DocketNumber: Docket No. 6563-73
Citation Numbers: 65 T.C. 873, 1976 U.S. Tax Ct. LEXIS 170
Judges: Dawson,Hall,Wilbur,Tannenwald,Raum,Featherston,Forrester,Drennen
Filed Date: 1/29/1976
Status: Precedential
Modified Date: 10/19/2024
Decedent was the sole shareholder of a corporation. Prior to his death, a plan of complete liquidation under
*873 OPINION
Respondent determined deficiencies of $ 160,203 and $ 2,197 in petitioners' Federal income taxes for the taxable years ended May 31, 1969, and May 31, 1970, respectively.
Some issues have been conceded by petitioners. The primary issue for our decision is whether a liquidating distribution received by the Estate of Harry B. Sidles from Bi-State Distributing Corp. constituted "income in respect of a decedent" within the meaning of
All of the facts are stipulated. The stipulation of facts and the exhibits attached thereto are adopted as our findings. The relevant facts are summarized below.
Harry B. Sidles (herein referred to as *172 the decedent) was born on May 2, 1903, and died testate in Omaha, Nebr., on June 12, 1968. During his lifetime the decedent was a cash basis taxpayer.
Daniel J. Monen, Jr., and Janice P. Sidles, the petitioners herein, are the duly appointed and qualified coexecutors of the Estate of Harry B. Sidles (herein referred to as the estate). When the petition was filed herein the legal residence of Daniel J. Monen, Jr., was Omaha, Nebr., and that of Janice P. Sidles was Scottsdale, Ariz.
The estate's fiduciary income tax return (Form 1041) for the taxable year beginning June 12, 1968, and ending May 31, 1969, was filed with the Internal Revenue Service Center at Kansas City, Mo. Subsequently, two amended returns were filed for that year. The estate's fiduciary income tax return for the taxable year ending May 31, 1970, was filed with the District Director of Internal Revenue at Omaha, Nebr.
Bi-State Distributing Corp. (herein referred to as Bi-State) was originally incorporated under the laws of Nebraska in 1930 as the H.E. Sidles Co. On October 17, 1947, the name of the corporation was changed to Bi-State Distributing Corp.
From January 3, 1956, until his death on June 12, 1968, the decedent *173 owned all the outstanding common stock (500 shares) of Bi-State. At his death decedent's adjusted basis in these shares was $ 29,701.04.
As of June 12, 1968, Bi-State's board of directors consisted of three individuals: the decedent (nominated and elected January 20, 1933), Janice P. Sidles (nominated and elected on January 3, 1956), and Areta L. Kelly (nominated and elected on June 26, 1962). Janice P. Sidles and Areta L. Kelly were the decedent's wife and mother-in-law, respectively. On July 22, 1968, Margaret DeVore was nominated and elected to serve the balance of the decedent's term as a director. She was an employee of Bi-State and was not related to the decedent or to either of the other two directors.
*875 At a special meeting held on February 28, 1968, Bi-State's board of directors adopted a plan of complete liquidation and dissolution pursuant to
On February 29, 1968, Bi-State filed with the Nebraska secretary of state a statement of intent to dissolve.
Bi-State*174 owned 11,025 shares of Sidles Co. stock. On March 26, 1968, Sidles Co. made an offer to purchase these shares. The purchase agreement provided that Bi-State would receive cash of $ 13,429 and a 20-year, 6-percent promissory note from Sidles Co. in the face amount of $ 899,000. On the same day Bi-State accepted this purchase offer. Bi-State's basis in the 11,025 shares of Sidles Co. stock at the time of sale was $ 86,344.84.
Bi-State owned certain real and personal property at 4827 Dodge Street in Omaha, Nebr., and from November 1964 until November 1968 was actively engaged in the operation of a gift shop, Areta's, at that location. The gift shop was managed by Areta L. Kelly, decedent's mother-in-law.
After the decedent's death, Bi-State took no action to distribute any of its assets pursuant to the previously adopted plan of liquidation until November 29, 1968, when its board of directors adopted a resolution to distribute all its real and personal property to the decedent's estate. On that date a warranty deed, transferring the real property located at 4827 Dodge Street, and a bill of sale, transferring the personalty to the estate, were executed.
On November 30, 1968, Bi-State*175 assigned all its right, title, and interest in the Sidles Co. promissory note to the estate.
As of the dates of distribution, November 29 and 30, 1968, the assets distributed in liquidation by Bi-State to the estate had a total net fair market value of $ 702,830.85, being the total fair market value of assets received ($ 731,195.88), less liabilities assumed ($ 28,365.03).
Articles of dissolution were executed by Bi-State on November 30, 1968, and were filed with the Nebraska secretary of state on December 17, 1968. On December 17, 1968, a certificate of dissolution was issued.
