Kleine v. U.S.
| Decision Date | 23 September 1976 |
| Docket Number | No. 74-4065,74-4065 |
| Citation | 539 F.2d 427 |
| Parties | 76-2 USTC P 13,158 William D. KLEINE and wife, V. Ann Kleine, and Brown Oil Tools, Inc., Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
William Monroe Kerr, Midland, Tex., for plaintiffs-appellants.
James E. Clark, U. S. Atty., San Antonio, Tex., J. W. Littlefield, Refund Section, Scott P. Crampton, Asst. Atty. Gen., Gilbert E. Andrews, Chief, Appellate Section, Tax Div., U. S. Dept. of Justice, Washington, D. C., for defendant-appellee.
Appeal from the United States District Court for the Western District of Texas.
Before GODBOLD and RONEY, Circuit Judges, and FREEMAN, District Judge.
Section 6324(a)(1) of the Internal Revenue Code of 1954, 26 U.S.C. § 6324(a) (1), imposes a pre-assessment tax lien on the gross estate of any decedent whose property is subject to the estate tax. The special estate tax lien attaches automatically at death to all property in the decedent's gross estate. This appeal presents certain novel questions left unresolved by the decision of this court in Northington v. United States, 475 F.2d 720 (5th Cir. 1973) 1 concerning the circumstances in which property, otherwise subject to the lien of § 6324(a)(1), may be divested of the lien by operation of law prior to the payment of the estate tax.
The decedent, J. E. Jones, died testate on October 31, 1964. Decedent's will was admitted to probate in Midland County, Texas, and letters testamentary were issued to his son, Philip McRae Jones, who was named in the will as the independent administrator of the estate, pursuant to § 145 of the Texas Probate Code. 17A Vernon's Texas Civil Stat.Ann. § 145. 2
The Texas system of independent administration authorizes an executor to proceed with the administration of an estate, without requiring court approval of specific dispositions, once the "will has been probated, and the inventory, appraisement and list . . . (of claims) has been filed by the executor and approved by the court." 17A Vernon's Texas Civil Stat.Ann. § 145. Moreover, the independent executor is authorized to "receive presentation of and classify, allow, and pay, or reject, claims against the estate" in accordance with the order of priority and classifications prescribed in the Texas Probate Code "to the same extent and result as if his actions had been accomplished in, and under orders of the court." 17A Vernon's Texas Civil Stat.Ann. § 146. 3 In sum, the independent system of administration is designed to permit an independent executor to effectuate the distribution of the estate free of judicial supervision with a minimum of cost and delay. See Burke v. Satterfield, 525 S.W.2d 950 (Tex.Sup.1975).
At his death, the decedent owned a certain parcel of residential real property and a parcel of commercial property, both of which were included in his gross estate. On August 30, 1965, the independent executor sold the residential property, formerly owned by his father, to two of the appellants herein, Mr. and Mrs. Kleine, for $35,000.00; two days later, he deposited a check in the amount of $31,286.94, representing the net proceeds of the sale of the residential property into an account for the estate maintained at the First National Bank of Midland, Texas. Thereafter, on October 14, 1965, the executor issued a check drawn on the estate's account in the amount of $30,000.00 to the Jones Exploration Company, an individual proprietorship operated by the executor, that had formerly been a partnership operated by decedent and his son, the executor. In a similar series of transactions, the executor sold the commercial property to appellant Brown Oil Tools, Inc. for $75,000.00 on April 30, 1965, and deposited the net proceeds in the estate's bank account. On that same date, the executor issued a check drawn on the estate's account for $75,000.00 payable to the Jones Exploration Company representing the proceeds of the sale.
On January 24, 1966, the independent executor filed a federal estate tax return reflecting a total estate tax liability of $392,347.31, of which certain amounts still remain unpaid and owing by the estate.
