Opinion
No. L-43.
January 9, 1933.
Albert L. Hopkins, of Washington, D.C. (Burlingame, Nourse Pettit, of New York City, and Hopkins, Sutter, Halls De Wolf of Chicago, Ill., on the brief), for plaintiffs.
Joseph H. Sheppard, of Washington, D.C., and Charles B. Rugg, Asst. Atty. Gen. (Percia E. Miller, of Washington, D.C., on the brief), for the United States.
Before GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
Action by Arthur K. Bourne and another, executors of the last will and testament of Frederick G. Bourne, deceased, against the United States.
Judgment for plaintiff.
Plaintiffs seek to recover $15,140.93, with interest, overpayment of estate tax in respect of the estate of Frederick G. Bourne. The overpayment involved resulted from the refusal of the Commissioner of Internal Revenue to allow a deduction of $59,125.82 for administration expenses. This deduction was denied by the department on the ground that no valid claim for refund therefor was on file.
Plaintiffs contend that a proper claim for refund was filed September 24, 1924, and that this claim was finally rejected August 9, 1929.
The defendant contends that a claim for refund was rejected by the commissioner April 6, 1925, and that this suit was barred at the time it was instituted, February 17, 1930; and, further, that the claim of September 24, 1924, was not sufficient to form the basis of a suit for the recovery of an overpayment on account of the expenses mentioned for the reason that such expenses were neither incurred nor paid until after the claim was filed.
Special Findings of Fact.
1. Frederick G. Bourne died March 9, 1919, and plaintiffs are the executors of his estate. The will was duly admitted to probate and letters testamentary were issued March 17, 1919. The will directed the executors to pay all debts and expenses, and out of the residuary estate to pay all transfers, succession, inheritance, or estate taxes.
2. September 1, 1920, the executors under protest and for the purpose of avoiding penalties, the enforcement of which had been threatened, paid to the collector of internal revenue $9,227,022.66 claimed by the collector as tax in respect of the value of the net estate of Frederick G. Bourne, and on October 15, 1920, for the reasons aforesaid, paid to the collector a further amount of $369,342.28 claimed by the collector to be an additional tax in respect of the value of the net estate.
3. In his audit of the estate-tax return filed by the executors, the commissioner disallowed as deductions certain claimed but unpaid debts and expenses of administration, including attorneys' fees and executors' commissions. At that time the administration of the estate had not been completed and the deductions claimed in the return represented the executors' determination of the amounts necessary to discharge the items of debts and expenses mentioned. The deductions claimed were of the kind allowable under the law of the jurisdiction under which the estate was being administered. The commissioner allowed as deductions only such of said items as had been paid at the time of his audit, August 9, 1922, and notified plaintiffs of his determination. In said letter it was stated that: "Executors' commissions are deducted in the amounts found to have been paid. Deduction is made for attorneys' fees in the amount shown to have been paid. If additional fees are hereafter paid out of the funds of the estate within the amount allowed by local law, the excess tax paid may be adjusted by a claim for refund." August 11, 1922, the executors replied to the commissioner's letter of August 9, 1922, and set forth that application for refund would be made based on the administration expenses claimed as deductions.
4. August 14, 1922, the commissioner advised the executors that if a claim for refund were filed adjustments would be made for "any additional administration expenses paid which have been incurred or were allowed on audit of the case." September 24, 1924, the executors filed a claim for refund of $100,000, or such greater amount as might be legally refundable, on the ground that the estate was entitled to a deduction of $400,000 for expenses of administration. The grounds of this claim were as follows: "In addition to the debts, administration expenses and other charges against this estate allowed as deductions by the bureau on its last previous audit, certain further charges have been paid or incurred by the estate for debts, commissions, legal and other expenses, all of which constitute allowable deductions from the gross estate under the estate tax law, but none of which have, up to this time, been considered by the bureau. The aggregate of these charges the executors now place at $400,000. If allowed on that amount the reduction in tax liability and the consequent overpayment of tax would be $100,000. Wherefore, claim is now made for the refund of $100,000 or such part of said sum as may be found to be properly refundable upon a final audit to be had when the administration of this estate has been closed."
