Seaboard Nat'l Bank v. Commissioner

SEABOARD NATIONAL BANK OF NEW YORK, N.Y., EXECUTOR, ESTATE OF C. FISHER HEPBURN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Seaboard Nat'l Bank v. Commissioner Docket No. 9690. United States Board of Tax Appeals 11 B.T.A. 1386; 1928 BTA LEXIS 3629; May 15, 1928, Promulgated *3629 1. The petitioner commingled funds of the estate derived from the sale of prior-taxed property with funds derived from other sources, and made expenditures therefrom deductible under paragraph 1 of section 403(a) of the Revenue Act of 1921. The funds from other than prior-taxed property were not sufficient to meet all such expenditures as made, but the present estate at decedent's death, and at all times thereafter, was of sufficient value to cover all charges against it, deductible under paragraphs (1) and/or (3) of said section. Held, that the deduction allowable under paragraph 2 of said section for prior-taxed property should not be reduced to any extent on account of deductions allowed and allowable under paragraph (1). 2. The amounts of additional deductions determined and allowed under section 403(a)(1) of the Revenue Act of 1921. A. Harding Paul, Esq., for the petitioner. R. E. Copes, Esq., for the respondent. TRAMMELL *1387 This is a proceeding for the redetermination of a deficiency in estate taxes, in the amount of $3,221.47. The issues are (1) whether the respondent erred in reducing the deduction allowable under paragraph*3630 2 of section 403(a) of the Revenue Act of 1921 for prior-taxed property by the total amount of certain deductions allowed under paragraph (1) of said section; and (2) whether the petitioner is entitled to certain additional deductions under paragraph (1) of section 403(a) of said Act, claimed for the first time in this proceeding. FINDINGS OF FACT. The Seaboard National Bank of New York, N.Y., executor of the estate of C. Fisher Hepburn, deceased, petitioner herein, is a corporation duly organized under the laws of the United States, with its principal office in the City of New York, and was during 1923 and is now doing business in said city. During the period involved herein and at the present time petitioner was and is duly qualified to do business in the State of Ohio as a foreign corporation. C. Fisher Hepburn, the decedent, died on September 16, 1923, an inhabitant of the State of Ohio. The executor seasonably filed an estate-tax return and paid the amount of tax shown thereon to the collector of internal revenue at Cleveland, Ohio. The respondent thereafter caused said return to be audited, and determined a gross and net estate different from the amounts shown on*3631 the return. The value of the gross estate was found by the respondent to be $485,067.90, which is the correct valuation. A. Barton Hepburn, father of decedent, died January 25, 1922, and a Federal estate tax was duly paid on his estate. In determining the value of the gross estate of said prior decedent, the respondent included the following property at the values stated: 786 shares of Safety Car Co. stock $47,946.00 1323 shares of the Texas Co. stock 53,250.75 1000 shares of May Department Stores stock 77,250.00 Total 178,446.75 The above property was bequeathed to the decedent, C. Fisher Hepburn under the will of the prior decedent, A. Barton Hepburn, together with an undistributed share in the estate of said prior decedent of $50,000. In determining the gross estate involved here, said property, which was taxed at a total valuation of $228,446.75 as a part of the estate of the prior decedent, was included at the valuation of $251,907. *1388 In determining the net estate of the present decedent, the respondent allowed the following deductions and statutory exemption: Funeral expenses $1,520.67 Executor's commissions 14,768.48 Attorney's fees 4,496.99 Claims against the estate 117,762.83 Miscellaneous expenses 1,308.32 Property previously taxed 88,589.46 Total deductions 228,446.75 Statutory exemption 50,000.00 Total 278,446.75 *3632 The shares of stock received from the prior estate and referred to herein as the prior-taxed property, were all sold between March 3, 1924, and August 6, 1924, and the total amount received by the petitioner from such sales was $192,411.31. As the sales occurred, the receipts from the prior-taxed property, together with all other cash receipts from the corpus of the estate, were deposited in a principal account maintained for the estate by the petitioner. From this account all expenditures of principal on behalf of the estate, except one, were disbursed. All the expenses, fees, commissions, debts and claims, except one, allowed by the respondent as deductions from the gross estate to determine the net estate, upon which the deficiency herein is based, passed through this