Helvering v. McGlue's Estate

• Decision Date: 10 April 1941
• Docket Number: No. 4752.,4752.
• Citation: 119 F.2d 167
• Parties: HELVERING, Commissioner of Internal Revenue v. McGLUE'S ESTATE.
• Court: U.S. Court of Appeals — Fourth Circuit

119 F.2d 167 (1941)

HELVERING, Commissioner of Internal Revenue v. McGLUE'S ESTATE.

No. 4752.

Circuit Court of Appeals, Fourth Circuit.

April 10, 1941.

Before PARKER, SOPER, and DOBIE, Circuit Judges.

William L. Cary, Sp. Asst. to the Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Sp. Asst. to the Atty. Gen., on the brief), for petitioner.

Ralph Page Wanlass, of Washington, D. C. (Walter G. Moyle, of Washington, D.C., on the brief), for respondent.

DOBIE, Circuit Judge.

This is a petition for a review of the decision of the United States Board of Tax Appeals (hereinafter called the Board) in the case of Estate of G. Percy McGlue v. Commissioner, 1940, 41 B.T.A. 1186.

The Commissioner of Internal Revenue (hereinafter called petitioner) determined a deficiency of $34,156.50 in the income tax of the decedent, G. Percy McGlue (hereinafter called respondent) for the year 1935. Respondent's executrix alleged that in such determination petitioner erred in including in respondent's gross income the amounts of $70,806.14 and $9,926.75, representing executor's fees which had been neither allowed by the probate court nor received by respondent up to the time of his death on October 31, 1935. Respondent's executrix further alleged that petitioner erred in including in respondent's gross income $623.31, representing a dividend on certain stock held by respondent. The dividend had been declared prior to the date of respondent's death but, according to the terms of the declaration, was payable to stockholders of a record date that was subsequent to the date of respondent's death.

The facts in this case were stipulated before the Board and are included in the Board's findings of fact. These facts may be thus summarized. On April 1, 1931, respondent and the American Security & Trust Company, both of Washington, D. C., were appointed as co-executors of the estate of B. F. Saul. Saul had previously entered into an agreement with respondent in 1928 and, under this agreement, respondent was to act as co-executor of Saul's estate for a fee of one and one-half per cent. of the appraised value of the entire Saul estate. In his will, Saul appointed respondent and the American Security & Trust Company as co-executors; but in the will there was no reference to the earlier contract and no provision for executors' or trustees' fees.

On January 30, 1932, a federal estate tax return was filed on behalf of the estate of B. F. Saul and a deduction was therein claimed for executors' fees in the amount of $141,612.29 which, it is stipulated, was "estimated at 3% of the gross estate of $4,720,409.75, as shown on said return." An affidavit was filed with the return in support of the deduction claimed for executors' fees, stating that the commissions would be taken upon the final accounting and would be returned as income for the year in which they should be so taken. On the audit of the federal estate tax return filed on behalf of the B. F. Saul estate, the Commissioner allowed the deduction claimed on account of executors' fees.

Since respondent's death, the American Security & Trust Company, as co-executor, has carried on the administration of the Saul estate. Up to the time of the hearing of this proceeding before the Board, no final accounting of the B. F. Saul estate had yet been prepared for, or filed with, the probate court. Moreover, the contract between respondent and B. F. Saul, regarding respondent's executorship of the Saul estate, had not been filed with the probate court and no proof of claim for executors' fees under the contract had been submitted.

Respondent had also been appointed co-executor of the estate of James F. Shea, who had died on September 24, 1934. This appointment had been made by Shea in his will. On June 27, 1935, a federal estate tax return was filed on behalf of the James F. Shea estate, in which a deduction was claimed for "estimated executors' commissions, in the sum of $37,000." The amount thus claimed was not finally allowed.

Respondent died on October 31, 1935; and, up to this date, no report had been filed with the probate court by the executors of the James F. Shea estate and no executors' fees or commissions had been claimed before, or allowed by, the court. The first accounting of this estate was filed in February, 1936, by the surviving co-executor, after approval by the residuary legatee. In this report, executors' fees in the amount of $9,926.75 were claimed on behalf of respondent's estate. The report was approved, and the commissions thus claimed were allowed, by the probate court on February 20, 1936. Audit of the federal estate tax return filed on behalf of the James F. Shea estate was not made until after the probate court's allowance of the executors' commissions. Accordingly, such commissions were allowed as a deduction in the return.

