*2249 The Commissioner did not err in including certain dividends received by six persons in 1922 in the petitioner's net income for 1922, although there was an order of the probate court entered in 1926 which held that the stock was illegally distributed to the six persons in 1920, and should be accounted for by them to the estate until December 31, 1922.
*1143 The respondent determined deficiencies in the petitioners' income taxes for the year 1922 in the following amounts:
| John B. Ford | $67,848.22 |
| George Pope MacNichol | 66,047.26 |
| George Ross Ford | 86,151.95 |
| Edna F. Knight | 69,248.85 |
| Mary Ford Bacon | 67,737.74 |
| Carrie J. Ford | 69,467.83 |
These proceedings were duly consolidated for hearing and decision. Each petitioner has alleged in effect that the Commissioner erred in including in income for the year 1922 certain dividends paid in that *1144 year on stock of the Michigan Alkali Co., the Edward Ford Plate Glass Co., and the J. B. Ford Co. By amended answers the Commissioner seeks to increase*2250 each deficiency by including in income for the year 1922 certain other dividends paid on this same stock in the year 1921.
FINDINGS OF FACT.
Each petitioner is an individual. George Ross Ford and Edna F. Knight reside at River Road, Wood County, Ohio. Edna F. Knight is the wife of William W. Knight. Mary Ford Bacon resides at Wyandotte, Mich. George Pope MacNichol resides in New York City. He is the husband of Laura Ford MacNichol. He filed a joint income-tax return for himself and wife for the year 1922.
John B. Ford, Laura Ford MacNichol, George Ross Ford, Edna Ford Knight, and Mary Ford Bacon are all children of Edward Ford and Carrie J. Ford, his wife. Edward Ford died on June 24, 1920, in Lucas County, Ohio. His will was probated in that county. This will provided that his entire estate should be divided into six equal parts; one part should be paid to his widow, and one part to each of his five children above named; and the estate should be distributed in kind as far as possible. George Ross Ford, William W. Knight, and J. B. Ford were named as executors and later qualified as such.
An inventory and appraisement of his estate dated September 2, 1920, was*2251 filed in the Probate Court of Lucas County, Ohio, wherein his personal goods and chattels, consisting principally of shares of stock and life insurance payable to the estate, were appraised at $4,555,836; money in banks was appraised at $245,733.27; certain bonds, mortgages, and notes, consisting principally of United States Government bonds, were appraised at $1,209,915; and the total appraised value of his estate was $6,011,484.27. Included in this appraisement were 11,463 shares of the common stock of the Edward Ford Plate Glass Co., 6,244 shares of the common stock of J. B. Ford Co., and 49,500 shares of the common stock of the Michigan Alkali Co. It included no other common stock of these companies.
Thereafter, one of the executors moved the probate court for an order authorizing the executors to file a supplemental report to the inventory and appraisement as follows:
The original report filed herein, sets forth that 49,500 shares of the Capital Stock of The Michigan Alkali Company and 6,284 shares of the Capital Stock of The J. B. Ford Company belong to said Estate, whereas in fact, said Estate owns but 500 shares of Michigan Alkali stock and 76 shares of J. B. Ford stock.
*2252 *1145 In addition thereto, said Estate has an interest in Ford Investment Company, a partnership, to the extent of 49,000 shares of Michigan Alkali and 6,168 shares of J. B. Ford stock, which stock, with the interests of various stockholders, was transferred by Edward Ford many years ago, to Ford Investment Company, a partnership, with its principal office in Detroit, Michigan, and formed for the purpose of retaining the controlling interest in said Companies, for a period of years, among members of the Ford family.
The interest of the Estate of Edward Ford in said partnership, is entirely covered by the valuations of the stock of the Michigan Alkali and J. B. Ford Companies, as set forth in the original appraisers' report, this amendment in no manner changing the valuation of said Estate, but simply setting forth the actual facts connected with the ownership of said stocks.
