Estate of McKay v. Commissioner
| Decision Date | 01 August 1994 |
| Docket Number | Docket No. 13929-92. |
| Citation | 68 T.C.M. 279 |
| Parties | Estate of Miriam G. McKay, Deceased, Victor A. Hermann, Executor v. Commissioner. |
| Court | U.S. Tax Court |
Robert H. Showen, 1290 Howard Ave., Burlingame, Calif., for the petitioner. Paul J. Krug, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency of $219,381 in petitioner's Federal estate tax.
The only issue is whether the deduction for charitable transfers claimed by the estate of Miriam G. McKay (estate) under section 2055(a)1 must be reduced pursuant to section 2055(c) to reflect a share of the estate's Federal and California estate tax liabilities.
Some of the facts have been stipulated and are so found.
At the time the petition was filed, Victor A. Hermann, the executor of the estate (Mr. Hermann or the executor), resided in Hillsborough, California.
Miriam G. McKay (decedent), a resident of San Mateo County, California, died testate on November 2, 1989. The principal beneficiary of decedent's estate was Elizabeth Neish (Ms. Neish), who had been decedent's friend for many years.
On December 3, 1985, decedent executed a "Last Will and Testament" (will). In March 1988, decedent executed a "First Codicil to the Will of Miriam Gardner McKay" (first codicil). In January 1989, decedent executed a "Second Codicil to the Will of Miriam Gardner McKay" (second codicil). The will and the first and second codicils were drafted for decedent by Robert H. Showen (Mr. Showen), who is also counsel for petitioner in this case.
Under Article Two of the will, decedent bequeathed to each of six named beneficiaries including Ms. Neish, $3,000.2 Under Article Three of the will, decedent bequeathed and devised, respectively, to Ms. Neish (provided she survived decedent by 30 days) her personal effects and her condominium in San Mateo, California. Under Article Five of the will, decedent bequeathed 25 percent of the residue of her estate to Ms. Neish (provided she survived decedent by 30 days) and 15 percent of the residue of her estate to each of five named charitable organizations. (Hereinafter, the residue of decedent's estate will be referred to as the residuary estate, and the six beneficiaries of the residuary estate will be referred to as the residuary beneficiaries.)
In Article Seven of the will, decedent made the following provision with respect to the payment of inheritance, estate, or other death taxes:
I direct that all inheritance, estate or other death taxes, that may by reason of my death be attributable to my probate estate or any portion of it, including any property received by any person as a family allowance or homestead, shall be paid out of the residue of my estate disposed of by ARTICLE FIVE of this will, without adjustment among the residuary beneficiaries, and shall not be charged against or collected from any beneficiary of my probate estate.
Prior to her death, decedent had discussed in general terms with Ms. Neish and Mr. Hermann her intention to make "tax-free gifts" to charities or gifts to "tax-free" charitable organizations. However, decedent did not discuss with either of them the allocation of estate, inheritance, or other death taxes among the beneficiaries of her estate. Neither Ms. Neish nor Mr. Hermann knew the terms of decedent's will prior to her death or the amount decedent intended to give to charity.
On January 22, 1990, the will and first and second codicils were probated, and Mr. Hermann was authorized to act as executor of the estate. On October 18, 1990, the executor filed with the Superior Court of California in and for the County of San Mateo (Superior Court) a first and final accounting and petition for final distribution of the estate (petition for final distribution). The executor requested, inter alia, in the petition for final distribution that Federal and California estate taxes paid by the executor be allocated and charged to Ms. Neish, the non-charitable residuary beneficiary of the estate. Ms. Neish had consented to that allocation of those taxes in a telephone conversation with Mr. Showen that occurred in July 1990.
On October 31, 1990, the Superior Court issued an order and judgment of final distribution (judgment) with respect to the petition for final distribution that provided, inter alia, that the Federal and California estate taxes paid by the executor should be charged to Ms. Neish, the noncharitable residuary beneficiary of the estate. Pursuant to that judgment, Ms. Neish's share of the residuary estate was $901,523.84, and the share of each of the remaining five charitable residuary beneficiaries was $930,266.12. The charitable residuary bequests were not reduced by the Federal and California estate taxes paid by the executor. The distribution as ordered in that judgment was not contested in that no formal objections were filed by the beneficiaries.
In its Federal estate tax return (return), the estate claimed a deduction under section 2055(a) of $849,4723 for the amount paid to each of the charitable residuary beneficiaries. The estate claimed a total deduction under that section of $4,250,360 for all charitable transfers made under the will that consisted of the five charitable residuary bequests and a $3,000 bequest to an educational institution.
