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E. C. JOHNSON, EXECUTOR, ESTATE OF MARY I. B. RUSSELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Johnson v. Commissioner

Docket No. 11250.

United States Board of Tax Appeals

13 B.T.A. 850; 1928 BTA LEXIS 3169;

October 9, 1928, Promulgated

*3169 Income and gains of an estate accruing to charitable organizations as residuary legatees, held to have been permanently set aside pursuant to the terms of the will, as provided in section 219(b) of the Revenue Act of 1921.

Lucius F. Robinson, Esq., for the petitioner.

John F. Greaney, Esq., for the respondent.

SIEFKIN

*850 This is a proceeding for the redetermination of deficiencies in income taxes for the period April, 15, 1921, to December 31, 1921, in the amount of $6,701.16, and for the calendar year 1922 in the amount of $1,499.74.

The error assigned is the disallowance by the respondent of claimed deductions from gross income in the amounts of $43,844.35 for the *851 period April 15, 1921, to December 31, 1921, and $28,314.02 for the calendar year 1922, alleged to represent that portion of the income and gains of the estate to which residuary legatees - charitable corporations, were entitled as beneficiaries under the will of the testatrix.

FINDINGS OF FACT.

Mary I. B. Russell died testate April 14, 1921. E. C. Johnson and Alice G. Tuttle were duly appointed and qualified as executors of her will and duly administered*3170 her estate. By her will the testatrix, after giving various pecuniary legacies and a certain specific devise, gave all the rest, residue and remainder of her estate, consisting of personally, to the Visiting Nurse Association of Hartford, the Church Home of Hartford, and Christ Church Parish of Hartford, all of which are charitable corporations.

During the settlement of the estate, the administrators sold certain securities of the estate for the purpose of paying taxes and claims of certain pecuniary legatees. A net profit of $37,007.33 was realized over the inventory value of the assets as of the time of the death of the testatrix. Of this amount, $24,525.55 was realized during the period April 15, 1921, to December 31, 1921, and was claimed as a deduction in the return for that period. The amount of $12,481.78 was realized during the year 1922, and was claimed as a deduction in the return for 1922. The executors accounted for this gain in their final account and the residue of the estate distributed to the residuary legatees in May, 1922, was increased by this amount.

The income of the estate received by the executors, from rents, interest and corporation dividends, during*3171 the settlement and prior to the distribution was $42,693.87. Of this amount, $1,481.60 represented interest accrued up to the time of the death of the testatrix and this was included in the principal of the estate. All administration expenses were charged against the corpus of the estate.

Of the $41,212.27 represent income accrued after the death of the testatrix, $25,422.58 was received by the executors during the calendar year 1921, and $15,789.69 was received during the calendar year 1922.

When the final amount was prepared April 15, 1922, the executors found that the average yield on the securities was 4.85 per cent. The interest was allocated at this rate to the legatees, who were entitled to the interest from the time of the death of the testatrix, and the balance was allocated to the residuary legatees. This allocation was shown in the final account. In such final account the executors credited themselves with having paid to all the legatees, including the residuary legatees, income in the amount of $40,912.27.

After the accounting had been filed, the executors paid over to each of the residuary legatees the amount of $270.33. This money *852 had been received*3172 by the executors as dividends after the accounting had been accepted. It was allocated as the securities were distributed.

The total amount paid over to the residuary legatees was $35,962.03, and of this amount, $20,609.39 had been received in 1921, and $15,352.64 had been received in 1922. This income included the amounts of $779.47 and $326.89, representing interest accrued during the years 1921 and 1922, respectively, on tax-exempt Government and municipal bonds. All of the interest received by the executors was kept in one depository.

The executor, Johnson, in preparing the income-tax return for the period April 15, 1921, to December 31, 1921, claimed a deduction on account of income permanently set aside for the three residuary legatees of $19,318.80, and in the return for the calendar year 1922, claimed a deduction on account of income actually paid to the residuary legatees of $15,832.24. At the time the 1921 return was prepared, the executors could not determine exactly the average interest income yield on the personal property.

On April 4, 1922, the Christ Church Cathedral was paid $5,000, and the balance due this legatee, $6,117.02, was paid later in April. There*3173 was also paid in April to the Church Home and the Visiting Nurse Association the amount of $11,717.01. The pecuniary legacies entitled to interest after the death of the testatrix amounted to $125,000.