account. The item of expenditure above referred to, which did not pass through the principal account of the estate, related to the repayment of a loan of $100,000 to the Guardian Trust Co. of Cleveland, Ohio, This amount had been loaned to the decedent by the said trust company, and after decedent's death demand was made upon his executor for payment. The loan department of the executor bank paid the amount*3633 due, with interest, and treated the payment as a loan to the estate then being administered by its trust department. At that time, the trust department transferred from the principal account of the estate to the loan department $947.22 to cover the interest on the note for the period from the date decedent first obtained the loan, July 16, 1923, to the date of his death, September 16, 1923, and also transferred from the income account of the estate $1,802.78 to cover interest from the latter date to January 11, 1924, when the note was paid by the executor bank. Later, as sales of the property of the estate were made, and the proceeds deposited in the principal account, the loan department was reimbursed in installments from the account for the $100,000 principal sum, and was also paid interest for the time the estate had the use of the money. At the time of his death, the decedent herein carried a cash balance in an account with the Guardian Trust Co. of Cleveland, Ohio, in *1389 the amount of $41,697.28, which was included in the gross estate, but not as a part of the previously taxed property. On October 27, 1923, the balance of this account, then amounting to $41,732.79, *3634 was transferred to the executor bank and deposited to the credit of the principal account of the estate. On March 3, 1924, the first deposit in the principal account of proceeds derived from the sale of prior-taxed property was made. On that date the executor sold 100 shares of May Department Stores stock, and the proceeds in the amount of $8,983 were deposited in the said account. On March 3, 1924, prior to the deposit of said $8,983, proceeds from the sale of previously taxed property, the balance of said account was $43,687.49. All expenditures in behalf of the estate, which constituted deductions in the estate-tax return, made prior to March 3, 1924, were made from the principal account, consisting solely of funds derived from other than prior-taxed property. Deductible expenditures so made prior to March 3, 1924, aggregated $1,580.17. The next sale of prior-taxed property was made on March 7, 1924, when 200 shares of the May Department Stores stock were sold, and the proceeds in the amount of $18,066 deposited in the principal account. Between the dates of March 3, 1924, when the first deposit of proceeds from the sale of prior-taxed property was made, and March 7, 1924, when*3635 the proceeds were deposited from the second sale of prior-taxed property, the following transactions occurred involving the principal account: The sum of $9,000 was transferred to the loan department of the executor bank to be applied against the loan of $100,000. Debts of decedent were paid as follows: Miller's Drug Store, $7.05; Fuller Cleaning Co., $.94; the Telling Belle Vernon Co., $13.28; City Ice & Fuel Co., $3.70; Samuel Budd, $62.50; Davies Mortuary Co., funeral expenses, $25; Hogan & Co., funeral expenses, $835; William Ramsdell Son & Co., $3,568; F. L. Dunne & Co., $100. Under date of March 6, 1924, there was transferred to the loan department of the executor bank the sum of $40,000 to be applied against the loan of $100,000, and on March 7, 1924, the amount of $18,000 was transferred to the loan department for the same purpose. Cost of telegram to attorneys in Cleveland, $1.73; paid to Empire Trust Co. for tax on 786 shares of Safety Car Heating & Lighting Co. and 1,323 shares of the Texas Co. stock, $44.68; on March 10, 1924, Davies Mortuary Co., funeral expenses, $98.50. On March 11, 1924, a check for $1,442.51 was received from the Irving Bank, Columbia Trust Co. *3636 and deposited to the credit of the principal account of the estate, covering a proportionate share of the interest of the residuary estate of A. Barton Hepburn estate from *1390 February 7, 1923, to December 31, 1923. This item was not included in the deduction for prior-taxed property, amounting to the total sum of $228,446.75, but was included in the gross estate valued at $251,907. The amounts paid for administration expenses and debts of the decedent, above referred to, were included in the deductions under schedules H and I of the estate-tax return. On March 12, 1924, the executor sold 400 shares of May Department Stores stock, and the net proceeds, amounting to $36,532, were deposited to the credit of the principal account. On the same date, the amount of $33,000 was transferred