Hubbard v. Commissioner

MILDRED M. HUBBARD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

MILDRED M. HUBBARD, FORMERLY EXECUTRIX OF THE ESTATE OF EDWARD HUBBARD, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

MILDRED M. HUBBARD, AS TRANSFEREE OF THE ESTATE OF EDWARD HUBBARD, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Hubbard v. Commissioner

Docket Nos. 63837, 63878, 67569.

United States Board of Tax Appeals

30 B.T.A. 619; 1934 BTA LEXIS 1294;

May 2, 1934, Promulgated

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COMMUNITY PROPERTY - DISTRIBUTION DURING COURSE OF ADMINISTRATION. - Petitioner is the survivor of a marital community in the State of Washington, and was sole legatee and executrix of the estate of her deceased husband. The major item of value in the estate consisted of a block of corporate stock which was community property. During the course of administration of the estate the executrix, acting as such, sold one half of the block of stock and received the proceeds as executrix. At the same time she sold a few shares of the stock as her own as survivor of the community, and later in the same year sold additional shares as her community portion. The sales were so reported to the probate court and approved by it in the decree of distribution, and were so reported in income tax returns filed. Held, that the partition made between property of the estate and that of the survivor should be recognized, and it was error on the part of respondent to treat the sales as sales of undivided portions of community property and to tax one half the gain on all sales as profit to petitioner as survivor of the community and the other half to the estate.

Frank E. Holman, Esq., and William M. Allen, Esq., for the petitioner.

Chester A. Gwinn, Esq., for the respondent.

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ARUNDELL

These proceedings were instituted to test the correctness of the respondent's determination of deficiencies in income taxes for the year 1929 in the two cases first set forth in the caption and petitioner's liability as a transferee in the matter of Docket No. 67569. The amounts asserted by the respondent are as follows:

Docket No. 63837	$306.11
Docket No. 63878	79,094.53
Docket No. 67569	306.11

The amounts asserted arise out of the same transactions, i.e., the sales of stock during the period of administration of the estate of Edward Hubbard, deceased, Mildred M. Hubbard being at the same time the widow and executrix and the sole legatee of Edward Hubbard. The parties have filed a stipulation in Dockets 63837 and 67569 agreeing that these proceedings may be determined in accordance with the findings of fact and decision by the Board in the case of Mildred M. Hubbard, Docket No. 63878, and further that there is only one deficiency, if any, to be determined by the Board in the proceedings bearing these particular numbers, and that if a deficiency is found in the case of the Estate of Edward Hubbard for the taxable year 1929, then the petitioner, Mildred M. Hubbard, Docket No. 67569, is liable as transferee for the payment thereof. The three cases were consolidated for hearing.

FINDINGS OF FACT.

Prior to December 18, 1928, Edward Hubbard and Mildred M. Hubbard, the petitioner, were husband and wife, residents of the State of Washington, and as such constituted a marital community under the laws of the State of Washington.

On December 18, 1929, Edward Hubbard died, leaving a last will and testament known under the laws of Washington as a non-intervention will, wherein Mildred M. Hubbard was appointed executrix and was made the sole beneficiary of the estate of said Edward Hubbard.

On January 15, 1929, the will was admitted to probate in the Superior Court of Washington for King County and on that date the petitioner qualified as executrix under the will. A decree of solvency was entered April 30, 1929.

The estate of Edward Hubbard, including all of the community property of Edward Hubbard and Mildred M. Hubbard, was inventoried and appraised, the appraised value thereof amounting to $1,733,697.64. Of this total, 19,093 shares of common stock of the Boeing Airplane & Transport Corporation were appraised at $1,687,952.53. The shares of Boeing Airplane & Transport Corporation stock were acquired as follows: On June 6, 1927, at which time Edward Hubbard and Mildred M. Hubbard were residents of Washington and constituted a marital community under the laws of that state, a certificate for 1,250 shares of stock of Boeing Air Transport, Inc., was issued to Edward Hubbard for services previously performed in behalf of that corporation, the services having been rendered during the existence of the marital community. On August 24, 1927, Edward Hubbard purchased 50 shares of Boeing Airplane Co. common stock at a cost of $5,000. This stock was acquired with funds of the marital community. In November 1928 these holdings were exchanged for 19,093 shares of common stock in the Boeing Airplane & Transport Corporation. The stock in the Boeing Airplane & Transport Corporation was issued in the name of Edward Hubbard, and at the time of his death Edward Hubbard and Mildred M. Hubbard owned the 19,093 shares thereof as community property under the laws of Washington. Subsequent to the issue of the stock the name of the corporation was changed to United Aircraft & Transport Corporation.

