Evarts v. Commissioner

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Evarts v. Commissioner Docket Nos. 89321, 89322. United States Board of Tax Appeals 39 B.T.A. 861; 1939 BTA LEXIS 964; May 17, 1939, Promulgated *964 SECTION 44:d), REVENUE ACTS OF 1932. - Commissioner's assertion of a tax under section 44:d) sustained where administratrix upon filing a return in 1934 failed to file bond as permitted by the statute and regulations. F. Harold Johnston,33 B.T.A. 551, distinguished. Erroneous advice given by a deputy collector can not prevent the Commissioner from applying the statute. John D. Biggers,39 B.T.A. 480. A. Calder Mackay, Esq., for the petitioner. E. A. Tonjes, Esq., for the respondent. ARUNDELL *861 In these proceedings the respondent is asserting against each petitioner, as transferee, a liability for a deficiency in income tax of Mary E. Evarts in the amount of $2,271.82 for the year 1933. The asserted liability grows out of the transmission of an installment obligation upon the death of Mary E. Evarts. Petitioners concede they are transferees, but deny that there is any deficiency in the taxes of their transferor. FINDINGS OF FACT. Petitioners are residents of Glendale, California, and are the children of the late Mary E. Evarts, who died intestate on July 5, 1933. In 1928 Mary E. Evarts sold*965 a piece of real estate for a total contract *862 price of $57,000, receiving $14,000 in cash and a trust deed and note for the balance of $43,000. At that time she elected to report the profit on the sale on the installment basis. On December 31, 1932, the unpaid balance amounted to $25,000. The installments paid up to that time were reported so as to show 54.889 percent as representing taxable income. On July 3, 1933, the decedent received another installment of $5,000, thus reducing the unpaid balance at the time of her death to $20,000. In March of 1934 petitioner Mabelle M. Evarts, as administratrix of her mother's estate, prepared two returns for 1933, one for the period to July 5, and the other for the remainder of the year. She reported in the latter period the sum of $5,000 received by the mother on July 3 and computed the profit thereon at the rate of 54.88 percent. She presented the returns so prepared to a deputy collector and went over them with him. The deputy collector did not advise the petitioner of the provisions of section 44:d) of the Revenue Act of 1932. The returns were sworn to by the petitioner, as administratrix, before the deputy whom she*966 consulted. The returns for the earlier period in 1933 showed no tax; the return for the later period showed a tax of $49.05, which was paid. The decedent's estate was distributed in May 1934 to these petitioners, each one of whom received assets in excess of the amount of tax here involved, with interest. Shortly after the distribution a deputy collector advised petitioner Mabelle M. Evarts that the percentage of profit on the installments collected should have been 88.992 percent instead of the percentage that had been used. He also advised that a bond should have been filed with respect to the installments unpaid at the time of the mother's death, and in response to a question as to whether a bond could then be filed, he stated that it was then too late. The two petitioners acquiesced in the use of the higher rate of profit on the installments previously collected and paid the resulting additional taxes for 1932 and 1933. In July 1934 the remaining $20,000 of the installment obligation was paid, each petitioner receiving $10,000. Each included in income reported for 1934 the sum of $8,899.23, being 88.9923 percent of $10,000, and attached to each return a full explanation*967 of the source of the item. The return of petitioner Frank H. Evarts showed no tax due for 1934; the return of petitioner Mabelle M. Evarts showed a tax of $419.74. In the notices to these petitioners, the respondent computed the profit on the transmission of the installment obligations at $22,248, and gave the following explanation: 1. Profit from transmission of installment obligations at date of death of the decedent has been added to the income reported as provided in section 44:d) of the Revenue Act of 1932. *863 The balance due on a sale of real estate made in 1928 has been computed as shown in your protest. Total sale price $57,000.00 Cash collected in 1928 14,000.00 Amount of the installment note $43,000.00 Amount paid in 1929 $10,000.00 Amount paid in 1932 8,000.00 Amount paid in 1933 5,000.00 23,000.00 Unpaid balance at date of decedent's death $20,000.00 Amount received prior to July 5, 1933 5,000.00 Total $25,000.00 The profit of $22,248.00 represents 88.992 per cent of $25,000.00, the balance of the notes as at January 1, 1933 received in connection with the installment sale. Neither of the petitioners*968 ever filed a bond pursuant to the provisions of section 44:d) of the Revenue Act of 1932. OPINION. ARUNDELL: The statute under which the respondent has determined the deficiency in this proceeding is section 44:d) of the Revenue Act of 1932. As far as material here the statute provides for the recognition of gain on the transmission of installment obligations upon the death of the holder, but that there shall be no such recognition if bond is filed with the respondent to assure the return as income by the recipients of the same amount as the decedent would have returned had he lived and received payment. The bond permitted to be filed in order to suspend recognition of gain on the transmission is, by statute, to be filed at such time as the respondent may be regulation prescribe. By article 355 of Regulations 77, approved by the Secretary of the Treasury on February 10, 1933, the respondent directs that the bond must be filed at the time of filing the return of the decedent for the year of his death. Clearly the provisions of the statute and of the regulations support the respondent in his assertion of a tax upon the transmission of the installment obligations owned by*969 the decedent. The petitioner's view is that, as they have now reported to receipts from the liquidation of the installment obligation, the respondent should be estopped from asserting a tax on the transmission. They say that the bond provision is a relief provision and should be liberally construed in their favor. Both parties cite the case of . The petitioners cite it as similar and controlling, and the respondent says it is distinguishable. The Johnston case is strikingly similar except for the matter of the year of death of the holder of the installment obligation and the time of filing a return on behalf *864 of the decedent. This difference in time is important, as will appear. In the Johnston case death occurred in 1932 and the executor filed a return of the decednt's income on March 15, 1933. At the time of filing the return Regulations 77 had been released less than three weeks, and the form prescribed by the respondent for filing bond was not available to the public until April 26, 1933. We held on the facts present in that case that the Commissioner's refusal to accept a bond that the executor*970 offered to file as soon as he learned of the requirements of article 355 of Regulations 77 was arbitrary and the determination of a deficiency was unwarranted. But in this case Regulations 77 had been released more than a year before the date of filing a return on behalf of the decedent, and the bond form had been available for nearly 11 months. This state of facts makes the holding of the Johnston case inapplicable. With the Revenue Act of 1932 in force for so long a period, and the regulations and bond form released to the public for such a substantial period, it is difficult to see wherein the petitioners can justly complain that the respondent is acting arbitrarily when he applies the statute and regulations as they are plainly written. To the argument for liberal construction in favor of the petitioners because section 44:d) is a relief provisions, it is enough to say that what the petitioners ask is not a contruction of the statute, but a complete disregard of it. That the petitioners were erroneously advised by a deputy collector may well arouse every sympathy for the petitioners, but that is no ground for us to now say that the respondent may not apply the law. *971 . In one respect the respondent has erred. The sum of $5,000 was received by the decedent two days before her death, and that payment reduced the balance of the obligation to $20,000. The respondent has treated the sum of $25,000 as being the amount of the installment obligation transmitted at death. Obviously the $5,000 was income of the decedent during her life and should not be included as a part of the obligation transmitted at death. This may be corrected on recomputation. Decision will be entered under Rule 50.