*2116 1. Where the will of a decedent directs that the income of the "residuary estate" shall be collected by trustees and the amount in excess of an annual payment made to the widow shall be accumulated for the benefit of minor children and the trustees accumulate and file returns of such excess income, held that the amounts thus accumulated are taxable to the trustees on a single trust.
2. Where one of the minors attained his majority on April 9, 1920, and the Supreme Court of the County of New York, which had jurisdiction in the premises, construed the will to the effect that the provision for the accumulation of income after April 8, 1920, was invalid and directed that the amounts accumulated up to April 8, 1920, inclusive, and subsequent thereto should forthwith be distributed to the children of the testator, held that the trustees are not taxable in respect of any accumulations of the fund for the year 1920, but that such accumulations constitute distributable income of the beneficiaries for 1920.
3. Amounts paid out by the trustees for the ordinary and necessary repairs of a residence of the testator, to be occupied by the widow during her lifetime, constitute legal*2117 deductions from the gross income of the trust fund in the determination of the taxable net income thereof.
4. Fees paid to accountants and attorneys and payments made for printing accounts and briefs and for surveying lands owned by the trust estate are proper deductions from the income of the trust estate for the year in which paid.
*2 These proceedings are from deficiencies determined by the Commissioner as follows:
| Docket No. | Petitioners | Years | Deficiencies |
| involved | determined | ||
| 19357 | Margaret B. Sparrow, John C. Vedder, | 1917 | $16,039.31 |
| and Edward Grant Sparrow, as trustees | 1918 | 10,564.97 | |
| under the will of Edward W. Sparrow, | 1919 | 14,182.92 | |
| deceased | 1920 | 4,057.65 | |
| 1921 | 967.20 | ||
| 45,812.05 | |||
| 19358 | Margaret B. Sparrow | 1917 | 610.12 |
| 1918 | 515.22 | ||
| 1920 | 2,180.72 | ||
| 1921 | 873.28 | ||
| 1922 | 4,092.43 | ||
| 1923 | 2,860.05 | ||
| 1924 | 1,403.21 | ||
| 12,535.03 | |||
| 19359 | Edward G. Sparrow | 1922 | 179.41 |
| 1923 | 6,498.43 | ||
| 1924 | 6,793.07 | ||
| 13,470.91 | |||
| 19360 | Margaret B. Sparrow, guardian for | 1922 | 94.03 |
| Margaret A. Sparrow | 1923 | 3,582.46 | |
| 1924 | 2,464.41 | ||
| 6,140.90 |
*2118 The petitioners allege that the Commissioner erred as follows in computing deficiencies:
(1) That in computing income of the estate of Edward W. Sparrow for the calendar years 1917, 1918, 1919, and for the period from January 1 to April 8, 1920, both inclusive, the Commissioner has assumed that the will of Edward W. Sparrow creates a single trust, a part of the income which was, pursuant to the terms thereof, payable to Margaret B. Sparrow and all of the balance of which the trustees were directed to accumulate until Edward Grant Sparrow should reach the age of 21 years and that the Commissioner has assessed against the estate of Edward W. Sparrow as an entity the whole of such balance of income in each of said years, whereas, in truth and in fact, the said will of said decedent as construed by the courts of the State of New York creates three separate trusts of the testator's residuary estate, one for the benefit of Margaret B. Sparrow, one for the benefit of Edward Grant Sparrow, and one *3 for the benefit of Margaret Alicia Sparrow. The petitioners contend that the trustees were by said will, as so construed, directed to accumulate and hold separately for his benefit*2119 the income of the trust for the benefit of Edward Grant Sparrow and to accumulate and to hold separately for her benefit the income of the trust for the benefit of Margaret Alicia Sparrow until Edward Grant Sparrow should attain the age of 21 years and thereupon to distribute such accumulated income each year; that under the revenue laws then in force the income of each of said three trusts should be taxed separately - the trust for the benefit of Margaret B. Sparrow to her, the trust for the benefit of Edward Grant Sparrow to the trustees for his benefit, and the trust for the benefit of Margaret Alicia Sparrow to the trustees for her benefit.
(2) The Commissioner has refused to permit the deduction of income received by the trustees during the years 1917 to 1924, inclusive, of the cost of repairs to the testator's residence, No. 41 East 68th St., Borough of Manhattan, City of New York.
(3) In computing the net income of the estate of Edward W. Sparrow for the year 1920, the Commissioner has failed to allow as a deduction from gross income $10,683.75 expended by the trustees for an audit of their accounts for the period commencing May 1, 1915, and ending on April 8, 1920.
*2120 (4) In computing the net income of the estate of Edward W. Sparrow for the year 1922, the Commissioner has refused to allow as a deduction from gross income of that year the following sums paid by the trustees during that year:
(a) $3,556.88 accountants' fees in preparing their accounts as trustees;
(b) $2,000 paid to the New York Life Insurance and Trust Co. for services rendered to the trustees;
(c) $2,408.48 paid by the trustees for printing their accounts.
(5) In computing the net income of the estate for the year 1923, the Commissioner has refused to allow a deduction from gross income of $25,299.18 paid by the trustees for counsel fees and disbursements for services rendered in connection with the suit for construction of the testator's will and for an accounting brought against the trustees in the year 1920, and for other legal services.
(6) In computing the net income of the estate for 1921 the Commissioner has failed to allow as a deduction from gross income in that year the amount of New York transfer taxes paid during the year to the State Tax Commission of the State of New York, but instead has allowed a deduction of the proportionate amount of such taxes to*2121 the individual beneficiaries named in the will.
