Matthiessen v. Commissioner

2 B.T.A. 921, 1925 BTA LEXIS 2213

• Court: United States Board of Tax Appeals
• Decided: October 20, 1925
• Docket: Docket No. 2125.
• Status: Published

Opinion

OPINION.

Littleton:

This appeal involves the determination of the amount of taxable gain derived by the taxpayer from the sale of stock received by him as residuary legatee under the will of his father.

Section 213 of the Revenue Act of 1918 provides, in part, as-follows :

That for the purposes of this title (except as otherwise provided in. section-233) the term “gross income”—

(a) Includes gains, profits, and income derived from salaries, wages, or compensation for personal service, * * * or sales, or dealings in property,, whether real or personal, growing out of the ownership or use of or interest-in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and', income derived from any source whatever. * * *; but

(b) Does not include the following items, which shall be exempt from taxation under this title:

* * * * * * *

(3) The value of property acquired by gift, bequest, devise, or descent (but the income from such property shall be included in gross income) ; * * *.

Under these provisions so much of the sale price of the stock as represents its value when acquired by the taxpayer is not to be included in gross income but is to be taken as the basis for determining the gain derived from the sale of said stock. The question in the case is twofold: First, when was the stock acquired by the taxpayer,, and, second, what was its value at the time of acquisition ? With reference to the value of the stock there is no dispute. The parties have stipulated its value as of the various dates involved, and that point needs no further consideration. With reference, however, to the date when the stock was acquired, there is no such accord between the parties.

In Webster’s New International Dictionary the word “ acquire ” is defined as follows:

To gain by any means, usually by one’s own exertions; to get as one’s own; as, to acquire a title, ricbes, knowledge, good or bad babits.

Bouvier’s Law Dictionary defines the word “ acquire ” in the following manner:

To make property one’s own; to gain permanently. It is regularly applied to a permanent acquisition. A man is said to obtain or procure a mere temporary acquisition. It bas been beld to include a taking by devise; * * *.

It is contended on behalf of the Commissioner that the property in the stock was acquired by the taxpayer as of the date of the death of the testator and that the gain derived from the sale of the stock is the difference between its fair market value on the date of the testator’s death and the sale price. As a basis for this contention, it is argued that the residuary legatees became vested with their respective interests in the residuum at the moment the will became operative and that the interests which vested at that time constitute the entire interests which the legatees received or could receive. It is contended by the counsel for the taxpayer, however, that the property vested in the executors under the will and that the stock was not acquired by the taxpayer until the estate was administered and the assets distributed. In Schouler on Wills, Executors, and Administrators, vol. 3, p.1997, the following appears:

§2051. * * * Tbe title to the assets of a decedent which vests in bis representative is that which the decedent had in his lifetime.

§2052. * * * The title of the executor or administrator, as representative, extends so completely to all personal property left by the decedent as to exclude creditors, legatees, and all others interested in the estate. They cannot follow such property specifically into the hands of others, much less dispose of it; but the executor or administrator is the only true representative thereof that the law will regard.

* * * The representative’s claim to such assets is of course superior to that of heirs, distributees, or residuary legatees, so long as the estate remains unsettled.

Section 2061 on page 2002 of the same volume states:

The legal and equitable title to all the personal property of the deceased, including choses in action and incorporeal rights, vests in fact in the executor or administrator, as against all others, during the suitable period for administration, and he holds this property as a trustee and proper representative of all parties interested therein, wherever such property may be situated, and whether such personalty is in the possession of the decedent at death or is recovered by the representative thereafter.

In Corpus Juris, vol. 24, pp. 201, 202, appears the following:

The common-law rule, which is still the general rule on the subject, is that the title to personal property of a decedent, testate or intestate, vests in the personal representative until administration is completed and the estate fully settled or distributed, or until he chooses or becomes forced to part with it earlier; and the rule applies to contingent as well as absolute interests of decedent in personal property, whether of a corporeal or incorporeal description, including rights in bonds, contracts, and choses in action, as well as goods and chattels.

The title of the executor or administrator is exclusive, he being the only representative recognized by law in regard to personal assets; and even property specifically bequeathed vests in him subject to distribution, as in cases of intestacy.

So well settled is the rule that the executor or administrator has the title and the right to possession of the property of the decedent during the period of administration that it was held by the Supreme Court of Wisconsin, in Palmer v. O'Rourke, 110 N. W. 389, that, where an heir has possessed himself of a fund and converted the same to his own use, the administrator has an absolute right to recover the value thereof from such heir, though the latter may thereafter be entitled to have a portion of the fund distributed to him. See also People ex rel. Gould v. Barker, 44 N. E. 785; Ritchie v. Barnes, 86 N. W. 48; Bailey v. Merchants' Ins. Co., 86 Atl. 328; and People v. Brooks, 14 N. E. 39.

In United States v. Jones, 236 U. S. 106, 112, the court said:

It bardly needs statement that personal property does not pass directly from a decedent to legatees or distributees, but goes primarily to the executor or administrator, who is to apply it, so far as may be necessary, in paying debts of the deceased and expenses of administration, and is then to pass the residue, if any, to legatees or distributees. If the estate proves insolvent nothing is to pass to them. So, in a practical sense their interests are contingent and uncertain until, in due course of administration, it is ascertained that a surplus remains after the debts and expenses are paid. Until that is done, it properly cannot be said that legatees or distributees are certainly entitled to receive or enjoy any part of the property. The only right which can be said to vest in them at the time of the death is a right to demand and receive at some time in the future whatever may remain after paying the debts and expenses.

