Comm'r of Internal Revenue

This case is not covered by Casetext's citator
Tax Court of the United States.Jan 5, 1951
16 T.C. 1 (U.S.T.C. 1951)

Docket No. 23259.



Whitfield H. Marshall, Esq., for the petitioner. F. S. Gettle, Esq., for the respondent.

Where the petitioner, a resident of Texas, was both independent executrix and sole beneficiary under the decedent's will and the decedent's estate was not subject to and its administration was not being continued pursuant to to the orders of the local probate court, held that when the estate ceased to be in the process of administration or settlement for Federal tax purposes must be determined from all material facts. Held, further, that in the instant case the period of administration of the decedent's estate was terminated some time prior to December 31, 1941. Whitfield H. Marshall, Esq., for the petitioner. F. S. Gettle, Esq., for the respondent.

The Commissioner has determined deficiencies in petitioner's income tax for the taxable years ending December 31, 1943, 1944, and 1945 in the amounts of $48,992.18, $64,082.01, and $127,626.15, respectively.

The sole issue is whether the estate of C. Jim Stewart was in the process of administration during the years 1942 to 1945, inclusive, so that the income reported by the estate in such years was taxable to it rather than to the beneficiary, the petitioner herein. The taxable year 1942 is involved herein due to the provisions of the forgiveness feature of the Current Tax Payment Act of 1943.

This proceeding has been submitted upon the pleadings, oral testimony, and a stipulation of facts, including exhibits.


Petitioner, Josephine Stewart, a resident of Houston, Texas, filed income tax returns for the taxable years involved with the collector of internal revenue for the first district of Texas.

Petitioner is the widow of C. Jim Stewart, hereinafter referred to as the decedent, who died on May 22, 1938, leaving a will which provided in part as follows:

Article III

Upon the death of either of us, whichever may first occur, it is our will that the survivor of us shall take under this will as the sole legatee of the one dying first, and we each will, devise and bequeath to the survivor of us, all of our property real and personal, of every kind and character and wheresoever situated, in fee simple and without reservation, subject only to the payment of our debts as hereinabove provided for.

Article IV

(b) Upon the death of the survivor of us, and after setting aside to our daughter, Aline Stewart Langham the property hereinabove specifically willed to her, we then give, will bequeath and devise all of the rest or residue of our property real or personal and then belonging to the survivor of us, to our son, Ross Stewart and Aline Stewart Langham in equal proportions, share and share alike.

At the date of decedent's death the petitioner was approximately 63 years of age.

At the time of his death and for many years prior thereto, decedent was a member of the partnership of C. Jim Stewart & Stevenson (hereinafter referred to as the partnership) located in Houston, Texas. Decedent, at the time of his death and for many years prior thereto, was also a member of the partnership of C. Jim Stewart & J. R. Stevenson. The latter partnership owned real estate which it leased to the C. Jim Stewart & Stevenson partnership. The income from the C. Jim Stewart & J. R. Stevenson partnership is not in dispute in this proceeding.

At the time of decedent's death, the partnership was operating under an agreement dated January 2, 1935, between decedent, J. R. Stevenson, and Ross Stewart whose interests in the partnership were 41.87 per cent, 41.87 per cent, and 16.26 per cent, respectively. Ross Stewart, son of the petitioner, had been general manager of the partnership since 1927. The aforesaid partnership agreement provided, in part, as follows:


Said partnership shall continue (unless sooner terminated as provided herein) until five years after the date of the death of the first to die of the parties hereto.


Upon the death of any partner during the term of the partnership, such partnership shall not be deemed dissolved thereupon but the personal representative of the partner so dying shall immediately succeed to his interest in the partnership and shall stand in his place with respect to the said deceased partner's share and profits in the business of the partnership during the remainder of the term of the partnership hereby formed, and such personal representative shall have the same rights and powers (except as to controlling the partnership business and the management of its affairs) and shall be subject to the same duties and liabilities as the deceased partner would have possessed and would have been subject to but for his death.

All of the parties hereto bind themselves to provide by will, duly executed, for the continuance of this partnership for the term thereof and to authorize and direct their respective executors, severally, to do all and every act needful therefor.

