we conclude that the purpose is altogether charitable or educational. All beneficiaries were required to be deserving and needy. The word "charity" is too broadly to be construed, to permit a contrary view. Old Colony Trust Co. v. Commissioner, supra. In Beggs v. United States, supra, the testator provided for distribution "to any charity or for any purpose they [executor and sister] may consider worthy,' and also used the words "worthy objects" and "special friends"; yet, considering the entire will and circumstances, the Court of Claims held the objects to be charitable. The same clearly appears here from the will itself.

This leads us to an alternative consideration of the latter clause of section 162 (a), providing for deduction in the case of provision for exclusively charitable or educational use of gross income. The section does not require that all gross income be devoted to exclusively charitable, etc., purposes in order for any portion thereof to be deductible, but only that any part of such gross income which the will provides shall be exclusively so used, may be deducted. Since we have just above concluded that the general language as to disbursements to individuals and institutions, such as public or private schools, is charitable or educational, it follows that in any event, of the entire gross income of the estate, all was exclusively devoted to charity, except the $12,500 per year required to pay the two special bequests, the $18,000 annually required for the former wife and the annual amounts payable to the widow ($6,000 per annum for life, or until remarriage, plus $20,000 for four years, and a like sum for a fifth year from 1932, if she did not remarry). Under the latter clause of section 162 (a), all of the income, except the above maximum amounts, was by the terms of the will exclusively devoted to charitable or educational purposes, and the deduction in any event proper. However, concluding as above that the will provided exclusively charitable use for the entire gross income, we hold that all (except the incidental special bequests) is deductible under the latter portion of section 162 (a).

In addition, we conclude, under the authority of the same cases above cited, that the foundation was in fact an organization organized and operated exclusively for charitable or educational purposes. The payments to the widow, former wife, and special bequests constituting, on this point also, only incidents to the primary benefaction set up in the will, and the reference to disbursing funds to institutions such as schools, public or private, and to worthy and deserving individuals all being subject to the direction that the estate be used for charity purposes, we see in such language no violation of the requirement that no part of the net earnings inure to private benefit. A reading of the entire will negatives the idea of noncharitable participation by any individual. The fact that the will was made by reference a part of

the corporate charter of the foundation, therefore, does not indicate that it was organized for other than charitable or educational purposes. The will under the above authority had no other purpose. Such cases. as Henry C. Dubois, 31 B. T. A. 239; Amy Hutchison Crellin, 46 B. T. A. 1152; and James Sprunt Benevolent Trust, 20 B. T. A. 19, involve situations where the charitable or educational element was plainly unimportant in comparison with the provisions for private and family benefactions, and do not affect the salutary general rule laid down in the above cases. Scholarship Endowment Foundation v. Nicholas, 106 Fed. (2d) 552, is not to the contrary, for there the taxpayer paid an annuity.to a donor in consideration of the transfer of property to it. The donor made gifts of $130,000, up to the taxable year, and had a right to a life annuity of $5,000. In the taxable year he drew only $2,000, but the amount spent for charity was only $1,000.

It is also contended that the deductions claimed are improper for the reason that the will does not direct the income to be used for charity during the period of administration, covering the taxable years, but that only the foundation could, under the will, spend the income upon charity. In Potter v. Bowers, supra, the court followed Bowers v. Slocum, supra, and held that it was not essential that the charitable institution be in existence during the taxable year, it being sufficient if the will mandatorily required its incorporation, and that the income ultimately distributed was deductible even though it had been reduced by an amount paid to settle a suit contesting the will. Here the will directed the organization of the foundation as soon as possible after the testator's death. Petitioner had no discretion in the matter and was bound by the directions set forth in the will. Neither is it essential that the income be earned in the year in which the deduction was made. Old Colony Trust Co. v. Commissioner, supra. In Bowers v. Slocum, supra, it is said: "There is no force in the argument that the clause does not apply to estates in process of settlement, but only to trusts, in view of its language, 'pursuant to the will or deed creating the trust."" In this connection we note that in the Estate of Edward T. Bedford case, supra, as here, the taxable year was covered by the administration, further, that the will provided, as in this matter, that the trustee should disburse to the daughter the money which was held to have been directed to be used by the daughter exclusively for purposes of charity or education; yet, the deduction was held allowable to the executor of the estate-even though corpus could be used if income were insufficient. Section 162 (a) makes no requirement either that the permanent setting aside of income for the purposes and in the manner specified in section 23 (o) (2), or its exclusive use under the latter clause, be by the executors of the estate in order that the exec

utors be allowed the deduction. It is true that the will does not in specific terms provide for use of income by the executor, but we find nothing in the statute, which should on this question of charity be liberally construed, to confine the deduction of income devoted to charity to the actual disburser of such income. The statute here involved allows a deduction under entirely different circumstances than those involved in section 162 (b) or (c) and without regard to taxability of the recipient. Estate of Edward T. Bedford, supra.

In Beggs v. United States, supra, the Court of Claims considered a case where the residuary estate was left to charity. The will did not specifically mention income from the residuary estate during administration and distribution, but the court holds that under section 219 (b) (1), Revenue Act of 1926, the same as section 162 (a), here being considered, such specific mention of income during administration was not necessary to the rights of the executor to deduct such income from income for income tax purposes. The estate was in process of administration throughout the taxable years 1927 to 1931, inclusive. Quoting the statute, the court says:

The income derived by the executor during administration became a part of the corpus of the residuary estate, the net proceeds of which we have held were by the will bequeathed to charity and so distributed. As such income was received it was by the terms of the will permanently set side and destined for charitable uses. Such income was clearly deductible.

