Jones v. Whittington, 4376.

• Decision Date: 20 February 1952
• Docket Number: No. 4376.,4376.
• Citation: 194 F.2d 812
• Parties: JONES v. WHITTINGTON.
• Court: U.S. Court of Appeals — Tenth Circuit

194 F.2d 812 (1952)

JONES v. WHITTINGTON.

No. 4376.

United States Court of Appeals Tenth Circuit.

February 20, 1952.

Maurice P. Wolk, Washington, D. C. (Ellis N. Slack, Acting Asst. Atty. Gen., Robert N. Anderson and A. Barr Comstock, Sp. Assts. to Atty. Gen., and Robert E. Shelton, U. S. Atty., Oklahoma City, Okl., on the brief), for appellant.

Bruce McClelland, Oklahoma City, Okl. (Louie G. Kneeland, Robert O. Bailey, Bruce McClelland, Jr., Oklahoma City, Okl., on the brief), for appellee.

Before HUXMAN, MURRAH and PICKETT, Circuit Judges.

HUXMAN, Circuit Judge.

The question in this case involves the income tax liability of appellee, Florence C. Whittington, for the year 1941. She filed her income tax return for that year and paid the income tax due thereon. Thereafter, on June 30, 1944, she filed a claim for refund on account of overpayment of taxes for 1941, in the amount of $3,283.42. The claim was disallowed and this suit was instituted in the United States District Court for the Western District of Oklahoma, 96 F.Supp. 967, to recover that amount. The trial court made findings of fact and conclusions of law and, based thereon, entered judgment for her as prayed for and this appeal followed.

The controversy arose out of the following facts. Emily Culbertson, a resident of Texas, died testate on April 12, 1941, possessed of a considerable estate, in which were included German bonds of various municipalities and corporations of the par value of $122,075 and of an aggregate appraised value at the time of her death of $19,382.50. The will of Emily Culbertson, so far as material, devised all her property of which she died seized and possessed to her three children, John J. Culbertson, Emily Culbertson Potter, and Florence Culbertson Whittington, share and share alike. It contained the usual provisions, providing for the appointment of an executor, directed him to pay the debts, carry out the provisions of the will, and administer the estate thereunder according to law.

Apparently the estate was not closed until 1944. It would also appear that there was no division or distribution of assets, or any part thereof, until in 1944, and, until that time, the entire estate, including these bonds, remained in the possession of the executor. The stipulation of facts recites that the legatees agreed to a division of the German bonds in 1944 and that on or about April 30, 1944, appellee received her share of such bonds, being the same bonds upon which her claim for refund of taxes for 1941 was predicated. It is without dispute that during the part of 1941 remaining after his appointment the entire assets of the estate were in the exclusive possession and control of the executor and were being administered by him in the discharge of his duties as the executor of the estate.

These German bonds became worthless on December 8, 1941, when we declared war against Germany¹ and thereafter had no value. The executor filed an income tax return on behalf of the deceased for 1941 to the date of her death and filed a fiduciary income tax return, as executor of the estate, for the remaining portion of the year 1941 after his appointment. He did not claim in his fiduciary return a capital loss deduction, because of the loss of value in these bonds. Neither did appellee in her original 1941 income tax return claim a capital loss deduction, because of these bonds. When subsequent to 1941 the executor's fiduciary return was audited, the collector allowed as a capital loss deduction the loss in value of these bonds and, since such loss more than equalled the amount of tax paid under the return, the amount of such tax was refunded.

Under the Federal income tax laws, all income, including capital gain, must be reported in the year in which it is received and likewise a capital loss must be taken in the year in which it occurs.² This capital loss occurred in 1941, after the executor was appointed and was engaged in the administration of the estate. The only question is whether he must report the loss, which occurred in that year and during the administration of the estate, in his fiduciary income tax return, or whether the heirs must report it in their individual income tax returns, notwithstanding that they had not received the property, had no dominion or control over it, and did not have the right to receive income, if any, realized therefrom. The trial court concluded that the answer to the question must be determined by the law of Texas and the provisions of the will. In reaching its conclusions, it relied largely upon Blinn v. McDonald, 92 Tex. 604, 50 S.W. 931, Smith v. Patton, Tex.Com.App., 241 S.W. 109, Meadows v. Russell, Tex.Civ.App., 203 S.W.2d 647, Arrott v. Heiner, 3 Cir., 92 F.2d 773 and Anderson v. Wilson, 289 U.S. 20, 53 S.Ct. 417, 77 L.Ed. 1004.

