*93 Decisions will be entered under Rule 50.
1. Administration of estate held completed when decedent's debts were paid and all other duties pertaining to administration were performed by the executor, except distribution of the assets of the estate to the life beneficiary under decedent's will.
2. Gift by the life beneficiary to her daughter of certain cattle which had been raised by the estate after decedent's death held not to have resulted in taxable gain to the donor.
*94 *277 The respondent has determined deficiencies in petitioners' income taxes for the fiscal years ended May 31, 1944, to May 31, 1948, inclusive, as follows:
| Petitioner | Docket No. | Year ended | Deficiency |
| Estate of W. G. Farrier | 24539 | May 31, 1944 | $ 1,444.99 |
| May 31, 1945 | 3,765.35 | ||
| Mamie F. Farrier | 24540 | May 31, 1945 | 17,142.60 |
| May 31, 1946 | 11,301.29 | ||
| may 31, 1947 | 5,556.98 | ||
| May 31, 1948 | 44,087.53 |
The principal question in issue is whether the estate of W. G. Farrier, deceased, was in the process of administration during the years 1945 to 1948, inclusive, so that the income thereof is taxable to the executor. Respondent has determined that the estate was closed during or prior to the taxable year 1945 so that the income therefrom for 1945 and subsequent years is taxable to the petitioner, Mamie F. Farrier, the life beneficiary under decedent's will.
To protect the interests of the Government the respondent proposes to tax the income realized by the estate in 1945 both to the estate and to the life beneficiary but he concedes that only one of the petitioners is liable for such tax.
There is a further issue as to whether Mamie F. Farrier realized income in 1945*95 by making a gift to her daughter of certain cattle which had been raised by the estate after decedent's death.
*278 Other issues raised by the pleadings have been settled by stipulation. The facts pertaining to the remaining issues have been stipulated in part and are found accordingly.
The proceedings were consolidated for hearing.
FINDINGS OF FACT.
W. G. Farrier, hereinafter referred to as the decedent, died testate on July 28, 1941, a resident of Omaha, Texas. The returns here involved were filed with the collector of internal revenue for the second district of Texas.
Decedent was survived by his wife, Mamie F. Farrier, and daughter, Lura Farrier Moore. In his will, which was duly probated, the decedent left all of his property to his wife for life with the remainder over to his daughter. He named his son-in-law, R. E. Moore, independent executor of his estate. The will reads in part as follows:
It is my will and desire that all of the property, both real and personal, I may die seized and possessed of, after the payment of my just debts, together with all of the expenses incident to the probating of this will, shall pass to my beloved wife, Mamie F. Farrier, for the *96 period of her natural life, but with full power to manage, sell, dispose of as she may wish or see proper; and at her death, said property, or proceeds thereof remaining, shall pass to and vest in fee simple in my beloved daughter, Lura (Trixie) Moore, wife of R. E. Moore.
Although it is my will that my said wife, Mamie F. Farrier, shall have the power to manage, sell or dispose of said Property during her natural life, it is my further will and desire that before any sale, incumbrance or disposition is made by her of any part thereof, she will consult and advise with and secure the consent of R. E. Moore, the husband of our only child, and the Executor of my will.
I hereby constitute and appoint the said R. E. Moore, Executor of this, my last will and testament, and direct that no bond or security be required of him as Executor.
It is my will that no other action shall be had in the County Court in the administration of my estate than to prove and record this will and to return an inventory and appraisement of my estate and list of claims.
Decedent's estate included, among other assets, about 600 acres of peach orchards, farm and pasture lands, a packing plant, a vegetable plant business, *97 and cattle. Decedent's total gross estate, as reported in his estate tax return, amounted to $ 92,364.95 and the deductions $ 64,639.99, leaving a net estate of $ 27,724.96. The estate tax return was accepted as filed without any change by the respondent. Decedent's debts were all paid on or before March 28, 1944.
A few days before his death the decedent told Moore that he had named him executor of his estate and requested him to see that his debts were paid and his estate put into such condition that his wife would be able to manage it. She had had no experience in operating the orchards and farm business and was not in good health at the time.
