Gruy v. Commissioner

ESTATE OF LUCILE GRUY, JOSEPH GRUY, INDEPENDENT EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Gruy v. Commissioner Docket No. 95901. United States Board of Tax Appeals 42 B.T.A. 1279; 1940 BTA LEXIS 880; November 22, 1940, Promulgated *880 1. The estate of decedent at the time of her death in 1933 consisted of community property and separate property. There were also community property debts and separate property debts. All community property was willed to decedent's husband and he was named independent executor without bond. In the year of decedent's death her husband paid all the community debts and took charge of the community property, of which he was the sole legatee, and thereafter dealt with it as his own. In the taxable year 1935 there was income from such property, which the surviving husband dealt with as his own, and he returned all of it for taxation on his own income tax return. Held, under Texas law such distribution to himself of the community property of which he was sole legatee and devisee after all community debts had been paid was proper and no part of the income therefrom was taxable to the estate of decedent, which was still in process of administration as to her separate property during the taxable year. 2. Petitioner is not entitled to a credit against whatever deficiency, if any, is determined in this proceeding under Rule 50 for income taxes paid in 1935 by the three minor children*881 of Joseph Gruy and Lucile Gruy, even though such payments were made with money furnished by petitioner estate to Joseph Gruy, natural guardian of the minor children. Charles V. Parker,17 B.T.A. 608 followed. E. H. Suhr, Esq., for the petitioner. J. E. Marshall, Esq., for the respondent. BLACK *1280 The respondent determined a deficiency in income tax against the estate of Lucile Gruy for the calendar year 1935 in the amount of $4,315.91. The Commissioner, in his determination of the deficiency, made the following adjustments to petitioner's net income for the year 1935: Net income as disclosed by return (Form 1041) $21,029.82 Unallowable deductions and additional income: (a) Cost of cattle decreased $3,783.64 (b) Depreciation decreased 3,764.93 (c) Income from rents 2,944.46 (d) Cattle sales 4,945.00 (e) Expense Solo Ranch 1,001.28 16,439.31 Total $37,469.13 Nontaxable income and additional deductions: (f) Profit on sale of lots $278.00 (g) Interest paid 483.17 (h) Taxes 290.61 (i) Insurance 466.35 (j) Repairs 100.32 (k) Commissions 4,346.74 $5,965.19 Net income adjusted $31,503.94 *882 The questions presented for our decision are: (a) Are income and profits from the community estate of Lucile Gruy, deceased, owned at the time of her death, taxable to petitioner in 1935? (b) Is petitioner entitled to a credit of $926.67 for income taxes paid by the minor children of Joseph Gruy and Lucile Gruy for the year 1935? In the petition there was an assignment of error (d), as follows: "The Respondent erred in decreasing the deduction for depreciation by the sum of $3764.93." This issue has now been settled by stipulation. *1281 FINDINGS OF FACT. Lucile Gruy and Joseph Gruy were husband and wife, residing in Jim Hogg County, Texas. Lucile Gruy died testate February 18, 1933, leaving as survivors her husband, Joseph Gruy, and three children, Dagmar Gruy, Viggo Gruy, and Joseph Gruy, Jr. The will of Lucile Gruy dated June 30, 1930, was admitted to probate in the County Court of Jim Hogg County, Texas, March 14, 1933. Its provisions material to the issue here were as follows: II I give and bequeath to my beloved husband, Joseph Gruy, my share of the Community property of myself and my said husband, Joseph Gruy, to pass to and vest in him in fee simple*883 to manage, control, use and dispose of as he may elect. III I give, devise and bequeath to my beloved children Dagmar Gruy, Viggo Gruy and Joseph Gruy, all my separate property of which I may die seized and possessed, real, personal and mixed, of every kind and character share and share alike. If there should be born to myself and my husband any other children, then they shall inherit equally with those above named, all my separate property, real, personal or mixed, of which I may die seized and possed. * * * V I hereby constitute and appoint my beloved husband, Joseph Gruy, guardian of the persons and estate of my said children, or such of them as may be minors at the time of my death. VI I hereby constitute and appoint my beloved husband, Joseph Gruy independent executor of this my last will and testament, and direct that no bond be required of him as such executor. VII It is my will and desire that no other action be had in the County Court than the probating of this will and filing of an inventory and list of claims. Joseph Gruy qualified as independent executor March 14, 1933, and by order of the County Court appraisers of the estate of Lucile Gruy were*884 appointed. The order of the County Court contained the following paragraph: It is further ordered that Letters Testamentary issue to the said Joseph Gruy as Executor of said will, upon his taking the oath required by law; and that