(7) The Commissioner in his notice of deficiency to Margaret B. Sparrow, as guardian of Margaret Alicia Sparrow, has failed to *4 give to Margaret B. Sparrow, as guardian as aforesaid, credit for an overassessment of $69.24 for the year 1921.
(8) In each of the years 1917 to 1924, the Commissioner, in apportioning the net income of the estate among the several taxpayers entitled to share therein, has omitted to apportion nontaxable income, with the result that taxable income apportioned to Margaret B. Sparrow, one of the beneficiaries, has been increased in each year and the amount of her income tax for each of said years has been correspondingly increased.
(9) In computing the net income of the estate for 1920, the Commissioner has failed to allow as a deduction from gross income $2,749.34 expended by the trustees during that year for an inspection of certain lands belonging to the estate situated in the State of Oregon.
FINDINGS OF FACT.
Edward W. Sparrow died February 21, 1913, a resident of the City, County, and State of New York. He was survived by his widow, Margaret B. Sparrow, his minor son, Edward Grant*2122 Sparrow, and his minor daughter, Margaret Alicia Sparrow. His will was admitted to probate March 25, 1913. The preliminary paragraphs of that will made certain bequests creating three trusts, one of which was canceled by a codicil. These bequests and trusts are not material to the present proceeding. The pertinent parts of the will are the twelfth, thirteenth, and fourteenth paragraphs. By the twelfth paragraph the testator conveyed to certain trustees all of his "residuary estate," with power to manage and control and pay expenses. The income to the extent of $50,000 yearly (plus certain additional sums if the income was large enough) was to be paid to the testator's widow, Margaret B. Sparrow, during the minority of the children and until the son became 30 years of age. The widow was charged with the care, maintenance, and education of the children during their minority. The balance of the income with certain exceptions was to be accumulated until the son, Edward Grant Sparrow, was 30 years of age.
Specific provision was made in case the widow or either or both of the children died or other contingencies occurred before the son became 30 years of age.
During the years*2123 1917 to 1920, inclusive, the trustees paid the expenses of the estate, paid the sum certain to the widow, and accumulated the remainder of the income. They filed income-tax returns for said years showing as taxable to a single entity all of the income received by them from the "residuary estate" except that disbursed for expenses and the payments made to the widow. They paid the tax so returned.
*5 On April 9, 1920, Edward Grant Sparrow attained his majority and soon thereafter brought suit against the executors and others in the Supreme Court of the County of New York, alleging that the accumulations of income from and after April 9, 1920, were invalid under the statutes of the State of New York. The proceeding was entitled "Edward Grant Sparrow v. John M. Longyear et al." It prayed for judgment as follows:
That the Court construe the provisions of the aforesaid Last Will and Testament of Edward W. Sparrow, Deceased, so far as the same effect or direct accumulations of Income, either during the Plaintiff's minority or subsequent to the time when Plaintiff reached the age of twenty-one years, and that the Court order, adjudge and decree that the Plaintiff be now*2124 entitled to receive three-fifths of any and all accumulations of Income accumulated by the Executors and Trustees up to April 9, 1920, the date when Plaintiff became twenty-one years of age; that the Court order, adjudge and decree that any and all provisions of the Last Will and Testament of Edward W. Sparrow, Deceased, which direct that any portion of the Income from the Residuary Estate be accumulated for the Plaintiff after he reached the age of twenty-one years, are invalid and contrary to the Law of the State of New York; and furthermore that the Court order, adjudge and decree that the aforesaid Executors and Trustees of Edward W. Sparrow, Deceased, pay over to Plaintiff three-fifths of any and all Income collected by the said Executors and Trustees of Edward W. Sparrow, Deceased, after April 9, 1920, the date when Plaintiff became twenty-one years of age, over and above the payments directed to be made by the Last Will and Testament of Edward W. Sparrow, Deceased; that the Court order and direct the Defendants John M. Longyear, Alton T. Roberts and the Defendants Archibald M. Maclay and John J. Beattie, as Executors of Charles I. McBurney, Deceased, to make and file an Account*2125 of the Proceedings of the Executors and Trustees of the Trusts created by the Last Will and Testament of Edward W. Sparrow, Deceased, from the said 1st day of May, 1915, down to and including the 6th day of December, 1915, and also that the Court order and direct the Defendants John M. Longyear, Alton T. Roberts and Margaret B. Sparrow, to make and file an Account of Proceedings of the Executors and Trustees of the Trusts created by the said Last Will and Testament of Edward W. Sparrow, Deceased, from the said 6th day of December, 1915, down to and including the 9th day of April, 1920, the date when Plaintiff became twenty-one years of age, and that such Accounts show specifically the accumulations of Income accumulated by said Executors and Trustees of the Trusts created by the said Last Will and Testament of Edward W. Sparrow, Deceased, down to the 9th day of April, 1920, the date when Plaintiff became twenty-one years of age; that such Accounts be taken and stated and judicially settled by or under the direction of this Court in this action; that the legal Commissions of the Defendants, John M. Longyear, Alton T. Roberts and Margaret B. Sparrow, as Trustees, and of the said Archibald*2126 M. Maclay and John J. Beattie, as Executors of the said Charles I. McBurney, a deceased Trustee, may be ascertained, awarded and allowed by this Court, and that the said Defendants, John M. Longyear, Alton T. Roberts and Margaret B. Sparrow, as Executors and Trustees of the Last Will and Testament of Edward W. Sparrow, Deceased, may be directed and ordered to pay and turn over to the Plaintiff three-fifths of any and all Income as shown by said Accounts to have been accumulated up to April 9, 1920, the date when *6 Plaintiff became twenty-one years of age, and that the Plaintiff may have such other and further relief in the premises as may be just, together with the costs of this action.
