United States Court of Appeals,
Eleventh Circuit.
No. 94-8287.
ESTATE OF Otis C. HUBERT, Deceased, C & S Soveran Trust Company
(Georgia), N.A., a National Banking Association, Co-Executor,
Petitioners-Appellees,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
Sept. 12, 1995.
Appeal from a Decision of the United States Tax Court (Georgia
Case). (Tax Court No. 22333-90).
Before DUBINA, Circuit Judge, RONEY and ESCHBACH*, Senior Circuit
Judges.
RONEY, Senior Circuit Judge:
On appeal by the Government in this estate tax case, we
affirm the United States Tax Court holding that the marital and
charitable deductions are to be reduced only by the portion of
administration expenses allocated to principal and not by amounts
allocated to income. Estate of Otis C. Hubert v. Commissioner of
Internal Revenue, 101 T.C. 314, 1993 WL 414716 (1993). This
holding brings us in conflict with the two other circuits which
have decided the issue. Estate of Street v. Commissioner, 974 F.2d
723 (6th Cir.1992); Burke v. United States, 994 F.2d 1576
(Fed.Cir.), cert. denied, --- U.S. ----, 114 S.Ct. 546, 126 L.Ed.2d
448 (1993). The Tax Court, in a reviewed decision, concurred in by
15 of the 17 Tax Court judges, specifically declined to accept the
reasoning in Street in a comprehensive opinion.
*
Honorable Jesse E. Eschbach, Senior U.S. Circuit Judge for
the Seventh Circuit, sitting by designation.
Since the Tax Court wrote a careful analysis of every argument
that is made by the Commissioner on this appeal, and we agree with
the reasoning in that opinion, we simply attach that part of the
opinion found at 101 T.C. at 320-30 as an Appendix and adopt it as
our own, as completely as if we had set it forth herein.
We note just four points that may assist in understanding the
analysis made in the portion of the Tax Court opinion attached.
First, the Tax Court was confronted with other issues not
raised on this appeal so that the portion attached deals only with
the issue on this appeal. Critical to understanding that opinion,
however, is the following footnote on page 2 of the original
opinion:
We are using the terms "marital portion" and "charitable
portion" to mean the amounts received by the spouse and the
charity, respectively, under the settlement agreement.
Pursuant to the settlement agreement, the marital and
charitable portions include income accumulated to the date of
distribution. The terms "marital portion" and "charitable
portion" should not be confused with the terms "marital share"
and "charitable share" or "marital deduction" and "charitable
deduction." 101 T.C. at 350 n. 1.
Second, this case involves the $30,000,000 estate of Otis C.
Hubert, a Georgia resident. There was considerable other
litigation in connection with the estate. The settlement agreement
referred to in the portion of the opinion published here was the
result of some prior litigation.
Third, Georgia law authorizes allocation of expenses to income
rather than principal, if the will so provides. Ga.Code Ann. §§
53-2-101, 53-15-3 (Michie 1982). Hubert's will authorized such an
allocation. See Estate of Warren v. Commissioner, 981 F.2d 776
(5th Cir.1993) (allocation of administrative expenses to income
allowed by state law did not reduce the charitable deduction).
Fourth, the estate included a generous amount of income
producing property. From 1986 until 1991, the estate generated
over $4,500,000 of income and incurred over $2,000,000 in
administration expenses. The executors allocated $506,989 to the
principal of the estate and paid the rest of the administration
expenses from post-death income and deducted it on the estate's
income tax returns.
Our reasons for disagreeing with the Sixth Circuit's analysis
in Street are the same as those which addressed that case in the
Tax Court opinion. The later decided case of Burke by the Federal
Circuit simply relied on Street and added nothing new to the
discussion.1
1
With due respect to the dissenting opinion, the two cases
cited as binding authority are inapplicable to this case.
In Ballantine v. Tomlinson, 293 F.2d 311 (5th
Cir.1961), neither the will nor Florida law permitted the
expenses there involved to be paid out of income. "The
decedent, by his will directed that the wife's share of the
residuary estate should not be charged with any part of the
estate tax. There was no such provision or other direction
with respect to administration expenses or other charges
against the estate." (emphasis added). 293 F.2d at 312.
"[W]e find nothing in the Florida statutory law requiring
payment of administration expenses from estate income. We
are likewise unable to agree ... (that a state case) ...
requires that administration expenses be paid from estate
income." 293 F.2d at 314. Unlike Ballantine, the Georgia
law in this case provided for the payment of these expenses
from income if the will permitted.