Further in this behalf it is provided that in the event of the death of any partner, the law in relation to surviving partners is waived and the business shall continue to be carried on the same as if such death had not occurred until the expiration of the term of the partnership, and no part of the capital of the partnership shall be withdrawn by any administrator, executor, heirs or legatees, or other personal representatives, and while the affairs of the partnership are so conducted the then surviving partners (whose voice in the management and control of the business shall upon the death of any partner become equal) shall have full right of control and management of the partnership affairs, and the surviving heirs of the deceased partner or his legal representative shall have no voice in determining the policies or affairs of the partnership or its affairs (sic); provided that should such interest of the decedent be required to pay his debts in course of lawful administration, then there shall be a withdrawal only, and upon such terms as the remaining members of the firm and such administrator, executor, heirs, legatees and personal representative may agree upon, of such capital, with profits already accured (sic), over and above ascertained and probable losses, but in no case shall there be a sale of such interest in the partnership.

The foregoing provision continuing the partnership and the interest of a deceased partner therein for 5 years, with control vested in the surviving partners, was inserted at the instance of decedent to avoid the possibility of having to take a deceased partner's widow into the partnership with the consequent danger of hampering the operation of the business and the orderly liquidation of the deceased partner's interest in the firm.

In accordance with the provisions of the partnership agreement, decedent executed a codicil to the joint will which contained the following provision:

Item I.

Under date of January 2, 1935 I have entered into a written partnership agreement with J. R. Stevenson and Ross Stewart which, among other things, provides that said partnership shall continue until five (5) years after the date of the death of the first to die of the parties to said partnership agreement. It is my will and I so direct that if I should die prior to the end of the term of said partnership agreement, said partnership shall, nevertheless, continue for the term or period provided in said partnership agreement, subject to the terms and upon the condition as provided in said partnership agreement (subject, of course, to the right of termination of the partnership by unanimous consent and agreement of all of the then partners), and my executors shall do each and everything necessary and proper for the accomplishment of the matters and things directed in this Item I, of this codicil.

Item II

During the continuance of said partnership after my death it is my will and I so direct that the control and management of the said partnership and its business shall be vested in the surviving partner or partners, and that my executors and the beneficiaries under my will shall cooperate in every way possible with the surviving partner or partners in the carrying on of said partnership and its business.

Decedent's will and codicil referred to above were duly probated in the County Court of Harris County, Texas, shortly after his death, and petitioner was duly appointed and qualified as independent executrix of his estate. Petitioner thereupon proceeded upon the administration of the estate and the partnership continued in the regular course of its business, with the estate continuing therein as provided in the partnership agreement and in decedent's will and codicil but with control of the business vested in J. R. Stevenson and Ross Stewart, the surviving partners.

On April 12, 1939, petitioner, as executrix of the estate, filed the inventory and appraisement thereof with the County Court of Harris County, Texas. The total claims against the estate of C. Jim Stewart, exclusive of partnership indebtedness, amounted to $9,100.95, of which amount the sum of $2,100.95, consisting principally of funeral expenses, expenses of last illness, and income and ad valorem taxes, was paid by the executrix by December 31, 1938. The remaining $7,000 represented one-half of the principal amount of a note secured by deed of trust on real estate owned by decedent and J. R. Stevenson. Petitioner's inventory and appraisement described the real estate and stated:

This property is subject to encumbrance of approximately $14,000.00, said one-half interest being appraised at $14,234.75.

This indebtedness was paid in installments over the period from 1938 to 1945, final payment being made in 1945.

A Texas state inheritance tax report for the estate showing a tax due of $98.39 was filed by the executrix in May 1939, and such tax was paid in june 1939. The Federal estate tax return was filed in August 1939, showing no tax due.

The partnership had been founded in 1903 and with the advent of the automobile the firm's business was developed in lines related thereto. By the time of C. Jim Stewart's death, the partnership was engaged in distributing trucks, merchandising automobile accessories and parts, building truck bodies, repairing automobiles and trucks, and other activities in the automotive field. At the time of decedent's death, the partnership's total assets were $144,902.10, its total liabilities were $29,329.59, and its net worth was $115,572.51. The liabilities of the partnership consisted of $26,248.41 in accounts payable, $2,342.64 in notes payable, and $738.54 in estimated taxes, all of which was liquidated and paid by December 31, 1941. Decedent's interest in the net worth of the firm (being the community property of decedent and petitioner) was reported by petitioner in her inventory and appraisement as $48,540.45. The partnership's average annual sales during the period 1936-1939 were $543,842.85 and its average annual net profit was $26,738.98.

In 1939, the partnership entered into a truck lease business and a distributorship of diesel engines, the development of which tied up a considerable amount of the firm's capital.

