Stearns v. Commissioner

ESTATE OF F. M. STEARNS, FRANK B. STEARNS, EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Stearns v. Commissioner

Docket Nos. 16672, 19922.

United States Board of Tax Appeals

16 B.T.A. 889; 1929 BTA LEXIS 2498;

June 4, 1929, Promulgated

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">*2498 1. Where a fiduciary, in good faith, seasonably filed his returns for the years 1920 and 1921, respectively, on Form 1041 instead of on Form 1040 as required by the applicable regulations, the returns were filed in sufficient compliance with the statutes and the statute of limitations began to run at the respective dates of filing.

2. Held, under the facts of this proceeding assessment and collection of the taxes in question are barred by the provisions of section 277 of the Revenue Act of 1926.

J. W. Reavis, Esq., for the petitioner.

Brooks Fullerton, Esq., for the respondent.

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VAN FOSSAN

">*889 These proceedings, which were consolidated for hearing and decision, were brought for a redetermination of deficiencies in income taxes of $8,426.69 for the calendar year 1920 and of $4,208.87 for the calendar year 1921.

The petitioner alleges in effect: (a) That the respondent erred in his determination that profit received from the sale of certain real property by the petitioner during each of the years 1920 and 1921 should be reflected in the taxable net income of the petitioner for each of said years, respectively, and income tax paid">*2499 thereon instead of such profit being reflected in the individual returns of the beneficiaries of the estate to whom it was actually distributed in each of the years 1920 and 1921, respectively.

(b) That the assessment and collection of the deficiency asserted for each of the years 1920 and 1921 are barred by the expiration of the period of time within which the assessment may be made.

The facts were stipulated by the parties.

FINDINGS OF FACT.

F. M. Stearns of Cleveland, Ohio, died testate on January 30, 1911. His last will and testament and a codicil thereto were thereafter duly admitted to probate by the Probate Court in and for Cuyahoga County, Ohio. Thereupon, on February 7, 1911, Celia B. Stearns, widow of F. M. Stearns, and Frank B. Stearns, son of F. M. Stearns, were duly appointed executors of the estate of F. M. Stearns. After qualification the executors continued to act as such until the death of Celia B. Stearns on October 1, 1921, and thereafter Frank B. Stearns was, and now is, the duly appointed, qualified and acting executor of the estate of F. M. Stearns.

">*890 By the first three paragraphs of his will the testator provided for the payment of">*2500 debts and made certain bequests. The fourth, fifth and sixth paragraphs of the will are as follows:

FOURTH: I give, devise and bequeath to my beloved wife the use of the house and lot now occupied by myself as a home and situated at the corner of Euclid Ave. and Republic St., in the City of Cleveland, to live in or to rent or release as she may deem it advisable, and to receive all the income, rental, emoluments derived therefrom, as long as she lives, provided however, that in case my executors deem it advisable they may sell said residence, make, execute and deliver proper deeds therefor, and out of the proceeds of the sale, deliver and pay over to my wife one-third of the proceeds thereof. The remaining two-thirds of the proceeds shall be disposed of as hereinafter provided.

FIFTH: I give, devise and bequeath to my beloved wife during her life time the use, income and usufruct of all the rest of my property real, personal and mixed wherever situated, except as the same may be charged by subsequent bequests in this my last will and testament.

SIXTH: After the death of my beloved wife, or in the event that she die previous to my death, I give, devise and bequeath all my">*2501 property, real, personal and mixed not hereinbefore disposed of in Bequests one, two, three and four, to my three children, share and share alike, and if any one of my said children die leaving issue, then and in that event said issue shall receive the full share of the deceased parent.

On or about January 1, 1920, the executors of the estate of F. M. Stearns entered into a contract with one G. W. Grandin for the sale to Grandin by the estate of the parcel of real estate referred to in the fourth paragraph of the decedent's will, this parcel being described in the contract by metes and bounds.

The second paragraph of the agreement between the executors and Grandin is as follows:

SECOND: The price of said premises is Three Hundred Forty Seven Thousand Five Hundred and Sixty Dollars ($347,560) on the basis of Four Thousand Dollars per foot of said Euclid Avenue frontage, payable, one-fifth cash in hand, the receipt of which is hereby acknowledged, the balance in four equal instalments of Sixty Nine Thousand Five Hundred and Twelve Dollars each on the first day of January 1921, 1922, 1923 and 1924, with interest on such deferred payments at the rate of six per cent (6%) per annum">*2502 from the date thereof, payable on the 1st days of July and January of each year.

The agreement between the executors and Grandin also contained the following paragraph:

FIFTH: If Vendee, his heirs, executors, administrators or assigns shall well and truly pay the full purchase price of said premises with interest, taxes and assessments, at the time and in the manner above stipulated, then Vendors, or their successors, will execute and deliver or cause to be executed and delivered to Vendee, a good and sufficient warranty deed of said premises, free and clear of all encumbrances except as to any liens or encumbrances placed thereon by Vendee, or as to taxes and assessments which Vendee assumes to pay hereunder, and will furnish an extension of the abstract title as to the interest of the Vendors, their successors or the beneficiaries under the said will, showing the title to be as aforesaid.

