Equitable Trust Co. v. Comm'r of Internal Revenue, Docket No. 19631.
| Decision Date | 10 November 1949 |
| Docket Number | Docket No. 19631. |
| Parties | EQUITABLE TRUST COMPANY, TRUSTEE AND TRANSFEREE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Held, sections 826 and 827, I.R.C., authorize the collector to recover estate taxes from assets of inter vivos trust before first exhausting assets of decedent's estate in the hands of the executor. Dean P. Kimball, Esq., for the petitioner.
Paul P. Lipton, Esq., for the respondent.
This is a proceeding for the redetermination of the liability asserted against petitioner as trustee and transferee in the amount of $94,803.62 for the unpaid balance of the estate tax due on the estate of Laura Etnier Austin. The only issue in the proceeding relates to the extent of petitioner's liability as trustee and transferee under sections 827(b) and 900 of the Internal Revenue Code.
The facts herein were stipulated and they are adopted as stipulated.
Petitioner is a trustee under a deed of trust executed on March 14, 1930, by Laura Etnier Austin, who died September 3, 1944. The estate tax return was filed with the collector of internal revenue for the district of New Hampshire.
Under the provisions of the inter vivos trust agreement, the net income of the trust was payable to decedent during her lifetime and to her son, A. Everett Austin, Jr., (designated in said agreement as Arthur E. Austin, Jr.) after her death and after the death of the said son provisions were made in the agreement for the subsequent distribution of the income and corpus to other beneficiaries.
Decedent was a resident of New Hampshire and her will was probated in the Court of Probate for Rockingham County, New Hampshire. Under her will her son, A. Everett Austin, Jr., was the residuary legatee and executor.
As of the date of decedent's death the assets of the trust estate had a fair market value of $355,108.66. The assets of decedent's estate subject to administration in New Hampshire were as follows:
+----------------------------------------------------+
¦Item ¦Value at date ¦
+------------------------------------+---------------¦
¦ ¦of death ¦
+------------------------------------+---------------¦
¦Securities ¦$43,624.00 ¦
+------------------------------------+---------------¦
¦Cash ¦18,779.05 ¦
+------------------------------------+---------------¦
¦Household goods and personal effects¦9,150.71 ¦
+------------------------------------+---------------¦
¦Automobiles ¦575.00 ¦
+----------------------------------------------------+
The only additional property owned by the decedent at the date of her death consisted of real estate as follows:
+------------------------------------------+
¦ ¦Value at date ¦
+--------------------------+---------------¦
¦Location ¦of death ¦
+--------------------------+---------------¦
¦Windham, New Hampshire ¦$10,000 ¦
+--------------------------+---------------¦
¦Hartford, Connecticut ¦18,200 ¦
+--------------------------+---------------¦
¦Philadelphia, Pennsylvania¦6,500 ¦
+--------------------------+---------------¦
¦Boston, Massachusetts ¦7,500 ¦
+------------------------------------------+
The estate tax return disclosed a total gross estate of $475,959.33, which included the trust created by the decedent March 14, 1930, at a value of $355,108.86 and insurance policy valued at $3,334.73, payable to her son. The executor erroneously included in the gross estate some Maine real estate valued at $2,900 which was not owned by the decedent at the time of her death. Total allowable deductions, except specific exemption, were listed at $20,635.28.
The total estate tax disclosed by said return was $103,633.33. The executor paid $17,400.07 on December 10, 1945. The estate tax liability on said estate tax return was duly assessed in December 1945. No portion of the balance of said estate tax liability has been paid.
In a letter accompanying the estate tax return, the executor's attorneys advised the collector at Portsmouth, New Hampshire, that it was impossible for the executor to pay the full amount of the tax; that, in their opinion, petitioner was liable for a proportionate part of the tax under the New Hampshire apportionment statute; and that it would not be reasonable to compel the executor to sell all the real and personal property and then proceed against the trustee for reimbursement. The collector was advised that the payment accompanying the return represented the proportionate share of the tax due from the executor and the collector was requested to proceed against the petitioner for the balance.
