in the first above entitled action, to remand the same to the Supreme Court, is denied. The motion of William Kelly, the plaintiff in the second above entitled action, for a preliminary and provisional injunction, is granted.

Settle orders on notice.

WILKINSON v. GOREE.

(District Court, N. D. Texas, Fort Worth Division. November 5, 1926.)

No. 1376.

I. Bankruptcy 200(4)-Purchaser of real estate at execution sale, which was held after debtor had been adjudicated bankrupt, held not to take title (Vernon's Sayles' Ann. Civ. St. Tex. 1914, arts. 3739, 3740; Bankruptcy Act, § 70 [U. S. Comp. St. § 9654]).

Purchaser of real estate at execution sale, which was held after debtor had been adjudi

cated bankrupt, held not to take title, in view of Bankruptcy Act, 8 70 (U. S. Comp. St. 9654), and Vernon's Sayles' Ann. Civ. St. Tex. 1914, arts. 3739, 3740, where marshal had not taken control or custody of property, since debtor could have "transferred" his title, and property therefore passed to trustee in bankruptcy of debtor. 2. Bankruptcy

101.

In Equity. Action by W. M. Wilkinson, trustee, against B. K. Goree, trustee. Order entered affirming referee's ruling for defendant.

Boykin & Ray, George M. Conner, and Capps, Cantey, Hanger & Short, all of Fort Worth, Tex., for complainant.

P. T. Lomax, W. D. Caldwell, Ben G. Smith, and H. T. McGown, all of Fort Worth, Tex., for respondent.

ATWELL, District Judge. Walker Grain Company was adjudicated a bankrupt in this court several years ago. The main stockholder, J. L. Walker, has, during all the time since such adjudication, diligently combated nearly every move made by the creditors and the trustee. Through the

weary process of the law, when thus found, final judgments were ultimately entered for certain of the creditors against Mr. Walker. These judgments were duly recorded in the county clerk's office of Tarrant county, in which county Walker's realty was said to be, and thereafter, in June, 1925, orders of sale were issued out of such judgments and the sale was fixed for August 4th, at 2 o'clock p. m. Walker sought an injunction in various courts without avail, and at 2 o'clock, on August 4th, filed a voluntary petition in bankruptcy, and was immediately adjudicated a bankrupt. One of his attorneys went to the place of the sale, arriving there before it had begun, and gave notice of such adjudication. After a few moments' consultation among the attorneys, who were representing the trustee for whom the sale was being made by the marshal, it was decided to go forward with the sale and the sale actually occurred at five minutes after 2 o'clock. The trustee, Wilkinson, bought the property in for a few thousand dollars. The property was worth approximately $300,000. There were many liens against it. The aggregate of such liens, together with the amount of Trustee Wilkinson's judgment, would leave a substantial equity.

It was agreed between Trustee Goree, who was appointed after the adjudication of Walker, and Trustee Wilkinson, that Trustee Goree might retain the possession of the property pending this suit. Thereupon this suit was brought by Wilkinson for the property. The schedules of Walker show him to have been solvent at the time he was adjudged a bankrupt. It is agreed

that he was solvent.

[1] Did Wilkinson get title to the realty by a sale which took place under an execution after Walker had been adjudged bankrupt? Section 70 of the Bankruptcy Act (Comp. St. 9654) provides:

"The trustee of the estate of a bankrupt, shall in turn be vested by operation of law with the title of the bankrupt, as of the date he was adjudged a bankrupt, to all (5) property which prior to the filing of the petition he could by any means have transferred, or which might have been levied upon and sold under judicial process against him."

The effect of the adjudication of Walker was to vest in his trustee, by operation of law, the title to all of the bankrupt's property that was not exempt which, prior to the filing of the petition, he could by any

means have transferred.

Co. v. Beekman Lumber Co., 222 U. S. 307, 32 S. Ct. 96, 56 L. Ed. 208; Matter of Scott (C. C. A. 7th Circuit) 33 Am. Bankr. Rep. 53, 226 F. 201, 141 C. C. A. 653. [2] The exclusive jurisdiction of the bankruptcy court is so far in rem that the estate is regarded as in custodia legis from the filing of the petition, said Mr. Justice Day, in the Harvester Case.

[3] There is a well-recognized judicial and necessary exception. When at the time of the adjudication some other court has actual possession of the res, and is proceeding with reference to it the adjudication shall not disturb such possession. Harmony between and in orders of the various courts of the country is so important as to be paramount. That court, which begins first to order and dispose of property will proceed with such ordering and disposition, eyen though the owner of such property voluntarily or involuntarily submits to the constitutional jurisdiction of a bankruptey tribunal. Jones v. Springer, 226 U. S. 149, 33 S. Ct. 64, 57 L. Ed. 161; Lewis v. Schrader (D. C.) 287 F. 893; In re Richardson (D. C.) 294 F. 349.

