*862 The petitioner was bequeathed a life estate in her deceased husband's residuary estate and was entitled to "the rents, issues, income and profits thereof accruing during her life." During the taxable year certain securities belonging to the residuary estate were sold at a gain over their value at the time of the testator's death, which gains were due in part to accumulated earnings since the testator's death and in part to enhancement of value. Held, that the entire amount of such gains representing the difference between the selling price of the securities and their value at the time of the testator's death is taxable to the petitioner.
*969 OPINION.
SMITH: The respondent has determined a deficiency in petitioner's income tax for 1931 in the amount of $8,693.52. So much of the deficiency as is here in dispute results from the respondent's action in adding to the petitioner's income the gains realized upon the sale of certain securities belonging to the residuary estate of the petitioner's deceased husband, Herbert DePuy, in which the petitioner*863 was bequeathed a life estate.
The petitioner's husband, Herbert DuPuy, died testate on January 10, 1930. After making numerous specific bequests, the decedent provided in article 13 of his will that:
All the residue and remainder of my estate and property, real and personal, I dispose of as follows, -
(A) If my wife, AMY H. DEPUY, shall survive me, I devise and bequeath the said property to her, for and during the term of her life, and she shall receive and retain, as her absolute property, the rents, issues, income and profits thereof accruing during her life. I hereby authorize and empower my said wife during her life to retain any and all of my investments or property, real and personal, which may come into her possession, under this Article of my will, or in her discretion, from time to time, to sell, absolutely and in fee simple or for any less estate (at public or private sales to such person or persons, for such price and upon such terms as she shall deem proper) convey and convert all or any part thereof, and from time to time, in like manner, to invest, sell, convey and reinvest the said property in such real estate, stocks, bonds, notes, mortgages or other securities*864 as she shall deem to be safe and wise investments. She shall not be required to convert all or any part of said property into legal investments for trustees, or to invest any of the proceeds received from the sale or other disposition thereof, in legal investments for trustees. No purchaser of any property from my said wife shall be under any responsibility or liability for the application of the *970 purchase money. In holding or managing any real estate, which may at any time form a part of the property to be held by my wife during her life, as aforesaid, I authorize and empower my said wife, from time to time, not only to lease the same in such manner, for such time, upon such terms and at such rental as she shall deem proper, but also to improve all or any part of such real estate by the erection of buildings or other improvements thereon or otherwise, and to repair, alter or remove the same as she shall deem proper and make all such expenditures in connection therewith as she may deem advisable, all such expenditures to be made from the principal of the funds or property in the possession of my wife as legatee or devisee for life under this will. My wife shall not be*865 required to give any security as legatee or devisee for life, under this will.
Article 16 of the will provides in part that:
I hereby appoint my wife, AMY H. DUPUY, and the PEOPLES-PITTSBURGH TRUST COMPANY, of Pittsburgh, Pennsylvania, jointly as executors of this will. * * *
I hereby authorize and empower my executors or executor, who may be acting as aforesaid, to sell at public or private sales all or any part of my real or personal estate (except that specifically devised or bequeathed) to such person or persons, for such price and upon such terms as they shall deem proper, and to transfer and convey the property thus sold without any liability of the purchasers for the application of the purchase-money.
During the taxable year 1931 certain securities belonging to the decedent's residuary estate, consisting of 16 1/2 shares of stock of the Klondike Supply Co. and miscellaneous bonds, were sold at a profit of $12,235.38. The profit on the sale of the shares of stock, which occurred in complete liquidation of the company, was $10,293.50 and on the bonds $1,941.88, there amounts representing the difference between the selling price of the securities and their value at*866 the date of death of the testator. In computing the deficiency herein the respondent has increased the petitioner's net income by the amount of $50,051.86, including the profits on the sale of the above described securities computed at $26,221.15. The parties have stipulated in this proceeding that except for the item of $26,221.15 the computation as shown in the deficiency notice is correct and have further stipulated that the correct amount of the profit on the sale of the securities in question is $12,235.38 instead of $26,221.15.