At the time of the death of Edward Hubbard, and at all times thereafter, his estate was fully solvent and the assets thereof greatly exceeded the amount of the liabilities, and the community one-half interest of the decedent in the community property greatly exceeded in value the total amount of the claims against the estate. It was unnecessary to sell any of the stock in the Boeing Airplane & Transport Corporation in order to pay all of the community debts and the expenses of administration.

On January 15, 1929, immediately following the probate of the will and the appointment and qualification of Mildred M. Hubbard as executrix of the estate, at a conference with Elmer E. Todd, her legal adviser, and Dietrich Schmitz, her financial adviser, Mildred M. Hubbard decided to sell the one-half interest of Edward Hubbard in the 19,093 shares of Boeing Airplane & Transport Corporation common stock and gave directions at that time that this should be done. On the advice of Schmitz, who handled the sales, Mildred M. Hubbard further decided to sell an additional 46 1/2 shares, over and above the 9,546 1/2 shares constituting the one-half interest of the decedent, in order to leave her own shares in even hundreds so as to make it more convenient for her in case of future sales of her own shares of the stock. The reasons for making the sale of the decedent's one-half interest in the Boeing Airplane & Transport Corporation stock were that the stock was at that time very active and highly speculative; that the Federal estate tax and the Washington inheritance tax would fall upon the estate's one-half interest in this stock; and that if Mildred M. Hubbard retained her one-half interest in this stock for a full two-year period her taxes on sales made by her would be minimized by the application of the capital gain provisions of the income tax act.

Pursuant to this plan, in January and February 1929, there were sold by Mildred M. Hubbard, as executrix of the estate of Edward Hubbard, deceased, and upon her order, 9,546 1/2 shares of Boeing Airplane & Transport Corporation stock, and for her individual account 46 1/2 shares of the same stock. The proceeds of 9,546 1/2 shares were credited to the account of Mildred M. Hubbard, executrix of the estate of Edward Hubbard, deceased, with the Pacific National Bank.

The sales of the 9,593 shares of Boeing Airplane & Transport Corporation stock were handled by the Pacific National Co., of which Schmitz was the president, and were made on orders of Mildred M. Hubbard, as executrix. Certificates for the shares so sold physically passed through the hands of Schmitz, they having first been transferred on the books of the transfer agent for the Boeing Airplane & Transport Corporation from the name of Edward Hubbard to a "street name" - that is, a name selected for facilitating sales of such stock and to prevent as far as possible affecting the market by having it known that the stock was being sold by or for the account of someone connected with the company. It was the intention of Mildred M. Hubbard that the sales of Boeing Airplane & Transport Corporation stock made in January and February 1929 to the extent of 9,546 1/2 shares should constitute a segregation and sale of the interest of the estate of Edward Hubbard, deceased, in the 19,093 shares of Boeing Airplane & Transport Corporation stock which was the community property of herself and Edward Hubbard at the time of his death.

In July and August 1929 Mildred M. Hubbard sold 2,100 shares of Boeing Airplane & Transport Corporation stock which she claimed as part of her one-half interest in the community property, the sales being made for her individual account and the proceeds being credited to her personal account with the Pacific National Bank. These sales were made out of a block of 3,500 shares of stock which, at the direction of Mildred M. Hubbard, had been transferred to a street name and left with the Pacific National Co. for purposes of making sale upon her instructions during her absence from the state of Washington at that time.

No part of the proceeds of the sale of said 9,546 1/2 shares of Boeing Airplane & Transport Corporation stock belonging to the estate of Edward Hubbard, deceased, was at any time distributed to Mildred M. Hubbard prior to April 29, 1930. The profits to the estate on the sale of the 9,546 1/2 shares of Boeing Airplane & Transport Corporation stock were returned by Mildred M. Hubbard as executrix in the income tax return of the estate for the year 1929.

The profits to Mildred M. Hubbard on the sale of the 2,100 shares for her own account during the year 1929 were returned by her in her individual income tax return for 1929. Mildred M. Hubbard also included in her return for the year 1929 profit upon the sale of 46 shares of said stock as part of the 9,593 shares sold in January and February 1929, having recognized to the estate a sale of a total of 9,547 shares, being one half of a share in excess of the estate's one-half interest in the total of 19,093 shares, allocating to herself at that time only 9,546 shares.

