Bond's Estate v. United States

• Decision Date: 24 January 1964
• Docket Number: No. 205-57.,205-57.
• Citation: 326 F.2d 999
• Parties: ESTATE of Harry S. BOND v. The UNITED STATES.
• Court: U.S. Claims Court

326 F.2d 999 (1964) ESTATE of Harry S. BOND v. The UNITED STATES.

No. 205-57.

United States Court of Claims.

January 24, 1964.

Martin Rubashkin, for plaintiff. Philip Zimet, New York City, John J. Slain, and Alfred L. Scanlan, Washington, D. C., were on the brief.

Gilbert W. Rubloff, Dept. of Justice, Washington, D. C., with whom was Asst. Atty. Gen. Louis F. Oberdorfer, for defendant. Edward S. Smith, Lyle M. Turner, and Philip R. Miller, Washington, D. C., were on the brief.

Before JONES, Chief Judge, and WHITAKER, LARAMORE, DURFEE and DAVIS, Judges.

JONES, Chief Judge.

This is a suit by the executor of the estate of Harry S. Bond for a refund of income taxes which plaintiff alleges were erroneously collected for the year 1951. Plaintiff asserts that there was an over-payment of income taxes due to his failure to deduct from taxable income for 1951 that portion of the income which became payable to the legatees and distributees during that year.

The issue involved section 162(b) and (c) of the Internal Revenue Code of 1939, as amended by section 111 of the Revenue Act of 1942 (26 U.S.C. § 162 (1952 ed.)) and Treasury Regulations issued pursuant thereto, pertinent parts of which are found in the footnote.¹

The Facts

The facts are set out in the findings of fact. Briefly, they are as follows:

Harry S. Bond (decedent) died December 24, 1935. His will was admitted to probate in Connecticut, December 31, 1935. It provided three classes of bequests: 1. Specific: Certain personal effects were bequeathed. These are set out in the fourth and tenth paragraphs of the will. 2. General: Legacies in definite amounts aggregating $248,500 were directed to be paid to designated persons. These are set out in finding 4. 3. Residuary: The remainder of the assets of the estate, after payment of expenses, debts, and the above bequests were satisfied, was left to certain relatives. (Finding 5.)

The bulk of the estate consisted of stock in the Hotel Bond Company (hereafter referred to as the "Corporation") valued for tax purposes at $343,859.70. However, at the time of his death the decedent owed the Corporation the sum of $239,755.50.

The will contemplated that the decedent's assets including the stock in the Corporation, were to be sold and the proceeds distributed according to the terms of the will within 2 years. Yet the executors (originally five in number, of which number one died, one later resigned, and one was removed) operated the Hotel Bond Company properties approximately 17 years until June 1, 1951, at which time they sold decedent's stock in the Corporation to the Gateway Company for $779,745.60. Out of the proceeds of the sale the sum of $239,745.60 was turned over to the Corporation in payment of the estate's debt to the Hotel Bond Company. The sales price exceeded the estate tax valuation by $435,885.90, thus resulting in gross income of that amount.

In late June or early July 1951, the executors filed with the Probate Court of the District of Hartford, Connecticut, an administration account which contained a schedule of proposed distribution of the estate's assets. This schedule provided for the payment of principal aggregating $248,500 to the cash legatees. The schedule also provided, pursuant to the terms of Connecticut law, for the payment of interest on these cash legacies, except those listed in the sixth and seventh paragraphs of the will, at the rate of 6 percent per annum from December 24, 1936 to July 17, 1951, in the sum of $173,453.01.

The hearing, after two postponements, was finally set for December 27, 1951. On the latter date the Probate Court entered an order finding the accounts filed by the executors true — with certain minor exceptions not germane here — and finding "that all legacies which have not lapsed have been paid" and "that all claims duly presented within the time limited by this Court have been paid, settled or barred by law." The court then ordered the rest, remainder and residue of the estate to be paid over to the residuary distributee according to the terms of the will. The actual payment of these legacies was not made until October 30, 1952.

