Record and brief — White v. United States
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No. 88-928-CFX Title: James M. White, etc., Petitioner
Status: GRANTED Vv.
United States, et al.
Docketed: Court: United States Court of Appeals
December 3, 1988 for the Second Circuit
Counsel for petitioner: Payment,Kenneth A.
Counsel for respondent: Solicitor General
Entry Date Note Proceedings and Orders
1 Dec 3 1988 G Petition for writ of certiorari filed.
2 Dec 3 1988 Appendix of petitioner James White, etc. filed.
4 Jan 3 1989 Brief amici curiae of New York State Bar Association, et al.
filed.
6 Jan 3 1989 Order extending time to file response to petition until
February 4, 1989.
7 Feb 11989 #£=Brief of respondents United States, et al. in opposition
filed.
8 Feb 8 1989 DISTRIBUTED. February 24, 1989
9 Feb 27 1989 Petition GRANTED.
SAEAAAAAAAEAAAAAAAAAAAAAAAAAAAAAAAAAAAAARAAAAAAARARAARAEREE
11 Mar 17 1989 Order extending time to file brief of petitioner on the
merits until April 27, 1989.
12 Mar 17 1989 Joint appendix filed.
13. Apr 26 1989 Brief amici curiae of New York State Bar Association, et al.
filed.
14 Apr 26 1989 Brief of petitioner James White, etc. filed.
16 May 26 1989 Order extending time to file brief of respondent on the
merits until June 20, 1989.
17 Jun 20 1989 Brief of respondent United States filed.
18 Jul 12 1989 CIRCULATED.
19 Jul 20 1989 SET FOR ARGUMENT TUESDAY, OCTOBER 3, 1989. (2ND CASE)
20 Jul 20 1989 X Revly brief of petitioner James White, etc. filed.
21 Sep 22 1989 Record filed.
* Certified copy of original record and proceedings
received.
22 Oct 3 1989 ARGUED.
PETITION
FOR WRIT OF
CERTIORARI
In The
Supreme Court of the United States
October Term, 1988
JAMES M. WHITE, as attorney for and as the Executor of the
Estate of Helen P. Smith, Deceased,
Petitioner,
vs.
UNITED STATES OF AMERICA and JAMES M. SERLING,
Estate Tax Attorney, Internal Revenue Service,
Respondents.
PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
Kenneth A. Payment, Esq.
Counsel of Record
A. Paul Britton, Esq.
HARTER, SECREST & EMERY
Attorneys for Petitioner
700 Midtown Tower
Rochester, New York 14604
Telephone: (716) 232-6500
JAMES M. WHITE, Esq.
624 Executive Office Building
Rochester, New York 14614
Telephone: (716) 454-2060
CRIS BOR I NS A SE RE ES Rt NE
mm benny tr ay (15133)
’
\
QUESTION PRESENTED FOR REVIEW
May the factual determination of a state court of original juris-
diction, awarding attorneys’ fees in an estate matter in accord-
ance with well-settled decisions of the state’s highest court, be
collaterally attacked by the Internal Revenue Service in federal
audit proceedings?
ii
TABLE OF CONTENTS
QUESTION PRESENTED FOR REVIEW...........
TABLE OF AUTHORITIES ..............--000005:
rr eee
FE EEES occccccccccccccescocscsscoesesees
CONSTITUTIONAL PROVISIONS. STATUTES,
AND REGULATIONS ...... 2.2... 2c eee nceeeees
STATEMENT OF THE CASE
Decisions of the District Court and Court of Appeals
REASONS FOR GRANTING THE PETITION
A. The Decision of the Court Below Conflic:s With
Decisions in Other Circuits Regarding the Conclu-
siveness of a Probate Court Decree Under I.R.C.
B. The Decision of the Court Below Misconstrues
This Court’s Decision in Commissioner v. Estate of
C. The Ruling of the Court Below Makes the Require-
ment of “Relevance” a Dead Letter ............
D. Countervailing Considerations of Federalism
1. Federal authorities are not in a position to
effectively apply the Freeman criteria ........
13
16
19
iii
2. The appi cach of the lower court portends delay
in settling estates, uncertainty on the part of
taxpayers, and a demeaning of the legitimate
role of state probate courts...... P laa ieee 21
3. The approach of the lower court will engender
unnecessary new federal court litigation. ..... 24
Dee Ub ae Lk cece seecses 26
TABLE OF AUTHORITIES
Cases Page
Aaron, Estate of, 30 N.Y.2d 718, 332 N.Y.S.2d 717
I Ree ae eee eeu abi Saeed sccccccs 16
Bank of Nevada v. United States, 80-2 U.S. Tax Cas.
(CCH) ¢ 13,361, p. 85,817 (D. Nev. 1980).......... 11
Byers v. McAuley, 149 U.S. 608 (1893)............... 22
Commissioner v. Estate of Bosch, 387 U.S. 456, 18 L. Ed.
EEE EEE SE OO TT 8, 13, 15, 23
Dulles v. Johnson, 273 F.2d 362 (2d Cir. 1959), cert.
denied, 364 U.S. 834, 5 L. Ed. 2d 60 (1960)......... 11
Erie R. R. v. Tompkins, 304 U.S. 64, 82 L. Ed. 1188
A eae oon kind wikigeneacese ces 14
First National Bank of Nevada v. United States, 77-2 U.S.
Tax Cas. (CCH) 4 13,207, p. 88,636 (D. Nev. 1977)... 10
Freeman, Estate of, 34 N.Y.2d 1, 355 N.Y.S.2d 336
EE MEE AREAS wih boeéeedcstsevccece passim
Giardina v. Fontana, 733 F.2d 1047 (2d Cir. 1984) ..... 22
Jenner, Estate of v. Commissioner, 577 F.2d 1100 (7th
ec Ee eke ks be cee decbescesecccecs 10
iv
Marcus v. DeWitt, 704 F.2d 1227 (11th Cir. 1983)...... 11
New York Trust Co. v. Eisner, 256 U.S. 345, 65 L. Ed. 963
ccd avs chcoaeeaareasabitisetessitedes aes 22
Noll, In re, 273 N.Y. 219, 125: hon da dhe deg we 16
Park, Estate of v. Commissioner, 475 F.2d 673 (6th Cir.
DE ah stadceadnesbhaceeddbbustes kbeeneestetes 11
Pitner v. United States, 388 F.2d 651 (Sth Cir. 1967). ... 11
Pott’s Estate, Matter of, 213 A.D. 59, 209 N.Y.S. 655
(4th Dep’t 1925), aff'd, 241 N.Y. 593 (1925) ........ 18
Shalman v. Levinson, 68 A.D.2d 940, 414 N.Y.S.2d 70
SE ng ca cckcckntsdeesaneuebere teedess 20
Smith, Estate of v. Commissioner, 510 F.2d 479 (2d Cir.
1975), cert. denied, 423 U.S. 827, 46 ~. Ed. 2d 44
Wilhelm, Matter of, 88 A.D.2d 6, 452 N.Y.S.2d 957 (4th
FE FEED we ce cccculivcccenvcccedsucdsastoswes 18, 19
Younger v. Harris, 401 U.S. 37, 27 L. Ed. 2d 669 (1971) 22
Statutes
IED cbc cccsisveccgccnccscdvcouseuse 2
Internal Revenue Code § 2053(a)..............20005- 2, 9, 16
Internal Revenue Code § 7602(a)...............0005- 2, 19
Constitution of the State of New York art. 6, § 12(d) .. 3, 6
New York Surrogate’s Court Procedure Act § 201 (3) .. 3
In The
Supreme Court of the United States
October Term, 1988
JAMES M. WHITE, as attorney for and as the Executor of the
Estate of Helen P. Smith, Deceased,
Petitioner,
vs.
UNITED STATES OF AMERICA and JAMES M. SERLING,
Estate Tax Attorney, Internal Revenue Service,
Respondents.
:
PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
OPINIONS BELOW
The opinion of the Court of Appeals (reproduced at Appendix
A-1) (hereinafter “A.”) is reported at 853 F.2d 107 (2d Cir. 1988).
The opinion of the District Court (A. 26) is ee at 650 F.
Supp. 904 (W.D.N. Y. 1987).
JURISDICTION
The judgment of the Court of Appeals was dated and entered
on August 2, 1988. (A. 1) An order denying Petitioner White’s
Petition for Rehearing in banc was dated and entered on October
—— »
6, 1988. (A. 45) Jurisdiction to review the judgment of the Court
of Appeals is conferred on this Court by 28 U.S.C. § 1254(1).
CONSTITUTIONAL PROVISIONS,
STATUTES, AND REGULATIONS
The following constitutional provisions, statutes, and regula-
tions are involved in this petition:
1. Internal Revenue Code § 2053(a):
§ 2053. Expenses, indebtedness, and taxes
(a) General rule.—For purposes of the tax imposed by
section 2001, the value of the taxable estate shall be deter-
mined by deducting from the value of the gross estate such
amounts—
(1) for funeral expenses
(2) for administration expenses,
(3) for claims against the estate, and
(4) for unpaid mortgages... ,
as are allowable by the laws of the jurisdiction, whether
within or without the United States, under which the estate
is being administered.
2. Internal Revenue Code § 7602(a)
§ 7602. Examination of books and witnesses
(a) Authority to summon, etc.—For the purpose of
ascertaining the correctness of any return, making a return
where none has been made, determining the liability of any
person for any internal revenue tax or the liability at law or
in equity of any transferee or fiduciary of any person in
respect of any internal revenue tax, or collecting any such
liability, the Secretary or his delegate is authorized—
(1) To examine any books, papers, or other data which
may be relevant or material to such inquiry;
(2) To summon the person liable for tax or required to
perform the act, or any officer or employee of such person,
or any person having possession, custody, or care of books
of account containing entries relating to the business of the
person liable for tax or required to perform the act, or any
other person the Secretary or his delegate may deem proper,
to appear before the Secretary or his delegate at a time and
place named in the summons and to produce such books,
papers, records, or other data, and to give such testimony,
—— oath, as may be relevant or material to such inquiry;
an
(3) To take such testimony of the person concerned,
under oath, as may be relevant or material to such inquiry.
3. Constitution of the State of New York art. 6, § 12(d):
§ 12.
’
d. The surrogate’s court shall have jurisdiction over all
actions and proceedings relating to the affairs of decedents,
probate of wills, administration of estates and actions and
proceedings arising thereunder or pertaining thereto,
guardianship of the property of minors, and such other
actions and proceedings, not within the exclusive jurisdic-
tion of the supreme court, as may be provided by law.
4. New York Surrogate’s Court Procedure Act § 201(3):
§ 201. General jurisdiction of the surrogate’s court
3. The court shall continue to exercise full and complete
general jurisdiction in law and in equity to administer jus-
tice in all matters relating to the affairs of decedents, and
upon the return of any process to try and determine all ques-
tions, legal or equitable, arising between any or all of the
parties to any action or proceeding, or between any party
and any other person having any claim or interest therein,
over whom jurisdiction has been obtained as to any and all
matters necessary to be determined in order to make a full,
equitable and complete disposition of the matter by such
order or decree as justice requires.
STATEMENT OF THE CASE
Introduction
This case presents to this Court for the first time an issue that
now divides the Circuit Courts of Appeal. To be resolved is the
degree of deference owed by federal tax authorities to determina-
tions by state courts in matters within their particular province.
A state probate court has made an award of attorneys’ fees for
services rendered on behalf of an executor. The legal standards
governing this award have long been settled by the state’s highest
court. The probate court had only to exercise its discretion under
these standards based on the facts presented to it. Reasonable
attorneys’ fees for an executor, as administrative expenses
“allowable” by the law of the State, are deductible under section
2053(a) of the Internal Revenue Code.
Notwithstanding the probate court decree, the Internal Reve-
nue Service seeks in this case to make a collateral attack on the fee
amount awarded in the discretion of the probate court and to
relitigate the issue in federal court. The Second Circuit Court of
Appeals has now sanctioned the avalanche of new federal litiga-
tion portended by the Service’s position. The Sixth and Seventh
Circuit Courts of Appeals have previously reached contrary rul-
ings.
How the case arose
The case arose because a Rochester, New York lawyer, peti-
tioner James M. White, believed that Internal Revenue Service
auditors had no legitimate reason to subpoena his file and time
records for an estate he had represented. The district court
agreed with attorney White, but the Second Circuit Court of
Appeals reversed and ordered that the IRS summonses be
enforced.
The late Helen P. Smith, who lived in Monroe County, State of
New York, died in November, 1982, leaving an estate of approxi-
mately $450,000. Petitioner White, an experienced general prac-
titioner, was retained as both executor and attorney for the
Estate.
Within a month after Mrs. Smith’s death, attorne, White
obtained a decree of probate from ihe Monroe County Surro-
gate. The decree was based on a petition he had filed to probate
her Will and First Codicil, affidavits of attesting witnesses, and
waivers and consents from four out-of-state distributees. White
then collected the assets of the Estate, which included numerous
securities and cash accounts. Among other tasks, he paid various
cash legacies and distributed moneys to a dozen residuary lega-
tees. He caused the Estate to make a timely alternate valuation
election and prepared and filed federal and state estate tax
returns.
On July 17, 1984, after preparing and submitting a detailed
accounting, White obtained a decree of judicial settlement from
Monroe County Surrogate Arnold F. Ciaccio. The decree
included an express direction that attorney White be paid the
statutory fee as executor of the Estate and that he receive the sum
of $16,800 for legal services renrered * ict the benefit of the
Estate.” Each of the twelve residuary legatecs had received a copy
of the accounting, which had specifically requested the fee, and
each legatee had consented in writing to payment of the requested
fee.
The Surrogate Court in New York State, like its sister probate
courts in many other state systems, is a specialized court whose
principal role is to oversee the administration of local estates.
N.Y. Constitution art. 6, § 12(d); N.Y. Sur. Ct. Proc. Act
§ 201(3). More than any other lawyer or judicial officer, the local
Surrogate knows the role of local lawyers in estate practice. From
his experience and from reviewing the documents filed in Surro-
gate Court, a Surrogate Judge can assess the responsibility
assumed by an attorney for an estate of this size and complexity,
the steps needed to be taken, and the time they require. He can
also see whether the attorney carried out those responsibilities
promptly and effectively. Finally, because he must approve attor-
neys’ fees for every Monroe County estate where judicial settle-
ment is sought, a Surrogate Judge is familiar with local
community practice regarding attorneys’ fees for services ren-
dered in estate matters.
