Burke v. U.S., 92-5062

Decision Date02 June 1993
Docket NumberNo. 92-5062,92-5062
Citation994 F.2d 1576
Parties-6705, 93-2 USTC P 60,146 James W. BURKE, as Personal Representative of the Estate of Edna Sproull Williams, Deceased, Plaintiff-Appellant, v. The UNITED STATES, Defendant-Appellee.
CourtU.S. Court of Appeals — Federal Circuit

William R. Frazier, Frazier & Frazier, P.A., Jacksonville, FL, argued for plaintiff-appellant.

Joan I. Oppenheimer, Atty., Dept. of Justice, of Washington, DC, argued for defendant-appellee. With her on the brief were James A. Bruton, Acting Asst. Atty. Gen., Gary R. Allen and Gilbert S. Rothenberg, Attys.

Before NIES, Chief Judge, PLAGER and RADER, Circuit Judges.

NIES, Chief Judge.

James W. Burke, as personal representative of the estate of Edna Sproull Williams, appeals from the summary judgment entered by the United States Court of Federal Claims 1 in Burke v. United States, No. 540-89T (Cl.Ct. Nov. 27, 1991), that Williams' estate is not entitled to a refund for taxes paid based on the federal estate tax return filed November 24, 1982.

I.

Edna Sproull Williams died testate on February 28, 1982, while a resident of Jacksonville, Duval County, Florida. James W. Burke is the presently acting personal representative of the Williams estate. Williams' will was filed for probate in the Circuit Court for Duval County, Florida (the probate court) on March 2, 1982.

On November 11, 1982, Burke petitioned the Florida probate court to construe Articles I and XIII of Williams's will under Florida law 2 as authorizing payment of administrative expenses out of the income earned by the estate over the probate period (post-mortem income), rather than requiring payment out of the principal of the estate. Articles I and XIII of Williams' will provide:

Article I

I direct that all my just debts, including expenses of my last illness and funeral expenses be paid by my Personal Representatives as soon as reasonably convenient after my death. I direct that all estate, inheritance and succession taxes that may be levied against my estate, including such taxes levied against property constituting any part of my estate for federal estate tax purposes, whether passing under this Will or otherwise, shall be paid by my Personal Representatives solely out of the residuary estate being bequeathed hereunder, it being my intention that the portion of my estate devised and bequeathed to or for the benefit of all legatees hereunder, except the residuary legatee, shall be enjoyed by them free from any burden for such estate, inheritance or succession taxes....

Article XIII

I give, devise and bequeath all of the rest, residue and remainder of my estate, including all lapsed legacies or devises, after On November 12, 1982, only one day after the unopposed petition for construction was filed, the Florida probate court entered an Order construing the will as follows:

paying therefrom any debts and taxes, including estate, inheritance, or succession taxes and other obligations of my estate, including all administration expenses, to the Trustees of the Edna Sproull Williams Foundation.... 3

Articles I and XIII of the decedent's Will are construed to authorize payment of the administrative expenses by the Personal Representatives out of income if they choose to pay such expenses out of income, and to the extent that the Personal Representatives do not choose to pay administrative expenses out of income, such administrative expenses shall be paid out of the residuary share of the estate prior to distribution to the residual beneficiary, as requested in the Petition.

Burke filed the estate's federal estate tax return on November 24, 1982. On the tax return, the entire gross estate was valued at $10,489,753.94. However, the estate claimed deductions totaling $9,747,444.42, leaving a taxable estate of $742,309.52. Included within the total claimed deductions, were charitable deductions totalling $9,662,605.10, of which $8,869,080.10 represented the will's residual bequest to the Foundation. Burke also filed a fiduciary estate income tax return covering income earned by the estate after Williams' death in 1982. On the estate's fiduciary income tax return for 1982, Burke claimed a deduction of $144,441.00 for administrative expenses incurred in administering the estate. With this income tax return, Burke also filed an elective statement under I.R.C. section 642(g) in which the estate waived its right to deduct administrative expenses on the estate's estate tax return.

After auditing the estate tax return, the Commissioner determined that the administrative expenses claimed as a deduction on the estate's income tax return should have been shown on the estate's estate tax return as reducing the charitable deduction which was based upon the residuary clause's bequest to the Foundation. The Commissioner, thus, reduced the amount of the charitable deduction claimed by the estate by $236,536.38--the amount of the administrative expenses plus the estate taxes attributable thereto--and assessed an estate tax deficiency of $80,110.87 against Williams' estate. The estate paid the deficiency and brought suit in the Court of Federal Claims, seeking a refund of $110,717 (the $80,110.87 deficiency plus interest).

