Hughes v. Oklahoma Tax Commission, 42447

CourtSupreme Court of Oklahoma
Citation467 P.2d 153
Docket NumberNo. 42447,42447
PartiesDwight H. HUGHES and Cabell J. Hughes, Co-Administrators of the Estate of J. R. (Jonah R.) Hughes, Plaintiffs in Error, v. The OKLAHOMA TAX COMMISSION, J. D. Dunn, Chairman, L. L. Leininger and M. C. Connors, Members of the Tax Commission of the State of Oklahoma, Defendants in Error.
Decision Date17 March 1970

Syllabus by the Court

Where during the administration of an estate of a decedent a capital asset of said decedent is sold and a gain or profit therefrom to the estate is realized and where such gain is properly distributed to a legatee, heir or other beneficiary of said decedent during the same year in which said gain was received, such gain, to the extent of such distribution, is properly deductible from the taxable gross income of said estate for said year pursuant to Title 68 O.S. 1961, § 884(D)(3).

Appeal from order of Oklahoma Tax Commission.

Appeal from order of Oklahoma Tax Commission which assessed an additional income tax liability against the estate of J. R. (Jonah R.) Hughes, deceased, for the years 1962, 1963 and 1964. Order reversed.

Kothe, Eagleton & Hall, E. J. Eagleton, Tulsa, for plaintiffs in error.

Albert D. Lynn, E. J. Armstrong, R. O. Ingle, Oklahoma City, for defendants in error.

LAVENDER, Justice.

In this appeal from an order of the Oklahoma Tax Commission which assessed income tax for 1962, 1963 and 1964 against the estate of J. R. (Jonah R.) Hughes, deceased, we are presented with a question which has not been heretofore decided in this jurisdiction. That question is whether the gain realized upon the sale of a capital asset of an estate where such gain is distributed to the devisees and legatees named in decedent's will during the same year in which such gain was received is deductible from the gross income of the estate in computing the estate's income tax liability for the year of receipt and distribution. The statute, which the estate contends allows the deduction, is (or was, during the years involved) 68 O.S.1961, § 884. The applicable portions of § 884 are:

'(D) (1) The tax imposed by this Act on individuals shall apply to estates and trusts, which tax shall be collected and paid annually upon, and with respect to, the income of estates or of any kind of property held in trust including:

'(a) Income received by estates of deceased persons during the period of administration of settlement of the estate;

'* * *.'

and, in particular, the following:

'(3) In cases under paragraphs (a), (b), and (c), of subsection (D)(1), of this Section, (above quoted) the tax shall be imposed upon the estate or trust with respect to the net income of the estate or trust and shall be paid by the fiduciary, except that in determining the net income of the estate of any deceased person during the period of administration or settlement, There may be deducted the amount of any income properly paid or credited to any legatee, heir or other beneficiary. In such cases, the estate or trust shall be allowed the same credits as are allowed to single persons under Section 882, and in such cases an estate or trust created by a person not a resident, and an estate of a person not a resident, shall be subject to tax only to the extent to which individuals other than residents are liable.' (Emphasis supplied.)

Without making a detailed statement of the circumstances giving rise to the controversy we think it sufficient to state that the gains involved represent the proceeds received upon an installment sale of a large ranch. The installments were received by the estate during the years above mentioned and were--in accordance with permission contained in the will of the decedent--fully paid to the individual heirs during the same years in which such payments were received. An order of the county court (and apparently the will involved) authorized the executor, during the administration of the estate and from time to time, to make distributions to named beneficiaries such as were made here.

The parties agree that the individual beneficiaries reported the capital gain involved on their individual income tax returns for the years involved and paid the proper amount of tax to the State of Oklahoma.

It is the contention of the Commission that the capital gain involved was not 'income,' as that word is used in § 884(D)(3), supra, but instead represented corpus.

The argument is made that it was not possible to distribute corpus and call it 'income' simply for the purpose of obtaining the deduction mentioned in the statute. The contention is made also by the Commission that the term 'income,' as used in the last mentioned statute, means 'ordinary income of the estate such as rental payments, dividends or interest * * *.' In support of its contentions Commission cites the New York case of In re Lewis' Will, which is also entitled Bank of Richmondville et al. v. Graves (1940), 259 App.Div. 4, 18 N.Y.S.2d 133, affirmed, without comment, 284 N.Y. 671, 30 N.E.2d 720. Commission also relies upon an opinion of the United States District Court for the Southern District of New York, Simon et al. v. Hoey (1949), 88 F.Supp. 754, affirmed by the Court of Appeals, 2 Cir., 180 F.2d 354. Other federal court cases, to the same effect, are cited.

We think it is well to discuss the federal case first. In Simon et al. v. Hoey, supra, the author of the opinion, after carefully pointing out that the question of what is includible in 'income' for federal income tax purpose is a federal question and that a again upon the sale of a capital asset of an estate is taxable, as income, to the estate, then said, regarding the question of whether a distribution of such a gain to a devisee or legatee during the same taxable year is 'income * * * properly paid or credited' as those terms are used in 26 U.S.C.A. § 162(c):

'The state courts supervise and control the estates of decedents and the conduct of the executors and administrators of the estates. The state courts determine the rights of creditors, legatees and distributees and also the manner and method of payments of the estate to legatees and beneficiaries. Whether an executor may 'properly' pay a sum out of an estate, is a matter to be determined by local law, since it concerns problems over which the state courts exercise jurisdiction in the administration of estates. (Citing cases.)'

The federal court then went on to conclude that in New York the question had been settled by Bank of Richmondville v. Graves, supra.

That case refers to New York statutes very similar to our 68 O.S.1961, § 884(D)(1) and (3). Shares of stock were sold and a gain realized. That gain was distributed to the residual beneficiary and a claim was made by the executor that it was a deductible distribution of income. A disallowance of the deduction was affirmed on appeal.

We turn now to an analysis of the New York case.


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