Schuhmacher v. Commissioner , 8 T.C. 453 ( 1947 )

Kathrine Schuhmacher, Petitioner, v. Commissioner of Internal Revenue, Respondent. Estate of Henry C. Schuhmacher, H. C. and John Schuhmacher, Executors, Petitioner, v. Commissioner of Internal Revenue, Respondent. Estate of Julia Agnes Robson, Deceased, Max R. Robson, Sr., Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent

Schuhmacher v. Commissioner

Docket Nos. 6152, 6153, 6154

United States Tax Court

8 T.C. 453; 1947 U.S. Tax Ct. LEXIS 264;

February 28, 1947, Promulgated

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Decisions will be entered under Rule 50.

1. Value of shares of corporate stock for gift tax purposes and estate tax purposes determined.

2. Gifts of shares of corporate stock were made to five minor grandchildren, with the provision that the stock should be issued in the names of their respective fathers and held by them as guardians until such time as each grandchild became 21 years of age, the dividends to be accumulated or used only for the benefit of the various grandchildren without any benefit ever inuring to the respective fathers, except that the fathers had the right to vote such stock. Held, that the gifts were of future interests.

3. Taxpayer, in her 1935 gift tax return, reported more than one-half of the value of gifts made by her and her husband out of community property and applied the whole specific exemption of $ 40,000, instead of reporting only one-half of the value of such gifts requiring application of only $ 37,131.25 of the specific exemption. No gifts were made by her after 1935, until 1941. Held, that the taxpayer is entitled to a specific exemption of $ 2,868.75 in computing tax on gifts made in 1941.

4. Under the law of Texas, the entire community estate is subject to administration by the executors of a deceased husband. Held, that only one-half of certain fees of executors, accountants, and a lawyer are deductible in computing the estate tax on the deceased husband's portion of the community estate.

Wright Matthews, Esq., for the petitioners.

Frank B. Schlosser, Esq., for the respondent.

Turner, Judge.

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TURNER

The respondent has determined deficiencies in tax as follows:

	Docket No.	Tax	Year	Deficiency
Kathrine Schuhmacher	6152	Gift tax	1941	$ 8,613.20
Estate of Henry C. Schuhmacher	6153	Estate tax		10,408.79
Estate of Julia Agnes Robson	6154	Estate tax		17,147.11

The issues presented are the correctness of the respondent's action (1) in determining the fair market value of shares of common stock in the Schuhmacher Co. on September 28, 1940, the date of death of Henry C. Schuhmacher, on December 23, 1941, the date of death of Julia Agnes Robson, and on December 24, 1941, the date of gifts of certain shares of the stock by Kathrine Schuhmacher; (2) in disallowing Kathrine Schuhmacher five exclusions of $ 4,000 each in computing her gift tax liability for 1941; (3) in disallowing her a specific exemption of $ 2,868.75 in computing her gift tax liability for the same year; (4) in failing to allow the estate of Henry C. Schuhmacher a deduction of $ 2,560 as miscellaneous administration expenses; and (5) in failing to allow the estate of Henry C. Schuhmacher and the estate of Julia Agnes Robson any amount as a credit for inheritance taxes paid to the State of Texas.

Overpayment of taxes is claimed as follows: Kathrine Schuhmacher, $ 1,298.26; estate of Henry C. Schuhmacher, $ 413.87; and estate of Julia Agnes Robson, $ 4,723.88.

FINDINGS OF FACT.

Petitioner Kathrine Schuhmacher ¹ is a resident of Houston, Texas. She filed a gift tax return for 1941 with the collector of internal revenue for the first district of Texas, in which she reported gifts of 4,107 shares of common stock of the Schuhmacher Co. of Houston, Texas, at a value of $ 22 per share, or a total value of $ 90,354. The gifts of the 4,107 shares, which shares were her community one-half of 8,214 shares of such stock owned by herself and husband, Henry C. Schuhmacher, at the date of his death, were made by petitioner to her two sons, two daughters-in-law, and five minor grandchildren on December 24, 1941, as follows:

	Relationship	Shares given
John Schuhmacher	Son	1,453
Paula Schuhmacher	Daughter-in-law	200
John Schuhmacher	Grandson	200
Dinneen Schuhmacher	Granddaughter	200
Harry Schuhmacher	Son	1,254
Ruth Schuhmacher	Daughter-in-law	200
Nancy Schuhmacher	Granddaughter	200
Katherine Schuhmacher	Granddaughter	200
Henry Schuhmacher	Grandson	200
Total		4,107

The gifts were made in accordance with a letter of the same date, addressed to her two sons, John and Harry Schuhmacher, reading as follows:

In view of the fact that my personal income is assured through the provisions of my late husband's, and your father's, will, and of the further fact that I do not wish to be burdened with the duties of management of a personal estate as large as that of which I am now possessed outside of my life interest in the income from the estate left me by my late husband, as well as of the love and affection that I hold for my two sons and their families and my desire to see them have substantial interests in the properties to which they are devoting their time and talent, I hereby make gifts to you and your families, as follows, effective as of this date, and authorize you to cause the various securities to be transferred to the respective names:

[Names of donees and number of shares given to each omitted.]

