Spaeder v. United States
| Decision Date | 28 October 1978 |
| Docket Number | Civ. A. No. 76-64 Erie. |
| Citation | 478 F. Supp. 73 |
| Parties | John A. SPAEDER, Esq. and Robert Francis Bixby, Co-Executors of the Estate of Leo V. Stoeltzlen, Deceased, v. UNITED STATES of America. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
James E. Marsh, Donald J. Rogala, John M. Quinn, John G. Gent, Walter A. Dart, Jr., Erie, Pa., for plaintiffs.
J. Brian Ferrel, Tax Div., Dept. of Justice, Washington, D. C., for defendant.
Plaintiffs, John A. Spaeder, Esq., and Robert Francis Bixby, bring this action as co-executors of the Estate of Leo V. Stoeltzlen (decedent) seeking a refund of $75,583.23 in federal estate tax and interest. The Court has jurisdiction of the action pursuant to Title 28 U.S.C. § 1346(a)(1). Plaintiffs base their claim for refund on two grounds: (1) that the estate was improperly denied a charitable deduction pursuant to § 2055 of the I.R.S. Code of 1954 (IRC) Title 26 U.S.C. § 2055 for bequests in the will to qualifying charities and (2) that the value of cash gifts to Robert and Barbara Bixby and/or the value of certain real estate in Erie, Pa. were improperly included in the gross estate.
On August 30, 1977 the United States moved for summary judgment pursuant to F.R.C.P. 56(b); on September 30, 1977 the plaintiffs moved for partial summary judgment under Rule 56(a). The defendant contends that the estate is not entitled to a charitable deduction because nothing has been paid to the charitable beneficiaries of the estate. Defendant further argues that paragraph 45 of decedent's will clearly provides that charitable bequests must abate where as here the assets of the estate are insufficient to pay all debts, expenses, taxes and bequests to individual and charitable beneficiaries in full. Thus, there will be no funds qualifying for the charitable deduction under § 2055.
Second, defendant argues that the full market value of the real estate in Erie, Pa. must be included in the gross estate pursuant to § 2040, as decedent provided the entire consideration for purchase and construction of the premises.
In their motion, plaintiffs maintain that the will is ambiguous with respect to payment of taxes and that under applicable state law, all estate taxes are to be apportioned equitably among individual and charitable beneficiaries. Plaintiffs contend that under the Pennsylvania Estate Tax Apportionment Act, 20 P.S. § 3701 et seq., the burden of the federal estate tax is to be borne by the bequests to the individual beneficiaries, leaving $158,877.91 for the charitable bequests, which qualifies for the charitable deduction pursuant to § 2055.
These motions raise four issues for consideration by the Court:
(1) whether decedent's transfer of cash gifts to Robert and Barbara Bixby, made within three years of his death, are includable in the gross estate as gifts made in contemplation of death.
(2) whether the value of certain real estate passing to the Bixbys under the joint tenancy provisions is taxable in full to the estate (3) whether plaintiffs fairly raised the question of the valuation of this real estate in their claim for refund.
(4) whether the estate is entitled to a charitable deduction pursuant to § 2055 for bequests to qualifying charitable beneficiaries.
The Court heard oral argument on the motions on November 3, 1977 and has received extensive briefs from the parties. In addition, the Court has received briefs on behalf of the individual and charitable beneficiaries with respect to the charitable deduction issue.
After careful consideration of the briefs and arguments of counsel, the Court determines that defendant's motion must be granted, except with regard to the question of gifts allegedly made in contemplation of death. Accordingly, plaintiffs' motion for partial summary judgment will be denied.
The facts thus far developed by the parties can be summarized as follows: Leo V. Stoeltzlen, the decedent in this case, died on October 23, 1972 at the age of 85. Mr. Stoeltzlen was a retired engineer who had never been married and had no children. Prior to 1971, he lived alone in a second floor apartment at 12th and State Streets in the City of Erie, Pa.
In January of 1971, decedent suffered a broken hip and his condition left him unable to climb the stairway to and from his apartment. As a result, he proposed to his long time friends, Robert and Barbara Bixby, that he furnish them with funds for the construction of a new home in which he would be permitted to occupy an apartment. Between August and December of 1971 decedent transferred approximately $102,716.001 to the Bixbys. He filed a Federal Gift Tax Return for the final quarter of 1971 which reflected this amount. With these funds, the Bixbys acquired the property at 4110 Venice Dr., Erie, Pa. which they held with decedent as joint tenants with right of survivorship.