The record does not show what action, if any, was taken by the court in regard to this motion. At the time Edward Ford died, the 49,000 shares of Michigan Alkali Co. stock and the 6,168 shares of J. B. Ford Co. stock, above mentioned, were in the name of and were owned by the Ford Investment Co. *2253 , a partnership. Various members of the Ford family had transferred their stock in these two companies to the Ford Investment Co. The latter held no other kind of stock. The partners held certificates of ownership showing their interest in the partnership.
On or about December 20, 1920, the executors of Edward Ford made an equal distribution to the six beneficiaries of 11,463 shares of the common stock of the Edward Ford Plate Glass Co. Transfers were made on the books of that corporation and new certificates were issued to the six beneficiaries. These six beneficiaries continued to hold this stock and received from the company all dividends paid on it during the years 1921 to 1925, inclusive.
On or about December 20, 1920, the shares of stock in the Michigan Alkali Co. and the J. B. Ford Co. standing in the name of Edward Ford were transferred to the Ford Investment Co. on the books of the corporations and new certificates were issued, the certificate of ownership in the Ford Investment Co. formerly held by Edward Ford was surrendered, and new certificates of ownership in this company were issued to the six individuals, increasing the ownership by each of one-sixth of the*2254 property thus received from the estate of Edward Ford. During the years 1921 to 1925, inclusive, each of the six individuals received one-sixth of all dividends paid on the 49,500 shares of Michigan Alkali Co. stock and 6,244 shares of J. B. Ford Co. stock inventoried and appraised as part of the estate of Edward Ford.
Edna F. Knight reported in her Federal income-tax return for 1921 and 1922, the dividends which she received in each of those years respectively, from the Michigan Alkali Co., the J. B. Ford Co., and the Edward Ford Plate Glass Co.
*1146 At some time, probably after September 3, 1925, the executors filed a paper in the Probate Court of Lucas County, Ohio, entitled "First and Final Account," which was sworn to by one executor on June 16, 1925, and by the other two on September 3, 1925, and which set forth, among other things,
Said Executors represent to the Court that all of the debts, claims and legacies of every kind and nature existing against said estate, including all Federal and State taxes found to be due, so far as the same are known to any of said Executors, have been fully paid and discharged, and that there are now no debts or claims existing*2255 against said estate.
Said Executors present herewith a receipt in full from each of the beneficiaries named in the Will of said decedent for their respective distributive shares of said estate and the consent of each of said beneficiaries to the final discharge of said Executors.
Said Executors therefore, having fully distributed said estate, and having fully completed and carried out the trust devolving upon them, ask that their first and final Account may be approved and confirmed by the Court and that they may be discharged as such executors.
On April 9, 1926, the probate court entered an order as follows:
In the matter of the estate of Edward Ford, deceased.
Admn. No. 13136.
This day this cause came on to be heard upon motion of the court, and the court being fully advised in the premises;
It is ordered, adjudged and decreed that the distribution of all of the stock of said estate in the Michigan Alkali Company, the Edward Ford Plate Glass Company and the J. B. Ford Company made by the executors thereof on or about the 20th day of December, 1920, was without authority, illegal and of no effect and it is further ordered, adjudged and decreed that the recipients*2256 of said stock, namely, John B. Ford, Mary F. Bacon, Laura F. MacNichol, Edna F. Knight, George R. Ford and Carrie J. Ford, as equal beneficiaries under the last Will and Testament of Edward Ford, deceased, account to said executors for the principal and the income of said stock received by said individuals hereinbefore named from and after the date of said distribution and until the 31st day of December, 1922.
It is further ordered, adjudged and decreed that said executors may redistribute said stock to said individuals hereinbefore named in equal parts as of the 31st day of December, 1922, and that the said recipients of the said income from said stock from the time of said distribution in 1920 until the 31st day of December, 1922, be and they are hereby chargeable with interest at the legal rate.
(Signed) O'BRIEN O'DONNELL,
Probate Judge.
A certified copy of this order was served on a representative of the Government on or about April 15, 1926. The shares of stock mentioned in that order were never returned to the executors. The six beneficiaries never returned to the executors the sums which each had received as dividends on the said stocks during the years *1147 *2257 1921 and 1922, and they never paid any amount to the executors as interest.
