Roebling v. Commissioner

Joseph M. Roebling, Petitioner, et al. 1 v. Commissioner of Internal Revenue, Respondent Roebling v. Commissioner Docket Nos. 30678, 306791 United States Tax Court 18 T.C. 788; 1952 U.S. Tax Ct. LEXIS 135; July 24, 1952, Promulgated *135 Decisions will be entered for the respondent. Held, income received from dividends on stock held by an estate is properly taxed to the beneficiaries of the estate if the period of administration of the estate has terminated and the income is currently distributable. Harold R. Medina, Jr., Esq., and Albert Rosenblum, Esq., for the petitioners. Maurice S. Bush, Esq., for the respondent. Van Fossan, Judge. VAN FOSSAN *789 The respondent determined deficiencies in income and victory taxes, as follows: Docket Petitioner number Year Deficiency Joseph M. Roebling 30678 [1943] $ 8,193.27 [1944] 9,901.41 30679 [1945] 28,986.85 [1946] 19,433.18 [1947] 12,025.81 [1948] 10,980.00 Ruth M. Roebling 30680 [1945] 21,378.20 [1946] 21,333.87 [1947] 9,539.44 [1948] 18,000.27 Ferdinand W. Roebling, III 30681 [1945] 24,299.29 [1946] 23,015.03 [1947] 15,249.02 Ferdinand W. Roebling, III, and Estate of Mary S. Roebling, Deceased, Ferdinand W. Roebling, III, Administrator 30682 [1948] 10,949.63 *136 The sole issue in these consolidated proceedings is whether income is to be taxed to an estate or to the beneficiaries of that estate. FINDINGS OF FACT. The facts stipulated are so found. Petitioners, Joseph M. Roebling and Ferdinand W. Roebling, III, are the sons of Ferdinand W. Roebling, Jr., hereinafter referred to as the decedent, who died testate on May 29, 1936. Petitioner Ruth M. Roebling is the widow of the decedent. Joseph M. Roebling and Ferdinand W. Roebling, III, were appointed executors of their father's will and have continued in this capacity until the time of the hearing. The net estate of the decedent subject to tax under the Revenue Act of 1926 amounted to $ 7,214,778.35. Under the Revenue Act of 1932, the net estate aggregated $ 7,274,778.35. The total net Federal estate tax liability was $ 3,240,214.79 subject to a credit for state taxes paid. Under the terms of their father's will, Joseph M. Roebling and Ferdinand W. Roebling, III, each received one-third of the residuary estate. Ruth M. Roebling received a similar share. The residuary estate consisted of the assets remaining after payment of debts, funeral expenses, and specific cash legacies. These *137 legacies were paid during 1936. All debts of the estate were paid prior to 1940. In the years from 1936 to 1940, $ 1,456,572.32 was distributed to Ruth M. Roebling. During the same period, $ 1,297,642 was distributed to Joseph M. Roebling. Ferdinand W. Roebling, III, received $ 1,297,804.01 from the estate during these years. The distribution included $ 1,207,570 to each of the three beneficiaries in the common *790 stock of John A. Roebling's Sons Company. Nothing was distributed to any legatee during the years from 1941 through 1948. Among the assets retained in the estate after December 31, 1940, were 50,000 shares of Class B preferred stock of the First-Mechanics National Bank of Trenton, New Jersey. These shares had been valued for estate tax purposes at $ 100,000. Dividends were received by the executors on these shares and reported for income tax purposes by the estate in the following amounts: Year Dividend [1941] $ 125,000 [1943] 20,000 [1944] 40,000 [1945] 80,000 [1946] 80,000 [1947] 40,000 [1948] 40,000 The afore-mentioned stock was acquired in the following manner: Prior to July 31, 1934, the outstanding stock of the First-Mechanics National Bank of Trenton, *138 New Jersey, hereinafter called the Bank, consisted of 40,000 shares of common stock of a par value of $ 50. The decedent owned 1,405 of these shares. In 1934 the Bank's liabilities exceeded the depressed value of its assets. The Reconstruction Finance Corporation, hereinafter called the R. F. C., agreed to invest $ 2,000,000 in a new issue of preferred stock of the Bank. The R. F. C. conditioned its offer upon investment of $ 1,200,000 by the directors and/or shareholders of the Bank in another new issue of preferred shares junior to the R. F. C. stock. In late 1934 the R. F. C. bought $ 2,000,000 par value Class A cumulative preferred stock of the Bank. In November 1934 the decedent bought $ 1,000,000 par value Class B preferred stock. This purchase consisted of 50,000 shares of $ 20 par value cumulative preferred stock retirable at $ 20 per share, plus accrued dividends. The remaining $ 200,000 par value Class B stock was bought by 22 other purchasers. In August and October, 1935, the R. F. C. purchased $ 3,500,000 par value Class A preferred stock of the Bank. Each share of each class of stock was entitled to one vote. The R. F. C. had voting control of the stock but*139 did not control Bank policies in fact. The Articles of Association, as amended on October 25, 