Estate of Johnson v. Commissioner

Keith Johnson left five residuary beneficiaries of his estate (plaintiff). One beneficiary, Willard Johnson, died very soon after Keith died, with Willard’s estate then being entitled to his share of Keith’s estate. Both Keith’s estate and Willard’s estate used the same accountants and same executors. For each year from 1976 to 1981, Keith’s estate deducted as a distribution an amount credited to Willard’s estate. Willard’s estate included that amount as gross income for each such tax year. However, no money actually changed hands. Keith’s estate included substantial contingent assets and liabilities, with disputes surrounding those liabilities, rendering it unwise to make any principal distributions. Keith’s estate therefore had not made any principal distributions to any of the residuary beneficiaries as of the end of 1981. The Commissioner of Internal Revenue (the commissioner) (defendant) ultimately disallowed the income distributions claimed by Keith’s estate in 1980 and 1981. Keith’s estate filed suit, arguing that it was entitled to the deductions, because even though the payments had not been made, they were properly credited, meaning that they were so definitely allocated that they were beyond any recall by creditors, courts, or others. Informal, pencil-drafted worksheets from both Keith’s estate and Willard’s estate indicated the distributions. However, the commissioner argued that those papers did not place the distributions beyond even the ability of Keith’s estate to recall those funds, and the distributions should not be credited to Keith’s estate.