A book of the estate was kept by a clerk under supervision of the executors. It was not offered in evidence. One of the executors, who had never seen the book until a few days before the hearing of this case, testified as to some entries contained in that book. Some entries were made in this book after the order of the court dated April 9, 1926, in order to account for recovery by the estate of 49,500 shares of Michigan Alkali Co. stock, 6,244 shares of J. B. Ford Co. stock and 11,463 shares of Edward Ford Plate Glass Co. stock, dividends paid on the same during 1921 and 1922, and interest to December 31, 1922, on the dividends. An entry was made as of December 31, 1921, charging $503,130.12 "to pay back dividends distributed to the beneficiaries in error and interest computed on the same at six per cent." On the 1921 dividends $29,860.30 was charged as interest, and on the 1922 dividends $16,898.50 was charged as interest. The charge for the 1922 dividends and interest aggregated $617,552.86. After this entry there was an explanation as follows:
It will be noted the above distribution of $617,552.86*2258 with that of December 31, 1921 of $511,665.32 totaling $1,129,208.18 represents dividends and interest on 49,500 shares of the Michigan Alkali Company, 11,463 shares of the Edward Ford Plate Glass Company, 6,244 shares of the J. B. Ford Company from the 20th day of December, 1920, to the 31st day of December, 1922, inclusive.
An entry was also made on the books as of January 2, 1923, to show the amount of $4,284,848 distributed to the beneficiaries with the explanation:
This is to record the distribution to the beneficiaries, January 1, 1923, of the Michigan Alkali Company stock, the J. B. Ford Company stock and the Edward Ford Plate Glass Company stock. The above stock was distributed in error December 20, 1920, and upon order of the Probate Court was returned to the estate with the instructions that distribution should be made as of this date.
A report of George R. Ford, executor, sworn to by him on April 8, 1927, was filed in the Probate Court of Lucas County, Ohio. This report was as follows:
Now comes George R. Ford, one of the executors of the above estate, and having reference to the order of the court heretofore entered herein on the 9th day of April, 1926, advises*2259 that he has duly charged the executors of said estate with the stock and dividends thereon of the Michigan Alkali Company, the Edward Ford Plate Glass Company and the J. B. Ford Company, which was the subject of said order, from the 20th day of December, 1920, until the 31st day of December, 1922, inclusive; that interest on said dividends has been duly charged to the executors of said estate at the rate of six per cent. (6%) per annum for the same period; and that he has credited the executors of said estate with said stocks as of January 1, 1923, all in conformity with said order of the Probate Court, dated April 9, 1926.
*1148 The final account of the executors sworn to by one of them on September 13, 1928, was filed in the Probate Court of Lucas County, Ohio. It set forth that all of the debts, claims and legacies had been fully paid; the executors still had on hand assets of the value of $2,011,810.17, which they proposed to distribute to the beneficiaries; receipts in full from each of the beneficiaries had been filed with the court; the executors had fully complied with the order of the court dated April 9, 1926, as indicated by report filed in the court dated April 8, 1927; *2260 and the executors ask that their final account and their report dated April 8, 1927, be approved and that they be discharged as executors.
In this report the executors charged themselves, inter alia, as follows:
| Year | Michigan | J. B. | Ford Plate |
| Alkali Co. | Ford Co. | Glass Co. | |
| 1921 dividends | $398,475.00 | $7,492.80 | $91,704.00 |
| 1921 interest on dividends | 36,260.10 | 574.16 | 7,009.56 |
| 1922 dividends | 420,750.00 | 12,488.00 | 137,556.00 |
| 1922 interest on dividends | 12,767.74 | 267.70 | 3,863.12 |
The executors did not charge themselves with the receipt of dividends from any of the three companies or with interest on dividends from any of the three companies for any year after 1922. The executors claimed credit in the report under "Distribution to Beneficiaries":
| 4. Stocks - January 1, 1923 - | |
| Michigan Alkali Company | $ 3,168,000.00 |
| J. B. Ford | 199,808.00 |
| Edward Ford Plate Glass Co. | 917,040.00 |
The total expenses for which the executors claimed credit were recapitulated as follows:
| Total expenses | |
| 1920 | $366,275.17 |
| 1921 | 1,165,617.95 |
| 1922 | 193,384.88 |
| 1923 | 18,643.721924 |
| 10,290.98 | |
| 1925 | 353,435.23 |
| 1926, none [tax refund exceed expenses, substract] | 10,346.19 |
| Total | 2,097,301.74 |
*2261 Receipts for 1920 were shown in the amount of $335,196.33.
