*22 Decision will be entered under Rule 50.
Included in the gross estate of petitioner's decedent were 19 items of property having an aggregate value of $ 2,477,631.67, all of which had been included in the gross estate of a prior decedent, under the terms of whose will petitioner's decedent was residuary legatee. At the time petitioner's decedent received the property there were outstanding debts, taxes, and charges against the estate of the prior decedent in the amount of $ 1,080,961.77, which petitioner's decedent thereafter paid from her separate funds. Held, the deduction for prior taxed property provided for in section 812(c), Internal Revenue Code, in so far as here material, extends only to the residue of the prior estate after payment of debts, taxes, expenses, and all other charges identified in the latter estate, and, to the extent the property received by decedent exceeds that to which she was entitled under the will, the deduction does not apply.
*1247 This case concerns an asserted deficiency of $ 200,245.90 in Federal estate taxes, and the sole controversy between the parties is over the proper amount of a deduction for previously taxed property allowable to the estate of decedent, who died within five years after the death of her husband. At*24 the hearing, petitioner proposed an amendment to the petition so as to claim an additional deduction on account of added attorneys' fees and administration expenses in connection with this proceeding, and the parties have agreed that the amount may be determined under Rule 50.
Most of the facts have been stipulated. We therefore adopt the stipulation as a part of our findings, but only so much thereof as is necessary to an understanding of the issue will be summarized herein.
FINDINGS OF FACT.
Ada M. Wilkinson died testate March 5, 1941, a resident of Connecticut, and the petitioner is the duly appointed executor of her estate. The Federal estate tax return was filed with the collector of internal revenue at Hartford, Connecticut.
Decedent was the widow of Horace S. Wilkinson (hereinafter sometimes called the "prior decedent") who died testate, a resident of Connecticut, on April 11, 1937, within five years prior to decedent's death. His will was admitted to probate in Greenwich, Connecticut, on or about July 2, 1937, and letters testamentary were issued to decedent as executrix. Decedent, having survived the prior decedent, was also sole legatee and devisee under his will. The*25 second and third items of the will read as follows:
Second: I direct that my just debts and funeral and testamentary expenses be paid.
Third: All the rest, residue and remainder of my estate, both real and personal, I give and devise to my wife, Ada M. Wilkinson, her heirs and assigns forever.
The entire estate of the prior decedent was situated within the United States and was valued at $ 3,421,672.83 as finally determined by the Commissioner pursuant to the executrix's election of an optional valuation date. Deductions aggregating $ 411,039.73 (exclusive of the specific exemption) were allowed his estate for debts and funeral and administration expenses. Other debts, taxes, and expenses aggregating $ 965,231.64, were not allowed as deductions. They are itemized as follows:
| Federal estate tax | $ 757,623.86 |
| Connecticut succession tax and interest | 186,383.61 |
| Federal income tax of the estate | 19,773.35 |
| Miscellaneous items | 1,450.82 |
| Total | 965,231.64 |
*1248 No deduction was claimed by or allowed to the prior estate for property previously taxed or for any mortgage or lien.
During 1937 and the early part of 1938 the decedent, as executrix, collected cash belonging*26 to the prior estate (including dividends and proceeds from the sales of stock) in the amount of $ 295,309.60. In addition, she obtained bank loans in the amount of $ 221,550, so that her total cash receipts, as executrix, were $ 516,859.60. Of this amount the executrix disbursed $ 490,884.91 and transferred the balance of $ 25,974.69 to herself.
On October 21, 1937, upon application made by the executrix for the purpose of availing herself of the optional valuation date provisions of the Federal estate tax laws, the probate court ordered that the executrix distribute "to herself as sole legatee" under the last will of the prior decedent, seven blocks of stock, which had been included in the prior estate at a value of $ 2,931,766.03 as finally determined. In 1938 the executrix distributed to herself the remaining personal property of the estate, consisting of stocks, bonds, and various other items of intangible and tangible personalty, which had been included in the prior estate at a value of $ 44,266.09. At the time of these distributions the prior estate owed debts, taxes, and expenses of $ 1,080,961.77, as follows:
| Federal estate tax | $ 547,364.88 |
| Connecticut succession tax and interest | 186,383.61 |
| Attorneys' fees | 151,113.97 |
| Monument | 524.00 |
| Bank loans | 195,575.31 |
| 1,080,961.77 |
*27 After the distributions by the executrix to herself, the prior estate had no remaining assets from which the debts, taxes, and expenses could be paid.
In 1939 decedent sold some of the stocks received upon the distributions and realized gains of some $ 33,000. She made gifts of some of the property. After the distributions and prior to September 26, 1939, the date on which the final installment of the Federal estate tax was paid, decedent received dividend and interest income from the property in the amount of approximately $ 250,000.
Prior to decedent's death all the debts, taxes, expenses, and liabilities of her husband's estate, amounting to $ 1,080,961.77, had been fully paid and discharged by decedent.
Items of property which have been identified as having been included in the prior decedent's estate (or exchanged for property so included) at an aggregate value of $ 2,477,631.67, as finally determined, are included in decedent's estate at a higher aggregate value. They consist of eleven items of stocks and bonds aggregating $ 2,341,421.90 *1249 in the prior estate, seven items of life insurance proceeds at an aggregate value of $ 135,119.77, and one item of real estate*28 at a value of $ 1,090.
