Bahr v. Commissioner of Internal Revenue

• Decision Date: 22 April 1941
• Docket Number: No. 9589.,9589.
• Citation: 119 F.2d 371
• Parties: BAHR et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fifth Circuit

119 F.2d 371 (1941)

BAHR et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 9589.

Circuit Court of Appeals, Fifth Circuit.

April 22, 1941.

William Fulton Tarver, of Houston, Tex., and Milton K. Eckert and John C. White, both of Washington, D. C., for petitioners.

John J. Pringle, Jr., and Sewall Key, Sp. Assts. to Atty. Gen., Samuel O. Clark, Jr., Asst. Atty. Gen., and J. P. Wenchel, Chief Counsel, Bureau of Internal Revenue, and Ralph F. Staubly, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., for respondent.

Before SIBLEY, HUTCHESON, and McCORD, Circuit Judges.

SIBLEY, Circuit Judge.

Two brothers, Frank V. and Eugene L. Bender, were universal partners, having no individual property or debts. Frank died March 18, 1934, leaving a will of which Eugene was executor, and which required all his debts to be paid and then gave Eugene all his property of every sort. Eugene qualified as executor but before completing the administration died December 1, 1934, leaving a will of which the petitioners are executors. A return for federal estate taxes on Frank's estate had been made by Eugene as executor, but the taxes had not been paid when Eugene died. There was no controversy over them, and they have been paid by petitioners. The estate taxes of Eugene's estate are in dispute, the Commissioner having assessed a deficiency, which the Board of Tax Appeals, In re Bender's Estate, 41 B.T.A. 80, confirmed. The errors assigned in the petition to the Board and elaborated here are: (1) The Commissioner in his computation of the deduction for property previously taxed erred in using the net estate of the prior decedent (Frank) as a basis instead of the gross estate. (2) He erred in reducing the deduction for debts evidenced by notes on partnership property from three-fourths of $406,000 to one-half of $406,000. (3) He erred in disallowing deductions of $61,464 and $44,902 for federal estate tax and State inheritance tax respectively on the estate of Frank, which became debts of Eugene's estate.

The facts are all stipulated. Frank left a widow, who under the Texas community property law had a half interest in her husband's half of the partnership. She was settled with in property and money, and by her assumption of one-fourth of the debts. She does not figure in this case. Her husband's interest in the partnership and his one-fourth of the debts alone do. The point of the controversy is whether Eugene's gross estate is to include Frank's gross estate and to take deduction for his fourth of the debts, or whether Frank's estate is to be considered reduced by the amount of his debts in figuring Eugene's estate. The question occurs in two forms: first, in figuring Eugene's gross estate and the deductions for claims against that estate; and, second, in figuring the special deduction for property previously taxed within five years, under Revenue Act of 1926, Sect. 303 (a) (2), as amended by Revenue Act of 1932, Sect. 806 (a), 26 U.S. C.A. Int.Rev.Acts, page 233.

Some effort is made in petitioner's brief to foreclose the matter by claiming that the stipulation of facts establishes that the gross value of Eugene's estate is $2,414,920. That figure and those of which it is the total are preceded in the stipulation by this: "At the date of Eugene L. Bender's death the value of the property formerly belonging to the partnership enterprise * * * without reduction for debts owing * * * was as follows." We do not think the stipulation was intended to cut off enquiry as to whether Frank's debts ought to be deducted from his share of the property in figuring Eugene's estate, for that was the very thing to be tried under the stipulation.

Under the law generally prevalent in the United States Eugene, as surviving partner, would have been under duty to possess and administer the partnership land and personalty for the settlement of the partnership. 47 C.J., Partnership, §§ 611, 613, 616, 633, 642. The land, no matter how the legal title stood, would in equity be treated as personalty. The dead partner's estate would be entitled only to a share in the residue after the business was wound up. Fourth Nat. Bank v. New Orleans & Carrollton Railroad, 11 Wall. 624, 20 L.Ed. 82; Shanks v. Klein, 104 U.S. 18, 26 L.Ed. 635; Bank of Southwest Georgia v. McGarrah, 120 Ga. 944, 48 S.E. 393. 47 C.J., Partnership, §§ 626, 627, 629. When the surviving partner is also the personal representative of the deceased partner, his rights and his duties as survivor are unaffected. 47 C.J., Partnership, §§ 643, 646, 221. These principles seem to be well established also in Texas. Moore v. Steele, 67 Tex. 435, 3 S.W. 448; Oliphant v. Markham, 79 Tex. 543, 15 S.W. 569, 23 Am.St.Rep. 363; Altgelt v. Alamo Natl. Bank, 98 Tex. 252, 83 S.W. 6; Gresham v. Harcourt, 93 Tex. 149, 53 S.W. 1019; Martin v. Dial, Tex.Com.App., 57 S.W.2d 75, 89 A.L.R. 571; Bright v. Morrow, Tex. Civ.App., 225 S.W. 580; Colorado River Syndicate v. Alexander, Tex.Civ.App., 288 S.W. 586; Ramon v. Ramon, Tex.Civ.App., 10 S.W.2d 584; Sherk v. First Natl. Bank, Tex.Com.App., 206 S.W. 507; Diamond v. Gust, Tex.Civ.App., 206 S.W. 366. Neither Frank's estate, nor Eugene as Frank's legatee, could have anything except an interest in what was left of the partnership property after the debts were paid.

