#### MARY ROXBURGHE v. THE UNITED STATES

[No. E-198.

Decided November 7, 1927]

*On the Proofs*

*Income taw; income from trust estate; depreciation of the corpus; sec. Z1J/, revenue act of 1918.*— Where under a trust created by will a beneficially for life receives, without diminution for depreciation of the corpus, the income of part of the estate, and said income is subject under the terms of the will to expenses of- repairs and improvements that are largely within the discretion of the trustees to make, the income tax is upon the entire amount received by the beneficiary and is not to be diminished by deductions for depreciation provided in section 214 of the revenue act of 1918.

*The Reporter's*statement of the case:

*Mr. Edward F. Clark*for the plaintiff.

*Mr. Charles T. Hendler,*with whom was *Mr. Assistant Attorney General Merman J. Galloway,*for the defendant. *Mr. Fred K. Dyar*was on the brief.

The court made special findings of fact, as follows:

I. Plaintiff, Mary ftoxburghe, is, and at all times hereinafter mentioned was, a citizen and subject of the Kingdom of Great Britain, which is a Government that accords to citizens of the United States the right to prosecute claims against it, the Government of the Kingdom of Great Britain, in its courts.

*224II. The plaintiff is the daughter of Ogden Goelet, deceased, and of Mary R. Goelet and at all times herein mentioned received the net rents, issues, and profits of a trust created under the terms of the will of the said Ogden Goelet. The said will is set forth in plaintiff’s petition on pages 15 to 32, inclusive, as Exhibit 2 and is made a part hereof by reference. The trust provides, 'among other things, that the plaintiff is to receive the net rents, issues, and profits therefrom for and during the term of her natural life with remainder over as provided by the terms of the said will. The corpus of said trust consists in part of ah undivided one-half interest in certain real estate in the city of New York of which the trustees are seized as cotenants with plaintiff’s brother, Robert Goelet, who is the owner in fee simple of an undivided one-half interest in said real estate. Upon said real estate are upward of 88 buildings of various types and ages. The net rentals therefrom to the extent of one-half thereof constitute the income upon which the taxes involved herein were assessed.

III. Said trustees duly filed for each of the calendar years 1917, 1918, and 1919 income-tax returns of the income from the said trust created for the benefit of Mary Roxburghe. Said returns set forth the gross income received from said trust proj)erties and deducted therefrom payments for taxes, interest, repairs, and expenses of the administration of the trust, and also, deducted therefrom an amount claimed for depreciation as set forth in Finding IV hereof. The returns so filed by the trustees of the net income from said trust properties were less for each year by the amount claimed as depreciation for each year, as set forth in Finding IV hereof, than the amount of net income actually paid by the trustees as the income from said trust properties to said Mary Rox-burghe during each of said years, respectively. The plaintiff separately filed for each of the calendar years 1917,1918, and 1919 a return of income received by her from sources in the United States other than rents, issues, and profits received by her from the trust properties. The amount of the tax as shown by each of the returns so filed was, in each instance, paid. The plaintiff, Mary Roxburghe, was a nonresident alien beneficiary, and the returns of income accruing from *225the trust properties were therefrom made and the taxes paid by the trustees for the beneficiary pursuant to requirements of law then existing.

IY. In the aforesaid returhs filed by the said trustees for each of said years 1917, 1918, and 1919 there was taken a deduction for depreciation for wear and tear on the aforesaid buildings at the average rate of 3%, calculated (with respect to said undivided one-half interest) upon the fair market value of said buildings as of March 1, 1913, or, in the case of those acquired after said date, upon their actual cost. The amounts so deducted were as follows:

3 % on one-half

Year interest

1917_$71,810.18

1918_ 61, 992. 00

1919_ 61,992. 00

These deductions, upon a subsequent audit by the Bureau of Internal Bevenue of the aforesaid returns for the years named, were disallowed, and the additional taxes assessed and collected, which are sought to be recovered in this action, were based upon the disallowance of such deductions for depreciation.

