Bohan v. United States

• Citation: 326 F. Supp. 1356
• Decision Date: 19 March 1971
• Docket Number: Civ. A. No. 16866-3.
• Parties: Ruth H. BOHAN, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Western District of Missouri

326 F. Supp. 1356

Ruth H. BOHAN, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. A. No. 16866-3.

United States District Court, W. D. Missouri, W. D.

March 19, 1971.

Ida Turner, Goehring & Turner, Kansas City, Mo., for plaintiff.

John DeBruyn, Dept. of Justice, Washington, D. C., for defendant.

AMENDED MEMORANDUM, FINDINGS OF FACT, CONCLUSIONS OF LAW AND JUDGMENT FOR PLAINTIFF

WILLIAM H. BECKER, Chief Judge.

This is a suit for refund of federal income taxes for the calendar year 1957. Plaintiff is the widow of Dr. Peter T. Bohan, who died October 7, 1955. Plaintiff was the executrix and sole residuary legatee and devisee under the will of the decedent. The will of the decedent was admitted to probate in the Probate Court of Jackson County, Missouri, on October 14, 1955. Dr. Bohan's domicile at the time of his death was Jackson County, Missouri.

The Probate Court of Jackson County ordered partial distributions of shares of corporate stock from the estate to plaintiff on May 13, 1957, July 9, 1957, and November 25, 1957. The last distribution included the right to receive a declared dividend payable on December 10, 1957, and certain rights to purchase additional stock. The total value of these distributions was $162,025.00. This sum was much in excess of $29,076.15, which was the distributable net income of the estate for the year ending December 31, 1957. Because the estate made distributions to plaintiff of stock valued in excess of the distributable net income of the estate for the year, it was determined by the defendant that the estate was entitled to a deduction for its income tax purposes in the amount of the distributable net income ($29,076.15) under § 661(a) of the Internal Revenue Code of 1954. The defendant then determined that this sum of $29,076.15 was income received by plaintiff in 1957 and assessed a deficiency against plaintiff for income tax due on the included amount of $29,076.15 in the gross income of plaintiff. On June 23, 1963, plaintiff filed a claim for refund, alleging that inclusion of the $29,076.15 in her income for 1957 was erroneous. Defendant notified plaintiff on April 13, 1966 that her claim for refund was disallowed. Plaintiff thereafter timely filed her suit for refund on April 9, 1968.

The governing statutes are Sections 661(a) and 662(a) of the Internal Revenue Code of 1954. Section 661(a) allows an income deduction to the estate for "amounts properly paid", "credited" or "required to be distributed" for the taxable year but the deduction shall not exceed the distributable net income of the estate or trust. Under this section:

"A deduction is allowed * * * for the sum of (1) any amount of trust or estate income for the taxable year which is required to be distributed currently (including an annuity payable out of income or corpus, to the extent that it is paid out of income) and (2) any other amounts paid, credited, or required to be distributed for the taxable year; however, the deduction allowed under this section may not exceed the distributable net income of the estate or trust for its taxable year."

6A Rabkin & Johnson, Federal Income, Gift and Estate Taxation § 661, p. 6:4204. Section 662(a) requires a reciprocal inclusion in the beneficiary's taxable income of the amounts described in Section 661(a) as deductible by the estate from its income.¹

To support its position that the amounts of the partial distributions made from the estate to plaintiff in 1957 are includible up to the amount of $29,076.15 in the plaintiff's taxable income, defendant quotes the following paragraph from United States v. Bank of America (C.A.9) 326 F.2d 51, 54, as exemplifying the "spirit of these sections":

"* * * Where * * * an estate distributes property which exceeds in value the income which the estate could distribute (i. e., distributable income), even though the property actually distributed by the estate is corpus, the estate is then deemed, for federal tax purposes, to have distributed the distributable income. Thus, it is entitled to the deduction for income distributed. The recipient is required, by the same sections, to include in its gross income the amount of the income deemed distributed."² (Emphasis added.)

Plaintiff, on the other hand, argues that the distributable net income of the decedent's estate is properly attributable to plaintiff's 1957 gross income only if the income of the estate was required to be distributed to plaintiff, or that income was otherwise properly paid or credited to plaintiff during the year 1957.

