The benefit of net losses is extended 18 to the estate or trust rather than to the beneficiaries. Only losses sustained in business are contemplated by section 206.

DEDUCTIONS FOR DEPRECIATION.-A fiduciary may deduct depreciation sustained in computing the net income of the estate or trust. (See Bulletin "F," page 32, and C. B. II-2, 162; A. R. R. 3959.) However, if the estate or trust has no net income against which to apply the deduction, the benefit is lost. [See discussion of section 215 (b) at page 697 et seq.]

In Whitcomb's Appeal (4 B. T. A. 80) the Board stated the general rule.

DECISION. 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. . . .

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.

18

[Former Procedure] See Income Tax Procedure, 1926, page 1735.

However, in De Forest's Appeal (4 B. T. A. 1059) the Board in overruling the Commissioner's disallowance of a deduction for the exhaustion of a patent, established a different rule because of special circumstances.

DECISION. There is no language in this Statute which says or which by necessary implication may be construed to provide that a beneficiary may not in any case claim a deduction for exhaustion of property from which the income upon which he is taxable was derived. The Commissioner relies upon the separate entities of fiduciary and beneficiary, but there is no reason why Congress may not, if it so desires, ignore the fiduciary in respect to all or a portion of the income of the trust. We think it intended to do so in cases of the character of the one before us. The Statute directs that the income of the trust which is distributed periodically shall be excluded from the income of the trust and be taxed to the beneficiary, to whom it belongs under the instrument creating the trust, and where it is shown as it was here, that it was the beneficiary who created the trust for himself and that he is also the remainderman, we find no justification for the conclusion that he may not get the benefit of the allowance for the exhaustion of his property temporarily and for convenience only in the hands of a trustee to collect the income and pay it to them. We think in cases of this character the separate entity of fiduciary and beneficiary should be ignored and that the taxpayer should be allowed a deduction for the exhaustion of her interest in the patent.

If this is correct, it is difficult to believe that Whitcomb's Appeal was correctly decided. On principle, the De Forest opinion seems wrong, however appealing the special circumstances may have been.

The 1926 law provides that the deduction for depreciation of improved real estate shall be equitably apportioned between the lifetenant and the remainderman. (See page 1242.)

DEDUCTIONS FOR CONTRIBUTIONS AND GIFTS.-The deduction for such contributions allowed in section 219 (b-1), discussed on page 1242, is expressly stated to be in lieu of the deduction allowed by section 214 (a-10) in the case of dividends.

Credits and Exemptions

LAW. Section 219. .... (c) For the purpose of the normal tax the estate or trust shall be allowed the same credit as is allowed to a single person under subdivision (c) of section 216, and, if no part of the income of the estate or trust is included in computing the net income of any legatee, heir, or beneficiary then in addition the same credits as are allowed by subdivisions (a) 20 and (b) of section 216. 19 The personal exemption to single individuals is $1,500.

(d) If any part of the income of an estate or trust is included in computing the net income of any legatee, heir, or beneficiary, such legatee, heir, or 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, under this section, required to be included in computing his net income. Any remaining portion of such amounts specified in subdivisions (a) and (b) of section 216 shall, for the purpose of the normal tax, be allowed as credits to the estate or trust.

REGULATION. (a) An estate or a trust is allowed the same credits against net income as are single persons, including a personal exemption of $1,500 but no credit for dependents.

(b) If no part of the income of the estate or trust is included in computing the net income of any legatee, heir, or beneficiary, the estate or trust shall be allowed the credits provided in section 216, (a) and (b), in respect of certain dividends, and of interest upon certain obligations of the United States.

