Luehrmann's Estate v. CIR

Decision Date08 February 1961
Docket NumberNo. 16442.,16442.
Citation287 F.2d 10
PartiesESTATE OF Edward H. LUEHRMANN, Deceased, et al., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
CourtU.S. Court of Appeals — Eighth Circuit

Robert H. Batts, St. Louis, Mo., for petitioner. Chas. D. Long, Milton Yawitz, Rassieur, Long & Yawitz, St. Louis, Mo., were with him on the brief.

Morton K. Rothschild, Atty., Dept. of Justice, Washington, D. C., for respondent. Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, Robert N. Anderson, Attys., Dept. of Justice, Washington, D. C., were with him on the brief.

Before WOODROUGH, VAN OOSTERHOUT and MATTHES, Circuit Judges.

VAN OOSTERHOUT, Circuit Judge.

The executors of the estate of Edward H. Luehrmann (taxpayers) filed a timely petition for review of the decision of the Tax Court determining a deficiency in estate tax. The facts, which are entirely stipulated, appear in the opinion of the Tax Court reported at 33 T.C. 277.

Mr. Luehrmann, a resident of St. Louis, Missouri, died testate on March 10, 1952. By his will, which has been admitted to probate, the testator devised and bequeathed his residuary estate in trust, the trustees to pay to two employees specified modest monthly payments for life, the remaining income after deducting trust expenses to be paid a sister-in-law, Jane Hord, for life, and at her death the trust income to be paid in perpetuity to Washington University, a recognized charity within the meaning of § 812(d) Int.Rev.Code of 1939, 26 U.S. C.A. § 812(d), for specified charitable purposes.1

The primary issue upon this appeal is whether costs of administration paid in the years 1952 to 1955, aggregating $121,000, which the executors elected to claim as a deduction from estate income tax in its income tax returns pursuant to § 162(e), Int.Rev.Code of 1939, 26 U.S. C.A. § 162(e), should be deducted from the gross estate before determining the present value of the charitable bequest. Taxpayers, in their brief, thus state their position: "Electing to deduct expenses of administration against income rather than against the estate enhances the value of the residuum of the estate and hence enhances the value of the charitable bequest which is a part thereof."

The Commissioner took the position that the amount of the charitable deduction is limited to the present value of the property which the charity actually receives for charitable uses, and that the taxpayer's election to claim administration expenses as an income tax deduction constitutes no presumption or proof that such administration expenses were actually paid out of income, or that the residuary estate was not in fact diminished by the amount of the administration expenses.

The Tax Court upheld the Commissioner's contention that the administration expenses should be deducted from the gross estate before determining the residue available for charitable purposes.

The parties have stipulated as to the tax due in the event the administration expenses should be deducted from the gross estate. The deficiency determination was based upon such agreed computation. Thus, the sole issue is whether the Tax Court committed error in determining that the administration expenses should be deducted from the gross estate in determining the present value of the residuary estate passing to charity.

Taxpayers elected to claim the $121,000 here involved as deductions from income for estate income tax due in the years in which such expenses were paid, as permitted by § 162, Int.Rev.Code of 1939.2

As required by said statute, taxpayers filed in 1953 a statement that the administration expenses claimed as deductions in the income tax returns had not been claimed or allowed as an estate tax deduction authorized by § 812(b) and a waiver of the right to have such items allowed as a deduction in computing the estate tax. No deduction from estate tax by reason of such administration expenses has been claimed or allowed.

Taxpayers urge that the election afforded by § 162(e) is not dependent upon the source of funds used for payment and that the statute affords the taxpayers, upon compliance with the conditions of the statute, a free choice to claim administration expenses either as a deduction from estate income tax or estate tax. To this extent, we agree with the taxpayers. Likewise, it is clear that the taxpayers, having elected to deduct the administration expenses from income, cannot claim the same items as a deduction for estate tax purposes.