Alice Pratt Conkling, who was entitled to interest after the death of the testatrix, died on November 21, 1921, and $156.25 was paid to her estate. An annuity of $300 was also paid. Other than these two items no interest was paid by the executors to pecuniary legatees prior to December 31, 1921. All payments of corpus and interest to residuary legatees were made in 1922.

The petitioner filed its income-tax return upon a cash receipts and disbursements basis.

OPINION.

SIEFKIN: The question to be decided is whether the respondent erred in disallowing as deductions from gross income the amount of $43,844.35 for the period April 15, 1921, to December 31, 1921, and $28,314.02 for the calendar year 1922, which amounts were alleged to represent a portion of the income and gains of the estate to which residuary legatees were entitled as beneficiaries under the will of the testatrix, it being stipulated that the residuary legatees were charitable organizations within the meaning*3174 of the section of the law involved.

During the administration of the estate the executors received $41,212.27 from rents, interest and corporation dividends. Of this amount $25,422.58 was received in 1921, and $15,798.69 was received in 1922. The total amount paid over to the residuary legatees in *853 1922, exclusive of interest on tax-exempt bonds, was $34,855.67, of which amount $19,829.92 had been received by the executor in 1921 and $15,025.75 had been received in 1922.

During the settlement of the estate, the executors sold for the purpose of paying taxes and certain claims of pecuniary legatees, certain securities of the estate and realized a profit of $37,007.33 over the inventory value of the assets as of the time of the death of the testatrix. Of this amount $24,525.55 was realized in 1921 and $12,481.78 was realized in 1922. No payments were made to residuary legatees until 1922.

Section 219(b) of the Revenue Act of 1921 provides:

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*3175 section 212, except that (in lieu of the deduction authorized by paragraph (11) of subdivision (a) of section 214) there shall also be allowed as a deduction, without limitation, any part of the gross income which, pursuant to the terms of the will or deed creating the trust, is during the taxable year paid or permanently set aside for the purposes and in the manner specified in paragraph (11) of subdivision (a) of section 214. In cases in which there is any income of the class described in paragraph (4) of subdivision (a) of this section the fiduciary shall include in the return a statement of the income of the estate or trust which, pursuant to the instrument or order governing the distribution, is distributable to each beneficiary, whether or not distributed before the close of the taxable year for which the return is made.

In the case of , decided by the Circuit Court of Appeals for the Second Circuit, June 6, 1927, it was held that where a will gave the residue of an estate to 35 seperate charitable, religious and educational corporations, and provided that if any such corporation be incapable of taking it, the share of*3176 such corporation should be divided among the others in prescribed proportion, the income earned by the estate during administration and becoming part of the residue of the estate was by the will itself "permanently set aside" for the residuary legatees, within the meaning of section 219(b) of the Revenue Act of 1918. The court in that case said:

No part of the income of this estate was paid to any of the residuary legatees during the year 1919. No entry was made on the books of the executors, crediting the residuary legatees with the income, but in the return made by the executors, in March, 1920, and in the amended returns of the income received during the year 1919, such income was returned as passing to the said corporation, and as subject to no tax.

Section 219(b) does not make the deduction depend upon the action of the executors in crediting the income upon their books, but upon the permanent setting aside of the income by the will itself for corporations of the character in question.

* * *

The *854 intention of the testatrix plainly appears from her will that all of her residuary estate shall go to corporations of the character described in section 219(b), *3177 and the residuary estate includes the income in question. * * *

See also , and , which are to the same effect.

There is no doubt that the amounts of $15,025.75 and $12,481.78, constituting income accrued in 1922 and paid in 1922 to the residuary legatees, are proper deductions under section 219(b) of the Revenue Act of 1921.

The amount of $24,525.55 realized upon the sale of assets in 1921 and the amount of $19,829.92 claimed by the executors to be due the residuary legatees from the rents, interest and dividends in 1921, were not paid to the residuary legatees until 1922, but under the authority of the cited cases we must hold that they were permanently set aside for the residuary legatees pursuant to the terms of the will.

The evidence indicates that $44,355.47 was permanently set aside in 1921, but since the petitioner in regard to that period alleges error in disallowing a deduction of $43,844.35, we are precluded from allowing a greater deduction than that.

The deductions allowed then, are $43,844.35 for the period April 15, 1921, to December 31, 1921, and $27,507.53*3178 for the year 1922.

Judgment will be entered under Rule 50.

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