Degener v. Commissioner

JOHN F. DEGENER, JR., AND AUGUST W. DEGENER, AS EXECUTORS OF THE LAST WILL AND TESTAMENT OF JOHN F. DEGENER, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Degener v. Commissioner Docket No. 38500. United States Board of Tax Appeals 26 B.T.A. 185; 1932 BTA LEXIS 1353; May 26, 1932, Promulgated *1353 1. Commissioner valued decedent's interest in a partnership by including therein interest upon his capital investment and a share of the profits of the firm up to the time of his death, and the value, as of the date of death, of the right of his estate to receive a share of the profits for the remainder of the firm's fiscal year. The Commissioner's determination is sustained upon principle, and for lack of evidence that the right to share in subsequent profits had any value other than that determined. 2. Executor's commissions, although neither awarded by decree nor paid, held deductible from the gross estate where allowable by the laws of the jurisdiction in which the estate is being administered. Otto C. Wierum, Esq., for the petitioners. Ralph F. Staubly, Esq., for the respondent. SMITH *185 This proceeding is for the redetermination of a deficiency of $14,649.40 in estate tax. The petitioners allege that the Commissioner erred (1) in determining the value of the decedent's interest in a partnership; and (2) in disallowing a claimed deduction for executors' commissions. The facts were stipulated. FINDINGS OF FACT. The petitioners*1354 are the executors of the will of John F. Degener, who died April 15, 1924, a resident of the City, County, and State of New York. *186 At the time of his death, the decedent was a copartner in the firm of C. A. Auffmordt & Company, doing business as factors and commission merchants in the city of New York. The decedent contributed $50,000 to the capital of the firm upon its organization on December 1, 1923. In so far as material hereto, the articles of copartnership provided: Fourth: Interest at the rate of six (6%) per centum per annum shall be allowed to each partner upon his capital and such interest is to be paid for out of the copartnership assets, charged as an expense of the said business, and shall be deducted from any of the profits thereof. Fifth: The net profits of the said copartnership shall be divided as follows: John Frederick Degener to receive thirty-seven (37%) per cent. John Frederick Degener, Jr. to receive thirty-one and one-half per cent (31 1/2%). Gustave de Hasperg to receive thirty-one and one-half per cent (31 1/2%). The losses, if any in said copartnership are to be borne by the respective copartners in like*1355 proportion. * * * Seventh: In the event that any of the said parties shall die or become incapacitated from attending to the business of the firm, the copartnership business shall nevertheless continue the same as it did before such death or incapacity occurred; that is to say, if the said death or incapacity shall occur between the first of December and the thirty-first of May in any given year, the business shall continue until the thirtieth day of November next following. If the event referred to occurs at any time between the first of June and the thirtieth of November, then the copartnership business shall continue until the thirty-first day of May, next ensuing, but nothing herein contained shall be construed as providing for the continuation of the said copartnership business further than the thirty-first day of May, 1926, the time herein limited for the continuance of the business of said firm. * * * Ninth: In the event of the dissolution for any reason whatever, the affairs of the copartnership are to be liquidated and closed within one year from such dissolution, and such liquidation shall, in case of death, or incapacity to act be conducted solely and*1356 only by the surviving members of the firm. * * * * * * Twelfth: In the event of the death of any partner or partners during the life of this agreement, the surviving partners shall liquidate the affairs of the business as herein provided, and upon any accounting to the representative or representatives of such deceased partner or with his estate, they shall be required to account for and pay over only the value of the deceased partner's interest, as shown by the books of the partnership, without any allowance whatever for so-called "good-will." The decedent's interest in the partnership was included in his gross estate at a value of $1,590,874.85 on the Federal estate-tax return. The Commissioner determined the value of this interest upon the basis set forth in the revenue agent's report, which, in so far as material hereto, is as follows: *187 This company [C. A. Auffmordt & Co.] acts as factors for commission merchants, mills, etc., doing a large part of its business with foreign houses. As a necessity an