The tax return for the Smith estate listed deductions for the
executor’s fee and the attorney’s fee as approved by the Monroe
County Surrogate. The documents on file with the Surrogate
Court verified that the fees had actually been awarded and paid
to attorney White.
Several months later, the Internal Revenue Service undertook
an audit of the Smith estate tax return. In the course of the audit,
the Service wrote to White demanding documentation of the
basis for the executor’s and attorney’s fees taken as deductions.
The Service wanted to review the reasonableness of the fee
amount approved by the Surrogate, and to do so it demanded his
time records of work on the estate. In the alternative, the Service
demanded a list of acts performed for the Smith estate, time
spent on each task, and hourly rates.
It was apparent to White that, notwithstanding the Surrogate’s
decree, the Service intended to decide for itself what his services
as a lawyer for the Estate were worth, based primarily on his
timesheets, and to limit the estate tax deduction accordingly. As
he saw it, however, his time records and hourly rates did not bear
on the reasonableness of his fee under New York law; in any case,
the only issue that could possibly concern the Service was
whether his fee had been approved under New York law by the
Monroe County Surrogate.
White supported his posi*ion by obtaining a February 25, 1985
letter from the Surrogate Court that addressed the question of
the attorney’s fee in the Smith estate (A. 53). The Surrogate’s let-
ter stated:
This is to advise that the fee set is in keeping with our
ordinary and customary guidelines which have been fol-
lowed in this Court for several years. Moreover, it conforms
to the criteria established by the Court of Appeals in Matter
of Freeman, 34 N.Y.2d 1 and in Matter of Potts, 241 N.Y.
593. . . . Inconclusion, I state to you that a re-review of the
file and account submitted justify in every respect both the
commission and the fee approval. These are not done in an
arbitrary fashion but rather as indicated following the
application of various criteria.
The Service was unpersuaded. White was served with two IRS
summonses demanding the previously requested records. (A. 46,
50) White appeared in person and later by a representative, but
respectfully declined to comply. The Service eventually disal-
lowed the attorney’s fee deduction in the Smith estate in its
entirety and assessed a deficiency.
Decisions of the District Court and Court of Appeals
In the meantime, the Service commenced a proceeding in
United States District Court to enforce its summonses. The mat-
ter came before Hon. Michael A. Telesca, U.S.D.J. (who had
served as Monroe County Surrogate Judge himself for many
years until he was appointed to the federal bench).
The district judge issued a considered Decision and Order in
which he declined to enforce the summonses. He ruled that the
Service’s objective of making an independent determination of
the reasonableness of the executor’s fee and the attorney’s fee
awarded to White was not a proper purpose. He held that the IRS
was bound to accept the determination of a state probate court
which had applied state law as pronounced by the state’s highest
court. In the district court’s view, the Service’s position that it
could collaterally review a Surrogate Court determination vio-
lated principles of federalism. 650 F. Supp. 904 (W.D.N.Y. 1987)
(A. 26).
The Second Circuit Court of Appeals reversed and directed
that the summonses be enforced. In the court’s view, the Service
had made a prima facie case for enforcement merely by alleging
in aconclusory affidavit that the purpose of its investigation was
to determine the tax liability of the Smith Estate, that it needed
the subpoenaed books and records for that purpose, and that it
did not already have them.
The court rejected the argument that enforcement was never-
theless improper because there was no valid purpose for these
particular summonses. The court held that the decree of the Sur-
rogate alone did not establish the deductibility of the Estate’s
attorney’s fee under section 2053(a) of the Internal Revenue
Code. Furthermore, the court interpreted Commissioner v.
Estate of Bosch, 387 U.S. 456, 18 L. Ed. 2d 886 (1967), to entitle
the Service to make “an independent assessment” of the validity
of the attorney’s fee under state law, since the Surrogate’s decree
came from a mere trial-level court, not from New York’s highest
court.
Finally, the Court of Appeals found no danger that collateral
review by the Service of the fee amount approved by the Surro-
gate would cast disrespect on the considered judgment of a state
court. 853 F.2d 107 (2d Cir. 1988) (A. 1).
REASONS FOR GRANTING THE PETITION
A. The Decision of the Court Below Conflicts With Decisions in
Other Circuits Regarding the Conclusiveness of a Probate
Court Decree Under I.R.C. Section 2053(a).
The key issue in this case is whether the Service was bound
under section 2053(a) of the Internal Revenue Code to accept the
State court’s determination as to the amount of a reasonable
attorney’s fee, or whether the Service was free to determine a rea-
sonable fee independently. The decision of the Second Circuit
Court of Appeals conflicts with prior Sixth and Seventh Circuit
decisions of the Sixth Circuit and district court decisions in the
Ninth Circuit.
Section 2053(a) entitles an estate to deduct amounts for admin-
istrative expenses “as are allowable by the laws of the jurisdiction
. . . under which the estate is being administered.” The Service’s
— and now the Second Circuit’s — position agrees with the
approach of the Sixth and Seventh Circuits and petitioner in
holding that deductibility depends on the application of state law.
These courts differ sharply, however, on the issue of who is to
apply state law. The Sixth and Seventh Circuits hold that an
expense is “allowable by the laws of the jurisdiction” if @ court in
that jurisdiction has so ruled, applying state law. But the Second
Circuit has now held that the statute merely requires the Service
to apply state rules of law in determining allowability for itself.
According to the Second Circuit’s decision in the instant case, the
statute is indifferent to rulings of a state trial-level court as to par-
ticular expenses for particular estates. 853 F.2d at 113.
10
Thus, in Estate of Park v. Commissioner, 475 F.2d 673 (6th
Cir. 1973), the Sixth Circuit Court of Appeals interpreted section
2053(a) to mean that if a particular expense has been allowed
under state probate proceedings as a charge against an estate, it is
necessarily deductible under section 2053(a). “Congress has
committed to the considered judgment of the states whether a
particular expense is allowable as a proper or necessary charge
against estate assets.” Jd. at 676.
The Seventh Circuit Court of Appeals has agreed with this
construction of the statute. In Estate of Jenner v. Commissioner,
577 F.2d 1100 (7th Cir. 1978), the court followed Park in holding
that if an expense has been found by a state probate court to be
allowable, the full amount is “allowable” for purposes of the
statute authorizing a deduction for administration expenses. “As
a general rule the decree of a probate court approving expendi-
tures as proper administrative expenses under state law will con-
trol.” Jd. at 1106. Both Park and Jenner rejected the notion that
the deductibility of particular expenses depends on whether the
Internal Revenue Service independently concludes that they are
allowable under state law — the position the Service has
advanced in the present case.
Several years later, the District Court for Nevada took a posi-
tion similar to that of the Sixth and Seventh Circuits in a case that
specifically involved the deductibility of attorneys’ fees. In First
National Bank of Nevada v. United States, 77-2 U.S. Tax Cas.
(CCH) 4 13,207, p. 88,636 (D. Nev. 1977), a taxpayer sued for a
refund of estate taxes, complaining that the Service had disal-
lowed all but $60,000 of a $200,000 attorney's fee award made by
a Nevada probate court. The issue, as stated by the district court,
was whether the United States was entitled to litigate the reason-
ableness of a fee fixed by the state court in an estate proceeding.
The district court, on the taxpayer’s motion for summary judg-
ment, held that it was not:
Once a proper state court has allowed an attorney’s fee, and
such fee is paid, the Internal Revenue Service is without
authority to disallow, as nondeductible under Section 2053
of the Internal Revenue Code of 1954, such fee or any part
thereof, absent allegations of fraud or collusion, or the like
supporting a conclusion that a fraud on the revenue had
been perpetrated.
Id. at 88, 640-41. There was no appeal.
Several years later, the Service took essentially the same posi-
tion on another Nevada estate, with the same result in favor of
the taxpayer. In Bank of Nevada v. United States, 80-2 U.S. Tax
Cas. (CCH) { 13,361, p. 85,817 (D. Nev. 1980), the Service disal-
lowed $450,000 of a deduction for a $839,000 attorney’s fee
allowed by the probate court with respect to an $18 million estate.
The federal district court granted the taxpayer’s motion for sum-
mary judgment in a refund suit, noting that there were “no unu-
sua! circumstances to take the case out of the general rule that a
probate court’s decree is ordinarily to be accepted.”
In the present case, the Service concedes that attorneys’ fees
are, in general, allowable items of administrative expense.' The
Service also concedes that New York law, as represented by the
ruling of New York’s highest court in Estate of Freeman, 34
N.Y.2d 1, 355 N.Y.S.2d 336 (1974), governs the factors that
affect the amount of an attorney’s fee that may be charged
against an estate as “allowable”. However, the Service has little
' This rule is well established. See, e.g., Dulles v. Johnson, 273 F.2d 362 (2d Cir.
1959), cert. denied, 364 U.S. 834, 5 L. Ed. 2d 60 (1960). The present case thus
does not involve the distinct, more difficult issue of whether an expense
deductible unaer state law may nevertheless not be the type that is an “admin-
istration expense” within the meaning of the statute. Compare Marcus v.
DeWitt, 704 F.2d 1227 (11th Cir. 1983); Estate of Smith v. Commissioner, $10
F.2d 479 (2d Cir. 1975), cert. denied, 423 U.S. 827, 46 L. Bd. 2d 44 (1975); and
Pitner v. United States, 388 F.2d 651 (Sth Cir. 1967), with Estate of Park v.
Commissioner, 475 F.2d 673 (6th Cir. 1973) (discussed above at page 10).
12
interest in the result already reached by the Monroe County Sur-
rogate Court, which has applied New York law to the very fee
whose deductibility is in question.
Instead, the Service claims the liberty to apply the Freeman cri-
teria itself to determine what was a reasonable fee for represent-
ing Mrs. Smith’s estate. Then, presumably, the Service will allow
a deduction for its amount for estate tax purposes.
The Second Circuit has now adopted the Service’s position:
[T]he IRS is entitled to make an independent assessment of
the validity of White’s fees under applicable state law as
determined by the state’s highest court. . . . In this case,
although the IRS is bound by the factors established in Free-
man, it is not bound by the Surrogate’s application of those
factors.
853 F.2d at 114(A. 16).
This Court, it is respectfully submitted, should resolve the con-
flict in interpretation of section 2053(a) between the Sixth and
Seventh Circuits, on one hand, and the Internal Revenue Service
and the Second Circuit, on the other. The Service’s position that a
fee amount that has actually been allowed by a local probate
court is not necessarily “allowable by the laws of the jurisdic-
tion” turns the word “allowable” on its head.
Moreover, Congress can hardly have contemplated a duplica-
tive process that requires the Service to perform, de novo, the
same task of applying state law to a particular fee application
that a probate court has already performed. Surely Congress
intended, as it considered the interaction of federal tax law with
state administration of decedents’ estates, to permit taxpayers to
rely on the deductibility of amounts approved by probate courts.
13
B. The Decision of the Court Below Misconstrues This Court’s
Decision in Commissioner v. Estate of Bosch.
In Commissioner v. Estate of Bosch, 387 U.S. 456, 18 L. Ed. 2d
886 (1967), this Court established the choice-of-law principle that
where a state’s highest court has not passed on an issue of Jaw
that is at issue in a federal proceeding, the government is not
bound by rulings a lower court may have made on that issue. /d.
at 465, 18 L. Ed. 2d at 893-94.
Bosch dealt with issues of law. But the Second Circuit Court of
Appeals has now improperly construed Bosch to mean that fed-
eral authorities are also free to disregard a lower state court adju-
dication of matters of discretion and fact — even where the rule
of law is not at issue — unless that determination is appealed to
and affirmed by the state’s highest court.
The Bosch decision resolved two appeals that dealt with sepa-
rate legal issues that were unsettled under state law: whether a
document purporting to release a general power of appointment
was valid under New York law, and whether federal estate taxes
should be prorated under Connecticut law notwithstanding a tes-
tamentary directive to the contrary. Local probate courts had
been called upon to resolve both points of law without the benefit
of controlling precedent from the appellate courts of New York
and Connecticut. Neither decision was appealed. Jd. at 457-61,
18 L. Ed. 2d at 889-92.
These lower court state rulings affected federal estate tax lia-
bility, and the issue on audit was whether they should be given
conclusive effect for tax purposes. This Court agreed with the
Service that the decisions of the trial-level courts were not con-
trolling. Jd. at 464-65, 18 L. Ed. 2d at 893-94. The Second Circuit
has, however, now construed Bosch to mean that no adjudication
of rights and obligations from a trial-level state court need be
14
~
honored by the Service unless that very decision has been
appealed to and affirmed by the state’s highest court. (A. 15)
The limited holding in Bosch, however, was simply that where
a rule of law has not been settled by a state’s highest court, the
IRS is not necessarily bound to follow a lower court’s view of the
rule of law, but should attempt, like a lower state court, to ascer-
tain what the law of the state actually is. In Bosch, of course, the
issue was whether trial-level state-court rulings in cases involving
the very taxpayers in question must be followed. The issue arose,
however, because the trial-level ruling was on an unsettled issue
of state law.
Thus, this Court in Bosch was concerned only with a choice-
of-law question. It resolved it by analogy to the Erie doctrine,
which governs choice-of-law questions in diversity cases: “‘state
law as announced by the highest court of the State is to be fol-
lowed.” 387 U.S. at 475, 18 L. Ed. 2d at 893-94 (see Erie R. R. v.
Tompkins, 304 U.S. 64, 82 L. Ed. 1188 (1938)). As a corollary of
the Erie doctrine, this Court observed, “the decision of a state
trial court as to an underlying issue of state Jaw should a fortiori
not be controlling.” 387 U.S. at 465, 18 L. Ed. 2d at 893 (empha-
sis supplied).
In other words, where the rule of law is in doubt, the goal of
federal authorities should be to ascertain, by reference to lower
court authorities or other persuasive data, what the highest court
in the state would decide the rule of law to be. Jd. As this Court
held:
This is not a diversity case but the same principle may be
applied for the same reasons, viz., the underlying substan-
tive rule involved is based on state law and the State’s high-
est court is the best authority on its own law. Jf there be no
decision by that court then federal authorities must apply
what they find to be the state law after giving “proper
regard” to relevant rulings of other courts of the State. In
j
‘
;
}
15
this respect, it may be said to be, in effect, sitting as a state.
court.
Id. at 465, 18 L. Ed. 2d at 894 (emphasis supplied).
