Opinion
Docket No. 107485.
1943-01-26
ELIZABETH T. JONES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Harry J. Alker, Jr., Esq., for the petitioner. Paul E. Waring, Esq., for the respondent.
Executors of an estate had discretion to determine what amount in each year during administration of estate properly could be paid or credited to petitioner. In 1936 they paid her $11,000 and did not credit her with any greater amount. In 1937 they paid her $49,000, of which, according to the estate's accounts, $16,250.84 was out of 1936 accumulated income. No evidence was introduced to show that the balance, $32,749.16, was not properly paid to petitioner out of the 1937 income of the estate. None of that account was shown to have been paid out of 1936 income. Held, that $32,749.16 was paid to petitioner out of 1937 income of the estate for the purpose of determining her income tax liability under section 162(c) of the Revenue Act of 1936. Ethel S. Garrett, 45 B.T.A. 848, distinguished. Harry J. Alker, Jr., Esq., for the petitioner. Paul E. Waring, Esq., for the respondent.
The respondent determined a deficiency in income tax liability in the amount of $3,061.64 for the year 1937. The only question is whether the respondent erred in including certain amounts in petitioner's income.
Petitioner filed her return with the collector for the first district of Pennsylvania.
FINDINGS OF FACT.
Petitioner resides in Jenkintown, Pennsylvania. She is the widow of Joseph L. Jones, who died, testate, on April 6, 1936. Joseph L. Jones, 3d, and the Corn Exchange National Bank & Trust Co. of Philadelphia are the executors of the last will of the decedent. The estate was in process of administration throughout 1937. During 1936 and 1937 the executors made payments to petitioner out of the income of the estate for her support. They did this without any direction under the will or from any court, and solely in exercise of their own discretion.
The decedent directed his executors to pay out of his estate all debts, funeral expenses, and certain specific bequests. He bequeathed the residue to trustees, in trust, the income of the trust going to petitioner during her lifetime.
The Corn Exchange Bank, as coexecutor, kept accounts for the estate. Accounts for principal and income were separate. The income account was a running account showing a balance after each entry. For each debit and credit in the income account there was a brief descriptive notation. The executors maintained a bank account in another bank in which all of the income of the estate was deposited and commingled.
During 1936 the executors paid petitioner $11,000. As of December 31, 1936, the income account of the estate showed a balance of $31,273.12. The income tax of the estate for 1936 was computed by the executors to be $3,508.83, and allowing for that amount, the balance of accumulated income of 1936 at the end of the year was $27,764.29. None of the net balance was credited to petitioner during 1936.
The total income received by the estate during 1937 was $45,806.80, of which taxable income amounted to $44,506.77 and tax exempt income amounted to $1,300.03. During 1937 the executors paid an aggregate amount of $49,000 to petitioner by checks. The income account of the estate was ‘credited‘ for each payment to petitioner, and a balance showed what remained in the income account after each disbursement. As the account was a running account, the balance shown after each ‘debit‘ and ‘credit‘ represented a cumulative net balance on the date of each entry. The balance on December 31, 1936, was carried forward and increased by deposits of income in 1937 and decreased by disbursements in 1937. The only description given in the account to the disbursements made to petitioner in 1937 was ‘remittance from income,‘ or a similar description. No disbursement to petitioner in 1937 was described as a payment out of the estate's income for 1936. There was no notation of any kind on any check to petitioner in 1937 describing the payment as out of 1936 estate income, or otherwise. There was no segregation, in the bank deposit account or on the books, of the 1936 balance of estate income. That cash balance was commingled with income received by the estate in 1937, both on the executors' books and in the deposit account.
In January of 1937 Joseph L. Jones, 3d, conferred with an officer of the Corn Exchange Bank and asked him to use the balance of the 1936 income of the estate to defray payments to petitioner during 1937, so that she would not receive any of the 1937 income of the estate until the balance of the 1936 income had been exhausted. He agreed that, ‘theoretically,‘ the net balance of $27,764.29, on hand as of December 31, 1936, would be set aside to cover whatever payments might be made to petitioner during 1937. However, no separate account was set up in which said balance was set aside and the amounts paid to petitioner in 1937 were not earmarked as payments out of the balance of 1936 income.
Joseph L. Jones, 3d, is petitioner's son. He told petitioner that payments were being made to her out of the balance of the 1936 income. In her income tax return for 1937 petitioner treated the amount of $49,000 paid to her in 1937 as paid out of the 1936 balance to the extent of $27,764.29. The difference, $21,235.71, included exempt interest of $1,300.03, so that $19,935.68 was taxable income. Petitioner reported $19,935.68 as the amount of taxable income received by her during 1937 from the estate.
Respondent determined that only $16,250.84 of the amount paid to petitioner in 1937 was paid to her out of the 1936 income, and that $32,749.16 was paid to her out of the estate's current income in 1937, of which $1,300.03 was exempt from tax, and $31,449.13 was taxable.
The determination that $16,250.84 (out of the entire $49,000) was paid out of the balance of 1936 income of the estate, was made in the following way: The first four payments to petitioner in 1937 were, in each instance, an amount in excess of current income received by the estate in 1937 on and before the date of the particular payment to petitioner. For example, on January 2, the executors paid petitioner $1,500, but they had received only $144, currently. Respondent treated the difference of $1,356 as a payment out of the balance of 1936 income. The same was true of payments made on January 11, February 3, and March 3, so that the aggregate of these four payments made from the 1936 balance of income was $16,250.84. Thereafter, each payment in 1937 was less than the balance of 1937 current income on hand at the date of payment, and respondent held that those payments, aggregating $32,749.16, were made out of the current 1937 income of the estate.