It is further stipulated that:
The sum of $12,235.38, gains realized on sales of securities, has been treated by Peoples-Pittsburgh Trust Company, Pittsburgh, Pennsylvania, the agent for the petitioner, as a corpus or capital gain of the trust estate in which Mrs. Amy H. DuPuy has a life interest and has not in fact been distributed or paid to Mrs. Amy H. DuPuy.
It is further stipulated, subject to its materiality, that of the $10,293.50 gain realized on the final liquidation of the Klondike Supply Co. only $6,997.84 represents undistributed earnings on the 16 1/2 shares of stock owned by the decedent's estate accruing or *971 earned from*867 the date of the decedent's death, January 10, 1930, to the date of the liquidation of the company on September 30, 1931.
The petitioner's rights in the residuary estate as well as her tax liability in respect of the income from the estate must, of course, be determined by construction of the will in accordance with the testator's intent and the laws of the Commonwealth of Pennsylvania. The wording of the will is that the petitioner "shall receive and retain, as her absolute property, the rents, issues, income and profits thereof accruing during her life." What part of the gains derived from the sale of the bonds and the shares of stock over and above their value at the date of death of the testator constitutes "income and profits" distributable to the petitioner?
It is the petitioner's contention that the amounts of $1,941.88, representing the gain on the sales of bonds, and $3,295.66, which is the amount of gain realized on the liquidation of Klondike Supply Co. due to appreciation in value of the shares of stock and not undistributed earnings accrued or earned after the decedent's death, are not taxable income to the petitioner "for the reason that these gains are accretions*868 to the principal of the trust estate and therefore belong to the remaindermen named in Mr. DuPuy's will." The petitioner concedes in her brief that $6,997.84 of the $10,293.50 gains realized on the liquidation of the Klondike Supply Co., representing the undistributed earnings since the date of the testator's death attributable to the 16 1/2 shares of stock owned by the estate, is taxable to her under authority of
Under the Pennsylvania or American rule adopted in most American jurisdictions, the rights of the life tenant and the remainderman to an extraordinary cash or stock dividend declared during the life tenancy are determined by a division of the dividend between the claimants so as to preserve intact the book value of the devised property (the corpus) as it existed at testator's death. This was made clear by the decision in
* * *
* * * In
"* * * (4) When a corporation is liquidated, those entitled to the income of the trust are to be awarded so much of the sums received for the stock as they show was income accruing after their right to income began, and the balance goes to the principal; and this is so although the course pursued takes the form of a sale of the stock."
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In conclusion, we may summarize what has been said above. * * * Fourth, where the trustee sells stock and the sale in substance effects a distribution, as in the case of liquidation of the company, the court will disregard the form and treat the sale as a distribution. *872
We will first inquire whether in the instant proceeding there was a trust such as existed in
*873 In
* * * for and during the term of her natural life, or so long as she remains my widow, she to have full possession, control over, and management of the principal of all my personal estate, and to manage and invest same in whatever manner she may deem proper, and shall not be required to give any security therefor, to my hereinafter named executors,
with the remainder over to his children. The court held that the widow was a debtor to remaindermen in the amount originally received, and not a trustee, and that, as respects liability for inheritance tax, the increase of testator's estate descended to the children from the widow and not from the testator. In its opinion the court said:
The Act of May 17, 1871 (P.L. 269), provides that where personal property is given to one for life with remainder over, the life tenant may take possession thereof on giving security. We held in *874
Where the testator directs that no security be given, the legal relations between life tenant and remaindermen must be the same as if a bond had been given under the act of 1871. Prior to that act, section 49 of the Act of February 24, 1834 (P.L. 70, 83), controlled; the wording is substantially the same as in the act of 1871. Under the earlier statutes we held the life tenant was not a trustee within the Act of June 16, 1836 (P.L. 784). Mackinson v. Mackinson, 2 Grant, Cas. 286. And under the act of 1871, further bearing on the nonexistence of a trust estate, we held that no fiduciary relation existed to prevent the life tenant from becoming a purchaser of testator's property. (*875
Other cases in which the Supreme Court of Pennsylvania has held that life tenants do not hold as trustees for the remaindermen are
The petitioner submits that it is immaterial whether she is considered a trustee or merely a debtor to the remaindermen, since in either situation the amount of her debt or the amount of her trust fund is determined by her right to the increment.
