Wood v. Commissioner ( 1931 )

S. A. WOOD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Wood v. Commissioner

Docket No. 35128.

United States Board of Tax Appeals

22 B.T.A. 535; 1931 BTA LEXIS 2107;

March 4, 1931, Promulgated

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Notwithstanding the fact that items of salary and interest were charged as expense items and taken as expense deductions, without his knowledge, in estate tax returns, petitioner is not liable for income tax on such items when it is clearly shown that he did not in fact receive that money.

Barry Mohun, Esq., and George E. Elliott, Esq., for the petitioner.

L. A. Luce, Esq., for the respondent.

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LOVE

This proceeding is for the redetermination of income tax for the years 1924 and 1925, in the amounts of $1,455.64 and $2,184.23, respectively.

There are three assignments of error, all of which may be summarized by saying that petitioner complains of the action of the Commissioner in including in his income for the year 1924, $6,000, and for the year 1925, $12,000, alleged by the Commissioner to have been constructively received by petitioner as salary in those years, and also the constructive receipt for the year 1925 of $2,246.88, as interest on certain notes held by him.

FINDINGS OF FACT.

Petitioner is now a resident of Washington, D.C. During the years 1924 and 1925, and for many years prior thereto, he resided in DeLand, Fla.

He was connected with the Volusia County Bank and Trust Company for many years, and in 1920 became its president, succeeding A. D. McBride in that position. A. D. McBride died January 6, 1922, and petitioner was appointed executor of his estate and duly qualified and acted as such. McBride left a rather large estate, among the assets of which was an orange grove in Florida, and quite extensive holdings in business enterprises in the vicinity of Rochester, N.Y. The estate owed liabilities aggregating over $40,000.

During the year 1922 petitioner was compelled to devote a large part of his time attending to the harvesting and marketing of the orange crop; he also had to make a number of trips to Rochester in the interest of the estate, and made trips to New York City relative to the liabilities of the estate. By reason of the fact that the holders of the notes against the estate were pressing for the payment of the notes, when the estate was without cash to pay the same, petitioner arranged on his personal responsibility to take over and did take over and hold those notes as his own.

In view of the extra services being rendered to the estate by petitioner, at his instance the probate court made and had entered of record in September, 1922, and order allowing petitioner a salary of $500 per month in addition to the legal fees and commissions allowed as executor. This order appears to have had no time limit.

For the year 1922 petitioner vouchered to himself the legal fees, plus $6,000 salary, and in his income tax return for that year, reported the full amount so received by him. In respect to the year 1922 there is no controversy.

In 1923 petitioner was not required to devote so much of his time to the estate, and decided that he was not entitled to the salary as extra compensation, and did not take such salary for that year, but the court order remained uncanceled and unmodified. The same situation prevailed in 1924 and 1925.

In making up the books for the estate for the years 1924 and 1925, the accountant for the estate entered a charge on the books, that is, a credit to petitioner, of $6,000 for the year 1924, and $12,000 for the year 1925, as the salary for 1923 and 1925. In making the income tax returns for the estate, the accountant listed those charges as expense items of the estate, and was allowed those amounts as deductions. After an examination of the estate books and finding the entries as above set out, the revenue agent decided that the $18,000 had been erroneously omitted from petitioner's tax returns. Also, for the year 1925, the revenue agent found a credit to petitioner of $2,246.88, as interest paid petitioner on the estate notes held by him, and decided that item had been erroneously omitted from petitioner's tax return.

The Commissioner included the salary items as well as the interest item in gross income because those items "were unqualifiedly credited to your [petitioner's] account on the books of the estate of A. D. McBride." He took the extra compensation of $6,000 for the first year, and then by reason of the fact that he did not perform extra services in the succeeding years, he did not deem himself entitled to receive it and decided that he would not take it after the first year. Petitioner, as executor of the estate, did not voucher those items to himself, and they were not actually paid to, or received by him. He did not know those items had been entered on the books of the estate or included in the tax returns until the controversy arose over his own tax liability. The inclusion of said items in petitioner's gross income constituted the bases for the several deficiencies asserted herein for the years 1924 and 1925. Petitioner kept no personal books of account, but made his tax returns, regularly, on the cash receipts and disbursement basis.

OPINION.

LOVE: In this case petitioner admittedly is placed in an embarrassing position. As executor of the estate of McBride, he executed income tax returns prepared by an accountant, which returns disclose the fact that the items here in controversy were charged up against said estate income, and taken as expense deductions, and were so allowed by the Commissioner. Petitioner now claims that he never in fact received any part of those items. In his testimony at the hearing, he was examined and cross-examined, and swore specifically and positively that he had not received that money. In view of the manner of his testimony, as well as the character of the man as disclosed by the evidence in the case, we believe that he did not receive the money. After the first year of service by petitioner to the estate, he did not perform those extra duties for which the extra compensation was granted him by the court, and hence, for the succeeding years he was not entitled to such additional compensation. He did not deem himself entitled to it, and decided in advance not to take it, and did not take it, and hence it was never income to him.

With reference to the item of interest on notes held by petitioner against the estate, he, as executor, did not voucher such payments to himself in the taxable years, nor were such payments credited to his account. It may be true that such interest was then due, and while there is no evidence to the effect that no money was available to pay such interest, the evidence is clear that petitioner, as executor, was short of funds to such an extent that at times he borrowed money on his own responsibility to tide over the periods in which there was scarcity of funds. Under such conditions, we do not believe there was any constructive receipt of such money, and it is clear that there was no actual receipt within the taxable years, and hence, there was no tax liability incurred by reason of that item in the taxable years. Cf. .

Reviewed by the Board.

Judgment will be entered for the petitioner.

Murdock dissents.