On October 11, 1928, the probate court approved the account filed September 15, 1928, and the report filed April 16, 1927.
In April, 1927, George R. Ford instituted a suit in the United States District Court for the Northern District of Ohio against a *1149 collector of internal revenue to recover an alleged overpayment of income taxes for the year 1921 resulting from the inclusion in his income for 1921 of the dividends paid to him in 1921 on the stock of the Michigan Alkali Co., the J. B. Ford Co., and the Edward Ford Plate Glass Co. Judgment was entered for Ford on January 13, 1928. The case is reported in , which report is made a part hereof by reference. On or about October 4, 1928, a certificate of overassessment for the year 1921 was issued to each of the six beneficiaries allowing claims for refund of income taxes for that year because of the decision of the District Court.
OPINION.
MURDOCK: In determining the deficiencies, the Commissioner has included in the income of each petitioner a certain amount representing dividends received in 1922 from the Michigan Alkali*2262 Co., the Edward Ford Plate Glass Co., and the J. B. Ford Co. By his amended answers he now seeks to increase the deficiencies for 1922 by including in the gross income of each of the petitioners the dividends which each received from the three companies mentioned in the year 1921. Clearly, he is wrong in thus seeking to increase the deficiencies which he has already determined. The dividends received in 1921 were, under the Revenue Act, taxable to some one as income in 1921, but, as that year is not before us, it is immaterial whether the dividends were taxable to the individuals or to the estate. The Revenue Act does not provide that the same dividends, which were taxable as income to one or the other in 1921, are again taxable to either in 1922. . Commissioner's Regulations 65, article 344.
Thus, the only question which remains to be considered is whether or not the petitioners have shown that the Commissioner erred in including in their income for 1922 the dividends which they received in 1922. In deciding this question it is unnecessary to consider and decide a number of contentions made by the respondent. The case of *2263 , had to do with a year not before us and does not control here. The probate court treated the matter as if all of the stocks belonged to the estate when in fact the situation was complicated by the previous transfers to the Ford Investment Co. Since, however, the petitioners are in worse standing here because of these previous transfers, we will discuss the case as if this complication did not exist. The order of the probate court may be given full force and effect and yet the petitioners have failed to show that the Commissioner erred in including in their income the dividends which they received in 1922 on the three kinds of stock. Obviously, these dividends were taxable either to the estate or to these *1150 six individuals in 1922, and are not to escape taxation by reason of such circumstances as are here present. Section 219 of the Revenue Act of 1921 provides that the tax imposed by sections 210 and 211 shall apply to the income of estates, including income received by estates of deceased persons during the period of administration or settlement of the estate. The fiduciary is responsible for making a return of*2264 income for the estate for which he acts, and under subparagraph (c) the tax is imposed upon the net income of the estate and paid by the fiduciary "except that in determining the net income of the estate of any deceased person during the period of administration or settlement there may be deducted the amount of any income properly paid or credited to any legatee, heir or any other beneficiary." Where income may be thus deducted, "the tax shall not be paid by the fiduciary, but there shall be included in computing the net income of each beneficiary, that part of the income of the estate or trust for its taxable year which, pursuant to the instrument or order governing the distribution, is distributable to such beneficiary, whether distributed or not."
