T.C. Memo. 1999-46
UNITED STATES TAX COURT
ESTATE OF HARRY FAGAN, JR., DECEASED, FIRST
CITIZENS BANK, EXECUTOR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4688-97. Filed February 16, 1999.
Maria M. Lynch, for petitioner.
Edwina L. Charlemagne, for respondent.
MEMORANDUM OPINION
COHEN, Chief Judge: Respondent determined a deficiency in
the Federal estate tax of the estate of Harry Fagan, Jr., in the
amount of $84,899. The issues for decision are:
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(1) Whether the amount included in the gross estate as a
bequest from Viola K. Fagan should be increased to restore
amounts incurred for administrative expenses of her estate; and
(2) whether the amount of the charitable deduction should be
reduced by Federal estate and State inheritance taxes.
This case was submitted fully stipulated pursuant to Rule
122. Unless otherwise indicated, all section references are to
the Internal Revenue Code as in effect as of the date of
decedent's death, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
The stipulated facts are incorporated herein by this
reference. Harry Fagan, Jr. (decedent), died on May 3, 1993, a
resident of Wake County, North Carolina. The executor of
decedent's estate is First Citizens Bank, the principal office of
which was located in Raleigh, North Carolina, at the time of the
filing of the petition.
Issue 1. Bequest From Viola K. Fagan
Background
Decedent was predeceased by his mother, Viola K. Fagan
(Mrs. Fagan), who died on March 5, 1992, a resident of North
Carolina. A portion of her estate passed to decedent under her
will. Pertinent excerpts from Mrs. Fagan's will are as follows:
ARTICLE I
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I desire and direct that all my just debts be paid
without unnecessary delay by my Co-Executors,
hereinafter named and appointed.
ARTICLE II
I direct that all federal estate taxes and all
costs of administration be paid from the residuary
portion of my estate, * * * in order that that portion
of my estate passing to my son, Harry Fagan, Jr. under
Article III of this Will, will not be diminished
because of the payment of federal estate taxes. I
further direct that all state inheritance taxes be
assessed against the receiving beneficiary.
ARTICLE III
I give and bequeath to my son, Harry Fagan, Jr.,
one-half of my gross estate. This bequest is not to be
diminished because of any federal estate taxes which
are assessed against my estate, but my son is
responsible for the payment of his state inheritance
taxes from his share.
* * * * * * *
ARTICLE XV
All the rest and residue of my property, after the
payment of federal estate taxes, shall be divided into
two equal shares [one share was to be paid to a
granddaughter and one share was to be held in trust for
a grandson]. * * *
In calculating the amount of Mrs. Fagan's bequest to
decedent as reported on her Federal estate tax return, the
executor of Mrs. Fagan's estate subtracted administrative
expenses ($209,186) and debts ($11,765) from her gross estate
($4,875,844) and then multiplied the remaining amount by one-
half, for a result of $2,327,447. Respondent determined that the
amount included in decedent's gross estate as the bequest from
Mrs. Fagan's estate should be increased by $104,593 (half of the
total administrative expenses) on the ground that such expenses
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should not have been deducted in determining the value of the
bequest. The parties do not dispute the subtraction of the debts
from Mrs. Fagan's gross estate before determining decedent's one-
half share.
Discussion
Generally, the value of the gross estate of a decedent
includes the value of all of the decedent's property, real or
personal, tangible or intangible, wherever situated, to the
extent of the decedent's interest therein at the time of death.
Secs. 2031(a), 2033. State law determines property interests.
Morgan v. Commissioner, 309 U.S. 78 (1940). Thus, our decision
on this issue involves a determination of decedent's property
rights under Mrs. Fagan's will pursuant to the laws of the State
of North Carolina.
Where the terms of a will are not clear, unequivocal, and
unambiguous, it is the responsibility of the courts to interpret
the will. Pittman v. Thomas, 307 N.C. 485, 492, 299 S.E.2d 207,
211 (1983). Under North Carolina law, "'the intention of the
testator is the polar star which is to guide in the
interpretation of all wills, and, when ascertained, effect will
be given to it unless it violates some rule of law, or is
contrary to public policy.'" Id. (quoting Clark v. Connor, 253
N.C. 515, 520-521, 117 S.E.2d 465, 468 (1960)). In determining a
testator's intent, the will is to be considered as a whole and in
light of the circumstances at the time the will was made. Id.
