*1686 Federal estate and New York inheritance taxes paid in the taxable years allowed as deductions to the petitioner who claimed them on a joint return for himself and wife, where the wife was beneficiary of the estate and trust involved, returns were filed on behalf of the estate and the trust and the tax was not claimed as a deduction against any income taxable to either. Following
*126 The Commissioner determined deficiencies of $23,807.26 and $8,361.09 in the petitioner's income-tax liability for the calendar years 1922 and 1923, respectively. The petitioner assigns as error (1) for the year 1922 the disallowance of a deduction for Federal estate tax paid by the petitioner's wife upon the estate of her sister, Jean Stewart, of which the wife was the sole beneficiary; (2) for the year 1923 the disallowance of New York State transfer or inheritance tax paid by the petitioner's wife on the above mentioned estate, and also the disallowance of Federal estate tax paid*1687 by the estate of Julia B. Stewart, the wife's mother, said estate being held in trust and the income payable to the wife for life. An alternative assignment of error was also made, but it is immaterial on the evidence.
The respondent alleges, (1) that the petitioner failed to report for 1923 his wife's distributable share of the income of the trust created by the will of Julia B. Stewart in the amount of $49,881.65, consisting of $1,300 of dividends and $48,581.65 of ordinary income; (2) that a deduction of $7,740, representing personal property taxes which in fact were not paid by the petitioner or his wife, was erroneously allowed the petitioner; (3) should the Board find that the petitioner is entitled to deduct, for 1922, $193,444.25 representing Federal estate tax on the Jean Stewart estate and $9,776.92 representing Illinois inheritance tax on this estate, then there should be added to the petitioner's income the income shown on the return filed for the estate for 1922, without deducting the above taxes; and (4) should the Board find that the petitioner is entitled to deduct for 1923 $47,400.77 representing Federal estate tax on the estate of Jean Stewart or $82,976.04 representing*1688 New York inheritance tax, then there should be added to the petitioner's income the income shown on the return filed for the estate for 1923, without deducting the above taxes.
*127 FINDINGS OF FACT.
The petitioner is an individual residing at Huntington, Long Island N.Y. For the calendar years 1922 and 1923 he filed joint returns on the cash receipts and disbursements basis for himself and his wife, Marian Stewart Honeyman, in accordance with the method used in keeping their books.
Marian Stewart Honeyman was the sister and only heir at law of Jean Stewart, who died intestate on October 10, 1921. Jean's estate was entirely distributed on August 31, 1923.
In 1922 the administrators of the Jean Stewart estate paid Federal estate tax on the estate in the amount of $193,444.25. They filed a fiduciary return of income for the calendar year 1922 on Form 1041, showing gross income of $53,304.30 and a net deficit of $157,048.87 after certain deductions, including a deduction of $193,444.25 representing the estate tax above mentioned. This return also reported that Marian S. Honeyman had a 100 per cent beneficial interest in the estate and was entitled to all income*1689 and credits of the estate. They filed no other Federal income-tax return and paid no income tax.
On the petitioner's joint return for 1922, under Item 4, income from fiduciaries, there was shown a computation wherein the Federal estate tax of $193,444.25 was deducted from "net distributable income," leaving a deficit of $157,048.87, which was entered in the right-hand column. Under "Deductions, Item 13, Taxes Paid," no figure was entered in the right-hand column, but the following notation was made "Federal Estate Tax - Est. Jean Stewart $193,444.25. See 4c above."
In 1923 the administrators of the Jean Stewart estate paid transfer or inheritance tax in the amount of $82,976.04 to the State of New York in connection with the estate. They filed a fiduciary return of income for the calendar year 1923 on Form 1041 showing gross income of $39,132.07 and, under deductions, Item 10, "Taxes Paid N.Y. Transfer Tax $82,976.04, Federal Estate $47,400.77 - $130,376.81." The return showed a net deficit of $119,197.08 and also that Marian Stewart Honeyman had a beneficial interest of 100 per cent. This return was filed on February 5, 1924. The administrators had been notified in 1923*1690 after final distribution of the estate, that additional estate tax was due in the amount of $47,400.77. They had no funds with which to pay this tax, so they notified Marian Stewart Honeyman, who furnished Liberty bonds, received from the estate, of the par value of $45,000, on which some interest had accrued, and her personal check for the balance. These bonds and the check were delivered to the Collector in November, 1923, and his temporary receipt was taken. A receipt stamped "Paid Jan. 23, 1924" was *128 later received by the estate. But between February 5, 1924, and March 15, 1924, the Collector gave notice that the tender of payment in the form made was not accepted. The bonds were returned, Marian Stewart Honeyman received the interest due on the bonds on March 15, 1924, and at some time in the latter part of 1924 the matter was settled by the Collector accepting Liberty bonds of the par value of $45,000 and making certain adjustments for interest as of November, 1923. Marian Stewart Honeyman made a small additional payment by check at the time of final settlement.
