Braun v. Commissioner , 29 B.T.A. 1161 ( 1934 )

ARTHUR E. BRAUN, SURVIVING TRUSTEE UNDER THE LAST WILL AND TESTAMENT OF T. H. GIVEN, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Braun v. Commissioner

Docket No. 54556.

United States Board of Tax Appeals

29 B.T.A. 1161; 1934 BTA LEXIS 1409;

February 23, 1934, Promulgated

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">*1409 1. During the taxable years 1927 and 1928 the taxpayer, a trust estate, paid to the trustees the sum of $75,000 as compensation for personal services in managing two newspaper publishing companies owned by the estate, and also in 1927 paid to the life tenant $150,000 as additional income distributable under decedent's will or in settlement of the life tenant's claim against the estate for additional inncome. By the terms of the decedent's will, which created the estate, all the ordinary net income was distributable currently to the life tenant, who paid the tax thereon, and only the capital vet gain was taxable to the fiduciary or trust estate. Held, the items of $75,000 and $150,000 affect only the tax liability of the life tenant and the trustees, individually, and do not constitute deductions allowable in computing capital net gain.

2. Petitioner acquired by general bequest from decedent's estate, pursuant to decrees of distribution of the Orphans' Court entered May 20, 1925, and November 3, 1927, certain shares of stock in the Radio Corporation of America. The decrees ordered distribution "unless exceptions be filed within ten days, or an appeal be taken herefrom within">*1410 three weeks." Two lots of the stock were sold in 1928. Held, the correct basis for computing gain from these sales, under section 113 (a)(5) of the Revenue Act of 1928, is the fair market value of the stock at the times of distribution to the taxpayer, which were the respective dates on which distribution was directed by the decrees, and not the dates on which the decrees were entered.

3. Payment of the amount specified in a bond, pursuant to an authorized call prior to maturity, is not a "sale or exchange" within section 208(a) of the Revenue Act or 1926 defining "capital gain," and the profit derived from such a transactiov is taxable as ordinary income. John H. Watson, Jr.,27 B.T.A. 463">27 B.T.A. 463, followed.

Maynard Teall, Esq., for the petitioner.

F. R. Shearer, Esq., for the respondent.

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TRAMMELL

">*1162 This is a proceeding for the redetermination of deficiencies in income tax for the years 1927 and 1928 in the amounts of $72,193.53 and $39,346.78, respectively. However, the amounts in controversy are $4,687.50 for 1927 and $39,789.06 for 1928. In his amended pleadings, petitioner assigned the following errors:

(a)(b) ">*1411 The Commissioner's failure and refusal to allow as deductions from gross income for each of the years 1927 and 1928 the sum of $25,000 paid in each of said years to Arthur E. Braun for services rendered, and the further sum of $12,500 paid in each of said years to George C. Moore for services rendered;

(a-1)(b-1) The Commissioner's failure and refusal, since he did not allow said payments as trustees' compensation for services rendered, to take account of said payments as additional cost of the capital stock of the Post Publishing Co., a corporation, and reduce the taxable profit from the sale of said stock accordingly;

(c) The increase by the Commissioner of gross income for 1928, as returned, by the sum of $121,656.25 as alleged additional and unreported profit on the sale of 8,500 shares of class A stock of Radio Corporation of America; and

(d) The action of the Commissioner in taxing for 1927 at 12 1/2 percent as capital gain the difference between the cost and call price of certain bonds acquired by the taxpayer at $150,000 and called and redeemed by the issuer at $157,500; whereas such difference between ">*1163 cost and call and redemption price should have been taxed">*1412 at the statutory rate as ordinary income.

Respondent denied the foregoing alleged errors, and, in his answer to the amended petition as amended, affirmatively averred that in determining the deficiency for 1927 he failed to disallow a decuction of $150,000 representing the amount paid to Annie Given Kerr, and thereby understated petitioner's net income for said year, subject to tax as capital net gain. Respondent also in his answer claimed an increase of the deficiency for 1927 "sufficient to offset any amount by which the Board may otherwise decrease the tax liability of the petitioner for either or both of said years."

By amendment to his answer to the amended petition as amended, respondent affirmatively alleged that in the event it be held that he erred in any respect in connection with the item of $121,656.25, mentioned in the petitioner's assignment of error (c) above, then he also erred in favor of the petitioner in determining the deficiency for 1928 by erroneously decreasing in the amount of $6,562.50 the net income taxable as capital net gain.

Petitioner admits that respondent erred as to the item of $6,562.50, but denies that respondent erred as to the item of $150,000">*1413 alleged in his answer.

FINDINGS OF FACT.

The petitioner, Arthur E. Braun, an individual residing at Pittsburgh, Pennsylvania, is surviving trustee under the last will and testament of T. H. Given, deceased, who died June 28, 1919. The petitioner and one George C. Moore were appointed trustees by and under the will of said decedent, duly qualified under the appointment, and thereafter, particularly during the years 1927 and 1928, acted and continued to act as such testamentary trustees until the decease of George C. Moore on July 9, 1930. Since the last mentioned date the petitioner has acted and is now acting as the surviving and sole trustee under the will.

