Piller v. Commissioner ( 1934 )

ESTATE OF BENJAMIN PILLER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Piller v. Commissioner

Docket No. 63023.

United States Board of Tax Appeals

29 B.T.A. 799; 1934 BTA LEXIS 1479;

January 17, 1934, Promulgated

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During the taxable period the petitioner, which kept its books and filed its tax return on the cash receipts and disbursements basis, deposited with the tax commission of New York State certain corporate bonds to secure the payment of an estimated inheritance or transfer tax imposed by the laws of that state with respect to certain contingent interests created by the will of the petitioner's testator. Held, that the deposit of the bonds did not constitute payment of the tax and that the amount thereof is not an allowable deduction in determining the petitioner's taxable net income.

Albert Mannheimer, Esq., and Louis Summers, Esq., for the petitioner.

W. Frank Gibbs, Esq., for the respondent.

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TRAMMELL

This proceeding is for the redetermination of a deficiency in income tax of $1,500.89 for the taxable period December 8, 1928, to December 7, 1929. The only matter in controversy is the correctness of the respondent's action in disallowing as a deduction the amount of $10,605.63 taken by the petitioner as inheritance taxes paid the State of New York with respect to contingent interests created by the will of Benjamin Piller, deceased. The proceeding was submitted upon a stipulation of facts and documentary evidence.

FINDINGS OF FACT.

Pertinent portions of the stipulation are as follows:

Benjamin Piller died testate December 8, 1928, leaving a last will and testament dated November 29, 1928.

In connection with the administration of the decedent's estate, the executors Helen Piller, Jacob Ritter and Eugene I. Gottlied [sic] were, during the year December 8, 1928, to December 7, 1929, assessed transfer or inheritance taxes by the State of New York in the amount of $5,106.32. Said taxes were satisfied by the payment of $4,851.01, which amount represents the assessment of $5,106.32 less a 5% discount for payment of the assessment within six months of the accrual date of said assessment.

In addition to the above payment the executors deposited within six months subsequent to decedent's death with the Tax Commission of the State of New York $13,000.00 par value of Bertal Building Corporation bonds having a market value as of the date of deposit of $11,163.82. This deposit was made to secure the payment of estimated inheritance or transfer taxes computed in accordance with a temporary taxing order entered pursuant to Section 241 of Article 10 of the New York State laws. These securities were to be held by the Tax Commission of the State of New York until the happening of the contingencies mentioned in the decedent's will, at which time an order would be made fixing the tax thereon in accordance with its actual distribution.

The interest paid on the said Bertal Building Corporations bonds was paid to the trustees of the decedent's estate during the period of deposit of said bonds with the New York State Commission to the present time. The estate of Benjamin Piller, petitioner, keeps its books of account and records and has filed its income tax returns on the cash receipts and disbursements basis.

At the date of decedent's death the only children surviving the decedent were those mentioned in his will and all of said children were under twenty years of age at that time.

The estate of Benjamin Piller in filing its income tax return for the fiscal year beginning December 8, 1928 and ending December 7, 1929, claimed as a deduction in computing net income, the item of $4,851.01, representing taxes paid to the State of New York, as set forth in paragraph 2 of this stipulation, and in addition thereto claimed a deduction of $10,605.63 as taxes paid to the State of New York, which latter amount represents the fair market value of the bonds deposited with the New York Tax Commission as set forth above, less the 5% discount for payment within six months of decedent's death. This deduction claimed represents the temporary tax and is the amount agreed upon between the Surrogate's Court having jurisdiction of the estate and the estate as the amount to be deposited with the said Tax Commission until the contingencies mentioned in the decedent's will shall have happened.

The estate in filing its income tax return as required by the laws of the State of New York claimed both the aforesaid deductions and up to the present time there has been no disallowance of said deductions by the State of New York.

In the determination of the deficiency the respondent has allowed as a deduction in computing taxable net income the new York State inheritance and transfer taxes in the amount of $4,851.01 and has disallowed the item of $10,605.63.

Under the terms of his will Benjamin Piller, hereinafter referred to as the decedent, left the residuary portion of his estate to Helen Piller (his wife), Jacob Ritter, and Eugene I. Gottlieb in trust, with the following provisions respecting the application and payment of the net income therefrom and the principal thereof:

TWELFTH: As long as my wife lives and remains unmarried, my trustees shall pay to her the entire income of the trust estate for her support and maintenance and for the support, and maintenance and education of my beloved children Mimi, Edwin Malcolm and Seymour Eugene. If my wife remarries, my trustees shall pay to her out of the income of the trust estate, the sum of twenty-five ($25.00) dollars weekly for her support and maintenance, and the remainder of such net income shall thereafter be applied by my trustees for the support, maintenance and education of my said children. In the event that after my wife has remarried her husband dies or she procures an absolute divorce from him or her marriage is annulled, then and thereafter the entire net income of the trust estate shall again be paid to her for her support and maintenance and for the support, maintenance and education of my said children.

THIRTEENTH: Upon the death of my wife, my trustees shall divide my entire residuary estate into three equal parts; one part thereof shall be set apart by my Trustees for the benefit of my daughter Mimi, one part thereof for the benefit of my son Edwin Malcolm and one part thereof for the benefit of my son Seymour Eugene, such estates not to vest in my said children until payment of the principals as hereinafter provided. If any of my children shall have attained the age of forty years at the time of the death of my wife, my trustees shall pay to such child or children his, her or their respective share of the trust estate hereby created for the benefit of such child or children. If any of my children shall not have attained the age of forty years at the time of the death of my wife, my trustees shall pay to such child the entire net income of the share of the trust estate hereby created for such child until such child attains the age of forty years and thereupon the principal of the trust estate hereby created for such child shall be paid to such child by my trustees.

