ESTATE of David SMITH, Deceased, et al., Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
No. 133, Docket 74-1617
United States Court of Appeals, Second Circuit
Decided Feb. 4, 1975
510 F.2d 479
Argued Nov. 4, 1974.
IV
With the district judge, I see no connection between the Texas operation of Schlitz and the North Carolina operation. If the operations were proven to be similar, then I think what Schlitz knew about the Texas operation at the relevant times in the North Carolina affair might be admissible as evidence of knowledge. But I cannot find that the similarity of the operations has been proved. Therefore, I would not require the district court to reexamine its ruling that the evidence was irrelevant absent some proof of similarity of the Texas and North Carolina operations. “The determination of the relevancy of proof offered at the trial is a matter resting largely within the sound discretion of the trial court and is not ordinarily reviewable upon appeal.” Beaty Shopping Center v. Monarch Insurance Company of Ohio, 315 F.2d 467, 471 (4th Cir. 1963).
George G. Wolf, Tax Div., Dept. of Justice, Washington, D. C. (Scott P. Crampton, Asst. Atty. Gen., Gilbert E. Andrews, and William S. Estabrook, Attys. Tax Div., Dept. of Justice, Washington, D. C., on the brief), for respondent-appellee.
M. Bernard Aidinoff, New York City (Sullivan & Cromwell, Ira M. Lowe, Henry Christensen, III, and Laurie L. Malman, New York City, on the brief), for petitioners-appellants.
Before KAUFMAN, Chief Judge, and ANDERSON and MULLIGAN, Circuit Judges.
ROBERT P. ANDERSON, Circuit Judge:
David Smith, a sculptor, died on May 23, 1965 possessed of 425 pieces of sculp
Had the large number of artistic works which he left at his death been generally known and had all of these works been immediately placed on the market they would have brought substantially less than could be received by feeding them slowly into the market over a period of time. Shortly after Smith‘s death, therefore, the executors began an orderly process of gradual liquidation of the Estate‘s holdings of sculpture through Marlborough-Gerson Galleries, which was entitled to a commission on each piece of sculpture sold in accordance with a 1963 contract that was subsequently renewed by the executors in 1968 and 1970. From May 23, 1965 through April 30, 1970, an aggregate of $1,187,144.67 in commissions was paid to Marlborough and allowed by the Surrogate‘s Court. Further commissions of $396,400 were paid by the Estate to Marlborough from May 1, 1970 through August 21, 1973 and the Surrogate‘s Court allowed these as well.
A federal estate tax return was filed on August 24, 1966 and a deficiency was agreed upon and paid on July 10, 1968. On August 7, 1969, the Commissioner of Internal Revenue (Commissioner) issued a notice of deficiency for $2,444,629.17 based upon a valuation of Smith‘s estate of $5,256,918 and a disallowance of any payments of commissions in excess of $289,661.65.
Upon a petition by the executors for redetermination, the Tax Court reduced the value of the estate to $2,700,000, and no appeal has been taken from this appraisal. From the time of Smith‘s death to August 21, 1973, the executors paid to the Galleries, with the approval of the
Appellants first argue that, given the speculative and volatile market value of the sculptures, which were the Estate‘s major assets, they were under a duty to liquidate sufficient of these assets as were necessary adequately to preserve their value, provide for debts, anticipated administration expenses and taxes of the Estate and diversify properly the Estate‘s investments. In particular, they claim to have been put on notice by the Commissioner‘s Notice of Deficiency dated August 7, 1969 that they had to be prepared to meet a contingent liability of $2,444,629.17 in additional federal estate taxes and $570,193.23 in additional New York estate taxes, and
Appellants further contend that the allowance by the New York Surrogate‘s Court of all of the sales commissions as administrative expenses is determinative of their deductibility under
Both
As noted in Pitner v. United States, 388 F.2d 651, 659 (5 Cir. 1967), however, the interest of the federal government in taxing the passage of property from a decedent‘s estate to individual beneficiaries or to a trustee will not always completely or accurately be reflected in a state‘s interests in supervising the fiduciary responsibilities of executors. In the present case, appellants’ claims for administration expenses were not contested in the Surrogate‘s Court and there is some question as to whether some of these expenses were in fact incurred for the benefit of the estate in accordance with the general purpose of
It is, therefore, unnecessary to pass on whether
MULLIGAN, Circuit Judge (dissenting):
I dissent with respect but without reluctance. Section 2053(a) of the Internal Revenue Code provides that in determining a decedent‘s taxable estate there shall be a deduction from the gross estate of
such amounts . . . for administration expenses . . . as are allowable by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered.
