Opinion
Docket No. 54956.
1956-02-6
EUGENE C. DELMAR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Horace A. Young, Esq., for the petitioner. Andrew Kopperud, Jr., Esq., for the respondent.
SECS. 162(c) AND 22(b)(3), I.R.C. 1939.— Petitioner in 1951 renounced his wife's will and therefore became entitled to one-half of her estate. The estate contained certain stock which he claimed should be distributed to him in kind. This, which was the principal controversy with the estate, was opposed by the estate and litigation resulted. In the interim the estate received income. No controversy existed as to petitioner's right to one-half of such income. A settlement agreement resolving controversies with the estate was arrived at in 1951 effecting, so far as petitioner was concerned, a final distribution of the estate. Petitioner received part of the stock he claimed and cash in addition. Held: Petitioner has not shown that this distribution did not include his share of the income of the estate and he is taxable on such income pursuant to section 162(c). Nor has petitioner shown this income was received by ‘gift, bequest, devise or inheritance’ and so exempt from taxation under section 22(b)(3). Horace A. Young, Esq., for the petitioner. Andrew Kopperud, Jr., Esq., for the respondent.
Respondent determined a deficiency in income tax for the year 1951 in the amount of $20,037.31.
The question for decision is whether certain amounts received by the petitioner in the year 1951 constituted taxable income as determined by the respondent or were exempt from income tax under the provisions of section 22(b) (3), Internal Revenue Code of 1939, as property acquired by inheritance.
Upon motion duly made and granted, a brief amicus curiae on behalf of Alvin W. Bartholomew, individually and as executor of the last will and testament of Helen A. Delmar, deceased, was filed herein by John H. Thomson, Esq.
FINDINGS OF FACT.
The stipulated facts are so found and the stipulation together with the exhibits attached thereto are incorporated herein by reference.
The petitioner is an individual presiding in Evanston, Illinois. He filed his income tax return for 1951 with the collector of internal revenue for the first district of Illinois.
In February 1947 the petitioner married Helen A. Delmar. She died testate on February 11, 1950, leaving no descendants. The following heirs at law and next of kin survived her: Her husband, Eugene C. Delmar; her brother, Frank H. Wishart; and her nephews, Alvin W. Bartholomew, John B. Bartholomew, Jr., and Donald Minor, children of deceased sisters of Helen A. Delmar. Her sister, Margaret W. Minor, predeceased her.
Helen's last will and testament was admitted to probate in Cook County, Illinois, on March 24, 1950, and Alvin W. Bartholomew was appointed and duly qualified as executor. In the probate proceedings the law firm of Pope and Ballard entered its appearance as attorneys for the executor. John H. Thomson was in charge of the matter for the firm. On and after March 1952, Thomson became associated with Vedder, Price, Kaufman and Kammholz and now represents the estate of Helen A. Delmar (hereafter called the estate) and the three above-mentioned nephews.
On March 27, 1950, petitioner duly filed his renunciation of Helen's will pursuant to chapter 3, section 17, Illinois Revised Statutes (1949), then in force in the State of Illinois.
Chapter 3, section 16, Illinois Revised Statutes (1949), then in force in the State of Illinois, provided as follows:
Sec. 16. Share of Spouse on Renunciation of Will. When a will is renounced by the testator's surviving spouse in the manner provided in Section 17 hereof, whether or not the will contains any provision for the benefit of the surviving spouse, the surviving spouse is entitled to the following share of the testator's estate after payment of all just claims:
(a) * * * or (b) if the testator leaves no descendants, one-half of the personal estate and one-half of each parcel of real estate of which the testator died seized and in which the surviving spouse does not perfect his right to dower in the manner provided in Section 19 hereof.
The most valuable asset of said estate was the item of 590 shares of stock in the Adams Corporation which Helen had owned since 1928. The Adams Corporation had 1,000 shares of stock outstanding and it was and is engaged in various mineral and oil operations. During the years 1949, 1950, and 1951, the Adams Corporation paid dividends per share of $225, $215, and $225, respectively. A share of its stock was valued for Federal estate tax purposes, at the date of Helen's death, at $1,100 and that valuation has not been questioned by the respondent.
