Hargis v. Commissioner

Estate of J. F. Hargis, F. E. Hargis, Administrator, Petitioner, et al., 1 v. Commissioner of Internal Revenue, Respondent Hargis v. Commissioner Docket No. 26474.1 United States Tax Court 19 T.C. 842; 1953 U.S. Tax Ct. LEXIS 241; January 30, 1953, Promulgated *241 Decisions will be entered under Rule 50. 1. Held, a deceased husband's estate is taxable upon one-half of the income derived during the administration of Texas community property, following Estate of J. T. Sneed, Jr., 17 T. C. 1344. 2. Held, the periods of administration of two estates terminated in the year in which the principal administration proceedings were closed and the ordinary duties of administration completed. *242 Paul Port, Esq., for the petitioners. Joseph P. Crowe, Esq., for the respondent. Van Fossan, Judge. Hill, J., dissents. Opper, J., concurring. Kern, Murdock, Turner, Tietjens, Raum, and Withey, JJ., agree with this concurring opinion. VAN FOSSAN *842 The respondent determined deficiencies in income tax as follows: Docket Petitioner number Year Deficiency Estate of J. F Hargis 26474 — 1946 — $ 36,863.12 Estate of Mary M. Hargis 26475 — 1946 — 36,863.12 F. E. Hargis 26476 — 1946 — 36,863.12 F. E. Hargis 31694 — 1947 — 19,048.31 Ruth Hargis 31695 — 1947 — 19,091.06 The two questions in issue, after other issues were conceded by stipulation, are whether income from community property of a husband and wife should be taxed after the death of the husband to the husband's estate and the wife or solely to the husband's estate, and also whether the administration of two estates was completed in 1947. FINDINGS OF FACT. The facts stipulated are found accordingly. J. F. Hargis and Mary M. Hargis were husband and wife and owned as community property a 43.75 per cent partnership interest in the Hargis Motor Company, Houston, Texas, and a one-sixth partnership*243 interest in the Hargis-Jones Motor Company, Corpus Christi, Texas, and each owned certain other assets as separate property. J. F. Hargis died December 11, 1945, leaving a will in which he provided that all of his estate should pass to his widow, Mary M. Hargis, subject to administration thereof. Mary M. Hargis died intestate about a month later on January 16, 1946, and her estate passed under the intestate laws of the State of Texas to her son, F. E. Hargis, subject to administration of her estate. Both parties resided in Houston, Harris County, Texas, at the time of death. F. E. Hargis was appointed and qualified as administrator *843 of the Estate of J. F. Hargis in the Probate Court of Harris County, Texas, on February 5, 1946. Administration proceedings were also taken out in Oklahoma. Upon petition for ancillary probate of the will, F. E. Hargis was appointed administrator of the Estate of J. F. Hargis on June 3, 1947, in the County Court of Oklahoma County, Oklahoma. F. E. Hargis was appointed as administrator of the Estate of Mary M. Hargis in the Probate Court of Harris County, Texas, on February 20, 1946. Administration proceedings were also taken out in Oklahoma*244 County, Oklahoma, for this estate on March 18, 1946. Practically all the income received during the periods in question came from the two partnerships mentioned above, and almost all was community income. During the year 1946, such net community income was credited to, and reported in, the income tax returns of the respective estates (one-half each), as follows: Estate of J. F. Hargis $ 47,425.73 Estate of Mary M. Hargis 45,715.54 Mary M. Hargis, Deceased (for period from Jan. 1-Jan. 16, 1946, the date of her death) 2,276.73 During the year 1947 net income, almost all of which was from community property, was credited to, and reported in, income tax returns of the respective estates (one-half to each), as follows: Estate of J. F. Hargis (to Aug. 1, 1947) $ 25,766.23 Estate of Mary M. Hargis (to Aug. 9, 1947) 25,684.25 The probate and administration proceedings for the two estates were carried on entirely separately in both Texas and Oklahoma. In the accounting made for such administrations, one-half of the community income was separately credited and accounted for by each estate. An accounting of the debts and expenses were also separately kept and accounted*245 for and separately paid. The principal debts and obligations of the estates were for Federal estate, state inheritance, and income taxes. Payments were made on these in 1946 but final investigation and settlement was not made until 1948 and 1949. All returns for these taxes were filed before the end of 1947 and, with the exception of the two Federal income tax returns for 1947 and the Oklahoma inheritance tax returns for the Estate of J. F. Hargis, all returns were filed prior to August 8, 1947. F. E. Hargis was appointed temporary administrator of the Estate of J. F. Hargis on January 3, 1946, it being shown that there were certain tax payments and other obligations immediately due and payable and that Mary M. Hargis, the surviving widow, who was named as executrix in the will of J. F. Hargis, was unable to act as executrix on account of bad health. This appointment was made final on February 5, 1946. The inventory of the Estate of J. F. Hargis reflects *844 ownership of 8 tracts of real estate in Oklahoma of a value of $ 4,825 