The above represents gift of the entire 4,107 shares of common stock of The Schuhmacher Company, owned by me in fee simple, as my community share of the 8,214 shares owned by myself and my husband at the date of his decease. The remaining 4,107 shares, representing my late husband's community interest in said stock, remains subject to the provisions of his will.

It is my desire that the stock which I have designated as gifts to my grandchildren, be issued in the name of their respective fathers, and held by them, as Guardian, for the benefit of said grandchildren until such time as each of the grandchildren becomes twenty-one years of age. Said fathers, as guardians, shall have the right and power to sell, trade, or otherwise dispose of said stock, for the benefit of said grandchildren, in any manner that they deem wise and proper, except that neither said stock nor the proceeds of sale or exchange of same, nor the income therefrom, shall ever inure to the benefit of said fathers, except under the laws of descent and distribution, or by will after said grandchildren individually become twenty-one years of age. It is specifically a term of this gift to the grandchildren that the fathers, or their legal representatives, shall have the right to vote this stock so long as it is held by them as guardians. Dividends received on the stock, or reinvestment of proceeds of sale of same, shall be accumulated or used only for benefit of the various grandchildren.

During 1935 Mrs. Schuhmacher and her now deceased husband made gifts out of their community property to their sons, Harry Schuhmacher and John Schuhmacher, of property having a total value at the dates of such gifts of $ 94,262.50. In his gift tax return for 1935 the husband reported with respect to such gifts that he gave to Harry on April 1, 1935, $ 6,037.50 in cash, and on June 1, 1935, 131 shares of stock in the Schuhmacher Co. of a value of $ 13,100, and on July 26, 1935, a lot of a value of $ 3,000. He also reported that he gave to John on April 1, 1935, $ 6,125 in cash, on June 1, 1935, 130 shares of stock in the Schuhmacher Co. of a value of $ 13,000, and on July 26, 1935, a lot of a value of $ 3,000. Against the total of the foregoing, $ 44,262.50, he claimed two exclusions of $ 5,000 each and a specific exemption of $ 34,262.50, with the result that he reported no gift tax liability for the year. In her gift tax return for 1935, Mrs. Schuhmacher reported that on June 1, 1935, she gave to each of her sons 250 shares of stock in the Schuhmacher Co. of a value of $ 25,000, or a total for the two gifts of $ 50,000. Against that total she claimed, and was allowed by the respondent, two exclusions of $ 5,000 each and a specific exemption of $ 40,000, with the result that no gift tax was payable or paid by her. No portion of the specific exemption was claimed by Mrs. Schuhmacher prior to 1935 and no gifts were made between 1935 and 1941.

In her gift tax return for 1941 Mrs. Schuhmacher claimed a specific exemption of $ 2,868.75 representing the difference between the specific exemption of $ 40,000 and one-half of the total value of the gifts made by her and her husband in 1935, or $ 37,131.25, after deduction of two exclusions of $ 5,000 each. In determining the deficiency against her, the respondent disallowed the claimed specific exemption of $ 2,868.75.

In her gift tax return for 1941 Mrs. Schuhmacher claimed nine exclusions of $ 4,000 each with respect to the gifts of the Schuhmacher Co. stock made in that year to her sons, her daughters-in-law, and her five minor grandchildren. The respondent disallowed the five exclusions claimed with respect to the gifts made to the grandchildren.

H. C. and John Schuhmacher are the independent executors of the estate of Henry C. Schuhmacher, who died on September 28, 1940, while a resident of Houston, Texas. A timely estate tax return was filed with the collector for the first district of Texas, in which election was made to have the property included in the gross estate valued as of the date of the death of the decedent. Among the assets owned by the decedent at the date of his death was a community one-half interest in 8,214 shares of the common stock of the Schuhmacher Co., which was reported in the estate tax return at a fair market value of $ 22 per share, or a total value of $ 90,354.

In the estate tax return a deduction of $ 3,000 was taken for miscellaneous administration expenses. Among the items composing the deduction were executors' fees of $ 1,000 paid to each of the executors and an amount of $ 525 paid for accounting services. In determining the deficiency against the estate the respondent determined that the deduction of $ 3,000 thus taken should be reduced to $ 275, in order to reflect the expenses paid in respect of the purpose claimed, and accordingly disallowed $ 2,725 of the deduction taken.

Max R. Robson, Sr., is the independent executor of the estate of Julia Agnes Robson, who died on December 23, 1941, while a resident of Houston, Texas. A timely estate tax return was filed with the collector for the first district of Texas, in which election was made to have the property included in the gross estate valued as of the date of death of the decedent. Among the assets owned by decedent at the date of her death was a community one-half interest in 6,866 shares of the common stock of the Schuhmacher Co. and 1,297 shares of such stock owned by descent as her separate estate. Such stock was reported in the estate tax return at a fair market value of $ 22 per share, or a total value of the community one-half interest of $ 75,526, and a total value for the separate interest of $ 28,534.

