Opinion
Docket No. 28951.
1953-03-30
SIDNEY N. LeFIELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Louis Janin, Esq., for the petitioner. John D. Picco, Esq., for the respondent.
Louis Janin, Esq., for the petitioner. John D. Picco, Esq., for the respondent.
ESTATE— PERIOD OF ADMINISTRATION.— Petitioner and his deceased father carried on a business in partnership in which their respective interests were 40 per cent and 60 per cent. Petitioner's father died in 1942. Petitioner was appointed administrator. Petitioner did not liquidate the partnership business but continued its operations. By May 3, 1944, all debts of the estate were paid, and all legatees, heirs at law, and possible claimants had executed agreements settling their claims. On May 19, 1944, the state probate court approved the agreements settling claims and the administrator's accounts and found that petitioner was the sole person interested in the estate subject to an annuity for one person, but petitioner continued to file reports, and in 1951 obtained a court order which said, inter alia, that the estate was not in a condition to be closed. Upon the facts, held, that for Federal income tax, the period required for administration of the estate ended on May 19, 1944. Held, further, that petitioner is not taxable on income of $1,800 each year, the annuity of Ella LeFiell.
The respondent has determined deficiencies in income tax for the years 1944, 1945, and 1946 in the respective amounts of $9,388.18, $11,944.36, and $9,782.67.
The respondent has determined, under Regulations 111, section 29.162-1, that administration of the estate of Alfred E. LeFiell was concluded prior to 1944, and that the income of the estate for 1944, 1945, and 1946 is taxable to the petitioner rather than to the estate. The chief question is whether the LeFiell estate was in process of administration during the taxable years.
The respondent's pleadings present the question whether the provisions of section 275(c) of the Code apply to the years 1944 and 1945. He has made the allegation that petitioner's gross income from 1944 and 1945 was understated in his returns to the extent of more than 25 per cent, and that therefore deficiencies for 1944 and 1945 are not barred by the statute of limitations.
The petitioner filed his returns with the collector for the first district of California.
FINDINGS OF FACT.
The facts which have been stipulated are found as facts; the stipulation is incorporated herein by this reference.
1. The petitioner is a resident of Atherton, California. His wife is Kathleen M. LeFiell. She filed separate income tax returns for the years 1944, 1945, and 1946.
2. The father of the petitioner, Alfred Edgar LeFiell, hereinafter referred to as either the decedent or Alfred LeFiell, died testate, a resident of the county of San Francisco, on January 15, 1942. His will was offered for probate on January 21, 1942. Or February 4, 1942, the petitioner was appointed administrator with the will annexed of the decedent's estate.
3. The decedent was unmarried when he died, having been divorced. He was survived by three children, a daughter, Aileen LeFiell Power; a son, Cecil K. LeFiell; and the petitioner here, Sidney N. LeFiell.
4. The decedent left an holographic will which was admitted to probate in the Superior Court of California for the County of San Francisco. The only legatees and devisees named in the will were Aileen Power and Sidney LeFiell. Cecil LeFiell was not mentioned in the will.
5. Ella M. LeFiell, the former wife of Alfred LeFiell, is the mother of Sidney LeFiell, Aileen Power, and Cecil LeFiell. She survived Alfred LeFiell. She was divorced from him. At the time of his death, Ella LeFiell was about 60 years old. She was living at the time of the trial of this proceeding.
6. Ella LeFiell was not an heir at law of the decedent. She did not file any claim against his estate as an heir, legatee, or claimant.
7. Alfred LeFiell's will provided as follows:
I, Alfred Edgar LeFiell, do hereby bequeath a one-quarter interest in the LeFiell Co. of 1469 Fairfax Avenue, San Francisco, to my dear daughter Aileen Phyllis Power, & the balance of my three-fifths interest in the LeFiell Co. to my son and partner, Sidney Norman LeFiell, & the care of his mother in her old age.
The petitioner, as administrator of his father's estate, was advised, and he believed, that the wording in the will referring to Ella LeFiell was not sufficient to create and constitute a charge against the estate, and he so reported to the Superior Court in his ‘Report and Petition for Ratable Distribution, Settlement of Account, and Approval of Assignment of Interests ‘ filed with the court on May 3, 1944.
8. On February 2, 1938, Sidney LeFiell, the petitioner, was admitted as a partner in LeFiell Company, 1469 Fairfax Avenue, San Francisco, a business theretofore conducted by Alfred LeFiell. The business was the manufacture and sale of equipment for the meat industry. Under the partnership agreement, the interests of the two partners were as follows: Alfred LeFiell, 40 per cent. The partnership agreement did not provide for the continuation of the partnership after the death of a partner.
9. On July 20, 1942, the petitioner filed the Inventory and Appraisement of the estate with the probate court. It disclosed that the estate consisted of only money in the amount of $1,198.55, and a 60 per cent interest in the partnership, LeFiell Company. The 60 per cent interest in the partnership was reported as having a value of $22,826.92 as of the date of the decedent's death. This value was 60 per cent of the net worth of the business in the amount of $38,804.86.
10. The petitioner employed S. E. Sheffey to act as attorney for the administration of the estate.
11. The total claims filed against the estate amounted to $2,913.76, and these were paid prior to March 26, 1943. The time for the presentation of claims expired August 6, 1942. The California state inheritance return filed in June 1943 showed tax due of $100.65. The tax was paid on June 15, 1943. The Federal estate tax return was filed before March 15, 1943, showing no tax due. The expenses of the estate consisted of only the ordinary fees and administration expenses. Exclusive of the state inheritance tax, the total claims against the estate, the disbursements and the expenses as of March 26, 1943, amounted to $4,803.78.
