Opinion
No. K-64.
April 6, 1931.
Suit by Richard H. McCann and another, as ancillary administrators of the estate of John William Cooke, deceased, against the United States.
Judgment of dismissal.
This suit is for the recovery of $3,415.76, with interest from May 11, 1926, representing additional income tax alleged to have been erroneously assessed and collected by the Commissioner of Internal Revenue for the year 1920.
This case having been heard by the Court of Claims, the court upon the stipulation, and the report of the Commissioner, makes the following special findings of fact:
1. Richard H. McCann and Mason H. Partridge, Jr., are the ancillary administrators de bonis non of John William Cooke, letters of administration having been duly issued to them by the Surrogate's Court of Queens County, State of New York, on November 26, 1927.
2. John William Cooke died on March 28, 1915, a citizen of England, leaving property in Queens county, state of New York. On September 27, 1916, ancillary letters of administration upon his estate were duly issued to Thomas M. Rowlette. Thereafter said Thomas M. Rowlette died, and on December 17, 1918, ancillary letters of administration de bonis non on the estate of John William Cooke, deceased, were duly issued to F. Herbert Wadsworth. Thereafter said F. Herbert Wadsworth died, and ancillary letters of administration de bonis non on said estate of John William Cooke were duly issued to Richard H. McCann and Mason H. Partridge, Jr., as aforesaid.
3. William Washington Cole died on March 10, 1915, a resident of Queens county, state of New York. By his last will and testament, duly admitted to probate by the Surrogate's Court of Queens County, in the year 1915, said William Washington Cole gave, devised, and bequeathed one-eighth of his residuary estate to the said John William Cooke, together with another portion of said residuary estate on the contingency that Margaret C. Cole should die before complete distribution of the residuary estate. The Union Trust Company of New York, which is now the Central Union Trust Company of New York, was appointed executor under said will.
4. Among the assets owned by William Washington Cole at the time of his death was a parcel of real estate and buildings thereon, known as 31 Union Square, and also a parcel and buildings thereon known as 19 East Sixteenth street, in the city, county, and state of New York. Said parcels of real estate were appraised for New York State inheritance tax purposes, relative to the estate of William Washington Cole, at the sum of $800,000 as of March 10, 1915, being the date of his death.
5. Said parcels of real estate, known as 31 Union Square and 19 East Sixteenth Street, had been acquired by said William Washington Cole on or about February 10, 1906, through purchase from the Bank of the Metropolis, a corporation organized and existing under the laws of the state of New York, for a total consideration of $1,500,000, which amount was duly paid. Said William Washington Cole continued thereafter to own said real estate until the time of his death, on March 10, 1915. The deed to said real estate was duly recorded on February 15, 1906.
6. In the year 1920, the Central Union Trust Company, as executor of the estate of William Washington Cole, deceased, sold said parcels of real estate under the power of sale contained in said will. The gross proceeds of said sale were $1,000,845, and the net proceeds of said sale were $978,001.58.
7. The building on parcel of real estate known as 31 Union Square was a sixteen-story office building of stone and concrete, reinforced with iron and steel, and the building on parcel of real estate known as 19 East Sixteenth street was a four-story brick building.
8. The city of New York assessed said parcels of real estate at $967,500 for the year 1913 and the fair value of said parcels of real estate, less depreciation on March 1, 1913, was $1,100,000; of the latter sum the fair value of the building as of that date was $700,000 and the fair value of the land $400,000.
9. The fair rate of depreciation on said building (both buildings are considered as one in determining their value), from March 1, 1913, was 1 per cent. per annum, and the total depreciation on said building for seven years from March 1, 1913, to the date of the sale of said property in 1920 was $47,552, and the fair value of said property at the time of its sale was $1,002,448.
10. The estate of John William Cooke received from the Central Union Trust Company of New York, as executor of the estate of William Washington Cole, the share of the net proceeds of sale of said real estate to which John William Cooke was entitled under the will of William Washington Cole. Thereafter and on or about March 17, 1921, the estate of John William Cooke, by its agent, the Central Union Trust Company of New York, filed an income-tax return for the estate covering the year 1920, and showing a tax to be due thereon of $539.59, which amount was duly paid. Thereafter, on or about February 11, 1926, the Commissioner of Internal Revenue assessed an additional tax against the estate of John William Cooke in the amount of $3,415.76. Said additional tax was arrived at by using as a basis for determining the gain or loss from the sale of said real estate, the sum of $800,000, said amount being the value of the property at the date of William Washington Cole's death, on March 10, 1915.
