sale of an income-producing asset, thus reducing the income which would have been distributable. Therefore this interest, by the payment of which other funds are left free to draw income, is charged against income. § 601. Payment of Tax on Decedent's Income The federal and any other income taxes owed on account of the decedent's income before his death are considered a debt as of that time and as such are deductible in determining the amount of the taxable estate. (See § 267.) For this reason their payment is charged to Debts of Decedent (Entry No. 16). Income taxes against the income of the estate, however, are expense against income, but the federal tax is not an expense deductible in determining the amount of that income for purposes of ascertaining the amount of that tax. The administrator must usually file two federal returns of income for the estate, as no return may cover a longer period than twelve months. The law regarding the federal income tax and the need for the representative making sure that the returns are properly filed and the tax fully paid are shown in Chapter XXVIII. The tax when paid is a charge against income, and is recorded by the entry: Expense, Income Cash $ 602. After-Discovered Assets $........ $...... The entry in the case of after-discovered assets (see § 586) is always (No. 17) Cash Assets Not in Inventory.. $...... $.... for the amount which is realized if they are sold. If not sold the procedure outlined in § 627 should be followed. Entry No. 18 assumes that the Montrose State Bank has called the attention of the executor to the existence in the decedent's name of a savings account of $1,000, not included in the inventory. The interest for the past six months, amounting to $20, must be divided between corpus and income as in the case of other interest income, but since the interest accrued to the date of demise was not included in the inventory, it as well as the principal must be credited to Assets Not in Inventory. The entry is then: Savings Accounts Assets Not in Inventory. § 603. Gain or Loss on Realization $1,020.00 $1,011.67 8.33 If an automobile entered on the inventory as being worth $1,000 is sold for $1,200, the following entry (No. 20) is The same principle must be followed in reference to any sale for other than the appraised value. If this automobile had been sold for $800 the entry would have been: In other words—and this should never be lost sight of-the Inventory account must be credited with the inventory value of each asset disposed of, as only in this way will the Inventory account close out with the assets. § 604. Payment and Collection of State Inheritance Taxes As has been said, state inheritance taxes are to be deducted from the amount which would otherwise pass to each heir. A deposit of the estimated amount of such taxes may be required by the state in advance of distribution. In the estate under consideration it is assumed that it has been estimated that the tax will amount to about $2,000 and that under the law the administrator is required to deposit this amount, subject to correction when the true amount of tax shall have been determined and assessed. This payment is shown in Entry No. 23. As it was not a debt of the decedent, existing at the time of the demise, it would be improper to charge its payment to Debts of Decedent. The payment, or so much of it as is properly due to the state, is an advance on the distribution of the assets. Since, however, in our present case there are three equal heirs on whom the inheritance tax will rest equally, there are no complications and the payment of the tax may be charged directly to Distribution of Cash. When the correct amount is determined and the state refunds the difference the entry will be (No. 34): Cash Distribution of Cash.. $...... $..... In any less simple case than this an Inheritance Tax Suspense account should be opened and the procedure outlined in § 624 should be followed, but the plan above suggested will serve in most administratorships. § 605. Payment of Federal Transfer Tax The federal transfer tax is entered as an administration expense, but since administration expenses are deductible in determining the amount of the federal tax, and the tax itself is not so deductible, it must be borne in mind that, while the tax is entered in that account, it is not subject to the same interpretation as the other entries. There is one exception to the rule that the tax is considered an expense against corpus of the estate as a whole. If there are life insurance policies in excess of $40,000, there is charged to the beneficiaries under these policies that proportion of the total tax which "the proceeds, in excess of $40,000, of such policies bear to the net estate."3 In this case the entry would be: Administration Expense (for the amount to be borne by the estate)... Distribution of Assets (for the amount to be § 606. Loss by Theft $...... ...... $........ If the proceeds of the interest collection shown in Entry No. 25, together with his own funds, had been placed in the administrator's safe until they could be deposited in the bank, and had been stolen therefrom, it would be necessary for the administrator to make an entry: Loss on Income.. $........ $........ The loss would be charged against income because the money stolen belonged to income and the loss should not fall upon the general assets of the estate. It would be improper for the administrator to allow the books to ignore both the receipt and the theft, because he is chargeable prima facie with all the amounts he collects and these must appear on his books. The distinction between Loss on Income and Expense, Income, is that the former account is used for amounts for the distribution of which the representative receives no commission (see § 196), while Expense, Income, is charged with items for the payment of which he is entitled to his commission. If the money stolen had been the net balance of miscellaneous receipts and disbursements, some of each against cor Revenue Act of 1918, § 408. See also 327 of this book. pus and some against income, it would have been necessary to add the total receipts from corpus and subtract the total disbursements from corpus, and to add the total receipts from income and subtract the total disbursements against income, thus ascertaining the amount of the theft from corpus and income separately. The entry in this case would have been: Loss on Income. Loss on Realization Cash $...... $....... Loss on Income would be charged with the amount of income cash stolen, and Loss on Realization with the amount of corpus cash. A theft of inventoried articles not yet realized upon would be shown by the following entry, made whenever the recovery seemed improbable: Loss on Realization.. Inventory § 607. Sale of Pledged Assets $........ $........ The bonds of the Gypsum Valley Company, of the par value of $10,000 and appraised at $9,000, are now sold by the Second National Bank under authority from the administrator to make that sale and satisfy from the proceeds a $6,000 loan secured by these bonds. The bank sells the bonds for $9,500, $6,000 of which it retains, the remaining $3,500 being paid to the executor. The entry might then be: In this instance the administrator would in most jurisdictions be entitled to a commission for the sale at $9,500 and for |