Opinion
Docket No. 6580.
1946-04-3
ESTATE OF ANDREW J. IGOE, PETER IGOE AND JAMES J. IGOE, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Charles A. Roberts, Esq., and Harold J. Beairsto, C.P.A., for the petitioners. William F. Evans, Esq., for the respondent.
Petitioners, executors of the estate of Andrew J. Igoe, deceased, credited current income on the books of the estate to beneficiaries who were residuary legatees under the decedent's will. The several distributions of income were so credited under circumstances which rendered them constantly available to the beneficiaries on demand. Substantial amounts in cash were withdrawn from the accounts. The method of so treating the distributions was approved by decree of the surrogate settling petitioners' accounts as executors. The beneficiaries reported such distributions on their income tax returns. Held, under the provision of section 162(c), Internal Revenue Code, petitioners are entitled to deduct the amounts distributed. Charles A. Roberts, Esq., and Harold J. Beairsto, C.P.A., for the petitioners. William F. Evans, Esq., for the respondent.
The respondent determined deficiencies of $9,275.10 and $38,921.70 in the income tax of the estate of Andrew J. Igoe, deceased for the years ended May 31, 1940, and May 31, 1941, respectively.
The sole issue is whether or not the petitioners are entitled to deduct from the net income of the estate amounts credited to beneficiaries on its books, as income to be distributed currently or as properly paid or credited to them, pursuant to the provisions of subsections (b) and (c) of section 162, Internal Revenue Code.
FINDINGS OF FACT.
The petitioners are the sole executors now qualified and acting under the will of Andrew J. Igoe, deceased. Their principal office is in Brooklyn, New York. They filed their income tax returns for the taxable years with the collector of internal revenue for the first district of New York.
Andrew J. Igoe died June 16, 1937. His will, dated January 22, 1936, was admitted to probate by the Surrogate's Court for Kings County, New York, on September 2, 1937. On the same day letters testamentary were issued to Peter Igoe, James J. Igoe, and Alma Igoe, the executors named in the will.
The provision of the will material to the issue is as follows:
FIRST: After payment of all my just debts, funeral and testamentary expenses, I give, devise and bequeath my entire estate in the proportions and to the persons who would be entitled to receive the same under the Laws of the State of New York had I died intestate.
The will appointed Peter Igoe, James J. Igoe, and Alma Igoe executors thereof and granted them broad powers, among which was the following:
I further authorize and empower them to make distribution of my estate among my distributees in kind or in cash or partly in kind and partly in cash whichever to them may seem best.
Pursuant to the quoted bequest, Peter A. Igoe, Catherine Igoe Dailey, and Elizabeth Igoe Murphy, adults, and John Francis Igoe, infant son of Alma Igoe, all children of the deceased and Alma Igoe, his widow, became entitled to his entire net estate in the ratio of one-third thereof to the widow and one-sixth thereof to each child.
The estate of Andrew J. Igoe was more than adequate to meet the taxes, debts, and administrative expenses without resort to the income in controversy.
+-----------------------------------------------------------------------------+ ¦The gross estate as determined by the Commissioner ¦ ¦ ¦ ¦of Internal ¦ ¦ ¦ +----------------------------------------------------+----------+-------------¦ ¦Revenue for estate tax was ¦ ¦$1,257,650.97¦ +----------------------------------------------------+----------+-------------¦ ¦Deducting and allowing for the following items, at ¦ ¦ ¦ ¦the valuations ¦ ¦ ¦ +----------------------------------------------------+----------+-------------¦ ¦so determined by the Commissioner: ¦ ¦ ¦ +----------------------------------------------------+----------+-------------¦ ¦Real estate ¦$13,150.92¦ ¦ +----------------------------------------------------+----------+-------------¦ ¦Insurance ¦99,015.17 ¦ ¦ +----------------------------------------------------+----------+-------------¦ ¦Jointly owned property ¦10,000.00 ¦ ¦ +----------------------------------------------------+----------+-------------¦ ¦Transfers inter vivos ¦153,663.00¦ ¦ +----------------------------------------------------+----------+-------------¦ ¦Expenses and other statutory deductions ¦156,129.50¦ ¦ +----------------------------------------------------+----------+-------------¦ ¦Federal estate tax (before credit for state estate ¦ ¦ ¦ +----------------------------------------------------+----------+-------------¦ ¦and inheritance taxes) ¦225,309.75¦657,268.34 ¦ +----------------------------------------------------+----------+-------------¦ ¦There remains, as net principal of the estate, ¦ ¦ ¦ ¦personal property ¦ ¦ ¦ +----------------------------------------------------+----------+-------------¦ ¦(chiefly stocks and bonds) valued at approximately ¦ ¦600,382.63 ¦ +-----------------------------------------------------------------------------+
Federal estate taxes, later paid, amounted to $190,458.91 and estate taxes, amounting to $38,952.92, due to the State of New York and also later paid, constituted obligations of the petitioners. The estate did not have sufficient cash to pay these charges, the amount of cash possessed by the decedent being $751.11.