12. On March 26, 1943, the petitioner, as administrator, filed with the Superior Court a Petition for Distribution of the estate. In this petition, the petitioner reported that the time for presentation of claims against the estate had expired; that the only claim filed was his own claim for debts of the decedent which he had paid in the amount of $2,913.76; that the heirs at law were Sidney and Cecil LeFiell and Aileen Power; that the legatees were Sidney LeFiell and Aileen Power; that the assets of the estate consisted of a 60 per cent interest in LeFiell Company, a partnership business into cash because the assets would not be worth as much, if liquidated, as they would be worth if the business were continued as a going business; that the petitioner had continued to operate the business since the death of the deceased; that the petitioner had owned a 40 per cent interest in the business prior to the death of the decedent; that the petitioner was able and ready to pay to the other heirs and legatees his or her respective shares in cash according to the amount which the court should determine the heirs or legatees were entitled to receive; that the court was requested to determine the amounts in cash and the parties entitled to receive distribution of the assets of the estate; and that upon distribution the administration of the estate be closed and the administrator be discharged. On March 29, 1943, proof of posting of the notice of hearing in respect to the petition for distribution was filed with the Superior Court. April 19, 1943, was the date fixed for the hearing.
13. On April 19, 1943, Aileen Power filed exceptions and objections to the petition for distribution. Thereafter she assigned, on May 14, 1943, under written assignment, all of her interest in the estate to the petitioner, as an individual, in consideration of $5,000, and she also consented, in the assignment, to distribution of the estate to Sidney N. LeFiell. The parties have stipulated that it was also agreed that Aileen was to receive distribution of an additional $5,000 from the income of the estate.
14. On May 15, 1943, Cecil LeFiell, as the claimed pretermitted heir, assigned all of his right and interest in the estate of his father to Ella M. LeFiell. Thereafter, on May 18, 1943, Ella M. LeFiell entered into an agreement with the petitioner, as administrator of the estate, settling any and all claims she might have against the estate as the assignee of Cecil LeFiell, or in any other way, for $150 per month cash to be paid to her during the remainder of her life ‘out of the assets of the estate,‘ from, and effective as of, January 15, 1942, the date of the decedent's death, by Sidney LeFiell. The agreement of May 18, 1943, provided as follows:
WHEREAS Second Party by virtue of an assignment from CECIL K. LeFIELL is the owner of the rights and claims of the last named person as a surviving son and pretermitted heir of the said ALFRED EDGAR LeFIELL, there being no mention nor provision for said son in the last will and testament of said decedent, and as such Second Party is entitled to certain rights to receive and demand distribution from the estate of said decedent, but the amount of money and value of property that Second Party might thereby be entitled to is of great difficulty, if not impossible, of determination, and
WHEREAS to attempt such determination would be of substantial expense to the parties and probably would mean great sacrifice to the estate, and these parties are willing and anxious to dispose of and determine their mutual rights and obligations by compromise and amicable settlement between them.
NOW THEREFORE IT IS MUTUALLY UNDERSTOOD AND AGREED (1) Effective as of January 15, 1942, the date of death of said decedent, First Party has paid and will continue to pay to Second Party from and out of the assets of said estate, the sum of One Hundred and Fifty Dollars ($150.00) per month so long as the Second Party shall live.
(2) Second Party accepts the undertaking prescribed in the next preceding paragraph as and in full of all rights, claims and interests which she now has, had or ever may have in, to or arising out of, or in any wise connected with, the Estate of ALFRED EDGAR LeFIELL.
In the California state inheritance tax return filed on June 24, 1943, the interests of the heirs at law and legatees of Alfred LeFiell and the allocations of the state tax were reported as follows:
+------------------------------+ ¦Cecil LeFiell ¦6/18ths¦$33.55¦ +---------------+-------+------¦ ¦Aileen Power ¦5/18ths¦11.29 ¦ +---------------+-------+------¦ ¦Sidney LeFiell ¦7/18ths¦55.81 ¦ +------------------------------+
Prior to May 15, 1943, i.e., as of March 26, 1943, the petitioner in his Report and Account of Administrator which he filed with the probate court stated:
That if Cecil Kenneth LeFiell shall claim his share as a pretermitted heir, the said estate, according to law, will be divided into three parts; one third (1/3) to Cecil Kenneth LeFiell and the balance thereof in the proportions fixed by the will; that as to the property of which said deceased died intestate, your petitioner believes the same must be divided in three equal shares to the three heirs, according to the law of descent;
At some time after March 26, 1943, Cecil LeFiell filed with the administrator of his father's estate his claim as a pretermitted heir of the decedent.
15. On May 3, 1944, the administrator of the estate filed a petition with the probate court for ratable distribution of the estate, for approval of assignments of interests, and for approval of his account for the income and disbursements of the estate for the entire period of administration. The administrator petitioned the probate court, also, to order distribution of a piece of real estate, held in the names of A. E. LeFiell and S. N. LeFiell doing business as LeFiell Company, to Sidney LeFiell as the sole owner; to approve payment of a fee of $150 per month to Sidney LeFiell, in addition to the fee for administrator's services, for his services in operating the business of LeFiell Company for the estate; to approve distribution to Sidney LeFiell of the balance of the net, undistributed income of the estate in the amount of $12,460.70.