At the time Bi-State adopted its plan of liquidation and dissolution, which was by act of the corporation,
Pursuant to the provisions of
On the decedent's Federal estate tax return, the executors included the 500 shares of Bi-State stock at a value of $ 702,830.85, valued as of the alternate valuation date (November 30, 1968). This valuation was accepted by respondent following an audit.
In his notice of deficiency dated June 12, 1973, respondent determined that the gain realized from the liquidation of Bi-State constituted income in respect of a decedent. The gain ($ 673,129.81) was calculated by subtracting the decedent's adjusted basis in his Bi-State stock ($ 29,701.04) from the net fair market value of the assets received by the estate as a liquidating distribution ($ 702,830.85). The respondent further determined that a deduction of $ 950 for the taxable year ending May 31, *178 1969, for Federal estate tax attributable to income in respect of a decedent, as claimed by petitioners, was not allowable, but that an estate tax deduction of $ 94,448 was *877 allowable as an offset against income in respect of a decedent totaling $ 674,708 in computing the alternative tax. It was further determined that for the taxable year ending May 31, 1970, the proper deduction for Federal estate tax attributable to income in respect of a decedent was $ 255, rather than $ 686 as claimed on the return.
Petitioners contend that the liquidating distribution received by the estate from Bi-State is not governed by
The principal issue is whether the liquidating distribution received by the estate from Bi-State constituted "income in respect of a decedent" as that term is used in
The amount of all items of gross income in respect of a decedent which are not properly includible in respect of the taxable period in which falls the date of his death or a prior *179 period (including the amount of all items of gross income in respect of a prior decedent, if the right to receive such amount was acquired by reason of the death of the prior decedent or by bequest, devise, or inheritance from the prior decedent) shall be included in the gross income, for the taxable year when received, of:
(A) the estate of the decedent,
those amounts to which a decedent was
Respondent determined that the liquidation proceeds were income in respect of the decedent because, as of the date of his death, the decedent was entitled to and possessed the right to receive the liquidating distribution from Bi-State.
Petitioners argue that the criterion for determining whether an item constitutes "income in respect of a decedent" *180 within the meaning of the Code and regulations sections quoted above is that the decedent must be entitled to the item in the sense that he had a right to the income at the time of his death, which right had been earned during his lifetime. Petitioners further contend that neither the adoption of the plan of liquidation nor *878 decedent's activities or economic efforts created the requisite right to income under
Income in respect of a decedent is defined only in the regulations and not in the statute. An attempt to add such a definition to the Code in 1959 failed. H.R. 3041, 86th Cong., 1st Sess. (1959). However, some guidelines can be gleaned from an examination of congressional intent as reflected in the legislative history of
Prior to 1934 an accrual basis taxpayer was required to pay income tax on those amounts accrued but not received as of the date of his death. However, neither a cash basis taxpayer nor his estate was required to pay *181 a Federal income tax on such amounts because they were considered corpus rather than income.
While this section achieved an equality between cash and accrual basis decedents, it resulted in bunching of income since amounts which would have been received over several years and taxed at lower rates were required to be reported in the year of death. This situation was aggravated by the imposition of war surtaxes and by the realization that taxpayers might be taxed on substantial sums which they had not yet received or might never receive. See S. Rept. No. 1631, 77th Cong., 2d Sess. 100-105 *879 (1942),
Accruals here are to be construed in furtherance of the intent of Congress to cover into income the assets of decedents, earned during their life and unreported as income, *183 which on a cash return, would appear in the estate returns. Congress sought a fair reflection of income. [
Section 134 of the Revenue Act of 1942 added
there is nothing in the legislative history or in the text of
* * *
it is our view that
The facts and circumstances of this case lead us to the conclusion that the amounts received by the decedent's estate on the liquidation of Bi-State constituted income in respect of a decedent within the meaning of
On February 28, 1968, the board of directors of Bi-State Distributing Corp., consisting of Harry *187 B. Sidles, Janice P. Sidles, and Areta L. Kelly, passed a resolution calling for the complete liquidation and dissolution of the corporation. The sole *881 stockholder of Bi-State, Harry B. Sidles, approved the resolution that same day.
The liquidating distribution had its source exclusively in decedent's actions. His affirmative vote for liquidation created a right to receive that distribution, which right existed at his death. Although decedent had the power to rescind the transaction creating such a right, he had not attempted to do so before his death. Had the decedent lived to receive the liquidating distribution, it would have constituted income to him, and consequently such amounts constitute income in respect of a decedent when received by the estate.
There can be no doubt that the estate acquired the right to receive the liquidation distribution from the decedent. The estate's right to such proceeds derived solely from decedent's death and not from its own efforts. Whatever actions the estate took were of no material significance here.