The will of the decedent, in part material here, reads as follows:

FIRST. I give, devise and bequeath unto my executors, hereinafter named, all of my estate, real, personal and mixed, upon the trusts, and for the uses and purposes following, viz., To sell and convert, at public or private sale, all of my said estate, at such times, for such prices, and upon such terms as they shall deem proper, hereby giving them full power and discretion with respect thereto; to execute all notes, bonds and other evidences of indebtedness">*1414 * * * in order to extend or continue the indebtedness owing by me at the time of my decease, until they shall deem it wise to convert said estate into cash, * * * to make and deliver deeds, bills of sale, assignments or other assurances necessary to vest good and sufficient titles in the purchasers in and to the property which they may sell * * *, but nothing herein contained shall be construed to be a direction to my executors to sell or convert said estate, real ">*1164 personal or mixed, or any part thereof, into cash until they shall deem it necessary and proper so to do, for the purposes of this trust.

As my executors sell the said estate and collect the income therefrom, they shall apply the proceeds derived from the sale thereof, and said income, to the payment of all administration expenses, and thereafter, to the payment of my just debts and liabilities. After the payment of all administration expenses, debts, liabilities, insurance premiums, taxes and charges upon my estate, my executors shall invest the remainder of my estate in such notes, bonds, stocks or property, real or personal, as to them shall seem proper, * * * but they may continue to hold such of my estate">*1415 as they shall not have converted, in the kind in which the same may be at the time of my decease. They shall pay the net income derived therefrom, after the payment and deduction of all taxes, premiums of insurance, expenses and other charges of every nature, to my Sister, Ammie Given Kerr, quarterly, during her life, * * * and upon her death, my executors shall convert said estate into cash, at such times, and for such prices and upon such terms as to them shall seem proper, and divide the proceeds derived from the conversion thereof, and the income which may accrue upon said trust estate from the time of her decease, as follows:

(a) To the payment of all charges and expenses incurred by them in the execution of this trust. (b) Six-tenths of the remainder to Arthur E. Braun, and the other four-tenths of the remainder to George C. Moore, freed and discharged of any trust. The time of such conversion shall be in the sound discretion of my executors.

Lastly, I nominate, constitute and appoint George C. Moore and Arthur E. Braun, of Pittsburgh, Pennsylvania, to be the executors of this, my Last Will and Testament * * *.

The decedent's widow duly elected to take against his">*1416 will the share of the estate to which she was entitled by law.

At the time of his death decedent owned all the outstanding stock of the Post Publishing Co., consisting of 4,000 shares, and of the Sun Publishing Co., consisting of 2,500 shares, which stock passed to the decedent's executors. Pursuant to a decree of the Orphans' Court of Allegheny County, Pennsylvania, entered on or about May 20, 1925, 2,000 shares of the stock of the Post Publishing Co. and 1,250 shares of the stock of the Sun Publishing Co. were distributed to the decedent's trustees and the remaining shares of the stock of those corporations were distributed to other persons. The trustees acquired the shares of stock so distributed to such other persons, and thereafter owned and held in trust all the outstanding stock of both corporations until on or about August 1, 1927, when all of it was sold by them to one Paul Block at a profit to the trust estate.

A written agreement was entered into under date of November 3, 1927, by and between the trustees, the life tenant, and the remainder-men under decedent's will, which agreement provided, among other things, as follows:

WHEREAS, Annie Given Kerr, the Life Tenant, ">*1417 has contended that the Executors should pay her as income a sum greater than that to which the Executors, Trustees and Remaindermen think she is entitled, but in view of the fact that ">*1165 they have heretofore pursued the policy of determining every matter of income as reasonably in her favor as could be done, and the Remaindermen being the owners of the remainder of the estate absolutely in their own right and having full disposition of the assets subject to the consent of Annie Given Kerr, the Life Tenant, they have yielded to her contention and have agreed to pay her the additional sum hereinafter provided, and she has agreed to allow them certain compensation in addition to that contained in the several Accounts filed, for services rendered in the management of The Polt Publishing Company and The Sun Publishing Company, and she has agreed to the covenants hereafter provided;

WITNESSETH: * * *

First. The Trustees and Remainderman shall now pay Annie Given Kerr, the Life Tenant, the sum of One Hundred Fifry Thousand ($150,000.00) Dollars out of the principal or corpus of the trust estate, which with all previous payments to her is in full of all sums which she might">*1418 or could claim as income now or hereafter payable to her by the Executors or Trustees out of the estate from the date of the death of the decedent, with the exception of $195,523.15, which shall be immediately distributable as income shown in the Third and Partial Account of Arthur E. Braun and George C. Moore, Executors.

