 |
| 6,420 shares Autopiano Co | 195,328.50 | 195,328.50 | 195,328.50 | 195,328.50 | 781,314.00 |
| 570 shares Brambach Piano Co | 10,725.00 | 10,725.00 | 10,650.00 | 10,650.00 | 42,750.00 |
| 1,008 shares Milton Piano Co | 32,256.00 | 32,256.00 | 32,256.00 | 32,256.00 | 129,024.00 |
| 2,800 shares Standard Pneumatic Action Co | 87,500.00 | 87,500.00 | 87,500.00 | 87,500.00 | 350,000.00 |
| Leaseholds owned: | |||||
| South Side of West 51st St | 2,280.85 | 2,280.84 | 2,280.84 | 2,280.84 | 9,123.37 |
| Northeast corner 12th Ave. & West 51st St | 14,135.29 | 14,135.30 | 14,135.30 | 14,135.29 | 56,541.18 |
| 190,000 participation in 5% mortgage certificate of New York Title & Mortgage Co | 45,000.00 | 45,000.00 | 45,000.00 | 55,000.00 | 190,000.00 |
| 20 shares Auto-Pneumatic Action Co | 550.00 | 550.00 | 550.00 | 550.00 | 2,200.00 |
| 1,000 shares Autopiano Co | 26,992.50 | 26,992.50 | 26,992.50 | 26,992.50 | 107,970.00 |
| Total | 672,066.85 | 672,164.69 | 671,971.93 | 684,563.00 | 2,700,766.47 |
*1566 *248 In the decree of the surrogate's court (heretofore referred to as entered on May 23, 1927, and as being the final decree in the State court proceeding) the accounts of the trustees, including provision for the amortization of the leaseholds and the reservation of such amortization as a part of the principal of the four trusts, were approved.
In accordance with the decision of the Court of Appeals of the State of New York (heretofore referred to) the trustees have paid to each of the petitioners during each of the years here in question not only the amount of $25,000 as required under the will which provided for the creation of trusts A, B and C, but also the excess of such income (exclusive of the amount retained for the amortization of leaseholds) produced by such trusts over the said $25,000. The excess of income over $25,000 produced by the trust created for the testator's widow has likewise been paid to the daughters, petitioners herein. The petitioners received taxable income from the estate in question and included the same in their income-tax returns for 1923 and 1924 as follows:
| Petitioner | 1923 | 1924 |
| Rita M. Kohler White | $102,187.94 | $43,732.14 |
| Vera M. Kohler Alker | 101,945.27 | |
| Olga K. Miglietta | 95,272.65 | 34,660.44 |
*1567 Fiduciary returns were filed by the trustees for each of the years 1923 and 1924, and upon such returns deductions from gross income were claimed in the amount of $20,324.52, representing the exhaustion or amortization of leaseholds heretofore referred to. Each of the petitioners also filed income-tax returns for 1923 and 1924, reflecting therein the distributive income as shown by the fiduciary returns, together with their separate incomes and deductions. None of the petitioner claimed deductions on their returns for said years of any amount for exhaustion or amortization of said leaseholds, though, as indicated above, the amount returned by them was determined by the trustees by taking such deduction. Upon an audit of the returns of the trustees and of the three petitioners, the Commissioner disallowed as a deduction from the gross income shown by the fiduciary return in each of the years 1923 and 1924 the amounts claimed on account of exhaustion or amortization of leaseholds hereinabove referred to in the amount of $20,324.52 and added to the income shown by the individual returns of each of the petitioners the amount of $6,774.84 for each of the years here involved.
OPINION.
*1568 SEAWELL: The issue with which we are concerned arises on account of the trusts referred to in our findings as A, B, C and D, which *249 were created under the terms of the will of Charles Kohler. The decedent died on June 4, 1913, leaving a large estate, and by the terms of his will provided that a portion thereof should be set aside which would be sufficient to produce income for each of the petitioners during the life of each of them in the amount of $25,000. A similar provision was made for his widow, who is not a petitioner in this proceeding. The trusts were not created until after extended court proceedings which terminated in 1921 with a decision by the Court of Appeals of the State of New York. The trusts were then created and the trustees received property on account of each trust of some $680,000. Included in the property so received were two leaseholds of the respective values of $100,000 and $185,000, and one-fourth of the value of each leasehold was included in the trust for each daughter and one-fourth for the widow. One lease expired in 1927 and the other in 1930. The remaindermen with respect to each of the trusts for the petitioners were the issue*1569 of the respective daughters. While was are not shown in detail the amount produced by each trust and the exact disposition thereof, our understanding is that substantial amounts were produced by each trust (computed by taking as a deduction the amount retained for amortization of the leaseholds) in excess of that required to pay the annual amount of $25,000 to each of the daughters (petitioners herein) and that pursuant to the decision of the Court of Appeals of New York (hereinbefore referred to) such excesses were paid to the respective daughters. And we understand further that similar excesses were produced by the trust for the widow and that these excesses were likewise paid to the daughters. In the fiduciary returns as filed by the trustees, the amount retained as amortization of the leaseholds was claimed as a deduction and the petitioners as beneficiaries reported in their returns the amounts so shown by the trustees, which were likewise the amounts distributed to them.