The partnership was a distributor for Duco products and also used them in its automobile painting department. In 1939, the manufacturers of Duco advised the partnership that under the terms of certain license agreements it could not sell the products and also use them in its paint shop and required the partnership to separate the two activities. Therefore, a Texas corporation, Stewart & Stevenson Distributing Company, was organized to which the partnership transferred its inventory of Duco products, such inventory being slightly less that 15 per cent of the partnership's then net worth. This inventory was not physically segregated from the other assets of the partnership. In the affidavit filed with the charter of the corporation, its capital stock was shown as subscribed and paid for as follows:

+-----------------------------------------------------------------------------+ ¦J.R. Stevenson ¦$10,500¦ +---------------------------------------------------------------------+-------¦ ¦Mrs. Josephine Stewart, Independent Executrix of the Estate of C. Jim¦10,500 ¦ ¦Stewart, deceased ¦ ¦ +---------------------------------------------------------------------+-------¦ ¦Ross Stewart ¦4,000 ¦ +---------------------------------------------------------------------+-------¦ ¦Total ¦$25,000¦ +-----------------------------------------------------------------------------+

The stock was issued to the persons and in the amounts set forth above except that the stock certificates issued to the petitioner were issued in the name of Josephine Stewart and did not designate her as the executrix of the estate.

From May 1942, until after the end of World War II, the partnership was engaged primarily in the performance of work connected with the war. These contracts involved the manufacture of machine gun barrel covers, the construction of diesel generator sets and diesel welding machines, the supplying of diesel engines, and the rebuilding of jeeps. The partnership's war work taxed its productive capacity and its financial resources far beyond anything theretofore experienced.

The growth of the business of the partnership after the death of decedent, and particularly after the beginning of the war, is shown by the following table:

+-------------------------------------------------------+ ¦ ¦ ¦Net profit ¦ +----------------------------+------------+-------------¦ ¦Period ¦Net sales ¦before ¦ +----------------------------+------------+-------------¦ ¦ ¦ ¦renegotiation¦ +----------------------------+------------+-------------¦ ¦12 months average, 1936-1939¦$543,842.85 ¦$26,738.98 ¦ +----------------------------+------------+-------------¦ ¦12 months ended 12-31-41 ¦755,275.80 ¦50,570.01 ¦ +----------------------------+------------+-------------¦ ¦12 months ended 12-31-42 ¦994,818.45 ¦128,788.12 ¦ +----------------------------+------------+-------------¦ ¦10 months ended 10-25-43 ¦1,866,346.01¦468,090.89 ¦ +----------------------------+------------+-------------¦ ¦8 months ended 6-30-44 ¦3,250,263.72¦657,155.36 ¦ +----------------------------+------------+-------------¦ ¦12 months ended 6-30-45 ¦6,878,550.59¦969,659.56 ¦ +----------------------------+------------+-------------¦ ¦12 months ended 6-30-46 ¦5,148,151.24¦587,226.80 ¦ +-------------------------------------------------------+

All of the partnership's war contracts were taken on a fixed price basis and the aggregate of such contracts amounted to $12,902,504.34. Some of the petitioner's contracts carried an 18-month warranty, and practically all of those carrying such warranties were for diesel driven generator sets for use in the Artic to be operated with an extremely low-grade fuel. General Motors corporation withdrew its manufacturer's warranty on the engines used in the generator sets because of their proposed use, and the partnership on its own account assumed full liability on the warranty.

Prior to the war, the partnership financed its operations by securing credit from its suppliers and its bank. Upon obtaining its first large war contracts in 1942, the partnership arranged for a line of credit with its bank for $100,000 and in 1943 secured in increase of this line to $200,000. During 1942 and 1943 the partnership was able to hold down its fixed liabilities by liquidating a large part of its older inventory and by completing its smaller war contracts.

By the end of 1943, the partnership, having acquired a contract of over $3,000,000, entered into a special loan agreement with The Union National Bank of Houston, dated January 21, 1944, under which the bank committed itself to lend the firm up to $850,000 in connection with its performance of war contracts. This agreement was replaced by another on February 29, 1944, carrying the same commitment, and the firm's borrowings thereunder reached $750,000 in March 1944.

On January 15, 1945, the partnership entered into another loan agreement with The Union National Bank of Houston providing for financing to the extent of $1,000,000. Under this agreement and instruments supplementing and extending it, loans were made which reached $700,000 in April, May, and June 1945.

