The opinion of the court was delivered by: GOURLEY
This is a suit for a refund of income taxes paid by the estate of Pressly T. Craig during the year 1936, for the period from April 20, 1936 to December 31, 1936, inclusive. The plaintiffs in the case are the three executors of the estate of Presly T. Craig, deceased, who died a resident of Allegheny County on April 20, 1936. Pressly T. Craig died testate, his last will and testament, dated March 14, 1933, and codicil thereto, dated August 21, 1934, were probated in the office of the Register of Wills of Allegheny County, Pennsylvania, and letters testamentary were issued to the plaintiffs in this action on April 28, 1936.
On or about April 23, 1937, the plaintiffs filed a first and partial account of their administration of the decedent's estate, said account having been duly audited and confirmed by decree of Orphans' Court of Allegheny County, Pennsylvania, on June 23, 1937. In the first and partial account the executors set forth various items which were paid to legatees, which hereinafter will be discussed, and no exceptions or objections were filed by any person interested in said estate as to any items, regardless of their nature, which appeared in said account. This estate was very sizeable in nature; the personal estate being appraised at $ 3,156,604.78, and the real estate at $ 223,049.50. The balance of the fund which remained for distribution, after allowance being given for the various items which were set forth in the first and partial account, to wit, $ 2,672,297.73, was awarded to the executors for further accounting.
On April 3, 1939, the plaintiffs filed their second and final account of their administration of the decedent's estate, to which exceptions were filed by various parties to the various items which appear in the second and final account but which have no direct bearing or relationship to the matters now before the Court for consideration. In addition thereto, one of the life beneficiaries under the last will and testament of the deceased filed a petition for review of the first and partial account.
It appears that in the first and partial account the plaintiffs in this action claimed credit for a legacy in the amount of $ 12,500 paid to Elsie Craig Simpson from the income of the estate. The life tenant excepted to this payment being made from the income of the estate, and contended that it should have been made from the principal. The Orphans' Court of Allegheny County, Pennsylvania, held in a written opinion that in order to carry out the intention and direction of the testator, the legacy must be paid from the corpus of the estate.
It furthermore appears from the will and Codicil that the deceased provided for the payment of the amount of $ 2,000 to Elsie Craig Simpson each and every year during the full term of her natural life, in quarter-yearly installments. In order that the estate could be finally adjudicated and distribution made in accordance with the residue clause of the will, the executors of said estate filed a proceeding, in accordance with the provisions of law in the Commonwealth of Pennsylvania, to discharge the residuary estate from the payment of said annuity. on November 10, 1939, the Orphans' Court directed the executors to set apart to themselves, as trustees, from the assets of said estate the amount of $ 150,000 to secure the payment of $ 2,000 per annum to Elsie Craig Simpson, and then proceed with the administration of said estate in accordance with the residue clause of said will.
On March 13, 1937, within the time required by law, the plaintiffs filed a Fiduciary Return of Income, Form 1041, and an Individual Income Tax Return, Form 1040, for the estate of Pressly T. Craig, for the period from April 20, 1936 to December 31, 1936.
The Commissioner of Internal Revenue subsequently determined a deficiency in the 1936 income taxes due from the estate of Pressly T. Craig in the amount of $ 39,114.56, and said amount just mentioned together with interest thereon in the sum of $ 7,515.35 was paid to the Collector of Internal Revenue on May 28, 1940.
On or about September 12, 1941, within the time required by law, the plaintiffs filed a claim for a refund of the amount paid on May 28, 1949, and said refund claim was rejected in its entirety by the Commissioner of Internal Revenue.
Under the Fourth Paragraph of the decedent's will, it was provided that said legacies were to be paid from the net income of returns and profits of said estate, subject to certain conditions set forth in the Fifth Paragraph of said will. The income for said estate from April 20, 1936 to December 21, 1936, was $ 142,842.58, and there were paid from said fund certain legacies, which are set forth in the Fourth Paragraph of the will, in the amount of $ 68,500.
