United States v. White, Misc. No. CIV-86-140T.

• Decision Date: 07 January 1987
• Docket Number: Misc. No. CIV-86-140T.
• Citation: 650 F. Supp. 904
• Parties: UNITED STATES of America, and James M. Serling, Estate Tax Attorney, Internal Revenue Service, Petitioners, v. James M. WHITE, as Attorney for and as the Executor of the Estate of Helen P. Smith, Deceased, Respondent.
• Court: U.S. District Court — Western District of New York

650 F. Supp. 904

UNITED STATES of America, and James M. Serling, Estate Tax Attorney, Internal Revenue Service, Petitioners, v. James M. WHITE, as Attorney for and as the Executor of the Estate of Helen P. Smith, Deceased, Respondent.

Misc. No. CIV-86-140T.

United States District Court, W.D. New York.

January 7, 1987.

Jonathan W. Feldman, Asst. U.S. Atty., of Rochester, N.Y., Deborah S. Meland, Trial Atty., Tax Div., U.S. Dept. of Justice, Washington, D.C., for petitioners.

James M. White, Rochester, N.Y., for respondent.

DECISION and ORDER

TELESCA, District Judge.

INTRODUCTION

This action was brought on by the Government's petition for enforcement of two IRS summonses under 26 U.S.C. § 7402(b) and § 7604(a). An order to show cause was granted, Mr. White filed a Response, and the Government filed a Reply. The Monroe County Bar Association (MCBA) sought and was granted leave to file a brief amicus curiae, to which the Government has also filed a Response. As set forth below, I hold that Mr. White should not be compelled to obey the IRS summonses served upon him, and I dismiss this proceeding without prejudice.

FACTS

Helen P. Smith died on November 10, 1982, leaving a gross estate valued at over $455,000. Her will named respondent James M. White, Esq. as executor of the estate, and in his capacity as executor of the estate, Mr. White chose to act as the attorney for the estate as well. This is a practice permitted under New York Law. Surrogate's Court Procedure Act (SCPA) 2307. He promptly petitioned for probate of the will, and then waited the seven months required under SCPA § 1802 for any claims to be filed before the estate could be closed.

As required, Mr. White as executor filed his federal estate tax return (commonly referred to as the 706 Return). In that return, he claimed a deduction of $16,530 for his attorney's fees. He also claimed a deduction of some $17,548.13 for the executor's commission to which he was entitled under SCPA § 2307¹.

Although he had not received a "closing letter" from the IRS, Mr. White petitioned for judicial settlement of the estate.² Under SCPA § 2110, attorneys' fees can be fixed by an adversary proceeding³, or by a judicial settlement if releases have been submitted from all legatees. In the Smith estate, Mr. White submitted releases from all nine⁴ residuary legatees, one of whom was an experienced estates lawyer. The releases indicated the legatees' approval of Mr. White's accounting, which included $16,800 for his attorney's fee. After reviewing the accounting and the tax returns, on July 17, 1984, Surrogate Arnold F. Ciaccio granted a decree of judicial settlement of the Smith estate which had the effect of settling the executor's accounting, approving the distribution of assets to those interested in the estate, and fixing and approving the executor's commissions and attorney's fees both of which were due to Mr. White. See SCPA 2307.

On August 7, 1984, petitioner Serling met with Mr. White to review the 706 return. On January 29, 1985, Mr. Serling wrote to Mr. White, stating that the Surrogate Court decree of judicial settlement did not preclude the necessity of his providing justification for the legal fees claimed. He stated that

each case must be determined upon its own facts and circumstances taking into consideration the following factors:

1. Amount involved

2. Time abd sic effort of attorney

3. Seriousness of problems

4. Results obtained

5. Experience and ability of attorney

6. Length of administration.

He sought either Mr. White's time records or, if not available, then an itemized list of all legal work performed, time expended for each service and hourly rate charged.

Mr. White then wrote to Surrogate Ciaccio concerning the matter. Surrogate Ciaccio responded by letter to Mr. White dated February 25, 1985. That letter indicates that the executor's commission was fixed by statute, and that the attorney's fee was set:

in keeping with our ordinary and customary guidelines which have been followed in this Court for several years. Moreover, it conforms to the criteria established by the Court of Appeals in this state as enunciated in Matter of Freeman, 34 NY2d 1 355 N.Y.S.2d 336, 311 N.E.2d 480 and Matter of Potts, 241 NY 593 150 N.E. 568. I might say, parenthetically, that the attorney fee approved was some $700 less than what would have been approved. I set these matters forth fully aware that you were both executor and attorney for the estate. In those instances, I personally have been careful to attempt to keep the fees for attorney-executors below a full commission. In this particular estate, you have complied. In conclusion, I state to you that a re-review of the file and the account submitted justify in every respect both the commission and fee approval. These are not done in an arbitrary fashion but rather as indicated following the application of the various criteria.