All of the instruments referred to in the two preceding paragraphs described the partnership as including ‘Mrs. Josephine Stewart, individually and in her capacity as Independent Executrix of the estate of C. Jim Stewart, deceased, ‘ and were signed by petitioner in that form.

The partnership's profits on war contracts were subject to adjustment under the Renegotiation Act, and pursuant to renegotiation under such Act contracts were entered into between the partnership and appropriate agencies of the United States, fixing the firm's renegotiation liabilities as follows:

+----------------------------------------------------+ ¦ ¦Date of ¦ ¦ +----------------------------+-------------+---------¦ ¦Fiscal period of partnership¦renegotiation¦Amount of¦ +----------------------------+-------------+---------¦ ¦ ¦agreement ¦liability¦ +----------------------------+-------------+---------¦ ¦1-1-42 to 12-31-42 ¦12-20-43 ¦$8,000 ¦ +----------------------------+-------------+---------¦ ¦1-1-43 to 10-25-43 ¦5-23-45 ¦200,000 ¦ +----------------------------+-------------+---------¦ ¦10-26-43 to 6-30-44 ¦4-12-46 ¦250,000 ¦ +----------------------------+-------------+---------¦ ¦7-1-44 to 6-30-45 ¦12-3-46 ¦150,000 ¦ +----------------------------------------------------+

In May 1943, the end of the 5-year period specified for the continuance of the decedent's interest in the partnership, the partnership's direct liabilities on accounts payable and notes were $40,942.98 and $111,349.11, respectively, and its contingent liabilities under the 18-month warranty on Government contracts totaled $1,805,668.19. By the end of 1943, its direct liabilities on accounts payable and notes, and its contingent liabilities on warranties had risen to $122,327.09, $125,000, and $5,418,285.34, respectively. Petitioner's liabilities, direct and contingent, rose to their highest point in April 1945, when its liabilities on accounts payable and notes, and its contingent liabilities on warranties were $216,096.82, $700,000, and $7,911,445.80, respectively. At the end of 1945, petitioner's liabilities had fallen off to approximately $3,000,000 consisting of accounts payable, and contingent liabilities on warranties in the amounts of $128,442.43 and $2,535,779.64 respectively.

During 1943, Donald Stevenson, son of J. R. Stevenson, was released by the Army from his position as a civilian instructor in the maintenance of tank destroyer units in order to enable him to return to the partnership which needed his services in connection with its war production work. On October 25, 1943, Donald Stevenson was admitted as a partner under an agreement dated November 4, 1943, which fixed the respective interests of the parties in the partnership property and in its profits and losses as follows:

+-----------------------------------------------------------------------------+ ¦ ¦Per cent ¦ +------------------------------------------------------------------+----------¦ ¦J. R. Stevenson ¦34 ¦ +------------------------------------------------------------------+----------¦ ¦Ross Stewart ¦16 ¦ +------------------------------------------------------------------+----------¦ ¦Mrs. Josephine Stewart, individually and in her capacity as ¦34 ¦ ¦Independent Executrix of the estate of C. Jim Stewart, deceased ¦ ¦ +------------------------------------------------------------------+----------¦ ¦Donald Stevenson ¦16 ¦ +-----------------------------------------------------------------------------+

No property was withdrawn from the partnership by this agreement, and its only effect was to continue the business of the firm and to reduce the interest of J. R. Stevenson, Ross Stewart, and the decedent and to provide Donald Stevenson with an interest in the firm. The decedent's interest remained in the partnership precisely as before, with control vested in J. R. Stevenson, Ross Stewart, and Donald Stevenson. The reduction of the decedent's interest in the firm was assented to, by joinder in the execution of the contract for that purpose, by petitioner in her individual capacity and as executrix of the estate of C. Jim Stewart and by Ross Stewart and Aileen (Aline) Stewart Langham.

Prior to 1943, the income from the decedent's interest in the partnership, having being community property of decedent and petitioner, was treated as being one-half the income of the estate and one-half the income of the petitioner. Accordingly, on the partnership's return for 1941 and on its original return for 1942, in the schedule of partners' distributive shares of income, the decedent's interest in the partnership income was attributed one-half to the estate and one-half to petitioner, and income from the partnership was reported in that manner on returns filed by the estate and by petitioner. In February 1943, an Internal Revenue Agent made an examination and report on the year 1941 in which he ruled that all of the income from the decedent's interest in the partnership (including petitioner's community interest therein) was income of the estate, and none of it was petitioner's income. Acceding to this position, in an amended partnership return for 1942 prepared by the firm's independent public accountants, the distributive share schedule of the return was changed to eliminate petitioner and to show all of the income from the interest in question as attributable to the estate. This method was also followed on returns filed for subsequent years.