The execution under which Trustee Wilkinson was selling issued out of this court, and J. L. Walker was adjudicated a bankrupt

Whatever rights Wilkinson had against Walker's property before adjudication he now has against Walker's estate in bankruptcy. To hold otherwise would be to ignore the ascendency of the Bankruptcy Act, and to permit a loss of a large equity which must be advantaged for other creditors.

I think the referee ruled correctly in holding that Wilkinson took no title by his sale, and an order will be drawn accordingly.

affa 507 (ad) 350.

SLOCUM et al. v. BOWERS, Collector of Internal Revenue.

14, 1926.)

While it is true that it is the execution first begun to be executed which is entitled to priority, and that the filing of the bill out of which the execution comes is the beginning of such execution, still, I believe, that the case must turn upon possession rather than priority. Article 3739 of Vernon's Sayles' Texas Civil Statutes 1914, provides: "In order to make a levy on real estate, it shall not be necessary for the officer to go upon the ground, but it shall be sufficient for him to indorse such levy on the writ."

The next article provides that a levy on personal property "is made by taking possession thereof. Trustee Wilkinson had made a paper levy upon Walker's real estate. The marshal of this court had not taken actual possession. Walker could have "transferred" his title to the property at any time. It was in his possession. It was in his custody. The marshal had not taken possession or custody or control of it. He had merely advertised that he was going to make a sale of it under the execution which

1. Internal revenue 7.(33)-Statute should be construed to carry out policy of exempting religious, charitable, scientific, or educational corporations from income tax (Revenue Act of 1918).

Revenue Act of 1918 (40 Stat. 1057)

should be construed to carry out policy of exempting religious, charitable, scientific, or educational corporations from income tax, and not to make result turn on accidental circumstances or legal technicalities. 2. Internal revenue ~7(8).

Income belonging to residuary legatees is subject to income tax, unless exempted by stat ute, whether all of it was derived from capital passing to them or not.

3. Internal revenue 25.

Tax return of estate income may be made either by beneficiary or executor.

4. Internal revenue 7(33)-Income ultimately passing to religious, charitable, scientific, or educational corporations held not subject to income tax in hands of executor of decedent's estate (Revenue Act 1916, §§ 2 [b], [a], being Comp. St. §§ 6336b, 6336k, Revenue Act 1918, §§ 219, 231 [6], [12], being Comp. St. §§ 6336, 633680).

ultimately pass to religious, charitable, scienIncome of estate of deceased, which would tific, or educational corporations, which were

residuary legatees, held not subject to income tax, in view of Revenue Act 1918, § 231 (6), being Comp. St. § 6336%0, not being taxable under section 219 (Comp. St. § 6336ii) because of failure to distribute or neglect to enter credit during tax year, in view of section 231 (12), and Revenue Act, § 2 (b), 11 (a), being Comp. St. §§ 6336b, 6336k.

At Law. Action by Herbert Jermain Slocum and others, as surviving executors of the last will and testament of Margaret Olivia Sage, deceased, against Frank K. Bowers, Collector of Internal Revenue for the Second District of New York. On motion to dismiss complaint. Motion denied.

De Forest Bros., of New York City (Robert Thorne, of New York City, of counsel), for plaintiffs.

Emory R. Buckner, U. S. Atty., of New York City (Thomas J. Crawford, Asst. U. S. Atty., of New York City, and T. H. Lewis, Jr., Sp. Asst., Internal Revenue, of Washington, D. C., of counsel), for defendant.

AUGUSTUS N. HAND, District Judge. This is a motion to dismiss the complaint. The action is brought against the collector of internal revenue to recover income taxes upon the estate of Margaret Olivia Sage, deceased, for the year 1919 alleged to have been illegally exacted. These taxes amounted to $1,408,568.68 and were based upon income ultimately passing to various religious, charitable, scientific, and educational corporations which were residuary legatees under the will of Mrs. Sage. The income was derived from personal property. There has already been a refund of an income tax of $15,200.75, which was based on rentals derived from real estate. This latter sum the department finally admitted could not be assessed against the above corporations, which on the death of Mrs. Sage succeeded to the title to the real estate as residuary devisees. It is thus apparent at the outset that the position of the government is based upon the rule that a legacy of personal property does not pass the legal title to the legatee, whereas a devisee takes title directly under the will. Nevertheless the beneficial interest in each kind of property belonged to religious, charitable, scientific, or educational corporations generally exempt from income taxes. It is interesting to note that the department first took the position now maintained by the executors of the Sage estate and approved returns filed by the executors under which they claimed that the net residuary income of the estate was payable to and had been set aside for the residuary legatees which were corporations organized and op15 F. (2d)-26

erated exclusively for religious, charitable, scientific, or educational purposes and exempt from income taxes. In a letter of July 28, 1921, the department referred to the amended returns by the executors and said:

"An audit of the several returns discloses that those filed on January 25, 1921, are correctly made. Since it appears that the residuary legatees are tax exempt corporations and that the amounts actually paid to the general legatees have been included in their returns, there is no further tax due from the executors for that year."