The plaintiffs claimed the amount of $ 68,500 as a deduction in their income tax return for the decedent's estate on the basis of the provisions of Section 162 of the Revenue Act of 1936. In connection with the settlement of the federal estate tax liability of the decedent's estate, the plaintiffs stipulated and agreed with the Government not to claim as a deduction for income tax purposes $ 20,000 of said total of $ 68,500, which were legacies given to certain charitable institutions. On the basis of the adjudication by the Orphans' Court of Allegheny County, Pennsylvania, of the payment of $ 12,500 to Elsie Craig Simpson, it has been stipulated and agreed between the Government and the plaintiffs that said amount of $ 12,500 should not be considered in the proceeding now before the Court. In other words, of the amount of $ 68,500, which was claimed by the plaintiffs as a deduction under the provisions of Section 162 of the Revenue Act of 1936, it has been stipulated and agreed that the amount of the deduction, if allowable, which should be considered by the Court in passing on the issues joined herein, should be confined to the amount of $ 36,000.
In short, it is claimed that the amount of $ 36,000 should have been allowed by the Government as a deduction from the computation of the income tax liability of said estate for the year 1936, and on the basis of said deduction being authorized by law the plaintiffs are entitled to a refund from the Government of $ 22,319.51 with interest in the amount of $ 4,287.95, or a total of $ 26,607.46 together with interest thereon from May 28, 1940.
In the first instance it becomes necessary to consider the provisions of the Revenue Act of 1936, which has application to the matter now before the Court.
Section 161 of the Revenue Act of 1936, 26 U.S.C.A.Int.Rev.Acts, page 892, provides as follows:
'(a) Application of tax. The taxes imposed by this title upon individuals shall apply to the income of estates or of any kind of property held in trust, including --
'(1) Income accumulated in trust for the benefit of unborn or unascertained persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust;
'(2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct;
'(3) Income received by estates of deceased persons during the period of administration or settlement of the estate; and
'(4) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.'
Section 162 of the Revenue Act of 1936, 26 U.S.C.A.Int.Rev.Acts, page 893, provides as follows:
'The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that --
'(a) There shall be allowed as a deduction (in lieu of the deduction for charitable, etc., contributions authorized by section 23(o)) 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 section 23(o), 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;
'(b) 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, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year;
'(c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, 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 properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary.'
In determining the application of the Revenue or Tax Act, it is necessary for the Court to judicially interpret the will. In so doing, it is the duty of the Court to ascertain the intention of the testator according to the meaning of the words which have been deduced from a consideration of the whole instrument, and a comparison of its various parts in the light of the situation and circumstances which surrounded the testator, when the instrument was framed. Colton v. Colton, 127 U.S. 300, at page 310, 8 S. Ct. 1164, 32 L. Ed. 138.
In this case the will was executed on March 14, 1933, and the codicil was executed on August 21, 1934. Since it is necessary for the Court to ascertain the intention of the testator from a consideration of the whole instrument, the Court will refer to the will and codicil with completeness.
'I, Pressly T. Craig, unmarried, a resident of the Borough of Sewickley, Allegheny County, Pennsylvania, do make this my Last Will and Testament, hereby revoking all other Wills heretofore made by me.
'First: I direct that my body be buried in our family burial lot in the Uniondale Cemetery, Pittsburgh, Pennsylvania, and that my obsequies shall be under the exclusive control of my sister Mrs. Matilda S. McCready, if she survive me, and that a marker to be the same as those at the graves of my mother and father now on the lot shall be erected and paid for by my Executors, and I give and bequeath unto my said sister, Mrs. Matilda S. McCready, if she survive me, all of my tangible personal property (not including in this classification certificates of stock or bonds) except certain articles hereinafter specifically disposed of, which at my death my be in her home or in any room which I may be occupying away from her home, or on my person wherever I may be, such as books, clothing, jewelry, furniture and mementos given me by members of my family and friends.
'Second: I give and bequeath to my brother, George L. Craig, my stick pin containing one pearl.
'Fourth: I give, devise and bequeath to my Executors hereinafter named, all the rest, residue and remainder of my property of every kind and description and wherever the same may be situate, it being my intention not to die intestate as to any part of my estate; in trust, nevertheless, for the following uses and purposes and for no other use, purpose or trust whatsoever, viz.: To sell and reduce to cash and to invest, call in and re-invest the same in good and safe securities, not, however, to be confined to what are known as trust investments under the laws of the Commonwealth of Pennsylvania, and with the privilege of retaining any property that I may be possessed of at the time of my death as part of the trust ...