The administrator's account reported the following:
+-----------------------------------------------------------+ ¦Assets (charged to the administrator): ¦ ¦ +------------------------------------------------+----------¦ ¦ ¦ ¦ +------------------------------------------------+----------¦ ¦Estate assets at death ¦$24,025.47¦ +------------------------------------------------+----------¦ ¦Estate income 1942 (60%) ¦14,804.46 ¦ +------------------------------------------------+----------¦ ¦Estate income 1943 (60%) ¦14,987.86 ¦ +------------------------------------------------+----------¦ ¦Total ¦$53,817.79¦ +------------------------------------------------+----------¦ ¦ ¦ ¦ +------------------------------------------------+----------¦ ¦Disbursements: ¦ ¦ +------------------------------------------------+----------¦ ¦ ¦ ¦ +------------------------------------------------+----------¦ ¦Charges against assets, fees, taxes, claims paid¦$4,904.93 ¦ +------------------------------------------------+----------¦ ¦Charges against income ¦17,331.62 ¦ +------------------------------------------------+----------¦ ¦ ¦$22,236.55¦ +------------------------------------------------+----------¦ ¦Balance of income on hand ¦12,460.70 ¦ +------------------------------------------------+----------¦ ¦Balance of undistributed assets ¦19,120.54 ¦ +------------------------------------------------+----------¦ ¦Total ¦$53,817.79¦ +-----------------------------------------------------------+
The disbursements which the administrator reported out of income were as follows:
+-----------------------------------------+ ¦1942 ¦ ¦ ¦ +---------------------+---------+---------¦ ¦ ¦ ¦ ¦ +---------------------+---------+---------¦ ¦To Aileen Power ¦$5,000.00¦ ¦ +---------------------+---------+---------¦ ¦Ella LeFiell ¦1,800.00 ¦ ¦ +---------------------+---------+---------¦ ¦Sidney LeFiell (fees)¦1,800.00 ¦ ¦ +---------------------+---------+---------¦ ¦Income taxes ¦1,317.25 ¦ ¦ +---------------------+---------+---------¦ ¦Total, 1942 ¦ ¦$9,917.25¦ +---------------------+---------+---------¦ ¦ ¦ ¦ ¦ +-----------------------------------------+
1943 To Ella LeFiell $1,800.00 Sidney LeFiell (fees) 1,800.00 Bond purchase 375.00 Income taxes 3,439.37 Total, 1943 $7,414.37 Total charges to estate income Dec. 31, 1943 $17,331.62
In the administrator's report and petition of May 3, 1944, the petitioner, as administrator, in Par. VI, stated as follows:
That, thereupon your petitioner entered into an agreement with said Ella M. LeFiell, wherein and whereby your petitioner, as an individual, bound and obligated himself to pay to the said Ella M. LeFiell, out of the assets of the estate, the sum of One Hundred Fifty Dollars ($150.00) per month so long as she should live, in exchange for the interest in said estate assigned to the said Ella M. LeFiell by said Cecil Kenneth LeFiell; that your petitioner now holds all right, title and interest in the estate of the above-named deceased, subject to the said charge created as aforesaid in favor of the said Ella M. LeFiell.
The probate court, on May 19, 1944, entered its Order approving the administrator's account and report. The court, in its Order, stated that there was no appearance of any person opposing or contesting the report. The court found that all taxes and claims against the estate had been paid; that the estate was not indebted; that Sidney LeFiell was the sole person interested in the estate subject only to the agreement to pay Ella LeFiell $150 per month for life out of the assets of the estate. The court granted the administrator's petition to settle his account. The court approved the assignment of Aileen Power to Sidney LeFiell. The court ordered distribution of the balance of estate income, $12,460.70, to Sidney LeFiell. The court ordered distribution of the real estate owned by the former partnership to Sidney LeFiell, and reduced the administrator's bond from $20,000 to $10,000.
The agreement of May 14, 1943, with Aileen, settling her claim as a legatee (par. 13, supra), was executed after lengthy negotiations between her attorneys and petitioner's attorney. In fact, the petition was filed ‘to bring to a head the determination of the sister's right.‘ There was a hearing in the probate court on Aileen's claim and her attorneys presented evidence. The judge of the probate court who tried the issue pointed out, in court, the various difficulties in reaching a settlement and even made suggestions ‘as to the amount‘ of the settlement. In the settlement reached, petitioner, as an individual, agreed to pay $5,000 to his sister, and she agreed to receive $5,000 from the estate out of income of LeFiell Company. At about the same time, petitioner's attorney worked out the settlements with Cecil and Ella.
