Rogan v. Taylor

• Decision Date: 11 June 1943
• Docket Number: No. 10301.,10301.
• Citation: 136 F.2d 598
• Parties: ROGAN v. TAYLOR. TAYLOR v. ROGAN.
• Court: U.S. Court of Appeals — Ninth Circuit

136 F.2d 598 (1943)

ROGAN v. TAYLOR.

TAYLOR v. ROGAN.

No. 10301.

Circuit Court of Appeals, Ninth Circuit.

June 11, 1943.

Samuel O. Clark, Jr., Asst. Atty. Gen., Tax Division, Sewall Key, J. Louis Monarch. Maryhelen Wigle and Carleton Fox, Sp. Assts. to the Atty. Gen., and Leo V. Silverstein, U.S. Atty., E. H. Mitchell, Asst. U.S. Atty., and Eugene Harpole, Sp. Atty., Bureau of Internal Revenue, all of Los Angeles, Cal., for Collector.

W. M. Greathouse, of Los Angeles, Cal., for taxpayer.

Before WILBUR, MATHEWS, and STEPHENS, Circuit Judges.

WILBUR, Circuit Judge.

Alfred G. Taylor, executor of the estate of Emma A. Bailey, deceased, sued Nat Rogan, Collector of Internal Revenue, in the United States District Court for the Southern District of California for refund of a portion of the estate tax paid. Recovery was allowed in part and denied in part, and both parties appeal. The questions involved on both appeals concern the determination of the amount of the estate which is subject to the applicable federal estate tax (Revenue Act of 1926, § 301, 26 U.S.C.A.Int.Rev.Acts, page 225; Revenue Act of 1932, § 401, as amended by Revenue Act of 1935, § 201, 26 U.S.C.A. Int.Rev.Acts, page 573).

Deduction on Account of Residuary Charitable Bequests.

Section 303 of the Revenue Act of 1926, 26 U.S.C.A.Int.Rev.Acts, page 232, provides that in determining the amount of the estate subject to the federal estate tax there may be deducted from the gross estate the amount of bequests payable to charitable organizations therein described. The difficulty in applying this provision in the case at bar arises from the fact that certain of the charitable bequests are residuary, five twenty-thirds of the residue of the estate being bequeathed to charities. The federal estate tax is, as its name indicates, a tax upon the estate as a whole and is payable by the executors, but how its burden is to be apportioned as among the beneficiaries of the estate is a question to be determined by the law of the jurisdiction in which the estate is being administered. Riggs v. Del Drago, 317 U.S. 95, 62 S.Ct. 109, 87 L.Ed. ___, 142 A.L.R. 1131. If each legatee is required to pay his proportionate share as under the New York statute considered in that case, then a residuary bequest to charities presents no unusual problem. If, however, the federal tax must be paid from the general estate, like other administration expenses, the payment of the tax upon the taxable portion of the estate will operate to reduce the nontaxable residuary gift to charity. The question then arises as to whether the deduction of charitable bequests allowed by § 303, supra, is a deduction of residue as computed before it is diminished by payment of the federal tax or afterward. The former course, adopted by the lower court in the case at bar, presents the anomalous result of allowing deduction from the gross estate, as a gift to charity, of a sum which in fact goes not to charity but to the Collector of Internal Revenue. The alternative course presents the practical problem of using the federal tax itself as an element in computing the taxable estate, upon which the amount of the tax will in turn depend. The problem of determining the federal estate tax in the latter case may be solved readily by algebraic means.

It was originally held, in Edwards v. Slocum, 264 U.S. 61, 44 S.Ct. 293, 68 L.Ed. 564, in February 1924, that when there was a bequest of the entire residue to charity, § 303, supra, permitted deduction of the entire residue, undiminished by the federal estate tax, in determining the taxable estate. Thereafter § 303, supra, was amended by § 807 of the Revenue Act of 1932, 26 U.S.C.A.Int.Rev.Acts, page 235, to add a provision dealing with this subject, as follows: "If the tax imposed by section 301, or any estate, succession, legacy, or inheritance taxes, are, either by the terms of the will, by the law of the jurisdiction under which the estate is administered, or by the law of the jurisdiction imposing the particular tax, payable in whole or in part out of the bequests, legacies, or devises otherwise deductible under this paragraph, then the amount deductible under this paragraph shall be the amount of such bequests, legacies, or devises reduced by the amount of such taxes. The amount of the deduction under this paragraph for any transfer shall not exceed the value of the transferred property required to be included in the gross estate * * *."

