9 T.C. 89">*89 The Commissioner determined deficiencies of $ 1,171.72 and $ 65,772.90 in income tax for 1942 and 1943. The question to be determined is whether the petitioners, for the purpose of determining taxable net income of the estate, are entitled to deduct, in addition to the income distributed to beneficiaries, all of the remaining income of each year although not distributed to beneficiaries or credited to them. In his amended answer the Commissioner makes claim for1947 U.S. Tax Ct. LEXIS 147">*150 increased deficiencies in the amounts of $ 1,768.55 for 1942 and $ 67,425.17 for 1943.

Most of the facts were stipulated.

FINDINGS OF FACT.

J. David Zellerbach and Harold L. Zellerbach are the duly appointed and acting executors of the last will and testament of Isadore Zellerbach, who died on August 7, 1941, a resident of the city and county of San Francisco, California. Income tax returns (Form 1041) for the years 1942 and 1943 were filed on the cash basis with the collector of internal revenue at San Francisco.

9 T.C. 89">*90 On September 2, 1941, the will of petitioners' decedent was admitted to probate by the Superior Court of California in and for the city and county of San Francisco. Under the will, after bequests of $ 5,000 to each of his eight grandchildren, all the rest, residue and remainder of testator's estate is given, devised and bequeathed as follows: An undivided three-sixths thereof to the widow, Jennie B. Zellerbach, and an undivided one-sixth thereof to each of the three children, J. David, Harold L. and Claire. The executors were given full, absolute, and complete power and authority to sell, mortgage, pledge, exchange, or otherwise dispose of or deal with the whole1947 U.S. Tax Ct. LEXIS 147">*151 or any portion of the estate according to their judgment and discretion and without any court order. The will made no provision for the distribution of the income received by the estate during the period of administration.

Upon petition of the executors of the estate praying for leave to distribute the specific legacies, an order of the probate court, dated September 2, 1942, was entered authorizing distribution of 61 shares of the preferred stock of Crown Zellerbach Corporation of a stated value of $ 4,994.38 and the sum of $ 5.62 in cash to each of the 8 grandchildren of decedent.

On November 25, 1942, the executors filed with the probate court a petition for the distribution of $ 181,000 from the income of the estate received during the year 1942, amounting to approximately $ 317,000, as follows:

The petition stated in part that the total value of the estate as shown by the inventory and appraisement was $ 4,754,671.56, and that "it is not proposed at this time to distribute any of the corpus of 1947 U.S. Tax Ct. LEXIS 147">*152 the residue of the estate, nor any income, save and except that hereinabove described."

After hearing had, the probate court entered an order dated December 7, 1942, in which it found as follows:

* * * that the time for filing claims against said estate has expired; that all claims which have been filed have been allowed, approved and paid; that the federal estate tax, as shown by the return, has been paid; that the State Controller of the State of California has consented in writing to the said distribution; that all personal property taxes due and payable by said estate have been paid; that the distribution prayed for in said petition may be allowed as therein prayed for without injury to said estate or any person interested therein, 9 T.C. 89">*91 and that after said distribution sufficient assets will remain in the hands of the executors to pay all debts and expenses of administration;

* * * *

The order authorized payment "from the income of said estate, for the calendar year 1942, the total sum of $ 181,000," payable $ 22,000 to the widow and $ 53,000 to each of the three children of decedent.

The above distribution of $ 181,000 was paid $ 180,297.85 out of income and $ 702.15 out1947 U.S. Tax Ct. LEXIS 147">*153 of corpus.

On November 25, 1942, the executors filed another petition with the probate court, praying for authority to distribute from the corpus of the estate:

one-half thereof to the widow and one-sixth to each of the three children of decedent. After hearing had, the probate court entered an order dated December 8, 1942, authorizing the executors to make distribution of the above stock as prayed for. The fair market value of the above stock at the time of its distribution was $ 1,146,000.

On December 31, 1942, all the distributions authorized by the probate court during the year 1942 had been made.

An original income tax return for the year 1942 was filed for the estate showing income of $ 322,756.33, from which was deducted $ 181,000 as the amount distributable to beneficiaries, leaving a net income (taxable to fiduciary) of $ 141,756.33, and disclosing a tax liability of $ 97,606.47. On December 14, 1943, an amended income tax return was filed1947 U.S. Tax Ct. LEXIS 147">*154 for the year 1942 showing income of $ 322,756.33, from which was deducted $ 315,323.74 as the amount distributable to beneficiaries, leaving a net income (taxable to fiduciary) of $ 7,432.59 and disclosing a tax liability of $ 1,619.78.

