Aaron v. Comm'r of Internal Revenue, Docket No. 34922.

Citation22 T.C. 1370
Decision Date30 September 1954
Docket NumberDocket No. 34922.
PartiesWILMA AARON, Petitioner,v.COMMISSIONER OF INTERNAL REVENUE, Respondent.
CourtUnited States Tax Court

OPINION TEXT STARTS HERE

1. Petitioner received all the assets of her deceased husband's estate upon its final distribution, except for $150,000 in Treasury notes and $19,428.66 in cash which, pursuant to an order of the Probate Court, were placed in a trust to be available for the payment of the estate's undetermined tax liabilities. The estate had a net income of $86,193.61 in its final year of administration, and respondent determined that such income was included in the assets distributed to petitioner and taxable to her rather than to the estate.

Held, respondent is sustained since petitioner has failed to prove that the income earned by the estate in its final year of administration was not distributed to her.

2. In computing the amount of a net operating loss, petitioner deducted State income taxes from her gross income received from trade or business. Respondent disallowed this deduction.

Held, respondent is sustained since State income taxes are not ‘attributable to the operation of a trade or business' as required by section 122(d)(5) of the Internal Revenue Code of 1939 for deductions from the income received from a trade or business. Walter C. Greene, Esq., for the petitioner.

Wayne L. Prim, Esq., for the respondent.

OPINION.

RICE, Judge:

This proceeding involves a deficiency in income tax determined against Wilma Aaron (hereinafter referred to as the petitioner) in the amount of $111,069.74 for the year 1946.

The issues to be decided are: (1) Whether the income of the estate of Alfred H. Massera for the period from January 1, 1946, to August 9, 1946, is includible in petitioner's income for 1946, that being the year in which the estate's administration terminated and its residual assets were distributed to petitioner as its sole beneficiary; (2) whether any part of the income taxes paid by petitioner to the State of California in 1947 are allowable as a deduction in calculating a net operating loss under section 122(d)(5) of the Internal Revenue Code of 1939; and (3) if so, whether one-half of the collections on accounts receivable owned by the decedent and petitioner as community property at the time of his death constituted income to petitioner in 1945.

Certain other issues raised by the pleadings have been conceded by the petitioner.

All of the facts were stipulated, are so found, and are incorporated herein by this reference.

Petitioner resided in Watsonville, California, during 1946 and all years material to this proceeding. Her income tax returns for such years were filed with the collector of internal revenue for the first district of California.

Petitioner was married to Alfred H. Massera (hereinafter referred to as the decedent) at the time of his death on February 13, 1945. The decedent died intestate, and petitioner is the sole beneficiary of his estate.

Petitioner, Walter J. Massera, and the Bank of America National Trust and Savings Association (hereinafter referred to as the bank) were appointed and qualified as administrators of the decedent's estate. Pursuant to an order of the Superior Court of the State of California in and for the County of Santa Cruz (hereinafter referred to as the Probate Court), the administrators continued the operation of the decedent's businesses until the final distribution of the estate on August 9, 1946. These businesses were: Al Massera Company (a trucking and produce company) and Lucky Strike Auto Court (an auto court), which were sole proprietorships. Upon the distribution of the assets of the estate to the petitioner, she continued the operation of these two businesses.

The assets of said businesses were acquired subsequent to 1927 and were owned and held by the decedent and petitioner as community property. At all times material herein, the records of these businesses were maintained on the cash receipts basis. The income tax returns of the decedent, petitioner, and the administrators were also filed on the cash receipts basis.

Issue 1.

The total net income of the property under administration for the period beginning on January 1, 1946, and ending with the entry of the decree of distribution on August 9, 1946, was $172,387.22. As the property under administration was the community property of petitioner and the decedent, one-half of this amount was petitioner's share of community income. The remaining one-half, $86,193.61, was earned by the decedent's estate, and whether it is taxable to the estate or to petitioner is here in issue.

Before the administration of the estate could be terminated, it was necessary to provide for its various undetermined tax liabilities. Accordingly, a trust agreement was entered into on July 25, 1946, with the bank as trustee. Under this agreement, $150,000 in the United States Treasury notes and $19,428.66 cash were assigned to the bank as trustee, to be available for the payment of the aforementioned tax liabilities. These assets were already in the possession of the bank in its capacity as depository of the estate. The trust agreement states that petitioner is the trustor, and it provides for various beneficiaries and contingencies which are unrelated to the estate's tax liabilities. However, in no event was the petitioner to be entitled to revoke the trust nor were any of its assets or income to be distributed (except in the event of petitioner's need therefor by reason of her illness or other emergency) until all taxes owing by reason of the decedent's death to the United States and the State of California, including income taxes owing by the decedent and his estate, were fully satisfied.

