*1104 Petitioner was beneficiary under a testamentary trust provided in her husband's will. The independent executor continued the administration throughout the taxable year and thereafter sued as such to collect a note forming a part of the corpus of the testamentary trust, of which he was also named trustee. Though the petitioner in later litigation alleged and the executor-trustee admitted the existence of the trust, held, on the facts, and absent plea or proof of estoppel, that the estate was during the taxable year in process of administration and the petitioner taxable only upon income actually received, under section 162(c), Revenue Act of 1932.
*545 This proceeding involves the redetermination of a deficiency of $28,602.99 in income tax for 1932. The stipulation of facts is incorporated herein by reference as part of our findings of fact. The issue is whether there should be included in petitioner's income, profits of a partnership having as one of its members a trust (set up by her husband's will) and of which*1105 petitioner was beneficiary, or whether the petitioner was required to report only the amount actually distributed on the theory that her husband's estate was in process of administration.
FINDINGS OF FACT.
The petitioner is the widow of Roy E. Dearing, who died testate January 19, 1932, and at the time of the institution of this proceeding she was unmarried. In November 1940 she married J. T. Buckner. Petitioner kept her books on the cash basis.
The partnership of R. H. Dearing & Sons, organized in 1922, was composed of R. H. Dearing and his two sons, Roy E. and Willis R. Dearing, all of whom were residents of Texas and each had a one-third interest in the profits of the firm. R. H. Dearing died November 23, 1932, and Willis R. Dearing died December 20, 1938. At all times important the principal business of the partnership was the drilling in Texas of oil wells for others.
The material provisions of the articles of copartnership read as follows:
IV. It is further understood and agreed that in the event of the death of either of the parties hereto, the survivor, or survivors, shall be authorized and directed, and he or they are hereby authorized and directed, to continue*1106 the business of the said R. H. Dearing & Sons along the general lines heretofore conducted, and in such manner as such survivor, or survivors, may deem most expedient and proper, and that the death of any of the parties hereto, less than the whole, shall not of itself dissolve said copartnership, necessitate an accounting thereof, nor require a sale or disposition of the properties belonging thereto.
* * *
VII. It is further understood and agreed that all questions of business policy, in case of disagreement, shall be determined by a majority of interest, and that on the death of any of the parties hereto that the survivor, or survivors shall continue the business under the name of R. H. Dearing & Sons, and that the executor or executors, or representatives, of such deceased partner or partners shall not have the right to participate in the management or control thereof, but that such survivor or survivors shall, from time to time, render an accounting to the executors or executor, or representatives, of such deceased partner or partners of the affairs of said copartnership.The will of Roy E. Dearing was admitted to probate in Dallas County, Texas, February 9, 1932, on which*1107 day Willis R. Dearing qualified as executor of the estate. On February 27, 1932, petitioner accepted the provisions of the will. The will devised and bequeathed *546 to Willis R. Dearing, in trust, property which included certain stock, real estate and the testator's entire interest in the partnership of R. H. Dearing & Sons, for the following uses and purposes:
The said Willis R. Dearing is to manage and control absolutely all such trust estate, with full power and authority to sell all or any part thereof, or to exchange same, to invest and reinvest any proceeds thereof, to mortgage and pledge same, it being the intention hereof to give unto the said Willis R. Dearing full and unlimited power of control, disposition and management of said properties for the benefit of the trust herein created; and he is especially directed to continue, as established under a written agreement in existence between the members of said firm, the operation and conduct of the partnership of R. H. Dearing & Sons, of which partnership the said Willis R. Dearing is to have full and complete control and management, free from the interference of any one.
Item 5: All net proceeds from the said*1108 properties herein conveyed to the said Willis R. Dearing in trust, shall be by him paid over to my beloved wife, Effie Reed Dearing, annually, so long as she shall live; and at her death said trust shall terminate and the corpus of same and any unused or indisposed [sic] income therefrom shall go one-half (1/2) thereof to my brother, the said Willis R. Dearing, and the remaining one-half (1/2) thereof in equal portions to his two sons, Robert M. (Jack) Dearing and Herman A. Dearing.