1935, contained a limitation on retirement of stock. The limitation provided that, except with the approval of the Comptroller of the Currency, no preferred stock, Class A or B, shall be called or purchased for retirement unless the unimpaired capital, surplus and undivided profits and retirement fund exceed $ 5,500,000 by an amount necessary for such retirement. Nor shall any preferred stock be retired unless all accrued dividends shall have been paid on all the outstanding shares of the class to be retired. No Class B preferred stock could *791 be retired as long as any Class A preferred stock was outstanding. These Articles of Association were not amended in any material respect until 1947. The decedent's will authorized the executors to retain any of his property in the same form of investment in which it might be at his death. The executors were also authorized to distribute stocks, bonds, or other investments in lieu of cash. The executors retained the 50,000 shares of Class B preferred stock of the Bank and did not distribute any of these shares to the legatees during the*140 period of 1942 to 1948. There was no market for the stock during the years following the depression. One small lot of Class B preferred stock was sold, however, during the period in question, at a loss. Joseph M. Roebling has been a director of the Bank since 1932. His brother, Ferdinand, has been a director since 1934. No dividends were paid on common stock of the Bank from 1936 to 1949. In 1946 a plan of recapitalization of the Bank was formulated. It called for the issuance of 40,000 additional shares of common stock to be sold for at least $ 30 a share. The proceeds were to be used to retire all the Class B preferred stock. The plan was adopted by the Bank in 1947 and was approved by the R. F. C. and the Comptroller of the Currency. At that time 350,000 shares of Class A preferred stock of the Bank was outstanding. Two common stockholders instituted a suit in the Court of Chancery of New Jersey to enjoin execution of the plan. The Bill of Complaint in this suit was dismissed in July 1948. On January 4, 1949, the 50,000 shares of Class B preferred stock held by the estate was retired for $ 1,000,000. The estate did not distribute the $ 1,000,000 but in that year $ *141 144,619.08 was distributed in cash. Securities of a value of $ 142,229.32 were also distributed in that year. During 1950, $ 15,000 in cash was distributed to the residuary legatees. After her husband's death, Ruth M. Roebling sold residences in Trenton and Spring Lake, New Jersey. She also sold about $ 530,000 worth of securities at an approximate loss of $ 100,000. Ruth M. Roebling asked the executors to distribute one-third of the Class B preferred stock to her but they refused. She did not sell any of her stock in the John A. Roebling's Sons Company. The Roebling family, including cousins, aunts and uncles of the petitioners, have been united in the voting of their controlling stock in John A. Roebling's Sons Company. The executors have never filed an accounting and do not intend to do so. The respondent determined that the income and capital gains in the years in question from the decedent's estate should be taxed to the petitioners. The period of administration or settlement of the estate expired previous to any of the taxable years in question. *792 OPINION. The only issue presented in these proceedings is to whom the income arising from dividends on Class B preferred*142 stock of the Bank should be taxed. The dividends in question were paid to the decedent's estate in 1941 and in the years of 1943 to 1948, inclusive. The estate reported the dividends as income for tax purposes. The respondent has determined that the income is taxable to the petitioners. The petitioners contend that the income was taxable to the estate under the provisions of section 161 (a) of the Internal Revenue Code2 because the estate was in the process of administration during the taxable years involved. Most of the estate was distributed by 1940 but the Class B preferred shares of the Bank were retained by the executors. The petitioners argue that this stock was kept*143 intact by the executors in order to recoup the $ 1,000,000 invested by their father in 1934. The petitioners further argue that their father loaned the money to the Bank to help that institution during the depression. They contend that the loan merely took the form of a stock investment. We cannot agree. No promise, express or implied, was made by the Bank to pay back any specific sum to the decedent or his estate. The basic elements of a loan and a debt have not been established. The shares of stock received by petitioners' father were made retirable at a certain amount but no debt relationship was spelled out. The R. F. C. required the investment to be made in preferred stock junior to the issue received by that agency. The decedent's motive may