The decedent's estate consisted of many shares of stock in numerous corporations, bonds, insurance policies, interests in partnerships and joint ventures, mineral property, and other miscellaneous assets. Included therein were 12,220 shares of cumulative preferred stock in Igoe Brothers, Inc., hereinafter called Igoe, Inc., valued at $19,747.52 and 3,055 shares of common stock thereof with no value; 7,332 shares of preferred stock in Eybro Realty Corporation, hereinafter called Eybro, valued at $206,469.12, and 3,055 shares of common stock thereof with no value; debenture bonds of Igoe, Inc., valued at $183,300, with interest of $2,579.72 accrued thereon and debenture bonds of Eybro valued at $274,950, with interest of $3,869.66 accrued thereon. The petitioners did not desire to liquidate the decedent's securities in the family corporations, Igoe, Inc., and Eybro.
During the taxable years ended May 31, 1940-1941, the estate received net income in the amounts of $9,643.55 and $91,066.27, respectively, and made due returns thereof. In such returns it showed that these amounts were distributed to Alma Igoe, Peter A. Igoe, Catherine Dailey, Elizabeth Murphy and John Francis Igoe (Marie L. Keller, guardian), in proportion to their respective interests in the decedent's estate. Such amounts were so credited severally to the beneficiaries on the books of the estate. The books were kept at the offices of Eybro (which acted as a banker for the family) and under the supervision of petitioner James J. Igoe.
From time to time the beneficiaries drew against the credits, as they required money. At all times the executors could have provided the cash with which to pay to the beneficiaries the entire aggregate amounts of income credited to them on the books of the estate and the estate itself also could have secured the cash for such purpose through the family corporations, which had ample current resources available therefor and which, controlled by the petitioners, were ready and willing to respond to any demand to pay estate taxes or any income payments so credited.
The income so received and credited by the estate to the several legatees and designated in its returns as the beneficiaries' shares of income for the taxable years was as follows:
+----------------------------------------------------+ ¦ ¦Fiscal year ended-- ¦ +--------------------------+-------------------------¦ ¦Credited to-- ¦May 31, 1940¦May 31, 1941¦ +--------------------------+------------+------------¦ ¦Alma Igoe (widow) ¦$16,547.85 ¦$30,355.42 ¦ +--------------------------+------------+------------¦ ¦Peter A. Igoe ¦8,273.93 ¦15,177.72 ¦ +--------------------------+------------+------------¦ ¦Catherine Igoe Dailey ¦8,273.93 ¦15,177.71 ¦ +--------------------------+------------+------------¦ ¦Elizabeth Igoe Murphy ¦8,273.92 ¦15,177.71 ¦ +--------------------------+------------+------------¦ ¦John Francis Igoe (infant)¦8,273.92 ¦15,177.71 ¦ +--------------------------+------------+------------¦ ¦Estate's entire net income¦49,643.55 ¦91,066.27 ¦ +----------------------------------------------------+
Each beneficiary reported the above items of income on his Federal income tax returns.
Each beneficiary was notified that a distribution of the income of the estate had been made and that his share thereof was the amount as above set forth. Alma Igoe, executrix, and Marie L. Keller, guardian of John Francis Igoe, individually and through their brother Paul H. Keller, their attorney and also attorney for the estate for a time, were thoroughly conversant with the condition of the estate and with the income so received and credited by it during the taxable years. The executors were advised that they must be able and ready to pay over the income without any hesitation or debate at any time it might be demanded. The adult beneficiaries were in accord with petitioner's management of the estate.
