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CLARKE v. UNITED STATES

December 15, 1950

CLARKE
v.
UNITED STATES



The opinion of the court was delivered by: FOLLMER

This is an action brought for the refund of income taxes for the calendar year 1941. The facts were stipulated and as so stipulated are substantially as follows:

The plaintiff (then Rhoda R. Wagner and hereinafter called the 'taxpayer') and the Provident Trust Company of Philadelphia, on August 31, 1939, became the executors of the will of Edward S. Wagner, a resident of Montgomery County, Pennsylvania, who died August 15, 1939.

 During the course of the administration of the estate differences arose between the executors and the taxpayer in her individual capacity and as beneficiary under the will around the question as to whether, under the language of the will, the testator intended his residuary estate to bear all the Federal and Pennsylvania estate taxes payable by reason of his death, or whether the executors should require the taxpayer under the then comparatively recent Pennsylvania Apportionment Act of July 2, 1937, P.L. 2762, 20 P.S. § 844, to reimburse the estate for the amount of such taxes as were attributable to the inclusion in the gross estate of her interest in certain jointly held property.

 The taxpayer (in her personal capacity) and the executors, for the purpose of settling those differences, entered into a written agreement dated May 26, 1941, which agreement was approved by the Orphans' Court of Montgomery County by decree entered June 2, 1941. The agreement recites that prior to the death of the decedent certain real estate was owned by him and the taxpayer as tenants by entireties and certain joint deposit accounts had been maintained by them and, upon his death, the taxpayer became the sole owner as surviving tenant by the entirety of such real estate and of the personal property consisting of the proceeds of the deposit accounts; that the real estate and personal property had been included in the decedent's gross estate for Federal estate tax and Pennsylvania additional estate tax purposes; and, whereas a question had arisen as to whether, under the provisions of the Act of July 2, 1937, P.L. 2762, 20 P.S. § 844, the executors could require the taxpayer to reimburse them for the portion of the Federal estate tax and the Pennsylvania additional state tax, which was attributable to the inclusion of the real estate and personal property in the decedent's gross estate; that the amount of taxes attributable to the inclusion of such property in the gross estate was approximately $ 84,000. The agreement also recites that on September 15, 1939, the executors received from the Scott Paper Company $ 37,491.60, representing a dividend at the rate of $ .40 per share upon 93,729 shares of the common stock of the company held by the executors; that under the will the taxpayer was entitled to the income from three-fourths of the residuary estate and Rhoda Wagner Richards, a daughter of the decedent, was entitled to the income from the remaining one-fourth thereof; and that the taxpayer and the daughter had claimed that the dividend of $ 37,491.60 should have been paid to them in the proper proportions as income from the estate instead of having been added to the principal as shown by the executors' account. The agreement further recites that the taxpayer is entitled to compensation for her services as co-executor in the amount of $ 48,116.12, calculated at the rate of one per centum upon the appraised value of the personal estate. Following those recitals the parties agreed as follows:

 '1. The executors agree that the Federal estate tax and Pennsylvania additional estate tax applicable to the real estate and personal property to which the widow became entitled upon the death of her husband as aforesaid, amounting to $ 84,000, as nearly as can be determined, shall be borne by the estate and no claim for reimbursement or of any other nature shall be made against the widow therefor.

 '2. The widow does hereby agree that she will not assert a claim for compensation for acting as co-executor of the said estate.

 '3. The widow agrees that, to the extent of her interest in the dividend received by the executors upon shares of Scott Paper Company as above recited, such dividend shall be treated as principal and not as income, and she does hereby agree not to assert any claim for such dividend or any part thereof, and the widow further agrees that she will obtain the agreement of the said Rhoda Wagner Richards that such dividend, to the extent of her interest, shall be treated as principal and not as income, and that the said Rhoda Wagner Richards will not assert any claim for such dividend or any part thereof.

 '4. This agreement has been entered into upon the express understanding that it shall be subject to the approval of the Orphans' Court of Montgomery County, Pennsylvania, and in the event of its not being so approved the rights and obligations of the parties shall be the same as though the agreement had not been entered into. In such event the widow, as well as the said Rhoda Wagner Richards, shall be entitled to present their respective claims as above mentioned either against the estate or against the trust created by the will of the decedent.'

 The taxpayer consistently reported her income, including that for the year 1941, upon a cash basis.

 On March 16, 1942, the taxpayer filed her return for the year 1941 disclosing a tax liability of $ 25,480.14, which she paid on the date of filing.

 The taxpayer did not include in the 1941 return, or in the return for any other year, any income representing commissions or compensation for acting as co-executor of the estate of Edward S. Wagner, deceased.

 On June 10, 1944, the Commissioner of Internal Revenue notified the taxpayer of his determination of a deficiency in her income taxes for the year 1941 in the amount of $ 34,317.01, as the result of including in her gross income, in addition to all other items, the amount of $ 48,116.12, being one-third of the amount of $ 144,348.36 awarded as executors' commissions, of which deficiency $ 31,886.31 is attributable to the inclusion of the amount of $ 48,116.12.

 The amount of $ 34,317.01, together with interest of $ 5,226.53, a total of $ 39,543.54, was assessed on September 29, 1944; and on November 4, 1944, the assessment, plus accrued interest of $ 197.72, a total of $ 39,741.26 was paid.

 On November 1, 1946, the taxpayer filed with the Collector of Internal Revenue for the First Collection District of Pennsylvania a claim for the refund of income taxes for the year 1941 in the amount of $ 31,886.31, with interest at six ...


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