Furthermore, the actions of Bi-State's board of directors which remained to be done at the time of decedent's death do not derogate decedent's *188 right to receive the liquidating distribution. The resolution of November 29, 1968, to distribute the assets in liquidation to decedent's estate, the declaration of the liquidating dividend and the filing of articles of dissolution were mere formalities; ministerial acts necessary to complete the liquidation under State law. On the date of his death the decedent had performed enough substantive acts within his control to perfect his right to receive the liquidating distribution for purposes of
In
Mr. Shaw died November 27, 1958. ICC approval was not obtained until May 5, 1960. On July 21, 1960, pursuant to authority granted by the ICC, the three companies were liquidated pursuant to the agreement earlier agreed upon, and the cash received from the sale was distributed *190 in exchange for shares of the stock of the three companies. The executor of the Estate of Mr. Shaw paid over to Mrs. Keck $ 314,328.53 in exchange for 100 shares of one of the companies liquidated. The court there held that at the time of the decedent's death, his stock had not been converted into
The
The second issue we must decide is whether the estate tax deduction provided in
Based on our conclusion on the first issue, the estate had income in respect of a decedent of $ 674,708. The estate tax attributable to the income in respect of a decedent (and thus the amount of the
In his statutory notice of deficiency the respondent allowed the 691(c) deduction only as an offset against the 691(a) items (capital gain) and not from ordinary income. Respondent's computation in the notice of deficiency was as follows: *884
Petitioners' method results in a tax savings because the deduction was first taken against ordinary income, which is taxable at a higher rate than the capital gains.
Respondent relies on
In
The Court of Appeals, after allowing the offset, noted that:
The offsetting is a
Respondent argues that this language requires us to sustain his position in this case because this will result in a proper matching of the deduction with its related income consistent with congressional intent.
We do not find
The issue confronting us in this case was not before the court in
The scope of the 691(c) deduction has been explored in three subsequent cases.
In
We are of the view, however, that taxpayers are not limited to an "either-or" choice; we think that to carry out the purpose of
In
The taxpayer did not use the alternative tax in
The issue before us is precisely the one considered in
to provide approximately the same tax consequences in the case of a decedent whose gross estate includes claims to income as in the case of a decedent all of whose income receivables had been collected (and income tax paid thereon) prior to his death. * * * [2 Mertens, Law of Federal Income Taxation, sec. 12.102(b), *199 ch. 12, p. 404.]
* * *
To adopt the Government's view would result in the imposition of both estate and income tax on the income amounts where the alternative computation was used. * * * [
*887
(A) General rule. -- A person who includes an amount in gross income under subsection (a) shall be allowed, for the same taxable year,
We have examined the legislative history of
Our holding results in as close an approximation as is possible without adding additional language to
Accordingly, we conclude that the estate tax deduction provided by
Hall,
Tannenwald,
The fact that the right to proceeds of liquidation may not have sufficiently ripened to require them to be included in decedent's income on the theory of constructive receipt (decedent being a cash basis taxpayer)
In the foregoing context, I believe
My disagreement with the majority goes *206 to the issue of how the estate tax deduction under
In
In
In
In
Unquestionably,
My own view is that
Another possible approach is that reflected in
I would sustain respondent's computation in the instant case.
*894 Featherston,
This imprecise test is not easily applied to cases involving the liquidation of corporations. In my opinion, in such cases "The crucial question should be whether the redemption or liquidation has proceeded to a point beyond the control of the decedent prior to his death." Ferguson, Freeland & Stevens, Federal Income Taxation of Estates and Beneficiaries 208 (1970). The issue of whether a contract for the disposition of property has created income in respect of a decedent, e.g., via sale, is analogous. In contract cases, the issue is whether, on the date of death, the transaction has proceeded to the point where the value of the property has been converted into an intangible right to receive the ultimate proceeds of the sale or other disposition. Sec. 1.691(a)-2(b),
[Decedent] entered into a binding contract prior to his death. That contract required the conveyance of the property from whence the income in litigation was derived. The contract created a right to these proceeds in [decedent] at the time the contract was executed. The contract inured to and was binding upon his executor. * * *
In contrast, in
I do not think the liquidation of Bi-State, at decedent's death, had proceeded to a point beyond his control so that his stock had been converted to a mere right to receive income. It bears reiterating *217 that decedent was
At any time prior to his death, decedent, the sole shareholder, could have reversed the decision to liquidate Bi-State.
Under the
*896 The importance of the power to rescind a decision to liquidate a corporation has been emphasized in cases dealing with the transfer of stock in a corporation after the adoption of a resolution to liquidate. In
we read
To the same effect, see
Deciding the first issue in this fashion *220 would obviate the necessity for dealing with the second one.