office was maintained in Paris, the account for which was carried in the New York books as the "Franc Account." The "Franc Account" was in effect a capital*1357 account and was segregated to show each partner's interest therein. Balance (franc account) 11-30-23 fr. 7,951,594.10 Add Interest at 6% to 4-15-24 178,910.86 Profit to 4/15/24 6,413.34 185,324.20 fr.8,136,918.30 at 5.1625 $1,578,134.70 Add Profit to 4/15/24 25,654.99 Profit to 11-30-24 Fr. Acct 2,007.30 N.Y. Acct. 44,858.35 46,865.65 Discounted at .965391 * 45,243.68 70,898.67 Less Income Tax 15,921.75 Private Acct 21,445.99 37,367.74 33,530.93 $1,611,665.63 50,000.00 Capital $1,661,665.63 On or about March 14, 1925, there was filed on behalf of the decedent an amended income-tax return covering the period December 1, 1923, to April 15, 1924, the date of the decedent's death; included in this return is the sum of $57,804.42 as income from the partnership for that period. About the same time, an amended income-tax return was filed for the estate of the decedent for the period April 16, 1924, to November 30, 1924, in which was included the sum of $37,590.99 as income from the partnership. The petitioners duly paid the tax computed upon these returns, but subsequently*1358 sued for the recovery of the tax so paid. Said suit is now pending and undetermined before the United States District Court for the Southern District of New York. There has been no final accounting to the surrogate by the executors of the decedent's estate and no decree of the surrogate awarding commissions to them, and no commissions have been paid to or received by the executors. The sum of $72,815.44 claimed as a deduction by the executors in this proceeding is computed on a valuation of $1,819,385.87, which included income to a later date; the Commissioner disallowed the claimed deduction. *188 OPINION. SMITH: The first issue is whether the respondent has correctly valued the interest of the decedent in the partnership "at the time of his death." (Section 402(a), Revenue Act of 1921.) The articles of copartnership provided that the "surviving members of the firm" conduct the business of the firm to the end of the fiscal or accounting period in which the decedent died, and that upon "any accounting * * * with his estate, they shall be required to account for and pay over only the value of the deceased partner's interest, as shown by the books of the partnership. *1359 " The petitioners have interpreted the articles of copartnership as providing that the decedent's estate should receive a share of the profits of the firm, and contend that such profits could not be ascertained until the end of the accounting period, and that no part of such profits should be considered in computing the value of the decedent's interest in the firm. By way of argument, they further contend that to include such profits in the corpus of the decedent's estate would be to subject the profits to double taxation. As we said in Walter R. McCarthy, Executor,9 B.T.A. 525, 527: In the decision of this case we are not disturbed by the fact that an estate tax and an income tax may impinge upon each other in their ultimate incidence. George D. Widener et al.,8 B.T.A. 651. * * * We think the respondent has correctly determined the value of the decedent's interest in the partnership; no attack is made upon the correctness of the amounts used in that determination. In determining the "value of the deceased partner's interest" the surviving partners included a share of the profits of the firm for the fiscal year in which the decedent died. *1360 For income-tax purposes the petitioners have allocated a portion of these profits to the period in the fiscal year prior to the date of the decedent's death and reported the amount thereof as income to the decedent, and allocated the remainder to the period in the fiscal year subsequent to his death and reported the amount thereof as income to the estate. The difference between the amounts of these profits in the respondent's computation and the petitioners' returns for income-tax purposes is explained, on petitioners' brief, as being as "between profits and income - the latter, of course, including interest." We are not called upon to decide any question respecting the income tax upon these amounts. The respondent in his computation properly included interest on the decedent's investment in the firm up to the time of his death. Cf. William G. Frank, Administrator,6 B.T.A. 1071; E. S. Heller et al.,10 B.T.A. 53; William K. Vanderbilt et al.,11 B.T.A. 291; *189 Frank H. Clark, Executor,12 B.T.A. 425; *1361 Jackson B. Kemper, Administrator,14 B.T.A. 931; Ella C. Loose, Executrix,15 B.T.A. 169; Mellie Esperson Stewart,18 B.T.A. 1010. The decedent's share of the profits up to the time of his death was income to him and passed to the executors