Carl T. Miller Trust v. Comm'r of Internal Revenue, Docket No. 10909-78.

• Court: United States Tax Court
• Citation: 76 T.C. 191
• Docket Number: Docket No. 10909-78.
• Parties: CARL T. MILLER TRUST, ALICE G. MILLER, TRUSTEE, and ALICE G. MILLER, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Decision Date: 02 February 1981

76 T.C. 191

CARL T. MILLER TRUST, ALICE G. MILLER, TRUSTEE, and ALICE G. MILLER, PETITIONERS
v.
COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 10909-78.

United States Tax Court

Filed February 2, 1981.

At the time of his death, decedent and his wife owned all of the stock in two corporations to which decedent was indebted in the amounts of $30,000 and $3,000. Pursuant to an order of the Probate Court, the last day for filing claims against the estate was Feb. 21, 1973. The corporations did not file claims against the estate for these debts. Nevertheless, in Aug. 1973, the estate filed a Federal estate tax return on which it reported the indebtedness to the corporations by claiming a $33,000 deduction. Wisconsin law (Wis. Stat. Ann. secs. 859.01 and 859.05 (West 1971) provides that claims against an estate not filed within the time fixed by the probate court shall be forever barred. Held, under sec. 61(a)(12), I.R.C. 1954, the estate realized income from the discharge of indebtedness on Feb. 21, 1973.

[76 T.C. 191]

Bernard J. Traeger, for the petitioners.

Christy M. Pendley, for the respondent.

FEATHERSTON , Judge:

Respondent determined a deficiency in the amount of $14,428.37 in the Federal income tax of the Estate of Carl T. Miller for 1973. Respondent further determined that

[76 T.C. 192]

petitioner Alice G. Miller is individually liable for the deficiency under section 3467 of the Revised Statutes of the United States as amended. The only issue for decision is whether the estate realized income during 1973 from the discharge of indebtedness within the meaning of section 61(a)(12).¹

FINDINGS OF FACT

The Estate of Carl T. Miller (hereinafter the estate) filed a Federal fiduciary income tax return (Form 1041) for 1973. At the time the petition herein was filed, petitioner Alice G. Miller (hereinafter petitioner) was a legal resident of Walworth, Wis.²

Carl T. Miller (decedent) died solvent and testate on November 4, 1972. Pursuant to decedent's will, his wife (petitioner) was appointed to be personal representative of his estate and trustee of the Carl T. Miller Trust created by the will. Probate of the will was conducted in the Walworth County Court, Probate Branch, and, during the proceedings, the court ordered that all claims against the decedent's estate be filed by February 21, 1973.

At the time of his death, and for a number of years prior thereto, decedent and petitioner each owned, individually, 50 percent of the outstanding shares of stock of the Waukesha Specialty Co. (Waukesha), a Wisconsin corporation. In addition, decedent and petitioner jointly owned all of the outstanding shares of stock of Walworth Foundries (Walworth), also a Wisconsin corporation. Decedent served as president of both corporations.

Sometime prior to 1959, decedent borrowed $15,000 from Waukesha. In 1963, he incurred a further obligation to Waukesha, also in the amount of $15,000. ³ These obligations, in the total amount of $30,000, were carried as assets (i.e., receivables) on the books of the corporation from the time they were incurred

[76 T.C. 193]

by decedent through the date of his death and for several years thereafter. Throughout the 1950's and 1960's, decedent and petitioner jointly maintained Waukesha's corporate books and records.

A number of Waukesha's unaudited financial statements, prepared during the period April 30, 1967, through April 30, 1973, show as an asset of the corporation a “Note Receivable—Carl Miller” in the amount of $15,000. This figure represents the obligation incurred by decedent in 1963. The remaining $15,000 due from decedent is included in an amount designated in the financial statements as “Other Receivables.”⁴ The total amount shown as “Other Receivables,” as of the various dates on which the financial statements were prepared, is as follows:

+-------------------------------+
                ¦Apr. 30, 1967¦$30,200 ¦
                +-------------+-----------------¦
                ¦Apr. 30, 1968¦29,300 ¦
                +-------------+-----------------¦
                ¦Apr. 30, 1969¦29,300 ¦
                +-------------+-----------------¦
                ¦Apr. 30, 1970¦29,300 ¦
                +-------------+-----------------¦
                ¦Apr. 30, 1971¦22,500 ¦
                +-------------+-----------------¦
                ¦Apr. 30, 1972¦15,000 ¦
                +-------------+-----------------¦
                ¦Oct. 31, 1972¦(See n. 4 supra) ¦
                +-------------+-----------------¦
                ¦Nov. 30, 1972¦15,000 ¦
                +-------------+-----------------¦
                ¦Apr. 30, 1973¦15,000 ¦
                +-------------------------------+
                

It is not clear from the record to whom the obligation represented by the amount of “Other Receivables” in excess of the $15,000 owed by decedent was attributable; nor is it clear who made payments reducing the total to $15,000.

