not yet paid him, but if the taxable year on the basis of which
he makes his returns fails to coincide with the annual ac-
counting period of the estate or trust, then he need only
include in his return his distributive share for such account-
ing period ending within his taxable year. The regulations
governing partnerships are generally applicable to such an
estate or trust.'

It has been held, however, that where the income is not actually paid or credited to the beneficiary as specified in (c) above, it is not taxable to him, even though he was entitled to the payment or credit.3

The income of an estate or trust, the tax on which has been paid, is free from tax when it has been distributed to the beneficiaries.

As an intestate's real estate does not pass to his administrator, upon a sale by the heirs, whether before or after settlement of the estate, each heir is taxed individually on any profit derived.*

§ 221. Estates and Trusts Which Cannot Be Treated as a Unit In the case of certain estates and trusts, it is recognized that the estate or trust cannot be treated as a unit for income tax purposes and may represent an aggregate of distinct interests to all of which the fiduciaries are responsible. . . . (a) When there is income distributable periodically and also income which is to be accumulated in trust, held for future distribution, or added to the corpus; (b) when there is income distributable periodically and also income (according to the Federal income tax statutes and regulations) which is not distributable periodically under state law, e. g., gains from sale of capital assets; (c) when there is income distributable periodically and deductions (according to Federal income tax statutes and regulations) which are not deductible under state law from the distributable income, e. g., losses from the sale of capital assets, depletion, depreciation.

Article 345 of Regulations 45.

Advisory Tax Board Regulation 47, Bureau of Internal Revenue.
Article 342 of Regulations 45.

In ascertaining whether an estate or trust comes within any one of the cases just enumerated, the provisions of the Federal statutes and regulations—rather than the provisions of the will or trust and the provisions of state laws-shall determine what items constitute taxable gross income or allowable deductions; the provisions of the will or trust and of state laws shall determine the allocation of items of gross income or deduction; that is, to which of the different interests making up the whole such items shall be charged or allowed. . . . The items of gross income and deduction as determined by the Federal income tax statutes and regulations must be scrutinized and classified in accordance with the provisions of the will or trust or rules of local law into two classes. . . . The result will be that the beneficiary to whom income is to be distributed periodically must include in computing his net income the amount actually distributable to him (except exempt income) even though the aggregate of the distributive shares should be larger than the net income of the estate or trust computed as a unit. Any gain, profit, or income which is not periodically distributable, must be included in computing the net income of the estate or trust so that the fiduciary will pay the tax upon any excess of the net income of the estate or trust computed as a unit over the aggregate distributive shares.'

Any fiduciary or beneficiary who comes under the above regulations should consult a properly qualified accountant.

§ 222. Voluntary Trusts

The income of a revocable trust must be included in the gross income of the grantor, because if the grantor of voluntary and revocable trusts were allowed to pass the tax along, the result would be that persons whose income ran into high surtax rates would be able to arrange for the transfer of part of that income into the reports of others whose income, being lower, was not taxable at such a high rate, thus defeating the intention of the law.

Article 347 of Regulations 45.

§ 223. Credits to Which Beneficiaries Are Entitled

The return filed by a fiduciary against whom the tax does not run shows the part of the income accrued to each beneficiary, and in the same way shows the credits which may be taken by each beneficiary, who:

is allowed for the purpose of the normal tax, in addition to his individual credits, his proportionate share of such dividends from domestic and resident foreign corporations and of such interest not entirely exempt from tax upon obligations of the United States and bonds of the War Finance Corporation as are received by the estate or trust. Each beneficiary is entitled to but one personal exemption, no matter from how many trusts he may receive income."

When the beneficiary has computed the amount of tax due on his personal return he is allowed to deduct from that tax his proportionate share of the amount of any income and profits taxes paid by the fiduciary to foreign countries and to possessions of the United States.

It should be noted that although the fiduciary may not have been required to make a return because the income of the estate was too low, each beneficiary of an estate or trust against which the tax does not run must nevertheless include the amount of income he receives from the estate, no matter how small, in his own return.

§ 224. Exemption for Liberty Loan Bonds

When income is taxable to beneficiaries . . . each beneficiary is regarded as the owner of a proportionate part of the [Liberty loan] bonds held in trust and is entitled to exemption on account of such ownership as if he owned such proportionate part of the bonds directly. In such a case a subscription by a trustee for bonds of the fourth Liberty loan, or notes of the Victory Liberty loan, constitutes each beneficiary existing at the time of such subscription an original Article 346 of Regulations 45.

subscriber for his proportionate part of such bonds or notes,
as the case may be, and entitles such beneficiary to the appro-
priate collateral exemption of interest on bonds of previous
issues, whether owned by such beneficiary or by the trustee,
as if the beneficiary had himself originally subscribed for
such proportionate part of the bonds or notes; and a sub-
scription by such beneficiary for bonds of the fourth Liberty
loan or notes of the Victory Liberty loan, as the case may be,
entitles him to the appropriate collateral exemption of inter-
est on bonds of previous issues held by the trustee.'

To be deemed an original subscriber to bonds for the purpose of claiming the conditional exemptions, the beneficiary must have been such when the original subscription was made.

§ 225. Gross Income Defined

Gross income is, generally speaking, the same for fiduciaries as for individuals, and:

... includes gains, profits, and income derived from salaries,
wages, or compensation for personal service. . . of what-
ever kind and in whatever form paid, or from professions,
vocations, trades, businesses, commerce, or sales, or deal-
ings in property, whether real or personal, growing out of
the ownership or use of or interest in such property; also
from interest, rent, dividends, securities, or the transaction
of any business carried on for gain or profit, or gains or
profits and income derived from any source whatever."

The proceeds of life insurance policies paid upon the death of the insured to individual beneficiaries or to the estate of the insured are not to be included in gross income. The supreme court has declared stock dividends not taxable for either nor mal tax or surtax.

9

No taxable income or deductible loss results from the passage of property to the executor or administrator on the

? Article 81 of Regulations 45.

Revenue Act of 1918, § 213.

• Eisner v. Macomber, 252 U. S. 189.

death of the decedent, even though such property has appre-
ciated or depreciated in value since the decedent acquired it.10

Where, however, the executor sells property of the estate
for more than its value at the death of the decedent, the
excess is income taxable to the estate."

If, however, a legacy to be divided equally or in a certain ratio is, in accordance with mutual agreement, divided upon the basis of the market value or some otherwise determined value of the legacy at the time of distribution, which may be in excess of the value at the date of decedent's death as appraised for federal estate tax purposes, the estate derives no taxable gain from the transfer of the securities to the legatee, but when the property is sold by the legatees the amount of gain or loss in that sale is the difference between the selling price and the value of the property at the date of the testator's death, as appraised for the purpose of federal estate tax.

Where in a bequest of property the remaindermen have only a contingent interest prior to the death of the life tenant, the basis for determining gain or loss from a sale of such property by the remaindermen is its value as of the date of death of the life tenant."

§ 226. Normal Tax Credits

For the purpose of the normal tax only, the credits allowed fiduciaries are dividends, interest on United States government bonds and bonds of the War Finance Corporation, and an exemption of $1,000, but no credit for dependents. In reference to the specific exemption of $1,000, it will be recalled (see § 208) that one of the first acts of an administrator or executor is the filing of an income tax return for part of the last year of the decedent's life, and that he must at the end of the decedent's full taxable year file a return of income for the remainder

10 Office Decision 731, Bureau of Internal Revenue.

11 Article 343 of Regulations 45.

12 Office Decision 727.