It is true the taxpayer did acquire a right on the death of the testator, but that right was not a property right in the stock which was the subject matter of the transaction involved in this appeal. Th^ most that the taxpayer, as residuary legatee, could demand at the time of the death of the testator was a proper administration of the estate and a distribution of such assets as remained after all debts and claims were settled. Irwin v. Sample, 72 N. E. 687; Norton v. Lilley, 96 N. E. 351; United States v. Jones, supra; Anderson v. Shepard, 121 N. E. 215; In re Waban Rose Conservatories, 106 N. E. 137.

From the authorities cited it appears that, although the taxpayer had a right to the proper administration of the estate and to a proportionate share of the residue remaining, he had no right or title in the stock in question until distribution was made by the executors. The date on which he acquired the property in the stock was the date of its distribution, and any amount representing an increase in the value of the stock between the date of the death of the testator and the date of such distribution should not be included in the income of the taxpayer.

That such was the intention of Congress seems to be confirmed by the provisions of section 219, which reads in part as follows:

(a) That the tax imposed by sections 21© and 211 shall apply to the income of estates or of any kind of property held in trust, including—

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

* * * * * * *

(c) In cases under paragraph (1) * * * of subdivision (a) the tax shaE be imposed upon the net income of the estate or trust and shah 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. * * *.

From these provisions it appears that Congress recognized that the property of a decedent vested in the executor or personal representative during the period of administration and provided, in order that such estates might not escape taxation, that any gain derived during such period should be paid by such executor or personal representative. With reference to the stock in the instant case there was no transaction prior to distribution from which taxable gain resulted, even though it is clear that its value increased during that period and was greater at the time of the distribution than at the time of the death of the testator. This does not affect the income of the taxpayer, inasmuch as section 213 of the Act excludes from gross income the value of the property as of the date it was acquired, which was the date of distribution.

The question now arises as to whether the stock was distributed on March 13, 1918, the date of the agreement of distribution, or on November 12, 1918, the date when the stock was actually transferred on the books of the corporation.

Counsel for the taxpayer contend that the executors could not under the law distribute the assets of the estate prior to the probate of the will and their qualification as executors or prior to payment of the debts of the estate. On the basis of these contentions it Avas argued that the agreement of March 13, 1918, was in effect nothing more than an agreement fixing a method of distribution which as to the stock in question was actually made on November 12, 1918, when the said stock was transferred on the books of the corporation.

In this case, however, we are not. passing on the question as to the proper method of administering estates, but upon the tax liability of the taxpayer as determined by the transactions which actually occurred. When we consider that the exec'utor and legatee in this particular case were the same person it is hard to conceive of a more formal and -complete assignment and delivery of his distributive share of the assets of the estate than the agreement of March 13, 1918. With reference to the stock in question, the words of the agreement were “We assign, set over and deliver * * * the stocks listed, etc.” Such a declaration is certainly sufficient to show that the taxpayer no longer considered that he held the stock as executor, but. that he held it in his individual capacity. The certificates of stock were in his possession, and under the agreement he could have delivered it to the corporation for transfer at any time thereafter.

With, reference to the argument that the agreement was made before the will was probated and the executors qualified, it should be noted that when executors do qualify their title to the property of the estate relates back to the date of the death of the testator. In Pinkham v. Grant, 3 Atl. 179, the court held that where a person named in a will as executor paid to a legatee a legacy under the will prior to the probate thereof and prior to his qualification as executor, the probate of the will and his appointment and qualification as executor related back by construction to the death of the testator and validated the payment.

Corpus Juris, vol. 24, pp. 498, 499, states:

Voluntary payments to distributees without any order or decree of court authorizing the same are made by the representative at his own peril, although the representative acted in good faith in making such payments, and in ignorance of the existence of any debt or claim against the estate. Such distribution is, however, perfectly legal and divests the personal representative of title to the property delivered to the legatee or distributee. Furthermore the representative may be entitled to credit for the payments made, if they are correct and not more than the recipient’s distributive share, and will be protected by a subsequent decree authorizing such payments, or allowing an account in which such payments are stated.

See Burnes v. Burnes, 137 Fed. 781; Parker v. Wilson, 136 S. W. 981; and Parks v. Knox, 130 S. W. 203.

It is noted that where distribution is actually made the executor is divested of title to the property of the estate and that title vests in the legatees. The creditors are not without remedy, however, since the executor becomes personally liable to creditors prejudiced by such distribution. In the instant case the executors protected themselves by inserting in the agreement of distribution a clause whereby the beneficiaries were required to satisfy, pro rata, the liabilities of the estate. The creditors may also, under certain circumstances, have recovery against the distributees. But with these remedies we are not here concerned, since the beneficiaries fulfilled that part of the agreement which required them to pay, pro rata, the debts of the estate, and it does not appear that the legatees were ever disturbed in their possession and enjoyment of the property received under the agreement. Under these circumstances, we must hold that the stock in question was acquired by the taxpayer on March 13, 1918.