Second. The Life Tenant agrees to allow Arthur E. Braun, one of the Trustees and one of the Remaindermen, the sum of Fifty Thousand ($50,000.00) Dollars and George C. Moore, one of the Trustees and one of the Remaindermen, the sum of Twenty-five Thousand ($25,000.00) Dollars as full compensation for all their services rendered heretofore either individually, or as Executors or Trustees, in the management of The Post Publishing Company and The Sun Publishing Company, which sum of Seventy-five Thousand ($75,000.00) Dollars shall be deducted from the principal realized from the sale of said shares of stock to Paul Block, and the balance of the proceeds derived from the sale of said shares of stock shall be accounted for as principal or corpus upon which the Life Tenant may receive the net income.

One half of said sum of $75,000 was paid to the trustees during">*1419 the year 1927 and the remaining one half was paid to them during the year 1928. The respondent determined that the amount so paid in 1928 was constructively received by the trustees in the year 1927. The respondent further determined that the trust estate realized a profit of $685,416.71 on the sale of the stock of the publishing companies in 1927, and in computing the amount of the profit respondent did not deduct from the sale price or otherwise allow as a deduction the amount of $75,000 so paid to the trustees in 1927 and 1928.

The books of the trustees reflect the payment to Arthur E. Braun of $25,000 on November 5, 1927, and the payment to George C. Moore of $12,500 on the same date. These payments were recorded by entries reading as follows: "On account of compensation per agreement dated November 3, 1927 for services rendered in the management of the Post and Sun." By substantially similar entries the books of the trustees show payments made to Braun and Moore of $25,000 and $12,500, respectively, on January 4, 1928. These amounts were credited to cash and charged against an account designated "Sale of Post Publishing Company and Sun Publishing ">*1166 Company capital">*1420 stock." Throughout the period from November 1 to December 31, 1927, the trustees had in their possession sufficient cash to have paid in full the $75,000 provided for in the agreement of November 3, 1927.

On the fiduciary return of income (Form 1041) of the trust estate for 1927, the trustees claimed the payments of $25,000 and $12,500 made in that year to the trustees as a reduction of the proceeds of sale of the stock of the Post and Sun Publishing Companies. In their income tax returns for 1927 (Form 1040) the trustees reported capital net gain in the amount of $853,893.44, being the profits computed on Form 1041, less $150,000 distributed to the life tenant, Annie Given Kerr.

On the fiduciary return of income (Form 1041) of the trust estate for 1928, the trustees claimed as a deduction from gross income the payments of $25,000 and $12,500 made in that year to the trustees. On the income tax return of the trustees (Form 1040) for the year 1928, they reported as gross income from the decedent's estate the amount of $733,712.04, which was $37,500 less than the profit from the sales of stocks shown in Schedule C on Form 1041 for that year. The respondent refused to permit">*1421 the trustees to reduce their taxable net income on account of these items.

The income tax returns of the trust estate for the years 1927 and 1928 were made on the calendar year basis. Also, the books of account of the trust estate were kept and the returns made on the basis of cash receipts and disbursements.

On May 20, 1925, a decree per curiam was filed in the Orphans' Court of Allegheny County, Pennsylvania, in In the Matter of the Estate of Thomas Hartley Given, Deceased, reading as follows:

DECREE

And now, to wit, May 20, 1925, the accounts in this case having been filed and confirmed nisi, and having been examined by the Court, upon consideration thereof it is decreed that said accounts be confirmed absolutely, and it appearing that an agreement by the distributees has been filed providing for distribution of a portion of the fund in the hands of the Accountants, in kind, and distribution of the remainder to be suspended until the filing of a final account, it is ordered that the fund in the hands of the Accountants, to wit, $2,731,772.78, be paid in accordance with the schedule of distribution hereto attached and made part hereof, unless exceptions be filed within">*1422 ten days, or an appeal be taken herefrom within three weeks.

A similar decree of the same court was entered on November 3, 1927, ordering distribution of a fund of $617,111.71.

Pursuant to the decree of May 20, 1925, stocks in various corporations were distributed to the trustees of the decedent's estate, including 20,000 shares class A common stock in Radio Corporation of America, and pursuant to the decree of November 3, 1927, 15,000 ">*1167 shares of class A common stock in the same corporation were distributed to the trustees. The books of the trustees reflect the 15,000 shares of this stock as having been received on December 10, 1927. Each of the distributions was made in accordance with the terms of the decedent's will and pursuant to a petition or agreement signed by the parties having interests in the estate.

During the year 1928 the trustees sold 1,000 shares of the class A common stock of the Radio Corporation of America distributed to them under the decree of May 20, 1925, and received therefor the sum of $100,910.