The total net income of the estate for 1942, before any allowance for income distributed to beneficiaries during the year, was $ 324,209.38, which sum was composed of ordinary income in the amount of $ 316,595.74 and capital gains in the amount of $ 7,613.64.

The $ 181,000 distributed in 1942 by the executors of the estate was reported by the beneficiaries under the will in their original Federal income tax returns for 1942 as distributable income from the estate as follows: The widow reported $ 22,000 and each of the three children reported $ 53,000.

On January 24, 1944, the widow filed an amended income tax return with the collector at San Francisco, in which she reported as having been distributed to her the amount of $ 157,661.87, representing one-half of all of the income of the estate for the year 1942.

9 T.C. 89">*92 Pursuant to a petition of the executors filed June 18, 1943, the probate court, on July 7, 1943, made an order authorizing the executors1947 U.S. Tax Ct. LEXIS 147">*155 to make a partial distribution of the assets of the estate, consisting of a parcel of unimproved real property in the city and county of San Francisco as follows: Three-sixths thereof to the widow and one-sixth thereof to each of the three children. The fair market value of the property at the time of distribution was $ 27,500.

Pursuant to a petition on the executors filed August 4, 1943, the probate court on August 18, 1943, made an order authorizing the executors to make a partial distribution of the assets of the estate, consisting of 627 shares of the common stock and 460 shares of the preferred stock of Dreamland Auditorium, Ltd., as follows: Three-sixths thereof to the widow and one-sixth thereof to each of the three children. The fair market value of the shares at the time of distribution was $ 3,450.

On November 30, 1943, the executors filed a petition with the probate court for authorization to make a partial distribution, consisting of $ 96,000, of which $ 32,000 was to be distributed to each of the three children of decedent. In the petition it was stated that the income for 1943 would approximate $ 191,500; that the executors desired to distribute $ 96,000 thereof; 1947 U.S. Tax Ct. LEXIS 147">*156 and that it was not proposed to distribute any of the corpus of the residue of the estate, nor any income save and except that thereabove described. No portion of the income was requested to be distributed to the widow. On December 13, 1943, the probate court made an order authorizing the income distribution of $ 96,000, as prayed for. The distribution of $ 96,000 was paid $ 94,164.15 out of income and $ 1,835.85 out of corpus.

On December 31, 1943, all distributions authorized by the probate court during 1943 had been made.

The income tax return filed for the estate for 1943 shows income tax income of $ 203,895.74 and victory tax income of $ 200,811.46, from each of which $ 185,328.30 was deducted as the amount distributable to beneficiaries, leaving an income tax net income of $ 18,567.44 and a victory tax net income of $ 15,483.16. The total income and victory tax liability shown by the return is $ 6,712.28. The return contains a schedule as follows:

1947 U.S. Tax Ct. LEXIS 147">*157 Note: On December 13, 1943 a distribution of income, $ 96,000.00 was authorized by court order to J. D. and Harold Zellerbach and Claire Saroni. The net income of the estate is deemed to be distributable under Section 162-2 of Regulations 111.

9 T.C. 89">*93 The widow included in her Federal income tax return for 1943, as income received by her from the estate, the sum of $ 92,664.15.

The total net income of the estate for 1943, before any allowance for income distributed to beneficiaries during that year, was $ 206,864.94, which sum was composed of ordinary income of $ 188,328.30 and capital gain of $ 18,536.64.

On petition filed October 26, 1942, the probate court, on November 6, 1942, made an order authorizing the executors to borrow a sum not to exceed $ 1,000,000, to execute their promissory note or notes payable on or before one year after date with interest at 2 1/2 per cent per annum, and as security therefor to pledge all or any portion of the personal property of the estate remaining in the hands of the executors.