We have been told that some book entries were made in 1926. This testimony leaves us in a quandary as to just what the books show, and we do not know just why it was offered by the petitioners. If book entries made in 1926 are important in this case, then the petitioners should have shown the absence of any entry as of December 31, 1922, crediting these dividends to the beneficiaries. Such an entry would have been entirely proper*2265 under the probate court's order. But we have not been told whether or not any entry was made as of December 31, 1922, crediting the dividends in question to the six individuals. Thus, if this be the petitioners' theory of the case, they have failed in their proof, for they have failed to show that the dividends were not credited to them on the books of the estate as of December 31, 1922. Dividends credited to a beneficiary on the last day of the year are included in the income of the beneficiary and taxable to him under section 219.
But are book entries made in 1926 important in the decision of this case? We think they are not. Under the order of the probate court it was only necessary that the executors charge themselves with the stocks and their proceeds up to December 31, 1922. On December 31, 1922, the beneficiaries could have the stock, the dividends and the interest for their own, with the court's permission. As a matter of fact, the six individuals either had the dividends on December 31, 1922, or had already disposed of them, and they never had to really give them up. The court's order and the executors' book entries were mere formal matters of no material consequence*2266 to the petitioners, for what was taken away had eventually to be returned *1151 to the same six persons. Years after the event, the court held that any distribution prior to December 31, 1922, was illegal. It did not hold that the distribution on that date was improper, but quite the contrary. It required the beneficiaries to account to the executors for the principal and income of the stock "from and after the date of said distribution and until the 31st day of December, 1922." It further ordered "That said executors may redistribute said stock to said individuals hereinbefore named in equal parts as of the 31st day of December, 1922." Apparently, the court sought to do no more than annul the original distribution and require that it be delayed until December 31, 1922, on which date it would be legal. A distribution on December 31, 1922, would have accomplished these ends, and the effect of the order need not be extended beyond that which it was intended to accomplish. The order may be interpreted as a ratification of a distribution as of December 31, 1922.
Under these circumstances, why are not these dividends taxable to the petitioners regardless of what book*2267 entries the executors made in later years? Cf. ; ; . Suppose they had never made any entries for several years, would the tax liability of the estate and that of each of the six beneficiaries have to remain open and subject to change, dependent only upon their arbitrary selection of a date as of which they would credit or distribute the dividends? We do not mean there has been any tax dodging in this particular case. But revenues must be collected more promptly than that, and, as was said in a different connection by the Circuit Court for the Second Circuit in :
It would be an unfortunate construction, which is not demanded by the statute, that would place it within the power of personal representatives and the real owners, namely, the legatees or distributees, to defer distribution in order to escape tax.
If the dividends in question were ever income of the estate of Edward Ford, they were income received by the estate during the period of administration or settlement of the estate. *2268 Such income under section 219(c) may be deducted from the net income of the estate upon which tax is paid by the fiduciary if properly paid or credited during the year to any beneficiary. In this case the beneficiaries had in fact received the income in 1922, and they were never required thereafter to actually surrender it to the executors. The court order required no more than a change in accounting. One beneficiary returned the dividends as part of her income in 1922, but whether or not the others did does not clearly appear from the evidence. Under such circumstances it seems to us that within the meaning of section *1152 219 of the Revenue Act of 1921, on December 31, 1922, the income was properly paid or credited to the beneficiaries, and on that date it was distributable to the beneficiaries pursuant to the instrument or order governing the distribution, whether distributed or not. The Commissioner did not err in including the dividends in the petitioner's net income under section 219(d).
Reviewed by the board.
Judgment will be entered under Rule 50.
VAN FOSSAN, dissenting: I dissent from the conclusion that the respondent did not*2269 err in including the dividends in question in the petitioners' income, and from the reasoning upon which such conclusion is based.
The order of the Probate Court of Lucas County, Ohio, entered April 9, 1926, and referred to in the findings of fact was determinative of the legal title to the stocks in question. It decreed, among other things, that the distribution of these stocks in 1920 was "without authority, illegal and of no effect." It decreed also that the recipients of the stocks, namely, the petitioners herein, should account to the executors of the estate of Edward Ford, deceased, for the principal and the income of the said stocks received by them and were to be charged with interest on the dividends from the time of the illegal and void distribution until December 31, 1922. The order further provided that the stocks might be redistributed by the executors as of December 31, 1922. It contained, however, no provision or direction with respect to the further distribution of the dividends for 1921 and 1922.
