#### MAY McKINNEY AND WILLIAM AYER McKINNEY EXECUTORS OF THE ESTATE OF HENRY NELSON McKINNEY, DECEASED, v. THE UNITED STATES 1

[No. D-367.

Decided May 3, 1926]

*On the Proofs*

*Res adjudicata; suit against collector of internal reverme.*— Dismissal of a suit against a collector of internal revenue in a district court of the United States is not *res adjudicata*as to suit in the Court of Claims.

*Income tax; revenue act of 1918; value at testator’s death; sale t>y executors.*— Where a testator died April 28, 1918, and his executors sold shares of stock not specifically bequeathed by him for a sum less than he paid for them prior to March 1, 1913, but greater than their market value at time tf his death, there was no gain taxable as income under section 202 of the revenue act of 1918.

*The*RefortePs statement of the case:

*Mr. Alfred F. Mecldenburger*for the plaintiffs. *Messrs. William J. Dowd*and *Harry H. Femmes*were on the briefs.

*Mr. Alexander II. McOormiclc,*with whom was *Mr. Assistant Attorney General Herman J. Gallon*ay, for the defendant.

The court made special findings of fact, as follows:

I. The above-named May McKinney and William Ayer McKinney are citizens of the United States. The above-named Henry Nelson McKinney departed this life testate on the 28th day of April, 1918, and was at and before the time of his death a citizen of the United States. In and by the terms of his last will and testament, duly admitted to probate in the Surrogate Court at New York County, in the State of New York, on May 8, 1918, the plaintiffs, May McKinney and William Ayer McKinney, together with Helen Francis McKinney, were named executors, as more fully appears from the petition filed in this case and made a part of this finding by reference. Said Helen Francis McKinney waived her right to act as executrix and departed this life on De*181cember 29, 1918. The plaintiffs, May McKinney and William Ayer McKinney, accepted the trust imposed upon them by said last will and testament of Henry Nelson McKinney, deceased, and on May 8, 1918, were duly appointed and qualified as sole executors of the last will and testament of Henry Nelson McKinney, deceased, in and by the Surrogate Court aforesaid, and are now and ever since their appointment aforesaid have been such executors, as more fully and at large appears from the duly authenticated copy of the record of the appointment of the plaintiffs as such executors.

II. On the 14th day of March, 1919, and thereafter throughout the calendar year 1919, Julius F. Smietanka was the collector of internal revenue for the first collection district of Illinois.

III. The said May McKinney is and at all times hereinafter mentioned Avas a resident of the city of Philadelphia, in the State of Pennsylvania, and the said William Ayer McKinney is and at all times herein mentioned >vas a resident of Hubbard Woods, Village of Winnetka, Cook County, first collection district of Illinois, and in accordance AAÚtli the provisions of the revenue act of 1918 the said May McKinney and William Ayer McKinney filed their Federal income tax returns of the income of said estate during the period of administration with the said Julius F. Smietanka, collector of internal reA^enue, at the city of Chicago, being the district in which the plaintiff, William Ayer McKinney, resided.

IV. On March 15,1919, the said plaintiffs filed their tentative return as executors of the last will and testament of the said Henry Nelson McKinney, deceased, of the income of said estate for the period from April -28, 1918, to December 31, 1918, both dates inclusive, and oh September 15, 1919, said plaintiffs filed their return thereof with the said collec- > tor of internal revenue at Chicago, in the form contemplated by the regulations promulgated by the Commissioner of Internal Kevenue with the approval of the Secretary of the Treasury relating to the income tax under the revenue act of 1918 and an amended return on December 13, 1919.

V. The said plaintiffs, as such executors, in accordance with the aforesaid regulations, included in their amended return of December 13,1919, as income the difference between *182the actual market value as of April 28, 1918, the date of the above-mentioned testator’s death, of 4,800 shares of common stock of the General Asphalt Co. and the net amount for which these shares of stock were sold by them in their capacity as executors, which difference amounted to $93,111.75.

