Bartlett v. Commissioner ( 1929 )

OPINION.

Littleton

The issues raised by the pleadings will be considered in the order set out in our preliminary statement above.

With respect to issue (1) respondent confessed error at the hearing, and conceded that real estate, of the value of $12,000, owned by the decedent and his wife as tenants by the entirety is not subject to tax. Since this amount has been included by the respondent in the gross estate, it should be deducted therefrom in redetermining the net estate subject to tax.

Issue (2) was settled by written stipulation, in which it was agreed by the parties that the petitioners are entitled to a deduction from the gross estate in the amount of $28,900 on account of the notes of the King Manufacturing Co. which were endorsed by the decedent during his lifetime and which at his death constituted a liability of the estate. Accordingly, the value of the gross estate should be reduced by said amount in redetermining the taxable net estate.

Issues (3) and (4) were submitted upon the record, without argument. Issue (3) pertains to a deduction from the gross estate claimed by the petitioners on account of executors’ commissions. The amount claimed in the petition was $14,899.98, all of which was disallowed by the respondent. The petitioners allege and the respondent admits that under the laws of Missouri, where the estate of the decedent is being administered, executors are entitled to a commission equal to 5 per cent of the value of the personal property administered upon. The evidence shows that the estate of the decedent being administered upon includes personal property of the appraised value of $247,018.70. Therefore, the petitioners are entitled to a deduction from the gross estate of $12,350.93 on this account in redetermining the net estate. It is immaterial that the amount of the commission has not been allowed by order of the probate court or paid. Stern et al., Executors, 2 B. T. A. 102.

Issue (4) relates to the deduction of attorneys’ fees. On November 30, 1925, the probate court passed an order allowing one Joseph Morton the sum of $5,000 for legal services rendered. This amount was allowed by the respondent as a deduction from the gross estate, but the petitioners also claimed an additional deduction of $5,000 on the theory that such amount would subsequently be allowed by the probate court. This amount so claimed by the j>etitioners was disallowed by the respondent. On July 30, 1928, after the commencement of this proceeding, the probate court passed an order allowing the firm of Morton & Morton an additional sum of $3,500 for legal services. It follows that the petitioners are entitled to an additional deduction from the gross estate of said sum of $3,500.

Thus, issue (5) presents substantially the sole material question in controversy here, namely, whether real estate owned by the decedent at the time of his death and situated in the State of Missouri constitutes a part of the gross estate for Federal-tax purposes, under the Revenue Act of 1921, which provides as follows:

Seo. 402. That the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—

(a) To the extent of the interest therein of the decedent at the time of his death which after his death is subject to the payment of the charges against his estate and the expenses of its administration and is subject to distribution as part of his estate; * * *.

The parties are agreed that the land in question is property in which the decedent had an interest at the time of his death, and no objection is made to the inclusion of the land in the gross estate on (.he ground that it was not subject to distribution as a part of decedent’s estate. They are also in agreement that.under the laws of Missouri, land is subject to the payment of charges against the decedent’s estate, but they do not agree that land in Missouri is subject to the payment of administration expenses. The contention of the petitioner is that, since under the laws of Missouri land may not be sold for the payment of administration expenses, the lands in question are not subject to the payment of administration expenses and that, accordingly, a necessary requirement to the inclusion of (.his property for Federal-estate-tax purposes has not been satisfied. While the Commissioner seems to agree that lands in Missouri may not be sold for the payment of administration expenses, he contends that this is not decisive of the issue before us and that, regardless of this fact, when proper construction is given to the statute in question, in the light of interpretations given to the Missouri statutes, the land in controversy satisfies all conditions necessary for compliance with section 402 (a).

The section in question is identical with the corresponding provision in the Kevenue Act of 1916, under which the case of United States v. Field, 255 U. S. 257, arose. That case involved the question whether the Act taxed a certain interest-in personal property that passed under testamentary execution of a general power of appointment created prior, but executed subsequent, to its passage. Mr. Justice Pitney, in holding that the property in question was not taxable, for the reason that it did not satisfy the final condition set forth in the section, said:

Tlie conditions expressed in clause (a) are to the effect that the taxable estate must be (1) an interest of the decedent at the time of his death, (2) which after his death is subject to the payment of the charges against his estate and the expenses of its administration, and (3) is subject to distribution as part of his estate. These conditions are expressed conjunctively; and it would be inadmissible, in construing a taxing act, to read them as if prescribed disjunctively. Hence, unless the appointed interest fulfilled all three conditions, it was not taxable under this clause.

While the foregoing case dealt with the satisfaction of an entirely different condition from that before us and concerned personal property rather than real, and therefore could not be controlling as to the issue before us, the decision is important as reflecting the attitude of the Supreme Court toward the conditions necessary to be satisfied m order to make property of the class there being considered taxable for Federal-estate-tax purposes. Conceding for the purpose of the first part of this discussion that land, in the case before us, must likewise meet the same requirements, let us see whether the conditions set forth have been met. As heretofore stated, there is no controversy as to conditions (1) and (3), but only as to the second condition.

