Franklin v. Commissioner

ESTATE OF CHARLES H. FRANKLIN, DECEASED, GRACE B. FRANKLIN, EXECUTRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Franklin v. Commissioner Docket No. 101482. United States Board of Tax Appeals 43 B.T.A. 612; 1941 BTA LEXIS 1481; February 13, 1941, Promulgated *1481 An allowance paid under the statutes of Michigan as a widow's allowance during administration of estate is not an allowable deduction from income of estate, although probate court specified that such payment be made out of income. John C. Evans, Esq., for the petitioner. P. M. Clark, Esq., for the respondent. VAN FOSSAN *612 Respondent determined deficiencies in the income tax of the petitioner for the years 1936 and 1937 in the sums of $9,250.78 and $7,343.62, respectively. The single question for decision is whether or not the sum of $26,000 paid in each of the taxable years by the petitioner to Grace B. Franklin, allegedly as a widow's allowance, is an allowable deduction. FINDINGS OF FACT. The facts were stipulated substantially as follows: Charles H. Franklin died November 27, 1935, testate, a resident of the City of Jackson, County of Jackson, State of Michigan. The relevant provisions of his will are as follows: I give, devise and bequeath all of my property, real, personal and mixed and wheresoever situated unto my wife, Grace B. Franklin, to be used by her as hereinafter mentioned, both principal and interest, for and*1482 during the term of her natural life. My said wife shall have full and complete power and authority to sell, convey, exchange, invest, re-invest, re-invest proceeds derived from the sale of re-investments, mortgage and pledge my said estate or any part thereof at such times and in such manner and upon such terms as my said wife in her absolute and uncontrolled discretion may deem expedient and proper, and may use first from the income and second from the principal of said estate that amount which in her absolute and uncontrolled discretion she may deem proper for her support, health, comfort and enjoyment, for and during the term of her natural life as aforesaid. Upon the death of my said wife, Grace B. Franklin, I give, devise and bequeath the remainder of said property unto my children, Ruth M. Franklin and Robert C. Franklin, share and share alike, if they are living at the time of the death of my said wife, and in case either of them shall not be living, *613 then to the issue of such deceased child or children (per stirpes and not per capita). On December 28, 1935, the petitioner, Grace B. Franklin, widow of the decedent, was appointed executrix of the last will and*1483 testament of Charles H. Franklin by Clarence M. Russell, Probate Judge for the County of Jackson, State of Michigan. The letters testamentary of the said Grace B. Franklin still remain in full force and effect and unrevoked. Federal income tax returns for the estate of Charles H. Franklin, deceased, for the years 1936 and 1937, were filed with the collector of internal revenue for the district of Michigan at Detroit, Michigan, within the time prescribed by law. On or about June 3, 1936, Grace B. Franklin, as widow of the decedent, filed a petition in the Jackson County Probate Court praying that she be allowed the sum of $500 per week for the maintenance of herself, to be paid from the corpus of the estate of the decedent. The petition is captioned "Petition for Widow's Allowance." On June 3, 1936, the said probate judge entered an order granting to the said Grace B. Franklin, widow of the decedent, an allowance of $500 per week for her support and maintenance for a period of one year from the date of death of the decedent, such allowance "to be paid out of the corpus of said estate." The decree was entered on a form designated "Order Granting Widow's Allowance" and recited*1484 that the widow prayed for "the assignment to her of her statutory allowances out of said estate." On or about November 1, 1937, Grace B. Franklin filed a petition in the said Probate Court, averring that on June 3, 1936, she was granted an allowance of $500 per week for a period of one year from the date of death of the decedent to be paid directly from the corpus. In her petition she further averred that instead of the allowance having been paid out of the corpus of the estate, it was taken from the income thereof. She then prayed that she be allowed the sum of $500 per week for her support and maintenance for the period of one year from and after one year from the date of death of the decedent, payable out of the income of the estate, and that the former order of the court be amended so that the allowance paid her for the first year after the date of death of the decedent should be paid from the income of such estate instead of from the corpus thereof. On November 3, 1937, the said probate judge entered an order granting to Grace B. Franklin a widow's allowance of $500 per week for her support and maintenance for a period of one year after the expiration of the previous order*1485 granting the widow's allowance, the said sum to be paid out of the income of the estate. The order also provided as follows: IT FURTHER APPEARING that the original order provided for the payment of the first year's allowance to said widow out of the corpus of said estate, but *614 that the same should have been directed paid out of the income of said estate; IT IS ACCORDINGLY ORDERED that said original order be and the same is amended to provide that said first year's allowance be paid out of the income of said estate, and in all other respects that said order shall stand. The order recited that the estate was still open, that the widow was entitled to further allowances, and that the amount granted was reasonable therefor. During the year 1936 Grace B. Franklin, as executrix of the estate of Charles H. Franklin, deceased, paid over to herself, as widow of the decedent, the sum of $26,000 as her widow's allowance for the year 1936 and during 1937 she, as executrix, so paid a like sum to herself as widow. During the year 1936 the estate of Charles H. Franklin had gross principal receipts of $62,492.36 from the sale of securities, $2,062.27 from ordinary interest, *1486 and $55,250.80 from dividends. During that year it had a deduction of $342.77, interest paid, in addition to the widow's allowance. During 1937 the estate had no principal receipts but received as income $57,994.70 in dividends and $1,793.08 in interest. It had a deductible item of $4,924.28, interest paid, in addition to the widow's allowance. All principal receipts and income receipts of the said estate during the years 1936 and 1937 were deposited in one common bank account. The executrix maintained no records segregating the principal funds from income funds in the said bank account. No allocation, identification, or earmarking was made on the books of the executrix indicating whether the widow's allowances of $26,000 for the year 1936 and $26,000 for the year 1937 were paid out of the income receipts of the estate or out of the principal receipts of the estate. The entire $52,000 of widow's allowances paid to Grace B. Franklin during the years 1936 and 1937 by the