Opinion
Docket Nos. 6067 6068.
1946-12-31
WILLIAM C. CHICK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.MABEL C. FOSS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Robert A. B. Cook, Esq., for the petitioners. A. J. McDowell, Esq., for the respondent.
1. The father of petitioners died in 1929, leaving a will in which he named petitioner William C. Chick as executor and also trustee of several trusts set up in the will, including one of the residue of the estate. The will was probated in 1929 and Chick qualified soon thereafter as executor and trustee. The two petitioners are equal beneficiaries of the trust comprising the residue of decedent's estate. In 1937 the last remaining claim against the estate was settled and closed and all the other trusts except the one of the residue of the estate has been set up. The Commissioner in 1940 determined that the estate was no longer in process of administration and that the income of the estate was taxable to petitioners under section 162(b), as beneficiaries of the residuary trust, to whom the net income was currently distributable. Held, decedent's estate was not in process of administration in the taxable year and the net income was taxable to petitioners, as the Commissioner has determined.
2. Liquidating distributions were made pursuant to a plan of liquidation which was to be completed at a time specified within three years from the date of the first distribution. Actual liquidation extended beyond such period. Held, the plan of liquidation was a bona fide plan and the fact that the liquidation was not completed within the time specified is not controlling. The distribution to the petitioner-stockholder gave rise to long term capital gain in the taxable year. Robert A. B. Cook, Esq., for the petitioners. A. J. McDowell, Esq., for the respondent.
These proceedings involve deficiencies in income tax for the taxable year 1940 in amounts as follows: William C. Chick, docket No. 6067, $3,312.61, and Mabel C. Foss, docket No. 6068, $2,488.73. The cases, consolidated for hearing and disposition, present two issues: (1) Whether the income derived by the estate of Isaac W. Chick, deceased, in 1940 was taxable to the estate or was currently distributable in the taxable year to the petitioners as beneficiaries of a testamentary trust, and therefore taxable to them under section 162(b) of the Internal Revenue Code; (2) whether certain capital gain realized by petitioner William C. Chick as a result of liquidating dividends received by him in 1940 constituted long term or short term capital gain.
In adding the net income of the estate of Isaac W. Chick, deceased, to the net income of each of the petitioners in the proportion of one-half to each, the Commissioner stated in his deficiency notices his reasons therefor. These reasons stated in the deficiency notice to petitioner William C. Chick were as follows:
You and your sister, Mrs. Mabel C. Foss, are the sole beneficiaries of a residue trust provided for under the will of your father, Isaac W. Chick, who died March 7, 1929.
It appears that the necessary administration in connection with the estate in process had been fully completed except for the transfer of the residue to the trustee and the reason given by you for your failure to set up the trust was because the main asset of the estate represented the shares of stock of Pray & Company and you refused to accept the liability as trustee, which you contend would be greater to you than by acting as executor. It is the opinion of this office that the above reason for not transferring the entity of the estate to you as sole trustee is not sufficient to consider the estate in process of administration because more than eleven years have elapsed since the testator's death.
It is therefore held by this office that since you, as executor, had collected all of the assets, paid all legacies and debts, and had no contingent liabilities or civil suit pending against the estate and you have performed all acts relating to the administration except for the transfer of the residue to yourself as trustee that for income tax purposes, the income realized is trust income taxable to you and your sister as beneficiaries under the will.
A similar statement was made in the deficiency notice to Mabel C. Foss. Both petitioners have assigned error contesting the correctness of this determination of the Commissioner. That represents the issue which is common to both proceedings. The second issue is involved only in the case of William C. Chick.
Most of the facts were stipulated, and as stipulated they are incorporated herein by reference.
FINDINGS OF FACT.
Petitioners William C. Chick and Mabel C. Foss are children of Isaac W. Chick, who died testate March 7, 1929, a resident of Boston, Massachusetts. Each petitioner filed his income tax return for the taxable year with the collector of internal revenue for the district of Massachusetts, and both returns were filed on the cash basis.
