loans by the petitioner and Hickey were secured by a lien on all of the physical assets of the company. The company went out of business and a trustee sold all of its assets for $1,975.31. On December 16, 1940, the trustee notified the petitioner that all of the company's assets had been turned into cash and that the petitioner's maximum recovery would be $760. Later the company denied the validity of the lien, a lawsuit followed, and in 1943 the petitioner and Hickey obtained a judgment for $1,957.56. On November 1, 1943, the petitioner had expenses against the judgment aggregating $966.76, leaving an ultimate net recovery of $990.80 on the judgment. Hickey had previously recovered payments on the debt in which the petitioner had not shared. Accordingly, Hickey's executors agreed to a settlement whereby the petitioner received the entire amount of the judgment.

The respondent held that "the loss of $10,512.92 claimed as sustained by the Miles Standish Trust upon the loss of certain timber property because of failure to pay taxes owing to the State of Oregon is disallowed on the ground that any loss sustained is deductible by the Estate of Miles Standish, Deceased, or trusts created by him, either prior to death or in his will."

The respondent also reduced the bad debt deduction claimed on a loan made to Yorkville Lumber Co. by $1,215.31, computed as follows:

VAN FOSSAN, Judge: We consider first the issue as to the correct amount of the bad debt against the Yorkville Lumber Co. which be came worthless in 1940. The petitioner claimed a loss of $4,240, based on the recovery of $760 as the partnership's share of the amount paid to the trustee in that year. The respondent charged against the loss of the original loan of $5,000 the entire amount ($1,975.31) of the payment held by the trustees.

The petitioner's contention is supported by the record. The evidence is uncontroverted that on December 16, 1940, the trustee had sold all of the assets of the company and that the company had no other source from which its debt to the petitioner and Hickey could be paid. The trustee held the fund for the benefit of the petitioner and Hickey. The worthlessness of the debt was definitely established at that time. Hickey and the petitioner were the creditors to whom the amount of

the recovery was payable in the proportions then known and accepted as the basis of the division between them.

The subsequent suit resulting in judgment and the adjustment made between the petitioner and Hickey's executor relating to items not in the record are not pertinent to the issue. The respondent has overlooked the fact that the recovery in 1940 was for the benefit of both the petitioner and Hickey and has misstated the amount of the "proceeds of liquidation." The partnership is entitled to the deduction of the bad debt in the sum of $4,240.27 ($5,000 minus five-thirteenths of $1,975.31). If any part of the ultimate net recovery in 1943 represented income to petitioner, it was a matter for accounting in that year. The second issue calls into question the validity of a trust instrument executed by Miles Standish on June 17, 1932, and also the effect of a testamentary trust established by the will of Miles Standish. The petitioner contends that the provisions of the first trust were void as violating the rule against perpetuities and that no testamentary trust was set up as to the residue devised to Allan Standish under paragraph fourth of the will. He argues that the will makes a direct devise of one-half of the estate to him as held by the California court. He does not discuss the status of the other half, but appears to concede that the will created a trust as to it.

The respondent argues that no judicial determination of the validity of the inter vivos trust (of June 17, 1932) has been made; that the trust did not violate the rule against perpetuities; that in case the trust should be declared invalid by this Court the property would revert to Miles Standish, subject to the testamentary disposition made by the will; and that the fact that the beneficiaries entitled to the trust income may ultimately receive the corpus does not invalidate the trust.

It appears clear that if the trust of June 17, 1932, did not violate the rule against perpetuities, as contended by the petitioners, a valid trust was created, which trust fixed the ownership of the property in question and accordingly fixes the liability for income taxes and the rights to losses arising from such property. For aught that appears, the trust has been in effect for all the years since its creation and has been recognized by the parties, the present instance being the only time its validity has been questioned.

It is elemental that the law favors the vesting of estates. It is also elemental that the law tends to support the intention of a grantor or a trustor, if such intention can be ascertained. Here it is obvious that by the trust Miles Standish was planning the future of his son Allan and his wife and their two children. The same intention involving the same parties is evident in his will dated two years prior. By the trust he left the income as at the date of his death (which occurred five days later) 51 percent to Allan Standish, 17 percent to Beatrice

M. Standish (Allan's wife), and 16 percent each to the two grandchildren, Patricia and Beatrice. This was to continue until the youngest grandchild became 30 years of age, when the trustee was to convey the corpus of the trust to the beneficiaries then living, in the same proportions as the income payments. Any additional grandchild living at the date of the death of the trustor was to share equally with those then living.

In Simes Law of Future Interests, vol. II, p. 103, appears the following:

Sec. 356. Intermediate Gift of Income.

An intermediate gift of the income to the legatee or devisee who is to receive the ultimate gift on attaining a given age is an important element tending to show that the gift is vested and not contingent. This would seem to be for the reason that the gift of income shows that the testator intended the legatee or devisee to take some benefit from the gift of the principal immediately on the testator's death, and that the postponement of possession was merely for the benefit of the donee. The same presumption in favor of the vested character of the gift obtains where only a portion of the income is to be given for maintenance.

The following statement from the opinion of the Pennsylvania Supreme Court in Appeal of Reed, 118 Pa. St. 215; 11 Atl. 787, is also in point:

And while it is true as a general rule, as before observed, that where the time or other condition is annexed to the substance of the gift and not merely to the payment, the legacy is contingent, yet it is equally true that a well recognized exception to the rule is, that where interest, whether by way of maintenance or otherwise, is given to the legatee in the meantime, the legacy shall, notwithstanding the gift appears to be postponed, vest immediately on the death of the testator.

