Opinion
Docket No. 55958.
1956-04-25
ESTATE OF WILLIAM G. HELIS, DECEASED, WILLIAM G. HELIS, JR., EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Charles D. Marshall, Esq., for the petitioner. Robert B. Wallace, Esq., for the respondent.
Charles D. Marshall, Esq., for the petitioner. Robert B. Wallace, Esq., for the respondent.
Decedent died July 25, 1950, while domiciled in Louisiana. He was survived by his wife, a son, and three daughters, all of maturity. He left a gross estate of over $5,000,000 as his share of the community. There were community debts at the time of his death of $713,180.50 to be paid out of the community property of over $10,000,000 and liquid assets with which to pay them of over $2,000,000. The administration of the community was unnecessary except for the purpose of facilitating the computation and payment of the State and Federal inheritance and estate taxes due from the decedent's estate. The decedent's son, who had managed the community for over 5 years prior to decedent's death, qualified as testamentary executor of the estate of decedent, and as such continued to manage the entire community property interest after decedent's death. In the course of the administration, the executor paid items for executor's commission, attorneys' fees, and administrative expenses totaling $616,146.90, which amount was approved by order of the Probate Court. Respondent allowed one-half of this amount as a deduction from the gross estate of the decedent under section 812(b)(2), I.R.C. 1939. Held, the respondent erred in not allowing as such deduction the full amount of $616,146.90.
The respondent determined a deficiency in estate tax of $43,120.38. Petitioner alleges that in lieu of a deficiency the estate has overpaid its tax in the amount of $165,382.26.
The respondent concedes that he erroneously included in the gross estate all the proceeds of a $5,000 life insurance policy whereas only one-half thereof should have been included. Effect will be given to this concession under Rule 50.
The sole issue remaining is whether the respondent erred in disallowing as a deduction from the gross estate one-half of the total amount of $616,146.90 paid for administrative expenses, executor's commission, and attorneys' fees.
FINDINGS OF FACT.
Most of the facts were stipulated. The stipulation is incorporated herein by this reference.
The decedent, William G. Helis, was domiciled in New Orleans, Louisiana, and died July 25, 1950. His son, William G. Helis, Jr., qualified as testamentary executor on August 10, 1950, and is still serving in that capacity. On November 23, 1951, the executor filed a Federal estate tax return, Form 706, with the then collector of internal revenue at New Orleans.
The respondent determined the total estate tax liability to be $2,555,827.84, which amount was subject to a tentative credit of $413,694.54 for State inheritance, estate, and death taxes to be paid. The estate paid the net amount of $2,142,133.30 as follows: $1,632,458.04 on October 25, 1951, and $509,675.26 on January 15, 1953. Later, the estate submitted proof of payment of State inheritance, estate, and death taxes in the total amount of $370,574.16. On October 25, 1954, the respondent issued a notice of deficiency to the estate in the amount of $43,120.38, which amount was the difference between the tentative credit of $413,694.54 and the amount paid of $370,574.16.
The respondent determined the gross estate of the decedent at $5,977,758.71, in which amount there was included the full proceeds of a $5,000 group life insurance policy of Aetna Life Insurance Company. Inasmuch as the respondent concedes that only one-half the proceeds of the life insurance policy should have been included, the correct amount of the gross estate was $5,975,258.71.
The total amount of allowable deductions, exclusive of the specific exemptions, was determined by the respondent to be $786,970.89 and the notice of deficiency is predicated upon this determination. The determination by the respondent of the allowable deductions include only one-half of the following items for executor's commission, attorneys' fees, and administrative expenses:
+-----------------------------------+ ¦Executor's commission ¦$205,208.32¦ +-----------------------+-----------¦ ¦Attorneys' fees ¦189,674.46 ¦ +-----------------------+-----------¦ ¦Administrative expenses¦221,264.12 ¦ +-----------------------+-----------¦ ¦Total ¦$616,146.90¦ +-----------------------------------+ The items for executor's commission, attorneys' fees, and administrative expenses, totaling $616,146.90, were paid in the course of the administration by the executor. The entire community property interest was administered by the executor, and at the time of the trial of this cause the estate was still under administration.
The executor's commission in the amount of $205,208.32 was computed at the legal rate of 2 1/2 per cent on the entire Louisiana community interest in those items which were subject to the commission, and payment in this amount was approved by order of the Probate Court.