upon the return of an inventory, appraisement and list of claims of said Estate, the filing of inheritance tax reports and payments of tax, if any due, and the payment of the cost of Court, this Estate be dropped from the Docket. *1282 The inventory and appraisement as found by the appraisers appointed by the County Court of Jim Hogg County, Texas, was filed in the County Court by Joseph Gruy April 19, 1933. The separate property and the community property were appraised separately and listed separately on the inventory, together with the debts attached to each. The properties, so listed, were appraised as follows: Community estate, $58,112.79; separate estate, $173,682.35. The claims against the estate are listed as follows: COMMUNITY ESTATE First National Bank, Hebbronville, Texas $4,495.55 First National Bank, Hebbronville, Texas 3,996.38 Total $8,491.93 SEPARATE ESTATE Federal Land Bank, Houston, Texas $2,582.28 Dallas Joint Stock Land Bank, Dallas, Texas 31,163.39 Unpaid taxes, Duval County, Texas 713.92 Unpaid taxes, Duval County, Texas 172.39 Unpaid taxes, Benavides County, Texas 51.20 Unpaid taxes, Benavides County, Texas 100.05 Unpaid taxes, Benavides County, Texas 100.00 Unpaid taxes, Benavides County, Texas 210.60 $35,093.83 *885 The indebtedness of the community estate with accrued interest, amounting to $8,659.28, was paid by Joseph Gruy, as independent executor, to the First National Bank of Hebbronville, Texas, on May 15, 1933. After the payment of this indebtedness Joseph Gruy, as beneficiary under the will of Lucile Gruy, took possession of the property comprising the community property included in her estate. Thereafter, beginning with the year 1934 and including the taxable year before us, Joseph Gruy treated such community property as his own and personally paid the taxes and maintenance expenses thereon. All of the income from the community property in 1934 and 1935 was deposited in banks to the personal account of Joseph Gruy and used by him as his own and was included by him in his personal income tax return. Income from the community properties for the year 1935 was received by Joseph Gruy in the total amount of $15,778.93. No community income was included in the return filed by Joseph Gruy for the year 1935 as independent executor of the estate of Lucile Gruy. The income from the separate estate of Lucile Gruy was kept separate in separate bank accounts was not commingled with the income*886 from the community property. All of the expenses, taxes, etc., incident to the separate estate were paid out of the funds of the separate estate. Joseph Gruy kept no books except a statement of the *1283 daily expenses and collections of the hotel which was a part of the separate estate of Lucile Gruy. In 1935 the estate of Lucile Gruy was still under administration and all the debts of her separate estate had not been paid. On December 31, 1934, the separate estate had $4,507.77 on hand in the First National Bank of Beesville, Texas, and $16,408.94, in the First National Bank of Hebbronville, Texas, a total of $20,916.71. Joseph Gruy, as independent executor of the estate of Lucile Gruy, on April 25, 1935, deeded to Ernest Cotulla and wife lot 3 and the east half of lot 2, block 54, Kohler Addition to the town of Hebbronville, Texas. The deed contains the following: That the separate estate of Lucile Gruy, deceased, is indebted to the Community Estate of Lucile Gruy and Joseph Gruy in the sum of $30,876.96, is indebted to the Federal Land Bank of Houston, Texas in sum of $2,582.28; is indebted to the Dallas Joint Stock Land Bank in sum of $31,163.39 and said Estate*887 is further indebted for the costs of administration of said Estate, and that this sale is necessary to pay on administrative costs to apply on such indebtedness. Individual income tax returns of Dagmar Gruy, Viggo Gruy, and Joseph Gruy, Jr., minors, were filed for the year 1935 by Joseph Gruy, their father and natural guardian. Each of these returns shows a tax of $308.89, the total of which three sums is the source of the claim for the credit of $926.67 for income taxes paid. Checks of the estate of Lucile Gruy, deceased, were used to pay these three sums to the collector of internal revenue, Austin, Texas. On November 18, 1936, Joseph Gruy swore to a refund claim for income taxes of Dagmar Gruy for 1935, which claim was later filed with the collector at Austin, Texas. The claim is for $308.89, the same figure shown as the tax in the 1935 return of Dagmar Gruy, and it contains the following statements: In making up the original return the taxpayer omitted to deduct $4346.74, executor's commissions on the Estate of Lucile Gruy, deceased, from which the income was derived, and $483.17, interest paid. These items, together with an item of $2795.42, executor's commissions*888 deducted from the estate tax return of Lucile Gruy, deceased, are shown as income on amended income tax return of Joseph Gruy, individually, filed herewith. When Joseph Gruy filed this claim for refund, the estate of Lucile Gruy was still in process of administration. In determining the deficiency here in question, the