Buckmaster v. U.S., 91-6210

• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)
• Writing for the Court: Before LOGAN and SEYMOUR, Circuit Judges, and BROWN; LOGAN
• Citation: 984 F.2d 379
• Parties: -764, 93-1 USTC P 50,054 Sylvia M. BUCKMASTER, as Personal Representative of the Estate of Daisy Murphy, Deceased, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Docket Number: No. 91-6210,91-6210
• Decision Date: 21 January 1993

Page 379

984 F.2d 379 71 A.F.T.R.2d 93-764, 93-1 USTC P 50,054 Sylvia M. BUCKMASTER, as Personal Representative of the
Estate of Daisy Murphy, Deceased, Plaintiff-Appellant,
v.
UNITED STATES of America, Defendant-Appellee. No. 91-6210. United States Court of Appeals,
Tenth Circuit. Jan. 21, 1993.

Page 380

James H. Rice, Midwest City, OK, for plaintiff-appellant.

Sara S. Holderness, Tax Div., Dept. of Justice (James A. Bruton, Acting Asst. Atty. Gen., and Kenneth L. Greene, Tax Div., Dept. of Justice, with her on the brief), Washington, DC, for defendant-appellee.

Before LOGAN and SEYMOUR, Circuit Judges, and BROWN, District Judge. ^*

LOGAN, Circuit Judge.

Sylvia M. Buckmaster, in her capacity as personal representative of the Estate of Daisy Murphy, deceased (the estate), appeals the district court's grant of the government's motion for summary judgment in the estate's suit for refund of income taxes levied by the Internal Revenue Service (IRS). The only issue on appeal is whether the estate is entitled to claim a deduction under I.R.C. § 661 for income it distributed to estate beneficiaries during two of the estate's tax years. The disbursements were made without explicit authority under the will and without any prior order from the state probate court in Oklahoma; but the distributions were approved as part of the final accounting in the probate court's order of final settlement and again later by a nunc pro tunc order specifically referencing the payments. ¹

I

Daisy Murphy died testate on February 9, 1984, leaving a will that gave her entire estate to her niece, Sylvia M. Buckmaster, and to her nephew, Jesse Murphy, in equal shares. Murphy was named as executor. The will was admitted to probate, letters testamentary issued, and Murphy administered the estate until his death while this appeal was pending. The estate contained valuable mineral interests that earned significant royalties during the course of the estate's administration. Choosing for the estate a tax year ending January 31, 1985, Murphy distributed during that year $437,000 of the estate's income to himself and to Buckmaster in equal shares, and the estate took a deduction for this amount, plus Oklahoma gross production taxes and federal windfall profits taxes relating to that income, on the estate's income tax return. The estate remained open for another year during which it distributed $155,649.51 to the beneficiaries, again claiming similar deductions on the estate's income tax return. In neither year did the estate secure an order from the probate court authorizing the distributions before they were made, but the estate was closed out on February

Page 381

20, 1986. At that time the probate court issued an order of final settlement in which it approved all actions taken by the personal representative without the order itself referencing the specific disbursements to the beneficiaries. These distributions, however, apparently were shown on the executor's final accounting filed with the petition for final settlement, see Okla.Stat.Ann. tit. 58, § 612, and the probate court's order referenced the final accounting.

When the IRS notified the estate after an August 1987 audit that it was disallowing the deductions taken by the estate, the personal representative obtained from the probate court an order nunc pro tunc to reflect explicit approval of the disbursements. This did not satisfy the IRS, which issued a deficiency assessment disallowing the deductions as unlawful because there was no probate court approval before they were made. The estate paid the deficiencies with interest, filed claims for refund, which were denied, and then brought the instant suit in the district court to secure the refunds.

Both parties filed motions for summary judgment. The district court granted the government's motion, holding that the question whether the disbursements were "properly paid" for purposes of I.R.C. § 661 is one of state law, that they were not proper under Oklahoma law unless approved by the probate court in advance of payment, and that the nunc pro tunc order did not cure the defect. ² The estate then appealed.

II

The federal income tax law recognizes the estate of a decedent as a separate tax entity entitled to choose its own tax year ending at the end of any month not exceeding one year after the decedent's death. I.R.C. §§ 441(b), 443(a)(2), 641; Treas.Reg. § 1.443-1(a)(2). It also recognizes the right of the representative of the estate, when acting properly, to spread the income otherwise taxable to the estate between the estate and the beneficiaries. This is accomplished by allowing deductions on the estate's income tax return for income required to be distributed currently or in fact "properly paid" during the tax year to beneficiaries of the estate. I.R.C. § 661(a)(2). It is common practice for personal representatives of decedents' estates to make distributions of income during the estate's tax year either for the support or convenience of the beneficiaries or to obtain the advantages of having the income taxed in the lowest possible rates.

The only question in the instant case is the correctness of the district court's determination that the distributions from the estate were not "properly paid" unless the probate court approved them before they were made. It is acknowledged that the will did not require the payments. The law is that the determination of what is properly paid is a matter governed by local law. See Freuler v. Commissioner, 291 U.S. 35, 44-45, 54 S.Ct. 308, 311-312, 78 L.Ed. 634 (1934); Simon v. Hoey, 88 F.Supp. 754, 759 (S.D.N.Y.1949), aff'd, 180 F.2d 354 (2d Cir.), cert. denied, 339 U.S. 966, 70 S.Ct. 1001, 94 L.Ed. 1374 (1950). We review the district court's determination of local law de novo. Salve Regina College v. Russell, --- U.S. ----, ----, 111 S.Ct. 1217, 1221, 113 L.Ed.2d 190 (1991).

The United States Supreme Court has considered the issue before us in the context of distributions from a trust under California law....