Cohen v. Commissioner

Estate of B. Brasley Cohen, Deceased, William F. Cole and Paula C. Lubic, Co-administrators, and William F. Cole, Paula C. Lubic, Carol Louise Lubic, William F. Cole as Guardian of the Estate of Betty Lou Cole, a Minor, Paula C. Lubic as Guardian of the Estate of Arthur Meyran Lubic, a Minor, as Distributees of the Estate of B. Brasley Cohen, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent

Cohen v. Commissioner

Docket No. 7112

United States Tax Court

8 T.C. 784; 1947 U.S. Tax Ct. LEXIS 234;

April 8, 1947, Promulgated

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Decision will be entered for respondent.

Under the facts, held, that income from decedent's estate was taxable to the estate because such income did not become payable to the legatees under section 162 (b), Internal Revenue Code, nor was the income properly paid or credited to the legatees under section 162 (c) during the taxable year; held, further, that income received by the estate during administration from real estate subject to administration is taxable to the estate, notwithstanding that title to the real estate under local law was vested in the devisees.

Harry C. Cogen, Esq., and A. Calder Mackay, Esq., for the petitioners.

A. J. Hurley, Esq., for the respondent.

Hill, Judge.

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HILL

Respondent determined a deficiency in income tax against the estate of B. Brasley Cohen for the taxable year May 16 to December 31, 1942, in the amount of $ 11,142.20. The question is whether the estate is taxable on $ 27,213.65 of income realized in the taxable year, or whether such income is taxable to the devisees and legatees. Decedent's income tax return was filed with the collector of internal revenue for the sixth district of California at Los Angeles. The case was submitted on oral testimony, exhibits, and a stipulation of facts. The facts as stipulated are so found.

FINDINGS OF FACT.

B. Brasley Cohen died testate May 16, 1942, leaving an estate consisting of real estate, cash, stocks, and bonds having an appraised value in excess of $ 600,000. Decedent's will provided as follows:

April 30 -- 1942

This is my last will -- all others previously written are herewith cancelled.

All I possess is to be divided --

40% to Paula C. Lubic

20% to my grandchildren Carol Louise Lubic-Arthur Meyran Lubic-Betty Lou Cole.

$ 10,000 for charity to be selected by Paula & Bill.

This will was admitted to probate by the Superior Court of California in and for the county of Los Angeles. William F. Cole and Paula Lubic were appointed administrators c. t. a. and acted in that capacity throughout the administration.

First publication and notice to creditors of the estate took place June 10, 1942. The time within which creditors might file claims against the estate expired December 10, 1942. All claims filed were paid prior to December 10, 1942. These claims totaled $ 29,637.59, of which amount $ 25,000 represented the California inheritance tax. State and Federal income taxes were not due until March 1943. The Federal estate tax in the approximate amount of $ 157,000 was paid in March 1943. As of December 31, 1942, the estate had a balance of cash on hand of $ 163,474.53. As of March 31, 1943, the estate had a balance on hand for distribution in the amount of $ 439,966.98.

The estate gave rise to net income during the taxable year May 16 to December 31, 1942, in the amount of $ 27,213.65, of which the sum of $ 8,283.99 was net income from real estate as follows: Pennsylvania property, $ 148.05, and California property, $ 8,135.94.

The administrators, on their fiduciary income tax return for 1942 (Form 1041), reported as income on line 11 thereof the amount of $ 27,213.65 and deducted the same amount on line 17 as the amount distributable to beneficiaries and consequently showed no taxable net income. The devisees and legatees under decedent's will reported as income for 1942 with respect to the estate the following amounts:

William F. Cole	$ 10,884.04
Paula C. Lubic	10,884.04
Carol Louise Lubic	1,814.00
Arthur Meyran Lubic	1,814.00
Betty Lou Cole	1,814.00

No actual distributions or bookkeeping credits were made on behalf of any of the devisees or legatees by the administrators during 1942. The estate used a system of bookkeeping known as the synoptic method, which makes no provisions for crediting amounts to the legatees or devisees. The devisees and legatees did not petition for a ratable partial or other distribution of the estate. On May 20, 1943, the superior court signed an order approving the final accounts of the administrators and ordered distribution of the estate. Shortly after this order of distribution, amounts were distributed by check to the devisees and legatees corresponding to the amounts reported on the Federal income tax returns by such devisees and legatees for 1942, as shown above.

