Estate of Herbert v. Commissioner

Memorandum Findings of Fact and Opinion

The Commissioner determined deficiencies of $9,200.28 and $5,525.46 in the petitioners' income taxes for the years 1938 and 1939, respectively.

The primary issue to be decided is whether or not the difference between the fair market value of a claim on the date of death and the amount of money, plus the fair market value of property, subsequently realized by the petitioners is taxable as income. *421 If it be held that this difference is taxable, then a secondary issue is presented, whether the difference is taxable as ordinary income or as a capital gain.

Findings of Fact

The facts were stipulated and as so stipulated are adopted as findings of fact. In so far as material to the issues they are substantially as follows:

The petitioners are the duly qualified and acting executors of the Estate of John W. Herbert, deceased. The decedent died August 26, 1934, owning a claim against The Peoples Realty Company, a New Jersey corporation, hereinafter referred to as Peoples, in the amount of $531,817.75. This claim was partially represented by notes and partially by an open account. On the date of death this claim had a fair market value of $200,191.90.

The petitioners collected $282,500 in cash from Peoples in the sums and years as follows:

In 1939 Peoples, on account of the claim, transferred to the petitioners participating interests in two mortgages. The aggregate fair market values of these interests at the time of the transfer was $13,303.61.

Opinion

VAN FOSSAN, Judge: By receiving the cash and accepting the participating*422 mortgage interests, the petitioners clearly realized a gain represented by the difference between the stipulated value of the claim on the date of death and the amount of cash and its equivalent received by them. The case falls squarely within the reasoning and decision of the Court in .

Petitioners contend that if the sum in question be taxable, it should be treated as capital gain and not as ordinary income. In order to be taxable as capital gain there must be a "sale or exchange of a capital asset." (Sec. 117, Revenue Act of 1938). No such situation is presented by the transaction under consideration. Petitioners sold no asset. On the contrary, a claim which they held was liquidated in part. Peoples received nothing but a pro tanto release from liability. There was no "sale or exchange" of a capital asset. The gain must be taxed as ordinary income. See ; ; ; .*423

Decision will be entered under Rule 50.