The attorneys' fees of $189,674.46 were approved by order of the Louisiana Probate Court and were paid as follows:
+-----------------------------------------------------------------------------+ ¦(1)¦To Milling, Saal, Saunders, Benson & Woodward of New Orleans,¦$175,000.00¦ ¦ ¦Louisiana, for legal services to the executor in Louisiana ¦ ¦ +---+-------------------------------------------------------------+-----------¦ ¦ ¦To Fountain, Cox & Gaines of Houston, Texas, for legal ¦ ¦ ¦ ¦services in connection with the administration (of the amount¦ ¦ ¦(2)¦here shown, $8,840 was for services in connection with ¦10,840.00 ¦ ¦ ¦property situated in $ Louisiana and $2,000 was for services ¦ ¦ ¦ ¦in connection with property situated in Texas) ¦ ¦ +---+-------------------------------------------------------------+-----------¦ ¦ ¦To Wells, Thomas, Wells & Smith of Jackson, Mississippi, for ¦ ¦ ¦(3)¦legal services in connection with ancillary estate ¦3,834.47 ¦ ¦ ¦proceedings in the State of Mississippi ¦ ¦ +---+-------------------------------------------------------------+-----------¦ ¦ ¦Total ¦$189,674.46¦ +-----------------------------------------------------------------------------+
The Louisiana attorneys' fees of $175,000 were arrived at in accordance with an understanding between the executor and his attorneys. The amount was based on services rendered, and one of the elements taken into consideration was the entire Louisiana community interest.
The administrative expenses of $221,264.12 were approved by order of the Louisiana Probate Court and were composed of the following:
+-----------------------------------------------------------------------------+ ¦Auditing fees ¦ ¦$19,948.46 ¦ +------------------------------------------------------+----------+-----------¦ ¦Court costs ¦ ¦2,343.82 ¦ +------------------------------------------------------+----------+-----------¦ ¦Special printing, stationery, and outside photostat ¦ ¦2,297.47 ¦ ¦expense ¦ ¦ ¦ +------------------------------------------------------+----------+-----------¦ ¦Appraisals: ¦ ¦ ¦ +------------------------------------------------------+----------+-----------¦ ¦Oil properties ¦$35,441.73¦ ¦ +------------------------------------------------------+----------+-----------¦ ¦Horses ¦4,181.90 ¦ ¦ +------------------------------------------------------+----------+-----------¦ ¦Parish and sundry appraisers ¦4,740.37 ¦44,364.00 ¦ +------------------------------------------------------+----------+-----------¦ ¦General and administrative expense including salaries ¦ ¦ ¦ +------------------------------------------------------+----------+-----------¦ ¦and clerical help on an actual time basis, and other ¦ ¦ ¦ +------------------------------------------------------+----------+-----------¦ ¦direct items such as traveling expense, portion of ¦ ¦ ¦ +------------------------------------------------------+----------+-----------¦ ¦office rent, allocable part of depreciation on ¦ ¦ ¦ +------------------------------------------------------+----------+-----------¦ ¦office equipment, etc. ¦ ¦$152,310.37¦ +------------------------------------------------------+----------+-----------¦ ¦Total ¦ ¦$221,264.12¦ +-----------------------------------------------------------------------------+
Decedent was survived by his wife and four children, all of whom were majors at the time of his death, and all of whom are still living, and have at all times since decedent's death been legally competent. The four children of the decedent constitute his sole heirs.
The actual debts of the community estate at the time of the decedent's death amounted to $713,180.50. Included among the community assets at the date of decedent's death were the following:
+-----------------------------------------------------------------------------+ ¦Cash in banks ¦$220,466.32 ¦ +---------------------------------------------------------------+-------------¦ ¦Cash on hand, including undeposited checks and receipts ¦67,242.16 ¦ +---------------------------------------------------------------+-------------¦ ¦U. S. Government bonds and Louisiana State highway bonds ¦129,068.10 ¦ +---------------------------------------------------------------+-------------¦ ¦Account receivable from Helis Petroleum Corporation, decedent's¦ ¦ +---------------------------------------------------------------+-------------¦ ¦wholly owned corporation ¦485,000.00 ¦ +---------------------------------------------------------------+-------------¦ ¦Accounts receivable for oil runs ¦322,827.98 ¦ +---------------------------------------------------------------+-------------¦ ¦Oil inventory (in tanks and waiting to be run) ¦122,266.67 ¦ +---------------------------------------------------------------+-------------¦ ¦Subtotal ¦$1,346,870.83¦ +---------------------------------------------------------------+-------------¦ ¦Other receivables, inventories, securities, and investments ¦2,301,865.09 ¦ +---------------------------------------------------------------+-------------¦ ¦Total ¦$3,648,735.92¦ +-----------------------------------------------------------------------------+
At the date of decedent's death, Helis Petroleum Corporation, decedent's wholly owned corporation, had on deposit, for decedent's account, the sum of $485,000 in bank deposits, which money had been deposited with Helis Petroleum Corporation as a matter of convenience.
