Estate of Whittle v. C.I.R., s. 92-1512

• Citation: 994 F.2d 379
• Decision Date: 19 May 1993
• Docket Number: 92-1513,Nos. 92-1512,s. 92-1512
• Parties: -2202, 93-1 USTC P 60,141 ESTATE OF Ruby Miller WHITTLE, Deceased, Citizens National Bank of Decatur, Trustee, Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 379

994 F.2d 379

71 A.F.T.R.2d 93-2202, 93-1 USTC P 60,141

ESTATE OF Ruby Miller WHITTLE, Deceased, Citizens National

Bank of Decatur, Trustee, Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.

Nos. 92-1512, 92-1513.

United States Court of Appeals, Seventh Circuit.

Argued Dec. 9, 1992.

Decided May 19, 1993.

Thomas Sly, Darrell A. Woolums (argued), Samuels, Miller, Schroeder, Jackson & Sly, Decatur, IL, for petitioner-appellee.

Abraham N.M. Shashy, Jr., I.R.S., Washington, DC, Gary R. Allen, Steven W. Parks (argued), Bruce R. Ellisen, James A. Bruton, Department of Justice, Tax Div., Appellate Section, Washington, DC, for respondent-appellant.

Before BAUER, Chief Judge, RIPPLE, Circuit Judge, and GRANT, Senior District Judge. ¹

BAUER, Chief Judge.

Ruby and John Whittle were husband and wife, and virtually all of their assets were held in joint tenancy with a right of survivorship. When John died in 1981, his gross estate was approximately $3.2 million. After allowable deductions, the taxable estate totalled approximately $1.6 million. John's interest in assets held in joint tenancy automatically terminated at his death and transferred to Ruby as his sole survivor. The only assets not held in joint tenancy were a $2,000 life insurance policy and miscellaneous personal property valued at $8,238, distribution of which was governed by Illinois law. ² Ruby filed the requisite federal estate tax form on behalf of John's estate within the nine-month time period after John's death as dictated by section 6075(a) of the Internal Revenue Code. 26 U.S.C. § 6075(a). Ruby also elected to defer the estate tax pursuant to Code section 6166 which governs extensions of time for payment of estate tax when the estate consists largely of interests in closely held businesses. Because the estate tax was deferred, interest began to accrue. That interest was payable in installment amounts calculated pursuant to the Code.

In March 1981, Ruby created the John G. and Ruby M. Whittle Trust, designating The Citizens National Bank of Decatur, Illinois as the trustee. Ruby transferred her assets to the trust. She died four years later in March 1985, leaving the trust valued at approximately $2.9 million. By that time, the trust had paid $113,948 in interest on the deferred tax.

The bank filed a federal estate tax return for Ruby's estate. In the return, the bank claimed credit for the tax on prior transfers of property ("TPT") pursuant to Code section 2013, 26 U.S.C. § 2013. The TPT credit represented the property John owned in joint tenancy that had been taxed in John's estate. After a review of Ruby's estate tax return, the Commissioner of the Internal Revenue Service determined that the interest payments should have been deducted from John's estate as administration expenses. Consequently, the reduced value of John's estate also reduced the amount of TPT credit that Ruby could claim under section 2013. The result of this recalculation was an increase in Ruby's taxable estate. The Commissioner issued a notice of deficiency to Ruby's estate in the amount of $19,584.

The Commissioner also reasoned that even if the interest was not an administration expense, the interest was an outstanding obligation of John's estate. He further reasoned that because Ruby received John's share subject to the estate's obligations, the value of John's estate that transferred to Ruby should have been reduced by the value of the interest payments.

The bank, as trustee for Ruby's estate, disagreed with the Commissioner. The bank argued that the interest payments were not administration expenses because no "estate" was created under Illinois law for purposes of administration under the Code. The bank cited three reasons for its argument: 1) virtually all of John's property passed to Ruby automatically as a joint tenant; 2) John's estate was not probated; and 3) the estate tax payment deferral did not create a claim against John's estate. The bank filed petitions for review with the Tax Court on behalf of the trust and Ruby's estate.

The Tax Court agreed with the bank. The court recognized that Ruby was a joint tenant; not a devisee, legatee, or heir, and that as a joint tenant, she already had an interest in the assets transferred to her by virtue of John's death. The court held that no administration expenses were incurred because the estate was not probated pursuant to the Illinois Probate Act, 755 ILCS 5/1 (formerly Ill.Rev.Stat. ch. 110 1/2). The court held that the absence of a probate estate made it impossible for the tax deferral to benefit that estate. Because of her joint tenant status, the court also held that Ruby received John's assets free and clear of all encumbrances except for those that were specifically imposed on her as a joint tenant.