An interlocutory decree was granted in said action on or about June 18, 1921, and final judgment was entered on or about November 17, 1922, wherein it was held in part:
NINETEENTH. Any and all provisions of the said Last Will and Testament of Edward W. Sparrow, deceased, directing that accumulations of income made by the testamentary trustees during the minority of Edward Grant Sparrow, son of said testator, for the benefit of said Edward Grant Sparrow or for the benefit of Margaret Alicia*2127 Sparrow be added to the principal of the trust estate, or directing further accumulations of income for the benefit of either the said Edward Grant Sparrow or the said Margaret Alicia Sparrow after the majority of said Edward Grant Sparrow are invalid and contrary to the laws of the State of New York.
The true construction of the provisions of the Last Will and Testament of Edward W. Sparrow, deceased, disposing of his residuary estate in trust for the benefit of Margaret B. Sparrow and others requires the testamentary trustees to determine in each year the net income that has accrued on said trust estate by deducting from the gross income thereof the expenses of administration, taxes including income taxes due the United States and State of New York, and the commissions of the trustees on income, and to pay therefrom to the defendant, Margaret B. Sparrow, for the purposes set forth in Subdivision B of the "Twelfth" paragraph of said Will the sum of Fifty Thousand Dollars ($50,000). If in any one year during the minority of said Edward Grant Sparrow, the net income of said trust estate shall have exceeded or shall exceed the sum of One Hundred Fifty Thousand Dollars ($150,000.) *2128 then to pay the said Margaret B. Sparrow one-fourth of such excess, and if in any one year after the majority of said Edward Grant Sparrow the net income of said trust estate shall have exceeded or shall exceed the sum of One Hundred Fifty Thousand Dollars ($150,000.) then to pay the said Margaret B. Sparrow one-eighth of such excess and after making such payments to accumulate the balance of said income during the minority of the plaintiff, Edward Grant Sparrow, that is to say, down to and including the eighth day of April, 1920.
There being no valid directions in said Will to add to the principal of said trust estate the accumulations of income made by said trustees during the minority of said Edward Grant Sparrow, such accumulations in the hands of said trustees on the date of the majority of said plaintiff pass, in accordance with the provisions of the "Fourteenth" paragraph of said Will and three-fifths of all such accumulations of income determined in accordance with the directions hereinabove set forth should be paid over to the said Edward Grant Sparrow and two-fifths of all of such accumulations should be paid over to the defendant, Margaret Alicia Sparrow, or to her guardians.
*2129 There being no valid direction in said Will for the accumulation of the income of said trust estate after the said Edward Grant Sparrow shall have reached his majority, said income passes in accordance with the provisions of the "Fourteenth" paragraph of said Will, and the said plaintiff, Edward Grant Sparrow, is entitled, subject to the provisions for the benefit of Margaret B. Sparrow contained in said Will, and in lieu of all other payments of income directed by said Will to be made to him, to three-fifths of the net income of *7 said trust estate received by said trustees after April 8, 1920; and the infant defendant, Margaret Alicia Sparrow, is entitled during her minority, subject to the provision for the benefit of Margaret B. Sparrow contained in said Will, to two-fifths of all of the net income of said trust estate received by said trustees after April 8, 1920; and the trustees of said trust are hereby ordered and directed to pay to said Edward Grant Sparrow the said three-fifths of said net income and to the said Margaret Alicia Sparrow, or her guardians, two-fifths of said net income, said payments to be in lieu of all other payments of income directed by said*2130 Will to be made to said Edward Grant Sparrow and Margaret Alicia Sparrow.
Subsequent to this decree the trustees for the estate conceived that the judgment was based on the theory that three separate trusts were created by the will in respect of the residuary estate and filed amended income-tax returns for the years 1917 to 1920, inclusive, for each of the three trusts which they believed were so created. The Commissioner has rejected the amended returns as a basis for the computation of the deficiencies herein involved and has determined the deficiencies upon the ground that the income of the residuary estate accumulated to April 9, 1920, the date on which Edward Grant Sparrow attained his majority, was taxable to the trustees on a single trust estate.
Paragraph "Thirteenth" of the will provided:
Thirteenth. Any residence in the City of New York I may own at the time of my decease shall not be disposed of except upon the request in writing of my wife, MARGARET B. SPARROW. My wife shall have the right to occupy such residence, or any residence that may be purchased upon her request with the proceeds of such a residence, in case she wishes to change her residence, as a*2131 home for herself and her children as long as she shall live, without the payment of any rent or charge therefor. Subject to the life interest therein of my said wife, said residence property shall be a part of my residuary estate.
Subdivision (g) of paragraph "Twelfth" of the will provided in part:
(g) If my son, EDWARD GRANT SPARROW, lives to attain the age of thirty years, and my wife, MARGARET V. SPARROW, is then living, the Trustees shall select and set apart from my residuary estate, and they may, so far as it is necessary, acquire the same by purchase, good interest-bearing securities of a value and to an amount which, having regard to any probable decrease in the interest return of such investments, will at all times during the life of my said wife produce an annual income of Fifty Thousand Dollars ($50,000); and also, in case I die owning a residence in the City of New York, an additional amount equal to the amount of the annual taxes, water rates, assessments, and insurance charges upon said property, * * *
The Commissioner has considered that the wife had a life estate in the premises, 41 East 68th St., New York City, and has accordingly disallowed the deduction from*2132 the annual income of the trust estate for all of the years 1917 to 1924, inclusive, the amounts spent *8 by them for repairs upon the premises. These amounts were as follows:
| 1917 | $1,919.24 |
| 1918 | 1,133.93 |
| 1919 | 831.14 |
| 1920 | 1,567.09 |
| 1921 | $1,542.02 |
| 1922 | 5,716.56 |
| 1923 | 1,922.29 |
| 1924 | 6,731.30 |
In order to comply with the directions of the interlocutory judgment in the suit brought by Edward Grant Sparrow against the trustees, the trustees were compelled to have an audit of their accounts made and an account prepared of all of their acts and doings for the whole period from May 1, 1915, to April 8, 1920, and subsequently under the direction of the court it was necessary to bring those accounts down to May 28, 1922, the date of the death of John M. Longyear, one of the trustees.