A refund of $71,213.05 had been made prior to the filing of this claim. The commissioner's office took the position at the time the aforementioned claim for refund was filed that no amount could be allowed as a deduction for debts, fees, commissions, and administration expenses beyond the amounts which had been paid. It was understood by the executors and the commissioner's office that since the estate had not been and would not be settled and liquidated for some time, there would be further disbursements constituting allowable deductions, and that it would therefore be necessary for the executors to submit these disbursements to the commissioner from time to time and that a refund on account thereof would be made at some future time.
At the time the claim for refund was filed, the commissioner's office informed the executors that adjustments on account of disbursements in the settlement of the estate could readily be taken care of under the claim for refund filed.
October 24, 1924, pursuant to the claim for refund, the executors submitted a schedule of expenses that had been paid since the audit of August 9, 1922, and advised the commissioner that there would be further payments of administration expenses from time to time. The commissioner's attention was called to the understanding of the executors that these additional payments could readily be taken care of under the claim. March 18, 1925, the commissioner allowed a deduction of some of the items set forth in said schedule and allowed a refund of $70,634.08 pursuant to the refund claim which had been filed. There was a pro forma rejection of the balance of the amount stated in the claim for refund of $29,365.92.
April 13, 1925, plaintiffs filed with the commissioner further proof in respect of certain items which had been included in the schedule of debts and administration expenses filed October 24, 1924, but which had not been allowed by the commissioner in his action on March 18, 1925. Pursuant thereto and pursuant to the refund claim on file, the commissioner allowed a further refund of $6,129.96 on March 2, 1926, of which he duly notified the executors by letter of that date. In this letter there was a pro forma disallowance of the balance of the amount stated in the claim for refund of $23,235.96.
5. On March 19, 1926, counsel for the estate wrote the commissioner they understood that some question with respect to the allowance of refunds from time to time under the refund claim, on submission by the executors of proof of expenses paid, had been referred to the solicitor of internal revenue, and requested the commissioner to advise the estate as to the result of his consideration of that point. On March 30, 1926, the commissioner advised the attorneys for the estate that upon the filing of an application to reopen the claim on account of the payment of executors' commissions, fees, and other deductible expenses since the previous audit, due consideration would be given to the claim.
6. November 11, 1926, the executors filed with the commissioner a schedule with proof showing the payments of debts and administration expenses in the amount of $33,969.97, consisting of items paid from June 30, 1924, to June 15, 1926, being the period covered by the third accounting made by the executors to the surrogate's court and not theretofore allowed as deductions by the commissioner, and, upon the basis of said items, requested a further refund of $8,429.49. On July 5, 1927, the commissioner advised the executors by letter as follows: "You will recall that in connection with the original claim for refund based upon the contention that additional deductions should be made on account of administration expenses you submitted a certified copy of the first and second partial accounts as settled and allowed by the Surrogate's Court, Suffolk County, New York. In order to support the contention that the estate is entitled to a further refund on account of expenses paid, there should be submitted a certified copy of the third account of the executors' proceedings, which, according to the affidavit of Mr. George P. Vail, covers the period from June 30, 1924, to and including June 15, 1926, and was settled and allowed as filed as appears from the decree of the surrogate entered thereon under date of October 25, 1926. Upon receipt of this document further consideration will be given to the claim for refund."
The information requested was furnished, and thereafter the commissioner allowed as deductions the items totaling $33,969.97 set forth in the aforesaid schedule, and determined and allowed a further refund of $8,495, notice of which was sent to the executors February 18, 1928. The last-mentioned refund was duly paid to the estate, together with interest of $3,664.02. A certificate of overassessment was issued and sent to plaintiff for this refund and interest. Neither the letter of February 18, 1928, nor the certificate of overpayment, purported to reject any part of the claim for refund.
