UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
filed: May 29, 1973.
ESTATE OF THOMAS W. STREETER, DECEASED, RUTH CHENEY STREETER, EXECUTRIX AND FRANK S. STREETER, EXECUTOR, APPELLANTS
COMMISSIONER OF INTERNAL REVENUE, APPELLEE
Before GIBBONS and HUNTER, Circuit Judges, and MUIR, District Judge,
Opinion OF THE COURT,
MUIR, District Judge.
The question in this case is whether executors may deduct for federal estate tax purposes auctioneers' commissions of $490,000 paid by decedent's testamentary trustees in connection with the trustees' sale of decedent's "Americana Collection."
The decedent, a lawyer, died in 1965. He bequeathed to his trustees his "Americana Collection" of 4,800 books, maps, historical manuscripts and similar properties. He directed the trustees to sell the collection and distribute the proceeds within 21 years to 18 charities and his issue. The number of individual beneficiaries entitled to participate was four.
The executors determined to sell the collection at public auction at Parke-Bernet Galleries, Inc., New York City and agreed with the auctioneers to sell the collection in seven auctions over a three-year period.
Nine months after the death, the executors transferred the collection to themselves as trustees. The auctions grossed $3,100,000 from which commissions of $490,000, or approximately 16%, were deducted auctioneers. the auctioneers.
The trustees paid preferred charitable legacies of $414,000 and started to distribute the balance to the individual beneficiaries. They suspended distribution when faced with the current tax controversy and invested in short-term government obligations.
There seems to be little doubt that if the sale had been made by the fiduciaries as executors, the auctioneers' fees would be deductible for federal estate tax purposes.*fn1 The reasonableness of the auctioneers' commissions was not challenged by the government in the court below and the Commissioner's attempt to raise that issue at this appellate level is inappropriate.
The Commissioner's arguments that these fiduciaries should be denied the deduction because they sold as trustees, not as executors, and that the expenses were not essential to the proper settlement of the estate are pure farrago.
The Internal Revenue Code of 1954 in § 2053 provides in part as follows:
"(a) General Rule. - For purposes of the tax imposed by § 2001, the value of the taxable estate shall be determined by deducting from the value of the gross estate such amounts - ...(2) for administration expenses...as are allowable by the laws of the jurisdiction...under which the estate is being administered."
The regulations under this section of the Code in § 20.2053-3 provide in part:
"(a) In general. The amounts deductible from a decedent's gross estate as "administration expenses"...are limited to such expenses as are actually and necessarily incurred in the administration of decedent's estate; that is, in the collection of assets, payment of debts, and distribution of property to the persons entitled to it. The expenses contemplated in the law are such only as attend the settlement of an estate and the transfer of the property of the estate to individual beneficiaries or to a trustee. Expenses not essential to the proper settlement of the estate, but incurred for the individual benefit of the heirs, legatees or devisees, may not be taken as deductions...." (Emphasis supplied)
Do the auctioneers' commissions in this case fall within the class of expenses necessarily incurred in or such as attend the administration and settlement of a decedent's estate, i.e., the collection of assets, payment of debts, and distribution of property to the persons entitled to it? If the answer to the question is yes, the taxpayers should prevail.
The tax court and the commissioner contend that the "distribution" in this case was the transfer of property to the trust and that the estate should be held to the form which the decedent set up. They reason that since the trust created by the decedent was a valid trust, expenses incurred by the trustees were not deductible by the estate. They point out that the trust could have continued in existence for up to 21 years.
The commissioner's arguments are too narrow and technical for us to accept. The sole purpose for this trust was to effect distribution of the decedent's estate. The duties imposed by the decedent on the trustees to sell the "Americana Collection" and distribute the cash are such as are normally performed by executors. The expenses were such as normally attend the settlement of an estate and such as were necessarily incurred in the distribution of property to the persons entitled to it.
How else could there be distribution to the beneficiaries of 4,800 unique items in a collection worth $3,000,000? Distribution in this case simply could not have been effected in kind. If the sale of the collection had stretched out over an unreasonably long period of time, the commissioner could have disallowed the expenses as he disallows the expenses incurred by executors beyond a reasonable time for administration of an estate. Treas. Reg. § 20.2053-3(d); Estate of William G. Peckham, 19 B.T.A. 1020 (1930).