On March 1, 1951, the then attorney for petitioner (who died prior to the hearing of this proceeding) received a letter from the attorney for the executor with which was enclosed the executor's check for $100,000, constituting a partial distribution to petitioner of his distributive share in the estate.
On April 9, 1951, petitioner filed in the probate proceedings a petition reciting that he was ‘entitled to receive one-half of the personal and real estate of said deceased’ by virtue of his renunciation of the will, that the principal asset consisted of 590 out of 1,000 shares of stock in the Adams Corporation, that there were assets in addition to such shares sufficient to take care of all claims, that, therefore, it would not be necessary to sell any of the stock, and asking that 295 shares of the stock be distributed to him in kind. The executor filed a motion to dismiss the petition in which it was alleged, inter alia, that, there being no descendants and no real estate, petitioner was entitled only to distribution of 50 per cent of the value of decedent's personal estate, that petitioner was not entitled to a distribution in kind of any particular asset, and that the petition sought a premature determination of the value of petitioner's share in the estate. After the filing on briefs the Probate Court granted the motion to dismiss.
On June 7, 1951, an appeal from this action was perfected to the Circuit Court of Cook County and a trial de novo was ordered. The appeal came on for hearing on October 11, 1951, for the purpose of determining applicable procedure and law. The court informally expressed the though that petitioner was entitled to a distribution in kind and suggested that the parties should settle the dispute.
The parties and their attorneys therefore resumed negotiations to settle their differences. Feelings between the parties themselves were not cordial and the attorneys were the principal negotiators. Both attorneys recognized there were possible income tax consequences involved, but agreed the parties should be responsible for their own income taxes. The parties other than petitioner were interested in keeping petitioner from controlling too large a block of Adams Corporation stock. Petitioner was anxious to secure his share of the estate without awaiting final settlement. In arriving at figures for the proposed settlement the attorney for the estate took into consideration the amount of income collected by the estate in the interim and his belief that half the income could be claimed by petitioner. He also considered it to be the estate's advantage to make a final distribution to petitioner and wind up the controversy.
Prior to November 13, 1951, the attorney for the estate made the following computations of the amount the estate would pay the petitioner:
+-----------------------------------------------------------------------------+ ¦One-half of the principal of the estate ¦$339,000¦ +--------------------------------------------------------------------+--------¦ ¦One-half of the taxable income of the estate from date of Mrs. ¦77,000 ¦ ¦Delmar's death to date of settlement ¦ ¦ +--------------------------------------------------------------------+--------¦ ¦One-half of non-taxable income of the estate from date of Mrs. ¦6,000 ¦ ¦Delmar's death to date of settlement ¦ ¦ +--------------------------------------------------------------------+--------¦ ¦Intangibles ¦48,000 ¦ +--------------------------------------------------------------------+--------¦ ¦ ¦$470,000¦ +-----------------------------------------------------------------------------+
The principal controversies, differences, and disputes between the estate and petitioner immediately prior to November 13, 1951, were two. The first dispute was whether or not petitioner was entitled to receive his one-half of the estate as a distribution in kind. The second dispute was whether or not petitioner should receive his one-half of the estate without reduction for Federal estate taxes. There had been a controversy in regard to the proper amount of the spouse's award and, as a part of this dispute, the parties differed on the value of the Adams Corporation stock. On July 11, 1950, the spouse's award was increased from $7,500 to $30,000 and from that date forward there was no dispute between the parties as to the proper valuation of the Adams Corporation stock.
On November 2, 1951, the executor filed in the Probate Court a petition to distribute 200 shares of stock of the Adams Corporation to petitioner, reciting, inter alia.
That various disputes between said three nephews on the one hand and said Eugene C. Delmar on the other have arisen, among such disputes being whether or not said Eugene C. Delmar is entitled to distribution in kind or in value, and whether or not the share of said Eugene C. Delmar should be computed before or after the federal estate tax, which former dispute is now pending in the Circuit Court of Cook County;
That negotiations have been carried on between said three nephews and said Eugene C. Delmar with respect to settling the various disputes between said parties and it appears at this time that a written agreement will shortly be signed by said four parties, which agreement will provide, among other things, that said Eugene C. Delmar will accept certain stock and money from the decedent's estate in full, complete and final settlement of his distributive share as renouncing spouse and in full settlement of all disputes between the parties; and
That upon the signing of such agreement, said Eugene C. Delmar will be entitled to receive from petitioner as executor, pursuant to the terms of such agreement, 200 shares of stock of The Adams Corporation out of the total of 297 shares of stock of such corporation which petitioner, as executor, is now holding; the balance of the 590 shares of such corporation's stock owned by decedent at the time of her death has already been distributed in various amounts to said three nephews of said decedent and to the two other legatees under the last will and testament of the deceased.