In 1938 Keller was attorney for the estate. In 1940, and some time prior to August of that year, a controversy arose between the petitioners, as executors, and Keller, as attorney for the estate, over the amounts he proposed to charge as his fees. Litigation ensured and over 10,000 pages of testimony were recorded. Alma Igoe and Marie Keller supported their brother's demands for compensation. Previous disputes had occurred between Alma Igoe and the other executors. The quarrel terminated in two settlement agreements dated November 21, 1941. During the period of altercation, the petitioner executors were advised that they must consider constantly the possibility of paying the income credited to Alma Igoe and to the guardian of John Francis Igoe. The petitioners were always in a position so to do.
The first settlement agreement of November 21, 1941 was executed by Alma Igoe, Marie L. Keller, as guardian, Paul H. Keller, and the petitioners, Peter Igoe and James J. Igoe, individually and as remaining executors of the estate. Pursuant thereto, Alma Igoe, her brother, and her sister as guardian, released all their claims of every kind, including their rights to the income in controversy, against the estate in consideration of the transfer of half of the debentures and stock of Igoe, Inc. and Eybro, owned by the estate, and of various other miscellaneous assets. The petitioners waived their commissions as executors, but Alma Igoe claimed and received hers. Simultaneously, and under the second agreement dated November 21, 1941, executed by Alma Igoe, Marie Keller, guardian, and Igoe, Inc., the Igoe, Inc., and Eybro debentures and stocks so transferred, together with other securities, were purchased by Eybro for $365,816.
The total cash requirements for the administration and settlement of the estate were approximately as follows:
+---------------------------------------------------------+ ¦Funeral and administrative expenses and debts¦$156,129.50¦ +---------------------------------------------+-----------¦ ¦Federal estate taxes ¦190,458.91 ¦ +---------------------------------------------+-----------¦ ¦State estate taxes ¦38,952.92 ¦ +---------------------------------------------+-----------¦ ¦ ¦385,541.33 ¦ +---------------------------------------------------------+
The executors sold miscellaneous securities for $141,892.78 and collected $33,562.38 in insurance.
The total income of the estate up to and including July 30, 1941, was $324,480.04. During that period the total amount distributed to Alma Igoe in cash was $56,818.77, for the account of John Francis Igoe, $2,856.59, and, in addition, payments of $16,500, $14,593.40, and $14,601.65 were made to or for the accounts of Peter A. Igoe, Catherine Dailey and Elizabeth Murphy, respectively, or a total distribution in cash of $105,370.41. Loans were made to the estate in the sum of $24,253.93 by Alma Igoe and in the sum of $12,000 each by Peter A. Igoe, Catherine Dailey, and Elizabeth Murphy, or a total of $60,453.93.
From July 1, 1941, to July 31, 1942, the petitioners, as executors, made further distributions to the beneficiaries in cash and assets of the estate, leaving a balance of $57,409.33 therein as of the latter date. The total distributions to the beneficiaries to July 31, 1942, including distributions of assets and income, were $778,506.86.
The petitioners filed a detailed statement of account dated February 5, 1942, charging themselves with the assets of the estate, including the income received to June 30, 1941, and crediting themselves with expenditures and disbursements for the benefit of the estate, including the $105,370.41 paid to the legatees. On September 2, 1942, they filed a supplemental account, reflecting their transactions from June 30, 1941, to July 31, 1942, and including the above mentioned disbursements to the legatees totaling $778,506.86.
On March 3, 1943, the surrogate for the County of Kings approved the compromise agreement of November 21, 1941 and authorized the petitioners to proceed as therein provided. On April 30, 1943, the surrogate entered a decree approving the sale made to Alma Igoe in full satisfaction of her interest as a beneficiary of the decedent (as to both principal and income), modifying and approving the sale to the guardian of John Francis Igoe, discharging Alma Igoe as executrix, and approving and judicially settling the petitioners' account as executors, as amended by the statement of September 2, 1942.
The entire net income of the estate was properly credited to the beneficiaries during the taxable years.
