20 F.(2d) 345 75, was deducted by it from the charter hire, and this libel, by the owner, has been sustained on exceptions filed to it, to recover the same from the appellant. This court, in Clyde Commercial S. S. Co. v. West India S. S. Co., 169 F. 275, held that the detention by quarantine authority is a restraint of princes and peoples, and an exception which prevented the owner from prose cuting his voyage with dispatch, and relieves him from liability to the charterer for the delay so caused. "The case is to be treated as if no delay had occurred. The charterer is not protected by the exception from paying hire, because it was not thereby prevented from paying hire, and because it had the use of the vessel for which it was to pay notwithstanding interruption." The Clyde Case deals with the question of the detention of a ship in quarantine, and was not a claim for the time actually employed in the process of fumigation. In Gow v. Steamship Line (C. C. A.) 174 F. 215, a vessel was detained for fumigation and observation of the crew, and we held that the owner should be allowed his hire for the period of fumigation under the exception of restraint of princes. But under the "breakdown" clause, allowing deduction of hire "in the event of loss of time from deficiency of men," the charterer was excused from paying for the time had due to the observation of the crew. [1-3] The claim is made that, under clause 15 of the charter, the charterer is relieved. But the events named there, which permit a cessation of hire payments, relate to the physical state of the vessel or her crew and equipment. Fumigation by government order is in no way related to the crew, stores, or physical damage to the vessel. Nor is it similar to drydocking, for the purpose of examination or painting the bottom. They relate, by analogy, to repairs required for needs of the condition of the vessel. So far as the clauses of this charter dealt with breakdown, we perceive no different reasoning to be applied than that used in the Gow Case. Nor does the rule of ejusdem generis permit that delay or costs of fumigation be included within the "breakdown" clause. A provision of article 15, "any other cause preventing the full working of the vessel," has no application to fumigation. And under article 16 the owner is excused from not having his vessel in full working condition when the restraint of princes or peoples hold the vessel for fumigation. To hold otherwise would lead to undesired results. Ice, embargo, storm-bound, quarantine detention, and strikes are all causes preventing full working of the vessel, and still no one would expect suspension of charter hire for these. Randall v. Sprague (C. C. A.) 74 F. 247. The cause for fumigation is due to trading between the United States and other ports. It is a United States quarantine regulation, and its application depends upon the foreign port to which the vessel is traded. The libel alleges, "trading with the West Indies, which are believed to be infested with rats." And the regulation requires the periodical six months fumigation. Various countries have similar regulations. They are not, by rule of the international law or otherwise, required to accept, as sufficient, the fumigation requirements of another country as in satisfaction of their own. It was the use of the vessel that made fumigation necessary. The appellant recognized this, and without complaint accepted it in the three previous requirements of fumigation. [4] Moreover, under clause 2, the port charges "and all other usual expenses" are to be borne by the charterer. This requirement to fumigate every six months may well be classified as the usual expense of navigating the vessel. Certainly, under port charges, which the vessel must pay before she makes her clearance from a port, the cost, resulting from the requirement to fumigate, in order to clear a port, would be an obligation of the charterer. See Newman & Dale v. Lamport & Holt, 1896, 1 Q. B. Div. 20. [5] The fumigation of a vessel is not a part of the owner's obligation to "keep the vessel in a thoroughly efficient state in hull, machinery, and equipment for and during the service." This refers to physical conditions. It does not contemplate the use of the vessel by the charterer. The owner, by the charter, furnished a vessel and a crew. His obligation required him to pay the expenses, such as the personnel of the ship, provisions, wages, and stores to maintain the ship as a navigating unit. If it was intended to mean anything more, the parties have not said it in their charter. The Queen Olga (D. C.) 162 F. 490. Fumigation is much like keeping a ship clean. As where a cargo of coal has been carried, it necessitates the cleaning of the holds and the charterer pays the cost of such cleaning. Dene Shipping Co. v. Tweedie Trading Co. (C. C. A.) 143 F. 854. Fumigation required when the ship is transferred over to the charterer is a much different matter than that during the time of the charterer's use of the vessel. See G. H. Schales, Ltd., v. Temperley S. S. Co., Ltd., 22 Lloyd's List, Law Rep. 533. [6] Clause 25 of this charter, providing that the owners shall remain responsible for all navigation of the steamer, insurance, crew, and all other matters, such as when trading for their own account, does not change the result. To accept the interpretation placed upon this clause by the appellant would make the owner responsible for such charges of use of the vessel as coal, stevedoring, pilotage, and port charges. The object of the quarantine laws and regulations is to safeguard the health of our citizens. A rat, or the fleas upon it, may become the carrier of the bubonic plague to a port of the country. This, of course, does not make the ship unseaworthy, or breach any of the