In the trustees' income tax returns (Forms 1041 and 1040) for rhe year 1928 there was reported as a profit from the disposition of said 1,000">*1423 shares of stock, taxable as capital gain to the trust estate, the amount of $48,972.50, computed as follows:

Date Distributed	Amount	Value at	Net Gain
	Received	alleged date
		of Receipt
6/11/25	$100,910	$51,937.50	$48,972.50

In determining the deficiency for 1928 the respondent decreased this item by the amount of $6,562.50 and determined the profit from the disposition of the 1,000 shares of stock, taxable as capital gain to the trust, to be $42,410, computed as follows:

Date Distributed	Amount	Value at	Net Gain
	Received	of Decree
5/20/25	$100,910	$58,500	$42,410

During the year 1928 the trustees also sold 8,500 shares of the class A common stock of the Radio Corporation of America which was distributed to them under the decree of November 3, 1927, and received therefor the sum of $1,576,180, less $124.21 postage and other expenses of sale, or the net sum of $1,576,055.79. Respondent used as a basis for the determination of profit from this sale the fair market value of the stock on the date the Orphans' Court decree was entered, namely, november 3, 1927, which was $80.375 per share, or $683,187.50 in the">*1424 aggregate, and computed a net profit on the sale of $892,868.29. The trustees on the fiduciary return of income (Form 1041) reported the profit from this transaction at $771,212.04, computed by deducting from the net proceeds of sale ($1,576,055.79) the amount of $804,843.75 representing the cost basis or average market price of the stock on November 26, 1927, of $94.6875 per share.

">*1168 In the fiduciary return of income (Form 1041) of the trustees for 1927 they reported capital net gain computed as follows:

4,000 shares Post Publishing Co. and 2,500 shares Sun Publish-
ing Co. Stock	$726,270.99
Bonds of the Post Publishing Co	7,500,00
12,500 shares Radio Corporation of America Class A common stock	270,585.00
Total	$1,004,355.99
Less taxes, postage, insurance, etc	462.55
Capital net gain reported on Form 1041	$1,003,893,44

In arriving at the aforesaid sum of $726,270.99, the trustees deducted from the sale price the sum of $37,500 paid to the trustees in 1927. In the schedule of Form 1041 headed "Beneficiaries Shares of Income and Credits," a part of said capital net gain, viz., $150,000, was shown as distributable to the life beneficiary, ">*1425 Annie Given Kerr, and only the balance thereof, viz., $853,893.44, was shown as being retained by or belonging to the trustees as part of the corpus of the trust.

In the audit of Form 1041 for the year 1927 the respondent determined the net profit to the trust estate from the disposition of the Post Publishing Co. and the Sun Publishing Co. stocks to be $685,416.71. The difference of $40,854.28 between the amount reported and the amount determined by the respondent is due to the allowance of $78,354.28 representing an increase in the reported cost or other basis of the stock, and to the disallowance of the sum of $37,500 paid to the trustees in that year. The reported profit from the disposition of the 12,500 shares of Radio Corporation of America class A common stock was based on a claimed fair market value at the date of distribution of $51.75 per share, or $646,875. In the audit of the return (Form 1041) the respondent determined that the correct basis to the trustees for the 12,500 shares of stock was $2.2778 per share, based upon the value at the date of decedent's death, thereby reducing the basis from $646,875 to $28,472.50, a difference of $618,402.50. These two adjustments">*1426 to cost, viz., $78,354.28 and $618,402.50, resulted in increasing the reported capital net gain by the amount of $540,048.22 in addition to the adjustment of $37,500.

In the income tax return (Form 1040) of the trustees for the year 1927 the only income reported was capital net gain in the amount of $853,893.44, thereby in effect claiming a deduction amounting to $150,000 representing the amount paid to Annie Given Kerr pursuant to the aforesaid agreement of November 3, 1927, and shown on Form 1041 as distributable to her as life beneficiary. In determining the deficiency for 1927 respondent failed to disallow the deduction of $150,000 and did not restore this item of $150,000 to taxable ">*1169 income of the trustees; but, starting with the reported capital gain of $853,893.44, he made only two adjustments, viz., (1) the aforesaid net decrease of cost or other basis amounting to $540,048.22, and (2) the disallowance of the item of $37,500.

In the schedule of capital net gain from the sale of assets reported in the fiduciary return of income (Form 1041) of the trustees for the year 1927, the following item was included: Post Publishing Co. bonds, par value $150,000, amount">*1427 realized $157,500, cost or inventory value $150,000, gain $7,500. In the audit of Form 1041 respondent made no change in this item.

The bonds referred to were distributed to the trustees under the decree of May 20, 1925, at their face value of $150,000. These bonds were subject to call prior to maturity at a premium of 5 percent, and on August 1, 1927, prior to their maturity, the bonds were called and redeemed at this premium. The trustees received the amount of $157,500 for the bonds held by them of the par value of $150,000.

The market prices of the class A common stock of the Radio Corporation of America at the dates pertinent in this proceeding were as follows:

Date	High	Low	Average
			(per sshare)
May 20, 1925	59 7/8	57 1/8	$58.50
June 11, 1925	52 3/8	51 1/2	51.9375
Nov. 3, 1927	81 3/4	79	80.375
Nov. 25, 1927 1	94 1/4	89 5/8	91.9375
Nov. 26, 1927	95 7/8	93 1/2	94.6875
Dec. 10, 1927	88 3/4	85 1/4	87.00

The Post Publishing Co. and the Sun Publishing Co. each published a daily newspaper in Pittsburgh, Pennsylvania. From decedent's death in 1919 to August 1, 1927, the">*1428 date upon which the trustees sold the stock, Arthur E. Braun, one of the trustees of the decedent's estate, was president of both of these companies and had charge of the entire business of them. He spent a considerable part of each day in the office of the companies and was, in general, responsible for the conduct and management of their affairs. The newspapers published by these companies were important publications and had large circulations.