16. Since the entry of the probate court's Order of May 19, 1944, the petitioner has continued to file reports on the administration of the estate with the court, to renew his bond as administrator, to employ an attorney to represent him as administrator, and to petition and have allowed to him distributions of funds from the estate. The administrator's accounts for the calendar years 1944, 1945, and 1946 were approved by the court by its Orders dated, respectively, June 15, 1945, November 29, 1946, and October 20, 1947. In its Orders, the court found that Sidney LeFiell was the only person interested in the estate except Ella LeFiell who is entitled to receive from the estate, for life, $150 per month. The estate's income disbursements, and balance of income distributed to Sidney LeFiell for 1944, 1945, and 1946 were as follows:
+----------------------------------------------------------+ ¦ ¦1944 ¦1945 ¦1946 ¦ +-------------------------+----------+----------+----------¦ ¦ ¦ ¦ ¦ ¦ +-------------------------+----------+----------+----------¦ ¦Income ¦$19,043.47¦$22,163.58¦$20,440.07¦ +-------------------------+----------+----------+----------¦ ¦Disbursements: ¦ ¦ ¦ ¦ +-------------------------+----------+----------+----------¦ ¦Ella LeFiell ¦1,800.00 ¦1,800.00 ¦1,800.00 ¦ +-------------------------+----------+----------+----------¦ ¦Sidney LeFiell ¦1,800.00 ¦1,800.00 ¦1,800.00 ¦ +-------------------------+----------+----------+----------¦ ¦Fed. and state income tax¦5,247.75 ¦6,851.93 ¦5,115.64 ¦ +-------------------------+----------+----------+----------¦ ¦Miscellaneous ¦50.00 ¦151.00 ¦151.00 ¦ +-------------------------+----------+----------+----------¦ ¦Balance of income ¦10,145.72 ¦11,560.65 ¦11,573.43 ¦ +----------------------------------------------------------+
17. Petitioner operated and managed the LeFiell Company for several years before decedent's death. After decedent's death petitioner continued to operate and manage this business. At the end of each year, during the period here involved, 40 per cent of the business income was credited to petitioner's capital account and 60 per cent of the income was credited to the estate's account on the books of the LeFiell Company. Charges were made against the estate's account for the distribution to Ella M. LeFiell, administration and legal fees, and Federal and state income taxes. The balance was then credited to the capital account of the petitioner after court order distributing same. There was no segregation or division of the cash. All disbursements of the estate were made through the books of the LeFiell Company. Commencing with January 1949, the two capital accounts of the estate and of petitioner, referred to above, were consolidated into one capital account. The balance sheets of the LeFiell Company, as of the close of the years 1944, 1945, and 1946 are incorporated herein by reference.
18. The net income of the LeFiell Company from 1942 to 1946 inclusive was as follows:
+--------------------+ ¦Year ¦Net income ¦ +------+-------------¦ ¦ ¦ ¦ +------+-------------¦ ¦1942 ¦$24,674.11 ¦ +------+-------------¦ ¦1943 ¦24,979.76 ¦ +------+-------------¦ ¦1944 ¦31,739.12 ¦ +------+-------------¦ ¦1945 ¦36,939.30 ¦ +------+-------------¦ ¦1946 ¦34,066.80 ¦ +------+-------------¦ ¦Total ¦$152,399.09 ¦ +--------------------+
At the time of the decedent's death the net worth of the LeFiell Company was $38,804.86. On December 31, 1944, the net worth of the LeFiell Company was $66,944.79; on December 31, 1945, it was $84,685.34; and on December 31, 1946, it was $100,327.11. The assets of the LeFiell Company at the end of the fiscal years 1944, 1945, and 1946 are summarized as follows:
+----------------------------------------------------------+ ¦Assets ¦Dec. 31, 1944¦Dec. 31, 1945¦Dec. 31, 1946¦ +----------------+-------------+-------------+-------------¦ ¦ ¦ ¦ ¦ ¦ +----------------+-------------+-------------+-------------¦ ¦Current assets ¦$57,826.99 ¦$60,788.38 ¦$66,228.73 ¦ +----------------+-------------+-------------+-------------¦ ¦Land ¦3,370.98 ¦9,815.05 ¦11,071.59 ¦ +----------------+-------------+-------------+-------------¦ ¦Building ¦13,454.10 ¦15,543.23 ¦39,106.30 ¦ +----------------+-------------+-------------+-------------¦ ¦Office equipment¦420.07 ¦589.81 ¦491.48 ¦ +----------------+-------------+-------------+-------------¦ ¦Shop equipment ¦3,746.55 ¦7,795.57 ¦15,039.87 ¦ +----------------+-------------+-------------+-------------¦ ¦Deferred charges¦2,171.28 ¦2,237.19 ¦2,311.88 ¦ +----------------+-------------+-------------+-------------¦ ¦Total assets ¦80,989.97 ¦96,769.23 ¦134,249.85 ¦ +----------------------------------------------------------+
The liabilities of the LeFiell Company consisted primarily of current trade accounts payable, taxes, and notes. Total liabilities were as follows, in each of the above years: 1944, $14,045.18; 1945, $12,083.89; 1946, $33,922.74.
19. On February 24, 1951, the petitioner, as administrator filed a report and petition with the probate court, which, inter alia, contained the following:
That petitioner has been advised and believes that certain allegations in previous pleadings filed by him herein and certain findings contained in previous orders herein have been inaccurate or misleading, including in the following respects: (a) Technically speaking, the estate did not have any right, title or interest in and to the real estate which is particularly described in the order approving report, settling account and for ratable distribution dated and filed herein on May 19, 1944, nor any other assets which prior to the death of the above decedent, belonged to the partnership known as LeFiell Company, nor a 60% or other per cent interest in said partnership or business; to the contrary, as a matter of law, on the death of said Alfred Edgar LeFiell, said partnership dissolved; it was the right and duty of the surviving partner, Sidney Norman LeFiell, to liquidate the same and what this estate owned was the right to 60% of whatever might be realized by such liquidation; * * * (b) said Sidney Norman LeFiell never personally obligated himself to the monthly payment of $150.00, or any other sum, to Ella M. LeFiell, but that the obligation so to do was solely that of this estate by and through petitioner as the administrator thereof; * * *
WHEREFORE, your petitioner prays that his within account be settled, allowed and approved; that this petition for ratable distribution be granted; that a reasonable amount be allowed to said counsel for services rendered herein, for an order adjudicating and declaring that the only interest of this estate in and to or connected with said partnership and its assets is the right to 60% of the liquidation realized by said surviving partner; that said estate has been and is obligated to said Ella M. LeFiell for the sum of $150.00 per month for the remainder of her life; that said Ella M. LeFiell is entitled to the security of the said estate's interest in said liquidation for the performance of its said obligation to her; that said estate cannot be closed so long as said agreement with and obligation to said Ella M. LeFiell remains in force and effect; that at all times during the pendency of said estate it has been and now is to the best interests of said estate that said surviving partner not sell out said business, but that he continue to operate the business and distribute a percentage of the profits thereof to this estate, and for such further order as may be proper.
