Masterson v. Commissioner

HUTCHESON, Circuit Judge. While it presents more than one facet, the ultimate question here presented is whether petitioner was taxable in 1935, the tax year in question, on all the income of the R. B. Masterson Estate, being administered by her as independent executrix, or only the part of it which was in that year paid over to her or expended for her use and benefit. The commissioner decided that all of it was taxable to her, the Tax Court affirmed, and she is here seeking a reversal of that decision. This is the record: In 1935, the tax year in question, petitioner, as independent executrix of the estate of R. B. Masterson, deceased, was the active administrator of its property. In that year she filed an individual return in which she included as her income all of the amounts physically received by her personally from the estate and all of the amounts the estate actually expended in her personal behalf during that year. As executrix, she also filed a return, in which she reported as the income of the R. B. Masterson Estate, the balance of the income from the estate property not physically and personally received by her or actually expended in her behalf. The commissioner, determining that the income returned by and for the estate was her personal income and should have been returned by and for her personally, determined a deficiency accordinglyIn her petition to the Tax Court, the taxpayer assigned, among other errors, “(b) The respondent erred in holding and determining that petitioner individually was taxable upon the entire net income of the estate of R. B. Masterson, deceased, of which she was independent executrix, or that she was taxable upon more than the amount of said income expended for her support and maintenance”. — 392 — The Tax Court ignored the fact stipulated and shown of record that the Masterson estate was in process of administration and that only the income turned over to, or expended on, Mrs. Masterson’s behalf was received by her individually, and its corollary that she was taxable only as to the income so received.1 2The Tax Court concerned itself instead with determining who would ultimately own the income. It decided that Mrs. Masterson was the ultimate owner of the income received by the estate for that year and not, as she had contended, of only that part of it which the estate paid over to her in that year or used for her benefit, and that all of the income should be taxed to her. Basing its decision that she was such owner on its holding that the judgment of this court,3 that Mrs. Masterson was the owner of a conventional life estate, was res adjudicata of the question whether she owned the income from it, it rejected petitioner’s contention that the rights of those named in the will were controlled and determined by the judgment of the state court which she had pleaded and proved.3 While petitioner does assign this ruling as error, she presents as the primary question for decision here, “Should petitioner have reported as her own all income received in 1935 by the estate of R. B. Masterson, deceased, rather than the proportion of this income distributed to her in that year”. We think it quite clear that the Tax Court erred in ignoring and refusing to give effect to the undisputed fact that the estate was in the process of administration, and thus erroneously determined that not only the income of the estate distributed to petitioner, but that undistributed, was taxable to her. It is undisputed: that petitioner and her husband executed a joint will; that that will was probated August 17, 1931; that Mrs. Masterson qualified as independent executrix under it;, and that in 1935, as executrix, she was duly administering the estate which by virtue of the terms of the will and her election consisted of all the property which had belonged to her and her husband in community at the date of his death; that on August 19, 1935, petitioner, in accordance with the will, relinquished and transferred to the six children of R. B. Masterson a one-half interest in all the property of the estate, and since the conveyance and relinquishment she has continued to administer on the remainder of the estate as independent executrix. For the calendar year 1935 she filed two returns, one for herself as an individual, and one for the Masterson estate. The income reported by her included all the amounts physically received by her from the Masterson estate and all amounts actually expended in her behalf by the estate during that year. The return filed for the estate showed a net income of $25,469.-09, and this amount represented the net balance of income from the estate’s properties not physically received by petitioner or actually expended in her behalf. Under these •circumstances, the income reported by her was her income; that reported by the estate was income of the estate, reportable by it and not by petitioner. Barbour v. Commissioner, 5 Cir., 89 F.2d 474; Commissioner v. Larson, 9 Cir., 131 F.2d 85. Because the income assessed to her was not her income but that of the estate, the deficiency was incorrectly determined, and the decision affirming that determination was wrong and must be reversed. It was wrong, too, in its holding that, despite the facts that the suit and judgment in the state court, which finally and conclusively settled the ownership of these funds, were for the first time, in this suit, pleaded and proved in the federal court, the — 393 — judgment in the gift tax suit was res adjudicata in this suit. Blair v. Commissioner, 300 U.S. 5, 57 S.Ct. 330, 81 L.Ed. 465, is to the contrary. The Tax Court’s view that this case is different from Blair’s case was based upon the erroneous assumption that this court decided the gift tax case as though the proceedings in the state court case were before it. These proceedings were not before us; they were expressly excluded from our consideration. We said [127 F.2d 256], “The motion to enlarge the record so as to include proceedings in the Texas State Court is denied, and those proceedings are not before us as evidence. So far as the legal questions decided by the Texas State Court are concerned we take judicial knowledge of the decision. * * * We are not bound by that decision, and to the extent that it differs from what we have said we do not agree with it”. All that we decided was that, treating the decision, as distinguished from the judgment, as a statement of the law of Texas, we did not agree with it. We did not say that we would not give effect to the judgment against the taxpayer. We said only that, treating the suit as ending in a judgment determining the title as between petitioner and the other persons claiming interests, the matter was not before us, and we could not give it effect. The situation here then is in legal effect the same as it was in Blair’s case. There the Federal Court made its first decision without having the State Court judgment before it. It made its second decision on a record in which the State Court proceedings appeared as pleaded and proved. Here, when the first decision was made, the record of the State Court proceedings was not before the court. When the second decision was made, they were. Res adjudicata is a principle of peace, and should be applied to bring litigation to an end where it is correct and just to do so.4 It is without application here. The order appealed from is reversed, and the cause is remanded to the Tax Court with directions to redetermine the deficiency accordingly. McCORD, Circuit Judge, concurs in the result. Footnotes [1] Secs. 161, 162, Rev.Act 1934, 26 U.S. C.A. Int.Rev.Code, §§ 161, 162. [2] Masterson v. Commissioner, 5 Cir., 127 F.2d 252. [3] She pleaded and offered in evidence the proceedings and judgment in cause No. 15,826 on the doc-kot of the 108th District Court of Potter County, Texas, in a suit she brought, individually and as independent executrix of the Masterson estate, in the early part of 1941, (after the Tax Court’s decision had been finally entered in the gift tax case and before the decision in the Circuit Court of Appeals in Masterson v. Commissioner, supra, affirming that decision), against all the other persons interested in the estate. This judgment, among other things, adjudicated that petitioner did not take individually a conventional life estate but only a right to be supported and maintained therefrom, and that the revenues, which accumulated from the estate and which had not been expended in caring for the estate and in supporting and maintaining petitioner, did not belong to her individually but fell into and remained a part of the estate in her hands to go ultimately to the six children named in the will. [4] But it is of the essence of the defense that it must be pleaded and proved that the matters in issue are the same as those in the former suit, the judgment in which it relies on. Judicial notice cannot be taken that they are. 20 Am.Jur., p. 102, “Evidence”, par. 83. “It is generally held that the existence and contents of a judgment sought to be made available as a basis for the application of the doctrine of res adjudicata must be proved by offering the record or a copy thereof in evidence, whether the judgment was rendered by the court trying the principal case, or by another court.” 30 Am.Jur., p. 993, Title “Judgments”, Par. 273. Divide Creek v. Hollingsworth, 10 Cir., 72 F.2d 859, 96 A.L.R. 937. Bennett v. Commissioner, 5 Cir., 113 F.2d 837, 130 A.L.R. 369, decided by this court, is not at all to the contrary.