United States v. Stapf

• Decision Date: 26 September 1962
• Docket Number: No. 18974.,18974.
• Citation: 309 F.2d 592
• Parties: UNITED STATES of America, Appellant, v. Dorothy Anne STAPF and B. T. Ware, II, Executors and Trustees of the Estate of Lowell H. Stapf, Deceased, and Dorothy Anne Stapf, Individually, Appellees. Dorothy Anne STAPF and B. T. Ware, II, Executors and Trustees of the Estate of Lowell H. Stapf, Deceased, and Dorothy Anne Stapf, Individually, Appellants, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

309 F.2d 592 (1962)

UNITED STATES of America, Appellant, v. Dorothy Anne STAPF and B. T. Ware, II, Executors and Trustees of the Estate of Lowell H. Stapf, Deceased, and Dorothy Anne Stapf, Individually, Appellees.

Dorothy Anne STAPF and B. T. Ware, II, Executors and Trustees of the Estate of Lowell H. Stapf, Deceased, and Dorothy Anne Stapf, Individually, Appellants, v. UNITED STATES of America, Appellee.

No. 18974.

United States Court of Appeals Fifth Circuit.

September 26, 1962.

Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Atty., Dept. of Justice, Washington, D. C., H. Barefoot Sanders, U. S. Atty., Fort Worth, Tex., John A. Bailey, Atty., Dept. of Justice, Washington, D. C., for appellants.

W. M. Sutton, Amarillo, Tex., for appellees.

Before BROWN, WISDOM, and BELL, Circuit Judges.

GRIFFIN B. BELL, Circuit Judge.

This is an estate tax case. The opinion of the District Court is reported at 189 F.Supp. 830. Suit was filed by the executors of the estate of Lowell H. Stapf for a refund of estate taxes and interest paid pursuant to a deficiency asserted against the estate.

All facts have been stipulated. Mr. Stapf died testate on July 29, 1953, a Texas resident and domiciliary. His will was probated in Texas where his principal estate consisting of separate and community property, was situated. His will put his wife to an election¹ either to elect not to take under the will and thereby retain her one-half interest in the community estate, or to allow her one-half interest to be disposed of under his will in order that she might receive specified benefits thereunder.

The benefits included one-third of the residue, consisting of the whole of the community property, and separate property of a value of $65,100 owned by the decedent, less specific bequests. The benefits also included an automobile, itself community property in which the widow owned a one-half interest. The will provided that if she should elect to take under its provisions, all funeral expenses, costs of administration and claims against the estate, whether community or separate, should be paid out of the one-half interest of decedent in the community property. Community debts totalled $32,367.74, while expenses of administration, including attorneys' fees, were $4,073.47 and the community of the husband was sufficient to pay these.

Electing not to take under the will, the widow would have retained her one-half of the community property, subject to its pro-rata share of expenses of administration and one-half of the community debts, having a net value of $111,442.68. Taking, she became entitled to one-third of the gross value of decedent's separate estate ($21,666.66), the one-half interest of the husband, valued at $700 in the community automobile, and one-third of the combined community estate. This had a value of $106,268.18, or $5,174.50 less than the value of the interest Mrs. Stapf would have retained had she not elected to take under the will. Computed differently but with the same result, the widow retained a one-third interest out of the one-half of the community owned by her, thereby transferring only a one-sixth interest under the election to take. Under this method of computation she transferred property having a valuation of $27,541.16 and received property being the one-third interest in the separate property of the husband and the one-half interest in the automobile of the aggregate value of the $22,366.66, making a net loss to her of $5,174.50. The government uses one method while the taxpayer uses the other. Either is sufficient for our purposes.

The taxpayer, having been notified of a deficiency after filing the estate tax return, paid the deficiency and claimed a refund. It being denied, suit was filed and this appeal is from the judgment of the District Court. The taxpayer appeals from the disallowance of the community debts and administration expenses as deductions from the gross estate of decedent under § 812(b) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 812(b). The government appeals from the allowance of an exclusion from the gross estate as a part of the marital deduction of the one-third of the separate property of decedent and the one-half interest in the community automobile passing to the widow under her election to take under the will, contending that this devise was incumbered or obligated within the meaning of § 812(e) (1) (E) (ii) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 812(e) (1) (E) (ii), in an amount exceeding the value of the devise received by the widow in that the property transferred by her was of a greater value than that received by her.