of his estate as an asset of the estate. Cf. Maurice L. Goldman et al.,15 B.T.A. 1341; Clarence B. Davison et al.,20 B.T.A. 856; affd., per curiam, C.C.A., 2d cir., Nov. 16, 1931; John L. Hall et al.,25 B.T.A. 1. See also G.C.M. 7678, C.B. IX-2, p. 360. As interpreted by the surviving partners, the decedent's estate had a right to receive a share of the firm's profits for the remainder of the fiscal year in which the decedent died. A similar situation was considered in William P. Blodget et al., Executors,13 B.T.A. 1243, 1246, wherein we said: The right of the estate of William Blodget to receive the year following the death of William Blodget the same share of the net profits of Blodget & Co. which William Blodget would have been entitled to receive had he survived was a valuable contractual*1362 right or chose in action constituting a part of the assets of William Blodget which passed on his death to the executors of his estate. * * * The right which the executors received to collect these profits was a capital asset of the estate and the value of such asset received by the executors constituted the basis for determining a gain or loss upon the disposition thereof. Only the excess received on the disposition of the asset constituted taxable income. Walter R. McCarthy, Executor,9 B.T.A. 525; Estate of A. Plumer Austin,10 B.T.A. 1055. * * * The petitioners have failed to show that the respondent erred in determining the value as of the date of the decedent's death of the right to receive a share of the firm's profits for the remainder of that fiscal year, and we accordingly sustain the respondent's determination. Cf. Ernest M. Bull, Executor,7 B.T.A. 993; Walter R. McCarthy, Executor, supra;James Brown et al.,10 B.T.A. 1036; George Nichols et al.,10 B.T.A. 919; *1363 Alexander W. Smith, Jr., Executor,20 B.T.A. 27; United States v. Carter, 19 Fed.(2d) 121; Nichols v. United States,64 Ct.Cls. 241; certiorari denied, 277 U.S. 584. The respondent's disallowance of the claimed deduction for executors' commissions is based upon the fact that there had been no decree of the New York surrogate's court awarding commissions to the executors and that no such commissions had been paid. In support of this action, the respondent cites Ordway v. United States, 37 Fed.(2d) 19, wherein the question decided was the timeliness of a claim for refund of an estate tax, and Braun v. Lewellyn, 38 Fed.(2d) 477, wherein a fee for services in managing an estate after administration and paid out of income was held not deductible from the *190 gross estate for estate-tax purposes. Such cases are not dispositive of the issue before us. Section 403(a)(1) of the Revenue Act of 1921 provides that the net estate of a decedent shall be determined by deducting from the gross estate, among other items, such amounts for administration expenses as are allowed*1364 by the laws of the jurisdiction under which the estate is being administered. The New York Surrogates' Court Act (ch. 928, Laws of 1920, as amended by ch. 649, Laws of 1923) provides in section 285 for the allowance of executors' commissions and the computation of the amount thereof upon the rates prescribed. There is nothing in the record to indicate that the executors' commissions will not be allowed and paid out of the decedent's estate. In James D. Bronson et al., Trustees,7 B.T.A. 127, 132 (affd., 32 Fed.(2d) 112), we said: In the Appeal of Samuel E. A. Stern, et al., Executors,2 B.T.A. 102, the Board held that in allowing deductions from the gross estate in computing estate taxes, Congress did not intend that determination of the tax should await final settlement of the estate and a reduction to absolute certainty of all claims against it, and that deductions for executors' commissions might be based upon a reasonable estimate of the amount allowable by the lex domicillii and it is not essential that such commissions be first allowed by order of court or paid. Compare *1365 Appeal of Grace M. Knox, et al., Executors,3 B.T.A. 143; Appeal of Henry Riffel,3 B.T.A. 436; Appeal of Salina Bell, Executrix,3 B.T.A. 1172; Mrs. Browning Coleman Moore, Executrix,5 B.T.A. 255; William W. Mead, et al., Executors,6 B.T.A. 752. The petitioners are entitled to deduct from the gross estate the amount allowable as executors' commissions, computed under the rates prescribed by the New York Surrogates' Court Act upon the valuation of the gross estate as determined as of the date of the decedent's death. Cf. Samuel E. A. Stern et al.,2 B.T.A. 102; Estate of Jacob Voelbel,7 B.T.A. 276; John A. Loetscher et al.,14 B.T.A. 228 (reversed on other points, 46 Fed.(2d) 835); Georgette Goldschmidt et al., Executors,14 B.T.A. 1010; Irving Bank-Columbia Trust Co. et al.,16 B.T.A. 897; Allie E. Nicholson, Executrix,21 B.T.A. 795. Judgment will be entered under Rule 50.