Perry v. Commissioner , 32 B.T.A. 513 ( 1935 )

HERBERT G. PERRY AND WINTHROP I. PERRY, EXECUTORS OF THE WILL OF ALONZO W. PERRY, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Perry v. Commissioner

Docket No. 74568.

United States Board of Tax Appeals

32 B.T.A. 513; 1935 BTA LEXIS 941;

April 26, 1935, Promulgated

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Petitioners' decedent gave stock to his sons in 1925 and died on November 10, 1928, without reporting the gift for Federal gift tax purposes or paying such tax thereon. In 1931 valid closing agreements, under section 606 of the Revenue Act of 1928, were executed, including both that gift tax and the Federal estate tax of petitioners' decedent. In the computation of the latter, such gift tax and interest thereon from March 15, 1926, to November 10, 1928, the date of the death of decedent, were deducted from the decedent's gross estate in determining the net taxable estate. Held, such gift tax and interest, paid by petitioners in 1931, are not deductible in the determination of the income tax of the estate for that year.

Gladwin M. Nead, Esq., for the petitioners.

Dean P. Kimball, Esq., for the respondent.

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LEECH

The petitioners here attack respondent's determination of a deficiency of $5,636.23 in income tax against their decedent's estate for the calendar year 1931. The disallowance of an asserted deduction of certain gift taxes and interest thereon, paid by petitioners during 1931, in the computation of that deficiency, is the only basis of controversy.

The facts were formally stipulated as follows:

Alonzo W. Perry died a resident of Rockland, Plymouth County, Massachusetts, on November 10, 1928, and Herbert G. Perry and Winthrop I. Perry, both of said Rockland, and American Trust Company, a Massachusetts corporation with its place of business in Boston, Suffolk County, Massachusetts, were duly appointed Executors of his will on December 10, 1928 and duly qualified as such. Said American Trust Company resigned as Executor and its resignation was accepted by the Probate Court of Plymouth County, Massachusetts, on March 9, 1931, since which time said Herbert G. Perry and Winthrop I. Perry have been and now are the Executors of said will.

The accounts of said Executors have always been kept upon the cash basis and income tax returns made upon the basis of the calendar year. The income tax return filed by the Executors of the Estate of Alonzo W. Perry for the year 1931 was filed with the Collector of Internal Revenue for the District of Massachusetts.

The said Executors timely filed a Federal estate tax return with the Collector of Internal Revenue for the District of Massachusetts at Boston which disclosed an estate tax in the amount of $231,846.02 subject to a credit of 80% thereof for Massachusetts legacy and succession taxes. In connection with the audit of said return the Commissioner of Internal Revenue learned for the first time of certain gifts of stock made by decedent to his three sons. These gifts were thereupon claimed by said sons to have been made in 1923 and by the Commissioner to have been made in 1925 and therefore subject to the gift tax imposed by the Revenue Act of 1924 as amended by the Revenue Act of 1926, and should have been reported by the decedent in the gift tax return on or before March 15, 1926.

There had been no assessment of gift tax against the decedent on account of said gifts of stock prior to his death. No gift tax return had been made by the decedent covering said gifts. The income tax returns of the decedent had been made upon the cash basis and no deduction had ever been claimed by the decedent on any income tax returns for the gift tax upon said gifts, or any part thereof. On the estate tax return filed by the Executors it was stated that the gifts of stock in question were made in 1925.

At or about the same time that the claim with reference to said gift tax was made by the Commissioner of Internal Revenue the said Executors were notified of an intention on the part of said Commissioner of Internal Revenue to assess a deficiency estate tax of $230,763.63 on account of increase in valuation of certain assets of the estate and inclusion of the aforementioned gifts of stock to the decedent's three sons as gifts made in contemplation of death. By a closing agreement entered into between the executors of the estate and the Commissioner of Internal Revenue the said Executors agreed to a final determination of gift tax liability in the amount of $42,179.70, exclusive of interest. This agreement was executed by said Executors on March 10, 1931, and by the Commissioner of Internal Revenue on April 16, 1931, and approved by the Under-Secretary of the Treasury, said approval being designated on Schedule 4911. A copy of said agreement is hereto annexed marked "A" and is expressly incorporated herein by reference. Said gift tax of $42,179.70, together with interest at 6% per annum from March 16, 1926 to April 17, 1931 amounting to $12,882.71 was paid by said Executors to the Collector of Internal Revenue for the District of Massachusetts at Boston on August 6, 1931.