At the outset, in considering whether the second condition has been complied with, it should be observed that it is compound in its nature, the entire condition reading, “ which after his death is subject to the payment of the charges against his estate and the expenses of its administration.” Much of the argument presented by the petitioner, in effect, would seem to say that there are four conditions to be satisfied, namely, one and three as set out by the Supreme Court, and that the property must be subject to the payment of charges against the estate and also subject to the payment of administration expenses. That is, as we understand the petitioner’s contention, it is that one of the conditions laid down by the Supreme Court is that the property must be subject to the payment of administration expenses, whereas this requirement is only a part of one condition. In view of the extent to which administration expenses are interwoven and connected with the payment of charges against an estate, we consider this joinder significant. Further, when the condition is considered in its entirety, it will be found that both parties are in agreement that the first part has been satisfied, namely, that the land sought to be included is subject to the payment of charges against the estate.

This brings us to an inquiry as to the status of administration expenses with respect to real estate under the Missouri statutes. In the first place, we do not think it is open to question that in Missouri real estate may not be sold for the sole purpose of paying administration expenses. Farrar v. Dean, 24 Mo. 16; Presbyterian Church v. McElhinney, 61 Mo. 540; Ritchey v. Withers, 72 Mo. 556; and Elstroth v. Young, 94 Mo. App. 351. It is, however, expressly provided by statute (section 141 of the Eevised Statutes of Missouri (1919)) that land may be sold for the payment of debts due by the decedent at the time of his death, and legacies, provided his personal estate shall be insufficient to pay such debts and legacies. But unless there are debts due by the decedent at the time of his death or legacies to be paid, no authority exists in the administrator to create debts in the administration of the estate and then procure an order of the court for the sale of land in payment of charges thus created. As expressed in Farrar v. Dean, supra:

* * * No one ever imagined that the legislature designed to place the power in the hands of the administrator to create the debt, and then to sell the real estate of the decedent to pay for it. When there are no debts, there is no law to sell the real estate. The administrator can not procure, in such a case, an order for its sale without a violation of law.

But does the fact that land may not be sold merely for the purpose of paying administration expenses mean that land is in no sense subject to the payment of such expenses? We think not. In the administration of an estate, among the expenses to be met before the payment of debts or legacies are administration expenses, and where there are debts or legacies to be satisfied, these administration charges will be paid out of the personal property before payment of debts or legacies from the real estate. But whether there will be considered sufficient personal property to satisfy the debts and legacies will be determined by taking into consideration the total liabilities for debts and legacies, together with the amount due for administration expenses. And if there be not sufficient personalty to take care of all of these demands, but more than sufficient to take care of the administration expenses, resort will then be had to the realty to make up the deficiency. It may be said that under such circumstances administration expenses are being met out of the personal property and that the deficiency which is being met out of the realty relates only to debts and legacies, but it is undeniably true that the deficiency to be met out of the sale of realty is greater because the administration expenses have consumed a part of the personalty. By way of illustration, a man leaves only $10,000 worth of personalty, but also leaves $5,000 in real estate. His debts are $9,000, and the expenses of administration amount to $2,000. It is not believed that any one would seriously question that under such circumstances real estate to the extent of $1,000 may and must be sold. Without the administration expenses no realty would be required to be sold. Whether we say that the administration expenses are paid out o,f personalty and the debts out of personalty and realty, or vice versa, would seem to be a mere choice of words and not material. The land can be sold only because the debt exists, but the sale is made on account of administration expenses in the same sense as it is of debts. Further, while land is admittedly subject to the payment of charges against the estate, the primary liability for the payment of such charges rests upon the personalty, and, therefore, it may be said that there is a difference of degree only as to the liability relationship between charges and administration expenses and land.

It also appears that where the funds coming into the hands of the administrator from all sources are insufficient to pay both debts and administration expenses, the former will be paid first and the balance apportioned among the creditors, section 224, Revised Statutes of Missouri, 1919, reading as follows:

Payment of Claims — How Oedebed upon' Settlement. — At every settlement, or at any time thereafter, when the best interests of the estate require it, the court shall ascertain the amount of money of the estate which has come to the hands of such executor or administrator from all sources, and the amount of debts allowed against such estate; and if there be not sufficient to pay the whole of the debts and expenses of administration, the money remaining after paying the expenses of administration shall he apportioned among the creditors according to the provisions of this chapter; and the court shall order that such executor or administrator pay the claims allowed by the court according to such apportionment, reserving apportionments made on claims which remain undecided until decision be had thereon. (R. S. 1909, § 233.) (Italics supplied.)

When the prior status of administration expenses is considered, this would seem to follow logically and not be inconsistent with section 149, Kevised Statutes of Missouri, 1919, which provides:

The Peoceeds of Sale, How Applied — Pbiobitt of Liens. The proceeds of the sale of such real estate shall be first applied to the payment of such judgments and attachments, according to their priority of lien, and the residue of such proceeds, if any, shall become assets in the hands of the executor or administrator, to be administered according to law. (R. S. 1909, § 158.)