On February 5, 1946, the collector at Portsmouth sent to the executor ‘Notice and Demand‘ for immediate payment of the unpaid balance of the estate tax.
Receipt of the notice and demand was acknowledged by the executor's attorneys in a letter addressed to the collector under date of February 7, 1946, and they refused payment on the ground that it was impossible for the executor to make the payment.
On February 18, 1946, the collector sent to the executor ‘Second Notice and Demand‘ for the unpaid balance of the estate tax.
Prior to filing the estate tax return, the executor requested petitioner to contribute to payment of the balance of the estate tax on the decedent's estate. Petitioner refused to contribute any amount to the payment of the tax. Since the filing of the estate tax return, the executor has repeatedly requested petitioner to contribute to payment of the estate tax. Petitioner has refused such requests, advising the executor that it would not contribute any amount until the assets of the estate were exhausted in payment of the estate tax and other necessary administration expenses.
The executor filed a first and final account in the Probate Court of Rockingham County, New Hampshire, which reflected the condition of the estate as of September 25, 1948. The account shows the disposition made of all personal property owned by the decedent at the date of her death and of all income of the estate subsequent thereto. The estate has had no income since September 25, 1949, and no additional assets have been found since the filing of the estate tax return. Said first and final accounting showed total receipts of $90,451.72 and expenditures of an equal amount. The account showed distributions to legatees as follows:
+----------------------------------------------+
¦Katherine Etnier ¦$1,000.00¦
+------------------------------------+---------¦
¦A. Everett Austin—Residuary Legatee:¦ ¦
+------------------------------------+---------¦
¦Packard Automobile ¦500.00 ¦
+------------------------------------+---------¦
¦Ford Automobile ¦75.00 ¦
+------------------------------------+---------¦
¦Household furniture, books, and maps¦9,150.71 ¦
+------------------------------------+---------¦
¦Cash ¦46,149.55¦
+------------------------------------+---------¦
¦Total ¦56,875.26¦
+----------------------------------------------+
With the exception of certain real estate located in Boston, Massachusetts, which was sold for $6,418.36 and on which the Commissioner released the Federal estate tax lien, none of the real estate owned by the decedent has been sold and no action has been taken by the collectors in the districts in which said real estate is located which would require the sale thereof.
On July 11, 1947, the Commissioner notified the petitioner of a proposed assessment against it as trustee and transferee of the balance of the tax due from decedent's estate. Petitioner protested this preliminary determination and requested issuance of a statutory notice of liability. On April 22, 1948, such notice of liability for $94,803.62 plus interest as trustee and transferee for the unpaid estate tax due from decedent's estate was sent to petitioner.
Respondent contends that petitioner is personally liable for the tax in question under the express provisions of section 827(b) of the Internal Revenue Code.1 Petitioner contends that liability under that section does not attach to a trustee of property transferred in trust prior to death unless and until the Commissioner has pursued and exhausted his remedies against the executor.
The solution of this controversy rests upon an examination of section 827(b) in the light of its affiliated sections and of its wording. Section 822(b) of the code provides that tax imposed by this subchapter shall be paid by the executor to the collector. Then follow a number of sections setting forth the remedies available to the Commissioner in the event the executor does not pay the tax as directed. Section 826(a)2 provides that if the executor fails to pay estate tax when due the collector shall ‘proceed to collect the tax under the provisions of general law‘ or by judicial proceedings the Commissioner may subject the assets of the estate to sales under judgment or decree of the court. Section 827(a)3 provides that, if the tax is not paid by the executor, the assets of the estate shall be subject to a lien for unpaid taxes for a period of ten years.
Finally, section 827(b) provides that, if the executor fails to pay the tax when due, then the Commissioner may proceed personally against ‘the spouse, transferee, trustee, surviving tenant,‘ appointee, appointor, or beneficiary, ‘who receives, or has on the date of the decedent's death, property included in the gross estate under section 811(b), (c), (d), (e), (f), or (g), to the extent of the value, at the time of decedent's death, of such property. ‘ Section 827(b) became law as section 411 of the Revenue Act of 1...
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