respondent did not allow any credit for the taxes paid by petitioner for Dagmar Gruy, Viggo Gruy, and Joseph Gruy, Jr., for the year 1935 in the sum of $308.89 each. The Commissioner, in his determination of the deficiency, made the following statement in his deficiency notice: Evidence presented discloses that both the separate and community estates of Lucile Gruy were in process of administration until after 1935. There were unpaid legacies, outstanding mortgages, and Federal estate tax liability, all of *1284 which remained unpaid at the close of 1935. Section 161 of the Revenue Act of 1934 provides that the income of an estate in the process of administration is to be returned and tax paid on it as income of the estate rather than the heirs or devisees. It is, therefore, held that the entire income of the estate from both separate and community*889 property is, for the year 1935, taxable to the estate. Also in explanation of certain adjustments made in petitioner's income tax return for the year 1935, the Commissioner stated as follows: This amount ($2,944.46), which represents one-half of $5,888.92 rents collected in 1935 from community property owned by Lucile Gruy and her husband, Joseph Gruy, at date of her death, is held to be taxable to you. Therefore, $2,944.46 has been transferred from the return of Joseph Gruy, and included as taxable income in your return. Section 161(a)(3) of the Revenue Act of 1934. During the year 1935 there were sales of community cattle aggregating $9,890.00, all of which was reported as income by the surviving spouse, Joseph Gruy. Since this office is holding that the estate was in the year 1935 in process of administration, one-half of the cattle sales, or $4,945.00, is held to be taxable to you. Section 161(a)(3) of the Revenue Act of 1934. The parties have stipulated that the allowable depreciation is $4,652.66 instead of $2,332.50 as allowed by the respondent in computing the deficiency. OPINION. BLACK: The first issue arises from the inclusion by the respondent in petitioner's*890 income for the year 1935 of $7,889.46 representing one-half of the income from community property of the decedent and her husband, Joseph Gruy. There is no dispute as to the amount of income involved. In support of his determination, the respondent contends that the income in question was received during the period of administration or settlement of the estate and is taxable to petitioner under section 161(a)(3) of the Revenue Act of 1934. 1 The petitioner concedes that the separate estate of Lucile Gruy was in process of administration in 1935, that there were debts of the separate estate still unpaid, and that the Federal estate tax was still in dispute and was not settled until a subsequent year. He contends, however, that, as an independent executor under the will of Lucile Gruy, he paid all of the debts of the community estate in 1933 and distributed*891 to himself, as legatee and devisee under the will, all the interest of Lucile Gruy in the community property owned by herself and her husband, Joseph Gruy, at the time of her death. The record discloses that after 1933 Joseph Gruy treated all the community property as his own; that he paid the taxes on such property and all expenses incident to it from his own funds; that he consistently *1285 deposited the income from such property in his personal bank account, used it as his own individual income, and included it in his personal income tax return for the taxable year before us. Moreover, no community income was included in the fiduciary income tax return for the estate of Lucile Gruy for the year 1935. Obviously after 1933, Joseph Gruy regarded himself as owner in possession of the community property formerly belonging to his deceased wife and himself and he dealt with it as such. The case then turns on whether there was such a distribution of the community estate of decedent in 1933 as to take it out of the estate of Lucile Gruy and out of the control of the executor of the estate. If the community property remained under administration in 1935 and the income in*892 question was received by Joseph Gruy in his fiduciary capacity as independent executor of the estate of Lucile Gruy, it is taxable to the estate, as respondent contends. . The estate of Lucile Gruy consisted of both her separate and community property. While all of such property was included in her general estate, the separate and community property were kept separate for the purposes of administration. At the death of Lucile Gruy, her husband, as surviving member of the community, was invested with full control of all the community property. ; . Under the terms of the will he became independent executor of all the decedent's estate, including the community property. As independent executor he was required to file a complete inventory and appraisement of all the property in the decedent's estate. Having filed such inventory and appraisement, he had the right to administer the community property for the payment of community debts without any supervision by the Probate Court. *893 . He could do whatever the court could do if the estate