Likewise in Alston v. United States, 349 F.2d 87 (5th
Cir.1965), though Georgia law permitted it, there was no
provision in the will for the payment of the administration
expenses there involved from income. Georgia law required
them to be paid from the residue of the estate. "Although
there is no specific reference in Georgia statutes to
administration expenses as such, there are provisions that,
unless otherwise directed, debts should be paid out of the
AFFIRMED.
APPENDIX
ESTATE OF OTIS C. HUBERT, DECEASED, C & S/SOVRAN TRUST COMPANY
(GEORGIA), N.A., A NATIONAL BANKING ASSOCIATION, CO-EXECUTOR,
Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
(Docket No. 22333-90, October 19, 1993, 101 T.C. 314, 320-30 [1993
WL 414716]).
Allocation of Expenses
The second issue for decision is whether the marital and
charitable deductions must be reduced by expenses allocated to
income of the estate.
The 1982 will gave the executors of decedent's estate the
power "to charge any expenses against income or principal or
apportion the same." The executors allocated $506,989 as funeral
and administration expenses to the principal of the estate. All
other administration expenses were allocated to income.
Respondent argues that the amount of a marital or charitable
deduction must be reduced by the entire amount of administration
expenses, whether those expenses are allocated to principal or to
income. Respondent cites section 20.2056(b)-4(a), Estate Tax
Regs., and the legislative history of section 2056 as support for
the proposition. In addition, respondent argues that the courts
have "uniformly recognized" that administration expenses reduce the
marital and charitable deductions regardless of whether those
expenses are paid out of income or principal. Respondent contends
that both Georgia law and the language of the settlement agreement
residuum." (emphasis added). 349 F.2d at 88.
There is nothing in either opinion that would indicate
a result contrary to the one the tax court reached in this
case.
also mandate such a result. We disagree.
Before considering this issue in detail, it is helpful to
consider an overview of the operation of estate accounting and
estate taxes. The starting point for determining Federal estate
taxes is the date-of-death (or alternate valuation date) value of
the property of the estate. Deductions are allowed for various
expenses of the estate, as well as for claims against the estate
and bequests to the decedent's spouse and to charity. Income
earned by the estate has no effect on the estate for Federal estate
tax purposes. It is accounted for separately in the estate's
probate account and is taxed separately on the estate's Forms 1041.
Executors have been granted significant flexibility in
accounting for the estate's administration expenses, both for
estate and income tax purposes, and for probate accounting
purposes. Congress has granted the executor the option of
deducting administration expenses on either the estate return, Form
706, or the fiduciary income tax return, Form 1041. Sec. 642(g).
In addition, many States give the decedent the option of
authorizing the executor to allocate such expenses to principal or
to income at the executor's discretion. If the administration
expenses were paid out of principal, they would reduce the amount
of such principal received by the beneficiaries and would reduce
the marital and charitable deductions. However, we conclude that
the administration expenses that are allocable to income in this
case do not change the amount of the estate principal received by
the spouse or the charity and do not reduce the marital and
charitable deductions. Administration expenses are incurred and
accrue during administration and should not be confused with the
claims against the estate which existed and accrued at the date of
death.
Our conclusion that the marital and charitable deductions are
not reduced by payment of administration expenses allocated to
income does not lead to a double deduction in violation of section
642(g). Section 642(g) prohibits a deduction under section 2053 or
2054 for any administration expenses deducted on the estate's
income tax return. However, section 642(g) does not prohibit or
reduce deductions under section 2055 or 2056. The deductions under
sections 2055 and 2056 are based on the date-of-death value of the
property received by the charity and the spouse from the gross
estate. The executor's ability to preserve the value of the
marital and charitable bequests by allocating administration
expenses to income is in no way barred by section 642(g).
The allocation of the expenses in the case before us is
governed by Georgia law. Georgia law authorizes allocation of
expenses to income rather than principal, if provided in the will.
Ga.Code Ann. §§ 53-2-101, 53-15-3 (Michie 1982). The 1982 will
authorized such an allocation, and this provision was not affected
by the settlement agreement. To the extent the executor exercised
its discretion and allocated administration expenses to income, the
marital and charitable deductions are not reduced by payment of
those expenses.
