Kleberg v. Commissioner , 31 B.T.A. 95 ( 1934 )

ROBERT J. KLEBERG, CAESAR KLEBERG AND RICHARD KING, EXECUTORS OF THE ESTATE OF HENRIETTA M. KING, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Kleberg v. Commissioner

Docket No. 52632.

United States Board of Tax Appeals

31 B.T.A. 95; 1934 BTA LEXIS 1162;

August 15, 1934, Promulgated

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">*1162 Ordinary and necessary expenses incurred by executors in carrying on operation of ranch of estate, from date of decedent's death to end of calendar year, were claimed as deductions in computing net income for the period but disallowed by respondent because the same items were also claimed, and allowed, as miscellaneous administration expenses in determining estate tax due. Held, whether or not such amounts were properly allowed in computing estate tax, their deduction in computing income tax is determined solely by provisions of the income tax statute, and under the provisions of the income tax statute the items are deductible.

Leroy G. Denman, Esq., for the petitioners.

John H. Pigg, Esq., for the respondent.

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MATTHEWS

">*95 Respondent determined that there was a deficiency of $22,375.31 in petitioners' income tax for the year 1926, while petitioners contend that there is not only no deficiency, but that they are entitled to a refund of $11,364. Four issues were raised by the pleadings, but three of these have been disposed of by stipulation of the parties and effect will be given thereto in the settlement under Rule 50. The sole issue">*1163 for determination is whether petitioners sustained a statutory net loss in 1925 in the amount of $155,820.68, which is deductible in 1926. Respondent refused to allow petitioners to take certain expenses incurred in operating the ranch of the estate as deductions from income for 1925, for the reason, as respondent contends, that the same expenses had been taken by petitioners and allowed by respondent as deductions from the gross estate in determining the Federal estate tax due.

The parties filed a very voluminous stipulation of facts, to which were attached and made a part thereof various exhibits. Many of ">*96 the facts stipulated are evidentiary in nature, from which we have made findings of the ultimate facts. Only such facts as are necessary to a decision of the case are set forth in our findings of fact.

FINDINGS OF FACT.

The petitioners are the duly appointed, qualified, and acting executors under the last will and testament of Henrietta M. King, who died on March 31, 1925, a resident of Kleberg County, Texas.

At the time of her death decedent was seized of a large tract of land situated in Texas, consisting of approximately 1,000,000 acres. She was also">*1164 the owner of various other property consisting of stocks, bonds, mortgages, notes and miscellaneous property, including a herd of approximately 100,000 head of cattle and other livestock.

At the time of her death, and for many years prior thereto, the tract of land, together with the facilities thereon, was operated by decedent as a cattle-ranching business, the ranch being known as "The King Ranch." Subsequent to the death of the decedent the cattle-ranching business has been carried on continuously by the executors or testamentary trustees. The nature of the business is breeding, raising, fattening, and marketing beef cattle. Approximately 20,000 to 30,000 head are born on the ranch every year and about the same number is marketed.

The books of the estate are kept, and its income tax returns for the years involved in this proceeding were made, upon the basis of cash receipts and disbursements, as were also the books and returns of the decedent prior to her death.

The original income tax return of the estate for the period in 1925 subsequent to decedent's death, April 1 to December 31, 1925, was filed on March 13, 1926, and an amended return was filed on March 15, 1927.

">*1165 On April 27, 1926, an estate tax return was filed. The affairs of the estate were under administration for a period of more than one full year next succeeding the date of death of the decedent, the executors not having yet discharged all of the duties required of them by law and by the decedent's will.

Among the deductions claimed in the income tax return filed for the estate for the period in 1925 succeeding decedent's death, was the amount of $244,574.69 representing the cost of ranch operations. The same deductions were claimed in the amended return which was filed one year later.

Included in the deductions claimed in the estate tax return under "Miscellaneous Administration Expenses" was the amount of $609,892.02. Some of the items going to make up this total were ">*97 the same items which made up the $244,574.69, claimed in the income tax return as the cost of ranch operations.

