# Estate of Bradford v. Comm'r

> United States Tax Court · September 23, 2002 · 84 T.C.M. 337

URL: https://www.frixlaw.com/law-library/cases/4334027

## Case

- **Full name:** ESTATE OF MARION P. BRADFORD, LIZETTE L. PRYOR v. COMMISSIONER OF INTERNAL REVENUE
- **Court:** United States Tax Court
- **Decided:** September 23, 2002
- **Citations:** 84 T.C.M. 337; 2002 T.C. Memo. 238; 2002 Tax Ct. Memo LEXIS 245
- **Precedential status:** Unpublished
- **Opinion:** Opinion
- **Judges:** "Whalen, Laurence J."
- **Cited by:** 0 later opinions in the Frix Law Library

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## Opinion text

T.C. Memo. 2002-238

UNITED STATES TAX COURT

ESTATE OF MARION P. BRADFORD, DECEASED,
LIZETTE L. PRYOR, EXECUTRIX, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 4659-00. Filed September 23, 2002.

Shaun A. Ingersoll, for petitioner.

Edwina L. Charlemagne, for respondent.

MEMORANDUM OPINION

WHALEN, Judge: Respondent determined a deficiency

of $294,712.16 and an addition to tax under section

6651(a)(1) of $14,736 in the Federal estate tax of the

Estate of Marion P. Bradford, Deceased. Hereinafter we

refer to Marion P. Bradford as the decedent. After

concessions, the sole issue for redetermination is the

amount of the charitable deduction under section 2055(a) of
- 2 -

the Internal Revenue Code (hereinafter all section

references are to the Internal Revenue Code as in effect on

the date of the decedent's death). Resolution of this

issue depends upon whether the Federal estate and State

inheritance taxes attributable to the decedent's death are

to be apportioned to the estate's charitable beneficiary,

thereby reducing, pursuant to section 2055(c), the amount

of the charitable deduction claimed on the subject estate

tax return, and whether the Federal estate and State

inheritance taxes paid by the decedent's inter vivos trust

reduce the amount of the charitable bequest and, thus, also

reduce the amount of the charitable deduction.

Background

The parties filed this case without trial under Rule

122 of the Tax Court Rules of Practice and Procedure

(hereinafter all Rule references are to the Tax Court Rules

of Practice and Procedure). The stipulation of facts and

the accompanying exhibits filed by the parties are hereby

incorporated in this opinion.

The decedent died testate on April 3, 1996, in

Raleigh, North Carolina. He was 86 years of age at the

time. A friend and caregiver of the decedent, Ms. Lizette

L. Pryor, was duly appointed executrix of the decedent's
- 3 -

estate. At the time the instant petition was filed, the

executrix resided in Raleigh, North Carolina.

On March 21, 1996, less than 1 month before he died,

the decedent had executed his last will and testament.

After making provision for the payment of the decedent's

debts, expenses, and death taxes, the decedent's will

made bequests of certain personal property to his sister,

Ms. Claudia Bradford Stach, and to Ms. Pryor, and it

directed that the rest, residue, and remainder of the

decedent's property be given to Ms. Pryor as successor

trustee under a revocable living trust that the decedent

created contemporaneously with the execution of his will.

The decedent's will provides for the payment of his

debts, expenses, and death taxes in the following

provision:

ARTICLE I
DIRECTIONS TO EXECUTOR

1.01 PAYMENT OF DEBTS AND EXPENSES. All
my legal debts, health care expenses, funeral
expenses and the administration expenses of my
estate, shall be paid out of my Residuary Estate.
I authorize my Executor, in its discretion, to
spend more than is otherwise allowed by law for
a suitable gravestone and for perpetual care of
the lot upon which my grave is located. It is
my desire that I be buried in my family plot in
Willow Dale Cemetery in Goldsboro, North
Carolina.

1.02 PAYMENT OF DEATH TAXES. All death
taxes (other than death taxes which are paid
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from property passing outside of this Will
pursuant to the terms of the governing
instrument) shall be paid out of my Residuary
Estate as an administration expense and shall
not be charged against or recovered from any
recipient or beneficiary of the property taxed,
except that my Executor shall recover as provided
by law any death tax attributable to property
over which I have a power of appointment or in
which I have qualifying income interest for life
to the extent that any death tax recoverable by
law is not otherwise paid out of such property.

1.03 PAYMENT OF DEBTS, EXPENSES AND
DEATH TAXES OUT OF TRUST IF RESIDUARY ESTATE
INSUFFICIENT. If my Residuary Estate is
insufficient, either in whole or in part, to
pay all of my legal debts, health care expenses,
funeral expenses, the administration expenses of
my estate and the death taxes payable out of my
Residuary Estate, my Executor shall certify to
the Trustee acting under the Trust Agreement
referred to in Article III, the amount of the
insufficiency, which amount shall be paid out
of the property of the trust as provided in that
instrument.

