22 T.C. 1370 (1954), 34922, Aaron v. Commissioner of Internal Revenue

Docket Nº:34922.
Citation:22 T.C. 1370
Opinion Judge:RICE, Judge:
Party Name:WILMA AARON, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
Attorney:Walter C. Greene, Esq., for the petitioner. Wayne L. Prim, Esq., for the respondent.
Case Date:September 30, 1954
Court:United States Tax Court
 
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Page 1370

22 T.C. 1370 (1954)

WILMA AARON, Petitioner,

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 34922.

United States Tax Court.

September 30, 1954

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.

Page 1371

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

Page 1372

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...

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