Unlike Bosch, the present case does not involve an unsettled
issue of state law. Bosch is not on point because the “underlying
substantive rule” governing an award of attorneys’ fees in the
Helen P. Smith estate is not in doubt. The substantive rule is
unambiguously set forth in Estate of Freeman, 34 N.Y.2d 1, 355
N.Y.S.2d 336 (1974). Neither the Monroe County Surrogate nor
the Internal Revenue Service needs to divine what the state’s
highest court might consider as factors controlling an attorney’s
fee award.
The Second Circuit characterized the Surrogate’s ruling as
“one court’s interpretation of applicable state Jaw.” 853 F.2d 107
at 114 (emphasis supplied). But the Monroe County Surrogate
did not interpret or resolve any issue of New York law. He merely
applied it, exercising his discretion on the basis of a factual
record with which he was uniquely familiar, under standards
unambiguously set forth by New York’s highest court. This was a
markedly different case from Bosch since, under Freeman, fee
award determinations are “findings of fact.” 34 N. Y.2d at 10, 355
N.Y.S.2d at 342.
Under the Second Circuit’s ruling, the amount of the Surro-
gate’s fee award to attorney White would be binding on the Inter-
nal Revenue Service only if someone had objected to it and
appealed to the Appellate Division of the Supreme Court, and
then only if the fee was also approved on further appeal to the
New York Court of Appeals. Under New York law, however, such
a scenario is fanciful, because the Surrogate’s exercise of discre-
tion on fee awards is not reviewable in the New York Court of
Appeals. That court has stated that “we do not review” awards
of attorneys’ fees because they are “matters resting in discre-
16
tion.” In re Noll, 273 N.Y. 219, 225-26 (1937). Accord, Estate of
Aaron, 30 N.Y.2d 718, 332 N.Y.S.2d 891 (1972).
If the Service were correct that no Surrogate Court fee award is
binding unless and until it has been specifically approved by the
New York Court of Appeals, therefore, the perverse result would
be that no Surrogate Court award would ever be binding on the
Service. It has been 14 years since an issue as to the amount of any
particular estate attorney’s fee was last litigated all the way to the
New York Court of Appeals. That was the Freeman case itself
(Estate of Freeman, 34 N.Y.2d 1, 355 N.Y.S.2d 336 (1974)), and
the issue was one of /aw, not whether the Surrogate’s decree was
proper as a matter of fact and discretion. Indeed, the Court of
Appeals, citing Noll, pointedly noted that it was “powerless” to
overturn an independent determination by the Surrogate. 34
N.Y.2d at 10, 355 N.Y.S.2d at 341-42.
The court below failed to distinguish between issues of law,
which are controlled by Bosch, and issues of fact and discretion,
which are not. This Court should grant this Petition for a Writ of
Certiorari in order to rectify the Second Circuit’s misconstruc-
tion of the decision in Bosch.
C. The Ruling of the Court Below Makes the Requirement of
“Relevance” a Dead Letter.
Under United States v. Powell, 379 U.S. 48, 13 L. Ed. 2d 112
(1964), the first factor for judicial enforcement of a summons is a
showing that the investigation will be conducted for a legitimate
purpose. Jd. at 57, 13 L. Ed. 2d at 119. Because, as already dis-
cussed, the Service has no business attempting to revisit and re-
determine a fee amount that has been fixed by the New York
Surrogate Court, the fundamental purpose of its purported
investigation is illegitimate.
17
In any case, however, Powell also requires that the Service’s
inquiry be “relevant” to its purpose. Jd. In the present case the
Service’s position has been hopelessly inconsistent. On the sur-
face, the Service assures the courts that it wants nothing more
than to apply the Freeman criteria independently in order to
value attorney White’s services to Mrs. Smith’s estate. But this
Court need look no further than the Service’s summonses (A. 46,
50) to see that the real focus of the Service’s inquiry is White’s
recorded time and his customary hourly rates. The Service
plainly wants to ascertain whether White’s fee is justified on an
hourly rate basis.
Hours expended and hourly rates are irrelevant under New
York law. In Estate of Freeman, 34 N.Y.2d 1, 355 N.Y.S.2d 336
(1974), an attorney’s fee of $13,250 was ultimately approved as a
charge against an estate whose principal amounted to $314,959.”
In the exercise of the Surrogate’s discretion, the New York Court
of Appeals stated, the factors relevant to a fee award include
— time and labor required,
— difficulty of the questions presented and the skill
required to handle the problems presented,
— the lawyer’s experience, ability, and reputation,
— the amount involved,
— the benefit to the client from the services,
— community custom and practice regarding estate attor-
neys’ fees,
— the contingency or certainty of compensation,
— results obtained, and
. By comparison, the Surrogate in the present case approved an attorney's fee
of $16,800 for services rendered to an estate of approximately $450,000.
18
— responsibility involved.
34 N.Y.2d at 6, 9-10, 355 N.Y.S.2d at 337-38, 340-41. The court
singled out “amount involved” and also emphasized the legiti-
macy of “customary fees” as a proper factor. Jd. at 9-10, 355
N.Y.S.2d at 341.3
Under Freeman, what is relevant is “time and effort required,”
not, as the Service seems to think, “time and effort actually
expended.” Under New York law:
The value of an attorney’s services cannot be limited to
“specified and detailed bills of particulars with a specified
amount for each item, as in the case of goods sold, or mere
manual services rendered.”
The standards by which the value of such services is mea-
sured is, however, the fair and reasonable value of the ser-
vices rendered after considering the various elements
referred to. I do not think items as to time actually
employed in work on the case are of much importance. It is
the ability of the attorney and his capacity and success in
handling large and important matters and in commanding
large fees therefor, the amount involved, and the result
obtained, which are of prime importance in determining
what constitutes a just and reasonable charge.
Matter of Pott’s Estate, 213 A.D. 59, 62, 209 N.Y.S. 655, 657-58
(4th Dep’t), aff'd, 241 N.Y. 593 (1925) (emphasis supplied). The
more recent Freeman decision relies on Pott’s Estate and does
not permit the conclusion that time actually expended, or cus-
tomary hourly rates, are factors that a New York Surrogate is
obligated to consider in allowing an estate attorney’s fee.
> The Freeman guidelines accord with long-standing New York case law, see
Matter of Pott’s Estate, 213 A.D. 59, 209 N.Y.S. 655 (4th Dep't), aff'd, 241
N.Y. 593 (1925), and they are regularly utilized and cited in estate administra-
tion matters, e.g., Matter of Wilhelm, 88 A.D.2d 6, 12, 452 N.Y.S.2d 957, 961
(4th Dep’t 1982).
19
Indeed, in Freeman the Court of Appeals rejected arguments
that a Surrogate, in fixing an attorney’s fee, should rely primarily
on evidence as to services performed. See 34 N.Y.2d at 2 (official
reporter’s summary of arguments of counsel). The factors enu-
merated by the Court were — except for “size of the estate” —
intangible matters that cannot be injected into a formula or
quantified. The court clearly intended, instead, to invest local
Surrogates with a large meesure of discretion. 34 N.Y.2d at 9-10,
355 N.Y.S.2d at 341. “There is no hard and fast rule for deter-
mining reasonable compensation. . . ”” Matter of Wilhelm, 88
A.D.2d 6, 12, 452 N. Y.S.2d 957, 961 (4th Dep’t 1982).
The Second Circuit has correctly noted that “relevance” under
Powell is not the same as “relevance” under rules of evidence.
853 F.2d at 116. Under Powell, records may be obtained by the
prt enact seo Remy eth ttn gn
United States v. Powell, 379 U.S. 48, 57, 13 L. Ed. 2d 112, :
pg ene ont a agi
below demonstrates that the Circuit is unwilling to take a
hard look at summonses that materials that are not even
potentially relevant to a determination of tax liability. The Ser-
vice’s emphasis on “time spent” and “hourly rates” shows that it
has no genuine intention of applying Freeman at all. Those items
are simply not “relevant”, or even potentially relevant, to an
“allowable” fee under New York law.
D. Countervailing Considerations of Federalism Require Defer-
ence to State Court Determinations in Matters of Estate
Administration.
The court below was critical (813 F.2d at 117) of the district
court for its sensitivity to considerations of comity and federal-
ism in construing section 2053(a). The court seems not to have
considered, however, either the unique ability of a local probate
court to knowledgeably evaluate the relevant circumstances
20
under state law, the impossible burden its ruling will place on tax-
payers and ultimately on the federal courts, or its ruling’s poten-
tial for engendering new litigation.
1. Federal authorities are not in a position to effectively apply
the Freeman criteria.
No matter whether a Surrogate Judge or the Service deter-
mines the fair value of legal services to an estate, the criteria set
forth in Estate of Freeman, 34 N.Y.2d 1, 355 N.Y.S.2d 336
(1974), must nevertheless be applied. Local probate judges are
able to apply those criteria out of a first-hand store of experi-
ences. Federal authorities cannot.
For example, under Freeman a reasonable attorney’s fee
depends in part on the difficulty of the questions involved in the
estate and the skill required to handle them. /d. at 9, 355
N.Y.S.2d at 341. A probate court judge knows the problems of
individual estates because he has overseen and, in many cases,
helped to resolve them. But a government tax attorney or a fed-
eral court is unlikely to appreciate the ease or complexity of estate
achieve the perspective of a probate judge.
Similarly, under Freeman the experience, ability, and reputa-
tion of the attorney handling the estate, together with the cus-
tomary fees charged by the Bar for similar services, must be
considered. Jd.; see Shalman v. Levinson, 68 A.D.2d 940, 414
N.Y.S.2d 70 (3d Dep’t 1979). Local probate judges know the
local estate bar; they can draw on personal knowledg: in consid-
ering these factors. Federal tax auditors and federal judges, on
the other hand, are typically unfamiliar with the ability and
standing of local estate lawyers and customary fees in the com-
munity. They will be unable to assess these factors without expert
assistance.
21
Again, under Freeman a Surrogate Judge is required to con-
sider how much an estate has benefited from the services of its
lawyer. 34 N. Y.2d at 9, 355 N.Y.S.2d at 341. But federal authori-
ties would have to review virtually the entire administration of an
estate — including aspects in which they have no expertise — to
determine how a lawyer's work benefited his client. Local pro-
bate judges, on the other hand, know first-hand the benefits par-
ticular services confer.
Thus, the discretion vested in the New York Surrogate Court to
set attorneys’ fees presupposes a judge’s personal knowledge of
estate administration generally, of the problems of particular
estates, of the estate bar and its practices, and of individual estate
attorneys. The Internal Revenue Service lacks first-hand know}-
edge of estate administration. It is ill-situated to apply the Free-
man criteria and prone, as its practices in western New York
demonstrate, to substitute its own notions of how fees ought to
be set. The absence of any likelihood whatsoever that the Inter-
nal Revenue Service could apply local standards such as the Free-
man criteria even half as well as a local probate court was surely a
principal reason why the authors of I.R.C. Section 2053(a) chose
to make “allowability” under state law the test for estate tax
deductibility.
2. The approach of the lower court portends delay in settling
estates, uncertainty on the part of taxpayers, and a demean-
ing of the legitimate role of state probate courts.
Estate taxpayers will find themselves in an unenviable position
under the Second Circuit's and Service’s approach. In preparing
an estate tax return, an executor is bound to take a deduction for
the attorney’s fee approved by the probate court. But that figure
will almost certainly be revised by the Service if it audits the
return under the standards approved by the Second Circuit. Only
by coincidence will the Surrogate’s view of a reasonable attor-
22
ney’s fee, based on his application of the Freeman criteria, be the
same as the Service’s independent assessment.
Freeman sets forth pn» mathematical formula for attorneys’
fees that will allow the Surrogate to calculate, the executor to
double-check, or the Service to merely verify the amount.
Instead, Freeman requires the exercise of discretion — an inher-
ently subjective determination — and it would be a rare case in
which two authorities exercise discretion with precisely the same
result.
Consequently, estate tax liability will be revised on a routine
basis, not in order to correct errors that an executor might with
due diligence avoid, but to reflect de novo determinations by the
Service that an executor cannot conceivably predict. No matter
what he reports on the return, the executor can never know the
actual tax liability of his estate unless and until the return is
audited and the Service has made its own assessment of a reason-
able fee.
The product will be delay and uncertainty in estate administra-
tion and virtual obliteration of the role of local probate courts.
The fee award of a New York Surrogate will be of litile more than
academic interest; the amount ultimately approved by the Service
will be the one that matters.
Congress could not have intended this. As District Judge
Telesca pointed out in his decision (650 F. Supp. at 909) (A. 38-
41), the courts have long recognized the special province of states
in matters of decedents’ estates administration. New York Trust
Co. v. Eisner, 256 U.S. 345, 65 L. Ed. 963 (1921); Byers v.
McAuley, 149 U.S. 608 (1893); see Giardina v. Fontana, 733 F.2d
1047 (2d Cir. 1984). Concern for a “proper respect for state func-
tions” under our federal system, see Younger v. Harris, 401 U.S.
37, 44, 27 L. Ed. 2d 669, 675 (1971), is never more appropriate
23
than in cases involving the administration of decedents’ estates.
As Justice Black commented in Younger, federalism represents
a system in which there is to the inter-
cnaltah anasto aia
the National Government, anxious though it may be to vin-
dicate and protect federal rights and federal interests,
always endeavors to do so in ways that will not unduly inter-
fere with the legitimate activities of the States.
Id. at 44, 27 L. Ed. 2d at 676. Given the strong interest and com-
petence of the states in matters pertaining to decedents’ estates,
District Judge Telesca properly invoked Justice Harlan’s views in
dissent in the Bosch case:
[T]he federal interest requires only that the Commissioner
Commissioner v. Estate of Bosch, 387 U.S. 456, 480-81, 18 L. Ed.
2d 886, 902 (1967) (Harlan, J., dissenting).
White’s position in this case does not threaten, as the Second
Circuit may have feared, to undermine the summons enforce-
ment powers of the Internal Revenue Service, which can still
exercise its broad powers to investigate the possibility that state
decrees have been obtained by collusion, fraud, or the like. The
objectionable aspect of the Second Circuit’s ruling is not its reaf-
firmation of the Service’s subpoena powers, but its assertion that
the Service can use the materials it subpoenas to review fee
amounts de novo. Collateral review of this sort exceeds the Con-
gressional warrant.