Respondent argues that section 20.2056(b)-4(a), Estate Tax
Regs., controls this question. That section states, in relevant
part:
Marital deduction; valuation of interest passing to surviving
spouse.—(a) In general. * * * The marital deduction may be
taken only with respect to the net value of any deductible
interest which passed from the decedent to his surviving
spouse, the same principles being applicable as if the amount
of a gift to the spouse were being determined. In determining
the value of the interest in property passing to the spouse
account must be taken of the effect of any material
limitations upon her right to income from the property. An
example of a case in which this rule may be applied is a
bequest of property in trust for the benefit of the decedent's
spouse but the income from the property from the date of
decedent's death until distribution of the property to the
trustee is to be used to pay expenses incurred in the
administration of the estate. [Emphasis added.]
We do not interpret section 20.2056(b)-4(a), Estate Tax Regs., as
mandating a setoff against the marital deduction for administration
expenses allocable to income. That section is merely a valuation
provision which requires material limitations on the right to
receive income to be taken into account when valuing the property
interest passing to the surviving spouse. The fact that income
from property is to be used to pay expenses during the
administration of the estate is not necessarily a material
limitation on the right
APPENDIX—Continued
to receive income that would have a significant effect on the
date-of-death value of the property of the estate.
On the facts before us, we find that the trustee's discretion
to pay administration expenses out of income is not a material
limitation on the right to receive income. Under section
2056(b)(4) and section 20.2056(b)-4(a), Estate Tax Regs., the value
of the interest passing to the spouse and the effect of any
encumbrance on that interest shall be determined "as if the amount
of a gift to the spouse were being determined." Therefore, we look
to the gift tax provisions and consider how they treat the payment
of expenses out of the income of a trust that was given to a
spouse. Under section 2523(e), in order for a donor to be entitled
to a deduction for a gift in trust to his spouse over which the
spouse has a general power of appointment, the spouse must be
entitled to all of the income from the trust. Under section
25.2523(e)-1(f)(3), Gift Tax Regs., a spouse is considered to
receive all of the income from a trust even if "trustees'
commissions, and other charges" are paid out of income, provided
the spouse is not deprived of substantial beneficial enjoyment.
That section is similar to section 20.2056(b)-(5)(f)(3), Estate Tax
Regs. In interpreting those sections, respondent has considered
the effect of a power "To charge to income or principal, executor's
or trustee's commissions, legal and accounting fees, custodian
fees, and similar administration expenses" on the marital
deduction. Respondent concluded that such a power "does not result
in the disallowance or diminution of the marital deduction."
Rev.Rul. 69-56, 1969-1 C.B. 224 (emphasis added). While we
recognize that the revenue ruling is not binding precedent, it does
present respondent's position on this subject. Crow v.
Commissioner, 85 T.C. 376, 389 [1985 WL 15387] (1985).
In the case before us, the power is essentially the same as
the power in the revenue ruling. Moreover, the income used to pay
administration expenses is insubstantial compared to the lifetime
of income Mrs. Hubert will receive from the property. Therefore,
she is not deprived of substantial beneficial enjoyment, and she
would be treated, under section 25.2523(e)-1(f)(3), Gift Tax Regs.,
as having received all of the income from the trust. If Mrs.
Hubert is treated as having received all of the income from the
trust, there can be no material limitation on her right to receive
income.
We also reject respondent's interpretation of the legislative
history of the marital deduction, which states that claims against
the estate paid out of income increase the residue by purchase, not
bequest, and therefore "the value of any such additional part of
the residue passing to the surviving spouse can not be included in
the amount of the marital deduction." S.Rept. 1013 (Part II), 80th
Cong., 2d Sess. (1948), U.S.Code Cong. and Admin.News 1948 p. 1163,
1228, 1948-1 C.B. 331, 335. The Senate report describes the result
only if income is use to pay claims against the estate; it does
not discuss administration expenses at any point. There is a clear
distinction between claims against the estate and administration
expenses which are allocable to income, and this distinction
mandates different treatment of the two. Claims against the estate
are, by definition, in existence at the date of death; therefore,
by their very nature, claims against the estate relate to corpus
and must be charged thereto. By contrasts, administration expenses
come into existence only after the death of the decedent and may
relate to both income and corpus. As a result, administration
expenses logically can be charged to either income or corpus. Here
they were charged to income in accordance with the will and Georgia
law. Accordingly, the legislative history cited by respondent does
not control the treatment of administration expenses in the case
before us.