The Schuhmacher Co., a Texas corporation, was organized on July 7, 1903, and since that time has been engaged continuously in the wholesale grocery business in the Gulf Coast area of Texas, with its principal office in Houston. The corporation succeeded to a business previously conducted under the name of Leo Frede & Co., which was engaged in the sale of packing house products, wooden ware, and groceries. Henry C. Schuhmacher, who became president of the corporation, was connected with the prior concern. At various times the Schuhmacher Co. acquired the business of other wholesale grocers. It was not its policy to take over the accounts receivable of such concerns. During the years 1940 and 1941, the company maintained branches at Austin, Beaumont, Bryan, Corpus Christi, Eagle Lake, Galveston, La Grange, McAllen and Victoria, all in Texas. Warehouses are maintained at such branches, from which the merchandise is distributed to the retailers. The company also has a working agreement with the Independent Grocers Association which provides the company with an outlet for its goods to the member stores of the association, although such members are free to buy wherever they choose. On January 1, 1940, the company acquired a controlling interest in Minimax Stores, a corporation.

The city of Houston has had a substantial growth in population in recent years and many war industries were constructed in the vicinity after the United States became involved in the war, resulting in the influx of many workers. Retailers, having a large market, purchased direct from the manufacturer as a a rule, thus eliminating the wholesaler.

The stockholders of the Schuhmacher Co. and the number of shares of stock owned by each on December 31, 1940 and 1941, were as follows:

	Shares owned
Name
	Dec. 31,	Dec. 31,
	1940	1941
Bauer, Mrs. Jessie	331	331
Dietrich, E. J.	10	10
Dick, Mrs. Dorothy	25	25
Drane, L. L.	32	32
Frede, Leo	3,780	3,780
Freeborn, Mrs. Louise	331	331
Gaines, M. C.	82	82
Garrott, Leon F.	260	260
Grosse, Mrs. Elizabeth	331	250
Guenard, Mrs. Eleanor	331	331
Hall, Constance A.	25	25
Hamblen, Mrs. Lillie M.	907	907
Isenberg, Homer	130	130
King, Clifford	26	26
King, John N.	26	26
Klimicke, W. F.	26	26
Kroll, T. H.	1,835	1,835
Kubena, J. R.	225	225
Longini, Mrs. Rosa L.	1,150	1,075
Matzinger, F. G.	55	55
Masquelette, F. G.	25	25
Masquelette, Mrs. Phil	5	5
Middleton, E.	1,000	800
Middleton, Mrs. M. I.	1,000	1,000
McBride, R. A.	379	379
Oeding, E. F.	156	156
Perlitz, Mrs. Anna	496	496
Perlitz, Anna Louise	1,125	1,125
Perlitz, Chas. A., Sr.	5,901	6,026
Perlitz, Chas. A., Jr.	1,122	1,122
Perlitz, Fred W.	1,122	1,122
Perlitz, George A.	1,127	1,127
Perlitz, Mrs. Mayme E.		16
Perlitz, Robert H.	1,122	1,188
Perlitz estate, W. E.	2,644	2,644
Perlitz, Will H.	798	798
Perlitz, Werner J.	731	731
Robson, M. R., Sr.	6,792	6,792
Robson, M. R., Jr.	222	270
Robson, Mrs. Julia S.	1,371	1,371
Robson, Henry C.	55	71
Robson, Agnes K.	57	57
Roensch, Mrs. Joe	28	28
Rucker, D. W.	220	220
Schuhmacher, Harry	2,548	3,847
Schuhmacher, Mrs. Ruth		200
Schuhmacher, Harry, guardian for
Nancy Schuhmacher		200
Schuhmacher, Harry, guardian for
Katherine Schuhmacher		200
Schuhmacher, Harry, guardian for
Henry Schuhmacher		200
Schuhmacher estate, H. C.	8,214	4,099
Schuhmacher, John	2,496	3,995
Schuhmacher, Mrs. Paula		200
Schuhmacher, John, guardian for
Dineen Schuhmacher		200
Schuhmacher, John, guardian for
John Schuhmacher, Jr.		200
Schuhmacher, John H.	55	55
Schuhmacher estate, Leo F.	1,311	1,311
Schuhmacher properties	32	32
Silberman, Lottie	38	38
Unity trust	52	52
Viebig, Herman	58	58
Vogler, P. A.	705	705
Von Minden, Mrs. H.	250	250
Warden, H. F.	165	165
Whyte, Jessie	5	5
Yerger, Hill, and son	1,150	1,150
Zweiner, C. W.	175	175
Total	54,668	54,668

The Schuhmacher, Perlitz, and Robson families were related by blood or marriage. Henry C. Schuhmacher was president of the Schuhmacher Co. from 1907 until his death on September 28, 1940. He was also a director of three banks, of the Gear Wrench Co., and of the Burlington-Rock Island Railroad. He directed the policies of the Schuhmacher Co., and notes of the company were endorsed by him and Charles A. Perlitz, Sr. After the death of Henry C. Schuhmacher, Charles A. Perlitz, Sr., who had been vice president of the company since 1905, became its president, M. R. Robson, Sr., who had been its secretary, became vice president and treasurer, and younger members of the three families became junior officers. Management plays an important part in the wholesale grocery business, and the management of the Schuhmacher Co. was good.

