Haffner v. United States
| Decision Date | 25 April 1984 |
| Docket Number | No. 83 C 4669.,83 C 4669. |
| Citation | 585 F. Supp. 354 |
| Parties | Charles C. HAFFNER III and the Northern Trust Company, as Executors of the Will of Charles C. Haffner, Jr., deceased, Plaintiffs, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — Northern District of Illinois |
Middleton Miller, Larry D. Berning, James J. Carroll, Sidley & Austin, Chicago, Ill., for plaintiffs.
Edward J. Moran, Asst. U.S. Atty., Dan K. Webb, U.S. Atty., Chicago, Ill., Terry K. Ray, Trial Atty., Tax Div., Dept. of Justice, Washington, D.C., for defendant.
This is an action against the government filed by the executors of the will of Charles C. Haffner, Jr. (the executors) asserting a claim for refund of $614,905.69 in estate tax, plus costs and interest. Our jurisdiction is predicated on 28 U.S.C. § 1346(a)(1). The parties have filed cross motions for summary judgment based on the undisputed facts in the record before us. For the reasons hereinafter stated, the executors' motion is granted and the government's motion is denied.
Charles C. Haffner, Jr. (decedent), a resident of Lake Forest, Illinois, died on February 13, 1979 leaving a will that the Circuit Court of Lake County, Illinois admitted to probate on March 15, 1979. The plaintiffs were named in the will and duly appointed as executors of the decedent's estate by the Lake County Circuit Court.
The executors, on November 13, 1979, filed the United States Estate Tax Return (the Return) for the decedent's estate with the District Director of Internal Revenue at Chicago, Illinois (the District Director), and paid the tax showed due thereon in the amount of $9,071,713.30. Schedule B, appended to the Return, disclosed the following public housing agency Project Notes, which are the subject matter of this litigation:
Although listing the Project Notes on Schedule B, the executors stated that they were not taxable, relying on section 11(b) of the Housing Act of 1937, 42 U.S.C. § 1437i(b) ("section 11(b)"),1 pursuant to which the Project Notes had been issued.
The District Director disagreed, taking the position, upon audit of the Return, that the $1,085,000 par value Project Notes were includible in the decedent's gross estate at a value, including interest, of $1,113,901.42. That adjustment and one other made by the District Director resulted in the assessment of an additional estate tax of $630,808.76. The executors have paid that additional assessment.
After receiving a National Office Technical Advice Memorandum elucidating the IRS's position that the Project Notes were subject to estate taxation, the executors, on November 10, 1982, filed with the District Director a claim for refund of the $614,905.69 of tax plus interest that was allocable to the Project Notes. That claim was denied on June 10, 1983 and this suit for refund was timely filed thereafter.
The question presented by these cross motions for summary judgment is one solely of law. Section 11(b) provides that obligations like the Project Notes owned by the decedent and the interest on them "shall be exempt from all taxation now or hereafter imposed by the United States whether paid by such agencies or by the United States." A March 1977 circular of the Department of Housing and Urban Development, titled "Short Term Tax-Exempt Project Notes," explained that "section 11(b) provides that the Notes including interest thereon ... shall be exempt from all taxation now or hereafter imposed by the United States." (Emphasis original.) Although the provision in question has been the applicable law since 1937, we are required to decide what is apparently an issue of first impression: whether the section 11(b) exemption includes federal estate taxes.
The estate tax is not a direct tax "on" the Project Notes themselves. Rather, it is an excise or duty, imposed with reference to the value of the notes, on their passage to the decedent's legatees. This principle, which has been developed in the context of the Constitutional apportionment decisions, is firmly entrenched. See e.g., Plummer v. Coler, 178 U.S. 115, 130, 20 S.Ct. 829, 835, 44 L.Ed. 998 (1900); Greiner v. Lewellyn, 258 U.S. 384, 387, 42 S.Ct. 324, 324, 66 L.Ed. 676 (1922); United States v. United States Manufacturers National Bank, 363 U.S. 194, 198, 80 S.Ct. 1103, 1106, 4 L.Ed.2d 1158 (1960). Though the distinction bears a somewhat formalistic stamp, Justice Holmes has commented that it is supported by "a page of history ... worth a volume of logic." New York Trust Co. v. Eisner, 256 U.S. 345, 349, 41 S.Ct. 506, 507, 65 L.Ed. 963 (1921). And the executors disavow any intention to travel the "primrose path" that would be indicated by a challenge to the notion that the estate tax is not a direct tax.
As a kind of corollary to this indirect nature of the estate tax, it has long been established that an exemption of securities or bonds from "taxation" or "all taxation" — despite the apparent literal force of the language—does not necessarily operate as an exemption from estate or inheritance taxes. See e.g., Murdock v. Ward, 178 U.S. 139, 145-147, 20 S.Ct. 775, 777-78, 44 L.Ed. 1009 (1900); United States Trust Co. v. Helvering, 307 U.S. 57, 60, 59 S.Ct. 692, 693, 83 L.Ed. 1104 (1939); Iglehart v. Commissioner, 77 F.2d 704, 712 (5th Cir.1935); Greene v. United States, 171 F.Supp. 459, 145 Ct.Cl. 259 (1959).2 The executors do not seek to controvert the established general rule, now embodied in Treas.Reg. § 20.2033-1 (1963),3 that an exemption from all taxation without exception generally does not affect the imposition of estate and other excise taxes.