It may well be that deficiencies in administration expenses, not connected with expenses incident to the sale of real estate, may not be made up out of funds from the sale of real estate, yet it is certainly true that expenses connected with the sale of real estate may be paid out of the funds received from the sale of such real estate. Elstroth v. Young, supra. The aforementioned case did not, however, involve a deficiency in administration expenses outside of expenses incident to the sale of land by the administrator, but it did involve commissions deducted by the administrator on account of the distribution of the proceeds of a sale of real estate, and the court expressly held that such expenses were a proper charge against the funds received from such sale. Certainly, such expenses are administrative in character and the proceeds from the sale of the land are subject to the payment thereof. As the court said in Steedman v. United States, 63 Ct. Cls. 226:

Tbe expression “expenses of administration” covers tbe whole field of administrative charges. It is difficult to see how real estate could be sold and the proceeds not be held liable for the expenses incident to the sale, which, in the case of a sale by an administrator under order of court, are part of the expenses of administration.

In any event, land which is subject to the payment of charges against his (the decedent’s) estate is subject to the payment of expenses of its disposition and of the administration and distribution of the funds realized or derived from the sale.

When we consider that the phrase “ subject to the payment of the charges against his estate ” is joined with the phrase “ and the expenses of its administration ” in one condition, we fail to see why land in Missouri does not fully comply with this condition. The two are so closely related that we can not have the former without the latter, and when the former does exist the land is certainly subject to the payment of administration expenses. The position of the petitioner would require not only that the two parts of the condition be treated as separate and distinct conditions, but also that the words “ subject to ” be construed to mean “ liable to be sold for.” But as we read the statute, we do not understand that it means more than that the property must be of such a nature and have such a relation to the decedent’s estate that the burden of administering the estate is incident and subject thereto. In Steedman v. United States, supra, the court in construing the same provision which we have before us said:

Section 402, supra, does not use the word “ liable; ” it uses the words “ subject to.” “ Subject to ” does not necessarily mean “ liable for.” It may be said that where land is liable for sale for the payment of debts, it is subject lo the payment of debts, but the converse is not necessarily true. Real estate may be under certain conditions “ subject to ” the payment of expenses of administration and yet not liable to sale therefor; that is, it may be under the contingency of or exposed to payment of administrative expenses and thus “ subject to ” the payment.

When considered in this manner, we do not find it necessary to decide whether the word “ and ” which joins the two parts of the compound condition is to be interpreted as meaning “ and ” or “ or ”; under either interpretation we think that land under the laws of Missouri sufficiently satisfies this requirement of the statute to make it includable in the gross estate of the decedent for estate-tax purposes.

The further consideration exists that if we were to carry petitioner’s argument to its logical conclusion, not only would all land in Missouri be exempt from Federal estate taxes, but in other States as well. This would follow from a strict interpretation of the third condition set out in the statute, namely, “ and is subject to distribution as part of his estate.” In law the term “ distribution ” is accurately and technically applicable only to personal property, whereas the corresponding term applicable to real estate is “ descent.” In other words, in the ordinary accepted meaning of the terms, personal property is distributed to the persons beneficially interested therein, whereas real property descends to the heirs. But we can not think that Congress intended by the opening clause of section 402 that all real property should be included in a decedent’s gross estate and then imposed limitations which would make of the statute a nullity in so far as real property is concerned. Either the limitations are applicable only to personal property, or a liberal construction must be given thereto, and under either interpretation we are of the opinion that land in Missouri satisfies its provisions. This, interpretation seems all the more reasonable when it is borne in mind that the statute is very broad, expressly including “ all property, real or personal, tangible or intangible, wherever situated,” subject only to the limitations here in controversy. Since the decedent .owned this real property and since his interest therein ceased at his death, it would seem clear that if such property is not to be included in his gross estate for estate-tax purposes, the statute has (to use the language of Mr. Justice Holmes in Irwin v. Gavit, 268 U. S. 161), “missed so much of the general purpose.”

Nor do we think it conclusive that the corresponding provision in the Revenue Act of 1926 eliminated the limitations which we are here considering. The explanation of the change was given by the Ways and Means Committee of the House in its report as follows:

* * * In the interest of certainty it is recommended that the limiting language above referred to shall be eliminated in the proposed bill, so that the gross estate shall include the entire interest of the decedent at the time of his death in all the property. (Italics supplied.)

The specific question before us has been before the Federal Courts on two occasions—first, in Steedman v. United States, supra, (certiorari denied, 275 U. S. 528) wherein the Court of Claims held that land in Missouri satisfies the requirements of section 402 (a), supra, with respect to the payment of administration expenses, and second, in Harrelson v. Crooks, 28 Fed. (2d) 510; aff'd. 35 Fed. (2d) 116, where an opposite holding was had. For reasons heretofore stated we agree with the conclusion reached in the Steedman case.

Reviewed by the Board.

Judgment will he entered for the respondent,

Murdock concurs in the result.