*39 Decision will be entered under Rule 50.
Harold Hirsch, husband of petitioner, died testate in September 1939, leaving a large estate with considerable indebtedness and other claims against it. In his will, after a few specific bequests to his wife, he bequeathed the remainder of his estate to trustees for the benefit of his wife during her lifetime, with remainders to his children. Executors were appointed and during the taxable years 1940 and 1941 the estate was in process of active administration. Held, that during the taxable years the residuary assets of the estate had not been turned over to the testamentary trust and section 162 (b), I.R.C., is not applicable; held, further, petitioner is taxable only on the income of the estate which was actually paid to her during the taxable years in question, under section 162(c), I.R.C.
*896 The Commissioner has determined deficiencies in petitioner's income tax of $ 13,735.46 for 1940 and $ 15,363.47 for 1941.
The deficiency for 1940 is due to the addition to the net income of $ 31,703.98 reported by petitioner on her return, of $ 29,202.18 as income from trust under the will of Harold Hirsch. The Commissioner explained this adjustment in his deficiency notice as follows:
(a) It is held that the income from the trust under the will of Harold Hirsch was distributable to you during the year 1940. The income of the trust for this year amounted to $ 58,232.04 and as you reported income from this source of $ 29,029.86 your net income has been increased by $ 29,202.18.
The deficiency for 1941 is due to the addition by the Commissioner to the net income of $ 35,146.58 reported by *41 petitioner on her return, of $ 26,484.55 as income from trust under the will of Harold Hirsch and $ 36.87 as capital gain. The reason why additional income from *897 trust under the will of Harold Hirsch was added is explained in the deficiency notice in the same way as explained above for 1940.
Petitioner, by appropriate assignments of error, contests the additions to her net income of income from trust under the will of Harold Hirsch. The petitioner does not contest the addition to her net income for 1941 of $ 36.87 as capital gain from the liquidation of the Equitable Co. That adjustment is, therefore, not in issue.
Petitioner has an assignment of error which reads as follows:
(h) In determining that net long-term capital loss in the amount of $ 23,223.28 incurred by the Estate of Harold Hirsch during the calendar year 1941 was, under the will of Harold Hirsch, chargeable against corpus rather than against income and thereby in failing to reduce the income of said estate for 1941 to the extent of said amount.
Petitioner presses this assignment of error only in the event that we should rule against her on the main issue.
The facts at the hearing were established by a stipulation*42 of facts, oral testimony, and documentary evidence.
FINDINGS OF FACT.
The stipulated facts are so found.
Petitioner is the widow of Harold Hirsch and resides in Atlanta, Georgia. The returns for the periods here involved were filed with the collector for the district of Georgia.
Harold Hirsch, a resident of Fulton County, Georgia, died September 25, 1939, leaving a will and owning a large estate in excess of $ 1,500,000 (net for Federal estate tax) according to the final settlement of Federal estate tax. The three executors named in the will were petitioner, her son, Harold Hirsch, Jr., and her son-in-law, Eugene Stern. They were also named as trustees.
The first thing done by the persons named as executors was to offer the will for probate in common form in the Ordinary's Court of Fulton County, Georgia, on October 3, 1939. On the same date they filed in the same court a petition for probate of the will in solemn form. On the same date Mrs. Hirsch, her son, and her son-in-law qualified as executors under the will of Harold Hirsch.
The executors then engaged an auditing firm to audit the books and records of the decedent to determine what he owned and owed at his death. This*43 audit required approximately six or seven months, being completed in March of 1940.
In the meantime, the executors took steps to collect various assets of the estate, including insurance and notes, and to have the assets of the estate appraised. They employed appraisers to valuate real estate, including city and farm lands owned by L. B. Lilienthal, Inc., the entire capital stock of which was owned by the decedent, and they had *898 discussions with executives of different companies, particularly local companies, closely held, in which the decedent owned stocks, to arrive at fair valuations.
One of the principal assets owned by the decedent was the entire capital stock in a holding company, Halmar, Inc., which in turn owned 9,184 shares of stock in the Coca-Cola Co. Eugene Stern, one of the executors, engaged in extensive deliberations with brokers, bankers, and others, seeking to arrive at a proper basis for valuing this large block of Coca-Cola stock. These deliberations continued right up to the time the executors filed the estate tax return in December 1940. Coca-Cola stock was thinly traded in, and it was felt that the price which several hundred shares brought on the*44 market was not representative of a large block of stock such as was involved in the estate.
