Court Opinion

ID: 4593779
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:11:32.784024+00
Date Added: 2024-06-11T07:51:07.417572
License: Public Domain

LILLIE M. CLARK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Clark v. CommissionerDocket No. 8049.United States Board of Tax Appeals9 B.T.A. 460; 1927 BTA LEXIS 2588; December 1, 1927, Promulgated *2588  1.  INCOME. - During 1918 a probate court approved final settlement of an estate and approved executrix's fees in the amount of $21,590.50 and turned the residue of estate and the amount of the fees over to petitioner, who refused to accept the executrix's fees as such.  In 1921 a memorandum was made on petitioner's books charging the fees, but explaining they were never paid.  Held, the executrix's fees were not income during 1921.  2.  Loss. - Upon the evidence held that certain stock did not become worthless during 1921 and no deductible loss was sustained during that year.  Harrison Brand, Jr., Esq., for the petitioner.  Bruce A. Low, Esq., for the respondent.  TRUSSELL *460  This proceeding is for the redetermination of a deficiency in income tax for the calendar year 1921, in the amount of $2,236.67 as asserted by the respondent.  The petitioner alleges that the respondent erred: (1) In including in gross income for 1921, $21,590.50 as executrix's fees, which are alleged not to have been paid, accrued, allowed nor made available *461  during that year; and (2) in disallowing a deduction of $9,866.22 as a loss sustained on certain*2589  stock alleged to have become worthless during 1921.  FINDINGS OF FACT.  The petitioner is an individual residing at St. Louis, Mo.  Uriel L. Clark, deceased, husband of the petitioner, died December 26, 1916, and in his will named Lillie M. Clark as executrix.  The said will provided for certain specific bequests and bequeathed the rest and residue, both real and personal property, to Lillie M. Clark during her life for her own use and benefit, with the right to sell and transfer the same without any restriction whatever.  The will then provided for a distribution of whatever property remained upon the death of his wife, Lillie M. Clark.  Prior to her husband's death, the petitioner owned separate property and accounts thereof were kept in her name separate from the accounts of her husband's property.  Since the death of U. L. Clark and during the year in question, the petitioner has employed as her secretary, Miss M. E. Boyle who had been U. L. Clark's secretary prior to his death.  Miss Boyle attended to petitioner's business affairs, banking, correspondence, tax matters, paid all bills and kept petitioner's books of account.  During the administration of her husband's estate*2590  the petitioner employed the St. Louis Union Trust Co., to advise her as to all matters pertaining thereto, and while she was the sole executrix, the said trust company handled all matters for petitioner, who had little knowledge of business affairs.  On April 3, 1918, the probate court accepted final settlement of the estate and discharged petitioner as executrix of the last will of U. L. Clark, deceased.  The trust company made out the Federal estate-tax return for the petitioner and deducted $21,590.50 as executrix's fees, which deduction was allowed as an expense.  The petitioner did not include in her personal tax return for 1918 or any subsequent year the said $21,590.50.  After petitioner had been discharged as executrix the trust company for the first time advised her that she was entitled to $21,590.50 executrix's fees, as approved by the probate court, but she refused to accept the fees.  The estate was solvent, but there was not sufficient cash to pay the said fees and petitioner refused to sell any of the property for that purpose for she would not reduce the corpus of the estate.  In April, 1918, the probate court turned over to the petitioner under the terms of U. L. Clark's*2591  will, the entire residue of the estate plus the executrix's fees which it had approved but which fees petitioner refused to accept as such.  *462  U. L. Clark's will provided for certain bequests to his relatives after the death of petitioner if his daughter Lillie L. Clark should die without issue.  Petitioner did not desire to be criticized by her deceased husband's relatives and in order to keep his estate intact she instructed her secretary to continue the use of the two sets of books of account, one set designated as Lillie M. Clark's books, being the accounts of property owned by petitioner prior to her husband's death and the other set designated as Uriel L. Clark Estate books, being the accounts of property received by petitioner under her husband's will.  The two sets of accounts, combined, reflected petitioner's income for the year in question.  No book entries relative to the executrix's fees were made until July 5, 1921, on which date there was entered in the Uriel L. Clark Estate books a charge of $21,590.50 against the executrix's fee account and a credit in the same amount to Lillie M. Clark account, with the following notation: Commissions allowed Lillie*2592  M. Clark personally for acting as executrix in estate of Uriel L. Clark by Probate Court, but never paid as there were not sufficient funds.  First allowance, August 10, 1917, $7,500.00; second allowance March 27, 1918, $14,090.50, total $21,590.50.  On July 5, 1921, there was entered in the Lillie M. Clark books a charge of $21,590.50 against the Uriel L. Clark Estate account and a credit in the same amount to executrix fee account with the following notation: This fee was allowed Lillie M. Clark personally by the Probate Court for acting as administratrix for the estate of Uriel L. Clark, but as there were not sufficient funds with which to pay the obligation, it was left unpaid.  Petitioner's secretary was planning an extended trip and made the above cross-entries, without the petitioner's knowledge thereof, merely as a memorandum to show that petitioner had never received the executrix's fees and also to explain the presence of $21,590.50 more in the Uriel L. Clark Estate accounts than was turned over to petitioner by the probate court as the assets of the estate.  During 1921 petitioner was the owner of 100 shares of preferred and 30 shares of common stock in International*2593  Fur Exchange, Inc., a Delaware corporation, which stock was acquired prior to 1921 at a cost of $9,866.22.  International Fur Exchange, Inc., hereinafter referred to as the Fur Exchange, was engaged in the fur auction business and its two subsidiary corporations, the F. C. Taylor Co. and the Funsten Brothers, were engaged in the business of soliciting and receiving shipments of furs direct from trappers at list prices, and those furs were sold regularly at daily sales in the St. Louis Market.  