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Wilson v. United States

decided: February 7, 1967.

SARAH A. WILSON, NOW KNOWN AS S.A.W. HOOKER, AND GEORGE C. WILSON, EXECUTORS OF THE ESTATE OF GEORGE C. WILSON JR., DECEASED,
v.
UNITED STATES OF AMERICA, APPELLANT



McLaughlin, Smith and Freedman, Circuit Judges.

Author: Mclaughlin

Opinion OF THE COURT

McLAUGHLIN, Circuit Judge.

In this estate tax case the Commissioner assessed a deficiency in the amount of $22,279.94. The estate executors paid the tax with interest and sued for a refund. The District Court upheld their claim and allowed the refund. The Government appeals from that decision.

The litigation derives from a Pennsylvania spendthrift trust which had been settled upon George C. Wilson, Jr. by his father in 1930. The trust was inter vivos to Wilson, Jr. for life, terminating at the latter's death with the corpus to go to those named by him in his will. Wilson, Jr. was a Pennsylvania resident at the time of his decease on October 26, 1951. Under Pennsylvania law no part of the trust could be seized for the payment of the debts of the deceased. Wilson, Jr. in his will gave, devised and bequeathed the spendthrift trust fund "* * * to my wife for and during the term of her natural life. On her death I give, devise and bequeath the said trust fund to my children above named, share and share alike." The District Court concluded that decedent's power of appointment under the original trust was a general power and that the amount of the trust was to be included in his estate. There was no appeal by the executors from that decision.

This brings us to the one point in dispute, whether the assets of the trust estate are subject to the claims against the general estate within the meaning of Section 812(b) of the 1939 Code. The District Court so held. That ruling had material results in favor of the taxpayers. Excluding the value of the spendthrift trust the Wilson, Jr. estate totaled $246,304.62. The estate debts and expenses amounted to $274,947.31. The Commissioner of Internal Revenue determined that a tax deficiency of $22,279.48 existed. It is very clear that in so acting, the Commissioner was in full compliance with both the letter and spirit of Section 812(b), which reads as follows:

"(b) [As amended by Sec. 405, Revenue Act of 1942, c. 619, 56 Stat. 798, and Sec. 502, Revenue Act of 1950, c. 994, 64 Stat. 906] Expenses, Losses, Indebtedness, and Taxes. -- * * *

"There shall be disallowed the amount by which the deductions specified in paragraphs (1) [funeral expenses], (2) [administration expenses], (3) [claims against the estate], and (4) ['unpaid mortgages] exceed the value, at the time of the decedent's death, of property subject to claims. For the purposes of this section the term 'property subject to claims' means property includible in the gross estate of the decedent which, or the avails of which, would, under the applicable law, bear the burden of the payment of such deductions in the final adjustment and settlement of the estate; * * *." (26 U.S.C. 1952 ed., Sec. 812).

Under 812(b) there is no deduction allowable to the estate for that part of claims against it which exceeds the value of the estate at the time of decedent's death. No part of the spendthrift trust "* * * would under the applicable law, bear the burden of the payment of such deductions in the final adjustment and settlement of the estate, * * *."

Treasury Regulations 105 (1939 Code) Section 81.29 follows 812(b) precisely. One of its specific examples of the statute's effect is the exact same type of situation as this appeal presents: "Likewise, in such a case where the gross estate is composed of real estate valued at $100,000, and proceeds of life insurance in the amount of $100,000 exempt from general claims, if the only deductions under section 812(b) are claims of creditors totaling $200,000, only $100,000 of such claims is allowable as deductions. * *."

The legislative history of the 1942 amendment to Section 812(b) expressly shows its purpose. The House Ways and Means Committee Report, (H. Rep. #2333, 77th Cong. 2d Sess. pp. 163-164 (1942-2 Cum. Bull. 372, 492)) inter alia states:

"Under section 812(b), as amended by this section, amounts otherwise deductible under section 812(b) are disallowed to the extent that they exceed the value at the time of the decedent's death of property subject to claims. 'Property subject to claims' is defined as property includible in the gross estate of the decedent which, or the avails of which, would, under the applicable law, bear the burden of the payment of such deductions in the final adjustment and settlement of the estate."

That we are dealing with a true spendthrift trust has been found by the District Court and is conceded by appellees. Even so it would not be amiss to quote the plenary provisions of the document itself:

"NINTH: Neither the principal nor the income of this trust fund shall be liable for the debts of any beneficiary nor shall the same be subject to seizure by any creditors or any beneficiary under any writ or proceeding at law or in equity, and no beneficiary hereunder shall have any power to sell, assign or transfer, encumber or in any other manner to ...


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