*1816 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 that she relinquished by electing to take under the will. 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.
*839 The respondent determined deficiencies in income tax for the years 1924 and 1925 in the respective amounts of $1,386.13 and $1,918.38. The deficiencies arise out of the disallowance of claimed deductions by the trustees of amounts*1817 paid decedent's widow under the will, the widow having elected to take thereunder in lieu of dower. The issue is whether such disallowance was proper.
The parties have stipulated that if the respondent is sustained in his disallowance of the deductions claimed, the correct deficiencies are $319.54 for 1924 and $968.60 for 1925 instead of the amounts determined.
FINDINGS OF FACT.
The petitioners herein are executors and trustees of the estate of William B. Butterworth, who died testate on October 5, 1921, while a resident of Pennsylvania. The will, dated March 18, 1910, after disposing of certain personal belongings, provided in part as follows:
Third: All the rest, residue, and remainder of my estate, real, personal, mixed, whatever and wheresoever, I give, devise, and bequeath unto my trustees hereinafter named, in Trust to invest and keep invested * * *, and to pay over the net income arising therefrom to my said wife, Julia Butterworth, for and during the full term of her natural life * * *.
Provision was made for the disposition of the corpus following the death of the deceased's widow. By writing, signed, acknowledged, delivered to the executors of the decedent, *1818 and duly filed and recorded as required by the statutes of Pennsylvania, Julia Butterworth, the widow, elected to take under the will in lieu of the interest allowed her in decedent's estate by the law of Pennsylvania.
During 1924 and 1925, the years involved in the proceeding, the trustees made payments to the widow as provided for under the will, which amounts, added to payments of prior years, did not aggregate a sum equal to that which would have been apportionable to her as of the date of deceased's death under the Pennsylvania statutory provisions had she not elected to take under the will.
In filing returns for the years 1924 and 1925 the petitioners as trustees, when computing taxable net income, deducted from gross income the amounts distributed to the widow in the same manner as they deducted amounts similarly distributed to other beneficiaries under the testamentary trust.
OPINION.
ARUNDELL: By decedent's will it was provided that his property, after making certain specific bequests, should be placed in trust and the income therefrom paid to the widow. Under the statutes of Pennsylvania a surviving spouse may elect to take either under or *840 against*1819 the will. Election to take under the will bars the right of the survivor to dower or any statutory interest in the estate of the decedent. Sec. 8335 et seq., Penna. Stat. 1920; Purdon's
The statute here involved is section 219 of the Revenue Act of 1924 which, as far as material here, provides:
SEC. 219. (a) The tax imposed by * * * this title shall apply to the income of estates or of any kind of property held in trust, including -
* * *
(2) Income which is to be distributed currently by the fiduciary to the beneficiaries * * *;
* * *
(b) Except as otherwise provided * * * the tax shall be computed upon the net income of the estate or trust, and shall be paid by the fiduciary. 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, except that -
* * *
(2) There shall be allowed as an additional deduction in computing the net income of the estate or trust*1820 the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries * * * but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. * * *
Under this statute the trustees claim that in computing the net income of the trust they are entitled to deduct the sums paid to the widow as "income * * * distributed currently by the fiduciary to the beneficiaries." The respondent disputes this claim on the ground that, because certain court decisions hold that payments received by a widow under the circumstances herein are not taxable to her, the payments may not be deducted by the trustees, as it is only income that is taxable to the beneficiary that is deductible.
In
What we have here is, in fact and in legal effect, the purchase of an annuity, in no way differing from an annuity purchasable by the widow from an insurance company, with the proceeds of her statutory rights in the estate, *841 except only that in such a purchase she would have an unsecured obligation, whereas here the obligation is secured by the income and principal of the trust fund. That such a relinquishment of dower rights is a purchase of the will provisions is well and long established. Burridge v. Beabyl, 1 Pere Wms. 127 (1710);
There was much the same situation in
The federal income tax laws recognize the legal status of the taxpayer as created by local law, and fix the taxes in accordance with such law. By the General Laws of Massachusetts (chapter 191, § 15), as well as under the earlier statutes, a surviving husband or wife may refuse to accept the provisions of a will and take his or her statutory share in the corpus of the estate as if the deceased had died intestate. When the surviving husband or wife accepts the provisions of the will, whether or not such provisions are expressly declared to be "in lieu of such statutory rights," the survivor is in the position of one who sells property to the estate, and acquires the legal status of "a purchaser for a valuable consideration."