The respondent determined the total valuation of all of decedent's mineral interests at.$3,028,063.67 (one-half of $6,056,127.34).
The estate proceedings of the decedent were conducted in the Civil District Court for the Paris of Orleans, Louisiana, No. 299-318 of the records of that court. In the course of the estate proceedings, the amount of inheritance taxes due the State of Louisiana was litigated. The matter was appealed to the Supreme Court of Louisiana, culminating in the decision of that court in Succession of Helis, 226 La. 133, 75 So.2d 221. In that case the Supreme Court of Louisiana held that the administration was ‘totally unnecessary except for the purpose of facilitating the computation and payment of the inheritance taxes due by the estate of the decedent alone under the very complicated federal inheritance tax laws'; and, accordingly, that the amounts paid by the estate for administrative expenses, executor's commission, and attorneys' fees were deductible entirely from the decedent's half of the community property.
The estate of the decedent consisted of operating businesses, and the conduct of the administration rendered the operation of these businesses more difficult.
The motivating reason for the administration of decedent's estate was the problems imposed by the Federal estate tax law. Particularly, there was uncertainty regarding the valuation which the Federal Government might place upon the producing mineral properties, and there was apprehension over the fact that, without an administration, the entire Federal estate tax might be collected from any one of the heirs. Two of the heirs of decedent had minor children. If it had not been for the problems imposed by the State and Federal inheritance and estate tax laws, the administration of decedent's estate would not have been necessary.
Decedent left a will dated May 17, 1950, wherein he left all his property to his children, subject to a usufruct in favor of his wife. On October 23, 1950, the wife renounced the succession of the decedent, which included her right to the usufruct.
On August 11, 1950, the executor filed a petition for authority with the Probate Court that he be authorized to take over and conduct the various operating businesses of the decedent as he had done for more than 5 years prior to decedent's death under a power of attorney from his father.
At the date of trial there had been over 200 separate filings in the succession proceedings. Among these filings were authorizations for the executor to act for the community estate in: Operating racing stable, leasing of race horses, payment of Christmas bonuses, compromising litigation, assigning mineral leases, selling mineral leases, conveying mineral properties in the performance of contracts executed by decedent, purchasing mineral lease, executing a joint operating agreement with an oil company, selling stock, drilling a well on an oil, gas, and mineral lease, and in assigning overriding royalty.
At the date of decedent's death, there was pending a lawsuit against William G. Helis, and others seeking recovery of $164,725. On January 24, 1951, the executor was authorized to compromise this litigation for $12,000.
As a result of an oral agreement made between an oil company and William G. Helis, during his lifetime, on September 28, 1951, the executor was authorized to transfer a one-half interest in certain oil leases to the company in consideration of $48,627.01, being one-half of the sum expended on the leases by William Helis during his lifetime.
At the date of death of decedent, there was pending a lawsuit for $37,259 and for an accounting of royalties on a lease owned jointly by decedent and an oil company. The executor was authorized to settle this suit on May 12, 1952. Under the terms of the settlement, the estate paid the plaintiffs $1,000 and took a new lease from them.
On July 16, 1951, the collector of revenue, State of Louisiana, sued the executor for gas-gathering taxes due for the period July 1, 1948, to March 31, 1951, in the sum of $74,357.20. The executor was authorized to settle this litigation on April 23, 1952. Under the terms of the settlement, the purchaser of the gas agreed to pay the major part of the judgment confessed.
OPINION.
ARUNDELL, Judge:
Section 812(b)(2) of the Internal Revenue Code of 1939 provides that for the purpose of the estate tax the value of the net estate shall be determined ‘by deducting from the value of the gross estate * * * such amounts * * * for administration expenses * * * as are allowed by the laws of the jurisdiction * * * under which the estate is being administered * * * .’ Section 81.32 of Treasury Regulations 105, relating to the estate tax under the 1939 Code, provides that ‘Administration expenses include (1) executor's commissions; (2) attorney's fees; and (3) miscellaneous expenses.’ The instant estate is being administered under the laws of the State of Louisiana.