From these premises, the taxpayers argue that their election to claim the administration expenses as estate income tax deductions forecloses any factual inquiry as to the true source of payment upon consideration of the allowable charitable deduction afforded by § 812(d). We adopt the Tax Court's response to such contention, which reads:

"Petitioners\' reliance on section 162(e), I.R.C.1939, seems to us misplaced. That provision was intended to deal solely with the amount of administration expenses deducted from the gross estate in order to compute the net estate upon which estate tax would be paid. It is clear that the option and waiver provisions were inserted to prevent a double deduction on both income and estate tax returns. H.Rept. No. 2333, 77th Cong., 2d Sess. (1942), pp. 75-76; S.Rept. No. 1631, 77th Cong., 2d Sess. (1942), p. 136. This is not our present problem."

Moreover, § 162(e) was added to the portion of the section of the Internal Revenue Code dealing with income taxes. While not conclusive, such fact is entitled to some consideration in determining Congress' intention as to whether the statute was to have any effect upon an estate tax statute such as § 812(d), which determines the extent of the charitable deduction for estate tax purposes. See and compare Achilli v. United States, 353 U.S. 373, 77 S.Ct. 995, 1 L.Ed.2d 918; Dillon v. United States, 8 Cir., 218 F.2d 97.

The election afforded by § 162(e) is in no way dependent upon the source of funds used to make the payment. Hence, the election can have no possible bearing upon the factual determination of the amount of the residue which the charity will actually receive. The amount of the residue depends upon factual considerations, not upon fiction. Obviously, if the administration expenses are in fact paid out of the corpus of the estate, the residue of the estate will be diminished by such payment. The purpose of § 162(e) as disclosed by its terms and legislative history, as demonstrated by the Tax Court in its opinion, was to prevent taxpayers claiming the same items of administration expenses as deductions for both estate income tax and estate tax purposes. Taxpayers received credit for the administration expenses for estate income tax purposes only because they complied with the terms of the statute and expressly waived the right to have such items "allowed at any time as deductions under section 812(b)."

Section 162(e) appears to be clear and unambiguous. There is nothing in said statute which manifests any legislative intent that the election afforded by said statute will have any bearing upon the computation of the amount of the charitable deduction authorized by § 812(d). Likewise, there is nothing in the legislative history of the statute to indicate any such intention.

The net estate subject to taxation is determined by deducting from the valuation of assets required to be included in the gross estate by § 811 the exemptions and exclusions allowed by § 812. Provision for the charitable deduction is found in § 812(d), which authorizes as a deduction from the gross estate "the amount of all bequests, legacies, devises or transfers * * * to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, * * * or to a trustee or trustees, or a fraternal society, order, or association operating under the lodge system, but only if such contributions or gifts are to be used by such trustee or trustees, or by such fraternal society, order, or association, exclusively for religious, charitable, scientific, literary, or educational purposes."

The Tax Court held that under the statute just quoted, "the amount deductible from the gross estate for the valuation of a charitable bequest may not be greater than the value of what the charitable corporation is actually entitled to and does, in fact, receive. Harrison v. Northern Trust Co., 317 U.S. 476 63 S.Ct. 361, 87 L.Ed. 407."

We believe that the Tax Court correctly construed the statute. There are apparently no decided cases determining the precise issue here presented. Harrison v. Northern Trust Co., 317 U.S. 476, 63 S.Ct. 361, 87 L.Ed. 407, while factually distinguishable, supports the Tax Court's conclusion. That case involved the deductibility of estate taxes in computing the amount of the charitable exemption. There the residuary estate before payment of estate taxes amounted to $463,000. The residue passed to a recognized charity. The executors contended they were entitled to claim this entire amount as a charitable deduction. The federal estate taxes amounted to $459,000. The Supreme Court determined that under the prevailing Illinois law, inheritance taxes were payable out of the residuary estate. Based upon such finding, the court determined that only the balance remaining in the residue after payment of inheritance taxes could be claimed as a charitable deduction, the court stating:

"While the estate tax may be a charge against the entire estate under Illinois law, admittedly its payment will operate to reduce the amount of the residuary estate. This legislative history is conclusive in favor of the Government\'s contention that respondents are entitled to deduct only the amount of the residuary estate actually passing to the charitable beneficiaries after provision is made for the payment of the federal estate tax." 317 U.S. at page 480, 63 S.Ct. at page 363.

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