and a half interest in community property of a value of $ 222,275.56, consisting primarily of the two partnership interests of Hargis Motor Company*246 and Hargis-Jones Motor Company and cash on hand. F. E. Hargis was appointed administrator of the Estate of Mary M. Hargis on February 20, 1946. The inventory and appraisement of her estate shows that her estate consisted of one item of real estate in Oklahoma (as her separate property) valued at $ 6,000, her one-half interest in the community estate of herself and husband, and her deceased husband's estate, which was willed to her, a total value of $ 216,218.12. Oklahoma administration proceedings for the Estate of Mary M. Hargis were taken out in Oklahoma on March 18, 1946, and were terminated by order of September 20, 1946. Probate and administration proceedings for the Estate of J. F. Hargis were filed in Oklahoma on May 2, 1947, and F. E. Hargis was appointed administrator with the will annexed on June 3, 1947. This administration proceeding was not closed until August 31, 1948. Subsequent to August 8, 1947, the date the order was entered closing the Texas administration proceedings for the Estate of Mary M. Hargis, the following actions and transactions took place: (a) Preparation and filing of the Oklahoma inheritance tax return for the Estate of J. F. Hargis on November*247 4, 1947. (b) Conferences about proposed deficiency in income taxes for the years 1946 and 1947 involving the issues in these proceedings. (c) Conferences and negotiations in connection with the Estate of J. F. Hargis, which resulted in the payment of a deficiency in estate tax of $ 414 on December 7, 1948. (d) Conferences and negotiations in connection with the estate tax return filed for the Estate of Mary M. Hargis, which resulted in a payment of additional estate taxes in the amount of $ 98.79 on December 7, 1948. (e) Conferences and negotiations during the year 1949 with an agent of the State of Texas concerning proposed additional inheritance taxes for both estates. (f) Collection of rents, sales of a lease and payment of ad valorem taxes on Oklahoma properties, as follows: Rents collected Jan. 12, 1948 E. C. Leal Rental 80-acre farm $ 100.00 Feb. 20, 1948 Kerr McGee Oil Co Delay rental -- 5 ac 5.00 July 31, 1948 Sohio Oil Delay rental -- 160 ac 160.25 Aug. 21, 1948 Kerr McGee Delay rental -- 5 ac 5.00 Dec. 20, 1948 Texas Co Delay rental -- 105 ac 105.00 June 21, 1949 Texas Co Delay rental 15.00 Aug. 15, 1949 Sohio Oil Delay rental -- 160 ac 160.25 Dec. 20, 1949 Texas Co Delay rental 105.00 *248 *845 Lease sales or bonuses Apr. 7, 1948 Quintin Little -- 105-acre tract $ 5,244.00 Sept. 7, 1948 Quintin Little -- 60 ac 748.65 Taxes paid (on property) December, 1947 $ 82.31 December, 1948 86.87 Royalty -- Magnolia Petroleum Co. — 1947 — $ 43,93 — 1948 — 166.14 — 1949 — 168.71 (g) Closing out the Oklahoma administration proceedings for the Estate of J. F. Hargis on August 31, 1948. (h) Payment of additional debts and liabilities of the Estate of J. F. Hargis, as follows: Date Amount Nov. 10, 1947 Legal fees $ 16.00 Nov. 25, 1947 Oklahoma inheritance tax 41.11 Dec. 18, 1947 Federal income tax -- 1947 2,446.01 Dec. 15, 1947 Garvin County, Oklahoma, taxes 78.38 Dec. 15, 1947 Oklahoma County, Oklahoma, taxes .88 Jan. 14, 1948 Federal income tax -- 1947 2,446.01 Feb. 26, 1948 Oklahoma inheritance tax 7.84 April 5, 1948 Federal income tax -- 1947 2,446.01 July 10, 1948 Federal income tax -- 1947 2,446.01 Oct. 10, 1948 Legal fees -- closing Oklahoma administration 215.30 Dec. 7, 1948 Additional estate tax 414.00 Dec. 7, 1948 Interest on above 32.07 March 5, 1949 Additional inheritance tax -- State of Oklahoma 17.68 June 21, 1949 Additional inheritance tax -- State of Texas 210.57 *249 (i) Payment of debts and liabilities of the Estate of Mary M. Hargis, as follows: Date Amount Dec. 18, 1947 Federal income tax -- 1947 $ 2,434.52 Jan. 14, 1948 Federal income tax -- 1947 2,434.52 April 5, 1948 Federal income tax -- 1947 2,434.52 July 10, 1948 Additional estate tax 98.79 Dec. 7, 1948 Interest on above 8.50 On July 1, 1947, F. E. Hargis, administrator in the Estate of J. F. Hargis, filed a "Final Account" for the estate with the County Court of Harris County, Texas, stating that all debts and expenses of the estate known to the administrator had been paid, and that the estate was subject to being closed. The County Court found that all the debts owing by the estate, including Federal and state inheritance taxes, had been fully paid and that there was no necessity for further continuing the administration. The court approved the "Final Account," closed the estate as of July 31, 1947, discharged the administrator and released his bondsman. *846 On July 18, 1947, F. E. Hargis, administrator in the Estate of Mary M. Hargis, filed a "Final Account" for the estate with the County Court of Harris County, Texas, stating that all debts and expenses of the*250 estate known to the administrator, including inheritance taxes, had been fully paid and that the estate was subject to being closed. On August 8, 1947, the court found that all debts owing by the estate, including Federal and state inheritance taxes, had been paid and that there was no necessity for continuing the administration. The court approved