The net income of the partnership in 1932 was $115,177.23.
Willis R. Dearing, as executor of the estate of Roy E. Dearing, during 1932 and 1933 authorized various disbursements in payment of the debts and expenses of last sickness of Roy E. Dearing. On August 31, 1932, as executor, Willis R. Dearing filed an inventory and appraisement of the estate of Roy E. Dearing, listing the one-third interest in the partnership, and on December 10, 1932, as independent executor of the estate of Roy E. Dearing, he filed in the County Court of Dallas County, Texas, an "Affidavit of Executor, Administrator or Heir for Inheritance Tax Appraisement," stating in pertinent part that as "executor, administrator, *1109 heir, this deponent is familiar with the affairs of said estate, the property constituting the assets thereof * * *", and listing in detail such assets as of the date of the decedent's death, including "An undivided 1/3 interest in the co-partnership of R. H. Dearing & Sons." On September 9, 1933, he filed an action in the District Court in Dallas County, describing himself as independent executor of the estate of Roy E. Dearing and alleging that he, individually and as such, and the independent executor of the estate of R. H. Dearing "now conduct the partnership known as R. H. Dearing & Sons and are the owners and holders of the indebtedness hereinafter set forth and claimed"; and prayed judgment upon such indebtedness, i.e., a promissory note, and to foreclose a pledge upon certain corporate stock held as collateral "in the names of the individual partners of said partnership." On March 23, 1934, judgment was in such action rendered. The court found that Willis *547 R. Dearing, individually and as independent executor of the estate of Roy E. Dearing, and the executor of the estate of R. H. Dearing "constitute the partnership of R. H. Dearing & Sons"; also that "said Willis*1110 R. Dearing and the Estate of Roy E. Dearing and R. H. Dearing, as represented by the independent executors, constitute the partnership of R. H. Dearing & Sons and are the owners and holders of the indebtedness herein sued upon"; and that the corporate stock pledged standing in the names of the petitioners, was held (so far as concerns Willis R. Dearing) individually and as independent executor of the estate of Roy E. Dearing. Judgment was rendered for the plaintiffs and for foreclosure of the pledge.
The only money paid or credited to petitioner during the year 1932, either by the executor, the trustee, or the partnership, was the sum of $686.43, which was reported in an income tax return made for her by Willis R. Dearing.
Neither the estate nor the trust filed a fiduciary return for 1932.
During the early part of 1933 the petitioner requested Willis R. Dearing to make an accounting to her, but received no response. Thereafter in 1933 he gave her a financial report of the partnership and informed her that there were no funds for distribution to her and that because of the precarious condition of the business the firm was threatened with receivership or bankruptcy proceedings. *1111 Petitioner then retained counsel to represent her in the matter. As the result of negotiations conducted by counsel, on May 6, 1933, petitioner conveyed her interest in the partnership and other property to the surviving members of the partnership for about $50,000, consisting of an oil payment for $40,000, a note for about $5,000, and other property.