The final judgment entered in the above referred to action directed the trustees to pay over to Edward Grant Sparrow and to his sister, Margaret Alicia Sparrow, all accumulations of income held by the trustees on April 8, 1920, and all income received by them between that date and the date of the final judgment. The purpose of the action therefore and the result accomplished*2133 thereby were to secure the payment to the plaintiff and to his sister of the income of the estate and the account prepared therein dealt primarily with the income of the estate. The expenses incurred by the trustees in the preparation of their accounts and in the conduct of said action related primarily to the income of the estate. The trustees, in 1920, paid $10,683.75 for accountants' fees and, in 1922, $3,556.88 accountants' fees; and also in 1922 paid $2,000 to the New York Life Insurance & Trust Co. for services rendered the trustees and $2,408.48 for printing of their accounts as trustees, all of which deductions have been disallowed by the Commissioner in the determination of distributable income for the years 1920 and 1922, respectively.
During 1920 the trustees also expended the sum of $2,749.34 for the inspection and survey of certain timber lands held by them as trustees and located in the State of Oregon. In the tax return filed by them for 1920 this amount was claimed as a deduction from gross income in arriving at the distributable income. The deduction was disallowed by the respondent in the computation of the distributable income of the estate. In 1923 the trustees*2134 paid $25,299.18 to their counsel for counsel fees and for disbursements in connection with the suit brought by Edward Grant Sparrow against them and for other legal services. This amount was claimed as a deduction from the gross income of the estate in the determination of the distributable net income for 1923. The amount was disallowed as a deduction *9 by the Commissioner in determining the deficiencies due from the beneficiaries.
During the year 1921 the trustees paid to the State Tax Commission of the State of New York $76,447.88, being the amount of transfer tax due the State of New York upon the estate of Edward W. Sparrow, together with interest thereon for delayed payment. The beneficiaries, in their income-tax returns for 1922, claimed the deduction of their pro rata shares of the transfer tax paid by the trustees in 1921. The petitioners allege error in that the Commissioner has failed to allow the amount of such tax and interest as a deduction to the trustees from the income of the year 1921, but has instead credited portions of it to the several beneficiaries in proportion to their interests in the estate.
The Commissioner in the letter dated February 25, 1926, addressed*2135 to the petitioner, Margaret B. Sparrow, as guardian of Margaret Alicia Sparrow, notified her of alleged deficiencies in taxes for the years 1922, 1923, and 1924 totaling $6,140.90, and of an overassessment for the year 1921 amounting to $69.24. In the deficiency notice of June 17, 1926, addressed by the Commissioner to Margaret B. Sparrow as guardian of Margaret Alicia Sparrow, there appears this statement: "Therefore, no change has been made in your tax liability as set forth in office letter dated February 25, 1926," but this notice omits any reference to the overassessment of $69.24 referred to in the letter of February 25, 1926.
The returns for all of the tax years in question were made on the cash receipts and disbursements basis.
OPINION.
SMITH: The principle question presented by these proceedings is whether the income of the residuary estate of Edward W. Sparrow, deceased, for the years 1917 to 1920, inclusive, accumulated by the trustees for future distribution in accordance with the terms of the will, should be taxed to the estate as an entity or taxed as the income of three trust estates. Throughout the period the trustees held the estate intact and made a single*2136 return each year of such accumulated income and paid the tax shown to be due by such returns.
Section 16 of the Personal Property Law of the State of New York (Laws of 1909, ch. 45) in so far as it is material in the present discussion is as follows:
Validity of directions for accumulation of income. An accumulation of the income of personal property, directed by any instrument sufficient in law to pass such property is valid:
1. If directed to commence from the date of the instrument, or the death of the person executing the same, and to be made for the benefit of one or *10 more minors, then in being, or in being at such death, and to terminate at or before the expiration of their minority.
2. If directed to commence at any period subsequent to the date of the instrument or subsequent to the death of the person executing it, and directed to commence within the time allowed for the suspension of the absolute ownership of personal property, and at some time during the minority of the persons for whose benefit it is intended, and to terminate at or before the expiration of their minority.
3. All other directions for the accumulation of the income of personal*2137 property, net authorized by statute, are void. In either case mentioned in subdivisions one and two of this section a direction for any such accumulation for a longer term than the minority of the persons intended to be benefited thereby, has the same effect as if limited to the minority of such persons, and is void as respects the time beyond such minority.