24
Section 2053(a)’s reference to allowability under state law is an
explicit recognition of the overriding interest of the states in
estate administration. It should not be construed, as the court
below has done, to undermine that interest.
3. The approach of the lower court will engender unnecessary
new federal court litigation.
The approach sanctioned by the court below will spawn a new
species of litigation over estate attorneys’ fees. Until now, as the
New York cases cited above at pages 15-16 demonstrate, a Surro-
gate Court’s award of attorneys’ fees has been subject to reversal
in the Supreme Court, Appellate Division only on the basis of
abuse of discretion; it may not be reviewed at all in the Court of
Appeals. In this manner New York law effectively discourages
extensive litigation concerning attorneys’ fees. But if the decision
of the Second Circuit is allowed to stand, estate attorneys’ fee
amounts will routinely be litigated — but in federal, not state
court.
In its machinations over the Smith estate, the Internal Revenue
Service has given a glimpse of the future. In the present matter,
petitioner White paid the deficiency assessed against the Smith
estate when the Service arbitrarily disallowed the entire attor-
neys’ fee awarded by the Surrogate. He was then required to sue
for a refund in a collateral proceeding in the Western District of
New York. After the Second Circuit rendered its decision in this
case, the Service filed a demand for a jury trial in the refund
action!
{
What will be tried before this jury — and in the other refund
actions that other executors are sure to institute now that the Sec-
ond Circuit has given its blessing to collateral review of fee
awards by federal tax authorities? Will Mr. White be compelled
to justify his fee by introducing expert testimony from estate
25
practitioners as to the work required, the complexity of the mat-
ter, and the benefit to the estate? Will he need to call to the wit-
ness stand other members of the Monroe County bar to attest to
his experience, ability, and reputation? Will he be required to
produce Surrogate Judge Ciaccio to testify as to community cus-
tom and practice regarding fees? Will the Service then be permit-
ted to cross-examine che Surrogate as to whether he fully
mae the Freeman criteria before authorizing Mr.
White's
It is respectfully submitted that Congress could not have con-
templated the possibility of federal court trials — whether by
judge or by jury — over the reasonableness of attorneys’ fees in
estate matters. Surely Congress intended, instead, to preclude
such litigation by authorizing an unqualified deduction for such
administrative expenses as are “allowable” under state law.
CONCLUSION
No federal interest is served by permitting the Internal Reve-
nue Service or the federal courts to redetermine the reasonable-
ness of an attorney’s fee that has already been considered and
approved by a state probate court. Congress authorized the
Smith Estate to deduct administrative expenses that were “allow-
able” under the laws of the State of New York, and the Monroe
County Surrogate Court did allow Mr. White's fee. No proper
purpose was served, therefore, by Internal Revenue summonses
seeking records that would aid the Service in redetermining the
reasonable value of Mr. White’s services.
The circuit courts are divided on this issue, which implicates
the construction of this Court’s Bosch decision and threatens to
undermine settled principles of federalism. It is respectfully
urged, therefore, that the Court grant the petition and set the
case for argument.
December 2, 1988
Respectfully submitted,
Kenneth A. Payment, Esq.
Counsel of Record
A. Paul Britton, Esq.
HARTER, SECREST & EMERY
Attorneys for Petitioner
700 Midtown Tower
Rochester, New York 14604
(716) 232-6500
JAMES M. WHITE, Esq.
624 Executive Office Building
Rochester, New York 14614
(716) 454-2060
Se ee ee eee
APPENDIX
In The °
Supreme Court of the United States
October Term, 1988
JAMES M. WHITE, as attorney for and as the Executor of the
Estate of Helen P. Smith, Deceased,
Petitioner,
vs.
UNITED STATES OF AMERICA and JAMES M. SERLING,
Estate Tax Attorney, Internal Revenue Service,
Respondents.
APPENDIX
Kenneth A. Payment, Esq.
Counsel of Record
A. Paul Britton, Esq.
HARTER, SECREST & EMERY
Attorneys for Petitioner
700 Midtown Tower
Rochester, New York 14604
Telephone: (716) 232-6500
JAMES M. WHITE, Esq.
624 Executive Office Building
Rochester, New York 14614
Telephone: (716) 454-2060
Rochester New York (15123)
——_— rv - —— _ — —_ = eS ~~ SS -Crtcic ele C—O
Decision of United States Court of Appeals for the Sec-
ond Circuit, decided August 2, 1988 (reported at 853
PE cde LbddenSédet ve dbdctebdsdccoorscoces
Decision of United States District Court for Western Dis-
trict of New York, Hon. Michael A. Telesca, U.S.D.J.,
dated January 7, 1987 (reported at 650 F.Supp. 904).
Order of United States Court of Appeals for the Second
Circuit, filed October 6, 1988, denying Petition for
Internal Revenue Service Summons, dated November 10,
1982, directed to James M. White, Executor and
Internal Revenue Service Summons, dated November 10,
1982, directed to James M. White, Executor........
Letter from Monroe County Surrogate Arnold F. Ciaccio
to James M. White, Esq., dated February 25, 1985. .
A-l
A-26
A-5S0
A-S3
:
A-1!
853 FEDERAL REPORTER, 2d SERIES
U.S. v. WHITE
Cite as 853 F.2d 107 (2nd Cir. 1988)
[107-118]
UNITED STATES of America, and James M. Serling, Estate Tax
Attorney, Internal Revenue Service, Petitioners-Appellants,
Vv.
James M. WHITE, as attorney for and as executor of the Estate
of Helen P. Smith, deceased, Respondent-Appellee.
No. 83, Docket 87-6046.
United States Court of Appeals,
Second Circuit.
Argued Sept. 3, 1987.
Decided Aug. 2, 1988.
Federal government petitioned for enforcement of two IRS
summonses requiring executor to substantiate deductions he
claimed on federal estate tax return. The United States District
Court for the Western District of New York, Michael A. Telesca,
J., 650 F.Supp. 904, denied petition, and Government appealed.
The Court of Appeals, Pierce, Circuit Judge, held that: (1) Gov-
ernment established prima facie case for enforcement of IRS
summonses; (2) IRS could investigate expenses claimed as deduc-
tion on federal estate tax return and obtain enforcement of sum-
mons, although expenses previously had been approved under
state law by state trial court; (3) executor’s own books and
records were relevant to Internal Revenue Service’s investigation;
and (4) federalism and comity did not constitute substantial
countervailing policy that would justify imposing requirement
A-2
upon IRS to make advance showing of fraud, overreaching, or
excessiveness by executor or state trial court before allowing
enforcement of summonses.
Reversed and remanded.
1. Internal Revenue 4513
Government established prima facie case for enforcement of
IRS summonses to compel executor of estate to substantiate
deductions he claimed on estate tax return; IRS agent submitted
affidavit which averred that purpose of investigation was to
determine correct tax liability, that summoned books and records
were necessary, that books and records were not already in pos-
session of IRS, and that administrative steps required by Code
had been followed. 26 U.S.C.A. §7602.
2. Internal Revenue 4512
Once government has established prima facie case for enforce-
ment of IRS summonses, burden shifts to taxpayer to disprove
existence of valid tax determination purpose for IRS inquiry.
3. Internal Revenue 3016
Internal Revenue Service could investigate expenses claimed as
deduction on federal estate tax return, and obtain enforcement
of summonses issued to carry out investigation, although
expenses had previously been approved under state law by state
trial court; state trial court decrees are not determinative of fed-
eral deductibility of expenses to exclusion of any federal inquiry,
and IRS may make independent assessment of deductibility of
expenses under state law and assess acceptability of court decree
for federal tax purposes. 26 U.S.C.A. § 2053(a)(2).
LL ————
4. Internal Revenue 4496
Executor’s own books and records were relevant in proceeding
to enforce summons issued to carry out Internal Revenue Ser-
vice’s investigation of expenses claimed as deduction on federal
estate tax return, despite executor’s contention that only records
of state trial court, which previously approved expenses, were
relevant; IRS need establish no more than potential relevance of
taxpayer’s books and records in summons enforcement proceed-
ing.
- 5. Internal Revenue 4490
In appropriate circumstances, broad latitude given IRS in use
of its summons power may be restricted in light of substantial
countervailing policies.
6. Internal Revenue 4508
Federalism and comity did not constitute substantial counter-
vailing policies that would justify imposing requirement upon
Internal Revenue Service to make advance showing of fraud,
overreaching, or excessiveness by executor of estate or state trial
court before allowing enforcement of summons issued to carry
out investigation of expenses claimed as deduction on federal
estate tax return, although expenses had previously been
approved under state law by state trial court.
Joan I. Oppenheimer, Atty., Tax Div., U.S. Dept. of Justice,
Washington, D.C. (Roger P. Williams, U.S. Atty., W.D.N.Y.,
Buffalo, N.Y., Roger M. Olsen, Asst. Atty. Gen., U.S. Dept. of
Justice, Washington, D.C., Michael L. Paup, Charles E.
Brookhart, Attys., Tax Div., U.S. Dept. of Justice, Washington,
D.C., of Counsel), for petitioners-appellants.
James M. White, Rochester, N.Y. (Kenneth A. Payment, A.
Paul Britton, Harter, Secrest & Emery, Rochester, N.Y., of coun-
sel), for respondent-appellee.
Charles E. Heming, New York City, Maryann S. Freedman,
Buffalo, N.Y. (Arthur M. Sherwood, Buffalo, N.Y., Jonathan
G. Blattmachr, Sanford J. Schlesinger, New York City, Jules J.
Haskel, Garden City, N.Y., John W. Tarbox, Rochester, N.Y., of
counsel), for the New York State Bar Ass’n.
Robert M. Kaufman, New York City (George DeSipio, Albert
Kalter, New York City, of counsel), for the Ass’n of the Bar of the
City of New York, submitted briefs as amici curiae.
Edward D. Bloom, Esq., Harris, Beach, Wilcox, Rubin &
Levey, Michael F. Buckley, Harter, Secrest & Emery, John L. Gar-
rett, Nixon, Hargrave, Devans & Doyle, Rochester, N.Y., for the
Monroe County Bar Ass’n submitted a brief as amicus curiae.
Before FEINBERG, Chief Judge, and PIERCE and ALTI-
MARI, Circuit Judges.
PIERCE, Circuit Judge:
The United States of America and James M. Serling, an estate
tax attorney in the Internal Revenue Service (“IRS” or the “gov-
ernment”), appeal from a judgment of the United States District
Court for the Western District of New York, Michael A. Telesca,
Judge, which denied appellants’ petition for an order enforcing
two IRS summonses issued to the respondent, James M. White,
an attorney. United States v. White, 650 F.Supp. 904 (W.D.N.Y.
1987). The district court found that the IRS had failed to show
that the summonses were issued pursuant to a legitimate tax pur-
pose, as is required for summons enforcement under United
States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112
(1964). According to the court, the IRS was foreclosed from
ae ee.
A-5
investigating the deductibility of White’s attorney’s fees, as
claimed on a federal estate tax return, because of a prior New
York State Surrogate’s Court decree that had approved White’s
attorney’s fees under New York law. The district court held that,
because (1) “the Surrogate ... passed on the facts upon which
deductibility depends,” 650 F.Supp. at 909; and (2) the IRS did
not make a prima facie showing that the Surrogate’s decision was
motivated by impermissible factors “such as fraud, overreach-
ing, Or excessiveness by the attorney or the Surrogate,” the IRS
was therefore bound by the Surrogate’s decision. /d. at 911.
We believe that the district court erred in concluding that the
Surrogate’s decree precludes the IRS from investigating the
deductibility of White’s attorney’s fees. Because the objective of
the investigation was to obtain information that may be used in
determining whether there is federal tax liability, the IRS had a
legitimate purpose for issuing its summonses under Powell.
Moreover, we find the district court’s summons enforcement
requirement that the IRS must make a prima facie showing of
“fraud, overreaching, or excessiveness by the attorney or the Sur-
rogate” to be inconsistent with Powell’s holding that only a
showing of a legitimate purpose, and not a showing of probable
cause, is required for summons enforcement of its summonses
and we therefore reverse.
BACKGROUND
The facts of this case are set forth in full in the district court’s
opinion, reported at 650 F.Supp. 904. We refer herein only to
those facts necessary to address the issues presented on appeal. In
July 1984, the Surrogate’s Court of Monroe County, New York,
granted a decree of judicial settlement of the Estate of Helen P.
Smith. Under New York law, see N.Y.Surr.Ct. Proc.Act § 2307
(McKinney 1967 & Supp. 1988), this decree had the effect, inter
alia, of approving attorney’s fees of $16,800 and an executor’s
A-6
commission of $17,548.13. James M. White, the respondent-
appellee, was both the executor and the attorney for the estate.
He filed a federal estate tax return which claimed deductions of
$16,530 foi his attorney’s fees and $17,450 as the executor’s com-
In August 1984, petitioner-appellant James M. Serling, a tax
attorney for the IRS, met with White to review the estate tax
return. White informed Serling that the Surrogate had signed a
judicial decree of settlement for the estate. In January 1985, Serl-
ing wrote to White requesting his time records or other documen-
tation of legal work undertaken for the estate, stating that White
was required to provide justification for his attorney’s fees not-
withstanding the Surrogate’s decree. In February 1985, White
responded by forwarding a letter he had obtained from the Sur-
rogate which stated that White’s attorney’s fees were valid under
New York law.
Pursuant to the IRS’s summons authority under § 7602 of the
Internal Revenue Code of 1954 (“I.R.C.” or the “Code”), 26
U.S.C. § 7602 (1982), Serling then sent two summonses to White,
one in May 1985 and one in February 1986. The May 1985 sum-
mons sought all records and documents relating to the adminis-
tration of the estate, including records of White’s activities as
attorney and as executor. The February 1986 summons sought all
records relating to White’s performance of his duties as executor
of the estate. White refused to comply with the summonses, rely-
ing on the Surrogate’s prior approval of his attorney’s fees under
New York law. Based on this refusal, the IRS issued a deficiency
note to White on behalf of the estate in July 1986 which disal-
lowed the claimed attorney’s fees and reduced the executor’s
commission from $17,450 to $16,804. Apparently, White does
not contest the reduction in the executor’s commission. White
paid the deficiency in the amount of $5,754.19 and filed a notice
ee
A-7
of claim for a refund; that claim in not presently before this
Court.
