Pitner v. United States

• Decision Date: 18 December 1967
• Docket Number: No. 23364.,23364.
• Citation: 388 F.2d 651
• Parties: Moselle Silvey PITNER et al., Appellants, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

388 F.2d 651 (1967)

Moselle Silvey PITNER et al., Appellants, v. UNITED STATES of America, Appellee.

No. 23364.

United States Court of Appeals Fifth Circuit.

December 18, 1967.

John M. Smith, Longview, Tex.. for appellants.

Richard M. Roberts, Act. Asst. Atty. Gen., Lee A. Jackson, Gilbert E. Andrews, Robert Waxman, Attys., Dept. of Justice, Washington, D. C., W. Wayne Justice, U. S. Atty., Tyler, Tex., for appellee.

Before WISDOM, COLEMAN and GODBOLD, Circuit Judges.

WISDOM, Circuit Judge:

The plaintiffs, describing themselves as "custodians, next of kin and beneficiaries of the estate of J. E. Sexton, deceased", sue the United States to recover $75,848.19 in estate taxes. Sexton's will was not probated and there was no formal administration of the estate. The plaintiffs had established their rights to Sexton's estate through litigation based on Sexton's oral agreement with his brother to make mutual wills in favor of the plaintiffs. The plaintiffs contend that the effect of the litigation was to probate the will in the district court; that under Texas law there would be no formal administration of Sexton's estate, because there were no debts; that therefore attorneys' fees and other related expenses of the litigation are deductible as "administration expenses" under Section 2053(a) of the Internal Revenue Code of 1954. At first blush, the notion that administration expenses may be deductible when there is no administration seems too paradoxical for serious consideration. On reflection and after considering Texas law, and somewhat to our surprise, we find ourselves in agreement with the plaintiffs' theory of recovery.

* * *

November 23, 1948, J. E. Sexton and his brother, W. H. Sexton, neither of whom had ever married, executed virtually identical mutual wills.¹ These wills resulted from an oral agreement between the brothers that the survivor would leave to the other his undivided interest in certain jointly held property in Hill, Johnson and Somervell Counties and would leave the residue to their nieces, the daughters of Mary Sexton Silvey.² W. H. died October 30, 1952. His will was probated, J. E. and Mrs. Pitner qualified as independent executors, and his estate was distributed according to the terms of the will. March 1, 1958, J. E. died while living in a rest home in Cherokee County, Texas; previously he had resided in Johnson County, Texas.

March 3, 1958, two days after J. E.'s death, Agnes Kirk, I. W. Kirk, and Gean Turner offered for probate in the County Court of Johnson County a document purporting to be J. E.'s last will. The document was dated March 23, 1954. Except for a few hundred dollars, the will left the entire estate to Agnes Kirk.

Each of the beneficiaries employed her own attorneys and each worked out separately the fees arrangements. Mrs. Murphy and Mrs. Beard each agreed to pay a fixed fee of $25,000 plus expenses, regardless of the outcome of the litigation. Mrs. Jacobs agreed to pay her attorney one-third of whatever he recovered for her, less $25,000 paid in advance. Mrs. Pitner agreed to pay her attorneys $31,500 regardless of the outcome.

The attorneys decided not to offer the 1948 will for probate. Instead, Mrs. Silvey, sister and sole-surviving heir of J. E., would contest the application for probate of the purported will filed by the Kirks in Johnson County. The nieces would sue in the district court in Rusk County in trespass to try title to the property of J. E. in that county, basing their suit on the contract between W. H. and J. E. to make mutual wills.

The plaintiffs were successful in both cases. In the Johnson County case the court denied the application of the Kirks to probate the will they offered; the court stayed further proceedings, pending the outcome of the Rusk County suit. As a result of this suit, the nieces acquired title to the Johnson, Hill, and Somervell properties as the intestate heirs of J. E. Sexton, their mother having died since the action was commenced.³ In the Rusk County suit the jury rendered a verdict in favor of the plaintiffs and the court entered judgment vesting in the nieces title to all property owned by J. E. at the time of his death. The Texas Court of Civil Appeals affirmed. Kirk v. Beard, 1960, 334 S.W.2d 531. The Texas Supreme Court modified and affirmed as modified the judgment of the trial court. Kirk v. Beard, 1961, 162 Tex. 144, 345 S.W.2d 267. The Texas Supreme Court defined the theory of the action as a suit on the oral contract between the two brothers:

The appellants stand to recover here not on the will of their uncle, but on the oral contract made between their two uncles, as that contract has been incorporated in the will. The contract did not provide that the survivor would leave the land to the nieces. The will has not been probated and may have been revoked. The question, as to whether the devise would have passed into the residuary estate had the will of the surviving brother been probated and became effective, is not material, we think, to the determination of the provisions of the oral contract. 345 S.W.2d at 273.