In order to raise funds for payment of estate taxes and other taxes, the executors completely liquidated this holding company on May 20, 1940, that day transferring all of the assets of Halmar, Inc., to the executors.
Following the liquidation of Halmar, Inc., the executors, during the period from May 21, 1940, through August 10, 1942, effected the sale of 5,484 shares of Coca-Cola stock, along with several minor holdings in bonds and other stocks. Decedent had died in September 1939, just after the war began in Europe. Coca-Cola stock sold on the Exchange on the date of decedent's death at about $ 112 per share and there was a steadily declining market from that time throughout the period during which the executors were liquidating the stock. The price of Coca-Cola had declined in February 1942 to approximately $ 58 per share, a decline of some $ 54 per share, and the executors believed it advisable to effect the liquidation gradually, in small lots, so as not to further depress the market.
At his death the decedent was one of the trustees of his father's estate, and the various members*45 of his family were in the midst of a complicated controversy concerning the administration of his father's estate, with litigation threatened against the decedent. After numerous conferences between the 13 parties involved in this dispute, and their lawyers, the dispute was settled December 31, 1940, and a written agreement evidencing the settlement was executed. The executors of the estate of Harold Hirsch were parties to this agreement.
At his death the decedent and his former secretary, Mrs. Sloan, had a joint investment account which held securities in some 20 to 30 companies and notes of a number of persons. It required until early in 1941 for the executors to agree with Mrs. Sloan on the valuation of her interest in this account.
*899 In the Federal estate tax return filed for the estate, the debts of the decedent listed in the return totaled $ 103,733.15. Funeral expenses were $ 7,156.15; executors' commissions, $ 50,333.69; and miscellaneous administration expenses, $ 166.50. During the calendar year 1940 the estate of Harold Hirsch paid debts of the decedent totaling $ 72,399.34. During the same year the estate paid executors' fees of $ 30,000. During the calendar*46 year 1941 the estate paid debts of the decedent totaling $ 14,303.04. During that year the estate paid executors' commissions of $ 16,085.85. The Federal estate tax return of the estate was filed with the collector of internal revenue at Atlanta, Georgia, on December 23, 1940, and a tax of $ 248,089.50 was paid to the collector on that date. On December 24, 1940, an inheritance tax return was filed with the department of revenue, State of Georgia, and a tax of $ 50,072.38 was paid to the State of Georgia.
On February 17, 1942, the estate of Harold Hirsch received from the internal revenue agent in charge, Atlanta, Georgia, a 30-day letter enclosing a report of the revenue agent's examination of the estate tax return of Harold Hirsch. This letter proposed a deficiency in Federal estate tax against the estate in the amount of $ 174,740.86. Following receipt of this 30-day letter, the executors and their counsel accumulated information relative to the proposals made by the revenue agent. The executors on April 27, 1942, filed a formal protest with the revenue agent in charge against the proposed adjustments in estate tax liability. Following a number of conferences among the executors*47 of the estate, their counsel, and the revenue agent's office, a settlement of the estate tax liability of the estate was reached with the Bureau in August 1942. As a result, the collector of internal revenue, by letter dated August 7, 1942, addressed to the executors, requested payment of the agreed deficiency of $ 88,145.28 in estate tax liability of the estate. This deficiency was paid in full on August 10, 1942, by the executors and on October 7, 1942, they paid to the Department of Revenue, State of Georgia, a $ 21,617.20 deficiency in Georgia inheritance taxes.
At the date of decedent's death there was pending a controversy between him and the Department of Revenue, State of Georgia, concerning his intangible tax liability for the years 1938 and 1939 with respect to his ownership of Halmar, Inc., stock. Following his death, the Department of Revenue, State of Georgia, in July 1940 made an assessment against the decedent for the years 1938 and 1939 and against the estate for the year 1940. The executors filed a protest against the assessments, and when it was overruled they filed an appeal to the Georgia Board of Tax Appeals and subsequently an appeal to the Superior Court*48 of Fulton County.