At the same time that the closing agreement as to final determination of gift tax was entered into a closing agreement as to final determination of Federal estate tax was entered into fixing the amount of said estate tax of $224,183.84 subject to a credit of 80% for Massachusetts legacy and succession taxes. In the determination of said estate tax the amount of said gift tax of $42,179.70 and interest thereon at 6% per annum from March 15, 1926 to November 10, 1928, the date of decedent's death, amounting to $6,725.63, was allowed as a deduction from the gross estate and there was excluded from gross estate said gifts which it had originally been proposed to include as gifts made in contemplation of death.

In the Federal income tax return filed by said Executors for the year 1931 deductions were taken for said gift tax of $42,179.70 and for said interest of $12,882.71, resulting in a net income of $19,864.02. The said Commissioner of Internal Revenue upon audit of said return has disallowed the deduction claimed for said gift tax in the amount of $42,179.70. He has also disallowed $6,725.63 of the total interest paid on said gift tax. The portion of the interest so disallowed represents the interest paid on said gift tax from its due date, March 15, 1926, to November 10, 1928, the date of decedent's death.

OPINION.

LEECH: The question presented is whether the amount of the gift tax and interest thereon, from the due date of such tax to the date of decedent's death, paid by his estate in 1931, is deductible from the income of that estate in the computation of its income tax for that year.

The right to deduct this item of interest rests upon the deductibility of the gift tax (, affirming ), which is controlled here by the Revenue Act of 1928, section 161(a)(3); section 162; and particularly section 23(c)(1).^{*947 . ."}

Upon this record it will be assumed that the gift tax here involved arose by virtue of the Revenue Act of 1924, which was repealed by section 1200 of the Revenue Act of 1926, *516 That tax is one imposed upon a transfer by gift inter vivos (Revenue Act of 1924, section 319; *949 of the entity against which the tax was assessed (), but upon the entity against which such tax accrued. , affirming ; ; ; ; ; affd., .

The taxable transfer here was made by petitioners' decedent - not his estate. He was the donor by whom the tax was payable and against whom it accrued as a tax liability. Obviously, at least before decedent's death, all events had occurred which fixed the tax and determined the liability to pay it. . These taxes then accrued as a claim against decedent. ; Since they are claims against the estate, they are deductible from its corpus but not from its income. ; It was only upon this theory that the disputed tax and interest were deductible and thus deducted from the gross estate of petitioners' decedent in determining its net amount subject to estate tax.

Petitioners argue that this conclusion violates the rule that income taxes are not affected by the incidence of estate taxes. This position is unsound. The deductibility of the present gift tax and interest from income of the estate is not denied because of its deductibility from the corpus of decedent's estate for estate tax purposes, per se. These taxes were claims against and therefore deductible from the corpus of the estate, because they accrued against decedent as his taxes upon a gift made by him, and not by his estate. Since such taxes accrued against him, as his taxes, they are not deductible by his estate, a distinct and separate entity. ;;;;

The word "taxpayers" used in the closing agreements mentioned in our present findings of fact, in describing petitioners in connection with the disputed gift tax and interest, did not mean to characterize such taxes as those of the estate. It meant merely that the estate was the entity paying such taxes. That nomenclature did not intend and certainly could not effect any change in the legal incidence and accrual of these gift taxes, upon which depends their disputed deductibility. ; Victor G. Marquissee,; affirmed as .

Judgment will be entered for respondent.

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Footnotes

• 1. SEC. 161. IMPOSITION OF TAX.

  (a) Application of tax. - The taxes imposed by this title upon individuals shall apply to the income of estates or of any kind of property held in trust, including -

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  (3) Income received by estates of deceased persons during the period of administration or settlement of the estate; * * *

  SEC. 162. NET INCOME. -

  The net income at the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual * * *.

  SEC. 23. DEDUCTIONS FROM GROSS INCOME. -

  In computing net income there shall be allowed as deductions:

  * * *

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

  (1) Income, war-profits, and excess-profits taxes imposed by the authority of the United States * * *. ↩

• 2. SEC. 1200. (a) The following parts of the Revenue Act of 1924 are repealed, to take effect (except as otherwise provided in this Act) upon the enactment of this Act, subject to the limitations provided in subdivision (b):

  * * *

  Part II of Title III (called "Gift Tax") as of January 1, 1926.

  * * * ↩

• 3. SEC. 319. * * * a tax * * * is hereby imposed upon the transfer * * * by gift * * * of any property wherever situated * * *. ↩

• 4. SEC. 324. The tax imposed by section 319 shall be paid by the donor on or before the 15th day of March * * *. ↩

• 5. ART. 131. Taxes. - * * * The gift tax imposed by section 319 of the statute is deductible from the gross income of the donor.

  * * * ↩