1957 U.S. Tax Ct. LEXIS 130">*130
When Ernst Zobel died in 1933, his son, Hans Zobel, owed him approximately $ 50,000. This debt was appraised for Federal estate tax purposes as having no value. In 1948, 1951, and 1952, payments on the debt were made to the decedent's estate totaling $ 18,000. The Estate of Ernst Zobel (petitioner) did not include any part of these payments in income in the years in question.
28 T.C. 885">*885 OPINION.
Respondent determined deficiencies in income tax of the Estate of Ernst Zobel as follows:
Year | Deficiency |
1948 | $ 1,824.48 |
1951 | 854.88 |
1952 | 949.05 |
The respondent, in his notice of deficiency, determined a deficiency for 1948 in the amount of $ 1,824.48, but the parties stipulated for a conditional increased deficiency making the total deficiency for the year 1948, $ 2,520.56. 1957 U.S. Tax Ct. LEXIS 130">*132 The petitioner, in the stipulation, consented to the entry of a decision by this Court for the increased deficiency without the necessity of an amendment of respondent's answer. Such consent was conditioned upon a decision of this Court sustaining the respondent's determination that the amounts specified in the deficiency notice constitute income to the Estate of Ernst Zobel.
The only questions are (1) whether certain payments received by petitioner estate, in settlement of an obligation due the estate, which obligation had been given a zero value at the time of decedent's death, constitute taxable income and (2) if so, were the moneys so received by petitioner estate taxable as ordinary income or at the capital gain rate?
All the facts are stipulated and are found accordingly.
Ernst Zobel died testate on April 3, 1933, a resident of Brooklyn, New York. The executors named in the will died and prior to 1948 Frederick C. Zobel was appointed, and at the date of this hearing was 28 T.C. 885">*886 still serving, in the capacity of administrator with the will annexed of the Estate of Ernst Zobel, the petitioner.
The present administrator, on behalf of the petitioner, filed cash basis Federal1957 U.S. Tax Ct. LEXIS 130">*133 income tax returns for 1948 and 1951 with the then collector of internal revenue, and for the year 1952 with the district director of internal revenue, at Newark, New Jersey.
At the time of the death of Ernst Zobel, his son, Hans E. Zobel, was indebted to him in the sum of $ 50,041.35. On the Federal estate tax return for the Estate of Ernst Zobel it was reported that this debt had "No Value," and the respondent accepted the zero valuation in appraising the value of the debt for estate tax purposes. The market value of the debt as of the date of death of Ernst was, in fact, zero.
The indebtedness of $ 50,041.35 due from Hans to Ernst at the death of Ernst was not deducted as a bad debt in any income tax returns filed by Ernst, nor in any such returns filed on behalf of Ernst after his death.
After the death of Hans Zobel in 1947, the estate of Ernst filed a claim against the estate of Hans for the unpaid balance of the debt which had been reduced somewhat by small payments made on account from time to time. On April 27, 1948, a settlement agreement was entered into between the representatives of the two estates. Under this agreement, the estate of Hans agreed to pay the estate1957 U.S. Tax Ct. LEXIS 130">*134 of Ernst, in full satisfaction and discharge of the debt arising out of the indebtedness of Hans to Ernst, the sum of $ 18,000, payable $ 9,000 on the execution of the agreement and the remaining $ 9,000 on January 10, 1949.
It was also agreed that the estate of Hans would release the estate of Ernst from any claim to any part of the $ 18,000 to be paid to the estate of Ernst, based upon the right of the estate of Hans to a one-eighth share of the estate of Ernst under the will of Ernst.
In accordance with the settlement agreement, the estate of Hans paid to the estate of Ernst, $ 9,000 on April 27, 1948. The remaining $ 9,000 was paid in two installments: $ 4,500 on December 27, 1951, and $ 4,500 on January 15, 1952.
The income tax returns which were filed on behalf of the estate of Ernst for the years involved did not include as income any part of the above payments made in 1948, 1951, and 1952. The respondent determined, and contends, that all of the payments received from the estate of Hans in such years constituted ordinary income to the estate of Ernst and accordingly determined deficiencies in income taxes.
Section 161 of the
Respondent's position is that the sums received by the estate fall within the definition of gross income in
There can be no doubt that such a transaction results in a gain to someone, and
Petitioner sees the necessary exclusion from gross income provision in
There can be no question that the basis at which the estate held the debt was zero. Section 113 (a) (5) provides: "If the property was acquired * * * by the decedent's estate from the decedent, the basis 28 T.C. 885">*888 shall be the fair market value of such property at the time of such acquisition." Here it was stipulated that the fair market value of the debt at the date of decedent's death, which was the date of its acquisition by the estate, was zero.
Section 111 provides that the gain "from the sale or other disposition of property" shall1957 U.S. Tax Ct. LEXIS 130">*138 be the excess of the amount realized therefrom over the adjusted basis which we have seen here is zero. The receipt of payment by an estate of an amount due the estate is a "disposition" and to the extent the amount realized exceeds the basis at which the obligation is held by the estate, a taxable gain results. "We have no doubt that the payment here of the claim held by the estate was a 'disposition' of the claim within the meaning of § 111."
The argument advanced by the petitioner that such income, if income at all, should be accorded capital gains treatment under the provisions of section 117 is without merit. Section 117 defines capital gain as gain from the
It is well settled that where a note is paid by or on behalf of the maker in satisfaction of the maker's liability thereon, a sale or exchange of property, as those words are used in the pertinent provision of the Revenue Act, does not result.
We have nothing more in the instant case than payment and settlement of a debt on behalf of a debtor, in satisfaction of his liability to the owners of the debt. See
Petitioner argues that if a sale or exchange is a necessary element to bring a taxpayer within the provisions of section 117, the instant case is distinguishable from the cases cited by the respondent and that such a sale or exchange existed in the instant case. The argument is 28 T.C. 885">*889 that the estate of Ernst gave up the debt in exchange for, not only the $ 18,000, but the relinquishment by the estate of Hans of its share of the very $ 18,000 it was paying the estate of Ernst. We do not see that the latter fact distinguishes the instant case from the statement of the law as set forth in the