The following schedule shows the par value of the common and preferred stock of the Schuhmacher Co. outstanding at the end of each of the years 1930 to 1941, inclusive, and the dividends paid thereon during those years:

	Stock outstanding		Cash dividends
Year					Stock
					dividends
	Common	Preferred	Common	Preferred
1930	$ 1,000,000	$ 150,000	$ 70,000	$ 9,000
1931	1,000,000	112,400		9,740
1932	1,000,000	112,400	40,000	7,864
1933	1,000,000	127,200		3,927
1934	1,000,000	67,800	60,000	7,451
1935	1,000,000	67,800	60,000	4,068
1936	1,000,000	91,980	60,000	4,068	$ 40,000
1937	1,051,200	101,380	73,800	4,892	51,200
1938	1,059,320	101,380	84,745	9,124
1939	1,093,360	99,840	61,449	6,036	33,960
1940	1,093,360		32,800	2,995
1941	1,093,360		63,601

During 1938 the par value of the common stock was reduced from $ 100 to $ 20 per share by the issuance of five shares for each one old share. All of the outstanding preferred stock was retired during 1940. The stock dividend of $ 40,000 paid in 1936 consisted of $ 15,000 in preferred stock of another corporation owned by the Schuhmacher Co. and the balance of $ 25,000 in cash or in stock of the Schuhmacher Co., at the option of the stockholder. The stock dividends of $ 51,200 in 1937 and $ 33,960 in 1939 were payable in cash or in stock of the Schuhmacher Co., at the option of the stockholder. The common stock was never listed on any stock exchange.

The following schedule shows the gross sales and net income as shown by the books after deducting all Federal taxes of the Schuhmacher Co. for the years 1930 to 1941, inclusive, and the amount of net income from properties not used in the business included in net income:

		Net income	Net income
Year	Gross sales	as shown by	from properties
		books	not used
			in business
1930	$ 6,088,054	$ 8,455
1931	5,046,914	2,597
1932	4,480,108	Loss (18,268)
1933	4,493,436	81,965
1934	5,267,531	128,948
1935	5,880,282	101,711
1936	6,995,624	92,311	$ 15,042
1937	7,563,730	146,532	5,483
1938	7,546,461	124,815	15,394
1939	7,557,091	168,953	16,335
1940	8,123,259	132,808	17,914
1941	9,938,645	163,568	21,654

The consolidated balance sheets of the Schuhmacher Co. and Minimax Stores as of December 31, 1940 and 1941, were as follows:

ASSETS
Cash on hand and in banks
Notes and accounts receivable
Merchandise inventories
Life insurance on officers, cash or
loan value
Employees -- Notes receivable and
advances
Real estate not used in business
(cost):
	Land
	Improvements	1940, $ 425,175.22	1941, $ 424,881.22
	Less depreciation	131,660.46	141,124.76
Securities -- unlisted:
	Stocks (cost)
Deferred charges
Fixed assets -- Used in business:
	Land (cost)
	Buildings, machinery,
	fixtures, trusts, etc.	1 1940, $ 368,762.79	1 1941, $ 395,539.12
	Less depreciation	171,184.52	196,108.80
Good will, franchise, etc. -- subsidiary
LIABILITIES
Notes payable -- unsecured
Mortgages payable on real estate
Accounts payable -- merchandise, expenses, etc
	Officers and employees
	Other liabilities
Reserve for accrued liabilities:
	Accrued salaries and bonuses
	Taxes -- other than income taxes
	Federal income taxes
	Other liabilities
Employees' trust fund
Notes payable -- stockholders -- due on or before 7/1/45
Minority interest:
	7% cumulative preferred stock, par value
Capital stock issued, par value			$ 1,100,000.00
Less treasury stock, par value			6,640.00
Surplus -- earned
	Total

		Dec. 31, 1940	Dec. 31, 1941
ASSETS
Cash on hand and in banks		$ 183,347.65	$ 189,308.99
Notes and accounts receivable		537,344.01	634,860.39
Merchandise inventories		1,004,557.60	1,285,814.51
Life insurance on officers, cash or
loan value		25,422.85	27,174.35
Employees -- Notes receivable and
advances		17,641.21	12,648.03
Real estate not used in business
(cost):
	Land	86,796.07	89,548.49
	Improvements
	Less depreciation
		293,514.76	283,756.46
Securities -- unlisted:
	Stocks (cost)	4,128.64	4,128.64
Deferred charges		4,881.61	4,356.60
Fixed assets -- Used in business:
	Land (cost)	61,100.00	62,000.00
	Buildings, machinery,
	fixtures, trusts, etc.
	Less depreciation
		197,578.27	199,430.32
Good will, franchise, etc. --
subsidiary		7,730.57	10,234.50
		2,424,043.24	2,803,261.28
LIABILITIES
Notes payable -- unsecured		350,000.00	677,000.00
Mortgages payable on real estate		114,000.00
Accounts payable --
merchandise, expenses, etc		154,014.82	126,153.90
	Officers and employees	18,782.43	14,355.76
	Other liabilities	10,216.58	4,839.81
Reserve for accrued liabilities:
	Accrued salaries and bonuses		64,029.82
	Taxes -- other than income taxes	13,875.41	13,371.65
	Federal income taxes	42,418.56	88,918.96
	Other liabilities	16,917.56	4,693.01
Employees' trust fund		1,249.32	1,090.99
Notes payable -- stockholders --
due on or before 7/1/45		65,480.00	65,480.00
Minority interest:
	7% cumulative preferred stock, par value	2 25,100.00	2 20,450.00
Capital stock issued, par value
Less treasury stock, par value
		1,093,360.00	1,093,360.00
Surplus -- earned		3 518,628.56	3 629,517.38
	Total	2,424,043.24	2,803,261.28

