Court Opinion

ID: 4619039
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:39:50.116936+00
Date Added: 2024-06-11T07:55:34.149433
License: Public Domain

IDA STEPHENSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Stephenson v. CommissionerDocket No. 62825.United States Board of Tax Appeals33 B.T.A. 252; 1935 BTA LEXIS 782; October 22, 1935, Promulgated 1935 BTA LEXIS 782">*782  1.  Where in the State of Texas decedent died January 19, 1929, and left a will bequeathing and devising to his wife all of his property and appointing her independent executrix without bond and directing that no action should be had in any court except to probate the will and return an inventory appraisement and list of claims of the estate, and the executrix duly qualified under the laws of the state, and at the time of decedent's death there were certain lawsuits pending against him which were not concluded until subsequent years and there were other claims against the estate to be settled, held that at least until the end of the year 1929 there was an administration open and pending within the meaning of section 161, Revenue Act of 1928.  2.  Where an independent executrix of an estate, who was also sole legatee and devisee, received certain interest and dividend payments from property which was owned one half by the estate and one half by her in her individual capacity, held that the interest and dividends so received were taxable, one half to her in her fiduciary capacity and one half to her in her individual capacity.  M. J. Arnold, Esq., and R. S. Cozby,1935 BTA LEXIS 782">*783  Esq., for the petitioner.  P. A. Bayer, Esq., and R. B. Cannon, Esq., for respondent.  BLACK 33 B.T.A. 252">*252  Petitioner contests a deficiency in income tax for 1929 in the amount of $8,976.14.  The entire amount is in controversy, plus an overpayment claimed in the amount of $2,125.66.  The only questions involved are whether the estate of petitioner's deceased husband, who died January 19, 1929, was in process of administration or settlement from the date of his death to at least the end of the calendar year 1929, and, if so, whether certain items of income and an item of deduction included by respondent in petitioner's net income for the calendar year 1929 should have been included in a return filed for the alleged estate, as was originally done.  33 B.T.A. 252">*253  The parties have filed a stipulation of facts and offered certain other documentary and oral evidence, from which we make the following findings of fact.  FINDINGS OF FACT.  Petitioner is an individual.  She and L. L. Stephenson were married about the year 1901 and had at all times lived together as husband and wife and as resident citizens of the State of Texas until January 19, 1929, when L. L. 1935 BTA LEXIS 782">*784  Stephenson dies.  All of the property which was owned by petitioner and her husband at the time of the latter's death was community property.  L. L. Stephenson left surviving him his widow (the petitioner), two minor children, and an adopted daughter.  He also left a will, which was duly probated in the County Court of Bexar County, Texas, on March 4, 1929, and reas as follows: San Antonio, Texas, 12/12/28.  I, L. L. Stephenson, Sr., do hereby revoke all wills heretofore made and constitute the following as my will: I hereby will all of my property unto my wife, Ida Stephenson, and appoint her Independent Executrix without bond and direct that no action shall be had in any court except to probate this will and return an inventory, appraisement and list of claims and as Independent Executrix she shall have full power to sell and in every other way handle and dispose of all or any property as she deems best without reporting to any court.  L. L. (His X Mark) STEPHENSON WITNESSED BY M. J. ARNOLD A. NONAK, R. N. H. G. TERRY. On December 11, 1928, L. L. Stephenson entered into a written agreement with the American Service Co. wherein Stephenson agreed to sell and the purchaser1935 BTA LEXIS 782">*785  agreed to buy certain specified property at a cash price of $1,700,000, to be paid "at the time of the consummation of the purchase * * *." The twelfth paragraph of the contract provided: This contract shall be binding upon, and shall inure to the benefit of, the Purchaser, and the Purchaser's successors and assigns, and Mr. Stephenson and his heirs, executors, administrators and assigns.  The American Service Co. was desirous of completing the contract it had with L. L. Stephenson as soon as possible.  In order that this might be done petitioner, on January 23, 1929, duly applied for appointment, was duly appointed, and duly qualified as the temporary administratrix of the estate of L. L. Stephenson, deceased, with bond fixed at $25,000, which position she occupied until March 4, 1929, when she was duly appointed, qualified, and sworn as the independent executrix of the will and estate of L. L. Stephenson, deceased.  