administrator's expense is to see if the expense is ordinary and necessary to collect the income of the estate. This would exclude the administrator's commissions and his attorney's fees (O. D. 537; Sol. Op. 88) but not commissions of New York trustees covering the distribution of corpus and income (S. M. 2463). Payments to executors in lieu of statutory fees, provided in the will, are proper deductions from the income of the estate (3 B. T. A. 141). An Estate Tax Division ruling that certain expenses are administrative expenses is not binding on the Income Tax Unit (S. M. 2498). Commissions paid to sell property are deductible if paid to a person other than the executor. If the commission is paid to the executor, he must report the amount as income. Where property owned by an estate is sold, the stamp tax on the deed is deductible (O. D. 632). Attorney's fees to defend title to property of an estate are not deductible expenses in the executor's return for the estate (A. R. R. 284). Income retained by the executor to pay taxes, even though legally payable to the beneficiary, is taxable income to the estate (T. B. R. 47); interest on such retained funds is also taxable (O. D. 656). Assessments on bank stock owned by an estate were not deductible losses when paid, but the assessment plus the value of the stock at the date of the testator's death is the basis for computing gain or loss upon the final disposition of the stock (O. D. 918). trustee of an estate made good a shortage of a co-trustee; the amount paid was held to be a gift because the trustee was legally not liable (I. T. 1811). When the time of payment of specific legacies under a will is deferred by the executors and they have paid interest on the legacies as required under the law of the state, the interest is taxable income to the legatees and deductible by the executors to the extent that the interest is legally required to be paid under the law of the state, whether or not it is paid out of corpus or out of income of the estate (I. T. 1720). A fiduciary may deduct amounts paid in final settlement of an estate if in accordance with the law of the state and the will (I. T. 1621); a donation is not deductible unless the will provides that it be paid from income (I. T. 1966). An estate's share in the net loss of a partnership for 1921 was not deductible from the income of the beneficiaries but should be charged against the income of the estate for the following year (I. T. 1771). The two-year period in connection with capital gains begins to run on the date of the decedent's death regardless of whether or not the executor or trustee is the same person (I. T. 1719).

Federal estate taxes are deductible in the year in which the due date falls (one year after the decedent's death) provided the

A

books are on an accrual basis; or if paid before the due date they may be claimed as a deduction in the taxable year paid. If the books are on a cash basis, the date or dates of payment will govern (T. D. 3411). The payment of an estate tax does not give rise to a loss resulting from the operation of the business of an estate and so may not be deducted as a net loss (I. T. 1803). Income is not made taxable to beneficiaries by the fact the income of the estate is paid over to a trustee under the will and then to the beneficiaries, where the income of the estate was freed from tax by the deduction of the Federal estate tax by the estate. It was not permissible for a beneficiary of a distributable trust to diminish his taxable income by the proportionate amount of the excess of the Federal estate tax over income received by the executor of the estate. Federal estate tax is not a deduction from the income of the beneficiaries (I. T. 1772). The Federal estate tax is deductible to the estate only; but if residuary legatees receive a distribution of income undiminished by such tax paid during the year, amended returns by the estate and legatees are required (I. T. 1551), presumably on the theory that a portion of the income distributed would have to be refunded. In another case (I. T. 1424) the tax was held non-deductible to the legatees after the assets had been distributed, and non-deductible to the estate (S. M. 2526).

Income held or accumulated for an unknown or unascertainable beneficiary was not taxable under the 1913 act (Smietanka v. First Trust and Savings Bank, 257 U. S., 602; T. D. 3321) but was taxable thereafter (O. 1001, overruling O. 322). The same rule now applies, of course, to any income held for future beneficiaries (O. D. 560, 1040). Income accumulated in an estate, at the end of the calendar year which was between payment dates, was taxable to the estate and later to the beneficiary when distributed where the will provided that the income was to be divided twice yearly to the then living beneficiaries and the state court had held that a beneficiary dying between payment dates was not entitled to accrued income. The beneficiaries had only a contingent interest in the income before its distribution (A. R. R. 3421). An administrator held rents from real estate pending the ascertainment of the next of kin; such income should not be included with that of the estate during administration because real estate passes directly to the heirs. However, he should file the return of income on Form 1041 and the heirs, when finally determined, should file amended returns, if the additional income warrants (I. T. 1596). If the state law requires the executor to collect rents where the other assets of the estate are insufficient