VI. By reason of the inclusion of the aforesaid item in the said amended return of December 13, 1919, the total net income to said estate for the said period from April 28,1918, to December 31, 1918, both dates inclusive, was shown thereby amounting to $100,781.99, that is to say, $90,605.24 subject to normal tax and $100,781.99 subject to surtax.

VII. The 4,800 shares of stock aforesaid were shares of General Asphalt Co., a New Jersey corporation. Said shares were held and owned by Henry Nelson McKinney as his sole and exclusive property at the date of his death. They were not specifically bequeathed by the said decedent in and by his last will and testament, but constituted a part of his estate which came into the hands of the plaintiffs as executors and were sold by them as such executors between May 8, 1918, and December 31, 1918, pursuant to due authority, at and for the net sum of $160,311.75. Out of said 4,800 shares 400 shares were sold at and for the net sum of $12,814 cash for the purpose of paying the debts of said decedent, and costs of administering said estate, there being no other funds available for that purpose, and 4,400 shares were sold for the net sum of $147,497.75 in cash. The actual market value of the aforementioned 4,800 shares of stock on the date of the death of the aforesaid Henry Nelson McKinney (April 28, 1918) was $67,200, such being the value as appraised for the Federal estate tax.

VIII. Thereafter and in accordance with the said amended income tax return of December 13, 1919, so made and filed by the plaintiffs, an assessment of Federal income tax was levied against the said plaintiffs in their capacity as executors of the last will and testament of Henry Nelson McKinney, deceased, for the period from April 28, 1918, to December 31, 1918, both dates inclusive, amounting to $34,460.25.

IX. Said plaintiffs from time to time during the year 1919 paid the said Federal income tax of $34,460.25, together *183with interest thereon in the amount of $123.22, so assessed against them as executors of the last will and testament of the aforesaid decedent to the said collector of internal revenue for the first collection district of Illinois in the manner following, to wit :

On Mar. 15, 1919, the sum of__ i..)

On June 12, 1919, the sum of_ 17, 500. 00

On Sept. 15, 1919, the sum of_ 9,181.16

On Dee. 13, 1919, the sum of_ 7, 502. 31

34, 583.47

X. On June 12, 1919, the said William Ayer McKinney sent a letter to Julius F. Smietanka, collector of internal revenue at Chicago, Ill., which letter is attached hereto as Appendix A. Said letter was received by said Julius F. Smietanka in due course. Said William Ayer McKinney was at the time acting in his capacity as one of the executors of the last will and testament of Henry Nelson McKinney, deceased.

XI. On September 16, 1919, the said William Ayer McKinney sent a letter to Julius F. Smietanka, collector of internal revenue at Chicago, Ill., which letter is attached hereto as Appendix B. Said letter was received by said Julius F. Smietanka in due course. Said William Ayer McKinney was at the time acting in his capacity as one of the executors of the last will and testament of Henry Nelson McKinney, deceased.

XII. On December 13, 1919, the said William Ayer McKinney sent a letter to Julius F. Smietanka, collector of internal revenue at Chicago, Ill., which letter is attached hereto as Appendix C. Said letter was received by said Julius F. Smietanka, in due course. Said William Ayer McKinney was at the time acting in his capacity as one of the executors of the last will and testament of Henry Nelson McKinney, deceased.

XIII. On December 15, 1919, the said William Ayer McKinney sent a letter to Julius F. Smietanka, collector of internal revenue at Chicago, Ill., which letter is attached hereto as Appendix D. Said letter was received by Julius F. Smietanka on the same day. William Ayer McKinney was at the time acting in his capacity as one of the executors of *184the last will and testament of Henry Nelson McKinney, deceased.

XIV. Thereafter and on May 12, 1920, said plaintiffs filed their claim for refund of $34,460.25 of the sum assessed against and paid by them as aforesaid in the office of ihe Commissioner of Internal Revenue in the Treasury Department of the United States at Washington, D. C., in the form required by law, and on November 28, 1921, the said commissioner refused to allow said claim.