OPINION.
HARRON, Judge:
The question arises under section 162(a) of the Revenue Act of 1936,
which is set forth below. The statute provides that ‘there shall be allowed‘ the amount of the income of the estate for its taxable year ‘which is properly paid or credited during such year to any legatee, heir, or beneficiary‘ as a deduction in computing the net income of the estate. It provides, also, that the amount so allowed as a deduction shall be included in computing the net income of the heir or legatee. The purpose of the enactment of the original provision in the Revenue Act of 1924 (section 219(b)(3) of that act being the same as section 162(c) of the 1936 Act), is stated to have been to prevent the evasion of the taxes by estates and trusts. 68th Cong., 1st sess., Rept. No. 179, p. 21, Ways and Means Committee; Rept. No. 398, p. 25, Finance Committee.
(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.
The same question was involved in Ethel S. Garrett, 45 B.T.A. 848. Petitioner contends that the same result should be reached here. We do not agree with this contention.
Perhaps one reason for the difficulty which is inherent in the problem presented is that in neither this case nor the Garrett case were the executors directed in any way by a testamentary, court, or statutory direction to pay the heir, the decedent's widow, any particular sum per year during the administration of the estate. At the hearing in this proceeding petitioner's counsel stated that the family of the decedent was entitled to $500 only, under Pennsylvania statute, during the period of administration of the trust. Counsel has not briefed the point, but see Purdon's Pennsylvania Statutes, Title 20, secs. 471, 480, on the point of the $500 allowance. Petitioner concedes that it was entirely within the discretion of the executors to determine what amount, if any, they would allow to petitioner in each year of the administration of the estate for her support. This situation makes the problem a special one, no doubt, and our considerations are, of course, limited to the problem as it is thus presented.
Under section 162(c) each year, clearly, stands alone. Where there is some external direction as to the amount in each year which is to be paid or credited to a beneficiary, the deduction allowable to the estate and the amount to be reported by the beneficiary are clear. But where no such external direction exists and it is only the determination of the executor which fixes the amount properly to be paid to a beneficiary each year, during the period of administration, then there should be proof to show what the executor determined. If he made no determination capable of being proved by concrete evidence, it will be difficult to overcome the prima facie correctness of the respondent's determination.
No evidence has been presented to show what amount of income of the estate for the year 1937 was properly paid to petitioner. It appears that the executors, themselves, did not make a definitive determination of that matter. If that is true, the pattern of section 162(c) was not observed. Estates are subject to claims of creditors during the period of administration, as well as to other claims. Here, there was no testamentary direction that the petitioner was to receive all of the net income of the estate, annually, during the period of administration. Even though the executors had the discretion to determine what amount might be paid to petitioner, it is reasonable to assume that their discretion was to be exercised in some orderly way, and that in each year they should arrive at some definite determination in the matter for the practical reason that, presumably, they had to provide for payments to creditors and others as well as to the petitioner.
Under section 162(c) the tax of an estate upon the estate income is to be borne by the estate except for the income which is properly paid or credited each year to a beneficiary. The word ‘properly‘ has some significance. The executors of the estate involved here appear to have attached none to that word. When they discussed the matter of making payments for 1937 to petitioner, their thought was only that the 1936 accumulation of income should be exhausted before applying any of the 1937 income to petitioner's use. It was to be set aside ‘theoretically.‘ While that view may have been satisfactory to the executors in so far as their administration of the estate was concerned, it did not give consideration to the need for arriving at some definite determination of the amount of the 1937 income which could be paid, properly, to petitioner. The executors apparently let the matter of the 1937 allowance to petitioner out of 1937 estate income rest, subject to meeting periodic requests of petitioner. In addition, they did nothing to segregate or earmark their disbursements as charges against the income of the current year or the preceding year. In this situation petitioner is wholly unable to establish that the respondent's determination is wrong.
For the year 1936 the executors paid petitioner $11,000 out of the 1936 estate income and they did not credit her with anything over the amount paid. During 1937 the income of the estate was $45,806.80. Petitioner is required to pay tax on that amount of the 1937 estate income which was properly paid or credited to her. Of the $49,000 paid to her during 1937, the 1937 current income available for the periodic payments to petitioner aggregated $32,749.16. Respondent has not determined that such amount was not properly paid to petitioner out of 1937 estate income, but, assuming that it was a proper amount to be paid to her, he has determined that it was, in fact, paid out of 1937 income. Petitioner has failed completely in establishing anything to the contrary.
Where the income of an estate for its taxable year covers the amount paid to a beneficiary during the year, and there is no proof that the proper amount to be paid to him out of current income is of a lesser amount, so that the difference necessarily has been paid out of the accumulated income of a prior year, whether or not such proof is made by showing the earmarking of funds or by some other evidence, then it must be held that the respondent's determination that the entire payment was out of current income is correct. Also, the proof must consist of some more substantial evidence than a mere intent of the executors, or an oral understanding between them alone.
It is held that the entire amount of $32,749.16 was paid to petitioner out of the 1937 income of the estate, of which $1,300.03 is nontaxable income, as respondent has determined.
Decision will be entered for the respondent.