Monen v. Comm'r of Internal Revenue (In re Estate of Sidles)
| Decision Date | 29 January 1976 |
| Docket Number | Docket No. 6563-73. |
| Citation | 65 T.C. 873 |
| Parties | ESTATE OF HARRY B. SIDLES, DECEASED, DANIEL J. MONEN, JR., AND JANICE P. SIDLES, CO-EXECUTORS, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Decedent was the sole shareholder of a corporation. Prior to his death, a plan of complete liquidation under sec. 337, I.R.C. 1954, was adopted and the corporation's principal asset was sold pursuant to this plan. As of the date of decedent's death all that remained to be done under the plan was a corporate resolution to distribute and the distribution of the corporation's assets, subject to its liabilities, and the execution and filing of the articles of dissolution with the State. Held, on the date of his death the decedent possessed the right to receive the proceeds of the liquidation; therefore, the liquidating distribution received by the estate constituted income in respect of a decedent within the meaning of sec. 691, I.R.C. 1954. Held, further: The estate tax deduction provided by sec. 691(c), I.R.C. 1954, may be used first against ordinary income, and then against long-term capital gain income in respect of a decedent. The deduction is not limited to offsetting related sec. 691(a) income items. William E. Seidler and John J. Gross, for the petitioners.
Ronald M. Frykberg, for the respondent.
Respondent determined deficiencies of $160,203 and $2,197 in petitioners' Federal income taxes for the taxable years ended May 31, 1969, and May 31, 1970, respectively.
Some issues have been conceded by petitioners. The primary issue for our decision is whether a liquidating distribution received by the Estate of Harry B. Sidles from Bi-State Distributing Corp. constituted ‘income in respect of a decedent’ within the meaning of section 691(a)(1).1 If this distribution is determined to be ‘income in respect of a decedent, ‘ then we must decide whether the deduction provided by section 691(c) is to be offset only against section 691(a) income.
All of the facts are stipulated. The stipulation of facts and the exhibits attached thereto are adopted as our findings. The relevant facts are summarized below.
Harry B. Sidles (herein referred to as the decedent) was born on May 2, 1903, and died testate in Omaha, Neb., on June 12, 1968. During his lifetime the decedent was a cash basis taxpayer.
Daniel J. Monen, Jr., and Janice P. Sidles, the petitioners herein, are the duly appointed and qualified coexecutors of the Estate of Harry B. Sidles (herein referred to as the estate). When the petition was filed herein the legal residence of Daniel J. Monen, Jr., was Omaha, Nebr., and that of Janice P. Sidles was Scottsdale, Ariz.
The estate's fiduciary income tax return (Form 1041) for the taxable year beginning June 12, 1968, and ending May 31, 1969, was filed with the Internal Revenue Service Center at Kansas City, Mo. Subsequently, two amended returns were filed for that year. The estate's fiduciary income tax return for the taxable year ending May 31, 1970, was filed with the District Director of Internal Revenue at Omaha, Nebr.
Bi-State Distributing Corp. (herein referred to as Bi-State) was originally incorporated under the laws of Nebraska in 1930 as the H. E. Sidles Co. On October 17, 1947, the name of the corporation was changed to Bi-State Distributing Corp.
From January 3, 1956, until his death on June 12, 1968, the decedent owned all the outstanding common stock (500 shares) of Bi-State. At his death decedent's adjusted basis in these shares was $29,701.04.
As of June 12, 1968, Bi-State board of directors consisted of three individuals: the decedent (nominated and elected January 20, 1963), Janice P. Sidles (nominated and elected on January 3, 1956), and Areta L. Kelly (nominated and elected on June 26,1962). Janice P. Sidles and Areta L. Kelly were the decedent's wife and mother-in-law, respectively. On July 22, 1968, Margaret DeVore was nominated and elected to serve the balance of the decedent's term as a director. She was an employee of Bi-State and was not related to the decedent or to either of the other two directors.
At a special meeting held on February 28, 1968, Bi-State's board of directors adopted a plan of complete liquidation and dissolution pursuant to section 337 of the Internal Revenue Code of 1954, and section 21-2083 of the Nebraska Business Corporation Act. On the same day this plan of complete liquidation was approved by the decedent as Bi-State's sole shareholder.