XY. The aforesaid 4,800 shares of stock of the General Asphalt Co. were acquired by Henry Nelson McKinney, deceased, by purchase prior to the 1st day of March, 1913, and were held and owned by him continuously from and after that date. The total net price paid by said Henry Nelson McKinney for said 4,800 shares of stock rras $177,131.90. The actual market value of said stock as of March 1,1913, was $187,200.

XYI. No part of said sum of $34,460.25 has been repaid to the plaintiffs. Plaintiffs have at all times been the sole and absolute owners of the claim hereinbefore referred to and have not assigned or transferred the whole or any part thereof or interest therein, and they and decedent, Henry Nelson McKinney, have at all times borne true allegiance to the Government of the United States and have not in any way voluntarily aided, abetted, or given encouragement to rebellion against the said Government.

XVII. On or about December 31, 1921, the plaintiffs brought a suit in the United States District Court for .the Northern District of Illinois against Julius F. Smietanka, lately collector of internal revenue, to recover the same sum claimed in this action, and based upon the same allegations and proofs. The court held that, although under the statute there had been no taxable gain or profit, but a loss, and it was illegal to assess and collect a tax computed on the difference between the value of the stock at the time of the testator’s death and the amount received from the sale of the stock, inasmuch as the proof did not show that the tax which the suit was brought to recover had been paid under protest, the suit should be dismissed with judgment in favor of the defendant for his taxable costs.

*185XVIII. The following are articles 343 and 1562, respectively, of regulation 45, promulgated by the Commissioner of Internal Revenue, to wit:

“ART. 343. The ‘ period of administration of 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 the purpose, whether longer or shorter than the period specified in the local statute for the settlement of estates. Where an executor who is also named as trustee fails to obtain his discharge as executor, the period of administration continues up to the time when the duties of administration are complete and he actually assumes his duties as trustee, whether pursuant to an order of the court or not. No taxable income is realized from the passage of property to the executor or administrator on the death of the decedent, even though it may have appreciated in value since the decedent acquired it. In the event of delivery of property in kind to a legatee or distributee, no income is realized. Where, however, the executor sells property of the estate for more than its value at the death of the decedent, the excess is income taxable to the estate.

“Art. 1562. In the case of property acquired by gift, beqiiest, devise, or descent the basis for computing gain or loss on a sale is the fair market price or value of the property at the date of acquisition or as of March 1, 1913, if acquired prior thereto. For the purpose of determining the profit or loss from the sale of property acquired by bequest, devise, or descent since February 28, 1913, its value as appraised for the purpose of the Federal estate tax, or in the case of estates not subject to that tax its value as appraised in the State court for the purpose of State inheritance taxes, should be deemed to be its fair market value when acquired.”

XIX. This claim is founded upon the Constitution of the United States and upon the Federal income tax law, being part of the revenue act of 1918, and the amendments thereof, enacted by the Senate and House of Representatives of the United States of America in Congress assembled.

The court decided that plaintiffs were entitled to recover the sum of $34,460.25, with interest at the rate of 6 per cent per annum from the dates of payments (Finding IX) to May 3,1926, said principal and interest aggregating the sum of $48,397.69.

1

 Writ of certiorari denied.

*186Graham, Judge,

delivered the opinion of the court:

This case arose out of a tax assessed against and paid by plaintiffs as executors of the estate of McKinney, based on the difference between the appraised value of certain stock as of the date of the death of McKinney and the sale price of the stock.

The applicable sections of the revenue act of 1918 (40 Stat. 1060, 1065) are as follows:

*“*Sec. 202. (a) That for the purpose of ascertaining the gain derived or loss sustained from the sale or other disposition of property, real, personal, or mixed, the basis shall be—

“(1) In the case of property acquired before March 1, 1913, the fair market price or value of such property as of that date; and

“(2) In the case of property acquired on or after that date, the cost thereof; or the inventory value, if the inventory is made in accordance with section 203.”

“ Sec. 213. That for the purposes of this * * * the term ‘ gross income ’—

“(a) Includes gains, profits, and income derived from * * * trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever.”

