974 F.2d 723 (6th Cir. 1992), 91-2230, Estate of Street v. C.I.R.

Docket Nº:91-2230.
Citation:974 F.2d 723
Party Name:ESTATE OF Gordon P. STREET, deceased; Gordon P. Street, Jr.; Ruth L. Street; Frances S. Smith; John P. Gaither, Co-Executors, Petitioners-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
Case Date:September 08, 1992
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit
 
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Page 723

974 F.2d 723 (6th Cir. 1992)

ESTATE OF Gordon P. STREET, deceased; Gordon P. Street,

Jr.; Ruth L. Street; Frances S. Smith; John P.

Gaither, Co-Executors, Petitioners-Appellees,

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.

No. 91-2230.

United States Court of Appeals, Sixth Circuit

September 8, 1992

Argued June 8, 1992.

Page 724

John P. Gaither, Hugh J. Moore, Jr. (argued), Douglas E. Peck (briefed), Witt, Gaither & Whitaker, Chattanooga, Tenn., for petitioners-appellees.

Abraham N.M. Shashy, Jr., Chief Counsel, I.R.S., Office of Chief Counsel, Gary R. Allen, Acting Chief (briefed), Shirley D. Peterson, Joy L. Pritts, Gayle P. Miller (argued), U.S. Dept. of Justice, Appellate Section Tax Div., Washington, D.C., for respondent-appellant.

Before: KEITH and SUHRHEINRICH, Circuit Judges, and CONTIE, Senior Circuit Judge.

CONTIE, Senior Circuit Judge.

Respondent, the Commissioner of Internal Revenue, appeals the Tax Court's order for petitioners, the estate of Gordon P. Street, wherein the court refused to reduce the estate's marital deduction by the amount of administrative and interest expenses paid from the estate's income after the death of the decedent.

I.

The facts in this case as stipulated, in part, by the parties are not in dispute. Gordon P. Street, (the "decedent"), died on July 21, 1982. The decedent was survived by his wife, Ruth L. Street and two children, Frances Street Smith and Gordon P. Street, Jr.

At the time of his death, the decedent left a valid will, providing in pertinent part:

ITEM I

I give to my executors all of the powers herein granted to my trustees hereunder.... I direct that my executors take such action and make such elections as will defer any federal estate tax on my estate until the death of my wife as permitted under the Economic Recovery Tax Act of 1981.

ITEM II

I direct that my executors pay all my just debts, funeral expenses, and the costs of the administration of my estate as soon after my death as practicable. All estate, inheritance or death taxes on my estate or occasioned by my death shall be paid from my residuary estate and not charged to any specific legatee or devisee hereunder.

....

ITEM VIII

[T]he executors and trustees shall have the following powers ... but no such powers granted to my trustees shall be exercised in such a way as to prevent that portion of my estate going to my wife from escaping federal estate taxes at my death pursuant to the provisions of the Economic Recovery Tax Act of 1981:

....

E. To determine conclusively, but not in such manner as to invalidate any of the provisions of this instrument, what receipts and expenditures, including dividends of every character, shall be credited or charged to principal and what to income.

With the exception of a $10,000 devise to decedent's son, the remainder of the estate was bequeathed, in trust, for the benefit of his wife under Item VI of the will, which provided as follows:

In the event my wife, Ruth Lowrance Street, is living at my death, I give devise and bequeath to my trustees hereinabove named the entire remainder of my estate to be held in trust for her during her lifetime. It is my intention to take

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advantage of the provisions of the Economic Recovery Tax Act of 1981 exempting from federal estate tax at the time of my death this portion of my estate. During the lifetime of my wife, all of the net income produced by this trust shall be paid to her at convenient intervals, but not less frequently than quarterly. My trustees shall so handle the assets of this trust and the income therefrom as to qualify for the tax exemption provided for by the Economic Recovery Tax Act of 1981.

The co-executors of the decedent's estate timely filed a federal estate tax return. The total gross estate was reported as $34,254,633, the primary asset consisting of 4,143,100 shares of common stock in North American Royalties, Inc. with a reported value of $30,723,250. The estate reported and paid federal estate taxes in the amount of $891,119, and other death taxes in the amount of $1,544,728.

Section 2056(a) of the Internal Revenue Code (the "Code") allows a deduction from the gross estate for the value of property "which passes or has passed from the decedent to his surviving spouse, but only to the extent that such interest is included in determining the value of the gross estate." 26 U.S.C. § 2056(a). Under section 2056(b)(4) of the Code, account must be taken of any taxes or other encumbrances to which property passing to the surviving spouse is subject. Pursuant to these provisions, the meaning of which are in dispute, the estate claimed a marital deduction in the amount of $31,164,894. Joint Appendix at 75.

In addition to the federal estate tax return, the estate filed fiduciary income tax returns (Forms 1041) for 1982, 1983, and 1984, reporting income of $325,223; $763,416; and $1,885,518. On these returns, the estate claimed deductions totalling $462,992 for various administrative fees and expenses, including attorney and accountant fees, fiduciary fees, and "other administrative expenses." As also reflected on those returns, the estate made disbursements of income to the surviving spouse during this three year period.

Upon auditing the estate tax return, the Commissioner...

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