Summary
In Estate of Woodward v. Commissioner, 24 T.C. 883 (1955), we adhered to the position that community income received by the executors of the deceased spouse's estate, during the administration of the estate, is taxable one-half to the estate and one-half to the surviving spouse.
Summary of this case from Grimm v. Comm'r of Internal RevenueOpinion
Docket Nos. 37080 37081.
1955-08-11
ESTATE OF BESSIE A. WOODWARD, W. B. BARNHILL, JOHN F. DILLARD AND J. A. PHILLIPS, TRUSTEES, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.ESTATE OF EMERSON F. WOODWARD, W. B. BARNHILL, JOHN F. DILLARD AND J. A.PHILLIPS, TRUSTEES, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
W. J. Knight, Esq., for the petitioners. W. B. Riley, Esq., for the respondent.
Held:
1. The estate of each decedent is taxable only on one-half of the income derived during administration from community property in Texas. Estate of J. T. Sneed, Jr., 17 T.C. 1344,affd. 220 F.2d 313.
2. Regulations 111, section 29.125-4, promulgated pursuant to section 125(c) (2), I.R.C. (1949), to supply administrative details was not unreasonable and arbitrary in its requirement that an election to amortize bond premium must be made in the return for the first taxable year in which taxpayer desires the election to be applicable. W. J. Knight, Esq., for the petitioners. W. B. Riley, Esq., for the respondent.
These consolidated proceedings involve deficiencies in income tax of the petitioners as follows:
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Deficiencies
Year Estate Estate Bessie A. Emerson F. Woodward Woodward Period 5/23/43—4/30/44 $48,640.07 $48,640.07 F/Y 4/30/45 65,639.15 65,354.50 F/Y 4/30/46 37,959.83 36,982.62 F/Y 4/30/47 30,641.06 30,633.09
The issues are (1) whether the entire income of the community property of the decedent, Bessie A. Woodward, and her deceased husband during the period of administration is taxable to the Estate of Bessie A. Woodward, or, in the alternative, to the Estate of Emerson F. Woodward, or one-half to each estate; and (2) whether the respondent erred in disallowing deductions for amortizable bond premiums with respect to fully taxable Gold Bonds of the Dominion of Canada, constituting community property of decedents, where the election to take the deduction was not made in the manner required by the applicable Treasury Regulations.
FINDINGS OF FACT.
Most of the material facts have been stipulated. They are adopted and incorporated herein by reference. They may be summarized as follows:
The decedents, Emerson F. Woodward and Bessie A. Woodward, were husband and wife and at the date of their deaths were resident and domiciled in Houston, Harris County, Texas. On May 22, 1943, they were involved in an automobile accident in which Bessie Woodward was instantly killed. Emerson F. Woodward received injuries resulting in his death on May 24, 1943. Both decedents died testate leaving wills of similar import. After making certain bequests each created a testamentary trust of the remainder estate, the income of which was to be paid to the survivor for life, and upon the death of the life tenant the corpus was to be held in trust for the benefit of their grandson until he reached 30 years of age. At the death of the decedents the grandson was 15 years of age. The husband was named as independent executor and trustee of Bessie Woodward's estate and the wife as independent executrix and trustee of the husband's estate. Each executor and trustee was empowered to act and administer the estate independently of court supervision and without bond. In the event of the death of the respective independent executor and trustee before the grandson became 30, W. B. Barnhill, John F. Dillard, and J. A. Phillips were named as substitute trustees and executors.
The will of each decedent was filed for probate on June 15, 1943. The City National Bank was appointed temporary administrator of each estate pending the outcome of proceedings to contest the wills. The bank administered the separate estates under orders of the Probate Court until April 6, 1944, on which date the contests were denied, the wills admitted to probate, and the substitute executors and trustees duly qualified. In the case of the Estate of Bessie A. Woodward a second will contest was filed. The substitute trustees were appointed on July 13, 1945, to act as temporary administrators, and so acted until November 1, 1945, when the second contest was denied. Thereupon, the temporary administration was terminated and the substitute trustees and executors resumed their duties.
The estates of both decedents remained in administration until April 30, 1947, when they were closed by direction of the executors and the respective estates were distributed to them in their capacity as trustees. The substitute trustees named in the wills at all times material herein have been and are the duly qualified and acting trustees for the respective estates.
The estate of each decedent consisted entirely of one-half of the community property. It was determined by closing agreement between the executors of the Estate of Bessie A. Woodward and the respondent that the value of her gross estate at death was $4,450,008.02, of which amount $170,604.83 was cash. The one-half of the community debts owned by Bessie A. Woodward at her death was $38,008.86, and she owed no other debts. By closing agreement the value of the gross estate of Emerson F. Woodward at the time of his death was determined to be $4,443,986.84, of which amount $170,604.83 was cash. One-half of the community debts owed by him at his death was $39,614.21, and he owed no other debts at such time.