The last will and testament of Isaac W. Chick, together with several codicils thereto attached, was allowed for probate March 28, 1929, and petitioner William C. Chick, who was named as both executor and trustee under the will and codicils, qualified immediately as executor. Shortly thereafter he also qualified as trustee. The value of the testator's estate at the time of his dismiss was approximately $2,500,000. Included in the assets were 4,000 shares of the capital stock of John H. Pray & Sons Co., a corporation engaged in the retail selling of rugs and floor coverings, with its principal place of business in Boston, Massachusetts. Except for possibly a few qualifying shares, the above 4,000 shares constituted the whole of the outstanding capital stock of the company. Also included in the estate were approximately 2,500 shares of the capital stock of the Atlantic National Bank of Boston, a banking institution organized under the Federal banking laws and having its principal place of business in the city of Boston. (The 2,500 shares were subsequently divided on a four for one basis, so that at the time of the closing of the bank, as hereinafter referred to, the estate held approximately 10,000 shares.) The balance of the estate was made up of some real estate and a considerable portion of other stocks and bonds.
The ,ill and codicils provided for the establishment of several trusts for the benefit of persons designated by the donor and provided that the residue of the estate should be transferred to a trust for the benefit of the donor's two children, the petitioners herein, and their survivors. All of the trusts except that comprising the residuary estate were duly created or the obligation to do so was satisfactorily discharged within a relatively short time after the death of the decedent. The trust comprising the residuary estate has never been set up, no assets have ever been transferred from the executor to a trustee, no accounting has ever been made by the executor, no accounts have ever been filed by the executor, and the executor has not identified any of the assets of the estate as assets of the trust referred to. The executor has never at any time paid any of the income from assets held by him as executor either to himself as an individual or to his sister, Mabel C. Foss, nor has he ever in any way earmarked, identified, or credited the income, or any part thereof, received by the estate as income belonging to or distributable to himself or his sister as beneficiaries under the trust.
After the death of Isaac W. Chick tax claims in substantial amounts were made against the estate. A deficiency of $24,259.63 in Federal estate tax was asserted against the estate and this claim was compromised May 28, 1931. Subsequently there was a refund of $554.95 to the estate on June 19, 1933, out of a further Federal tax claim.
At his death and for some years prior thereto the decedent had been a director of the Atlantic National Bank of Boston. Shortly subsequent to decedent's death petitioner William C. Chick, holding as executor the shares of the decedent, was made a director in his father's stead. The Atlantic National Bank was closed in May 1932, after a report by the senior National Bank examiner for the First Federal Reserve District had shown that the bank's affairs were in an unsatisfactory condition. Thereafter the Comptroller of the Currency or other Federal authority assessed or imposed a stockholder's liability upon the estate in connection with the shares of capital stock owned by it. In addition, the Federal authorities sought to impose a liability upon petitioner Chick as a director of the closed bank. These claims were not finally settled or disposed of until some time during the year 1937.
During the taxable year 1940 petitioner William C. Chick was the president and a director of John H. Pray & Sons Co. The 4,000 shares of common stock owned by the decedent at his death have at all times since his death continuously been held by the executor and have been administered by him under the will. Those shares constituted the larger portion of the estate's assets after 1937. For the period from 1932 to and including the year 1940, except the year 1937, Pray & Sons Co. sustained operating losses each year. In 1938, because of changed conditions in the location of its then business site, the company was moved to a more suitable location in Boston, where it has enjoyed a more successful operation, showing an operating profit since 1941. To overcome losses previously sustained by it, to pay expenses incident to its removal to a new location, and to provide it with additional working capital, the company increased its capital on two different occasions by authorizations of preferred stock in the aggregate sum of $400,000. In 1936 the company sold to the petitioners $100,000 of its preferred stock at par. In 1939 the company sold to the petitioners preferred stock at par in the amount of $125,000. Petitioner Chick, as executor, was advised that he could use the income of the estate from miscellaneous investments to protect the estate's interest in the shares of Pray & Sons Co. stock. Of the income so received, $75,000 was used by the executor to purchase at par that amount of the preferred stock of the company. In all $300,000 of the authorized $400,000 of preferred stock was issued by the company in the years 1936 and 1939. Pray & Sons Co. stock has become more valuable to the estate since the company's removal in 1938 to its present location.
