*1233 1. Petitioner is the surviving spouse of decedent, who died testate in the taxable year leaving a large estate consisting entirely of community property. Decedent and his wife were residents of the State of Washington. The estate was in administration throughout the taxable year. Held, that community property interest, rents, and dividends received by the executor of decedent's estate during administration are taxable to the estate in toto and no part thereof to the surviving spouse. Barbour v. Commissioner, 89 Fed.(2d) 474 followed.
2. During the taxable year the executor of the estate sold 85,000 shares of certain stock. Held, that the executor sold the shares from decedent's interest and that no part of the gain realized on the sale is taxable to petitioner.
3. Petitioner and her son signed notes as comakers, thereby obtaining loans totaling $58,000. The loans were obtained entirely on the credit of petitioner and the proceeds were immediately turned over to petitioner's son. Petitioner susequently made a gift of the proceeds of the loans to her son. Held, the interest paid on the loans in the taxable year by petitioner is deductible*1234 by her.
*1094 Respondent determined a deficiency of $2,043.98 in the income tax of each petitioner for the year 1933 and a deficiency in income tax of petitioner Rose B. Larson for the year 1934 in the sum of $69,243.49. The primary issue is whether income on community property received by the executor of the estate of the deceased husband of petitioner Rose B. Larson during the period of administration is taxable entirely *1095 to the estate or is taxable one-half to the estate and one-half to her. The second, third, and fourth issues relate to the taxability of community interest, rents, and dividends, respectively, which were received by the executor of the estate of the deceased husband of petitioner Rose B. Larson during the period of administration. The fifth issue is whether or not petitioner Rose B. Larson is taxable on gain from the sale of certain stock by the executor of the estate of her deceased husband during the period of administration. The final issue involves an interest*1235 deduction.
By stipulation of the parties filed at the hearing issues relating to bad debt losses and depreciation for the year 1933 were eliminated, the former being waived by petitioners and the latter conceded by The deficiencies resulting from the stipulation of the parties will be determined in recomputation under Rule 50. The issues remaining for the Board's determination relate only to the income tax liability of petitioner in Docket No. 88813 for the year 1934. The proceedings were consolidated for hearing.
FINDINGS OF FACT.
Rose B. Larson, hereinafter referred to as petitioner, is the surviving wife of Adelbert Larson, the administrator de bonis non of whose estate is petitioner in Docket No. 88814. Adelbert E. Larson, hereinafter referred to as decedent, died testate on June 7, 1934. Under decedent's will executed May 31, 1934, the Yakima First National Bank of Yakima, Washington, hereinafter referred to as executor, was appointed executor.
On June 13, 1934, decedent's will was admitted to probate and the bank duly qualified as executor. The executor employed a firm of attorneys to attend to legal matters arising in connection with the estate. At the*1236 request of petitioner the executor also employed Shirley D. Parker, petitioner's son, at a salary of $1,000 a month, to perform services relating to administration of the estate.
Under date of June 14, 1934, petitioner, as surviving wife of decedent, petitioned the court, sitting in probate, for a widow's allowance. The petition stated:
3.
That no inventory and appraisement has yet been made, but that the value of said estate, consisting of the community property of the decedent and your petitioner, is approximately $1,500,000.00.
4.
That it is necessary that your petitioner have an allowance for her support and maintenance, and that $5000.00, cash, and the further sum of $1500.00 a month, payable monthly, is a reasonable, proper and necessary amount to maintain and support the petitioner and the family residence of the decedent and your petitioner in the manner to which she has been accustomed: *1096 On the same date the court ordered the executor to pay petitioner the sums requested in her petition "until the further order of this court * * *."
At the time of decedent's death all the real and personal property owned by petitioner and decedent was community*1237 property. The value of this property, including the interest of petitioner as appraised by duly appointed appraisers of decedent's estate, was $2,353,480.79. Included in the community property of petitioner and decedent were 210,974 shares of stock of the Sunshine Mining Co.