The estate here was administered in the State of New York and the selling commissions at issue here were held to be allowable as proper expenses by the Surrogate of Warren County in several separate accountings. The Code unambiguously provides for their deduction if allowed by the jurisdiction administering the estate and neither the Commissioner of Internal Revenue nor the Tax Court, in my view, can properly reverse the State Court determination. Congress has explicitly left the matter in the hands of the state.
In a case squarely in point, the Sixth Circuit reversed the Tax Court‘s denial of deductibility, stating:
By the literal language of § 2053(a), Congress has left the deductibility of administrative expenses to be governed by their chargeability against the assets of the estate under state law. As otherwise stated, Congress has committed to the considered judgment of the states whether a particular expense is allowable as a proper or necessary charge against estate assets. In the situation before us, the expenses were admittedly allowable under Michigan law. They were paid out of probate assets and they were approved in two different accountings filed with the probate court. Hence they are deductible under § 2053(a).
Estate of Park v. Commissioner, 475 F.2d 673, 676 (6th Cir. 1973). Park is not alone in holding that the plain meaning of the statute controls and that the Congress intended deductibility to be determined by state law. E. g., Ballance v. United States, 347 F.2d 419, 423 (7th Cir. 1965); Commercial National Bank v. United States, 196 F.2d 182, 185 (4th Cir. 1952); Estate of Louis Sternberger, 18 T.C. 836, 843 (1952), aff‘d, 207 F.2d 600 (2d Cir. 1953), rev‘d on other grounds, 348 U.S. 187 (1955); see Dulles v. Johnson, 273 F.2d 362, 369-370 (2d Cir. 1959), cert. denied, 364 U.S. 834 (1960).
The majority here states that the Tax Court was not refusing to follow New York law but rather was making a de novo inquiry into the question of the factual necessity of these expenditures, and thus it is “unnecessary to pass on” the argument that the Regulation conflicts with the Code. I cannot agree that the issue can be so circumvented. The laws of the state are interpreted and administered by the courts of the state and not by the Tax Court of the United States. Pitner v. United States, 388 F.2d 651 (5th Cir. 1967), relied upon by the majority, is totally unlike the case before us. There had been no formal probate of the decedent‘s estate in that case and no Texas court had made any ruling which would bind the Tax Court. The Tax Court found no Texas statute or case in point, hence the necessary reliance on federal law.1
The functioning of the I.R.S. or the Tax Court as a surrogate Surrogate is particularly unfortunate here. While the commissions paid were substantial, we must bear in mind that the artist had difficulty in selling his works while alive and, two years before he died, of necessity entered into a 33 1/3% commission arrangement with a gallery for a five-year period. During the last 25 years of his life he had sold only 75 pieces of his sculpture and died owning 425 pieces, 185 of which were more than seven feet high. Ars longa, vita brevis. This art
Since I believe there was a failure to recognize the command of the Code, I would characterize the error here as one of law and not of fact, which would make the “clearly erroneous” test set by the majority inapplicable. Trust of Bingham v. Commissioner, 325 U.S. 365, 371, 65 S.Ct. 1232, 89 L.Ed. 1670 (1945). The five dissenting tax court judges were, in my view, correct in finding that the determination of the New York Surrogate as to deductibility was binding.
