*1158 1. Where in 1935 a part of the income of an estate in process of administration or settlement was credited upon the executors' books to the residuary legatees but used by the executors to pay state inheritance tax, the credit and paying being made on the same day, the estate may not in its income tax return for 1935 deduct from gross income the amounts credited to the legatees.
2. Executors' commissions are an expense of administration and a legal deduction from the gross estate in the determination of the net estate subject to estate tax. Where, as here, they were a percentage of the income collected during the first year of administration, they are not a legal deduction from the gross income of the estate for income tax purposes.
*628 This proceeding is for the redetermination of a deficiency in income tax for 1935 in the amount of $4,502.11. The petition alleges that the respondent erred in disallowing the deduction from gross income of *629 executors' commissions in the amount of $4,068.73, which the petitioner now admits should be*1159 in the amount of only $1,731.16; also, that he erred in the determination of the net income by disallowing the deduction from gross income of amounts of income that had been credited by the executors to the beneficiaries in 1935.
FINDINGS OF FACT.
1. C. R. Hubbard, of Wheeling, West Virginia, died testate on October 25, 1934, leaving a widow and four children surviving. His will was admitted to probate in Ohio County, West Virginia, December 10, 1934. Katherine Hubbard, widow of C. R. Hubbard, deceased. on January 19, 1935, renounced the provisions of the will made for her.
2. The National Bank of West Virginia at Wheeling and Stella Cracraft were granted letters testamentary as executors under the will to administer the affairs of the estate. R. M. McCloy is the trust officer of the above bank authorized to act for the bank in the administration of the affairs of the estate.
3. The decedent's estate at the time of his death was solvent.
4. The books and records of the account of the estate of C. R. Hubbard disclose that an amount of $19,748.80, representing part of the income of the estate for the calendar year 1935, was credited to the account of the beneficiaries*1160 of the estate as follows:
| Kate H. Hubbard | $7,245.92 |
| Lida Belcher | 3,125.72 |
| Stella Cracraft | 3,125.72 |
| Ann H. Heiskell | 3,125.72 |
| Helen H. Williams | 3,125.72 |
| 19,748.80 |
5. R. M. McCloy prepared an information return for the estate for the year 1935 and filed it with the collector of internal revenue, showing thereon the amounts credited, as set out above, to the beneficiaries.
6. MaCloy also prepared and filed with the collector an income tax return for the estate for the year 1935, claiming the deduction of the amounts credited to the beneficiaries and $4,068.76 executors' commissions.
7. An estate tax return was filed by the executors on October 25, 1935, with the collector for the district of West Virginia. This return claimed as a deduction for executors' commissions the amount of $10,000 and a credit of 80 percent of the amounts paid to the State of West Virginia for "estate, inheritance, legacy, or succession tax," which deduction and credit were allowed.
8. The decedent in his will, after making certain specific bequests to his wife, Katherine Hubbard, his daughter, Stella, and the Ohio valley General Hospital Association, devised and bequeathed*1161 the residue *630 of his estate in equal shares to his four daughters, Stella (Mrs. William A. Cracraft), Ann (Mrs. M. O. Heiskell), Helen H. Williams, and Lida (Mrs. James M. Belcher). The interest of his daughter Lida was in trust.
The will directed:
* * * that no distribution of the residuary property be made until the expiration of one year after my death, but it is my desire that distribution be made and the trust set up as soon after that time as the same may, conveniently and in the best interests of my estate, be done.
9. No cash was paid by the executors to any of the beneficiaries under the will during the year 1935.
10. About the time the credits of income were made to the widow and four daughters of the decedent, the executors took up with the heirs and legatees the advisability of paying the state inheritance taxes from the income of the estate instead of obtaining money for their payment from the sale of income-producing securities. All of the heirs and legatees gave permission to the executors to do this. Accordingly the money that was credited to the heirs or legatees was used for the payment of the taxes.
11. The executors prepared and filed*1162 income tax returns for the four daughters, including therein the credits equaling the amount of the inheritance taxes paid to the State of West Virginia. These returns showed no net income subject to tax. The widow, Katherine Hubbard, likewise included in her income tax return the amount credited to her account and paid the income tax shown to be due by her return.