estate of Charles H. Franklin was claimed and allowed as a deduction in computing the Federal estate tax due from that estate. On March 26, 1940, the said probate court approved and allowed the amended annual*1487 account of Grace B. Franklin, as executrix of the decedent's estate, covering the period from the date of death of the decedent to January 1, 1938. In that account she credited herself with $52,000 "cash paid on widow's allowance as per order of said court." The respondent refused to allow the deductions for widow's allowances on the ground that such payments made during the process of administration, "which amounts have been allowed as deductions in computing Federal estate tax due from said estate, are not also allowable as deductions in computing the net income of said estate for Federal income tax purposes." *615 OPINION. VAN FOSSAN: The petitioner contends that the widow's allowance paid by her as executrix of her husband's estate to herself as his widow, out of income, pursuant to a probate court order, constitutes a deduction from income allowable under the provisions of section 162(c) of the Revenue Act of 1936. 1 The respondent's position is that such payment was a charge against the corpus of the estate and hence is not deductible. *1488 It may be noted that although the amended court order directed a payment out of income, the facts do not reveal any practical substantiation of such fact. All receipts, either of principal or of income, were commingled in one common bank account. No allocation, identification or earmarking was made on the books. In view of other more basic considerations, however, we place no emphasis on this fact. Section 15,553 of the Compiled Laws of the State of Michigan, 1929, as amended, is as follows: Debts of testator and family expenses; liability of estate; allowance for widow. Sec. 22. All the estate of the testator, real and personal, shall be liable to be disposed of for the payment of his debts, and the expensesof administering his estate, and the probate court may make such reasonable allowance as may be judged necessary for the expenses of the maintenance of the widow and minor children, or either, constituting the family of the testator, out of his estate, during the progress of the settlement of the estate, but never for a longer period than until their shares in the estate shall be assigned to them, nor for more than one (1) year in an insolvent estate. (Section 27.2653, *1489 Michigan Statutes Annotated.) The case of , involving the California statutes, presented a situation essentially the same as the one now before us. The applicable sections of such statutes provided that if the property set apart were insufficient for the support of the widow or children, the court must take such reasonable allowance out of the estate as should be necessary for the maintenance of the family during the progress of the settlement of the estate. In that case we said: There is no mention made in the statutes of income of the estate of the decedent. *616 The granting of family allowance is not dependent on the existence of income of the estate, but the statute (§ 1466), in certain instances and for a limited period, authorizes the proper court or a judge thereof to make such reasonable allowance "out of the estate" as shall be necessary for the maintenance of the family, according to their circumstances, during the progress of the settlement of the estate, although the estate may be insolvent. The right of the widow to a family allowance is purely statutory. *1490 ; ; ; ; ; . The widow's allowance is in the nature of a part of the cost of administration. 24 C.J. 230, 231 and note 98 on page 231, citing ; ; ; . It is not a claim or demand which must be presented in due form of law to the executor or administrator of the estate, but is an expense of administration. ; . In determining the value of the net estate subject to estate tax, section 403 of the Revenue Act of 1921 and the corresponding section 303 of the Revenue Act of 1924, allow as a deduction from the corpus of the estate administration expenses, claims against the extate and such amounts reasonably required and expended for the support during the settlement of the estate of those dependent upon the decedent*1491 as are allowed by the laws of the jurisdiction under which the estate is being administered. In ; , the court held that the widow's allowance (authorized by section 15,553) is a statutory provision pertaining to the administration of the estate, intended for her support and maintenance during the progress of administration. See ; affd., . We conclude, therefore, that the payment of a widow's allowance is a cost of and attaches to the administration and settlement of the estate, irrespective of the source from which it came. The petitioner argues that the estate of a decedent includes both its corpus and the current income therefrom. This is undoubtedly true, but since the income is a part of the estate and the widow's allowance is an expense of its proper administration, such allowance is, under the statute, a charge against the entire estate and not against the income only. The fact that a probate court, by an amended order, directed payment from income does not alter the inherent character of the allowance. Mrs. *1492 Franklin received the "widow's allowance" not as a legatee, heir, or beneficiary of the estate, but as the widow of the deceased and by virtue of the statute. As costs of administration, the payments in question were properly deductible in computing the Federal estate tax and, as the respondent represents, were so deducted. They do not, however, come within the deductions from income allowed by the statute. *617 The petitioner argues further that, if the widow's allowance is a charge against the corpus, Mrs. Franklin received only that to which she was entitled under the terms of the decedent's will and that thus the facts bring the case within the contemplation of the statute. We are not impressed with this argument. We are dealing with an income tax case. Mrs. Franklin appears in three capacities - as executrix (the petitioner), as beneficiary under the will, and as widow. The estate was unsettled during the taxable years. No distribution of any kind had been made to Mrs. Franklin as a beneficiary. The allowances in question were payable and paid to her as widow, regardless of any provisions of the will or any agreement to the contrary, and it was wholly within*1493 the discretion of the court to determine the amount thereof, if any. See ; . It is beside the point to argue that Mrs. Franklin might have been paid as a beneficiary all sums needed and deemed by her proper for her support. The fact is that she was paid nothing pursuant to the directions of the will, but she did receive $26,000 each year solely as a widow's allowance granted in strict accord with statutory requirements. Decision will be entered for the respondent. Footnotes 1. SEC. 162. NET INCOME. The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that - * * * (c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year, which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary. ↩