Appellants commenced this summons enforcement proceed-
ing in August 1986. In January 1986, the district court, in a thor-
ough opinion, denied the petition for enforcement of the two
summonses principally on the ground that the IRS did not show
that the investigation would be conducted for a legitimate pur-
pose as required by Powell. The Code permits a deduction to be
taken for estate administrative expenses allowable under state
law, see 1.R.C. § 2053(a)(2), and an associated regulation ordi-
narily makes state court decrees related to the allowability of
such expenses binding on the IRS if the court “passed upon the
facts upon which deductibility depends,” see Treas.Reg.
§ 20.2053-1(b)(2). The district court concluded that “the IRS
cannot second-guess the Surrogate” when the Surrogate has
found such expenses to be valid under state law unless the IRS
makes “a prima ‘*cie showing that the Surrogate’s decision was
motivated by factors other than those on which deductibility
depends, such as fraud, overreaching, or excessiveness by the
attorney or the Surrogate.” 650 F.Supp. at 911. Without such a
standard to support enforcement of these summonses, the dis-
trict court stated, IRS investigations of amounts approved by
state courts “ ‘would be destructive ... of the proper relationship
between State and Federal law.’ ” Jd. at 909 (quoting Commis-
sioner v. Estate of Bosch, 387 U.S. 456, 480, 87 S.Ct. 1776, 1790,
18 L.Ed.2d 886 (1967) (Harlan, J., dissenting)). Finding that the
IRS failed to meet this standard, the district court held that “the
decision of the Surrogate should be accepted [by the IRS].” /d.
Concluding therefore that the IRS had no legitimate pur= use in
investigating the deductibility of fees previously approved by the
Surrogate, the district court denied the government’s petition for
summons enforcement and the government appealed.
The issue presented to us is whethcr the IRS may investigate
expenses claimed as a deduction on a federal estate tax return,
and obtain enforcement of summonses issued to carry out such
an investigation, where the subject expenses previously had been
approved under state law by a state trial court. The government
argues that the district court erred in denying its petition for sum-
mons enforcement because the summonses were validly issued
under the authority of § 7602 of the Internal Revenue Code of
1954 and because the IRS had met its burden of showing that they
were issued for a legitimate investigative purpose, in accordance
with the requirements of United States v. Powell, 379U.S. 48, 85
S.Ct. 248, 13 L.Ed.2d 112 (1964), for judicial enforcement of
summonses.
The IRS is authorized to issue summonses, inter alia, “to
examine any books, papers, records, or other data which may be
relevant or material” to an inquiry “[fjor the purpose of ascer-
taining the correctness of any return.” 1.R.C. § 7602. In enacting
§ 7602 of the Code, Congress endowed the IRS with “expansive
information-gathering authority” in order to encourage effec-
tive tax investigations. United States v. Arthur Young & Co., 465
U.S. 805, 816, 104 S.Ct. 1495, 1502, 79 L.Ed.2d 826 (1984).
enforce the tax Code,” United States v. Euge, 444 U.S. 707, 711,
100 S.Ct. 874, 878, 63 L.Ed.2d 141 (1980), the Supreme Court
has consistently held that restrictions on the IRS’s summons
power should be avoided “absent ambiguous directions from
Conyress.” United States v. Bisceglia, 420 U.S. 141, 150, 95 S.Ct.
915, 921, 43 L.Ed.2d 88 (1975); see also Euge, 444 U.S. at 711,
100 S.Ct. at 878 (the summons authority “should be upheld
A-9
absent express statutory prohibition or substantial countervail-
ing policies”).
In Powell, the Supreme Court set forth the standards to be met
by the IRS in order to obtain judicial enforcement of a summons.
In that case, the IRS had issued a summons for the records of a
taxpayer whose returns had been previously examined and where
the federal three-year statute of limitations barred assessment of
additional deficiencies except in cases of fraud. 379 U.S. at 49, 85
S.Ct. at 250-51. The taxpayer refused to obey the summons,
claiming that the IRS must first show probable cause to suspect
fraud. Jd. The Court rejected this contention and held that, in
order to obtain summons enforcement, the IRS need only show
that: (1) the investigation will be conducted pursuant to a legiti-
mate purpose; (2) the inquiry may be relevant to that purpose; (3)
the information sought is not already within the Commissioner’s
possession; and (4) the administrative steps required by the Code
have been followed. Jd. at 57-58, 85 S.Ct. at 255. Any other
standard, the Court stated, “might seriously hamper the Com-
missioner in carrying out investigations he thinks warranted.” /d.
at 54, 85 S.Ct. at 253.
According to Powell, the government establishes a prima facie
case for summons enforcement by demonstrating compliance
with these standards; the burden then shifts to the taxpxyer to
challenge these showings “on any appropriate ground,” includ-
ing a showing that the summons had been issued for an improper
purpose, such as to harass the taxpayer, to put pressure on him to
settle a collateral dispute, or “for any other purpose reflecting on
the good faith of the particular investigation.” Jd. at 58, 85 S.Ct.
at 255; see also United States v. LaSalle Nat’! Bank , 437 U.S. 298,
316, 98 S.Ct. 2357, 2367, 57 L.Ed.2d 221 (1978); United States v.
Antonio J. Sancetta, M.D., P-C., 788 F.2d 67, 71 (2d Cir. 1986). If
the taxpayer sustains this burden of demonstrating a failure by
the government to meet the four Powell criteria, then the court
aetna iin a ial
A-10
*
should deny enforcement of the summons, since any Otuer result
would constitute an abuse of the court's process. Powell, 379
U.S. at 58, 85 S.Ct. at 255. If the taxpayer fails to meet his bur-
den, then enforcement should be granted. /d.
Subsequent cases have held that the government's burden of
proof of its compliance with the Powell standards is minimal, see
United States v. Davey, 543 F.2d 996, 1000 (2d Cir. 1976); United
States v. Balanced Financial Management, Inc., 769 F.2d 1440,
1443 (10th Cir. 1985), and that the government may even establish
its prima facie case by the affidavit of an agent involved in the
investigation averring each Powell element. See Alphin v. United
States, 809 F.2d 236, 238 (4th Cir.), cert denied, U.S. ;
107 S.Ct. 1578, 94 L.Ed.2d 768 (1987); United States v. Kis, 658
F.2d 526, 536 (7th Cir.1981), cert. denied, 455 U.S. 1018, 102
S.Ct. 1712, 72 L.Bd.2d 135 (1982). In contrast, the taxpayer’s
burden of proof to establish that enforcement would be
improper is significantly greater than the burden on the govern-
ment to show a legitimate purpose. Kis, 658 F.2d at 535. In the
words of the Supreme Court, the taxpayer’s burden is a “heavy”
one, which he must meet by “disprov{ing] the actual existence of
a valid civil tax determination or collection purpose by the Ser-
vice.” LaSalle, 437 U.S. at 316, 98 S.Ct. at 2367.
The imposition of a heavier burden on the taxpayer in a sum-
mons enforcement proceeding is intended to facilitate the IRS's
investigative process. Kis, 658 F.2d at 535. Summons enforce-
ment proceedings are intended to be summary in nature so that
an investigation can advance to an ultimate determination as to
whether tax liability exists. Jd. These proceedings generally occur
at the early investigative stage of any tax inquiry involving a tax-
payer, when no guilt or liability of the taxpayer has been estab-
lished. Jd. Therefore, the primary issue presented by a summons
proceeding is mot whether the IRS has established, or is even
likely to establish guilt or liability on the taxpayer's part; rather,
A-11
the issue is whether the IRS had a valid tax determination or col-
lection purpose in issuing its summons.
In determining the enforceability of the summonses herein, we
must consider whether the government met the four-part test
under Powell, and, if it did, whether White demonstrated that
enforcing the summonses would constitute an abuse of the
court’s process. We consider first whether the government met its
burden of proof under Powell.
A. The Government's Burden of Proof
[1] The government's petition for enforcement was supported
by IRS Agent Serling’s affidavit, which averred that (1) the pur-
pose of his investigation was to determine the correct tax liability
of the Estate of Helen P. Smith; (2) the summoned books and
records were necessary for this purpose; (3) the books and
records were not already in the possession of the IRS; and (4) the
administrative steps required by the Code had been followed.
Just on the basis of this affidavit, it is clear that the government
did establish a prima facie case for enforcement. See, e.g., San-
cetta, 788 F.2d at 71; United States v. Beacon Hill Fed. Sav. &
Loan, 718 F.2d 49, 52 (2d Cir. 1983); Kis, 658 F.2d at 536-37.
The declared purpose of the subject investigation is unques-
tionably legitimate under § 7602, which authorizes the issuance
of summonses “[flor the purpose of ascertaining the correctness
of any return.” Contrary to White’s argument that the purpose
must be stated with more specificity, the IRS is required to
declare only a “good-faith pursuit of the congressionally autho-
rized purposes of § 7602,” LaSalle, 437 U.S. at 318, 98 S.Ct. at
2368. This we believe the IRS has done.
“—
With regard to relevance, White's books and records relating
to legal work performed for the estate are clearly relevant to the
IRS’s declared purpose under § 7602, which authorizes the issu-
ance of a summons for books and records “which may be rele-
vant ... to such inquiry (emphasis added). See also Arthur Young,
465 U.S. at 814, 104 S.Ct. at 1501 (“The language ‘may be’
reflects Congress’ express intention to allow the IRS to obtain
items of even potential relevance to an ongoing investigation... ”")
(emphasis in original); Davey, $43 F.2d at 1000 (the test of rele-
vance is whether the inspection might throw light on the correct -
ness of the taxpayer's return). Serling’s remaining declarations,
that the IRS does not have White's records in its possession, and
that the proper administrative procedures have been followed,
satisfy the remaining Powell criteria.
B. Non-existence of a Valid Tax Determination Purpose
[2] Once the government has established a prima facie case for
enforcement, the burden shifts to the taxpayer to disprove the
existence of a valid tax determination purpose for the IRS
inquiry. Powell, 379 U.S. at 58, 85 S.Ct. at 55. It is at this stage
that we consider White's challenge to the legitimacy of the IRS's
declared purpose and “inquire into the underlying reasons for
the examination.” /d. at $8, 85 S.Ct. at 255. To ascertain whether
White has met his “heavy” burden in this regard, we turn to
White’s claim that no legitimate purposes exists for the IRS
investigation.
White argues in essence that, in light of the Surrogate’s prior
approval of his attorney's fees, the IRS has no legitimate purpose
in summoning his books and records because the Surrogate’s
decision is binding on the IRS. We note that this case does not
involve any allegation of a lack of “good faith” by the IRS, in the
sense that White does not claim that the IRS issued the sum-
monses to harass him or to pressure him into settling a collateral
— ae
A-13
dispute. Nor does White assert that the Surrogate’s decree is
binding on the IRS based on the full faith and credit provision of
28 U.S.C. § 1738, or based on principles of re judicata and collat-
eral estoppel. Rather, he asserts that, as a matter of law, there is
a
strained by relevant Code and regulatory provisions to accept
Surrogate’s decree. _
In agreeing with White that the IRS is bound by the 's
decree, the district court relied primarily on he
§ 20.2053-1(b(2) and not its associated statute, 1.R.C.
§ 2053(aX(2). Nonetheless, we must first examine the statute to
determine whether there exists evidence of “unambiguous direc-
tions from Congress,” Bisceglia, 420 U.S. at 150, 95 S.Ct. at 921,
restricting the IRS's summons px wer when a state court applying
state law has found “allowable” the attorney's fees that are the
subject of IRS scrutiny.
1. LR.C. § 205ay(2)
Section 2053(a) of the Code sets forth certain deductions
allowable in determining the value of a taxable estate. In relevant
part, § 2053(a) authorizes deductions of such amounts for
administrative expenses “as are allowable by the laws of the juris-
diction ... under which the estate is being administered.” 1.R.C.
§ 2053(a(2). White interprets the statute as making state court
decrees which approve administrative expenses under state law
conclusive and binding on the IRS; this, by inference, would ren-
der subsequent tax investigations of such expenses pointless.
We do not read the statute as giving state fria/ court decrees
preclusive effect with regard to IRS investigations. To be sure,
the plain language of § 2053(a\(2) indicates that the federal
deductibility of estate administrative expenses is governed by
state law. Thus, under this statute, the state rules applicatne to the
allowability of these expenses have been “absorbed” as the rele-
A-14
vant feceral rules relating to the deductibility of such expenses.
See C. Wright, The Law of Federal Courts § 60, at 94-95 (4th ed.
1983) (“sometimes the federal statute will direct that state law be
applied.” in which case “the state rule has merely been absorbed
as the relevant federal rule”). Although the statute directs the
IRS and federal courts to apply state rules, the deductibility of
such expenses nonetheless remains a federal question. The stat-
ute does not address the effect of state trial court approval of
estate administrative expenses under federal law. In the absence
of preclusive language in the statute, we are not persuaded that
Congress unambiguously intended to make state tral court
decrees determinative of the federal deductibility of such
expenses to the exclusion of any federal inquiry.
Moreover, any suggestion that Congress intended to preclude
IRS investigation into the deductibility of White's fees under
state law is untenable in light of the Supreme Court's reasoning in
Commissioner v. Estate of Bosch, 387 U.S. 456, 87 S.Ct. 1776, 18
L .Ed.2d 886 (1967). In Bosch, the Supreme Court addressed the
problem of what effect must be given a state trial court decree
where the issue addressed by such decree has federal estate tax
consequences. /d. At issue in Bosch was a federal estate tax
deduction whose validity under |_R.C. § 2056(b 5S) depended on
the invalidity under state law of an instrument executed by the
decedent's wife. In a separate proceeding, to which the IRS was
not a party, a state trial court held the instrument invalid, which
conclusion was disputed by the IRS with regard to the claimed
federal estate tax deduction.
In considering the effect of the state court determination in a
subsequent tax proceeding, the Supreme Court found
that C im enacting 1.R.C. § 2056(>\(5), had intended to
give “proper regard” and not “finality” to the interpretations of
state law by state trial courts. “If the Congress had intended state
tnal court determinations to have [a conclusive and binding)
A-15
effect on the federal actions, it certainly would have said so—
which it did not do.” 387 U.S. at 464, 87 S.Ct. at 1782. Using
diversity cases as its guide, the Bosch court applied the rule of
Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed.