Each of the estates was administered as a separate estate by the temporary administrators and the executors during the time they acted as such. No orders were entered in the Probate Court during the pendency of the temporary administrations authorizing the administrators of one estate to act with respect to the other.
Separate Federal estate tax and State inheritance tax returns were filed by each estate and each was treated by the executors, the respondent, and the comptroller of the State of Texas as a separate entity.
Separate income tax returns were prepared and filed on a cash basis for each estate for each of the taxable periods in question with the collector of internal revenue for the first district of Texas at Dallas, Texas. One-half of the income of the community property was reported thereon. The income tax and the Victory tax shown by such returns to be due were paid out of the assets of the respective estates making the returns.
Separate books of account were kept by the temporary administrators and the executors of each estate during their successive periods of administration.
During the entire period of administration in both estates no necessity existed for selling any property to pay community debts, and no community property was sold for such purpose to pay community debts, and no community property was sold for such purpose during such time.
At the date of death each decedent owned a community one-half interest in a number of 4% Gold Bonds of the Government of the Dominion of Canada, having a par value of $2,000,000. The bonds were interest bearing and one of the interest was excludible from gross income. Neither the petitioners, the administrators, the executors, nor the decedents were dealers in securities, and the bonds were not held primarily for sale to customers in the ordinary course of trade or business, and did not constitute obligations of a kind which would properly be included in the inventory of the estates of the respective decedents at the close of any taxable year.
The bonds provided for maturity on October 1, 1960, and were callable on and after October 1, 1950, but not earlier. They were called for redemption on October 1, 1950, and were redeemed at par by the executors of the estates. The proceeds were credited and distributed equally between the two estates when received.
The executors of each decedent's estate filed a Federal estate tax return on August 22, 1944. In each return the executors elected to determine the value of the properties for estate tax purposes as of the date of death. The revenue agent's reports showing the results of his examination of the respective returns were filed on July 17, 1945. On September 5, 1945, the executors of the estates executed waivers agreeing to the deficiencies resulting from the agent's examinations. On May 24, 1946, the executors of the Estate of Bessie A. Woodward executed a closing agreement finally determining the estate tax liability of her estate and the basis therefor. It was determined that the community one-half interest of Bessie A. Woodward in the bonds had a value of $1,096,875 in lieu of the value of $1,097,500 shown on the return.
On February 15, 1946, the executors of the Estate of Emerson F. Woodward entered into a closing agreement finally determining the estate tax liability of his estate and the basis therefor. It was determined that the community one-half interest of Emerson F. Woodward in the bonds had a value of $1,097,500 in lieu of the amount of $1,096,875 shown on the return.
The respective closing agreements above mentioned were approved by the Joint Committee on Internal Revenue Taxation, pursuant to section 3777 of the Internal Revenue Code of 1939, on April 17, 1946, and were approved by the Treasury Department on June 4, 1946.
No method of computing amortizable bond premiums was established by the decedents prior to their deaths, or by the representatives of their estates during the taxable periods involved herein. The amounts of amortizable bond premiums for the respective estates computed in accordance with the method prescribed by the Treasury Regulations have been stipulated.
Income tax returns were filed by each estate on the dates shown below reporting tax liabilities which were paid as follows:
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Liabilities
F/Y ended April 30 Date filed 1 Bessie A. Emerson F. Woodward Woodward 1944 July 21, 1944 $44,540.45 $44,540.45 1945 Aug. 21, 1945 45,924.87 46,209.52 1946 July 16, 1946 24,187.47 25,164.68 1947 July 15, 1947 19,737.66 19,745.63
No deductions for amortizable bond premium with respect to the Canadian bonds were made in the income tax returns filed for the respective estates, but claims for refunds for each of the years were filed on the dates shown below and in the amounts as follows:
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Amount claimed
F/Y ended April 30 Date filed Bessie A. Emerson F. Woodward Woodward 1944 June 9, 1948 $9,529.26 $9,590.82 1945 June 9, 1948 10,476.03 10,562.53 1946 Nov. 8, 1949 8,673.32 9,121.45 1947 None
Each of the aforesaid claims for refund has remained on file with the respondent for more than 6 months without any action having been taken thereon.
Consents (Form 872) to extend the period of limitation upon assessment of income tax with respect to each estate were timely executed by the respective parties which consecutively extended such periods for each of the taxable years in question to June 30, 1952.
The deficiencies claimed by the respondent against both petitioners are based on the ground that all of the income from the community estate for the periods in question is taxable to the estate against which the deficiency is assessed, but, in each case, solely to protect the revenues it is claimed by the respondent that such entire income is taxable to the other estate.
OPINION.