20. On March 8, 1951, the probate court, pursuant to the administrator's report of February 24, 1951, entered its Order which provided inter alia, as follows:
It further appears to the court that it is true, as alleged in said petition, that certain allegations in previous pleadings filed herein and certain findings contained in previous orders herein have been inaccurate or misleading and therefore now should be clarified and properly adjudicated. In that connection the court hereby finds and determines that at the time of the death of the above named Alfred Edgar LeFiell, LeFiell Company was a partnership consisting of said deceased and Sidney Norman LeFiell in the proportion of 60% to 40 %, respectively. Upon the death of said Alfred Edgar LeFiell, all in accordance with the applicable statutes of the State of California, known as the Uniform Partnership Act, now being numbers 15,001, et seq., of the Corporations Code of the State of California, and formerly designated 2395 Civil Code, said partnership dissolved but did not terminate; it was the right and duty of said Sidney Norman LeFiell, as the surviving partner, to wind up the affairs of said partnership and to account therefor in due course; that said estate never owned or had any interest in said partnership or its assets, particularly including the real property heretofore mentioned in these probate proceedings; that the true interest of this estate in the subject matter was and is the right to receive 60% of the net residue from the liquidation of the said partnership assets and it had no other or further rights or interests except as hereinafter in this decree specifically set forth; that the amount for which the inheritance tax appraiser in this estate, appraised this estate's interest in said partnership was and is the fair and reasonable value of the said interest of this estate to participate in the above mentioned liquidation and therefore is hereby confirmed and approved.
The court hereby further finds and determines that it was for the best interest of this estate that said surviving partner did not forthwith liquidate the assets of the said partnership upon the death of said Alfred Edgar LeFiell, for various reasons, particularly including that to have done so would have meant the loss of practically all value of good will and the price that could and would have been realized at all times since then, including the present.
The court hereby further finds and determines that by reason of the delay in said liquidation, the estate has become entitled to receive a participation in the operation of the said business since the death of said Alfred Edgar LeFiell, particularly including the rights provided by section 15,042 of the Corporations Code (formerly 2436 Civil Code); that ever since said death, said surviving partner regularly has accounted to this estate for 60% of the profits of said operation, that said 60% is a fair and reasonable apportionment to estate in payment for the last mentioned rights of said estate; that the payment of the moneys so allocated has been for the best interest of said estate and hereby specifically is approved and confirmed. That had said surviving partner liquidated the assets of said business forthwith after said death, the total amount this estate would have received by reason of its interest and ownership in connection with said partnership, would have been approximately the amount of said liquidation, whereas in fact the estate already has received as its participation in the operations of the business subsequent to said death, sums in excess thereof and will receive more in the future.
The court hereby further finds and determines that in regard to the rights herein of Ella M. LeFiell, a certain contract was made and entered into on May 18, 1943, a true copy of which is attached to the report and annual account of administrator with will annexed, petition for settlement of account and for ratable distribution filed herein on March 8, 1951 and marked ‘Exhibit B‘; that said contract was and is not the personal obligation of said Sidney Norman LeFiell in any respect but that of the administrator of this estate; that the said contract was and is a reasonable and proper one between said parties in regard to said subject matter; that said contract heretofore has been duly approved and confirmed by this court and it hereby is approved and confirmed as memorializing the rights and obligations of this estate in respect to said subject matter; that said Sidney N. LeFiell never entered into any agreement obligating himself in regard to any payments to said Ella M. LeFiell, and the obligations to pay said sum of $150.00 per month are exclusively those of this estate.
The court hereby finds and determines that said estate is not in a condition to be closed.
IT IS THEREFORE ORDERED, ADJUDGED AND DECREED that said report be and the same is hereby confirmed and the said administrator is hereby authorized to distribute and pay to said Sidney Norman LeFiell out of the funds on hand the sum of $776.39; that said account be and the same is hereby in all respects as the same was rendered and presented for settlement, approved, allowed and settled.
IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the order made and filed herein on May 19, 1944, so far as it purported to distribute the said said real property to said Sidney Norman LeFiell, was beyond the jurisdiction of this court for the reason that said estate never had any right, title or interest in or to said real property and, therefore, in that particular is hereby vacated and annulled.
IT IS FURTHER ORDERED, ADJUDGED AND DECREED that any previous allegation or order herein to the contrary notwithstanding, said Sidney
Norman LeFiell does not now own and never has owned any of the assets which
belong to this estate; that this court retains jurisdiction over all of said assets, subject to such further orders and decrees as may be proper.
21. The Report and Annual Account dated February 24, 1951, the hearing thereon, and the court Order of March 8, 1951, constituted typical probate proceedings. Notice of these proceedings was posted in the City Hall, pursuant to section 1200 of the Probate Code of California. However, no notice was served personally on either Cecil Kenneth LeFiell or Ella M. LeFiell. No one filed objections or made any opposing claim, and as the matter was not contested, it was set for hearing on the uncontested calendar. There was no real controversy between the parties. The estate was the only party represented at the hearing. Petitioner was the only person who testified. After this hearing the court signed the Order. Counsel for the estate prepared the Report, Annual Account, and the Order of the court dated March 8, 1951, prior to the hearing.
