The opinion of the court was delivered by: WEBER
Plaintiff Executor seeks to recover Estate Tax paid upon a disallowed deduction for a debt.
Decedent H. L. Emmet, Sr., died testate July 15, 1968. Plaintiff was Executor of his estate. The gross estate amounted to $1,332,222.47. The distributive share of decedent's son, H. L. Emmet, Jr. in the estate amounted to more than the debt in question.
At the time of decedent's death his son, H. L. Emmet, Jr. owed the Bank, which is also Executor of the estate, $94,431.73 on a demand note signed October 4, 1967. On June 6, 1968 decedent had deposited personal securities as collateral for this note. The decedent endorsed the note as a guarantor, not personally, but to the extent of the collateral pledged as security.
By a family agreement between decedent, his wife, and their five children, dated July 1, 1957, which was ratified by a subsequent agreement of March 9, 1966, it was provided that securities provided by decedent would be used to guarantee loans made by the Bank to his children. The agreement provided that such loans would be payable in full upon the death of either decedent or his wife. Under the terms of the agreement and under decedent's will it was provided that if any child owed money on the loans at decedent's death and the collateral or decedent's funds had to be used to pay the loan, each such child's share of decedent's estate was to be reduced by the amount of the payment.
After decedent's death, the Bank, as Executor, sold the collateral and paid off the notes of each child, including that of H. L. Emmet, Jr.
The value of the collateral was included in decedent's gross estate.
In accordance with the terms of the family agreement and decedent's will the share of H. L. Emmet, Jr. in the estate was reduced by $94,431.73, the amount of the payment of his note to the Bank.
However, the Estate claimed a deduction from the value of the assets under Sec. 2053(a)(4) of the Internal Revenue Code which allows a deduction
"for . . . any indebtedness in respect of, property where the value of the decedent's interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate,
as are allowable by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered."
This deduction was disallowed, the estate paid the tax, made a claim for refund, and hence this suit.
The United States claims that the amount of any such deduction claimed for, an indebtedness against property, must be reduced by the value of an existing right of subrogation or ...