This Court has spoken on this issue in Estate of Richardson v.
Commissioner, 89 T.C. 1193 [1987 WL 257908] (1987), and Estate of
Street v. Commissioner, T.C.Memo 1988-553 [1988 WL 128662], aff'd
in part and rev'd in part, 974 F.2d 723 (6th Cir.1992). In Estate
of Richardson, the decedent left to his wife the amount of his
residuary estate necessary to maximize all of his estate tax
deductions in order to make his estate nontaxable for Federal
estate tax purposes. The decedent's executors were given the power
to allocate expenses between income and principal. Respondent
argued that the marital deduction should be reduced by the amount
of interest payable on the estate's Federal estate taxes and State
inheritance taxes, even though the executors had allocated the
interest to income.
We concluded: "Whether an expenditure on behalf of an estate
is chargeable to principal, or the income produced thereby, depends
on the law of the State wherein decedent was a resident at the time
of his death, or upon the terms of decedent's will." Estate of
Richardson v. Commissioner, supra at 1201. In that case, there
were no provisions of State law dictating where the interest should
be charged. Therefore, we looked to the language of the will and
determined that, based on the decedent's intent to minimize taxes,
the executors had the power to charge the interest against income
and, thereby, not reduce the marital deduction.
In Estate of Street, on similar facts we held that Tennessee
law permitted a decedent to grant the power to allocate
administration expenses between income and principal. We held that
the marital deduction was not reduced by the amount of the expenses
allocated to income.
We note that the fact that the marital bequest in Estate of
Street was in trust did not affect our reasoning in that case.
Respondent argues that the fact of the trust should make a
difference, because if Mrs. Hubert is receiving only an income
interest and part of the income is used to pay expenses, the value
of the interest passing to Mrs. Hubert is reduced. However,
respondent ignores the fact that, because Mrs. Hubert has a general
power of appointment over one of the trusts and the other trust is
a qualified terminable interest trust, Mrs. Hubert is treated as
having received the entire value of both trusts, not just the
income portions.
On appeal, the Court of Appeals for the Sixth Circuit reversed
our holding in Estate of Street with regard to administration
expenses, concluding that payment of such expenses reduces the
marital deduction whether the payment is allocated to income or to
principal. However, the court upheld our holding that the payment
of interest on estate taxes and inheritance taxes allocated to
income does not reduce the marital deduction. Estate of Street v.
Commissioner, 974 F.2d 723 (6th Cir.1992), aff'g in part, rev'g in
part and remanding.2
On the issue of the administration expenses, the Court of
2
Respondent has now accepted the holding that the payment of
interest on estate and inheritance taxes allocated to income does
not reduce the marital deduction. Rev.Rul. 93-48, 1993-25 I.R.B.
9. Respondent has specifically limited her change in position to
payments of interest and has reaffirmed her position regarding
all other administration expenses. As we explain below, we see
no valid distinction between interest and other administration
expenses.
Appeals determined that section 20.2056(b)-4(a), Estate Tax Regs.,
was controlling. The Court of Appeals concluded that the
regulation mandates a setoff against the marital deduction for
administration expenses paid from income. The court reasoned:
Income earned by the estate during * * * [the administration]
period builds up the marital share. Expenses paid from income
during this period have the effect of decreasing the amount of
estate property distributable to the spouse. Therefore, the
payment of administration expenses from income must operate to
reduce the size of the marital deduction, otherwise the spouse
would receive a deduction which exceeded the amount which was
actually in the estate, and available for distribution. * *
* [Id. at 727].
The court found support for this reasoning in the legislative
history of the marital deduction.
The Court of Appeals distinguished administration expenses
from interest on estate and inheritance taxes on two grounds.
First, citing Estate of Richardson, the court stated that the
interest on taxes accrues after death, whereas administration
expenses "accrue at death." As a result, the court determined that
payment of interest on taxes from estate income does not affect the
principal of the estate as it existed at the time of decedent's
death, but payment of administration expenses from such income
"will serve to build up the gross estate." Id. at 727. Second,
the court noted that section 20.2056(b)-4(a), Estate Tax Regs.,
specifically mentions administration expenses in it example, but it
does not mention interest on taxes. Therefore, the court held that
the regulation was inapplicable to interest on taxes. Id. at 729.