George C. Moore, the other trustee of the decedent's estate, was a director and vice president of both companies, and Braun frequently consulted with him about their management.

The payments aggregating $75,000 made to the trustees in 1927 and 1928, hereinabove referred to, were not made particularly for effecting the sale of the stocks of the two publishing companies, but ">*1170 were for services of the trustees in managing and conserving the newspaper properties. Prior to 1927 neither of the trustees had received any compensation for his services in connection with the management of the newspapers.

During the years 1925 and 1927 the procedure in the Orphans' Court of Allegheny County, Pennsylvania, in connection with the">*1429 accounting for and distribution of property of an estate, was as follows: The executor prepared an account of his administration and filed it with the clerk of the court. The account was confirmed nisi by the clerk, who thereupon advertised the account, and all parties in interest had a certain time within which to file exceptions thereto. The account, together with the exceptions, if any, was audited by the court at a public hearing held by the judge. The auditing judge then entered a decree settling and confirming absolutely the account and setting forth a schedule of distributions. The decree usually provided that the schedule of distributions might be excepted to within 10 days or an appeal taken within 21 days.

The decrees of May 20, 1925, and November 30, 1927, hereinabove mentioned, were in the usual form of decree, except in so far as they referred to the petition or agreement filed by the distributes. Such a decree of the Orphans' Court is absolute unless exceptions are filed or an appeal taken, and no further decree is entered by the court. The three-month period allowed by the laws of Pennsylvania for the taking of appeal starts running on the date the decree">*1430 is entered. Under the practice existing in the Orphans' Court it is not necessary that exceptions be filed in order that an appeal may be taken from such decree. No exceptions to the account confirmed by the decree of November 3, 1927, were filed. If an appeal had been taken from that decree after the expiration of 21 days from the entry thereof, it would not have been effective as a supersedeas. In such cases the distribution can be and generally is made immediately after the expiration of the 21 days, irrespective of the taking of an appeal. If an appeal is taken within 3 weeks and a bond filed, such an appeal is a supersedeas.

OPINION.

TRAMMELL: The first matter of which petitioner complains is the refusal of the respondent to allow as a deduction from gross income for each of the taxable years 1927 and 1928 the amount of $37,500 paid in each of those years to the trustees for their services in managing, conserving, and operating the two publishing conpanies. By amendment to the amended petition, petitioner further alleges that, since respondent did not allow these payments as compensation for services rendered, he erred in refusing to take account of the payments ">*1171 ">*1431 as additional cost of the stock of the publishing companies and reduce the taxable profit from the sale of the stock accordingly.

Respondent contends that the written agreement of November 3, 1927, between the life tenant, on the one side, and the two remaindermen, who were also trustees, on the other, these parties being the only persons interested in the trust estate, provided in effect for the distribution of a portion of the corpus of the estate, namely, $75,000, to the remaindermen and $150,000 to the life tenant, prior to the time of distribution fixed in decedent's will, which created the trust estate. Respondent further contends that if the payments to the trustees did not constitute a partial distribution of the corpus of the trust to the remaindermen, the amounts can not in any event be regarded as a capital expense to be reflected in computing capital gain on the sale of the stock of the publishing companies, and that, even if the payments are properly deductible as business expense in determining ordinary net income, the allowance of such deductions would result in a corresponding reduction of the net income distributable to the life tenant, and would not affect the">*1432 tax liability of the petitioner. We think the latter contention of the respondent must be sustained.

Respondent also argues that if the payments in controversy are allowable deductions from ordinary gross income, then the amount of $37,500 paid to the trustees in 1928 was constructively received by them in 1927, since the evidence shows that the whole amount of $75,000 was due and payable immediately after the written agreement was executed and the trustees at that time had in their hands sufficient funds to pay the amount in full. In the view we take of this issue, the question of constructive receipt is unimportant and need not be decided by us, as will be more fully indicated below.

The Revenue Act of 1928, applicable to the year 1928, provides as follows:

SEC. 161. IMPOSITION OF TAX.

(a) Application of tax. - The taxes imposed by this title upon individuals 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 * * *.

SEC. 162. NET INCOME.

The net income of the estate or trust shall be computed in the same manner and on the">*1433 same basis as in the case of an individual, except that -

* * *

(b) There shall be allowed as an additional deduction in computing the net income of the estate or trust 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 beneficiary * * *.

Substantially ">*1172 the same provisions are contained in section 219 of the Revenue Act of 1926, applicable to the taxable year 1927.