Respondent, in his explanation accompanying the deficiency notice, stated:

Deduction of $ 27,213.65 taken in the return as the amount of income distributable to the beneficiaries is disallowed as not within the provisions of section 162, Internal Revenue Code.

OPINION.

Whether the income involved is taxable to the estate or to the individual legatees and devisees depends in part on the applicability of section 162 (b) and (c). Subsection (b) provides in effect that income from the estate "which is to be distributed currently" to the legatees, whether distributed or not, shall be taxable to such legatees and not to the estate. Subsection (b) defines income which is to be currently distributable as including income which "becomes payable to the legatee" within the taxable year. Regulations 111, section 29.162-2 (b), interprets the term "income which becomes payable" as income to which the legatee "has a present right" which right may be derived from "a recognized present right under local law to obtain income or compel a distribution of income."

In view of the above provisions and the interpretations of subsection (b), the question under the present facts narrows down to whether the legatees had a present right under local law to obtain or compel a distribution of the income in question during the taxable year. Section 1010 of the California Probate Code, 1941, provides in part:

Facts warranting distribution: Petition and Notice: Right to oppose. When the time for filing or presenting claims has expired and all uncontested claims have been paid, or are sufficiently secured by mortgage, or otherwise, but the estate is not in a condition to be finally closed and distributed, the executor or administrator, or any heir, devisee or legatee, * * * may petition the court for a ratable payment of the legacies, or ratable distribution of the estate, to the heirs, devisees or legatees * * *.

Section 1011 of the California Probate Code provides:

Hearing and order for distribution. If, at the hearing, it appears that the allegations of the petition are true, that all inheritance taxes payable in said proceeding have been paid * * * and that no injury will result to the estate or any person interested therein, the court shall make an order requiring the executor or administrator to deliver to the heirs, devisees or legatees, * * * such portion of the estate as the court may designate.

We think it apparent from the above quoted provisions of the local law that the legatees did not have during the taxable year a present right to compel a distribution of the income in question. The legatees did have the privilege of petitioning the court, which they did not exercise, and if they had established certain facts the local court could have, in its discretion, ordered a distribution of the designated portion of the estate. We think the privilege of soliciting the local court's discretion is not the equivalent of a present right to compel distribution. See the discussion of a somewhat similar situation in Estate of Andrew J. Igoe, 639">6 T. C. 639, at 646.We hold that the estate is not relieved from the tax on the income in question by virtue of subsection (b).

Subsection (c) provides in effect that during the period of administration any estate income "which is properly paid or credited" during the taxable year to the legatees shall be taxable to such legatees and not to the estate. Petitioners argue that there was a "mental crediting" and that the legatees reported their shares for tax purposes and that these facts should satisfy subsection (c). There was no bookkeeping entry reflecting credits in favor of the legatees and the record indicates that the bookkeeping system used by the estate made no provision for any such crediting. The reporting of such income by the legatees is not, in our opinion, a substitute for proper crediting by the estate. A credit to be effective for subsection (c) purposes should place the income beyond the estate's control, Commissioner v. Stearns, 65 Fed. (2d) 371, or make it constantly available to the legatees on demand. Estate of Andrew J. Igoe, supra.A "mental crediting" even accompanied by inclusion of income for tax purposes by the legatees, does not satisfy the requirements of subsection (c). We hold that the estate is not relieved from tax for the income in question by virtue of subsection (c).

Finally, petitioners contend that at least such income as was derived from the real estate is taxable to the devisees and not to the estate. Petitioners on brief state that "The net amount realized from properties located in the State of Pennsylvania is so small that no attempt will herein be made to distinguish between California and Pennsylvania law. Petitioners will present their arguments as though all of the income was derived from California properties." We shall, therefore, consider the problem on this same basis and expressly refrain from an interpretation of the law of Pennsylvania in considering the taxable status of the property in that state. Petitioner's argument is based essentially on the fact that under California law real estate is deemed to vest in the devisees immediately on the death of the decedent. In this connection petitioners rely on Guaranty Trust Co. of New York, 30 B. T. A. 314, and George L. Craig, 7 B. T. A. 504.Under the local law as pertinent to the above cited cases the executor had no right to possession of the real estate and no right to collect the income therefrom. See in this connection Coann v. Culver, 80 N. E. 362; 188 N. Y. 9; and In re Fitzpatrick's Will, 169 N. E. 110; 252 N. Y. 121. A careful reading of the Craig and Guaranty Trust Co. cases will indicate that the income in question was not, in effect, subject to administration at all.