The decedent's will defines the term "death taxes" as

follows:

ARTICLE X
DEFINITIONS

* * * * * * *

10.02 "DEATH TAXES." The term "death
taxes" means inheritance, estate, supplemental
estate, generation-skipping, transfer and
succession taxes, and any interest and penalties
on these taxes, imposed by reason of my death by
any jurisdiction with respect to property passing
under or outside of the provisions of this Will
or any codicil to it which is includible in my
estate for the purpose of determining such tax,
including, but not limited to, any tax on
property includible under section 2041 (relating
to life insurance proceeds), section 2042
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(relating to powers of appointment), or section
2044 (relating to qualified terminable interest
property) of the Internal Revenue Code, or any
comparable provision of state law, but excluding,
however, any tax imposed by section 2032A(c)
(relating to qualified real property) or chapter
13 (relating to generation-skipping transfers)
of the Internal Revenue Code, or any comparable
provision of state law, for which my estate is
not liable.

The decedent's will provides for the disposition of the

decedent's residuary estate in the following provision:

ARTICLE III

DISPOSITION OF RESIDUARY ESTATE. All the
rest, residue, and remainder of my property,
real and personal, tangible and intangible,
wheresoever situate and howsoever held, including
any property over which I may have a power of
appointment, herein referred to as my Residuary
Estate, I give, devise and bequeath to LIZETTE
LEWIS PRYOR, as successor Trustee under that
Revocable Living Trust Agreement dated the 21st
day of March, 1996, wherein I am the original
Grantor and original Trustee, and as the same may
from time to time be amended, to be held and
administered as a part of the Trust Fund therein
created as though it had originally been a part
thereof.

The trust agreement referred to above in article III

of the decedent's will is the revocable living trust

agreement, mentioned above, that the decedent executed

contemporaneously with his will. Under the trust

agreement, the name of the trust is the Marion Peacock

Bradford Revocable Living Trust (the trust). In the trust
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agreement, the decedent designated himself as the original

trustee, and he made provision for the appointment of

Ms. Pryor as successor trustee upon his death.

The trust agreement provides for the distribution of

the trust property in the following provision:

Article V

DISTRIBUTION OF TRUST ON GRANTOR'S DEATH

5.01 PAYMENT OF DEBTS AND EXPENSES.
Upon the death of Grantor, the Successor Trustee
shall pay Grantor's just debts, expenses of
last illness, and burial expense, to the extent
that these items shall not be paid or the
responsibility for their payment be assumed by
some other person or estate, except that the
Successor Trustee, in its discretion, shall not
be required to pay and discharge, both as to
principal and interest, any valid lien, mortgage,
or charge against any real property, including
buildings and improvements, but may elect to
treat such as a continuing debt.

5.02 DISTRIBUTION OF PERSONAL PROPERTY
TO CLAUDIA BRADFORD STACH. Upon the death of
Grantor, the Successor Trustee shall distribute
to grantor's sister, CLAUDIA BRADFORD STACH, if
she survives Grantor, Grantor's two diamond
rings if such rings have not previously been
distributed. In the event CLAUDIA BRADFORD
STACH predeceases Grantor, then the Successor
Trustee shall distribute such two diamond rings
to LIZETTE LEWIS PRYOR.

5.03 CREATION OF CHARITABLE FOUNDATION.
Upon the death of the Grantor, the Successor
Trustee shall allocate one half of the remaining
Trust assets or property for the establishment
of a private charitable foundation for the
benefit of the church at which LIZETTE LEWIS
PRYOR attends and is a member as of the date
of Grantor's death. Such private charitable
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foundation shall be established for a period of
five (5) years, and upon the fifth anniversary
date of the date of Grantor's death, the remain-
ing proceeds plus any interest accumulated within
the private charitable foundation established
pursuant to this paragraph shall be distributed
in fee to the charitable organization for which
this private charitable foundation is initially
established. The Foundation Trustee or manager
of the private charitable foundation established
pursuant to this paragraph shall be LIZETTE LEWIS
PRYOR.

* * * * * * *

It is Grantor's intent that such Foundation
Trustee or manager have the authority and
discretion to distribute proceeds from the
private charitable foundation as he or she see
[sic] fit for specific charitable events, project
[sic], or needs of the charitable organization
for which the private charitable foundation was
established. Thus, during the five (5) year term
of the private charitable foundation and upon its
termination as described in this paragraph, the
Foundation Trustee or manager may allocate
foundation funds to the designated charitable
organization for specific needs or for the
general benefit of the charitable organization at
his or her discretion provided that all funds are
disbursed to such charity upon the foundation's
termination.

5.04 ALLOCATION OF REMAINING TRUST
PROPERTY. Upon the death of the Grantor, the
Successor Trustee shall distribute the remaining
Trust property which remains after providing for
all previous distributions and for payment of
all expenses of administering such Trust in
accordance with provisions of paragraph 6.02
herein for bequests, debts, expenses, and taxes
of Grantor's estate to LIZETTE LEWIS PRYOR in
fee, discharged of Trust if she survives Grantor.
* * *
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Thus, according to paragraph 5.03 of article V of the

trust agreement, the successor trustee is directed to

"allocate one half of the remaining Trust assets or

property for the establishment of a private charitable

foundation for the benefit of the church at which LIZETTE

LEWIS PRYOR attends and is a member as of the date of

Grantor's death." The church referred to in that provision

is the Millbrook United Methodist Church. The private

charitable foundation is to be established for a period

of 5 years, and the remaining proceeds held by the

charitable foundation and any accumulated interest are to

be distributed in fee to the Millbrook Methodist Church

5 years after the decedent's death.