Under New Jersey law and practice, arranging for the sale of decedent's property, investment of the proceeds in short-term investments, and distribution of the proceeds to beneficiaries are all executorial in nature. (R. 50-51) Trustees may perform services with respect to probate assets that would normally be performed by executors, and amounts paid in connection therewith are deductible administration expenses.*fn2 The estate tax regulations themselves provide that trustees' commissions are deductible for federal estate tax purposes to the extent that the trustees are performing duties with respect to private assets that are normally performed by executors. Reg. § 20.2053-3(b) (3) (1958).*fn3 While the items here are trustees' expenses relating to probate assets and are not trustees' commissions, they should logically receive the same treatment. The commissioner has given us no reason to distinguish the expenses incurred by the trustees from the commissions paid to them. The same kind of inquiry must be undertaken in both instances, i.e., were the trustees "performing services with respect to property subject to claims which would normally be performed by an executor"?
The regulations also provide at § 20.2053-3(d) (2):
"Expenses for selling property of the estate are deductible if the sale is necessary in order to pay the decedent's debts, expenses of administration, or taxes, to preserve the estate, or to effect distribution. The phrase " expenses for selling property" includes brokerage fees and other expenses attending the sale, such as the fees of an auctioneer if it is reasonably necessary to employ one".
It seems to us pellucid that the auctioneers' fees were necessarily incurred to effect distribution of property to the persons entitled to it and as such are clearly deductible under the commissioner's own regulations. The decision $6 of the Tax Court in favor of the commissioner will be reversed.
GIBBONS, Circuit Judge, dissenting:
The decedent's will provided for the creation of a trust to which his Americana Collection was bequeathed. The trustees were directed to sell the collection within twenty-one years. The will defined the duties of executor and of trustee separately. Undoubtedly the decedent had a valid trust purpose in concluding the administration of his estate by his executors promptly, while leaving to his trustees the possibly time-consuming task of disposing of a unique collection when market conditions for the objects in the collection were fortuitous. The appointed trustees filed acceptances of the trusteeship, acknowledging transfer of the Americana Collection from the executors to the trustees. The public auction sales were conducted by Parke-Bernet Galleries on behalf of the trustees. The deductibility of the Parke-Bernet commissions by the executors for estate tax purposes is the issue. Taxpayers contend that the commissions are deductible as expenses of administration of the estate pursuant to § 2053, Int. Rev. Code of 1954. Mindful of the burden which rested upon the taxpayer in the Tax Court, I would affirm its holding rejecting this contention.
The decedent did create a trust. He gave his trustees discretion to perform their duties over twenty-one years. Such a long period ordinarily is not afforded for the administration of an estate. There are differences between the post of executor and that of testamentary trustee, in obligation, in accountability, and in duties. 1 A. Scott, Trusts § 6 (3d ed. 1967); Restatement (Second) of Trusts § 6 (1959). See In re Rogers' Estate, 13 N.J.508, 512, 100 A.2d 527, 530 (1953), which states that it is:
"firmly established that a fiduciary must act in one or the other of his fiduciary capacities, and cannot, in his administration of any part of the property committed to him, be said to act in a duplex character". ...Each act generally must be performed in the capacity of executor (or administrator) or in the capacity of trustee, and the reasons for this placement of duty and responsibility, which are legion, are apparent in suits premised on alleged fiduciary neglect".
The executors had neither duty nor power to sell the Americana Collection. They turned it over intact to trustees who had that duty and power, and who, judging from the results, performed it well. That the executors might have done as well is beside the point. The trustees were legatees. The relevant regulations provide that expenditures "not essential to the proper settlement of the estate, but incurred for the individual benefit of the heirs, legatees, or devisees, may not be taken as deductions." Treas. Reg. § 20.2053-3(a). If the executors had been required by the will to sell assets to effect distribution auctioneer fees would have been deductible. Treas. Reg. § 20.2053-3(d) (2). Here they were required to distribute to trustee legatees in kind. The validity of the trust would undoubtedly be recognized in New Jersey. See, e.g., In re Voorhees, 93 N.J. Super. 293, 298, 225 A.2d 710, 713 (1967); In re Steelman's Estate, 87 N.J. Eq. 270, 273-74, 99 A.612, 614 (1917). It would seem that the auctioneer's fees would, under New Jersey law, be expenses of the trust, not of the estate. This being so they would not qualify for deduction under § 2053. See Treas. Reg.§ 20.2053-1.
Much as we would like to avoid seemingly harsh results in tax litigation, we cannot redraft the instruments chosen by the decedent. This, I think is what the majority has undertaken. I respectfully dissent.