1188 (1938), that a federal court will give effect to a state court
decree, if at all, “only after independent examination of the state
law as determined by the highest court of the State.” 387 U.S. at
463, 87 S.Ct. at 1781 (emphasis added). Consequently, the
Supreme Court concluded in Bosch that “when the application
of a federal statute is involved, the decision of a state trial court
as to an underlying issue of state law should ... not be control-
ling.” Id. at 465, 87 S.Ct. at 1782. While federal authorities are
bound to apply state law as determined by the state’s highest
court, they need only give “proper regard” to relevant rulings of
other courts in the state and “may be said to be, in effect, sitting
as a state court.” Jd. In Bosch, therefore, the Court found that
the IRS was entitled to make an independent assessment as to the
validity vel non of the instrument under applicable state law as
determined by the state’s highest court.
~
[3] We believe the ruling in Bosch supports the view that the
Surrogate’s decree is not conclusive and binding on the IRS
under I.R.C. § 2053(a)(2). Like the statutory provision at issue in
Bosch, 1.R.C. § 2053(a)(2) gives no indication that Congress
intended the Svrrogate’s decision to be preclusive. We conclude
that, with regard to the federal deductibility of White’s fees, the
IRS is entitled to make an independent assessment of the validity
of White’s fees under applicable state law as determined by the
state’s highest court. Contrary to White’s claim, the mere fact
that the Surrogate issued a decree does not preclude the IRS from
investigating the deductibility of White’s fees under state law.
The district court in this case interpreted Bosch differently.
Because the New York Court of Appeals has already set forth the
factors to be considered when determining the validity of attor-
. A-16
ney’s fees in estate practice, see In re Estate of Freeman, 34
N.Y.2d 1, 311 N.E.2d 480, 355 N. Y.S.2d 336 (1974), and since the
Surrogate’s letter to White stated that that it had applied these
factors, the district court concluded that the IRS is bound by the
Surrogate’s decision. 650 F.Supp. at 911 n. 7. We do not agree
with this interpretation of Bosch. The Erie approach taken in
Bosch assumes that state law, as announced by the state’s highest
court, is to be followed by both the state trial court and federal
authorities. However, even assuming that the state trial court
properly applied such state law, the Bosch court found that
“when the application of a federal statute is involved, the deci-
sion of a state trial court as to an underlying issue of state law
should ... not be controlling.” 387 U.S. at 465, 87 S.Ct. at 1782.
Rather, federal authorities may make an independent examina-
tion of the state law as determined by the highest court of the
state. Jd. at 463, 87 S.Ct. at 1781-82. In this case, although the
IRS is bound by the factors established by the New York Court of
Appeals in Freeman, it is not bound by the Surrogate’s applica-
tion of these factors. Rather, according to Bosch, the Surrogate’s
ruling only need by given “proper regard” as one court’s inter-
pretation of applicable state law.
White and at least one amicus argue that the New York Court
of Appeals may not overturn the Surrogate’s factual determina-
tion of reasonableness, that as a practical matter that Court does
not hear appeals from the Surrogate’s determinations of fees,
and that it has “delegated” its power to the Surrogate. While all
this may be true, under New York law the Court of Appeals
retains the authority to review a Surrogate’s decision to ensure
that it complies with New York law. That the Court rarely exer-
cises its prerogative does not deprive the federal authorities of
their jurisdiction to consider the same issues.
Subsequent to Bosch, we have stated that, even if proper
regard is accorded to a state court’s adjudication, “it would only
A-17
be as valid as its evidentiary base,” and that “[w]Je have not hesi-
tated to disregard state court judgments affecting federal tax lia-
bility where the factual questions involved were not contested in
state court, see Lowe v. Commissioner, 510 F.2d 479 (2d Cir.),
cert. denied, 423 U.S. 827, 96 S.Ct. 44, 46 L.Ed.2d 44 (1975), or
where a lower state court made an erroneous application of state
law, see Cheng Yih-Chun v. Federal Reserve Bank, 442 F.2d 460
(2nd Cir. 1971).” United States v. Bosurgi, 530 F.2d 1105, 1112 (2d
Cir. 1976). It follows that the IRS is entitled to make an initial
assessment of the “proper regard” to be accorded a state trial
court decree in a particular case.
We note that, at this summons enforcement stage, the validity
of the Surrogate’s decree is not at issue. Since the purpose of a
summons is “not to accuse, but to inquire,” Bisceglia, 420 U.S. at
146, 95 S.Ct. at 919, the IRS is merely seeking to inquire into the
factors that have a bearing on the deductibility of White’s fees—
this is not the same as accusing the Surrogate of error. Thus, our
discussion of Bosch and subsequent cases is intended solely to
demonstrate that, contrary to White’s claim, the IRS may indeed
inquire under § 2053 into the allowability of White’s fees under
state law.
On the basis of the plain language of § 2053(a)(2) and the
Supreme Court’s reasoning in Bosch, we conclude that there is
no statutory support for White’s proposition that the Surrogate’s
decree is binding on the IRS in subsequent federal tax proceed-
ings nor for the assertion that the statute bars the IRS from inves-
tigating the deductibility of White’s attorney’s fees. As
previously mentioned, however, the district court found support
for White’s proposition primarily in the statute’s associated regu-
lation, Treas.Reg. § 20.2053-1(b)(2), which we consider next.
2. Treasury Regulation § 20.2053-1(b)(2)
. A-18
Treasury Regulation § 20.2053-1(b)(2), which is entitled
“Effect of Court Decree,” provides in relevant part:
The decision of a local court as to the amount and allowa-
bility under local law of a claim or administration expense
will ordinarily be accepted if the court passes upon the facts
upon which deductibility depends. If the court does not
pass upon those facts, its decree will, of course, not be fol-
lowed.... If the decree was rendered by consent, it will be
accepted, provided the consent was a bona fide recognition
of the validity of the claim (and not a mere cloak for a gift)
and was accepted by the court as satisfactory evidence upon
the merits.... The decree will not be accepted if it is at vari-
ance with the law of the State ... (emphasis added).
The district court concluded in light of this regulation that (1)
the Surrogate having passed upon the facts upon which deduct-
ibility depends, and (2) in the absence of a prima facie showing by
the IRS that the Surrogate’s decision was motivated by factors
other than those upon which deductibility depends, “such as
fraud, overreaching, or excessiveness by the attorney or the Sur-
rogate,” the IRS was bound by the Surrogate’s decision. 650
F.Supp. at 909. The district court therefore accepted White’s
claim that an IRS investigation of the deductibility of his fees
would be pointless and hence it found that the IRS summonses
were not issued for a legitimate purpose.
We believe that the district court erred in concluding that this
regulation precludes the IRS from investigating the deductibility
of White’s fees under state law. The regulation merely parallels
and elaborates on its related statute, 1.R.C. § 2053(a), and there-
fore, the principles discussed in ‘Bosch are as applicable in the
context of the regulation as they are in the statutory context. In
stating that a local court decree “will not be accepted if it is at
variance with the law of the State,” the regulation, like the stat-
ute, when read in conjunction with Bosch, makes it clear that the
IRS is entitled to make an independent assessment of applicable
A-19
state law as interpreted by the state’s highest court. Contrary to
the district court’s conclusion, and by analogy to Bosch, the reg-
ulation does not preclude the IRS from independently assessing
the deductibility of White’s fees under state law.
Moreover, the regulation authorizes the IRS to determine,
prior to acceptance of a local court decree, whether or not that
decree is at variance with state law. For instance, a local court
decree may be at variance with state law if, in the district court’s
words, “the Surrogate’s decision was motivated by factors other
than those upon which deductibility depends, such as fraud,
overreaching, or excessiveness by the attorney or the Surrogate.”
The decree may also be at variance with state law if the local court
did not pass on the facts upon which deductibility depends, or if
the consent given was not a bona fide recognition of the validity
of the claim—these are questions regarding the proper applica-
tion of state law that the regulation itself sets forth as standards
to determine when the IRS should accept a local court decree.
Also, these standards are consistent with our prior statement that
a state court decree “would only be as valid as its evidentiary
base” and may be disregarded “where [it is determined that] a
lower state court made an erroneous application of state law.”
Bosurgi, 530 F.2d at 1112.
From the language of the regulation, it is clear that, while the
IRS may “ordinarily” accept a local court decree, it is not
required to do so if the decree did not properly apply state law.
Rather, the regulation permits the IRS to make an independent
assessment of the deductibility of White’s fees under state law
and to assess the acceptability of the Surrogate’s decree for fed-
eral tax purposes. Since neither 1.R.C. § 2053 nor Treas.Reg.
§ 20.2053-1(b)(2) precludes the IRS from investigating the
deductibility of White’s fees under state law, we conclude that
White has failed to meet his burden of disproving the existence of
a legitimate tax determination purpose.
. A-20
The district court erred in requiring, as a prerequisite for sum-
mons enforcement, that the IRS make a prima facie showing that
the Surrogate’s decision was motivated by impermissible factors
“such as fraud, overreaching, or excessiveness by the attorney or
the Surrogate.” This requirement is virtually the same as that
advanced by the taxpayer in Powell, namely, that the IRS must
make an advance showing of probable cause to suspect fraud. In
Powell, the Supreme Court rejected such a standard because “it
might seriously hamper the Commissioner in carrying out inves-
tigations he thinks warranted, forcing him to litigate and prose-
cute appeals on the very subject which he desires to investigate.”
379 U.S. at 54, 85 S.Ct. at 253. Since we believe that the district
court’s requirement would be equally likely to hamper the IRS in
carrying out investigations it thinks are warranted, and has
already forced the IRS to litigate and prosecute an appeal on the
very subject it desires to investigate, we reject the district court’s
new standard for enforcement of summonses as an invalid
restraint on the summons. power of the IRS.
Finally, the district court prematurely considered and decided
the issue of whether the Surrogate “passed on the facts upon
which deductibility depends.” As previously stated, at this sum-
mons enforcement stage, the validity of the Surrogate’s decree is
not at issue. Rather, the IRS seeks to inquire into the facts that
bear on the deductibility of White's fees, and not to accuse the
Surrogate of error. See Bisceglia, 420 U.S. at 146, 95 S.Ct. at 918-
19. Indeed, as far as we know, no record evidence, as such, had
been presented to the district court that would have enabled it to
decide whether the Surrogate passed on the facts upon which
deductibility depends. The post hoc letter from the Surrogate
justifying its decision is not sufficient to eliminate inquiry into
whether the Surrogate actually considered the appropriate facts.
The function of the district court and of this Court in an
enforcement proceeding is not to test the final merits of the
A-21
claimed tax deduction, but to assess within the limits of Powell
whether the IRS issued its summons for a legitimate tax determi-
nation purpose. We conclude from our review of I.R.C. § 2053
and its associated regulation that, contrary to White's claim, the
IRS has a legitimate purpose in investigating the deductibility of
his fees. We further conclude that White has failed to meet his
“heavy” burden of disproving the existence of a legitimate tax
determination for the IRS investigation.
3. Relevance
[4] In rebuttal to Serling’s declaration of relevance, White
argues that, even if the IRS may conduct an investigation, the
only books and records that would be relevant to such an investi-
gation are those of the Surrogate’s Court, not his own. We dis-
agree. In United States v. Arthur Young & Co., 465 U.S. 805, 104
S.Ct. 1495, 79 L.Ed.2d 826 (1984), the Supreme Court stated:
The language “may be” [in § 7602] reflects Congress’
express intention to allow the IRS t> obtain items of even
potential relevance to an ongoing investigation... The pur-
pose of Congress is obvious: the Service can hardly be
expected to know whether such data will in fact be relevant
until they are procured and scrutinized. As a tool of discov-
ery, the § 7602 summons is critical to the investigation and
enforcement function of the IRS; the Service therefore
should not be required to establish that the documents it
seeks are actually relevant in any technical, evidentiary
Id. at 814, 104 S.Ct. at 1501 (emphasis in original). Clearly,
White’s books and records have “potential” relevance to an
investigation to ascertain the deductibility of his fees under stace
law. The IRS need not establish more than that in a summons
enforcement proceeding.
A-22
C. Countervailing Policies
[5] Thus far, White has tailed to demonstrate that enforcement
of the IRS summonses would constitute an abuse of the court's
process. However, that does not automatically entitle the IRS to
enforcement of its summonses; other considerations may bear on
their enforceability. See United States v. Arthur Young & Co.,
677 F.2d 211, 219 (2d Cir. 1982), rev'd on other grounds, 465 U.S.
805, 104S.Ct. 1495, 79 L.Ed. 826 (1984). In appropriate circum-
stances, the broad latitude given the IRS in the use of its sum-
mons power may be restricted in light of “substantial
countervailing policies.” Euge, 444 U.S. at 711, 100 S.Ct. at 878.
The district court herein found that, in addition to the relevant
statutory and regulatory provisions, principles of comity and
federalism argued against allowing the IRS to “second-guess”
the Surrogate’s decisions. 650 F.Supp. at 909. As examples of the
respect accorded state judgments by federal courts, the district
court cited, inter alia, the eleventh amendment, the full faith and
credit statute and federal common law rules of preclusion.
In establishing what it considered to be the proper balance
between federal and state interests in this proceeding, the district
court relied on Justice Harlan’s dissent in Bosch. Id. at 910. In
Bosch, Justice Harlan stated:
the federal interest requires only that the Commissioner be
permitted to obtain from the federal courts a considered
adjudication of the relevant state law issues in cases in which
_.. the state courts have not already provided such an adju-
dication. In turn, it may properly be assumed that the state
court has had an opportunity to make, and has made, such
an adjudication if, in a proceeding untainted by fraud, it
has had the benefit of reasoned argument from parties
holding genuinely inconsistent interests.
387 U.S. at 480-81, 87 S.Ct. at 1790-91. Relying on Justice
Harlan’s reasoning, the district court formulated a new standard
A-23
for enforcement of a summons: in order to “challenge” a deci-
sion of the Surrogate when the Surrogate has passed on the facts
upon which deductibility depends, “the IRS must make a prima
facie showing that the Surrogate’s decision was motivated by fac-
tors other than those on which deductibility depends, such as
fraud, overreaching, or excessiveness by the attorney or the Sur-
rogate.” 650 F.Supp. at 911. However, it is the reasoning of the
majority in Bosch, and not that of the dissent, that is controlling.
[6] On the facts presented, we are not persuaded that federal-
ism and comity constitute a “substaniial countervailing policy”
that would justify imposing a requirement upon the IRS to make
an advance showing of factors “such as fraud, overreaching, or
excessiveness by the attorney or the Surrogate” before granting
enforcement of its summonses. Unquestionably, in proper cir-
cumstances, federal courts are bound to respect the considered
judgment of state courts. However, the facts of this case do not
implicate the eleventh amendment, full faith and <redit_ princi-
ples of collateral estoppel, or other doctrines arising from princi-
ples of federalism and comity; consequently, federal authorities
are not bound to give preclusive effect to the Surrogate’s decree.