The government changed its ruling and assessed a tax for 1919 on the income passing to the residuary legatees because of a reaudit made at the request of the executors in July, 1921, in order that they might be in position safely to distribute the income to the residuary legatees.

The claim that such income is taxable is

based on section 219 of the Revenue Act of 1918 (Comp. St. § 6336ii), which reads as follows:

"Estates and Trusts.

sections 210 and 211 shall apply to the income "Sec. 219. (a) That the tax imposed by of estates or of any kind of property held in trust, including

"(1) Income received by estates of deceased persons during the period of administration or settlement of the estate;

"(2) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests;

"(3) Income held for future distribution under the terms of the will or trust; and

"(4) Income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals, and the income collected by a guardian of an infant to be held or distributed as the court may direct.

"(b) The fiduciary shall be responsible for making the return of income for the estate or trust for which he acts. The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212, except that there shall also be allowed as a deduction (in lieu of the deduction authorized by paragraph [11] of subdivision [a] of section 214) any part of the gross income which, pursuant to the terms of the will or deed creating the trust, is during the taxable year paid to or permanently set aside for the United States, any state, territory, or any political subdivision thereof, or the District of Columbia, or any corporation organized and operated exclusively for religious, charitable, scientific,

or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual; and in cases under paragraph (4) of subdivision (a) of this section the fiduciary shall include in the return a statement of each beneficiary's distributive share of such net income, whether or not distributed before the close of the taxable year for which the return is made. "(c) In cases under paragraphs (1), (2), or (3) of subdivision (a) the tax shall be imposed upon the net income of the estate or trust and shall be paid by the fiduciary, except that in determining the net income of the estate of any deceased person during the period of administration or settlement there may be deducted the amount of any income properly paid or credited to any legatee, heir or other beneficiary. In such cases the estate or trust shall, for the purpose of the normal tax, be allowed the same credits as are allowed to single persons under section 216.

"(d) In cases under paragraph (4) of subdivision (a), and in the case of any income of an estate during the period of administration or settlement permitted by subdivision (c) to be deducted from the net income upon which tax is to be paid by the fiduciary, the tax shall not be paid by the fiduciary, but there shall be included in computing the net income of each beneficiary his distributive share, whether distributed or not, of the net income of the estate or trust for the taxable year, or, if his net income for such taxable year is computed upon the basis of a period different from that upon the basis of which the net income of the estate or trust is computed, then his distributive share of the net income of the estate or trust for any account ing period of such estate or trust ending within the fiscal or calendar year upon the basis of which such beneficiary's net income is computed. In such cases the beneficiary shall, for the purpose of the normal tax, be allowed as credits in addition to the credits allowed to him under section 216, his proportionate share of such amounts specified in subdivisions (a) and (b) of section 216 as are received by the estate or trust."

The general provisions of the Revenue Act of 1918 exempting charitable corporations from taxation so far as applicable to this case are as follows:

"Sec. 231. The following organizations shall be exempt from taxation under this title

"(6) Corporations organized and operated exclusively for religious, charitable, scien

tific, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual." Comp. St. § 6336so.

Under the original Revenue Act of 1913 (38 Stat. 177) there was no provision for a tax of estates and trusts and the only provision was for the taxing of individuals and for the withholding at the source of income received by agents and fiduciaries. Accordingly income accumulated for unborn or unascertained persons could not be reached in the hands of fiduciaries. Smietanka v. First Trust & Savings Bank, 257 U. S. 602, 42 S. Ct. 223, 66 L. Ed. 391. The Revenue Act of 1916, as amended by the act of 1917, aimed at reaching these hitherto untaxed incomes by the following provision:

"Sec. 2. (b) Income of Estates. Income received by estates of deceased persons during the period of administration or settlement of the estate, shall be subject to the normal and additional tax and taxed to their estates, and also such income of estates or any kind of property held in trust, including such income accumulated in trust for the benefit of unborn or unascertained persons, or persons with contingent interests, and income held for future distribution under the terms of the will or trust shall be likewise taxed, the tax in each instance, except where the income is return for the purpose of the tax by the beneficiary, to be assessed to the executor, administrator, or trustee, as the case may be: Provided, that where the income is to be distributed annually or regularly between existing heirs or legatees, or beneficiaries the rate of tax and method of computing the same shall be based in each case upon the amount of the individual share to be distributed. "Comp. St. § 6336b.