The 1948 mutual will executed by J. E., which named Moselle Silvey Pitner and W. H. as independent executors, was never offered for probate. The estate tax return filed June 2, 1959, reported the total value of the estate at $1,468,981.32. The Commissioner of Internal Revenue assessed the tax at $304,471.47 and collected this sum by administrative levy on certain bank accounts in J. E. Sexton's name.

$31,288.98 went to court costs and related expenses. $66,271.39 was paid to an accountant, but this sum was not claimed as a deduction from the gross estate. The net sum the plaintiffs claimed as an authorized deduction under 26 U.S.C.A. § 2053(a) (2) was $218,426.77. The government stipulated that the $31,288.98 spent on court costs was a reasonable sum under the circumstances. No such stipulation was made regarding the attorneys' fees.

The District Director denied the claim for refund. The district court also rejected the claim: "There was never any formal legal administration of the Estate of J. E. Sexton. * * * The expenses claimed to be deductible were not incurred in any attempt to obtain property for the Estate * * * but were individual and personal expenses of the plaintiffs incurred by them for their individual benefit and were not administration expenses." Jacobs v. United States, E.D.Tex.1965, 248 F.Supp. 695.

I.

Section 2053(a) of the 1954 Code permits the deduction "from the value of the gross estate such amounts * * * for administration expenses * * * as are allowable by the laws of the jurisdiction * * * under which the estate is being administered".⁴ The Code does not define the term "administrative expenses", but the Regulations, 26 C.F.R. § 20.2053-3(a), provide:

The amounts deductible from a decedent\'s gross estate as "administration expenses" * * * are limited to such expenses as are actually and necessarily incurred in the administration of the decedent\'s estate; that is, in the collection of assets, payment of debts, and distribution of property to the persons entitled to it. The expenses contemplated in the law are such only as attend the settlement of an estate and the transfer of the property of the estate to individual beneficiaries or to a trustee, whether the trustee is the executor or some other person. Expenditures are essential to the proper settlement of the estate, but incurred for the individual benefit of the heirs, legatees, or devisees, may not be taken as deductions. * * *

Deductible attorneys' fees are those which an "executor or administrator * * * has * * * paid or an amount which at the time of filing of the estate tax return may reasonably be expected to be paid". 26 C.F.R. § 20.2053-3(c) (1).

Under the 1948 will the plaintiffs' mother, Mary Sexton Silvey, could have qualified as an "independent executrix", but she never acted in that capacity. Even when she contested the 1958 will in the Johnson County action, she was acting in her capacity as sole heir-in-law in the event of intestacy rather than in the capacity of a personal representative of the estate. In the Rusk County action, the plaintiffs proceeded in their individual capacities to enforce the oral contract upon which the 1948 wills were based rather than as official representatives under the will to enforce the will itself. Finally no expenses were ever paid out of the estate: $41,041.18 was paid from a joint bank account to which all the plaintiffs contributed, and the remaining $177,385.59 was paid out individually by the plaintiffs.

II.

A. A formal probate proceeding is not a prerequisite to a deduction for federal estate tax purposes under § 2053 (a). Commissioner of Internal Revenue v. Bronson, 8 Cir. 1929, 32 F.2d 112; Lewis v. Bowers, S.D.N.Y.1937, 19 F. Supp. 745, 747; 4 Mertens, Law of Federal Gift and Estate Taxation § 26.16, pp. 38-41 (1959). Even where there is a probate proceeding, administration expenses may be deducted, if reasonable, although they have not yet been allowed by the court. Estate of Alice K. Larkin, 1949, 13 T.C. 173; Estate of Jacob Voelbel, 1927, 7 B.T.A. 276; Bourne v. United States, 1933, 2 F.Supp. 228, 231, 76 Ct.Cl. 680.

Section 2053(a) requires only that the deduction be "allowable" by the laws of the jurisdiction under which the estate is being administered. See Commercial Nat. Bank v. United States, 4 Cir. 1952, 196 F.2d 182, 30 A.L.R.2d 1103; Smyth v. Erickson, 9 Cir. 1955, 221 F.2d 1. The term "allowable" was used in the 1954 Code for the first time, replacing the phrase "as are allowed", which had been used in the Internal Revenue Code of 1939, § 812(b), and all earlier versions of this section. This change seems to imply that the policy of the Code is not to rely upon formal probated actions in determining permissible deductions. The Eighth Circuit has suggested the reason for this policy: Section 2053(a) is meant to apply any-where in...