Hord v. Comm'r of Internal Revenue (In re Estate of Luehrmann), Docket No. 63463.

• Citation: 33 T.C. 277
• Decision Date: 18 November 1959
• Docket Number: Docket No. 63463.
• Parties: ESTATE OF EDWARD H. LUEHRMANN, DECEASED, JANE LOUISE HORD, FORMERLY JANE LOUISE LUEHRMANN, CHAS. D. LONG, AND AUGUST C. JOHANNINGMEIER, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE RESPONDENT.
• Court: United States Tax Court

33 T.C. 277

ESTATE OF EDWARD H. LUEHRMANN, DECEASED, JANE LOUISE HORD, FORMERLY JANE LOUISE LUEHRMANN, CHAS. D. LONG, AND AUGUST C. JOHANNINGMEIER, EXECUTORS, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE RESPONDENT.

Docket No. 63463.

Tax Court of the United States.

Filed November 18, 1959.

Robert H. Batts, Esq., for the petitioner.

James H. Martin, Esq., and William A. Goffe, Esq., for the respondent.

In computing for Federal estate tax purposes the present value of a charitable bequest, which consists of a remainder interest in the estate's residue, held, costs of administration and executors' commissions, even though claimed as deductions from the estate's gross income for Federal income tax purposes, are to be deducted in computing the value of the estate residue.

OPINION.

OPPER, Judge:

This proceeding involves a deficiency in Federal estate tax in the amount of $203,020.17 determined against the Estate of Edward H. Luehrmann.

All of the facts were stipulated. They are hereby found.

The stipulation reflects certain concessions on the part of each of the parties. The only question for our consideration is whether executors' commissions and costs of administration which were claimed as deductions on the estate's Federal income tax returns, during the course of administration, and were not claimed as deductions on the estate's Federal estate tax return, as amended or supplemented, are required to be deducted from the gross estate in computing, for estate tax purposes, the value of a charitable bequest which consists of the income from the residue of the corpus of the estate following a life interest in said income. The parties have stipulated that the deficiency in Federal estate tax is $63,959.70 if we hold for respondent, and $39,535.57 if we hold for petitioners.

Edward H. Luehrmann (hereinafter referred to as the decedent) died on March 10, 1952, leaving a last will and testament which was duly admitted to probate in the Probate Court of the City of St. Louis, Missouri, on March 13, 1952. Decedent's Federal estate tax return and ‘supplemental’ Federal estate tax return were filed on May 26, 1953, and December 15, 1953, respectively, with the director of internal revenue, St. Louis, Missouri.

Under the terms of decedent's last will and testament, Jane Louise Luehrmann, Leo S. Rassieur, and August C. Johanningmeier were named as executors and were duly qualified. On May 29, 1954, Jane Louise Leuhrmann remarried and is named in the Probate Court as Jane Louise Hord. On May 29, 1955, Leo S. Rassieur died and Chas. D. Long was appointed as successor executor and was duly qualified.

Under the terms of his last will and testament, decedent gave, devised, and bequeathed the residue of his estate in trust. The income for her life (with the exception of two relatively minor income bequests) was to be paid to his sister-in-law, now Jane Louise Hord, and at her death in perpetuity to Washington University, a corporate charitable institution organized and existing under the laws of the State of Missouri. The applicable provisions of the will are as follows:

ITEM VII: I direct that all the rest, residue and remainder of my estate, of whatever kind or character, and wheresoever the same may be situated, whether the same be real, personal or mixed, of which I may die seized or possessed, or to which I may be entitled at the time of my death, including any and all legacies or devises herein contained which shall have lapsed, shall pass to my sister-in-law, Jane Louise Luehrmann, Leo S. Rassieur and the St. Louis Union Trust Company, a corporation of the City of St. Louis, Missouri, as Trustees upon the trusts, for the use and benefit of those hereinafter named, and with the powers and duties hereinafter set out, to-wit:

(5) I direct the Trustees after paying all expenses of administering said trust, including compensation of the Trustees, to pay to Herbert Sharp, who is now in my employ, the sum of One Hundred Thirty Dollars ($130.00) per month, and Mary Krause, who is now also in my employ, the sum of Eighty Dollars ($80.00) per month for and during the period of their respective natural lives, but only so long as each of them respectively shall remain in the service of my said sister-in-law, Jane Louise Luehrmann, or shall have left her service in a manner which she is willing to certify in writing to the Trustees was satisfactory to her and with her approval.