Decedent's will provided for legacies aggregating $482,000 and named petitioner residuary legatee. It also provided:
SEVENTEENTH: The executor of my estate shall have three years if necessary to liquidate enough property to pay all of the above bequests.
Claims filed against decedent's estate totaled $112,140.51.
At the time of his death decedent was president of the Sunshine Mining Co. Prior to his death a plan had been discussed with regard to listing the stock of Sunshine Mining Co. on the New York Curb Exchange. Decedent had not been in favor of the plan. The plan had for its purpose the enhancing of the value of the mining company's stock. After decedent's death the plan was again considered. It was initiated by Carl M. Stolle of Grande, Stolle & Co., who was associated with Walter Seligman of New York City, the owner of a large block of stock in the Sunshine Mining Co.
Stolle approached*1238 the president of the bank in regard to the participation of the estate of decedent in the listing plan and stated that a certain number of shares would have to be optioned and sold by the four majority shareholders of the mining company in order that the plan might be a success. The shares which Stolle wished to purchase and obtain options to purchase amounted to approximately 40 percent of the total shares held by the four shareholders. The shareholders who were asked to participate in the plan were Alexander Miller and wife, Mrs. N. P. Hull, J. B. Cox, and decedent's estate.
On June 30, 1934, the executor of decedent's estate entered into five option agreements covering a total of 70,000 shares of Sunshine Mining Co. stock. The option agreements were identical, with the exception of the number of shares covered thereby. The provisions of these agreements were as follows:
For and in consideration of the sum of One and No/100 Dollars ($1.00) paid by GRANDE, STOLLE & COMPANY, a Washington corporation, to the YAKIMA FIRST NATIONAL BANK, a corporation, as the duly appointed, qualified and acting executor of the estate of A. E. Larson, deceased, receipt of which is hereby acknowledged, *1239 the undersigned, said executor, does hereby give and grant unto said Grande, Stolle & Company, a corporation, an option and right to purchase 10,000 shares of capital stock of the Sunshine Mining Company in the sum of $7.00 per share.
*1097 This option shall continue in force and effect from the date hereof until four months after the listing of the stock of Sunshine Mining Company on the New York Curb Exchange and in no event beyond the 31st day of December, 1934, at 5:00 o'clock p.m., and on said date, whichever occurs first, this said option and all rights hereunder shall terminate.
The said undersigned does further agree to deposit said stock, to-wit, 10,000 shares, in escrow with the Yakima First National Bank of Yakima, Washington, with instructions to said bank to surrender all or any portion thereof to Grande, Stolle & Company, a corporation, upon its payment to said bank for the account of said Yakima First National Bank, a corporation, as executor, the purchase price per share above set out, the expense of said escrow to be borne by Grande, Stolle & Company, a corporation.
It is understood that during the life of this said option the undersigned agrees that*1240 it will not sell or dispose of any of its stock now owned in the Sunshine Mining Company, a corporation, except that during the life of this said option said undersigned may sell not to exceed one thousand (1000) shares of its said stock, provided that said Grande, Stolle & Company, a corporation, shall have the first right of refusal of said stock, should the undersigned elect to sell said one thousand shares, or any part thereof.
It is understood that this option is subject to the said Grande, Stolle & Company, a corporation, appointing an engineer, receiving said engineer's report on said Sunshine Mining Company's properties and completing the listing of the stock of said Sunshine Mining Company upon the New York Curb Exchange, and this option shall become null and void and of no force and effect in the event the appointment of said engineer, his report and the listing of said stock upon the New York Curb Exchange shall not be completed on or before the first day of September, 1934.
It is understood that in the event said engineer is appointed, his report made, and said listing completed on or before the first day of September, 1934, then in that event this option shall continue*1241 in full force and effect for a period of four months from the date of listing said stock on the New York Curb Exchange and not later than the 31st day of December, 1934, at the hour of 5 o'clock p.m., whichever date occurs first and thereafter this agreement shall be null and void.
