Estate of Deobald v. United States, Civ. A. No. 75-1782.
| Decision Date | 28 December 1977 |
| Docket Number | Civ. A. No. 75-1782. |
| Citation | 444 F. Supp. 374 |
| Parties | ESTATE of Harold John DEOBALD (through its Executrix, Frances M. Deobald) v. UNITED STATES of America. |
| Court | U.S. District Court — Eastern District of Louisiana |
Joel A. Mendler, Baldwin, Haspel, Molony, Rainold & Meyer, New Orleans, La., for plaintiff.
Leonard P. Avery, Asst. U. S. Atty., New Orleans, La., Fred W. Schwendimann, Dept. of Justice, Tax Div., Dallas, Tex., for defendant.
MEMORANDUM AND ORDER
The plaintiff, Estate of Harold J. Deobald, and the defendant, United States of America, have filed cross-motions for summary judgment on issues concerning estate tax assessments against the deceased's estate.
Harold J. Deobald died January 22, 1972, while domiciled in Jefferson Parish, Louisiana. His spouse, Mrs. Frances Deobald, was duly qualified as executrix of his estate. A federal estate tax return was duly filed and the estate taxes paid.
After audit, an estate tax deficiency was assessed in the amount of $6,306.46, part of which was attributable to the inclusion in decedent's gross estate of: (1) the decedent's contributions to the U.S. Civil Service Retirement System, or $14,495.00, and (2) one-half the value of 619 shares of Cleveland Trust Co. and 282 shares of Central National Bank of Cleveland, or $28,876.50. The estate paid the assessment, and subsequently petitioned to recoup that amount, contending that portions of the funds in the two aforementioned transactions did not constitute part of the gross estate.
Plaintiff suggests that the estate should not include the full value of the retirement fund contributions made by the deceased, even though the Retirement Act characterizes all death benefit funds as the decedent's separate property. 5 U.S.C. § 8331, et seq. Rather, plaintiff contends that the Internal Revenue Service should allow as a debt in Schedule K of the federal estate tax return the reimbursement due by decedent's separate estate to the surviving spouse for the enhancement of decedent's separate estate at the expense of the community assets. LSA C.C. Art. 2408 provides in part:
When the separate property of either the husband or the wife has been increased or improved during the marriage, the other spouse . . . shall be entitled to the reward of one half of the value of the increase or ameliorations, if it be proved that the increase or ameliorations be the result of the common labor, expenses, or industry; . . .
Plaintiff relies on a series of Louisiana cases that allow the community to gain reimbursement from the separate property of one spouse when shown that community funds were expended to enhance that separate property. Abraham v. Abraham, 230 La. 78, 87 So.2d 735 (1956). In Blalock v. Blalock, 259 So.2d 367 (La.App.2d Cir. 1972) the husband was allowed to claim one-half of his spouse's Teacher's Retirement Fund, statutorily designated as the wife's separate property, since contribution to that fund was made from community income. Plaintiff requests that the value of Mrs. Deobald's contribution, which is one-half the employee contribution, should be deducted from the gross estate.
Plaintiff urges that it is axiomatic that state law governs the determination of a claim against an estate for federal estate purposes. Section 2053(a) of Title 26, United States Code, provides in part:
To demonstrate the application of this statute to the estate tax plan, plaintiff refers the Court to the Estate of Wildenthal, 29 TCM 519 (1970). There, the decedent owned four insurance policies as his own separate property, with his wife designated as beneficiary. The policy premiums were paid with community funds. Under Texas law, the wife was allowed to claim a reimbursement from the decedent's estate for one-half of the community funds expended. The Court agreed with the taxpayer's argument that the gross estate for federal estate tax purposes should be reduced by one-half the community funds expended. Plaintiff requests that the same ruling should be rendered in the present matter where contributions to the Civil Service Retirement Fund are at issue.
In response to plaintiff's position, the United States argues that Congress has opted to deny any estate tax deductions for state law claims against the Civil Service Retirement System proceeds, on the grounds that (1) Congress has already afforded the taxpayer preferential tax treatment by excluding a part of the proceeds from the estate; and (2) a paramount Congressional consideration looming behind enactment of the Civil Service Retirement Act, 5 U.S.C. §§ 8331-8348, would be upset by granting the requested deduction.
