Court Opinion

ID: 9449321
Source: CourtListenerOpinion
Date Created: 2023-08-04 16:09:24.772867+00
Date Added: 2024-06-11T17:31:46.936252
License: Public Domain

REED, Justice
(Ret.), sitting by designation (dissenting).
I join that portion of the opinion of the court that holds the transfer of corporate assets was not a gift. However, I feel the court holds incorrectly in deciding that the Commissioner’s ruling that the estate should be considered closed by 1952 was erroneous. The history of the estate is set out in detail in our Findings 37 through 77. Suffice it to say that by 1952, fourteen years after the death of the taxpayer’s husband, all of the normal functions of administration had been completed. The only outstanding obligations of the estate consisted of debts to the taxpayer and to her daughter, the only other beneficiary of the residuary estate.1 The estate had borrowed from its beneficiaries at the same time it had purchased the home in which the taxpayer has since resided. Not only could the estate have discharged its indebtedness to the taxpayer and her daughter by transferring the home to them, but during the years prior to 1952 the estate had distributed to its two beneficiaries substantially more money than would have been necessary to discharge the debts. Indeed, the earnings of the estate were even being used to pay the taxpayer’s ordinary household expenses.
Eighteen years is far longer than is ordinarily required to wind up the affairs of an estate. The facts indicate no substantial business reason why this estate should have remained open for so long a period. Our Commissioner so *380found,2 and the taxpayer has taken no exception to his finding. The taxpayer does suggest that the estate was held open to avoid sacrificing closely held corporate stock. This was the grounds upon which the Florida probate court granted permission to keep the estate open. However, it is perfectly clear that the estate could have discharged its debts without selling this stock. See Finding 66. On what basis, then, can we hold that the Commissioner of Internal Revenue erred when he determined that the administration of this estate was unreasonably prolonged. ? 3
The taxpayer and the majority opinion seem to suggest two reasons. First, taxpayer stresses that the estate was held open with the approval of the Florida probate court. The Government argues that since it was not a party to the probate proceedings, which were nonadversary, it is not bound by the orders rendered therein. But I do not doubt either the correctness or the finality of the determination that the estate was held open in accordance with Florida law. Frederich v. Commissioner, 145 F.2d 796, 799 (C.A.5, 1944). However, although relevant, the validity of the procedure followed under state law is not conclusive of the reasonableness of the period for which an estate is held open for federal *381tacóme tax purposes.4 Indeed, there is agreement between the majority opinion and the dissent that the action of the Florida court is not conclusive. This conclusion is compelled by the necessity to interpret the tax laws “so as to give a uniform application to a nation wide scheme of taxation.” Burnet v. Harmel, 287 U.S. 103, 110, 53 S.Ct. 74, 77, 77 L. Ed. 199 (1932); Estate of Putnam v. Commissioner, 324 U.S. 393, 65 S.Ct. 811, 89 L.Ed. 1023 (1948), which of course would be impossible if the probate judges of every state had the power to extend the period of administration for income tax purposes. A state may choose to allow an estate to be used for purposes other than gathering the decedent’s assets, paying his debts, and distributing the proceeds among the beneficiaries of the estate. But the provisions recognizing the estate as a separate tax entity were not intended to apply when the estate is used for such other purposes. S.Rep.No.1622, 83d Cong., 2d Sess. 340.
The majority opinion seems to imply that because the estate was not held open for the purpose of tax avoidance, the estate must be recognized as a separate tax entity for the tax years in question. The factual premise on which this argument rests is weak. In 1947, the taxpayer had transferred all but a few thousand dollars out of the estate bank account and had prepared to close the estate; the money was then returned to the estate and permission was requested from the probate court to keep the estate open. Findings 50-53. In the absence of any explanation why the estate was not terminated at that point, it is difficult to conclude that the taxpayer was not attempting to obtain the advantages inherent under a graduated tax system in the use of an additional tax entity.
Moreover, even assuming the absence of any tax-saving purpose, the Commissioner of Internal Revenue was nonetheless entitled to regard the estate as closed in 1952. The absence of tax-saving motive does not establish the taxpayer’s right to prolong the administration of the estate any more than the presence of such motivation would defeat her attempt to keep the estate open for tax purposes. “The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted. * * * But the question for determination is whether what was done, apart from the tax motive, was the thing which the statute intended.” Gregory v. Helvering, 293 U.S. 465, 469, 55 S.Ct. 266, 267, 79 L.Ed. 596 (1935). See Knetsch v. United States, 364 U.S. 361, 365-366, 81 S.Ct. *382132, 5 L.Ed.2d 128 (1960); National Carbide Corp. v. Commissioner, 336 U.S. 422, 439, 69 S.Ct. 726, 93 L.Ed. 779 (1949). The non-tax purposes for which an estate is held open bear upon the reasonableness of the period for which it is preserved; but in the absence of any substantial non-tax justification for failing to close an estate after the performance of the normal functions of administration, not even ignorance of the very existence of an income tax precludes the Commissioner of Internal Revenue from treating the estate as closed for income tax purposes.
The crucial question thus becomes whether the evidence fairly supports the determination of the Commissioner that the administration of the estate was unreasonably prolonged. Recognizing that the state court has approved the procedure followed here, and that the tax laws do not condition recognition of the estate as a separate tax entity upon adoption of the fastest means possible to settle the estate, we are nonetheless faced with the extreme situation in which an estate, after assuming an obligation to its beneficiaries which enabled the estate to purchase a home for the beneficiaries, and although distributing substantial amounts of income over a number of years to the creditor-beneficiaries, failed to apply any of the amounts distributed to the satisfaction of the indebtedness, or to adopt any of several other obvious and nononerous alternatives to discharge the indebtedness. The reasonableness of ever holding an estate open beyond the period required for the performance of the conventional tasks of administration in order to avoid sacrificing closely-held corporate stock to satisfy an indebtedness which is owed to the beneficiaries of the estate and which was assumed after the death of the decedent and for the immediate benefit of the beneficiaries, is at best questionable. But even assuming that this may be reasonable in some circumstances, certainly prompt steps are required under the regulations to satisfy such an indebtedness when arrangements are available which would not necessitate a sacrifice of the stock or any other perceptible disadvantage to the estate. Otherwise, I see no reason why any estate holding unsaleable assets could not be held open indefinitely merely by the expedient of borrowing from its beneficiaries and failing to discharge the debt, and by obtaining the acquiescence of the probate court. In short, in the circumstances of this case, it seems to me that the Commissioner could hardly have reached any conclusion other than the one which this court now holds to have been erroneous.
JONES, Chief Judge, joins in the dissent.