Was the petitioner, as life tenant and not trustee of the residuary estate, entitled to the use of, and therefore taxable on, such part of the income realized on the sale of the securities held in the residuary estate as represented the increase in value thereof due both to the enhancement of value and the accumulation of earnings during the life tenancy? In
A different conclusion was reached in
In
*975
In
* * * From Earp's Appeal, 28 pa. 368, to
"Where extraordinary dividends, whether of cash, scrip or stock, are declared and paid on shares of corporate stock left by a decedent in trust, they are to be distributed by giving to the corpus sufficient*880 to keep intact the value of the shares as they were at the time the trust began, and by giving the rest of the dividend to those entitled to the income of the estate."
To the same effect is
The petitioner in her brief cites and relies upon
I dissent from the view which the auditing judge has taken in respect of what shall constitute "income and profits," and what "principal." If the gift had been of specific property for life, with remainder over, it may be conceded that Mrs. Leech [life tenant] would have had no right to share in the proceeds of its sale; for such proceeds when realized would simply have been *976 the measure of value of the specific property which, by the terms of the will, those in remainder would otherwise have had a right to demand at her death. The gift, however, being general, gave those in remainder no title to any specific property, but implied conversion into cash, which referred the value of the corpus to the date of the testator's death. Had the gift to Mrs. Leech been legal as well as equitable, that value would have been the measure of her liability to those in remainder, and the source of the income and profits beneficially intended for her. Investment and reinvestment would have been in her control, and for her sole*882 benefit. Those in remainder would have had no interest further than the safety of this corpus, and its payment at her death. This being conceded, why should the mere separation of legal and equitable estates imply any change in her beneficial estate? The obvious purpose of separation was to vest in the trustee the duty of administration of the trust estate. The gift of the beneficial interest was as absolute as though coupled with a legal estate. It was no greater or less because of the separation. In either event the trust estate would consist, at the beginning, of cash, and Mrs. Leech, by the terms of the will, be entitled to whatever "income and profits" it might earn during her life. * * *
* * *
The authorities cited in the support of the theory of capitalization of profits are not, in my opinion, entitled to the weight which has been given them. The rule as quoted from Hill, Trustees, to the effect that "any extraordinary" profits realized from "stocks or other property" belong to the corpus, was no doubt the result of the English cases which had been decided when the text was written; but later cases have greatly modified, if not reversed, it, while it has been distinctly*883 repudiated in Pennsylvania.
These suggestions sufficiently indicate the trend of decision, and the principle which should settle the question raised here. The gift being, not of specific property, but general and residuary in its character, the measure of the remainder is its value at the date of testator's death, and that of the life estate the increase thereafter. It follows that the amounts invested in mortgage, which were admittedly parts of the estate at testator's death, should be treated as the corpus, and the residue in the hands of the trustees, arising from foreclosure, as belonging to Mrs. Leech, as "income and profit," within the "purpose and intent" of Mr. Park's will.
The same distinction as was pointed out between Park's Estate and Graham's Estate is present as between the instant case and Nirdlinger's Estate, that is, in Nirdlinger's Estate the life beneficiary was entitled to receive the "rents, issues, income, dividends and revenue" in the profits, while in the instant case the life tenant was entitled to receive the "rents, issues, income and profits."
From our review of the cases we conclude that under the*884 prevailing rule in the Commonwealth of Pennsylvania the petitioner herein, as life tenant of the testator's residuary estate, was entitled to all of the profits derived from the sale of the assets of the estate over and above their value at the date of the testator's death.
Reviewed by the Board.
Judgment will be entered under Rule 50.