Northern Trust Co. v. Harrison

• Decision Date: 27 February 1942
• Docket Number: No. 7661.,7661.
• Citation: 125 F.2d 893
• Parties: NORTHERN TRUST CO. et al. v. HARRISON, Collector of Internal Revenue.
• Court: U.S. Court of Appeals — Seventh Circuit

125 F.2d 893 (1942)

NORTHERN TRUST CO. et al. v. HARRISON, Collector of Internal Revenue.

No. 7661.

Circuit Court of Appeals, Seventh Circuit.

February 27, 1942.

Edward H. Horton, Sp. Asst. to Atty. Gen., Samuel O. Clark, Jr., Asst. Atty. Gen., and J. P. Wenchel, of Washington, D. C. (Sewall Key, Sp. Asst. to Atty. Gen., J. Albert Woll, U. S. Atty., and Austin Hall, Asst. U. S. Atty., both of Chicago, Ill., of counsel), for appellant.

Alexander F. Reichmann and Myron D. Davis, both of Chicago, Ill., for appellees.

Before SPARKS, MAJOR, and KERNER, Circuit Judges.

SPARKS, Circuit Judge.

Appellees sued to recover an alleged overpayment of federal estate taxes in the amount of $119,069.43 with interest. The District Court entered judgment in the sum of $149,416.92, and from that judgment appellant has appealed. The facts were found as stipulated.

Henry M. Wolf, a resident of Chicago, Illinois, died testate on June 4, 1935. By his will he made special bequests to charitable organizations aggregating $1,570,696.74, and bequeathed his residuary estate to certain exempt charitable organizations. He directed that all inheritance, legacy, succession and estate taxes, both state and federal, on the specific bequests and gifts contained in two articles of the will should be paid by his executors out of his general estate, but gave no further direction relative to the payment of federal estate or Illinois inheritance taxes.

The primary question presented is whether under the provisions of Section 303(a) (3) of the Revenue Act of 1926, as amended by Section 807 of the Revenue Act of 1932, the amount to be deducted from decedent's gross estate on account of his residuary bequest to charity is the actual amount of such bequest, after payment of federal estate taxes, or what would be the amount of such bequest had there been no federal estate taxes.¹

Appellant contends that under Illinois law the federal estate tax was a paramount charge and expense of administration against the estate, hence is payable in whole or in part out of the residuary estate, within the meaning of the statute and the intent of Congress, as exemplified by Article 44, Treasury Regulations 80 (1934 Edition). It is conceded that the latter is not applicable unless Section 807 is applicable. He further contends that there can be no residuary estate until the federal estate tax has been paid, because such tax is a paramount charge or expense of administration and must be paid out of the assets of the estate. Hence he argues that such payment operates to reduce the residue under the will.

That the federal estate tax is a charge against the estate is not questioned. Whether it is to be paid out of the residue or out of the general or gross estate is to be determined by the terms of the will, or by the law of the jurisdiction under which the estate is administered, or by the law of the jurisdiction imposing the particular tax. The will is silent on this subject, and it is conceded that unless the will so directs the federal estate tax can not be paid out of the residue bequeathed to charitable organizations, in the absence of applicable law to the contrary. The law of the jurisdiction under which the estate is settled, which in this case is the law of Illinois, provides that the federal estate tax is a paramount charge and expense of administration which is payable out of the gross estate of the decedent. People v. Pasfield, 284 Ill. 450, 120 N.E. 286; People v. Northern Trust Co., 289 Ill. 475, 124 N.E. 662, 7 A.L.R. 709; and People v. McCormick, 327 Ill. 547, 158 N.E. 861. Hence, under that jurisdiction, such tax is not payable in whole or in part out of the residuary bequests to charity.

It is conceded that prior to the enactment of Amendatory Section 807 of the Act of 1932, there was no federal enactment which authorized the deduction of federal estate tax from residuary bequest to charities in fixing the net taxable estate. Edwards v. Slocum, 264 U.S. 61, 44 S. Ct. 293, 68 L.Ed. 564. Appellant concedes that the facts in that case are substantially identical with those here, except as to the amounts involved, and were it not for Section 807 the decision of the Supreme Court in Edwards v. Slocum, supra, would be controlling here.

However, appellant contends that Section 807 is a limitation upon the amount otherwise deductible on account of charitable bequests. This thesis is based on the assumption that the language of the section is ambiguous when applied to a residuary bequest to charity,...