
    FRANK C. WALDROP AND WILLIAM C. SHELTON, SURVIVING EXECUTORS OF THE ESTATE OF ELEANOR PATTERSON, DECEASED, v. THE UNITED STATES
    [No. 74-54.
    Decided January 31, 1956]
    
      Mr. Edmund D. Campbell for plaintiffs. Mr. John C. Bistine and Messrs. Jaekson, Nash, Brophy, Barringer & Brooks and Douglas, Obear <& Campbell were on tbe briefs.
    
      Mrs. Elizabeth B¿ Davis, witbt whom was Mr. Assistant Attorney General H. Brian Holland, for the defendant. Mr. Andrew D. Sharpe was on the brief.
   Madden, Judge,

delivered the opinion of the court:

The plaintiffs are the executors of the will of Eleanor Patterson, a resident of the District of Columbia, who died on July 24,1948. They sue to recover $683,814.88 of the $7,476,-927.10 of estate tax which they have paid to the United States.

The decedent’s gross estate amounted to $16,839,459.50. By her will she made specific bequests to individuals amounting to $5,181,208.97, and bequeathed to various persons annuities having a commuted value of $659,508.66. She made a bequest of $229,406 to the American Bed Cross which bequest was deductible for estate tax purposes. There were debts and administration expenses amounting to $1,666,-205.05 which were also deductible. The entire balance of her estate she left to trustees in trust for charities. This balance before deducting Federal estate taxes amounted to $8,260,-474.35. But the United States assessed an estate tax of $7,476,927.10 as we have seen, and the District of Columbia assessed a similar tax of $1,722,880.72 a total of such taxes of $9,199,807.82. The payment of these taxes more than exhausted the residue of $8,260,474.35 which would, but for the taxes, have been available for the charitable trust. This would have seemed to make it necessary to take some one million dollars out of the specific bequests in order to pay the estate taxes.

But the executors were able to obtain income on that portion of the gross estate which was ultimately used to pay the debts, and part of the taxes. That income amounted to $1,165,521.34, an amount sufficient to pay the balance of the taxes and leave $238,979.38 to go to the charitable trust.

The plaintiffs say that if the $1,165,521.34 had been added to the gross estate, the estate would have shown $1,039,040.78 available for the residue for charity, and that amount would have been deductible from the gross estate before estate taxes were assessed, and the taxes would have been reduced by 77% (the estate tax rate here applicable) of that amount, that is to say, by $633,814.88, the amount here sued for. Stated in another way, the $238,979.38 given above as the amount available for the residuary charitable trust, even if no deduction is allowed, is only 23% (100 — 77%) of the amount which, would be available if the deduction were allowed.

The Government urges that the income produced by the estate after the death of the decedent is not, for estate tax-purposes, a part of the gross estate. It cites Bull v. United States, 295 U. S. 247 to the effect that such income cannot be subjected to the estate tax, and Maas v. Higgins, 312 U. S. 443 holding that this is so even where the executors elect, under section 811 (j) of the Internal Revenue Code of 1939, to use the optional valuation date of one year after the’ testators death. Hence, the Government says, since the post mortem income is not a part of the gross estate, and since-the charitable deduction is, according to sec. 812 (d) of the Internal Revenue Code of 1939, 26 U. S. C. (1952 ed.) 812,. to be a deduction from the gross estate, it would be illogical to allow a deduction from the gross estate of assets not included in it, and which would not be taxed as a part of it even if they went to a private devisee.

The Government further urges that, from a practical standpoint, to allow a charitable deduction where it cannot be determined at the time of the decedent’s death would: render any computation of the Federal estate tax almost impossible. It cites the instant case in which when the estate tax return was made, no charitable deduction for the residuary gift was claimed, since there was no residue; when the first refund claim was filed, as of May 31, 1952, a charitable deduction of $95,436.93 was asserted; presently, because off the August 31, 1952 transfer of post mortem income to principal, a charitable deduction of $1,039,040.78 is asserted. The Government says that this process could go on indefinitely, so long as there were undistributed assets of the estate which might earn income. It cites Henslee v. Union Planters Bank, 335 U. S. 595, where the will permitted unlimited invasion of the corpus of the estate for the benefit of the decedent’s mother during her life, and gave the remainder after her death to charity. The mother died three years after the decedent and in fact there had been no invasion of the corpus. The Court said:

Nor do we think it significant that the trust corpus was intact at the mother’s death, for the test of present ascertainability of the ultimate charitable interest is applied “at the death of the testator.” Ibid. The charitable deduction is a matter of congressional grace, and it is for Congress to determine the advisability of permitting amendment of estate tax returns at such time as the probable vesting of the charitable interest has reduced itself to unalterable fact.

