Docket No. 36044.
Henry W. Howard, Esq., for the petitioner. Dan S. Morrison, Esq., for the respondent.
Henry W. Howard, Esq., for the petitioner. Dan S. Morrison, Esq., for the respondent.
Upon the facts, held that the executors properly credited net income for the taxable year to the beneficiaries and are, therefore, entitled to deduct such credits under section 162(c), Internal Revenue Code, Estate of Andrew J. Igoe, 6 T.C. 639.
The Commissioner determined a deficiency in income tax for the fiscal year ended January 31, 1948, in the amount of $25,489.24.
The sole issue is whether the executors properly credited net income for the fiscal year ended January 31, 1948, to beneficiaries so as to be entitled to deductions under section 162(c), Internal Revenue Code.
FINDINGS OF FACT.
The stipulated facts are so found and the stipulations are incorporated herein by this reference.
The petitioner is a duly qualified and acting coexecutor of the estate of John Fossett, deceased. The income tax return of the estate for the taxable year was filed with the collector for the district of Nevada at Reno.
John Fossett died testate, a resident of Reno, Nevada, on February 7, 1947. His last will and testament was admitted to probate on February 24, 1947, in the Second Judicial District Court for the State of Nevada in and for the County of Washoe. Petitioner and Orr M. Chenoweth were named in the will as executors; letters testamentary were issued to them as coexecutors. They posted a bond in the amount of $25,000 in the Nevada District Court, and they also posted a bond for $25,000 in the Superior Court of the State of California, in and for the County of Shasta.
The pertinent provisions of the will of the decedent are as follows:
Fourth: My said Executors shall continue, and said Executors are hereby given authority and direction to continue, my lumber business, without the necessity of any order of Court and until the same can be advantageously wound up and terminated.
Fifth: I give, devise and bequeath all of my property and estate to my brother, William R. Fossett, and his daughter, Sue Ann Fossett, and son, William R. Fossett, Jr., in equal shares that is to say one-third (1/3) thereof to each.
The decedent's will is silent as to the disposition of income earned during administration of the estate.
On April 10, 1947, the Nevada court having jurisdiction over the estate entered its order authorizing the executors to continue the operation of the business of the decedent. Notice to creditors to file claims against the estate was duly published, as is required by Nevada law. Also, the notice to creditors was duly filed with the court. The time for the filing of claims against the estate expired May 24, 1947.
Decedent had been engaged in the lumber business and, in connection therewith, owned interests in several lumber mills in California and numerous contracts for timber delivery. Such lumber interests constituted most of the assets of decedent's estate.
Under the court order petitioner and his coexecutor assumed management and control of decedent's business and gradually started to liquidate the business and reduce the decedent's assets to cash.
Books of account for the estate were set up by a public accountant of Sacramento, California, who had audited and maintained decedent's books since 1940. They contained all transactions involving the estate, including the business transactions.
For the first fiscal year February 7, 1947, to January 31, 1948, a net profit in the amount of $53,227.06 was realized. The executors instructed the accountant for the estate to credit the earnings of the estate to the beneficiaries. In accordance with this direction a separate account was set up in the journal for each of the beneficiaries and one-third of the $53,227.06 was credited to each of these accounts as follows:
TABULAR OR GRAPHIC MATERIAL SET AT THIS POINT IS NOT DISPLAYABLE (TABLE OMITTED)
These entries were made on March 22, 1948, when the books of the estate for the fiscal year ending January 31, 1948, were closed.
By the end of that fiscal year all the debts of the decedent had been paid and the time for filing claims of creditors against the estate had expired. Two lawsuits were, however, still pending against the estate. The first was a breach of contracts action for $186,000. The executors, who were both attorneys, estimated its maximum potential liability of between $25,000 and $35,000. The suit was actually settled on August 13, 1948, by a payment of $30,000. Another suit which had been brought against the decedent in his lifetime alleged that certain interests which decedent had in a sawmill had been obtained by fraud. The suit was still pending at the time of the trial of this case, but the executors understood the claim to be one of minor concern to the estate because of the financial condition of the estate.
A condensed balance sheet of the estate as of January 31, 1948, showed total assets in the amount of $524,825.24. Included in this was cash in the amount of $218,122.80. Liabilities amounted to $156,601.37, which amount included the $53,227.06, which had been credited to the heirs and was carried in the statement as ‘payable to heirs.‘
Early in February 1948, William R. Fossett, one of the beneficiaries under decedent's will and the guardian of the other two who were then minors, came to Reno, Nevada, from his home in Shreveport, Louisiana, to confer with the executors. The executors told Fossett that the net income of the estate for the fiscal year ending January 31, 1948, was being credited to and set aside for the three heirs of the estate and would be available to them on demand. The executors asked Fossett to give them instructions to cover the disposition of these funds. In the early part of 1949, the executors paid each of the beneficiaries the amounts credited to them and the appropriate debit entries were made in the books of the estate offsetting the credits.
After his conference with petitioner, Fossett went to Sacramento where he consulted with the accountant, who confirmed the executors' instructions and advised him that the earnings of the estate were available to the beneficiaries of the estate.
On February 6, 1953, the Nevada District Court for Washoe County issued its order approving the credits made upon the books of account of the estate to the accounts of the beneficiaries thereof, as well as the distributions which were made in accordance with the credits. The court found ‘that there was at all times sufficient property in said Estate to enable the executors to properly credit, pay over, or distribute the net earnings from the business carried on by the executors on behalf of said estate‘ at the close of the fiscal year ended January 31, 1948.