22. The petition to the probate court dated February 24, 1951, was prepared by an attorney for the estate who, upon review of earlier petitions and reports of the administrator, that of May 3, 1944, in particular, believed errors had been made in the petitions and reports, which should be clarified and corrected both as to fact and California law. He believed that another attorney for the estate had failed to take into account some technical, legal points. He was aware, also, of the tax question raised in the notice of deficiency in this proceeding which had been mailed to the petitioner on March 15, 1950, relating to the period of administration of the estate and believed that the California probate court should determine whether continuation of the period of administration of the estate was necessary so that this Court would not have to ‘speculate upon the subject.‘ He advised the probate court when the petition of February 24, 1951, was heard that one of the reasons clarification was desired was because the question of the period of time required for administration of the estate was ‘coming to issue on the Tax Court calendar of this month.‘
23. Forty per cent of the income of the LeFiell Company, before and after decedent's death, was credited to petitioner's capital account and for tax purposes was reportable by him as community income, divisible equally between petitioner and his wife. In the event it is found that the remaining 60 per cent of the income from the business was not the income of the estate during the period here involved, it is stipulated by the parties that the income belongs to the petitioner and his wife, Kathleen M. LeFiell, under California community property law, and that in such event said income is reportable for tax purposes by petitioner and his wife as follows:
50% thereof to represent community income, divisible equally between petitioner and his wife.
50% thereof to represent income from separate property, taxable solely to the petitioner.
24. The returns of LeFiell Company, after decedent's death and during the tax years, contained the following pertinent data:
+-------------------------------------------------+ ¦ ¦1944 ¦1945 ¦1946 ¦ +----------------+----------+----------+----------¦ ¦Net income ¦$31,739.12¦$36,939.30¦$34,066.80¦ +----------------+----------+----------+----------¦ ¦Credited to: ¦ ¦ ¦ ¦ +----------------+----------+----------+----------¦ ¦Petitioner (40%)¦12,695.65 ¦14,775.72 ¦13,626.73 ¦ +----------------+----------+----------+----------¦ ¦Estate (60%) ¦19,043.47 ¦22,163.58 ¦20,440.07 ¦ +-------------------------------------------------+
Sixty per cent of the gross income of LeFiell Company, in the sums designated above, were reported by the estate on its returns and the tax thereupon paid by the estate. Petitioner did not include these sums in his income tax returns for the tax years.
25. Petitioner's income tax returns for 1944 and 1945 were filed on March 15, 1945, and March 15, 1946, respectively. Petitioner reported a gross income of $8,921.50 in his 1944 return, and a gross income of $10,796.57 in his 1945 return. Petitioner omitted from the gross income stated in his return for 1944 the sum of $19,043.47, which represented the 60 per cent of income from LeFiell Company reported by the estate. Petitioner also omitted from the gross income stated in his return for 1945 the sum of $22,163.58, which represented the 60 per cent of income from LeFiell Company reported by the estate. The statutory notice of deficiency covering petitioner's taxable years 1944 and 1945 was mailed on March 15, 1950, which is within 5 years after the filing of petitioner's returns for said years.
26. The income of the estate for 1944, 1945, and 1946 amount to $19,043.47, $22,163.58, and $20,440.07, respectively, before disbursements to Ella M. LeFiell, and other payments. (See par. 16, supra.) The deficiencies in the taxable years result chiefly from the respondent's determination that each of the above amounts of estate income, adjusted to exclude $900 in each year—administration fees— is includible in petitioner's income in the respective years 1944, 1945, and 1946. The respondent gave the following explanations for his determinations with respect to each year, in the statement attached to the notice of deficiency:
(a) It is disclosed that you and your wife, Mrs. Kathleen M. LeFiell, reported 40% of the net profits of the LeFiell Company on your income tax returns for the taxable years 1944, 1945 and 1946 and that form 1041 returns were filed in the name of the Estate of A. E. LeFiell, Deceased, for the above-mentioned years in which 60% of the profits of the LeFiell Company were reported. By court order dated May 19, 1944, all assets of the Estate of A. E. LeFiell, Deceased were transferred to you as an individual.
It is held that final distribution of the estate was made prior to December 31, 1944 and that the entire net profits of the LeFiell Company for the years 1944, 1945 and 1946 are taxable
to
you and your wife. Accordingly, income from the above-named business is adjusted as follows:
(b) You reported administration fees of $900.00 (1/2 of $1,800.00) from the Estate of A. E. LeFiell, Deceased. Since it is held that all of the income reported by the purported estate is taxable to you and your wife, the above-stated amount is eliminated from taxable income.
27. The actual time, i.e., the period, required by the administrator of the estate of Alfred Edgar LeFiell to perform the ordinary duties pertaining to administration, in particular the collection of assets and the payment of debts and legacies, ended on May 19, 1944.
28. Under the agreement settling the claim of Ella LeFiell against the estate, as an assignee of an heir, Cecil LeFiell, Ella LeFiell was entitled to receive, as a matter of right, the amount of $1,800 out of the income of the LeFiell Company. The petitioner, therefore, received $1,800 in each of the years 1944, 1945, and 1946 only as a trustee for Ella LeFiell, for payment to her under the settlement agreement.
OPINION.
HARRON, Judge:
Under section 161(a)(3) of the Code, an estate is a taxable entity ‘during the period of administration or settlement of the estate.‘ Regulations 111, sec. 29.161-2, provides, in part, as follows:
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.
The respondent relies upon the above cited regulation. He contends that under the facts, the period of administration of the LeFiell estate, for the purpose of Federal income tax, was concluded before January 1, 1944.