Respondent determined in the notice of deficiency that the charitable deduction claimed in the return must be decreased to reflect the allocation to the charitable residuary beneficiaries of their proportionate share of Federal and California estate taxes.
OpinionThe estate bears the burden of establishing error in respondent's determination.4 Rule 142(a); Welch v. Helvering [3 USTC ¶ 1164], 290 U.S. 111, 115 (1933); Rockwell v. Commissioner [75-1 USTC ¶ 8324], 512 F.2d 882, 885 (9th Cir. 1975), affg. [Dec. 31,430(M)] T.C. Memo. 1972-133.
The dispute in this case involves section 2055(c). That section provides that the deduction otherwise allowable under section 2055(a) for charitable transfers is to be reduced by the amount of estate and similar taxes payable out of those transfers. The question whether such taxes are payable out of a charitable transfer is one of State law. See Riggs v. Del Drago [42-2 USTC ¶ 10,219], 317 U.S. 95, 97-99 (1942); Estate of Leach v. Commissioner [Dec. 41,274], 82 T.C. 952, 963 (1984), affd. without published opinion 782 F.2d 179 (11th Cir. 1986); cf. Robinson v. United States [75-2 USTC ¶ 13,080], 518 F.2d 1105, 1107 (9th Cir. 1975). In the instant case, California law governs that question. Cf. Estate of Heim v. Commissioner [90-2 USTC ¶ 60,040], 914 F.2d 1322, 1325 (9th Cir. 1990), affg. [Dec. 45,054(M)] T.C. Memo. 1988-433. We must apply California law as announced by the Supreme Court of California, and, if there is no decision by that highest court, we must apply what we find to be the law of California, giving proper regard to the decisions of other courts of the State. Commissioner v. Estate of Bosch [67-2 USTC ¶ 12,472], 387 U.S. 456, 465 (1967).
The California proration statute provides in pertinent part that, except as provided therein, any estate tax is to be equitably prorated among the persons interested in the estate (proration). Cal. Prob. Code App. sec. 20110(a) (West 1991). That statute requires the burden of any estate tax to be borne by each beneficiary to the extent the beneficiary's share has contributed to the tax. E.g., In re Armstrong's Estate, 366 P.2d 490, 493 (Cal. 1961); Estate of Silveira, 197 Cal. Rptr. 121, 123 (Ct. App. 1983); In re Setrakian's Estate, 338 P.2d 247, 251-252 (Cal. Dist. Ct. App. 1959).5 Under the California proration statute, charitable transfers do not bear the burden of estate taxes, since such transfers do not contribute to such taxes. See Security-First Natl. Bank v. Wellslager, 198 P.2d 700, 702-703 (Cal. Dist. Ct. App. 1948).
There are exceptions to proration that are prescribed in the California proration statute. That statute does not apply, inter alia, to the extent the decedent in a written inter vivos or testamentary instrument disposing of property specifically directs "that the property be applied to the satisfaction of an estate tax or that an estate tax be prorated to the property in the manner provided in the instrument." Cal. Prob. Code App. sec. 20110(b)(1). Because proration is the general rule in California, the intent that it not apply must be clearly and unambiguously expressed; ambiguities are resolved in favor of proration. See In re Armstrong's Estate, supra at 494-495; Estate of Hendricks, 89 Cal. Rptr. 748, 749 (Ct. App. 1970). No specific language is required to elect out of the California proration statute, provided that the language used clearly expresses the intention that it not apply. See Estate of Lindner, 149 Cal. Rptr. 331, 334 (Ct. App. 1978).
We must decide whether decedent specifically directed in her will that the burden of estate taxes be allocated in a manner other than that provided by the California proration statute. Before turning to the will itself, we shall address two matters that the estate urges us to consider in deciding whether to adopt its construction of the will, viz., the judgment of the Superior Court and extrinsic evidence of decedent's intent to make gifts to charity.
With respect to the judgment of the Superior Court, the estate acknowledges that the judgment has no binding effect in the instant case and apparently concedes that there is no evidence that the Superior Court, in approving the allocation of taxes requested by the executor in the petition for final distribution, in fact considered whether the proration statute applied. The estate also acknowledges that the burden of estate taxes attributable to the bequests of $3,000 to the three individuals other than Ms. Neish6 should have been borne by the entire residuary estate under Article Seven of the will.7 Thus, the estate apparently...
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