Following his accident, decedent was confined from February 19, 1971 until late February 1972 at either the Hamot Medical Center (Hamot) or the Western Reserve Convalescent Home (Home). In addition, he received in-patient radiation therapy at Hamot between September 8, 1971 and October 22, 1971 for cancer of the larynx. Finally, in late February, 1972, decedent was discharged from the Home to the Bixbys new residence at 4110 Venice Dr., Erie, Pa., where he remained until October 2, 1972. He suffered a stroke and died at the Home on October 23, 1972.
Decedent at various times prepared three wills, the last of which was admitted to probate in November of 1972. The original will, executed on February 28, 1959, provided for specific bequests to individuals and charities and directed that the residue of decedent's estate be paid to his brother, a Florida resident, in quarterly installments. This will directed that all inheritance, estate and succession taxes be paid from the principal of the residuary estate. No provision, however, was made for the possibility that the residuary estate might be insufficient to pay taxes.
The second will, dated April 2, 1965, also contained bequests to charities and individuals, but provided for specific cash amounts rather than percentage gifts. Decedent again directed that all estate and inheritance taxes be paid from the residuary estate.
Decedent's last will, dated April 2, 1965, contained the following pertinent directions:
Paragraphs 1 through 3 related to the payment of debts and funeral expenses and provided for funeral arrangements. Paragraphs 4 through 28 contained charitable bequests totalling $180,500.00. Paragraphs 29 through 32 established four trusts for the children of decedent's friends.2 Paragraphs 33 through 40 bequeathed a total of $198,000.00 to various individuals, including the Bixbys. In Paragraph 42, decedent directed that "all estate, inheritance and succession taxes" on property passing under or outside the will "shall be paid out of the principal of my residuary estate as if said taxes were expenses of administration" and all property passing by reason of his death or under the last will was to be free and clear of said taxes. Paragraph 44 provides that the residue of the estate, after the payment of debts, funeral expenses, administration expenses, and ". . . all taxes such as succession and Federal Estate taxes . . ." was to go to Mrs. Claire Martin Schrader, David and Edith Martin, and the Bixbys.
In Paragraph 45, a critical provision in this litigation, decedent directed as follows:
It being my express will and intention, I accordingly order and direct that in the event that the assets of my estate at the time of my death, after deducting therefrom my just debts, funeral expenses, the expenses for the administration of my estate and the payment of Inheritance and Succession, as well as Estate Taxes, that may be assessable against the same, should prove insufficient to pay all of the many aforementioned legacies and bequests in full, then, and in such event, I order and direct that the bequests made to the named individuals or persons shall be paid in full and the bequests to charitable, religious or educational institutions shall abate and prorate and share out of the then balance in ratio and their respective bequested amounts bear to said total residual balance.
Finally, plaintiffs, John A. Spaeder and Robert F. Bixby, were appointed executors.
On July 19, 1973 plaintiffs filed a federal estate tax return claiming the following valuations:
(1) Total Gross Estate $492,325.13
(2) Deduction-Debts, Funeral
Expenses 52,447.22
(3) Adjusted Gross Estate (1) - (2) 439,877.91
(4) Deduction-Charitable Bequests 175,500.00
(5) Total Deductions (2) + (4) 227,947.22
(6) Exemption 60,000.00
(7) Taxable Estate 204,377.91
(8) Net Federal Estate Tax Due 49,268.30
Of the $492,325.13 which plaintiffs reported as the gross estate, $469,325.13 constituted probate assets. The balance of $23,000.00 represented plaintiffs' valuation of decedent's interest as joint tenant with right of survivorship in the premises at 4110 Venice Dr., Erie, Pa.
Upon audit of the return, the Internal Revenue Service, disallowed the charitable deduction claimed by plaintiffs and included the sum of $102,716.00 in the gross estate. Thus, on May 30, 1975, the IRS assessed an estate tax deficiency against the estate of $68,022.49, together with interest of $7,560.74, which was paid in full June 13, 1975. On August 28, 1975, plaintiffs filed a timely claim for refund (Exhibit B of the complaint) with the IRS, asserting the grounds for refund noted above, and claiming an additional deduction for attorneys fees incurred in connection with the refund claim. On May 13, 1976 plaintiffs filed this action for refund in this court.
Upon audit of the estate tax return, the District Director of the...
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...in a tax refund suit may only recover upon the grounds specifically set forth in the administrative refund claim." Spaeder v. United States, 478 F.Supp. 73, 80 (W.D.Pa.1978). Plaintiff in this case complied with the section 7422(a) requirement by filing an administrative claim for a refund;......
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