Notes
§ 222 was succeeded as of September 1, 1967, more than two years after decedent‘s death, by § 11-1.1(b)(23) of the New York Estates, Powers and Trusts Law (McKinney‘s Consol. Laws, c. 17-b, 1967) (renumbered as of June 22, 1973 as 11-1.1(b)(22)), which provides that a fiduciary is authorized:“§ 222. Payment of expenses incurred by representative.
An executor, administrator, guardian or testamentary trustee may pay from the funds or estate in his hands, from time to time, as shall be necessary, his legal and proper expenses of administration necessarily incurred by him, including the reasonable expense of obtaining and continuing his bond and the reasonable counsel fees necessarily incurred in the administration of the estate. Such expenses and disbursements shall be set forth in his account when filed, and settled by the surrogate.”
The revisers’ notes state that subparagraph (b)(23) is intended to incorporate the substance of § 222 of the Surrogate‘s Court Act. The other cases cited in the majority opinion are either distinguishable or in fact helpful to the appellant. Commissioner v. Estate of Bosch, 387 U.S. 456, 87 S.Ct. 1776, 18 L.Ed.2d 886 (1967) involved the question of whether a federal court or agency in a federal tax controversy is conclusively bound by a state trial court adjudication regarding the characterization of property interests. There was no act of Congress there ceding jurisdiction to the state but only the report of a Senate Committee recommending that “proper regard,” not finality, should be given to the interpretation of a will by state courts. Id. at 464, 87 S.Ct. 1776. Commercial Nat‘l Bank v. United States, supra, did deal with the question of whether attorneys’ fees were administrative expenses under the old Internal Revenue Code but found that the state court had never passed upon the question since the fees were fixed by stipulation between the parties and the issue was intentionally excluded from the judgment of the state court. The position of the United States, namely, that even if the fees had been assessed by the state court they were not deductible for federal tax purposes, was therefore not reached but in dicta was described by the court as “doubtful.” The court cited Lyeth v. Hoey, 305 U.S. 188, 194, 59 S.Ct. 155, 158, 83 L.Ed. 119 (1938) for the proposition that it is the will of Congress which controls in interpreting a tax statute. “Congress establishes its own criteria and the state law may control only when the federal taxing act by express language or necessary implication makes its operation dependent upon state law.” I submit that this was the case here.“(23) In addition to those expenses specifically provided for in this paragraph, to pay all other reasonable and proper expenses of administration from the property of the estate or trust, including the reasonable expense of obtaining and continuing his bond and any reasonable counsel fees he may necessarily incur.”
Dulles v. Johnson, supra, and Sussman v. United States, 236 F.Supp. 507 (E.D.N.Y. 1962) both followed the state court‘s determination of administration-expense deductions.
“(a) General rule—For purposes of the tax imposed by section 2001, the value of the taxable estate shall be determined by deducting from the value of the gross estate such amounts—
- for funeral expenses
- for administration expenses,
- for claims against the estate, and
- for unpaid mortgages on, or 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.”
Ҥ 20.2053-3 Deduction for expenses of administering estate.
(a) In general. The amounts deductible from a decedent‘s gross estate as ‘administration expenses’ of the first category (see paragraphs (a) and (c) of § 20.2053-1) are limited to such expenses as are actually and necessarily incurred in the administration of the 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, whether the trustee is the executor or some other person. 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 . . . .
* * * * * *
(d) Miscellaneous administration expenses
(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 . . . .”
Thus, the Fifth Circuit, as well as the Tax Court, have rejected the proposition that the only requirement for deductibility under Section 2053(a) is the allowability of the expense under state law.“[i]n the determination of deductibility under section 2053(a)(2), it is not enough that the deduction be allowable under state law. It is necessary as well that the deduction be for an ‘administration expense’ within the meaning of that term as it is used in the statute, and that the amount sought to be deducted be reasonable under the circumstances. These are both questions of federal law and establish the outside limits for what may be considered allowable deductions under section 2053(a)(2).” 388 F.2d at 659.