Thus, the Court of Appeals concluded that payment of administration
expenses from income of the estate should reduce the marital
deduction, but payment of interest on estate and inheritance taxes
from income should not reduce the marital deduction. See also
Burke v. United States, 994 F.2d 1576 (Fed.Cir.1993), and Fisher v.
United States, 28 Fed.Cl. 88 (1993), which rely on the rationale of
Estate of Street with respect to administration expenses.
Respectfully, we disagree with the reasoning of the Court of
Appeals and decline to follow its decision in Estate of Street. As
stated above, we interpret section 20.2056(b)-4(a), Estate Tax
Regs., to be a valuation provision. Therefore, unlike the Court of
Appeals, we find that the regulation does not control the case
before us. In addition, as noted previously, we conclude that the
legislative history of the marital deduction does not mandate a
different conclusion.
Moreover, we take issue with the Court of Appeals' analysis of
the effect of income and expenses on the marital share. The court
stated that income earned on estate property increases the marital
share, and presumably the marital deduction, leading to a deduction
greater than the amount distributed if payment of expenses from
income does not reduce the marital deduction. However, income
earned on estate property is not included in the gross estate.
Alston v. United States, 349 F.2d 87 (5th Cir.1965). As a result,
under section 2056(a), such income does not lead to an increase in
the amount of marital deduction requiring a corresponding decrease
for payment of administration expenses chargeable against income of
the estate.
Finally, we disagree with the Court of Appeals' distinction
between interest on estate and inheritance taxes and administration
expenses. The fact that section 20.2056(b)-4(a), Estate Tax Regs.,
explicitly refers to administration expenses but does not mention
interest on taxes is not relevant because the reference to
administration expenses is "An example of a case in which this rule
may be applied." Sec. 20.2056(b)-4(a), Estate Tax Regs. (emphasis
added). Application of the regulation, when appropriate, is
clearly not limited to administration expenses. Regardless of the
regulation's treatment of administration expenses and interest on
taxes, it does not provide a useful distinction between the two.
In addition, administration expenses and interest on taxes
cannot be distinguished according to the time at which they accrue.
Both accrue after the date of death. Administration expenses, by
their very nature, are incurred over the entire period of the
estate's administration and can vary significantly from estate to
estate. As a result, administration expenses are too uncertain at
the date of death to accrue at that time. Our analysis in Estate
of Richardson v. Commissioner, 89 T.C. 1193 [1987 WL 257908]
(1987), therefore applies to administration expenses as well as to
interest on taxes, and we will follow our holding in that case.
Both respondent and the Court of Appeals cite Estate of Roney
v. Commissioner, 33 T.C. 801 [1960 WL 1078] (1960), aff'd, 294 F.2d
774 (5th Cir.1961), as support for their positions. In Estate of
Roney, the decedent left the residue of his estate to his wife.
The will made no provision as to the source of payment of
administration expenses. The executor deducted the administration
expenses on the estate's fiduciary income tax returns and did not
reduce the marital deduction on the estate tax return by the amount
of those expenses. In that case, we looked to Florida law and
determined that the executor was required to pay administration
expenses out of the residuary estate. Since the residuary estate
does not include income, we determined that the marital deduction
should be reduced by the amount of the expenses because the amount
of principal received by the spouse was reduced to that extent.
The holding in Estate of Roney is not inconsistent with the
result we reach in the case before us. We merely held in Estate of
Roney that when administration expenses are required to be
allocated to principal, the marital deduction is reduced by the
amount of those expenses. Whether the deduction for the
administration expenses is taken on Form 706 or Form 1041 is
immaterial and irrelevant. See also Alston v. United States,
supra.
Although Estate of Wycoff v. Commissioner, [59] T.C. 617 [1973
WL 2679] (1973), aff'd, 506 F.2d 1144 (10th Cir.1974), was not
cited by either party, we find it appropriate to discuss that case
here. In Estate of Wycoff, the decedent's will provided:
all inheritance, estate and transfer taxes due by reason of my
death shall be paid out of that portion of my estate which is
not included in the Marital Trust to be administered by my
Trustee, unless, in the best business judgment and sole
discretion of my executor, such taxes could be more prudently
paid from any assets in my estate without respect to what is
or is not included in the Marital Trust * * * [Id. at 619.]
Based upon the above election available to the executor, we
concluded that the marital trust might be charged with those taxes
and that the marital deduction was accordingly reduced. We
distinguish that case on its facts.