In their income tax returns for the taxable years the petitioners deducted the amounts so credited from the net income of the estate for those years. The Commissioner held that such deductions were ‘not allowable under section 162(b) of the Internal Revenue Code since such amounts were not to be distributed currently; nor * * * allowable under section 162(c) since they were not properly paid or credited during such years to any legatee or beneficiary.‘
OPINION.
VAN FOSSAN, Judge:
The single issue before us is whether or not the amounts credited by the petitioners on the books of the estate are deductible from its gross income as contemplated in section 162(b) or (c), Internal Revenue Code.
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—(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;(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 petitioners contend that such amounts are deductible under either subsection. The respondent asserts that they are deductible under neither. In his statement of the issue, the respondent's counsel says ‘the question before the court is whether or not the conduct of the executors in handling this income constituted a distribution.‘ He thus has narrowed the issue to one of fact, thereby relating it to subsection (c). However, the question here presented merits consideration and discussion under both subsection (b) and subsection (c). Counsel for both the petitioners and the respondent seem so to regard it, since they each submitted arguments pertinent to both subsections.
The petitioners argue that the phrase ‘is to be distributed currently by the fiduciary to the beneficiary‘ covers the situation precisely, because under the provisions of the Personal Property Law of New York, section 17-b,
in conjunction with section 16-3 of that law
SEC. 17-b. Distribution of income earned during period of administration.Unless otherwise expressly provided by the will of a person dying after this act takes effect, all income from real and personal property earned during the period of administration of the estate of such testator and not payable to others or otherwise disposed of by the will shall be distributed pro rata as income among the beneficiaries of any trusts created out of the residuary estate of such testator and the other persons entitled to such residuary estate. None of such income shall, after such distribution, be added to the capital of the residuary estate the whole or any part of which is devised or bequeathed in trust or for life or for a term of years, but shall be paid ratably to the life beneficiary of a trust, or to the life tenant, or to the absolute residuary legatee, as the case may be. * * *
and section 146 of the Decedent Estate Law of New York,
SEC. 16. Validity of directions for accumulation of income.3. All other directions for the accumulation of the income of personal property, not authorized by statute, are void. * * *
the beneficiaries, the potential distributees, may demand and recover the income earned by the estate.
SEC. 146. Action upon refusal to pay legacy or distributive share.If, after the expiration of seven months from the granting of letters testamentary or letters of administration, an executor or administrator refuses, upon demand, to pay a legacy, or distributive share, the person entitled thereto may maintain such an action against him, as the case requires. * * *
Section 16-3 of the Personal Property Law refers to ‘directions‘ for the accumulation of income of personal property. There are no such directions in the instrument before us and, therefore, that provision is irrelevant.
Section 17-b provides for the distribution of income, earned during administration, to the beneficiaries of a residuary estate as established by trust or otherwise, if the will contains no express provision to the contrary. This section was adopted to vitiate the treatment of the estate income as corpus under the rule of the Benson case (Matter of Benson, 96 N.Y. 499) which held that, in order to ascertain the amount of a general residue, all income of the estate, not otherwise disbursed, must be added to the residue. As was stated in Matter of Cochran, 176 Misc. 809, 29 N.Y.S.(2D) 249:
The section was enacted upon the recommendation of the Decedent Estate Commission, of which the author of this decision was chairman, by chapter 706 of the Laws of 1931. (Combined Reports of the Decedent Estate Commission, p. 448.) Its purpose was to abrogate the rule enunciated in Matter of Benson (96 N.Y. 499).
Thus, section 17-b serves only to determine and identify the character and status of the estate's income earned during administration. It does not direct when or how that income becomes currently distributable to the beneficiaries thereof.
The petitioners argue that the effect of section 146 of the Decedent Estate Law is to make such income currently distributable. We do not so construe that section.
Section 146 does not provide when such distribution shall be made nor does it give the fiduciary the unlimited power to distribute at his will or discretion. It merely gives the beneficiaries the right to maintain an appropriate action against a fiduciary if the latter, after seven months from the granting of letters testamentary or letters of administration, refuses to distribute. When the case is presented to a proper tribunal then, and then only, may the fiduciary be directed to make a distribution deemed proper by the court.