clauses which are assumed by the owner as his obligation. We are referred to arbitrations which have reached a different result from that which we here announce. We note, however, that these arbitrations dealt with other subjects, as well as matters of fumigation, and, as arbitrations go, with a spirit of compromise, it may well be that allowances were made for fumigation. It is sufficient to say that, in view of the clauses of the charter here referred to and the previous rulings of this court, we may not sustain the exceptions filed to this libel. Decree affirmed, with costs. IVY COURTS REALTY CO. v. UNITED STATES. Circuit Court of Appeals, Second Circuit. June 6, 1927. No. 243. I. Internal revenue 9(25)—Full amount of $29,025, annual interest paid by corporation having paid-up $2,000 capital stock, held not deductible from gross income (Corporation Excise Act Aug. 5, 1909, § 38, par. 2). Where corporation, having paid-up capital stock of $2,000, owned real estate subject to mortgages aggregating $567,500, and paid annual interest of $29,025, held, full amount of interest actually paid was not deductible from gross income, under Corporation Excise Act Aug. 5, 1909, § 38, par. 2 (36 Stat. 112), authorizing deduction of interest actually paid within the year on bonded or other indebtedness "to an amount of such bonded or other indebtedness not exceeding the paid-up stock of the corporation." 2. Internal revenue 7(17)-Full amount of $29,025, annual interest paid by corporation having $2,000 paid-up capital stock, held not deductible from gross income under statute (Income Tax Act 1913, § 2, subsec. 2G [b]; Revenue Act Sept. 8, 1916, § 12a, third). Where corporation, having paid-up capital stock of $2,000, owned property mortgaged to secure a bonded indebtedness of $567,500, and paid annual interest aggregating $29,025, held, full amount of interest so paid was not deducti In Error to the District Court of the United States for the Southern District of New York. Action by the United States against the Ivy Courts Realty Company. Judgment for plaintiff on directed verdict, and defendant brings error. Affirmed. Louis E. Felix, of New York City, for plaintiff in error. Emory R. Buckner, U. S. Atty., of New York City (Edward Feldman and Thomas J. Crawford, Asst. U. S. Attys., both of New York City, of counsel), for the United States. Before MANTON and MACK, Circuit Judges, and CAMPBELL, District Judge. MACK, Circuit Judge. Writ of error to reverse a judgment in favor of the United States, the plaintiff, on a directed verdict in the sum of $1,258.07, which, with interest and costs, amounts to $2,183.51. The action was to recover for additional corporation excise taxes under the provisions of section 38 of the Act of August 5, 1909 (36 Stat. 112), for the years 1909 to 1912, inclusive, for additional income taxes under the provisions of subsection 2G (b) of section 2 of the Revenue Act of October 3, 1913 (38 Stat. 172), for the years 1913 and 1915, and under the provisions of section 12a, third, of the Revenue Act of 1916 (Comp. St. § 63361) for the year 1916. Defendant is a New Jersey corporation, with paid-up capital stock of $2,000, which owned certain premises with three adjoining apartment houses thereon in the city of New York. The property was subject to a first and a second mortgage as security for a bonded indebtedness of defendant aggregating $567,500, with annual interest aggregating $29,025. The sole question involved is whether the full amount of this interest actually paid was deductible from gross income as to each of these years, or whether, as contended by the government, only $100, being the interest on the paid-in capital, for each of the years 1909 to 1912, inclusive, and $14,937.50, being the interest on the paid-up capital stock, plus one-half of the interest-bearing indebtedness 20 F.(2d) 348 for each of the years 1913, 1915, and 1916, were properly deductible. The relevant portions of the statutes are copied in the margin.1 [1] In Anderson v. 42 Broadway, 239 U. S. 69, 36 S. Ct. 17, 60 L. Ed. 152, the court said that "mortgage interest may, under special circumstances, be treated among the 'ordinary and necessary expenses,' or as included among the charges 'required to be made as a condition to the continued use or possession of property,' but interest upon the bonded or other indebtedness' of the corporation, whether such indebtedness be secured by mortgage or not, comes within the specific provision of the third clause, whose effect, in our opinion, is not in this respect limited by anything contained in the first." Clearly there is no difference whatsoever, so far as the years 1909 to 1912 are concerned, between that case and the present one. [2] As to the later years, the question is whether, under the facts in this case, the main clause or the proviso governs. This real estate, with a couple of vacant lots, constituted 1 Statutes. Section 38 of the Corporation Excise Tax Act of August 5, 1909, provides in part as follows: * "Second. Such net income shall be ascertained by deducting from the gross amount of the income of such corporation, * * received within the year from all sources, (first) all the ordinary and necessary expenses actually paid within the year out of income in the maintenance and operation of its business and properties, including all charges such as rentals or franchise payments, required to be made as a condition to the continued use or possession of property; * * (third) interest actually paid within the year on its bonded or other in debtedness to an amount of such bonded and other indebtedness not exceeding the paid-up capital stock of such corporation, * and in the case of a bank, banking association or trust company, all interest actually paid by it within