According to paragraph 5.04 of article V, the

successor trustee is directed to make a distribution to the

other beneficiary of the trust, Ms. Pryor, "Upon the death

of the Grantor". The trust agreement describes the amount

of this immediate distribution to Ms. Pryor as "the

remaining Trust property which remains after providing for

all previous distributions and for payment of all expenses

of administering such Trust in accordance with provisions

of paragraph 6.02 herein for bequests, debts, expenses, and

taxes of Grantor's estate".
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The trust agreement provides for the payment of

bequests, debts, expenses, and taxes of the decedent's

estate in the following provision:

Article VI

TRUSTEE'S POWERS

* * * * * * *
6.02 PAYMENT OF BEQUESTS, DEBTS, EXPENSES
AND TAXES OF GRANTOR'S ESTATE. Notwithstanding
the directions previously given as to the
disposition of the Trust after the Grantor's
death:

* * * * * * *

B. PAYMENT OF BEQUESTS, DEBTS, EXPENSES AND
TAXES CERTIFIED BY PERSONAL REPRESENTATIVE OF
GRANTOR'S ESTATE. The Successor Trustee shall
pay those amounts to Grantor's estate or to the
persons or authorities eligible to receive the
same which are certified by the personal
representative of Grantor's estate as being
required to pay (i) any bequest in Grantor's
Last Will, (ii) any of Grantor's debts, health
care expenses, funeral expenses and
administration expenses of Grantor's estate,
except that the Successor Trustee, in its
discretion, may decline to pay any of Grantor's
debts or expenses from life insurance proceeds
which are exempt from creditors' claims, and
(iii) any death taxes imposed by reason of
Grantor's death, including any inheritance,
estate, supplemental estate, generation-skipping,
transfer or succession taxes and any interest and
penalties payable in connection with such taxes.
Such amounts shall be paid first from the Trust
property which is subject to allocation under
Article V.
- 10 -

The trust was funded before decedent's death with real

property and stocks and bonds. On the date of death, the

assets owned by the trust were valued at $1,711,294.

On the date of the decedent's death, the decedent's

gross estate totaled $3,057,009 and consisted of the

following assets:

Asset Value

Real estate $148,500
Stocks and bonds 2,149,394
Mortgages, notes and cash 200,943
Ins. on the decedent's life 25,720
Jointly owned property 519,141
Other misc. property 13,311

Total 3,057,009

The decedent's nonprobate estate property, that is, the

property passing outside of the will, consisted of the

following:

Asset Value

Revocable living trust property $1,711,294
Jointly owned property 519,141
Ins. on the decedent's life 25,720

Total 2,256,155

The decedent's probate estate consisted of the following

property:
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Asset Value

5422.033 shares of Eli Lilly $356,160
3400 shares of Eli Lilly 223,338
Merrill Lynch CMA account 200,943
189.99 shares RJR 5,867
Rings & misc. household items 6,500
Intangibles tax refunds 6,811
22 shares Ameritech 1,225
Exdividend 10

Total 800,854

The decedent's estate filed a Form 706, United States

Estate (and Generation-Skipping transfer) Tax Return, on

February 3, 1997, approximately 1 month after the due date

of the return. It paid estate tax of $254,051, the net

estate tax reported on the return. Among other deductions,

the return claimed a charitable deduction for a gift or

bequest of $1,346,060 to the Millbrook United Methodist

Church.

On or about July 22, 1997, the estate filed an

amended Form 706 that reported net estate tax of $239,165.

The amended return reflected reductions in the fair market

value of the real estate and stocks and bonds reported

on the original return. It also reduced the charitable

deduction claimed. Set out below is a schedule that

compares the assets and deductions reported on the

original and amended estate tax returns:
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Original Amended
Recapitulation return return Difference

Real estate $199,400 $148,500 $50,900
Stocks and bonds 1,827,042 1,796,600 30,442
Mortgages, notes, and cash 200,943 200,943 -0-
Ins. on the decedent's life 25,720 25,720 -0-
Jointly owned property 519,141 519,141 -0-
Other misc. property 6,500 6,500 -0-
Transfers during the decedent's life -0- -0- -0-
Appointment -0- -0- -0-
Annuities -0- -0- -0-

Total gross estate 2,778,746 2,697,404 81,342

Funeral expenses $48,506 48,506 -0-
Debts of the decedent 5,899 5,899 -0-
Mortgages and liens -0- -0- -0-
Total 54,405 54,405 -0-
Allowable amount 54,405 54,405 -0-
Net losses during admin. -0- -0- -0-
Expenses incurred in
administering property -0- -0- -0-
Bequests, etc. to surviving spouse -0- -0- -0-
Charitable, public, and
similar gifts and bequests 1,346,060 1,305,390 40,670

Total allowable deductions 1,400,465 1,359,795 40,670

The manner in which the estate computed the charitable

deduction claimed on the original estate tax return and on

the amended return is as follows:

Original Amended
Computation of charitable deductions return return

Gross estate $2,778,746 $2,697,404
Less:
Funeral expenses 48,506 48,506
Debts per return 5,899 5,899
Ins. on the decedent's life 25,720 25,720
Bequest of rings to sister 6,000 6,000
Bequest of household goods to Ms. Pryor 500 500

86,625 86,625

Net assets available for distribution 2,692,121 2,610,779

Charitable deduction (1/2 of net assets available) 1,346,061 1,305,390
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In passing, we note that the net assets available for

distribution, as computed above, include jointly owned

property valued at $519,141 that was not available for

distribution as part of the charitable bequest.