The first question for determination in arriving at the amount of the residue of the estate is to determine whether the federal estate tax is payable from individual legacies or from the estate as a whole. If the latter, the burden of this payment would fall upon the residuary legatees. Where this burden falls is a question to be determined by the law of the state in which the estate is administered. Riggs v. Del Drago, 317 U.S. 95, 63 S.Ct. 109, 87 L.Ed. ___, 142 A.L.R. 1131, supra. The question has recently been before the Supreme Court in an action arising in the state of Illinois. Harrison v. Northern Trust Co., 317 U.S. 476, 63 S.Ct. 361, 87 L.Ed. ___, decided January 11, 1943. It was held that under the law of Illinois the federal estate tax is payable from the general estate, thus reducing the amount of the residuary charitable legacies and that § 303, supra, as amended only allows deduction of such legacies as so reduced. That case is controlling as to the case at bar upon this point unless the law of California differs from that of Illinois. The taxpayer concedes in his reply brief filed subsequent to the argument, that: "Since the Supreme Court has ruled in Harrison v. Northern Trust Co., supra that the effect of the Illinois law, as established by the Pasfield case, People v. Pasfield, 284 Ill. 450, 120 N.E. 286 is to reduce the amount of residuary bequests to charities, and the 1935 Inheritance Tax Act of California provides that federal estate taxes must first be deducted before computing inheritance taxes, the conclusion is inescapable in the instant case that the residuary bequests to charities must be reduced by the federal estate tax in accordance with the law of this state."

The taxpayer, however, further contends that the 1935 Inheritance Tax Act in California "provides precisely how the federal estate tax may be computed in order to reach the net estate to be charged with California inheritance taxes," citing § 2, subsec. (11) (e), of the 1935 California Inheritance Tax Act. Act 8495, Deering General Laws for 1937, p. 3953, quoted in the margin.¹ The taxpayer states: "Since the thrust of California law is to deduct the federal estate tax, as determined by the Inheritance Tax Appraiser of this state, the Collector in ascertaining the net taxable estate, may not decrease the residuary share of charities by deducting from the gross estate a larger federal estate tax than the state law permits."

He further states that the Collector deducted from the gross estate the federal estate tax in amount of $34,511.15, whereas the Inheritance Tax Appraiser of California deducted only $20,926.69. Of course the state of California cannot determine the amount of the federal estate tax to be collected by the federal government. That is determined by the law of the United States. The California statute on which the taxpayer relies does not provide (as it could not) how much the federal estate tax shall be, nor does it provide (as it could have done) how its burden shall be apportioned among the beneficiaries of the estate. It is merely a provision that a particular deduction from the gross estate will be allowed in determining the amount of the estate subject to the state inheritance tax. That deduction is designed to correspond, with certain limitations, to the amount of the federal estate tax; but those limitations in no way restrict the independent taxing power of the federal government. There is, moreover, nothing in the statute cited that in any way modifies the otherwise established law of California as to distribution among beneficiaries of the estate of the burden of the federal estate tax. The general rule, when the law of the state does not provide otherwise, is that this burden rests, like other administration expenses, on the general estate and is not apportioned among the legatees. Y.M.C.A. v. Davis, 264 U.S. 47, 44 S.Ct. 291, 68 L.Ed 558. See cases on this point collected in a note to Riggs v. Del Drago, supra, 142 A.L.R. 1135, at page 1137. This rule is recognized in California. In re Estate of Miller, 184 Cal. 674, 678-680, 195 P. 413, 16 A.L. R. 694, where the court quoted with approval People v. Pasfield, 284 Ill. 454, 120 N.E. 286, supra.

We hold that under the decision of the Supreme Court in Harrison v. Northern Trust Co., supra, the residuary legacies...