*279 After taking over the duties of executor of the estate, Moore was required to devote most of his time to that business. The peach orchards and vegetable plant business required constant care. A labor force was employed of 35 or 40 the year around and of 200 or more during the harvest season. The financing of these operations required between $ 40,000 and $ 50,000 a year. Moore made arrangements for such financing and succeeded in building up a good credit rating for the estate.
At the time of his death the decedent was president*98 of the State Bank of Omaha, a position to which Moore succeeded on his death.
From the beginning of his executorship of decedent's estate Moore intended to sell the peach orchards and vegetable plant business as soon as conditions were favorable and a purchaser could be found. He did not like the work of operating the business and it required too much of his time. He was then interested in an oil development business which he and decedent had been operating as a joint venture up to the time of decedent's death. He began seeking a buyer for the properties in 1943. After advertising them, and at one time attempting to organize a stock company to take them over, he finally sold the properties in May 1948 to an individual whom he had employed a year or two previously to manage the vegetable plant business. Moore assisted the purchaser in making the necessary financial arrangements. The total consideration under the contract of sale was $ 211,376.62 and the profit to the estate was $ 170,673.46.
Soon after the sale Moore advised Mamie F. Farrier that the administration of the estate was closed. He instructed the bookkeeper to close the books of the estate as of May 31, 1948, and*99 open a new set of books for Mamie F. Farrier as of June 1, 1948.
Fiduciary income tax returns were filed by the estate for the years 1944 to 1948, inclusive, showing net income and distributions to the beneficiaries as follows:
| Year | Net income | Distributions to |
| beneficiaries | ||
| May 31, 1944 | $ 38,152.46 | |
| May 31, 1945 | 32,703.39 | $ 16,000 |
| May 31, 1946 | 34,638.63 | 15,000 |
| May 31, 1947 | 23,546.92 | 11,000 |
| May 31, 1948 | 104,043.46 | 14,500 |
The amount of $ 104,043.46 reported for 1948 includes the capital gain realized in that year on the above mentioned sale of assets.
For his services as executor of the estate Moore received compensation, by agreement between him and Mamie F. Farrier, of $ 5,000 in 1944, $ 10,000 in each of the years 1945 and 1946, and $ 5,000 in 1948. He received no compensation for 1947.
*280 On August 1, 1944, Mamie F. Farrier made a gift to her daughter, Lura Farrier Moore, of certain properties formerly owned by decedent, consisting of real estate, oil and gas leases, cattle, and bank stock, which she reported in a gift tax return for that year at the following values:
| Farm land | $ 10,043.92 |
| Livestock | 5,070.00 |
| Accounts receivable -- | |
| W. G. Farrier Estate | 6,938.68 |
| 110 shares common stock -- | |
| The State Bank of Omaha | 5,500.00 |
| Oil properties | 7,200.00 |
*100 The above values represented the donor's one-half community interest in the properties. The livestock included the following:
| No. of | |||
| head | Description | Price | Value |
| 97 | Cows -- 3 to 7 years old | $ 30.00 | $ 2,910.00 |
| 20 | Heifers -- 2 years old | 45.00 | 900.00 |
| 4 | Bulls -- 5 to 8 years old | 90.00 | 360.00 |
| 60 | Calves -- 2 to 3 months old | 15.00 | 900.00 |
| Total | $ 5,070.00 |
In his audit of the gift tax return the respondent increased the value of the livestock by the amount of $ 2,100.87, representing the value of the donor's life estate therein. Similar adjustments were made in some of the other items not here in controversy. Also, in determining the deficiency in the donor's income tax for 1945 the respondent added to her income $ 3,600, representing the fair market value at the time of the gift of the 20 heifers and 60 calves included in the gift. This amount was determined to be income realized by the donor by reason of the gift.
The estate of W. G. Farrier, deceased, was closed prior to or during the taxable year ended May 31, 1945.
OPINION.