Our question is whether the action of the trustees in claiming a deduction for amortization of leaseholds was correct in arriving at the amount distributable to the petitioners and therefore taxable to*1570 them. The fact that the petitioners have reported in their returns the amounts distributed to them by the trustees is not conclusive as to the amounts upon which they are to be taxed, since the controlling sections of the statutes (section 219(a)(4) and (d) of the Revenue Act of 1921 and corresponding provisions of the Revenue Act of 1924) provide that the amount to be returned is that which, "pursuant to the instrument or order governing the distribution, is distributable to such beneficiary, whether distributed or not." Since the decision in (certiorari denied, ), many cases have arisen before the Board with respect *250 to the income upon which a life beneficiary is to be taxed, and we have held that where the trustees create an unauthorized reserve out of income to replace depreciable assets of the corpus of a trust estate, the amount so withheld is distributable and taxable to the life beneficiaries. , and *1571 ; affd., , and certiorari denied, . But where the will is not clear as to whether an amount should be withheld by the trustees from the income of a given trust in order to conserve the corpus of the trust, consideration will be given to the interpretation placed thereon by the parties themselves () and to the rule of law with respect to the conservation of such assets which exists in the State where the particular trust is being administered as well as to any State decrees which may have been entered with respect to such estate. .
While the will have involved does not clearly show whether an amount should be retained by the trustees on account of the exhaustion of the leaseholds included in certain trusts created pursuant to the will, an examination of the other considerations named above makes necessary the conclusion that the amount deducted and retained by the trustees may not now be considered as taxable income to the beneficiaries. *1572 In the first place, the fact can not be overlooked that the estate, of which the trusts in question formed a part, was the subject of protracted litigation, particularly with respect to the creation of these trusts, and that in the final decree entered by the Court of Appeals of New York, which held that definite amounts should be set up in these trusts, it was stated that it could not be said that the amounts so set up were intended by the testator to "remain uncertain, varying or shifting amounts," and that "The principal of such trust funds when set aside will, subject to the trusts, become vested in those to whom the residue thereof is given under the will," that is, the issue of the petitioners in these proceedings. Pursuant to that decree, the trusts in question were set up out of assets then included in the testator's estate and included among the assets so used were certain exhaustible or wasting assets, that is, leaseholds. The general rule in New York as expressed by a court of that State in a case involving leaseholds (*1573 ) follows:
* * * The general rule is that, where trustees or executors find a portion of the estate invested in what are termed "wasting" securities, they should pay to the life beneficiary only so much of the income as represents a fair return upon the capital value, accumulating and retaining the residue for the benefit of the remaindermen, unless a contrary intention is evidenced from the will itself, read in the light of the surrounding circumstances. ; .
Not only do we fail to find anything of a positive nature indicating that provision should not be made for the exhaustion of the leaseholds, but also when the case (referred to above as involving the testator's estate) was returned by the Court of Appeals to the surrogate's court for the entry of final judgment, such final judgment was entered on the basis of an accounting which made provision for the exhaustion of the leaseholds in question. That is, the amount which it is now proposed to*1574 be added to the taxable income of the several petitioners in these proceedings was shown in the schedule submitted to, and approved by, the surrogate's court as representing the amount to be retained by the trustees on account of the exhaustion of the leaseholds in question.
In the next place, we find that the trustees, with the apparent acquiescence of the beneficiaries, interpreted the directions of the decedent, as indicated by the several decrees heretofore referred to, to mean that amounts should be retained each year from the income of the trusts to conserve the corpus in so far as the wasting assets (leaseholds) were concerned. The amounts so retained by the trustees were considered by them as corpus and were not distributed to the beneficiaries (petitioners in these proceedings), to whom they are now proposed to be taxed. In this respect, the cases at bar are even more favorable to the petitioners than that of , in that the beneficiaries involved therein had actually received the amounts sought to be deducted by the trustees in their fiduciary returns. We held, however, that since a court of competent jurisdiction later*1575 decided that an amount should have been retained by the trustees on account of exhaustion, wear and tear of trust property, such an amount was a proper deduction in the fiduciary returns and therefore was not taxable income to the beneficiaries even though it had been received by them. In the cases which we are considering the amounts in question had not been paid to the beneficiaries, but were retained by the trustees with approval of the court having jurisdiction thereof and that in a State where the rule of law applicable to the situation here existing is in accord with the action taken by the trustees. Under such circumstances, we are unwilling to say that the course pursued by the trustees constituted an unauthorized withholding of income from the beneficiaries. The report previously promulgated in these proceedings (), which held that the amounts withheld by the trustees on account of the exhaustion of the leaseholds were taxable to the beneficiaries, is accordingly reversed and the contention of the petitioners *252 that the amounts so withheld should not be considered taxable to them is sustained.
Reviewed by the Board.
Judgment will*1576 be entered under Rule 50.