At the end of each fiscal year of the partnership during the period here involved, the decedent's share of the partnership income was credited to the estate's account on the partnership books. Thereupon, approximately one-half of the amount of the estate's share of partnership income would be distributed by the partnership to petitioner individually, and reported by her as her individual income in her Federal income tax returns. Such distributions were accomplished by the partnership's giving petitioner a check in the appropriate amount and which was charged to the estate's account. Petitioner would immediately advance to the partnership an amount which was ordinarily identical with the amount distributed to her. Thereafter, the partnership would pay petitioner's income taxes, advance her funds for living expenses, etc., and the payments thus made to petitioner or for her account would be charged against the advances made by her to the partnership.

This method of crediting the estate for its share of the partnership's income and the method of making disbursements to petitioner was effected by Ross Stewart with the advice of the partnership's firm of certified public accountants. Petitioner was not consulted in regard to these matters.

The total amounts paid out by the partnership for petitioner's account during each of the years here involved were as follows:

+----------------------------------+ ¦Year¦For income tax¦For living ¦ +----+--------------+--------------¦ ¦ ¦ ¦expenses, etc.¦ +----+--------------+--------------¦ ¦1942¦$1,758.65 ¦$5,629.53 ¦ +----+--------------+--------------¦ ¦1943¦22,436.07 ¦7,577.06 ¦ +----+--------------+--------------¦ ¦1944¦37,288.12 ¦34,481.97 ¦ +----+--------------+--------------¦ ¦1945¦149,615.36 ¦13,752.76 ¦ +----------------------------------+

The amounts withdrawn from the partnership by J. R. Stevenson, Ross Stewart and Donald Stevenson during the period in question were as follows:

+-----------------------------------------------------------------------------+ ¦Period ¦Purpose ¦J. R. Stevenson¦Ross Stewart¦Donald Stevenson¦ +--------------------+----------+---------------+------------+----------------¦ ¦10 months to 10/24/ ¦Income tax¦$15,983.62 ¦$4,074.94 ¦Not a partner ¦ ¦43 ¦ ¦ ¦ ¦ ¦ +--------------------+----------+---------------+------------+----------------¦ ¦ ¦Other ¦13,148.27 ¦9,296.22 ¦ ¦ +--------------------+----------+---------------+------------+----------------¦ ¦8 months to 6/30/44 ¦Income tax¦99,262.92 ¦27,969.76 ¦$5,400.00 ¦ +--------------------+----------+---------------+------------+----------------¦ ¦ ¦Other ¦7,672.61 ¦9,667.80 ¦7,208.83 ¦ +--------------------+----------+---------------+------------+----------------¦ ¦12 months to 6/30/45¦Income tax¦220,803.34 ¦78,756.16 ¦65,406.78 ¦ +--------------------+----------+---------------+------------+----------------¦ ¦ ¦Other ¦35,584.49 ¦11,309.58 ¦18,094.17 ¦ +-----------------------------------------------------------------------------+

Net profits of the partnership for these three periods, after renegotiation of war contracts, were, respectively, $268,090.89, $407,155.36, and $819,659.56.

By some time in 1947 the liabilities of the partnership arising out of its war contracts and on account of renegotiation had either been liquidated or could reasonably be determined. As war contracts were liquidated, partnership funds were placed in Government bonds, and in September 1947 a corporation was formed to which the remaining operating assets of the partnership were transferred, the stock being issued to the partnership. The business of the firm was then down to between a half and a fourth of what it had been during the war years, and only about $200,000 of partnership assets were placed in the corporation. The rest of its assets, consisting of Government bonds, were retained in the partnership which thereafter was in inactive organization.

In 1947 the partnership changed the title of the account marked ‘Estate‘ to ‘Mrs. Josephine Stewart.‘

The estate of C. Jim Stewart was not in administration after December 31, 1941.



The deficiencies herein arise from the respondent's determination that the administration of the estate of C. Jim Stewart was concluded prior to the taxable year 1942 within the meaning of Regulations 111, section 29.162-1 and, therefore, the income received and reported by the estate during the taxable years 1942 to 1945, inclusive, was properly taxable to the beneficiary, the petitioner herein.