The consolidated net worth as shown by the books of account of the Schuhmacher Co. and its subsidiary, Minimax Stores, was $ 1,611,988.56 at December 31, 1940, and $ 1,722,877.38 at December 31, 1941. The net worth of the Schuhmacher Co. as shown by its balance sheet as of December 31, 1939, was $ 1,576,350.73, of which $ 99,840 was allocable to preferred shares.

Sales of the common stock of the Schuhmacher Co. were made during the period from March 19, 1940, to December 16, 1942, as follows:

Date	Sold by --	Sold to --	Shares sold	Price paid
				per share
Mar. 19, 1940	R. P. Wilcox	H. C. Robson	50	$ 22
	R. P. Wilcox	H. C. Robson	13	22
Dec. 27, 1940	W. G. Harsha	Constance Hall	25	20
Feb. 26, 1941	E. Middleton	John W. Schuhmacher	25	21
	E. Middleton	Harry Schuhmacher	25	21
	E. Middleton	M. R. Robson, Jr	50	21
	E. Middleton	Robt. H. Perlitz	50	21
	E. Middleton	C. A. Perlitz, Sr	50	21
Apr.  3, 1941	E. Longini	C. A. Perlitz, Sr	75	20
May   8, 1941	Elizabeth Grosse	Harry Schuhmacher	16	22
	Elizabeth Grosse	John W. Schuhmacher	17	22
	Elizabeth Grosse	Robt. H. Perlitz	16	22
	Elizabeth Grosse	H. C. Robson	16	22
	Elizabeth Grosse	Mayme E. Perlitz	16	22
Apr.  9, 1942	Agnes Robson	H. C. Robson	2	20
Apr.  9, 1942	E. Middleton	E. F. Oeding	200	23
May   4, 1942	Will H. Perlitz	L. M. Hamblen	19	22
May   4, 1942	E. Longini estate	P. A. Gogler	50	20
Dec. 16, 1942	E. Longini estate	C. A. Perlitz	22	20
	E. Longini estate	R. H. Perlitz	22	20
	E. Longini estate	H. C. Robson	22	20
	E. Longini estate	P. A. Vogler	24	20
		Total	805

The sale by Elizabeth Grosse, nee Hopper, whose mother was a Schuhmacher, on May 8, 1941, of 81 shares was handled by her husband, H. W. Grosse. Prior to the sale he submitted a financial statement of the company to Robert Maroney of Maroney-Beissner Investment Co. and asked his opinion as to the value of the stock. A few days later Maroney advised that in his opinion $ 22 a share was a fair price for the stock. Thereupon Grosse offered to sell the 81 shares to John Schuhmacher at that price. Neither H. W. Grosse nor his wife was under any financial stress at the time, and they had access to the records of the company to determine the book value, past earnings, and dividend payments of the company. They had no other connection with the company. There was no restriction on the sale of the stock to an outsider, or any obligation to sell it to any member of the Schuhmacher, Robson, or Perlitz families. E. F. Oeding, who had been an employee of the Schuhmacher Co. since 1911 and who owned 156 shares of stock, in 1942 desired to secure additional shares. He contacted various holders of the stock, offering to buy, and as a result E. Middleton, a retired employee of the company, offered to sell him 200 shares at $ 25 a share. Oeding purchased the 200 shares from Middleton at $ 23 a share. E. Longini, a friend of John Schuhmacher, purchased his stock upon the organization of the company, and was not interested in the company except as a stockholder. After his death his estate sold some of his stock.

From 1938 through the middle of 1942 the First National Bank of Houston made loans on the Schuhmacher Co. stock on the basis of $ 10 a share.

Following the invasion of France by the Germans in May of 1940, the securities markets experienced a break in prices. By the fall of 1940 there had been a slight recovery. After that they experienced advances in prices which continued until the Japanese attack on Pearl Harbor, on December 7, 1941, when a break in prices occurred, followed by a substantial decline.

In determining the deficiencies in controversy, the respondent determined that the fair market value (1) of the community one-half interest in 8,214 shares of common stock in the Schuhmacher Co. included in the gross estate of Henry C. Schuhmacher was $ 31 a share on September 28, 1940, the date of his death, (2) of the community one-half interest in 6,868 shares of the same class of stock in the same company of Julia Agnes Robson and the 1,297 shares of such stock owned by her as her separate estate, included in her gross estate, was $ 34 a share on December 23, 1941, the date of her death, and (3) of the 4,107 shares of the same class of the stock in the same company was $ 34 a share on December 24, 1941, the date Mrs. Schuhmacher made gifts of such shares.

