Estate of Ferber v. Commissioner

Estate of Jacques Ferber, Deceased, The Pennsylvania Company for Banking and Trusts, Co-Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent Estate of Ferber v. Commissioner Docket No. 35462 United States Tax Court 22 T.C. 261; 1954 U.S. Tax Ct. LEXIS 214; May 7, 1954, Filed. May 7, 1954, Filed *214 Decision will be entered under Rule 50. Capital Assets. -- Sec. 117 (a) (1), I. R. C. -- Executor Liquidating Furs of a Retail Store. -- Auction and bulk sales of furs made by executors of retail fur dealer were of capital assets and produced capital gains. John B. Leake, Esq., and Stephen T. Dean, Esq., for the petitioner. Charles J. Hickey, Esq., for the respondent. Murdock, Judge. Van Fossan and Withey, JJ., dissent. MURDOCK *261 The Commissioner determined deficiencies in income tax against the estate of Jacques Ferber of $ 18,329.36 and $ 6,551.46 for its taxable years ended February 28, 1947, and February 29, 1948. The issue for decision is whether the estate realized ordinary income or capital gain from auction and bulk sales during the taxable years of furs and fur garments which were part of the decedent's estate. FINDINGS OF FACT. Jacques Ferber died on November 30, 1945. His executors filed fiduciary income tax returns for the taxable years with the collector of internal revenue for the first district of Pennsylvania. Ferber, as sole proprietor, had operated a retail fur store known as Jacques Ferber in Philadelphia. He provided in his*215 will that *262 his executors could sell the business to his nephew under certain conditions, but the executors promptly concluded that the nephew did not have sufficient funds to make the purchase and they immediately decided to liquidate and dispose of the business and its assets as rapidly as possible without loss to the estate. The furs and fur garments which came into the hands of the executors were valued as a part of the decedent's estate at $ 233,634.35. The executors, in their efforts to liquidate, endeavored to dispose of the business as a whole and to dispose of the merchandise in large lots. They continued in those efforts until they had disposed of all the merchandise. They kept the store open for the purpose of preserving the value and good will of the business and as a means of selling some of the finished garments while they searched for a buyer for the entire business or for goods in large lots. They were unable to find a purchaser who would buy the whole business, including all of the merchandise, but they sold the business name, the furniture, fixtures, and some of the furs and leased the store premises in August 1946. Thereafter, the executors took no *216 part in the operation of the retail store. The decedent had made in his establishment most or all of the garments which he sold and his custom had been to buy about $ 200,000 worth of skins each year, usually during the period from December through April, which he would then make up into garments for sale. The executors never ordered and purchased any skins but they did pay for some merchandise which the decedent had ordered prior to his death and they also paid for 5 or 6 fur coats which the decedent's widow, who was one of the executors, ordered despite the disapproval of the other two executors. They made no other purchases. The executors reported total receipts and net profits from retail sales through the store as follows: Year ended February 28 Total receipts Net profit — 1946 — $ 143,029.58 $ 24,642.21 — 1947 — 98,421.24 20,233.56 The executors used inventories in computing those net profits. The executors, after disposing of the store in August 1946, had merchandise in their hands which had a basis of $ 179,118. They attempted to sell that merchandise in bulk through a firm which regularly conducted auction sales in New York and were advised that it was too large*217 a quantity for 1 sale and 3 auction sales would produce better results. Auction sales were held on October 16, 1946, January 29, 1947, and in December 1947 at each of which substantial quantities of the merchandise were sold. Some skins were *263 sold to a dealer in New York City, some furs were sold to a wholesaler in New York City, and the remainder of the merchandise, including odds and ends, was sold to the persons who had bought the store. The sales through the auctions and the other sales mentioned in the preceding paragraphs were reported on the returns for the taxable years in separate amounts, the totals of which were as follows: Long-term 50% reported Year Basis Sale price gain as income — 1947 — $ 88,201.00 $ 131,000.00 $ 42,799.00 $ 21,399.50 — 1948 — 90,917.00 117,183.08 26,266.08 13,133.04 