">*891 On December 20, 1919, prior to the execution of the contract of sale, all the parties entitled under the will of F. M. Stearns to any interest in the said realty or the profits thereof, namely: Celia B. Stearns, widow; Frank B. Stearns, son; and Clara Stearns Zug, and Nellie">*2503 J. Stearns, daughters of F. M. Stearns, executed an agreement as follows:

WHEREAS CELIA B. STEARNS is the widow and FRANK B. STEARNS, CLARA STEARNS ZUG AND NELLIE J. STEARNS are the only children of F. M. Stearns, deceased, late of the City of Cleveland, the two first named having been appointed executors of the last will of said decedent and duly appointed and qualified as such in and by the Probate Court of Cuyahoga County; and

WHEREAS by virtue of the power conferred upon them as such executors by the fourth clause of the will of said decedent they have entered into a contract of sale of the Stearns homestead at the corner of Euclid Avenue and Republic Street in said City; and

WHEREAS by the provisions of said will one-third of the proceeds of such sale belong to said Celia B. Stearns as widow, she likewise claiming to be entitled under the terms of said will to the income for her life of the remaining two-thirds of such proceeds; and

WHEREAS the parties hereto desire and said Celia B. Stearns consents that the payments of principal upon such purchase price as the same are from time to time received by the executors be at once distributed;

NOW, THEREFORE, IT IS AGREED:

">*2504 FIRST. The said Celia B. Stearns shall receive one-third of each instalment of principal paid upon the purchase price of said premises as the same is received by the executors, and in addition thereto will, during her life time, receive the income or interest upon all deferred payments as the same is received.

SECOND. That two-thirds of all payments received upon the principal of the purchase price of said premises shall be by the executors at once distributed among the three children above named, share and share alike.

THIRD. Each of the parties hereto guarantees to the extent of distributions received by them respectively of such two-thirds, to indemnify the executors against and save them harmless from any liability or loss to which they or their estates may be subjected by reason of substituted beneficiaries provided for in paragraph Sixth of said will in case of the death of any of said children prior to the death of the said Celia B. Stearns.

It is understood by all parties that the purchase price above referred to is the net amount received after payment of brokerage fees and other expenses of the sale.

WITNESS the hands of said parties this 20th day of December, ">*2505 A.D. 1919.

(Signed) CELIA B. STEARNS.

FRANK B. STEARNS.

CLARA STEARNS ZUG.

NELLIE J. STEARNS,

By GEORGE L. DAKE,

her Attorney in Fact.

The fair market value of the parcel of real estate referred to was, on March 1, 1913, $104,000, and the gross profit ultimately to be derived from the sale was $243,160. The net profit ultimately to be derived after the deduction of the expenses of the sale was $233,144.19. ">*892 One-fifth of the purchase price, namely $69,512, was paid upon the execution of the contract and the balance was paid to the estate in four equal installments of $69,512 each on the first day of January in each of the years 1921, 1922, 1923, and 1924.

Upon the receipt on or about January 1, 1920, by the executors of the estate of F. M. Stearns of the first installment of $69,512 of the purchase price of the realty paid pursuant to the contract of sale, the executors of the estate paid and distributed to Celia B. Stearns one-third of the amount of the installment and paid to and distributed equally among Frank B. Stearns, Clara Stearns Zug, and Nellie J. Stearns, the only children of F. M. Stearns, the remaining two-thirds of the installment">*2506 so paid upon the purchase price. On or before March 15, 1921, the executors of the estate of F. M. Stearns made, executed, verified by proper oath, and filed on Form 1041 with the collector of internal revenue at Cleveland, Ohio, fiduciary return of income for the estate of F. M. Stearns for the calendar year ending December 31, 1920, disclosing therein net income of the estate for the calendar year from various sources of $5,104.46 and the distribution to Celia B. Stearns during the calendar year 1920 of $4,595.26. This return, however, did not disclose the sale of the realty hereinbefore referred to or receipt of the first installment of the purchase price thereof.

Celia B. Stearns died on October 1, 1921.

On or before March 15, 1922, the executor of the estate of F. M. Stearns made, executed, verified by proper oath, and filed on Form 1041 with the collector of internal revenue at Cleveland, Ohio, fiduciary return of income for the estate of F. M. Stearns for the calendar year ending December 31, 1921. This return disclosed net income of the estate for the calendar year 1921 from various sources, aggregating $67,071.69, and included profit from the sale of the real estate">*2507 hereinbefore referred to, amounting to $48,712, and also disclosed distributions during the year 1921 of the entire amount of such net income as follows:

To Celia B. Stearns	$34,516.82
Estate of Celia B. Stearns	162.50
Frank B. Stearns	10,824.89
Nellie J. Stearns	10,824.89
Clara Stearns Zug	10,824.89

For the calendar year 1920 Celia B. Stearns returned as profit and income taxable to her the sum of $12,898.73 as her portion of the profit resulting from the installment payment on the sale price of the real estate paid during the calendar year 1920 and Frank B. Stearns returned as profit and income taxable to him the sum of $8,599.15 as his portion of the profit so resulting, both of such returns being made under protest.