The petitioner contends that since the California probate court having jurisdiction over the LeFiell estate's administration, determined in March 1951, that the period of administration had not been concluded in any year up to and including 1951, the respondent is precluded from making the determination which he has made; that under section 161(a)(3) of the Code, the estate was a taxable entity in 1944, 1945, and 1946, taxable on the estate income in question; and that the respondent and this Court are bound by the California probate court's Order of March 8, 1951, in which it was stated that the estate was not in a condition to be closed. The petitioner relies upon Frederich v. Commissioner, 145 F.2d 796, reversing 2 T.C. 936. The petitioner argues that the Order of March 8, 1951, of the California court, was not obtained fraudulently or collusively, and that it was predicated upon sound considerations, namely, the circumstances surrounding petitioner's continuation of the operation of the LeFiell Company business, the circumstances relating to Cecil LeFiell's assignments of his interest in the estate of Ella LeFiell, and the provision in the settlement agreement with Ella LeFiell under which she is to receive $150 per month for life. The petitioner takes the position that the latter agreement puts upon the estate a continuing obligation to Ella LeFiell which requires prolonging the period of administration.
Under the issue presented, we must decide, for the purpose of Federal estate tax, whether the estate was a taxable entity in the taxable years, i.e., what period was required for administration of the estate. The regulation of the respondent refers to the time ‘actually required‘ for the performance of the ordinary duties of administration. The petitioner, as we understand his argument, does not attack the regulation, but, rather, he questions the propriety of the respondent's application thereof to the facts in this proceeding. The regulation has been cited with approval frequently. Chick v. Commissioner, 166 F.2d 337, certiorari denied 334 U.S. 845, affirming 7 T.C. 1414; Estate of J. P. Armstrong, 2 T.C. 731, 734; Josephine Stewart, 16 T.C. 1, affd. 196 F.2d 397.
Our first considerations are directed to the Order of March 8, 1951, of the California probate court, and to a prior Order of the same court dated May 19, 1944. The petitioner has failed to take into account the relationship of the 1951 Order to the 1944 Order. His argument suffers from his placing complete reliance upon the 1951 Order, which did not vacate and set aside the chief findings and conclusions of the 1944 Order. The 1951 Order, admittedly, was a ‘clarifying‘ Order. Although it corrected the earlier Order on the point that the obligation to pay Ella LeFiell an annuity was an obligation of the estate, it did not change any of the provisions of the 1944 Order which are material to the issue presented here. For example, on May 19, 1944, the probate court approved all of the settlement agreements, those of Aileen, Cecil, and Ella, and it found that Sidney LeFiell was the sole person interested in the estate subject only to the charge to pay Ella $150 per month for life out of the assets of the estate; the court found that all taxes, debts, and claims against the estate had been paid; and the court, also, approved the administrator's report and account in which he claimed a fee for operating the LeFiell Company business for the estate and reported that he had not liquidated the business for cash because it was worth more as a going concern, and, as a consequence, he had continued to operate the business. Later, in 1951, the California court approved the administrator's action in continuing to operate the business and in abstaining from liquidation thereof; the court did not retract its earlier approval of the settlement agreements of Aileen and Cecil. It is apparent, therefore that the condition of the estate was the same in 1951 as it was in 1944, and that the 1951 Order of the California court was in substance, in so far as material here, no more than one which clarified and corrected the 1944 Order. The 1951 Order, however, contained the proviso that the estate was not in a condition to be closed, which was not contained in the 1944 Order. It is this provision in the court's Order upon which the petitioner relies in this proceeding, and he admits that the basis for the provision was the charge in Ella's favor to provide her with an annuity.
Upon consideration of the facts, we cannot find that the time actually required for the administration of the LeFiell estate extended beyond May 19, 1944. It is true that all of the debts and obligations of the estate had been paid before March 26, 1943, and that all of the agreements of legatees and heirs settling their claims against the estate had been executed before June 1943, but the settlement agreements of the legatees and heirs, which were executed in May 1943, required approval by the probate court. As this Court stated in the Chick case, supra, p. 1421, executors are allowed a reasonable time within which to do all the things required in the administration of an estate. The administrator of the LeFiell estate filed in the probate court a petition for approval of the agreements and his account on May 3, 1944, and the probate court gave its approval on May 19, 1944. We do not think that there was any unreasonable delay on the part of the administrator in so doing. Accordingly, we do not sustain the respondent's contention that the period of administration did not extend beyond December 31, 1943.
On the other hand, when, on May 19, 1944, the probate court approved the settlement agreements, and found that all debts and taxes had been paid, and that Sidney LeFiell was the sole person interested in the estate subject only to the agreement to pay Ella LeFiell $150 per month for life out of the estate assets, nothing remained to be done in the administration of the estate. It is noted, also, that the administrator's plan, as set forth in his Petition For distribution of March 26, 1943, was to pay the heirs and legatees their respective shares in the estate, in cash, and that plan was effectuated by the settlement agreements executed in May 1943. Thereafter, the administrator was in a position to renew his earlier petition to the probate court to make distribution of the estate in accordance with the agreements. That he did not do so in the petition he filed on May 3, 1944, is not adequate cause, under the circumstances, for holding that the period of administration, for Federal income tax purposes, extended beyond the time when the probate court approved all the settlement agreements. Upon approval of them on May 19, 1944, the estate was ready for distribution. Cf. Hazel Kirk Carlisle, 8 T.C. 563, affd. 165 F.2d 645; Estate of J. F. Hargis, 19 T.C. 842; Marin Caratan, 14 T.C. 934.