The provisions of this act as well as the act of 1916, which was held to be identical in effect, have been fully discussed in the cases of *Goodrich*v. Edwards, 255 U. S. 527; *Walsh*v. Brewster, *id.,*536, and *United States*v. Flannery, 268 U. S. 98, and in the recent decision of this court in *Ludey*v. *United*States, 61 C. Cls. 126, decided November 9, 1925. See also 33 Ops. A. G. 291, cited by the Supreme Court in the *Flannery*case, *supra.*

McKinney died on April 28,1918, and the executors qualified on the 8th of May, 1918. The stock consisted of 4,800 shares of the General Asphalt Co., appraised at $61,200 by the Surrogate Court of New York County, State of New York, as of April 28, 1918, the date of the testator’s death. It was sold for $160,311.75, or $93,111.75 more than its appraised value. Upon the basis of this apparent gain of $93,111.75 there was assessed against plaintiffs a tax of *187$34,460.25, which they paid under protest and for the refund of which they subsequently filed their claim.

This stock was purchased prior to March 1, 1913, at a cost of $177,131.90, its market value on March 1, 1913, being $187',200. It was sold by the executors, as stated, for $160,-311.75. It will be seen from this that as between the purchase price and the value on March 1,1913, there was a gain, but that as between the value on March 1, 1913, and the selling price there was a loss, and that as between the purchase price and the selling price there was also a loss.

It is plain that, under the decisions cited, had McKinney made the sale himself there would have been no taxable gain. Whether he would have been entitled to a deductible loss it is not necessary to determine, as that question is not before the court.

The statute, according to the construction given it by the foregoing decisions, had for its purpose the taxation of “ gains derived from the sale ” of property, based on the difference between the original investment and the sale price, and the allowance of loss sustained measured in the same way. It contemplated a purchase and a sale. It made no provision, and it is clear that it did not intend, that any value other than the market value on March 1, 1913, was to be considered. Had it intended otherwise it would have so stated.

Defendant’s contention in effect asks the court to add a provision to the statute to the effect that if a sale is made after the death of the purchaser and after March 1, 1913, the measure of gain or loss for the purposes of taxation should be not the measure fixed by the statute but the difference between the appraised value of the property as of the date of the testator’s death and the selling price. And if this contention were sustained, it would amount to assessing plaintiffs with a taxable gain, although there was an actual loss both as between the purchase price and sale price, and the appraised value on March 1, 1913, and the sale price. The statement of the proposition is its answer.

Defendant is also contending that the sale by the executors creates a different situation from that which would have existed had the sale been made by McKinney himself, and *188it in effect asks the court to consider as the cost of the property, not the purchase price, but the appraised value of it at the time of the testator’s death, as though it had cost them that amount. Of course, there was no cost to the executors. They were the personal representatives of the decedent. The stock was the same stock as it had been in the hands of the decedent, and, as stated, had he lived and sold the stock himself there would have been no question of taxable gain. The fact that they were executors did not alter the situation.

In the case of the *Mercantile Loan & Trust Co.*v. *Smie*tanka, 255 U. S. 509, which was a sale of assets by trustees of a fund under a will, the Government’s brief contended for the following position:

“ The gains received by a trustee under a will by the profitable sale of capital assets purchased by the testator in his lifetime are measured in precisely the same way they would have been measured if the latter had lived and made the sale himself.”

And this view of the matter was accepted by the court as is evident from its decision.

Before final argument in this case the defendant filed a motion to dismiss the petition upon the ground that the suit which had been previously brought in the Northern District of Illinois against the former collector of internal revenue, though it had been dismissed, was still a pending suit within the meaning of section 154 of the Judicial Code, and further that said judgment of dismissal constituted *res adjudícala*as to the claim forming the subject matter of the petition in this case. The motion was heard by this court on briefs and oral argument, and denied.

While the question is not raised or discussed in defendant’s bi'ief, we are of opinion that the requirements of the doctrine of *res adjudicata*have not been met by dismissal of the suit brought against the collector. See *Sage et al.*v. *United*States, 250 U. S. 33.

Judgment should be entered for the plaintiffs, and it is so ordei’ed.

Hay, *Judge;*Dowkey, *Judge;*Booth, *Judge;*and Campbell, *Chief*Justice, concur.