John H. Pray & Sons Co. is perhaps the oldest rug house in America, having been established in 1817. In 1937, after many consultations with counsel and interested parties, it was recognized that a forced sale at that time would result in a nominal price for the inventories and almost nothing for the good will, which had a substantial value. The only satisfactory course was the continuance of the business with a view to restoring its former earning capacity and thus enhancing its sale value. Petitioner William C. Chick became ill in 1936 and endeavored to locate a corporate trustee who would take over the assets and run the business so that he, Chick, could resign as trustee. Ordinary trust companies refused to assume the trusteeship because its principal asset was the stock of the Pray Co. and the trustee, because of the ownership of the entire capital stock, would have to be responsible for the operation of the business.
The trust of the residuary estate of Isaac W. Chick for the benefit of the petitioners herein was provided for by article seventh of the second codicil to his will. Under the terms of the instrument the net income from one equal part of the property so given in trust is currently distributable to the petitioner William C. Chick; the net income from the other equal part of such property is currently distributable to Mabel C. Foss.
All acts necessary to complete and wind up the administration of the estate of Isaac W. Chick had been fully performed prior to the taxable year. However, the assets comprising the residuary estate of the decedent, Isaac W. Chick, have never been transferred by William C. Chick from himself as executor to himself as trustee.
The estate of Isaac W. Chick was not an estate in the process of administration at any time during 1940.
Neither petitioner included in his income for the taxable year 1940 any income from the decedent's estate.
For some years prior to the year 1940 petitioner William C. Chick had owned 147 shares of common stock of the Atlantic Coast Lumber Corporation, a corporation organized under the laws of South Carolina. He was not an officer or a director of the company. These shares had been acquired by him at a cost of $8 per share.
In pursuance of an earlier vote by the stockholders of the corporation authorizing and empowering the directors thereof to liquidate its business and affairs, the directors on July 14, 1937, adopted the following resolution:
RESOLVED: That, as duly authorized by the Stockholders, the Directors now authorize and direct the President to proceed with the sale of all assets of the corporation with a view to the final liquidation of the corporation, that all assets shall be disposed of, all liabilities paid and capital stock retired on or before December 31, 1939.
At the time of the adoption of the resolution the assets and liabilities of the corporation, as reflected by its balance sheet, were as follows:
+--------------------------------------------------------------+ ¦Assets ¦Liabilities ¦ +--------------------------------+-----------------------------¦ ¦Cash ¦$586,640.93 ¦Accruals ¦$4,005.16 ¦ +-------------------+------------+----------------+------------¦ ¦Accounts receivable¦16,333.29 ¦Deferred credits¦4,800.00 ¦ +-------------------+------------+----------------+------------¦ ¦Property ¦838,984.93 ¦Paid-in surplus ¦449,296.26 ¦ +-------------------+------------+----------------+------------¦ ¦Inventories ¦5,158.86 ¦Earned surplus ¦21,728.79 ¦ +-------------------+------------+----------------+------------¦ ¦Deferred charges ¦6,412.20 ¦Capital stock: ¦ ¦ +-------------------+------------+----------------+------------¦ ¦ ¦ ¦Preferred ¦494,600.00 ¦ +-------------------+------------+----------------+------------¦ ¦ ¦ ¦Common ¦479,100.00 ¦ +-------------------+------------+----------------+------------¦ ¦ ¦_ 0 ¦ ¦_ 0 ¦ +-------------------+------------+----------------+------------¦ ¦Total ¦1,453,530.21¦Total ¦1,453,530.21¦ +--------------------------------------------------------------+
The above asset item entitled ‘property‘ was made up as follows:
+----------------------------------+ ¦Plant and equipment ¦$440,049.61¦ +----------------------+-----------¦ ¦Timber and real estate¦338,477.63 ¦ +----------------------+-----------¦ ¦Railroad property ¦26,414.93 ¦ +----------------------+-----------¦ ¦Logging equipment ¦12,435.04 ¦ +----------------------+-----------¦ ¦Miscellaneous property¦21,607.72 ¦ +----------------------+-----------¦ ¦ ¦838,984.93 ¦ +----------------------------------+
The only business transacted by the corporation after the date of this resolution consisted of the disposition of its assets, the payment of its debts, and the retirement of its capital stock. The corporation did not undertake to and did not thereafter engage in any other business activities. When the resolution of the directors was adopted the corporation owned approximately 96,000 acres of timber land. It also owned sawmills, railroad equipment, and other assets incident to a lumber operation. By or before December 31, 1939, it had paid all of its indebtedness with the exception of ‘accrued expenses of approximately $26,000.‘ It had retired all of its outstanding preferred stock, amounting to $662,300, and had liquidated about 25 per cent of its assets. Beginning in 1938, the corporation commenced paying liquidating dividends to the holders of its common shares, and thereafter, to and including December 1943, the corporation paid, in all, to its common shareholders in liquidation sums aggregating $172 per share.