33 B.T.A. 252">*254  While acting as temporary administratrix, petitioner, in order to carry out the contract between her deceased husband and the American Service Co., entered into certain additional contracts of sale with the latter on January 23, 1929, and consummated, 1935 BTA LEXIS 782">*786  so far as possible, the sale of the property covered by the earlier contract dated December 11, 1928.  On February 5, 1929, the purchaser deposited $850,000 of the purchase price in the City National Bank of San Antonio to the credit of "Mrs. Ida Stephenson individually and the Estate of L. L. Stephenson, Deceased." On March 4, 1929, when the decedent's will was probated, petitioner, as temporary administratrix, acting pursuant to the orders of the County Court of Bexar County, delivered over to herself as independent executrix all of the property in her hands belonging to the estate of L. L. Stephenson, deceased.  On the same date petitioner was duly discharged as temporary administratrix, and the sureties on her bond as such were likewise released and discharged.  The oath petitioner took as independent executrix on March 4, 1929, was as follows: I DO SOLEMNLY SWEAR that the writing which has been offered for probate is the last will of L. L. Stephenson, deceased, so far as I know or believe, and that I will well and truly perform all the duties of Independent Executrix of said will of the estate of said L. L. Stephenson, deceased.  On March 23, 1929, the county judge of Bexar1935 BTA LEXIS 782">*787  County examined and approved in open court an inventory, appraisement, and list of all the property, real and personal, and claims belonging to the estate which were transferred to petitioner as independent executrix.  On March 29, 1929, petitioner, as independent executrix, paid an amount of $9,393.58 as Federal estate tax; and on April 1, 1929, she paid an amount of $45,934.43 as the inheritance tax due the state.  On April 30, 1929, the entire balance of the purchase price of the property purchased by the American Service Co. was paid over to petitioner individually and as independent executrix, conditioned upon her compliance with the following arrangement (quoted from the stipulation): In order to draw down said balance, which was so covered by the Escrow agreement, the said Mrs. Ida Stephenson, individually and as Independent Executrix, on April 17, 1920, deposited in escrow with the City National Bank of Dallas certain United States Government Bonds of the par value of $100,000.00, to so remain in escrow under the same conditions as set forth in said original Escrow contract; and these bonds were released and returned to her on or about April 4, 1930, as provided by said1935 BTA LEXIS 782">*788  escrow contract.  The above arrangement was fully carried out in every respect.  All of the money representing the proceeds of the said sale was deposited, as and when received, in a bank account in the name of and to the credit of "Ida Stephenson, Individually and as Independent 33 B.T.A. 252">*255  Executrix of the Estate of L. L. Stephenson, Deceased." All checks against this account were likewise signed in both capacities.  This account was carried in this manner from the time the first payment was received until December 31, 1930.  In this account was also deposited practically all moneys received by petitioner from other sources.  On May 2, 1929, petitioner, for herself individually and as independent executrix, paid M. J. Arnold, an attorney, his fee of $10,000 for the services rendered by him.  The fee also covered payment for any subsequent services which might be necessary in connection with the estate's affairs.  Such services did become necessary and were performed by Arnold in the spring of 1930.  No application for partition of the estate was ever filed in the county court, or in any other court, and no court has ever made any order with reference thereto.  At the time1935 BTA LEXIS 782">*789  of the death of L. L. Stephenson certain lawsuits were pending in which the decedent was involved either as sole defendant or as one of several defendants.  Some of these lawsuits were not settled and disposed of until in years subsequent to the taxable year in question.  On February 15, 1930, petitioner filed with the collector of internal revenue for the first district of Texas two returns, one for herself individually and one for the estate of L. L. Stephenson, deceased.  The return for herself was on form 1040, which is captioned "Individual Income Tax Return." The return for the estate was on form 1041, which is captioned "Fiduciary Return of Income." A transcript of the latter return is as follows: INCOMEItem No.2 Interest on Bank Deposits, etc$30,379.717 Dividends, Domestic Corporations44,300.648 Other Income, Insurance Dividend8.659 Total Income in Items 1 to 8$74,689.00DEDUCTIONS10 Interest Paid3.3611 Taxes Paid (State Inheritance and Federal Estate)55,328.0116 Total Deductions in Items 10 to 1555,331.3717 Net Income (Item 9 minus Item 16)$19,357.6318 BENEFICIARIES' SHARES OF INCOME AND CREDITS(a) Mrs. Ida Stephenson, Dividends (Item 7 above, or Item 17, whichever amount is smaller$19,357.631935 BTA LEXIS 782">*790 33 B.T.A. 252">*256  The above item of $19,357.63 was included by petitioner in her individual return (form 1040) as dividends on stock of domestic corporations, and in that return she reported a net income of $43,905.37 taxable at normal and surtax rates, and a capital gain of $614,457.45 taxable at capital gain rates.  