The order of the probate court was complied with by entries in the books of the estate as shown in the findings of fact.
*2270 In the case of , incorporated by reference in the statement of facts, the United States District Judge made certain conclusions of law which were admitted as evidence in the present proceedings. Among these conclusions, he stated that "the final order and decree of the Probate Court of Lucas County on April 9, 1926, in the matter of the Ford Estate is determinative of the ownership and control of the stocks of the J. B. Ford Company, the Edward Ford Plate Glass Company and the Michigan Alkali Company and the income thereon during the year 1921." In my opinion the said order was also determinative of the ownership and control of the income from said stocks during 1922. It determined that during the whole of that year the estate of Edward Ford was the rightful owner of such income. This order and decree of the Probate Court of Lucas County determining the ownership of property was a judgment in rem and in binding on the respondent and *1153 this Board alike. The probate court which made the order was a court of competent jurisdiction, was in the fullest sense a court of record, whose judgments and decrees import absolute*2271 verity, and was competent to decide its own jurisdiction and to exercise it to final judgment without setting forth the facts and evidence on which it was rendered. (Sections 7 and 8 of the Constitution of Ohio; section 10492 of the General Code of the State of Ohio; ; ; ; .) The Probate Court of Lucas County therefore had jurisdiction to determine finally as against all the world the ownership of the property in question (, and its judgment in respect thereto is binding in state courts, courts of the United States, and upon this Board. ; ; ; ; .
While the said order of the Probate Court of Lucas County provided that the stocks in question might be redistributed as of December 31, 1922, it made no such provision concerning*2272 the dividends on such stocks for the year 1922. Redistribution of the stocks to the beneficiaries as of December 31, 1922, or as of a later date, would not carry with it, as a matter of law, legal title to dividends paid prior to the date of such redistribution of the stock. There being no contrary provision in the said order of the probate court, the legal title to the said dividends remained in the executors of the estate of Edward Ford after December 31, 1922. Nor were the beneficiaries of the estate entitled to the amount of such dividends until the court made an order redistributing them, or until the executors lawfully made an entry in their books crediting the beneficiaries with such redistribution.
The final accounting of the executors of the estate was dated December 15, 1928. The proof shows that the executors then charged themselves with a balance on hand of more than $2,000,000. They charged themselves with the receipt of the principal value of the stocks in question pursuant to the order of the probate court and credited themselves with a redistribution to the beneficiaries of such principal value of the stocks. They charged themselves with the receipt of the*2273 amount of the said dividends and interest thereon pursuant to the said order of the probate court, but did not credit themselves with a redistribution to the beneficiaries of the amount of such dividends. If follows that at the date of the final accounting the amount of the said dividends was included in the balance on hand with which the executors charged themselves. Therefore, giving full force to the order of the probate court, as we are bound to do, *1154 the amount of said dividends had not been paid to any legatee, heir or beneficiary during 1922. They were not credited to any beneficiary during that year on the books of the estate and were therefore not distributable during said year.
It is true, of course, that the amount of the said dividends actually remained in the possession of the petitioners. But I concur in the conclusion of law made by the District Judge in the case of , to the effect that the amount of the said dividends was received by the beneficiaries for the executors of the estate of Edward Ford. This situation could not be lawfully changed except by decree of the court or by action of the executors by which*2274 they lawfully redistributed the amount of the dividends to the beneficiaries or credited such amount to them in the books of the estate.
The probate court approved the executors' account dated September 15, 1928. By the action of the executors and by the approval of the probate court thereof, shown in the findings of fact, the executors became charged with liability of tax on the amount of the said dividends.
For the foregoing reasons, I am of the opinion that the amount of the dividends in question was not taxable to the petitioners under any provisions of section 219 of the Revenue Act of 1921, and that the respondent erred in including the amounts of said dividends in the gross income of the petitioners, respectively, for the year 1922.