Each of the option agreements was accompanied by a letter of escrow instructions. The certificates of stock enumerated by the option agreements and escrow instructions were as follows:
| Certificate No. | Shares |
| 601 | 10,000 |
| 633 | 10,000 |
| 654 | 5,000 |
| 736 | 5,000 |
| 739 | 5,000 |
| 1346 | 30,000 |
| 2822 | 5,000 |
These certificates, together with option agreements and escrow instructions, were deposited with the Yakima First National Bank in escrow on June 30, 1934. Similar option agreements were entered into between Grande, Stolle & Co. and the other three majority shareholders.
Petitioner and her son, Shirley D. Parker, left for a trip to California on June 14, 1934, and did not return to Yakima until about the middle of July 1934. Neither petitioner nor her son *1098 knew of the option transactions until after their return from California. Upon her return from California in July*1242 1934, petitioner requested that all matters affecting her interest in decedent's estate be handled by Parker.
Parker was advised of the options granted by the executor. On July 26, 1934, with Parker's consent and approval, the executor petitioned the Probate Court for authority to grant options to purchase the 70,000 shares of stock (which the executor had already optioned) and to sell immediately 10,000 shares of that stock. In its petition the executor stated:
That it is necessary that some part of the personal property of said estate be sold to pay the specific bequests provided in the will herein, and that your petitioner believes that said offer of the Grande, Stolle & Company is the best offer that could be received for a portion of said stock in the Sunshine Mining Company;
* * *
On the same date the court entered an order containing the following provisions:
Now, THEREFORE, IT IS ORDERED that the executor be and it is hereby authorized to carry out such agreement of sale to said Grande, Stolle & Company as outlined in said petition; and it is further
ORDERED that all acts of said executor heretofore done in connection therewith are hereby fully and completely*1243 ratified and approved.
On July 31, 1934, the executor petitioned the court for authority to sell to Grande, Stolle & Co. 5,000 shares of Sunshine Mining Co. stock in addition to the 10,000 shares already authorized to be sold. On the same date the court entered an order containing the following provisions:
Now, THEREFORE, IT IS ORDERED that the executor be and it is hereby authorized to sell 15,000 shares of stock of the Sunshine Mining Company for the net price of $5.82 1/2 per share; and
IT IS FURTHER ORDERED that this order shall supersede the order made on the 26th day of July, 1934, insofar as the sale of the 10,000 shares of stock were concerned, but shall have no effect upon the order permitting the executor to grant an option to said Grande, Stolle & Company for the sale of 70,000 additional shares.
On August 2, 1934, the estate received the sum of $87,375 from the sale of 15,000 shares of stock of Sunshine Mining Co. The 70,000 shares covered by the five option agreements were sold at intervals throughout the year 1934, the estate receiving therefor a total sum of $483,000. The shares sold under the options were those represented by the certificates enumerated*1244 in the option agreements.
Neither petitioner nor Parker ever gave permission to sell any of petitioner's one-half interest in the community property belonging *1099 to the estate of decedent and petitioner. There was no understanding that petitioner's one-half interest was affected by the stock sales.
Under date of May 1, 1935, the executor of decedent's estate filed with the Probate Court a petition for partial distribution, stating as follows:
1.
That the final report of your petitioner as executor herein is on file and that such final report, together with the inventory shows that included within the estate herein was a total of 210,974 shares of capital stock of Sunshine Mining Company, a corporation, of which a total of 85,000 shares have been sold, leaving in the possessing of the executor, your petitioner herein, shares to the number of 125,974, of which said shares Rose B. Larson, as surviving spouse, is the owner of 105,487.
2.
That the said Rose B. Larson, as surviving spouse, desires to have distributed to her 15,000 shares of said stock and that your petitioner, therefore, prays for an order of the court permitting and authorizing it to distribute*1245 to the said Rose B. Larson forthwith, 15,000 shares of stock of Sunshine Mining Company.