On June 16, 1972, in order to ensure the payment of the estate tax, the Internal Revenue Service levied upon both the residential and commercial properties and attempted to sell the properties in order to collect the estate tax due, pursuant to its authority under § 6331(a) of the Internal Revenue Code, 26 U.S.C. § 6331(a). Thereafter, the purchasers of the property, appellants herein, brought the instant action in federal court seeking to enjoin the United States from enforcing the federal tax lien. The district court denied appellants' request for injunctive relief and granted appellee's motion for summary judgment, concluding, as a matter of law, that (1) the proceeds of the sale of the properties sub judice were not utilized to pay debts that were "charges against the estate" nor (2) were the sales "allowed by any court having jurisdiction thereof" within the meaning of § 6324(a)(1). Accordingly, the district court dismissed the action, concluding that the property was not divested of the federal estate tax lien prior to the levy and seizure of the property by the United States.
At the outset, we note that appellants herein admit that the proceeds of the sale of both pieces of property were commingled with other funds in possession of the Jones Exploration Company, and that neither the executor nor the appellants have records that carefully "trace" in detail the purposes for which the funds were utilized. See Northington v. United States, supra. Cf. United States v. Security-First National Bank, 30 F.Supp. 113 (S.D.Cal.1939), appeal dismissed, 113 F.2d 491 (9th Cir. 1940). 4 Similarly, appellants do not argue that the sale of the properties and the disposition of the proceeds thereof was pursuant to a court order or with the approval of the court, nor do they contend that the executor applied for and received a discretionary release of the estate tax lien from the Internal Revenue Service, pursuant to § 6325 of the Internal Revenue Code.
Thus, the instant appeal presents two distinct legal questions pretermitted by this court in Northington v. United States, supra, 475 F.2d at 722 n. 1: (1) whether the general obligations of the estate which were allegedly satisfied by the proceeds of the sale were in themselves "charges against the estate" or "expenses of administration" within the meaning of § 6324(a)(1), and (2) whether the obligations which were purportedly satisfied by the proceeds of the sale were, in the context of the Texas system of independent administration, "allowed by any court having jurisdiction thereof" within the meaning of § 6324(a)(1). 5
Section 6324, the special estate tax lien and divestment statute, provides as follows:
(a) Liens for estate tax Except as otherwise provided in subsection (c)
(1) Upon gross estate. Unless the estate tax imposed by chapter 11 is sooner paid in full, or becomes unenforceable by reason of lapse of time, it shall be a lien upon the gross estate of the decedent for 10 years from the date of death, except that such part of the gross estate as is used for the payment of charges against the estate and expenses of its administration, allowed by any court having jurisdiction thereof, shall be divested of such lien.
26 U.S.C. § 6324(a)(1) (emphasis supplied).
Appellants' contention that the property sub judice was automatically divested of the special estate tax lien pursuant to § 6324 is two-fold. In the first instance, appellants contend that under Texas law, an independent executor is expressly empowered to conduct the administration of the estate and allowance of claims "to the same extent and result as if his actions had been accomplished in, and under orders of, the court," 17A Vernon's Texas Civil Stat.Ann. § 146, and that the independent administrator may, without court order, do or perform any act which any ordinary executor or administrator may perform only pursuant to court order. Burke v. Satterfield, supra. First State Bank of Stratford, Texas v. Roach, 124 F.2d 325 (5th Cir. 1941); Austin v. United States, 116 F.Supp. 283 (S.D.Tex.1953). Thus, appellants conclude that in the specialized context of the Texas system of independent administration, approval and allowance of any claims by the independent executor constitutes "allow(ance) by any court having jurisdiction thereof" for purposes of automatic lien divestiture within the meaning of § 6324(a)(1). We disagree.
The express language of § 6324(a)(1) manifests the intent of Congress to interpose an independent and neutral judicial evaluation of claims as a prerequisite to any divestiture of the special estate tax lien in order to protect the right and ability of the Service to collect the estate tax. Thus, Congress expressly limited the applicability of the automatic divestiture provisions to situations where property in the gross estate was used to satisfy charges against the estate and expenses of administration and where such expenditures were "allowed" by a court of competent jurisdiction. United States v. Security-First National Bank, supra, relied upon by appellants does not require a contrary result. In that decision the court considered certain peculiarities in the manner of probate administration recognized by California law and held, in the first instance, that "what constitutes due approval by a probate court in California of expenditures made by a California executor must be determined by California law;" Id. 30 F.Supp. at 118. However, the court did not dispense with the requirement that the payment be "allowed" and dealt merely with the question of the appropriate timing for such approval, stating:
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