On February 29, 1968, Bi-State filed with the Nebraska secretary of state a statement of intent to dissolve.
Bi-State owned 11,025 shares of Sidles Co. stock. On March 26, 1968, Sidles Co. made an offer to purchase these shares. The purchase agreement provided that Bi-State would receive cash of $13,429 and a 20-year, 6-percent promissory note from Sidles Co. in the face amount of $899,000. On the same day Bi-State accepted this purchase offer. Bi-State's basis in the 11,025 shares of Sidles Co. stock at the time of sale was $86,344.84.
Bi-State owned certain real and personal property at 4827 Dodge Street in Omaha, Nebr., and from November 1964 until November 1968 was actively engaged in the operation of a gift shop, Areta's, at that location. The gift shop was managed by Areta L. Kelly, decedent's mother-in-law.
After the decedent's death, Bi-State took no action to distribute any of its assets pursuant to the previously adopted plan of liquidation until November 29, 1968, when its board of directors adopted a resolution to distribute all its real and personal property to the decedent's estate. On that date a warranty deed, transferring the real property located at 4827 Dodge Street, and a bill of sale, transferring the personalty to the estate, were executed.
On November 30, 1968, Bi-State assigned all its right, title, and interest in the Sidles Co. promissory note to the estate.
As of the dates of distribution, November 29 and 30, 1968, the assets distributed in liquidation by Bi-State to the estate had a total net fair market value of $702,830.85, being the total fair market value of assets received ($731,195.88), less liabilities assumed ($28,365.03).
Articles of dissolution were executed by Bi-State on November 30, 1968, and were filed with the Nebraska secretary of state on December 17, 1968. On December 17, 1968, a certificate of dissolution was issued.
At the time Bi-State adopted its plan of liquidation and dissolution, which was by act of the corporation, section 21-2088, Nebraska Business Corporation Act, provided the procedure for the corporate revocation of voluntary dissolution proceedings.2
Pursuant to the provisions of section 337, Bi-State did not recognize its gain on the sale of its assets in liquidation, i. e., the gain on the sale of its Sidles Co. stock, less a $204 loss on the sale of a 1968 Buick station wagon.
On the decedent's Federal estate tax return, the executors included the 500 shares of Bi-State stock at a value of $702,830.85, valued as of the alternate valuation date (November 30, 1968). This valuation was accepted by respondent following an audit.
In his notice of deficiency dated June 12, 1973, respondent determined that the gain realized from the liquidation of Bi-State constituted income in respect of a decedent. The gain ($673,129.81) was calculated by subtracting the decedent's adjusted basis in his Bi-State stock ($29,701.04) from the net fair market value of the assets received by the estate as a liquidating distribution ($702,830.85). The respondent further determined that a deduction of $950 for the taxable year ending May 31, 1969, for Federal estate tax attributable to income in respect of a decedent, as claimed by petitioners, was not allowable, but that an estate tax deduction of $94,448 was allowable as an offset against income in respect of a decedent totaling $674,708 in computing the alternative tax. It was further determined that for the taxable year ending May 31, 1970, the proper deduction for Federal estate tax attributable to income in respect of a decedent was $255, rather than $686 as claimed on the return.
Petitioners contend that the liquidating distribution received by the estate from Bi-State is not governed by section 691(a) and, even if it did constitute income in respect of a decedent, the deduction provided by section 691(c) should not be limited solely to section 691(a) income items.
The principal issue is whether the liquidating distribution received by the estate from Bi-State constituted ‘income in respect of a decedent’ as that term is used in section 691, which provides, in relevant part, that:
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;
Section 1.691(a)-1(b), Income Tax Regs., defines ‘income in respect of a decedent’ as:
those amounts to which a decedent was entitled as gross income but which were not properly includible in computing his taxable income for the taxable year ending with the date of his death or for a previous taxable year under the method of accounting employed by the decedent. * * *
Respondent determined that the liquidation proceeds were income in respect of the decedent because, as of the date of his death, the decedent was entitled to and possessed the right to receive the liquidating distribution from Bi-State.
Petitioners argue that the criterion for determining whether an item...
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