Before L. HAND, Chief Judge, and SWAN and CLARK, Circuit Judges.
These petitioners seek reversal of decisions determining deficiencies in their respective income taxes for the years 1939 and 1941.In the case of Benjamin J. Weil the deficiencies are $463.07 for 1939 and $3443.78 for 1941; in the case of his brother, L. Victor Weil, they are $2542.99 for 1939 and $3890.44 for 1941. Each case presents the same legal question, namely, whether payments actually received by the taxpayer in the years in suit should be treated as constructively received in earlier years in which he reported as income the amounts now in dispute.
Section 42 of the Internal Revenue Code, 26 U.S.C.A. § 42, lays down the general rule for reporting income, as follows:
"The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under section 41, any such amounts are to be properly accounted for as of a different period."
Although the statute says nothing as to constructive receipt of income this doctrine has from the beginning been incorporated in the Treasury Regulations. Section 19.42-2 of Treasury Regulations 103, applicable to the years in suit, reads as follows:*fn1
"Sec. 19.42-2. Income not reduced to possession. - Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. To constitute receipt in such a case the income must be credited or set apart to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made, and must be made available to him so that it may be drawn at any time, and its receipt brought within his own control and disposition. A book entry, if made, should indicate an absolute transfer from one account to another. If a corporation contingently credits its employees with bonus stock, but the stock is not available to such employees until some future date, the mere crediting on the books of the corporation does not constitute receipt."
The doctrine of constructive receipt treats as taxable any income which is unqualifiedly subject to the demand of a taxpayer on the cash receipts and disbursements method of accounting, whether or not such income has actually been received in cash. Ross v. Commissioner, 1 Cir., 169 F.2d 483, 490. Although the doctrine was doubtless conceived by the Treasury in order to prevent a taxpayer from choosing the year in which to return income by electing when he will reduce it to possession, the regulation lays down a rule of uniform application, which the taxpayer as well as the Commissioner may invoke. So the Ross case held, and we agree with it. Hence if the facts show a constructive receipt of income in earlier years, the petitioners may assert the doctrine to defeat an attempt to tax it in a later year.
The taxpayers were the executors of the estate of their father, Jonas Weil, who died in 1917. The Surrogate's Court of New York County in which his estate was being administered entered a decree on February 11, 1932 and another in March 1940 directing the executors to pay to themselves certain sums.*fn2 The sums awarded by the 1932 decree were included by the taxpayers, who were on the cash receipts and disbursements basis, in their respective income tax returns for 1932; but by reason of losses claimed on worthless stock their returns showed no tax due. The income tax return for the Jonas Weil estate did not show payment of the 1932 awards to the petitioners; it showed a loss of some $90,000 without them. Although each petitioner reported the full amount of the award to him, the portion thereof actually received in cash in 1932 was $30,064.08 by Benjamin and $29,131.68 by Victor. The balance of the 1932 awards they collected in instalments during subsequent years, the final payment in 1939 being $31,862.67 to Benjamin and $11,953.72 to Victor. This payment the Commissioner ruled to be taxable in that year, thus producing the 1939 deficiencies.
The 1940 award of executor's commissions was similarly treated by the taxpayers as constructively received in that year. In his 1940 income tax return each taxpayer reported the full amount awarded him, and paid the tax thereon computed as though the amount were received during the years 1930 to 1938 inclusive, under the option granted to taxpayers by § 107(a) of the Internal Revenue Code, 26 U.S.C.A. § 107(a). The sum actually paid each taxpayer in 1940 was $5,000, and in 1941 each received an additional payment of $10,000 on account of the award. This is the item producing the 1941 deficiencies.
The Tax Court held that there was no constructive receipt by the petitioners of the sums awarded them by the 1932 and 1940 decrees for two reasons: (1) Because such sums "were neither credited to the accounts of the petitioners in those years, nor were they set apart for them in any manner"; and (2) because the Jonas Weil estate did not have sufficient cash during those years to pay the petitioners the amounts awarded them.
It is true, as the Tax Court found, that the estate did not set up the awards of the Surrogate's Court in favor of the petitioners as accounts payable, and the amounts of the awards were not credited on the estate's books in the years they were made, and no funds were segregated or set apart for them. But it is also true that the only books kept by the estate were books of cash receipts and disbursements. Having no ledger, the estate's only record of accounts payable would be the decrees of the Surrogate's Court directing the executors to make the payments. Section 19.42-2 of Regulations 103 does not require any particular type of bookkeeping. Indeed, the section itself clearly implies that a book entry is not the only way to establish a credit, since it provides: "A book entry, if made, should indicate an absolute transfer from one account to another" (italics added). Usually, of course, an entry on the obligor's books crediting a sum to the account of the obligee will be the best evidence that the obligee has only to reach out his hand to reduce the debt to possession, but it is not necessarily the only evidence that he has unfettered control of the money. See Acer Realty Co. v. Commissioner, 8 Cir., 132 F.2d 512, 515-516.
Assuming arguendo that, in the case of an estate where the books kept by the executors show only receipts and disbursements, probate decrees directing the executors to pay specified sums to themselves individually as fees or interest on their allowed claims against the estate may be considered as a "credit" of income to their personal accounts, within the meaning of the constructive receipt Regulations, the question remains whether, without more, it is a credit of income "which may be drawn upon by him [the taxpayer] at any time" and "without any substantial limitation or restriction as to the time or manner of payment." We think this question must be answered in the negative. It is elementary law that in probate administration, executors are regarded as separate legal persons in their individual and official capacities. The decrees directing payment leave it discretionary with the executors when the payment is to be made. In exercising their discretion they must consider the interest of the estate without regard to their personal interest with respect to receipt of payment. This is obvious when the estate has insufficient cash on hand and the executors must sell some asset or borrow money on the credit of the estate in order to obtain the necessary funds to make payment to themselves individually. They must choose the time to sell or borrow with an eye single to the interests of the estate. Even when the estate has cash on hand sufficient to pay the fees or interest awarded by a probate decree, their fiduciary duty requires them to consider whether payment should be temporarily deferred because the cash may be needed for other purposes, such, for example, as payment of taxes accrued or about to accrue. Consequently until the executors do something to indicate that their discretion has been exercised in favor of immediate payment to their personal accounts, they do not in their individual capacities have unrestricted control of the money. Had the executors kept a ledger account and credited the fee to the taxpayers' personal accounts that might suffice to show that they had only to ask for it to receive it. Had they done some other thing, for example, claimed credit for the payment in the estate's income tax return for the year in which the decree was entered, that might also show the immediate availability of the money to the taxpayers. But in the case at bar they did nothing in their official capacity to indicate that the money was immediately available to them in their personal capacity.
Nor was it shown to the satisfaction of the Tax Court that the condition of the estate in 1932 or 1940 was such that deferment of payment could not have been required in the interests of the ...