Estate of Ackley v. Comm'r of Internal Revenue
| Decision Date | 18 January 1955 |
| Docket Number | Docket No. 40034. |
| Parties | ESTATE OF ROSWELL G. ACKLEY, CLARE T. ACKLEY AND GLEN F. ACKLEY, CO-EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
John Potts Barnes, Esq., for the petitioners.
Paul Levin, Esq., for the respondent.
Decedent was the sole legatee and executor of the estate of his brother who died less than 5 years prior to decedent. Decedent's estate contained assets from his brother's estate, having a value in excess of the net value of the brother's estate after deductions of debts, Federal estate, and State inheritance taxes. The brother's estate had earned income during its administration. Petitioners claimed the value of the assets of decedent's brother, actually held by them, as the deduction for previously taxed property allowable to decedent's estate as provided in section 812(c) of the Internal Revenue Code of 1939.
Held, the deduction for previously taxed property to which decedent's estate is entitled is limited to the net value of his brother's estate after deductions for debts, Federal estate, and State inheritance taxes. Central Hanover B. & T. Co. v. Commissioner, 159 F.2d 167 (C.A. 2, 1947), certiorari denied331 U.S. 836 (1947), followed.
This proceeding involves a deficiency in Federal estate taxes of $35,758.79 determined against the Estate of Roswell G. Ackley.
The sole issue is the proper amount of a deduction for previously taxed property, as provided in section 812(c) of the Internal Revenue Code of 1939. 1 Allowable to the estate of the decedent who died within 5 years after the death of his brother and who was the brother's sole legatee.
The parties have stipulated that the petitioners will incur and pay additional administration and litigation expenses, and attorney's fees, not heretofore allowed, in connection with the determination of the decedent's net estate subject to tax, and that the amount thereof will be taken into account under a Rule 50 computation.
All of the facts were stipulated and are adopted as a part of our findings. Only such facts as are necessary to an understanding of the issue will be summarized herein.
Roswell G. Ackley died on November 6, 1947, and the petitioners are the duly appointed executors of his estate. The Federal estate tax return was filed with the collector of internal revenue for the first district of Illinois.
Decedent was the brother and sole legatee of Richard C. Ackley (hereinafter referred to as Richard) who died testate on October 2, 1944, less than 5 years prior to decedent's death. Decedent was also the duly appointed executor of Richard's estate, which consisted of a one-half interest in Ackley Brothers, a partnership owned by the two brothers. The partnership assets were comprised principally of real estate, bank accounts, and Government bonds.
On December 18, 1945, the Federal estate tax return for Richard's estate was filed. The return shows a gross estate of $942,672.35, and allowable deductions for debts and charges of $28,199.93. The estate paid Federal estate taxes of $243,444.34; the Illinois inheritance tax paid was $55,565.98.
On January 24, 1946, Richard's estate was closed and decedent transferred to himself all of its assets.
Richard's estate, throughout the course of its administration, earned net income of not less that $56,996.31 after claimed depreciation of not less than $19,784.18.
On decedent's estate tax return, $839,275.79 was claimed as the deduction for property previously taxed in Richard's estate. The parties herein have now agreed that the maximum value of such previously taxed property included among the assets of decedent's estate is $675,834.96.
The respondent determined, as follows, that the deduction allowable to decedent's estate for property previously taxed in Richard's estate was $615,462.10:
+--------------------------------------------------------+
¦Gross estate of Richard C. Ackley¦ ¦$942,672.35¦
+---------------------------------+----------+-----------¦
¦Less: ¦ ¦ ¦
+---------------------------------+----------+-----------¦
¦Debts and charges ¦$28,199.93¦ ¦
+---------------------------------+----------+-----------¦
¦Federal estate tax ¦243,444.34¦ ¦
+---------------------------------+----------+-----------¦
¦Illinois inheritance tax ¦55,565.98 ¦327,210.25 ¦
+---------------------------------+----------+-----------¦
¦ ¦ ¦$615,462.10¦
+--------------------------------------------------------+
The theory on which the respondent has based his determination is that the decedent, as sole legatee of Richard, could not have received more than the net value of Richard's estate after deduction of charges and debts outstanding against it, and taxes.