*1823 In
"The bequest in this case to the widow of the testator is made in express terms in lieu of dower, and on condition that she relinquishes all her right and title thereto.
"A wife cannot be deprived of her dower except by her own consent. Therefore, when she accepts a provision in her husband's will as a substitute for this existing legal right, the law regards her as standing in the light of a purchaser for a valuable consideration, and entitled to receive the whole of the sum given by the will, for which she has relinquished her life estate in one-third of the testator's real estate, in preference to other legatees, who, being only objects of the bounty of the testator, and not having any legal claim on his estate, are regarded as volunteers, and are not allowed to take until the widow has received the full amount of the bequest to her."
* * *
Under the principles announced by the Supreme Judicial Court of Massachusetts, we think that, in the case before us, the payments made to Sarah A. Davenport during the years in dispute represented*1824 "purchase money" or "installment payments" by the estate in consideration for her share in the corpus of the estate. We think, then, that she was a "purchaser for value."
* * *
In the case at bar the local law gave Sarah A. Davenport the status of a "purchaser for value." The federal income tax law recognizes that status. We think it clear that she was not liable for the payment of any of the taxes in dispute; * * *
* * *
*842 While in the Warner case the court had before it an annuity, the provision relating to the annuity was made expressly in lieu of statutory rights of the beneficiary in the estate; we think the principles announced in that case are controlling in the case before us * * *.
In
It is freely conceded, if the widow had taken the amount of her interest in the estate, and with that sum had purchased an annuity of $50,000.00 per annum for a period of years, such annuities, when paid to her, would not have been taxable to her under the law, for the laws above referred to so provide. In legal effect, is that not precisely what was done in this case? She took her property by her acquired under the laws of the state, turned the same over to her husband's estate under an agreement she should receive as the purchase price of her interest $50,000.00 per annum from the estate, that is to say, her invested capital was the value of her interest in her husband's estate, to wit, $483,727.79. By the expenditure of this sum, the same being her own money, she purchased an annuity of $50,000 per annum from those representing her husband's estate to be paid out of that estate. Clearly, in such case, under the law, she should not be required to pay any income tax on the annual payments received until her capital invested in the annuities shall have been returned to her.
*1826 After theadjudication of the above cases the respondent published ruling
*843 The idea expressed by the Circuit Courts of Appeals in the above cases that annuities are not taxable until cost has been recovered finds support in the decision of the Supreme Court in
The*1828 transaction was not a closed one. Respondent [taxpayer] might never recoup her capital investment from payments only conditionally promised. Prior to 1921 all receipts from the sale of her shares amounted to less than their value on March 1, 1913. She property demanded the return of her capital investment before assessment of any taxable profit based on conjecture.
As to the sums received as the result of inheritance the court said:
Some valuation - speculative or otherwise - was necessary in order to close the estate. It may never yield as much, it may yield more. If a sum equal to the value thus ascertained had been invested in an annuity contract, payments thereunder would have been free from income tax until the owner had recouped his capital investment. We think a like rule should be applied here. The statute definitely excepts bequests from receipts which go to make up taxable income. See Burnet, Commissioner, v. Whitehouse, 282 U.S. (Apr. 13, 1931).
Likewise, the proposition asserted by the Circuit Courts of Appeals, that the widow by acceptance of provisions of the will in lieu becomes a purchaser for value, is amply supported by authority. *1829 See cases cited in the Warner, Bolster, and Brandeis cases. Such is the law of Pennsylvania. In
It is true that her acceptance under the will must be regarded as an acceptance in lieu of dower, and so to be taken as a purchase for a valuable consideration * * *.
She has surrendered her rights under the intestate law in accepting these provisions, and was therefore a purchaser for value of the testamentary provisions in her favor.
The widow, by accepting the provisions of the will in lieu of dower, is a purchaser for value * * *.
