Opinion
No. 33188
Decided March 11, 1953.
Taxation — Executor may be "taxpayer" — Sale by executor of securities of estate — Transaction in usual course of business, when — Sale not conversion rendering proceeds taxable, when — Section 5366, General Code.
1. An executor of an estate may be a taxpayer within the definition of that term in Section 5366, General Code.
2. The sale by an executor of securities belonging to the estate, which sale is in the process of the administration and settlement of the estate, is a transaction in the usual course of business of the executor.
3. Such sale does not constitute such a conversion as to render the proceeds thereof taxable, and the deposit of the proceeds in a bank subsequent to the date as of which deposits are required to be listed for taxation is within the exception stated in Section 5366, General Code.
APPEAL from the Board of Tax Appeals.
The plaintiff, appellant herein, is Helen Reinhard, the executrix of the estate of her deceased husband, Joseph H. Reinhard. The defendants, appellees herein, are John W. Peck, Tax Commissioner of Ohio, and George Guckenberger, auditor of Hamilton county, Ohio.
This is an appeal from a decision of the Board of Tax Appeals affirming an order of the Tax Commissioner which increased the intangible property tax assessment against the estate for the year 1951. The cause was heard by the Board of Tax Appeals on a stipulation of facts, which may be summarized as follows:
The decedent died on November 22, 1949, and Helen Reinhard was named in his will as the sole legatee of his residuary estate.
At his death decedent was the owner of 324 1/2 shares of stock in the Guentter-Reinhard Company, an Ohio corporation. These shares had been endorsed by the decedent to Mrs. Reinhard prior to his death and were not originally included in the inventory of the estate.
Shortly after the death of decedent, Guentter, who also owned 324 1/2 shares of stock in the corporation, told Mrs. Reinhard that he would not permit her, because of her inexperience, to take any active part in the management of the business. Negotiations then followed in regard to a sale of the shares, which continued during a period of six months, the parties being in disagreement as to the value of the shares. In the latter part of July 1950, the parties agreed on a value thereof in the amount of $90,000, and Guentter proposed payment therefor out of the funds of the corporation, it being his intention to have the stock retired by the company.
A question was raised by the attorney for Guentter whether the shares belonged to Mrs. Reinhard individually or to the estate, and to settle the question an action for declaratory judgment was instituted in the Probate Court of Hamilton County. That court found that the shares belonged to the estate and they were thereafter inventoried as a part thereof. On the fifth day of December 1950, plaintiff obtained an order from the Probate Court authorizing her to sell the shares to pay debts, taxes and costs of administration and to distribute the estate. On December 14, 1950, pursuant to a resolution adopted by the shareholders of the company, the purchase was completed and the shares were delivered and paid for. The check so received was deposited, prior to December 31, 1950, in the Second National Bank of Cincinnati to the credit of "estate of Joseph H. Reinhard, deceased."
The Tax Commissioner held that the conversion of the shares of the corporation into cash after the date as of which deposits are required to be listed did not constitute a sale in the "usual course of business," and that, therefore, the proceeds of the sale constituted "taxable property" as defined in Section 5366, General Code.
The Board of Tax Appeals affirmed the order of the Tax Commissioner, and the cause is before this court on appeal by the plaintiff from the decision of the Board of Tax Appeals.
Mr. Walter K. Sibbald, for appellant.
Mr. C. William O'Neill, attorney general, Mr. Thomas R. Lloyd and Mr. Paul Tague, Jr., for appellees.
The question of law presented in this appeal involves the determination of the meaning of the words, "usual course of the taxpayer's business," found in Section 5366, General Code, as applied to a sale of securities by an executrix in the process of the settlement of the estate.
In the determination of this question, the following parts of Section 5366, General Code, are pertinent:
"`Taxable property,' when used without other qualifying or limiting words, includes all the kinds of property, excepting real property, mentioned in Sections 5328 and 5328-1 of the General Code, and also the amount or value as of the date of conversion of all taxable property within the year preceding the date of listing, and on or after the first day of November converted into bonds or other securities not taxed, and of all other taxable property within that time, and after the date as of which deposits are required to be listed, converted into deposits, otherwise than in the usual course of the taxpayer's business to the extent he may hold or control such bonds, securities or deposits on such day, without deduction for indebtedness created in the purchase of such bonds or securities from his credits; but said term does not include such investments and deposits as are taxable at the source as provided in chapter four of this title, nor surrender values under policies of insurance.
"`Taxpayer' means any owner of taxable property and includes first, every person residing in, or incorporated or organized by or under the laws of this state, or doing business in this state, or owning or having a beneficial interest in taxable personal property in this state, excepting in each instance, those hereinafter expressly excluded; and, second, every fiduciary required by this chapter to make return for or on behalf of another. * * *
"* * *
"`Fiduciary' includes executors, administrators, parents, guardians, receivers, assignees, official custodians, factors, bailees, lessees, agents, attorneys and employees; but such term does not include trustees unless the sense requires that it shall do so."
The basis for the tax assessment herein is indicated by Section 5411-1, General Code, wherein it is provided that on a day in November, to be selected by the Tax Commission (commissioner), all bank deposits are assessed. The evident purpose of this method is to prevent removal of deposits on tax listing day.
It is clearly provided in Section 5366, General Code, that, where other taxable personal property is converted into money, except in the usual course of business, between tax listing day for bank deposits and the day of listing of such other personal property, January 1st of the succeeding year, such property is considered taxable property as of the value thereof at the time of the conversion into money.
In this case both the Tax Commissioner and the Board of Tax Appeals held that the sale of the securities involved herein was not in the usual course of business and, therefore, constituted such a conversion as to render the proceeds thereof taxable. Such conclusion was based upon the broad principle that the purpose of Section 5366, General Code, is to tax the substance of any such conversion by a taxpayer within the prohibited period, whether the purpose of the conversion was tax evasion or the ultimate effect of an innocent conversion led to the same end, and thus insure that no property subject to tax will be allowed to escape its burden of the tax load.
However, it seems clear also that the exception specifically stated has some meaning and purpose. A conversion occurring in the usual course of business is expressly excepted and property so converted is not to be taxed. Taxpayers engaged in retail merchandising annually convert much of their inventory into cash within the prohibited period, and the merchandise thus sold escapes the tax in the hands of the purchaser. Hence in construing and applying this statute the legislative purpose to except the proceeds of such transactions, which are in the usual course of business, must be considered as an intended exception of otherwise taxable property.
The plaintiff was a taxpayer as that word is defined in Section 5366, General Code. She was a taxpayer of the class referred to in the paragraph defining taxable property and, therefore, the conversion resulting from the sale of the securities of the estate was under her administration in the usual course of her business as executrix. The executrix was endeavoring to act in obedience to the statutory requirement that estates shall be administered expeditiously.
Except in those instances where an executor is engaged in carrying on the business of the decedent, the primary duty of the executor is to marshal the assets of the decedent, reduce them to cash and make distribution thereof. Such transactions are clearly within the usual course of business required of an executor or administrator.
We hold, therefore, that the sale of the securities of the Guentter-Reinhard Company by the executrix in the usual and normal course of the administration of the estate was a transaction in the usual course of business of such executrix and the proceeds thereof were within the exception stated in Section 5366, General Code.
The decision of the Board of Tax Appeals being unreasonable and unlawful, the same is hereby reversed.
Decision reversed.
WEYGANDT, C.J., MIDDLETON, TAFT, HART, ZIMMERMAN and STEWART, JJ., concur.