There was also in controversy at the decedent's death the matter of intangible taxes of Halmar, Inc. The executors filed a protest in connection therewith, an appeal to the Georgia Board of Tax Appeals. *900 and subsequently an appeal to the Superior Court of Fulton County. The Commissioner of Revenue of the State of Georgia brought suit in 1943 against the trustees of the estate of Harold Hirsch in connection with the tax claim against Halmar, Inc., which had been liquidated in 1940, and the controversy was then settled in 1943. As a result, the executors filed a claim for refund of estate tax and received a refund. Petitioner, the widow of Harold Hirsch, applied to the Ordinary's Court of Fulton County for a year's support on April 25, 1940, and was allowed a year's support by order of the court during its June 1940 term. She applied for and was allowed a second year's support in 1941.
Harold Hirsch, Jr., one of the executors, went into the Army Air Corps and was on duty outside the United States for some time. Before he left the executors, by petition to the Court of Ordinary, Fulton County, obtained an order relieving Harold Hirsch, Jr., as a coexecutor*49 during his absence from the United States and substituting Ernestine H. Stern in his place.
At his death the decedent was a director in some 15 to 20 companies, among which were the Coca-Cola Co., Farmers & Ginners Cotton Oil Co., Mutual Cotton Oil Co., several Coca-Cola bottling companies, Scripto Manufacturing Co., and Norris Candy Co. The affairs of two of these companies, Farmers & Ginners Cotton Oil Co. and Mutual Cotton Oil Co., were badly involved financially and both were considered insolvent. The executors anticipated possible legal action against the directors.
Not until the Federal estate tax matter was settled and paid on August 10, 1942, did the executors consider it proper to transfer the possession and management of the estate to the trustees, because of the outstanding claims against the estate. After the settlement of estate taxes with the Federal Government, the executors considered it safe, from a practical standpoint, to turn the assets over to themselves as trustees under the will of Harold Hirsch, even though several Georgia intangible tax claims were still pending against the estate. Accordingly, they made an income tax return as executors for the period*50 January 1 through August 10, 1942 (the date of settlement of estate taxes). For the balance of the year 1942 (i. e., August 11 through December 31, 1942) and for each year thereafter they operated the estate as a trusteeship and filed income tax returns as trustees. The properties of the estate were formally transferred from the executors, as such, to the trustees sometime after August 10, 1942, but the executors considered the operation of the estate as a trusteeship commencing August 11, 1942, and so treated it.
There was distributed to the petitioner by the estate of Harold Hirsch out of its net income for 1940 the sum of $ 29,029.86 and during the year 1941 there was distributed to her $ 31,606.32 of its income for *901 that year. Petitioner reported this income in her income tax returns for the years 1940 and 1941.
The will of decedent Harold Hirsch contained, among others, the following provisions:
Item I
To my beloved wife, Marie Brown Hirsch, I will and bequeath all of my personal effects, including my jewelry, my library, my automobiles, my clothing, my household furniture and such like articles.
Item II
To my Trustees hereinafter named, I bequeath, devise and appoint*51 all the rest of the property which I shall own at the time of my death and over which I shall then have any power of appointment, general or special, in trust for the following uses:
(a) During the life of my said wife, to pay to her the income of the trust estate quarterly, or more often if she shall request it. The determination by my Trustees as to what constitutes income and what constitutes principal shall be conclusive upon all parties.
The estate of Harold Hirsch, deceased, was in process of administration during the calendar years 1940 and 1941. The testamentary trust provided in decedent's will did not begin to function prior to August 10, 1942.
OPINION.
The Commissioner has added to the net income disclosed on petitioner's income tax returns for 1940 and 1941, the respective amounts of $ 29,202.18 for 1940 and $ 26,484.55 for 1941 and has designated these amounts as "Income from trust under will of Harold Hirsch." It is petitioner's contention that throughout the taxable years 1940 and 1941 the estate of Harold Hirsch was in process of administration, and that the income of the estate is taxable to the executors in their fiduciary capacity, except that which they properly*52 pay or credit during any year to any legatee, heir, or beneficiary. Petitioner cites as the applicable statute the parts of section 162 of the Internal Revenue Code, printed in the margin. 1*53 Petitioner cites as the *902 applicable regulation, section 19.162-1 of Regulations 103, printed in part in the margin. 2 This regulation has often been approved by this court and other courts. See William C. Chick, 7 T.C. 1414">7 T. C. 1414.
