CAMPBELL, District Judge (having stated the facts as above).
The determination of the question raised in the case at bar depends upon the construction of the provisions of section 219(a)(b)(c), and section 231(6), of the Revenue Act of 1918.
The provision of section 219(a)(1), of the Revenue Act of 1918, applied to all of the income received by the estate during the period of administration or settlement of the estate, and by subdivision (b) the duty was imposed on the executors to make a return of the income of the estate. By that act the estate became a taxpayer as distinguished from the legatees or beneficiaries, and cannot escape from taxation under that act by implication, but only by taking the deductions provided for under the provisions of subdivisions (b) or (c) of section 219, if the same are allowable.
Relief from the provisions of section 219 cannot be found in section 231(6), generally exempting corporations organized and operated exclusively for religious, charitable scientific, or educational purposes; but that section may properly be considered in determining the intent of Congress, as expressed in section 219, if the language of that section may fairly be susceptible of two interpretations, one of which would relieve the estate from taxation on the income received, which passes to the residuary legatees, which are corporations of the character described, and the other would not.
We are thus brought to a consideration of the deductions provided for under section 219(b) and (c). Subdivision (c), it would appear, deals with income properly paid or credited to any legatee, heir, or other beneficiary, such as income paid in the exercise of the discretion of the fiduciary in acknowledging the legatee of a pecuniary or specific legacy, as distinguished from 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 to or permanently set aside for corporations of the character of the residuary legatees in question. The deductions included in subdivision (b) apply only to such corporations.
There is therefore no overlap of the two subdivisions, and our consideration will be only of subdivision (b), wherein it is provided that there shall be allowed as a deduction, in lieu of certain specified deductions, "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 to or permanently set aside for, * * * or any corporation organized and operated exclusively for religious, charitable, scientific or educational purposes. * * *"
The purpose of the Congress to encourage bequests to corporations of the character of the residuary legatees is made plain by the deductions provided for by section 219, and the purpose of the act of 1918 was to insure the taxation of incomes which would eventually go to taxable persons in a more accurate and enforceable manner than was possible under prior laws, but not to tax incomes which would go to corporations of the character of the residuary legatees.
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 question, therefore, resolves itself into this: Was the income received by the estate during the year 1919 permanently set aside for the residuary legatees by the will itself?
There is no force in the argument that the clause does not apply to estates in process of settlement, but only to trusts, in view of its language, "pursuant to the will or deed creating the trust." The will of the decedent provides, so far as material here, as follows:
"I give, devise and bequeath all the rest, residue and remainder of my estate, wheresoever and whatsoever, as follows:
"I divide my said residuary estate into fifty-two equal parts, and I give such parts as follows: * * *
"Should any of the religious, educational or charitable corporations named as residuary legatees in my will be incapable for any reason of taking the whole or any part of the legacies given to them, I give, devise and bequeath the amount which any such corporations would have taken, if capable of taking, to the other corporations entitled to share in my residuary estate, in the same proportion which the legacy given to each corporation capable of taking bears to the entire amount of legacies given to all such corporations."
The 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), and the residuary estate includes the income in question. This appears from the care she exercised to prevent intestacy as to any part of the residuary estate.
The government, as I understand it, argues that the income in question might have been allowed as a deduction, if it had been paid by the executors or credited on their books. This would make the imposition of the tax depend upon some act of the executors, which had no result in law upon the rights of the parties, and is not in accordance with what we have found to be the expressed intent of the Congress, which was to tax the income received by the estate which would pass to any person subject to taxation, but relieve from taxation the income set aside by the terms of the will for corporations of the character described.
Much stress is laid by the government upon the contention that the personal property of a decedent passes to her personal representatives; but, whatever may be said on that subject, it does not alter the fact that the income in question, in the case at bar, reaches the beneficiaries of the bounty of the testatrix through the executors, and, if that income should be lost or reduced in amount, the loss occasioned thereby would be that of the residuary legatees, and therefore the income which the government is proposing to tax is the income of the residuary legatees. Stockton v. Lederer (D.C.) 262 F. 173; Lederer v. Stockton (C.C.A.) 266 F. 676; Id., 260 U.S. 3, 43 S. Ct. 5, 67 L. Ed. 99.
We do not agree with the reasoning in the opinion in, nor accept as an authority which we should follow, Kings County Trust Co. v. Law, 201 App. Div. 181, 194 N.Y.S. 370, affirmed without opinion 234 N.Y. 610, 138 N.E. 466, in which a state statute was passed upon by a state court.
In the case at bar the testatrix took the most effective method of setting aside the income in question for the residuary legatees, because by the will itself she set aside for them everything that was left, and thus we find that the income, when received by the executors, was by the will permanently set aside for the residuary legatees, the corporations in question, and that the income in question for the year 1919 was deductible under the provisions of section 219(b).
The judgment is affirmed.
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