the "Final Account," ordered a distribution of assets, closed the estate as of August 8, 1947, discharged the administrator and released his bondsman. A Federal income tax return was filed for the Estate of J. F. Hargis for the period January 1, 1947, to July 31, 1947, and marked "Final." On December 19, 1947, a Federal income tax return was filed for the Estate of Mary M. Hargis for the period January 1, 1947, to August 8, 1947, and marked "Final." The respondent determined the deficiency against the Estate of J. F. Hargis for the year 1946 upon the basis that the distributive shares of income reported by Mary M. Hargis and her estate were taxable to her deceased husband's estate. The deficiency against the Estate of Mary M. Hargis for the year 1946 was determined as the liability of a transferee of the Estate of J. F. Hargis under *251 section 311, Internal Revenue Code. The deficiency against F. E. Hargis for the year 1946 was determined as the liability of a transferee of the Estate of Mary M. Hargis, it being held to be the transferee of the Estate of J. F. Hargis under section 311, I. R. C. It was stipulated by the parties that any deficiency for the Estate of J. F. Hargis for 1946 is now the liability of F. E. Hargis, as transferee. The deficiencies against F. E. Hargis and Ruth Hargis for the year 1947 were determined upon the basis that $ 53,933.03 was derived by F. E. Hargis and Ruth Hargis as a distribution from the Estate of Mary M. Hargis. One-half of this amount was determined to be includible in the income of each. The respondent disallowed certain expenses and contributions claimed as deductions by the estates of J. F. Hargis and Mary M. Hargis in determining the amount includible in the income of F. E. Hargis and Ruth Hargis for 1947. The parties now agree that these contributions and expenses were proper deductions in the determination of the income for 1947 of either the estates or the alleged distributees. The period of administration or settlement of the two estates expired in 1947. OPINION. *252 The first issue for determination is whether all the income from the community property of J. F. Hargis and *847 Mary M. Hargis for the year 1946 is to be taxed to the Estate of J. F. Hargis, or divided between his estate and Mary M. Hargis or her estate. 2 J. F. Hargis died in December 1945, devising all of his estate to his widow, Mary H. Hargis. She died intestate in the next month, January 16, 1946. The income received during 1946 was almost entirely from the community property previously owned by J. F. Hargis and his wife. The question presented has been recently determined by this Court with regard to the income from Texas community property. Estate of J. T. Sneed, Jr., 17 T. C. 1344. We there reviewed the prior decisions and their history and held that the estate of the deceased husband is taxable upon only one-half of the community property during the period of administration. We find here no sufficient distinction to justify a different result. We are therefore of the opinion that the respondent erred in his determination that all of the 1946 income from community property should be taxed to the Estate of J. F. Hargis alone. *253 The second issue is whether the income reported by the estates of J. F. Hargis and Mary M. Hargis for the year 1947 through July 31 and August 8, respectively, is taxable to F. E. Hargis, the sole heir, and his wife, as distributees, because the period of administration of the estates had terminated in 1947. Hazel Kirk Carlisle, 8 T. C. 563, affd. 165 F. 2d 645. In 1947 F. E. Hargis, the administrator of the two estates, filed final accountings with the Texas court stating that all known debts and expenses of the two estates had been paid and that the estates were subject to being closed. On July 31, 1947, the court found that there was no necessity for continuing the administration of the Estate of J. F. Hargis, approved the final account, closed the estate, discharged the administrator and released his bondsman. On August 8, 1947, similar actions were taken in the Estate of Mary M. Hargis. Federal income tax returns were then filed marked "Final." Oklahoma administration proceedings for the Estate of Mary M. Hargis were begun on March 18, 1946, and terminated September 20 of the same year. After August 8, 1947, the administrator*254 of the two estates prepared tax returns, engaged in conferences concerning Federal and state taxes, collected rents, sold leases, closed the Oklahoma administration proceedings for the Estate of J. F. Hargis in August 1948, and paid legal fees and taxes for the estates. The period of administration is the time required by the administrator to carry out the ordinary duties of administration, in particular *848 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 time specified by statute. Regulations 111, sec. 29.161-2; William C. Chick, 7 T. C. 1414, affd. 166 F. 2d 337. The petitioners F. E. Hargis and Ruth Hargis contend that the periods of administration did not terminate until the Oklahoma administration was completed in August 1948. The respondent argues that the administration periods terminated in August 1947. At the time the Texas administration proceedings were closed in August 1947, the ordinary duties pertaining to the