12. The following tabulation shows the time and manner of the credits to the beneficiaries on the executors' books and the disposition made thereof:
| Beneficiaries' Share of Income. | ||||
| Cash transactions | ||||
| Year | Debit | Credit | Balance | |
| 1934 | ||||
| Dec. 29 | Income available | $899.75 | $899.75 | |
| 1935 | ||||
| Apr. 19 | Income available | 16,506.13 | 17,405.88 | |
| 19 | To Fred L. Fox, State Tax Commissioner, inheritance tax for beneficiaries | $19,095.20 | -1,689.32 | |
| Nov. 21 | To State Tax Commissioner, additional inheritance tax | 653.60 | -2,342.92 | |
| Dec. 31 | Balance net income available | 14,910.26 | 12,567.34 | |
| 31 | Advances to corpus of estate | 12,371.65 | 195.69 | |
| 1936 | ||||
| Jan. 4 | Available income | 3,000.00 | ||
| Paid to beneficiaries | 3,000.00 | |||
| July 3 | Available income | 1.200.00 | ||
| Paid to beneficiaries | 1,200.00 | |||
| Dec. 30 | Available income | 4,389.75 | ||
| Paid to beneficiaries | 4,585.44 | |||
| 1937 | ||||
| Dec. 31 | Available income | 1,903.09 | ||
| Paid to beneficiaries | 1,903.09 | |||
| 1938 | ||||
| Dec. 30 | Available income | 1,661.93 | ||
| Paid to beneficiaries | 1,661.93 | |||
*1163 *631 The amounts appearing above in the debit column appear in credit columns of the accounts with the five heirs or legatees. One-third of the "Income available" appears as a credit in the distribution account of Mrs. Hubbard and one-sixth in the credit column of each of the daughters of the decedent. The disbursements by the estate appearing in the credit column of the above statement appear in the debit columns of the accounts with the heirs, but are not strictly in the proportion of one-third to the widow and one-sixth to each of the daughters, since the inheritance tax payable upon the widow's distributive share was more than one-third of the total inheritance taxes payable.
13. The inheritance taxes were paid direct to the State Tax Commissioner of West Virginia on the following dates and in the following amounts:
| April 19, 1935 | $19,095.20 |
| November 21, 1935 | 653.60 |
| Total | 19,748.80 |
14. Practically all of the corpus of the estate was invested in income-producing securities. The income collected by the executors consisted principally of interest and dividends. The only income reported on the returns is from interest, dividends, and gains on*1164 the sale of securities.
15. During 1935 the executors of the estate were paid $1,731.16 representing a charge of 5 percent upon the collection of income for the estate. This amount was not included as a part of the administration expenses of $10,000 charged against the corpus of the estate and deducted from the gross estate in the estate tax return. Instead it was included in the amount of $4,068.73 claimed as a deduction from gross income in the income tax return filed for the estate for 1935.
OPINION.
SMITH: The petitioners claim the deduction from the gross income of the estate for 1935 of $19,748.80 representing credits made to the beneficiaries of the estate. The deduction has been disallowed by the respondent.
The applicable provisions of the Revenue Act of 1934 are as follows:
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 or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be*1165 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 *632 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. [
SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
* * *
(c) TAXES GENERALLY. - Taxes paid or accrued within the taxable year, except -
* * *
(3) estate, inheritance, legacy, succession, and gift taxes; * * *
The Revenue Act of 1932 (
SEC. 802. 80 PER CENTUM CREDIT.
(a) Section 301(b) of the Revenue Act of 1926 is amended to read as follows:
"(c) The tax imposed by subdivision (a) of this section shall be credited with the amount of any estate, inheritance, legacy, or succession taxes actually paid to any State or Territory or the District of Columbia, in respect of any property included*1166 in the gross estate (not including any such taxes paid with respect to the estate of a person other than the decedent). The credit allowed by this subdivision shall not exceed 80 per centum of the tax imposed by subdivision (a) (after deducting from such tax the credits provided by subdivision (b)), and shall include only such taxes as were actually paid and credit therefor claimed within four years after the filing of the return required by section 304, * * *"
Article 24-2 of Regulations 86 provides, in part, as follows:
* * * Expenses of the administration of an estate, such as court costs, attorneys' fees, and executors' commissions, are chargeable against the corpus of the estate and are not allowable deductions. * * *
It will be noted that under section 162(c) of the Revenue Act of 1934, quoted above, amounts which are "properly paid or credited" to legatees, heirs, or beneficiaries are legal deductions from gross income and the amounts so paid or credited are required to be taken up in the income tax returns of the legatees, heirs, or beneficiaries. The petitioners contend in this case that the amount of $19,748.80 was properly credited to the beneficiaries and that*1167 therefore the estate is entitled to deduct that amount from the gross income.
