Little's Estate v. CIR

• Citation: 274 F.2d 718
• Decision Date: 19 January 1960
• Docket Number: No. 16308.,16308.
• Parties: ESTATE of Mary Jane LITTLE, Deceased, Bank of America National Trust and Savings Association, Executors, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

274 F.2d 718 (1960) ESTATE of Mary Jane LITTLE, Deceased, Bank of America National Trust and Savings Association, Executors, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 16308.

United States Court of Appeals Ninth Circuit.

January 19, 1960.

William L. Kumler, Wilson B. Copes, Los Angeles, Cal., for petitioner.

Howard A. Heffron, Acting Asst. Atty. Gen., David O. Walter, Lee A. Jackson, Robert N. Anderson, Attys., Dept., of Justice, Washington, D. C., for respondent.

Before STEPHENS and JERTBERG, Circuit Judges, and LINDBERG, District Judge.

JERTBERG, Circuit Judge.

Before us is a petition for review of a decision of the Tax Court. The opinion of the Tax Court is reported at 30 T.C. at page 936.

The petition for review involves federal income taxes for the calendar years 1949 through 1952.

The basic issue to be determined on this review is whether the Tax Court erred in holding that deceased taxpayer was not entitled to claim a portion of certain deductions for depreciation and depletion allowable for the tax years involved under Section 23(l) and Section 23(m) of the Internal Revenue Code of 1939, with respect to gas and oil properties held as trust corpus, and in holding that the trustee of a testamentary trust of which decedent was a life income beneficiary was entitled to claim the entire amount of such deduction.

The pertinent provisions of Section 23 (26 U.S.C.1952 Ed. Section 23) are:

"§ 23. Deductions from gross income.

"In computing net income there shall be allowed as deductions:

* * * * * *

"(l) Depreciation. — A reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) —

"(1) of property used in the trade or business, or

"(2) of property held for the production of income.

"In the case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust the allowable deduction shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allocable to each.

"(m) Depletion. — In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case; such reasonable allowance in all cases to be made under rules and regulations to be prescribed by the Commissioner, with the approval of the Secretary. In any case in which it is ascertained as a result of operations or of development work that the recoverable units are greater or less than the prior estimate thereof, then such prior estimate (but not the basis for depletion) shall be revised and the allowance under this subsection for subsequent taxable years shall be based upon such revised estimate. In the case of leases the deductions shall be equitably apportioned between the lessor and lessee. In the case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust the allowable deduction shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allocable to each."

The facts in the case before the Tax Court were all stipulated, as set forth in the stipulation of facts and documentary exhibits referred to therein, and such facts were found by the Tax Court accordingly. The following is a summary of the facts as contained in the opinion of the Tax Court, as supplemented by statements based upon and excerpts from certain of the exhibits which were a part of the record before the Tax Court:

Mary Jane Little died on or about September 10, 1953, a resident of Los Angeles County, California. Decedent filed her Federal income tax returns for the years 1949, 1950 and 1951 with the then collector of internal revenue and for the year 1952 with the district director of internal revenue for the sixth district of California, Los Angeles, California. The Bank of America National Trust and Savings Association is the duly appointed and acting executor of the Estate of Mary Jane Little, deceased.

Decedent was the mother of Gloria D. Foster, who died on or about July 30, 1943, a resident of Dallas County, Texas. For many years prior to her death, Gloria conducted an oil business, owning, operating, developing and maintaining many producing oil and gas leases in the East Texas oil field. At the date of her death in 1943 she owned undivided interests in approximately 84 producing oil wells in this field and in the physical equipment used in connection therewith. The oil income distributed to Mary Jane Little as beneficiary of the Gloria D. Foster Trust during the years here involved (from which depletion and depreciation deductions here at issue were taken) was derived from these oil properties, or other subsequently acquired similar oil properties.

The last will and testament of Gloria D. Foster, deceased, was duly probated by order of the County Court of Dallas County, Texas, on August 16, 1943. The will named L. C. Webster, Sol Goodell and T. A. Knight executors. After providing for a few specific bequests of cash and personal effects, the residue of Gloria's property was devised and bequeathed to L. C. Webster, T. A. Knight and Sol Goodell as trustees. The trust provisions of the will are contained in Article "V" and in this portion of the will said trustees were given broad authority and discretion in connection with the management of the corpus, investments and reinvestments. Paragraph 2 of Article V of the will provided, in part, that the "decision of trustees as to what property is corpus and what property is income of the estate, shall be final and binding on all parties at interest hereunder. * * *" Paragraph 5 of Article V of the will also grants the trustees unqualified discretion in allocating trust receipts to income or corpus.

The will made no mention of the treatment of depletion and depreciation deduction as between income beneficiaries and the trust. Paragraphs 8 and 9 of Article V of the will provided as follows:

8. Out of the net income of my estate I direct that Two Hundred ($200.00) Dollars per month shall be paid to my faithful servant, Eva Culbertson, during her lifetime, and One Hundred ($100.00) Dollars per month shall be paid to my mother-in-law, Mrs. Jeremiah Foster, during her lifetime and thereafter to my sister-in-law, Evelyn Foster, during her lifetime. All other net income from my estate shall be paid to my mother, Mary Jane Little, during her lifetime. If during any calendar year after the calendar year during which I die, while my mother is alive, the net income so paid my mother is less than Twelve Thousand ($12,000.00) Dollars, I direct that at the end thereof trustees pay to her the difference out of the corpus of my estate if she so requests.

9. This trust shall terminate on the date of the death of my mother, Mary Jane Little. On termination of this trust, I direct that all the estate and properties constituting it that are then in the hands of trustees shall pass and vest in fees simple and by trustees shall be conveyed,

(a) one-half to Ann Armstrong Knight, if she then be living, and to her heirs per stirpes if she then be dead; and

(b) one-half to Marian Ralston Knight, if she then be living, and to her heirs per stirpes if she then be dead.

The trustees named in the will accepted the trust and allocated to the corpus of the trust so much of the income of the trust after operating expenses but prior to any deductions for depreciation and depletion as was equal to the amount of depreciation and depletion allowable for Federal income tax purposes with respect to such income.

Decedent, Mary Jane Little, proposed to institute proceedings to contest Gloria's will dated April 19, 1943, relying upon the validity of a prior will dated September 8, 1942. For the purpose of settling the threatened will contest a contract and agreement, dated September 20, 1944, was entered into by and between the interested parties. The contract and agreement provided, in part, as follows: (a) that the purpose of the "contract and agreement is to settle, adjust and compromise all matters in issue or controversy between any and all of the parties hereto;" (b) that the trustees named under Gloria's will (dated April 19, 1943) were to resign as trustees, and others were to be appointed; (c) a trust agreement was to be entered into by all beneficiaries under the will, with changes in the power and duties of the new trustees, and with changes in the rights of the beneficiaries.

Under Section II, heading 16, of the Contract and Agreement of September 20, 1944, the parties confirmed and agreed to the validity of the Gloria D. Foster will dated April 19, 1943, the validity of the probate thereof, further agreeing to defend against any attack against the will, "Subject to the conditions being met that are set out under headings 2, 3, and 5 above." Those conditions were that a declaratory judgment be obtained that the bequests to Ann Armstrong Knight and Marian Ralston Knight were not subject to the spendthrift trust provisions of the will, that the trustees resign and Mercantile National Bank at Dallas be the sole successor trustee, and that a trust agreement be entered into, which provided that one-half of the remainder go to the heirs of the deceased taxpayer. Under Section II, heading 6, the remaindermen were to convey their interests to the Mercantile National...