Plaintiff argues that the will of decedent made "no provision for payment of the income of the estate during administration to plaintiff, nor to anyone else"; that, in the absence of such a testamentary provision, under the Missouri law of 1957, "income from the assets of an estate during administration" is not properly distributable but rather constitutes assets in the administrator's hands to be applied to the debts, taxes and costs of administration and legal charges against the estate;³ that no payment could properly have been made to plaintiff from the estate in 1957 because Missouri law prohibits final distributions to an heir before, among other things, all debts of the estate are paid;⁴ that the debts and taxes incurred and payable by decedent's estate during 1957 exceeded the distributable net income of the estate;⁵ and that therefore the stock distributions were not distributions of the income of the estate which were properly payable during 1957, but rather advances on distributions of the corpus (of the residuary estate) which were properly payable on final distribution on March 9, 1964, the amount of which was not ascertained until that date.

Plaintiff's principal reliance is upon the case of Sitterding v. Commissioner of Internal Revenue (C.A.4) 80 F.2d 939. In that case, the will of the decedent directed $300,000 to be held in trust and the income thereof to be distributed quarterly among his children. In 1929, while the estate was still in the process of administration, a total of $49,322.64 was paid to the children. During the same year, the estate had a gross income of $96,998.84, and a federal estate tax of $34,556.56 and a state inheritance tax of $138,582.41 were paid. Payment of these taxes required that the estate borrow money to pay them. In that case, the Circuit Court of Appeals held that the distributions from the estate to the children were not includible in the latters' 1929 gross incomes for the following reasons:

"The matter must be considered in the light of the applicable probate and administration law. By this law the duty of the executors was to receive the principal of the estate, to inventory it, to ascertain the debts to be paid, including all taxes, and after paying all creditors and taxes and expenses of administration, to strike a balance from which should be paid specific or particular legacies, trust funds should be set up as required by the will, and final balance should be distributed to the residuary legatees, of whom the taxpayer was one. As this was not done during the year 1929, there is certainly nothing to show that the comparatively small sums distributed to the taxpayer during that year were in excess of her principal interest as residuary legatee in the estate. It is not shown by the record what the total charges against the estate were, including debts to be paid. The estate has not been fully administered. It is not possible, therefore, to say that the distribution to the taxpayer was income and not merely an advance on account of the corpus. It is still undetermined what amount of corpus the residuary legatee will receive from the estate." 80 F.2d at 941.

Many of the holdings of the Sitterding case are now obsolete. For example, its rulings in regard to the deductibility of inheritance taxes are not relevant in this case. But the holding of the case is still viable on the proposition that under some state laws, the value of the residuary estate cannot properly be determined until the estate has been fully administered, or at least until debts, taxes and costs of administration have been ascertained and allowed or paid.

It is apparent, however, from the literal wording of the applicable sections of the Internal Revenue Code and the application of Missouri law to the questions of administration of the estate, that the partial distributions did not include any amount of income "required to be distributed currently", "paid, credited or required to be distributed for the taxable year" within the meaning of § 661(a) and § 662(a) of the Internal Revenue Code of 1954.

In 1957, under Missouri law, in the absence of a testamentary directive and judicial decree authorized by statute no legacy or devise was properly distributable to the residuary legatee or devisee until all debts, including taxes and expenses of administration of the estate, have been paid or ascertained and finally allowed. Sections 473.260, 473.263, RSMo 1949; In re Holmes' Estate, 328 Mo. 143, 40 S.W.2d 616; cf. Commissioner of Internal Revenue v. Stearns, Adm. (C.A.2) 65 F.2d 371; Milens v. Bostian (C.A.8) 139 F.2d 282; Smith v. Oliver, Mo.App., 157 S.W.2d 558. All partial distributions made before payment of debts, including taxes and expenses of administration, were subject to return. § 473.613, RSMo 1949. The version of the latter statute which was in effect in 1957 read as follows:

"1. Upon application of the executor or administrator at any time, or on application of any distributee, after the expiration of six months from the date of letters, the court may order the executor or administrator to deliver to any distributee who consents to it possession of any specific real or personal property to which he is entitled under the terms of the will or by intestacy, if other distributees and claimants are not prejudiced thereby. The court, at any time prior to the decree of final distribution, may order him to

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