Holt v. Lynch

HEDRICK, Judge.

We note at the outset that plaintiffs are claiming as deductions, in calculating the State inheritance tax, the following interest expenditures: (1) interest paid on the estate’s federal estate tax liability; (2) interest paid on the State inheritance tax liability; and (3) interest paid on money borrowed to pay the federal estate and State inheritance taxes; plaintiffs seek to deduct these expenditures as “costs of administration” of the estate. At oral argument, both parties agreed that, for the purposes of their deductibility in calculating State inheritance tax liability, there is no distinction in the treatment of the three kinds of interest expenditures at issue. We agree with the “all or nothing at all” theory of the parties, i.e. if any one of the kinds of interest at issue is deductible as a “cost of administration,” then they all are, but if any one is not, none is.

With respect to the interest paid on the estate and inheritance taxes, the following statutes, each appearing within the same Subchapter, are relevant:

In determining the clear market value of property taxed under this Article, or schedule [which is entitled “Inheritance Tax”], the following deductions, and no others shall be allowed:

(5) Estate and inheritance taxes paid to other states, and death duties paid to foreign countries.

(8) Costs of administration, including reasonable attorneys’ fees.

G.S. § 105-9;

“Tax” ... for the purposes of this Subchapter . . . include[s] penalties and interest, as well as the principal amount of such tax ....

G.S. § 105-241.101).

Under plaintiffs’ argument, interest on late federal estate and North Carolina inheritance taxes would be deductible as costs of administration; by an extension of reasoning, interest on late estate and inheritance taxes paid to other states would also be deductible under the “costs of administration” provision, since such interest expenses paid to other states are qualitatively similar to interest paid on federal estate and North Carolina inheritance taxes. Hence, plaintiffs’ rationale leads to the conclusion that if the deductibility of “costs of administration” were revoked by the legislature, interest on liability for other state’s inheritance and estate taxes would be nondeductible. Upon such a revocation, however, such interest would still be deductible, since the deductibility of the estate’s liability for other state’s estate and inheritance taxes also includes, by virtue of G.S. § 105-241.l(il), the interest thereon. The deductibility of interest on estate and inheritance taxes, therefore, must arise out of the combined effect of G.S. § 105-9(5) and G.S. § 105-241.l(il). Furthermore, the principle that “words of a statute are not to be deemed merely redundant if they can reasonably be construed to add something to the statute which is in harmony with its purpose,” see Schofield v. Great Atlantic & Pacific Tea Co., 299 N.C. 582, 590, 264 S.E. 2d 56, 62 (1980), would be violated if G.S. § 105-9(5) and G.S. § 105-241.1(il) provided for a deduction which already existed under G.S. § 105-9(8). Hence, the required non-redundant construction of G.S. § 105-9 is that the deductibility of interest on estate and inheritance taxes arises out of and only out of G.S. § 105-9(5) and G.S § 105-241.1(il), and not out of G.S. § 105-9(8). G.S. § 105-9(5), however, does not provide for the deductibility of federal estate or North Carolina inheritance taxes, and, hence, for the deductibility of the interest thereon. Federal estate taxes and presumably the interest thereon, were deductible under the former N.C. Gen. Stat. § 105-9(e) (1950), but such deductibility was repealed in 1957 N.C. Sess. Laws Ch. 1340, § 1 and is still not permitted under the present G.S. § 105-9(5). G.S. § 105-9(5) also does not allow the deductibility of North Carolina inheritance taxes, and, hence, of the interest thereon. The statutory scheme of G.S. § 105-9 does not permit the plaintiffs to deduct the interest on the federal estate and North Carolina inheritance tax liabilities.

Plaintiffs have argued that it is stipulated that the interest on those liabilities was incurred in their execution of their duties under G.S. § 28A-13-2 to settle the decedent’s estate with as little sacrifice of the estate’s value as is reasonable under the circumstances, and, hence, that such interest should be deductible as “costs of administration” under G.S. § 105-9(8). As discussed above, however, G.S. § 105-9(8) is unavailing for plaintiffs’ interest owed on the federal estate and North Carolina inheritance taxes, because of the preemptive coverage of interest on estate and inheritance taxes under G.S. § 105-9(5) and G.S. § 105-241.1Ü1). This bar on deductibility based on statutory construction, however, is not applicable to interest which accrued on something other than estate and inheritance tax liability, to wit, on funds borrowed to pay such taxes. Plaintiffs could argue that such interest, which also was incurred as “being reasonably necessary for the benefit of the estate,” could hardly fail to be characterized, given ordinary understandings of language, as a “cost of administration.” The parties, however, have agreed that each kind of interest payment at issue should receive identical treatment in terms of their deductibility, and, hence, the interest on borrowed funds is also not deductible as a cost of administration.

Since this case presented only a question of law arising on undisputed facts, and the law has been resolved in favor of defendant, the court’s granting of summary judgment for defendant is

Affirmed.

Judge HILL concurs. Judge BECTON concurs in part and dissents in part.