the year on deposits. * Section 2, subd. 2G (b), of the Income Tax Act of 1913, provides as follows: (sec "Such net income shall be ascertained by deducting from the gross amount of the income of such corporation, joint-stock company or association, or insurance company, received within the year from all sources (first) ond) • * (third) the amount of interest accrued and paid within the year on its indebtedness to an amount of such indebtedness not exceeding one-half of the sum of its interest-bearing indebtedness and its paid-up capital stock outstanding at the close of the year, or if no capital stock, the amount of interest paid within the year on an amount of its indebtedness not exceeding the amount of capital employed in the business at the close of the year: Provided, that in case of indebtedness wholly secured by collateral the subject of sale in ordinary business of such corporation, joint-stock com the entire property of the defendant corporation; the rent from the apartment houses was its entire revenue. While it is true that the property was for years in the hands of several brokers for sale, it was not sold until 1922. In our judgment, it clearly could not be deemed the "subject of sale in ordinary business of such corporations," or "the subbusiness of such corporation as a dealer only ject of sale or hypothecation in the ordinary in the property constituting such collateral.” fied in finding that during all that time the On the evidence, the court was fully justiproperty was held as an investment, and not as an object of trade and sale in the ordinary business of the corporation, that the ordinary business of the corporation in fact was to keep the property rented, and not to deal in properties, although it was authorized by its charter to buy and sell real estate. As motions for a directed verdict were made by each party, the court properly directed judgment for plaintiff. Judgment affirmed. pany, or association, the total interest secured and paid by such company, corporation, or association, within the year on any such indebtedness may be deducted as a part of its expense of doing business. Section 12a, third, of the Revenue Act of September 8, 1916, provides in part as follows: "The amount of interest paid within the year on its indebtedness * * * to an amount of such indebtedness not in excess of the sum of (a) the entire amount of the paid-up capital stock outstanding at the close of the year, or, if no capital stock, the entire amount of capital employed in the business at the close of the year, and (b) one-half of its interest-bearing indebtedness then outstanding: Provided, that for the purpose of this title preferred capital stock shall not be considered interest-bearing indebtedness, and interest or dividends paid upon this stock shall not be deductible from gross income: Provided further, that in cases wherein shares of capital stock are issued without par or nominal value, the amount of paid-up capital stock, within the meaning of this section as represented by such shares, will be the amount of cash, or its equivalent, paid or transferred to the corporation as a consideration for such shares: Provided further, that in the case of indebtedness wholly secured by property collateral, tangible or intangible, the subject of sale or hypothecation in the ordinary business of such corporation, joint-stock company or association as a dealer only in the property constituting such collateral, or in loaning the funds thereby procured, the total interest paid by such corporation, company, or association within the year on any such indebtedness may be deducted as a part of its expenses of doing business, but interest on such indebtedness shall only be deductible on an amount of such indebtedness not in excess of the actual value of such property collateral." BOWERS, Collector of Internal Revenue, v. SLOCUM et al. Circuit Court of Appeals, Second Circuit. June 6, 1927. No. 324. 1. Internal revenue -7(33)-Income earned during administration held "permanently set aside" by will itself for residuary charitable legatees, and not subject to income tax (Revenue Act 1918, § 219 [b], being Comp. St. § 6336gii). Where will gave residue of estate to 35 separate charitable, religious, and educational corporations, and provided that, if any such corporation be incapable of taking it the share of such corporation should be divided among the others in prescribed proportion, held, income earned by estate during administration and becoming part of residue of estate was by the will itself "permanently set aside" for the residuary legatees, within meaning of Revenue Act 1918, § 219 (b), being Comp. St. § 6336ii, and hence not subject to income tax. 2. Internal revenue 7(17)-Provision of 1918 Revenue Act authorizing deduction of income permanently set aside, applies to estates in process of settlement (Revenue Act 1918, § 219 [b], being Comp. St. § 6336ii). Revenue Act 1918, § 219 (b), being Comp. St. § 6336ii, authorizing deduction in calculating net income of any part of gross income which, pursuant to the terms of the will or deed creating the trust, is paid to or permanently set aside for the United States or others named, applies to estates in the process of settlement, and not to trusts only. In Error to the District Court of the In Error to the District Court of the United States for the Southern District of New York. Action by Herbert Jermain Slocum, Stephen L'Hommedieu Slocum, Robert W. De Forest, and Henry W. De Forest, 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. Judgment for plaintiff (15 F. [2d] 400), and defendant brings error. Affirmed. Margaret Olivia Sage died November 4, 1918, a resident of the city, county, and state of New York. She left a last will and testa ment and two