be deducted the amount of any income properly paid or credited to any legatee, heir or other beneficiary.

Credits allowed when tax is payable by the fiduciary.

In such cases [paragraph (1), (2) or (3) of subdivision (a)] the estate or trust shall, for the purpose of the normal tax, be allowed the same credits as are allowed to single persons under section 216.7

REGULATION. (a) In the case of an estate or trust taxed to the fiduciary it is allowed the same credits against net income as a single person, including a personal exemption of $1,000, but no credit for dependents. . . . . (Art. 346.)

Income taxable to beneficiary.

LAW. Section 219. (d) In cases under paragraph (4) of subdivision (a), and in the case of any income of an estate during the period of administration or settlement permitted by subdivision (c) to be deducted from the net income upon which tax is to be paid by the fiduciary, the tax shall not be paid by the fiduciary, 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 estate or trust for the taxable year, or, if his net income for such taxable year is computed upon the basis of a period different from that upon the basis of which the net income of the estate or trust is computed, then his distributive share of the net income of the estate or trust for any accounting period of such estate or trust ending within the fiscal or calendar year upon the basis of which such beneficiary's net income is computed.

REGULATION. In the case of (a) a trust the income of which is distributable periodically, (b) an ordinary guardianship of a minor, and (c) an estate of a decedent before final settlement as to any income properly paid or credited as such to a beneficiary, the income is taxable directly to the beneficiary or beneficiaries. Each beneficiary must include in his return his distributive share of the net income, even though not yet paid him, but if the taxable year on the basis of which he makes his returns fails to coincide with the annual accounting period of the estate or trust, then he need only include in his return his distributive share for such accounting period ending within his taxable year. The regulations governing partnerships are generally applicable to such an estate or trust. . . . . (Art. 345.)

'The credits so specified in section 216 are: (1) dividends, (2) interest on United States government bonds and bonds of the War Finance Corporation, (3) an exemption of $1,000.

Beneficiary to receive credit for proportionate share of dividends, etc.—

LAW. Section 219.

(d) . . . . In such cases the beneficiary shall, for the purpose of the normal tax, be allowed as credits in addition to the credits allowed to him under section 216, his proportionate share of such amounts specified in subdivisions. (a) and (b) of section 216 as are received by the estate or trust.

REGULATION. . . . . (b) In the case of an estate or trust taxed to the beneficiaries each beneficiary is allowed for the purpose of the normal tax, in addition to his individual credits, his proportionate share of such dividends from domestic and resident foreign corporations and of such interest not entirely exempt from tax upon obligations of the United States and bonds of the War Finance Corporation as are received by the estate or trust. Each beneficiary is entitled to but one personal exemption, no matter from how many trusts he may receive income. (Art. 346.)

Returns may be made on basis of accounting period other than calendar year.—

LAW. Section 212. [Individuals] .... (b) The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer;

The section is applicable to fiduciaries, because of the definition of taxpayer given in the law, viz., "The term 'taxpayer' includes any person, trust or estate subject to a tax imposed by this Act" (section 1).

Receivers are not all classed as fiduciaries.

[Former Procedure] In the 1913 law no mention was made of receivers for corporations, and it was contended that such receivers and the corporations whose property they administered were not subject to the income tax. A federal district judge in the northern district of California upheld this contention, but the Treasury never recognized it and, on the contrary, held the receiver to be liable for the income tax on the net income arising and accruing during his incumbency, even though such income was used, under orders of the court, to pay the debts of the corporation, or retained by him pending orders of the court as to its disposition. These conflicting holdings of a judge of a lower federal court and of the Treasury leave the intent of the 1913 law very much in doubt, but it is certain that the language of the 1916 law confirms the position taken by the Treasury.

bankruptcy, or assignees are operating the property or business of corporations, such receivers, trustees, or assignees shall make returns for such corporations in the same manner and form as corporations are required to make returns. Any tax due on the basis of such returns made by receivers, trustees, or assignees shall be collected in the same manner as if collected from the corporations of whose business or property they have custody and control."

Liability for tax on estate or trust.—

REGULATION. Liability for payment of the tax attaches to the person of an executor or administrator up to and after his discharge, where prior to distribution and discharge he had notice of his tax obligations or failed to exercise due diligence in determining whether or not such obligations existed. Liability for the tax also follows the estate itself, and when by reason of the distribution of the estate and the discharge of the executor or administrator it appears that collection of the tax can not be made from the executor or administrator, the legatees or distributees must account for their proportionate share of the tax due and unpaid. The same considerations apply to other trusts. Where the tax has been paid on the net income of an estate or trust by the fiduciary, such income is free from tax when distributed to the beneficiaries. (Art. 344.)

