Babcock's Estate v. Commissioner of Internal Rev.

• Decision Date: 21 June 1956
• Docket Number: No. 11848.,11848.
• Citation: 234 F.2d 837
• Parties: ESTATE of Edward V. BABCOCK, Deceased, Mellon National Bank and Trust Company and Mary A. Babcock, Executors, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Third Circuit

234 F.2d 837 (1956) ESTATE of Edward V. BABCOCK, Deceased, Mellon National Bank and Trust Company and Mary A. Babcock, Executors, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 11848.

United States Court of Appeals Third Circuit.

Argued May 10, 1956.

Decided June 21, 1956.

Paul G. Rodewald, Pittsburgh, Pa. (Carl Cherin, Smith, Buchanan, Ingersoll, Rodewald & Eckert, Pittsburgh, Pa., on the brief), for petitioners.

John N. Stull, Dept. of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, A. F. Prescott, Grant W. Wiprud, Attys., Dept. of Justice, Washington, D. C., on the brief), for respondent.

Before MARIS, GOODRICH and KALODNER, Circuit Judges.

MARIS, Circuit Judge.

This is a petition for review of a decision of the Tax Court that there is a deficiency of $46,413.35 in the federal estate tax liability of the executors of the Estate of Edward V. Babcock. The facts were stipulated and may be summarized as follows:

The decedent died September 2, 1948, a resident of Allegheny County, Pennsylvania. Under his will, the residue of his estate was disposed of to his widow, Mary A. Babcock; his two sons, Edward Vose Babcock, Jr., and Fred C. Babcock; his nephew, Robert P. Babcock; charities and individuals to be designated by the testamentary trustees; and John K. Saxman, Ben L. Anderson, Harry B. Leech, E. O. Friday and C. R. Meadows, employees of corporations in which the decedent was interested. The widow filed her election to take against the will and thereby, under Section 8 of the Pennsylvania Wills Act of 1947, became entitled to one-third of the net value of her husband's entire estate.

The decedent's net estate for purposes of federal estate tax was computed after deducting, pursuant to section 812(e) (1) of the Internal Revenue Code of 1939,¹ the value of the one-third interest in the estate passing to the widow.

The gross federal estate tax shown on the return was $1,453,654.11. This consisted of the net estate tax of $1,232,211.54 paid with the return, credit for state inheritance taxes of $219,609.27 (the maximum amount allowable under Section 813(b) of the 1939 Code based on the gross basic federal estate tax shown on the return), and credit of $1,833.30 for foreign death taxes. Because of adjustments not now in dispute, it was stipulated that all Pennsylvania inheritances taxes would be less than the allowable credit, and that a Pennsylvania estate tax would be due. $36,934.19 of the Pennsylvania inheritance tax represented a 2% inheritance tax upon the value of the one-third share of the estate passing to the widow.

On April 6, 1951, the executors filed their first account in the Orphans' Court of Allegheny County, Pennsylvania, showing payment by them to the Commonwealth of Pennsylvania on account of Pennsylvania inheritance taxes of $220,000. On April 20, 1951, they made a cash distribution to the widow in the amount of $726,827.05, which was one-half of the gross federal estate tax of $1,453,654.11 shown on the estate tax return. They stated that this was done to equalize the distributions from the estate, since the items making up the gross estate tax paid would be borne by the testamentary estate, not by the widow.

At the audit of the first account held May 23, 1951, the executors filed a petition for distribution, in which they stated that no petition for proration of tax would be filed. In their attached "Statement of Questions to be Determined by the Court" made as required by the rules of the Orphans' Court, the executors stated that one purpose of the proceeding was to obtain a decree of distribution from the Court of the entire share of Mary A. Babcock, and that this required a determination of whether her share was to be subject to proration or reduction by reason of any federal estate taxes. The executors' position was stated to be that her share was not subject to such reduction "and should be determined to be one-third (1/3) of the estate, real and personal, after deduction only of debts, administration expenses and any inheritance taxes attributable to her share and not absorbed by credit against the gross federal estate tax".

A trustee ad litem who had been appointed on May 8, 1951, to represent all unborn or unascertained beneficiaries, submitted his report to the Orphans' Court on October 5, 1951. He concluded that under Pennsylvania law the widow's share was not to be generally reduced for federal estate tax, but that the Pennsylvania inheritance tax on the widow's one-third share reduced the federal marital deduction and would thus subject that much of her widow's share to federal estate tax.

Prior to the audit, two of the employees, Saxman and Friday, filed exceptions on the ground that the widow's election to take against the will extinguished remainders to the sons of the decedent expectant upon a life interest bequeathed to the widow. Similar exceptions were filed by Anderson on October 2, 1952, and by Meadows on November 24, 1952. On October 2, 1952, Anderson also filed exceptions claiming that the cash distribution of $726,827.05 to the widow was improper and that the executors should be surcharged in two-thirds of that amount.

Hearings on the various exceptions were held on November 24 and 26, 1952. In his testimony at the hearing, counsel for the executors stated on cross-examination by counsel for Anderson that in his opinion the share of the widow was not to be reduced for Pennsylvania inheritance tax. In their briefs on Anderson's exceptions, counsel for the executors took the position that the estate tax to be apportioned was the gross federal estate tax before credit, that the entire gross federal estate tax shown on the return (including the allowable credit for state inheritance tax) was paid for the will beneficiaries, that no part of that amount was to be borne by the widow, and that the widow could be charged only with any portion of the Pennsylvania inheritance tax attributable to her share which was not absorbed as part of the allowable credit for state death taxes. Arguments to the contrary were made by counsel for Anderson.

The auditing judge filed his opinion on May 27, 1953. In it he held that the $1,453,654.11 gross federal estate tax shown on the return which the executors had paid to the federal government on December 2, 1949, $1,232,211.54 in cash and $221,442.57 by credits for amounts previously paid by them in cash to Pennsylvania and Canada, was all paid for and on behalf of those who took as beneficiaries under the decedent's will, that no part of that burden was created by the widow's share, and that consequently the widow's share was not to be reduced by any part of that amount. At the conclusion of his opinion, he directed that a decree be entered in accordance with his opinion.

A supplemental petition for distribution was filed on July 21, 1953. Paragraph 9 of this petition requested the Court to decree to Mary A. Babcock one-third of the estate subject...