Bowers v. Slocum, supra, says on this question:

The intention of the tesiatrix plainly appears from her will that all of her residuary estate shall go to corporations of the character described in section 219 (b), and the residuary estate includes the income in question.

In so far as deductions should be disallowed in this case, the amount going to charity would be curtailed, and in effect the tax be paid by the beneficiaries of charity. In our opinion the object of the statute is to preserve to the use of charity, free from taxes entailed in deductions denied, that which the testator intended exclusively for charitable use; and to deny such deduction to the executor, prior to the formation of the charitable trust would defeat such object. Moreover, in substance, the disbursements by executors were those of the foundation; and the respondent upon brief, in arguing that the foundation was not operated exclusively for charitable purposes, cites the payments by the executors, ratified and agreed to by the foundation under the agreement of June 15, 1939, as those of the foundation by its agent. The testator considered the foundation to be merely a part of the management of his estate, for he provided that the two annuities, payable. for 20 years or life, should be paid "out of the income of my estate." He can not reasonably be pre

sumed to have expected the administration to be so long continued. The local law provided for payment of debts primarily from corpus, rather than income, leaving the income to charity. Rachels v. Wimbish, 31 Ga. 214. That corpus might, if income were insufficient, be called upon, is immaterial. Estate of Edward T. Bedford, supra. No claim is made that the possibility of using corpus for other purposes rendered the charity nondeductible as being impossible of computation, and in any event, such possibility is so remote as to require that no effect be given. The income necessary to pay the special bequest and annual payments to the widow and former wife was only a very small fraction of the annual income of the estate. It is suggested that a state court had construed the will against the petitioner's contention. The order of the local court was not one establishing a rule of property, but merely authorizing the borrowing of money, reciting that it was necessary for the preservation of the estate and the objects for which it was created by the will. The state court could not decide the question of Federal taxation. We conclude that the will permanently set aside income for, and directed it to be used for, charity during the period of administration.

ever,

The respondent urges that he was in error in allowing deduction of the amounts paid by the executor upon the two special bequests, contending that the amounts, being payable by the foundation, were not "properly" payable under section 162 (c) by the executor. Howthe amounts were to be paid annually out of income, and were actually paid by the executor. Though the will does recite that the special bequests are to be paid by the foundation, it also recites that the bequests are made "out of the income of my estate and before the same is disbursed *by the Foundation." In the light of all this language, we think it within the testator's intent that the special bequests be paid annually both before and after the formation of the foundation. We do not think he intended to leave the two special beneficiaries unprovided for during the period of administration. He intended, in our opinion, that the amounts be paid annually, out of his estate, either by the executor or by the foundation. The amounts were income "which is to be distributed currently" under Section 162 (b). We can not say that the amounts were not properly payable by the executor. We find no error shown in the allowance of the deduction of the $12,500 per year for these bequests. In view of the conclusions above expressed, it is unnecessary to pass upon the question of limitation upon assessment.

Decision will be entered under Rule 50.

TEXAS GAS DISTRIBUTING COMPANY, BY H. HARPER MCKEE, TRUSTEE, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPOND

ENT.

Docket No. 112785. Promulgated January 18, 1944.

1. On December 31, 1940, petitioner owed a note for $400,000 and other current obligations of $108,649. The fair market value of its assets was $235,000. On that day, pursuant to a prior agreement, it sold its entire assets to A. M. Russ, who assumed the current indebtedness, acquired the note, delivered it marked "Cancelled" to petitioner, and paid petitioner $14,610 in cash. The petitioner's assets were acquired by it at a cost of $455,155.82. Petitioner was insolvent at the time of the sale and transfer of its property to Russ. Held, that due to the insolvency of petitioner no taxable gain, except the $14,610 paid in cash, was derived by it from the transaction.

2. Under the same conditions, a bookkeeping entry made during the taxable year, transferring credit balances in reserve accounts to petitioner's surplus, did not result in taxable gain.

C. F. Rothenburg, Esq., for the petitioner.

P.J. Cavanaugh, Esq., for the respondent.

The respondent determined deficiencies of $9,232.11 and $5,177.71 in the petitioner's income tax and excess profits tax, respectively, for the taxable year ended June 30, 1941.

The issues are (1) the correct amount of taxable gain or loss upon the sale of the petitioner's assets; and

(2) the inclusion in the petitioner's income of $3,438.59 representing reserve amounts closed out to surplus on December 31, 1940.

FINDINGS OF FACT.

Certain facts were stipulated and as so stipulated are adopted as findings of fact. The portions thereof material to the issues are as follows:

The petitioner is a Texas corporation organized on November 15, 1935, for the purpose of selling and distributing natural gas. Its capital stock consisted of ten shares of common stock with a par value of $100 per share, owned in equal proportions by Albert D. Brokaw, A. Faison Dixon, and H. Harper McKee. In June 1936 the petitioner's capital stock was increased to $5,844, consisting of 5,844 shares of common stock with a par value of $1 per share.

The petitioner kept its books on the accrual basis of accounting, with its fiscal year ending June 30. It filed its income and excess profits tax returns for its fiscal year ended June 30, 1941, with the collector of internal revenue for the second district of New York.

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