An order authorizing the transfer was signed by the court dated November 7, 1951.
On November 13, 1951, the executor, as executor and individually, together with the other nephews of decedent and the petitioner ‘entered into an agreement to settle and adjust all controversies, disputes and differences of every character and description heretofore existing, including all controversies, disputes and differences arising or growing out the estate of’ decedent.
The agreement provided among other things: (1) The stock in Adams Corporation had a value of $1,100 per share; (2) petitioner would receive 200 shares of Adams Corporation stock in kind; (3) the executor would pay petitioner $50,000 in cash concurrently with the execution of the agreement and would pay or cause to be paid for the account of petitioner the further sum of $100,000 over a 7-year period.
The agreement was executed and on the same day petitioner signed an appearance, receipt, and release which provided, in part:
And I do further acknowledge receipt of 200 shares of stock of The Adams Corporation and the sum of $250,000 ($100,000 of which is payable in installments pursuant to a memorandum of agreement dated November 13, 1951), in full, complete and final satisfaction of my distributive share of said estate.
And I do further release the Executor of said Estate and said Estate of and from any and all claims and demands which I have or may have against them or either of them.
It is stipulated that the corrected net one-half of the estate for the purpose of the marital deduction was $333,410.32.
On April 14, 1952, the executor filed the fiduciary income tax return (Form 1041) of the estate for the calendar year 1951. On said return, the estate deducted $32,846.53 as the petitioner's distributable share of income. This amount is one-half of the estate's net income for the period from January 1, 1951, to November 13, 1951. An audit of the fiduciary income tax return resulted in an adjustment which was agreed to by the executor and altered the estate's deduction for the amount distributable to petitioner to the amount of $32,718.10.
On June 2, 1954, the executor filed his final account which final account includes as a description of voucher number 4, a check dated November 13, 1951, in the amount of $50,000 and payable to petitioner, the following:
Eugene C. Delmar, in partial payment of his distributive share of estate, constituting principal and his one-half share of 1951 income collected by Executor.
The check itself contained no such description.
The estate was closed on June 2, 1954.
In the statement accompanying the deficiency letter respondent added $32,718.10 to petitioner's income with the following explanation:
On the Federal income tax return which you filed for the taxable year of 1951, you failed to report, in accordance with sections 162(c) and 22(a) of the Internal Revenue Code, the amount of $32,718.10 paid to you during 1951 as a distribution of income of the Estate of Helen A. Delmar, Deceased, for the year 1951.
OPINION.
TIETJENS, Judge:
Respondent having determined that petitioner received $32,718.10 as income from the estate in 1951, the burden is on petitioner to prove the impropriety of the determination by showing that the assets which he received from the estate did not actually include this income. Wilma Aaron, 22 T.C. 1370. We do not think this burden has been carried. As a matter of fact, the inference which we draw from the record is to the effect that petitioner was paid the income in question by the estate, and our conclusion is that he should properly pay income tax thereon.
The brunt of petitioner's argument is that all the cash and stock which he received from the estate were received as a lump-sum settlement of various claims against the estate and hence was received ‘by inheritance’ which was therefore properly excludible from gross income under section 22(b)(3), Internal Revenue Code of 1939.
He cites and relies on Lyeth v. Hoey, 305 U.S. 188.
SEC. 22(b). The following items shall be exempt from taxation under this chapter: * * *(3) THE VALUE OF PROPERTY ACQUIRED BY GIFT, BEQUEST, DEVISE OR INHERITANCE.—There shall not be excluded from gross income under this paragraph, the income from such property, or in case the gift, bequest, devise or inheritance is of income from property, the amount of such income. For the purposes of this paragraph, if under the terms of the gift, bequest, devise or inheritance, payment, crediting or distribution thereof is to be made at intervals, to the extent that it is paid or credited or to be distributed out of income from property, it shall be considered a gift, bequest, devise or inheritance from property.