have been to put sufficient funds in the hands of the Bank to enable it to secure the R. F. C. funds and survive the depression. The method employed to advance these funds was, however, an investment in stock and not a loan. The executors did not hold the stock during the years in question to collect a debt owed to decedent or his estate. The petitioners contend that the stock was kept in a single block in order to realize $ 1,000,000*144 upon the shares which had little, if any, value when received. The stock had been valued at $ 100,000 for estate tax purposes but no dividends had been received prior to 1941. Thus, the estate, it is said, remained in the process of administration from 1942 to 1948 for the purpose of collecting an asset. In this respect, it must be borne in mind, however, that the $ 1,000,000 to be received on *793 retirement of the stock was not a then present asset owned by the estate. The stock itself was an estate asset but the retirement payment was no more than a possibility. The stock possessed a possible future value of $ 1,000,000 if the Bank prospered sufficiently to retire the issue and if it determined to do so. Before retirement could occur, several requisites contained in the amended Articles of Association had to be met. The executors held the stock as a block with the hope, and after 1946, with the expectation, of receiving the retirement payment. However, the hope of recovering a greater amount if the Bank was able to retire the stock does not mean that the executors must wait for this contingency to occur. The stock itself had little value when received. No market *145 for it existed even in 1940. The $ 1,000,000 retirement payment cannot be classified as an asset of the estate to be collected by the executors. The administration of an estate cannot be prolonged indefinitely or long after any need for it exists. In such an instance the administration may be deemed terminated for tax purposes. William C. Chick, 7 T. C. 1414, affd. 166 F. 2d 337. Regulations 111, section 29.162-1, provide that: * * * The period of administration or settlement of the estate is the period required by the executor or administrator to perform the ordinary duties pertaining to administration, in particular the collection of assets and the payment of debts and legacies. It is the time actually required for this purpose, whether longer or shorter than the period specified in the local statute for the settlement of estates. * * * This portion of the Regulations was approved in Estate of J. P. Armstrong, 2 T. C. 731. In a case before this Court the Court may determine the time actually required to perform the ordinary duties pertaining to administration. Marin Caratan, 14 T. C. 934.*146 According to petitioners, in the instant case, the administration of decedent's estate continued from 1936 through 1948. We are of the opinion that petitioners, on whom rested the burden of proof, have presented no valid or compelling reason to justify the extension of the administration into any of the taxable years. An executor cannot extend the period of administration by engaging in activities which are not part of his administrative duties. Josephine Stewart, 16 T. C. 1, affd. 196 F. 2d 397. The estate was not, during this period, engaged in the collection of an asset, the payment of a debt or any of the ordinary duties of administration. Unlike the situation in Estate of Isadore Zellerbach, 9 T. C. 89, affd. 169 F. 2d 275, the estate liabilities had been paid prior to the taxable years. Moreover, the process of awaiting retirement of the stock could have been carried out as well by the same parties following distribution of stock. Alma Williams, 16 T. C. 893. *794 We do not have here, as in Frederich v. Commissioner, 145 F. 2d 796,*147 the continuation of administration over a considerable period under the direction and approval of a state court. The process of awaiting retirement of the stock for 14 years was neither necessary nor reasonably related to the administration of the estate. The criterion, as we see it, is not as petitioners contend, analogous to the "business purpose" test but is an "administrative purpose" test. The petitioners urge that it was necessary to retain the stock in a single block to insure the control which flowed from ownership of the shares. The 50,000 shares of preferred stock and the small number of common shares held by the estate were a minority of the Bank's shares outstanding. The R. F. C. owned approximately 10 times as many shares, each similarly entitled to one vote. The R. F. C. may not in fact have imposed and exercised its control over Bank policies but this does not establish a basis for assuming that the estate would control the Bank in future years and bring about the retirement of its stock. Whatever control was exercised by the estate similarly could have been exercised after distribution. The Roebling