The question calls for the construction of section 219 of the Revenue Act of 1918, and more particularly subdivisions (b) and (d) thereof. The pertinent provisions are as follows:

Sec. 219. (a) That the tax imposed by sections 210 and 211 shall apply to the income of estates or of any kind of property held in trust, including

(4) Income which is to be distributed to the beneficiaries periodically,

(b) 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 section 212, * and in cases under paragraph (4) of subdivision (a) of this section the fiduciary shall include in the return a statement of each beneficiary's distributive share of such net income, whether or not distributed before the close of the taxable year for which the return is made.

*

(d) In cases under paragraph (4) of subdivision (a),

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,

Provisions of similar import are contained in the Act of 1916, as amended by the Act of 1917.

Nowhere in the Act is there contained a specific definition of the term "distributive share." Treasury Decision 2987, dated March 1, 1920, forms the basis of the Commissioner's action in the instant appeal and is so important to an understanding thereof as to warrant its reproduction in full.

Regulations No. 45 are amended by adding thereto article 347 to read as follows:

ART. 347. Estates and trusts which can not be treated as a unit. In the case of certain estates and trusts it is recognized that the estate or trust can not be treated as a unit for income-tax purposes and may represent an aggregate of distinct interests, to all of which the fiduciaries are responsible. In such cases the procedure stated in this article should govern. The following are recognized as cases which can not be treated as a unit and must, therefore, be governed by this article: (a) When there is income distributable periodically and also income which is to be accumulated in trust, held for future distribution, or added to the corpus; (b) when there is income distributable periodically and also income (according to the Federal income-tax statutes and regulations) which is not distributable periodically under State law, e. g., gains from sale of capital assets, stock dividends; (c) when there is income distributable periodically and deductions (according to Federal incometax statutes and regulations) which are not deductible under State law from the distributable income, e. g., losses from the sale of capital assets, depletion, depreciation.

In ascertaining whether an estate or trust comes within any one of the cases just enumerated, the provisions of the Federal statutes and regulations-rather than the provisions of the will or trust and the provisions of State laws-shall determine what items constitute taxable gross income or allowable deductions; the provisions of the will or trust and of State laws shall determine the allocation of items of gross income or deduction; that is,

to which of the different interests making up the whole such items shall be charged or allowed. In cases which are to be treated under this article, the items of gross income and deduction as determined by the Federal incometax statutes and regulations must be scrutinized and classified in accordance with the provisions of the will or trust or rules of local law into two classes, one subject to the procedure specified in subdivision (c) of section 219, and the other to the procedure specified in subdivision (d) of section 219. The result will be that the beneficiary to whom income is to be distributed periodically must include, in computing his net income, the amount actually distributable to him (except exempt income) even though the aggregate of the distributive shares should be larger than the net income of the estate or trust computed as a unit. Any gain, profit, or income which is not periodically distributable must be included in computing the net income of the estate or trust, so that the fiduciary will pay the tax upon any excess of the net income of the estate or trust computed as a unit over the aggregate distributive shares.

For example, a trust is created the income of which is distributable periodically for the life of the beneficiary, the remainder over to others. The trust has the following items of income: Rent, $3,000; interest, $2,000; gain on sale of capital assets, $1,500; cash dividend, $1,000. And deductions: General expenses (all deductible from distributable income), $700; depreciation, $300; loss on sale of capital assets, $3,000. Under the terms of the trust $5,300 will be distributed to the beneficiary, viz, rent, $3,000; plus interest, $2,000; plus dividend, $1,000; less general expenses, $700. The gain and loss on the sale of capital assets will be considered capital items affecting the corpus only, and the items of depreciation will not affect the amount to be distributed, there being no rule of State law or provision of the trust requiring this deduction from distributable income. In such a case the fiduciary must report on Form 1041, showing a net income for the trust of $3,500, and must show as the distributive share of the beneficiary the $5,300 to which he is entitled. The beneficiary must account for the amount actually distributable to him as income, viz, $5,300, as provided in section 219 (d) and will be entitled to a credit of $1,000 on account of the dividends in computing the normal tax, but not to any deduction on account of depreciation or capital losses.

