McGlue v. Commissioner

41 B.T.A. 1186, 1940 BTA LEXIS 1088

• Court: United States Board of Tax Appeals
• Decided: May 21, 1940
• Docket: Docket No. 98446.
• Status: Published

Opinions

OPINION.

Smith:

The first question for our determination is whether the executors’ fees or commissions from the estates of B. F. Saul and James F. Shea are includable in the gross income of the estate of the decedent, G. Percy McGlue, for the year in which his death occurred.

Section 42 of the Revenue Act of 1934 provides:

SEO. 42. PERIOD IN WHICH ITEMS OE GROSS INCOME INCLUDED.

The amount of all items of gross income shall he included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under section 41, any such amounts are to be properly accounted for as of a different period. In the case of the death of a taxpayer there shall he included in computing net income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not; otherwise properly includable in respect of such period or a prior period.

The respondent in his regulations, Regulations 86, article 42-1, has construed this provision of the statute as requiring the net income of a deceased taxpayer for the year in which his death occurs to be computed on the accrual basis. The pertinent part of the article reads as follows:

* * * If a taxpayer has died there shall also be included in computing net income for the taxable period in which he died amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period, regardless of the fact that the decedent may have kept his books and made bis returns on the basis of cash receipts and disbursements. If no determination of compensation is had until the completion of the services, the amount received is ordinarily income for the taxable year of its determination, if the return is rendered on the accrual basis; or, for the taxable year in which received, if the return is rendered on the receipts and disbursements basis. If a person sues in one year on a pecuniary claim or for property, and money or property is recovered on a judgment therefor in a later year, income is realized in the later year, assuming that the money or property would have been income in the earlier year if then received. * * *

Referring to tbe above section of the statute, we said in Lillian O. Fehrman, Executrix, 38 B. T. A. 37, after reviewing its legislative history, that:

It is obvious from the language of the act and the legislative intent as disclosed by the committee reports quoted above that the purpose of Congress was to treat the income of a decedent as though he were on an accrual basis even though he was actually on a cash basis and kept his books on a cash basis, and that the phrase “amounts accrued up to the date of his death” means those amounts which would be properly included in a decedent’s income if he were on an accrual basis as distinguished from a cash basis.

See also Estate of Wilton J. Lambert, 40 B. T. A. 802.

The respondent’s contentions in this proceeding are that the executors’ fees to which the decedent was entitled from the estates of B. F. Saul and James F. Shea had accrued at the date of the decedent’s death and are therefore includable in decedent’s gross income for that year. The petitioner contends, however, that the executors’ fees were not accruable income at the date of decedent’s death because under the laws of the District of Columbia an executor is not entitled to any fees or commissions until he has filed his final account as executor and the payment of the fees or commissions has been approved by the Probate Court, neither of which events had taken place at the rim pi of the decedent’s death. The parties have cited a number of cases involving questions of the accrual of various items of income. As stated in Ernest M. Bull, Executor, 7 B. T. A. 993, “the word ‘accrue’ has no definite meaning but must be interpreted in accordance with the statutory requirement that the accounts must clearly reflect income.”

The factors governing the accrual of items of income and items of deduction are substantially the same; that is, all the events must have occurred which determine the taxpayer’s rights or obligations with respect thereto. Thus, as to the accrual of the munitions tax in United States v. Anderson, 269 U. S. 422, the Court said:

* * * In a technical legal sense it may be argued that a tax does not accrue until it has been assessed and becomes due; but it is also true that in advance of the assessment of a tax, all the events may occur which fix the amount of the tax and determine the liability of the taxpayer to pay it. * * *

In Jackson v. Smietanka, 272 Fed. 970, it was held that the additional compensation paid to a receiver at the end of his receivership, pursuant to a preexisting agreement, was taxable to him in the year when allowed by the court having jurisdiction of the receivership. The court there called attention to the provisions of article 32 of Regulations 45 that:

Where no determination of compensation is had until the completion of the services, the amount received is income for the taxable year of its determination, if the return is rendered on the accrual basis; or, for the taxable year in which received, if the return is rendered on a receipts and disbursements basis. * * *

A substantially similar provision is found in article 42-1 of Regulations 86, promulgated pursuant to the Revenue Act of 1934, referred to above.