There is no dispute as to the amount of income of the estate of Harold Hirsch which was paid to petitioner in each of the taxable years. She returned that for taxation on her income tax returns and it is not in*54 controversy here. But the Commissioner has added to petitioner's net income amounts of income of the estate of decedent which were not distributed to her, but which were used by the executors of the estate in the payment of claims against the estate, such as estate taxes to the Federal Government and inheritance taxes to the State of Georgia, and other claims against decedent.
In his deficiency notice respondent does not raise the question that the estate was not in process of administration. He simply states: "It is held that the income of the trust under the will of Harold Hirsch was distributable to you." The latter fact is undoubtedly true if and when the testamentary trust should come into possession of the residuary estate. Petitioner does not dispute that fact at all, but contends, and properly so, we think, that in each of the taxable years the estate was in process of administration and that the executors had possession of the assets of the estate, administering them under the laws of the State of Georgia, and the testamentary trust had not yet begun to function. The facts with reference to what the executors of the estate were doing during the taxable years 1940 and *55 1941 have been fully stated in our findings of fact and need not be repeated here. Suffice it to say that these facts clearly show that the estate of decedent was in process of administration during each of the taxable years here in question. That fact seems too clear for argument, and to discuss it would only be a waste of words. Also, it is clear that the administration of the estate was not needlessly prolonged. Cf. Caro duBignon Alston, 8 T.C. 525">8 T. C. 525. The decedent died September 25, 1939, and he left a large estate, consisting of numerous properties and securities, and there were many matters for his executors to adjust and settle before turning over the residuary estate to the trustees. On August 10, 1942, when the deficiency in estate tax determined by the Commissioner had been compromised *903 and settled by the executors, they considered it safe then for them to consider the administration closed and to proceed thereafter in their capacity as trustees of the testamentary trust established by decedent's will. Although the assets of the estate were not at that time formally transferred by the executors to the trustees, this being done at*56 some later date not identified in the record, nevertheless from August 11, 1942, all the income of the estate was treated as the income of the testamentary trust and was accounted for as such.
Therefore, in the light of the foregoing facts, it seems clear that the income of the estate of decedent was the income of an estate in "process of administration" and is taxable as provided in section 162 (c), as petitioner contends, and not as provided by section 162 (b), as contended by respondent. For a full discussion of the two above provisions of the statute, see Estate of Peter Anthony Bruner, 3 T.C. 1051">3 T. C. 1051, and First National Bank of Memphis, Executor, 7 T. C. 1428. These two cases clearly support petitioner. In both of those cases the shoe was on the other foot from what it is here. The Commissioner was invoking the provisions of section 162 (c) against the estate of the decedent and was contending that section 162 (b) was not applicable while those estates were in process of administration. We sustained him and held against the taxpayers. Respondent, in his brief, undertakes to distinguish these two cases from the instant*57 case, but we regard his effort in that respect as unconvincing. We hold that these cases are controlling in petitioner's favor. See also Caro duBignon Alston, supra.
Having decided the main issue in petitioner's favor, it is unnecessary to decide the capital loss issue raised by the petitioner in the alternative. The facts with reference to that issue are stipulated but we have omitted any recital of those facts in this report because it is unnecessary to decide the issue.
There is one small adjustment made by the Commissioner which is not contested; therefore,
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 --
* * * *
(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 legatees, heirs, or beneficiaries, but the amount so allowed as a deduction shall be included in computing the net income of the legatees, heirs, or beneficiaries, whether distributed to them or not. As used in this subsection, "income which is to be distributed currently" includes income for the taxable year of the estate or trust which, within the taxable year, becomes payable to the legatee, heir, or beneficiary. 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;
(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.↩
2. The income of an estate of a deceased person, as dealt with in the Internal Revenue Code, is therein described as received by the estate during the period of administration or settlement thereof. 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 longer or shorter than the period specified in the local statute for the settlement of estates. If an executor, who is also named as trustee, fails to obtain his discharge as executor, the period of administration continues up to the time when the duties of administration are complete and he actually assumes his duties as trustee, whether pursuant to an order of the court or not. * * *↩