A fiduciary income tax return for the fiscal year ending January 31, 1948, was filed by the estate. The return showed taxable net income in the amount of $50,197.06, consisting of $47,036.12 income, plus $3,160.94, representing the taxable portion of net capital gains of $6,190.94. A deduction of the same amount was claimed under the column ‘amount distributable to beneficiaries.‘
During the year the estate realized gain (or loss) on the sale of capital assets as follows:Short term capital gain . . . . . $267.74Short term capital loss . . . . . (136.80)Long term capital gains ($6,060) 50 per cent taxable . . . . . 3,030.00Total . . . . . $3,160.94The amount deducted for each beneficiary and reported by each beneficiary was one-third of the $47,036.12 and one-third of the $3,160.94, making a total of $16,732.36 for William Fossett and $16,732.35 for the other two beneficiaries.
Individual Federal income tax returns for the year 1948 were filed by each of the beneficiaries in which each included the entire amount of the income credited to him upon the estate's books. Each paid the full amount of tax reported on each return.
In his notice of deficiency, the Commissioner determined that all of the income of the estate for the fiscal year ended January 31, 1948, was taxable to the estate and he disallowed the deductions claimed in the fiduciary return under section 162(c) of the Code, as amounts which were not properly paid or credited to the beneficiaries during the taxable year.
The entries on the books of the estate crediting income to the beneficiaries in accounts set up in their respective names constituted an inter partes account. The net income of the estate for the fiscal year ended January 31, 1948, was properly credited to the beneficiaries within the requirements and intent of section 162(c).
The sole issue is whether the executors properly credited during the taxable year the net income of the estate to the legatees and beneficiaries of the estate within the requirements of section 162(c), Internal Revenue Code.
SEC. 162. NET INCOME.(c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, * * * 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.
The respondent admits that the crediting to the beneficiaries occurred within 65 days after the close of the taxable year of the estate and, therefore, falls within the purview of section 162(d)(3)(A), which provides that amounts paid or credited within 65 days after the close of the taxable year shall be deemed to have been paid or credited upon the last day of such year. The parties are not in dispute about the amounts of net income of the estate and of capital gains for the taxable year. Petitioner concedes that respondent did not err in making an adjustment in the net income of the estate by treating an item as a capital expense and allowing depreciation therefor, rather than allowing petitioner to deduct the total cost of the item as a business expense. This adjustment resulted in additional income of the estate in the amount of $557.55.
The petitioner relies upon Estate of Andrew J. Igoe, 6 T.C. 639. There, as in the instant case, amounts were credited to the account of each beneficiary on the books of the estate with the full knowledge and consent of the beneficiaries who reported such amounts on their income tax returns. These amounts were readily available to the beneficiaries at all times. The time for filing by creditors of the estate had expired. Also, in the Igoe case, the distributions were approved by decrees of the proper court several years after distributions were made. There, as here, lawsuits were pending against the estate. In the Igoe case, we stated at page 647, that ‘under the facts and circumstances of record, the entry of the income and its availability upon demand constituted, in effect, an 'account stated’ between the petitioners and each beneficiary.‘
Whether income is properly paid or credited within the purview of section 162(c) is primarily a fact question. Respondent argues, first, that petitioner has failed to establish that under the Nevada law, the estate's income for the taxable year constituted distributable income. Respondent contends also that the administration had not progressed to a point where it had income which properly could be distributed.
Upon the entire record in this proceeding, we hold that the executors properly credited the net income of the estate for the taxable year to the three beneficiaries. The Nevada court having jurisdiction over the administration of the estate has approved the distributions. The evidence, as a whole, shows that the estate was in a condition to make distribution of the net income for the year in question. All of the indebtedness of the estate had been paid. The estate was in a liquid condition. Its assets amounted to $524,825.24, of which cash amounted to $218,122.80. We are satisfied from the record that the administration of the estate had progressed to a point where distribution of the estate income for the taxable year was proper. The facts in this case are substantially the same as in the Igoe case and it is concluded that the same result should be reached here. The authorities cited by respondent are distinguishable on their facts, namely, Commissioner v. Stearns, 65 F.2d 371, certiorari denied 290 U.S. 670; Estate of Isadore Zellerbach, 9 T.C. 89; and Estate of B. Brasley Cohen, 8 T.C. 784.
In computing the amount of the net income for the estate for the taxable year which was available for distribution, the executors included capital gain in the amount of $6,190.94 realized from the sale of property. Whether or not it was proper for the executors to credit this capital gain to the beneficiaries along with the business income of the estate depends upon the decedent's will and the provisions of Nevada law. The decedent's will did not direct the executors to add capital gain to the principal of the estate. The respondent has failed to cite any provision of Nevada law or decision of Nevada courts which requires that capital gains be added to the principal of the estate. Furthermore, the respondent, on brief, has not seriously dealt with the question. On the other hand, the petitioner relies on G.C.M. 22034, 1940-1 C.B. 90, where it was held that distributions to beneficiaries of income and gains from sales of capital assets were deductible by the estate under section 162(c) as ‘properly paid‘ where the income was sufficient to cover the distributions and neither the will nor state law required that capital gains be added to principal. Upon the record in this proceeding, we hold that the executors did not err in crediting and distributing the capital gain in question to the beneficiaries.
The executors have abandoned an issue raised in the petition by which claim was made for a bad debt less deduction.
Since petitioner concedes that respondent properly increased the estate's income to the extent of $557.55, as set forth above, recomputation under Rule 50 is necessary.
Decision will be entered under Rule 50.