The respondent in his determination of the deficiency herein increased petitioner's net income, in part, by the net amount of $55,328.01, which equals the state inheritance and Federal estate taxes paid by the estate.  In addition to the net amount of $55,328.01, the respondent increased petitioner's net income as reported by her by the amount $8,108.04, as profit from the sale of certain stock.  The respondent thus determined that petitioner's net income taxable at normal and surtax rates was the total amount of $107,341.42.  The respondent also determined that petitioner's capital gain was the amount of $586,759.24 instead of $614,457.45, a reduction of capital gain of $27,698.21.  The petitioner does not question the respondent's determination relative to the reduction of capital gain and the increase in net income by the item of $8,108.04.  OPINION.  BLACK: Petitioner's1935 BTA LEXIS 782">*791  only contention is that the respondent erred in adding to her net income the above described net amount of $55,328.01.  She contends that the three items of income and the deduction making up this net amount were the income and deduction of the estate of L. L. Stephenson, deceased, and were correctly reported by petitioner as independent executrix on the fiduciary return, form 1041.  The respondent's position is contained in the opening statement and oral argument of his counsel, made in place of a brief.  In his opening statement counsel said: Of course, it is our position that the petitioner and her husband owned certain property as community property.  When the husband died she was the sole beneficiary named in the will, and having first of all one-half of the community property, and having inherited the second half, subject to any debts, I assume that she owned the entire property, and that the income from the property is the income of the petitioner.  In support of the above stated position, counsel for the respondent in his oral argument cited as authority articles 3662, 3449, and 3436 of Vernon's Annotated Texas Statutes, and 1935 BTA LEXIS 782">*792 ; . These articles are as follows: ART. 3662. (3593) (2220) (2165) Where there is no child.Where the husband or wife dies intestate, or becomes insane, having no children, and no separate property, the common property passes to the survivor, charged with the debts of the community; and no administration thereon or guardianship of the estate shall be necessary.  33 B.T.A. 252">*257  ART. 3449. (3376) (2009) (1956) Administration under will.The administration of an estate under a will shall in all respects be governed by the provisions of the law respecting the administration of intestates' estates, except where it is otherwise provided by law or by the provisions and directions of the will.  ART. 3436. (3362) (1995) (1942) Testator may provide that no action be had in court, etc.Any person capable of making a will may so provide in his will that no other action shall be had in the county court in relation to the settlement of his estate than the probating and recording of his will, and the return of an inventory, appraisement and lists of claims of his estate.  Under the above articles1935 BTA LEXIS 782">*793  the respondent contends that no administration of the decedent's estate was necessary or in fact took place; that therefore there was no "Income received by estates of deceased persons during the period of administration or settlement of the estate" as that clause is used in section 161(a)(3) of the Revenue Act of 1928; that there was no net income of an estate to be computed under section 162, no tax to be paid by the fiduciary under section 161(b), and no return to be filed under section 143, all of the Revenue Act of 1928; that the three items of income and the one item of deduction for interest paid that were reported on form 1041 should have been reported in petitioner's own individual return; and that, under section 23(c) of the Revenue Act of 1928 and article 154 of Regulations 74, petitioner was not entitled to deduct on her own individual return the state inheritance and Federal estate taxes paid in the total amount of $55,328.01.  Petitioner is not contending that she is entitled to deduct the state inheritance and Federal estate taxes amounting to a total of $55,328.01 in her individual income tax return.  She concedes that under section 23(c), supra, such taxes are1935 BTA LEXIS 782">*794  "allowed as a deduction only to the estate." She merely contends that certain income which the respondent has determined to be her income was in fact and in law the income of the estate, so that the estate would have income from which such taxes could be deducted.  