Our principal question here is whether decedent's estate was closed, or should be treated as closed, for income tax purposes, *101 for the taxable years 1945 to 1948, inclusive, so that the income therefrom is all taxable to the life beneficiary. Respondent contends that the period of administration of the estate must be considered as having ended prior to May 31, 1945. Petitioners contend that the estate was not closed until after the sale of the principal assets by the executor in 1948. The effect of continuing the administration and distributing only a portion of the income each year was to lessen the over-all tax burden on the income of the estate.
Section 161, Internal Revenue Code, provides that "Income received by estates of deceased persons during the period of administration *281 or settlement of the estate" is subject to the same income tax as is imposed on individuals, and, that with exceptions not here material, "shall be computed upon the net income of the estate or trust, and shall be paid by the fiduciary." If the estate was closed during the fiscal year ended May 31, 1945, as respondent contends, then the income thereof became currently distributable and under section 162 (b) of the Internal Revenue Code is taxable to the beneficiary.
Section 29.162-1 of Regulations 111 provides that:
*102 * * * 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. * * *
This Court has expressed its approval of the above-quoted provisions of the Regulations, or their counterpart in previous Regulations, in several recent cases. See Walter A. Frederich, 2 T. C. 936, revd., 145 Fed. (2d) 796 (CCA-5); Estate of J. P. Armstrong, 2 T. C. 731; Pierce Estates, Inc., 3 T. C. 875; William C. Chick, 7 T. C. 1414, affd., Chick v. Commissioner, 166 Fed. (2d) 337 (CCA-1), certiorari denied 334 U.S. 845; Caro Du Bignon Alston, 8 T. C. 525; Marin Caratan, 14 T. C. 934.
The Walter*103 A. Frederich case, supra, involved a Florida estate where the administration of estates of deceased persons is under the jurisdiction of the County Judge's Court. The decedent died in 1934 and his debts were all paid off within a year but his heirs and his surviving partner agreed, with the retroactive approval of the county judge, to continue the estate in the partnership, with the surviving partner serving as administrator by court appointment. We held that the estate was not in process of administration in 1937, 1938, and 1939. The court reversed, saying that:
It seems clear that the act and also the regulation each contemplates that during the period that the estate is actually under administration and unsettled the income shall be reported by, and the undistributed portion thereof taxed to, the estate.
The court said further that the orders of the county judge approving the continuation of the estate in the partnership business were "valid and conclusive determinations that the period legally and properly required for the winding up of the estate had not expired even in 1942."
In the case at bar there was no order of the probate court or any local court authorizing*104 the continuation of the administration of the estate beyond the period when the respondent determined that it was closed. The administration of the estate under the laws of the State of Texas was not subject to the jurisdiction of the probate court.
*282 Chick v. Commissioner, supra, involved a Massachusetts estate which was subject to the jurisdiction of the probate court but the court had not ordered a continuation of the administration beyond the time when the Commissioner determined it to be closed. The court there said, after referring to the ruling of the Circuit Court of Appeals for the Fifth Circuit in the Frederich case, that:
* * * We express no opinion upon it * * * [the question under consideration in the Frederich case] since the probate court was not asked to take and did not take any affirmative action of any kind with respect to continuing the administration of the estate here involved.
All we are called upon to hold here, and all we do hold, is that Congress can, and in the interest of a uniform system of federal income taxation did, clothe the Commissioner and the Tax Court with power to determine, at least absent*105 conflicting valid affirmative action by the state court having jurisdiction in the premises, that the period of administration or settlement of an estate has terminated for income tax purposes when the executor or administrator has performed all the ordinary duties incumbent upon him in his fiduciary capacity.
The same distinction, perhaps more pronounced, is found between the Frederich case and the instant case; since here the administration of the estate was not subject to the jurisdiction of any state court. No approval of any court was obtained or required to extend the administration of the estate. The matter was left entirely to the discretion of the independent executor. He was accountable to the probate court only for probating the will and filing "an inventory and appraisement * * * and list of claims" of the estate. See Art. 3436. Vernon's Texas Civil Statutes.