Respondent issued a notice of deficiency to the

estate. The adjustments to the original estate tax return

that respondent determined in the notice are summarized in

the following schedule:

Original
Recapitulation return Notice Difference

Real estate $199,400 $148,500 ($50,900)
Stocks & bonds 1,827,042 2,149,394 322,352
Mortgages, notes & cash 200,943 200,943 -0-
Ins. on the decedent's life 25,720 25,720 -0-
Jointly owned property 519,141 519,141 -0-
Other misc. property 6,500 13,311 6,811
Transfers during the
decedent's life -0- -0- -0-
Appointment -0- -0- -0-
Annuities -0- -0- -0-

Total gross estate 2,778,746 3,057,009 278,263

Funeral expenses 48,506 87,506 39,000
Debts of the decedent 5,899 23,475 17,576
Mortgages & liens -0- -0- -0-

Total 54,405 110,981 56,576

Allowable amount 54,405 110,981 56,576
Net losses during admin. -0- -0- -0-
Expenses incurred in -0- -0- -0-
administering property
Bequests, etc. to -0- -0- -0-
surviving spouse
Charitable, public 1,346,060 800,752 (545,308)
& similar gifts
& bequests

Total allowable deductions 1,400,465 911,733 (488,732)
- 14 -

Respondent's adjustment to the charitable deduction claimed

on the decedent's original estate tax return is described

in the notice as follows:

It is determined that you are entitled to
a deduction of $800,752 as a charitable
contribution deduction rather than the
amount of $1,346,060 as shown on your return.
Accordingly the taxable estate has been
adjusted by $545,308, computed as shown below:

Item #1 Foundation $1,346,060 $800,752
Net Increase (Decrease) (545,308) ________

$ 800,752 $800,752

The manner in which respondent computed the charitable

deduction, $800,752, is set forth in the following

schedule:
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Recapitulation Gross estate Nonprobate Probate

Real estate $148,500 $148,500 -0-
Stocks & bonds 2,149,394 1,562,794 586,600
Mortgages, notes & cash 200,943 -0- 200,943
Ins. on the decedent's life 25,720 25,720 -0-
Jointly owned property 519,141 519,141 -0-
Other misc. property 13,311 -0- 13,311

Gross estate 3,057,009 2,256,155 800,854

Funeral expenses 48,506 -0- 48,506
Additional admin. expenses 39,000 -0- 39,000
Debts per return 5,899 -0- 5,899
Additional debts, unpaid 17,576 -0- 17,576
income taxes
Federal estate tax 548,763 -0- 548,763
State death taxes 244,401 -0- 244,401
Ins. on the decedent's life 25,720 -0- -0-
Bequest of rings to sister 6,000 -0- 6,000
Bequest of household goods 500 -0- 500
to executor
Total deductions 936,365 -0- 910,645

Net probate residue (109,791)

Trust assets 1,711,294

Net assets available for distribution 1,601,503

Charitable deduction (1/2 of net assets available) 800,752

It is apparent that the principal difference between

respondent's computation of the allowable charitable

deduction and the estate's computation is that respondent

computed the charitable deduction after Federal estate tax

(viz, $548,763), State death taxes (viz, $244,401), and

additional debts (viz, $17,576) were deducted from the

assets available for distribution, whereas the estate

computed the charitable deduction before these amounts

were deducted.
- 16 -

Discussion

Generally, in computing the estate tax imposed by

section 2001, section 2055(a) allows the amount of all

bequests, legacies, devises, or transfers to or for the use

of any corporation organized and operated exclusively for

religious or charitable purposes to be deducted from the

value of the decedent's gross estate. Respondent does not

question the fact that a bequest or gift to Millbrook

United Methodist Church is eligible to be deducted under

section 2055(a). Only the amount of the deduction is at

issue in this case.

If the tax imposed by section 2001 or any inheritance

tax is payable out of the charitable bequests, then section

2055(c) limits the amount of the deduction to the amount of

such bequests reduced by the amount of the taxes. Section

2055(c) provides as follows:

SEC. 2055(c) Death Taxes Payable Out of
Bequests.--If the tax imposed by section 2001,
or any estate, succession, legacy, or inheritance
taxes, are, either by the terms of the will, by
the law of the jurisdiction under which the
estate is administered, or by the law of the
jurisdiction imposing the particular tax, payable
in whole or in part out of the bequests,
legacies, or devises otherwise deductible under
this section, then the amount deductible under
this section shall be the amount of such
bequests, legacies, or devises reduced by the
amount of such taxes.
- 17 -

In effect, section 2055(c) provides that the

charitable deduction under section 2055(a) is based upon

the amount actually available for charitable uses; that

is, the amount of the funds remaining after the payment

of all death taxes. See sec. 20.2055-3(a)(1), Estate Tax

Regs. If section 2055(c) applies, an interrelated

calculation is required to determine the amount of the

allowable charitable deduction. See sec. 20.2055-3(a)(2),

Estate Tax Regs.

Generally, the manner in which death taxes are

apportioned to the assets that compose a decedent's gross

estate is governed by State law. See Riggs v. Del Drago,

317 U.S. 95, 97-98 (1942); Estate of Leach v. Commissioner,

82 T.C. 952, 963 (1984), affd. without published opinion

782 F.2d 179 (11th Cir. 1986); Estate of Fagan v.

Commissioner, T.C. Memo. 1999-46; Estate of McKay v.