It must be borne in mind that we are concerned here only with the tax liability of the trust estate created by the decedent's will. Neither the life tenant nor the trustees, individually, are before us.

Plainly the statutes above referred to contemplate that the tax liability of this trust estate shall be computed in the same manner and on the same basis as in the case of an individual, except that the income upon which the trustee is required to pay the tax shall be reduced by the additional deduction of the income distributable to the life tenant, which, under the decedent's will, embraces all of the ordinary net income. The only income taxable to the trustee is capital net gain. It is clear, then, that the allowance">*1434 of the deductions claimed by the petitioner as compensation for personal services cannot affect in any manner the tax liability of the trustee. To allow these deductions from ordinary income would merely result in decreasing the amount of ordinary net income distributable to the life tenant, and whatever the amount of such income might be, whether more or less than that reported in the fiduciaries' return, the capital net gain would not be changed by such adjustment.

If the decedent's will had provided that the net income of the trust should be distributed to the life tenant within the discretion of the trustees, and for the taxable years they had distributed only a portion of such income to the beneficiary and had retained the balance and paid tax thereon, then the allowance of the calimed deductions would reduce the tax liability of the trust estate. But where, as here, the entire amount of the ordinary net income is distributable, the whole tax thereon is payable by the beneficiary and any adjustment of the amount of the distributable income does not affect the tax liability of the fiduciaries.

Therefore, it is unnecessary for us to decide in this proceeding whether or not">*1435 the payments made to the trustees during the taxable years constituted allowable deductions from ordinary income as compensation for services rendered, or whether the whole $75,000, if so allowable, should be deducted from the income for 1927 on the theory that one half of this amount was actually received and one half was constructively received by the trustees in that year. These are matters which affect only the tax liability of the trustees, individually, and of the life tenant, and they are not before us. The only question material here is whether or not these payments constitute capital deductions to be taken into account in determining the net gain derived from the sale of the stock of the publishing companies in 1927. The profit realized from the sale of the stock was reported by the trustees in their return for 1927 as capital net ">*1173 gain and the tax was paid by the trust estate. The trustees kept their books of account and made their tax returns on the basis of cash receipts and disbursements, and, if the amounts paid to the trustees in 1927 constituted capital deductions, such deductions would serve to reduce the deficiency determined by respondent against">*1436 the trust estate, petitioner herein; otherwise not.

The amounts paid to the trustees in 1927 were deducted by them in computing the profit returned from the sale of said stock, while the amounts paid to the trustees in 1928 were deducted from ordinary income. In determining the deficiencies respondent disallowed both deductions.

Section 208(a)(3) of the 1926 Act defines "capital deductions" as meaning "such deductions as are allowable by section 214 for the purpose of computing net income, and are properly allocable to or chargeable against capital assets sold or exchanged during the taxable year."

In our opinion the preponderance of the evidence indicates that the deductions claimed by the petitioner are not properly allocable to or chargeable against the capital assets sold during the taxable year 1927, and hence, are not allowable as capital deductions. The agreement of November 3, 1927, authorized the payment of $75,000 to the trustees "as full compensation for all their services rendered heretofore * * * in the management of The Post Publishing Company and The Sun Publishing Company." And at the hearing Arthur E. Braun, surviving trustee of the trust estate, testified">*1437 in reference to these payments as follows:

Q. Did both you and Mr. Moore, or you or Mr. Moore, prior to 1927, at or about the time of the sale of the stock of these two companies, ever receive any compensation for the work you have described?

A. We did not.

Q. Was it for the effectuating of the sale that you were paid, or for your work over the years, or for both?

A. It was not for effectuating the sale particularly, although, if we had not sold the papers, I don't think we would have asked any compensation for our work. It was for the services that we had rendered in taking care of these properties, conserving them, and of course, we did negotiate the sale; but as I say, we did not claim any compensation for that particular thing.

This witness again later testified that the compensation paid to the trustees was "for the management of the newspapers" and that the matter of their compensation for such services was first brought up "subsequent to the time when the sale of the papers was made to Paul Block."

This evidence we think is insufficient to establish that the $75,000 paid to the trustees as compensation for their services in managing and conserving the">*1438 newspaper properties constituted a commission for the sale of the stock, or that it should be regarded as additional ">*1174 cost of the stock sold or otherwise as an expense incident to the sale. Respondent's determination on this issue is approved.

The second issue involves the question of the proper basis for computing gain from the sale in 1928 of stock of the Radio Corporation of America. Pursuant to the decree of the Orphans' Court entered May 20, 1925, 20,000 shares of class A common stock in that corporation were distributed to the trustees, and pursuant to the decree of the same court entered November 3, 1927, an additional 15,000 shares of the stock were distributed to the trustees.