Julia B. Stewart, the mother of Marian Stewart Honeyman and Jean Stewart, died testate in 1917*1691 and left her entire estate in trust, the income payable to her two daughters or the survivor of them for life, remainder to their issue. In 1923 the trustees paid Federal estate tax of $53,440.98 on the estate. The trustees filed, for the calendar year 1923, a fiduciary return of income on Form 1041, showing net income of $50,882.53 (after deducting taxes in the amount of $7,740, but without deducting the $53,440.98 of tax), all distributable to Marian Stewart Honeyman, except for a profit of $1,000.88 from a sale which was shown as an accretion to the trust estate. The trustees filed a return on Form 1040A, showing the profit of $1,000.88, no deductions, and a tax of 4 cents due.
The petitioner on his joint return in reporting the income from the Julia B. Stewart Trust, deducted the tax payment of $53,440.98 from the ordinary income from the trust and entered the difference as a deficit under Item 4, income from fiduciaries, and noted the fact under "Deductions, Item 12, Taxes Paid." Under this item he deducted $7,740 which had already been deducted by the trust in arriving at the income distributable to Marian Stewart Honeyman. He reported the share of the dividends received*1692 from the Julia B. Stewart estate, but as he showed no tax due, he made no showing of a credit for $231.20, income tax paid at source by Julia B. Stewart estate.
In regard to the Jean Stewart estate, the petitioner's return for 1923 showed under Item 4, income from fiduciaries, a deficit of $119,197.08 and a notation under "Deductions, Item 12, Taxes Paid," that $82,976.04, New York Inheritance Tax had been deducted above.
The deficiency notice was mailed March 2, 1927. The Commissioner held that the Federal estate taxes and the New York inheritance taxes of the two estates above mentioned were not deductible by the petitioner, and disallowed the deficits from these sources claimed on the petitioner's returns.
OPINION.
MURDOCK: The only material fact about which there is much controversy between the parties is the date of payment of the Federal *129 estate tax of $47,400.77 on the estate of Jean Stewart. The petitioner now claims this tax was not paid until 1924, is not deductible in 1923, and must be deducted in 1924. His wife filed a separate return for 1924 and the question of her right to deduct this payment for 1924 is before us in a related case. The Commissioner*1693 contends that the payment was made as of some date in November, 1923. It is true that the petitioner's wife tried to make the payment in 1923 by a tender of Liberty bonds and a check, and she thought she had paid the tax, but the tender was never accepted and the bonds were turned back to her and she received interest on them in 1924. The matter was finally adjusted in 1924 and Liberty bonds were accepted by the Government in partial payment of the tax. Appearantly they were not the precise bonds previously tendered (which had been mutilated and had to be reissued), but this does not matter. It is now to the petitioner's advantage to allow his wife to claim the deduction in 1924. For the purpose of a deduction under section 703 of the Revenue Act of 1928, we hold with the petitioner that on the cash basis the payment was not deductible in 1923 and the Commissioner did not err in this connection.
The deficiency notice was mailed before the enactment of the Revenue Act of 1928, containing section 703. Under that section the estate and inheritance taxes paid within the taxable years 1922 and 1923 are allowed as deductions to the beneficiary who claimed them through the petitioner*1694 on his joint returns. The fiduciary returns mentioned in the findings of fact are not the returns referred to in section 703 and the "claim" must be construed to mean the substantial application of the amounts of the taxes in arriving at taxable net income. . Here, as in the Lentz case, it clearly appears from the various returns that the fiduciaries did not in fact apply the tax against their town taxable incomes and did not claim the deductions, but the petitioner did apply the tax against his and his wife's taxable income and in this way he alone claimed the deduction.
The deficiencies, if any, must be recomputed. The petitioner must be allowed as deductions $193,444.25 for 1922, representing Federal estate tax paid on the Jean Stewart estate; $82,976.04 for 1923, representing New York inheritance tax paid in connection with the Jean Stewart estate; and $53,440.98 for 1923, representing Federal estate tax paid on the Julia B. Stewart estate. He shall not be allowed any deduction for 1923 representing any part of the $47,400.77 paid as Federal estate tax on the Jean Stewart estate. The income and credits to which*1695 Marian Stewart Honeyman is entitled as a beneficiary of the Jean Stewart estate and the Julia B. Stewart trust shall, of course, be properly applied in such recomputations. *130 The respondent's first allegation is contrary to the facts; his second is supported by the evidence. Recomputation under Rule 50 will straighten out the matters mentioned in his other allegations so far as there is any evidence relating to them.
Reviewed by the Board.
Judgment will be entered under Rule 50.