The distributions were made to the holders of common stock on the dates and in per share amounts as follows:
+-----------------+ ¦Nov.¦10,¦1938¦$10¦ +----+---+----+---¦ ¦Mar.¦3, ¦1939¦10 ¦ +----+---+----+---¦ ¦Dec.¦15,¦1939¦10 ¦ +----+---+----+---¦ ¦Oct.¦21,¦1940¦10 ¦ +----+---+----+---¦ ¦Dec.¦17,¦1940¦12 ¦ +----+---+----+---¦ ¦May ¦28,¦1941¦5 ¦ +----+---+----+---¦ ¦Dec.¦18,¦1941¦35 ¦ +----+---+----+---¦ ¦July¦31,¦1942¦20 ¦ +----+---+----+---¦ ¦Dec.¦28,¦1942¦40 ¦ +----+---+----+---¦ ¦Oct.¦29,¦1943¦10 ¦ +----+---+----+---¦ ¦Dec.¦31,¦1943¦10 ¦ +-----------------+
In December 1943 the final liquidating dividend was paid, and the charter of the corporation was surrendered and canceled by the State of South Carolina.
During the period of liquidation of the assets of the corporation a new process was developed which, through a chemical treatment of the sap and gum contained in Southern pine, made possible the use of such pine in the manufacture of pulp for paper making. This use of the pine had not been possible previously. Thereafter, pulp plants were erected at various points in the South and a demand for this type of pulp was created, thus permitting the corporation to be liquidated more advantageously for its common stockholders.
During the taxable year 1940 the petitioner Chick received two liquidating dividends, aggregating $22 per share. Prior to the taxable year he had received as liquidating dividends an amount in excess of the cost basis.
The respondent has determined that the liquidating dividends were received in partial liquidation of the company and that the gain to the petitioner is short term capital gain, taxable in its entirety.
OPINION.
BLACK, Judge:
The respondent concedes that the property has never been transferred from the executor to the trustee; that the executor has never filed his final account with the probate court; and that there has been no distribution of the income in question to the petitioners. However, he takes the position that there was actually no estate in process of administration; that the administration of the estate had been completed prior to the taxable year; that there was no necessity for prolonging it; that there remained only the formality of transferring the assets from the executor to himself as trustee; and that the income falls within section 162(b) of the Internal Revenue Code,
as income currently distributable under the terms of the testamentary trust to the petitioners as beneficiaries, and is therefore taxable to them. In taking this position respondent relies upon section 19.162-1 of Regulations 103, printed in part in the margin.
SEC. 162. NET INCOME.(b) 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 estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year.
Petitioners, on the other hand, contend that the respondent is without authority to tax the income to anyone other than the estate so long as the estate is in fact still open and in the hands of the executors. They rely upon section 161(a) of the code, printed in the margin.
The income of an estate of a deceased person, as dealt with in the Internal Revenue Code, is therein described as received by the estate during the period of administration or settlement thereof. The period of administration or settlement of the estate is the period required by the executor or administrator to perform the ordinary duties pertaining to administration, in particular the collection of assets and the payment of debts and legacies. It is the time actually required for this purpose, whether longer or shorter than the period specified in the local statute for the settlement of estates. If an executor, who is also named as trustee, fails to obtain his discharge as executor, the period of administration continues up to the time when the duties of administration are complete and he actually assumes his duties as trustee, whether pursuant to an order of the court or not. * * *
They further contend that the administration process has not been unreasonably delayed and that the income is taxable to the estate.