Y. The sums of money represented by the deductions of three per cent for depreciation set forth and claimed in the aforesaid returns for the years named were not retained by the trustees under the will of Ogden Goelet, but were paid to and received by the plaintiff, so that no part of the amounts claimed as deductions for depreciation was used for repairs or betterments, a deduction for the amount expended for repairs in practically the same amount having been claimed in the aforesaid returns for each of the years named and allowed upon the audit of such returns. No deduction was claimed or allowed for betterments as distinguished from repairs or upkeep.

VI. On February 21, 1923, the Commissioner of Internal Bevenue, upon an audit of plaintiff’s returns for said years 1917,1918, and 1919, disallowed said deductions for depreciation and assessed an additional income tax for each year, of which the following amounts, respectively, were due to the *226commissioner’s refusal to allow the aforesaid claims for depreciation:

Portion of

Year additional tax

1917_$25,794.27

1918_ 42, 764. 68

1919_ 40, 357.48

Total_108,916.38

The basis of so much of the additional taxes assessed and collected as are sought to be recovered in this action was the disallowance of deductions for depreciation as shown in Finding TV hereof, and the additional taxes growing out of such disallowance are shown above.

VII. Thereafter on September 13, 1923, plaintiff paid said additional taxes, including the amounts aforesaid, under protest, and duly filed claims for the refund thereof, which claims were in November and December, 1924, denied.

VIII. The term “ net rentals ” as used in paragraph II of the original agreed statement of facts filed herein was intended merely to describe generally the source of the income. The term excludes expenditures by the trustees and deductions taken in the returns filed by the trustees for the plaintiff for repairs, interest, taxes, trustees’ commissions, and other expenses incident to the administration of the trust, but, as determined by the Commissioner of Internal Revenue, does include the amount claimed as a deduction for depreciation.

■IX. In the adjustment of the income taxes of said Robert Goelet for the years 1917, 1918, and 1919, deductions for depreciation in the above-stated amounts were allowed to him by the Commissioner of Internal Revenue on his undivided one-half interest in said real estate owned by him in fee simple.

The court decided that plaintiff was not entitled to recover.

CaMPbeld, *Chief*Justice,

delivered the opinion of the court:

By the will of her father certain trusts were created in favor of the plaintiff. A copy of the will is attached to the *227petition. Clause 12 devises to the executors and trustees certain real estate with directions to pay the net income to his son and daughter in a designated way, and clause 13 devises and bequeaths to the executors and trustees the residue of his estate with directions as to the net income, to be mentioned. The property mentioned in clause 12 is required always to be “ kept in good condition and repair ” and the expenses of repairs and improvements are chargeable against the income of the trust estate. Clause 13, relating to the residuary estate, and succeeding clauses vest a large discretion in the trustees in the matter of repairs and improvements. The question in the instant case relates to the residuary estate. The trustees are directed to pay one-half of the “ net interest, income, dividends, rents, and profits ” of the residuary estate to each the son and daughter, but provides that when the son attains a stated age, he shall have one-half of the estate in fee, while as to the daughter the provision is that she shall have the entire net income of one-half of the residuary estate for and during her natural life. Upon her death the one-half of the estate goes to her children or their issue, and if there be no children or issue of children it goes to the son. Prior to the time during which the circumstances giving rise to this action occurred the testator’s son had become vested in possession and enjoyment of one-half of the residuary estate, and the other half was being administered in accordance with the trusts created by the will. The plaintiff is a citizen of Great Britain, and made tax returns for the years in question of income accruing to her from sources in the United States other than income received from the trusts created by her father’s will. As to the latter, the trustees made returns for her, the fiduciary being required to make a return of income for the trust for which he acts. Revenue act of 1918, 40 Stat. 1071. In making up this return the trustees reported the net income of one-half of the residuary estate and made a deduction therefrom of an item for depreciation, stated in the findings to be “ for wear and tear on the aforesaid buildings at the average rate of 3% calculated (with respect to said undivided one-half interest) upon the fair market *228value of said buildings as of March 1, 1918, or in case of those acquired after said date, upon their actual cost.” The trustees paid over to plaintiff, and she actually received, the amount of net income shown in the return undiminished by the amount of the 3% depreciation. She paid (or the trustees paid for her) taxes on the net income diminished by the amount of the 3% depreciation. In other words, she 'claims that she was entitled to a deduction for and on account of depreciation, ascertained as stated. The commissioner would not allow the deduction, and required her to pay taxes based upon the entire net income received by her from the residuary estate. She paid the tax accordingly, and the commissioner having refused to refund the amount she sues in this court. The question therefore is whether she was entitled to the deduction for depreciation.