Viewing our question here as one of fact, namely, what was the period actually required for the performance of the ordinary duties pertaining to the administration of the estate, such as the collection of assets and payment of the debts and legacies, we must conclude, as the respondent has determined, that*106 the period of administration did not extend beyond the close of the fiscal year ended May 31, 1945. The evidence indicates that by that time all of the decedent's debts had been paid and that some of the assets, those which the beneficiary transferred by gift to her daughter, had already been distributed. So far as the evidence shows, there was no reason, relating to the settlement of the estate, why the assets should not all have been distributed to the beneficiary by the end of the taxable year 1945.
Petitioners argue that the executor was under a promise to the decedent, and under a moral obligation, to sell a portion of the assets, the peach orchards and vegetable plant business, before closing the estate and that before such a sale could be made on reasonable terms it was necessary for him to establish a sound credit rating for the estate, as a going business, and make certain improvements in the properties.
*283 The decedent in his will did not require the executor to sell any of the properties of the estate. On the other hand, he said that:
It is my will and desire that all of the property, both real and personal, I may die seized and possessed of, after the payment*107 of my just debts * * * shall pass to my beloved wife, Mamie F. Farrier, for the period of her natural life, but with full power to manage, sell, dispose of as she may wish or see proper * * *.
He expressed the further desire that in selling any of the properties his wife should consult with the executor.
Building up a credit rating for the going business of an estate is in no sense a duty or an ordinary function of an executor. It seems to us that the things which the executor claims required a continuance of the administration of the estate might just as well have been done by the distributee with the advice and, if necessary, the assistance of the executor, in accordance with the expressed wishes of the decedent.
We think that the administration of the estate must be deemed to have been completed prior to the close of the fiscal year ended May 31, 1945.
This leaves the question of whether Mamie F. Farrier realized taxable income by making a gift of certain cattle which she received from the decedent's estate to her daughter in August 1944. Respondent seeks to apply the rule of Helvering v. Horst, 311 U.S. 112. In that case the Supreme Court*108 held that the owner of bonds who made a gift to his son of negotiable interest coupons thereon, which matured and were cashed by the son later in the taxable year, realized income in the amount of such interest coupons. Applying the doctrine of the Horst case, the respondent ruled in I. T. 3932, 1948-2 C. B. 7, that a gift by a father to his son of feeder cattle, which he had raised and which had no cost basis in his hands, resulted in the receipt of taxable income by the father to the extent of the fair market value of the cattle at the date of the gift. That ruling is relied upon by the respondent in his brief here.
The subject matter of the gift here was a herd of cattle, consisting of old cows, which the decedent had owned at the time of his death, and 80 head of heifers and calves which had been raised by the estate. It is the value of the heifers and calves only which respondent seeks to tax to the petitioner as income realized by reason of the gift.
In our opinion, the doctrine of the Horst case is not applicable here. 1 The Court there pointed out that the donor had two independent and separable kinds of property rights in the bonds, *109 one the right to receive the principal at maturity of the bonds and the other to receive the interest payments; and that it was the "power to command its [the interest] payment to others which constituted an economic gain *284 to him." The question there, the Court said, was "whether because one who in fact receives payment for services or interest payments is taxable only on his receipt of the payments, he can escape all tax by giving away his right to income in advance of payment." In the instant case, there is no such question. No income is involved. There had been no sale of the cattle and no income realized either by the donor or anyone else. The donor simply made a gift of the property itself before realization of any income thereon. The income, if there was ever to be any, had to await the sale of the cattle. In this respect the facts here differ from those dealt with in I. T. 3932, supra, where the cattle had been sold by the donee and the question posed was whether the profit realized on the sale was to be taxed to the donor or to the donee. Whatever may be said of this factual difference, we think that an erroneous result is reached by applying the ruling *110 to the facts in this case.
For all the evidence shows, or the respondent claims, there was no contract for sale of the cattle or thought of their sale at the time the gift was made. There was, in the gift, no element of an assignment of earned income. We think that the respondent erred in his determination that the gift resulted in taxable gain to the donor.
Decisions will be entered under Rule 50.
Footnotes
1. For a full discussion of this question see article by Robert N. Miller, Tax Law Review (Nov. 1949), pp. 1-15.↩