On August 9, 1946, the Probate Court entered its decree of final distribution of the decedent's estate. The Probate Court confirmed, therein, the assignment made by petitioner to the trust, and ordered that the Treasury notes and cash specified in the assignment be distributed from the estate to the trustee. All other property in which the decedent had any interest, or in which his estate may have acquired any interest, was ordered distributed to petitioner. These properties, consisting of the trucking and produce business, the auto court business, and various other tangible and intangible personal property, were immediately distributed to her. The value of the properties thus received by petitioner upon final distribution of the decedent's estate was in excess of the $86,193.61 net income of the estate for the period January 1, 1946, to August 9, 1946.

The only disbursements made from the trust, prior to November 1953, were for the payment of trustees' fees and tax liabilities and interest thereon.

The only cash distributions made from the decedent's estate to the petitioner during 1946 consisted of the following:

1. $17,500.00 in cash paid to her in monthly installments of $2,500.00 each as a family allowance.

2. $52.00 in cash withdrawn by petitioner from the trucking and produce business.

3. Cash balance in Lucky Strike Auto Court account, in the amount of $8,589.02, as of July 31, 1946.

4. Cash balance of produce and trucking businesses, in the amount of $11,949.47, as of July 31, 1946.

Financial statements submitted to the Probate Court by the administrators of the estate disclose that the estate had a net worth of $120,595.38 on December 31, 1945, and that this net worth had increased to $175,919.96 by July 31, 1946.

The respondent determined that the net income of the estate for the period January 1, 1946, to August 9, 1946, amounting to $86,193.61, had been distributed to petitioner upon the final distribution of the estate on August 9, 1946.

Petitioner concedes that certain of the cash distributions made to her during 1946 represent a distribution to her of portions of the estate's income for that year. However, she argues that the major portion of the estate's $86,193.61 income for that year was used to liquidate various debts and establish the trust for the undetermined tax liabilities. Consequently, she contends that the income so used was neither ‘payable'1 nor ‘paid or credited'2 to her during 1946 and is taxable to the estate rather than to her.

Respondent argues that, as a matter of law, the assets which petitioner received as the sole beneficiary upon the final distribution of the estate must be presumed to include the $86,193.61 income earned by the estate during that year. He contends that the 1942 amendment of section 162(b) of the Internal Revenue Code of 1939 requires that the income earned in the final year of administration be taxable to the beneficiaries and cites Hazel Kirk Carlisle, 8 T. C. 563 (1947), affd. 165 F. 2d 645 (C. A. 6, 1948), to that effect. He argues that the use of the income of the final year of administration to liquidate liabilities and pay taxes cannot preclude its being taxable to the beneficiary under the doctrine of the Carlisle case.

Whatever the merits of respondent's argument with respect to income earned by the estate during its final year of administration and expended by it prior to the final distribution, they need not be decided here. Petitioner has not established the crucial factor in her case, namely, that the income in question was not actually included in the assets which she received on final distribution of the estate. Having failed to prove this, her case is not distinguishable from Hazel Kirk Carlisle, supra, and the income in question must be held taxable to her rather than to the estate.

Petitioner's burden of proof required that she show that the income determined by the respondent to have been received by her was not actually distributed to her. See Elizabeth T. Jones, 1 T. C. 491 (1943). However, on the basis of the books and records which seem to have been maintained by the administrators, this would be an almost impossible task. No attempt appears to have been made to segregate income from corpus...

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7 cases
  • Redlark v. Comm'r of Internal Revenue, 4445–94.
    • United States
    • United States Tax Court
    • January 11, 1996
    ...v. Commissioner, supra, and Polk v. Commissioner, supra, we had denied taxpayers a deduction for deficiency interest in Aaron v. Commissioner, 22 T.C. 1370 (1954), we concluded that, in Standing and Polk, we had departed from the restrictive view of the phrase “attributable to trade or busi......
  • Robinson v. Comm'r of Internal Revenue, 9574–99.
    • United States
    • United States Tax Court
    • September 5, 2002
    ...Reise v. Commissioner, 35 T.C. at 579–580, we noted that neither Standing nor Polk discussed our earlier opinion in Aaron v. Commissioner, 22 T.C. 1370, 1954 WL 43 (1954), in which we had held that interest on a tax underpayment was not attributable to the taxpayer's trade or business withi......
  • Allen v. U.S., 5:96-CV-909-F.
    • United States
    • United States District Courts. 4th Circuit. Eastern District of North Carolina
    • December 2, 1997
    ...net operating loss. See id. at 381. The Tax Court in Reise specifically overruled one of its prior decisions, Aaron v. Commissioner, 22 T.C. 1370, 1954 WL 43 (1954), in which it held that deficiency interest on state taxes was not deductible because the connection contemplated by the Code b......
  • Tompkins v. United States, 315-66.
    • United States
    • Court of Federal Claims
    • June 16, 1972
    ...of the business. The Tax Court had also so held in similar situations. Maxcy v. Commissioner, 26 T.C. 526 (1956); Aaron v. Commissioner, 22 T.C. 1370 (1954). However, the Tax Court, on reconsideration, and other courts, commenced holding otherwise. Polk v. Commissioner, 31 T.C. 412 (1958), ......
  • Request a trial to view additional results

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