1934 BTA LEXIS 1489">*1489 In lieu of her statutory dower interest in her deceased husband's estate the petitioner took under the provisions of the decedent's will, by which he left the residue of his estate in trust, the income therefrom, except for a small annuity to a servant, to be paid to the petitioner for life. Held, that the capital value of the statutory dower interest of the widow has no bearing upon the determination of petitioner's tax liability, but that she is taxable as a beneficiary upon the entire amount paid to her within the year by the trustees.
29 B.T.A. 740">*740 This proceeding is for the redetermination of the petitioner's income tax liability for the calendar year 1928. In his deficiency notice the respondent has determined a deficiency of $35,822.22, which, by an amended answer, he contends should be increased to such extent as may be necessary by reducing the corrected capital value of the statutory dower interest from $542,007.83 to $522,413.78, while the petitioner contends that there has already1934 BTA LEXIS 1489">*1490 been an overassessment and overpayment of $14,164.71, which she asks be refunded. The question at issue is the amount of taxable income received by the petitioner in 1928 from distributions made to her in that year from the estate of her deceased husband and from the testamentary trust created for her benefit by his will.
FINDINGS OF FACT.
Eugene Atwood, a resident of Stonington, Connecticut, died June 3, 1926. He was survived by his wife, who is the petitioner herein, and three daughters. Petitioner's age at the time of her husband's death was 65 years. The decedent left a last will and testament which provided in part as follows:
First: I hereby direct my executors hereinafter named to pay all of my just debts, funeral and administrative expenses.
Second: I hereby give, devise and bequeath my entire estate, real, personal and mixed, of whatever name and nature and whereever situated, to C. Hadlai Hull of the Town and County of New London, State of Connecticut, and T. Whitridge Cutler and Frank F. Dodge both of the town of Stonington, County of New London, State of Connecticut, in trust, as follows:
Said trustees are hereby authorized and empowered to make a careful1934 BTA LEXIS 1489">*1491 inventory of said estate, and to invest and reinvest the property, real or personal, as they shall deem best, and to purchase, bargain, sell, mortgage, lease 29 B.T.A. 740">*741 and convey any of the estate, real or personal, belonging to this trust as and when they shall deem for the best interests of said trust estate, and also to make, execute and deliver any and all writings of conveyance necessary or convenient for the purpose of carrying out the powers herein conferred.
This trust shall begin six months after my decease, and continue during the lives of my wife, Annie C. Atwood, and of my daughters, Genevieve Hartman, Annie Atwood Dodge, and Constance Atwood McComb, and all survivors of them to the last. At the death of said last survivor of said four persons, to wit: my wife and my three daughters, the trust herein described shall be terminated, settled and disposed of as hereinafter provided.
Said trustees are hereby authorized and directed out of the net interest, income and profit of said trust estate, to pay to Catherine Blass, who has been a faithful servant in my family for many years, the sum of seventy-five dollars ($75.00) each and every third month, from and after the1934 BTA LEXIS 1489">*1492 beginning of this trust for and during the term of her natural life, but not beyond the termination of this trust.
Said trustees are further authorized and directed to pay the remainder of the net interest, income and profit of said trust estate to my wife, Annie C. Atwood, during the term of her natural life, and I hereby authorize and direct said trustees to pay and deliver to my wife, Annie C. Atwood, such part of the principal of said trust estate discharged of trust as she in her discretion may at any time deem necessary for her comfortable maintenance and support in the event the aforesaid remainder of the net interest, income and profit of said trust estate at any time in her opinion is insufficient therefor.
* * *
Said trustees are hereby directed and empowered to exercise their best judgment in fixing such times for the payments of income herein provided for as shall conserve the interests of said estate.
* * *
Fourth: I hereby nominate and appoint C. Hadlai Hull, T. Whitridge Cutler and Frank F. Dodge executors of this my last will and testament, and request that no bonds be required of them as such executors or as trustees of the trust hereinbefore created except1934 BTA LEXIS 1489">*1493 such as may be required by law.
