Northern Trust Co. v. Commissioner

APPEAL OF NORTHERN TRUST CO., EXECUTOR, ESTATE OF LUCY C. UNDERWOOD.

Northern Trust Co. v. Commissioner

Docket No. 2473.

United States Board of Tax Appeals

9 B.T.A. 1310; 1928 BTA LEXIS 4263;

January 14, 1928, Promulgated

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">*4263 1. The value of securities purchased by decedent with proceeds from sale of securities acquired from a prior decedent who died within five years and on whose estate the tax was paid, was acquired in exchange within the meaning of section 403(a)(2) of the Revenue Act of 1921 and should be deducted from the value of the decedent's gross estate.

2. Where the property previously taxed within five years is commingled with all of the other funds of the decedent, and funeral and administration expenses and debts of the decedent are paid out of such commingled funds, and such "other funds" are at all times sufficient to pay the expenses, debts, etc., the amount allowable as a deduction under section 403(a)(2) of the 1921 Act should not be reduced by any portion of such expenses, debts, etc., allowable as deductions under section 403(a)(1) and (3). John F. Archbold, Executor, v. Commissioner,8 B.T.A. 919">8 B.T.A. 919.

John D. Watkins, Esq., and Edward McCarthy, Esq., for the petitioner.

J. C. Swayze, Esq., for the Commissioner.

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GREEN

">*1310 In this appeal the taxpayer seeks a redetermination of an estate-tax liability for which the">*4264 Commissioner has determined a deficiency in the amount of $5,595.46, of which $3,508.03 is in controversy. The questions involved are: (1) Whether certain Phoenix, Ariz., waterworks bonds ahve been identified as having been acquired in exchange for property previously taxed within five years so as to be deductible from the gross estate; and (2) whether the value of the property previously taxed within five years should be reduced by the amount of the funeral and administration expenses and debts of decedent which were paid out of commingled funds of the estate.

FINDINGS OF FACT.

The taxpayer is an Illinois corporation and is the duly qualified executor of the estate of Lucy C. Underwood, deceased. Arthur W. Underwood, husband of the decedent, died on January 24, 1919, leaving all his property to the decedent, and the estate tax was duly paid thereon. Included in his estate on which the tax was paid were 89 shares of Bacon Underwood Veneer Co. stock of the value of $18,912.50, and 135 bonds of the Elmwood Cemetery Co. of the value of $12,150. On September 29, 1919, the decedent, Lucy C. Underwood, sold the 89 shares of Bacon Underwood Veneer Co. stock for $14,850.22, and on">*4265 October 3, 1919, she sold the 135 Elmwood Cemetery bonds for $12,768.75, or a total of $27,618.97. On October ">*1311 3, 1919, the cash proceeds of these sales, together with the proceeds of the sale of certain Elmwood Cemetery bonds belonging to her three wards, amounting to $2,364.58, and miscellaneous income amounting to $26, or a total of $30,009.55, were deposited in her account as executrix of the estate of Arthur W. Underwood, deceased, in the State Bank & Trust Co. of Evanston, Ill. Immediately before this deposit was made the balance to her credit in this bank amounted to $1,133.25.

By checks dated October 3, 1919, and paid on that date, she withdrew from this account $1,702.50 in payment of the amount due two of her wards from the sale of their bonds, leaving a balance of $29,440.30. On October 4, 1919, she deposited $685.87, miscellaneous income received, and withdrew by check dated October 3, 1919, $662.08 in payment of the amount due her third ward, leaving a balance of $29,464.09. By check dated October 7, 1919, and paid October 8, 1919, she withdrew $25,204.47 in payment of the purchase price of Phoenix, Arizona, waterworks bonds of the face value of $25,000, ">*4266 leaving a balance of $4,259.62 in the bank.

The account of Lucy C. Underwood, as executrix of the estate of Arthur W. Underwood, was kept with the State Bank & Trust Co. of Evanston, Ill., from August 5, 1919, to January 14, 1920, and a separate set of books of account as executrix of the estate of Arthur W. Underwood, deceased, was kept by her.

The Commissioner in his deficiency letter determined that Lucy C. Underwood left a net estate for tax of $505,005.56, computed as follows:

Gross estate:
Real estate			$36,978.19
Stock and bonds			421,897.18
Mortgages, notes, cash and insurance			16,620.31
Other miscellaneous property			8,077.63
Property identified as taxed within five years			391,398.81
Total gross estate			874,972.12
Deductions:
Funeral expenses		$643.00
Administration expenses -
Executor's fee	$17,500.00
Attorney's fee	14,000.00
Miscellaneous	1,614.42
		33,114.42
Debts of decedent		6,278.71
Property identified as taxed within five years		279,930.43
Specific exemption		50,000.00
Total deductions			369,966.56
Net estate for tax			505,005.56

">*1312 Of the $25,000 face value of Phoenix, ">*4267 Ariz., waterworks bonds the decedent, Lucy C. Underwood, held at her death, on May 20, 1922, $20,000 face, having a value at that time of $20,600. These bonds were purchased with part of the proceeds of the sale of 89 shares of the Bacon Underwood Veneer Co. stock and the 135 bonds of Elmwood Cemetery Co. previously taxed. The Commissioner did not allow any part of the value of the Phoenix waterworks bonds held by the decedent at her death as a deduction from the gross estate.

