interest accrued since the death of the testator on obligations of the executor to the estate. (C. B. 1, 175; O. D. 51.)

A non-resident alien beneficiary who, through the medium of a domestic trust, receives interest from bonds of a foreign government and dividends and interest from a foreign corporation, is not required to report such income for taxation in the United States. (C. B. II-1, 81; I. T. 1642.)

RULING. A deceased incompetent had received during his lifetime and during the period of his incompetency dividend checks which he was not competent to indorse and collect and which no one else was legally qualified to indorse and collect in his behalf.

For income tax purposes the dividend checks in any return filed on behalf of the incompetent for the taxable periods during which such checks were made subject to the incompetent's unqualified demand are to be treated as taxable income, regardless of the fact that the taxpayer was himself unable to indorse and collect the checks and that no other person was at that time qualified to do so. (C. B. III-2, 76; I. T. 2072.)

A testator directed his executor to continue a certain partnership business. After his death, his estate was credited monthly with interest upon the assets of the estate left with the business. These credits were memorandum entries and it could not be determined until an inventory was taken whether the estate was entitled to any interest. It was not intended that the amounts credited should be available to the estate prior to the end of the partnership's fiscal year. They were not withdrawn by the estate. It was held that the interest credits did not constitute taxable income to the estate. (C. B. II-2, 159; A. R. R. 2859.)

An insolvent corporation was indebted for interest to a taxpayer and after her death to her estate. The corporation made certain payments for the taxpayer and her estate. It was held that the amount of the expenditures was income from interest to the decedent and her estate. (C. B. III-1, 109; A. R. R. 6239.)

As to the income tax liability of the executor regarding interest accrued or dividends declared before, but paid after death, see the paragraph below on income exempt from taxation.

INCOME FROM RENTS.-In many jurisdictions real estate passes by operation of law to the devisee or in cases of intestacy to the heir, subject only to the power of the personal representative of the decedent to sell it to pay debts or legacies. In jurisdictions where this rule obtains, if the administrator has done nothing to effect a con

version of the realty for the payment of debts, the income therefrom should be reported by the heirs and not by the administrator. Even though the will is contested, and the rents are collected by the fiduciary, they are ordinarily taxable to the heir or devisee as finally determined. (C. B. III-2, 177; S. M. 2673.) However, where the executor has duties to perform in the allotment of the land among the heirs, the rents should be reported by him until the conveyances are actually made. (C. B. V-1, 68; S. M. 4945.)

The liability of the administrator in respect of interest and rents accrued before but collected after decedent's death is discussed in the following paragraphs.

Income exempt from taxation.-Income ordinarily exempt when received by individuals, such as proceeds of life insurance, municipal and other exempt bond interest, etc., is also exempt when received by a fiduciary. (See Chaper 12, supra.)

The statute exempts from income taxation the "value of property acquired by gift, bequest, devise, or inheritance." [Section 213 (b-3).] Suppose at the time of a decedent's death, amounts of interest and rent have accrued to him, which are paid subsequent to his death. The amounts so accrued up to the date of death must be returned for estate tax purposes as part of the decedent's estate. (See Estate Tax Procedure, 1926, page 560.) When collected by the executor, are such amounts accordingly exempt? The Solicitor has held that they are not, in S. M. 3256, C. B. IV-1, 186; and S. M. 3790, C. B. IV-2, 61, overruling many former rulings. (See C. B. IV-1, 189; I. T. 2166.) His argument is that the executor does not acquire property by gift, bequest, devise, or inheritance; that the estate tax is imposed on the right to receive income, but that the payments themselves are still income. The rulings would be open to doubt, were it not for the decision in Irwin v. Gavit, discussed at page 695.

Deductions. The law provides that in computing the income of the estate or trust (other than the trusts described in subdivisions (g) and (h) of section 219) certain deductions shall be allowed, in addition to or in lieu of, the ordinary deductions allowed individuals, and discussed in Chapter 39. These specific deductions will be discussed in the following pages; and thereafter, the application of the

See also People ex rel Kernochan v. Gilchrist, 214 App. Div. (N. Y.) 114. 7 For a discussion of these trusts, see page 703 et seq.

deductions allowed individuals in the computation of the net income

on estate or trust.

Special deductions allowed an estate or trust.—

INCOME PAID OR SET ASIDE FOR CHARITABLE, ETC., PURPOSES.(b) . . . 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, except that—

LAW. Section 219.

(1) There shall be allowed as a deduction (in lieu of the deduction authorized by paragraph (10) of subdivision (a) of section 214) any part of the gross income, without limitation, which pursuant to the terms of the will or deed creating the trust, is during the taxable year paid or permanently set aside for the purposes and in the manner specified in paragraph (10) of subdivision (a) of section 214, or is to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, or for the establishment, acquisition, maintenance or operation of a public cemetery not operated for profit;

A discussion of the deductions allowed by section 214 (a-10) will be found at page 1132 et seq.