7. January 19, 1929, the executors filed with the commissioner a schedule and proof of additional administration expenses paid and incurred subsequent to June 15, 1926, together with a request for further refund on account thereof. July 20, 1929, the executors filed with the commissioner a schedule of attorneys' fees, executors' commissions, and other administration expenses paid and incurred subsequent to June 15, 1926, and covered by the fourth accounting by said executors in the Surrogate's Court, together with a certified copy of a decree of the court approving said fourth accounting of the executors and requesting a further refund on account thereof. The fees, commissions, and expenses set forth in the aforementioned schedules aggregated $59,125.82. All of the items making up this amount were necessary and proper expenses incurred in the administration of the estate of the decedent, were duly paid by the executors, or allowed and approved as expenses of administration by the court in its decree settling and approving said fourth accounting of the executors, and the total thereof constituted a proper and legal deduction from the value of the gross estate in determining the net estate subject to tax. The commissioner did not question the propriety or legality of the deduction of the total of $59,125.82, but he declined to allow the same and to make a further refund on account thereof and advised the executors on August 9, 1929, as follows: "Your application for reopening the claim for refund heretofore filed in connection with this estate has been considered. Treasury Decision 3240 mentioned in your application has been revoked and superseded by Treasury Decision 4235. The facts stated do not appear to bring this case within the purview of Treasury Decision 4235 and accordingly your application is denied."
The deduction of the last above-mentioned amount of $59,125.82 for fees, commissions, and other necessary administration expenses results in an overpayment of the estate tax of $14,781.45.
We are of opinion that the claim for refund in this case was legally sufficient. It was timely filed and under the facts and circumstances we think it was not finally rejected within the meaning of section 3226, Revised Statutes, as amended (26 USCA § 156 and note), until August 9, 1929. This suit is based upon the items and grounds set forth in the claim and was timely instituted. We find no merit in the contention of the defendant that a valid claim for refund cannot be filed in the case of an estate tax until the administration expenses claimed have been incurred and paid. Section 403 of the Revenue Act of 1918 ( 40 Stat. 1098) provides that for the purpose of estate tax, the value of the net estate should be determined by deducting from the value of the gross estate such amounts for administration expenses and claims against the estate as are allowed by the laws of jurisdiction under which the estate is being administered. Other statutes from 1916 to 1926 contained substantially identical provisions.
The statute imposes only two restrictions: First, that the deductions mentioned fall within the class of administration expenses or claims against the estate; and, second, that they must be such as are allowable under the law of jurisdiction under which the estate is being administered. There was no legal impediment against a valid claim by the executors for the reasonable deduction for fees, commissions, and expenses allowable under the laws of the jurisdiction, nor against a determination and allowance on account thereof by the commissioner. It does not appear from the statute that the amounts are required either to have been allowed by actual order of the court or to have been paid, in order to be claimed by the estate or in order that an allowance could be made in respect thereof by the taxing authorities. The statute requires merely that they shall be such charges as are proper deductions and, as in the ordinary course of administration of an estate, will ultimately be allowed. Stern et al., Executors, 2 B.T.A. 102; Henry Riffel, 3 B.T.A. 436; Voelbel, Executor, 7 B.T.A. 276; Bronson et al., Trustees, 7 B.T.A. 127, affirmed (C.C.A.) 32 F.2d 112; Loetscher et al., Executors, 14 B.T.A. 228; Goldschmidt et al., Executors, 14 B.T.A. 1010.
In this case it appears that the commissioner was adverse to allowing the claim for refund until the claimed expenses had been paid. The estate was large and the expenses claimed were substantial. The commissioner, therefore, assured the executors that the expense deductions would be allowed and refunds made from time to time as expenses were paid. Accordingly, the claim for refund was left open or was reopened, and refunds were allowed from time to time as stated in the findings.
The last allowance of a refund under the claim filed September 24, 1924, was on February 18, 1928, at which time the balance of the claim was not specifically rejected. However, on August 9, 1929, the commissioner refused to consider further administration expenses, which had been allowed by the court and paid, and on that date definitely rejected the claim. This suit was instituted within two years from the notice of February 18, 1928, advising the executors of the allowance of a refund of $8,495 on account of the items of administration expenses contained in the schedule filed by the executors November 11, 1926, and less than two years after the final rejection of the claim on August 9, 1929.
Judgment will be entered in favor of plaintiff for $14,781.45 with interest as provided by law. It is so ordered.
BOOTH, Chief Justice, took no part in the decision of this case on account of illness.