Since the decedent herein died testate rather than intestate, since he was not insane, and since he and the petitioner had two minor children and an adopted daughter at the time of his death, we fail to see wherein article 3662, supra, is at all applicable to this case.  Of course, it is the respondent's contention that, since article 3449, supra, provides that except for certain stated provisions the administration of an estate under a will shall be governed by the "law respecting the administration of intestates' estates", it is the last clause of article 3662 that is applicable here.  We doubt very much the correctness of this contention for the reason that the estate here in question was being administered by an independent executrix.  See 33 B.T.A. 252">*258 ; 1935 BTA LEXIS 782">*795 . In that case the court, after quoting in full article 3449 (then art. 2009, Rev. Stat.), said: It is doubtful if this provision was intended to apply to independent executors.  It appears rather to be intended to apply to a judicial administration by an administrator under the will, or by an executor without independent powers.  In any event, we are clearly of the opinion that there was an "administration" of the decedent's estate within the meaning of that term as used in section 161 of the Revenue Act of 1929.  ; ; . In the Todd case the Supreme Court of Texas said: We have no doubt that the management of the estate of a deceased person, and the disposition of property by executors acting under a will which withdraws the estate from the general control of a probate court, is to be deemed, within the meaning of the law, an "administration." We have examined , and find nothing therein which is contrary to our holding in the Donnelly case, supra, which was1935 BTA LEXIS 782">*796  exactly in point with the instant case.  It only remains for us to decide whether the estate of L. L. Stephenson, deceased, was in process of administration until at least the close of December 31, 1929, and whether the three items of income and one item of deduction for interest paid were the income and deduction of the estate or the income and deduction of petitioner in her individual capacity.  We think the evidence clearly shows that the estate was in process of administration until at least the close of December 31, 1929.  At that time the lawsuits in causes numbered B-47878, 33796, and 8585 were still pending and the $100,000 in bonds deposited in escrow on April 17, 1929, by Ida Stephenson individually and as independent executrix of her deceased husband's estate had not then been released and were not in fact released until about April 4, 1930.  We therefore find as a fact that the estate of L. L. Stephenson, deceased, was in process of administration or settlement until at least the close of December 31, 1929.  We come now to the more troublesome question of fact as to whether the evidence offered by petitioner proves that the three items of income and one item of deduction1935 BTA LEXIS 782">*797  for interest paid were in fact the estate's income and deduction rather than petitioner's.  The respondent has determined that the net amount of these four items, namely, $55,328.01, was taxable to petitioner in her individual capacity, and the burden of showing otherwise is on the petitioner.  . 33 B.T.A. 252">*259  The theory of petitioner is that there was an estate in process of administration during the taxable year (and on this point we have sustained petitioner); that the property which was owned by L. L. Stephenson and his wife, Ida Stephenson, prior to his death was community property in which each owned a one-half interest and upon the death of L. L. Stephenson, his estate continued to own his one half of the property and Mrs. Stephenson owned her one half; that during the taxable year petitioner, in her individual capacity and as independent executrix of her husband's estate, partitioned the property, distributing one half thereof to herself and one half to the estate; that she returned on her individual income tax return the income from the one half of the property which was distributed to her as an individual and on the fiduciary1935 BTA LEXIS 782">*798  return which she filed for the estate she reported the income from the property which was partitioned to the estate; and that, after giving effect to certain deductions, the remainder of the income partitioned to the estate, amounting to $19,357.63, was distributed to petitioner as the sole beneficiary of the estate and returned by her on her individual income tax return.  There seems to be no doubt that under the laws of Texas an independent executor has the right to make such a partition.  The case of , holds as follows: Being authorized by will to administer independently of the probate court, the executors could determine for themselves when they would surrender their rights and powers over the estate to the distributees.  Where executors are empowered to act independently of the probate court, they may close the administration, or surrender all or any portion of the property to the heirs or devisees, without the formality of judicial sanction.  