family has been united in the voting of its stock in John A. *148 Roebling's Sons Company though ownership was scattered. No obstacle appears to the continued voting of the 50,000 Class B preferred shares of the Bank as a block by the two executors and their mother after distribution. No condition upon retirement of the Class B preferred shares prevented distribution of the stock. Not only did ownership of the shares bear no relationship to retirement of the stock but we fail to see any possible adverse effect upon the chances of retirement if the shares were distributed to the beneficiaries in their individual capacity. Other available methods of proceeding existed. The petitioners argue that the executors feared that Ruth M. Roebling would dispose of her distributive share of the stock and thus jeopardize the chances of retiring the stock. This fear that one beneficiary might sell her share of the assets upon distribution appears to have little relation to the executors' duties of administration. Moreover, there is serious doubt that this fear was justified. No market existed for the stock and it became productive of yearly income through dividends after 1940. In this regard, it should be noted that Ruth M. Roebling sold two houses but*149 sold none of the stock in John A. Roebling's Sons Company. Here, as in Alma Williams, supra, we reach the conclusion, in view of all the facts, that the period of administration and settlement of the estate had expired previous to the taxable years and that the income should be taxed accordingly. *795 In the event that we reach the aforestated conclusion, the petitioners contend that the residuary beneficiaries could not be taxed on the dividends under the provisions of sections 162 (b) and 162 (c), I. R. C.3 There is no doubt that the dividends were not paid or credited to the petitioners within the terms of section 162 (c), I. R. C. An estate is entitled to a deduction under section 162 (b), I. R. C., on income which is to be distributed currently by the fiduciary to the legatees but the amount so allowed as a deduction is to be included in the net income of the legatees whether distributed to them or not. By the terms of the statute, "income which is to be distributed currently" includes income which, within the taxable year, becomes payable to the legatee, heir, or beneficiary. If the period actually required for performance of the ordinary*150 duties of administration of the estate had terminated and no administrative reason exists why the assets should not be distributed, the income thereof becomes currently distributable and is taxable to the beneficiary under section 162 (b), I. R. C.Estate of W. G. Farrier, 15 T. C. 277. In this instance, even prior to the termination of administration, the executors could have distributed the stock to the beneficiaries if they desired so to do. This was not true in Estate of Margaret McAllen Fairbanks, 3 T. C. 260, cited by petitioners. We have held the period of administration of the estate to have terminated prior to the taxable years in question. The income arising from the dividends, being currently distributable, is properly taxed to the petitioners. *151 Decisions will be entered for the respondent. Footnotes 1. Proceedings of the following petitioners are consolidated herewith: Ruth M. Roebling, Docket No. 30680; Ferdinand W. Roebling, III, Docket No. 30681; and Ferdinand W. Roebling, III, and Estate of Mary S. Roebling, Deceased, Ferdinand W. Roebling, III, Administrator, Docket No. 30682.↩ 1. Proceedings of the following petitioners are consolidated herewith: Ruth M. Roebling, Docket No. 30680; Ferdinand W. Roebling, III, Docket No. 30681; and Ferdinand W. Roebling, III, and Estate of Mary S. Roebling, Deceased, Ferdinand W. Roebling, III, Administrator, Docket No. 30682.↩ 2. SEC. 161. IMPOSITION OF TAX. (a) Application of Tax. -- The taxes imposed by this chapter upon individuals shall apply to the income of estates or of any kind of property held in trust, including -- * * * * (3) Income received by estates of deceased persons during the period of administration or settlement of the estate; and * * * *↩ 3. SEC. 162. NET INCOME. The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that -- * * * * (B) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the legatees, heirs, or beneficiaries, but the amount so allowed as a deduction shall be included in computing the net income of the legatees, heirs, or beneficiaries whether distributed to them or not. As used in this subsection, "income which is to be distributed currently" includes income for the taxable year of the estate or trust which, within the taxable year, becomes payable to the legatee, heir, or beneficiary. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year; (c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year, which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary;↩