(c) If any part of the income of the estate or trust is included in computing the net income of any legatee, heir, or beneficiary, he is allowed for the purpose of the normal tax, in addition to his individual credits, the proportionate share of such dividends specified in section 216 (a) and article 301 and of such interest not entirely exempt from tax upon obligations of the United States, which he is required to include in computing his net income. Any remaining portion of such amounts will be allowed for the purpose of the normal tax to the estate or trust. Each beneficiary is entitled to but one personal exemption, no matter from how many trusts he may receive income. (Art. 345.) *

If the entire income of the estate or trust is taxable to the fiduciary, the credits provided for in section 216 are allowed in their entirety to the fiduciary. If the entire income is distributable, or is properly paid or credited to beneficiaries, then the credits in respect of the trust income are allowed proportionately to the beneficiaries in addition to their personal exemption and credits with respect to their other income. If the income is in part taxable to the fiduciary and in part to the beneficiaries, the credits must be apportioned between the beneficiaries and the fiduciary.

In filing a return an executor or administrator may claim for the purposes of the normal tax on behalf of the decedent, an exemption of $1,500 or $3,500, as the case may be, no matter how small a portion of the year is covered by the return. And he may again. claim the full exemption of $1,500 when he later reports the income

22

[Former Procedure] See Income Tax Procedure, 1926, page 1737.

of the estate for the remaining portion of the year. (See C. B. IV-2, 58; I. T. 2239.)

REGULATION. (c) If an individual dies during the taxable year, his executor or administrator in making a return for him is entitled to claim his full personal exemption according to his status at the time of his death. If a husband or wife so dies the joint personal exemption may be used by the executor or administrator in making a return for the decedent, and an undiminished personal exemption, according to the status of the survivor at the end of the taxable year, may be claimed in the survivor's return. (Art. 305.) 23

LAW. Section 200.

(a) . . . . The term "taxable year" includes, in the case of a return made for a fractional part of a year under the provisions of this title or under regulations prescribed by the Commissioner with the approval of the Secretary, the period for which such return is made. . .

RULING. In the case of an estate in process of administration or settlement where all of the income is paid or credited to the beneficiary, the executors may not, in their return on Form 1040 for the estate deduct the specific exemption of $1,000 and report as paid or credited to the beneficiary (to be reported by her in her return) the amount actually shown on their books less such $1,000. The beneficiary must report in gross income in her individual return the entire amount of the income of the estate so paid or credited to her. (C. B. II-2, 165; I. T. 1782.)

Credit for taxes.-Section 222 (see Chapter 8) of the law allows a citizen of the United States [except citizens entitled to the benefits of section 262 (see page 1185)] to credit against his income tax payable to the United States, amounts paid or accrued as income, war-profits, and excess-profits taxes to foreign countries and possessions of the United States. The amount of the credit in each case depends upon the ratio of taxable income from sources within the United States to taxable income from all sources. A similar credit is allowed to aliens resident in the United States for taxes paid or accrued to foreign countries which allow a like credit to citizens. of the United States and of possessions of the United States.

This credit is allowed proportionately to beneficiaries of an estate or trust. As an estate taxable as an entity is treated by the law as an individual, it would seem that the credit for foreign taxes on income taxable to the estate should be availed of by the estate.

LAW. Section 222. (a) The tax. . . . shall be credited with: . .

23

(4) In the case of any such individual who is a . . . . bene

[Former Procedure] See Income Tax Procedure, 1926, page 1738. 24 Citizen or resident of the United States.

ficiary of an estate or trust, his proportionate share of such taxes* the estate or trust paid or accrued during the taxable year.

of

Earned income credit.-The law in section 209 (b) (see page 151), provides that "in the case of an individual," the earned income credit shall be allowed. The Bureau following this language literally has ruled that estates and trusts are not entitled to the credit. (C. B. IV-1, 14; I. T. 2137.)

Deductions and credits of ancillary administrators.-An ancillary administrator, in cases where the domiciliary representative is a resident or citizen of the United States, should return the amount of gross income received by him as ancillary representative with all deductions claimed against such income including any amounts paid or credited by him to a beneficiary. If a domiciliary representative is a non-resident alien, the ancillary representative should make a return for the entire estate. (Art. 442, see page 1269.)

25 Income, war-profits, excess-profits taxes paid or accrued to foreign countries and possessions of the United States. See page 136 et seq. for a discussion of the credit.