and the same legal consequences follow.  Was there such a partition made as the petitioner claims?  We do not think the evidence is sufficient to establish such a partition.  The stipulation1935 BTA LEXIS 782">*799  which has been filed does not show any partition.  The only witness who testified concerning the alleged partition was E. G. Hendrix, accountant and business manager of both the estate and petitioner.  He testified: "We assigned certain of those properties to her (Mrs. Ida Stephenson as an individual) and certain of them to the estate." On cross-examination the following questions and answers of the witness relating to the above testimony appear: Q.  How was that done?  A.  By segregating them and keeping them separate in the books.  Q.  In other words, the only segregation as I understand it, is on this book which you have in your lap at the present time, is that right?  A.  Segregation of the properties, yes sir.  Q.  Did anybody else know anything about that besides you and Mrs. Stephenson?  A.  No, and the attorney.  33 B.T.A. 252">*260  Q.  So that when you have been referring to partitions here during your direct examination, what you meant was that an account was opened in this book in which certain assets were listed as being estate assets, is that right?  A.  Correct.  From a careful review of all the evidence we conclude that what was actually done was substantially1935 BTA LEXIS 782">*800  this: The estate was a large estate, thoroughly solvent, and there was no need for the independent executrix to retain in the estate all the decedent's interest in the community property, so she distributed certain of the property, bonds, notes, etc., to herself as an individual.  This she had a right to do, being the sole legatee and devisee under the will.  The income from the property thus distributed is not in controversy here.  Certain other of the community property was not distributed during the taxable year.  The estate owned a one-half interest in this property and Mrs. Stephenson owned the other half.  The instant case is distinguishable from that of  In that case the decedent, A. M. Donnelly, and his wife, Catherine, owned as community property 5,373 2/3 shares of stock in the Eastland Oil Co.  After Donnelly's death, the stock was divided and certificates were issued for 2,686 5/6 shares to Catherine Donnelly and 2,686 5/6 shares to her as executrix of the estate of A. M. Donnelly, deceased.  Under those circumstances we held that the dividends on the 2,686 5/6 shares belonging to the estate were not taxable1935 BTA LEXIS 782">*801  to Catherine Donnelly in her individual capacity.  As we have already pointed out, we can not hold under the evidence in this case that there was any such definite partition of the assets as there was in the Donnelly case.  Therefore the resulting taxation is not the same.  We therefore find as ultimate facts that the item of interest amounting to $30,379.71, reported as item No. 2 on form 1041, was the total interest received between January 19, 1929, and December 31, 1929, on community property or on the investment of the proceeds from such property owned by decedent and his wife at the time of his death and in which the estate still owned a one-half interest; that the item of dividends, amounting to $44,300.64, reported as item No. 7 on form 1041, was the total dividends received between January 19, 1929, and December 31, 1929, on community property or on the investment of the proceeds from such property owned by decedent and his wife at the time of his death and in which the estate still owned a one-half interest; that the item of other income amounting to $8.65, reported as item No. 8 on form 1041, was one half of an insurance dividend received between January 19, 1929, and1935 BTA LEXIS 782">*802  December 31, 1929, on community property owned by decedent and his wife at the time of his death; and that the other one half of the insurance dividend just referred to was 33 B.T.A. 252">*261  reported by petitioner in her individual return, form 1040.  No evidence was offered with respect to the item of interest paid in the amount of $3.36, reported as item No. 10 on form 1041.  The conclusions we reach from the findings set forth in the previous paragraph are that the respondent erred in increasing petitioner's net income taxable at normal and surtax rates by one half of $30,379.71, plus one half of $44,300.64, plus $8.65, or a total amount of $37,348.82.  The evidence offered by petitioner proves to our satisfaction that this total amount of $37,348.82 was properly the income of the estate of L. L. Stephenson, deceased.  Under sections 161, 162, and 143 of the Revenue Act of 1928, we think petitioner, as independent executrix, was not only entitled, but was required by law, to file a return for the estate and report therein the said amount of $37,348.82, from which she was entitled to take allowable deductions.  Decision will be entered under Rule 50.