Revenue Act 1916, § 11 (Comp. St. § 6336k [a]), contained a general exemption from income taxes in favor of corporations organized for religious, charitable, scientific, or educational purposes, similar to that of the act of 1918. Both of these acts contained in substance the further exemption from income taxes, which I quote from section 231 (12) of the act of 1918:

"Corporation or association organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt from the tax imposed by this title."

The act of 1918 not only continued the former exemptions and added the additional exemption up to 15 per cent. of the income

of any individual given by him to charity, but it also exempted from the federal estate tax every bequest and devise to charity and made this exemption retroactive to January 1, 1918. It is quite clear that the primary purpose of the amendments taxing estates and trusts as entities was to reach income that had not theretofore been presently taxable at all. A design to tax income where the beneficial ownership is in corporations generally exempt under the law accordingly seems contrary to the history and spirit of the statute.

The act of 1918 (section 219) clearly covers the situation in the case of a trust where income is to be distributed periodically to the beneficiary and provides for payment by a taxable beneficiary of the tax on such income "whether distributed or not." The government relies on the language of section 219, supra, taxing generally: "(a) (1) Income received by estates of deceased persons during the period of administration or settlement of the estate❞—and bases its claim on a literal reading of the statute which does not in terms exempt estates passing to charitable corporations from income taxes and the testamentary rule of law that the legal title to the income in question was in the executors and the beneficiaries had only the right to require an accounting.

[1] In view of the wide general exemption of charitable corporations under section 231 (6), supra, of the act of 1918, the careful provision to exempt a corporation holding title to property the income of which is to be turned over to exempt corporations, the 15 per cent. exemption in the case of distributions of income to charity inter vivos by private individuals, and the permitted deduction by a fiduciary in his return of any part of the gross income of an estate which is paid or permanently set aside for religious, charitable, scientific, or educational corporations, it is hard to believe that in the one case of administration of an estate the exemption should turn on the technical question of whether the corporations seeking it have the legal or equitable title to the income. The policy of exempting these corporations is firmly established and has been continuously expanding ever since the system of income taxation was adopted. The statute should be read, if possible, in such a way as to carry out this policy and not to make the result turn on accidental circumstances or legal technicalities. There is no doubt that the executors held the legal title, but it does not necessarily follow because they can sell assets, pay debts and distribute, that the portion of the property which they hold, though ultimately distribut

able to tax exempt persons, is taxable in their hands. The New York Court of Appeals held that where a statute provided that "if a person holds taxable property as

ecutor

ex

he shall be assessed therefor as such," an executor was not subject to a personal tax on property ultimately passing to a corporation exempt by statute from taxation. People ex rel. Crook v. Wells, 179 N. Y. 257, 71 N. E. 1126.

The Circuit Court of Appeals of the Third Circuit, in the case of Lederer, Collector, v. Stockton, 266 F. 676, held (by a court consisting of Buffington, Woolley, and Haight, Circuit Judges) that surplus income accumulated in the hands of a trustee, which on the death of an annuitant would immediately pass to tax exempt charities, was not taxable under the Revenue Act of 1916. Section 2 (b) (1) of the act of 1916 differs in no substantial respect from section 219 (a) (1) of the act of 1918. Judge Buffington said:

66

• The temporary holding of the income being by a trustee, who was the agent and representative solely of the hospital, it is clear that when substance and spirit, and not mere form and words, are the interpreters of the statute, the receipt of this income by the hospital's agent and representative was in truth and reality a receiving by the hospital, for he who acts by the hand of another himself acts."

It is true that the trustee in the Stockton Case, supra, made a loan of the corpus of the trust to the tax exempt remainderman in order to avoid a decision of the Pennsylvania Supreme Court holding that the income could not be paid out until the death of all the annuitants, so that the charitable corporation actually received the income. The Supreme Court placed its decision on the ground that the charitable corporation had actually received the income, while the Circuit Court of Appeals also relied on the further ground that the remainderman, though acting for the trustee in collecting the income, was the beneficial owner of the income. But the Supreme Court in no way disapproved of the additional ground adopted by the Court of Appeals and Chief Justice Taft, who wrote the opinion, reported in 260 U. S. 3, 43 S. Ct. 5, 67 L. Ed. 99, said:

"This residuary fund was vested in the hospital. The death of the annuitant would completely end the trust."

In the case of Kings County Trust Co. v. Law, 201 App. Div. 181, 194 N. Y. S. 370, affirmed without opinion in 234 N. Y. 610, 138 N. E. 466, a situation similar to the one here arose under the New York Income Tax Act