Instead of substantial countervailing policies, we find in
1.R.C. § 7602 “a congressional policy choice in favor of disclo-
sure of all information relevant to a legitimate IRS inquiry.”
Arthur Young, 465 U.S. at 816, 104 S.Ct. at 1502 (emphasis in
original). The Supreme court informs us that “In light of this
explicit statement by the Legislative Branch, courts should be
chary of recognizing exceptions to the broad summons authority
of the IRS.... If the broad latitude granted to the IRS by § 7602 is
to be circumscribed, that is a choice for Congress, and not this
Court, to make.” Jd. at 816-17, 104 S.Ct. at 1502.
a
: A-24
While we appreciate the concern of the amici and acknowledge
that one may well wonder whether the IRS in the Buffalo area is
allocating wisely the time and effort of its limited staff, neverthe-
less, in the absence of substantial countervailing policies, and in
the absence of a showing that enforcement of the summonses
would constitute an abuse of the court’s process, we conclude
that the IRS is entitled to enforcement of its summonses. Accord-
ingly, we reverse and remand with directions that the district
court grant the petition for enforcement.
A-25S
JUDGMENT IN A CIVIL CASE
[Filed Jan 8, 10:32 AM 87, U.S. District Court, Rochester]
United States District Court
Western District of New York
UNITED STATES OF AMERICA, ET AL.
Vv.
JAMES M. WHITE, as attorney
for and as executor of the
ESTATE OF HELEN P. SMITH,
Deceased, CASE NUMBER MISC. CIV. 86-140T
_) Jury Verdict. This action came before the Court for a trial by
jury. The issues have been tried and the jury has rendered its
verdict.
X Decision by Court. This action came hearing before the
Court. The issues have been heard and a decision has been
rendered.
IT IS ORDERED AND ADJUDGED that the respondent
should not be compelled to obey the IRS summonses served upon
him and dismissing this proceeding without prejudice.
JANUARY 8, 1987 EDWARD }* GUETH JR.
Date Clerk
[signature]
650 FEDERAL SUPPLEMENT
UNITED STATES v. WHITE
Cite as 650 F.Supp. 904 (W.D.N.Y. 1987)
(904-912)
UNITED STATES of America, and James M. Serling, Estate Tax
Attorney, Internal Revenue Service, Petitioners,
v.
James M. WHITE, as Attorney for and as the Executor of the
Estate of Helen P. Smith, Deceased, Respondent.
Misc. No. CIV-86-140T.
United States District Court,
W.D. New York.
Jan. 7, 1987.
Federal Government petitioned for enforcement of two IRS
summonses, requiring executor to substantiate deductions he
claimed on federal estate tax return. The District Court, Telesca,
J., held that IRS failed to show a “legitimate purpose” for requir-
ing executor to substantiate deductions, so that Government's
petition would be denied.
So ordered.
1. Internal Revenue 4508
Petition to enforce IRS summonses, and to compel executor of
testator’s estate to substantiate deductions he claimed on estate
tax return, was not rendered moot by executor's payment of defi-
ciency under protest. 26 U.S.C.A. §§ 7402(b), 7604(a).
2. Internal Revenue 4513
IRS failed to show a “legitimate purpose” for requiring execu-
tor to substantiate the deductions he claimed on federal estate tax
return, so that petition to enforce IRS summonses would be
denied, where deductions related to attorney fees claimed by
executor as attorney for testator’s estate, surrogate had deter-
mined that fees were reasonable based on same facts as Govern-
ment would apply in deciding whether deduction would be
allowed, and IRS faile’ to demonstrate fraud, overreaching or
excessiveness by surrogate or executor. N. Y.McKinney’s SCPA
2307; 26 U.S.C.A. §§ 205Ma), 7402(b), 7604(a).
3. Internal Revenue 4185
To challenge deductibility on federal estate tax return of attor-
nev fees approved by surrogate and paid by executor, IRS must
first make prima facie showing that surrogate’s decision was
motivated by factors other than those on which deductibility
depends, such as fraud, overreaching, or excessiveness by attor-
ney or surrogate. 26 U.S.C.A. § 2053a).
4. Internal Revenue 16
Federal laws dealing with taxation of decedents’ estates must
accom.nodate and yield to judicial determinations made under
state law by state courts. 26 U.S.C.A. § 205Ma).
Jonathan W. Feldman, Asst. U.S. Atty., of Rochester, N.Y.,
Deborah S. Meland, Trial Atty., Tax Div., U.S. Dept. of Justice,
Washington, D.C., for petitioners.
James M. White, Rochester, N.Y., for respondent.
—— — al
xe a as — 7 ti ili ma — a
This action was brought on by the Government's petition for
enforcement of two IRS summonses under 26 U.S.C. § 7402()
and § 7604(a) An order to show cause was granted, Mr. White
filed a Response, and the Government filed a Reply. The Monroe
County Bar Association (MCBA) sought and was granted leave
to file a bref anmcus Curiae, to which the Government has also
filed a Response. As set forth below, | hold that Mr. White should
not be compelled to obey the IRS summonses served upon him.
and | dismiss this proceeding without prejudice.
FACTS
Helen P. Smith died on November 10, 1982, leaving a gross
estate valued at over $455,000. Her will named respondent James
M. White, Esq. as executor of the estate, and in his capacity as
executor of the estate, Mr. White chose to act as the attorney for
the estate as well. This is a practice permitted under New York
Law. Surrogate’s Court Procedure Act (SCPA) 2307. He
promptly petinoned for probate of the will, and then waited the
seven months required under SCPA § 1802 for any clarms to be
filed before the estate could be closed.
As required, Mr Whute as executor filed his federal estate tax
return (commonly referred to as the 706 Return). In that return.
he clanumed a deduction of $16,530 for his attorney's fees. He also
A-29
claimed a deduction of some $17,548.13 for the executor’s com-
mission to which he was entitled under SCPA § 2307.'
Although he had not received a “closing letter” from the IRS,
Mr. White petitioned for judicial settlement of the estate.? Under
SCPA § 2110, attorneys’ fees can be fixed by an adversary pro-
ceeding’, or by a judicial settlement if releases have been submit-
ted from all legatees. In the Smith estate, Mr. White submitted
releases from all nine‘ residuary legatees, one of whom was an
experienced estates lawyer. The releases indicated the legatees’
approval of Mr. White’s accounting, which included $16,800 for
his attorney’s fee. After reviewing the accounting and the tax
returns, on July 17, 1984, Surrogate Arnold F. Ciaccio granted a
decree of judicial settlement of the Smith estate which had the
' SCPA 2307 provides ia pertinent part that On the settlement of the account of
any fiduciary ... the court must allow to him the reasonable and necessary
expenses actually paid by him and if he be an attorney of this state and shall
have rendered legal services in connection with his official duties, such com-
pensation for his legal services as appear to the court to be just and reasonable
and in addition thereto it must allow to the fiduciary for his services as fiduci-
? Under SCPA § 1804, an estate can be judicially settled before the State estate
tax is final. Although § 1804 says nothing about Federal estate taxes, Trea-
sury Regulations 20.2053-3(b) and (c) clearly contemplate the filing of the 706
return (and the concomitant deduction of any executor’s commissions and
attorney’s fees) both before and after the decree of judicial settlement. See
also Hartwick College v. United States, 801 F.2d 608, 613 n. 4 (2d Cir.1986).
> If such an adversary proceeding had taken place, Mr. White would have been
required to file an affidavit detailing his efforts in this matter, under § 2230.29
of the Uniform Calendar and Practice Rules for Surrogate’s Courts in the
Fourth Department. As of January, 1986, a similar requirement was added by
§ 207.45 of the Uniform Rules for New York State Trial Courts. See also,
Estate of Gutchess, 117 A.D.2d 852, 498 N.Y.S.2d 297 (3d Dept. 1986), app.
denied, 68 N.Y.2d 609, 501 N_E.2d 36 (1986) (administratrix of estate is “enti-
tled to be fully apprised of .he nature and extent of [the estate attorney's] ser-
vices”).
* Although Mr. White’s Response (414) indicates that there were nine residual
beneficiaries, the MCBA’s brief indicates that there were twelve residuary leg-
atees, all of whom submitted releases.
A-30
effect of settling the executor’s accounting, approving the distri-
bution of assets to those interested in the estate, and fixing and
approving the executor’s commissions and attorney’s fees both
of which were due to Mr. White. See SCPA 2307.
On August 7, 1984, petitioner Serling met with Mr. White to
review the 706 return. On January 29, 1985, Mr. Serling wrote to
Mr. White, stating that the Surrogate Court decree of judicial set-
tlement did not preclude the necessity of his providing justifica-
tion for the legal fees claimed. He stated that
[e]ach case must be determined upon its own facts and cir-
cumstances taking into consideration the following factors:
1. Amount involved
2. Time abd [sic] effort of attorney
3. Seriousness of problems
4. Results obtained
5. Experience and ability of attorney
6. Length of administration.
He sought either Mr. White’s time records or, if not available,
then an itemized list of all legal work performed, time expended
for each service and hourly rate charged.
Mr. White then wrote to Surrogate Ciaccio concerning the
matter. Surrogate Ciaccio responded by letter to Mr. White dated
February 25, 1985. That letter indicates that the executor’s com-
mission was fixed by statute, and that the attorney’s fee was set:
in keeping with our ordinary and customary guidelines
which have been followed in this Court for several years.
Moreover, it conforms to the criteria established by the
Court of Appeals in this state as enunciated in Matter of
Freeman, 34 NY 2d, 1 (355 N.Y.S.2d 336, 311 N.E.2d 480}
A-31
and Matter of Potts, 241 NY 593 [150 N.E. 568]. I might
say, parenthetically that the attorney fee approved was some
$700 less than what would have been approved. I set these
matters forth fully aware that you were both executor and
attorney for the estate. In those instances, I personally have
been careful to attempt to keep the fees for attorney-
executors below a full commission. In this particular estate,
you have complied. In conclusion, I state to you that a re-
review of the file and the account submitted justify in every
respect both the commission and fee approval. These are
not done in an arbitrary fashion but rather as indicated fol-
lowing the application of the various criteria.
Mr. White forwarded this letter to Mr. Serling with a cover letter
dated February 27, 1985.
. Not satisfied with this explanation, on May 1, 1985, Mr. Serl-
ing issued an IRS summons to Mr. White as executor and attor-
ney for the estate of Helen P. Smith which sought the production
of any and all records and documents relating to the administra-
tion of the estate of Helen P. Smith, including records of Mr.
White’s activities both as attorney and as executor. Mr. White
responded with a letter dated June 5, 1985, outlining his position
and refusing to permit the IRS to examine the file. On December
16, 1985, Mr. Serling wrote to Mr. White, asking him to submit,
in affidavit form, a detailed account of the duties he performed
in his capacity as executor. By letter dated January 3, 1986, Mr.
White responded that the amount of $17,548.13 was for the exec-
utor’s commissions allowable under SCPA § 2307. On February
3, 1986, Mr. Serling issued another IRS summons to Mr. White,
seeking any and all records relating to Mr. White’s performance
of the duties of executor of the estate of Helen P. Smith.
On July 16, 1986, the IRS issued a form Letter 902(DO), noti-
fying Mr. White that it was assessing a deficiency of $5,754.19
against the estate of Helen P. Smith. Apart from an increase in
the value of stocks and bonds in the estate (which was not con-
; A-32
tested by Mr. White), the deficiency was based principally upon
the disallowance of $17,176 in administration expenses, chiefly
the entire amount ($16,530) of the attorney's fees claimed as a
deduction. The IRS also determined that the claimed executor’s
commission of $17,450 should be corrected to $16,804. Mr.
White states that he has paid the deficiency, with interest, and has
filed a notice of claim for a refund. He also states that he does not
contest the reduction in the executor’s commission.
This enforcement proceeding was commenced August 12,
1986.
DISCUSSION
{1] At the outset, Mr. White argues that his payment of the
deficiency renders this enforcement proceeding moot. However
whether or not Mr. White has paid the deficiency, the issue
remains whether the IRS is entitled to his time records so that it
can independently determine the amount of any allowable
deductions (notwithstanding the Surrogate’s prior determination
in a judicial proceeding). See United States v. Gimbel, 782 F.2d
89, 93 (7th Cir. 1986); United States v. Roundtree, 420 F.2d 845,
847 n. 3(Sth Cir.1970); see also Multistate Tax Commission v.
United States Steel Corp., 714 F.2d 925 (9th Cir. 1983), and Mar-
shall v. Stevens People and Friends For Freedom, 669 F.2d 171,
174 (4th Cir. 1981), cert. dismissed, 455 U.S. 930, 102 S.Ct. 1297,
71 L.Ed.2d 639 (1982), and cert. denied, 455 U.S. 940, 102 S.Ct.
1432, 71 L.Bd.2d 651 (1982). Cf Carr v. United States, 663 F.2d
$9 (8th Cir.1981), United States v. Kis, 658 F.2d 526, 532-35 (7th
Cir.1981), cert. denied, 455 U.S. 1018, 102 S.Ct. 1712, 72
L.Ed.2d 135 (1982), United States v. First American Bank, 649
F.2d 288 (Sth Cir.1981), and United States v. Silva and Silva
Accountancy Corp., 641 F.2d 710 (9th Cir. 1981) (actual compli-
ance with an IRS summons would render an enforcement action
A-33
moot); but cf Gluck v. United States, 771 F.2d 750, 753-54, n. 3
(3d Cir. 1985) (contra). Accordingly, the petition will not be dis-
missed as moot.
To enforce a summons, the IRS must show that the investiga-
tion will be conducted pursuant to a legitimaie purpose, that the
inquiry may be relevant to the purpose, that the information
sought is not already within the Commissioner’s possession, and
that the administrative steps required by the Code have been fol-
lowed. United States v. Powell, 379 U.S. 48, 57-58, 85 S.Ct. 248,
254-55, 13 L.Bd.2d 112 (1964); United States v. MacKenzie, 777
F.2d 811, 819 (2d Cir.1985), cert. denied, U.S. , 106
S.Ct. 2889, 90 L.Ed.2d 977 (1986). For the reasons set forth
below, I conclude that the IRS has not made the necessary show-
ing that the investigation will be conducted pursuant to a legiti-
mate purpose.