were under its entire control. . He had the power to close administration or surrender all or any portion of the property to the heirs or devisees without the formality of judicial sanction. . Joseph Gruy, as independent executor, paid all the community debts against the estate in 1933. His acts thereafter were the acts of an owner and not administrator of the community property. We hold that the community property from which the income in question was derived was distributed to Joseph Gruy as legatee under the will prior to 1935 and that none of it was in process of administration in that year. As to this issue petitioner is sustained. In our opinion, it is immaterial whether or not the separate estate was indebted to the community estate in the year 1935 as respondent contends. The only evidence of such indebtedness is the statement in *1286 the deed of April 25, 1935, to Ernest Cotulla and wife. No such indebtedness appears in the inventory and*894 appraisement. But even if the statement in the deed were correct, it would only mean that there was a partial distribution of community property in 1933, and would not affect our decision as to the property distributed. The income from such property after it was distributed belonged to Joseph Gruy, who was then the owner thereof. Nor is the fact that the estate tax was in dispute in 1935 controlling. Under the laws of Texas, property of a decedent vests immediately upon his death in the devisee, subject to the payment of the debts of the testator. ; ; ; . See Vernon's Annotated Civil Statutes, art. 3314. The distributee would, therefore, be liable for such debts to the extent of the amount distributed to him, , but the distribution would be valid and have the effect under Texas law of taking the property distributed out of administration. *895 The Commissioner, in his adjustment of petitioner's income for 1935, allowed as additional deductions: (h) Taxes, $290.61; (i) insurance, $466.35; (j) repairs, $100.32. In explanation of these additional deductions he stated in his deficiency notice, as follows: (h), (i), and (j) These amounts, which represent one-half of the following community deductions claims by the surviving spouse, Joseph Gruy, are held to be allowable deductions on your return. [Here are set out by the Commissioner the figures we have given above.] Manifestly, if the community property was distributed to Joseph Gruy prior to the taxable year, the expenditures named above were made by him individually and the deductions are his and no part of them are deductible by the estate. We do not understand that petitioner contends otherwise. In a recomputation under Rule 50 the above named deductions should be disallowed. The second issue involves the claim for a credit in the amount of $926.67 representing income taxes paid by the independent executor, Joseph Gruy, from funds of the estate of decedent on income returned by Joseph Gruy as natural guardian for Dagmar*896 Gruy, Viggo Gruy, and Joseph Gruy, Jr., all minor children of Lucile Gruy and Joseph Gruy. Dagmar Gruy, Viggo Gruy, and Joseph Gruy, Jr., were the beneficiaries of the separate estate of Lucile Gruy. As independent executor of that estate, Joseph Gruy had the right to make distribution to these beneficiaries of sufficient funds to pay their income tax. ;, and as natural guardian of the minor children, Joseph Gruy had the right to make a return of their income and to pay the tax from the funds so distributed, and we must regard such acts as within the scope of his power. But having *1287 distributed to the minors or their natural guardian the funds to pay their income tax, the petitioner may not now claim a credit on its tax for the amount so paid. We do not have the cases of the minor children before us and, therefore, do not pass upon the question as to whether they owed any income tax for the year 1935. Assuming, however, that the natural guardian erroneously filed a return for the minor children, we fail to see how the amount so paid can be allowed as a credit to petitioner. The*897 minor children, by their natural guardian, are not parties to this proceeding. Unquestionably they have a right to apply for a refund of the amounts paid, but such action has no relation to this petitioner, which is a different taxpayer. If an overpayment in taxes exists and the same taxpayer has an outstanding liability, the Commissioner is required before making any refund to apply the overpayment against the liability or allow a credit. Cf. . But he has no authority of his own motion to credit one taxpayer's overpayment against another's liability. Cf. ; certiorari denied, . He may allow such a credit with the consent of the parties, cf. ; affd., , but he can refuse to do so because of the fact that the parties are separate and distinct taxpayers. *898 . On the record before us, petitioner's claim for credit is denied. Decision will be entered under Rule 50. Footnotes 1. SEC. 161. IMPOSITION OF TAX. (a) APPLICATION OF TAX. - The taxes imposed by this title upon individuals shall apply to the income of estate 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. ↩