Regulations 111:Sec. 29.162-1. INCOME OF ESTATES AND TRUSTS.— * * *The income of an estate of a deceased person, as dealt with in the Internal Revenue Code, is therein described as received by the estate during the period of administration or settlement thereof. The period of administration or settlement of the estate is the period required by the executor or administrator to perform the ordinary duties pertaining to administration, in particular the collection of assets and the payment of debts and legacies. It is the time actually required for this purpose, whether longer or shorter than the period specified in the local statute for the settlement of estates.

The validity of the Regulations relied upon by the Commissioner has been recognized in Frederich v. Commissioner, 145 Fed(2d) 796 (CA-5), and in Chick v. Commissioner, 166 Fed.(2d) 337 (CA-1). The principal issue involved in both cases concerned the extent of the authority vested in the Commissioner and this Court to determine when the administration of a decedent's estate has been concluded for Federal tax purposes. In Frederich v. Commissioner, supra, it was held that an estate is to be considered as being in administration during the time actually required by the executor or administrator to settle its affairs and that the valid orders of local probate courts in respect to the continuance of administration are binding upon both the Commissioner and this Court. In Chick v. Commissioner, supra, it was held that Congress can, and in the interest of a uniform system of Federal taxation did, clothe the Commissioner and the Tax Court with the power to determine, in the absence of conflicting valid affirmative action by the state court having jurisdiction in the premises, when an estate has ceased to be in the process of administration or settlement and has ceased to exist for income tax purposes on the basis of actual performance of ordinary duties of administration.

We think it appropriate at the outset to explain why we believe the the facts of the instant case are distinguishable in at least two material respects from the facts of the cases discussed above and require us to base our decision herein primarily upon the petitioner's conduct in handling the assets of the estate. The estate herein was not subject to the jurisdiction of a local probate court as in Chick v. Commissioner, supra, nor was it being continued in administration pursuant to the order of a local probate court as was the case in Frederich v. Commissioner, supra. Petitioner occupied the position of an independent executrix and after she had complied with the statute by probating and recording the decedent's will and by filing an inventory, an appraisement and a list of claims of the estate, she acted directly under the powers granted to her by the will and without further interference by the probate court. See 34 C.J.S. 1349; Simkins, Administration of Estates in Texas (3d ed.),sec. 128, pp. 170,171. As independent executrix she had the authority to close the administration of the estate and surrender all or any portion of its assets to the heirs or devisees without the formality of judicial sanction. Nor was she required to make a formal report. Parks v. Knox, 61 Tex.Civ.App. 493, 130 S.W. 201; Leach v. Leach (Civ. App.) 208 S.W.(2D) 618.

Moreover, the petitioner had virtually complete authority to deal with the estate as she saw fit for in addition to the wide powers she enjoyed as an independent executrix she was also the sole beneficiary under the decedent's will. Thus, the petitioner, unlike the executors in Frederich v. Commissioner, and Chick v. Commissioner, supra, was able to administer the decedent's estate without the interference of a probate court and at all times possessed the right to settle the estate with herself as the sole beneficiary without judicial sanction or the filing of a final report.

There is some question as to whether the petitioner was anything more than the life beneficiary of certain property specifically willed to her daughter, Aileen (Aline) Stewart Langham.

Turning to the facts in the instant case, we find that petitioner filed decedent's will and duly qualified as independent executrix shortly after decedent's death on May 22, 1938. On April 12, 1939, she filed her inventory and appraisement of the estate which was approved by the county court on the same date. Prior to December 31, 1938, petitioner had paid all claims against the estate with the exception of $7,000, representing one-half of the principal amount of a note secured by a deed of trust on real property owned by the decedent and J. R. Stevenson. The appraisal filed by petitioner listed the value of the decedent's one-half interest in this property at $14,234.75 which was in excess of the total amount of the note. If this indebtedness was in fact an obligation of the estate, there appears to have been no good reason for petitioner's having allowed this one remaining liability to go unsatisfied other than possibly to meet the convenience of J. R. Stevenson, decedent's co-owner. In any event, it is clear that the decedent's obligation on this note was not of a character to require a continuation of administration and a postponement of settlement and distribution of the estate. The only practical accomplishment of administration which could have been expected in the instant case was the payment of the unsecured debts of the estate, for the petitioner in her dual capacity as independent executrix and sole beneficiary had no one to satisfy or to deal with other than the creditors of the estate and herself. In fact, there was no necessity of disposing of the realty in question or to use the other assets of the estate to discharge the note inasmuch as the holder of the note was amply secured by the deed of trust and the property was readily distributable subject to the indebtedness. Therefore, the petitioner's satisfaction of this note by regular installments from 1938 to 1945 did not, in our opinion, constitute one of her administrative duties as independent executrix.