It is clear that there was a vesting in possession of the beneficiaries of the income of the trust as of the date of the grantor's death. We are of the opinion that by the terms of the trust, under the law, there was also, as of that date, an immediate vesting of interest in the corpus or remainder. The fact that as of the date of the trust there was a possibility of divesting of the estates of the grandchildren and a redistribution to accommodate an after-born child does not affect the vesting or make it contingent. It is our opinion that, looking to the four corners of the trust, the grantor contemplated immediate vesting of interest of the corpus of the property in the several beneficiaries.

The consequence of our ruling that the property had vested as of the date of the grantor's death is that petitioners are not entitled to deduct the loss sustained on the Coos County and Douglas County properties.

The situation is not, in anywise, affected by the decree of the California Court of Probate entered in 1942. This adjudication dealt with

wholly different specified property and does not purport to deal with or affect in any way the property here in question.

The record discloses no evidence to warrant the imposition of penalties for "negligence or intentional disregard of rules and regulations," as charged by the respondent. The petitioners disclaimed any such act or intent. The notices of deficiency reveal no more than the ordinary difference of opinion between taxpayers and the Treasury Department. Therefore, no such penalties will attach.

Reviewed by the Court.

Decision will be entered under Rule 50.

ESTATE OF HUNT HENDERSON, ALLARD D'HEUR, EXECUTOR, AND JEANNE CRAWFORD HENDERSON, EXECUTRIX, PETITIONER, COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 111403. Promulgated March 20, 1945.

Decedent, at the time of his death a resident of Louisiana, was a member of a partnership. The agreement under which it was formed provided that it was to continue for one year after the death of any partner. The partnership filed its tax returns for the calendar year on an accrual basis. Decedent filed his returns for the calendar year on a cash basis. Decedent died June 21, 1939. The loss of the partnership for the period January 1 to June 21, 1939, attributable to decedent's interest amounted to $22,136.25. The partnership income for the period June 22 to December 31, 1939, distributable to decedent's estate amounted to $56,584.92. Decedent's estate, having filed an election and the necessary consents pursuant to section 134 (g) of the Revenue Act of 1942, contends that it is taxable on the income less the amount of the loss, or $34,448.67. Respondent contends that the loss was properly deducted in the return filed on behalf of decedent for the period ending with his death. Held, the partnership income distributable to decedent's estate for the period of June 22 to December 31, 1939, is taxable in full to petitioners, without subtracting therefrom the partnership losses attributable to decedent's interest therein for the period January 1 to June 21, 1939.

C. J. Batter, Esq., for the petitioners.

Robert C. Whitley, Esq., for the respondent.

SUPPLEMENTAL FINDINGS OF FACT AND OPINION.

v.

KERN, Judge: In this case our memorandum findings of fact and opinion was entered on December 14, 1943. Thereafter the petitioners filed a motion for further hearing and reconsideration for the purpose of giving effect to an election and consents filed under the provisions of section 134 (g) of the Revenue Act of 1942, which, petitioners contend, would require the taxation of the income of decedent

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and his estate under the provisions of section 126 (a) (1) of the Internal Revenue Code, as added by section 134 (e) of the Revenue Act of 1942, and sections 42 (a) and 43 of the Internal Revenue Code, as amended by sections 134 (a) and 134 (b) of that act. This motion was granted and a further hearing was held therein. At that hearing a stipulation of facts was filed by the parties. We find the facts to be as stipulated. Attention is also directed to our findings heretofore made for a full factual background of the issue now presented.

The facts which present this issue may be stated as follows:

* 零 *

Hunt Henderson died on June 21, 1939. At the time of his death he was a member of a partnership carrying on the business of sugar refining under the style of "Wm. Henderson." The articles of partnership provided that "The new firm is to continue for one (1) year after the death of any partner." The decedent, prior to his death, filed his income tax returns for the calendar year on a cash basis. The partnership filed its returns for the calendar year on an accrual basis.

An income tax return was filed on behalf of the decedent for the period January 1 to June 21, 1939 (the date of death). In that return there was claimed as a deduction the sum of $11,068.12 representing one-half of the accrued loss sustained by decedent on account of his interest in the partnership. This return was prepared on the cash receipts and disbursements basis. The other half of the loss was claimed on behalf of decedent's widow.

The partnership return for the calendar year 1939, which was filed on an accrual basis, showed the decedent's apportioned share of the operating loss for the period January 1 to June 21, 1939, in the amount of $22,136.25 and income distributable to decedent's estate for the balance of the year 1939 in the amount of $56,584.92. Half of the latter sum was reported in the return of the estate of decedent for the period June 22 to December 31, 1939, and the other half was reported by decedent's widow in her return for the year 1939 on the community property basis.

We have heretofore held in our original findings of fact and opinion that the entire income from the partnership attributable to decedent's interest therein from the time of his death to the end of 1939 was taxable to the estate, and not, as petitioners contended, taxable onehalf to the estate and one-half to decedent's widow. We also held that certain dividends declared prior to the death of decedent did not constitute taxable income of the estate.

Petitioners now contend that the income taxable to decedent's estate is $34,448.67, representing the income of the partnership attributable to the interest therein of decedent for the period from June 22 to December 31, 1939 ($56,584.92), less the partnership losses for the period