The plaintiffs stress the following language of section 812 (d):

If the tax, imposed by section 810, or any estate, succession, legacy, or inheritance taxes, are, either by the terms of the will, by the law of the jurisdiction under which the estate is administered, or by the law of the jurisdiction imposing the particular tax, payable, in whole or in part out of the bequests, legacies or devises otherwise deductible under this paragraph, then the amount deductible under this paragraph shall be the amount of such bequests, legacies, or devises reduced by the amount of such taxes.

Stated perhaps more simply, this means that if the gift to the charity is a residuary gift, and if by the will or the local law specific or other legacies or devises are to be paid in full and the estate taxes are to be paid out of the residue, the charitable deduction will be only the amount which will be left in the residue after the taxes are paid. This statutory language was a “legislative reversal,” Harrison v. Northern Trust Co., 317 U. S. 476, of the decision of the Supreme Court in Edwards v. Slocum, 264 U. S. 61. The decision in Edwards v. Slocum permitted a charitable deduction for the entire amount of the residue as it appeared before any deduction for estate taxes, even if after the payment of the taxes nothing, or little, would actually go to charity.

As we understand it, the advantage which the plaintiffs seek to draw from the statutory language last quoted above is this. They say that by the local law of the District of Columbia, as shown by the decision in Proctor v. American Security and Trust Company, 98 F. 2d 499, post mortem income becomes a part of the principal of the estate. The plaintiffs say that, as such, it is available for the payment of debts, taxes, and administration expenses. When used for that purpose it maintains the level of the gross estate, leaving .something in the residue for the charitable trust.

We see nothing very relevant in the Proctor decision. The question there was whether post mortem income earned during the period of administration and before the trust of the residue was set up, should go to the life tenants of the residue, or be added to the corpus of the residue, thus ultimately going to the remainderman. The case was decided on the basis of what the court supposed the testator intended by the conventional language which he used.

The plaintiffs say that if the testatrix had specifically provided in her will that Federal estate taxes were to be payable in the first instance out of income accrued during administration, then the provision of section 812 (d) quoted above would not be applicable, since the tax would not be paid out of the bequest to charity. They say that since under local law they could pay the taxes out of such income, and since by their bookkeeping entries of July 81,1952, they did transfer these income funds to the principal account of the estate, the legal effect should be the same as if they had paid as much of the Federal estate tax out of income as the income funds amounted to.

It may be noted that the Federal estate taxes were paid almost entirely in 1949 and 1950, with a final payment of $52,820.95 on May 2, 1952, all before the bookkeeping entry made on July 31, 1952. It should further be noted that the executors, in their income tax returns for the estate for the yéars 1948, 1949, 1950 and 1951, claimed and were allowed deductions, under section 162 (a) of the Internal Revenue Code because the income was paid to or permanently set aside for charitable organizations. These deductions amounted to $1,018,805.07 and reduced the estate’s income taxes by as much as the amount here sued for.

This case may be simpler than the parties have made it. A residuary gift to charity which, at the time of the testatrix’s death, seemed to be illusory because there wasn’t going to be any residue, later takes on reality because of post mortem earnings of the assets of the estate. There is no question here of life tenant and remainderman. The additional money clearly goes to the residuary legatee, after the deficit in the prior claims is made up. The bookkeeping of the executors, whether they kept the post mortem earnings in a separate fund which they used to pay debts or funeral expenses or expenses of administration, or taxes, or whether they mingled them with the original assets of the estate out of which these expenses as well as legacies were paid, seems to us to be immaterial. In fact, when the accounts were cast up, there was that much more in the estate’s funds, and some of it would constitute a residue for the charitable trust.