11. On May 11, 1926, the estate of John William Cooke, by F. Herbert Wadsworth, ancillary administrator de bonis non, duly paid to the collector of internal revenue for the second district of New York, the sum of $3,209.05, which, together with the sum of $206.71, credit applied as overpayment for another year, equals the sum of $3,415.76, the amount of the additional tax assessed for the year 1920.
12. On or about December 30, 1927, plaintiffs filed with the Commissioner of Internal Revenue a claim for refund in the sum of $3,415.76, additional income taxes assessed and paid for the year 1920. On or about November 21, 1928, the Commissioner of Internal Revenue rejected the claim for refund in full.
A. Donald MacKinnon, of New York City (Murray, Aldrich Webb, of New York City, on the brief), for plaintiffs.
George H. Foster, of Washington, D.C., and Charles B. Rugg, Asst. Atty. Gen., for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
This suit is brought by the administrators of the estate of John William Cooke, who inherited an undivided one-eighth interest in certain real estate in the city of New York under the will of William Washington Cole, who died March 10, 1915, to recover an assessment of additional income taxes based on the increased value of the property at the time of sale over the appraised value placed on it at the time of the death of Cole. The plaintiffs contend the value of the property in March, 1913, should be compared with the sale price received in 1920 which would show a loss sustained instead of a gain derived. But Cooke had no interest in the property in 1913. The only interest he acquired was under the will of Cole, and that interest vested immediately upon the death of Cole. The value of his interest was an undivided one-eighth of the total value of the property at that time. The appraisal of the property by the State authorities for inheritance-tax purposes placed a value of $800,000 on the property at the death of Cole. Cooke's interest was one-eighth of that amount, or $100,000. Cooke died 18 days after the devise had vested. The plaintiffs are the ancillary administrators de bonis non of his estate and as his representatives are entitled to receive his interest in the estate of Cole. No immediate distribution of this property was made by the executor of Cole. It was held by the executor until 1920, when it was sold for $978,001.58, or a net gain of $178,001.58 over the appraisal made at the death of Cole. The mortgages taken in part payment were not disposed of until 1923, and then distribution was made by the executor of Cole of the proceeds of sale. The estate of Cooke received one-eighth of the $978,001.58, or $122,250, an increase of $22,250 over the value of the property when acquired by Cooke upon the death of Cole. The Commissioner of Internal Revenue assessed a tax on this increase as income to the estate of Cooke. The taxable year is 1920 and the revenue act of 1918 is applicable. The corpus of the devise is exempt from taxation, but the income from such property is subject to tax. Section 213(b) (3), 40 Stat. 1057, 1065. The regulations specifically provide that where there is no appraised value for federal estate tax purposes "its value as appraised in the State court for the purpose of State inheritance taxes should be deemed to be its fair market value when acquired." Article 1562, Reg. 45.
Immediately upon the death of the owner, title to his real estate passes to his heirs or devisees. The value at the time of Cole's death is the basis for the ascertainment of gain or loss on the sale of real estate. That is the time of acquisition. Under the will of Cole, his executor had the power of sale of the real estate for distribution, but the title of Cooke vested at the time of death of Cole and its value as of that time is the basis on which the tax should be computed. Brewster v. Gage, 280 U.S. 327, 50 S. Ct. 115, 74 L. Ed. 457.
The plaintiffs contend the Elmhirst Case, 38 F.2d 915, 69 Ct. Cl. 295, and the McKinney Case, 62 Ct. Cl. 180, decided by this court sustain their position. But there is no merit in this contention. In the Elmhirst Case, supra, it was held that the cost to the testator of property purchased after March 1, 1913, was the basis of computing gain or loss when sold by his estate and the ownership by the testator during his lifetime and his estate afterwards was an entity. In the McKinney Case, supra, the property had been purchased prior to March 1, 1913, and sold by the executors. This court held that the cost to the testator was the basis of computing the gain derived or the loss sustained from the sale. It was the difference between the original investment and the sale price and not the market value of the property on the date of the death of the testator. In this case the court treated the holdings of McKinney during his lifetime and his estate as an entity. These cases are entirely different from the case under consideration. Neither Cooke nor his estate had any interest in the property before March 10, 1915, and no purchase was made by Cooke. He acquired his interest under the will of Cole in 1915. The estate of Cole is in no way involved in the question before us and only the estate of Cooke is under consideration. There is a clear demarcation between the McKinney and Elmhirst Cases, supra, and the case at bar. The Commissioner was correct in assessing the tax and the complaint should be dismissed. It is so ordered.