Commissioner, T.C. Memo. 1994-362. In this case, the

decedent was a resident of North Carolina at the time of

his death, and we look to North Carolina law to determine

the manner in which death taxes are apportioned to the

decedent's estate and, specifically, to determine whether

death taxes are apportioned to the charitable bequest made

by the decedent. Estate of Fagan v. Commissioner, supra.
- 18 -

The North Carolina apportionment statute, chapter 28A,

article 27, of the General Statutes of North Carolina,

N.C. Gen. Stat. sec. 28A-27-2 (2001), provides as follows:

Section 28A-27-2. Apportionment.

(a) Except as otherwise provided in subsection
(b) of this section, or in G.S. 28A-27-5, * * *
the tax shall be apportioned among all persons
interested in the estate in the proportion that
the value of the interest of each person
interested in the estate bears to the total value
of the interests of all persons interested in the
estate. The values as finally determined for
federal estate tax purposes shall be used for the
purposes of this computation.

(b) In the event the decedent's will provides a
method of apportionment of the tax different
from the method provided in subsection (a) above,
the method described in the will shall control.
However, in the case of any will executed on or
after October 1, 1986, a general direction in the
will that taxes shall not be apportioned, whether
or not referring to this Article, but shall be
paid from the residuary portion of the estate
shall not, unless specifically stated otherwise,
apply to taxes imposed on assets which are
includible in the valuation of the decedent's
gross estate for federal estate tax purposes only
by reason of Sections 2041, 2042 or 2044 of the
Internal Revenue Code of 1954 or corresponding
provisions of any subsequent tax law. In the
case of an estate administered under any will
executed on or after October 1, 1986, in the
event that the estate tax computation involves
assets described in the preceding sentence,
unless specifically stated otherwise, apportion-
ment shall be made against such assets and the
tax so apportioned shall be recovered from the
persons receiving such assets as provided in
Sections 2206, 2207 or 2207A of the Internal
Revenue Code of 1954 or corresponding provisions
of any subsequent tax law. (1985 (Reg. Sess.,
1986), c. 878, s. 1; 1987, c. 694, s. 1.)
- 19 -

Furthermore, N.C. Gen. Stat. sec. 28A-27-5 (2001) provides

in part as follows:

Sec. 28A-27-5. Exemptions, deductions, and
credits.

(a) Any interest for which a deduction or
exemption is allowed under the federal revenue
laws in determining the value of the decedent's
net taxable estate, such as property passing to
or in trust for a surviving spouse and gifts or
bequests for charitable, public, or similar
purposes, shall not be included in the
computation provided for in G.S. 28A-27-2 to the
extent of the allowable deduction or exemption.

* * * * * * *

(d) To the extent that property passing to or in
trust for a surviving spouse or any charitable,
public, or similar gift or bequest does not
constitute an allowed deduction for purposes of
the tax solely by reason of an inheritance tax or
other death tax imposed upon and deductible from
the property, the property shall not be included
in the computation provided for in this Article,
and to that extent no apportionment shall be made
against the property. * * *

Thus, under the general rule set out in N.C. Gen.

Stat. sec. 28A-27-2(a), a decedent's Federal estate tax

is apportioned pro rata to all persons interested in

the decedent's estate on the basis of the value of each

person's interest in the estate. The statute further

provides that, if the interest is one for which a deduction

or exemption is allowed under the Federal estate tax in

determining the decedent's net taxable estate, such as a
- 20 -

gift or bequest for charitable purposes, then the interest

is not to be included in the apportionment computation.

N.C. Gen. Stat. sec. 28A-27-5(a). In that event, none

of the Federal estate tax is apportioned by the North

Carolina statute to the charitable bequest or other

deductible interest, and the entire amount of the bequest

can be deducted from the gross estate in computing the

taxable estate. See, e.g., Estate of Brunetti v.

Commissioner, T.C. Memo. 1988-517.

The North Carolina apportionment statute further

provides that if a decedent's will specifies a method of

apportionment of the estate tax that is different from the

method specified by N.C. Gen. Stat. sec. 28A-27-2(a), then

the method specified in the decedent's will controls. N.C.

Gen. Stat. sec. 28A-27-2(b).

There are several provisions of the Internal Revenue

Code in which Congress has given the decedent's estate the

right to recover from the person receiving the decedent's

property the portion of the estate tax burden attributable

to the property. See secs. 2206 (life insurance), 2207

(powers of appointment), 2207A (marital deduction

property), and 2207B (reserved life estate). Generally,

these Federal recovery provisions deal with property

that does not pass through the hands of a personal
- 21 -

representative in administering a decedent's estate.

See Riggs v. Del Drago, 317 U.S. at 102; Estate of

Fagan v. Commissioner, T.C. Memo. 1999-46. One of these

provisions, section 2207B(a), provides as follows:

SEC. 2207B. RIGHT OF RECOVERY WHERE DECEDENT
RETAINED INTEREST.

(a) Estate Tax.--

(1) In general.--If any part of the
gross estate on which tax has been paid
consists of the value of property included
in the gross estate by reason of section
2036 (relating to transfers with retained
life estate), the decedent's estate shall
be entitled to recover from the person
receiving the property the amount which
bears the same ratio to the total tax under
this chapter which has been paid as--

(A) the value of such property,
bears to

(B) the taxable estate.