If there had been no loss on the sale of capital assets so that the net income of the estate or trust was $6,500, Form 1041 should show the distributive share of the beneficiary as $5,300 and the distributive share of the fiduciary as $1,200; and the fiduciary should file a separate return on Form 1040-A, reporting $1,200 for taxation.

DANIEL C. ROPER, Commissioner of Internal Revenue.

The particular situation of these taxpayers is covered in subdivision (c) of the first paragraph of the foregoing, that is, the income in this case is distributable periodically, but there are reductions (in this case depreciation) which do not affect the computation of distributable income of the life beneficiaries but do affect the corpus of the estate. This is illustrated in the third paragraph, wherein is set forth ordinary income subject to distribution, in the total amount of $5,300, and capital losses which reduce the income of the estate for the purpose of the fiduciary return, but relate to the separate entities represented by the estate as a whole, ultimately consisting of the remaindermen.

We are dealing here, then, with a situation in which there are distributive shares of life tenants and distributive shares in effect of remaindermen, which latter have to do with the capital assets and capital transactions of the estate and have nothing to do with the life tenancy and the income distributable thereunder. The situation is perfectly clear in the case of the estate or trust in which a portion of the taxable net income is derived from capital sources. In such a case the ordinary income is distributed to the life beneficiaries and the capital gains are reported by the fiduciary and taxed to him. The situation is not different in the case of capital losses, that is, the ordinary income is distributed to the life tenants and the capital losses are absorbed by the estate or trust as the representative of the remaindermen. True, in the one case the fiduciary must make an income-tax return and pay tax upon the gain derived from capital transactions, whereas, in the case of losses, no such return is required and of course no such tax is collected, but the distributive share of the life tenant is unchanged in either case. It is the share to which he is entitled of the ordinary net income of the estate, that income which under the will or trust instrument or under the laws of the jurisdiction under which the estate or trust is being administered, is ordinarily distributable to life tenants. The other gains taxable or deductions allowed relate not to such ordinary income, but to capital transactions in which the life tenant has no interest upon which he may be charged for tax as to gains and as to losses which he may not be permitted to use to reduce the distributive share of the income which he receives and upon which he should pay tax. His distributive share remains unchanged whether the capital transactions of the estate or trust show a gain or a loss, and he has no interest in that aspect of the trust, except the natural future interest in the increase of his income in the case of gains or in its decrease in the case of losses.

There is, then, in all of these cases, a taxable entity represented. by the estate or trust, in the background of which lie the remaindermen who will ultimately divide the corpus. These remaindermen are not themselves taxable upon the gains, nor themselves entitled to deduct the losses, but the entity, the trust, which is administering the corpus for the time being, is taxable on such gains and is entitled to the deduction of such losses. It matters not that in many cases of losses under these circumstances there remains no income from which to deduct them. The estate in such circumstances is in no different position from that of any taxpayer whose losses exceed his gains. He is fortunate only in that he has no tax to pay. It is not altogether fortunate that Treasury Decision 2987 contains the following language:

The result will be that the beneficiary to whom income is to be distributed periodically must include, in computing his net income, the amount actually

distributable to him (except exempt income) even though the aggregate of the distributive shares should be larger than the net income of the estate or trust computed as a unit.

The aggregate of the distributive shares, when due regard is had for the estate as an entity, is never other than the taxable net income of the estate. The fact merely is that the sum of the plus quantities is, where losses occur, in excess of the net income and is reduced by the minus quantities, namely, capital losses, depletion or depreciation.