Respondent, on the other hand, relies on sections 22(a) and 162(c) of the Internal Revenue Code of 1939, as amended.
SEC. 22- GROSS INCOME.(a) GENERAL DEFINITION.— ‘Gross income’ includes gains, profits, and income derived from salaries, wages, or compensation for personal service (including personal service as an officer or employee of a State, or any political subdivision thereof, or any agency or instrumentality of any one or more of the foregoing), of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * *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 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 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;
True, as argued by petitioner, neither the agreement of November 13, 1951, nor the checks which he received pursuant thereto recited that any of the assets of the estate which were to be distributed to him and which he did receive were attributable to ‘income’ of the estate as such. He also testified that he never received any ‘income’ from the estate and professed a lack of knowledge that the estate was ever charging him with having received income until, apparently as an afterthought, and in an attempt to save income taxes to the estate, the estate did claim as a deduction the amount of $32,846.53 on the fiduciary return for 1951 which was signed April 11, 1952, and filed shortly thereafter.
We do not think, however, that petitioner's knowledge or understanding, or professed lack of such understanding or the lack of specificity in the written agreement have much to do with the case. This is indicated in Alma Igoe, 19 T.C. 913, where petitioners advanced a lack of knowledge that their accounts had been credited with certain items of income by the estate as a reason why they should not be taxable on such income. There we nevertheless said petitioner could not thus ‘succeed in avoiding the impact of the mandatory clause in section 162(c) which requires that they include in their net income, income of the estate which was properly credited to them by the estate.’ Here the determination of respondent was that the income was received or paid to petitioner rather than ‘credited.’ This is a minor difference.
The situation here, as we see it, was this. Petitioner was dissatisfied with the treatment accorded him in his wife's will. He renounced it and sought a distribution in kind of his share of certain stock holdings of the estate in accordance with the Illinois law. In the interim the estate had received income, the amount of which is not in dispute. The attorney for the estate testified, and we have no reason for disbelieving him, that it was never disputed and the estate so acknowledged that petitioner was entitled to one-half of this income, which was finally determined to be $32,718.10. That a renouncing spouse is so entitled under Illinois law to a share in the income of the estate has been decided, though petitioner disavows it, in Lewis v. Sedgwick, 223 Ill. 213, 79 N.E. 14. Whether petitioner ever specifically claimed this amount seems to us to have no bearing here. It was taken into consideration by the estate in computing how much the estate would distribute to petitioner in order to make what had the effect, as to petitioner, of a final distribution pursuant to the November 13, 1951, agreement. The questions settled by that agreement were not whether petitioner was entitled to this income, but were stipulated to be two in number, as set out in our Findings of Fact. Neither controversy had anything to do with rights to income of the estate and the agreement contained no compromise or settlement on that score.
Despite petitioner's disclaimer, the facts are (and here we to some extent repeat) that there was income of the estate to which petitioner was entitled, the estate recognized this and, though petitioner's then attorney died before the hearing and we do not have the benefit of his testimony, the record indicates that he, too, was cognizant that an income tax problem was thus posed. Although the settlement agreement skirted this problem, the estate took it into consideration in agreeing to the settlement and in its final accounting reflected petitioner's share of the estate's income as having been paid to petitioner in 1951 pursuant to the agreement. The accounting, so far as the record goes, has not been questioned by petitioner. Neither has any question been raised as to the propriety of the settlement agreement or the distributions made pursuant to it to petitioner.
This is not a Lyeth v. Hoey, supra, case. No will contest is involved. Respondent is not seeking to tax as income here all amounts distributed to petitioner pursuant to the settlement agreement as he did in the Lyeth case. What respondent has done is to determine that a portion of the amount of cash received by petitioner as a distribution in 1951 under the agreement was in fact income of the estate and as such was taxable to petitioner under section 162(c). On the facts before us, petitioner has not demonstrated, as petitioner in Wilma Aaron, supra, also failed to do, ‘the crucial factor in her case, namely, that the income in question was not actually * * * received on final distribution of the estate,‘ which, so far as petitioner is concerned, took place in 1951 when he received cash and stock equal in value to well over half of his wife's estate in full release of all claims he may have had.
Decision will be entered for the respondent.