Linderman v. Commissioner

*113 This proceeding was brought to redetermine a deficiency of $9,923.50 in the income tax of Mary M. Bindley, deceased, for the period of January 1, 1929, to November 13, 1929, inclusive.

The petitioner alleges that the respondent erred in disallowing as deductions from income expenses aggregating $51,137.18 paid for decedent during the taxable period incident to a guardianship of her property and estate.

Mary M. Bindley died on November 13, 1929, and the petitioner is the duly appointed and qualified executor of her will.

The material facts were stipulated and from the stipulation of facts and the pleadings we make the following findings of fact.

FINDINGS OF FACT.

On August 30, 1929, the Court of Common Pleas of Allegheny County, Pennsylvania, adjudicated Mary M. Bindley a mentally incompetent person, and appointed the Commonwealth Trust Company of Pittsburgh, Roy G. Bostwick and John H. Musgrave, all of Pittsburgh, Pennsylvania, guardians of her estate. The said guardians immediately took possession of her estate and managed it in the manner*1185 provided by law until her death.

Mary M. Bindley died on November 13, 1929, leaving a will, in which William S. Linderman was named as sole executor of the *114 estate of the decedent, and he is the person legally entitled to institute this proceeding.

At the time of the death of the decedent, and for many years prior thereto, she was domiciled in the State of Pennsylvania, with her residence in the city of Pittsburgh, County of Allegheny. At all times material the decedent's books were kept and her income tax returns were filed upon the cash receipts and disbursements basis. Her taxable year was the calendar year.

The will of the decedent was contested, and the Register of Wills of Allegheny County, Pennsylvania, the tribunal having original jurisdiction of the matter, refused to admit the will to probate or to issue letters testamentary thereon, or to let the executor named in the will, William S. Linderman, assume possession of the estate of the decedent until the contest was finally heard and decided. On November 29, 1929, the Register of Allegheny County, Pennsylvania, appointed George J. Campbell, of Pittsburgh, Pennsylvania, administrator of the estate of*1186 the decedent, pendent lite. The administrator pendente lite thereupon took possession of the estate of the decedent and did and performed those acts with respect thereto as required by law. Upon the appointment of the administrator pendente lite, the executor named in the will of the decedent, William S. Linderman, by proper proceedings, caused the will contest and record therein to be removed from the Register of Wills of Allegheny County, Pennsylvania, to the Orphans' Court of Allegheny County, Pennsylvania, which tribunal thereupon assumed complete jurisdiction of the controversy. The will contest was then withdrawn and the matter of probate of the will way by that court remitted to the Register of Wills. On December 28, 1929, the Register of Wills admitted the will of the decedent to probate and issued letters testamentary to the executor named therein, William S. Linderman, who, as such executor, immediately entered into possession of the estate of the decedent, and has since that time continuously been in possession thereof.

On March 15, 1930, the executor of the estate of the decedent, William S. Linderman, filed an income tax return for the decedent, covering*1187 the period of the calendar year 1929 prior to her death, i.e., January 1, 1929, to November 13, 1929. He included therein all taxable income received by the decedent or by her guardians during that period.

Upon the appointment of George J. Campbell as administrator pendente lite of the estate of the decedent, the guardians turned over to him, George J. Campbell, as such administrator, cash, securities, and other property of the aggregate value of $3,615,785.74, retaining in their hands to cover the expenses of the guardianship *115 approximately $200,000. The guardianship books were kept on a cash receipts and disbursements basis.

During the lifetime of Mary M. Bindley, subsequent to her adjudication as a mental incompetent, her committee or guardians incurred expenses which were paid and entered on the guardianship books as indicated below:

*1188 Early in the year 1930 the guardians turned over to the executor of the estate of the decedent, William S. Linderman, the sum of $152,129.86, representing the excess of the amount retained by the guardians to cover the expenses of the guardianship, except for an amount hereinafter mentioned.

On April 28, 1930, the guardians filed their first and final account in the Court of Common Pleas, which account disclosed, inter alia, the expenses and disbursements set forth above. This account was filed at the same number and term, i.e., in the same proceeding, in which the guardians had been appointed. The account of the guardians was confirmed by the court, and the court entered an order directing the guardians to pay over to the executor, William S. Linderman, the undistributed balance of $8,389.63, which was done.

In the State of Pennsylvania, the Register of Wills for the county of domicile of the decedent has original jurisdiction for the probate of wills. The Orphans' Court has appellate jurisdiction of the probate of wills, i.e., appeals from probates granted by the Register are taken to the Orphans' Court; and a pending will contest may be taken from the Register prior*1189 to probate and heard by the Orphans' Court. Accounts of executors and administrators, however, are filed in and audited by the Orphans' Court and that tribunal enters the necessary decrees of distribution. The Orphans' Court has no jurisdiction to adjudicate any adult person mentally incompetent or to appoint a guardian for any such person or to pass upon the account of any such guardian. The Court of Common Pleas is the tribunal, in Pennsylvania, having jurisdiction to adjudicate adult persons mentally incompetent and to appoint guardians for their estates. When an account is filed by a fiduciary in either *116 the Orphans' Court or the Court of Common Pleas showing receipts and expenditures, any party having an interest in the estate may except to any expenditure shown in the account. If the exception is sustained, an order of surcharge is made against the accounting fiduciary for the amount of the expenditure excepted to, sometimes with interest and sometimes without interest. The accountant is personally liable for such surcharge.