Mr. White forwarded this letter to Mr. Serling with a cover letter dated February 27, 1985.

Not satisfied with this explanation, on May 1, 1985, Mr. Serling issued an IRS summons to Mr. White as executor and attorney for the estate of Helen P. Smith which sought the production of any and all records and documents relating to the administration of the estate of Helen P. Smith, including records of Mr. White's activities both as attorney and as executor. Mr. White responded with a letter dated June 5, 1985, outlining his position and refusing to permit the IRS to examine the file. On December 16, 1985, Mr. Serling wrote to Mr. White, asking him to submit, in affidavit form, a detailed account of the duties he performed in his capacity as executor. By letter dated January 3, 1986, Mr. White responded that the amount of $17,548.13 was for the executor's commissions allowable under SCPA § 2307. On February 3, 1986, Mr. Serling issued another IRS summons to Mr. White, seeking any and all records relating to Mr. White's performance of the duties of executor of the estate of Helen P. Smith.

On July 16, 1986, the IRS issued a form Letter 902(DO), notifying Mr. White that it was assessing a deficiency of $5,754.19 against the estate of Helen P. Smith. Apart from an increase in the value of stocks and bonds in the estate (which was not contested by Mr. White), the deficiency was based principally upon the disallowance of $17,176 in administration expenses, chiefly the entire amount ($16,530) of the attorney's fees claimed as a deduction. The IRS also determined that the claimed executor's commission of $17,450 should be corrected to $16,804. Mr. White states that he has paid the deficiency, with interest, and has filed a notice of claim for a refund. He also states that he does not contest the reduction in the executor's commission.

This enforcement proceeding was commenced August 12, 1986.

DISCUSSION

At the outset, Mr. White argues that his payment of the deficiency renders this enforcement proceeding moot. However whether or not Mr. White has paid the deficiency, the issue remains whether the IRS is entitled to his time records so that it can independently determine the amount of any allowable deductions (notwithstanding the Surrogate's prior determination in a judicial proceeding). See United States v. Gimbel, 782 F.2d 89, 93 (7th Cir.1986); United States v. Roundtree, 420 F.2d 845, 847 n. 3 (5th Cir.1970); see also Multistate Tax Commission v. United States Steel Corp., 714 F.2d 925 (9th Cir.1983), and Marshall v. Stevens People and Friends For Freedom, 669 F.2d 171, 174 (4th Cir. 1981), cert. dismissed, 455 U.S. 930, 102 S.Ct. 1297, 71 L.Ed.2d 639 (1982), and cert. denied, 455 U.S. 940, 102 S.Ct. 1432, 71 L.Ed.2d 651 (1982). Cf. Carr v. United States, 663 F.2d 59 (8th Cir.1981), United States v. Kis, 658 F.2d 526, 532-35 (7th Cir.1981), cert. denied, 455 U.S. 1018, 102 S.Ct. 1712, 72 L.Ed.2d 135 (1982), United States v. First American Bank, 649 F.2d 288 (5th Cir.1981), and United States v. Silva and Silva Accountancy Corp., 641 F.2d 710 (9th Cir.1981) (actual compliance with an IRS summons would render an enforcement action moot); but cf. Gluck v. United States, 771 F.2d 750, 753-54, n. 3 (3d Cir.1985) (contra). Accordingly, the petition will not be dismissed as moot.

To enforce a summons, the IRS must show that the investigation will be conducted pursuant to a legitimate purpose, that the inquiry may be relevant to the purpose, that the information sought is not already within the Commissioner's possession, and that the administrative steps required by the Code have been followed. United States v. Powell, 379 U.S. 48, 57-58, 85 S.Ct. 248, 254-55, 13 L.Ed.2d 112 (1964); United States v. MacKenzie, 777 F.2d 811, 819 (2d Cir.1985), cert. denied, ___ U.S. ___, 106 S.Ct. 2889, 90 L.Ed.2d 977 (1986). For the reasons set forth below, I conclude that the IRS has not made the necessary showing that the investigation will be conducted pursuant to a legitimate purpose.

The statute which governs the IRS's ability to determine the deductibility of estate administrative expenses is 26 U.S.C. § 2053(a), which permits the deduction of administrative expenses in "such amounts ... as are allowable by the laws of the jurisdiction ... under which the estate is being administered." An associated Treasury Regulation, § 20.2053-1(b)(2), sets forth the IRS policy in more detail:

(2) Effect of court decree. The decision of a local court as to the amount and allowability under local law of a claim or administration expense will ordinarily be accepted if the court passes upon the facts upon which deductibility depends. If the court does not pass upon those facts, its decree will, of course, not be followed. For example, if the question before the court is whether a claim should be allowed, the decree allowing it will ordinarily be accepted as establishing the validity and amount of the claim. However, the decree will not necessarily be accepted even though it purports to decide the facts upon

...