The opinion of the court was delivered by: ROSENBERG
The plaintiffs, John G. Buchanan, John G. Buchanan, Jr. and Mellon National Bank and Trust Company, Executors of the Estate of Mabel Lindsay Gillespie, claim of the defendant, the United States of America, the sum of $21,089.71 as the erroneous sum of money which they paid to the Internal Revenue Service in accordance with its demand. The matter was submitted on briefs and the facts are undisputed.
Essentially the stipulated facts are as follows: that Mabel Lindsay Gillespie, the testatrix, died on October 2, 1967; that the plaintiffs were granted letters testamentary; that one of the plaintiffs so appointed, John G. Buchanan, Jr., died on March 22, 1970, and no successor has been or will be appointed; that by her will the decedent made numerous specific bequests to individuals and charities; that said will also directed that the residue of the estate be given in various shares to 42 charitable organizations, and further, that all death taxes also be paid from the principal of said residue; that all of these organizations are "charitable" for the purposes of the Federal Estate tax charitable deduction under 26 U.S.C. § 2055(a) (2); that on January 2, 1969, the plaintiffs filed the estate's federal estate tax return showing a taxable estate of $1,880,815.00, said amount being computed by subtracting from the gross estate of $17,715,482 the funeral and administrative expenses ($442,921.00), debts of the decedent ($105,105.00), charitable bequests ($15,774,667.00) and the standard exemption ($60,000.00); that in computing the charitable residue, which was reflected within the charitable deduction, the plaintiffs added to the amount actually available to charity at the date of death a further amount of some $33,182.00, said additional amount constituting the amount of interest at 3 1/2% over 15 months on the funds designated for payment of death taxes, or alternatively, the differential between the amount of taxes actually paid and their date of death value; that the tax funds were used to pay Pennsylvania, Maryland and Federal death taxes; that each of these taxes was payable and was paid 15 months after death; that the value of the interest on these taxes over a period of 15 months at the legal rate of 3 1/2%, as set out in Treasury Regulation Section 20.2031-7, was $33,182.00; that upon audit, the Internal Revenue Service disallowed the deduction of the additional $33,182.00 which resulted in the assessment of $20,127.72 additional estate taxes; that on November 11, 1969, the plaintiffs paid the alleged deficiency together with interest of $961.99; that on November 12, 1969, the plaintiffs filed for a refund of these monies but that nothing has yet been recovered; and that as a result the plaintiffs filed this suit and the resultant motion for summary judgment, which the defendant, the United States of America, opposed through its cross motion for summary judgment. The plaintiffs demand judgment against the defendant in the amount of $21,089.71, together with interest from November 5, 1969 and costs.
It is admitted that the deduction method used by the plaintiffs is unique and, to this court's knowledge, unprecedented. The plaintiffs propounded two different arguments to support their accounting, both of which were as vigorously and competently opposed by counsel for the defendant. Inasmuch as the case is novel and could presumably provide the basis for a radical departure from present estate accounting methods, I must analyze each of the arguments in accordance with whatever precedent can be gleaned from the Revenue Code, the corresponding regulations and the case law.
(1) The plaintiffs' initial argument states that an amount due after death without interest (the death taxes) should be deducted from the residue at its date of death value, i. e., by deducting the allowable interest of 3 1/2% on the tax funds over 15 months from the amount of taxes actually due. In the case at bar, for example, the date of death value of the taxes due was some $33,000.00 less than the actual amount of taxes paid. Thus by deducting the date of death value from the entire residue, the plaintiffs obtain $33,000.00 more available for the charitable deduction than if the actual amount of the taxes had been deducted.
In support of this contention, the plaintiffs argue that in cases such as Commissioner v. State Street Trust Company, 128 F.2d 618, C.A. 1, 1942, and Commissioner v. Maresi, 156 F.2d 929, C.A. 2, 1946, the courts have upheld the present value theory in alimony payments and payments to be made as set forth in a divorce settlement, and which are to be paid after death. Further, argue the plaintiffs, the Internal Revenue did not question the present valuing of the specific charitable trusts which decedent had set up in other sections of the will.