In fact, we can find no ordinary or extraordinary administrative duties thereafter required of the petitioner. Although the partnership agreement and the will provided for the continuation of the partnership for a 5-year period after the decedent's death, we do not understand those instruments to require that administration be continued for that period. In any event, there is ample evidence of conduct on the part of petitioner which we regard as inconsistent with her contention that administration lasted beyond the time determined by the respondent.

As early as 1939 petitioner assented as to the transfer of approximately 15 per cent of the partnership assets to a corporation formed to take over the partnership's Duco distributing business. Even though this action was in the interest of the partnership as such, it can hardly be regarded as a step in the orderly administration of the estate. Nor do we think that the full right of management and control vested in the surviving partners by the partnership agreement or the authority granted the petitioner to continue the interest of the estate in a partnership for 5 years required or empowered the petitioner as executrix to assent to such a far-reaching change in the character of the estate's assets. Petitioner's participation in the transfer of assets of the partnership to a corporation was certainly not pursuant to any express grant contained in the will and, coming as it did after the completion of all ordinary administrative duties, indicates to us that she could not have seriously regarded the estate as then being in the process of administration. The fact that the shares in the newly formed corporation were issued to her in her individual name rather than as executrix is not without significance.

In October 1943 petitioner consented to a reduction of approximately 8 per cent in what had been decedent's interest in the partnership in order to permit the admission of Donald Stevenson as a partner. It hardly seems within the scope of an executrix's authority to give up so important a part of a decedent's estate without consideration. A more reasonable interpretation of petitioner's conduct is that she believed her administrative responsibility had ended and that she was free to deal as she wished with the assets of the estate as the sole beneficiary.

Furthermore, during the taxable years the distribution of income attributable to the decedent's interest in the partnership was handled in such a manner as to disregard the separateness of the estate from the petitioner as beneficiary and to further a calculated plan for employing the estate as a device to minimize income taxes. In each year the share of partnership income which was payable in respect to the decedent's interest was duly credited to the estate's account on the partnership books. However, no distribution was made to the estate but instead one-half of the amount so credited to the estate was distributed directly to the petitioner. The restrictions contained in the partnership agreement as to withdrawal of partnership funds by the personal representative or the heirs or legatees of the decedent applied only to partnership capital and we know of no good reason for the parties' conduct in eliminating the estate from its rightful participation in the distribution of partnership income unless it was honestly believed that administration of the estate had already been completed.

Moreover, the distribution of exactly one-half of the income in each year directly to the petitioner individually, without regard to her personal needs, and her subsequent reimbursement of the same amount to the partnership is further evidence that the sole purpose of holding the estate open was to attempt to divide the total income for Federal tax purposes, as a distribution of all the income to either the estate or the petitioner as beneficiary would have resulted in a greater overall tax than splitting it equally between the two. The superficiality of the arrangement is further demonstrated by the total lack of any explanation as to what if any recognition was given to the petitioner by the partnership for the funds she later returned to the business. In our opinion, this evidence clearly demonstrates the lack of any necessity or reality for the petitioner's purported continuance of administration during the taxable years in question.

We think it is particularly significant that the petitioner allowed the decedent's interest to remain in the partnership after May 22, 1943, the termination date provided for in the partnership agreement of January 2, 1935, when it certainly must have been clear to all concerned that in so doing she was not acting in her administrative capacity as executrix or within her authority under the decedent's will.

Ordinarily a partnership is dissolved by operation of law upon the death of a member. Mary D. Walsh, 7 T.C. 205; Charles F. Coates, 7 T.C. 125. An exception to this rule exists where the articles of partnership and the will authorize the estate to continue the decedent's interest in a partnership. The need of express authority in the will is as necessary in the case of an independent executor as it is in the case of an ordinary executor. Altgelt v. Sullivan & Co. (Civ. App.) 79 S.W. 333; Altgelt v. Alamo Nat. Bank, 98 Tex. 252, 83 S.W. 6; Simkins, supra, sec. 135.