The fair market value (1) of the shares of common stock in the Schuhmacher Co. included in the gross estate of Henry C. Schuhmacher was $ 23 a share on September 28, 1940, (2) of the shares of such stock included in the gross estate of Julia Agnes Robson was $ 24 a share on December 23, 1941, and (3) of the shares of such stock that were the subject of gifts by Mrs. Schuhmacher was $ 24 a share on December 24, 1941.

OPINION.

The shares of common stock in the Schuhmacher Co. included in the gross estates of Henry C. Schuhmacher and Julia Agnes Robson, respectively, as well as the shares that were the subject of gifts by Mrs. Schuhmacher, were reported as having a value of $ 22 a share on the respective critical dates. By amended petitions and on brief, the petitioners respectively allege that the value of the respective blocks of the stock on the critical dates was not in excess of $ 18 per share. The respondent contends that the value of the stock included in the estate of Henry C. Schuhmacher was at least $ 31 per share on September 28, 1940, and that the value of the stock included in the estate of Julia Agnes Robson and that involved in the gifts by Mrs. Schuhmacher was at least $ 32 per share on the respective critical dates, December 23 and December 24, 1941.

After considering all of the evidence, including opinion testimony, bearing on the question, we have found as facts that on September 28, 1940, the fair market value of the common stock in the Schuhmacher Co. included in the gross estate of Henry C. Schuhmacher was $ 23 a share, that on December 23, 1941, the fair market value of such stock included in the gross estate of Julia Agnes Robson was $ 24 a share, and that on December 24, 1941, the fair market value of the stock involved in the gifts by Mrs. Schuhmacher was $ 24 a share.

The respondent determined that the gifts of 200 shares of common stock of the Schuhmacher Co. by Mrs. Schuhmacher to each of her 5 minor grandchildren were gifts of future interests and that she was not entitled to 5 exclusions of $ 4,000 each. Accordingly, he reduced the claimed exclusions of $ 36,000 by $ 20,000 to $ 16,000. At the hearing and on brief respondent also contends that such gifts were made in trust and therefore no exclusions are allowable under section 1003 (b) (2) of the Internal Revenue Code, ² since the gifts were made after 1928 and before 1943.

It is contended by the petitioner-donor that the gifts under the letter of December 23, 1941, were gifts of present interests to her grandchildren and, therefore, she is entitled to five exclusions of $ 4,000 each.

It is true, as argued by the petitioner, that the first two paragraphs of her letter of December 24, 1941, indicate an intention to give outright a present interest in the 4,107 shares to the designated donees, which included the 5 grandchildren. However, the intention of the donor must be ascertained from the letter as a whole. The third and last paragraph of the letter contains specific directions as to the gifts made to the 5 grandchildren. Although in the first paragraph of the letter the sons, John and Harry Schuhmacher, are authorized to cause the 4,107 shares to be transferred to the respective donees thereafter named, which lists of donees includes the names of the 5 grandchildren, it is specifically provided in the last paragraph that the "stock which I have designated as gifts to my grandchildren" shall "be issued in the name of their respective fathers, and held by them, as Guardian, for the benefit of said grandchildren until such time as each of the grandchildren becomes twenty-one years of age." It was made "specifically a term" of such gifts that the fathers, or their legal representatives, vote the stock so long as it is held by them as guardians." The last paragraph further provides that dividends received on the stock or reinvestment of proceeds of the sale of same "shall be accumulated or used only for the benefit of the various grandchildren." The grandchildren were not entitled to the enjoyment or use of the principal until each became 21 years of age. The use of the income therefrom for their benefit was within the discretion of their respective fathers. Hence, the grandchildren were not entitled, as a matter of right, to the immediate enjoyment or use of the shares or the income therefrom. Furthermore, that the gifts of the shares were prompted by the desire of the donor that her two sons, John and Harry Schuhmacher, have control over the shares, rather than to make gifts in praesenti to her 5 grandchildren, is disclosed not only by her statement in the first paragraph that it was her desire "to see them [her sons] have substantial interests in the properties to which they are devoting their time and talent," but by expressly making the gifts to her grandchildren, subject to the right of her sons to vote the stock so long as it was held by them as guardians. In our opinion the gifts of 200 shares to each of her 5 grandchildren were gifts of "future interests in property" within the meaning of section 1003 (b) (2), supra. United States v. Pelzer, 312 U.S. 399">312 U.S. 399; Ryerson v. United States, 312 U.S. 405">312 U.S. 405; Fondren v. Commissioner, 324 U.S. 18">324 U.S. 18; Commissioner v. Disston, 325 U.S. 442">325 U.S. 442; United States v. Knell, 149 Fed. (2d) 331; and Vivian B. Allen, 3 T.C. 1224">3 T. C. 1224.

The petitioner repeatedly refers to the interests of the five grandchildren as vested. That the interest of a donee is vested is not sufficient; he must have the right "presently to use, possess or enjoy the property," which terms "connote the right to substantial present economic benefit." The question is of time, not when title vests, but when enjoyment begins. Fondren v. Commissioner, supra;Commissioner v. Disston, supra, reversing 144 Fed. (2d) 115.

The petitioner relies primarily upon Smith v. Commissioner, 131 Fed. (2d) 254. That case is distinguishable upon the facts. In that case the court pointed out that the trust instrument there involved contained no specific provision for accumulation or postponement and that the dominant and controlling purpose of the settlor in making the gifts as gathered from the whole instrument, namely, the education and preparation of her four grandchildren for a desirable position in life, repelled the idea of either.