Under the petitioners' theory, a fiduciary is required to make distribution of the current income earned by the estate during its administration. If he should do so and later be confronted with taxes, undisclosed debts, or other obligations of the estate, he might be subject to serious embarrassment or by action from creditors. We do not think that the New York statutes contemplate any such situation.
The fiduciaries did not pay the full amounts to the legatees of the estate. The legatees instituted no action to compel them to do so. Such potential rights as they might have had were neither recognized nor enforced. Hence, under the New York statutes, the net income of the estate was not ‘to be distributed currently,‘ as provided in section 162 (b).
The petitioners contend further that the entire net income of the estate was ‘constructively paid‘ to the beneficiaries as provided in section 162(c). They argue that the sums placed to their credit on the books of the estate were both legally and practically available on demand. The respondent's position is that the entries on the estate's books were simply a ‘bookkeeping gesture‘ and were never intended to evidence a distribution of the funds except in the final settlement of the estate. He challenges the bona fides of the transactions and asserts that they were made for the purpose of reducing the taxable net income of the estate.
At the outset it should be observed that we find nothing whatever in the entire record to suggest that the petitioners' conduct and actions were motivated by a purpose or desire to evade or reduce tax. The fact that money unneeded by the beneficiaries should remain in and be used by the estate does not evidence such a purpose. Distributions were accomplished by means of specific credits to the account of each beneficiary, duly and properly entered on the books of the estate. These transactions were consummated with full knowledge and consent of the beneficiaries, who were notified of their respective distributive shares of the estate and who reported the amounts so distributed on their income tax returns.
The record amply supports the conclusion that the funds credited to the beneficiaries were readily available to them at all times. In fact, during the period from October 1, 1937, to July 31, 1942, all beneficiaries received numerous large payments in cash, which were charged to their accounts with the estate. The actions of the petitioners in so treating the income earned by the estate were approved in all respects by the surrogate having jurisdiction over the settlement of their accounts, The character and extent of the estate of Andrew J. Igoe, as set forth in detail in the facts, show that the petitioners were fully justified in crediting to the beneficiaries the entire net income received by the estate during the taxable years. See Commissioner v. Crawford Estate, 139 Fed.(2d) 616. Any chance they took of making an improvident distribution was wiped out by the surrogate's decree. Since the seven-month period established in section 146 had long before expired, there was no legal bar in New York to the distribution made by the petitioners.
The respondent cites Commissioner v. Stearns, 65 Fed.(2d) 371; certiorari denied, 290 U.S. 670, in support of argument that the provisions of section 162(c) do not apply to the case at bar. There the court said:
* * * The income must be so definitively allocated to the legatee as to be beyond recall; ‘credit‘ for practical purposes is the equivalent of ‘payment.‘ Therefore, a mere entry on the books of the fiduciary will not serve unless made in such circumstances that it cannot be recalled. If the fiduciary's account be stated inter partes, that would probably be enough; it would certainly be, when a court, as for example, the surrogate in this instance, passes the account and directs payment. * * *
This decision sustains the petitioners' view rather than that of the respondent. Under the facts and circumstances of record, the entry of the income and its availability upon demand constituted, in effect, an ‘account stated‘ between the petitioners and each beneficiary. The beneficiaries so acquiesced in that relationship, since they reported the several amounts thereof as income. This is particularly true with respect to Alma Igoe and Marie Keller, guardian for John Francis Igoe. They, through their brother, Paul Keller, were constantly on the watch to see that they received their full share of the income. Keller was attorney for the estate and at all times knew its condition, its receipts and disbursements, its obligations, and its management by the executors. We have no doubt that the action of the petitioners in crediting the income was beyond their recall. If they had attempted to disturb the entries, prompt preventive action certainly would have been instituted by Keller, whose antagonistic attitude toward the petitioners is thoroughly reflected in the record.
The respondent also relies on Estate of C. R. Hubbard, 41 B.T.A. 628, but the facts in that case differ materially from those before us and thus that case is not in point. We hold that the distributions were properly credited to the beneficiaries and that the petitioners are entitled to the deductions claimed, under the provisions of section 162(c).
Decision will be entered under Rule 50.