The rule stated in Simkins, administration of Estates in Texas (3d ed.), sec. 135, p. 182, in respect to this question is as follows:

In continuing the business of the testator, which includes a mercantile business, it is entirely within the discretion of the independent executor to determine whether it would be for the best interests of the estate to do so, and he is not responsible for losses unless he clearly has failed to exercise a reasonable discretion with the lights before him. However, a partnership business cannot be continued by him, unless the will specifically so provides. (Footnotes and citations omitted)

Petitioner had no authority to continue the estate in the partnership after May 22, 1943, even if, as petitioner contends, the estate was still in the process of administration at that time. On that date, the partnership established by the partnership agreement of January 2, 1935, terminated and any partnership which continued thereafter had to be a new partnership. The fact that petitioner considered that she had the authority to permit the decedent's interest to be carried over into this new partnership indicated to us that she must have believed that administration of the decedent's estate had been completed at some time prior thereto and that she had some source of authority other than that granted by decedent's will.

Petitioner puts great stress upon the business necessity for the estate's interest remaining in the business throughout the war years when the partnership had assumed the responsibility for completing large war contracts. We can readily understand why it was advantageous to all concerned that the partnership capital be left intact. However, we do not understand how the petitioner could better serve the partnership business by continuing the estate as a partner than by concluding administration and continuing the estate's interest in the partnership as its sole beneficiary. Cf. Chick v. Commissioner, supra. The partnership agreement and the will guaranteed the surviving partners wide discretion in the determination of business policies and management for a period of 5 years after the decedent's death and was binding upon the decedent's heirs and legatees as well as his personal representative. Thus the apprehension about a woman's interference in the partnership's business was unnecessary as the petitioner's winding up of the estate prior to the expiration of the 5-year period would not have permitted her to exercise any greater voice in partnership affairs than she already enjoyed as an independent executrix.

We think that petitioner's claims that business necessity prevented her from concluding the administration of the decedent's estate and withdrawing its interest from the partnership during the years in question loses much of its force in the light of events which occurred in 1947. Although the petitioner takes the position that the decedent's interest could not have been settled without its withdrawal from the partnership and a resulting impairment of partnership capital, the evidence shows that in 1947 the interest of the decedent and the other partners were effectively withdrawn from the partnership by transferring its operating assets to a corporation in exchange for stock. The partnership in which the estate purportedly remained a member retained assets consisting of Government bonds and was thereafter an inactive organization. According to our understanding of petitioner's arguments, the final administration of decedent's interest was then accomplished merely by changing the title of an account on the partnership books from ‘Estate‘ to ‘Mrs. Josephine Stewart.‘ Even should the argument be accepted that business necessity is material to a determination of the issue herein, we cannot understand why the same action taken by the parties to settle the decedent's interest in the partnership in 1947 could not have been carried out in the same fashion at any time prior to or during the taxable years in question.

Nor do we think that a decedent, by providing in his will that the period of administration of his estate will continue for a period of time unrelated to the performance of the ordinary duties of administration, may require the Commissioner or this Court to adopt his declaration for Federal tax purposes. It seems clear enough that taxpayers may not by private agreement between themselves, or by their own characterization of a transaction, or the nature of a business, bind the Commissioner and this Court as to tax matters arising therefrom and we see no good reason why, in determining when the period of administration has ceased for tax purposes, the terms of a decedent's will requiring that the period of administration remain open for reasons unrelated to the performance of the ordinary duties of administration should be controlling.

It is not necessary that we fix a specific date for the ending of the administration of the decedent's estate. An identifiable act or event such as a decree discharging an executor by a local probate court may not be found in the case of an independent executor. This is particularly true where the independent executor is also the sole beneficiary under the decedent's will. In fact, the petitioner herself does not attempt to cite any specific act or event occurring in 1947 as indicative of the final closing of administration.

The record in its entirety and particularly those facts we have discussed above showing an early completion of the ordinary administrative duties, conduct by the petitioner in respect to the estate's interest in the partnership inconsistent with her fiduciary capacity as executrix, the manner of handling of the estate's distributive share of partnership income, and the continuation of the estate's interest in the partnership after May 22, 1943, lead irresistibly to the conclusion that the administration of the estate of C. Jim Stewart was in fact completed and was so regarded by the interested parties at some time prior to the beginning of the taxable year 1942, as determined by the respondent. We so hold.

Decision will be entered for the respondent.