The provisions of the will of Edward W. Sparrow for the accumulation of the income beyond the date when Edward Grant Sparrow attained his majority (April 9, 1920) were contrary to the laws of the State of New York, and shortly after Edward Grant Sparrow attained his majority he instituted a suit in the Supreme Court of the State of New York against the executors and others interested under the will in a case entitled "Edward Grant Sparrow v. John M. Longyear et al.," praying for judgment that the directions for accumulations contained in the will of his father after he had reached his majority were invalid and in conflict with the laws of the State of New York. An interlocutory decree was entered in said action on or about June 18, 1921, wherein it was held that the directions for accumulations of income after the majority*2138 of Edward Grant Sparrow were invalid and wherein it was directed that the trustees pay to Edward Grant Sparrow three-fifths and to Margaret Alicia Sparrow two-fifths of all accumulations theretofore made by the trustees. The final judgment in this action was entered on or about November 17, 1922, and incorporated the terms and provisions of the interlocutory judgment.
It is the petitioners' contention that this final judgment of the Supreme Court of the State of New York must be construed in the light of the law of that State, and that so construed it holds that the will of Edward W. Sparrow created three trusts as follows:
FIRST. A trust for the benefit of the petitioner, Margaret B. Sparrow, the testator's widow of so much of the residuary estate as is necessary to pay to her the sum of $50,000.00 per annum, together with certain other sums specified in subdivision "(b)" of the "Twelfth" paragraph of said will;
SECOND. A trust to accumulate the income of 3/5ths of the balance of said residuary estate, for the benefit of the petitioner, Edward G. Sparrow, the testator's son until his majority and thereafter to pay such income to him annually;
THIRD. A trust to accumulate*2139 the income of 2/5ths of the balance of the testator's residuary estate for the benefit of testator's daughter, Margaret *11 Alicia Sparrow until Edward G. Sparrow should attain his majority and thereafter to pay such income to her annually.
A careful study of the provisions of the will of Edward W. Sparrow does not evince an intention on the part of the testator to create three trust funds with respect to his residuary estate. The testator did create certain trust funds for the benefit of relatives, but they had nothing whatever to do with the residuary estate. It was the apparent intent of the testator that his residuary estate should be kept intact by the trustees for a long period of years and that part of the income be paid to his widow annually and the balance be accumulated for the benefit of his children until the son, Edward Grant Sparrow, should reach the age of 30 years. The will provided that the income thus accumulated should be added to the corpus during the period of accumulation. The trustees acting under the will during all of the years 1917 to 1920, inclusive, kept accounts of the residuary estate as an entity and made no distribution to the son and daughter*2140 of the decedent and did not set apart on the books of account the income which accrued to their benefit. It was not until after Edward Grant Sparrow reached the age of 21 years that there was any segregation of the accounts of the estate for the purpose of showing income accruing for his benefit.
In the litigation instituted by Edward Grant Sparrow against the executors and others there was no contention that the will was invalid so far as it related to accumulations of income up to the date when the son attained his majority, which was April 9, 1920. The validity of the will relating to such accumulations was not in question. The petitioner simply prayed for a judgment that the directions for accumulations contained in the will of his father on and after the son reached his majority were invalid and in conflict with the laws of the State of New York. The court granted such prayer. There is no statement in the interlocutory decree or the final judgment of the court that the proper construction of the will of Edward W. Sparrow is that three trusts were created with respect to the residuary estate from the date of the death of the decedent or from the date when the executors*2141 turned the residuary estate over to the trustees to be administered by them. The court refers in many places to the income of the residuary estate as being the income of "said trust estate." In the fifteenth paragraph of the final judgment of the court, mention is made of the "trustees for the several trusts" and mentions them as -
Trust for Margaret B. Sparrow and others.
Trust for Alicia J. Lansing.
Trust for Mary H. S. Orloff.
*12 The "Trust for Margaret B. Sparrow and others" refers to the trust composed of the "residuary estate." The contention of the petitioners that the will of Edward W. Sparrow created three trust estate with respect to his residuary estate is not sustained.
The petitioners do not contend that the Supreme Court of New York County expressly found that the testator's will created three trusts. They do contend, however, that the direction of that court to the trustees to distribute income in accordance with the instructions of the testator (as modified by the order of the court), was predicated upon a finding that the will created separate valid trusts. It is contended that the trusts involved in the case at bar were subject to regulation*2142 under the laws of the State of New York, which limit the period during which a single trust may exist to two lives in being at the date of the creation of the trust, ; , and forbids accumulations beyond the minority of the beneficiary. Petitioners further contend that the will of the testator is to be construed according to the laws of New York and that, further, this Board must determine either (1) that the trusts for the benefit of Margaret B. Sparrow, Margaret Alicia Sparrow, and Edward Grant Sparrow have been since their creation separate and distinct trusts, or (2) that the disposition of his estate contemplated by the testator was in violation of the law of New York; that in the latter case the residuary estate of the testator is disposed of by article "Fourteenth" of his will and that Edward Grant Sparrow became entitled to three-fifths thereof and the income therefrom and Margaret Alicia Sparrow to two-fifths thereof and the income therefrom; that in either case the income is divided in the same way.
We do not think it necessary to consider the statutes of the State*2143 of New York as they have been construed by the courts of that State with respect to the limitation of the period during which a single trust may exist to two lives in being at the date of the creation of the trust. In the case of Sparrow v. Longyear the Supreme Court of New York County was not asked to decide, and did not decide, that the provisions of the will of Edward W. Sparrow with respect to the accumulations of income during the minority of Edward Grant Sparrow were invalid. We can not presume that the New York court would have held, had it been asked to do so, that the will of Edward W. Sparrow created three trust estates out of his "residuary estate." The court simply directed that the accumulations made by the trustees up to April 9, 1920, be distributed forthwith to the beneficiaries entitled to the same and directed that proper *13 accounting be had for the purpose of determining the amount of the income to be distributed.
The reason for the New York rule that several trusts are created where one would be void is not here present and the rule does not apply. As was stated in *2144 , "It seems to us to be fundamentally unsound to determine income tax liability by what might have taken place rather than by what actually occurred."