The law is uncontradicted that for the purposes of the federal estate taxes "at the decedent's death his estate had the obligation of paying estate taxes, debts, charges and expenses of administration." Ballantine v. Tomlinson, 293 F.2d 311, 312 (C.A. 5, 1961); Ithaca Trust Co. v. United States, 279 U.S. 151, 73 L. Ed. 647, 49 S. Ct. 291 (1929). Viewed literally, this doctrine dictates that at the moment of decedent's expiration, the obligation to pay all the estate taxes arose. Although there was admittedly a 15-month post-death period provided before the taxes must be actually paid, there was no obligation to refrain from paying those taxes until the 15-month period has run; they could be paid any time within that period. 26 U.S.C. § 6075 (through a 1970 amendment the time for filing has been changed to 9 months); Treasury Regulation 20.6075-1.
Based upon the foregoing discussion, I conclude that the estate taxes must be deducted from the residue at their full value. It is recognized that in State Street Trust Company, supra, and Maresi, supra, the courts did allow deductions of post-death martial obligations at their present values. Yet both cases were based largely on the fact that the post-martial obligations due at periodic times were enforceable as a judicial decree or order and thus deductible for estate tax purposes under § 303(a, d) of the 1926 Internal Revenue Code and § 812(b) of the 1939 Act. Under these cases, each party, the deceased and the obligee, was bound by the mutual condition that the obligation to make payments arose at certain subsequent stated times. Presumably if for some specific reason the potential recipient was offered pre-payment of the obligation before the period in which the obligation became due, he or she could have the right to postpone such payment until such period.
Contrary to the above noted situations, the case at bar presents neither a judicial decree nor a future obligation in terms of periodic payment. Rather, through legislative grace, a 15-month period was given to provide for administration of the estate, accounting, and related matters. Certainly if the taxes were offered any time within that 15-month period, the Commissioner would have no legal basis for requiring postponement. Hypothetically, the taxes could thus be paid exactly at the moment of death with no actual interest benefits at all accruing to the charities.
To allow the plaintiffs to deduct only the date of death value of the taxes from the residue of the estate left to charity also presents the mathematical enigma of a whole being less than the sum of its parts. If, assuming arguendo, the plaintiffs are allowed to deduct the additional $33,000.00 as charitable, the Commissioner is confronted with a tax legal rate of 3 1/2%. Since the amount actually deducted obligation which was paid on time in full, plus a charitable deduction which, totaling both figures, adds up to $33,000.00 more than the total amount left in the estate residuary at the determination date, the date of death.
Federal regulations 20.2055-3(a) deals directly with the problem of death taxes payable from charitable transfers. This regulation sets forth the example of a $50,000 specific bequest to charity from which state inheritance taxes of $5,000 are to be paid. The resultant amount which could be used for a charitable deduction is $45,000.00 ($50,000.00 less $5,000.00). It further states that in any number of different instances where a charitable transfer is to be reduced by death taxes, one must deduct the "amount" of the taxes under Internal Revenue Code § 2055(c). Certainly given the specific example provided and the normal meaning of the word "amount", I cannot state that the death taxes deductible from the residue here should be less than the amount actually due and paid.
(2) The plaintiffs' second argument is that in computing the value of the charitable bequests for estate tax purposes, the value at the date of death of the 15 month income on funds held for payment of estate taxes, which will eventually go to charity, is ascertainable and should be included in the charitable deduction. In relation to this argument, the plaintiffs stress that the income includable in the charitable deduction is not the interest actually earned but only the date of death value calculated by multiplying the tax funds at the 3 1/2% legal rate over a 15-month period.
It is well settled law in the federal judiciary that the use of post-mortem income to satisfy charges against the charitable residuary bequest so as to increase the charitable deduction is not allowable. Waldrop v. United States, 133 Ct. Cl. 902, 137 F. Supp. 753 (1956); Alston v. United States, 349 F.2d 87, C.A. 5, 1965. Though the plaintiffs claim that the taxes were in fact paid from the principal of the residue (as dictated by the will), an analysis of their computations as reflected by the federal estate tax return would belie their contentions as an exercise in semantics.
As seen from the estate tax return, the plaintiffs reduce the residuary amount left to charity by the amount of $575,600.90 instead of the $601,304.25 actually paid in Federal death taxes, the difference representing the amount of interest which could be earned on the $601,304.25 over 15 months at the legal rate of 3 1/2%. Since the amount actually deducted for payment of taxes was $25,703.35 less than that necessary to fully pay the tax obligations, the ...