OPINION.

TRAMMELL: The petitioner contends that the amount of $10,605.63 disallowed by the respondent was paid by the deposit with the tax commission of the State of New York of the Bertal Building Corporation bonds and that under section 23 of the Revenue Act of 1928 the amount constituted an allowable deduction in determining taxable net income. The respondent contends that the deposit of the bonds did not constitute payment of the taxes and that the amount in controversy was not allowable.

The Revenue Act of 1928 provides:

SEC. 23. DEDUCTIONS FROM GROSS INCOME.

In computing net income there shall be allowed as deductions:

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(c) Taxes generally. - Taxes paid or accrued within the taxable year, -

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For the purpose of this subsection, estate, inheritance, legacy, and succession taxes accrue on the due date thereof, except as otherwise provided by the law of the jurisdiction imposing such taxes, and shall be allowed as a deduction only to the estate.

To a taxpayer keeping its books and filing its returns on the cash receipts and disbursements basis, as did the petitioner, taxes are deductible only in the amount actually paid during the taxable period. ; . The petitioner therefore is entitled to the deduction of the amount in controversy only if the circumstances here presented constituted a payment.

The matter for determination resolves itself into the question of whether the deposit of corporate bonds with the tax commission by the petitioner constituted payment of the tax with respect to the contingent interests. In , involving contingent interests similar to those here involved, the constitutionality of the New York Transfer Law imposing a transfer tax with respect to contingent interest was attacked. In sustaining the validity of the law the United States Supreme Court said in part:

The tax on the transfer of contingent remainders is not payable until the death of the life tenant; and it is measured by the value at the testator's death of the estate transferred, undiminished by the value of the intervening life estate. For the due payment of the deferred tax the executor must furnish adequate security. The amount of the security is fixed by a temporary taxing order. Laws of 1925, c 144 §§ 230 and 241.

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As the remainders are contingent, it is impossible to know before the contingency happens in whom the remainders will vest; and it may be impossible to determine until then the relationship of the beneficiaries to the testator and the portions of the estate they will respectively receive. Thus the rate of taxation will remain uncertain. For this reason the statute postpones until the contingency happens both the definitive assessment of the tax on the transfer of the contingent remainders and the payment thereof.

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The argument presented is unsound, because it ignores the fact that the tax in respect to the contingent remainders is not payable until after the death of the life tenant. The temporary taxing order, entered upon the testator's death, is made solely to ensure that the tax so deferred will be paid when ultimately assessed. The requirement may be satisfied by depositing with the State either approved securities or cash. In either event the income collected from the security prior to the time when the tax becomes payable is accounted for to the executor; and after the tax has been paid, the securities or cash remaining on deposit will be accounted for to him. By applying the applicable rate to the full value of that which comes into enjoyment and not exacting payment of the tax until then a just result is sought. For the definitive assessment of the contingent remainder and the payment of the tax thereon are postponed to the same date.

In view of the foregoing it seems clear that the Court did vote think that a deposit of corporate securities with respect to the tax constituted payment thereof, but considered it to be a method of providing security to ensure payment of the tax when it becomes payable.

The petitioner urges that under the decisions of the New York courts the deposit of securities by it constituted payment of the tax with respect to the contingent interests, and relies upon the per curiam opinion of the New York Court of Appeals in , affirming the decision of the New York Supreme Court in . In that case the executors, instead of depositing securities of the estate to ensure the payment of the transfer tax with respect to contingent interests as determined by the temporary order of the surrogate, as they were permitted to do under the law, paid the amount so determined. In the income tax return for the estate filed under the New York income tax law they deducted as taxes paid the amount of the payment thus made. The state tax commission refused to allow the deduction as not being one coming within that portion of the New York income tax law which provides that "In computing net income there shall be allowed as deductions: * * * Taxes * * * paid or accrued within the taxable year * * *." The commission contended, among other things, that the payment did not constitute the payment of a tax, but was a deposit as security for the payment of a tax which would be levied later upon the termination of a particular life estate. In holding the amount to be deductible the New York Supreme Court said:

Sections 230 and 241 provide that, under certain conditions, the estate is given the option to file a bond for the ultimate payment of the tax or to secure its payment by the deposit of securities. The estate in this proceeding did not take advantage of such option. If a bond had been given or security deposited, of course the tax would not have been paid and the amount fixed would not be deductible. and , affirmed , * * *

This estate must be credited with this deduction when the payment was made or not at all. There will be no income belonging to the estate which will be taxable at the death of the life tenant. The income will belong to the life tenant until her death and to the remainderman thereafter. The determination of the state tax commission should be annulled, * * * and the matter remitted to them for the purpose of deducting the inheritance tax payment. [Italics supplied.]

We do not think the decision supports the petitioner's contention. The court has clearly indicated that deposit of security was not payment of the tax and that the amount thereof was not deductible for the purpose of determining net income under the New York income tax law.

In view of the holdings of the United States Supreme Court and the courts of New York set forth above relative to the deposit of securities in connection with the transfer tax involving contingent interests, we do not believe it can be said that the deposit of the securities here in controversy constituted the payment of the tax The tax not having been paid during the taxable period, the amount thereof is not an allowable deduction in computing the net income of the petitioner, which keeps its books and files its returns on the cash receipts and disbursements basis.

Judgment will be entered for the respondent.