Commercial Nat. Bank of Charlotte v. United States

• Decision Date: 26 April 1952
• Docket Number: No. 6394.,6394.
• Parties: COMMERCIAL NAT. BANK OF CHARLOTTE v. UNITED STATES.
• Court: U.S. Court of Appeals — Fourth Circuit

196 F.2d 182 (1952)

COMMERCIAL NAT. BANK OF CHARLOTTE v. UNITED STATES.

No. 6394.

United States Court of Appeals Fourth Circuit.

Argued April 4, 1952.

Decided April 26, 1952.

John S. Cansler, Charlotte, N. C. (Cansler & Cansler, Charlotte, N. C., on brief), for appellant.

Melva M. Graney, Sp. Asst. to Atty. Gen. (Ellis N. Slack, Acting Asst. Atty. Gen., Lee A. Jackson, Sp. Asst. to Atty. Gen., Thomas A. Uzzell, Jr., U. S. Atty., Asheville, N. C., and Francis H. Fairley, Asst. U. S. Atty., Charlotte, N. C., on brief), for appellee.

Before SOPER and DOBIE, Circuit Judges, and HUTCHESON, District Judge.

SOPER, Circuit Judge.

This suit relates to the deductibility of attorneys' fees as an administrative expense in computing the net estate of E. L. Baxter Davidson for estate tax purposes under Section 812(b) (2) of the Internal Revenue Code, 26 U.S.C.A. § 812(b) (2). Fees were paid for services rendered by attorneys in connection with a caveat of the will of the deceased under which an estate of approximately $800,000, consisting in great part of real estate in the business section of Charlotte, North Carolina, with the exception of certain legacies, amounting to less than $60,000, was devised and bequeathed to Davidson College, one of the outstanding educational institutions of the South. The executor filed an estate tax return showing no estate tax to be due. Subsequently, numerous heirs at law of the testator employed attorneys and made an attack on the validity of the will which involved an extensive investigation into the life and habits of the testator who died at the age of 86 years, and culminated in a proceeding in the Superior Court of Mecklenberg County, North Carolina, to set aside the will on the grounds of lack of testamentary capacity and undue influence. The case came to trial and after three days spent in taking testimony, during which the propounders of the will completed their case and the caveators had offered certain testimony attacking the will, an agreement of settlement was reached under which the caveators were paid $108,000, including $26,740.22 that was allotted and paid to their lawyers in accordance with pretrial contingent agreements between attorneys and clients.

The agreement of settlement was embodied in an exchange of letters between attorneys for the caveators and the attorneys for the estate in which it was provided that the caveators would discontinue all efforts to prosecute the caveat, so that a verdict establishing the will might be rendered, and that the trustees of the college would pay to the caveators $108,000 and would pay all federal and state estate, inheritance, legacy, succession and death taxes, and that no court costs would be assessed against the caveators. It was further provided that the sum of $108,000 would be inclusive of any attorneys' fees payable to the caveators and that if the court should tax any fees for said attorneys to be paid out of the estate, the amount thereof should be deducted from the sum of $108,000.

The widow of the testator joined the executor in defense of the will and in the final settlement of the controversy she was paid an additional sum of $35,000, which included $8750 in counsel fees, in addition to the sum of $47,000 to which she was entitled under an ante-nuptial agreement executed by her and the testator ten years before his death. For purpose of convenience the amounts agreed to be paid to the heirs at law and the widow, and to the attorneys, as above set out, were paid by the college, the residuary legatee of the estate.

The terms of the settlements, however, were not embodied in the judgment of the court since the residuary estate consisted entirely of real property and the attorneys for the college desired to avoid any semblance of a cloud upon the title. Accordingly, when the trial was resumed after the settlement had been reached, the caveators offered no further evidence and the jury returned a verdict upon the evidence offered by the propounders in support of the will. A judgment was then entered admitting the will to probate and directing the executor to proceed with the administration of the estate, according to the terms of the will, and further directing that the costs of the proceedings be taxed by the clerk and paid by the executor out of the estate. No reference was made in the judgment to the amounts paid in settlement or to the attorneys' fees, and none of the fees were taxed as costs.

When these matters were brought to the attention of the federal tax authorities and it appeared that the charitable deduction had been reduced and that the net estate was subject to tax, there was assessed a deficiency tax of $58,967.96, which was paid. Thereafter, demand for refund was made and the instant suit was brought by the executor to recover the sum of $14,600.96 with interest, which represents the amount by which the tax was increased, by including in the taxable estate attorneys' fees in the aggregate sum of $35,490.22. The District Judge, being of the opinion that no deduction for the amount of the attorneys' fees was allowable under the federal and state law, entered judgment for the United States.

It is conceded, by reason of the decisions of the courts,¹ that what was paid to the caveators and the widow, in accordance with the compromise agreements, was received because of their standing as heirs and widow of the testator, since their claims although not established by a formal judgment of the court, were based upon their relationship to the deceased; and hence the amounts paid to them were properly included in the taxable net estate. The United States takes the further position that the amounts paid for the attorneys' fees are in the same category and should also be included in the net estate since they were paid for services rendered to the heirs and to the widow, and constituted a part of what they received in the settlement of their claims. It is said that the attorneys' fees were not administrative expenses of the estate within the meaning of the federal statute, but were the individual expenses of the heirs and the widow, incurred by them in protecting their own interests.

This position, under usual circumstances, is in accord with Section 812(b) (2) of the Internal Revenue Code and Sections 81.29 to 81.35 of Treasury Regulations 105 promulgated in pursuance thereof. The statute provides that, in determining the value of the net...