In 1927 the Commissioner had a field audit and examination made for the purpose of determining the correct Federal estate tax. A deficiency of $1,067,046.27 in petitioners' Federal estate tax was recommended, resulting from increasing the value of various items of property and from">*1166 disallowing substantially all the deductions claimed for "Miscellaneous Administration Expenses." The petitioners' protest led to reconsideration, allowance of a part of the disputed item of miscellaneous administration expenses, and the reduction of the proposed deficiency to $802,979.04. Notice of a deficiency in this amount was sent to the executors of the estate, in which the items here involved were included in "Miscellaneous Administration Expenses" allowed. The executors filed a petition with this Board, Docket No. 40466, on August 27, 1928. The respondent, in his answer, affirmatively pleaded that practically all of the amount of the miscellaneous administration expenses had been erroneously allowed, and asked that they be disallowed. Negotiations looking to a settlement in the Bureau followed between the parties. A committee appointed by the respondent to consider the case recommended the disallowance of approximately $463,000 of the miscellaneous administration expenses which had been allowed in the notice of deficiency, and reached the conclusion that the value of the net estate was $5,147,100, and the deficiency assessable about $324,000. The estate rejected the committee's">*1167 recommendation. Further negotiations finally resulted in a stipulation signed by Caesar Kleberg, executor, and his counsel, on December 5, 1929, as follows:

It is hereby stipulated and agreed by and between the parties to the above-entitled proceeding, through their respective attorneys, that there is a deficiency in estate tax due from this estate in the amount of $200,000.00 against which the estate is entitled to a credit pursuant to Section 301(b) of the Revenue Act of 1924, of $50,000.00, leaving an undischarged deficiency in estate tax due from this estate in the amount of $150,000.00, and that the Board may enter an order so determining the deficiency without notice to either party.

It is understood and agreed that the Commissioner may assess and collect the said deficiency immediately upon the issuance by the Board of its order of redetermination, without regard to the restrictions, if any, contained in Section 308 of the Revenue Act of 1926.

On December 17, 1929, the executors paid the deficiency in estate tax in the amount fixed by the settlement agreement of December 5, 1929, above.

On January 9, 1930, the General Counsel of the Bureau presented the situation">*1168 fully to the Commissioner by letter and obtained his approval of a settlement of a deficiency of $200,000 less state inheritance tax credit. In arriving at this deficiency, the miscellaneous ">*98 administration expenses allowed in the notice of deficiency were approved and allowed.

On February 8, 1930, the parties filed with this Board a stipulation, signed by the Commissioners' General Counsel and petitioners' counsel, to the effect that there was no deficiency and no overpayment in estate tax, and that there had been an overassessment in the sum of $132,746.30. On the same day this Board entered its decision in Docket 40466, as follows:

Under written stipulation signed by counsel for the parties in the above-entitled proceeding and filed with the Board on February 8, 1930, it is

ORDERED and DECIDED: That there is no deficiency and no overpayment in estate tax with respect to the above-named estate.

The parties have stipulated that petitioners sustained a statutory net loss of $155,820.68 for the period April 1 to December 31, 1925, the taxable period next succeeding the death of the decedent, if the items hereinafter more specifically set out and aggregating $244,574.69">*1169 are deductible from gross income received in the same period; but if not deductible, the petitioners did not sustain a net loss but had net income for the same period of $88,754.01.

The disputed sum of $244,574.69 consists of the following items:

Cost of ranch operations:
Care livestock - labor and supplies	$95,515.39
Feed livestock - labor and supplies	50,466.62
Water facilities - labor and supplies	7,944.14
Care fences	8,502.38
Ranch kitchen	7,530.23
Ranch camp kitchen	5,856.20
General ranch expense	12,656.38
Chickens and chicken yard	1,066.94
Grubbing pastures	10,012.34
Land rent	45,024.07
	-----------
	244,574.69

All of the above items claimed as deductions were ordinary and necessary expenses paid in carrying on the ranching business of the estate.

Three other issues raised by the pleadings are settled by the stipulation and effect will be given thereto in the computation under Rule 50.

OPINION.

MATTHEWS: The income tax deficiency involved is $22,375.31 for the year 1926. The petitioners also claim an overpayment of $11,364 for the same year.

The sole matter in controversy is the deductibility in 1926 as a statutory">*1170 net loss, under section 206(a)(1), (b), and (g) of the Revenue Act of 1926, of $155,820.68 claimed by petitioners to have ">*99 been sustained in 1925. Whether there was such a net loss depends in turn upon the deductibility from petitioners' gross income for 1925 of items in the aggregate of $244,574.69, representing cost of ranch operations during this taxable period, from decedent's death on March 31, 1925, to December 31, 1925. No question is made by the respondent as to these expenditures being "ordinary and necessary expenses" under section 214(a)(1), and, from the facts stipulated as to their character, we have made the finding that they were ordinary and necessary expenses. As such they were properly deductible from petitioners' income for 1925 unless they should be disallowed under the respondent's contention.

