*1580 1. DEDUCTION FROM GROSS INCOME OF ESTATE. During 1924 the trustees paid to decedent's widow the amount of $10,000 pursuant to the directions of the decedent's will, she having elected to take under the will in lieu of dower. Held, that the amounts so paid were paid to the widow in purchase and satisfaction of her dower right and not as distributions of income of the estate and hence are not deductible by the trustees in computing net income of the estate.
Julia Butterworth et al.,23 B.T.A. 838">23 B.T.A. 838, followed.
2. CAPITAL EXPENDITURES. All of the income-producing assets of said estate were transferred by the testator's three sons as individuals to a corporation for its capital stock. The corporation paid the said annuity to the widow during 1925, 1926 and 1927. Held, that the corporation acquired said assets by purchase subject to the charge against them of the said annuity and that such payments constituted a portion of the purchase price of the widow's dower interest in assets of the estate, were capital expenditures and therefore not deductible in computing net income of the corporation.
*862 In these proceedings, duly consolidated for hearing, the taxes in controversy are deficiencies in income taxes determined by the respondent to be in the following amounts:
| Taxpayer | Year | Amount |
| Estate of T. S. Martin | 1924 | $300.00 |
| Do | 1925 | 205.00 |
| T. S. Martin Realty Co | 1925 | 1,300.01 |
| Do | 1926 | 1,350.00 |
| Do | 1927 | 880.28 |
*863 By his amended answer the respondent avers that a correct computation of the tax liability of the estate of T. S. Martin results in a deficiency in the amount of $1,765.02 for the year 1924 and he prays that the Board determine the deficiency to be in such increased amount for that year. The amended answer included a revised computation of the alleged deficiency.
The petitioner in Docket No. 44583, the estate of T. S. Martin, assigns as error the respondent's inclusion in gross income and his disallowance of a deduction therefrom for 1924 and 1925, the amount of $10,000 representing income from the assets of the estate which was paid to Agnes J. Martin, widow of T. S. Martin, deceased, as an annuity under*1582 the latter's will in lieu of dower. Further, said petitioner alleges that prior to 1925 all of the income-producing assets of the estate were conveyed to the T. S. Martin Realty Company and that neither the estate nor the trustees received any income or paid such annuity during 1925.
The petitioner in Docket Nos. 43739 and 45001, the T. S. Martin Realty Company, assigns as error the respondent's inclusion in gross income and his disallowance of a deduction therefrom for each of the years 1925 and 1926 the amount of $10,000, and for the year 1927 the amount of $6,520.54, received by the company as income from the estate's assets transferred to it and paid by the company to the said Agnes J. Martin as such annuity. The petitioner alleges in its petitions that such amounts were received by the company as trustee for Agnes J. Martin and that it was obligated to pay such amounts to her as an annuity under the terms of the will of T. S. Martin, deceased.
FINDINGS OF FACT.
J. Earle Martin, Jules T. Martin and Howard V. Martin are the trustees of the estate of T. S. Martin, deceased.
The T. S. Martin Realty Company is an Iowa corporation with its principal place of business at*1583 Sioux City.
T. S. Martin, while a resident of Iowa, died testate in August, 1915. His last will and testament, dated March 29, 1915, made several specific bequests and provided in part as follows:
*864 ITEM III.
To my beloved wife, Agnes J. Martin, I also give the net income of the rentals from the undivided one-half interest of the West one-third of Lots Seven and Eight (7 & 8), and all of Lot Nine (9), in Block Fifteen (15), in Sioux City East Addition. It is my desire that my wife shall accept the income from said property last above described, * * * in lieu of her dower interest in my estate, and it is my desire that she shall receive from the rent of said undivided one-half interest in said property at least Ten Thousand Dollars ($10,000.00) per year net to her for her maintenance, but if for any reason it shall not produce a net income of Ten Thousand Dollars ($10,000.00) per year, then it is my instruction to the executors and trustees of my estate, and they are hereby authorized, empowered and directed to pay her yearly any difference that may exist between the net income of said property and the sum of Ten Thousand Dollars.
If my wife determines not to*1584 accept the income from said property for the period of her life, and the last above provision of my Will to be in lieu of her dower, then she shall relinquish all interest in said property and shall receive her one-third interest in my estate.
* * *
ITEM IX.
