Before GOODRICH and MCALLISTER, Circuit Judges, and GIBSON, District Judge.
MCALLISTER, Circuit Judge.
These cases, while varying in factual background, present a common question, and are, accordingly, dealt with in the same opinion.
Henry W. Breyer died testate March 5, 1936, survived by his wife, son, and daughter. Executors of deceased's will were the widow, son, Girard Trust Company, and Wilber F. Scott.
Some five years before his death, decedent entered into three separate contracts with his wife, son, and daughter, granting them the right to purchase 50%, 25%, and 25%, respectively, of all the stock of the Henry W. Breyer Company owned by him at the time of his death, at the price of $25 per share. Five months after his death, his widow, son, and daughter, paid to the Executors of his will $200,000, $100,000, and $100,000, respectively, and received therefor 8,000, 4,000, and 4,000 shares of the company's stock. On the following day, August 6, 1936, the Executors filed an estate tax return for the estate of the deceased, and paid estate tax due thereon of $2,675,396.33.
However, an additional federal estate tax was thereafter assessed by the Commissioner, based on the inclusion in the estate of the 16,000 shares of the company's stock (which had theretofore been received by the widow and two children for the aggregate payment of $400,000) at their full market value - and of various gifts made in contemplation of death. Pursuant to such assessment, the Commissioner, on July 23, 1938, mailed to the Executors deficiency notice showing deficiency of $10,732,916.16.
Subsequently, on the filing of a petition by the Executors with the Board of Tax Appeals for redetermination of the deficiency, a stipulation was entered into between the Breyers, the Executors, and the Commissioner, in which the tax deficiency was determined to be $6,036,191.85 (including an allowable credit for state taxes in the amount of $1,751,264.63). This stipulation was conditioned upon the payment of the aforementioned federal and state taxes with interest, by the Executors, and the widow and children of the deceased in manner as follows: the Executors, to pay $900,788.63 with interest; the widow, $2,567,701.61 with interest, and each of the two children, $1,283,850.81 with interest-each of the latter, in satisfaction of his "liability at law and in equity as a transferee of the assets of the decedent's estate."
These sums were paid in accordance with the stipulation. Thereafter, the Executors paid to the trustees of the three trusts created by the will of the deceased for the benefit of the widow and two children, a total of $3,694,742.55, the last of such payments being made in October, 1939. Upon making such final payment, there remained no more assets of the estate in the hands of the Executors.
In their income tax returns for 1938 and 1939, the widow, the son, and the daughter, claimed as deductions, the sums paid as statutory interest on the deficiencies in the aforesaid estate taxes under Section 23(b) of the Revenue Act of 1938, Section 23(b) of the Internal Revenue Code, 26 U.S.C.A. Int. Rev. Code, § 23(b), which provides that in computing net income for income tax, there should be allowed as deductions all interest paid or accrued within the taxable year on indebtedness.The Commissioner disallowed the deductions, and determined deficiencies accordingly. On appeal, the Tax Court held that the deductions were allowable and reversed the Commissioner's determination; and the Commissioner here asks review of such decision.
Koppers Company, as sole stockholder, and as transferee, received in liquidation all of the assets of several corporations. During the taxable year of 1938, the company paid deficiencies in taxes of such corporations for prior years and interest thereon.
Claiming that it was liable for the tax deficiencies of the above mentioned corporations, the company contended that the amount of interest which it paid thereon was interest on its own indebtedness, and, as such, was deductible by it under Section 23(b).
The Commissioner of Internal Revenue refused to allow such deductions. On appeal to the Tax Court of the United States, it was held that that part of the interest which accrued on the above described deficiencies subsequent to the date on which the company received the assets of the named corporations, was interest on its own indebtedness and was deductible as interest under Section 23(b), but that the interest which accrued from the due date to the date the property was transferred to ...