Where possible, effect is to be given to every clause, phrase,
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and word. Coppedge v. Coppedge, 234 N.C. 173, 176, 66 S.E.2d
777, 779 (1951). Technical words are presumed to have been used
in their technical sense unless the other language of the will
evidences a contrary intent, in which case the words will be
given their ordinary and popular meaning. Kale v. Forrest, 278
N.C. 1, 6, 178 S.E.2d 622, 625 (1971). "[T]he use of particular
words, clauses or sentences must yield to the purpose and intent
of the testator as found in the whole will." Id.
Petitioner argues that Mrs. Fagan's will is ambiguous in
that Article II states that the payment of both administrative
costs and Federal estate taxes is to come from the residue, but
that the purpose is to not diminish her son's bequest by Federal
estate taxes. It is petitioner's position that Mrs. Fagan's
intent was to relieve her son's share only of Federal estate
taxes. Petitioner also points to the second sentence in Article
III, which reads: "This bequest is not to be diminished because
of any federal estate taxes", as exonerating the bequest to
decedent only from Federal estate tax. In addition, petitioner
argues that Mrs. Fagan did not intend the term "gross estate" in
Article III in a technical sense but in the sense opposite to
that of "net estate"; in other words, meaning "not reduced by
federal estate tax". On the basis of the foregoing, petitioner
maintains that decedent's share of Mrs. Fagan's estate should be
reduced by one-half of the administrative expenses of that
estate.
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Respondent's position is that the term "gross estate" was
meant in the technical sense used for Federal estate tax purposes
and that Mrs. Fagan intended for decedent to receive one-half of
all of the property in which she had an interest at the time of
her death. The only diminution was that resulting from the
instruction in Article I to pay her debts. Respondent points to
Article II as clearly stating Mrs. Fagan's intent that her son's
share not be decreased by either the Federal estate tax or the
administrative costs, in that she instructed that those items be
paid from the residuary estate, and his portion was a specific
bequest, not part of the residue.
Petitioner's interpretation of Mrs. Fagan's will would
render void her direction that "all costs of administration be
paid from the residuary portion of my estate". Paying the costs
out of the residue does not contradict or interfere with the
purpose of not diminishing decedent's share by Federal estate
taxes. Paying such costs out of the residue gives effect to the
first sentence of Article II and of Article III. Although, under
this construction, the term "gross estate" does not totally
coincide with the term as used on the Federal estate tax return,
to wit, assets before deduction of debts, charging administrative
costs to the residue is more consistent with that meaning.
Moreover, no language in Mrs. Fagan's will expresses an intent
contrary to the use of "gross estate" as a technical term.
The final clause in the first sentence of Article II,
referring only to estate taxes, and similar limiting language in
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Article III merely reflect that, absent any reference to Federal
estate taxes, the burden of such taxes would have been allocated
to all the legatees, including decedent, under the apportionment
provision of chapter 28A, article 27, of the General Statutes of
North Carolina (1997). Specific language preventing this
consequence with respect to administrative costs was unnecessary
because there is no provision of North Carolina law apportioning
such costs.
We sustain respondent's position on this issue.
Issue 2. Decedent's Charitable Bequests
Background
On June 17, 1988, decedent executed a will and a trust
agreement. The trust agreement was between decedent as grantor
and First Citizens Bank as trustee. Decedent also named First
Citizens Bank as executor of his will. In decedent's will, he
left his automobile to his son and the rest of his tangible
personal property to his daughter. Decedent made no other
specific bequests and left the residue of his estate to the
trust.
Decedent's will contains the following pertinent provisions:
ARTICLE I
DIRECTIONS TO EXECUTOR
1.01 Claims against My Estate. I direct my
Executor, hereinafter named, to pay out of the general
funds of my estate the cost of the administration of my
estate, all my legal debts, expenses of last illness,
and funeral expenses.
1.02 Payment of Taxes. I direct my Executor
to pay out of my residuary estate, otherwise passing
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under Article III hereof, and as soon as practical, all
inheritance, estate, transfer, and succession taxes
payable by reason of my death (including interest and
penalties thereon in the discretion of my Executor)
assessed on my property or interest included in my
gross estate for tax purposes. I direct that my
Executor shall not require that any part of such taxes
by [sic] recovered from, paid by, or apportioned among
the recipients of, or those interested in, such
property.