Respondent contends that the petitioners did not sustain a statutory net loss for the year 1925, for the reason (a) that the items of expenses upon the basis of which the claimed loss is predicated have been properly allowed by the Commissioner as deductions from the petitioners' gross estate in computing estate tax liability, and (b) that the estate elected">*1171 to claim and to receive the benefit and advantages flowing from the allowance of the expenses as deductions from its gross estate for estate tax purposes and is, therefore, estopped to deny that it made such election.

The petitioners contend (1) that, disregarding the relationship of the items to the estate tax return, they are deductible in the income tax return; (2) that, even if the items were allowed in computing the Federal estate tax, they are, nevertheless, deductible in computing income tax, and (3) that the facts in reference to the handling of the items in the estate tax return were not such as to estop taxpayer from deducting them in computing income tax.

Petitioners also contend that the items were not allowed in the estate tax return. From a careful examination of all of the documents submitted in evidence and of the facts stipulated, we are of the opinion and have so found that the items were allowed as a deduction in determination the amount of the deficiency in estate tax which was finally agreed upon.

The facts do not support respondent's contention that petitioners "elected" to take these expenses as estate tax deductions rather than as income tax deductions. ">*1172 Petitioners filed their original income tax return for the period April 1 to December 31, 1925, on March 13, 1926, in which the disputed items of expenses were claimed as deductions. They were also claimed in the amended income tax return filed on March 15, 1927. The original estate tax return was not filed until April 27, 1926. As the income tax deductions in controversy were originally claimed prior to the estate tax deductions, and simultaneously with the latter, through succeeding years, there is nothing upon which to rest an "election" by petitioners in favor of the estate tax deductions. Cf. .

">*100 It is not necessary to a decision of the issue before us to determine whether the amounts in question were properly allowed as "Miscellaneous Administration Expenses" in computing the Federal estate tax liability. Assuming that such amounts were properly allowed as deductions in computing estate tax, whether they are deductible in computing income tax is determined by the provisions of the statute imposing the income tax.

The estate tax and the income tax are different in kind and wholly disparate in their incidence. ">*1173 ; ; ; ; ; ; affd., ; ; .

The estate tax is an excise tax on the transfer of property occasioned by death. The measure of the tax is the net estate of the decedent, which is the value of the gross estate less certain statutory deductions. Only the property owned by decedent at the time of his death is included in gross estate, while some of the deductions allowed are for claims and expenses arising after death. Whether such expenses should be allowed conditionally or unconditionally, or whether any deductions should be allowed, was wholly within the discretion of Congress.

The income tax is an annual tax imposed upon the net income received by the taxpayer in the taxable year. Net income is gross income less deductions. While Congress cannot by legislative">*1174 fiat make something income which is not income, it is a matter wholly within the discretion of Congress as to what deductions shall be allowed in computing the net income subject to tax, and whether such deductions shall be granted conditionally or unconditionally. .

Deductions allowable in computing the estate tax are determined under the provisions of the statute imposing an estate tax. Deductions allowable in computing income tax are determined under the provisions of the statute imposing the income tax. If an item is properly deductible under some provision of the estate tax law in determining the net estate subject to the tax, and the same item is also deductible under a provision of the income tax law in determining the net income of the estate subject to income tax, that fact does not militate against the allowance in either levy.

Under the provisions of section 219(a)(3) of the Revenue Act of 1926 the income received by estates of deceased persons during the period of administration or settlement of the estate is subject to income tax. Paragraph (b) of the same section provides that the ">*101 ">*1175 tax shall be computed upon the net income of the estate and shall be paid by the fiduciary, and that such net income shall be computed in the same manner and on the same basis as provided in section 212. Under the provisions of section 212 the term "net income" means the gross income as defined in section 213, less the deductions allowed by sections 214 and 206.

Section 214 provides that "In computing net income there shall be allowed as deductions: (1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *." This deduction is an unconditional allowance of all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

The executors carried on the ranching business of the estate from the date of decedent's death through the period here involved and subsequent thereto. In carrying on such business, expenses were necessarily incurred. In 1925 the gross income derived during the period April 1 to December 31 was over $400,000. Among the ordinary and necessary expenses incurred in earning this income were the items here in issue in the total sum of $244,574.69. ">*1176 Such amount is, therefore, deductible in determining the net income subject to tax. Since the deduction of these amounts resulted in a net loss, as defined in section 206, such net loss is deductible in computing net income for 1926.

Judgment will be entered under Rule 50.