After making the foregoing payments I direct my said Trustees to pay over to my said sister-in=law, Jane Louise Luehrmann, for and during the period of her natural life all the balance of the net income from said trust estate in monthly or other convenient installments. I further direct that from and after the death of my said sister-in-law the entire net income from said trust fund, after making the monthly payments required to be made to Herbert Sharp and Mary Krause, shall be paid to Washington University, a corporation under the laws of Missouri, for the use and benefit of its medical school to be used and applied by said medical school for scientific study, research, and experimentation to discover the causes, treatment, relief and cure of degenerative diseases such as diabetes, heart disease and circulatory diseases, such study, research and experimentation to be conducted by and under the supervision and direction of full time professors in said medical school, so long as the said Washington University shall maintain a department in its medical school for such study, research and experimentation.

During the course of administration of the estate the following costs of administration and executors' commissions (hereinafter sometimes collectively referred to as administration expenses)¹ were claimed as deductions on the estate's Federal income tax returns: $1,260.97 for the year 1952; $78,204.12 for the year 1953; $29,265.31 for the year 1954; and $12,381.28 for the year 1955. These administration expenses were not claimed as deductions on the estate's Federal estate tax return.

Petitioners filed a statement and waiver referring to section 162(e), I.R.C. 1939, with its income tax return for the taxable year 1953.

In determining the estate tax deficiency, respondent deducted the administration expenses totaling $121,111.68 mentioned above from the corpus of the gross estate in computing, for estate tax purposes, the value of the charitable bequest. Petitioners contend that such administration expenses should not be so deducted.

We agree with respondent that under the terms of the will the charitable bequest herein consists of a remainder interest in the residue of the estate following a life interest therein and is not to be computed as a ‘percentage of the taxable estate’ as stated by petitioners. Cf. William Nelson Cromwell et al., Executors, 24 B.T.A. 461; Estate of Leonard S. Waldman, 46 B.T.A. 291; Hartford Nat. Bank & Trust Co. v. United States, (D. Conn.) 106 F.Supp. 76. Thus, the real disagreement of the parties is as to the value of the residue of the estate which must be used in computing the present value of the remainder interest therein. The disagreement as to the value of the residue is, in turn, due entirely to their differences with respect to whether the the executors' commissions and costs of administration mentioned above are to be deducted from the corpus of the estate in determining the present value of the income therefrom which decedent bequeathed to Washington University.

The residue of the estate (sometimes referred to as the residuary estate) has been defined as that which remains after all debts and expenses of administration, as well as all specific bequests and devises, have been paid or satisfied. Black's Law Dictionary (4th ed.); Nichols v. Swickard, 211 Iowa 957, 234 N.W. 846, 847. See also In re Cushman's Estate, 143 Misc. 432, 257 N.Y.Supp. 582, 586; Brown v. Hilleary, 147 Ore. 185, 32 P.2d 584, 587.

It may well be that petitioners had the right to deduct some of the administration expenses from the gross income of the estate for the purpose of computing the estate's Federal income tax liability. This right would be derived from section 23 of the Internal Revenue Code of 1939, and is predicated upon the provisions contained in section 161(a)(3) that ‘(i)ncome received by estates of deceased persons during the period of administration or settlement of the estate’ is subject to the same income taxes as are imposed upon individuals, and the provisions contained in section 162 that the net income of the estate ‘shall be computed in the same manner and on the same basis as in the case of an individual,‘ with certain exceptions, including the qualification contained in section 162(e).

We may also agree with petitioners that, having elected to deduct administration expenses from the gross income of the estate for income tax purposes, the estate is not permitted, because of the provisions of section 162(e),² thereafter to deduct again such expenses from the gross estate for estate tax purposes.

But we agree with respondent's argument that the amount deductible from the gross estate for the valuation of a charitable bequest may not be greater than the value of what the charitable corporation is actually entitled to and does, in fact, receive. Harrison v. Northern Trust Co., 317 U.S. 476.

At one time it was thought that Congress intended charitable residuary bequests to be deductible at their gross value without reduction for any costs or administration expenses. Edwards v. Slocum, 264 U.S. 61. Congress promptly corrected this assumption by enacting what is now section 812(d), I.R.C. 1939. ³ And the purpose of this legislation was declared to be ‘to limit the deduction for charitable bequests, etc., to the amount which the decedent has in fact and in law devised or bequeathed to charity.’ H. Rept. No. 708, 72dCong.,1stSess., pp. 49-50. (Emphasis added.)

In general, where, as in the case of section 812, the...