LEMIRE, Judge:
The first question presented is whether the income from property previously belonging to the marital community in Texas earned during the period of administration is taxable in its entirety to the estate of the surviving husband, or, in the alternative, entirely to the estate of the wife; or whether it is taxable one-half to each estate, as contended by the petitioners.
The respondent relies upon Barbour v. Commissioner, 89 F.2d 474 as controlling our decision here. This Court has adhered to the view that an estate of a deceased spouse during administration, whether the deceased be the husband or wife, is taxable only on one-half of the income from Texas community property. Estate of J. T. Sneed, Jr., 17 T.C. 1344, affd. 220 F.2d 313. On the basis of this most recent decision, we sustain the petitioners on this issue.
The second question presented is whether the petitioners are entitled to deductions for amortizable bond premium on certain bonds of the Government of the Dominion of Canada in the taxable periods in question. No deductions were claimed on the income tax returns filed by the respective estates for amortizable bond premiums.
It is conceded that under section 23(v) of the 1939 Code petitioners would be entitled to the bond premium deduction provided in section 125 of the 1939 Code if the Treasury Regulations adopted pursuant to the latter section had been complied with. The amounts of such deductions for the respective taxable periods have been stipulated. Subsections (a)(1) and (c)(1) and (2) of section 125 of the Code and Regulations 111, section 29.125-4, pertinent here, are set forth in the margin.
Section 125(c)(2) provides that the election authorized shall be made in accordance with such regulations as the Commissioner, with the approval of the Secretary, shall prescribe.
Decisions will be entered under Rule 50. SEC. 125. AMORTIZABLE BOND PREMIUM.(a)GENERAL RULE.— In the case of any bond, as defined in subsection (d), the following rules shall apply to the amortizable bond premium (determined under subsection (b)) on the bond for any taxable year beginning after December 31, 1941:(1) INTEREST WHOLLY OR PARTIALLY TAXABLE.— In the case of a bond (other than a bond the interest on which is excludible from gross income), the amount of the amortizable bond premium for the taxable year shall be allowed as a deduction.(c) ELECTION ON TAXABLE AND PARTIALLY TAXABLE BONDS.—(1) ELIGIBILITY TO ELECT AND BONDS WITH RESPECT TO WHICH ELECTION PERMITTED.— This section shall apply with respect to the following classes of taxpayers with respect to the following classes of bonds only if the taxpayer has elected to have this section apply.(2) MANNER AND EFFECT OF ELECTION.— The election authorized under this subsection shall be made in accordance with such regulations as the Commissioner with the approval of the Secretary shall Prescribe. If such election is made with respect to any bond (described in paragraph (1)) of the taxpayer, it shall also apply to all such bonds held by the taxpayer at the beginning of the first taxable year to which the election applies and to all such bonds thereafter acquired by him and shall be binding for all subsequent taxable years with respect to all such bonds of the taxpayer, unless, upon application by the taxpayer, the Commissioner permits him, subject to such conditions as the Commissioner deems necessary, to revoke such election. * * *SEC. 29.125— 4. ELECTION.— In the case of a corporation, the election provided in section 125 may be made only with respect to fully taxable bonds. In the case of a taxpayer other than a corporation, the election provided in such section may be made with respect to (a) fully taxable bonds only, or (b) partially tax-exempt bonds only, or (c) both fully taxable bonds and partially tax-exempt bonds. Such election shall be made by the taxpayer by claiming a deduction for the bond premium in his return for the first taxable year to which he desires the election to be applicable. No other method of making such election is permitted. If the election is so made, the taxpayer should attach to his return a statement showing the computation of the deduction. The election shall apply to all bonds in respect of which it was made owned by the taxpayer at the beginning of the first taxable year to which the election applies and also to all bonds of such class (or classes) thereafter acquired by him, and shall be binding for all subsequent taxable years. Upon application by the taxpayer, the Commissioner may permit him to revoke the election, subject to such conditions as the Commissioner deems necessary. In the case of bonds owned by a partnership, common trust fund, or foreign personal holding company, the election shall be exercisable by such partnership, common trust fund, or foreign personal holding company. -------- Notes:
The return for each fiscal year was due on or before July 15 of the year in which the fiscal year ended. A request for an extension for filing the return for the fiscal year 1944 was granted until July 25, 1944, and two extensions were granted extending the time for filing the return for the fiscal year 1945 to September 1, 1945.
