Estate of Whipple v. United States, 19199.

• Decision Date: 11 December 1969
• Docket Number: No. 19199.,19199.
• Citation: 419 F.2d 494
• Parties: ESTATE of James A. WHIPPLE, Deceased, Mildred G. Whipple, Executrix, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

419 F.2d 494 (1969) ESTATE of James A. WHIPPLE, Deceased, Mildred G. Whipple, Executrix, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

No. 19199.

United States Court of Appeals Sixth Circuit.

December 11, 1969.

Carolyn R. Just, Department of Justice, Washington, D. C., Richard M. Roberts, Acting Asst. Atty. Gen., Lee A. Jackson, Robert N. Anderson, Attys., Department of Justice, Washington, D. C., on brief; Ernest W. Rivers, U. S. Atty., Louisville, Ky., of counsel, for appellant.

J. Lane Peck, Paducah, Ky., Thomas J. Marshall, Wheeler & Marshall, Paducah, Ky., on brief, for appellee.

Before WEICK, CELEBREZZE and PECK, Circuit Judges.

WEICK, Circuit Judge.

The suit in the District Court was brought by the Estate of James A. Whipple for refund of federal estate taxes alleged to have been erroneously and illegally assessed and collected. The decedent Whipple died intestate on August 6, 1960, a resident of Kentucky. The only question for our determination is the calculation of the marital deduction under Section 2056(b) (4) (A) of the Internal Revenue Code of 1954.¹ In general, Section 2056 provides that for the purposes of determining the federal estate tax, the value of the taxable estate shall be determined by deducting from the value of the gross estate an amount equal to the value of any interest in property which passes or has passed from the decedent to the surviving spouse, provided that it shall not exceed fifty per cent of the value of the adjusted gross estate.

Decedent died intestate leaving a gross estate of $1,387,089.44 and an adjusted gross estate after debts and expenses of $1,310,413.52. The gross value of the property passing to the surviving spouse, Mildred G. Whipple, was $640,570.90.

In determining the value of the property passing to the surviving spouse for purposes of the marital deduction, Section 2056(b) (4) (A) provides:

"(A) there shall be taken into account the effect which the tax imposed by section 2001, or any estate, succession, legacy, or inheritance tax, has on the net value to the surviving spouse of such interest; * * *."

Both parties agree that to arrive at the net value allowable for the marital deduction, the gross value of the property passing to the widow must be reduced pursuant to Section 2056(b) (4) (A) by the amount of Kentucky inheritance tax levied on such property². In the case of intestacy under Kentucky law each beneficiary must bear his proportionate share of the state inheritance tax. Estate of Webber v. United States, 404 F.2d 411 (6th Cir. 1968); Louisville Trust Co. v. Walter, 306 Ky. 756, 207 S.W.2d 328 (1948); Trimble v. Hatcher's Ex'rs, 295 Ky. 178, 173 S.W.2d 985 (1943), cert. denied, Trimble v. Justice, 321 U.S. 747, 64 S.Ct. 611, 88 L.Ed. 1049; Martin v. Martin's Adm'r, 283 Ky. 513, 142 S.W.2d 164 (1940); Hampton's Adm'rs v. Hampton, 188 Ky. 199, 221 S.W. 496, 10 A.L.R. 515 (1920).

Taxpayer computed the Kentucky inheritance tax on the property passing to the surviving spouse at $26,055.68³ and deducted this amount from the gross value of $640,570.90 to arrive at an allowable marital deduction of $614,515.22. The Government argues that the effect of reducing the net amount available to the spouse decreases the marital deduction and thereby increases the estate tax by increasing the amount of the net estate. The Government therefore contends that the marital deduction should be further reduced in the amount of $9,299.94 in order to reflect the surviving spouse's proportionate share of the increase in federal estate tax occasioned by the deduction of the state inheritance tax. The allowable marital deduction was computed as $603,796.65, which increased the taxable estate and the ultimate federal estate tax.⁴ A federal estate tax in the amount of $3,266.43 resulted from using $603,796.65 as the marital deduction instead of $614,515.22. It is contested by the taxpayer.

The District Court held for the taxpayer on the grounds that state law determines what part of the federal estate tax is to be charged to the respective beneficiaries, and that under Kentucky law the marital deduction allowed to a surviving spouse is not to be charged with any federal estate tax.⁵ The Government appealed.

We affirm.

The Government concedes that under Kentucky law no part of the federal estate tax is chargeable to the widow by reason of the marital deduction, but contends that since the amount of the state inheritance tax which reduced the value of the property passing to her does not qualify for the marital deduction, it has the effect of increasing the value of the taxable estate, and the value of the property allotted to the widow should be reduced by a proportionate part of the federal estate tax attributable to the portion of the property which was used to pay the Kentucky inheritance tax on her share of the estate. The basis of the Government's contention is that state law is irrelevant except insofar as it imposes a state inheritance tax on the widow's property.