to the loan department to pay the balance of the $100,000 loan. On March 13, 1924, 100 shares of May Department Stores stock were sold, and the net proceeds of $9,283 deposited to the credit of the principal account. Thereafter, the following transactions occurred during 1924, affecting the principal account of the estate: March 14, quarterly installment of 1923 income tax of the decedent*3637 paid to the collector of internal revenue, $81.10; March 17, cost of inventory and appraisal and sale of personal property paid to Probate Court of Cuyahoga County, Ohio, $7.10; April 10, Neal Fireproof Storage Co., storage charges, $36.42. All the remaining debit items in the principal account were paid by the executor of the estate and deducted in the return, with the following exceptions, none of which was deducted in the return: June 12, 1924, inheritance tax paid to the Treasurer of the State of New Jersey, $987.51; June 30, claim of C. Birdsall Smith, $386.65, which represented a check returned by the payee, and the amount was not paid; July 18, correcting entry covering the Texas Co. stock repurchased, $12,421.31. November 1, paid note of the Hepburn Co., $35,000, and interest to November 4, 1924, $2,251.67; November 3, fee for mortgage release, etc., in connection with sale of the Hepburn plant, $339.74. These last three items were paid, and deducted in Schedule B of the return but were not deducted in Schedule I or J. November 19, paid collector of internal revenue, Cleveland, Ohio, Federal estate tax, $977.16, which was not deducted in the return. With the exceptions*3638 indicated, all payments made from the principal account up to November 13, 1924, were deducted in the estate-tax return. On June 21, 1926, the credit balance of the principal account became fully exhausted, and thereafter, all the prior-taxed property having been sold and the proceeds expended, there was no further commingling of funds derived from the sale of prior-taxed property and from other sources. Between the dates of March 3, 1924, and June 21, 1926, there was paid from the principal account the total sum of $38,277.13, as expenses, *1391 debts, claims, etc., which amount was allowed by respondent as a deduction in determining the net estate. During the same period, from March 3, 1924, to June 21, 1926, additional expenditures for expenses, debts, and claims were paid from the principal account, which were not considered nor allowed as deductions by the respondent, in the total amount of $4,276.15, and subsequent to June 21, 1926, similar items were paid from said account, and not allowed as deductions by the respondent, in the total sum of $11,992.35, as follows: Administration expenses, debts, claims, etc., paid by the executor from theprincipal account of the estate subsequent to March 3, 1924, not considerednor allowed as deductions by the respondent. Storage charges on property in warehouse at Cleveland, Ohio $107.25 Disbursements to attorneys in connection with suits against the estate 347.09 Paid Cleveland Trust Co. for special services in connection with adjustment of a claim against the estate 200.00 Probate costs connected with claims against the estate 25.46 Railroad fare and expenses of an officer of the executor going to Cleveland 187.77 Expenses of a representative of the executor on trip to Washington to confer on estate-tax return 133.85 Preparation of income-tax return 25.00 Cost of photostat copies of records for use in this appeal 6.30 Expenses of two individuals in connection with estate matters 69.12 Williams War Memorial Fund claim 600.00 Paid Thompson, Hines & Flory on account of suit brought by Stephens against the estate 2,629.75 Angel, Mail & Chaplet claim 937.46 Ohio Paper Company claim 2,550.00 The Texas Co. claim 2,700.00 American Box Company claim 1,695.95 *3639 Attorneys' fees paid in connection with estate matters November 19, 1924, Wilkin, Cross & Daoust $1,200.00 November 25, 1924, patent attorney 50.50 December 4, 1924, Masten & Nichols 621.24 March 14, 1925, Wilkin, Cross & Daoust 500.00 April 23, 1925, Wilkin, Cross & Daoust 2,000.00 November 7, 1925, J. B. Ryan 100.00 August 10, 1926, Wilkin, Cross & Daoust 4,078.75 Total attorney's fees paid 8,550.49 Previously allowed as deductions by the respondent 4,496.99 Additional attorney's fees not allowed by the respondent $4,053.50 Total amount of expenses, debts, commissions, etc., paid from the principal account subsequent to March 3, 1924, not considered nor allowed as deductions by the respondent 16,268.50 Payments included above which were made subsequent to June 21, 1926: July 26, 1926, telephone call to Cleveland $6.65 August 10, 1926, attorney's fees paid Wilkin, Cross & Daoust up to an including final accounting 4,078.75 August 12, 1926, telegram to attorneys .48 October 25, 1926, American Box Co. claim 1,695.95 Angel, Mail & Chaplet claim 937.46 Ohio Paper Co. claim 2,550.00 The Texas Co. claim 2,700.00 October 29, 1926, court costs on suits 16.76 May 16, 1927, photostat copies of records for use in this appeal 6.30 Total amount of expenses, claims, etc., paid subsequent to June 21, 1926, not considered nor allowed as deductions by the respondent $11,992.35 Total amount of expenses, claims, etc. paid between March 3, 1924, and June 21, 1926, not considered nor allowed as deductions by the respondent 4,276.15 *3640 *1392 In the final deficiency letter dated October 7, 1925, the respondent adjusted the prior allowance for debts of the decedent by including the additional sum of $15,252.42, on account of the payment of a claim of the Standard Oil Co. of New Jersey. This claim was actually paid in the amount of $14,839.40, the difference between the amount allowed and the amount paid representing an error in determining the amount of interest. This allowance was excessive to the extent of $413.02. OPINION. TRAMMELL: The principal issue in this proceeding involves the correctness of the respondent's action in reducing the deduction allowed for prior-taxed property under paragraph (2) of section 403(a) of the Revenue Act of 1921 by the amount of deductions allowed under paragraph (1) of said section, in determining the value of the net estate. Also, the petitioner here claims for the first time certain additional deductions under paragraph (1) of said section on account of expenditures for administration expenses and claims against the estate, which were not presented to the respondent for consideration nor allowed by him. The material provisions of the Revenue Act of 1921 are*3641 as follows: SEC. 403. That for the purpose of the tax the value of the net estate shall be determined - (a) In the case of a resident, by deducting from the value of the gross estate - (1) Such amounts for funeral expenses, administration expenses, claims against the estate. * * * but not including any income taxes upon income *1393 received after the death of the decedent, or any estate, succession, legacy, or inheritance taxes; (2) An amount equal to the value of any property forming a part of the gross estate situated in the United States of any person who died within five years prior to the death of the decedent where such property can be identified as having been received by the decedent from such prior decedent by gift, bequest, devise, or inheritance, or which can be identified as having been acquired in exchange for property so received: Provided, That this deduction shall be allowed only where an estate tax under this or any prior Act of Congress was paid by or on behalf of the estate of such prior decedent, and only in the amount of the value placed by the Commissioner on such property in determining the value of the gross estate of such prior decedent, *3642 and only to the extent that the value of such property is included in the decedent's gross estate and not deducted under paragraphs (1) or (3) of subdivision (a) of this section. This deduction shall be made in case of the estates of all decedents who have died since September 8, 1916. The decedent, C. Fisher Hepburn, died September 16, 1923, and the petitioner filed an estate-tax return on November 13, 1924. The respondent caused the return to be audited, and determined the value of the gross estate to be $485,067.90, which the petitioner concedes is the correct valuation. A. Barton Hepburn, father of the decedent, died January 25, 1922, and a Federal estate tax was paid on his estate. There were included in the gross estate of the prior decedent certain shares of stock at a total value of $178,446.75, which, together with an undistributed share of $50,000 in the estate of said prior decedent, were bequeathed to the present decedent and included in his gross estate at a valuation of $251,907. Accordingly, in determining the value of the net estate of the present decedent, under section 403(a) of the Revenue Act of 1921, supra, a deduction is allowable under paragraph*3643 (2) of said section for prior-taxed property in the amount of $228,446.75, the value at which the property was taxed as a part of the gross estate of the prior decedent, if no part of the amount has been deducted under paragraph (1) of said section. In determining the value of the net estate herein, the respondent allowed deductions for funeral expenses, executor's commissions, attorneys' fees, claims against the estate and miscellaneous administration expenses in the total amount of $139,857.29, under paragraph (1) of section 403(a) supra, and also allowed under paragraph (2) of said section, a deduction for prior-taxed property in the sum of $228,446.75, less the deductions