* * * * * * *
ARTICLE III
DISPOSITION OF RESIDUARY ESTATE
All the rest, residue and remainder of my
property, real and personal, tangible and intangible,
wheresoever situate and howsoever held, including any
property over which I may have a power of appointment,
herein referred to as my residuary estate, I give,
devise, and bequeath to First-Citizens Bank & Trust
Company, as Trustee under that certain Trust Agreement
dated the 17th day of June, 1988, wherein I am the
Grantor and First-Citizens Bank & Trust Company is
Trustee, to be held and administered as a part of the
trust hereby [sic] created.
* * * * * * *
ARTICLE V
ADMINISTRATIVE PROVISIONS
* * * * * * *
5.02 Payments By Trustee to Executor. Under
that Trust Agreement referred to in Article III above,
I provided that the Trustee thereunder shall pay to my
Executor certain amounts as required by my Executor for
payment of debts, funeral expenses, costs of
administration of my estate and the inheritance and
estate taxes payable upon my estate by reason of my
death. I expressly authorize and empower my Executor
to request from time to time, in writing from said
Trustee, the required amounts for payment of such
debts, expenses and taxes.
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The trust agreement established a trust of the proceeds of
certain life insurance policies on the life of decedent to be
received by the trustee as beneficiary, plus other property
received by the trustee from decedent or third parties. The
trust was revocable by decedent, who also reserved the right to
receive the income and such portions of principal as decedent
requested.
Article IV of the trust agreement provides for the
disposition of the trust estate remaining at the time of
decedent's death, including property devised or bequeathed under
decedent's will, by dividing the remaining estate into three
shares designated as shares A, B, and C. Shares A and B, each
equal to one-fifth of the trust estate, were to be placed in
trust for decedent's daughter and son, respectively. Share C,
constituting three-fifths of the trust estate, was to be
distributed one-fourth to each of four charitable organizations.
The trust agreement provided "that the portions disposed of under
Share C shall not be reduced by any taxes chargeable against the
Grantor's gross estate."
In addition, Article V of the trust agreement provides:
5.02 Use of Trust Funds to Pay Estate Debts.
The Trustee shall pay to the Executor or Administrator
of the estate of the Grantor from the principal of the
trust of Shares A and B, such sum or sums as such
Executor or Administrator certified to be necessary to
discharge the liability of the estate of the Grantor
for all inheritance, legacy, succession or estate taxes
due from or assessed against the estate of the Grantor,
and such further sum or sums as the Executor or
Administrator may certify to the Trustee as being
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required in order to pay the debts of the Grantor, his
funeral expenses, cost of Grantor's last illness and
any other expenses of the administration of his estate.
On decedent's Federal estate tax return, the executor
reported a gross estate of $5,037,386. The value of the assets
contained in the trust and included in the gross estate was
stated as $2,417,846. Stocks and bonds owned by decedent were
reported at a value of $1,550,615. The gross estate included
$242,301 in proceeds from life insurance policies on decedent's
life, owned by and payable to the trust as beneficiary. The
trust was also the beneficiary of annuities totaling at least
$300,000. Additionally, the estate reported real estate,
mortgages, notes, bank accounts, and other miscellaneous assets
valued at more than $500,000. The executor reported four
charitable bequests totaling $2,929,683, three-fifths of the
estate's residue. No taxes were listed as being payable out of
this property. The estate reported and paid a tax of $166,818.
Respondent determined that the total amount of the
charitable bequests should be reduced by $150,142 for a portion
of the estate's Federal and State taxes. On brief, respondent
concedes that, due to a mathematical error, the adjustment should
have been only $147,791.
Discussion
Section 2055(a) allows a deduction from the value of the
gross estate for the value of charitable bequests. Section
2055(c) provides that, if the Federal estate tax,
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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 section, then the
amount deductible under this section shall be the
amount of such bequests, legacies, or devises reduced
by the amount of such taxes.
"Section 2055(c) in effect provides that the deduction is based
on the amount actually available for charitable uses, that is,
the amount of the fund remaining after the payment of all death
taxes." Sec. 20.2055-3, Estate Tax Regs.