As to the deductibility of the total of the debts and expenses from the community of decedent alone,² § 812 of the Internal Revenue Code of 1939, as amended, being the applicable statute, provides in part:

"§ 812. Net estate

"For the purpose of the tax the value of the net estate shall be determined, * * * by deducting from the value of the gross estate — * * *

"(b) * * * such amounts —

"(1) for funeral expenses,³

"(2) for administration expenses,

"(3) for claims against the estate, * * *

as are allowed by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered, * * *. The deduction herein allowed in the case of claims against the estate * * * shall, when founded upon a promise or agreement, be limited to the extent that they are contracted bona fide and for an adequate and full consideration in money or money\'s worth * * *."

This section is the same as § 303 of the Revenue Act of 1926 with respect to which it was said in First-Mechanics Nat. Bank of Trenton v. Commissioner of Internal Revenue, 3 Cir., 1940, 117 F.2d 127, 132 A.L.R. 1459:

"Unquestionably, a claim against a decedent\'s estate which is allowed by the laws of the jurisdiction under which the estate is administered is deductible in determining the net estate subject to federal tax. The Revenue Act applicable to the instant case specifically so provides."

Cf. Blair v. Stewart, Footnote (3), supra; and Lang's Estate v. Commissioner of Internal Revenue, 9 Cir., 1938, 97 F.2d 867, on appeal from the Board of Tax Appeals, 34 B.T.A. 337. Thus, uniformity in the application of the statute was not expected by the Congress, and we look to the law of Texas to determine this issue.

The principle that community debts are deductible in their entirety from the community interest of the decedent in determining estate tax liability where directed by the provisions of the will was recognized, although not applied, in Lang's Estate v. Commissioner, supra:

"On this issue we think the Board was correct in permitting a deduction of only one-half of these community obligations. Regardless of the incidents of the husband\'s personal liability for community debts during his lifetime, section 1342, Remington\'s Revised Statutes, supra, as construed by the Supreme Court of Washington, requires that community debts be satisfied pro rata from that portion of the community property distributable to the wife and that portion subject to the husband\'s testamentary disposition. It is only by provision of a deceased husband\'s will that a community debt may be charged solely against his share of the community. Redelsheimer v. Zepin, 105 Wash. 199, 202, 177 P. 736; In re Hart\'s Estate, 150 Wash. 482, 492, 273 P. 735."

There was no provision in the will in that case to charge the whole of the claims against the community of the decedent, but the holding was that the claims in any event were not personal obligations of the decedent within the meaning of the Washington law as required by the regulation.

The Applicable Treasury Regulation, 105 (1939 Code), provides in pertinent part:

"Sec. 81.29 Deduction of administration expenses, claims, etc. — In order to be deductible * * * the item must fall within one of the several classes of deduction * * * enumerated * * * and must also * * * be one of payment of which out of the estate is authorized by the laws of the jurisdiction under which the estate is being administered. Unless both of these conditions exist the item is not deductible. * * * If a claim against the estate, an unpaid mortgage, or an indebtedness is founded upon a promise or agreement, the deduction therefor is limited to the extent that the liability was contracted bona fide and for an adequate and full consideration in money or money\'s worth, * * *."

"Sec. 81.32 Administration Expenses — * * * Administration expenses include (1) executor\'s commissions; (2) attorney\'s fees; (3) miscellaneous expenses. * * *" "Sec. 81.36 Claims against the estate. — The amounts that may be deducted under this heading are such only as represent personal obligations of the decedent existing at the time of his death, * * *. Only claims enforceable against the decedent\'s estate may be deducted. If the claim is founded upon a promise or agreement, the deduction therefor is limited to the extent that the liability was contracted bona fide and for an adequate and full consideration in money or money\'s worth. * * *"

Measured by the criteria of the statute and the regulation, which adds the additional requirement that the claims be personal obligations, we hold that the debts and expenses here were deductible in full from the community interest of decedent, and reverse to that extent.

First, the Texas case law makes it abundantly clear that decedent by the terms of his will could so obligate his estate and his community property. Medlin v. Medlin, Tex.Civ.App., 1947, 203 S.W.2d 635; and Matthews v. Jones, Tex.Civ.App., 1952, 245 S.W.2d 974. It is true that neither of these cases involved taxes, but the regulation here requires only that the payment be authorized under the Texas law. Cf. In re Marinos' Estate, 1940, 39 Cal.App.2d 1, 102 P.2d 443.

Second, the government contends that only one-half of the debts represented personal...