The petitioner was entitled under the statutes of the State of Connecticut to a one-third life interest in his entire net estate. She did not elect within the time provided by the laws of Connecticut to take such statutory interest in the estate and her failure to do so amounted under the laws of Connecticut to an election by her to take under the provisions of the decedent's will.
The value of the net estate of the decedent as of the date of death, inclusive of $100,000 allowed as a deduction under the provisions of the estate tax law, was $5,000,438.43, and that value was accepted and used by the respondent for the purpose of determining the Federal estate tax due from the estate.
The assets of the estate included shares of capital stock of corporations, bonds, and miscellaneous real and personal property. Among the shares of capital stock were 7,502 shares of the capital stock of the Atwood Machine Co., which was a corporation engaged in the manufacture of machinery used in producing silk and rayon products. All of such assets were subject to sale, investment, and 29 B.T.A. 740">*742 reinvestment at the discretion of the executors or trustees1934 BTA LEXIS 1489">*1494 of the estate.
The will of Eugene Atwood was admitted to probate in the probate court of Stonington, Connecticut, and the persons named as executors qualified as such. The income of the estate during the first six months following decedent's death was not distributed by the executors, but was added to the corpus of the estate. At the termination of the six-month period the executors did not transfer the assets of the estate to themselves as trustees, but exercised the powers which the decedent's will vested in them as trustees. They distributed the income of the estate to Catherine Blass and to the petitioner as beneficiaries of the trust in accordance with the second paragraph of the will. They opened new accounts for the estate as of December 4, 1926, for the purpose of allocating income during the period of the trust. They sold assets of the estate and made new permanent investments.
As of March 31, 1928, the executors made their first accounting to the probate court and received the approval thereof under date of April 14, 1928. The decree of the court provides in part as follows:
The Executors under the will of the deceased, having filed with this Court a partial1934 BTA LEXIS 1489">*1495 administration account containing a true statement of all moneys received and expended by them and of the receipt and disposition of all property held by them in their capacity aforesaid from the date of their appointment and qualification as executors to March 31, 1928 inclusive, which said partial accounting was, on the 14th day of April, 1928, accepted, allowed and ordered on record by this Court; and said executors having applied to this Court for an order of partial distribution of said estate authorizing and directing said executors to transfer and deliver to the Trustees under the will of said deceased such assets of said estate as the executors will not require for the completion of the administration of said estate; and it appearing to and being found by this Court from sworn return on file that the notice ordered by this Court on the 14 day of March 1928, upon the hearing upon said partial accounting and upon the application for a partial distribution as hereinbefore set forth, was given as in said order directed; that all ante mortem debts and claims against the deceased as of the date of his decease have been satisfied and paid; that the completion of the administration1934 BTA LEXIS 1489">*1496 of said estate by said executors will not require said executors to retain in their possession the principal assets of said estate as set forth and particularly described in Section 2 Schedule H, entitled "Statement of Corpus of Principal Assets in Possession of the Executors, March 31, 1928" of the aforesaid partial accounting accepted, allowed and ordered on record by this Court as hereinbefore set forth, with the exception of the following items:
| 240,400 Par Value United States of America Treasury Notes Series | |
| B 1930/1, 1932, Dated September 15, 1927, 3 1/2's Due | |
| September 15, 1932/30, | |
| 4 Bonds at $100.00 each | |
| 24 Bonds at $10,000.00 each | $240,400.00 |
| Corpus Cash in Possession | 3,210.80 |
And after due hearing, this Court further finds and ascertains that said deceased, by the second paragraph of his will, gave, devised and bequeathed 29 B.T.A. 740">*743 his entire estate, real, personal and mixed, of whatever name and nature and wherever situated to C. Hadlai Hull, T. Whitridge Cutler and Frank F. Dodge in trust.