">*893 For the calendar year 1921 Celia B. Stearns returned as profit and income taxable to her the sum of $16,785.25 as her portion of the profit resulting from the installment on the sale price of the realty paid during 1921 and Frank B. Stearns returned as profit and income taxable to him the sum of $10,824.89 as his portion of profit so resulting.

The parties to these proceedings have stipulated that they are not advised whether">*2508 Clara Stearns Zug and Nellie J. Stearns, two of the distributees of the estate, returned as income to them for the calendar years 1920 and 1921 distributions received by them from the estate which represented proceeds from the sale of the real property herein referred to.

On May 25, 1926, the Commissioner mailed to Frank B. Stearns, executor of the estate of F. M. Stearns, a 60-day letter, asserting a deficiency in tax for the year 1920 amounting to $8,426.96. The Commissioner held that the sale of the realty was an installment sale and that the profit of $46,628.65 resulting from the installment of the purchase price received during 1920 should be included in the taxable income of the estate of F. M. Stearns for the calendar year 1920.

On July 20, 1926, the Commissioner mailed to Frank B. Stearns, executor of the estate of F. M. Stearns, a 60-day letter, asserting a deficiency in tax for the year 1921 of $4,208.87. This deficiency was based upon the determination that $31,085.77 of the purchase price of the realty paid during the year 1921 was profit taxable to the estate, the Commissioner having determined that the portion of the profit paid to the widow during 1921, namely, ">*2509 $15,542.88, should not be included in the net income of the estate. However, by his answer to the petition for redetermination of the tax deficiency asserted for the year 1921, the respondent alleged that the amount of $31,085.77 stated by him in the 60-day letter as the profit from the installment paid during the year 1921 was in error and that the correct amount of taxable profit received by the petitioner for the calendar year 1921 as the result of the installment payment was $46,628.65.

The executors of the estate of F. M. Stearns have never made, executed, or filed any waivers or agreements extending the period of limitation within which income taxes may be assessed against the estate of F. M. Stearns for the calendar years 1920 or 1921.

There is no allegation that either the return for the year 1920 or the return for the year 1921 was false or fraudulent with intent to evade tax.

">*894 OPINION.

VAN FOSSAN: Two issues are presented. The second is whether the assessment of the taxes in question for the year 1920 and the year 1921 is barred by the statute of limitations.

Section 277 of the Revenue Act of 1926, which is applicable to the second issue, provides">*2510 in substance, among other things, that the income taxes imposed by the Revenue Act of 1918 shall be assessed within five years after the return was filed and that the income taxes imposed by the Act of 1921 shall be assessed within four years after the return was filed.

Section 278(a) of the Revenue Act of 1926 provides, among other things, that "in the case of * * * a failure to file a return a tax may be assessed or a proceeding in court for the collection of such tax may be begun without assessment at any time."

On or about March 15, 1921, the petitioner filed an income-tax return for the year 1920. On or about March 15, 1922, petitioner filed a return for the year 1921. Both returns were made on Form 1041. An alleged deficiency with respect to the 1920 tax was determined by the respondent on May 25, 1926, which latter date is more than five years after the return for the year 1920 was filed on Form 1041. The asserted deficiency in tax for the year 1921 was determined by the respondent on July 20, 1926, which is more than four years after the return for the year 1921 was filed on Form 1041.

The position of the respondent is that the applicable regulations issued pursuant">*2511 to the Revenue Acts of 1918 and 1921, which have the force and effect of law, require that if the estate had taxable income in the years 1920 and 1921 the fiduciary should report for each of such years on Form 1040. The respondent asserts that the petitioner had income taxable to it in both of the years 1920 and 1921 and that consequently a return filed on Form 1041 instead of on Form 1040 was not filed in compliance with the regulations and the statutes. The respondent, therefore, denies that the assessment of the taxes in question is barred by the statutes of limitations. In other words, the respondent's position is, in substance that in accordance with section 278(a) of the Revenue Act of 1926 the taxes here in question may be assessed or a proceeding in court for the collection of such taxes may be begun without assessment at any time.

In respect to the question involved in the second issue, there is no material distinction in principle between this case and the case of . In the Werbelovsky case, as in this case, the executor had filed his return in good faith on Form 1041. In that case, as in this case, the">*2512 respondent claimed that there was income taxable to the estate and ">*895 that, therefore, pursuant to the applicable regulations, the report should have been filed on Form 1040. In the instant case there is no allegation that the returns filed on Form 1041 were false or fraudulent returns "with intent to evade tax" nor was there a similar allegation in the Werbelovsky case.

Therefore, in accordance with the views expressed in the Werbelovsky case, supra, we are of the opinion that the returns filed by the petitioner for the year 1920 and the year 1921 sufficiently comply with statutory requirements and that the assessment and collection of the taxes in question are barred by the provisions of section 277 of the Revenue Act of 1926.

Reviewed by the Board.

Judgment will be entered for the petitioner.