*824 Petitioner's decedent was the sole executor and sole residuary legatee of an estate, the administration of which commenced in 1932. No distribution of the estate was made until litigation in which it was engaged terminated in 1938. Held, on the facts, there was nothing arbitrary or capricious in continuing the administration of the estate during 1938 and the income of the estate for that year, prior to distribution of the corpus to petitioner's decedent, was not taxable to him as an individual.
*750 This proceeding is for the determination of a deficiency in income tax of the decedent, Robert W. Harwood, in the amount of $8,397.02 for the taxable year 1938. The single issue is whether income of an estate of which the decedent was the sole executor and sole residuary legatee was taxable to him as an individual prior to the distribution of the estate.
FINDINGS OF FACT.
The petitioners are the duly appointed executors of the will of Robert W. Harwood, deceased, who died on September, 1, 1939. The decedent's return for 1938 was filed with the*825 collector of internal revenue for the district of Massachusetts.
Blanche G. Harwood died November 18, 1932, leaving an estate valued at approximately $1,400,000, with very few debts. Robert W. Harwood was the sole executor of her estate and the sole residuary legatee under her will. Within a few weeks after her death *751 the will of Blanche G. Harwood was probated. During the balance of the year 1932 and during 1933 and 1934 the administration of the estate involved considerable activity. All legacies and debts were paid and a trust was set up as required by the will. In addition, the executor and his counsel filed all the tax returns and held extended conferences with state and Federal tax officials. During the latter part of 1934 and until June 1935 considerable work was done with respect to a Federal income tax dispute concerning the year 1929. The matter was in the course of litigation but was settled without trial in 1935. Litigation before the Massachusetts Appellate Tax Board with respect to state taxes of the estate was terminated in 1936.
After the Federal estate tax return of the estate of Blanche G. Harwood was audited in 1934 a dispute arose between*826 the Bureau of Internal Revenue and the executor concerning the valuation of certain property in the estate. In November 1936 a claim for refund of Federal estate tax was filed by the executor. Six months later counsel for the estate commenced suit in the United States District Court for the District of Massachusetts, claiming a refund of estate taxes in the amount of $7,500. In June 1938, after negotiations between the attorneys for the respective parties, the suit for refund was settled without trial. The estate accepted $1,057.33, plus interest from April 11, 1934, in full satisfaction of its claim. The action was dismissed by the court on consent of the parties on October 28, 1938. Within a few months thereafter certain securities which constituted all of the property of the estate except cash were distributed to Robert W. Harwood. The cash belonging to the estate remained in its bank account throughout the year 1938.
In the year 1938 checks were drawn on the account of the estate of Blanche G. Harwood, Robert W. Harwood, executor, payable as follows:
| $4,237.68 | |
| Commonwealth of Massachusetts | 1,197.26 |
| 423.76 | |
| 18,581.17 | |
| Collector of internal revenue | 1,090.99 |
| To attorneys for the executor | 400.00 |
*827 Robert W. Harwood, as executor of the estate, filed an income tax return on behalf of the estate for the year 1938. In this return all of the income of the Blanche G. Harwood estate received before the securities were transferred to Robert W. Harwood as legatee was reported as income of the estate. All of the income from the securities comprising the Blanche G. Harwood estate, after the date of distribution to Robert W. Harwood, was reported as income in Robert W. Harwood's individual income tax return for the year 1938.
*752 The estate of Blanche G. Harwood was in the process of administration during the year 1938.
OPINION.
SMITH: The respondent has determined that the income of the estate of Blanche G. Harwood is taxable to the petitioners' decedent as an individual during the year 1938 and is not taxable to the estate as an entity. Two arguments are advanced to support this determination. In the first place, the respondent contends that as a matter of fact the estate was no longer in the process of administration during the taxable year and therefore it is not entitled to recognition as a separate taxable entity. In the second place, it is argued that since*828 the decedent was the sole executor and the sole residuary legatee and all specific legacies and substantially all debts of the estate of Blanche G. Harwood had been paid prior to the taxable year, the decedent, Robert W. Harwood, was the substantial owner of the property comprising the estate, and that the income from that property is therefore taxable to him under section 22(a) of the Revenue Act of 1938.
The evidence is clear and convincing to the effect that the estate in question was actually in process of administration during the taxable year. There was nothing arbitrary or capricious in the action of petitioners' decedent in continuing the administration of the estate during 1938. The executor on behalf of the estate was conducting a litigation against the Federal tax collector, which suit was not settled until June 1938 and not officially dismissed until October 1938. The controversy was bona fide in every respect and within a few months after its termination the most substantial assets of the estate were distributed to Robert W. Harwood, the legatee. In his individual income tax return for 1938 Robert W. Harwood reported all income received from the property after the*829 distribution. The action of the petitioners' decedent was in good faith and under all the circumstances was entirely prudent and reasonable. It has repeatedly been held that under such circumstances the estate is still in process of administration and must be recognized as a separate taxable entity. ; ; ; ; . Cf. .
, relied upon by the respondent, is not in point. That case is concerned solely with the *753 question of whether the rights of the legatees were vested for the purposes of the imposition of a succession tax under the Spanish War Revenue Act.
The cited cases also dispose of the respondent's argument that on the authority of *830 , the decedent was the substantial owner of the property, and that the income of the estate is therefore taxable to him in his individual capacity. In the Clifford case and similar cases cited by the respondent the owner of property creating a trust to which the property is transferred is held not to have lost his status as owner, because substantial elements of ownership were retained. Thus, in those cases, the trust created is not considered to be a separate taxable entity and the income of the trust property is taxable to the grantor. In the instant case, while the administration of the estate was reasonably continued the estate is recognized as a separate taxable entity by local law and for Federal tax purposes. During the same period of time the distinction between the personalities of the decedent in his capacity as executor and as an individual must be respected. The respondent's determination is therefore disapproved.
Decision will be entered under Rule 50.