If the partnership be considered wound up, it being clearly solvent, by Eugene's apportioning the property and debts among Mrs. Frank, Frank's estate, and himself, so that one-fourth of the property became Frank's and one-fourth of the debts (as between themselves) Frank's individual debts, a similar result follows. Eugene as executor was bound to sell so much of Frank's property as was needed, and pay Frank's debts. Had he done so, he as sole legatee would get only what was left. The value of Frank's property less the amount of Frank's debts was his legacy, and the will so said. He did not become entitled to anything else by dying during the year of administration. In most jurisdictions the executors of the executor would then become Frank's representative, or an administrator de bonis non cum testamento annexo would be appointed to complete the administration of Frank's estate, and Eugene's estate would get only what was left after paying Frank's debts.

It is argued that it is otherwise in Texas because of Rev.Civ.Stats. Art. 3314: "When a person dies, leaving a lawful will, all of his estate devised or bequeathed by such will shall vest immediately in the devisees or legatees * * * subject, however, to the payment of the debts of the testator * * *." There is a similar provision as to heirs where there is no will; and in either case the grant of letters testamentary or of administration entitles executor or administrator to possess and dispose of the estate. Art. 3343 makes the debts of the decedent a lien on the property if taken without administration. As to this we observe that federal taxing statutes are to be so applied as to have the same results in like situations throughout the United States. The peculiarities of local laws do not control unless the statute refers to them as a standard. Thomas v. Perkins, 301 U.S. 655, 57 S.Ct. 911, 81 L.Ed. 1324; Burnet v. Harmel, 287 U.S. 103, 53 S.Ct. 74, 77 L.Ed. 199. Whether the local law provides one sort of administration, or another sort, or no administration, ought not to affect the incidence or the amount of this tax on the transfer of wealth from the dead to the living. When an administration is cut short, as here, just as equity considers that done which ought to have been done and grants relief accordingly, so the estate tax administration ought to consider that done which should have been done and assess the tax accordingly, and alike in all parts of the United States. If either the partnership or the estate of Frank had been regularly wound up, Eugene would not have received from Frank's estate a full one-fourth of the partnership assets, but that fourth reduced by Frank's fourth of the debts.

As to the partnership creditors, Eugene owed the debts equally with Frank; but as between themselves after dissolution and settlement with Mrs. Frank, he did not. Each partner was amply solvent. If Eugene should pay Frank's part he would have recourse on Frank's estate. For present purposes Frank's fourth of the debts were an incumbrance on Frank's property and not "claims against the estate" of Eugene. The two things are clearly distinguished in the tax statute and regulations; Sect. 303 (a) (1), as amended by Revenue Act 1932, § 805, 26 U.S.C.A. Int.Rev.Acts, page 232; Reg. 80, Art. 38. That section, providing for deductions, after naming funeral and administration expenses, mentions: (C) Claims against the estate, and (D) Unpaid mortgages upon or any indebtedness in respect to property, where the value of decedent's interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate. Frank's part of the debts, a lien on his part of the property, is "such mortgage or indebtedness." Subsection D permits, so far as it is concerned, either that the net value of the property be put in the gross estate in which case the indebtedness may not be deducted, or else the full value may be included in the gross with a contra deduction. There is, as the Board remarks, no difference thus far which is done.

But when we come to Sec. 303 (a) (2), as amended by Sect. 806 (a) of the Revenue Act of 1932, which deals with the deduction of property which has caused estate taxes within five years preceding, it does make a difference, both in the basis of this deduction, and in the subtraction from it of the result of the formula with which subparagraph (a) (2) ends. The purpose of these provisions is to avoid a double estate or gift tax on the same property within five years. The language used is adapted to one or more particular pieces of property specifically given or inherited. It is not adapted to an...