The law of Louisiana regarding the question of who bears the cost of administering a community estate depends upon the factual determination of whether administration is necessary for the settlement of the affairs of the entire community or whether administration is necessary only for the purpose of facilitating the computation and payment of the State and Federal inheritance and estate taxes due by the estate. If administration is necessary for the settlement of the affairs of the entire community, the administration expenses are to be borne by the decedent's share of the community and the wife's share equally. If, on the other hand, administration is necessary only for the purpose of facilitating the computation and payment of the State and Federal taxes due by the estate, the administration expenses are to be borne entirely by the decedent's share of the community. Succession of Helis, 226 La. 133, 75 So.2d 221, and cases therein cited.
In Estate of Thomas E. Gannett, 24 T.C. 654, which involved an estate being administered under Louisiana law, it was stipulated as a fact that ‘The only purpose for the administration of the estate of Thomas E. Gannett was to pay state and federal inheritance taxes' and as a result of that stipulation we held that the administration expenses were deductible in full by the estate under section 812(b)(2) of the 1939 Code.
In the instant case the executor testified specifically that there would have been no administration of the estate except for the complicated Federal and State inheritance taxes due from the estate. In this connection it was pointed out that the community estate was in excess of $10,000,000; that it had community debts of only $713,180.50; and that there were ample liquid assets in excess of $2,000,000 available to pay such debts. This evidence stands uncontradicted and we have made a finding to that effect. Our finding is the same as was made by the Civil District Court of Orleans Parish and affirmed by the Supreme Court of Louisiana, with two justices dissenting, in Succession of Helis, supra. In that case the precise question here involved was likewise raised by the State inheritance tax collector for the Parish of Orleans where the instant estate is being administered. The executor, as in the instant case, sought to deduct from the gross estate of the decedent the entire costs incurred and paid by the executor in administering the entire community, including the fees of the attorneys and the executor, which were admittedly computed or measured by the appraised value of the community. The tax collector contended that only half of such costs were legally chargeable to the decedent's share of the community and that the other half was chargeable to the surviving widow's share. The District Court decided in favor of the executor. In affirming that decision, the Supreme Court, in the course of its majority opinion written by the chief justice, said:
Despite loose expressions in some of the decisions to the contrary, ever since Dixon v. Dixon's Exrs., 4 La. 188, was decided in 1832, title to half of the community property from the very moment of its acquisition is, under our civil law system, vested in the wife, irregardless in whose name acquired. * * * And while it is true the jurisprudence is to the effect that the cost of administering a community estate, including the fee of the attorneys, is to be borne by the decedent's share of the community and the wife's share equally, as is true when an ordinary commercial partnership is under liquidation, the administration of the community estates in the authorities relied on by the collector was necessary for the settlement of the affairs of the entire community, that is, for the purpose of determining the amounts of and liquidating the obligations of the community, and the division, thereafter, of the net assets equally between the two spouses, or their estates. In the instant case the evidence is (sic) uncontroverted that an administration of the community was totally unnecessary except for the purpose of facilitating the computation and payment of the inheritance taxes due by the estate of the decedent alone under the very complicated federal inheritance tax laws. Consequently, we do not think the authorities relied on by the tax collector are controlling under the peculiar facts of this case.
In view of our finding that if it had not been for the problems imposed by the State and Federal inheritance and estate tax laws, the administration of decedent's estate would not have been necessary, we hold that the administration expenses in the total amount of $616,146.90 should be allowed as a deduction from the gross estate. Estate of Thomas E. Gannett, supra; Succession of Helis, supra. Cf. Vaccaro v. United States, 55 F.Supp. 932. See also the recent decision (Oct. 17, 1955) by the United States District Court for the Western District of Louisiana in McCullough v. United States, 134 F.Supp. 673, where it was held that the estate there involved was entitled to deduct the entire amount of the administration expenses. In that case, Judge Hunter recognized that under the law of Louisiana there were situations, particularly where the marital community itself was heavily involved, that required the proration of administration expenses between the separate estate of a deceased Louisiana citizen and the survivor, but that the case presently before the court was not such a case. The court said:
Here, the total community debt was $309.90, and the community had cash on hand in excess of $45,000; and here, too, the widow was the sole legatee and the sole heir. We cannot distinguish the instant case from one recently decided by the Supreme Court of Louisiana, Succession of Helis, 226 La. 133, 75 So.2d 221, 222.
In view of what we have said above, we do not deem it necessary to discuss respondent's argument that the decision in Succession of Helis, supra, was collusive in the sense that the cause of action was nonadversary or in the nature of a consent decree and, therefore, not binding in the instant litigation. Suffice it to say that we have carefully considered the argument made by the respondent and find it to be without merit. The litigation in Succession of Helis, supra, was real and absolutely necessary in the disposition of the tax questions here involved.
Decision will be entered under Rule 50.