In April 1935 petitioner filed a suit against the partnership to set aside the conveyance of May 6, 1933, because of alleged false and fraudulent representations made to her, and for an accounting, alleging that the executor of the testamentary trust, Willis R. Dearing, had qualified as independent executor and thereby "became bound and obligated himself as such Trustee to faithfully carry out and perform the terms and provisions of said will as therein directed. By qualifying under the order probating said will, Willis R. Dearing accepted the trusteeship therein imposed and became bound and obligated as such Trustee * * *." The allegation of the acceptance of the trust and duty as trustee is repeated elsewhere in the petition. It was further alleged in substance that Roy E. Dearing intended to, and did, create an express active*1112 trust to continue during the petitioner's lifetime, she to receive from the trust annually the benefits thereof, and that "neither this plaintiff nor the said Willis R. Dearing, Trustee, could lessen, modify, change or defeat the express purposes of said trust as intended by Roy E. Dearing and *548 as fixed in said will"; that the trust as created by the will "and as accepted by herself and Willis R. Dearing, Trustee therein named, is still in existence and will continue during her lifetime"; also that by reason of the acts complained of, he is an improper person to continue to act as trustee and should be removed and a substitute trustee appointed. In a fifth amended petition filed in the proceeding in March 1939 and a sixth amended petition filed in April 1939, after the death of Willis R. Dearing, she alleged that her share of the profits of the partnership for 1932 was $50,129.09, and repeated in substance the earlier allegations as to trust and assumption thereof, and alleged further that it was also a spend-thrift trust for her benefit. In May 1940 the suit was settled by the payment of $30,000 to the petitioner by the executors and trustees of the estate of Willis R. *1113 Dearing.
In his determination of the deficiency the respondent included in petitioner's return as income from the trust created by her husband's will the amount of $95,093.71 as the trust's distributable share of the profits of the partnership of R. H. Dearing & Sons.
OPINION.
DISNEY: The first contention of the petitioner, all others being in the alternative, is that since the estate of her deceased husband was in the process of administration throughout the taxable year, she is liable to report as income to her only $686.43; i.e., so much of the income of the estate as was actually paid or properly credited to her as beneficiary. The effect of the petitioner's contention is that the executor, not the trust, was a member of the partnership during the taxable year and accordingly the partnership earnings were distributable and taxable to the executor, not the trustee, and therefore that only $686.43, the amount actually distributed to her, is properly to be included in her income. She cites , as controlling. That case did not involve a trust or partnership. The question was whether certain dividends were*1114 taxable to the petitioner as executor of the estate of her deceased husband or to her personally as sole beneficiary of the estate. Here the will of the decedent clearly bequeathed his interest in the partnership to Willis R. Dearing in trust, with petitioner as sole beneficiary of the trust. No provision was made in the will for the payment of income of the estate of the decedent to petitioner.
Notwithstanding the contention being made, the petitioner does not specifically deny that the trust was in existence in 1932. The record not only does not contradict the existence of a trust during the taxable year, but contains evidence indicating that the trust was a member of the partnership during that period. In his determination *549 of the deficiency the respondent found that the partnership had net income distributable to the trust estate, of which petitioner was sole beneficiary. The petition does not allege that the executor was a partner or deny that the trust was not a member of the firm. On the contrary, it contains allegations that Willis R. Dearing was made trustee by the will of petitioner's husband; that he "as trustee" denied that anything was due to her; *1115 that she claimed that she was entitled under the will "to receive from the said Willis R. Dearing as Trustee" certain sums, which he "as Trustee" disputed, and that she had instituted action to recover "proceeds of said trust estate due her." The petition assumes the reality of the trust. The stipulation of facts contains a statement that a certain amount was paid or credited to the petitioner in 1932 "either by the executor, the trustee or the partnership" and that "No fiduciary return was filed for the year 1932, either for the estate or the trust." These statements are at least some indication that the trust was being administered during the taxable year.
