63 F.3d 1083 (11th Cir. 1995), 94-8287, Estate of Hubert v. C.I.R.
|Citation:||63 F.3d 1083|
|Party Name:||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.|
|Case Date:||September 12, 1995|
|Court:||United States Courts of Appeals, Court of Appeals for the Eleventh Circuit|
Loretta C. Argrett, Asst. Atty. Gen., Tax Div., U.S. Dept. of Justice, Washington, DC, Abraham N.M. Shashy, Jr., Chief Counsel, I.R.S., Washington, DC, Gary R. Allen, Joan I. Oppenheimer, Jonathan S. Cohen, Michael L. Paup, U.S. Dept. of Justice, Tax Div., Washington, DC, for appellant.
David DeCoursey Aughtry, David W. Siegel, Chamberlain, Hrdlicka, White, Williams & Martin, Atlanta, GA, for appellees.
Appeal from a Decision of the United States Tax Court (Georgia Case).
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.
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. Secs. 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
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).
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 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. Secs. 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...
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