(2) Decedent may otherwise direct.--
Paragraph (1) shall not apply with respect
to any property to the extent that the
decedent in his will (or a revocable trust)
specifically indicates an intent to waive
any right of recovery under this subchapter
with respect to such property.

The estate's position in this case is that the amount

of the charitable deduction, attributable to the decedent's

bequest of trust property to Millbrook United Methodist

Church, should be computed without apportionment of Federal
- 22 -

estate and State inheritance taxes. In support of that

position the estate makes three arguments.

The estate's first argument is that the decedent

intended all of the death taxes attributable to his death

to be paid from the trust and not from the residuary

probate estate. The estate bases this argument on the

parenthetical language in paragraph 1.02 of article I of

the decedent's will (viz, "other than death taxes which are

paid from property passing outside of this Will pursuant to

the terms of the governing instrument") and on the broad

definition of "death taxes" in paragraph 10.02 of article

X, quoted above. The estate further argues that the

trust agreement, which forms a part of the decedent's

interrelated estate plan, confirms the decedent's intent to

pay death taxes from the trust, and the trust controls the

apportionment of death taxes. According to the estate,

article V of the trust agreement, particularly paragraph

5.04 thereof, makes it clear that the decedent intended

death taxes to be paid from the trust residual assets,

after disposition of the general legacy for the charitable

beneficiary.

The estate's second argument is that the decedent did

not provide a method of apportionment of tax that differs

from the method prescribed under the North Carolina
- 23 -

apportionment statute, with the result that the statutory

exception, N.C. Gen. Stat. sec. 28A-27-5(a), under which

Federal estate tax is not apportioned to charitable

bequests, applies to the gift or bequest to Millbrook

United Methodist Church. Implicit in the estate's argument

is the assumption that the Court must find two things in

order to conclude that the decedent opted out of the North

Carolina apportionment statute: (a) That the decedent

intended all death taxes to be paid from the probate

residuary estate, and (b) that the decedent intended to

apportion death taxes to all beneficiaries, including

the charitable beneficiary. According to the estate, the

decedent's will directs that death taxes be paid from the

trust, not from the probate residuary estate, and the will

does not make specific reference to the "apportionment" of

death taxes.

Finally, the estate argues that the language used by

a decedent to opt out of the North Carolina apportionment

statute must be clear, unequivocal, and unambiguous; and,

if there is any ambiguity in the language, then the Court

must apply the North Carolina apportionment statute,

including the exception for charitable bequests. According

to the estate, the language of paragraph 1.02 of the

decedent's will and paragraph 6.02B of the trust agreement
- 24 -

create an ambiguity as to whether the death taxes are to be

paid out of the probate residuary or the trust residuary,

and as to whether decedent intended to apportion taxes.

Thus, the estate contends that the North Carolina

apportionment statute applies in this case.

Respondent contends that under the decedent's will

and trust, death taxes are payable from the decedent's

residuary probate estate without apportionment or, to the

extent that such assets are not sufficient, from trust

property before such property is allocated to the

charitable beneficiary. Accordingly, respondent contends

that the decedent's death taxes reduce the property

available for distribution to the charitable beneficiary

and, thus, reduce the amount of the estate's charitable

deduction.

According to respondent, paragraph 1.02 of the

decedent's will clearly opts out of the North Carolina

apportionment statute by providing that death taxes "shall

be paid out of * * * [the decedent's] Residuary Estate as

an administration expense and shall not be charged against

or recovered from any recipient or beneficiary of the

property taxed". Implicit in respondent's argument is the

assumption that if the decedent's will provides a method

of apportionment of the tax that differs from the method
- 25 -

specified by N.C. Gen. Stat. sec. 28A-27-2(a), then the

decedent automatically loses the benefit of N.C. Gen. Stat.

sec. 28A-27-5(a), the exception which provides that any

interest in a decedent's estate for which a deduction or

exemption is allowed, such as a charitable bequest, is not

taken into account in the apportionment computation. The

estate does not take issue with this assumption.

Contrary to the estate's argument, respondent explains

that the parenthetical language in paragraph 1.02 of the

decedent's will merely serves "to indicate that there is an

alternative source of payment of death taxes" and does not

mean that all death taxes are to be paid by the trust.

Respondent argues that the estate's reading of the will

disregards paragraph 1.03, which permits the payment of

death taxes out of the trust if the residuary estate is

insufficient and if the "Executor shall certify to the

Trustee * * * the amount of the insufficiency". Respondent

further argues that the estate's reading of the will

disregards paragraph 6.02B of the trust agreement, which

states that the successor trustee shall pay to the

decedent's estate amounts "which are certified by the

personal representative of Grantor's estate as being

required to pay * * * (iii) any death taxes imposed by

reason of Grantor's death".
- 26 -

Respondent points out that the total deductions from

the probate estate exceed the gross probate estate by

approximately $100,000. Notwithstanding this shortfall,

respondent argues that there is no "insufficiency" of

probate assets, within the meaning of paragraph 1.03 of

the will, because the executrix is obligated by section

2207B(a) to recover from the trust the estate tax,

penalties, and interest attributable to the inclusion in

the decedent's gross estate of the interest of the

noncharitable beneficiary of the trust. In this

connection, respondent notes that the assets of the

trust are includable in the decedent's gross estate under

section 2036, a prerequisite for section 2207B(a) to apply.