Wherefore said executors are hereby ordered to pay, transfer and deliver all of the corpus or principal assets in their possession on March 31, 1928 as1934 BTA LEXIS 1489">*1497 set forth and particularly described in Section 2, Schedule H, entitled "Statement of Corpus of Principal Assets in Possession of the Executors, March 31, 1928" of the aforesaid partial accounting with the exception of the following items:
| 240,400 Par Value United States of America Treasury Notes | |
| Series B. 1930/1, 1932 dated September 15, 1927, 3 1/2's Due | |
| September 15, 1932/30. | |
| 4 Bonds at $100.00 each | |
| 24 Bonds at $10,000.00 each | $240,400.00 |
| Corpus Cash in Possession | 3,210.80; |
and said executors are hereby ordered to retain in their possession said last described principal assets for the purpose of paying and discharging such other and further costs, charges and expenses as may be incurred in the completion of the administration of said estate and are chargeable to the principal or corpus of said estate.
Following the decree of the probate court of April 14, 1928, the executors took possession of all of the assets of the estate as trustees, with the exception of the $243,610.80 securities and cash which the executors retained for the purpose of completing the administration of the estate. The Connecticut inheritance tax, amounting to $194,337.73, was1934 BTA LEXIS 1489">*1498 paid by the executors on May 10, 1928, out of the sum which had been retained by them for that purpose. The executors, after the entry of the decree above referred to, adjusted the Federal estate tax, received a refund of taxes from the Federal Government, sold certain assets, made new investments, collected income, reimbursed the petitioner for certain expenditures, filed income tax returns, paid taxes, and paid other expenses incident to the administration of the estate. They filed an income tax return covering the calendar year 1928 in which they included the total income of the estate up to the date they took possession of the trust estate and the income of the remaining assets in their hands to the end of the year. From the income thus received in the aggregate amount of $323,863.07 they claimed deductions from gross income of the inheritance tax paid to the State of Connecticut in the amount of $194,337.73 plus other deductions by way of accounting, legal expenses, and commissions, leaving a net income of $53,863.12. They filed their final administration account with the probate court on September 1, 1932.
The distributions of income made to the petitioner as beneficiary1934 BTA LEXIS 1489">*1499 of the estate and trust during the years 1927 and 1928 were as follows:
| May 20, 1927 | $300,000 | |
| Total for 1927 | $300,000.00 | |
| April 1, 1928 | $400,000.00 | |
| April 20, 1928 | 55,000.00 | |
| September 30, 1928 | 27,000.00 | |
| December 29, 1928 | 58,267.11 | |
| Total for 1928 | $540,267.11 |
29 B.T.A. 740">*744 In the income tax returns filed by the executors for 1928 there was included in gross income a portion of the income of the estate which was distributed to the petitioner during that year. The respondent determined, however, that the income distributed to the petitioner was a legal deduction from gross income and that the estate had no net income for that year. He therefore refunded to the executors the tax which had been paid by them upon the reported income of $53,863.12.
Of the amounts paid to the petitioner by the executors and trustees in 1928, $171,331.92 represented income that had been collected by the executors of the estate in years prior to January 1, 1928, to wit, 1926 and 1927, and this sum had been reported by the executors on their returns and taxes paid thereon; of the balance, $243,886.97 was collected as income by the executors of the estate during the period1934 BTA LEXIS 1489">*1500 January 1 to March 31, 1928.
The respondent further determined that income of the estate distributed to the petitioner as beneficiary in 1927 and 1928 was taxable to the petitioner to the extent that it exceeded the value of the statutory interest which she had surrendered in order to qualify as a beneficiary under the will. He determined the value of such statutory interest in accordance with the method prescribed in article 13 of Regulations 70. He used as the basis of his calculation a hypothetical annuity at the rate of 4 percent of the value of one third of the entire net estate; and he determined the present worth of such annuity by use of the "Actuaries' or Combined Experience Table of Mortality" for a person 65 years of age, with interest at a percent per annum compounded annually. The value of petitioner's statutory dower interest computed in accordance with such method is $522,413.78, as follows:
| Corrected net estate | $5,000,438.43 |
| One third of net estate | 1,666,812.61 |
| Hypothetical annuity at a rate of 4 per centum per annum | 66,672.51 |
| Present value of each $1 of annuity during the | |
| life of petitioner age 65 years | 7.83552 |
| Corrected capital value of life use of one third of estate | 522,413.78 |
1934 BTA LEXIS 1489">*1501 The respondent determined that all of the distributions made to the petitioner in 1927 and a portion of those made to her in 1928 should be regarded as a tax-free recovery of the value of such statutory interest. He determined that the amount of the distributions of income made to the petitioner in 1928, to the extent that they 29 B.T.A. 740">*745 exceeded the value of her statutory interest in the estate, were taxable to her as income.