Pursuant to such authorization the executors, on November 6, 1942, borrowed from Wells Fargo Bank & Trust Co. the sum of $ 500,000, pledging as collateral 9,000 shares1947 U.S. Tax Ct. LEXIS 147">*158 of the preferred stock of Crown Zellerbach Corporation of the market value at that time of approximately $ 720,000. They also borrowed the sum of $ 318,669.31 from the widow, Jennie B. Zellerbach. On January 15, 1943, a payment of $ 100,000 was made, reducing the principal of the bank loan to $ 400,000. On August 5, 1943, and on December 6, 1943, additional amounts of $ 50,000 and $ 75,000 were borrowed, increasing the principal of the loan to $ 525,000. The entire loan was paid on March 13, 1944.

The Federal estate tax, as disclosed by the return filed, had been paid at December 31, 1943. The Commissioner subsequently determined that the estate was liable for a deficiency in Federal estate taxes, which controversy was finally settled in November 1946.

On December 31, 1942, the estate had assets of the then value of $ 3,425,092.17 and liabilities of $ 1,490,565.49, or an excess of assets over liabilities of $ 1,934,526.68. This was after the distribution of the amount of $ 181,000 and the distribution of corpus of $ 1,146,000, and after giving effect to all liabilities which were subsequently determined to be due.

On December 31, 1943, the assets of the estate had a value of1947 U.S. Tax Ct. LEXIS 147">*159 $ 3,942,739.89, and the liabilities amounted to $ 1,104,886.70, or an excess of assets over liabilities of $ 2,837,853.19.

OPINION.

The respondent contends that the executors under the will of Isadore Zellerbach were not required to distribute to the beneficiaries any of the income of the estate during 1942 and 1943 and that, therefore, only so much of the income as was actually distributed constituted a deduction under the provisions of section 162, Internal Revenue Code.

The petitioners contend that the estate is entitled, under section 1629 T.C. 89">*94 (b) and (c), ¹1947 U.S. Tax Ct. LEXIS 147">*160 to a deduction of the full amount of its 1942 and 1943 income. They argue that the will provides for the distribution of three-sixths of the residue to the widow and one-sixth to each of the three children of decedent; that under the provisions of section 300 of the California Probate Code² the beneficiaries had a present right, both in 1942 and 1943, to the entire income of the estate; and that, upon petition, it would have been mandatory upon the probate court to have made an order for the payment of all of the 1942 and 1943 income to the beneficiaries. Secs. 956, 1000, and 1001, California Probate Code. ³

1947 U.S. Tax Ct. LEXIS 147">*161 9 T.C. 89">*95 Although section 300 of the California probate code provides that title to the property of a deceased person passes to his heirs, devisees, or legatees, it also provides that the title so passes "subject to the possession of the executor or his administrator and to the control of the superior court for the purpose of administration, sale or other disposition" and "shall be chargeable with the expenses of administering his estate, and the payment of his debts and the allowance to the family." See Dabney v. Dabney, 129 Pac. (2d) 470. In the Estate of B. Brasley Cohen, 8 T.C. 784, involving a California estate, the question considered was whether the legatees had a present right under California law to obtain or compel a distribution of all the income during the taxable year. This Court concluded that the legatees did not have "a recognized present right under local law to obtain income or compel a distribution of income" (Regulations 111, sec. 29.162-2 (b)), stating:

The legatees did have the privilege of petitioning the court, which they did not exercise, and if they had established certain facts the local1947 U.S. Tax Ct. LEXIS 147">*162 court could have in its discretion, ordered a distribution of the designated portion of the estate. We think the privilege of soliciting the local court's discretion is not the equivalent of a present right to compel distribution.

The will involved herein contains no direction for the payment of the income received during the administration of the estate to the residuary beneficiaries. Petitions were filed with the court for a distribution of the 1942 income to the extent of $ 181,000 and of the 1943 income to the extent of $ 96,000. No other petition for the distribution of income was addressed to the court either by petitioners or any of the beneficiaries under the will and no further distribution of 1942 and 1943 income was authorized. The possession and handling of the property of an estate by the executor are subject to the control of the court and the executor derives his power to act from the order of the court. In Re Palm's Estate, 156 Pac. (2d) 62, 66; Sec. 300, California Probate Code. The testimony of the judge of the Superior Court of San Francisco County, in which court the will involved herein was admitted to probate, to the effect1947 U.S. Tax Ct. LEXIS 147">*163 that, had petition been made therefor, he would have issued an order in 1942 and 1943 for the distribution of all the income received by the estate during such years, is not determinative. Neither is it material that the bank to which the estate was indebted on a $ 500,000 loan, or the inheritance tax attorney, would have consented to such distribution had petition been made therefor. The facts as they actually existed during the taxable year are determinative. American Potash & Chemical Co., 7 T.C. 1113, 1116.