Respondent argues that, under the terms of paragraph 6.02B

of the trust agreement, any amount of estate tax recovered

from the trust under section 2207B(a) "must be paid before

the trust assets are allocated to the charitable foundation

as provided under Article V of the Trust."

The dispute between the parties in this case is

principally a dispute about the meaning of the will and

the trust agreement and, on the basis of those documents,

about the intent of the decedent. Under North Carolina

law, "'the intention of the testator is the polar star

which is to guide in the interpretation of all wills, and,
- 27 -

when ascertained, effect will be given to it unless it

violates some rule of law, or is contrary to public

policy.'" Pittman v. Thomas, 299 S.E.2d 207, 211 (N.C.

1983) (quoting Clark v. Connor, 117 S.E.2d 465, 468 (N.C.

1960)); see also In re Wilson's Will, 133 S.E. 2d 189, 191

(N.C. 1963). In determining a testator's intent, the will

is to be considered as a whole and in light of the

circumstances at the time the will was made. Pittman v.

Thomas, supra at 211. The testator's intent is to be

gathered from a consideration of the four corners of the

will. Harroff v. Harroff, 102 S.E.2d 224, 226 (N.C. 1958);

Coppedge v. Coppedge, 66 S.E.2d 777, 778 (N.C. 1951). In

addition, effect is to be given to every clause, phrase,

and word. Coppedge v. Coppedge, supra at 779; Williams

v. Best, 142 S.E. 2, 4 (N.C. 1928); Edens v. Williams, 7

N.C. 27, 29 (1819). Furthermore, we may consider documents

other than the will if they are incorporated therein by

reference. See Godwin v. Wachovia Bank & Trust Co., 131

S.E.2d 456, 461 (N.C. 1963).

We disagree with the estate's construction of both

the decedent's will and the trust agreement. In our view,

respondent is correct in asserting that the parenthetical

language set forth in paragraph 1.02 of the will, "(other

than death taxes which are paid from property passing
- 28 -

outside of this Will pursuant to the terms of the govern-

ing instrument)", simply recognizes that, in certain

circumstances, death taxes can be paid from the trust.

It does not express the decedent's intent that all death

taxes be paid from the trust.

We agree with respondent that under paragraph 1.02 of

the will, the death taxes attributable to the decedent's

death are to be paid from his residuary estate as an

administration expense, but, if the residuary assets are

not sufficient to pay all of the decedent's debts,

expenses, and death taxes, then paragraph 1.03 of the will

provides that the "Executor shall certify to the Trustee

* * * the amount of the insufficiency, which amount shall

be paid out of the property of the trust as provided in

that instrument." If the decedent had intended that all

death taxes be paid from the trust, as the estate contends,

then there would be no point in requiring the executor to

certify the amount of any "insufficiency" to the trustee of

the trust, as provided by paragraph 1.03 of the will.

We also agree with respondent that the decedent's will

provides that there is to be no apportionment of death

taxes. Paragraph 1.02 of the will states that the

decedent's death taxes "shall be paid out of my Residuary

Estate as an administration expense and shall not be
- 29 -

charged against or recovered from any recipient or

beneficiary of the property taxed". Thus, not only does

the will direct that the decedent's death taxes be paid

from his residuary estate, but it also directs that the

taxes be paid as an administration expense and that they be

borne by the residuary estate without charge or recovery

from any recipient or beneficiary. In our view, this is

equivalent to directing that death taxes not be prorated or

apportioned. See Estate of McKay v. Commissioner, T.C.

Memo. 1994-362, where the decedent directed that her death

taxes be paid out of the residuary of her estate "without

adjustment among the residuary beneficiaries, and shall not

be charged against or collected from any beneficiary of my

probate estate." See also Branch Banking & Trust Co. v.

Staples, 461 S.E.2d 921, 926 (N.C. Ct. App. 1995).

We reject the estate's contention that the decedent

must use the word "apportionment" in order to express the

concept that there is to be no apportionment of death

taxes. We also reject the estate's contention that the

phrase "of the property taxed" in paragraph 1.02 of the

will conveys the "decedent's intent to recover the taxes

only from those recipients or beneficiaries who receive

property subject to tax, i.e., non-charitable bene-

ficiaries." We disagree that this phrase, when read
- 30 -

in context, is a reference to the noncharitable

beneficiary, as opposed to any beneficiary. However, even

if it is read in that way, the sentence states that death

taxes "shall not be charged against or recovered from any

recipient or beneficiary of the property taxed". (Emphasis

supplied.)

Furthermore, we do not agree with the estate's

construction of the trust agreement under which it claims

that "all death taxes are to be apportioned to the non-

charitable residual beneficiary of the Trust." To the

contrary, as we read it the trust agreement, is fully

compatible with decedent's will in directing in paragraph

6.02B that death taxes be paid from trust property before

the property is allocated between the charitable and

noncharitable beneficiaries. The estate's reading of

the trust agreement fails to recognize that the trust

agreement makes a distinction between the manner in which

a distribution to the noncharitable beneficiary is to be

computed, paragraph 5.04 of the trust agreement, and the

manner in which death taxes are to be paid, paragraph 6.02B

of the trust agreement.