administration of the two estates had been carried out. All debts and expenses had been paid*255 excepting certain taxes and legal fees. Final accountings were filed and accepted by the Texas court which ordered the estates closed, the administrator discharged and his bondsman released. During 1947 final Federal income tax returns for the two estates were filed by the administrator. It does not appear that any outstanding assets remained uncollected after 1947 excepting rents, royalties, and other income. The respondent possesses the authority to determine that an estate is no longer in the process of administration for tax purposes despite the fact that state administration proceedings have not as yet terminated. Alma Williams, 16 T. C. 893; Joseph M. Roebling, 18 T. C. 788. Here the Texas administration proceedings were closed in 1947. There appears to us no valid reason why the period of administration did not then terminate. The activities carried on in connection with the estates after 1947 were not such as would require the further existence of the period of administration. It is true that the Oklahoma administration proceeding for the Estate of J. F. Hargis was not closed until August 31, 1948. However, *256 the Oklahoma proceeding was merely ancillary and pertained to property of a value of $ 4,825 in an estate possessing community property of a value of $ 222,275.56. Here the periods of administration were both practically and legally closed in 1947. Albeit the periods of administration were unusually brief, we find no basis to extend the period of administration of either estate into 1948 and therefore conclude that the periods of administration terminated in the year 1947. Decisions will be entered under Rule 50. OPPER Opper, J., concurring: The question on the second issue is whether the income of the two Hargis estates for the first seven months or so of 1947 is taxable to the estates' legatees. I concur in the present result because I think it required under the 1942 amendment to section *849 162 (b) whether or not the administration of the estates technically terminated in that year. As the Carlisle case 1 points out, the sentence added in 1942 to section 162 (b) reads as follows: "* * * 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*257 payable to the legatee, heir, or beneficiary." (Emphasis added.) The effect of this definition under the remaining provisions of section 162 (b) was to render such income available as a deduction to the estate but to require that it be "included in computing the net income of the legatees * * * whether distributed to them or not." 2 *258 The report of the Senate Finance Committee (Rept. No. 1631, 77th Cong., 2d Sess.), phrases the purpose of the amendment as follows: "* * * to include in the income of a legatee or beneficiary the income of the estate or trust for its taxable year which, within such taxable year, becomes payable to the legatee or beneficiary even though it then becomes payable as part of an accumulation of income held until the happening of some event which occurs within the taxable year." (Emphasis added.) It is true that in Hazel Kirk Carlisle, supra, the "event" which occurred "within the taxable year" was the formal termination of administration of the estate. That is, to be sure, thought of by the Senate Finance Committee as the case "usually" to be found, so described by it, in language quoted in the Carlisle case (p. 367), as "where accumulated income of an estate is paid to a residuary legatee upon termination of the estate * * *." (Senate Finance Committee Report, op. cit.) But it seems evident that both language and purpose are applicable to other situations, of which this seems to me one. The present record shows that the Harris County (Texas) Court*259 not later than August 8, 1947, "ordered a distribution of the assets." Although the statement of facts does not so state explicitly, the stipulation shows that at about that time the estate funds, presumably including all net income for the current year, were transferred from an account entitled "F. E. Hargis, Administrator" to "F. E. Hargis, *850 Special." The legatees thereby became entitled to distribution of all such estate funds, including current income. This seems to be precisely the case to which the statutory provision was directed. I accordingly think it unnecessary to deal with such difficult subjects as whether a primary administration can formally terminate while an ancillary proceeding is still pending, and whether such matters as computation and payment of estate taxes do not constitute a continuing administration. Footnotes 1. Proceedings of the following petitioners are consolidated herewith: Estate of Mary M. (Mrs. J. F.) Hargis, F. E. Hargis, Administrator, Docket No. 26475; F. E. Hargis, Docket Nos. 26476 and 31694; and Ruth Hargis, Docket No. 31695.↩ 1. Proceedings of the following petitioners are consolidated herewith: Estate of Mary M. (Mrs. J. F.) Hargis, F. E. Hargis, Administrator, Docket No. 26475; F. E. Hargis, Docket Nos. 26476 and 31694; and Ruth Hargis, Docket No. 31695.↩ 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↩ 1. Hazel Kirk Carlisle, 8 T. C. 563, affd. (C. A. 6), 165 F. 2d 645↩. 2. 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;↩