We use the same standard of review for Tax Court decisions that we use for district court decisions in civil cases tried without a jury. Applegate v. Commissioner, 980 F.2d 1125, 1128 (7th Cir.1992). The parties have stipulated the facts, so we consider only the question of law, which we review de novo. We owe no special deference to the Tax Court on a legal question, but when we consider the application of the legal principle to the facts we will reject the Tax Court decision only if it is clearly erroneous. Gunther v. Commissioner, 909 F.2d 291, 294 (7th Cir.1990). Here we must decide whether the interest on deferred estate tax is an administration expense of a nonprobate estate that is deductible for purposes of the TPT credit pursuant to section 2013.

Typically, we defer to an agency's interpretation of legislation that it administers if that reading is based on a permissible construction of the statute. Chevron, U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843-44, 104 S.Ct. 2778, 2782, 81 L.Ed.2d 694 (1984). No statute, however, addresses the treatment of interest on deferred tax for a nonprobated estate. In Cottage Savings Ass'n. v. Commissioner, --- U.S. ----, ----, 111 S.Ct. 1503, 1508, 113 L.Ed.2d 589 (1991), the Supreme Court recognized that Congress delegated the duty of promulgating rules and regulations for enforcement of the Code and held that federal courts must defer to these rules and regulations. But despite volumes of rulings and regulations generated by the IRS, the Commissioner has not issued rules or regulations about treatment of interest on deferred tax for a nonprobate estate. For this reason, we need not defer to the Commissioner in this case.

Federal tax is imposed on the transfer of a decedent's taxable estate pursuant to 26 U.S.C. § 2001(a). The estate tax may be paid at the appropriate time after the decedent has died, or the tax may be deferred for five years, then paid in a ten-year installment plan pursuant to 26 U.S.C. § 6166. Ruby opted for the deferral. Because Ruby died four years after John, she never paid the actual tax, but only paid the interest that accrued on the deferral. Section 6166 gives no direction about how interest payments on the deferral should be treated by the survivor or the decedent.

Section 2013 allows credit for tax paid on prior transfers of property that passed to the decedent's estate from someone who died within ten years before or two years after the decedent's death. ³ John is the "someone" in this equation. The Code does not give comprehensive instruction on how to compute that credit. Although section 2013(b) instructs how the decedent's estate (Ruby's) should compute "death taxes" paid by the transferor's estate (John's), it does not instruct how the decedent's estate should treat the interest payments resulting from that tax if the tax is deferred.

The Commissioner's primary argument is that the interest is considered an administration expense and may be deducted from the gross estate pursuant to Code section 2053. Treasury regulations define administration expenses as "actually and necessarily, incurred in the administration of the decedent's estate; that is the collection of assets, payment of debts, and distribution of property to the persons entitled to it." 26 C.F.R. § 20.2053-3(a). Those expenses are categorized in three ways: executor's commissions, attorney's fees, and miscellaneous expenses.

The Commissioner relies on Estate of Gilruth v. Commissioner, 50 T.C. 850, 1968 WL 1391 (1968), to support its contention that John's estate must be responsible for the interest payments. In that case, the parties disputed from what source the executor's and attorney's fees generated by the decedent's estate should be paid. The court held that these fees should be paid from the transferor's gross estate because they were directly related to the distribution and administration of that estate. Consequently, the deduction from the transferor's estate reduced the value of the section 2013 TPT credit.

The facts in Gilruth are not analogous to those in this case. Clearly, executor's and attorney's fees generated by the administration of an estate may be deductible from that estate. In contrast John's assets did not require an executor or an attorney for distribution. The interest payments are not a commission or expense, unlike the fees in Gilruth, and they do not reduce the amount of the estate that passes to the transferor's beneficiaries. Moreover, the Tax Court based its decision on the fact that Ruby Whittle was a joint tenant, not a beneficiary.

Because the tax deferral interest is not a commission or fee, it must fall within the ambiguous category of "miscellaneous expenses" to be considered an administration expense within the meaning of section 2053. The regulations define miscellaneous expenses as "court costs, surrogates' fees, accountants' fees, appraisers' fees, clerk hire, etc." 26 C.F.R. § 20.2053-3(d). Again, interest is not one of the listed items in the regulation and we must determine what constitutes "etc." to know whether interest is a miscellaneous...