Should the estate tax accounting be reopened because of this probably unusual sequence of events? The gross estate of the decedent is the starting point for the computation of the estate tax. Income earned during administration is not a part of the gross estate for estate tax purposes, and is not taxable as such. Instead, it is taxable to the estate as income, and, as such, is subject to deductions, including unlimited deductions for such amounts of it as are destined for charity. The statutory scheme seems to contemplate separate treatment of this asset, though it will ultimately go to the same persons who, by the will or the law of descent, get the statutory “gross estate.” The statutory provision for deductions from this income of charitable gifts seem .to make the statutory scheme equitable, and to relieve any pressure upon us to depart from the statutory scheme to achieve a fair result.

The plaintiffs’ petition will be dismissed.

It is so ordered.

Laramore, Judge; Whitaker, Judge; Littleton, Judge; and Jones, Chief Judge, concur.

PINDINGS OP PACT

The court makes findings of fact, based upon the stipulation of the parties, and the briefs and argument of counsel, as follows:

1. Plaintiffs are the surviving and qualified executors under the will of Eleanor Patterson, deceased (hereinafter called “decedent”). The decedent died on July 24, 1948, a resident of the District of Columbia, and her estate is now being administered in the Probate Division of the United States District Court for the District of Columbia in Administration. Causo No. 71,574. Joseph W. Brooks, formerly one of the executors under said will, died on November 27, 1953.

2.On October 24, 1949, plaintiff and the said Joseph W. Brooks, as executors of the decedent’s estate, duly filed a Federal estate tax return on behalf of said estate. Said return showed a gross estate of $16,718,091.25, which was increased on audit by the Commissioner of Internal Eevenue to $16,839,459.50. The estate tax liability determined in the amount of $7,476,927.10 was assessed against decedent’s estate. This tax has been paid by plaintiffs and said Joseph W. Brooks as executors in installments as follows:

November 1,1949_$1,000,000.00
November 30,1949_ 1,500,000.00
January 31,1950_ 2,900,000.00
August 31, 1950_ 2,024,106.15
May 2, 1952 _ 52, 820.95
$7,476,927.10

3. A true copy of decedent’s Federal estate tax return as filed was attached to the stipulation and marked exhibit A and is made a part hereof by reference.

4. A true copy of the adjustments of the Federal estate tax return as made by the Commissioner of Internal Eevenue was attached to the stipulation and marked exhibit B and is made a part hereof by reference.

5. Plaintiffs and the said Joseph W. Brooks filed with the Commissioner of Internal Eevenue on August 1,1952, a claim for the refund of estate taxes paid in the amount of $319,-506.24. Said filing date is more than six months prior to the date of the institution of this suit. The Commissioner of Internal Eevenue has not served the statutory notice of dis-allowance of the said claim pursuant to section 3772 (a) (2) of the Internal Eevenue Code. A true copy of the complete refund claim with accompanying schedule was attached to the stipulation and marked exhibit C and is made a part hereof by reference.

6. From the decedent’s gross estate of $16,839,459.50 as determined, the Commissioner of Internal Eevenue has allowed decedent’s estate deductions of $1,666,205.05 for funeral and administration expenses, $842,656.47 for debts, and a specific bequest to the American Red Cross amounting to $229,406.00, leaving a net estate for Federal estate tax purposes of $14,101,191.98.

7. The decedent made specific and general bequests, other than the specific bequest to the American Red Cross, totaling $5,181,208.97. If funeral and administration expenses (exclusive of Federal and state, estate and inheritance taxes), debts and all specific and general bequests in the total amount of $7,919,474.49 are deducted from the gross estate of $16,-839,459.50, there would be a balance of $8,919,983.01. The value of the annuities under paragraph 11 of the will at the date of death of the decedent was $659,508.66. This amount is the difference between the value of a hypothetical fund of $1,380,345.41, the amount necessary to yield the annuities at 4%, and $720,836.75, the value of the charitable remainder interest in such fund.