In the income tax return filed on behalf of the decedent by the executor, as set forth above, the aforesaid expenses aggregating $51,137.18*1190 were claimed as a deduction. The deficiency notice was mailed May 18, 1931. In his determination of the deficiency involved the Commissioner disallowed the deductions so claimed. The reasons assigned by the Commissioner for such disallowance are as follows:

Inasmuch as the return of the decedent was filed on a cash receipts and disbursements basis, in accordance with article 332 of Regulations 74, the action of the agent in disallowing the deduction has been sustained since the amounts in question were not paid during the lifetime of the decedent; nor was each guardian's share of commissions set aside on the records and charged to the decedent's account prior to her death.

The following laws and decisions of the State of Pennsylvania shall be deemed in evidence: Act of May 28, 1907, Pamphlet Laws 292, as amended by section 1 of the Act of April 15, 1915, Pamphlet Laws 124; ; Frankenfield's Appeal, 11 Weekly Notes of Cases 373; Bull v. Towson, 4 Watts & Sargent, 557; *1191 ; Appeal of Freeman, 22 Weekly Notes of Cases 173.

OPINION.

VAN FOSSAN: There is but one issue in this proceeding; i.e., whether or not certain expenses incurred during the lifetime of decedent and aggregating $51,137.18 are deductible from the gross income of Mary M. Bindley for the period from January 1 to November 13, 1929, inclusive. The deduction was disallowed because the expenses "were not paid during the (decedent's) lifetime" and because "each guardian's share of the commissions" was not "set aside on the records and charged to the decedent's account prior to her death."

In our opinion the respondent has failed to distinguish between the two capacities in which the guardians functioned; first, as Mary Bindley's guardians during her lifetime, her representatives, charged with the duty of conserving her estate and collecting the income thereof; and, second, as statutory guardians rendering an account of their stewardship.

*117 A guardian or committee of an incompetent person is not a taxable person under the statute. He merely acts for and on behalf of his ward. The tax return is made in the ward's name. The*1192 title to the property in the possession of the guardian is in the ward. The guardian transacts all business in the ward's name and manages the estate for the ward's benefit.

On August 30, 1929, Mary Bindley was adjudicated a mentally incompetent person and by duly constituted authority her guardians took possession of her estate. She died on November 13, 1929, within the calendar year and hence the taxable period for computing the income tax on income received by her or by her guardians for her was January 1, 1929, to November 13, 1929.

When Mary Bindley died the relationship of guardian and ward was terminated. ; ; ; ; . Thereupon the guardians became merely custodians of the ward's property for the purpose of making a final accounting and settlement. ; *1193 . Thereafter the guardians could perform no affirmative acts as her representatives. Whatever books were kept by them reflecting their business transactions for the ward were theoretically closed at the date of her death. Subsequent entries were only memoranda indicating the nature and amount of the items entering into the preparation of the guardians' account to be rendered to the court. Furthermore, at her death the guardians immediately became debtors to the estate for the net balance of funds returnable to the estate and all book entries subsequently made were made in such capacity. Bull v. Towson, 4 Watts & Sargent, 557; Crowell's Appeal, 2 Watts (Pa.) 295. The amount of the ward's estate, passing to her executor, was the net amount in the hands of the guardians after deducting all proper expenses paid or incurred during the guardianship. It is not questioned in this case that the items in question, consisting principally of guardians' and attorneys' fees, were proper expenses.

The books kept by the guardians would seem to show that these expenses were paid subsequent to the ward's death. *1194 But under the reasoning of the above cases we deem this fact of book entry immaterial. It is stipulated by the parties that the expenses were incurred during the lifetime of the decedent. The payment related to the guardianship and the guardian fees accrued automatically as the guardianship progressed. They were a proper charge against the funds in the hands of the guardians. The funds that came into the *118 hands of the guardians were obviously more than sufficient to pay these items of expense. The amounts due on account of such items were determinable as of November 13, 1929, the date of the death of the ward and of the automatic termination of the active guardianship. By their very nature they attached to the income of the estate. By the same token they bore no relation to the estate in the hands of the executor, they were incurred prior to the death of the ward and the creation of the executorship. They never passed out of the hands of the guardians. The final accounting of the guardianship was as of the date of the death of the ward. Thereafter they could not encumber the estate. Such items belonged to the guardianship and in no sense were debts of the estate. *1195 Appeal of Freeman, 22 Weekly Notes of Cases 173. A priori, they could not be deducted by the estate as expenses and if not deducted from the income of the ward to which they adhered, deduction would never be permitted. Thus it may very properly be said that although the books bore entries of later date, so far as the ward was concerned these expenses were paid as of November 13, 1929, the date of her death. The assets of the ward which were charged with their payment were in the hands of the guardians on that date. Though we do not rest our decision solely on that ground, the least that can be said is that in the legal posture of the parties the expenses were constructively paid on or before November 13, 1929.

Section 41 of the Revenue Act of 1928 provides:

The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; * * * or if the method employed does not clearly reflect the income, the computation shall be in accordance with such method as in the opinion of the Commissioner does clearly*1196 reflect the income. * * *

while section 43 of the same act provides:

The deductions and credits provided for in this title shall be taken for the taxable year in which "paid or accrued" or "paid or incurred", dependent upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income the deductions or credits should be taken as of a different period.

Only by the treatment of the expenses of the guardianship as deductible from the gross income of the decedent during the guardianship can her net income be clearly or properly reflected. Such a treatment is expressly authorized by the statute and is correct in principle.

Reviewed by the Board.

Decision will be entered for the petitioner.

STERNHAGEN, ARUNDELL, MURDOCK, and LEECH dissent.