The estate of C. R. Hubbard was in process of administration or settlement during the year 1935. Although the evidence is to the effect that it was the practice of the National Bank of West Virginia at Wheeling to keep an account of the income of an estate in process of administration or settlement separate from the principal, payments of expenses and distributions to the legatees here were from one common fund. The will of the decedent did not provide for a distribution of income separate from a distribution of principal. It was the duty of the executors to pay all administration expenses and *633 the inheritance taxes payable to the State of West Virginia and then to distribute to the beneficiaries the residue of the estate in accordance with the directions of the will.
As shown by the estate's income tax return for 1935, the gross income was in the amount of $41,491.40. It was not this amount which was allocated to the beneficiaries' shares of income, but a far less amount. The credit which was made to the beneficiaries' shares was not made with any expectation that the amount would ever*1168 be paid over to the beneficiaries. At the time the credit was made it was known that the money would be needed and would be used for the payment of West Virginia inheritance taxes. The executors are charged with the duty of paying those taxes before the estate is distributed. The books of account of the executors show that on April 19, 1935, there was debited to the account of the estate "Income Available" $16,506.13 and on the same day there was paid inheritance tax in the amount of $19,095.20. This shows that at the time the credit was made to the beneficiaries there was no expectation that it would ever be paid over to the beneficiaries. In this situation we do not think that the income of the estate was "properly" credited to the beneficiaries within the meaning of subdivision (c) of section 162 of the applicable statute. The purpose of that subdivision is that where income is credited to a beneficiary to be paid to him at a later date the amount may be claimed as a deduction by the estate or trust for the year in which the credit is made, and the beneficiary will be required to include in his or her return the income credited. It is obvious that the credits here were made*1169 to the beneficiaries for the purpose of reducing the net income of the estate taxable as an entity. We think that the respondent did not err in disallowing the deduction from gross income of the credits made to the beneficiaries in the amount of $19,748.80.
The second question is whether the estate is entitled to deduct from gross income executors' commissions in the amount of $1,731.16. The estate was in process of administration during 1935 and clearly the executors' commissions are a legal deduction from the gross estate in the estate tax return for purposes of estate tax. It appears that the executors deducted $10,000 of executors' commissions, which amount represented their commissions chargeable against the corpus of the estate, but failed to deduct $1,731.16 which represented a charge of 5 percent made upon the collection of income. The $1,731.16 was paid to the executors on December 31, 1935.
The point in issue in this case was given careful consideration by the Board in
Ordinarily the fees and commissions of executors, administrators, attorneys, and other representatives of estates*1170 are regarded as administration expenses and are applied against the gross estate in determining the estate tax. Ordinarily *634 such fees and commissions are not allowable as deductions in determining the net income of the estate.
Where, however, such fees or commissions are paid for services rendered exclusively in carrying on the affairs of the estate as a business, rather than in preparing it for settlement and distribution, such payments constitute ordinary and necessary expenses and may be deducted for income tax purposes.
In
What has been said had no bearing on the commissions taken for receiving and paying out income on the property during administration. By New York law commissions*1172 on income are calculated separately and are not part of the administration expenses chargeable on the corpus of the estate. They are chargeable only against income. Such commissions are a proper deduction from gross income received by the executors in paying the income tax, but they have no place as a deduction for purposes of the estate tax.
The executors' commissions here in question are provided for by
An estate in process of administration or settlement is taxable the same as an individual. An individual is not permitted to deduct from gross income ordinary and necessary expenses unless they are incurred in a trade or business. We think it clear from the evidence in this case that the estate as such was not engaged in a trade or business during the calendar year 1935. The executors*1173 simply collected the interest and dividends and paid the debts of the estate. Cf.
Decision will be entered for the respondent.