The executor's choices in Estate of Wycoff were between two
shares of the estate, the marital trust and the nonmarital trust,
both of which were included in the gross estate, and not between
principal and income, where only principal would be included in the
gross estate and income would be accounted for and taxed
separately, as noted above.
We decline to read Estate of Wycoff more broadly to make the
result depend entirely on the discretion of the executor. We will
confine Estate of Wycoff to its facts and to the more narrow
interpretation which we believe was intended by the Court.
Respondent cites Ga.Code Ann. section 53-2-101 (Michie 1982)
as support for the contention that Georgia law requires expenses to
be allocated to principal rather than income. However, that
section only requires allocation of expenses to the principal if no
other provisions are made by the will. Ga.Code Ann. section 53-15-
3 (Michie 1982) allows decedents to grant their executors the power
to allocate expenses between principal and income. Decedent, in
this case, clearly granted such power to his executors.
Finally, we conclude that the settlement agreement did not
alter decedent's grant of the power to allocate expenses. The
settlement agreement merely set forth a formula for determining the
final amounts of both income and principal to be received by Mrs.
Hubert and the charity. That this is the case is demonstrated by
the fact that both parties agree the marital portion, as calculated
under the settlement agreement, should be reduced by income in
order to determine the marital deduction. The fact that the
settlement agreement provided for allocation of expenses between
the marital and charitable portions does not preclude the executors
from allocating those expenses to income rather than principal
within those portions pursuant to the 1982 will.
Respondent cites a variety of cases in support of the
contention that the marital and charitable deductions must be
reduced by expenses. However, none of those cases is on point.
They deal with situations in which the will made no provision for
the allocation of expenses and, therefore, the statute controlled
the allocation. Here, we clearly have a provision in the will
which controls the allocation.
We hold that the allocation of petitioner's expenses to income
was permitted by Georgia law, and the marital and charitable
deductions are not reduced by expenses so allocated.
DUBINA, Circuit Judge, dissenting:
I.
Because I am convinced that the majority has erred in adopting
the tax court's analysis in this case, I respectfully dissent. I
disagree with the majority's holding for two reasons: First, the
holding disregards fundamental federal estate taxation principles
in light of state law which allows administration expenses to be
paid out of post-mortem income, and second, it contravenes binding
circuit precedent.
II.
In this case, both the decedent's will and relevant state law
allowed administrative expenses to be paid out of post-mortem
income; however, "the allowable sources of payment for
administration expenses under state law does not necessarily affect
the source from which the deduction for administrative expenses
must be made under federal law." Burke v. U.S., 994 F.2d 1576,
1580 (Fed.Cir.) (emphasis in original), cert. denied, --- U.S. ----
, 114 S.Ct. 546, 126 L.Ed.2d 448 (1993) (citing Lyeth v. Hoey,
Collector of the Internal Revenue, 305 U.S. 188, 193-94, 59 S.Ct.
155, 158, 83 L.Ed. 119 (1938)).
Section 2031 of the Internal Revenue Code ("I.R.C.") defines
the value of the gross estate as "the value at the time of [the
decedent's] death."1 At the decedent's death, the estate has the
obligation to pay administration expenses. I.R.C. § 2053;
Ballantine v. Tomlinson, 293 F.2d 311, 312 (5th Cir.1961).2 Also,
contrary to the Tax Court's assertion, administration expenses,
although unascertained on the date of death, are deemed to accrue
at the decedent's death. Alston v. United States, 349 F.2d 87, 88
(5th Cir.1965) ("at the decedent's death his estate had the
obligation of paying estate taxes, debts, charges and expenses of
administration") (citation omitted). See also Estate of Street v.
Commissioner, 974 F.2d 723, 727 (6th Cir.1992). "[R]egardless of
the source of payments for administration expenses, such payments
are charges against the gross estate and must be accounted for
accordingly." Burke, 994 F.2d at 1581 (citing Estate of Street,
974 F.2d at 728-29; Alston, 349 F.2d at 88; Rifkind v. United
States, 5 Cl.Ct. 362, 374 (1984)).
Using income to pay administration expenses can be of great
benefit to an estate, especially where no other liquid assets are
1
I.R.C. § 2032 provides an alternative valuation scheme
which is not relevant to this case.