Generally, "Congress intended that the federal estate tax
should be paid out of the estate as a whole, and that the
applicable state law as to the devolution of property at death
should govern the distribution of the remainder and the ultimate
impact of the federal tax". Riggs v. Del Drago, 317 U.S. 95, 97-
98 (1942). In limited situations, Congress has specified where
the estate tax burden would fall. See secs. 2206 (life
insurance), 2207 (powers of appointment), 2207A (marital
deduction property), and 2207B (reserved life estate). These
situations deal with property that does not pass through the
executor's hands in administering the estate. See Riggs v. Del
Drago, supra at 102. Section 2206 provides in part:
Unless the decedent directs otherwise in his will,
if any part of the gross estate on which tax has been
paid consists of proceeds of policies of insurance on
the life of the decedent receivable by a beneficiary
other than the executor, the executor shall be entitled
to recover from such beneficiary such portion of the
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total tax paid as the proceeds of such policies bear to
the taxable estate. * * * [Fn. ref. omitted.]
Chapter 28A, article 27, of the General Statutes of North
Carolina is entitled "Apportionment of Federal Estate Tax." N.C.
Gen. Stat. sec. 28A-27-2 provides in part:
(a) Except as otherwise provided in subsection (b)
of this section, or * * * [computational statutes] the
tax shall be apportioned among all persons interested
in the estate in the proportion that the value of the
interest of each person interested in the estate bears
to the total value of the interests of all persons
interested in the estate. The values as finally
determined for federal estate tax purposes shall be
used for the purposes of this computation.
(b) In the event the decedent's will provides a
method of apportionment of the tax different from the
method provided in subsection (a) above, the method
described in the will shall control. * * * [Emphasis
added.]
The section then provides for exceptions not applicable to the
instant case.
N.C. Gen. Stat. sec. 28A-27-5(a) provides in part:
(a) Any interest for which a deduction or
exemption is allowed under the federal revenue laws in
determining the value of the decedent's net taxable
estate, such as * * * gifts or bequests for charitable,
public, or similar purposes shall not be included in
the computation provided for in G.S. 28A-27-2 to the
extent of the allowable deduction or exemption. * * *
Petitioner's position is that decedent's charitable bequests
should not be reduced by any taxes. Petitioner argues that
decedent's intent to pass the bulk of his estate to charity free
of tax is clear from reading the provisions of the will and trust
together. Alternatively, petitioner argues, if one looks only to
the will, decedent's instructions as to apportionment within the
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residue are ambiguous and, therefore, the North Carolina
apportionment statute applies to the apportionment of the taxes
within the residue, causing the charitable portion to be exempt
from apportionment.
Respondent's position is that decedent clearly instructed in
his will that all taxes payable by reason of his death be paid
from the residuary estate, without apportionment, prior to its
distribution to the trust as residuary beneficiary, and that,
because of that clear instruction, apportionment as provided in
the North Carolina statutes is avoided. Respondent argues that
the provision in the trust regarding apportionment to the
noncharitable trust beneficiaries applies only to those taxes
required to be paid from trust assets; that is, if the residuary
portion of the estate were insufficient to pay all debts,
expenses, and taxes.
We agree with respondent. Decedent's instructions were
clear as to where the burden of the taxes should fall. Paragraph
1.02 of his will provided that all taxes payable by reason of his
death on his property or interest included in his gross estate
were payable from the residuary portion of his estate. He also
expressly provided that there be no apportionment among the
recipients of, or those interested in, such property. Because of
decedent's instructions in his will on this subject, neither
section 2206 nor the method of apportionment found in chapter
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28A, article 27, of the General Statutes of North Carolina
applies to the apportionment of the Federal estate tax.
Petitioner's position seeks to import into the will the
apportionment provision of a separate document, namely, the trust
agreement, in order to determine how decedent's residuary estate
should be distributed. See generally Shoup v. American Trust
Co., 245 N.C. 682, 97 S.E.2d 111, 115 (1957) (as a general rule
the construction of a will is not to be influenced by provisions
of other nontestamentary documents). Petitioner ignores the
distinction between determining how an estate is to be divided
and how the burden of taxes is allocated. The apportionment
clause in the trust agreement deals with an allocation of the tax
burden on property that the beneficiaries of the trust are
entitled to receive from the trust, not what the trust is
entitled to receive from the grantor-decedent's estate.
Accordingly, we hold that the amount of decedent's
deductions for charitable bequests is to be reduced by the amount
of Federal estate and State inheritance taxes.
In accordance with the parties' concessions and the above
holdings,
Decision will be entered
under Rule 155.