SEC. 161. IMPOSITION OF TAX.(a) APPLICATION OF TAX.— The taxes imposed by this chapter upon individuals shall apply to income of estates or of any kind of property held in trust, including—(3) Income received by estates of deceased persons during the period of administration or settlement of the estate; * * *
When all the facts in the instant case are taken into consideration, we think respondent's determination must be sustained and that petitioners' contentions should be denied. It seems to us that all need for further administration of the estate of Isaac W. Chick ended when the last claim against the estate was settled in 1937. All debts and claims against the estate, with the exception of claims with reference to the Atlantic National Bank stock, had been paid prior to 1937. When this last claim against the estate was settled, we are at a loss to see where there was any reason to prolong the administration any further. We, of course, do not mean to say that the petitioner, as executor of the estate, should have immediately filed his final account as executor in 1937. Naturally, executors are allowed a reasonable time within which to do these things. The Commissioner does not contend otherwise. It was not until 1940, three years after the final claim against the estate had been settled, that the Commissioner determined that there was no further necessity for administration of the estate, that the estate was no longer in process of administration, that the testamentary trust should be considered as having come into being, and that under section 162(b) the trust income was taxable to petitioners, as the beneficiaries of the trust. It is apparently petitioners' argument that the part of section 19.162-1 of Regulations 103 to which we have referred has no validity when construed as the Commissioner seeks to construe it. As we understand petitioners' argument, it is that only the probate courts of the State of Massachusetts can determine when an administration is closed in the State of Massachusetts, and that it naturally follows that as long as such administration is not closed the estate must be considered ‘in process of administration,‘ and the income of the estate must be taxed under the Federal statute to the estate and not as the income of the testamentary trust provided in decedent's will. If petitioners' position is correct, then it seems to follow that an administration can be prolonged indefinitely in the state courts and long after any need for it exists, and the income of the estate be still taxable to it as a separate entity and not to any testamentary trust provided in the will. Our Court has not subscribed to that doctrine and in several cases we have given approval to the part of Regulations 103 which is printed in the margin. See Walter A. Frederick, 2 T.C. 936; Estate of J. P. Armstrong, 2 T.C. 731; and Pierce Estates, Inc., 3 T.C. 875. In the Armstrong case, in speaking of the same regulation here involved, we said:
In our opinion, this is not a matter controlled by state decisions, in that it is not matter of local rules of property, but one where under Burnet v. Harmel, 287 U.S. 103, we must ascertain criteria for construction of an act of Congress, and if regulations upon the subject are fairly and reasonably within power of the Commissioner, we should look to such regulations. This is a case of determining whether the facts involved in a will and its probate indicate an ‘estate‘ or a ‘trust‘ under the Federal statute. Interpretation therefore should be so as to give ‘a uniform application to a nation-wide scheme of taxation.‘ We think that the regulation to the effect, as above seen, that a period of administration or settlement of an estate is the period required to perform the ordinary duties pertaining to an administration, is a valid and reasonable interpretation of the statute on this subject and that since it is plain herein that, the estate having been reduced to possession and the debts of the testator having been paid, many years ago, the ‘ordinary duties pertaining to administration‘ have long since been completed, that thereafter for the purpose of the Federal statute the executors should be considered to have continued their activities as trustees, and not longer as executors. * * *
Petitioners rely strongly on the Fifth Circuit's reversal of our decision in the Frederick case. See Frederick v. Commissioner, 145 Fed.(2d) 796. We have carefully read the court's opinion in that case and if it is, as petitioners contend, to be construed as holding that section 19.162-1 of Regulations 103 is invalid as applied to a state of facts such as we have in the instant case, then, with all due respect to the court, we are unable to agree. It seems to us that the regulation is designed to cover just such a case as we have here, and that the Commissioner has not abused his discretion in applying it.