Both transactions giving rise to the decedent's obligations were conducted with the full knowledge of all officers and shareholders of Waukesha; however, despite the references described above to notes receivable, no written instrument setting forth terms for the payment of interest or principal was executed with respect to either obligation. Further, no payment of principal or interest has ever been made by decedent or his estate.

Subsequent to decedent's death, Waukesha did not attempt to recover the $30,000 that he owed to it by filing a claim against his estate. Steven Miller, decedent's son and a remainderman of

[76 T.C. 194]

the Carl T. Miller Trust, was president of Waukesha during the period set by the Probate Court for the filing of claims.

In 1953, decedent borrowed at least $3,000 from Walworth. No written instrument was executed setting forth terms for repayment of the amount borrowed, but the obligation was carried as an asset (i.e., a receivable) on the corporate books and financial statements. The unaudited financial statements of Walworth for 1967 through 1970, inclusive, show as an asset a “Note Receivable—C. Miller” in the amount of $8,000. Five thousand dollars of this amount was paid to Walworth during 1971, reducing the “Note Receivable—C. Miller” to $3,000, the amount that decedent owed to Walworth at the time of his death. Walworth did not file a claim against decedent's estate for the $3,000.

In August 1973, the estate filed a Federal estate tax return (Form 706) on which it claimed a $33,000 deduction for decedent's liabilities to Waukesha and Walworth. Schedule B of the Form 706 discloses a valuation of the Waukesha stock owned by decedent of $88.85 per share, computed as follows:

+-----------------------------------------------------------------+
                ¦Waukesha net worth as of Oct. 31, 1972 ¦$201,384.84¦
                +-----------------------------------------------------+-----------¦
                ¦Shares of stock outstanding ¦1,700 ¦
                +-----------------------------------------------------+-----------¦
                ¦Book value per share (net worth ÷ shares outstanding)¦118.46 ¦
                +-----------------------------------------------------+-----------¦
                ¦Less 25-percent discount1 ¦29.61 ¦
                +-----------------------------------------------------+-----------¦
                ¦Value of stock per share for estate tax purposes ¦88.85 ¦
                +-----------------------------------------------------+-----------¦
                ¦ ¦ ¦
                +-----------------------------------------------------------------+
                

On September 2, 1975, decedent's estate was closed and its assets were transferred in trust to petitioner. Subsequently, respondent determined that the estate, as a result of Waukesha's and Walworth's failure to file creditor's claims against it, realized $33,000 in income from the discharge of indebtedness during 1973. Separate notices of deficiency were mailed to the Carl T. Miller Trust (of which petitioner is trustee), as transferee

[76 T.C. 195]

of the assets of the estate, and to petitioner, as fiduciary of the estate. ⁵

OPINION

Section 61(a)(12)⁶ provides that gross income includes income from the discharge of indebtedness. In general, upon the cancellation of an indebtedness, the debtor realizes income to the extent that his assets are freed from liability for the debt (whether the debt was secured or unsecured). See Bialock v. Commissioner, 35 T.C. 649, 661-662 (1961). The burden of proving that a discharge of indebtedness does not result in taxable income is on the debtor-taxpayer. Rule 142(a), Tax Court Rules of Practice and Procedure.

Determination of the point in time at which a debtor's obligation has been canceled, giving rise to income, is essentially a question of fact. In making such a determination, State statutes limiting the time within which a creditor may bring an action against a debtor to recover the debt, while of evidentiary value, are not necessarily controlling. Bear Manufacturing Co. v. United States, 430 F.2d 152, 154 (7th Cir. 1970), cert. denied 400 U.S. 1021 (1971); Policy Holders Agency, Inc. v. Commissioner, 41 T.C. 44, 49 (1963). But see Securities Co. v. United States, 85 F. Supp. 532 (S.D. N.Y. 1948). Thus, a debtor may realize income from the cancellation of indebtedness subsequent to⁷ (as well as before)⁸ the running of the statute of limitations on the debt. This is because, generally, a statute of limitations does not extinguish the debt itself, but simply provides a defense to an action by the creditor that must be affirmatively pleaded by the debtor. As stated by the Board of Tax Appeals in

[76 T.C. 196]

G. M. Standifer Construction Corp. v. Commissioner, 30 B.T.A. 184, 186 (1934):

Local statutes are not decisive of what constitutes income * * *. We are of course bound to follow established state rules of property, * * * but there is no property right in a statute of limitations which affects the remedy alone and not the obligation. Campbell v. Holt, 115 U.S. 620.

Respondent contends that decedent's estate realized taxable income in 1973 from the discharge of indebtedness to Waukesha and Walworth, in the total amount of $33,000, as a result of those corporations' failure to file claims against the estate in accordance with the provisions of Wisconsin Statutes Annotated sections 859.01 and 859.05 (West 1971). Those sections provide in pertinent part as follows:

859.01 Limitation on filing...