All the balance of my property, real, personal and mixed, I desire to be kept intact so far as the best interests of my estate will permit until my son, Howard V. Martin, shall have attained the age of thirty years, at which time all of my said property shall be divided equally among my three sons, J. Earle Martin, Jules T. Martin and Howard v. Martin, share and share alike.
Further, the will nominated the testator's three sons, J. Earle Martin, Jules T. Martin and Howard V. Martin, executors of the will and also nominated them trustees of the testator's estate and authorized them, "without an order of Court to manage, lease, mortgage, sell, assign and dispose of all the property in my estate as they may consider to be for the best interests of the estate."
On September 21, 1915, by order of the District Court of Iowa in and for Woodbury County, the will was admitted to probate and the testator's three sons were appointed*1585 executors thereof. The testator's widow elected to take under the will in lieu of the dower rights allowed her by the laws of Iowa and on October 13, 1915, filed in the said court written notice thereof.
On July 25, 1919, J. Earle Martin, Jules T. Martin and Howard V. Martin were discharged as executors and appointed trustees of the estate of T. S. Martin, deceased. As executors and as trustees they collected the income from the estate and paid the widow the annuity of $10,000 per annum to and including the year 1924, and filed income-tax returns for the estate for each year to and including 1924. Until 1921 they included the said $10,000 in net income and paid the tax thereon, but from 1921 to 1924, inclusive, they included such amount in gross income and deducted the same amount *865 therefrom in arriving at the taxable net income. Petitioner's income for 1924, without deduction of the annuity, amounted to $41,500.80.
For the year 1925 and subsequent years the three brothers, as trustees, did not file income-tax returns for the estate because the assets thereof were previously transferred to a corporation, the T. S. Martin Realty Company, as hereinafter described. *1586 During the year 1925 the trustees received no income on behalf of the estate. The respondent has asserted a deficiency against the estate in the amount of $205 for the year 1925, computed on the basis of an income of $10,000, less an exemption of $1,500. Such deficiency constitutes a duplicate assessment in that the $10,000 gross income charged to the estate represents the same amount collected by the corporation, paid by it to Agnes J. Martin as the annuity under the will, and included in the corporation's gross income but deducted by it in determining its net income, which deduction the respondent has disallowed in determining the deficiency now asserted against the corporation for 1925.
At the time of his death T. S. Martin, deceased, was engaged in operating a department store which leased and occupied the property specifically mentioned in the above quoted Item III of the will. In 1919 the trustees erected a new building for the department store and they also erected a theatre on certain property included in the estate. On June 6, 1923, Howard V. Martin became thirty years of age, but no effort was made to secure a distribution of the assets of the estate as provided in*1587 Item IX of the will. However, in the spring of 1924 the property mentioned in Item III of the will was sold to the Kresge Realty Company, which required and received a deed for the property from the said three brothers as trustees of the estate, also a deed from them and their wives as individuals and a quitclaim deed from Agnes J. Martin. The trustees did not request nor receive an order of the court granting permission to make the sale. During the remainder of the year 1924 the trustees paid the anuity to Agnes J. Martin out of the income from the other assets of the estate.
During 1924 and subsequent to the sale described in the next preceding paragraph, J. Earle Martin, Jules T. Martin and Howard V. Martin, as individuals, secured a charter for the T. S. Martin Realty Company, incorporated under the laws of Iowa with an authorized capital stock of $1,000,000, divided into shares of $100 each, to engage in the business of owning, selling, mortgaging and dealing in real and personal property, of subdividing and improving real estate, of borrowing money and dealing in commercial *866 paper and doing all things necessary to the conduct of the affairs of the corporation. *1588 The corporation was organized for the purpose of conducting and managing the property and affairs of the estate of T. S. Martin, deceased, as a matter of convenience. Near the close of the year 1924 there were transferred to the corporation all of the assets of the said estate, consisting of real and personal property, except for some nonincome-producing Canadian real property which could not be held by an American corporation and some nonincome-producing notes. The real property was conveyed to the corporation by deeds executed by the said three brothers as individuals and not as trustees. Shares of stock were transferred to the said corporation by having its name entered, as the owner thereof, upon the stock books of the various corporations in which stock was held by the estate. The T. S. Martin Realty Company issued 600 shares of its stock for the income-producing assets of the estate and such stock was divided equally between the three brothers, who became its officers and directors. No stock has ever been issued to any one else. Agnes J. Martin, widow of T. S. Martin, deceased, took no part in the organization of the said corporation, never owned any of its shares of stock, *1589 and never conveyed to it any interest she had in the estate. Neither at that time nor at any time during the years in controversy did the court order a distribution of the estate, or grant the trustees permission to transfer the assets of the estate to the corporation or discharge the said three brothers as trustees of the estate of T. S. Martin, deceased.