On the same date the court entered an order containing the following provisions:
* * * it appearing to the court that included within the assets of the above entitled estate was an aggregate of 210,974 shares of the capital stock of the Sunshine Mining Company and that all of said property was community property of the decedent and Rose B. Larson, his widow, and
It further appearing that said Rose B. Larson is entitled, as her share of the community property, to receive from said executor, upon the closing of said estate, a total of 105,487 shares, and no good reason appearing why a partial distribution should not at this time be made.
NOW, THEREFORE, it is ordered that the Executor herein be and it is hereby authorized and directed to distribute to said Rose B. Larson 15,000 shares of the Sunshine Mining Company, a corporation.
On July 2, 1934, the estate of decedent received a dividend of $3,600 from the Surety Finance Co. of Yakima, Washington. In her income tax return for the year 1934 petitioner included the sum of $1,570 representing one-half the sum of $3,140, the amount of*1246 the dividend which had accrued at the date of death of decedent.
On December 19, 1934, the board of directors of the Surety Finance Co, declared a dividend payable on December 31, 1934. A check in the sum of $3,600, payable to the order of decedent's estate, was issued December 31, 1934, in payment of dividends on stock of the Surety Finance Co. held by the estate. The check cleared through the bank on January 2, 1935. In the notice of deficiency respondent treated this payment as received December 31, 1934, and increased petitioner's gross income for the taxable year 1934 by $1,800.
*1100 In his notice of deficiency relating to petitioner's income tax for the year 1934 respondent added to petitioner's gross income $2,374.68, representing one-half of the interest on obligations held by the community which was received by decedent's estate during the period from June 7 to December 31, 1934. Respondent also added to petitioner's gross income for 1934 the sum of $9,782.49 representing one-half of rentals of community property received by decedent's estate in the period from June 7 to December 31, 1934. Respondent increased petitioner's gross income for 1934 by the sum*1247 of $33,453.64 representing one-half the amount of dividends from community property stock received by the estate of decedent from June 7 to December 31, 1934.
After decedent's death and during the year 1934 petitioner and Parker signed notes aggregating $58,000 as comakers, thereby obtaining loans from the Yakima First National Bank. The loans were made entirely on the credit of petitioner and the proceeds were turned over to Parker, who used them for his own purposes. On December 20, 1934, interest on these notes in the sum of $1,551.96 was deducted by the bank from petitioner's bank balance. In a proceeding involving gift tax brought before this Board by petitioner for the year 1935 petitioner and respondent stipulated that petitioner made a gift of the proceeds of the loans to Parker in 1935 and petitioner paid a gift tax thereon. In her income tax return for the year 1934 petitioner deducted interest on the $58,000 notes in the sum of $1,901.96. Respondent disallowed the deduction.
The estate of decedent was in administration throughout the taxable year 1934. Petitioner kept her accounts and filed her returns on the cash basis. Petitioners' returns were filed with*1248 the collector for the district of Washington.
OPINION.
HILL: The first issue is basic and its determination will affect most of the other questions before us in this proceeding. This issue concerns the treatment for income tax purposes of income from community property received by the estate of decedent during the period of administration of the estate. Petitioner contends that all such income received by the estate should be reported as income of the estate by the fiduciary representing the estate. Respondent contends that the community income received by the estate is taxable one-half to the estate and one-half to the survivor of the community.
Petitioner and respondent do not differ on the question of whether petitioner as surviving spouse has a vested interest in the community property. Respondent argues, however, that, since petitioner had a vested interest in the property, the income should be taxed to her. *1101 Petitioner's contention is that regardless of the fact that she had a vested interest in the property she was not entitled to its income during the period of administration. The applicable Federal statutes are section 161(a)(3) and section 162(c) *1249 of the Revenue Act of 1934. 1 State laws concerning the phase of community property here under consideration are sections 1342 and 1419 of Remington's Revised Statutes of Washington. 2
*1250 The courts of the State of Washington have long adhered to the rule that on the death of either husband or wife the whole of the community property is subject to administration as the estate of the deceased spouse. ; ; ; ; ; ; ; . Thus the entire income on community property during the period of administration is receivable by the estate.
