Kohn v. Commissioner

LILLIE V. KOHN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

ACHILLES H. KOHN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Kohn v. Commissioner

Docket Nos. 16477, 16478.

United States Board of Tax Appeals

16 B.T.A. 662; 1929 BTA LEXIS 2541;

May 24, 1929, Promulgated

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Loss held properly deductible by residuary legatees rather than estate.

William Sabine, Esq., for the petitioner.

F. S. Easby-Smith, Esq., for the respondent.

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SIEFKIN

These are proceedings, duly consolidated for hearing and decision, for the redetermination of deficiencies for the year 1922 determined against Achilles H. Kohn of $1,130.13, and against Lillie V. Kohn of $506.47. It is urged as error that the respondent disallowed deductions of $2,943.44 from the gross income of each petitioner and also added $1,901.28 to the income of each. At the hearing the respondent admitted error as to his disallowance of a loss on German marks.

FINDINGS OF FACT.

The petitioners are residents of New York City. Solomon H. Kohn, husband of Lillie V. Kohn and father of Achilles H. Kohn, died November 17, 1920, testate. His will was duly admitted to probate in the Surrogate's Court of New York County. By the terms of the will the entire residue of the estate, after certain specific legacies, was left in equal shares to the petitioners, both of whom were appointed, executors without bond. They qualified. After filing income-tax returns for the estate on Form 1040 for the period November 17, 1920, to December 31, 1920, and the year 1921, the executors, upon the theory that the administration of the estate was completed in 1921, filed a return on Form 1041, being a fiduciary return of income, for the year 1922. In that return they reported gross income received of $4,166.26 and a deduction of $9,689.33 as a loss on a note. Other deductions aggregating $363.50 left a net loss of $5,886.57, one-half of which was claimed as a deduction by each of the petitioners on his or her 1922 return.

The facts with respect to the claimed loss of $9,689.33 are:

Included in the decedent's property at the time of his death was a promissory note of Daniel W. Hermann for $12,400, due July 1, 1916, on which interest had been paid up to June 30, 1920, before the decedent's death and as to which interest up to December 31, 1920, was paid to the executors of the estate. This was the last interest paid. At the date of the decedent's death the note was considered worth par and was included at that amount for purposes of Federal estate tax and State transfer tax.

Hermann, a cloth jobber, became financially involved after the war and pledged certain life insurance policies as collateral for the note. In 1922 he was obliged to liquidate his business and, being unable to pay the premiums on the life insurance policies pledged as collateral, surrendered them for cancellation. The amount received, $2,710.67, was paid to the petitioners, who credited it against the $12,400 note, leaving an unpaid balance of $9,689.33. Hermann never went back into business and has never been able to pay his debts and his situation is such that he almost certainly never will.

All legacies and debts of the estate, with the exception of income taxes against the estate for 1921, a small adjustment of income taxes for prior years (amounting to about $200) and an adjustment of $720.64 on account of Federal estate tax (which was paid in 1923), were paid before the end of 1921.

Under the New York law a judicial settlement is not required in the Surrogate's Court under whose jurisdiction the estate is probated unless it is asked for by a creditor or a party interested in the estate. Where the parties who receive the estate are the same as executors, it is not customary to file an account or ask for a judicial settlement of the estate.

The estate kept books of account which were closed in 1924.

OPINION.

SIEFKIN: Aside from the question as to the loss on German marks, as to which the respondent has admitted error, a single question is presented. The facts show that a loss was sustained in 1922, but the deductibility of the amount by these petitioners depends upon whether the estate was still in process of administration in 1922.

In support of the respondent's determination, which assumes that administration of the estate was still in process in 1922, it is shown that income and estate taxes in varying amounts were not settled at the end of the year 1921, and that the books of account of the estate were not closed until 1924. On the other side, the petitioners rely upon the rule of law in New York and in the Federal courts that title to the assets vests in the residuary legatees when the debts and legacies are paid, and they insist that the later adjustments of taxes do not prevent the vesting. In Kahn v. United States,257 U.S. 244">257 U.S. 244, Mr. Justice Brandeis, speaking for the court, said:

* * * The beneficial interest were contingent unless the legatees were then in actual possession or enjoyment (Henry v. United States,251 U.S. 393">251 U.S. 393, 40 Sup.Ct. 185, 64 L. Ed. 322">64 L.Ed. 322), or were entitled to immediate possession or enjoyment (United States v. Jones,236 U.S. 106">236 U.S. 106, 35 Sup.Ct. 261, 59 L. Ed. 488">59 L.Ed. 488, Ann. Cas. 1916A 316; McCoach v. Pratt,236 U.S. 562">236 U.S. 562, 35 Sup.Ct. 421, 59 L. Ed. 720">59 L.Ed. 720; Coleman v.United States, 250 U.S.30, 39 Sup.Ct. 414, 63 L. Ed. 826">63 L.Ed. 826; Sage v.United States, 250 U.S.33, 39 Sup.Ct. 415, 63 L. Ed. 828">63 L.Ed. 828. * * *

* * *

* * * On July 1, 1902, the only unadjusted matters, so far as shown, were claims for taxes for relatively small sums. These were not finally disposed of until November, 1903.

On July 1, 1902, therefore, the trustees were entitled to the possession of the funds and all the beneficiaries to the immediate enjoyment of the income thereof, with the exception of the amount involved in controversies over taxes. The executors might then have paid over the balance of the estate in their hands to the trustees, retaining funds sufficient to satisfy the claims in dispute. The amount on which the taxes here in question were assessed is not shown to have exceeeded the amount of such balance. The beneficial interests were, therefore, vested, and taxes were properly assessed thereon. * * *

Also, in Woerishoffer v. United States,269 U.S. 102">269 U.S. 102, the Supreme Court held that where residuary legatees were entitled to demand and collect legacies they were vested in possession and enjoyment even though the executors did not fully distribute the lagacies because of unpaid taxes. There it was said:

Under the laws of New York, the time for the presentation of claims against the estate had expired before July 1, 1902, and before that date the legatees were entitled to the full payment of their legacies. Under the laws of the United States (Act of March 2, 1901, c. 806 § 11, 31 Stat. 938, 948), the time within which payment of the tax was required to be made had also expired before July 1, 1902. Before that date, all the testators' debts and all the specific legacies had been paid, and each of the residuary legatees had received, on account of the residuary bequest, $910,000, partly in cash and partly "in securities at New York Stock Exchange values" assented to by the legatees. Between that date and the end of the year 1908 each received in cash further sums aggregating $210,953.66. Some of the assets were still undistributed when the evidence was taken in this suit. The reason why no further or complete distribution of the residuary estate was made by the executors prior to July 1, 1902, was that they anticipated that the estate would be liable for payment of a New York estate transfer tax and the federal inheritance tax, for attorneys' fees, and other expenses of administration, and that the exact amount of the residuary estate left for distribution could therefore not be definitely determined prior to July 1, 1902.

The contention that the taxes had not been imposed prior to July 1, 1902, because no formal assessment had in fact been made by the Treasury Department before that date, is disposed of by Chochran v. United States,254 U.S. 387">254 U.S. 387, 41 S. Ct. 166">41 S.Ct. 166, 65 L. Ed. 319">65 L.Ed. 319. The contention that the interests of the residuary legatees in that portion of the estate not distributed prior to July 1, 1902, were contingent beneficial interests, not absolutely vested in possession or enjoyment, is disposed of by Kahn v. United States,257 U.S. 244">257 U.S. 244, 42 S. Ct. 85">42 S.Ct. 85, 66 L. Ed. 215">66 L.Ed. 215, Simpson v. United States,252 U.S. 547">252 U.S. 547, 40 S. Ct. 367">40 S.Ct. 367, 64 L. Ed. 709">64 L.Ed. 709, and earlier cases. * * *

See also Blood v. Kane,130 N.Y. 514">130 N.Y. 514, and Thomas v. Troy City National Bank, 19 Misc. (N.Y.) 470. In the latter case it was said:

There are no outstanding debts against the testator's estate. If that is so there is no trust in relation to the estate to be executed and no need for further administration. The title or estate which the widow and daughter took as executrices ended before their death. They were also entitled to the beneficial estate as legatees under the will. These two estates meeting in the same persons were merged and the widow and daughter became vested in their own right each to an undivided one-half of the entire interest in the property absolutely.

We conclude that the respondent was in error in denying the deduction to the petitioners, our belief being that the note was vested in the petitioners.

Reviewed by the Board.

Judgment will be entered under Rule 50.