to meet the debts or where no competent devisee is present to take them, they are taxable to the executor (S. M. 3790) unless fiduciaries have been appointed pending the adjustment of disputes between devisees (S. M. 2673). Income from certain funds in trust which were added to principal and which were to be held until the death of a present income beneficiary and then given to a municipality were not subject to tax (O. D. 972); and where the entire income was to be turned over to the municipality no return need be filed by the trustees (O. 895). A trust could not be taxed as a unit where the corpus was to pass to a charitable institution and the trustee receives income applicable only to corpus (O. D. 808; O. 1013). Income payable to a tax-exempt corporation not yet formed is taxable to the estate (O. D. 278). Income payable to a charitable institution through the medium of a trust which persisted because of the survival of one of the income beneficiaries, was not taxable to the trust (Lederer v. Stockton, 260 U. S., 1; T. D. 3407). Generally, income on property willed to tax-exempt corporations, while in the hands of executors, is not taxable (S. 1374; A. R. R. 280 and 521). But where the principal is converted before the time of its payment to the tax-exempt corporation has arrived, a profit from conversion is taxable to the estate (O. 1012). This rule held good notwithstanding the amount ultimately to be paid is reduced (O. D. 507). The residue of an estate which was in the process of administration for several years accrued to an exempt university; nevertheless it was held taxable before the rights actually left the administrator's hands (A. R. R. 3293). The income from the sale of securities of an estate, necessary, as provided in the will, to pay pecuniary legacies, is not exempt, although the balance of the estate is payable to exempt charitable corporations. The case is distinguished from Lederer v. Stockton, in which the exempt corporations were actually the recipients of the income (I. T. 1678). An annuitant cannot transmit income free from tax (I. T. 1215). Income from an estate, payable to the widow, and designated by the will as benefiting herself and daughters, should be reported in equal amounts by the beneficiaries, notwithstanding a formal assignment of a different proportion by the widow. (I. T. 1554).

The income beneficiary could not claim a loss on the sale of principal not made good by him (O. D. 156 and 1041; I. T. 2218; Baltzell v. Mitchell, 268 U. S., 690; T. D. 3642), even in the case of the creator of a revocable trust (3 B. T. A. 79), nor could the beneficiary claim a deduction for depletion (I. T. 1919). Depreciation was not allowable to beneficiaries having a life estate (4 B. T.

A. 80); under the 1926 act, depreciation on real estate improvements used for business purposes is deductible to the life tenant. See page 173. Income for life from a trust fund created by a will, with no remainder interest in the trust, is taxable income (Irwin v. Gavit, 268 U. S., 161); in this decision Justices Sutherland and Butler dissented, stating that the income was a bequest and that the source was immaterial. An assignment of part of the income of a life estate does not operate to decrease the taxable income of the beneficiary (S. M. 3303; 4 B. T. A. 504). Losses of the principal of a trust cannot be deducted by an income beneficiary (T. D. 3668) even where the trustee had no undistributed income to absorb them (1 B. T. A. 979). In 1916 and 1917 income beneficiaries were not permitted to take credit for dividends distributed (I. T. 1535) and were taxed only on the amount actually distributed (Sol. Op. 146, superseding S. 1344). Beneficiaries in Florida receiving property within two years of the date of death need not make fiduciary returns, inasmuch as under the laws of Florida the property passed directly to the beneficiaries, and did not pass to them as fiduciaries despite the implications of the Federal estate tax law (I. T. 1531).

The basis for determining gain or loss on securities received by residuary legatees is the value at the date of the testator's death as appraised for purposes of the Federal estate tax (O. D. 129, 667); the Board of Tax Appeals has held that the date "acquired" is the date of receipt by the legatees (2 B. T. A. 921). Where the remaindermen have a contingent rather than vested interest in the property, the basis is the value at death of life tenant (O. D. 727). Interest received on a claim after the termination of a trust the income of which had been accumulated is income to be reported by the beneficiaries (I. T. 1708).

XXVII

PARTNERSHIPS-PERSONAL SERVICE

CORPORATIONS

Taxation of partnership profits. Credits taken by partners. Returns necessary. Taxation of personal service corporations. Corporations classed as personal service corporations. Corporations partly personal service.

INCOME of partnerships under the 1917 law was subject to an excess profits tax, but due to the extreme difficulty of determining invested capital and to other problems the income since has been taxed as the income of the individual partners. Partnership informational returns of income must still be made (Form 1065), according to the fiscal or calendar year of the partnership. The individual partner may render his return on the basis of a calendar year and the partnership on a fiscal year basis; if so, the partner's distributive share for the fiscal year will be taxed according to the rates applicable to the years in which the income falls, the net income being prorated by the number of months falling within each calendar year. For 1925-1926 fiscal years, no separate computation for 1925 need be made as the rates for both years are the same.

The following points should be noted in connection with partnership returns (Sec. 218; Art. 335-8):

(a) Contributions are not allowable deductions, but each partner may include, along with his own contributions, his proportionate share of the contributions (as described and limited on pages 210-213) made by the partnership.

(b) Credits for the purpose of computing the normal tax are allowed partners out of their distributive shares as follows: their proportionate interest in (1) divi