Opinion
Docket Nos. 3453 3454.
1946-02-26
ROBERT L. SMITH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.WILLIAM W. SMITH, 2ND, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
James T. Aspbury, Esq., for the petitioners. William F. Evans, Esq., for the respondent.
Petitioners, executors and residuary legatees of their father's estate, distributed to themselves as residuary legatees the assets of the estate on December 31, 1937, without settlement of certain gift and estate taxes due by the estate to the United States. Thereafter, petitioners paid these deficiencies, together with interest thereon. Held, that, under section 23 (b), I.R.C., the interest on the deficiencies which accrued subsequent to the distribution of the assets to petitioners is deductible by them in computing their income taxes. James T. Aspbury, Esq., for the petitioners. William F. Evans, Esq., for the respondent.
These cases, consolidated for hearing and disposition, involve income tax deficiencies for 1940 in the orignal amounts of $6,151.68 and $5,995.36, respectively.
By virtue of stipulations by and between the parties, all matters have been settled except that part of the deficiencies attributable to deductions taken in the returns of the two petitioners in respect of certain interest items, paid by each, upon tax deficiencies assessed against their father's estate, of which they were executors.
FINDINGS OF FACT.
The facts have been stipulated and are found accordingly. In so far as they are pertinent to the consideration of the sole question here, they are as follows:
Petitioners are sons of the late Arthur G. Smith of Poughkeepsie, New York, who died testate May 6, 1936. Each of them filed a return for 1940 with the collector for the fourteenth district, at Albany, New York.
Under the terms of their father's will, the two sons were named as executors and residuary legatees of the estate. They qualified and entered upon their duties as executors on May 11, 1936. Assets of the estate were received and collected, specific legacies were delivered and paid, and the debts of the estate and costs of administration, so far as known and determined, were paid. On December 31, 1937, they transferred the remaining assets of the estate to themselves as residuary legatees. At that time the Federal estate tax return filed for the estate had not been audited. In considering the propriety of transferring the assets to themselves the petitioners were informed by their legal adviser that he had reason to believe that the Bureau of Internal Revenue was contemplating making claim against the estate in respect of certain alleged gifts made by the decedent during his lifetime. The petitioners decided that if a deficiency in tax arose against the estate, together with penalties and interest, they would pay it themselves, one-half each.
Thereafter, a deficiency in gift tax was asserted by the Commissioner in the amount of $82,110.20. In addition thereto a proposed deficiency in estate tax was under consideration by the Bureau of Internal Revenue in the pre-90-day stage. The executors took the gift tax deficiency to the Board of Tax Appeals. After certain deliberations an agreement was reached whereby it was stipulated that there was a deficiency in gift tax in the amount of $27,472.50 and a deficiency in estate tax amounting to $82,527.50. Hence, all matters in controversy relative to Federal taxes were settled.
The two items in tax were paid in 1940, each petitioner paying one-half, of which $9,159.74 was interest paid by each. Of the interest paid by each, $2,476.16 accrued prior to December 31, 1937, the date of the distribution of the estate assets by the executors to themselves.
Since the probate of the will and the qualification of the executors, no accounting of any kind has been filed with the surrogate's court having jurisdiction, nor any orders taken in respect of distribution or disbursement of the estate's assets. The estate has not been closed, nor the executors discharged by any decree of judicial settlement.
In his income tax return for 1940 each petitioner claimed the full amount paid by him as interest on the deficiencies in estate and gift taxes assessed against their father's estate as proper items for deduction from taxable income. On brief, however, petitioners concede that they are not entitled to a deduction for that portion of the interest which accrued prior to December 31, 1937. The respondent disallowed the claimed deductions in their entirety.
OPINION.
ARUNDELL, Judge:
The sole issue is whether the petitioners are entitled to a deduction from their gross income for the amount of interest which accrued on the estate and gift tax deficiencies after distribution of the remaining assets of the estate to themselves. The applicable statute is section 23 (b), Internal Revenue Code.
Much has been written with respect to the deductibility of interest payments of the character here considered and the law is not settled. Various cases posing different factual situations, but a common question, are directly in point. Since the decision in Koppers Co., 3 T.C. 62, we have uniformly held that interest accrued after the date of distribution and paid by the distributee comes within the scope of section 23(b) as an allowable deduction. Ralph J. Green, 3 T.C. 74; Estate of Hunt Henderson, T.C. memorandum opinion, Dec. 14, 1943; Lawrence R. Green, 3 T.C. 74; Henry W. Breyer, Jr., T.C. memorandum opinion, Jan. 20, 1944. Ralph J. Green, supra, was reversed (C.C.A., 8th Cir.) 146 Fed(2d) 352; Lawrence R. Green, supra, was reversed (C.C.A., 9th Cir.), 148 Fed.(2d) 157; Estate of Hunt Henderson, supra, was reversed (C.C.A., 5th Cir.), 147 Fed.(2d) 619, Henry W. Breyer, Jr., supra, and Koppers Co., supra, were affirmed (C.C.A., 3d Cir.), 151 Fed.(2d) 267. Application for a writ of certiorari was recently withdrawn by the government.
We are of the opinion that we should adhere to our established view that the interest on the deficiencies for the period after the petitioners received the assets of the estate was paid qua interest by the petitioners and is deductible by them under section 23(b). For the reasons expressed in Koppers Co. and Ralph J. Green cases, supra, and in the light of the decision by the Circuit Court of Appeals for the Third Circuit in the Koppers Co. and Henry W. Breyer, Jr., cases, supra, decision must be for petitioners.
Adjustments provided for in the stipulation, as well as that necessitated by this determination, will be made under a Rule 50 computation.
Reviewed by the Court.
Decisions will be entered under Rule 50.