On January 1, 1925, the T. S. Martin Realty Company commenced its business, which consisted of managing the property transferred to it, collecting all income from such property, and paying all expenses, taxes, etc. The corporation paid directly by check to Agnes J. Martin the annuity provided for by Item III of the will of T. S. Martin, deceased. During the years 1925 to 1927, inclusive, no dividends were declared and the net income over and above the said annuity was added to the corporation's surplus. The corporation paid to Agnes J. Martin the sum of $10,000 during each of the years 1925 and 1926, and the sum of $6,520.50 during 1927, being the prorated amount up to the time she died in August of that year.
For each of the years 1925, 1926 and 1927 the T. S. Martin Realty Company filed corporation income-tax returns*1590 and for each year it included in gross income all of the rents, profits, etc., received from the assets transferred to it as hereinbefore described. In computing its net taxable income it took the usual deductions allowed corporations, including compensation for officers, and also took a deduction in each year as a business expense the amount of the annuity paid to Agnes J. Martin. The respondent has disallowed the deduction *867 of the amount of the annuity for each of those years, which action has resulted in the deficiencies here in controversy.
OPINION.
VAN FOSSAN: In the case of , the Board, in an exhaustive opinion, reviewed the decisions applicable to the facts here presented. In that case decedent's widow elected to take under the will in lieu of dower. In the taxable years the trustees under decedent's will paid over to the widow the sums to which she was entitled under the will and claimed deductions therefor in computing net income of the testamentary trust. The amounts so paid to the widow, plus the amounts similarly paid to her in previous years, were not equal to the value of the dower interest*1591 that she relinquished by electing to take under the will. We held that the amounts paid to the widow were paid to her in satisfaction of her dower right and not distributions of income within the meaning of section 219(b)(2) of the Revenue Act of 1924, and hence are not deductible in computing net income of the trust.
In the instant case the same principles govern. The record does not establish the value of decedent's estate or permit us to determine as a fact that the payments made in any of the taxable years, together with all payments made in previous years, exceed the value of the widow's dower interest. If this be a fact it was part of the burden of proof assumed by petitioners and may not be left to presumption or assumption. In the absence of contrary proof our conclusion must be that the respondent was correct in disallowing the deduction claimed by the estate. Petitioner introduced no evidence to contradict respondent's revised computation, which results in a deficiency for 1924 of $1,765.02.
By parity of reasoning we arrive at the same conclusion as to the deductions claimed by the corporation to which the property was transferred as of January 1, 1925. The annuity*1592 provided by the will was a charge against a particular asset and, when that asset was disposed of, was a general charge against the remainder of the estate. The three sons of T. S. Martin were the residuary beneficiaries of the estate. When they, as individuals, and not as trustees, organized the T. S. Martin Realty Company and transferred all the income-producing assets of the estate to that corporation for its capital stock, they necessarily transferred such assets subject to the charge of the annuity. Agnes J. Martin, the widow, took no part in the organization of the corporation, received none of its stock and did not transfer to it the interest she had in the estate. Thus the corporation acquired the income-producing assets encumbered by the annuity charge, and the corporation to this extent stepped into the shoes of *868 the estate. It follows that payments of the annuity by the corporation were stamped with the same character as when made by the estate. They represented capital expenditures made as part of the purchase price of the dower interest. The deductions claimed by the corporation in 1925, 1926 and 1927 on account of the annuity payments were properly disallowed*1593 by the respondent.
As to the deficiency of $205 asserted against the estate for the year 1925, the respondent was obviously in error. The assets out of which income grew were transferred to the corporation late in 1924 and thereafter the estate had no income. The annuity was paid by the corporation. Consequently the estate had no tax liability.
The deficiency originally determined against the estate for the year 1924 was $300. By proper pleadings respondent made claim for an increased deficiency for said year and submitted his revised computation thereof, the total deficiency now determined and claimed by the respondent for 1924 being the sum of $1,765.02.
Decision will be entered in Docket No. 44583 redetermining a deficiency in the amount of $1,765.02 for the year 1924 and of no deficiency for the year 1925. Decision will be entered for the respondent in Docket Nos. 43739 and 45001.