There remain to be considered only certain points made by the taxpayer having to do particularly with the alleged erroneous reasoning in Baltzell v. Mitchell, 3 Fed. (2d) 428. In that case the court said: "It is necessary to resort to the instrument containing the terms of the trust to determine her distributive share." This the taxpayer contrasts with the language of the Supreme Court in Merchants' Loan & Trust Co. v. Smietanka, 255 U. S. 509, in which the court said: "The provision of the will may be disregarded. It was not within the power of the testator to render the fund nontaxable."

As we have pointed out above, the construction of the language "distributive share " is entirely consistent with the position taken by the Commissioner, and, in fact, is the only position which possibly can be taken in the case of returns of estates or trusts, where capital transactions and ordinary income are commingled in a single return but must be separated into parts to represent the various interests concerned therein. This, we believe, is all that the court meant in Baltzell v. Mitchell, and, as so interpreted, is certainly entirely correct.

Taxpayer also points out the identical language between sections 218 and 219, wherein "distributive share" of partners is contrasted with "distributive share" in the case of trusts. There again the question is one of fact as to what the distributive share is. Partnership income is quite commonly distributed in a manner different from the interests of the partners in capital, yet it is not often contended that the partners should be taxed upon shares computed upon the basis of their interest in capital alone, yet that, in a measure, is the contention here, namely, that life beneficiaries who have no interest, except in income, should be affected by the fact that capital transactions relating solely to remainder interests have occurred and affected the trust as an entirety.

Nor do we believe, as the taxpayer claims, that the construction which we have placed upon the statute above is one outside and beyond the statutory language. Certainly such is not our intent, for if the words "distributive share" are not subject to the construction given, there is no other place in the statute in which authority can be found for taxing as income the amount by which the Commis

sioner here seeks to increase the income returned by these taxpayers. That income must be then distributive shares or income taxes can not be imposed thereon. In our opinion, Congress, while using general language, used language peculiarly apt and particularly adapted to the purpose in mind. Any attempt to be specific would have resulted in far greater confusion than that incident to the application of general language to situations which from time to time are necessarily complex in fact, if not in the principles to be applied. The taxpayers also argue that depreciation, being a matter of annual deduction, is a deduction which is properly allowable to life beneficiaries. We think the answer is clear; depreciation or "exhaustion, wear and tear," in the language of the statute, allowed by the Act, relates to capital assets. The depreciation is not in the income but in the capital, and it affects income only in that, if the depreciable assets are not replaced, the income sooner or later will cease. This might result, as the taxpayer points out, in no assets being left for the remaindermen, but this certainly is not a matter in which a life tenant has any particular interest.

We are of the opinion that the Commissioner committed no error in the determinations here under appeal.

The deficiencies are: For the year 1917, Louise P. V. Whitcomb, $351.17; Charlotte A. W. Lepic, $364.80-total $715.97. For the year 1918, Louise P. V. Whitcomb, $3,491.12; Charlotte A. W. Lepic, $3,443.12-total $6,934.24. For the year 1919, Louise P. V. Whitcomb, $3,196.29; Charlotte A. W. Lepic, $3,196.29; Marguerite T. Whitcomb, $700.51— total $7,093.09. For the year 1920, Louise P. V. Whitcomb, $3,292.05; Charlotte A. W. Lepic, $3,433.63; Marguerite T. Whitcomb, $547.71-total $7,273.39. Order will be entered accordingly.

On reference to the Board, STERNHAGEN concurs in the result only.

APPEALS OF ELIZABETH M. ABELL, ELIZABETH M. ABELL, WALTER W. ABELL, MARY ABELL MORGAN, AND MARY ABELL MORGAN.

Docket Nos. 2693-2697. Submitted May 25, 1925. Decided April 23, 1926. Haines H. Hargrett, Esq., for the taxpayers.

Ellis W. Manning, Esq., for the Commissioner.

Before STERNHAGEN, LANSDON, GREEN, and LovE.

These appeals involve deficiencies in income taxes for the years 1919 and 1920 in the following respective amounts: Elizabeth M.