The Government urges that 26 U.S.C. § 2039(c) grants preferred tax treatment to an estate containing funds from a qualified employee trust such as the Civil Service Retirement Fund by excluding from the gross estate of the decedent the contributions made by the employer to the qualified retirement fund. In exchange for such treatment, the Government contends, Congress statutorily requires that all employee contributions to the Civil Service Retirement Fund (which presumably would include the spouse's community interest in the contributions) be included in the deceased employee's gross estate.
In the Government's second argument for denying the requested deduction, it relies heavily on its own Internal Revenue Service ruling involving a "debt deduction" issue similar to the issue presently before this Court, where the Service opined that a state's community property laws would not affect payments of annuities, death benefits, or refunds from the Civil Service Retirement Act funds. Revenue Ruling 57-466, 1957-2 Cumulative Bulletin 619. The Service grounded its holding on the Supreme Court decision in Wissner v. Wissner, 338 U.S. 655, 70 S.Ct. 398, 94 L.Ed. 424 (1950).
The Court has fully considered the Government's first contention that 26 U.S.C. § 2039(c) precludes the Estate of Deobald from taking a debt deduction pursuant to 26 U.S.C. § 2053(a), when that debt arises out of a spouse's community contribution to a qualified employee's trust such as the Civil Service Retirement Fund. The Government suggests that no other favorable tax advantages are allowed the taxpayer since 26 U.S.C. § 2039(c) has already allowed the estate to exclude employer contributions to the fund from the gross estate. The Court finds this argument unconvincing, having found no statutory or jurisprudential authority declaring the effects of 26 U.S.C. § 2039 and 26 U.S.C. § 2053 to be mutually exclusive.
Section 2039(c) creates an exclusion for certain assets from the decedent's estate in order to arrive at the gross estate for state tax calculations. While allowing the exclusion of all employer contributions to the fund, the statute does require that the decedent's contributions be included in his gross estate.
Section 2053(a), on the other hand, designates the deductions allowable from the gross estate. Included as deductible items are any claims against the estate as are recognized by the laws of the jurisdiction in which the decedent resided.
As in the federal income tax procedures, exclusions and deductions are separate though integral steps in the estate tax formula for arriving at the taxable assets in an estate. To allow a deduction based on a spouse's community property interest in contributions to a trust fund in no way runs afoul of the exclusion rules in Section 2039(c), since the two steps are separate aspects of the taxing formula.
A closer review of Section 2039 reveals to this Court that Congress in no way attempted to deny a spouse the right to one-half of the community contributions paid into the fund when it required that the decedent's contributions be included in the estate. Congress was completely aware that circumstances could arise in community property states where a spouse would have a legitimate claim to one-half of all community property contributions made to the fund. In fact, in Section 2039(d), the spouse that predeceases the employee may claim as an exclusion from his or her gross estate, the value of the interest (as created by the community property laws of the state) in the employer's contributions to the fund. Hence, in explicit fashion, Congress has recognized the community property interest in contributions to such retirement funds, and has determined that the estate of that property owner should receive the taxing advantages or disadvantages attributable to the particular property. Likewise, Section 2039(c) cannot be in conflict with a federal statute that merely recognizes that a spouse's community interest in certain funds is a valid debt of the decedent's estate, and thereby deductible.
But perhaps the most convincing evidence that Section 2039(c) does not require a spouse's community property interest in retirement funds to be included in the decedent's gross estate, arises from the decision in Revenue Ruling 75-408, "Annuity paid to Teacher's Survivor; Texas," 1975-2 Cumulative Bulletin 369. There, the taxpayers requested advice on whether the exclusion provided in Section 2039(c) applied to a survivorship annuity payable under the teachers' retirement system of Texas; and secondly, requested advice as to the amount of the decedent's contributions includable in his gross estate where the contributions were from community funds. The Internal Revenue Service found that the retirement system did...
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Wyly's Estate v. C. I. R., s. 78-1306
...cases to test." 5 A good example of its lack of diligence, even after the Revenue Ruling, is presented by Estate of Deobald v. United States, 444 F.Supp. 374 (E.D.La.1977), involving the question of whether a community property interest arising by operation of Louisiana law is "retained" wi......