In addition to arguing that the Commissioner has no authority to enforce such a regulation as he is seeking to enforce here, the petitioners argue, in the alternative, that there were good reasons for keeping open the administration of the estate of Isaac W. Chick through and beyond the taxable year. These reasons as advanced by petitioners are: The principal asset of the estate was the capital stock of the Pray Co., a corporation engaged in the rug and floor covering and furniture business; the location of the business of this corporation was bad; in 1938 it had to be moved to a better location; and that the move to the new location resulted in the great economic advantage of the Pray Co. and thereby increased the value of its stock, which was the principal remaining asset of the Isaac W. Chick estate. It is difficult for us to see why petitioner William C. Chick could not have looked after the shares of stock of the Pray Co. and the removal of its business from one location to another just as well in his capacity as testamentary trustee as in his capacity as executor of the estate. As a matter of fact, William C. Chick was the president and a director of the Pray Co. and it is reasonable to assume that what he did in securing a new and better location for the company and otherwise improving its business affairs was done in his capacity as chief executive of the company and not as executor of the estate of Isaac W. Chick. There is nothing in the records to show that any administrative action was required in the moving of the business of the Pray Co. from one location to another. So far as the record shows, the probate court had nothing at all to do with such removal. That was undoubtedly a matter for the directors of the corporation to decide, and doubtless they did decide it.
Another reason urged by petitioners as to why William Chick did not qualify as trustee of the residuary estate and close out the administration of the estate was that he had a spell of serious illness in 1936 and subsequently had some recurrences of such illness and on this account he did not want to assume the duties of trustee of the residuary estate. Petitioner William C. Chick testified that he interviewed certain corporations which were in the business of acting as executors and trustees, but that these corporations declined to act as trustee because the principal asset of the estate was the corporate stock of the Pray Co. and the trustee would have to assume the responsibility of operating the business. Petitioner Chick, when asked at the hearing the following question by respondent's counsel:
Q. Did you consider the expediency of going up to the court and presenting your resignation?
replied:
A. I concluded the answer was no, because if I petitioned the court for appointment as trustee, in other words, if I resigned, the court undoubtedly would have to appoint an individual which I knew the bank wouldn't accept, and that individual would be a total stranger to the family— whether he had any ability to run the business or not is problematical and I should be in the position of a stranger as trustee operating all the family funds, which might be done in a friendly way, or might be done and liquidated without any consultation with me. (Sic.)
We are not strongly impressed with these and other reasons which petitioner Chick gave for not closing out the administration of the estate and setting up the testamentary trust, of which he had already qualified as trustee. We feel that under the evidence we should sustain respondent, and we so hold.
One other question remains to be decided. Under section 115(c) of the Internal Revenue Code, as applicable to the taxable year 1940, gain resulting to a distributee from the liquidation of a corporation is taxable as a short term capital gain except in cases of distribution made in complete liquidation. The material portion of the statute is set out in the margin.
There is no question as to the amount of gain realized by the petitioner in the taxable year. The sole issue is whether the distribution by the corporation was in ‘complete liquidation‘ within the meaning of the statute.
SEC. 115. DISTRIBUTION BY CORPORATIONS.(c) DISTRIBUTIONS IN LIQUIDATION.— * * * For the purpose of the preceding sentence, ‘complete liquidation‘ includes any one of a series of distributions made by a corporation in complete cancellation or redemption of all of its stock in accordance with a bona fide plan of liquidation and under which the transfer of the property under the liquidation is to be completed within a time specified in the plan, not exceeding, from the close of the taxable year during which is made the first of the series of distributions under the plan, (1) three years, if the first of such series of distributions is made in a taxable year beginning after December 31, 1937, or (2) two years, if the first of such series of distributions was made in a taxable year beginning before January 1, 1938.
On brief, the respondent concedes that the directors' resolution of July 14, 1937, embodies the plan, that under the plan the liquidation was to be completed on or before December 31, 1939, and that the first of the series of distributions made pursuant thereto occurred in 1938. Thus it would appear that the time specified in the plan was well within the period allowed by the statute. Indeed, under the circumstances here, the statute allowed three years from the close of the taxable year in which the first distribution was made and, as the first distribution was made in 1938, the time set for the completion of the liquidation could have been any date prior to December 31, 1941.