. The estate also owed a relatively small amount to a bank which could easily have been satisfied at any time out of cash, bank deposits, or Government bonds held by the estate.

. Finding 77(h).

. Section 641(a) of the 1954 Code provides that “[t]he taxes imposed by this chapter on individuals shall apply to the taxable income of estates * * * including * * * (3) income received by estates of deceased persons during the period of administration or settlement of the estate.” 26 U.S.C. § 641(a) (1958 ed.). The same provision under the 1939 Code was found in § 161(a), 26 U.S.C. § 161(a) (1952 ed.).
The regulations under the 1954 Code, slightly expanded but substantively unchanged from prior regulations, provided as follows:
“§ 1.641 (b)-3 Termination of estates and trusts
“(a) The income of an estate of a deceased person is that which is received by the estate during the period of administration or settlement. The period of administration or settlement is the period actually required by the administrator or executor to perform the ordinary duties of administration, such as the collection of assets and the payment of debts, taxes, legacies, and bequests, whether the period required is longer or shorter than the period specified under the applicable local law for the settlement of estates. For example, where an executor who is also named as trustee under a will fails to obtain his discharge as executor, the period of administration continues only until the duties of administration are complete and he actually assumes his duties as trustee, whether or not pursuant to a court order. However, the period of administration of an estate cannot be unduly prolonged. If the administration of an estate is unreasonably prolonged, the estate is considered terminated for Federal income tax purposes after the expiration of a reasonable period for the performance by the executor of all the duties of administration. Further, an estate will be considered as terminated when all the assets have been distributed except for a reasonable amount which is set aside in good faith for the payment of unascertained or contingent liabilities and expenses (not including a claim by a beneficiary in the capacity of beneficiary). * * * * *
“(d) If a trust or the administration or settlement of an estate is considered terminated under this section for Federal income tax purposes (as for instance, because administration has been unduly prolonged), tlie gross income, deductions, and credits of the estate or trust are, subsequent to the termination, considered the gross income, deductions, and credits of the person or persons succeeding to the property of the estate or trust.”
For a history of the early development of the Commissioner’s position on this matter, see Kennedy, Federal Income Taxation of Trusts & Estates § 5.19 (1948 & Supp. 1953). The regulation in its present form has not only survived statutory reenactment, thus assuming much the force of law, see Helvering v. Winmill, 305 U.S. 79, 83, 59 S. Ct. 45, 83 L.Ed. 52 (1938), but also appears in relevant part in the Senate Report on the 1954 Code provisions. S.Rep. No. 1622, 83d Cong., 2d Sess. 340, U.S. Code Cong, and Admin.News 1954, p. 4980.
Taxpayer does not challenge the validity of this regulation, but argues only that the administration of the estate was not unreasonably prolonged.

. Cases in which it has been held that the administration of an estate has been unreasonably prolonged despite conformity with state law include the following: Stewart v. Commissioner, F.2d 397 (C.A.5, 1952) ; Chick v. Commissioner, 166 F.2d 337 (C.A.1, 1948), cert. denied, 334 U.S. 845, 68 S.Ct. 1514, 92 L.Ed. 1769; Williams v. Commissioner, 16 T.C. 893 (1951); Hargis v. Commissioner, 19 T.C. 842 (1953); LeFiell v. Commissioner, 19 T.C. 1162 (1953); Caratan v. Commissioner, 14 T.C. 934 (1950); Koffman v. United States, 300 F.2d 176 (C.A. 6, 1962). See 6 Mertens, Federal Income Taxation § 36.47 (1957); Glassmoyer, Termination Problems of Estates & Trusts, N.Y.U. 17th Annual Institute on Federal Taxation 1227-29 (1959). Frederich v. Commissioner, 145 F.2d 796 (C.A.5, 1944), is surely the strongest case to the contrary; however, that decision has repeatedly been distinguished and is of questionable vitality even in the circuit from which, it came. Compare Stewart v. Commissioner, supra; Brown v. Commissioner, 215 F.2d 697 (C.A.5, 1954). In any event it does not control here since the decision was premised, whether rightly or wrongly, on the assumption that the probate court had affirmatively ordered the administrator to keep the estate open, 145 F.2d at 799. Here, the taxpayer requested permission not to close the estate, and the probate court merely granted the taxpayer’s request. (“It is therefore, considered, adjudged and ordered that the Executrix may carry out the program of paying the indebtedness of the estate * * * and that the estate remain open. * * * ”) There is no reason to believe that the court would have refused to sanction the termination of the estate in 1947.