Relying upon Jackson v. Smietanka, supra, the Commissioner ruled in S. M. 1929, C. B. IV-1, p. 125, that executors’ fees in the State of Maine, where such fees are allowable at the discretion of the court, were taxable to the executor in the year when allowed by the court although they had been advanced to him in a prior year. However, in G. C. M. 20296, C. B. 1938-2, p. 198, the Commissioner ruled that fees received by an executor in the State of Massachusetts were taxable to him in the year of their receipt, even though they were not allowed by the Probate Court in that year. The distinction was based largely upon the difference in the laws of the jurisdictions.

In Commissioner v. Cadwalader, 88 Fed. (2d) 274; certiorari denied, 301 U. S. 706, the United States Circuit Court of Appeals for the Third Circuit held, reversing the Board, that in the State of New Jersey, where executors are not entitled to fees or commissions until the final account is filed and the fees or commissions are allowed by the Orphans’ Court, the executrices were taxable on commissions in the year when they were allowed by the Orphans’ Court, although such commissions had been advanced to them in a prior year.

In Brosnan v. Fox, 52 App. D. C. 143; 284 Fed. 923, the court said:

The commissions were granted under section 865, Code D. C., which provides that an executor or administrator may be allowed “Commissions, which shall be at the discretion of the court, not under one percentum nor exceeding ten per-centum on the amount of the inventory or inventories, excluding what is lost or perished.” This places a limitation beyond which the court may not go in allowing compensation for the services of an executor or administrator, or executors or administrators, in administering an entire estate. In other words, the limitation operates and commissions are available only when the administration is closed and a final settlement approved. It is then, and only then, that the court has before it complete evidence of the amount and character of services performed, upon which he may intelligently base an allowance. It follows, therefore, that an executor prior to final settlement of the estate, or the termination of his services in connection with the estate, is not entitled to an allowance of commissions.

The services of the decedent as coesecutor of the B. F. Saul estate were terminated by his death on October 31,1935, and the coexecutor, the American Security & Trust Co., has since carried on the administration of the B. F. Saul estate. The facts do not show to what extent the estate had been administered up to the date of the decedent’s death, although it is stipulated that up to that time no final accounting had been filed with the Probate Court and no executors’ fees or commissions had been allowed by the Probate Court or claimed by either of the executors.

The Code of the District of Columbia provides, in section 75 of chapter 5, Title 29, that:

If an executor or administrator shall die before the administration of the estate is completed, letters of administration de bonis non or de bonis non cum testa-mento annexo, as the case may require, shall be granted, in the discretion of the court, * * *

Section 270 of chapter 11, provides that:

The executor or administrator of the deceased executor or administrator shall return, on oath, to the court, on or before the day named as aforesaid, a list of the bonds, notes, accounts, and money aforesaid, and shall be entitled to retain out of the money such commission as the court shall allow, not exceeding ten per centum on the principal inventory, and the personal estate and money turned over by him shall be assets in the hands of the administrator de bonis non, to be accounted for by him as such.

Apparently, under the provisions of section 270 the fees or commissions which the decedent, McGlue, may have earned as executor of the B. F. Saul estate will be paid to his executor or administrator in such amount as the court shall allow “not exceeding ten percentum on the principal inventory.”

The amount of the executors’ fees which the respondent has determined was accrued at the time of McGlue’s death is one-half of the total amount of executors’ fees of $141,612.29, which was the amount claimed as a deduction in the Federal estate tax return filed on behalf of the B. F. Saul estate as “estimated at 3% of the gross estate of $4,720,409.75, as shown on the said return.”

Even if we assume that 3 percent of the gross estate is the total amount of the executors’ fees that the court eventually will allow (there is no evidence that B. F. Saul entered into any agreement as to the amount of executors’ fees with the decedent’s coexecutor, the American Security & Trust Co.), it does not follow that the amount will he divided equally between the coexecutors and that one-half of the amount, or $70,806.14, will be allowed to the decedent McGlue’s estate. It may appear to the Probate Court that by reason of McGlue’s death before completion of the administration of the B. F. Saul estate his services as coexecutor were not commensurate with those of the other executor, which has carried on the administration of the estate since McGlue’s death.

While the agreement which McGlue entered into with B. F. Saul to act as coexecutor of his, Saul’s, estate for a fee of 1% percent of the gross estate appears to be valid and while such agreements have been held enforceable by the courts of the District of Columbia (see Washington Loan & Trust Co. v. Convention of Protestant Episcopal Church, etc., 54 App. D. C. 14; 293 Fed. 833), it is quite obvious that the agreement contemplated that McGlue should serve as coexecutor until the estate should be completely administered. Then, and not until then, could he have claimed the right to his compensation under the terms of the agreement.