The respondent computed the deficiency in the income tax liability of Mildred M. Hubbard for the year 1929 by including in her gross income for that year a profit on one half of the 9,546 1/2 shares of Boeing Airplane & Transport Corporation stock sold by her as executrix and for the account of the estate of Edward Hubbard, deceased, and by taking out of her gross income for that year as reported on her return one half of the capital net gain on the sale of 2,100 shares of the stock made by her individually and for her own account.

On March 27, 1930, the final report and petition for distribution was filed in the estate of Edward Hubbard, deceased. That report and petition contained the following paragraph:

That during the course of the administration of said estate said Executrix had distributed to herself, as the owner of a vested community one-half interest in all of the property coming into her hands, 3,546 shares of common stock of United Aircraft and Transport Corporation (formerly Boeing Airplane & Transport Corporation) and has sold one-half, namely 9,547 shares of said stock, which was the community interest of the said Edward Hubbard therein, as shown by said Exhibit A, and has on hand 6,000 shares of said stock, which are a part of her community half thereof; that your said executrix has also distributed to herself as the owner of a community one-half interest Ten Thousand ($10,000.) Dollars in cash.

On April 29, 1930, the Superior Court of Washington for King County entered its decree approving the final report and petition for distribution, confirming and approving the sale by the executrix of 9,547 shares of Boeing Airplane & Transport Corporation stock as the community interest of the estate in the 19,093 shares of that stock belonging to the community at the time of the death of Edward Hubbard. The decree embodies the paragraph above quoted from the final report of the executrix.

OPINION.

ARUNDELL: The main point at issue in these proceedings is whether the first blocks of stock sold in 1929 on order of the executrix were property of decedent's estate alone or whether such stock was property in which she had a half interest by virtue of being the survivor of the marital community. In other words, could petitioner make a division of the stock between the estate and herself prior to the termination of administration of the estate? It is conceded that the stock was community property and that petitioner had a vested interest therein.

The argument of petitioner is that, under the laws of the State of Washington, when community property is not needed to pay community debts a division of the property can be made without formal order of the probate court, and upon such division either part can be sold without regard to the other. It is respondent's position that, although the petitioner had a vested interest in the property, is was an undivided interest at all times prior to the decree of distribution, so that the profit on all sales during the period of administration belonged jointly to petitioner and the estate.

We do not understand that respondent questions the validity of the sale, but only the identity of the property sold. But to resolve any doubts as to this, we think it clear that the validity of the sale is beyond question. In the absence of a statute, an executor has full power to sell or dispose of personal assets of the estate and give good title without special provision of the will or order of court. . The statutes of Washington, § 1492, Remington's Compiled Statutes, provide that no sale "of any property of an estate shall be made except under an order of the court, unless otherwise provided by law." This provision, however, does not appear to be applicable to the administration of an estate under nonintervention wills. Sections 1462 and 1463, Remington's Compiled Statutes, 1922, ¹ provide that where a testator directs administration without court intervention, and it appears that the estate is solvent, then the estate "may be managed and settled without the intervention of the court." In such cases the executor has full power to sell the property of the estate without court order and without notice, approval, or confirmation. While provision is made in § 1462 for a decree of settlement, "it is established that no final decree is necessary." ; . Nonintervention wills have been provided for by statute in Washington since 1868, and the right to administer under such wills without court intervention "is not a limitation, but rather a grant of power to the executor." ; ; affirmed on rehearing, . Upon a showing of solvency in a nonintervention case, the estate "passes from under the immediate jurisdiction of the court, and the court would have no jurisdiction to enter an order of sale." ; . It is further said in that case:

* * * It has been the policy of this court to put a most liberal construction on these laws, to the end that the object intended (that is, the saving of costs and the burdening and clouding of title with court proceedings) could be avoided by those who have property subject to testamentary dispositions.

One of the statutory prerequisites to a nonintervention settlement of an estate is a decree of solvency by the probate court. It appears in the case before us that no such decree was obtained prior to the sale of the stock by petitioner, but we think that no valid objection can be raised on this ground in view of the stipulation that the estate of the deceased was at all times fully solvent, the decree of solvency during the course of administration, and the decree of the probate court of April 29, 1930, declaring the estate to be fully solvent. "The only purpose of the adjudication of solvency is to determine whether the estate shall be administered according to the provisions of the [nonintervention] will or according to the provisions of the statute." ; . A sale even prior to probate is in effect ratified by a subsequent probate of the will, Schouler on Wills, Executors, and Administrators, 6th ed., § 2365, ; . The decree in this case goes further and approves the report of the executrix wherein she reports that she "sold one-half, namely, 9,547 shares of said stock, which was the community interest of the deceased." Legal title given under a decree of distribution "relates back to the date of death." .