It seems to be conceded that attention need only to be given the revenue act of 1918, so far as the material question is concerned. Section 219 (40 Stat. 1071) imposes upon the income of any kind of property held in trust the tax imposed by sections 210 and 211, including (4) income which is to be distributed to the beneficiaries periodically. The fiduciary is made responsible for making the returns of income of the estate or trust for which he acts, and the net income is to be computed in the same manner and on the same basis as provided in section 212, with an exception not material here. In cases arising under paragraph (4) the fiduciary does not pay the tax, “ 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 trust for the taxable year. The trust here referred to is in the instant case the trust created by the will. Subsection (b) of section 219 in providing for an additional deduction in computing the net income of the estate or trust refers to “ the will or deed creating the trust,” showing that reference must be had to the instrument creating the trust in ascertaining the distributive share thereunder. What the will conferred was the right to receive the net income accruing during plaintiff’s life. The statute does not attempt to enlarge this interest or increase her distributive share. The amount of it is not in dispute, be*229cause the trustees stated it accurately in making the returns. Nor is the amount received by plaintiff in doubt. If she was not entitled to deduct the 3% depreciation, she was properly taxable on her income as ascertained by the commissioner. The statute taxed her income and there can be no doubt that the net revenue from the trust estate received by her constituted income. See *Merchants Loan and Trust Co.*v. Smietanka, 255 U. S. 509, 517. But section 214 provides that in computing net income certain deductions shall be allowed, among others, “(8) A reasonable allowance for the exhaustion, wear, and tear of property used in the trade or business, including a reasonable allowance for obsolescence,” and plaintiff contends that she should be allowed the benefit of this provision. The question has been decided adversely in two cases by the Board of Tax Appeals. *Whitcomb's*Appeal, 4 B. T. A. 80, 5 B. T. A. 191. In *Baltzell*v. Mitchell, 3 Fed. (2d Ser.) 428, it was held that a life beneficiary of an estate held in trust was taxable upon the income actually paid over to him and was not entitled to credit his proportional share of losses of principal sustained by the trust estate during the year. See *Baltzell*v. *Casey,*1 Fed. (2d Ser.) 29. The Circuit Court of Appeals said in the first case cited:

> “ The beneficiary is not interested in the capital of the trust, but only in the income. If there are accretions to the capital, these are not distributable as income, so that the beneficiary may receive any part of them; and if there are capital losses they can not be made good out of the income.”

The plaintiff could have the entire net income of the one-half of the “ residuary estate, real and personal, for and during her natural life.” The corpus or capital was held by the trustees for remaindermen. The plaintiff could not compel them to improve or repair it. The authorized deduction for depreciation relates to capital assets.

In *United States*v. *Ludey,*decided May 16, 1927, 274 U. S. 295, the court say:

> “ The depreciation charge permitted as a deduction from the gross income in determining the taxable income of a business for any year represents the reduction, during the *230year, of the capital assets through wear and tear of the plant used. The amount of the allowance for depreciation is the sum which should be set aside for the taxable yea,r, in order that at the end of the useful life of the plant in the business, the aggregate of the sums set aside will (with the salvage value) suffice to provide an amount equal to the original cost.”

But if this depreciation be paid over to the beneficiaxy for life and the amount of it be deducted from her taxable income, of what possible benefit has it been to the estate or to those ultimately succeeding to the capital or corpus of the estate? The exemptions allowable are those authorized by the statute and the plaintiff must bring herself within the intent of the statute before she can exempt part of her income, being the net income of the trust estate, from taxation. She has not done this.

The petition should be dismissed and it is so ordered.

Moss, *Judge;*Gkaham, *Judge;*and Booth, Judge, concur.

Hay, *Judge,*absent.