The business of the Fur Exchange was conducted on a large scale; it received *463  shipments of furs from all over the world; made advancements in cash to the shippers; borrowed large sums of money from banks in order to make the advancements; and sold the furs at auction, receiving a 25 per cent deposit and the balance within a certain time, but the Fur Exchange held all furs as security until the purchasers had paid it in full.  The sales made in January, 1920, amounted to about $27,000,000 and the Fur Exchange's profits amounted to about $4,000,000.  However, shortly after the January, 1920, sale the fur market declined and in the May, 1920, auction sale the purchasers did not buy*2594  the large quantity of furs the Fur Exchange had on hand with an invoice value of approximately $50,000,000.  Also the Fur Exchange's customers were not able to take their furs back and pay the Fur Exchange the amounts due it.  In June, 1920, there came due a number of bankers' acceptances amounting to several millions, which were issued for financing the January sale; the Fur Exchange was not able to meet those obligations, the banks refused to renew the loans and there resulted an acceptance credit agreement between the banks and the Fur Exchange, whereby the banks took over the management of the business.  On June 30, 1921, the consolidated balance sheet of the Fur Exchange and its subsidiaries showed total assets to be $22,159,175.65 and a deficit of $207, 366.90.  The outstanding capital stock of the Fur Exchange during 1921 was $2,480,000 preferred, each share of a par value of $100, and 80,000 shares of common stock of no par value.  The assets consisted principally of notes and accounts receivable in the amount of $13,915,477.73 and furs, stocks, real estate and cash.  It was known during 1921 that all of the accounts receivable could not be collected, but to what extent the*2595  record does not show.  During 1921 and part of 1922 the banks brought suits to collect these accounts and the officers of the Fur Exchange were hopeful of straightening out the financial difficulties of the Fur Exchange.  During 1922 the banks were not very successful in making collections because debtors were bringing counter suits against the banks for forcing the liquidation of the Fur Exchange.  On April 5, 1922, there was a reorganization agreement whereby the Fur Merchant Sales Co. was organized to take over the assets of the Fur Exchange and to collect the remaining accounts receivable, totaling about $11,000,000.  The stockholders of the Fur Exchange were given the right to receive for their Fur Exchange stock a certain amount of stock in Fur Merchant Sales Company, which is still in the process of liquidation and its accounts receivable if collected will more than pay the remaining indebtedness to the banks.  During 1921 perferred stock of the Fur Exchange was sold for from $5 to $10 per share and common stock was sold for $1 per share.  *464  In her income-tax return for the year 1921 petitioner made no report as to the receipt of $2u,590.50 as executrix's fees*2596  and she deducted from gross income $9,866.22 as a loss on the International Fur Exchange, Inc., stock claimed to have become worthless during 1921.  The respondent after an examination of petitioner's books, included as income for 1921, $21,590.50 as executrix's fees received during that year and disallowed the deduction of $9,866.22 on the ground that the said stock did not become worthless during 1921.  The respondent's action resulted in the deficiency in question.  OPINION.  TRUSSELL: The courts and the Board have held heretofore that mere book entries alone do not and can not determine the question of the receipt of income.  The only year here involved is the year 1921 and the only question with regard to the executrix's fees for the Board to determine is whether petitioner received them during 1921.  In April, 1918, the probate court turned over to petitioner the residue of her husband's estate plus the $21,590.50 allowed by that court as executrix's fees, and if such fees were received as such by petitioner they must have been received at that time, but we do not decide that question.  Subsequent to April, 1918, the property included in petitioner's husband's estate became*2597  hers and she could use, transfer or sell any or all of it during her life without any restriction whatever.  The two sets of accounts combined reflected petitioner's income from her property during 1921 and the crossentry memorandum upon which it seems the respondent relies, has no meaning whatever in regard to what income petitioner actually earned or received during 1921.  The petitioner kept two sets of accounts so that at her death the property included in her deceased husband's estate would be intact and go to the residuary legatees designated in his will.  She desired to have the whole estate pass on to his relatives, including the $21,590.50, and the memorandum was made on the books merely to show that she had never accepted nor received the said amount as executrix's fees.  The said $21,590.50 was not income to petitioner during the year 1921 and upon this issue the respondent must be reversed.  The record before us shows that on June 30, 1921, the assets of the International Fur Exchange, Inc., had a book value in excess of $22,000,000 and that its deficit amounted to $207,366.90.  The corporation had accounts receivable in an amount in excess of $13,000,000 and the record*2598  does not disclose how good or bad those accounts were in 1921.  There is no doubt but that the stock in question declined in value during 1921, but such decline in value does not give rise to a deductible loss.  . *465 The Fur Exchange was in the process of liquidation, but such liquidation of assets was not completed during 1921 and it has not been established that the stock became worthless during that year.  To sustain the deductible loss claimed by petitioner it must be shown that the stock became worthless in fact during 1921, and that there was no probability that any portion of the investment would ever be recovered.  See ; . The evidence does not establish that the stock in question became worthless during 1921, resulting in a loss deductible under section 214(a)(5) of the Revenue Act of 1921, and upon this issue the respondent must be sustained.  Judgment will be entered upon 20 days' notice, pursuant to Rule 50.Considered by SMITH, LOVE, and LITTLETON.