The crux of the present controversy is that Ella LeFiell is to receive during the rest of her life an annuity payable at the rate of $150 per month. But that does not require prolonging the period of administration of the estate, for Federal income tax purposes, for as long as she lives. In the case of Josephine Stewart, supra, this Court considered a similar situation. See, also, Alma William, 16 T.C. 893, 903. In the Stewart case, the taxpayer was the sole person interested in the estate, in addition to being an independent executor. Here, the petitioner is the sole person interested in the LeFiell estate, in addition to being the administrator. In the Stewart case, the estate held land covered by a mortgage. Here, the estate held a 60 per cent interest in income of a going business concern, subject to a charge in favor of Ella LeFiell of $1,800 each year, an amount greatly less than the average income of the business which was around $24,000 per year. We held in the Stewart case that the kind of obligation of the estate there in question, ‘was not sufficient cause for a continuation of the period of administration since the property was readily distributable, with the transferee receiving the land subject to the mortgage.‘ Alma Williams, supra, p. 903.
The same conclusion must be reached in this proceeding. The obligation of the LeFiell estate to pay Ella LeFiell an annuity of $1,800 each year, for life, was not sufficient cause for continuation of the period of administration of the estate, in so far as the period of administration for Federal income tax must be determined by this Court. All that the LeFiell estate had was a 60 per cent interest in the income of the LeFiell Company which all interested parties agreed in 1943 was to be operated as a going concern rather than liquidated. After the execution of the settlement agreements in May 1943, the payment of $5,000 to Aileen, and the approval by the probate court of all the agreements on May 19, 1944, Sidney LeFiell was the only person who had any interest in the income of LeFiell Company. The estate, such as it was, could have been distributed to Sidney, readily, in 1944, i.e., the whole interest in the income of the LeFiell Company, subject to Ella LeFiell's contractual right to receive $1,800 thereof each year.
This proceeding is not distinguishable from the Josephine Stewart and the Alma Williams cases. It is true that under the law of Texas, Josephine Stewart was an independent executrix, and that Alma Williams was an independent administrator but was subject to the control of a probate court of California. But, we do not perceive that this difference requires that we reach a different result in this proceeding, particularly since the probate court having jurisdiction heard the parties in 1943 upon the administrator's Petition for Distribution, and stated in other proceedings that the interpretation of the law, if possible, should be to give ‘a uniform application to a nation-wide scheme of taxation.‘ William C. Chick, supra; Alma Williams, supra.
Petitioner relies upon Frederich v. Commissioner, supra. In particular, he relies upon the Order of March 8, 1951, of the California probate court in which, inter alia, the Order set forth that the LeFiell estate was not in a condition to be closed. We think there are substantial grounds for distinguishing this proceeding from the Frederich case as follows: The Order of March 8, 1951, was prepared by the administrator's attorney before the hearing thereon, in an uncontested, nonadversary proceeding, and the Order containing the dicta relied upon here was so prepared for the court before the hearing. Also, as set forth at length above, the court's Order of March 8, 1951, was no more than one to clarify the same court's prior Order of May 19, 1944, which was entered after hearing in a contested, adversary proceeding in April 1943. The court's Order of May 19, 1944, was silent with respect to whether the estate was not in a condition to be closed, and that question was not raised. We recognize the general rule that an adjudication of property rights by a state court of competent jurisdiction is binding on Federal courts. Blair v. Commissioner, 300 U.S. 5; Freuler v. Helvering, 291 U.S. 35. But there are exceptions to that rule. Tatem Wofford, 5 T.C. 1152; Leslie H. Green, 7 T.C. 263, 274, affd. 168 F.2d 994; Estate of Ralph Rainger, 12 T.C. 483, affd. 183 F.2d 587; First-Mechanics National Bank of Trenton, 40 B.T.A. 876, affd. 117 F.2d 127. It is our opinion that this proceeding falls within the exception to the general rule because the evidence shows clearly that the Order of March 8, 1951, of the California probate court did not decide on its merits any real issue, any actually contested issue, involving the question of whether the LeFiell estate was in a condition to be closed; and that the Order was, broadly speaking, in the nature of a ‘consent decree.‘ In comparison, the probate court's Order of May 19, 1944, was entered after hearing had been held on Aileen Power's objections to the petition of March 26, 1943, for distribution. That hearing was in an adversary proceeding, upon due notice to all. See, also, Tatem Wofford, supra, p. 1161; and Leslie H. Green, supra, p. 274; Estate of Mary Clare Milner, 6 T.C. 874, 881.
It is held, therefore, that the period of administration ended on May 19, 1944.
The respondent appears to have included the sum of $1,800 in the income of the estate which he has included in petitioner's income in each of the taxable years. We hold that in each taxable year, the petitioner is not taxable on the sum of $1,800. His interest in the estate's 60 per cent interest in the LeFiell Company income was subject to the charge of $1,800 payable to Ella LeFiell out of estate ‘assets.‘
There remains the question whether the 5-year period of limitation applies, under section 275(c), to the years 1944 and 1945. Under this issue the respondent has the burden of proof. C. A. Reis, 1 T.C. 9. The respondent has sustained his burden of proof. The evidence establishes that the petitioner omitted from gross income for each year— 1944 and 1945, an amount properly includible therein which is in excess of 25 per centum of the amount of gross income stated in his return for each year— 1944 and 1945. Accordingly, the provisions of section 275(c) apply to the years 1944 and 1945.
There is an issue in this proceeding which has been disposed of by the parties by stipulation. Effect will be given to their stipulation in the Rule 50 recomputation.
Reviewed by the Court.
Decision will be entered under Rule 50.