OPINION.
SMITH: The first contention of the petitioner is that the administration of the estate of Eugene Atwood was completed on March 31, 1928, and that no part of the income of the estate which was received by the executors prior to that date and paid over to the petitioner afterwards is taxable to the petitioner. In making this contention the petitioner relies, first, on article 863 of Regulations 74, which provides in part:
* * * 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 longer1934 BTA LEXIS 1489">*1502 or shorter than the period specified in the local statute for the settlement of estates. * * *
The petitioner submits that all of the outstanding accounts receivable had been collected by the executors prior to March 31, 1928, all the ante mortem debts had been paid, and all that remained to be done was the payment of the inheritance tax to the State of Connecticut and accounting and legal fees, commissions to executors, and other small items. The decree of the probate court clearly shows, we think, that the administration of the estate was not completed on March 31, 1928. It distinctly sets forth that the executors had filed with the court a "partial administration account"; that a "partial account was" accepted on the fourteenth day of April 1928; and that the executors were ordered to retain in their possession certain assets for the purpose of paying and discharging such other and further costs, charges, and expenses as might be incurred in the completion of the administration of the estate. It is further to be noted that the executors in their income tax return for 1928 did not file a return for the period from January 1 to March 31, 1928, inclusive, but filed a return1934 BTA LEXIS 1489">*1503 for the calendar year 1928 and by doing so obtained the deduction from gross income of the inheritance tax paid to the State of Connecticut in the amount of $194,337.73 on May 10, 1928. From these facts we conclude that the estate was in the process of administration and settlement during the entire year 1928, the same as the executors considered it both by their accounting and reporting.
The petitioner further contends that inasmuch as the executors in their 1928 income tax return for the estate accounted for its total income to March 31, 1928, she should not be subject to any income tax in respect of such income when paid over to her in 1928. This 29 B.T.A. 740">*746 contention is made by virtue of article 864 of Regulations 74, which provides in part:
* * * Where the tax has been paid on the net income of an estate or trust by the fiduciary, the net income on which the tax is paid is free from tax when distributed to the beneficiaries.
This article must be read in the light of section 162 of the Revenue Act of 1928, which, so far as material, provides as follows:
SEC. 162. NET INCOME.
The net income of the estate or trust shall be computed in the same manner and on the same1934 BTA LEXIS 1489">*1504 basis as in the case of an individual, except that -
* * *
(b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. * * *
(c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income1934 BTA LEXIS 1489">*1505 of the legatee, heir, or beneficiary.
The legal situation presented upon this point has been resolved by the Supreme Court in . In that case the Court observed:
Is a widow who accepts the provisions of her husband's will and receives part or all of the income from an established trust in lieu of her statutory rights a beneficiary within the ambit of the statute? We think she is. It is unnecessary to discuss her rights or position under other circumstances. We are dealing with a tax statute and seeking to determine the will of Congress.
When she makes her election the widow decides to accept the benefits of the will with the accompanying rights and liabilities. In no proper sense does she purchase an annuity. For reasons satisfactory to herself, she expresses a desire to occupy the position of a beneficiary and we think she should be so treated.
The income from the estate and trust paid over to the petitioner in 1928 was in the total amount of $540,267.11. The stipulation filed in this case is to the effect that of this amount $171,331.92 represented income that had been collected by the executors of the estate1934 BTA LEXIS 1489">*1506 in years prior to January 1, 1928, to wit, 1926 and 1927, and said sum had been reported by the executors on their returns and taxes paid thereon. Such amount is not subject to income tax in the hands 29 B.T.A. 740">*747 of the petitioner, under the provisions of article 864 of Regulations 74. The balance constitutes taxable income.
Reviewed by the Board.
Judgment will be entered under Rule 50.