Funeral expenses, executor's commissions, attorney's fees, miscellaneous administration expenses and debts of decedent, amounted to $40,036.13 and were paid in cash out of the commingled assets which consisted of (1) prior-taxed property and (2) funds received from other sources. The latter funds were at all times sufficient to pay the expenditures of $40,036.13. The amount of $40,036.13 was allowed by the Commissioner as deductions under the heading of funeral and administration expenses and debts of decedent, but a like amount was disallowed as a deduction under the heading of property identified and taxed within five years, on the ground that the executor was unable to show that the payment of the items">*4268 was made from property other than that identified as taxed within five years.

OPINION.

GREEN: The issues involved in this case are: (1) Whether the Phoenix, Ariz., waterworks bonds acquired by decedent through the sale of the securities received from the prior decedent, who died within five years prior to death of decedent and on whose estate the estate taxes were paid, can be identified as having been acquired in exchange for the securities so received, and (2) whether the value of the property previously taxed within five years should be reduced by the amount of funeral and administration expenses and debts of the decedent which were paid out of the commingled funds of the estate.

In accordance with the reasoning of the Board in the Appeal of Elmer E. Rodenbough, Executor,1 B.T.A. 477">1 B.T.A. 477, we are of the opinion that the record sufficiently establishes the identity of the $20,000 face value of the Phoenix, Ariz., waterworks bonds as having been acquired with part of the proceeds from the sale of the 89 shares of Bacon Underwood Veneer Co. stock and 135 bonds of Elmwood Cemetery Co. received from a prior-taxed estate within the meaning of section 403(a)(2) of">*4269 the Revenue Act of 1921. Since the Bacon stock and the Elmwood bonds were included in the prior decedent's estate at a value of $31,062.50, since such stock and bonds were sold for only $27,618.97, since only $25,204.47 of such proceeds were invested in the Phoenix bonds, since only four-fifths of such Phoenix ">*1313 bonds were still held by the decedent at her death, and since the value of such Phoenix bonds still held by the decedent at her death was only $20,600, it is clear that such value of $20,600 is less than the value at which the same proportionate part of the Bacon stock and Elmwood bonds were included in the prior decedent's estate. The value of such Phoenix bonds in the amount of $20,600, should, therefore, be deducted from the gross estate of Lucy C. Underwood in ascertaining the value of her net estate for the purposes of the estate tax. See also Appeal of Estate of Isabella C. Hoffman,3 B.T.A. 1361">3 B.T.A. 1361; Walter G. Pietsch, Executor, v. Commissioner,6 B.T.A. 582">6 B.T.A. 582; Honoro Gibson Pelton, Executrix, v. Commissioner,7 B.T.A. 1144">7 B.T.A. 1144; ">*4270 John F. Archbold, Executor, v. Commissioner,8 B.T.A. 919">8 B.T.A. 919; Cary v. United States, 22 Fed.(2d) 298; and, as contra, United States v. Rodenbough, 21 Fed.(2d) 781.

The second issue involved in this appeal is whether the value of the property with respect to which a deduction is claimed under paragraph two of subdivision (a) of section 403 of the Revenue Act of 1921 should be reduced by the amount of the funeral and administration expenses and debts of decedent paid by the executor out of the commingled funds of the estate.

This question presents the identical problem that was involved in the first point in 8 B.T.A. 919">John F. Archbold, Executor, v. Commissioner, supra, in which case we held that where funds consisting of (1) prior-taxed property and (2) funds from other sources were commingled, and the funds from other sources were always sufficient to defray the expenditures allowable as deductions under section 403(a)(1) and (3) of the 1921 Act, the amount allowable as a deduction under section 403(a)(2) should not be reduced by the amount allowable under section 403(a)(1) and (3) or any part thereof. In the">*4271 instant case, funeral expenses, executor's commissions, attorney's fees, miscellaneous administration expenses and debts of decedent, amounting to $40,036.13, were paid out of such commingled funds and the funds from sources other than prior-taxed property were at all times sufficient to pay such expenses, commissions, etc. It follows that the respondent was in error in reducing the deduction of property identified as taxed within five years by the amount of $40,036.13. The deficiency should be redetermined on the basis of a net estate for tax of $444,369.43, computed as follows:

Gross estate:
Real estate		$36,978.19
Stocks and bonds		401,297.18
Mortgages, notes, cash and insurance		16,620.31
Other miscellaneous property		8,077.63
Property identified as taxed within five years		411,998.81
Total gross estate		874,972.12
Deductions:
Funeral expenses	$643.00
Administration expenses	33,114.42
Debts of decedent	6,278.71
Property identified as taxed within five years	340,566.56
Specific exemption	50,000.00
Total deductions		$430.602.69
Net estate for tax		444,369.43

">*1314 Judgment will be entered on 15 days' notice, under">*4272 Rule 50.