Estate of Bickmeyer v. Comm'r of Internal Revenue

• Decision Date: 06 February 1985
• Docket Number: Docket No. 16039-80.
• Citation: 84 T.C. 170,84 T.C. No. 12
• Parties: ESTATE OF HENRY C. BICKMEYER, VIOLA BICKMEYER AND FRANCIS B. FROEHLICH, EXECUTORS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

84 T.C. 170

84 T.C. No. 12

ESTATE OF HENRY C. BICKMEYER, VIOLA BICKMEYER AND FRANCIS B. FROEHLICH, EXECUTORS, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 16039-80.

United States Tax Court

Filed February 6, 1985

Henry C. Bickmeyer was a shareholder in two corporations. Prior to his death on Nov. 15, 1973, Nassau County, New York, had taken all of the assets of the corporations by eminent domain; the corporations had voted to dissolve and liquidate under sec. 337, I.R.C. 1954; Nassau County had paid part of the value of the condemned assets to the corporations; and the corporations had distributed part of the condemnation proceeds to the shareholders. The corporations (or their trustees in dissolution) were litigating claims to additional amounts of compensation for their assets. After decedent's death, his estate received additional liquidation proceeds from the corporations in fiscal year 1974 and from the trustees in dissolution in fiscal year 1976. HELD: The gains from the liquidation of the corporations received by decedent's estate in fiscal years 1974 and 1976 were income in respect of a decedent under sec. 691(a)(1), I.R.C. 1954, and the estate is not entitled to a step up in basis for the stock rights in the two corporations under sec. 1014(a) and (c), I.R.C. 1954. PETER DEVLIN, for the respondent.

WILLIAM E. deBRUIN JR., for the petitioner,

OPINION

FEATHERSTON, JUDGE:

Respondent determined deficiencies in the amounts of $58,276 and $43,300 in petitioner's Federal income tax for the fiscal years ended October 31, 1974 and October 31, 1976, respectively. Other issues having been settled by the parties, the only issue remaining for decision is whether liquidating distributions received by petitioner, the estate of Henry C. Bickmeyer, deceased, from Hempstead Bus Corporation and H.B. Land Corporation in the fiscal years ended October 31, 1974 and October 31, 1976, constituted income in respect of a decedent within the meaning of section 691(a)(1). ¹

All the facts are stipulated.

Henry C. Bickmeyer (sometimes hereinafter decedent) died on November 15, 1973. Viola Bickmeyer and Francis B. Froehlich were appointed and qualified as co-executors of his will by order of the Surrogate's Court of Nassau County, New York. When the petition was filed, the legal residence of Viola Bickmeyer was Fort Lauderdale, Florida, and that of Francis B. Froehlich was Brookville, New York. Decedent's estate (petitioner) filed its fiduciary income tax returns using a fiscal year ending October 31.

At the time of his death, decedent owned 489 of the 490 outstanding shares of Hempstead Bus Corporation (Bus) and 2,500 of the 10,000 outstanding shares of H.B. Land Corporation (Land). On the date of his death, decedent had a basis for his stock in Bus of $71,847 and a basis of $0 for his stock in Land.

1. CONDEMNATION OF ASSETS OF BUS AND LAND

For a period prior to June 3, 1973, Bus operated bus lines in Nassau County, and Land owned a bus garage and maintenance facility which it had leased to Bus. On March 30, 1973, Nassau County initiated a condemnation proceeding in the local Supreme Court for the acquisition of all of the assets of Bus and Land. In its petition in the condemnation proceeding, the County alleged that the assets of Bus and Land had fair market values of $588,340 and $584,350, respectively, and, as consideration for the acquisition of their assets, the County offered to pay the corporations those amounts. Land and Bus answered the petition, denying the accuracy of the alleged values and claiming just compensation for their assets based on appraisals showing values of $1,074,933 and $1,308,000, respectively, for the assets of Bus and Land.

On June 1, 1973, the court granted the County's application to condemn the properties and placed the issue as to the fair market values thereof on a special calendar of the court. Nassau County acquired and took possession of all of the assets of Bus and Land on June 2, 1973. In accordance with New York law, Nassau County, in July 1973, paid Bus $588,340 and Land $584,350 as the appraised value of their assets.

Litigation ensued as to whether the remaining dispute concerning the fair market value of the properties should be resolved under the Nassau County Administrative Code or the New York Condemnation Law. The matter was finally resolved by a decision of the Appellate Division, Second Department, on May 6, 1974, that the case should be tried under the Nassau County Administrative Code without application of the New York Condemnation Law.