The respondent challenges only the bona fides of the plan. He points to the nature of the assets owned by the corporation and to the fact that the plan called for their conversion into cash, and he contends that it can not seriously be asserted that there was any reasonable, bona fide expectation on July 14, 1937, that the corporate assets would be completely disposed of by the time prescribed in the plan and that this is borne out by the fact that the liquidation was not completed until December 31, 1943.
The petitioner was not an officer or director of the company. The stipulation presents no facts bearing directly upon the good faith of the directors of the company in connection with the formulation and approval of the plan for liquidating the concern, nor has the respondent introduced any evidence in that respect. It should be noted that the Commissioner's determination herein antedated our decisions in Mary Dupont Faulkner, 3 T.C. 1082, and George G. Mason, 3 T.C. 1087, both of which have since been acquiesced in by him. In those cases we held that where distributions were made pursuant to a bona fide plan under which liquidation was to be completed within the period allowed by the statute, such distribution was in complete liquidation within the meaning of the statute, even though the corporation had not been completely liquidated within the period so allowed. In the light of that rationale, we think it may not be seriously advocated that the noncompletion of the liquidation process within the time contemplated in the plan or that set forth in the statute, standing alone, warrants a denial of the benefits of the statute on the ground that the plan was not a bona fide one.
On the basis of the stipulated facts, see Iowa Bridge Co. v. Commissioner, 39 Fed.(2d) 777, we can only conclude that the plan of liquidation was drawn up in good faith by the board of directors of the company and that it was bona fide in every respect. At the time that the plan was approved the company owned approximately 96,000 acres of timberland having a book value of about $338,500; plant and equipment with a book value of approximately $440,000; cash, $587,000; accounts receivable, some $16,000; railroad property, $26,000; logging equipment, $12,000; and other miscellaneous assets totaling about $21,000. Its liabilities were negligible. Apparently the directors saw nothing in the nature of the assets that would preclude their sale and disposition within the two and one-half year period they had decided upon. If there had been real doubt in their minds as to the possibility of completing the process within such time, the way was open to them to take the additional time permissible under the statute. We find nothing to suggest that the plan was not an entirely feasible one at the time of its adoption. Cf. Charles N. Manning, 3 T.C. 853. It is true that on December 31, 1939, the corporation had liquidated only about 25 per cent of its assets and also that the secretary of the corporation, in his affidavit, stated that ‘the liquidation was necessarily slow on account of the nature of the assets.‘ Both of these factors emerge only in the light of actual experience in the liquidation process and reflect not at all on the good faith of the directors of the directors or the bona fides of the plan at the time of its adoption. There is no evidence that the plan was abandoned or laid aside, but it is indicated that the winding up process might have been slowed down to afford the common shareholders the more advantageous prices resulting from the sale of pine to the new pulp plants which were springing up in the area.
We conclude that the directors of the corporation were entirely reasonable in their expectation at the time of the adoption of the plan that the dead line which they had set would be met. The plan was a bona fide one and the distributions were in ‘complete liquidation‘ within the applicable statute.
Reviewed by the Court.
Decisions will be entered under Rule 50. ARUNDELL, J., dissenting: I can not agree with the decision of the majority on the first issue, and I therefore respectfully note my dissent.