8. A true copy of the last will and testament of Eleanor Patterson, the decedent, dated June 21,1946, and true copies of codicils to the will dated November 7, 1946, and May 20, 1947, respectively, were attached to the stipulation and marked exhibits D-l-2-3, and are made a part hereof by reference.

9. The defendant in applying section 812 (d) of the Internal Revenue Code assessed against the decedent’s estate a total Federal estate tax of $7,476,927.10, which tax was paid by decedent’s executors in instalments on the dates and in the amounts shown heretofore in finding 2. In addition to said Federal estate tax, decedent’s executors have been required to pay other “State” (including the District of Columbia) estate and inheritance taxes in the amount of $1,722,880.72.

10. During the period of administration of decedent’s estate by plaintiff executors (and said Joseph W. Brooks, now deceased) and prior to the payment in full of the taxes referred to in finding 2, plaintiffs collected through July 31, 1952, an amount of $1,165,521.34, consisting of two items, $74,426.91 and $1,089,094.43, the* disposition of which is shown on page 11 of the Fourth Account of the executors filed on August 12, 1952, with the United States District Court for the District of Columbia, which account was approved by said Court. A copy of the F ourth Account of the executors was attached to th&'stipulation and marked exhibit E and is made a part hereof by reference. The above-mentioned amount of $1,165,521.34 was used, as it was accumulated, in so far as necessary for the payment of debts, taxes and other administration expenses. The final payment of Federal estate tax was made May 2,1952, and of the District of Columbia estate tax on October 24,1952.

11. If the court should hold that plaintiffs are entitled to a deduction under section 812 (d) of the Internal Eevenue Code of 1939, on account of the charitable gift of the remainder interest under paragraph 11 of the decedent’s will, in accordance with the grounds advanced in plaintiffs’ claim for refund, the amount of the refund of estate tax would be $633,814.52, as shown on the computation made by the Internal Eevenue Service, which was attached to the stipulation as exhibit F and is made a part hereof by reference.

12. The petition of plaintiffs in this cause is considered as amended by substituting the figure of $633,814.88 in paragraph 13 and in the concluding prayer thereof, in lieu of the figure of $319,506.24 appearing in said petition.

13. It was agreed in the stipulation that the answer might be considered as amended by adding a new paragraph numbered (15), reading as follows:

(15) And as an affirmative defense, defendant alleges that the plaintiffs herein are estopped from claiming any amount as a deduction from the gross estate on account of the gift to the charitable trust as claimed in paragraphs 10 and 11 of the petition, for the reason that in the final determination of the income tax liabilities for the estate of Eleanor Patterson, the decedent, the plaintiffs, as executors of said estate, were allowed deductions on account of the charitable gifts of the same amounts or a part thereof for the fiscal period from July 25,1948, to July 31,1948, and for the fiscal years ending July 31, 1949, 1950, and 1951, in the respective amounts of $14,-637.88, $610,796.96, $360,272.93, and $33,097.30, and as a further affirmative defense by way of setoff, defendant alleges that if this court should allow a deduction from the gross estate as claimed in paragraphs 10 and 11 of the. petition on account of the gift of the charitable remainder, the United States is entitled to refunds of income taxes resulting from a disallowance of the same amounts already allowed as deductions from gross income and that any judgment to which the plaintiffs are entitled should be reduced to zero as a result of the deficiencies in income tax for the years 1948, 1949, 1950, and 1951.

14. The plaintiffs concede that the deductions for charitable gifts referred to above in finding 13, (including amended paragraph 15 of defendant’s answer) were allowed on the estate income tax returns for the years indicated. Plaintiffs deny, however, that such allowance under Federal income tax laws estopped plaintiffs from claiming proper deductions from the gross estate for charitable gifts under the provisions of section 812 (d) of the Internal Revenue Code of 1939, as set forth in plaintiffs’ petition filed in this proceeding. Plaintiffs further deny that any refunds of Federal income taxes are due by plaintiffs as a setoff or offset to the refund of Federal estate taxes as claimed by plaintiffs.

CONCLUSION OF LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes that as a matter of law plaintiffs are not entitled to recover, and their petition is therefore dismissed.  