Estate of McCutchan v. Commissioner, Docket No. 11524-77.
| Decision Date | 24 September 1979 |
| Docket Number | Docket No. 11524-77. |
| Citation | 39 TCM (CCH) 219,1979 TC Memo 393 |
| Parties | Estate of Mary Culton McCutchan, Betty Wiskirchen, Executrix v. Commissioner. |
| Court | U.S. Tax Court |
J. Patrick Wheeler, 314 Eleventh St., Canton, Mo., for the petitioner. William J. Falk, for the respondent.
Respondent determined a deficiency of $9,652.41 in petitioner's Federal estate tax and an addition to tax under section 6651(a)1 of $482.62. Because of concessions, the remaining issues are (1) whether the amount of the charitable deduction petitioner claims under section 2055(a) must be reduced under section 2055(c) by the charitable bequests' pro rata share of Federal estate tax, (2) whether petitioner is liable for an addition to the tax under section 6651(a), and (3) whether a deduction from the gross estate should be allowed for attorney's fees associated with this proceeding.
All of the facts have been stipulated and are found accordingly. Petitioner, Betty Wiskirchen, is the executrix of the Estate of Mary Culton McCutchan, and at the time she filed her petition in this case petitioner's legal residence was Canton, Mo.
Mary Culton McCutchan died testate on October 19, 1975, while resident and domiciled in the State of Missouri.2 Exactly ten months later, on August 19, 1976, petitioner filed a Federal estate tax return with the Internal Revenue Service Center at Kansas City, Mo.
Miss McCutchan's last will and testament was admitted to probate in the Probate Court of Lewis County, Mo. In article One of the will the decedent directed that her debts and final expenses be paid as soon as practicable. Articles Two through Four contained specific legacies and devices. Article Five provided as follows:
In his statutory notice, respondent disallowed under section 2055(c) a portion of the estate's charitable deduction by allocating the Federal estate tax due pro rata among all of the shares of the residue bequeathed, six one-tenth shares of which went to various charities. Respondent also determined that the estate tax return was filed late without reasonable cause and asserted an addition to the tax under section 6651(a).
The first issue in this case is whether the amount of the charitable deduction allowed under section 2055(a) must be reduced under section 2055(c) by the charitable bequests' pro rata share of Federal estate tax. To answer this question we must decide whether the will, construed under Missouri law, bequeathes before-tax or after-tax fractional shares of the residue to various charitable and religious institutions.
Generally, a decedent's gifts for public, charitable, and religious uses are deductible from the gross estate under section 2055(a).3 However, if under the terms of the decedent's will or local law the charitable bequests must bear part of the burden of estate taxes, then section 2055(c) provides that the amount of the estate's charitable deduction must be reduced by that part of the taxes paid out of such charitable bequests.4 In other words, section 2055(c) limits the charitable deduction to the after-tax amount in fact devised or bequeathed to charity.5 Therefore, the narrow issue we decide here is how to construe the phrase "One-tenth (1/10) of my residuary estate" as used in six separate bequests to charities under the will.
The principles which lead us to the ultimate issue of state law are not in dispute. Respondent does not contest the deductibility of the charitable bequests, only the amounts thereof. Further, it is clear that while the Federal estate tax is imposed against the estate as a whole, the devolution of property in the estate and, thus, the ultimate impact of the tax upon the legatees is a question of local law. Riggs v. Del Drago 42-2 USTC ¶ 10,219, 317 U.S. 95 (1942); United States v. Goodson 58-1 USTC ¶ 11,758, 253 F. 2d 900 (8th Cir. 1958). It is equally clear that the Missouri courts do not follow the "burden on the residue" rule, under which estate taxes constitute a charge against the residuary estate. See, e.g., Buffaloe v. Barnes, 226 N.C. 313, 38 S.E. 2d 222 (1946).
Instead, the Supreme Court of Missouri has adopted the doctrine of equitable apportionment. In re Estate of Hough, 457 S.W. 2d 687 (Mo. 1970); Jones v. Jones, 376 S.W. 2d 210 (Mo. 1964); Hammond v. Wheeler, 347 S.W. 2d 884 (Mo. 1961); Carpenter v. Carpenter, 364 Mo. 782, 267 S.W. 2d 632 (1954). See Reed v. United States 70-2 USTC ¶ 12,698, 316 F. Supp. 1228 (E.D. Mo. 1970). The principle of equitable apportionment is that the property on which the tax is paid must bear the burden of the tax. Thus, where non-probate property adds to the taxable estate, the owners or beneficiaries of such property may be required to contribute their pro rata shares of the Federal estate tax to the executor. Carpenter v. Carpenter, supra. Conversely, a widow who elects against the will or who takes a distributive share in intestacy will not bear any tax burden with respect to such property as is eligible for the marital deduction and reduces the taxable estate, see sec. 2056. In re Estate of Hough; supra; Jones v. Jones, supra; Hammond v. Wheeler, supra; United States v. Melman, 398 F. Supp. 87 (E.D. Mo. 1975); Reed v. United States, supra.6 Correspondingly, since deductible charitable bequests also reduce the amount of the Federal taxable estate, sec. 2055(a), the doctrine of equitable apportionment will relieve such bequests of the burden of Federal taxes. In re Estate of Wahlin, 505 S.W. 2d 99 (Mo. App. 1973). See also First National Bank of Omaha v. United States 74-1 USTC ¶ 12,974, 490 F. 2d 1054 (8th Cir. 1974) ().
However, since in Missouri as elsewhere the touchstone of will construction is to give effect to the testator's intent, Housman v. Lewellen, 362 Mo. 759, 244 S.W. 2d 21 (1951), equitable apportionment will not be applied where the testator directs otherwise. Commerce Trust Company v. Starling, 393 S.W. 2d 489, 494 (Mo. 1965); St. Louis Union Trust Company v. Krueger, 377 S.W. 2d 303 (Mo. 1964). See Estate of Avery v. Commissioner Dec 26,134, 40 T.C. 392 (1963). Thus, we must determine here whether Miss McCutchan's will reveals any intent allocating the Federal estate tax burden among the residuary legatees.
Respondent contends that "residuary estate" as used in the will means net estate after taxes and that each one-tenth share of the residue should thus bear its pro rata share of Federal estate tax.7 Petitioner, on the other hand, argues that the will does not allocate the tax burden and, therefore, the Missouri courts would apply the doctrine of equitable apportionment to absolve the charitable bequests of Federal tax liability. Petitioner relies on In re Estate of Wahlin, supra, decided by the Missouri Court of Appeals.8 Respondent asks us to disregard Wahlin as an intermediate state court's ruling that would not be followed by the state's highest court. For the reasons below we agree with petitioner.
To begin with, the Missouri Court of Appeals decision In re Estate of Wahlin, supra, is squarely on point. In Wahlin, the relevant dispositive language of the will before the court was much the same as in the instant case and the issue was exactly the same: Was any express or implied intent of the testator discernible that would preclude applying equitable apportionment and exonerating the residuary charitable legatees from the impact of the Federal estate tax?
Article I of the Wahlin will was substantially identical to article One of the McCutchan will. Next, following a specific bequest, article IV of the Wahlin will bequeathed "all of the rest, residue and remainder" of the estate in the following amounts: 25 percent to the testator's sister, 25 percent...
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