The gross estate of decedent in excess of the property included in the prior decedent's estate is more than sufficient to pay all of the taxes, debts, expenses, and liabilities of or imposed upon decedent's estate.
Deduction for previously taxed property was claimed by decedent's estate based on the full amount of $ 2,477,631.67. The Commissioner disallowed the claim to the extent of $ 850,457.20, limiting the deduction (before proportionate reduction) to $ 1,627,174.47. He determined that the real estate and insurance proceeds, the decedent having been the beneficiary of the policies, had been received by decedent from the prior decedent by bequest, devise, or inheritance, but that of the personal property, aggregating $ 2,341,421.90, only 63.677752 percent, or $ 1,490,964.70, had been received by decedent by bequest, devise, or inheritance, and that 36.322248 percent, or $ 850,457.20, had been acquired by purchase. The Commissioner determined the percentages by obtaining the ratio of the unpaid debts of the prior estate ($ 1,080,961.77) to the aggregate value of the personal property ($ 2,976,032.12) at the time of the distributions by the decedent as executrix*29 to herself individually.
OPINION.
The sole question involved in this proceeding is the proper amount of deduction allowable to the estate of the decedent for previously taxed property under section 812 (c) of the Internal Revenue Code. 1 Petitioner takes the view that it is entitled to a deduction in an amount of $ 2,477,631.67 which is the aggregate value of nineteen items of property which were included in the earlier estate, which items (or others exchanged therefor) are included in decedent's estate at a higher valuation. Respondent, on the other hand, contends that a legatee who receives property from a decedent's estate before the estate's debts are paid and thereafter pays the debts out of his own funds is a purchaser of the property to the extent of the debts so paid. Debts, taxes, and expenses against the prior estate in the amount of $ 1,080,961.77 were paid by the decedent herein and the respondent argues the deduction above claimed should be reduced by that amount.
*30 We think the respondent must prevail. Under the clear and unambiguous *1250 terms of her benefactors' will, the decedent was entitled to receive "the rest, residue and remainder" after the payment of debts, funeral, and testamentary expenses. By the law of Connecticut, the "residue" of an estate is that portion of an estate which remains after the payment of debts, administration expenses, legacies, and other proper charges against the estate. First National Bank & Trust Co. v. Baker, 124 Conn. 577">124 Conn. 577; 1 Atl. (2d) 283; Central Hanover Bank & Trust Co. v. Nisbet, 121 Conn. 682">121 Conn. 682; 186 Atl. 643; Stanley v. Stanley, 108 Conn. 100">108 Conn. 100; 142 Atl. 851. Section 812 (c), supra, permits of a deduction for property previously taxed only to the extent that "such propery can be identified as having been received by the decedent from the donor by gift, or from such prior decedent by gift, bequest, devise, or inheritance * * *." Had the administration of the prior decedent's estate been carried out in a normal *31 manner and completed in the customary way, the decedent, as residuary legatee, would have received only that property which was left after payment of the expenses in question. Hence, we think it follows that the decedent received by "gift, bequest, devise, or inheritance" only the residue of the prior estate after deduction for the debts and charges in question, and, to the extent that the property obtained by decedent exceeded that to which she was entitled under the will of her benefactor, it may not be regarded as coming within the letter or intendment of the statute. Cf. Bahr v. Commissioner, 119 Fed. (2d) 371, affirming Estate of Eugene L. Bender, 41 B. T. A. 80. The court there, speaking of a forerunner 2 of the statute in question, pointed out that the language used is adapted to one or more particular pieces of property specifically given or inherited and that it is not adapted to an unadministered estate as a whole.
*32 Our attention has not been called to, nor have we found, any cases which may be said to be dispositive of the issue herein. The petitioner relies principally upon Brewster v. Gage, 280 U.S. 327">280 U.S. 327; Moore v. Commissioner, 146 Fed. (2d) 824, affirming 1 T. C. 14; and Commissioner v. Garland, 136 Fed. (2d) 82, affirming 46 B. T. A. 1243, none of which appears to be directly in point. In the Garland case, supra, the precise question here involved was conceded by the taxpayer when it agreed that the claimed deduction should be reduced by $ 14,000 representing unpaid debts of the prior decedent. If there is to be any inference taken from the language of the appellate court, we think such inference favors the result we have reached.
The deduction allowable for previously taxed property as computed by the respondent is upheld.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 812. NET ESTATE.
* * * *
(c) Property Previously Taxed. -- An amount equal to the value of any property (1) forming a part of the gross estate situated in the United States of any person who died within five years prior to the death of the decedent, or (2) transferred to the decedent by gift within five years prior to his death, where such property can be identified as having been received by the decedent from the donor by gift, or from such prior decedent by gift, bequest, devise, or inheritance, or which can be identified as having been acquired in exchange for property so received. * * *↩
2. Sec. 303 (a) (2), Revenue Act of 1926, as amended by sec. 806 (a), Revenue Act of 1932.↩