The petitioners dispute this determination, and claim that the deduction for previously taxed property should be allowed in the amount of $675,834.96— the value of assets in decedent's estate actually identified as having been included in Richard's estate. They argue (1) that to the extent income of Richard's estate was used to pay claims against it, and taxes, and thus freed assets for distribution to decedent, the value of such assets should be included in determining the property-previously-taxed deduction; (2) that the Illinois inheritance tax is not chargeable against Richard's estate, but decedent on his right of succession; and (3) that Federal estate taxes should not be taken as a deduction from Richard's gross estate in arriving at its net value here, since taxes are not a deduction in determining its taxable net value.
The petitioners observe, on brief, that the issue raised here has been before us a number of times, but that the cases are in conflict. In support of their argument, petitioners cite Estate of Edith P. Garland, 46 B.T.A. 1243 (1942), affd. 136 F.2d 82 (C.A. 1, 1943); Thomas V. Earnest, 161 F.2d 845 (C.A. 5, 1947); Estate of Charles C. Hanch, 19 T.C. 65 (1952); and a Memorandum Opinion of this Court. They recognize that our opinions in Estate of Eugene L. Bender, 41 B.T.A. 80 (1940), affirmed sub nom. Bahr v. Commissioner, 119 F.2d 371 (C.A. 5, 1941), certiorari denied 314 U.S. 650 (1941); and Estate of Ada M. Wilkinson, 5 T.C. 1246 (1945), affirmed sub non. Central Hanover B. & T. Co. v. Commissioner, 159 F.2d 167 (C.A. 2, 1947), certiorari denied 331 U.S. 836 (1947); as well as McCarthy v. Delaney, 76 F.Supp. 471 (D. Mass., 1948); and Edith Bloedorn v. United States, 126 Ct.Cl. 591, 116 F.Supp. 133 (1953), certiorari denied 347 U.S. 954 (1954), support the respondent's position.
In the Bender case, two brothers, Frank and Eugene, died within a year. They had been business partners; and Eugene, the second brother, was the executor and also the sole legatee of Frank, except for the community interest of Frank's wife. At the time of his death, Eugene had filed an estate tax return for Frank's estate, but had not paid the tax. Eugene's estate claimed a deduction for property previously taxed to the extent of all of Frank's assets held by it, and also a deduction for itself of such liabilities of Frank's estate as remained unpaid. In determining the deduction for property previously taxed allowable to Eugene's estate, the Commissioner applied the same method he used here— viz, allowable deductions, Federal estate and State inheritance taxes were deducted from Frank's gross estate and the net value of the estate remaining was allowed as the deduction for property previously taxed in Eugene's estate. We upheld the Commissioner's determination and were affirmed by the Court of Appeals for the Fifth Circuit.2
In the Garland case, a wife died less than 5 years after her husband. She was his executrix and the sole legatee of his estate. At her death there were unpaid taxes and other debts of the husband's estate of $14,031.50. Her estate contained assets from her husband's estate of $567,224.95 and claimed this amount as the deduction for property previously taxes. The respondent, in determining such deduction, applied the same method as he had in the Bender case and her, and determined that the husband's net estate after allowable deductions and taxes was $517,642.27. Her estate conceded that the $14,031.50 of unpaid liabilities of her husband's estate should be deducted from the $567,224.95 of its assets. It argued, however, that the remaining $35,551.18 difference, then remaining between the husband's assets held by it and the value of his net estate determined by the Commissioner, came from income and capital gains of the husband's estate; and, that to the extent that such funds had been used to pay taxes and indebtedness of the estate, thus freeing other assets of the husband then held by the wife's estate, those assets should be included in computing the property-previously-taxed deduction because they were actually held in the wife's estate and no indebtedness of the husband was outstanding against them.
We accepted that argument and said, 46 B.T.A. at p. 1245:
The deduction allowed (by the statute) is the value at which the property was taxed in the estate of the prior decedent, to the extent of its value in the present estate, reduced by the amount of any mortgage or lien thereon allowed as a deduction to the prior estate. There is no provision anywhere in the statute that the deduction allowable to the second decedent's estate must be reduced by any and all obligations of the estate of the prior decedent. * * *
The Court of Appeals for the First Circuit affirmed3 and distinguished the Bender case on the ground that all that Eugene's estate got there was a claim against Frank's estate, while in the Garland case, the wife's estate had specific items of property from her husband.
We reaffirmed our holding in the Garland case in a subsequent Memorandum...
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