In Lillian O. Fehrman, Executrix, supra, the decedent was manager of an F. W. Woolworth store and under his employment contract was entitled to a percentage of the profits each year. The decedent died October 14, 1934. We held that the portion of the profits for 1934, which was not determined until after the close of the year and was not paid to the decedent’s estate until some time in January 1935, was not an amount accrued up to the date of decedent’s death, within the meaning of section 42 above. Although the facts here differ somewhat, the same principle is involved in each case. At the time of decedent’s death the services giving rise to the right to compensation had been performed, but there were other events to take place before the decedent’s right to such compensation would become fixed and determined. In the Fehrmam case it was the taking of the inventory and the determination of the profits of the store; in the instant case, it was the filing of the final executors’ account and the allowance of the executors’ fees by the Probate Court.

In Estate of Wilton J. Lambert, supra, we held that legal fees which the decedent had earned and which were due and payable at the time of his death were accrued income and includable in his gross estate under section 42 above. There, all of the events had happened at the date of decedent’s death which fixed his rights to the fees. We said, referring to section 42 above, that “The effect of that provision, together with its complement in section 43, infra, was merely to place decedent on the accrual basis of accounting for the period of the year, 1935, in which he died.”

There is nothing to indicate that Congress intended section 42 to have any broader application than merely to require the inclusion in a decedent’s gross income of such amounts as, under ordinary accounting practice, would be treated as accrued at the date of his death.

In Spring City Foundry Co. v. Commissioner, 292 U. S. 182, Chief Justice Hughes, speaking for the Court, said: “When the right to receive an amount becomes fixed, the right accrues.”

We do not see how in the instant case it can be said that at the time of McGlue’s death he' had any fixed and determined right to receive any amount as executors’ fees or commissions from the B. F. Saul estate, which in the ordinary sense of the term had “accrued” to him.

We hold therefore that the amount of $70,806.14 representing the estimated executors’ fees from the estate of B. F. Saul was not income accrued to the decedent at the time of his death.

Most of what we have said in the foregoing discussion regarding the accrual of the executors’ fees from the B. F. Saul estate applies to the other item, the $9,926.75 representing the executors’ fees from the estate of James F. Shea, deceased, of which McGlue also served as co-executor up to the time of his death. In his will James F. Shea named McGlue as coexecutor of his estate, specifying that he should be entitled to receive the usual executors’ commissions. At the time of decedent’s death, which occurred a little over one year after the death of James F. Shea, no accounting on the estate had been filed by the executors and no executors’ fees had been claimed or allowed by the Probate Court. The first accounting on the estate was filed by the surviving coexecutor in February 1936, and in that report the a,mount of $9,926.75 was claimed as executors’ fees on behalf of McGlue’s estate. The claim was allowed by the court in that amount on February 20, 1936.

For reasons stated above, we are of the opinion that the amount of $9,926.75 representing the executors’ fees from the estate of James F. Shea was not income accrued to McGlue at the time of his death.

The remaining question is whether the dividend on the Bourjois, Inc., stock, which was declared “during the week of October 19,1935” and was payable on November 15, 1935, to the stockholders of record on November 1, 1935, had accrued at the date of decedent’s death, October 31,1935, and is therefore includable in decedent’s gross estate under section 42 above. We think not. Although the facts are somewhat lacking, we assume that at the time of his death the decedent was the owner of a sufficient number of the shares of stock in question to entitle him to the amount with which he is charged as a dividend accrued at that' time. It is to be noted, however, that the dividend, although declared prior to decedent’s death and “during the week of October 19, 1935”, was not payable to the stockholders of record at the time of the declaration, but to those who might be the stockholders of record on November 1, 1935. If by his will McGlue had specifically bequeathed the shares the legatee would have received and been taxable upon the dividend payable November 15, 1935. Until the latter date there was no certainty who would be the stockholders of record on November 1, 1935, and therefore would be entitled to receive the dividend. See Sharp v. Commissioner, 91 Fed. (2d) 802. Cf. William K. Vanderbilt et al., Executors, 11 B. T. A. 291. This uncertainty of the decedent’s right at the time of his death, October 31, 1935, ever to receive the dividend was sufficient, we think, to defeat the accrual of the dividend on that date. In other words, at the time of decedent’s death the right to receive the dividend on the Bourjois, Inc., stock had not become fixed. Spring City Foundry Co. v. Commissioner, supra.

Reviewed by the Board.

Decision will be entered wider Bule SO.