It is specifically stated in the last paragraph of the letter involved here that "neither said stock nor the proceeds of sale or exchange of same, nor the income therefrom, shall ever inure to the benefit of said fathers, except under the laws of descent or distribution, or by will after said grandchildren individually become twenty-one years of age." Since the obligation to support and educate the five minor grandchildren rests upon their respective fathers, the use of the stock or income therefrom for such purposes would violate the explicit directions that neither the stock nor the income therefrom "shall ever inure to the benefit of said fathers." The above statement suggests accumulation and postponement of enjoyment or use of the gifts and repels the idea of the immediate use or enjoyment thereof.

In view of our conclusion that the gifts to the five grandchildren were gifts of future interests, it is not necessary for us to consider the contention of respondent that such gifts were made in trust.

The action of the respondent in disallowing five exclusions of $ 4,000 each is accordingly approved.

Mrs. Schuhmacher contends that she is entitled to a specific exemption of $ 2,868.75 in computing her gift tax liability for 1941, which the respondent has disallowed. She claims that she erred in reporting in her 1935 gift tax return gifts in excess of the value of $ 47,131.25 or more than one-half of the total value of the gifts made by herself and husband in 1935 out of marital community property, and in applying the whole specific exemption of $ 40,000. She contends that she is therefore now entitled to a specific exemption of $ 2,868.75, the difference between the statutory specific exemption of $ 40,000 and one-half of the total value of the 1935 gifts after the deduction of two exclusions of $ 5,000 each, or $ 37,131.25.

The respondent takes no exception to Mrs. Schuhmacher's contention that there was properly includible in her 1935 return only her community one-half interest in the total gifts made out of community property by her and her husband in that year. Nor does he contend that her use of a specific exemption of $ 40,000 in 1935 has in any way enabled her or her husband to obtain the benefit of greater specific exemptions than they were otherwise entitled to. However, he does contend that, since Mrs. Schuhmacher claimed and was allowed the full specific exemption in 1935, it is immaterial whether she reported in that year a greater amount of gifts than she should have, because the year 1935 is not before us and we therefore may not consider and determine the aggregate sum of her net gifts in that year.

As was pointed out in Commissioner v. Disston, supra, the statutory plan for taxing the making of gifts requires the determination of the true and correct aggregate of net gifts for previous years in order to compute the gift tax for a given year. While assessment and collection of tax may not be made for a previous year which is barred by limitations, an examination may be made into events of prior years for the purpose of correctly determining gift tax liability for a year that is still open.

Where in prior years a taxpayer claimed and was allowed exclusions with respect to gifts which were of such a character that no exclusions were properly allowable, the erroneous allowances are to be disregarded in determining tax liability in a later year. Lillian Seeligson Winterbotham, 46 B. T. A. 972; Leo Wallerstein, 2 T. C. 542, and Dora Roberts, 2 T. C. 679. In Carl J. Schmidlapp, 43 B. T. A. 829, petition for review dismissed, C. C. A., 2d Cir., July 7, 1941, the taxpayer claimed one exclusion and part of his specific exemption in his gift tax return for 1933. In his 1934 return he claimed no exclusion, but claimed a part of his unused specific exemption. In a proceeding involving his 1935 tax liability it was held that he was entitled to two exclusions in each of the years 1933 and 1934. Since it was shown that the total amount of the gifts reported in the returns for such years, plus others that should have been included, did not exceed the two exclusions to which he was entitled for each of the years, it was held that he came to 1935 with the full amount of his specific exemption intact.

In view of the foregoing, we think the respondent's contention must be denied. We accordingly hold that Mrs. Schuhmacher is entitled to a specific exemption of $ 2,868.75 for 1941, as claimed.

In the estate tax return for the estate of Henry C. Schuhmacher a deduction of $ 3,000 was taken for miscellaneous administration expenses. The respondent allowed $ 275 of the deduction and disallowed the balance of $ 2,725. In the petition for the estate it is alleged that the respondent erred in failing to allow, in addition to the $ 275, the further amount of $ 2,560, composed of $ 2,000 for executors' fees, payment of $ 525 for accounting service, and $ 35 for attorney's fee. This was denied by the respondent. However, the parties have stipulated that payments of $ 2,000 for executors' fees and $ 525 for accounting services were made and that the $ 275 allowed by the respondent in determining the deficiency was one-half of the amount paid for accounting services. In reconciling the contradiction contained in the stipulation that $ 275 is one-half of $ 525, the respondent concedes on brief that an attorney's fee of $ 25 was also paid for assistance on probate work and that the $ 275 allowed by him in fact represents one-half of the amounts paid for accounting services and attorney's fee. The record otherwise containing no evidence on the point, the respondent's concession as to attorney's fee is accepted as correctly stating the facts. Having allowed $ 275 representing one-half of the payments for accounting services and attorney's fee, the respondent now concedes that one-half of the executors' fees, or $ 1,000, is also deductible. The respondent's concessions narrow down the question to whether the executors' fees, attorney's fee, and payments for accounting services are deductible in full, as the executors contend, or only to the extent of one-half, as the respondent contends. Since the evidence fails to show to what extent the property administered by the executors constituted separate property of the decedent, we assume, for the present purposes, that it consisted entirely of community property. Furthermore, in the absence of evidence to the contrary, we assume that the decedent's surviving widow had not applied for partition of the community property and that no partition had been made.