The statute allows the deduction of income permanently set aside for the specified purposes, as well as that paid over during the taxable year. The same result was reached by the Supreme Court under the 1916 and 1917 acts, in Lederer v. Stockton (260 U. S. 3). In that case, however, the charitable corporation actually received the income, and the Treasury has held that the decision did not apply under the 1918 and later laws unless the income was actually paid over or credited to the non-taxable beneficiary. In Slocum v. Bowers (U. S. Dist. Ct., S. D. N. Y., Sept. 14, 1926) a tax had been collected on income of an estate in the process of administration which income was ultimately to pass to certain corporations which were exempt from tax. No part of the income was either paid or credited to the beneficiaries, nor was there any act of the executor to indicate that it had been permanently set aside. The court said:

DECISION. It is hard to believe that in the one case of administration of an estate the exemption should turn on the technical question of whether the corporations seeking it have the legal or equitable title to the income. The policy of exempting these corporations is firmly established and has been continuously expanding ever since the system of income taxation was adopted. The statute should be read, if possible, in such a way as to carry out this policy and not to make the result turn on accidental circumstances or legal technicalities. There is no doubt

that the executors held the legal title, but it does not necessarily follow because they can sell assets, pay debts and distribute, that the portion of the property which they hold, though ultimately distributable to tax exempt persons is taxable in their hands."

In its more recent rulings, the Treasury has been reasonably liberal in interpreting the words "permanently set aside." Thus it has been held that income being accumulated by trustees under a will, whereby, when the amount reached a certain total, it was to be turned over to a charitable corporation is deductible, even though the corporation is as yet non-existent. (C. B. V-1, 71; S. M. 4613.) Again, gain from the sale of capital assets which by local law is to be added to the corpus and which ultimately is to be paid to charitable organizations has been held deductible. (C. B. V-1, 277; S. M. 4644; V-342883; G. C. M. 423. Cf. C. B. II-1, 129; I. T. 1678.) Where the principal of a trust fund is to be transferred to charitable institutions, income received on the property by the trustees prior to such transfers is deductible on the return of the estate. (C. B. 4, 221; A. R. R. 521.)

The Treasury has ruled that although under the Revenue Act of 1924 (or of 1926) a trust may deduct income that is to be used exclusively for religious, charitable, scientific, literary, or educational purposes, such a deduction is not allowable under prior acts, under which the contributions were required to be made to certain types of organizations in order to be deductible. (C. B. III-2, 221; S. M. 2620.)9 Moreover it has been ruled that it is not enough merely to show that some part of the gross income has been paid to or set aside for the specified organizations; it must appear that such part of the gross income has been paid or set aside pursuant to the terms of the will or deed creating the trust-that is, that the will or deed directs the payment or setting aside from the income of the trust, not merely from the corpus. (C. B. III-1, 215; I. T. 1966.) Again, if it is not clear that the income will ever belong to an exempt corporation, it is not deductible at that time, even though ultimately the corporation may receive it. (C. B. V-1, 279; S. M. 5245; see also C. B. II-2, 165; A. R. R. 3293.)

8

9

[Former Procedure] See Income Tax Procedure, 1926, page 1712. [Former Procedure] For examples of the strict construction of former laws, see: C. B. 1, 175; O. D. 278. C. B. 3, 203; A. R. R. 280. Income Tax Procedure, 1926, page 1713.

INCOME TO BE DISTRIBUTED CURRENTLY BY THE FIDUCIARY TO THE BENEFICIARIES.10.

LAW. Section 219. . . . . (b) . . . . 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, except that—

(2) 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 beneficiaries. . . . . Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under paragraph (3) in the same or any succeeding taxable year.....

REGULATION.

....

(2) 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 beneficiaries, . . . . shall be allowed as an additional deduction in computing the net income of the estate or trust. The amount so allowed as a deduction must be included by a beneficiary in computing his net income, whether distributed to him or not. If the taxable year of the beneficiary differs from that of the estate or trust, the amount which he is required to include in computing his net income shall be based upon the income of the estate or trust for its taxable year ending within his taxable year. The amounts which are allowed as a deduction under this paragraph shall not be allowed as a deduction under paragraph (3) of this article in any taxable year. (Art. 342.)

The 1918 and 1921 laws provided that the tax on income which was to be distributed periodically, whether or not at regular intervals, should be paid by the beneficiaries. The 1924 law changed the phrase "periodically, whether or not at regular intervals," to "currently."

Webster's New International Dictionary defines "periodical" as: "Characterized by periods; recurring more or less regularly after a certain period of time"; and "current" as: "Now passing, as time, or belonging to the present time." If the income is to be distributed within a reasonable period after its receipt it is taxable to the beneficiaries, whether distributed or not. In a general way this is the interpretation placed on prior laws by the Treasury, so that there has been no essential change in the law in this respect. Accordingly the Treasury rulings relative to periodical distributions of income are to some extent applicable. (See rulings relative to accumulated income, page 1251 et seq.)

It is not necessary that the income be actually paid or credited. It is not a condition precedent to the deduction that the income be

10 [Former Procedure] See under the 1916 law: C. B. III-2, 172; Sol. Op. 157. C. B. I-2, 160; Sol. Op. 146.