Article V of the trust agreement first provides for

the payment of the decedent's debts and expenses (paragraph

5.01) and for the distribution of two diamond rings that
- 31 -

were specifically bequeathed to the decedent's sister

(paragraph 5.02). It then directs the successor trustee,

in paragraph 5.03, to allocate one-half of the "remaining"

trust assets or property to a private charitable foundation

for the benefit of the charitable beneficiary. Paragraph

5.03 directs the charitable foundation to hold the church's

share for 5 years before distributing it in fee to the

church. Finally, paragraph 5.04 directs the successor

trustee make a distribution of property to the non-

charitable beneficiary "upon the death of the Grantor."

The trust agreement describes the share of the

noncharitable beneficiary which is to be distributed

upon the decedent's death as: "the remaining trust

property which remains after providing for all previous

distributions and for payment of all expenses of

administering such Trust in accordance with provisions

of paragraph 6.02 herein for bequests, debts, expenses,

and taxes of Grantor's estate". Thus, in computing the

one-half share to be distributed to the noncharitable

beneficiary 5 years before the charitable beneficiary

is to receive its share, paragraph 5.04 requires that the

decedent's bequests, debts, expenses, and death taxes be

taken into account. It appears that the trust agreement
- 32 -

thus safeguards against distributing too much to the

noncharitable beneficiary.

A different provision of the trust agreement,

paragraph 6.02B, governs the "payment of bequests, debts,

expenses and taxes". In this payment provision, the trust

agreement directs that the amounts of bequests, debts,

expenses, and death taxes which are certified for payment

by the decedent's personal representative "shall be paid

first from the Trust property which is subject to

allocation under Article V." Significantly, paragraph 6.02

states that it shall apply "notwithstanding the directions

previously given as to the disposition of the Trust after

the Grantor's death".

Thus, as we read paragraph 6.02B of the trust agree-

ment, any death taxes which are certified for payment by

the decedent's personal representative are to be paid

before the trust property is allocated to the two trust

beneficiaries and, thus, before the share of the charitable

beneficiary is determined. In effect, any death taxes

that are certified for payment by the decedent's personal

representative reduce the amount of property to be

distributed to the charitable beneficiary.

In summary, we agree with respondent that the

decedent's will, in substance, directs that the death taxes
- 33 -

attributable to his death are to be paid from the residuary

probate estate without apportionment and, to the extent

that the assets of the residuary estate are insufficient,

from the trust property. Thus, the decedent's will

provides a method of apportionment that is different from

the method prescribed by N.C. Gen. Stat. sec. 28A-27-2(a),

under which death taxes are to be apportioned "among all

persons interested in the estate". Accordingly, we agree

with respondent that the decedent opted out of the method

of apportionment found in chapter 28A, article 27 of the

General Statutes of North Carolina, including the exception

applicable to charitable bequests in N.C. Gen. Stat. sec.

28A-27-5(a). See Estate of Fagan v. Commissioner, T.C.

Memo. 1999-46; see also Estate of Fine v. Commissioner, 90

T.C. 1068 (1988), affd. without published opinion 885 F.2d

879 (11th Cir. 1989); Estate of Miller v. Commissioner,

T.C. Memo. 1998-416, affd. without published opinion 209

F.3d 720 (5th Cir. 2000); Estate of McKay v. Commissioner,

T.C. Memo. 1994-362.

The method of apportionment adopted by the decedent in

his will controls. See N.C. Gen. Stat. sec. 28A-27-2(b).

Under that method, the death taxes and other bequests,

debts, and expenses of the decedent that were paid by the

decedent's residuary estate exhausted the residuary estate.
- 34 -

As a result, no probate assets are available for

distribution to the trust, and no probate assets are

available for allocation to the charitable gift or bequest

to the Millbrook United Methodist Church.

In addition, as mentioned above, the total deductions

from the probate estate exceed the gross probate assets by

approximately $100,000. This shortfall in the assets of

the probate estate must be satisfied from the trust

property, either as an "insufficiency" pursuant to

paragraph 1.03 of the will, and paragraph 6.02B of the

trust agreement, or as a recovery from the trust under

section 2207B(a), on the ground that the value of property

is included in the gross estate by reason of section 2036.

If the shortfall is treated as an insufficiency under

paragraph 1.03 of decedent's will, then the trust agreement

governs whether death taxes will burden that amount. On

the other hand, if the executrix can recover the shortfall

from the trust under section 2207B(a), then the right to

such recovery would be another asset of the residuary

estate, and no resort to the trust agreement would be

necessary.

It is unnecessary for us to decide, in this case,

which of the two applies because the result would be the

same whichever applies. As discussed above, the trust
- 35 -

agreement provides in paragraph 6.02B that any death taxes

that are certified for payment by the decedent's personal

representative "shall be paid first from the Trust

property which is subject to allocation under Article V";

that is, before the share of the charitable beneficiary is

determined. Therefore, any death taxes certified under

paragraph 1.03 of the will for payment from the trust

property are paid under paragraph 6.02B of the trust

agreement before the trust property is allocated between

the trust beneficiaries and, like the death taxes paid

from the decedent's residuary probate estate, reduce the

property allocated to the charitable beneficiary and,

thus, reduce the amount of the charitable deduction.

Based upon the foregoing,

Decision will be entered

under Rule 155.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4334027. Public record. Not legal advice.