The primary question for determination is whether the administration of the executors was only as to the decedent's one-half interest in the community property of himself and wife or as to the entire property of the community. The petitioner relies on Blair v. Stewart (C. C. A., 5th Cir., 1931), 49 Fed. (2d) 257; reviewed on other issues, 63 Fed. (2d) 62; certiorari denied, 284 U.S. 658">284 U.S. 658. A question there was whether the funeral expenses of the deceased husband were deductible in computing the estate tax liability of his estate. Upon a review of the Texas statutes and decisions, the court concluded that an executor of a Texas decedent had authority to administer only on the estate of the decedent and therefore could not administer on the community property of the surviving spouse. Accordingly, it was held that the funeral expenses were deductible in full from the decedent's share of the community property.

Thereafter, in 1933, in Lovejoy v. Cockrell (Tex. Com. App.), 63 S. W. (2d) 1009, it was held that under the laws ofTexas the community property as an entity is generally regarded as belonging to the estate of a deceased husband, subject to administration by his executor and the payment of his or the community's debts, the husband being the party during marriage who contracts the debts for the community.

Subsequently, in 1937, in Barbour v. Commissioner (C. C. A., 5th Cir.), 89 Fed. (2d) 474, relied on by the respondent, the court was called on to decide whether one-half of the gain from the sale of community property corporate stock sold after the death of the husband but during the period of the administration of his estate was taxable to the surviving wife as her income, or whether the entire amount of the gain was taxable to the independent executors. The court held that the entire amount of the gain was taxable to the executors, citing with approval Lovejoy v. Cockrell, supra. As to that case, the court said:

* * * In it the law of Texas is examined, its controlling statutes are cited, and it is upon full deliberation held (1) the community property of a husband and his wife is chargeable with the debts of the husband. (2) The community property, for the purpose of paying his debts, which are chargeable to it, is as an entirety regarded in law as belonging to his estate. (3) While the administration of the estate of the deceased husband is pending in the probate court, the entire community property is subject to the exclusive jurisdiction of that court. * * *

The court quoted from the case as follows:

* * * The statute, for the purposes of the statute, regards the community property of the husband and wife, in case there be community debts, as belonging entirely to the estate of the husband, and does not authorize a dismemberment of the estate for administration purposes.

In our opinion, by its approval of Lovejoy v. Cockrell, supra, the Circuit Court of Appeals for the Fifth Circuit inferentially overruled Blair v. Stewart, supra. Furthermore, article 3630, Vernon's Texas Civil Statutes, provides that until partition of community property is applied for by the surviving spouse and made, "the executor or administrator of the deceased shall recover possession of all such common property and hold the same in trust for the benefit of the creditors and others entitled thereto." In Nesbit v. First National Bank of San Angelo (Tex. Civ. App., 1937), 108 S. W. (2d) 318, it is stated that, that community property is subject to the debts of a deceased husband and to administration by his executor, may be regarded as an elementary principle under the laws of Texas. See also Speer's Law of Marital Rights in Texas, 3d ed., § 657. This is applicable not only to estates administered under the jurisdiction of the probate courts, but also to estates administered by independent executors. Jenkins v. First National Bank of Coleman (Tex. Civ. App.), 110 S. W. (2d) 845.

From the foregoing, we conclude that under the laws of Texas the entire community estate is subject to administration by the executor of a deceased husband. Accordingly, only one-half of the administration expenses here in controversy was attributable to the decedent's portion of the estate and only one-half may be deducted in computing the estate tax. Lang v. Commissioner, 97 Fed. (2d) 867; Estate of Oscar Levy, 42 B. T. A. 991.

With respect to the respondent's failure to allow to the estate of Henry C. Schuhmacher and to the estate of Julia Agnes Robson credit for inheritance taxes paid to the State of Texas, the parties have stipulated that, upon submission of evidence of payment of such taxes, allowance of credit therefor is to be made to the extent provided for in the applicable statute and regulations.

Decisions will be entered under Rule 50.

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Footnotes

• 1. Signature on petition is "Katherine Schuhmacher."↩

• 1. Appreciation of $ 13,930.63 included in subsidiary.↩

• 2. No dividends declared or paid on preferred stock since Dec. 31, 1939.↩

• 3. The balance sheet as of Dec. 31, 1940, of Minimax Stores showed a deficit of $ 2,024.38 and as of Dec. 31, 1941, a surplus of $ 3,468.36.↩

• 2. (b) Exclusions from Gifts. --

  * * * *

  (2) Gifts after 1938 and prior to 1943. -- In the case of gifts (other than gifts in trust or of future interests in property) made to any person by the donor during the calendar year 1939 and subsequent calendar years prior to 1943, the first $ 4,000 of such gifts to such person shall not, for the purposes of subsection (a), be included in the total amount of gifts made during such year.↩