In a companion case heard concurrently with the instant proceeding (McGlue v. Commissioner, 41 B.T.A. 1199), the Board held that the two items of executors' fees, discussed above, should be included in respondent's gross estate for the purpose of the federal estate tax. Nevertheless, in the instant case, the Board held that the fees or commissions had not "accrued" prior to respondent's death, and, therefore, were not to be included in the determination of his income for the period from January to October 31, 1935.

Petitioner had also added to respondent's gross income for the year in which his death occurred the amount of $626.31, representing a quarterly dividend on the preferred stock of Bourjois, Inc. The dividend had been declared during the week of October 19, 1935, prior to the date of respondent's death, and was payable on a date subsequent to his death, November 15, 1935, to the stockholders of a record date subsequent to his death, November 1, 1935. The dividend was actually paid on November 15, 1935. The Board held that the dividend likewise had not "accrued" prior to respondent's death and, hence, should not be included in his income for the period from January to October 31, 1935.

Although prior to his death respondent kept his accounts on the cash receipts and disbursements basis, respondent's income for the period from January 1, 1935, to the date of his death, October 31, 1935, must be determined on the so-called accrual basis. Section 42, the Amendment found in the Revenue Act of 1934, states, 26 U.S.C.A. Int.Rev.Code, § 42: "The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under section 41, any such amounts are to be properly accounted for as of a different period. In the case of the death of a taxpayer there shall be included in computing net income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period."

The two items herein involved, the executors' fees and the dividend, are separately discussed in our opinion.

Executors' Fees.

Had respondent been alive, and had he kept his books on the "accrual basis" (as that term has been interpreted in many court decisions), we should feel obliged to uphold the Board's findings that the executors' fees could not have accrued prior to the allowance and approval of these fees by the probate court. See Pletz v. Commissioner, Dec. 20, 1940, 43 B.T.A. 140; cf. Commissioner v. Cadwalader, 3 Cir., 1937, 88 F.2d 274, 275, certiorari denied, 301 U.S. 706, 57 S.Ct. 940, 81 L.Ed. 1360. Under the law of the District of Columbia, which controls here the question of executors' fees, there is a strong public policy favoring the ultimate approval of all executors' commissions by the probate court. As Justice Van Orsdel said, in speaking of the applicable District of Columbia statute, in Brosnan v. Fox, 1922, 52 App.D.C. 143, 284 F. 923, 925, 926:

"In other words, the limitation of the statute operates and commissions are available only when the administration is closed and a final settlement approved. It is then, and only then, that the court has before it complete evidence of the amount and character of services performed, upon which he may intelligently base an allowance. It follows, therefore, that an executor prior to final settlement of the estate, or the termination of his services in connection with the estate, is not entitled to an allowance of commissions. * * *

"And if by reason of the will being ultimately adjudged invalid, or for any other reason, his services should cease, then, upon rendering his final account and turning over the estate to his successor, a reasonable allowance as compensation for his services should be made, with special reference, however, to the further services likely to be required of his successor, so that justice may be accorded each and the limitations of the statute observed."

Thus, notwithstanding the contractual arrangement previously concluded with B. F. Saul (cf. Washington L. & T. Co. v. Convention of P. E. Church, 1923, 54 App. D.C. 14, 293 F. 833, 34 A.L.R. 913), it could not be said that all the essential events had occurred which fixed the amount of respondent's fees. Cf. United States v. Anderson, 1926, 269 U.S. 422, 441, 46 S.Ct. 131, 70 L.Ed. 347. See Lucas v. North Texas Lumber Co., 1930, 281 U.S. 11, 50 S.Ct. 184, 74 L.Ed. 668; North American Oil Consolidated v. Burnet, 1932, 286 U.S. 417, 52 S.Ct. 613, 76 L.Ed. 1197; Brown v. Helvering, 1934, 291 U.S. 193, 54 S.Ct. 356, 78 L.Ed. 725.

However, our interpretation of section 42, supra, is directly controlled by the very recent holding of the United States Supreme Court in Helvering v. Estate of John M. Enright, 61 S.Ct. 777, 85 L.Ed. ___, decided March 31, 1941, wherein a much broader definition was given to the word "accrue" under section 42 than had previously been given to this word in the cases cited above....