During the year 1928 the trustees sold 1,000 shares of the stock distributed to them under the decree of May 20, 1925, for a total consideration of $100,910. In their tax return for 1928 the trustees reported net gain from the sale of 1,000 shares of stock in the amount of $48,972.50, computed by deducting from the proceeds of sale the stipulated fair market value of the stock at June 11, 1925, which was $51.9375 per share. Respondent computed net gain upon the sale of said stock">*1439 in the amount of $42,410, on the basis of the stipulated fair market value of the stock at May 20, 1925, the date of the decree of distribution, which was $58.50 per share. Thus respondent reduced by the amount of $6,562.50 the amount of net gain reported by the trustees.

During the year 1928 the trustees also sold 8,500 shares of stock of the Radio Corporation of America distributed to them under the decree of November 3, 1927, for which they received the net amount of $1,576,055.79. The trustees reported net gain from the sale of this stock computed by deducting from the net proceeds of sale the stipulated fair market value of the stock at November 26, 1927, which was $94.6875 per share, while respondent increased the net gain so reported by the trustees to the extent of $121,656.25, using as the basis for his computation the stipulated fair market value of the stock at November 3, 1927, the date of the court's decree, which value was $80.375 per share.

The specific point of controversy between the parties under this issue is whether the proper basis for computing gain from the sale of the Radio Corporation of America stock is the fair market value at the dates of the decrees">*1440 of distribution or at the dates on which distribution was directed by the decrees.

The stock involved was acquired by the trustees by general bequest under decedent's will, and the Revenue Act of 1928, in section 113 (a)(5), provides that in the case of personal property so acquired the basis for determining gain or loss "shall be the fair market value of the property at the time of the distribution to the taxpayer." Both parties concede the applicability of this statute, but they are in ">*1175 disagreement as to what date constitutes "the time of the distribution to the taxpayer."

Each of the decrees in question directed that distribution be made in accordance with an attached schedule "unless exceptions be filed within ten days, or an appeal be taken herefrom within three weeks."

Respondent contends that because the decrees ordered distribution in accordance with a petition or agreement filed by all known parties having an interest in the estate, there was no one who could file exceptions or appeal therefrom, and therefore the dates on which the decrees were entered should be taken as "the time of the distribution."

The petitioner contends that each decree directed">*1441 distribution to be made only in the event an appeal was not taken therefrom within three weeks, and hence the trustees did not acquire legal title to the stock by distribution until the expiration of the full period of 21 days from the entry of the decrees.

In the case of the decree of May 20, 1925, the period of three weeks for appeal expired on June 10, 1925, and petitioner asserts that the following day, June 11, 1925, was the date of distribution of the 1,000 shares of stock sold in 1928. In computing the profit reported the trustees used as a basis the fair market value of the stock on the last mentioned date.

In the case of the decree of November 3, 1927, the 21 days specified for appeal expired on November 24, 1927, which date was Thanksgiving Day, a legal holiday. Petitioner argues, therefore, that the following day, November 25, must be included within the period during which an appeal might have been taken, and that the next day, November 26, 1927, was the date of distribution of the 8,500 shares of stock sold in 1928.

Respondent cites ">*1442 , in support of his contentions, while petitioner argues that that decision does not rule the present proceeding. We are in accord with the petitioner's view on this point.

The cited case arose under the Revenue Act of 1921, which provided in section 202(a)(3) that, in the case of property acquired by bequest, devise or inheritance, the basis for computing gain or loss should be the price or value of such property "at the time of such acquisition." And the Court held that the value of stock at the time of testator's death determined the amount of taxable gain realized from the sale thereof by the legatee, and not the value of the stock at date of the decree of distribution.

However, in that connection the Court pointed out that the Revenue Act of 1928 in section 113(a)(5) expressly fixed fair market value "at the time of the distribution to the taxpayer " as the basis in ">*1176 all cases other than personal property acquired by specific bequest and real estate acquired by general or specific devise or by intestacy. The Court further stated in its opinion that "The deliberate selection of language so differing from that">*1443 used in the earlier acts indicates that a change of law was intended." We think, therefore, that Brewster v. Gage, and the line of our own decisions in accordance with or following that case, can not be regarded as decisive of the issue here.

Respondent argues that in Pennsylvania, and in other jurisdictions as well, "distribution" is accomplished by the probate court's decree of distribution and that the "time of the distribution" does not mean some later date on which the beneficiary may demand delivery of the property, or on which the personal representative carries out the mandate of the court's decree by delivering possession thereof, citing, among others, ; ; .

The cited cases do not appear to establish definitely respondent's contention. In some of them it is said substantially that distribution is made by the probate court or effected by that court's decree; others speak of distribution as being made by the personal representative pursuant to the probate court's decree; but in none of the cases referred">*1444 to was this question specifically presented to or decided by the court. However, if we assume, without attempting to decide, that distribution is accomplished by the decree, we think this does not help respondent's position. Certainly in such case distribution can not consistently be regarded as accomplished by the decree except in strict accordance with the terms and conditions of the decree itself.

The decrees involved in the present case ordered distribution only in the event exceptions were not filed within ten days or an appeal taken within three weeks. If either of the contingencies specified had happened, then the decrees did not direct distribution.