The pertinent provisions of the Revenue Acts of 1916 and 1918 applicable to the point in issue are as follows:
Revenue Act of 1916, section 2(b):
Income received by estates of deceased persons during the period of administration or settlement of the estate, shall be subject to the normal and additional tax and taxed to their estates, and also such income of estates or any kind of property held in trust, including such income accumulated in trust for the benefit of unborn or unascertained persons, or persons with contingent interests, and income held for future distribution under the terms of the will or trust shall be likewise taxed, the tax in each instance, except when the income is returned for the purpose of the tax by the beneficiary, to be assessed to the executor, administrator, or trustee, as the case may be: Provided, That where the income is to be distributed annually or regularly between existing heirs or legatees, or beneficiaries the rate of tax and method of computing*2145 the same shall be based in each case upon the amount of the individual share to be distributed.
Revenue Act of 1918, section 219:
(a) That the tax imposed by sections 210 and 211 shall apply to the income of estates or of any kind of property held in trust including -
(1) Income received by estates of deceased persons during the period of administration or settlement of the estate;
(2) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests;
(3) Income held for future distribution under the terms of the will or trust; and
(4) Income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals, and the income collected by a guardian of an infant to be held or distributed as the court may direct.
(b) The fiduciary shall be responsible for making the return of income for the estate or trust for which he acts. The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212, * * *
(c) In cases under paragraph (1), (2), or (3) of subdivision (a) the tax shall be imposed upon the net income of the estate or trust and*2146 shall be paid by the fiduciary, except that in determining the net income of the estate of any deceased person during the period of administration or settlement there may be deducted the amount of any income properly paid or credited to any legatee, heir or other beneficiary. In such cases the estate or trust shall, for the purpose of the normal tax, be allowed the same credits as are allowed to single persons under section 216.
*14 (d) In cases under paragraph (4) of subdivision (a), and in the case of any income of an estate during the period of administration or settlement permitted by subdivision (c) to be deducted from the net income upon which tax is to be paid by the fiduciary, the tax shall not be paid by the fiduciary, but there shall be included in computing the net income of each beneficiary his distributive share, whether distributed or not, of the net income of the estate or trust for the taxable year, or, if his net income for such taxable year is computed upon the basis of a period different from that upon the basis of which the net income of the estate or trust is computed, then his distributive share of the net income of the estate or trust for any accounting*2147 period of such estate or trust ending within the fiscal or calendar year upon the basis of which such beneficiary's net income is computed. In such cases the beneficiary shall, for the purpose of the normal tax, be allowed as credits in addition to the credits allowed to him under section 216, his proportionate share of such amounts specified in subdivisions (a) and (b) of section 216 as are received by the estate or trust.
The normal application of the provisions of the statutes above quoted is that the income collected by the trustees under the will of Edward W. Sparrow, deceased, should be taxed to the estate as an entity upon the ground that it is income held for future distribution under the terms of the will or trust. The trustees so returned the income and paid a tax thereon. The son and daughter of the testator, the principal beneficiaries of the trust fund, did not receive the income accumulated for them during the years 1917 to 1920, inclusive, and the income was not distributed to them until after April 8, 1920.
In support of their contention that the proper application of the taxing statute reaches the result contended for by them, the petitioners cite the case*2148 of , in which the Circuit Court of Appeals for the Eighth Circuit, in construing the provisions of the Revenue Acts of 1916 and 1918, said:
* * * In each of these acts, the intent is that annual income to a particular beneficiary from a trust estate shall be taxed to him as a separate unit of taxation where that income is "distributed" to him. "Distribution," as there used, does not necessarily mean passing into the uncontrolled possession and disposition of the beneficiary. It means separation and segregation from the trust estate so that it no longer forms any part or parcel thereof. The test set up by the statute is whether the income passes from the trust estate which produced it and ceases to be subject to the terms and control of that trust. If this trust instrument authorized such incomes to be so separated and segregated and they were so treated in fact, the Commissioner was in error and the trial court properly overruled the demurrer to this petition and entered judgment for the refund. (Italics ours.)
Petitioners submit that this case is determinative of the issues involved in these proceedings; that*2149 the Circuit Court of Appeals held that income of a trust payable to several beneficiaries, although not presently delivered by trustees to the beneficiaries, is, nevertheless, *15 separately taxable if the right to that income is fixed during the taxable year; that the postponement of payment is not decisive; that it is the legal right of the beneficiaries to the income which determines whether the tax is to be assessed against one or more taxable units. In our opinion the cited case is not controlling. In that case the point before the court was whether the income should be taxed to the fiduciary or to the beneficiaries. A trust had been established. Some of the beneficiaries under the trust were adults and some were minors. In accordance with the terms of the will, their portion of the income was actually distributed to the adults; a portion of the minors' income, because they were minors, was not handed over to them, but was by the trustees invested in securities which were segregated from the corpus of the trust fund and held in a separate repository until the minors attained their majority, at which time those securities were delivered to them. The court held in that*2150 case that there was a distribution; that the purchase and segregation of the securities for the benefit of the minors was on a par with the actual distribution to the adults. In the proceedings at bar there was no distribution to any one until the son attained his majority nor was there in this case a segregation of income of the alleged separate trusts. With respect to the accumulated income the son or the daughter of the decedent did not have a right to receive the income prior to the date when Edward Grant Sparrow attained his majority.
From a consideration of the entire record we are of the opinion that the respondent was correct in holding that the income accumulated for the son and daughter of the testator for the years 1917, 1918, and 1919 was taxable to the trustees as income accumulated upon a single entity.