The executors' argument is bottomed on the premise, recognized in Greene v. United States, supra, and followed in Jandorf's Estate v. Commissioner, 171 F.2d 464 (2d Cir.1948), that where there is a "strong indication" in a particular statute and its legislative history that Congress intended an exemption from "all taxation" to encompass excise taxes as well, the specific Congressional intention should override the general rule of Murdock v. Ward, supra; United States Trust Co., supra, and similar cases. The executors argue that the terms and legislative history of the Housing Act of 1937, Pub.L. No. 75-412, 50 Stat. 888 (1937) ("the 1937 Act"), from which section 11(b) is derived, contain sufficient indicia of a Congressional intent to exempt Project Notes from estate taxes so as to preclude application of the Murdock v. Ward and United States Trust Co. rule.
The 1937 Act created the former United States Housing Authority (the Authority) as an agency of the Department of the Interior. Section 3(a). It acknowledged the existence of "public housing agencies" defined as "any State, county, municipality, or other government entity or public body (excluding the Authority), which is authorized to engage in the development or administration of low-rent housing or slum clearance." Section 2(11).
Section 1 of the 1937 Act stated that the purpose of the legislation was to make available funds and credit to assist State and local governments in the provision of low income housing and the eradication of "slum" areas. To accomplish the objective, the Authority was authorized, within limits and under certain conditions, to provide loans to local public housing agencies "to assist the development, acquisition or administration of low-rent-housing or slum clearance projects by such agencies." Section 9. The Authority also had the power to make "annual contributions" to such agencies for the same purposes, section 10, and, as an alternative funding mechanism, to provide "capital grants" to the agencies in connection with the acquisition or development of housing projects or "slum clearance" programs, section 11. The primary importance of local participation in the national housing endeavor was recognized in section 12 of the 1937 Act, which directed the Authority to seek to transfer ownership and management responsibility for low income housing projects to the local agencies.
Section 5(e) of the 1937 Act described the tax treatment of obligations of "public housing agencies", of which the decedent's Project Notes are an example:
Obligations, including interest thereon issued by public housing agencies in connection with low-rent housing or slumclearance projects, and the income derived from such projects, shall be exempt from all taxation now or hereafter imposed.
(Emphasis supplied.)
Section 20(a) of the 1937 Act authorized the Authority to issue obligations and section 20(b) described the tax treatment of those obligations:
Such obligations, shall be exempt, both as to principal and interest, from all taxation (except surtaxes, estate, inheritance, and gift taxes) now or hereafter imposed by the United States or by any State, county, municipality, or local taxing authority.
(Emphasis supplied.) The emphasized divergence in the wording of sections 5(e) and 20(b) of the 1937 Act is reflected in the section by section summary of the Wagner Housing Bill, S.B. 1685,4 that was prepared by the Senate Committee on Education and Labor. See 81 Cong.Rec. 8086-8088 (1937).
During the 1937 hearings on the Wagner Housing Bill, then Secretary of Interior Harold L. Ickes proposed an alternate bill. The Ickes bill, which the Senate Committee on Education and Labor rejected, differed in many substantive respects from the Wagner bill, as to some of which Secretary Ickes gave testimony before the Senate Committee. The Ickes bill contained a section 20(b) identical to that in the 1937 Act. Ickes' section 5(e), however,—unlike the 1937 Act—contained the same excepting language as that in section 20(b). Ickes offered no testimony to explain this relatively minor aspect of his proposed changes to the Wagner bill.
The executors'...
To continue reading
Request your trial
-
Herbert v. US
...Act of 1937, 42 U.S.C. § 1437 et seq., were includible in a recipient's estate for federal estate tax purposes. Haffner v. United States, 585 F.Supp. 354 (N.D.Ill.1984), aff'd, 757 F.2d 920 (7th Cir.1985), held that the exemption of securities or bonds from "taxation" or "all taxation" (a m......
-
United States v. Wells Fargo Bank
...Stat. 939, which forecloses any refund for estate taxes paid on such Project Notes, is unconstitutional. Relying on Haffner v. United States, 585 F.Supp. 354 (N.D.Ill.1984), aff'd, 757 F.2d 920 (CA7 1985), the District Court for the Central District of California ruled that Project Notes we......
-
Estate of Bradford v. United States, C-86-0297-WWS.
...the Northern District of Illinois decided Haffner v. United States, holding that such Project Notes were exempt from federal estate tax. 585 F.Supp. 354. On June 28, 1984, approximately two months later, plaintiff filed a claim for refund of the tax attributed to the Project Notes with the ......
-
Powell v. Comm'r of Internal Revenue (In re Estate of Egger )
...this question and the results are not uniform. The progenitor of the cases supporting petitioner's position is Haffner v. United States, 585 F. Supp. 354 (N.D. Ill. 1984), affd. per curiam 757 F.2d 920 (7th Cir. 1985) with Judge Posner dissenting. On the other hand, the court in Shackelford......