Marcus v. Commissioner, Docket No. 8577-72
| Decision Date | 15 January 1975 |
| Docket Number | 8578-72.,Docket No. 8577-72 |
| Citation | 34 TCM (CCH) 38,1975 TC Memo 9 |
| Parties | B.M. Marcus Estate, Gladys L. Marcus, Leon J. Marcus, Richard E. Marcus and Robert M. Diggs, Executors v. Commissioner. |
| Court | U.S. Tax Court |
Robert M. Diggs, Exchange Bank Bldg., Olean, N.Y., for the petitioner. Louis J. Zeller, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent has determined a deficiency in the Federal income taxes of the Estate of B.M. Marcus in the amount of $20,474.05 for the year 1967 or alternatively in the amount of $22,009.60 for the year 1968.
We are asked to decide if in either of the aforesaid years the Estate of B.M. Marcus recognized forgiveness of indebtedness income under section 61(a)(12), Internal Revenue Code of 1954, as amended.1
The petitioner herein is the Estate of B.M. Marcus (decedent), who died a resident of Olean, New York, on September 29, 1967. On November 27, 1967, the decedent's will was admitted to probate and letters testamentary were issued to his executors by order of the Surrogate of Cattaraugus County (New York). The principal office of the decedent's executors was in Olean, New York, when the petition herein was filed. No Federal income tax return was filed by the petitioner for either 1967 or 1968.
Certain facts have been stipulated. We incorporate herein the stipulation of facts and the exhibits appended thereto.
Olean Improvement Company (Improvement), a New York corporation, owned the building in which the family of H.W. Marcus operated the Olean House Hotel.2 H.W. Marcus, the father of the decedent, acquired the 1,150 shares of Improvement stock oustanding in 1912. The corporation was to remain under the control of the Marcus family until its dissolution in 1971.
As of April 6, 1929, H.W. Marcus ceased to have an interest in Improvement, having distributed his shares equally among his five children in a series of gifts. When one of the children of H.W. Marcus died in 1940, the interests of the four survivors, among them the decedent, were increased by the holdings of the dead child. In 1954 the decedent further increased his holdings by purchasing several shares from his sister. On February 14, 1961, the decedent made a gift to his three children of the 292 shares which he had acquired by reason of the events recounted above. On July 19, 1962, he transferred to his son, Richard E. Marcus (Richard), an additional 77 1/8 shares which he had purchased from his sister and her daughter. In March, 1965, the decedent's brother, Mendell V. Marcus, gave him another ten shares which the decedent surrendered to Improvement on May 6, 1967, in satisfaction of an outstanding obligation.
From time to time while it was under the control of the Marcus family, Improvement disbursed funds to the decedent, made charitable contributions in his name and paid premiums on policies insuring his life. It was not the decedent's practice either to pay interest on these amounts or to execute notes in acknowledgment of an obligation to reimburse Improvement for them; but Improvement did debit these disbursements to a loan account styled "111 — B.M. Marcus," and the decedent did not include these amounts in his gross income when computing his Federal income tax liability.3
In 1960 the books of Improvement were audited by an agent of the respondent. In the course of the audit he came across Account No. 111 and after an investigation concluded that the disbursements debited to the account were in fact distributions made with respect to the decedent's Improvement shares. The decedent maintained to the contrary that the disbursements were loans which he was unable to repay; but he later agreed to pay the deficiencies which the agent determined to be owing for the years 1957 through 1959.
The decedent paid Improvement the amounts debited to Account No. 111 for the year 1960 and when Improvement advanced him $200 a month from January 1963 through June 1964 decedent acknowledged an obligation to repay these amounts (which he discharged prior to his death), together with 5¼ percent interest, by executing two promissory notes.
After the assessments had been made against the decedent for the years 1957 through 1959, he, together with his accountant, had entertained the notion of reducing the pre-1957 debit balance in Account No. 111 by various methods, among them repayment.4 But finding none of the available alternatives satisfactory, the decedent resolved that the account should in no event be balanced by action of Improvement's board of directors lest he realize income in consequence of such action. Thus at the time of the decedent's death, Account No. 111 still showed a sizeable debit balance. Nevertheless, Improvement made no attempt to recover any amounts from the decedent's estate; and had it done so, the decedent's executors would have availed themselves of the protection afforded by the statute of limitations.
The decedent died indebted to the Exchange National Bank of Olean (Exchange National) to the extent of $17,737.67. His estate incurred funeral and administration expenses in the amount of $2,435.23. His gross estate included, inter alia, the following assets:
Value at
date of
Asset death
Cash and Receivables ................... $11,678.29
Insurance Policies
1. Policy No. 398199, Equitable
Life Ins. Co. of Iowa, payable
to Gladys L. Marcus and Exchange
National .......................... 1,015.64
2. Policy No. 727,516, Provident
Mut. Life Ins. Co. of Phil
payable to Exchange National 5,092.71
3. Prudential Ins. Co. of America
policy, payable to Gladys L
Marcus ............................ 2,500.00
Stock
1. 109 shares, Standard Oil Co. of
Ca. ............................... 6,601.31
2. 105 shares, Texaco, Inc. .......... 8,367.19
__________
Total .................................. $35,255.14
The estate also included 12½ shares of stock (a 25 percent interest) in Olean House, Incorporated. In applying to the Surrogate of Cattaraugus County for a determination of the tax owing on the decedent's estate under Article 26 of the Tax Law (New York), the executors valued these shares at $1,000 each.
Several years prior to decedent's death, Olean House, Incorporated, began to suffer a serious decline in business. Late in 1970 Improvement sold the building which had housed the hotel to a purchaser who proceeded to convert the upper floors into apartments for the elderly. For several months thereafter, Olean House, Incorporated, leased the building's restaurant and bar facilities; but an attempt to operate them proved unremunerative. Consequently, in 1971 the members of the Marcus family sold the fifty shares of Olean House, Incorporated, outstanding for one dollar per share.
By timely statutory notice dated October 12, 1972,5 respondent determined a deficiency in the Federal income tax of the decedent's estate for either 1967 or 1968.
OpinionThe respondent contends that the amounts debited to Account No. 111 with respect to the years preceding 1957 represented loans which Improvement had made to the decedent; and that the petitioner's obligation to repay such of those loans as were still outstanding at the time of the decedent's death, was forgiven by Improvement in 1967 or 1968. The petitioner contends that the decedent and his estate were at no time under an obligation to pay Improvement the amounts debited to Account No. 111. Alternatively the petitioner contends that if such an obligation did ever exist, it terminated prior to 1967 or 1968.
The record discloses that the decedent executed no promissory notes payable to Improvement, covering the amounts in issue; and that he neither was charged interest on those amounts nor made a systematic effort to repay them. However, in computing his Federal income tax, the decedent did not include those amounts in his gross income; and they were carried as receivables on Improvement's books. As the petitioner bears the burden of proving its contentions, we hold that the debit balance in Account No. 111 as of December 31, 1956, did represent an obligation of the decedent, still outstanding at the...
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