On and after April 9, 1920, the accumulated income of the trust estate became distributable to the beneficiaries entitled to receive it. This related not only to the income accumulated during the years 1917, 1918, and 1919, but also to that which accrued from January 1 to April 8, 1920, inclusive. *2151 In a case involving facts identical with those under consideration, , this Board held that the entire annual income of a trust which terminated during the taxable year was taxable to the beneficiaries and not to the trustee. That case is controlling in these proceedings. The trust estate is not liable to income tax in respect of the income of the year 1920 which was distributable to the beneficiaries during that year. Cf. ; .
Article "Thirteenth" of the will of Edward W. Sparrow provides that his widow shall have the right to occupy any residence *16 which the testator might own in the City of New York at the time of his death. At the time of his death he owned the premises at 41 East 68th St., since which time his widow has resided therein. During the years 1917 to 1924, inclusive, the trustees made certain repairs upon the premises, which upon he death of the widow will become a part of the residuary estate. They paid over to the widow in accordance with the "Twelfth" paragraph of the will annually*2152 a sum equal to the amount of the annual taxes, water rates, assessments and insurance charges upon the residence. The amounts spent by the trustees for repairs upon the estate are shown in our findings. These amounts were claimed as deductions from gross income of the estate for the purpose of determining the net income of the estate for the years 1917, 1918, and 1919, and for the purpose of determining the distributable income of the beneficiaries for the years subsequent to 1919. The respondent has disallowed these deductions, upon the ground that Margaret B. Sparrow had a life estate in the property and that she was properly chargeable with the cost of repairs to the property.
We are of the opinion that Margaret B. Sparrow did not have a life estate in the premises. The will specifically provides that she "shall have the right to occupy such residence, * * * without the payment of any rent or charge therefor." This would imply that she could not lease the premises and that she would not be entitled to receive rents or profits from the premises should they be leased by the trustees. All such rents and profits would be payable to the trustees. Her only right in the premises*2153 is to occupy them. Nowhere does it appear in the will that the testator intended his widow to assume the obligations of a life tenant. She was not required to prevent waste, keep down encumbrances and charges, to pay interest on mortgages, if any such rested on the property, or to contribute toward paying off mortgages. Since the premises in question were a part of the corpus of the trust estate, the trustees clearly had authority to make necessary repairs upon them. Clearly, if the trustees had rented the premises and derived rent therefrom, no question could be raised but that they would be entitled to deduct from the gross income of the estate the amounts paid by them for necessary repairs. We think the situation is no different merely because by the provisions of the will the testator's widow was permitted to occupy the premises. Nor do we think that there is any necessary implication that the testator intended that his widow should bear the expense of necessary repairs. He provided that the trustees should pay over to the widow a sum "equal to the amount of the annual taxes, water rates, assessments, and insurance charges" *17 upon the property. Paragraph "Thirteenth" *2154 of the will provided, however, that the widow should occupy the premises "without the payment of any rent or charge therefor." As we construe the will, the widow was not chargeable with repairs upon the premises and, since the premises were included in the corpus of the trust estate, the trustees clearly had implied authority to make necessary repairs.
Although the respondent does not question the right of the Board to determine the deductibility of the amounts paid for repairs for the years 1917 to 1921, inclusive, the respondent does contend that the Board has no jurisdiction to determine the deductibility of any amounts paid by the trustees for the years subsequent to 1921, for the reason that the respondent has not determined any deficiencies to be due from the estate for years subsequent to 1921.
It is to be noted, however, that the respondent has determined deficiencies to be due from the beneficiaries of the trust estate for 1922, 1923, and 1924, and that in the determination of those deficiencies he has determined the distributable income of the estate and has disallowed the deduction of certain amounts which the petitioners claim are deductible. The effect of this is*2155 to increase the distributable income of the beneficiaries by certain amounts claimed by the petitioners to be deductible from the gross income of the estate in the determination of the distributable income. Margaret B. Sparrow, Edward Grant Sparrow, and Margaret Alicia Sparrow claim that the respondent has overstated in each case their shares of the distributable income of the estate for the years 1922, 1923, and 1924. The Board clearly has jurisdiction of those proceedings for the purpose of determining whether the respondent has erred in computing the petitioners' shares of the distributable income. Upon this point it may be noted that the deficiency notice sent to each of the beneficiaries on June 17, 1926, contains the following paragraph:
With reference to the deductions for accounts' fees, fees for the New York Life Insurance & Trust Co., and printing expenses claimed as deductions against the income of the estate of Edward W. Sparrow, you are advised that this office holds that these items were properly disallowed by the revenue agent.
The petitioners allege that the respondent has erroneously computed the distributable income for 1920 in that he has disallowed the deduction*2156 from gross income of $10,683.75 expended by the trustees for an audit of their accounts for a period commencing May 1, 1915, and ending on April 8, 1920, and also in disallowing the deduction of $2,749.34 expended by the trustees during that year for the inspection of certain lands belonging to the estate, situated in the State of Oregon.
*18 Section 219(b) of the Revenue Act of 1918 provides, so far as is here material:
* * * The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212 * * *.
Section 212 provides:
(a) That in the case of an individual the term "net income" means gross income as defined in section 213, less the deductions allowed by section 214.
Section 214(a) provides in part:
(a) That in computing net income there shall be allowed as deductions:
(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * *
In , the Board considered a case similar to the proceedings at bar, so far as the deduction of expenses is concerned. In that opinion we stated:
*2157 In our opinion expenses which were necessary to be paid out over a number of years in preserving the estate, selling the property and collecting interest or deferred payments on sales, are deductible from the gross income of the estate. Such expenses come under the classification of ordinary and necessary expenses in carrying on a trade or business. Under section 219 of the Revenue Act of 1918 an estate or trust is entitled to the same deductions for such expenses as are allowed to individuals.