The Commissioner, in determining the deficiencies, held that the entire amount of the gain thus reported was ordinary income and added to income the 50 per cent which the petitioner had not reported. OPINION. The only question for decision in this case is whether the furs sold by the executors after they had disposed of the retail store were capital assets*218 so that the gains from those sales were long-term capital gains, as reported, rather than ordinary business income. The Commissioner sums up his argument as follows: The executors operated the retail store, selling the furs at retail, until August, 1946, when the principal fixed assets and some of the furs were sold in bulk. The executors sold the remainder of the furs by consignment sales and privately conducted auctions. These furs were held by the executors as stock in trade, or merchandise properly includible in inventory, or as property held primarily for sale to customers in the ordinary course of business. Within the provisions of I. R. C., section 117 (a) (1) (A) the furs were non-capital assets, and the proceeds from the sales are taxable as ordinary income. Section 117 (a) (1) defines capital assets as property held by the taxpayer but not to "include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business * * *." Obviously the furs were not capital*219 assets in the hands of the decedent and there are cases holding that he could not have changed their character by deciding to terminate or liquidate his business and sell the assets whether in bulk or to his usual customers. Grace Bros., Inc., 10 T. C. 158, affd. 173 F. 2d 170; Ernest A. Watson, 15 T. C. 800, affd. 197 F. 2d 56, affd. 345 U.S. 544, rehearing denied 345 U.S. 1003; Williams v. McGowan, 152 F. 2d 570. Cf. Renziehausen v. Lucas, 280 U.S. 387, affirming 8 B. T. A. 87 and 31 F. 2d 675. However, the decedent's estate, which is the *264 petitioner here, is a different taxpayer and items which were not capital assets in the hands of the decedent may nevertheless be capital assets in the hands of the estate. Adams v. Commissioner, 110 F. 2d 578; O. A. Refling, Executor, 17 B. T. A. 327; affd. Refling v. Burnet, 47 F. 2d 859.*220 Cf. Waterman's Estate v. Commissioner, 195 F. 2d 244; N. Stuart Campbell, 5 T. C. 272; Everett G. Maley, 17 T. C. 260; Charles S. Guggenheimer, 18 T. C. 81, affd. 209 F. 2d 362. This rule is not inconsistent with the purpose of the capital gains provisions. "Property cannot be classified as stock in trade or property subject to inventory unless it is held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business." Thomas E. Wood, 16 T. C. 213, 225-226. See also Van Suetendael v. Commissioner, 152 F. 2d 654. The following is from Adams v. Commissioner, supra: Both the Board and the Commissioner emphasize that the activities of the executor were essentially the same as the testator. From this situation, the conclusion is drawn that the executor was "carrying on a business" in a taxing sense. This does not follow. If there is a tax difference between the activities of an orderly administration*221 and the carrying on of business by an executor, such is not measured by the prior activities of the testator. The gauge is whether certain activities of the executor are not such as properly fall within the duties of the executor in the collection and protection of the assets, the discharge of obligations, and the distribution of the residue. The executors kept the store open as one means of liquidating the stock on hand and of preserving to some extent the good will of the business, but they did not buy new skins and make them up into salable garments as had the decedent. They merely used some of the skins on hand to make up garments, some of which they were able to sell through the store. The fact that they used inventories in computing profits from that phase of their activities does not, under the cases cited above, exclude the goods here in question, those on hand after the store was sold, from the definition of capital assets. They consisted of some finished garments and quantities of unsewn skins. The sales of the goods on hand after the executors severed their connection with the retail store were consistent with their duties to liquidate the estate and in furtherance*222 of their purpose of liquidation and distribution. Cf. Refling v. Burnet, supra.This is certainly as strong a case for the taxpayers as was Garrett, et al. v.United States, (Ct. Cl.) 120 FY. Supp. 193. The auction and bulk sales here in question were of capital assets of the estate and the gains were capital gains. The amounts and the holding periods are not in dispute. Decision will be entered under Rule 50.