Family arrangements for the settlement of estates without court intervention are favorites of the law. ; . In ; , upon the death of the wife the husband took out letters of administration and caused the estate, which consisted of community property, to be inventoried and appraised, but proceeded no further with administration in probate court. He made no formal settlement with the heirs, but turned over to them sums aggregating $52,000. In a suit arising out of the husband's use of part of the funds retained by him, the court said:

In this state it is not essential to a valid partition of property of an estate between the persons entitled thereto that an order of the probate court be had for that purpose. If the heirs are adults, and the claims of creditors be satisfied, a valid partition can be made by agreement. .

And here we think there was a partition by agreement as to part of the property of the estate. It will be remembered that the administrator turned over to the heirs money in the sum of $52,000. If the estate was intact when this was done, and there is no showing to the contrary, the acceptance of this sum by the heirs implied an assent to the taking by the administrator of a like sum in his own right.

If a partition and distribution can be made as in , among several interested parties, we see no reason why the same thing may not be done by the survivor, who is also the executrix, by designation of parcels of the property where there are no adverse interests. Counsel for respondent says that an application of the principle of thatcher v. , to the present case would required a holding that only 3,546 shares of stock were partitioned and distributed to her. This argument is presumably based on that part of the probate court decree wherein it is set forth that the petitioner "distributed to herself * * * 3,546 shares of common stock * * * and has on hand 6,000 shares of said stock." We think this argument unsound. In the first place it would not be necessary for her to distribute to herself her full portion at one time; neither was it necessary that equal amounts be earmarked as property of the estate and as distributed to herself as a part of her community share. Secondly, and principally, we are not concerned with the portion distributed to petitioner as her community share, but with that part designated and sold as property of the estate of the decedent. The paragraph of the decree partially quoted above reads in full as follows:

That during the course of the administration of said estate said executrix up to December 31, 1929 had distributed to herself, as the owner of a vested community one-half interest in all of the property coming into her hands, 3,546 shares of common stock of United Aircraft and Transport Corporation (formerly Boeing Airplane & Transport Corporation), and has sold one-half, namely, 9,547 shares, of said stock, which was the community interest of the deceased therein, and has on hand 6,000 shares of said stock which are a part of her community one-half thereof. That on or prior to said date said executrix has also distributed to herself, as the owner of a community one-half interest $10,000 in cash. [Italics supplied.]

From this, and from other facts established, namely, the detailed steps taken to partition the stock, the sale of it and treatment of the proceeds as property of the decedent, and the approval of the court having jurisdiction, it is difficult to see what more could be needed to make a valid partition. We are of the opinion that it was valid and the stock sold in January and February 1929 was stock belonging to the estate of the decedent to the extent of 9,546 1/2 shares. The profit on that number of shares should be taxed accordingly, and the profit on the balance sold in 1929 should be taxed to petitioner as sales of her individual property.

Decision will be entered under Rule 50 in each proceeding.

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Footnotes

• 1. § 1462. Settlement Without Court Intervention - Order of Distribution - Mismanagement - Citation.

  In all cases where it is provided in the last will and testament of the deceased that the estate shall be settled in a manner provided in such last will and testament, and that such estate shall be settled without the intervention of any court or courts, and where it duly appears to the court, by the inventory filed, and other proof, that the estate is fully solvent, which fact may be established by an order of the court on the filing of the inventory, it shall not be necessary to take out letters testamentary or of administration, except to admit the will to probate and to file a true inventory of all the property of such estate and give notice to creditors and to the state board or person having charge of the collection of inheritance tax, in the manner required by existing laws. After the probate of any such will and the filing of such inventory all such estates may be managed and settled without the intervention of the court, if the last will and testament shall so provide. But when the estate is ready to be closed the court, upon application, shall have authority and it shall be its duty, to make and cause to be entered a decree finding and adjudging that all debts have been paid, finding and adjudging also the heirs and those entitled to the same, such decree to be made after notice given as provided for like decrees in the estates of persons dying intestate. * * * L. '17, p. 666; § 92.

  § 1463. Powers of Nonintervention Executors.

  Executors acting under wills such as are mentioned in the last preceding section shall have power, after the filing of an inventory of the estate if the said estate has been adjudged solvent, to mortgage, lease, sell and convey the real and personal property of the testator without an order of the court for that purpose and without notice, approval or confirmation, and in all other respects administer and settle the estate without the intervention of the court. [L. '17, p. 667, § 94.] ↩