We are of the opinion that the entire income from community property of decedent and petitioner during the period of administration *1102 was taxable to the estate. The instant case is not distinguishable from . There community property stock was sold after the death of the husband but during the period of administration of his estate. The Circuit Court of Appeals for the Fifth Circuit held that income received by the administrator*1251 of the estate during the period of administration was taxable in its entirety to the estate. We have recently approved this rule. . We have shown above that the Washington authorities have laid down the rule that community property is subject to administration as the estate of deceased spouse. Those cases do not differ materially from the Texas authorities relied upon by the court in the Barbour case. Respondent cites the case of , for the proposition that one-half of the community income is taxable to petitioner. In that proceeding, however, the instant problem was not before us. That case is not controlling because the specific question we are now considering was not in controversy.
This was not the case of "a nonintervention will" in which, upon a showing of solvency, the estate may be administered without court approval. Here each sale and distribution required court sanction and peitioner could only receive the income in question as a distribution from the estate. The facts of the case at bar present petitioner's view in the strongest possible light. Since the*1252 community property was subject to administration and income therefrom was receivable by the estate during administration, we believe it would be contrary to the intendment of section 161(a)(3) of the Revenue Act of 1934 to tax any part of that income to petitioner. In spite of petitioner's vested interest in the property, she had no right to the income during the taxable year. We hold that the income from community property subject to administration is taxable in its entirety to the estate of decedent during the period of administration.
The second and third issues relating to interest on obligations and rentals from property held by the community are necessarily determined by our decision on the first issue. We hold that no part of the sum of $2,374.68, interest, nor the sum of $9,782.49, rentals, which respondent included in petitioner's gross income, is taxable to petitioner. The entire amounts are includable in income of the decedent's estate.
The next issue is whether or not any portion of the dividends on community stock is taxable to petitioner. This question is also determined by our disposition of the first issue. Petitioner contends, however, that she erroneously*1253 reported the sum of $1,570 in gross income for the year 1934. The amount reported on her return represents one-half the sum of $3,140, which is the portion of a $3,600 dividend of the Surety Finance Co. which might be said to have accrued at the *1103 date of decedent's death. Since the dividend was not received until after the estate was in administration, no part of the dividend should have been included in petitioner's gross income. We hold that petitioner should not have included this amount in her 1934 income tax return.
In connection with this issue petitioner made a contention concerning the taxability of the proceeds of a dividend check in the sum of $3,600, dated December 31, 1934. This contention turned upon whether or not the check was actually received during the taxable year. Because of our determination of the first issue, we need not consider whether the check was actually received in the taxable year or in the year 1935.
The fifth issue is whether or not petitioner is taxable on gain from the sale of one-half of 85,000 shares of Sunshine Mining Co. stock which were sold by the estate of decedent in the taxable year. Petitioner contends that the shares*1254 sold came entirely from the interest of the estate. Respondent argues that it was the intent of the executor to sell shares from petitioner's interest as well as that of decedent's estate. He urges that the listing plan contemplated the sale and option of about 40 percent of each of four shareholders' holdings and that this intent would not be satisfied unless 40 percent of the entire holdings of the Sunshine Mining Co. stock in the hands of the executor was subject to option and sale. Respondent further argues that there was no immediate need for the sale of the stock, since the will of the decedent permitted the executor to have three years to liquidate the estate in order to pay bequests.
We are of the opinion that the shares in question were sold from the interest of decedent. We are convinced that petitioner gave neither actual nor tacit consent to the sale of shares from her interest. Although Parker, as her agent, approved the action of the executor in optioning the shares, it must be remembered that petitioner was residuary legatee and vitally interested in the preservation of the worth of the estate. Testimony at the hearing clearly indicated that the options and*1255 sales were to enhance the value of the remaining shares in addition to obtaining funds for the payment of legacies.