The question as to whether an estate is being held by the executor or by the same person or persons as trustees under the will of a decedent has been before the courts of Massachusetts a number of times. In Welch v. City of Boston, 211 Mass. 178; 97 N.E. 893, the executors of an estate determined to distribute to themselves as trustees under the will of their decedent a portion of the property left by him. The trustees opened an inventory of the property transferred in trust and they otherwise accounted for it as property held pursuant to the terms of the trust. As executors, however, they had filed no account in the probate court showing the transfer to the trust or seeking an approval of such transfer. The city of Boston claimed the right to collect a tax upon the whole property from the estate. The court, upon consideration and review of the authorities, held that where a part or the whole of the estate is given to the same person or persons as trustees, who are also the executors, there must not only be some definite, unequivocal, and final act of transfer from the executor to the trustee, but such act, before it could become ‘authoritative and notorious,‘ had to be shown by an account duly filed and allowed by the probate court. In Massachusetts Institute of Technology v. Attorney General, 235 Mass. 288; 126 N.E. 521, the Supreme Judicial Court pointed out that Welch v. City of Boston, supra, and the earlier opinions which that decision affirmed and the later cases which follow it, have established beyond the peradventure of a doubt that executors are liable to taxation as executors for the amounts given to them as trustees until their account as executors, showing a distribution to themselves as trustees, has been allowed in the probate court. See also Donnelly v. Levers & Sargent Co., 226 Mass. 214; 115 N.E. 252. Hence, under the laws of Massachusetts I think it may not be said that petitioner Chick held the property in a capacity other than that of executor.
Probate and settlement of estates of deceased persons is regarded as being in the nature of a proceeding in rem, wholly statutory, and exclusively within the province of the tribunal set up by the state for dealing with such matters, and the Federal courts are without jurisdiction to interfere. Ellis v. Stevens, 37 Fed.Supp. 488, and authorities there cited. The Supreme Court has pointed out the the problem of whether or not the income of a trust or an estate is currently distributable is a question of local law, Freuler v. Helvering, 291 U.S. 35, and that the states establish the procedures governing the probate of wills and the processes of administration, Lyeth v. Hoey, 305 U.S. 188.
Here the income was currently distributable only under the terms of the trust. So long as the property remained in the hands of the executor there was no duty to distribute any of the income to either of the petitioners herein. It would be taxable to the estate under section 161(a)(3) unless distributions were actually made, giving rise to deductions under section 162(c) and representing taxable income in the hands of the distributee. See In re Smith's Estate, 64 Fed.Supp. 196, where the court stated:
There was no present right on the part of the beneficiaries to receive the income of the estate, even though the will as construed by the Chancery Court of Shelby County, Tenn., provided that the income was to accrue to the beneficiaries ‘as and from the date of the death of the testator.‘ This is true because the estate during the taxable period was in process of administration, and in fact still is. The plaintiff's capacity as executor was entirely different from its capacity as trustee. While acting as executor it was under the orders of the County Court of Obion County, Tenn., where it was bound by law to make its final settlement as executor after the estate had been fully administered. During the process of administration the income of the estate was the property of the plaintiff as executor. The plaintiff was under no obligation to pay over any income of the estate to the testamentary trust beneficiaries while acting as executor, and the trust beneficiaries did not have an enforcible right against the executor for such payment.
The problem here is not to ascertain the status for Federal tax purposes of something received by the petitioners in the normal course through distribution from the estate, as was the situation in Lyeth v. Hoey, supra. Rather, we are requested by the respondent to regard the situation as if the trust had been established and to conclude that the application of the statutes in question is not dependent upon the state procedures and processes with respect to the actual administration of the estate. The majority have adopted that view.
I think the Circuit Court of Appeals for the Fifth Circuit took the proper view of the matter in Frederich v. Commissioner, 145 Fed.(2d) 796, reversing 2 T.C. 936, when it held that the period contemplated by the statute and by the regulations is the period during which the estate is actually in process of administration under the laws of the state, absent fraud, conspiracy to evade taxes, or other serious irregularity. By design, or at least by necessary implication, the provisions relating to the taxation of estates and trusts depend in their application upon the state laws and processes, and, as the Circuit Court observed in the Frederich case, the onus of a delayed distribution of an estate's assets is the taxation of the income as a unit during the period of actual administration.
Here there is no suggestion that this was a scheme or device designed for the purpose of defrauding the Federal Government. The evidence with respect to the nature of the assets making up the residuary estate and all the factors and circumstances in connection therewith indicate that there were business reasons, which apparently have been deemed sufficient by the court having jurisdiction, to warrant continued administration of the estate. Hence, there is no basis for a conclusion to the contrary, and I think the determination of the respondent on this issue should not be sustained.