An analysis of the basic problem of the apportionment of the estate tax burden may be beneficial in understanding the problem presented. The federal estate tax is a tax upon the privilege of transmitting property, and not a tax upon the receipt of property. If a decedent died testate, courts in many early cases determined that the federal estate taxes were intended to be a general charge on the residuary estate.⁶ YMCA v. Davis, 106 Ohio St. 366, 140 N.E. 114 (1922), aff'd, 264 U.S. 47, 44 S.Ct. 291, 68 L.Ed. 558 (1924).

Some courts reached a contrary result, either by statute or equitable principles, by applying the doctrine of apportionment, which required that the beneficiaries should share the estate tax burden. Hampton's Adm'rs v. Hampton, 188 Ky. 199, 221 S.W. 496, 10 A.L.R. 515 (1920). New York enacted an apportionment statute which was declared unconstitutional by the New York Court of Appeals on the ground that the federal estate tax laws required that the tax be borne by the residue of the estate, and that the New York law contravened the federal law.⁷ On appeal, the Supreme Court in Riggs v. Del Drago, 317 U.S. 95, 63 S.Ct. 109, 87 L.Ed. 106 (1942), reversed. In upholding the constitutionality of New York's apportionment statute, the Supreme Court held that the determination of who should ultimately bear the federal estate tax burden is to be made according to state rather than federal law, and that the state may apportion the federal estate tax as it sees fit among the beneficiaries of the estate.

The effect of adopting an apportionment doctrine is to decrease the share of the estate which a beneficiary would receive by the allocated federal estate tax instead of the residuary bearing the full impact of the tax. The federal estate tax due remains constant and only the one who bears the tax has changed⁸.

In 1948 Congress enacted the statute providing for the marital deduction in order to equalize the estate tax in non-community property states with that in community property states. Pitts v. Hamrick, 228 F.2d 486, 490 (4th Cir. 1955). Since the marital deduction is a deduction from the taxable estate, it does not generate any federal estate tax.

The question arose whether the marital share which would otherwise qualify for the marital deduction was to bear any part of the estate tax. Section 2056(b) (4) (A) requires a reduction for the effect of any estate taxes; however, the question whether estate taxes are to reduce the marital share is controlled by state law. Riggs v. Del Drago, supra; Reg. § 20.2056(b)-4(c) (4).

In the past the Government has contended that the marital deduction should be decreased by the amount of the federal estate tax which is attributable to the widow's share of the estate. Under this theory the total federal estate tax attributable to the net taxable estate, instead of merely a proportionate share of the federal estate tax attributable to the state inheritance tax which is asserted here, would be proportionately deducted in computing the allowable marital deduction. If this contention prevailed, the effect of it would be more than merely a shift of the burden of who bears the estate tax, since reducing the marital share by the attributable estate tax will reduce the marital deduction, thus increasing the net taxable estate and the ultimate estate tax.⁹

The federal courts, interpreting state law, have rejected the contention of the Government that the marital deduction should be reduced by the amount of the federal estate taxes. Dodd v. United States, 345 F.2d 715 (3d Cir. 1965); Pitts v. Hamrick, supra; First Nat'l Bank of Topeka v. United States, 233 F.Supp. 19 (D.Kan.1964); Weyenberg v. United States, 135 F.Supp. 299 (E.D. Wis.1955). But see Thompson v. Wiseman, 233 F.2d 734 (10th Cir. 1956).

Kentucky does not have an apportionment statute but follows the doctrine of equitable apportionment of federal estate taxes. Estate of Webber v. United States, supra; Louisville Trust Co. v. Walter, supra; Trimble v. Hatcher's Ex'rs, supra; Martin v. Martin's Adm'r, supra; Hampton's Admr's v. Hampton, supra. The only Kentucky case cited which deals with the question of whether federal estate taxes should be attributable to the marital deduction is Lincoln Bank & Trust Co. v. Huber, 240 S.W.2d 89 (1951). The Kentucky Court of Appeals there held in a declaratory judgment action that the widow's statutory one-half interest in personalty was not to be diminished by any federal estate tax.¹⁰ The Court reasoned that the marital deduction was enacted in 1948 for geographical equalization, stating:

"3 It appears to us that the apparent purpose behind the enactment of the U. S. Code above was to equalize the estate tax in non-community property states, with that of community property states, and to prepare the way for elimination from the tax burden all those whose legacies or allotments do not create or add to the tax." Id. at 91.

The...