under paragraph (1) in the amount of $139,857.29, or a net deduction for prior-taxed property of $88,589.46. This action of the respondent was based upon the assumption that, because the bank account from which these charges were paid was made up of commingled funds, the identity of the funds *1394 was lost, and therefore it could not be said that any portion of the deductions allowed under paragraph (1) of section 403(a) supra, was paid from funds of the present estate. The petitioner maintained*3644 two accounts for the estate, a socalled principal account and an income account. It is with the former account only that we are concerned here. At the time of his death in September, 1923, the decedent carried an account with the Guardian Trust Co. of Cleveland, Ohio, and on October 27, 1923, the balance of the funds in this account, amounting to $41,732.79, was transferred to the executor bank in New York and deposited to the credit of the principal account of the estate. The first deposit to this account of proceeds from the sale of priortaxed property was made on March 3, 1924. Hence, there was no commingling of funds from the beginning of administration to and including March 2, 1924. Prior to this date, the petitioner had expended from the principal account a total of $1,580.17, which the respondent allowed as deductions under paragraph (1) of section 403(a) supra, and included in the amount by which the deduction for prior-taxed property was reduced. The respondent now concedes that his action in this respect was erroneous. The deduction for prior-taxed property, under section 403(a)(2), should, therefore, be increased by the amount of $1,580.17. All of the previously*3645 taxed property was sold and the proceeds deposited in the principal account of the estate prior to June 21, 1926, on which date the credit balance of the principal account became fully exhausted. We have found, as set forth in our findings of fact above, that subsequent to June 21, 1926, the petitioner paid, from funds other than proceeds from the sale of prior-taxed property, administration expenses and claims against the estate, in the total amount of $11,992.35, which items were not presented to the respondent for consideration nor allowed by him in determining the deficiency involved herein. The respondent also concedes that deductible items paid subsequent to June 21, 1926, should to that extent increase the amount of the deduction allowed by him for such purposes and should not serve to reduce the amount of the deduction for prior-taxed property. The deduction under paragraph (1) of section 403(a) should accordingly be increased by the amount of $11,992.35, which should not affect the deduction for prior-taxed property under paragraph (2) of said section. This leaves for consideration only the question of the extent, if any, to which the deduction for prior-taxed property*3646 under paragraph (2) of section 403(a) should be reduced on account of the payment of deductible items allowed under paragraph (1) of said section, from the commingled funds account between the dates of March 3, 1924, and June 21, 1926. *1395 The Revenue Act of 1918 contained, for the first time in the history of Federal estate taxation, a provision for a deduction on account of prior-taxed property. In section 403(a) of that Act, it was provided that the net estate should be determined by deducting from the value of the gross estate (1) expenses, claims, losses, etc., (2) an amount equal to the value of prior-taxed property at the time of the decedent's death, and (3) the amount of all bequests, legacies, devises or gifts to or for governmental, religious, charitable, scientific, literary or educational purposes. Thus, a deduction of an amount equal to the full value of the prior-taxed property at the time of the decedent's death was allowable under paragraph 2, whthout reference to the deductions under paragraphs (1) and/or (3), and in a case where the value of the present estate was insufficient to meet the expenditures deductible under paragraphs (1) and/or (3), it is*3647 obvious that, to the extent that such items might be paid out of the prior-taxed estate, a double deduction under paragraph (2) would result. This situation was changed by the provisions of section 403(a) as reenacted in the Revenue Act of 1921, it being provided in paragraph (2) thereof that the deduction allowable on account of priortaxed property should be an amount equal to the value at which such property was included in the gross estate of the prior decedent and in the decedent's gross estate, and not deducted under paragraphs (1) or (3). It seems clear that the purpose of the changes indicated was to prevent, among other things, the allowance of a double deduction for the same value or property, as