*844 The above decisions consider the situation from the standpoint of the widow. Considered from the viewpoint of the estate, the holdings are that what occurs in a case of this sort is the purchase by the estate, through the trustee, of the share to which the surviving spouse was entitled. In *1830
A provision by will in lieu of dower is in fact and in legal effect a mere offer by the testator to purchase out the dower interest for the benefit of his estate.
It [a devise in lieu of dower] is the price put by the testator himself upon that right, and which she is at liberty to accept, * * * So, on the other hand, the husband offers a price for his wife's legal right of dower which he proposes to extinguish; and if she agrees to the terms, she relinquishes it and is entitled to the price. It is, therefore, a matter of convention or contract between them; and what she thus becomes entitled to receive is not by way of bounty - like other general bequests; but as purchase money for what she relinquishes.
To the same effect is
Section 219 of the Revenue Act of 1924, quoted above, deals with income. It taxes trust income primarily to the trustee, but it allows the trustee to deduct the "income * * * which is to be distributed currently by the fiduciary to the beneficiaries." This provision in our opinion relates solely to amounts paid as income to the objects of the testator's bounty. It does not apply to other payments by the trustee, as in this case where*1832 the trustee was completing the offer made to the widow for the purchase of her share in the estate; the trustee in such case was merely carrying out the "convention or contract" (
Petitioners call our attention to the rule that in case of doubt, taxing statutes are to be construed against the Government and in favor of the citizen. In view of the authorities quoted as to the status of the widow who takes a bequest in lieu of dower, we think there is no doubt that the amounts paid to her in this case are not "income * * * distributed * * * to the beneficiaries" and there is no room for application of the rule urged.
It is also argued by the petitioners that the*1833 last clause of section 219(b)(2), which provides that the amounts deducted by the trustee shall be included in the income of the beneficiary, is directed solely to the beneficiary and has no bearing on the preceding part of the section which gives the deduction to the trustee. We have indicated in our discussion so far that our decision is not rested on the last clause of section 219(b)(2) but is based on the preceding part under which the trustees claim the deduction. But even conceding that there is merit to the claim urged, it does not help the petitioner's case. The point urged is illustrated by supposing the beneficiary to be dishonest and failing to report income; or, as suggested by amicus curiae, the beneficiary might be exempt from tax. These examples do not fit the present case because in them it is taken as a premise that there is a beneficiary who has received distributable income, and such is not the case here for reasons above given.
Petitioners also cite
As the Hospital is admitted to be a corporation, whose income when received is exempted from taxation under § 11(a), we see no reason why the exemption should not be given effect under the circumstances. To allow the technical formality of the trust, which does not prevent the Hospital from really enjoying the income, would be to defeat the beneficent purpose of Congress.
We think it obvious that that case has no application here. The taxing statute does not purpost to put widows in an exempt class and we know of no provision for them which could be construed as evidencing in their behalf any "beneficient purpose of Congress." The Circuit Courts of Appeals cases discussed in the early part of this opinion are not authority for holding that widows constitute an exempt class of persons. Those cases merely put the widow in the *846 same class as other purchasers of annuities, and who receive no taxable income until the cost of the annuities has been recovered.
*1835 It is also argued that, if the respondent's position is sustained, the widow gets no real benefit from the decisions holding nontaxable the payments made in lieu of dower. It is not the purpose of courts to construe taxing laws so as to confer benefits other than those prescribed by the statute. If it so happens that certain persons are benefited by one provision of the law, it does not follow that they must receive equal benefits under others. As pointed out above, the courts have not singled out widows and given them an exempt status, but have only in such cases as this, placed them in the same class as other purchasers of annuities.
In reaching our decision that the amounts paid to the widow in this case are not deductible by the trustee, we have not overlooked the case of
We also recognize that for some purposes a distinction must be drawn between a bequest of income and a bequest of an annuity. Cf. Whitehouse and Gavit cases, supra. But in the view we take it is not necessary to draw that distinction here. That question may arise after the widow has recovered the value of her dower right (Allen v.
Reviewed by the Board.
Decision will be entered redetermining the deficiencies in the amounts stipulated.
STERNHAGEN concurs solely by reason of prior court decisions.