codicils, which were duly admitted to probate by the Surrogate's Court of New York County on or about December 6, 1918, and letters testamentary thereon were duly issued out of said court to the defendants in error and also to one Joseph Jeremiah Slocum, since deceased, all of whom qualified as executors and took upon themselves the administration of the decedent's estate. The decedent left a gross estate of $48,939,045.94, and her debts, so far as they had been ascertained up to December 31, 1919, amounting to slightly over $2,000,000, were paid before the end of the calendar year 1919. In and by said will and codicils the decedent, after making certain bequests and devises and providing for certain trusts, left her entire residuary estate to 35 separate charitable, religious, and educational corporations, which organizations, as such, were exempt from the payment of income taxes under the provisions of the Revenue Act of 1918 (Comp. St. § 6336a et seq.). During the entire calendar year of 1919 decedent's estate was being administered by the defendants in error as her executors, and they have not yet completed the administration. During the year 1919 the defendants in error, as such executors, in addition to the amount of income payable by them on general legacies and trust funds, and other items which were allowed to them as deductions, received income amounting to $2,142,713.62. Between March 13, 1920, and July 25, 1921, the defendants in error filed original and amended tax returns for the estate, both on individual form 1040 and fiduciary form 1041, and in all of these returns they reported the income received by the estate during the year 1919 as belonging to the charitable, religious, and educational residuary legatees, and no tax was due thereon. The defendants in error kept their books on a cash receipt and cash disbursement basis during the year 1919, and the income aforesaid was not credited to the residuary legatees on the estate books during the year 1919, nor until the year 1923. The Chief of the Division of Audit of Income Tax at first agreed with the view taken by the defendants in error, but subsequently, on March 9, 1925, a jeopardy assessment was made against the defendants in error, as such executors, in the principal sum of $1,517,167.21. After notice and demand for payment of the assessment, and under threat of distraint and under duress, the defendants in error paid the tax 10 days later. The Commissioner subsequently allowed, to the extent of $108,598.53, for reasons not important, a claim for refund filed by the defendants in error, as required by law, and rejected the claim as to the balance of $1,408,568.68, for the recovery of which amount with interest this suit was brought. The sections of the Revenue Act of 1918, 20 F.(2d) 350 which are directly involved in this case, namely, section 219 (a), (b), and (c), and section 231 (6), being Comp. St. §§ 6336ii, 633680, are set forth in the margin.1 The plaintiff in error, defendant below, moved to dismiss the second amended complaint, upon the ground that the same did 1 Sec. 219. (a) That the tax imposed by sections 210 and 211 shall apply to the income 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 paragraph (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. Sec. 231. That the following organizations shall be exempt from taxation under this title (6) Corporations 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. not constitute a cause of action, which motion was denied, and the plaintiff in error, defendant below, was given leave to answer in 20 days, and upon failure to answer defendants in error, plaintiffs below, were to have judgment against the plaintiff in error, defendant below, for a specified amount. The plaintiff in error, defendant below, having failed to answer, judgment was rendered in accordance with the order denying the motion to dismiss. Charles H. Tuttle, U. S. Atty., of New York City (Thomas J. Crawford and Edward Feldman, Asst. U. S. Attys., both of New York City, and T. H. Lewis, Jr., Sp. Atty., Bureau of Internal Revenue, of Washington, D. C., of counsel), for plaintiff in error. De Forest Bros., of New York City (Robfor defendants in error. ert Thorne, of New York City, of counsel), Before L. HAND and SWAN, Circuit Judges, and CAMPBELL, District Judge CAMPBELL, District Judge (having stated the facts as above). [1] The determination of the question raised in the case at bar depends upon the construction of the provisions of section 219 (a) (b) (c), and section 231(6), of the Revenue Act of 1918. The provision of section 219 (a) (1), of the Revenue Act of 1918, applied to all of the income received by the estate during the period of administration or settlement of the estate, and by subdivision (b) the duty was imposed on the executors to make a return of the income of the estate. By that act the estate became a taxpayer as distinguished from the legatees or beneficiaries, and cannot escape from taxation under that act by implication, but only by taking the deductions provided for under the provisions of subdivisions (b) or (c) of section 219, if the same are allowable. Relief from the provisions of section 219 cannot be found in section 231 (6), generally exempting corporations organized and operated exclusively for religious, charitable, scientific, or educational purposes; but that section may properly be considered in determining the intent of Congress, as expressed in section 219, if the language of that section may fairly be susceptible of two interpretations, one of which would relieve the estate from taxation on the income received, which passes to the residuary legatees, which are corporations of the character described, and the other would not. We are thus brought to a consideration of |