9 T.C. 89">*96 The facts herein are materially different from those in William C. Chick, 7 T.C. 1414. In that case the will of decedent was allowed for probate in March 1929. William C. Chick, the son of decedent, who was named both as executor and trustee under the will, immediately qualified as executor and shortly thereafter qualified as trustee. All acts necessary to complete and wind up the administration of the estate of decedent had been fully performed prior to the taxable year 1940, except that the assets comprising the residuary estate had not been transferred by the executor to himself in trust for the1947 U.S. Tax Ct. LEXIS 147">*164 benefit of himself and his sister, as provided under the will. Under the terms of the testamentary trust the net income of the residuary trust was currently distributable in equal shares to the two beneficiaries. This Court approved the determination of the Commissioner that the estate in 1940 was no longer in process of administration and that the income of the estate was taxable to the two beneficiaries of the residuary trust under section 162 (b).

Herein, decedent died in August 1941. The assets of the estate had an appraised value in excess of $ 4,700,000. At the end of 1943 there were liabilities outstanding in excess of $ 1,100,000. Although the Federal estate tax as disclosed by the return had been paid, the Commissioner subsequently determined that the estate was liable for a deficiency, which controversy was not settled until November 1946. There is no showing that the process of administration had been continued unreasonably or that the ordinary duties pertaining to the administration and settlement of the estate had been completed prior to the taxable years. Sec. 29.162-1(c), Regulations 111.

It is true that in the case of In Re Stephenson's Estate, 150 Pac. (2d) 222,1947 U.S. Tax Ct. LEXIS 147">*165 upon which petitioners primarily rely, it is stated that "It is made mandatory by section 1001 that the court make the order of distribution." The court, however, immediately modifies that statement, for it continues as follows:

* * * for it is there provided that if it appears that the estate is but little indebted and that inheritance taxes have been paid and that the distribution of the portion of the estate may be made without loss to creditors or injury to others "the court shall make an order" for the delivery of the share of the estate or such portion thereof as the court may designate to the person entitled thereto. * * *

The Probate Code clearly gives power to the court to order a partial distribution of an estate and, given the prescribed conditions, it is made mandatory upon the court to make the order. But to exercise that power accurately it is necessary that it first be determined what persons are entitled to the order and what portion or portions of the estate should be distributed to them. * * *

The court thus recognizes that the mandate is subject to certain conditions, so that in the last analysis the order of distribution is subject to the judgment and1947 U.S. Tax Ct. LEXIS 147">*166 discretion of the probate court.

The beneficiaries had no present right to the 1942 and 1943 income. They merely had a potential right thereto, which, as to the amount in 9 T.C. 89">*97 dispute, was neither recognized nor enforced. The 1942 and 1943 income of the estate was not income of the estate "to be distributed currently" as provided in section 162 (b). Estate of Andrew J. Igoe, 6 T.C. 639.

Neither is the estate entitled to any deduction for 1942 and 1943 under section 162 (c) in addition to the amounts actually distributed out of income. There is no evidence that the undistributed 1942 and 1943 income was properly credited to any of the beneficiaries, as required by the statute. Commissioner v. Stearns, 65 Fed. (2d) 371; certiorari denied, 290 U.S. 670">290 U.S. 670.

The facts and circumstances in Estate of Andrew J. Igoe, supra, are wholly different from the facts and circumstances herein. In that case specific credits of the distributive share of income were made to the account of each beneficiary. They were notified of their respective distributive shares; they1947 U.S. Tax Ct. LEXIS 147">*167 received numerous large payments in cash, which were charged to their accounts with the estate; and the actions of the executors in so treating the income earned by the estate were approved in all respects by the court having jurisdiction over the settlement of their accounts. Herein, the residuary beneficiaries may never have received the 1942 and 1943 income retained by the executors. There is no evidence showing what disposition was made of such income by petitioners.