Thereafter, on March 23, 1976, the case was settled by agreement; total asset values, agreed upon, including the amounts paid in July 1973, were $958,780 for Land and $713,340 for Bus. On July 14, 1976, the balances of the condemnation awards were paid to the trustees in dissolution, $374,430 for Land and $125,000 for Bus. The trustees paid petitioner its proportionate shares.

2. LIQUIDATION AND DISSOLUTION OF BUS AND LAND

On May 30, 1973, Bus and Land formally voted to dissolve and liquidate under section 337. Of the condemnation proceeds paid to Bus in July 1973, the sum of $15,503 was distributed to decedent in July 1973 as a partial liquidating distribution. Of the condemnation proceeds paid to Land in July 1973, $75,000 was distributed to decedent as owner of 2,500 shares and $60,000 was distributed to his wife, Viola Bickmeyer, as owner of 2,000 shares in the corporation. On the joint Federal income tax return filed on behalf of decedent and Viola Bickmeyer for 1973, these distributions were reported as long-term capital gains, computed by using the bases referred to above, and are not here in dispute.

Of the condemnation proceeds paid to Bus and Land in July 1973, Bus distributed $286,935 and Land distributed $33,996 to decedent's estate during the estate's fiscal year ended October 31, 1974.

Bus and Land on May 24, 1974, and May 29, 1974, respectively, distributed all of their remaining assets to the trustees in dissolution of the respective corporations. Among the assets distributed were the claims against Nassau County for additional condemnation awards. On the same respective dates, certificates of dissolution were filed with New York State for the two corporations.

3. TAX TREATMENT OF RECEIPTS FROM BUS AND LAND

On their 1973 tax returns, Bus and Land reported their gains from the condemnation of their assets as nontaxable pursuant to section 337.

In the estate tax return (Form 706) for decedent's estate, the estate valued decedent's interest in Bus at $256,700 and in Land at $38,950. Upon audit, the estate tax examiner increased the value of decedent's interest in Bus to $385,096 and in Land to $135,101 based on the condemnation awards, including accrued interest. The estate concurred in the increase for estate tax purposes.

On its fiduciary income tax return for the fiscal year ended October 31, 1974, decedent's estate did not report any capital gain or loss in respect of the distributions received from Land and Bus. On its fiduciary income tax return for the fiscal year ended October 31, 1976, the estate reported a long-term capital gain of $27,836 with respect to Bus and a long-term capital loss of $26,979 with respect to Land.

In so reporting the transactions, petitioner claimed, and here contends, that its bases for the Bus and Land stocks were increased under section 1014(a) to amounts equal to the values of the stocks at the date of decedent's death (i.e., the agreed values per the estate tax audit). Accordingly, the estate treated the liquidating distributions from the two corporations in 1974 and most of the liquidating distributions in 1976 as returns of capital.

In the notice of deficiency, respondent determined that decedent's estate realized capital gains income of $124,542 in fiscal year ended October 31, 1974, and $96,049 in fiscal year ended October 31, 1976, as a result of the liquidating distributions from Bus and Land. In making this determination, respondent asserted that the liquidating distributions constituted income in respect of a decedent under section 691 and that section 1014 did not, therefore, provide a step up in petitioner's basis for the Bus and Land stock interests held by decedent at his death. ²

4. TAX CONSEQUENCES OF THE DISTRIBUTIONS

Section 1014(a) ³ provides generally, with certain stated exceptions, that the basis of property in the hands of a person acquiring the property from a decedent will be its fair market value at the date of decedent's death. Petitioner relies upon this general provision to support its contention that its bases for decedent's Bus and Land stock rights were stepped up to the amounts of their respective fair market values at decedent's death, as agreed by the parties for estate tax purposes. Section 1014(c), one of the exceptions to section 1014(a), provides, however, that section 1014 shall not apply to ‘property which constitutes a right to receive an item of income in respect of a decedent under section 691.‘ The controlling issue here is thus whether petitioner's gains from the liquidation of Bus and Land were income in respect of a decedent. 84 T.C. NO. 12. Section 691(a)(1)(A) provides, in pertinent part, as follows:

(a) Inclusion in Gross Income.

(1) General Rule.—The amount of all items of gross income in respect of a decedent which are not properly includible in respect of the taxable period in which falls the date of his death or a prior period (including the amount of all items of gross income in respect of a prior decedent, if the right to receive such amount was acquired by reason of the death of the prior decedent or by bequest, devise, or inheritance from the prior decedent) shall be included in the gross income, for the taxable year when received, of:

(A) the estate of the decedent, if the right to receive the amount is acquired by the decedent's estate from the decedent; This statutory language is amplified...