2
In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th
Cir.1981), this court adopted as binding precedent all decisions
of the former Fifth Circuit handed down prior to October 1, 1981.
available to pay the expenses; yet, income earned by an estate
during administration is not part of the gross estate. See Alston,
349 F.2d at 88; Fisher v. United States, 28 Fed.Cl. 88
(Fed.Cl.1993). Allowing administration expenses to be paid out of
income earned during the administration of the estate, without
reducing the gross estate by the amount of the charges against it,
has the effect of increasing the gross estate by the amount of
post-mortem income. See Alston, 349 F.2d at 89.
III.
The Alston case is binding precedent. At the time Alston was
decided, state law required administration expenses to be paid out
of the residuum of the estate.3 The holding of Alston, however,
was based upon an interpretation of the statutory definition of the
gross estate, which is a matter of federal law. See id.
In Alston, the residue of the decedent's estate was left to a
qualified charity. The executors of the estate filed an estate tax
return with a gross estate of approximately $5.9 million. One
thousand forty-two dollars and forty-one cents ($1,042.41) in
funeral and administration expenses were deducted along with other
deductions, leaving an amount of approximately $4.4 million in
residue for the charitable deduction. Id. at 88. The next year,
the executors filed the estate's income tax return, claiming
administration expenses totalling $66,827.33 as deductions. The
executors had charged this amount against the estate's principal
account. Because the executors had failed to deduct these
3
There was no specific state statute regarding
administration expenses, but the court determined that the source
of payment of the expenses was the residuum of the estate.
administration expenses from the gross estate in computing the
residue for the charitable deduction, the Commissioner asserted an
estate tax deficiency. Thereafter, the executors changed their
book entries to charge the expenses to the estate's income, rather
than the principal, paid the deficiency, and instituted a suit to
recover the amount of the deficiency. Id.
The executors argued that "where expenses of administration
are paid out of post-mortem income, the amount of corpus available
for charity is not diminished by such payments." Alston, 349 F.2d
at 89. The court rejected the executors' argument and held that
the source of the deduction was the gross estate and that
"administration expenses must be deducted from the gross estate
even though paid out of post-mortem income." Id. See also
Ballantine, 293 F.2d at 313 (the gross estate must be reduced by
the amount of the administration expenses even though those
expenses are met from another source). The court reasoned that the
"effect of yielding to the executors' argument here would be to
increase the amount of the gross estate by the amount of
post-mortem income—a result directly contrary to the statutory
definition of gross estate." Alston, 349 F.2d at 89 (emphasis
added).
We are bound by the Alston court's interpretation of federal
law. Moreover, we are bound by precedent which specifically
rejects the Tax Court's interpretation of the relevant legislative
history of the marital deduction. See Ballantine, 293 F.2d at 313.
The legislative history provides:
The interest passing to the surviving spouse from the decedent
is only such interest as the decedent can give. If the
decedent by his will leaves the residue of his estate to the
surviving spouse and she pays, or if the estate income is used
to pay, claims against the estate so as to increase the
residue, such increase in the residue is acquired by purchase
and not by bequest.
S.Rep. No. 1013 (Part II), 80th Cong., 2d Sess. (1948), reprinted
in 1948 U.S.C.C.A.N. 1163, 1228 (emphasis added). In the present
case, the Tax Court erroneously held that administration expenses
are not "claims" because they come into existence only after the
death of the decedent. Going further, the court distinguished
administration expenses from claims against the estate reasoning
that administration expenses relate to both the corpus and the
income of the estate. Therefore, the court held that the
legislative history cited above does not control the treatment of
administration expenses.
In Ballantine, a decision that is binding on this court, the
court rejected the executors' argument that the term "claims" as
used in the legislative history referred to debts and excluded
administration expenses. Specifically, the court held that there
was no "logical basis for such a narrow construction" and that
"[t]he reason for including the one applies to the other."
Ballantine, 293 F.2d at 313 (citation omitted). Thus, the
majority's adoption of the Tax Court's interpretation of the
legislative history contravenes binding circuit precedent setting
forth what I believe is the more logical interpretation.
IV.
In sum, the precedent set forth in Alston and Ballantine
should be followed in this case. As a consequence, the Tax Court's
judgment in favor of the estate should be reversed.
Although state law in this case allows administration expenses
to be paid out of income earned by the estate during
administration, federal law requires the gross estate to be reduced
by the amount of the administration expenses, irrespective of the
source of the payment. Accordingly, the marital and charitable
deductions should be reduced by the amount of administration
expenses that were paid out of income earned by the estate during
administration.