The petitioners further contend that, having distributed property of the value of $ 1,146,000 in addition to the distribution of $ 181,000 in 1942, the estate is entitled to a deduction of the entire income in 1942, and, having distributed property of the value of $ 30,950 in addition to the distribution of $ 96,000 in 1943, the estate is entitled to a deduction in 1943 to the extent of $ 126,950, under section 162 (d) (1) of the code. ⁴

1947 U.S. Tax Ct. LEXIS 147">*168 9 T.C. 89">*98 The respondent argues that there is no occasion for the application of section 162 (d), since the amounts of income and corpus distributed by the estate are clearly identifiable, and that the orders of the probate court are binding in this respect.

Subsection (d) (1) is made specifically not applicable to any amount paid, credited, or to be distributed "under a gift, bequest, devise, or inheritance not to be paid, credited, or distributed at intervals." The bequest and devise under which the distributions of income and corpus herein were made was a bequest and devise of the residue of the estate of decedent after payment of all debts, specific legacies, and administration expenses. That the residue was paid in installments, consisting of income or corpus, is immaterial and does not convert the bequest and devise into one distributable at intervals within the meaning of section 162 (d) (1).

Subsection (d) was added to section 162 by section 111 (c) of the Revenue Act of 1942 as a complement to the amendment of section 22 (b) (3) and for purposes of clarity. Ways and Means Committee Report No. 2333, 77th Cong., 2d sess., sec. 110, pp. 66-68; Report of the Committee on Finance, 1947 U.S. Tax Ct. LEXIS 147">*169 No. 1631, 77th Cong., 2d sess., sec. 111, pp. 69-75. Section 110 of the Ways and Means Committee report is captioned "Annuity Trusts." The section states that the construction of the existing law as contained in Irwin v. Gavit, 268 U.S. 161">268 U.S. 161, was written into the amendment of section 22 (b) (3) and that both the amendment to section 22 (b) (3) and section 162 changed the treatment of gifts, bequests, devises, and inheritances of amounts to be paid in any event out of income or corpus, such as involved in Burnet v. Whitehouse, 283 U.S. 148">283 U.S. 148; and Helvering v. Pardee, 290 U.S. 365">290 U.S. 365. The Committee's report states that such changes involved:

* * * treating such amounts, if under the terms of the gift, bequest, or inheritance the payment, crediting, or distribution thereof is to be made at intervals, as gifts, bequests, devises, or inheritances if income from property to the extent that such amount is paid, credited, or to be distributed out of income from property. * * * [P. 67.]

As a complement to the amendment of section 22 (b) (3) and for purposes of clarity, section 162 of the Code1947 U.S. Tax Ct. LEXIS 147">*170 is also amended by adding a new subsection designated as "(d)". This subsection provides a formula for allocating income of an estate or trust to legatees and beneficiaries in order to make the source of distribution clear and to prevent tax avoidance by distributions claimed to be other than out of income or out of income other than income for the current taxable year. It is immaterial under the rule stated in section 162 (d) whether income is used to make the distribution, whether such distribution may, in the discretion of the fiduciary, be made out of other than income, or whether the terms of the will or trust instrument direct that amounts other than income be used to assure the beneficiary the payment of a specified sum at stated intervals. * * * [P. 68.]

In section 111 of the report of the Committee on Finance, p. 69, it is stated:

9 T.C. 89">*99 This section is basically the same as section 110 of the bill passed by the House, relating to annuity trusts. Although numerous changes have been made by your committee, such changes are designed to give further and more detailed application of the principles of section 110 of the House bill rather than to change its fundamental 1947 U.S. Tax Ct. LEXIS 147">*171 theory.

See also section 29.162-2 of Regulations 111, dealing with section 162 (d) (1), which is entitled "Allocation of Estate and Trust Income to Legatees and Beneficiaries. -- (a) Allocation among annuitants." From the foregoing, it is obvious that amounts paid out of corpus on a bequest and devise as herein involved are not within the purpose and scope of subsection (d).

Since the bequest and devise of the residuary estate herein is a bequest and devise "not to be paid, credited, or distributed at intervals," subsection (d) of section 162 is not applicable.

Petitioners are entitled only to the deduction in 1942 and 1943 of the amount actually distributed out of income under section 162 (c). In view of our holding, the respondent is entitled to increased deficiencies. Under the stipulated facts, petitioners distributed out of income $ 180,297.85 in 1942 and $ 94,164.15 in 1943, instead of $ 181,000 and $ 96,000, respectively, allowed by respondent in his original computation.

Decision will be entered under Rule 50.