There were seven separate appeals from the Probate Court's order of December 27, 1951.² Two of these appeals complained, inter alia, of the alleged invalidity of the sale of the stock of the corporation by the executors and prayed that the sale be set aside. These appeals were nonsuited September 26, 1952. The five other appeals claimed that the plaintiffs therein were aggrieved by the approval, acceptance, and allowance of the administration accounts, by alleged mismanagement on the part of the executors, and the improper allocation of payments between the legatees in the schedules filed and approved in the order of December 27, 1951. Numerous representations were made by the five different appellants as grounds for setting aside or modifying the probate order of December 27, 1951. These included, inter alia, that the court erred in improperly allowing certain accounts of the executors, in not properly allocating the amounts to be distributed, in accepting the proposed schedules, in not allowing interest on certain legacies, and on the method of scheduled distribution.

According to a stipulation for judgment signed by the legatees October 27, 1952, an order was entered by the Superior Court on November 7, 1952, in these five appeals, providing that interest be paid on the legacies set out in the sixth and seventh paragraphs of the will at the rate of 5 percent per annum from December 24, 1936, to the date of distribution, October 30, 1952. There had been allowed no interest to these several legatees according to the schedules originally filed. Since the several disputants had at last agreed on a distribution, which the court approved for payment as of October 30, 1952, we have not undertaken to list the changes, if any of consequence, in the first and last schedules of payment.

The Issue

The ultimate issue is whether by the terms of section 162(b) and (c) (as amended by section 111(b) and (c) of the Revenue Act of 1942, supra) and the Treasury Regulations issued pursuant thereto, the bequests named in the will became payable or were properly to be paid or credited to the legatees, heirs, or beneficiaries during the year 1951, or whether a present legal right to compel distribution arose during that year.³

We think in the circumstances of this case the income for 1951 was neither paid, payable, nor properly to be credited to any of the legatees during that year, nor could such legatees have enforced distribution during 1951.

The Probate Court order of December 27, 1951, was materially changed in the latter part of the year 1952. This change involved not only a correction of error made as a result of the fact that the probate judge had been led to believe that all of the legacies which had not lapsed had been paid, but also a correction of the failure to allow interest on the legacies set out in the sixth and seventh paragraphs of the will. This interest had not been included in the list of scheduled payments submitted to the court for action in the probate order of December 27, 1951.

The correction of this error changed the prorated amount available for distribution to the other legatees by the final order of distribution as of October 30, 1952. The Probate Court order of December 27, 1951, did not direct the distribution of any of the general legacies. It did direct that payment of any residue of the estate be made to the residuary distributees. However, there was no such remainder or residue. This part of the order no doubt was the result of the impression the court had that all unlapsed legacies had been paid. There were not enough funds in the estate to pay the amounts specified in the definite legacies and statutory interest thereon and these amounts of interest had to be prorated. There was no remainder in the estate. In addition, the order of December 27, 1951, reserved no amounts for the payment of the estate's income taxes. These income taxes were reported and paid in early 1952, in the sum of $108,971.48.

Thus, clearly the funds were not only not distributed or credited to the legatees in 1951, they were not ready for such action. In fact, neither the proposed schedule of distribution nor the court's erroneous recital and approval of a distribution supposedly already made included any mention of or reservation for payment of income taxes. The schedule submitted by the executors in 1951 had proposed interest payments to certain of the legatees, pursuant to the Connecticut law, in the aggregate sum of $173,453.01. But when the several disputants entered into a stipulated agreement in late 1952 it had been found that the payment of income taxes and other expenses had left only $76,758.60 for payment of interest on the legacies. So this amount was prorated among the named legatees, thus permitting payment of less than half the interest due.

The stipulation for judgment, signed on October 27, 1952, finally provided for actual payment to the legatees and fixed the distribution date as October 30, 1952. The Superior Court entered an order approving the 5 percent interest payment on the legacies named in the sixth and seventh paragraphs of the will which had been denied interest according to the original schedules filed by the executors. The court approved the schedule of distribution agreed upon by the interested parties and decreed the ending of interest on all the legacies as of October 30, 1952, the date of distribution. The actual payment to the designated legatees was made on October 30, 1952. The executors filed a supplemental report with the Probate Court in January 1953 showing the distribution that was made on October 30, 1952. This was approved in June 1953 by the Probate Court for the District of Hartford.

Whether section 162(b) or section 162(c) is applicable, the Probate Court decree of December...