In the instant case under the California law, though the real estate vested in the devisees at decedent's death, it was subject to the possession of the administrators, who were entitled to collect the rents therefrom. The real estate itself and the income therefrom were, in other words, subject to administration and to the decedent's debts. Sec. 581, Probate Code of California.

Under § 582 of the Probate Code of California the executor or administrator must deliver possession of real property to the heirs or devisees "unless the income therefrom for a longer period or a sale thereof is required for the payment of the debts of the decedent." It has not been shown in the instant case that the administrators were legally obligated to thus deliver possession. The administrators did not deliver possession. No court order compelled delivery of possession. The devisees did not seek to obtain possession, but, on the contrary, apparently acquiesced in the estate's returning of the rental income of Federal tax purposes. On December 31, 1942, the estate had cash on hand of some $ 163,000, with Federal and state income taxes unpaid and the Federal estate tax unpaid, which latter tax amounted to some $ 157,000. Under these circumstances and on the state of the record, we do not think we can conclude that the administrators were obligated to deliver possession of the real estate to the devisees after December 10, 1942, or during the remainder of that month. Consequently, the instant case poses the question of whether the income from the real property is taxable to the estate or to the devisees holding title thereto. More simply stated, the question is whether for income tax purposes such income is that of the estate or that of the individual devisees. We think the answer to this question is furnished by section 161 (a) (3) of the Internal Revenue Code, which imposes an income tax on estates, including "income received by the estates of deceased persons during the period of administration or settlement of the estate." This language, coupled with the provisions of section 582 of the California Probate Code, indicates that, for the purpose of determining whether the income here involved from the real property is taxable to petitioner or to the devisees of such property, depends on whether the possession of such income by the administrators was necessary for the payment of the debts of decedent. The reason for attributing income received by the estate during administration to the estate rather than to the devisees holding title to the income-producing property has been well stated in Kuldell v. Commissioner, 69 Fed. (2d) 739, as follows:

* * * It is perfectly true that under Texas laws an administrator takes no title to the property, either real or personal; that all of it descends to and vests in the legatees under a will, in the heirs, if there is none. It is equally true, however, that it does so subject to the payment of the debts of the intestate, and that it is provided that upon the issuance of letters testamentary or administration, the executor or administrator shall have the right to the possession of the estate as it existed at the death of the testator or intestate, and he shall recover possession and hold such estate in trust to be disposed of in accordance with law. It was in recognition of this period of husbandry and control by the administrator, which prudent administration requires, that the Revenue Acts provide that income received by estates during the period of administration or settlement shall be returned and paid by the administrator. * * *

Petitioners rely on Bishop v. Commissioner, 152 Fed. (2d) 389, for the proposition that income follows title despite administration. We think the cited case is distinguishable because the property involved therein was the community half of the surviving wife. Consequently, the wife did not derive her title from the decedent, but held title which antedated and persisted after her husband's death. We therefore do not consider the Bishop case as controlling the instant situation, which does not involve community property.

Nor do we think it can seriously be argued that the estate was not under administration during 1942. It is true that the estate was solvent and that the claims which had been filed had been paid prior to the end of 1942, but Federal and state income taxes and the Federal estate tax had not been paid, no distributions to the legatees or devisees had been made, and the final accounting was not approved until May 1943. The administrators filed a fiduciary return on behalf of the estate in 1942. Under these circumstances, we do not think it can be said that the estate entity and the administrators' control over it constituted an unreality or an improper prolongation of the period of husbandry during 1942. We have indicated before that we should be slow to disregard the date of final accounting and official discharge. J. H. Anderson, 30 B. T. A. 1275.

For all the reasons above stated, we hold that respondent correctly taxed the income in question to the estate.

Decision will be entered for respondent.