Before GOODRICH, KALODNER, Circuit Judges and LORD, District Judge.
Plaintiffs, Fidelity-Philadelphia Trust Company and J. Reece Lewis ("Fidelity"), executors of the will of Anna C. Burr, brought suit in the United States District Court for the Eastern District of Pennsylvania for a refund of federal estate tax in the amount of $8,215.13 plus interest. The District Court heard the case upon stipulated facts and ordered judgment for the defendant.*fn1
The litigation concerns the amount properly deductible from the gross estate as executors' commissions in computing the federal estate tax. Fidelity claimed $79,366.31, the amount actually paid as executors' fees, as the estate's proper deduction. The Internal Revenue Agent in Charge assessed a deficiency in which he reduced the claimed deduction by $18,285.33, to $61,080.98. The reduction resulted in what Fidelity contends is an over-assessment of $8,215.13.
The relevant statutory provision in the 1939 Internal Revenue Code is Section 812(b) (2):
I.R.C. " § 812. Net estate
"For the purpose of the tax the value of the net estate shall be determined, in the case of a citizen or resident of the United States by deducting from the value of the gross estate -
(b) Expenses, losses, indebtedness, and taxes - Such amounts -
"(2) for administration expenses, * * * as are allowed by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered * * *." 26 U.S.C.A. § 812. (Emphasis supplied.)
There is no statute in Pennsylvania governing the allowability of executor's fees so that we are compelled to resort to the decisions of its Courts to ascertain "the laws" to which Section 812(b) (2) refers.
The nub of the controversy presented relates to the interpretation to be placed upon an adjudication of the executors' account by the Orphans' Court of Philadelphia County. The Executors' account took credit for $79,366.31 as executors' commissions, 4 percent on personalty and 3 percent on realty. The Commonwealth of Pennsylvania opposed the payment of 4 percent for state transfer inheritance tax purposes, and asked that the commissions be reduced to 3 percent. The residuary legatee, the Lankenau Hospital ("Lankenau"), however, had approved the amount claimed by Fidelity and did not contest this amount before the Orphans' Court. In confirming the account the Orphans' Court ruled that "as concerns the residuary beneficiary, the commissions will stand, as stated in the account, because of its approval, but as to the Commonwealth in its claim for transfer inheritance tax the executors are surcharged with commissions at 1 percent." The United States contends that the sum allowed the executors with respect to the claims of Pennsylvania is the amount "allowed by the laws of the jurisdiction" for purposes of applying Section 812(b) (2). Fidelity, however, urges that the sum actually paid to the executors and allowed to stand by the Orphans' Court for all but state taxing purposes is the amount to be considered in applying this section.
In Pennsylvania it has long been settled that executor's commissions are to be fixed by a standard of "fair compensation", and this standard is to be applied by taking regard for the time, kind and relative complexity of the work entailed in the administration of the estate. In re Gardner's Estate, 1936, 323 Pa. 229, 185 A. 804; In re Harrison's Estate, 1907, 217 Pa. 207, 66 A. 354; In re Young's Estate, 1902, 202 Pa. 431, 51 A. 1036. It is clear that this standard was employed by the Orphans' Court in fixing the amount of commissions to be allowed for Pennsylvania transfer inheritance tax purposes. The Orphans' Court stated:
"After careful consideration I am unable to find in the services and responsibility of these executors and trustees justification for commissions of 4% against the claim of the Commonwealth. While valuable services have and will be rendered to the estate, I am convinced that they are not so extraordinary as to warrant such allowance in an estate of this size. I find that 3% is fair compensation." (Emphasis supplied.)
It would seem therefore that $61,080.98 (3 percent) represents the amount properly deductible from the gross estate. This is so not merely because the Orphans' Court agreed with the Pennsylvania taxing authorities that that amount was a proper "allowance", but because both arrived at that figure by resorting to ...