1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩
2. This section reads in relevant part:
By the act of the corporation, a corporation may, at any time prior to the issuance of a certificate of dissolution by the Secretary of State, revoke voluntary dissolution proceedings theretofore taken, in the following manner:
(1) The board of directors shall adopt a resolution recommending that the voluntary dissolution proceedings be revoked, and directing that the question of such revocation be submitted to a vote at a special meeting of shareholders;
(2) Written or printed notice, stating that the purpose or one of the purposes of such meeting is to consider the advisability of revoking the voluntary dissolution proceedings, shall be given to each shareholder of record entitled to vote at such meeting within the time and in the manner provided [in this act] for the giving of notice of special meetings of shareholders;
(3) At such meeting a vote of the shareholders entitled to vote thereat shall be taken on a resolution to revoke the voluntary dissolution proceedings, which shall require for its adoption the affirmative vote of the holders of at least two-thirds of the outstanding shares; and
(4) Upon the adoption of such resolution a statement of revocation of voluntary dissolution proceedings shall be executed by the corporation by its president or a vice president and by its secretary or an assistant secretary, which statement shall set forth:
(a) The name of the corporation;
(b) The names and respective street addresses of its officers;
(c) The names and respective street addresses of its directors;
(d) A copy of the resolution adopted by the shareholders revoking the voluntary dissolution proceedings;
(e) The number of shares outstanding; and
(f) The number of shares voted for and against the resolution, respectively.↩
3. Under present law, sec. 1014(c) provides that the general rule of sec. 1014(a) that the basis of property acquired from a decedent shall be the fair market value of the property on the date of the decedent's death, "shall not apply to property which constitutes a right to receive an item of income in respect of a decedent under
4. It is clear that the determination of whether a right or entitlement existed is to be made at the date of decedent's death.
See
"It is our conclusion that,
and
"It is implicit in the statute and in the definition that this condition or limitation has reference
Whatever actions the estate or Bi-State's board of directors could have taken after decedent's death are not material here. Therefore, the assignment-of-income cases, where the courts considered whether the transferees had power to revoke the plan of liquidation, cited by petitioners' counsel, are inapposite.↩
5. For additional factors see
6. Although the decedent's right to the liquidating distribution at his death was an absolute and unconditional one, it should be noted that
Further, it has been held that the requisite right need not be a legally enforceable one,
1. This consists of $ 673,130 realized on the liquidation of Sidles Co. and $ 1,578 from a note receivable of the Sidles Co.↩
1. Compare
2. It is not without significance that in
3. During the taxable years in question, that section read as follows:
(1) a partial tax computed on the taxable income reduced by an amount equal to 50 percent of such excess, at the rate and in the manner as if this subsection had not been enacted, and (2) an amount equal to 25 percent of the excess of the net long-term capital gain over the net short-term capital loss.↩
4. Some confusion exists in the cases regarding the mandatory or elective nature of the alternative tax, but this is primarily due to the fact that where the alternative tax produces a result more favorable to the taxpayer, he will always use it. However, the alternative tax is required to be applied if it produces a lower tax. See
5. The taxpayer had not sought to apply any part of the estate tax deduction against ordinary income.↩
6. It should be noted that the alternative tax was not involved in either
Edna Rice Meissner, Dorothy M. Freeman, and Edwin B. ... , 364 F.2d 409 ( 1966 )
Isabel Collier Read, as of the Estate of Miles Collier, ... , 320 F.2d 550 ( 1963 )
John P. Kinsey and Edith B. Kinsey v. Commissioner of ... , 477 F.2d 1058 ( 1973 )
Eleanor Quick v. United States , 503 F.2d 100 ( 1974 )
Walter M. Weil and Adele D. Weil v. Commissioner of ... , 229 F.2d 593 ( 1956 )
United States v. Memorial Corporation , 244 F.2d 641 ( 1957 )
Commissioner of Internal Revenue v. Linde , 213 F.2d 1 ( 1954 )
Estate of Helen Davison, Deceased, First National Bank of ... , 292 F.2d 937 ( 1961 )
W. B. Rushing v. Commissioner of Internal Revenue , 441 F.2d 593 ( 1971 )
O'Daniel's Estate v. Commissioner of Internal Revenue , 173 F.2d 966 ( 1949 )
Edward A. Jacobs v. United States , 390 F.2d 877 ( 1968 )
Jacobs v. United States , 280 F. Supp. 437 ( 1966 )
Estate of Nilssen v. United States , 322 F. Supp. 260 ( 1971 )
Edwin W. Hudspeth and Maxine G. Hudspeth v. United States , 471 F.2d 275 ( 1972 )
george-w-and-mary-ann-keck-v-commissioner-of-internal-revenue-mary-ann , 13 A.L.R. Fed. 605 ( 1969 )
Pope & Talbot, Inc. v. Commissioner of Internal Revenue , 515 F.2d 155 ( 1975 )
Quick v. United States , 360 F. Supp. 568 ( 1973 )
ellsworth-m-statler-trust-of-january-1-1920-for-ellsworth-morgan , 361 F.2d 128 ( 1966 )