Income of a trust estate accumulated over a period of years before distribution.-The following ruling covers a case in which there was a delay in preparing the annual returns. During the years of the delay, income was accruing but was not paid. The beneficiary was known and, as the annual income was less than $20,000 but the aggregate which had accrued was more than $20,000, it was important that the income for each year should be reported separately.

RULING. This office is in receipt of your letter, March 13, 1917, in which you advise that a resident of New York died in September, 1913, leaving a will by which he devised and bequeathed three-fourths of his estate to his three sons absolutely and one-fourth to a trust company in trust to pay the income there from to a daughter during her life, remainder to her issue; that it was impracticable for the executors to complete distribution of the estate or determine the amount of net income until 1916, when an account was prepared showing the net income accruing to each beneficiary during the last three months of 1913 and during the years 1914 and 1915, and that a large part of the accumulated income was distributed in 1916.

See page 868, where this point is elaborated.

You ask if this office will permit the daughter (beneficiary under the trust) to amend her returns for 1913, 1914 and 1915 and include in each the amount of income accrued to her and to which she was entitled in the year for which the return was made, but which was not actually determined or received by her until 1916, or whether she will be required to include the total amount received in her return of income for 1916. You state that if the income so distributed be spread over the years 1913 to 1915, inclusive, the amount distributed for any one of these years will be less than $20,000, but that taken together the amount would exceed $20,000.

From the foregoing statement, it would appear that the facts of the case bring it within the prescription of T. D. 1943 and that, although the beneficiaries were determined, not until 1916 did the settlement of the estate reach the stage where the respective interests in the income derived from the estate were determinable. The executors should make a fiduciary return for each of the years, 1913, 1914, 1915 and 1916, reciting therein the respective beneficiaries and their interests, if the interest of any beneficiary subject to withholding of normal tax by the fiduciary was $3,000 or over, and for 1916 if the amount paid or payable to any beneficiary from the amount shown on line 3, page 1 of the return, form 1041, was $3,000 or over. In all cases when the amounts so distributed for each of the years 1913 to 1916, inclusive, added to other income of the beneficiaries, would make the income of such beneficiaries subject to the additional tax, said beneficiaries should make amended returns and include therein the amount received for the years noted. If all tax for which the beneficiaries are liable shall have been paid, amended returns will not be required for the years 1913 to 1915, inclusive. For the year 1916 return must be made when the interest of a beneficiary is $3,000 or over, even though there is no tax liability, and for this reason amended return should be made for the year 1916. (Letter to The Corporation Trust Company, signed by Acting Commissioner David A. Gates, and dated March 24, 1917.)

Taxable Income of Fiduciaries

Gross income, in the case of returns on account of which the fiduciary has to pay the tax, includes the same items as in the case of individuals and as defined in section 213.

Exempt income.-The income exempt is the same as in the case of individuals.10

10See page 37.

LAW. Section 213.

.. (b) Does not include the following

items, which shall be exempt from taxation under this title:

(1) The proceeds of life insurance policies paid upon the death of the insured to individual beneficiaries or to the estate of the insured.11

Stock dividends and exchanges of securities.-Under section 201 (see Chapter XXI) stock dividends are considered income to the amount of the earnings or profits distributed. When declared before November 1, 1918, they were taxable at the rates for the years in which such earnings were accumulated. Under section 202 (see Chapter XV) gain or loss on property received in exchange for other property shall be computed on the basis of the fair market value of the property received, except in the case of reorganization, merger or consolidation. In such cases the amount of the excess in par or face value shall be treated as a gain to the extent to which the fair market value of the new securities is greater than the cost (or market value as of March 1, 1913) of the securities exchanged. Under most state laws such stock dividends and exchanged securities are considered principal, but they must nevertheless be considered income for income tax purposes, and the tax be paid by the fiduciary.

REGULATION. Stock dividends paid from earnings or profits accumulated after February 28, 1913, received by a fiduciary and retained as an accretion to the estate under the terms of the will or trust, are income to the estate. (Art. 1545.)

Valuation of property acquired by inheritance.—The regulations amplify the former procedure in regard to the value of property acquired by inheritance. The Treasury holds that when property passes by gift or bequest the appreciation, if any, in the value of the property transferred before the date of transfer is not taxable income.

"[Former Procedure] Under the 1916 and 1917 laws all proceeds of life insurance policies payable to others than the individual beneficiaries were taxable (section 4). The 1913 law (section B) stated that net income should not include "the proceeds of life insurance policies paid upon the death of the person insured."