It is obvious that the petitioner long took the view and in this matter has not abandoned the view that Willis R. Dearing was trustee for her benefit under the provisions of her husband's will; and the respondent determined the deficiency on the theory that there was income in the taxable year from partnership to trust, and therefore liability to tax on the petitioner's part as beneficiary of the trust, under section 162(b), Revenue Act of 1932, 1 regardless of the fact that there was no receipt of income by the petitioner*1116 (with the exception of $686.43). Does the petitioner show error on the part of the respondent? If in fact and contrary to the petitioner's view in the litigation instituted by her, the estate of Roy E. Dearing, and not the trust estate provided for in the will, was the owner of the partnership interest, then it would follow that under section 162(c), Revenue Act of 1932, 2 the petitioner, not having received the amounts *550 involved in this proceeding, would not be subject to tax thereon. The question is therefore one of fact. The trust estate, in our opinion, could have been set up and could have coexisted with the administration of the estate of Roy E. Dearing. That the estate was in process of administration is demonstrated by the various activities of the executor during the taxable year. Had the trust provided by the husband's will also come into being, so that it was one of the partners of R. H. Dearing & Sons, subject to tax upon its portion of partnership earnings, and was the petitioner the beneficiary of such trust during the taxable year? Though the will provided for a trust, it did not arise automatically upon the death of the deceased and the estate of*1117 Roy E. Dearing included the property, to wit, the interest in the partnership which the testator intended should constitute the corpus of the trust. Such property, like all other parts of the estate, was subject to administration and to the payment of the debts of the deceased. That the interest in the partnership was considered in the first instance a part of the general estate of Roy E. Dearing is shown by its inclusion in both the inventory and appraisement and the affidavit for inheritance tax appraisement. Therefore only when distributed to the trustee did the interest in the partnership become trust corpus. The respondent having treated it as trust corpus, plainly the burden is upon the petitioner to show otherwise; but we think that this showing has been made. Upon examination of the entire record, we are of the opinion and find that, although throughout her litigation with Willis R. Dearing petitioner charged and considered that the trust had come into existence, it had not in fact done so during the taxable year.
*1118 There is no definite evidence that a distribution by the estate to the trustee had not been made, yet we think that fact is plainly and sufficiently indicated, both by the fact that in the litigation against Willis R. Dearing the petitioner did not allege a distribution by the estate to the trustee, but instead alleged an assumption by Willis R. Dearing of the duties of trustee; and, second, by the fact involved in litigation instituted by Willis R. Dearing, in suing on September 9, 1933, to collect a note belonging to the partnership. Therein he sued not as trustee, but as independent executor of the estate of Roy E. Dearing, and alleged the existence of the partnership and that he, as independent executor of the estate of Roy E. Dearing, and the executors of the estate of R. H. Dearing conducted the partnership and were the owners and holders of the indebtedness sued on. He further alleged that corporate stock pledged with the note sued on stood in the name of the individual partners by and on behalf of the partnership. Judgment was sought on the note and foreclosure of the pledge, and in accordance with the prayer judgment was rendered by the court in which it was specifically*1119 found that the partnership *551 known as R. H. Dearing & Sons consisted of the estates of Roy E. Dearing and R. H. Dearing, and Willis R. Dearing individually. It thus appears that it was considered necessary, in order that judgment might be obtained upon the note belonging to the partnership, for the executor to institute action. We recognized that there is not the same necessity for formality in distribution between an executor, particularly in independent executor, and a testamentary trust estate of which the trustee is the same as the executor, as there is where one person is not both independent executor and trustee. ; 24 C.J. 471; ; . Nevertheless, we conclude from all the facts here that there had been at the end of the taxable year no distribution from the estate to the trust. Although the petitioner in the litigation above mentioned after the taxable year took the view that Willis R. Dearing was trustee and sought an accounting from him as such, we find in the present matter neither facts nor pleading to justify*1120 any idea that she is estopped from contending that the estate during the taxable year was in process of administration and that partnership income was receivable by her through and from the executor. We conclude and hold, therefore, that section 162(c) of the Revenue Act of 1932 applies and that the respondent erred in including in petitioner's income that portion of the income of the partnership not received by her. In view of this conclusion, it is unnecessary to discuss the other contentions advanced by the petitioner.
Reviewed by the Board.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 162. NET INCOME.
The net income of the estate or trust shall be computed, in the same manner and on the same basis as in the case of an individual, except that -
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(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. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year; ↩
2. (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 income of the legatee, heir, or beneficiary. ↩