The Texas cases relied on by the court are not helpful because in none of them was involved the question of income tax liability of an estate or the duty of an executor or administrator with regard to income tax returns. It is conceded that under Texas law the title to both personal and real property descends upon death and vests immediately in the heirs, legatees and devisees. All that was involved and decided in the Texas cases, relied upon by the court, was the question whether a creditor of an heir might levy execution upon his undistributed and undivided interest in the estate, during the period of administration. The Arrott and Anderson cases will be treated in subsequent portions of the opinion.

It has been held without exception that, while the status of property with respect to its ownership or the nature of an estate of one claiming an interest therein is determined by state law, the Federal tax liability with respect thereto is determined by Federal law and that for tax purposes the Federal Government may give such property a different status than it has under state law.³ Having determined the status or ownership of property by state law, we then look to the Federal law to determine the manner in which it is to be taxed and who is responsible for filing income tax returns and the payment of taxes with respect thereto at any particular time.

26 U.S.C.A. § 161 (a) (3), so far as it applies to estates in the process of administration, provides that the taxes imposed by the chapter upon individuals shall apply to "income received by estates of deceased persons during the period of administration or settlement of the estate". Subsection (b) provides that "The tax shall be computed upon the net income of the estate * * * and shall be paid by the fiduciary". 26 U. S.C.A. § 162 provides that "The net income of the estate * * * shall be computed in the same manner and on the same basis as in the case of an individual, except that * * * (c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate * * * there shall be allowed as an additional deduction in computing the net income of the estate * * * the amount of the income of the estate * * * for its taxable year, which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary". 26 U.S.C.A. § 142 (a) provides that every fiduciary "shall make under oath a return * * * stating specifically the items of gross income thereof and the deductions and credits allowed * * *." Subsection (c) provides that "Any fiduciary required to make a return shall be subject to all the provisions of law which apply to individuals."

The regulations promulgated under the tax laws are consistent with its provisions. Thus Section 19.161-1 likewise provides that "Taxes imposed upon individuals by the chapter shall be applicable to the income of estates * * * The rate of tax, the statutory provisions respecting gross income, and with certain exceptions, the deductions and credits allowed to individuals apply also to estates * * *" Subsection (b) provides that the fiduciary (the executor or administrator in the case of estates) "is required to make and file a return and pay the tax on the net income * * *" Section 19.162-1 provides that in ascertaining the tax liability of the estate "there is deductible from the gross income, subject to exceptions, the same deductions which are allowed to individual taxpayers." Subsection (2) in part provides that "There is taxable to the estate * * all income of the estate or trust for its taxable year which is not to be distributed currently to legatees or other beneficiaries * * * In all such cases, the tax is payable by the fiduciary * * *."

Throughout all the statutory provisions as well as the regulations runs the mandate that it is the duty of the executor during the period of administration to make a tax return for the estate in which he must report all gross income received and take all proper deductions, as in the case of individuals, so that the net income of the estate may be ascertained, upon which it is then his duty as executor to pay the tax.

The statutes make it clear that for income tax purposes income of an estate during the period of administration is dis-associated from the ownership of property from which it is derived. This becomes manifest from a consideration of Section 162 (c), just outlined. Subsection (c) makes it clear that a legatee or heir may or must report only such income as he has actually received from the estate or with which he has been credited. This is also clear from Section 19.162-1 of the regulations, which provides that "there is taxable to the estate * * * all income * * * which is not to be distributed currently to legatees or other beneficiaries * * *."

Net income, for income tax purposes, may be defined in substance as the difference between gross or total income and the permissible statutory deductions which may be taken therefrom.⁴ Capital...