As we construe these decrees, they directed in effect that distribution be made at a future date, upon the happening of specified events, and until those events transpired, the decrees by their terms were not operative to effect distribution. To illustrate, the decree of May 20, 1925, in substance ordered distribution on June 11, 1925, unless prior to that date exceptions had been filed or an appeal taken. It follows, we think, that no distribution was made to the trustees by the decrees prior to the dates fixed therein, ">*1445 even though it might have been known before that time that no exceptions would be filed or appeal taken.

A decree of distribution is in the nature of a judgment in rem, and is binding upon all concerned unless appealed from. ; . Such a decree, when complied ">*1177 with, protects the personal representative, but if he makes distribution or partition of the property otherwise he not only may not claim protection of the decree, but may be rendered liable to surcharge.

The dates on which the executors in this case delivered actual possession of the stock to the trustees, we think, are immaterial. The dates on which the decree directed distribution constitute the "time of the distribution to the taxpayer" within the meaning of section 113(a)(5), supra, and the fair market value of the stock on those respective dates is the basis provided for determining gain or loss. Such basis was properly used by the taxpayer in computing the gain derived. Respondent's action on this issue is reversed.

The third and final issue raised by the petitioner concerns the rate of tax applicable to the profit derived">*1446 from the prepayment, or redemption before maturity, of certain bonds of the Post Publishing Co. held by the trust estate. These bonds were distributed to the trustees under the decree of May 20, 1925, at their face value of $150,000. They were subject to call prior to maturity at a premium of 5 percent, and on August 1, 1927, the bonds were so called and redeemed. The trustees received $157,500 for the bonds and reported in their tax return for 1927 as capital net gain the amount of $7,500. In auditing the return respondent made no change in this item. Petitioner contends that the profit of $7,500 is properly taxable as ordinary income.

Petitioner's contention on this point must be sustained. The Revenue Act of 1926 (sec. 208(a)) defines "capital gain" as meaning taxable gain from the sale or exchange of capital assets consummated after December 31, 1921. The bonds in question were capital assets, but they were not sold or exchanged. Payment of the amount specified in a bond, either at maturity or pursuant to an authorized call prior to maturity, is not a sale or exchange of such bond, and the gain derived from the transaction is taxable as ordinary income. ">*1447 . The deficiency for 1927 will be redetermined accordingly.

There remains for consideration the issue raised by the respondent in his answer to the amended petition, to the effect that in determining the deficiency for 1927 he failed to disallow a deduction of $150,000 representing the amount paid to the life tenant, Annie Given Kerr, under the agreement of November 3, 1927, and thereby understated the petitioner's net income for that year, subject to tax as capital net gain.

Prior to that agreement there had been controversy between the life tenant and the trustees respecting the amount of income distributable to the life tenant under decedent's will. On August 1, 1927, the trustees had sold the stock of the two publishing companies, ">*1178 and thereafter, by the contract mentioned, the trustees and remaindermen agreed to pay to the life tenant out of the principal of the corpus of the trust estate the sum of $150,000 in full settlement of her claim for additional income, and the life tenant agreed to allow the trustees and remaindermen the total sum of $75,000, to be paid out of the proceeds of the sale of stock of the">*1448 publishing companies, as compensation for services rendered in the management of the companies.

In their income tax return for 1927 (Form 1040), the trustees reported as capital net gain taxable to the trust estate the gain computed on the fiduciary return of income (Form 1041) less said amount of $150,000, thus in effect claiming a deduction from capital gain of the amount paid to the life tenant.

Petitioner's contentions, briefly summarized, are that this amount represents a distribution of additional income to the life tenant, which is deductible in computing the net income of the trust estate under subdivision (b)(2) of section 219 of the Revenue Act of 1926, supra, or, if not so deductible, the amount represents the settlement of a claim against the estate and is deductible as expense.

If either of these contentions is sound, it would not affect the tax liability of the petitioner as trustee of the trust estate, but only the tax of the life tenant, since under decedent's will all the ordinary net income was distributable to her. The trust estate was liable for and paid the tax only on the capital net gain, and this is true even though the payment of the $150,000">*1449 was actually in fact made out of the corpus or principal of the trust. It is the nature of the expenditure which determines the question of deductibility, not the fund out of which it is paid. In no event could this item be regarded as expense properly allocable to or chargeable against capital assets sold in the taxable year.

What we said hereinabove in respect of the $75,000 paid to the trustees applies with equal force to the $150,000 paid to the life tenant under the same contract. The deduction claimed by petitioner from capital gain is disallowed.

The deficiencies for 1927 and 1928 will be redetermined in accordance with the foregoing opinion, and the deficiency for 1927 will then be increased in an amount equal to the aggregate by which the deficiencies for both years have otherwise been decreased, but not to exceed the maximum increase of the 1927 deficiency resulting from the disallowance of the deduction above referred to.

Reviewed by the Board.

Judgment will be entered under Rule 50.

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Footnotes

• 1. Nov. 24, 1927, was Thanksgiving Day. ↩