We have also held, in , that expenses incurred by executors in maintaining a country estate and in procuring a lessee for the estate, as well as attorney fees incurred in maintaining the corpus of the estate, are properly deductible from taxable income.
The trustees of the estate of Edward W. Sparrow were required to account to the court for the income which had been received by the trustees of the estate from 1915 to 1922. It was necessary for them to employ accountants for this detail work. They did so and paid necessary fees for the accomplishment of the work. The respondent has allowed the deduction of certain amounts paid for*2158 accountants' fees but has disallowed the balance. In our opinion the amounts disallowed constitute ordinary and necessary expenses of the trustees and are legal deductions from the gross income of the estate.
The respondent disallowed the deduction of $2,749.34 paid by the trustees in 1920 for the inspection of certain timber lands belonging to the estate, situated in the State of Oregon, the reason for the disallowance being that in the opinion of the Commissioner the item was a capital charge and was connected with a prospective sale of the timber lands. The respondent has, however, submitted no evidence that a sale of the timber lands was contemplated in 1920 and the will of Edward W. Sparrow authorized the trustees to retain *19 this timber land as a part of the principal of the trusts. Upon the evidence of record the amount paid for the inspection and survey must be held to be an ordinary and necessary expense of the conduct of the estate.
On December 30, 1921, the trustees of the Sparrow estate paid to the State Tax Commission of the State of New York $76,447.88, being the amount of transfer tax due the State of New York on the estate of Edward W. Sparrow together*2159 with interest thereon for delayed payment. In their income-tax returns for 1921, the beneficiaries claimed the deduction from gross income of their proportionate shares of the transfer tax paid. In their petition to this Board the petitioners allege that the respondent -
has failed to allow as a deduction from gross income for that year [1921] the amount of New York transfer taxes paid during the year to the State Tax Commission of the State of New York, but instead, has allowed a deduction of the proportionate amount of such taxes to the individual beneficiaries named in the said Will.
In the brief filed in support of the contentions of the petitioners it is stated:
During the year 1921 the trustees of the Sparrow estate paid certain transfer bequests to the State of New York. In the returns of their income for that year the individual beneficiaries claimed these taxes as a deduction.
The Commissioner disallowed these deductions.
Under the provisions of section 703 of the Revenue Act of 1928, deductions must be allowed to the petitioners as claimed. The evidence of record is to the effect that the Commissioner has allowed the beneficiaries the deductions of their*2160 pro rata shares of the transfer tax paid. This is warranted by section 703 of the Revenue Act of 1928. There appears to be no issue before the Board upon this point.
In 1922 the trustees of the estate of Edward W. Sparrow paid $3,556.88 accountants' fees in preparing their accounts as trustees and $2,000 to the New York Life Insurance & Trust Co. for services rendered to the trustees and $2,408.48 for bringing their accounts as trustees and, in 1923, they paid $25,299.18 for counsel fees and disbursements for services rendered in connection with the suit for construction of testator's will and for an accounting brought against the trustees for the year 1920 for other legal services, all of which deductions have been disallowed by the respondent in computing the distributable income of the beneficiaries for the years 1922 and 1923. We are of the opinion that these amounts were proper deductions from the gross income of the estate in the determination of the distributable income payable to the beneficiaries. A part, at least, of these amounts was incurred in connection with the suit *20 bought against the estate by Edward Grant Sparrow. The trustees were ordered by the*2161 court to incur the expenses. We can not doubt that the expenses were ordinary and necessary expenses within the purview of section 214(a)(1) of the Revenue Act of 1921. The distributable income of the estate should be reduced by the amounts in question.
The seventh allegation of error in the petition is that the respondent in his notice of deficiency to Margaret B. Sparrow, as guardian of Margaret Alicia Sparrow, has failed to give to Margaret B. Sparrow, as guardian, credit for an overassessment of $69.24 for the year 1921. The answer filed by the respondent in this case is to the effect that credit was not given by reason of the fact that more than five years elapsed from the date of payment to the date when the deficiency notice was mailed and that the credit can not be given under the statute. The petitioners have submitted no evidence to the contrary. The return in question was filed on or about March 16, 1922, and it shows on its face that the tax shown to be due by the return in the amount of $81.29 was paid on March 16, 1922. The deficiency notice from which the appeal to this Board was taken was mailed on June 17, 1926. The denial of the credit by the respondent*2162 is sustained.
The final allegation of error is that in each of the years 1917 to 1924, the Commissioner, in proportioning the net income of the estate among the several taxpayers entitled to share therein, has omitted to apportion nontaxable income, with the result that taxable income apportioned to Margaret B. Sparrow, one of the beneficiaries, has been increased in each year and the amount of her income tax for each of said years has been correspondingly increased.
It is not apparent from the voluminous evidence submitted in these cases that the error complained of was committed by the respondent. It is, however, a matter of accounting which will be adjudicated in the settlement under Rule 50.
Reviewed by the Board.
Judgment will be entered under Rule 50.
MURDOCK, dissenting: I dissent from a part of the prevailing opinion dealing with the last point. The opinion states in regard to this point that it is not apparent that the error complained of was committed by the respondent. I believe we should take no action in any case until it is apparent that the Commissioner has committed some error. See Henry Wilson et al.,16 B.T.A. 1280">16 B.T.A. 1280.*2163