The executor of the estate petitioned for the Probate Court's permission to option and sell the shares for payment of bequests. No citation of cases is necessary to demonstrate that petitioner's interest could not be sold to pay bequests under decedent's will. Although three years for liquidation of property to pay bequests was allowed to the executor under the will, it was certainly discretionary with the executor, after obtaining court approval, to liquidate a portion of the estate at an early date.
The factors which show undeniably that the interest in shares sold was that of the estate alone are the petition and order for partial *1104 distribution of the estate. The order of the court stated that "said Rose B. Larson is entitled, as her share of community property, to receive from said executor, upon the closing of said estate, a total of 105,487 shares." Since the entire community interest in the Sunshine Mining Co. shares aggregated 210,974 shares, that court's order indicates that one-half of the original number of shares was treated as the property*1256 of petitioner after the sale of 85,000 shares had been made. We consider the court's order a finding behind which we can not inquire. The Probate Court's determination, as evidenced by its order, must be binding as to which interest was disposed of by the options and sales. . See . Accordingly, we hold that no portion of the 85,000 shares optioned and sold by the executor of decedent's estate was sold from petitioner's interest. Respondent's determination was erroneous and is hereby overruled.
In connection with this issue respondent has urged an alternative contention that, in the event we find that the shares sold were not petitioner's, then she must be taxed upon dividends paid on her stock subject to administration. In the first issue we held that dividends paid on petitioner's stock in the hands of the executor were not taxable to petitioner while the stock was subject to administration. That issue disposes of respondent's alternative contention here.
The final issue is whether or not petitioner is entitled to a deduction for interest paid in the sum of $1,901.96. *1257 Respondent contends that the obligations upon which the interest was paid were incurred by petitioner's son and that the interest is not deductible by petitioner. He argues that petitioner voluntarily satisfied the obligations of another.
Petitioner's obligation as comaker of the notes was both joint and several. The notes were at all times her personal obligations and amounts paid by her as interest must by considered interest paid on her indebtedness. . Nor does the fact that petitioner later made a gift to her son of the amount borrowed change the result. Petitioner, however, has proved payment of only $1,551.96 as interest. Mere accrual of $350 interest does not give rise to a deduction in that amount to a taxpayer on a cash basis. We hold that respondent should have allowed petitioner a deduction of $1,551.96 for interest paid in the taxable year.
Upon recomputation we shall give effect to the stipulations filed at the hearing disposing of issues relating to Docket No. 88814 and the issues relating to Docket No. 88813 for the year 1933.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 161. IMPOSITION OF TAX.
(a) APPLICATION OF TAX. - The taxes imposed by this title upon individuals shall apply to the income of estates or of any kind of property held in trust, including -
* * *
(3) Income received by estates of deceased persons during the period of administration or settlement of the estate; and
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 -
* * *
(c) In the case of income received by estates of deceased persons during the period of administration of 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. § 1342. Descent of Community property. - Upon the death of either husband or wife, one-half of the community property shall go to the survivor, subject to the community debts, and the other half shall be subject to the testamentary disposition of the deceased husband or wife, subject also to the community debts. In case no testamentary disposition shall have been made by the deceased husband or wife of his or her half of the community property, it shall descend equally to the legitimate issue of his, her or their bodies. If there be no issue of said deceased living, or none of their representatives living, then the said community property shall all pass to the survivors to the exclusion of collateral heirs, subject to the community debts, the family allowance, and the changes and expenses of administration. * * *
§ 1419. Community property, how administered.↩ - A surviving spouse shall be entitled to administer upon the community property, notwithstanding any provisions of the will to the contrary, if the court find such spouse to be otherwise qualified; but if such surviving spouse do not make application for such appointment within forty days immediately following the death of the deceased spouse, he or she shall be considered as having waived his or her right to administer upon such community property. If any person, other than the surviving spouse, make application for letters testamentary on such property, prior to the expiration of such forty days, then the court, before making any such appointment, shall require notice of such application to be given the said surviving spouse, for such time and in such manner as the court may determine, unless such applicant show to the satisfaction of the court that there is no surviving spouse or that he or she has in writing waived the right to administer upon such community property. * * *