The petitioners made no election in the manner prescribed in any of the returns filed for the taxable years involved, but subsequently filed claims for refund based upon deductions for amortizable premiums claimed for each year. The petitioners contend that the regulation prescribing the time and manner of exercising the election is unreasonable and arbitrary as applied to them. The primary argument advanced against the validity of the regulation is the requirement that the election be made in the return for the first taxable year to which he desires the election to be applicable. The time for filing income tax returns expired as to each estate on July 15, 1944. At the request of the petitioners the time was extended to July 25, 1944. The time for filing the estate tax return in the Estate of Bessie A. Woodward expired on August 23, 1944, and in the Estate of Emerson F. Woodward on August 24, 1944. Both estate tax returns were filed on August 22, 1944. It is said that since the estate tax returns of the petitioners were not due until the fifteenth month following the dates of death, and by virtue of section 811(j) they had the election to value the estates as of the date of 1 year after the decedents' deaths, that to comply with the regulations requiring the election to be made for the first taxable year's return would have compelled the petitioners to value the bonds for estate tax purposes as of a date prior to the time allowed by section 811(j) of the Code, which date established the basis for determining amortizable bond premium. The fact that the election as to the optional date for valuation is not required to be made until the estate tax return is due, does not extend the valuation dates fixed by statute. The last date for valuing the bonds for estate tax purposes in the estate of the surviving decedent was May 25, 1944. The first income tax return in each estate was not due until July 25, 1944, or 2 months after the optional valuation date. In the light of such facts this contention of the petitioners lacks substance.
The petitioners did not make an election to take amortizable bond premium deductions in any of the income tax returns filed for the periods in question. On June 9, 1948, each estate filed claims for refund for the taxable periods ended April 30, 1944, and April 30, 1945. The period of limitation for assessment had been kept open by successive waivers to June 30, 1952, The respondent made his final determinations of tax liability on July 11, 1951. It is now contended by the petitioners that the filing of timely claims for refund constituted an effective and timely election to take the amortization of bond premium deduction. We have considered the authorities relied upon by the petitioners in support of their position and we regard them as inapplicable to the facts and circumstances presented here, or they are factually distinguishable.
Whether a transaction or result is taxable is a matter of statutes and valid regulations, and what they mean. Jeffries v. Commissioner, 158 F.2d 225; Trust Co. of Georgia v. Allen, 164 F.2d 438. To uphold the argument of the petitioners would be to rewrite the regulations, which responsibility is specifically imposed by the statute upon the respondent. Our function is to determine whether the regulation is controversy is a reasonable and proper exercise of the duty prescribed by section 125 of the Code.
We are dealing here with a regulation which the statute expressly commands to supplement the law. Such regulations are to be accorded greater weight than those of an interpretive character. Regulations promulgated pursuant to directions contained in a particular law have the force and effect of law unless they are in conflict with the express provisions of the statute. Such regulations unless clearly arbitrary and unreasonable are to be strictly adhered to. Santa Monica Mountain Park Co. v. United States, 99 F.2d 450; Ruud Manufacturing Co., 10 T.C. 14, affd. 173 F.2d 222.
The fact that section 125 has been amended since the promulgation of the regulations without altering or amending the provisions of subsection (c)(2) is indicative of congressional approval of the regulation. Helvering v. Winmill, 305 U.S. 79.
The purpose of the enactment of section 125 of the 1939 Code was to correct inequitable treatment then existing with respect to certain types of bondholders. The statute requires an election and provides that if exercised it applies to all such bonds and all after-acquired bonds for all subsequent taxable years. The privilege to elect to claim a deduction for amortization of bond premium is an option. The deduction, if claimed, reduces the basis of the bonds. A taxpayer's choice may have varying tax consequences in subsequent years. One of the purposes of the regulation is to prevent a taxpayer delaying his determination to see which method would be most profitable. The burden of deciding the more advantageous course rests upon the taxpayer, who must suffer the consequences of unforeseen contingencies or errors of judgment in its exercise. Burke & Herbert Bank & Trust Co., 10 T.C. 1007, 1009.
The record contains evidence to the effect that the executors or trustees intended to hold the Canadian bonds as an investment until their maturity or earlier call date. It would, therefore, presumably have been advantageous to have claimed amortization of the premium in the first income tax return. However, the regulation must be viewed in the light of its application to taxpayers generally. If, as the petitioners contend, they were relying upon the fact that the estate tax return had not been filed when the first income tax was due, no explanation has been advanced for the failure to make the election in the first return filed after the filing of the estate tax return.
In our opinion, the regulation in question is not in conflict with the provisions of section 125, but is a reasonable and appropriate one to accomplish the purposes of the statute and to carry out the duty imposed upon the respondent. Its validity is sustained.
The petitioners contend that the filing of timely claims for refund should be considered as an election within the scope of the regulation.
It is specifically provided in the regulation that no other method is permitted. A statutory requirement that a thing be done in a specified manner bars any other method. Botany Worsted Mills v. United States, 278 U.S. 282. Since we hold the regulation to be valid, to recognize the claims for refund as an effective election would thwart the purposes of the regulation. We, therefore, hold that such deductions for amortizable bond premium in the taxable years may not be taken into account in a redetermination of the income tax liabilities of the respective petitioners. Other adjustments made by the respondent are not contested.