in some cases might have occurred under the 1918 Act. This conclusion is supported by a consideration of the legislative history of section 403. In reporting the 1921 revenue bill to the Senate, the Committee on Finance in its report stated: Section 403(a)(2) and (b)(2) of the present Act provides for the deduction of an amount equal to the value of any property received by the decedent as a share in the estate of any person whose death occurred within five years prior to*3648 that of the decedent, or which can be identified as having been acquired in exchange for property so received, if an estate tax under the Revenue Acts of 1917 and 1918 was collected from such estate, and if such property is included in the decedent's gross estate. The proposed bill extends the right of deduction to property received from a prior decedent whose estate has paid such a tax "under this or any prior Act of Congress." The other amendments of this paragraph are designed to prevent a double deduction in whole or in part of the value of the property so received or acquired, and to remedy defects and omissions found to exist in the present law. If such, then, was the Congressional intent, the deduction under paragraph (2) of section 403(a) for prior-taxed property should be an amount equal to the full value at which the property was included *1396 in the gross estate of the prior decedent and in the gross estate of the present decedent, subject to be reduced only to the extent that the allowance of such amount would result in a double deduction by reason of deductions allowed under paragraphs (1) and/or (3) for the same value. *3649 If the value of the present estate which came into the hands of the executor at the time of the decedent's death was sufficient in amount to cover all expenditures deductible under paragraphs (1) or (3), a double deduction would not result from the allowance under paragraph (2) of an amount equal to the value at which the prior-taxed property was included in the gross estates of the prior and present decedents. The statute deals with values and not with specific, earmarked pieces of property. , and authorities cited. See also . In the instant case, the present estate at decedent's death and at all times prior to June 21, 1926, when the commingled funds became exhausted, exceeded in value the total amount of all deductions allowed and allowable under paragraph (1) of section 403(a), and there being no deduction under paragraph (3), the estate at all times possessed values in excess of an amount equal to that at which the value of the prior-taxed property is allowable as a deduction under paragraph (2). Hence, the deduction for prior-taxed property should*3650 not be diminished on account of the deductions under paragraph (1), since such allowance would not result in a double deduction. Under the respondent's theory, if an executor, having funds of the estate derived from prior-taxed property and also separate funds derived from other sources, should inadvertently or through lack of knowledge make expenditures deductible under paragraph (1) from the prior-taxed property funds, the deduction for prior-taxed property under paragraph (2) would be reduced to that extent, notwithstanding that the property or funds of the present estate, if used for such purpose would have been sufficient to have met the expenditures. Another executor, similarly situated, might have made the expenditures out of the funds of the present estate and thus have avoided any reduction of the allowance for prior-taxed property. Again, an executor temporarily in possession of liquid assets consisting only of prior-taxed property, might borrow money with which to meet expenditures for expenses and other items deductible under paragraph (1), and so avoid impairment of the deduction for prior-taxed property under paragraph (2). Under such a theory, the allowance of*3651 the deduction for prior-taxed property would be made to depend upon accident, mistake, or the *1397 method of bookkeeping employed by the executor, and we are not persuaded that such was the intention of Congress in providing for the deduction in question. The deficiency here should be redetermined on the basis of the allowance of a deduction under paragraph (2) of section 403(a) for prior-taxed property in the amount of $228,446.75, and the allowance of an additional deduction under paragraph (1) as follows: Additional allowable expenditures made between March 3, 1924, and June 21, 1926 $4,276.15 Additional allowable expenditures made subsequent to June 21, 1926 11,992.35 16,268.50 Less excessive deduction allowed on Standard Oil Co. Claim 413.02 Net additional deduction under paragraph (1) 15,855.48 Reviewed by the Board. Judgment will be entered on 15 days' notice, under Rule 50.