In response to both parties' cross-motions for summary judgment, the Court of Federal Claims began its analysis by noting that, under the Florida statute, administrative expenses must be paid out of the principal estate unless the will provides otherwise, i.e., unless the will states that such expenses may be paid out of post-mortem income. Further, noting that it was not bound by the Florida probate court's interpretation of the will, the Court of Federal Claims held that "the will did, in fact, provide for the payment of administrative expenses out of the pre-residue principal" in Article XIII. Burke, No. 540-89T, slip op. at 5-6. The Court of Federal Claims, thus, concluded that the administrative expenses of Williams' estate were required to be paid out of the principal estate.

Before the Court of Federal Claims, Burke argued that the charitable deduction attributable to the residuary bequest to the Foundation should not be decreased because, regardless of the Florida statutory requirement, the administrative expenses had in fact been paid out of post-mortem income and the Foundation had accordingly received a donation at least equal to the amount of the residuary. In response, the court held that "post-mortem income cannot be used to increase the amount of a charitable residual legacy, even by indirectly increasing the amount in the residual bequest." Id. at 7. Accordingly, the Court of Federal Claims granted the government's motion for summary judgment. It is from this summary judgment that Burke appeals.

II.

On appeal, Burke does not assert that the Court of Federal Claims erred by granting summary judgment over the existence of a genuine issue of material fact. Rather, Burke argues only that the trial court erred as a matter of law. Burke first argues that the Court of Federal Claims erred as a matter of law by construing Williams' will under Florida law as not allowing payment of the estate's administrative expenses out of post-mortem income, particularly in light of the Florida probate court's decision allowing such payment. Burke also argues that the estate's residuary charitable deduction should not be reduced by the amount of the administrative expenses as a matter of law because the estate in fact 4 paid the administrative expenses out of post-mortem income. The Commissioner argues, not surprisingly, that the Court of Federal Claims correctly interpreted the will and that the use of post-mortem income to pay administrative expenses does not alter the result that the residuary charitable bequest must be reduced by the amount of the administrative expenses for federal estate tax purposes.

While we do not find error in the Court of Federal Claims' determination that under Florida law the will required administrative expenses to be paid out of the principal of the estate, 5 we believe that the emphasis on the source of payment allowable under state law shifts the focus of the case from the pertinent question--whether payment of administrative expenses must be accounted for in computing the value of a taxable estate under federal law for federal estate tax purposes regardless of the actual source of payment.

A.

We have no quarrel with Burke's interpretation of the Florida statute as allowing a decedent to provide for the payment of administrative expenses out of post-mortem income. The Florida statute reflects the reality that often times it may be in the best interest of an estate to pay administrative expenses from post-mortem income instead of from principal. This payment method avoids forcing the personal representative to sell off portions of an estate to cover expenses. For example, emergency sales of personal property such as stocks or real property could unnecessarily deplete the value of the estate.

Nonetheless, while state law may allow for various sources of payment for administrative expenses, such allowance does not necessarily affect the treatment of these expenses for federal estate taxation purposes. As our predecessor court has stated, "Generally speaking, state law is determinative of property rights, while the manner and extent to which such rights are taxed are determined by federal law." Murray v. United States, 687 F.2d 386, 392 n. 3, 231 Ct.Cl. 481 (1982) (citing Morgan v. Commissioner, 309 U.S. 78, 80-81, 60 S.Ct. 424, 425-26, 84 L.Ed. 585 (1940)). In other words, the allowable sources of payment for administrative expenses under state law does not necessarily affect the source from which the deduction for administrative expenses must be made under federal law. See Lyeth v. Hoey, Collector of the Internal Revenue, 305 U.S. 188, 193-94, 59 S.Ct. 155, 158, 83 L.Ed. 119 (1938). Therefore, we must examine the...

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  • Comm'r of Internal Revenue v. Hubert
    • United States
    • U.S. Supreme Court
    • March 18, 1997
    ...conflict with the Sixth Circuit's decision in Street and with the Court of Appeals for the Federal Circuit's decision in Burke v. United States, 994 F.2d 1576, cert. denied, 510 U.S. 990, 114 S.Ct. 546, 126 L.Ed.2d 448 (1993). See 63 F.3d 1083, 1084-1085 (C.A.11 1995). We granted certiorari......
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    • U.S. Court of Appeals — Eleventh Circuit
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    • United States
    • Mercer University School of Law Mercer Law Reviews No. 47-3, March 1996
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