[2j The statute which governs the IRS’s ability to determine the
deductibility of estate administrative expenses is 26 U.S.C.
§ 2053(a), which permits the deduction of administrative
expenses in “such amounts ... as are allowable by the laws of the
jurisdiction ... under which the estate is being administered.” An
A-34
an active and genuine contest. If the result reached appears
to be unreasonable, this is some evidence that there was not
such a contest, but it may be rebutted by proof to the con-
trary. If the decree was rendered by consent, it will be
accepted, provided the consent was a bona fide recognition
of the validity of the claim (and not a mere cloak for a gift)
and was accepted by the court as satisfactory evidence upon
the merits. It will be presumed that the consent was of this
character, and was so accepted, if given by all parties having
an interest adverse to the claimant....
This statute and regulation were at issue in Estate of Smith v.
Commissioner, $10 F.2d 479 (2d Cir. 1975), cert. denied, 423 U.S.
827, 96 S.Ct. 44, 46 L.Ed.2d 44 (1975). In Smith, the Second Cir-
cuit affirmed a determination of the Tax Court that no more than
$750,447.74 in sales commissions were “necessary” to liquidate
the estate of a sculptor, even though the Surrogate’s Court of
Warren County, New York had approved the payment of almost
$1.6 million in commissions. Citing the above-noted Treasury
Regulation, the Second Circuit stated that
expenditures by an executor as proper
expcases under New York law will be controlling and will
not raise questions concerning possible discrepancies
between § 2053 of the Internal Revenue Code of 1954 and
Treas.Reg. § 20.2053-3(d){2).
Id. at 482.
Although in Smith the Commissioner and the Tax Court had
each made a de novo inquiry into the factual necessity for the
expenditures, they did so because the expenditures had not been
undertaken on the estate’s behalf, but rather on behalf of testa-
mentary trusts. (Mr. Smith's will had contemplated a distribution
of the sculptures in kind to the trusts for the benefit of his daugh-
ters.) Estate of David Smith, $7 T.C. 650 (1972). It was not a case
in which the Commissioner and the Tax Court refused to follow
A-35
state law which by all appearances had been prop-: ly applied by
the state court, as here. The Tax Court's determination in Smith
that only about half the sales commissions were “necessary”
either to preserve the estate or pay its debts was consistent with
§ 11-1.1 of the New York Estates, Powers and Trusts Law
(EPTL) and Treas.Reg. 20.2053-3(d)(2}. Compare Treas. Reg.
20.2053-3(c\(3).
The Government points to footnote 4 in Smith, in which the
Second Circuit quoted from the Fifth Circuit's decision in Pitner
v. United States, 388 F.2d 651 (1967):
“[ijn the determination of deductibility under section
2053(a)(2), it is not enough that the deduction be allowable
under state law. It is necessary as well that the deduction be
for an ‘administrative expense’ within the meaning of that
term as it is used in the statute, and that the amount soughi
to be deducted be reasonable under the circumstances.
These are both questions of federal law and establish the
outside limits for what may be considered allowable deduc-
tions under section 2053a)(2).” 388 F.2d at 659.
(Emphasis added.) The Government argues from this that, in the
Second Circuit, the question of the amount of a deduction is a
federal question which is the proper subject of an IRS inquiry.
The Government has placed undue emphasis upon this foot-
note. The texi which the footnote accompanies indicates that the
Second Circuit had declined to adopt the Surrogate’s computa-
tion of commissions because the interest of the federal govern-
ment (in taxing the passage of property) had not been completely
or accurately reflected in the State's interests (in supervising the
fiduciary respomsibilities of the executor). In particular, the Sec-
ond Circuit noted that there was a question as to whether some of
the expenses were in fact incurred for the benefit of the escate (in
accordance with the general purpose of 26 U.S.C. § 2053), or
instead were incurred for the benefit of the individual beneficia-
ries. The Court concluded that:
A-36
[iJn such circumstances, the federal courts cannot be pre-
cluded from reexamining a lower state court’s allowance of
administration expenses to determine whether they were in
fact necessary to carry out the administration of the estate
or merely prudent or advisable in preserving the interests of
the beneficiaries.
510 F.2d at 482-83 (citations omitted).
In this case, SCPA 2307 provides for the method of calcuating
executor’s commissions. Thus if the statute is followed the
deduction claimed for executor’s commissions is “reasonable”’
within the meaning of Pitner. The same statute specifically pro-
vides that the Surrogate allow to the executor, if he be an attor-
ney, a fee “as it appears to the Court to be just and reasonable...” —
(emphasis added).
In this case, Surrogate Ciaccio had before him Mr. White’s
accounting, as well as the Federal and State estate tax returns,
when he approved the amount of Mr. White’s attorney fee as
being “just and reasonable.” As he stated in his February 25,
1985 letter, he applied the criteria from Matter of Freeman, 34
N.Y.2d 1, 355 N.Y.S.2d 336, 311 N.E.2d 480 (1974), and Matter
of Potts, 241 N.Y. 593, 150 N.E. 568 (1925), in setting the
amount of Mr. White’s attorney’s fee. Freeman sets forth the fol-
lowing factors to be used in fixing an attorney’s fee:
1. Time and labor required;
2. The difficulty of the questions involved;
3. The skill required to handle the problems presented;
4. The lawyer’s experience, ability and reputation;
5
. The amount involved and benefit resulting to the client
from the services;
6. The customary fee charged by the Bar for similar ser-
vices;
A-37
7. The contingency or certainty of compenstion;
8. The results obtained;
9. The responsibility involved.
34 N.Y.2d at 9, 355 N.Y.S.2d 336, 311 N.E.2d 480. The six fac-
tors which Mr. Serling would have the IRS consider are all
included among the factors listed in Freeman. Under Treas.Reg.
20.2053-1(b)(2), then, the Surrogate having passed upon the facts
upon which deductibility depends, the decision of the Surrogate
should be accepted.‘
It appears that the IRS is claiming the right to second guess the
decision of the Surrogate on commissions and attorneys’ fees
under any circumstances. Such a position not only represents a
* The Monroe County Bar Association urges that I follow the holdi
Estate of Park v. Commissioner of Internal Revenue, 475 Aegon ede
Cir. 1973), and Estate of Jenner v. Commissioner of Internal Revenue, 577
F.2d 1100, 1106-07 (7th Cir. 1978), and hold that, if a state probate court has
determined that a particular expense is “necessary” to the administration of
an estate, its determination would not be subject to review by the IRS. The
MCBA argues that the Second Circuit effectively adopted this approach when
it affirmed without opinion the decision in Estate of Vatter v. Commissioner
of Internal Revenue, 65 T.C. 633 (1975), aff'd., 556 F.2d 563 (1976). The
MCBA also points out that this approach was adopted by the United States
District Court in Nevada in Bank of Nevada vy. United States, 80-2 U.S.T.C.
$13,361 (1980). The Government argues that the MCBA misconstrues Vatter.
and the Park, Jenner, and Bank of Nevada do not represent the law in this
ar pty om in the Smith case.
agree wit Government that Smith, not Park, Jenner, and Bank
Nevada, represents the law in this circuit. I aleo agres thet the Tax Count
Vatter properly distinguished that case from Smith, because in Vatter the
Property in question had not been specifically devised or intended to be dis-
tributed in kind (so that the executrix was acting on behalf of the estate not
the beneficiaries, when she sold the property). Nevertheless, I believe that
under Smith, the IRS can review a probate court’s determination that a partic.
ane chess is “necessary,” but only if it first makes a showing that the pro-
, for some reason (such
rn “toed ( as fraud), not passed on the factors on
A-38
misreading of the Smith holding, but is also “destructive ... of
the proper relationship between State and federal law...’ Com-
missioner v. Estate of Bosch, 387 U.S. 456, 480, 87 S.Ct. 1776,
1790, 18 L.Ed.2d 886 (Harlan, J., dissenting) (1967).
The Surrogate’s Court in New York State, and not the IRS or
the U.S. District Court, is exclusively authorized by New York
law to determine the appropriate award of attorneys fees in the
probating of an estate. The factors that the IRS would have this
Court consider are all factors which the Surrogate does consider
under Freeman and Potts. State courts “have an especially strong
interest and a well-developed competence” to adjudicate these
matters, Giardina v. Fontana, 733 F.2d 1047 (2d Cir.1984); see
also, Fay v. South Colonie Cent. Sch. Dist., 802 F.2d 21, 31-32
(2d Cir.1986), so much so that the federal courts have created
their own exception to diversity jurisdiction for probate matters.
Id.; see also Byers v. McAuley, 149 U.S. 608, 13 S.Ct. 906, 37
L.Ed. 867 (1893); Jn re Broderick’s Will, 21 Wall. (88 U.S.) 503,
22 L.Ed. 599 (1875); Hook v. Payne, 14 Wall. (81 U.S.) 252, 20
L.Ed. 887 (1872).
Respect for the considered judgment of state courts has been
expressed by federal courts over the years for other reasons as
well. This respect has been based upon the courts’ sense of com-
ity and federalism, see, e.g., Webb v. Web, 451 U.S. 493, 499-500,
101 S.Ct. 1889, 1893, 68 L.Ed.2d 392 (1981); Juidice v. Vail, 430
U.S. 327, 334-36, 97 S.Ct. 1211, 1216-17, 51 L.Ed.2d 376 (1977);
423 South Salina Street, Inc. v. City of Syracuse, 724 F.2d 26, 27
(2d Cir. 1983); a view of the states as “laboratories for social and
economic experiements,” Johnson v. Louisiana, 406 U.S. 356,
376, 92 S.Ct. 1620, 1636, 32 L.Ed.2d 152 (1972) (Blackmun, J.,
concurring); New State Ice Co. v. Liebmann, 285 U.S. 262, 311,
§2 S.Ct. 371, 386, 76 L.Ed. 747 (1932) (Brandeis, J., dissenting);
the Eleventh Amendment, Pennhurst State School & Hosp. v.
Haldermann, 465 U.S. 89, 106, 104S.Ct. 900, 911, 79 L.Ed.2d 67
A-39
(1984); the Full Faith and Credit statute (28 U.S.C. § 1738),
Migra v. Warren City School Dist. Bd. of Ed., 465 U.S. 75, 104
S.Ct. 892, 79 L.Ed.2d 56 (1984); Bottini v. Sadore Management
Corp., 764 F.2d 116 (2d Cir. 1985); and federal common-law rules
of preclusion. University of Tennessee v. Elliott, U.S. ;
106 S.Ct. 3220, 3224, 3226-27, 92 L.Ed.2d 635 (1986).°
Justice Black described the notion of comity and the principle
of federalism in Younger v. Harris, 401 U.S. 37, 44-45, 91 S.Ct.
746, 750-51, 27 L.Ed.2d 669 (1971) as follows:
... that is, a proper respect for state functions, a recognition
of the fact that the entire country is made up of a Union of
separate state governments, and a continuance of the belief
that the National Government will fare best if the States and
their institutions are left free to perform their separate func-
tions in their separate ways. This, perhaps for lack of a bet-
ter and clearer way to describe it, is referred to by many as
“Our Federalism,” and one familiar with the profound
debates that ushered our Federal Constitution into exist-
ence is bound to respect those who remain loyal to the ideals
and dreams of “Our Federalism.” The concept does not
mean blind deference to “States’ Rights” any more than it
means centralization of control over every important issue
in our National Government and its courts. The Framers
rejected both these courses. What the concept does repre-
sent is a system in which there is sensitivity to the legitimate
interests of both State and National Governments, and in
which the National Government, anxious though it may be
to vindicate and protect federal rights and federal interests,
always endeavors to do so in ways that will not unduly inter-
° The Full Faith and Credit Statute, and federal common-law rules of preclu-
sion, apply to disputes between the same parties, or of which a party has at
least had notice and an opportunity to fully present its claims. The Govern-
ment has not raised the point that the IRS did not have notice of the judicial
settlement proceeding or an opportunity to be heard therein, and this factor
was not addressed by the Second Circuit in the Smith case. This is presumably
because (as Justice Harlan noted in his dissent in the Bosch case) this is not a
res judicata or collateral estoppel question. 387 U.S. at 475, 87 S.Ct. at 1787.
A-40 A-41
fere with the legitimate activities of the States. It should Commissioner v. Estat
never be forgotten that this slogan, “Our Federalism,” born ee WS Oe
in the early struggling days of our Union of States, occupies
a highly important place in our Nation’s history and its
future. ; .
In this case, the interests of the State (in determining how an
attorney and an executor should be compensated for handling
the probate of an estate) must be balanced against the interests of
the IRS in enforcing the federal tax laws. I believe the proper bal-
ance was drawn by Justice Harlan in 1967:
The interests of the federal treasury are essentially nar-
row here; they are entirely satisfied if a considered judg- .
ment is obtained from either a state or a federal court, after
consideration of the pertinent materials, of the require-
ments of state law... [T]he federal interest requires only that
the Commissioner be permitted to obtain from the federal
courts a considered adjudication of the relevant state law
issues in cases in which, for whatever reason, the state
courts have not already provided such an adjudication. In
turn, it may properly be assumed that the state court has
had an opportunity to make, and has made, such an adjudi-
cation if, in a proceeding untainted by fraud, it has had the
benefit of reasoned argument from parties holding genu-
inely inconsistent interests.
. | recognize that Justice Harlan’s opinion in Bosch was a dissenting opinion
and that the majority in Bosch held that a state trial court decision Sead on
be binding on the IRS if the IRS had not been made a party. The majority
opinion in Bosch, however, is distinguishable in at least two respects. First,
Bosch involved a section of the Code for which the legislative history indi-
cated only that “proper regard” should be given to a state probate court deter-
mination, and then only when entered by a court “in a bona fide adversary
proceeding.” 387 U.S. at 464, 87 S.Ct. at 1787. By contrast, the Code section
and regulations at issue in this case specify that the probate court decision will
ordinarily be accepted, even if rendered by consent, if the court passes upon
the facts upon which deductibility depends. Second, unlike Bosch, there has
been a determination of the relevant New York law not merely by the trial
court, but also by the highest court in the state, in Freeman and Potts.
A-42
{3} I hold that the IRS cannot second-guess the decision of the
Surrogate when the Surrogate has passed upon the critical facts
upon which deductibility depends. to challenge such a decision,
the IRS must first make a prima facie showing that the Surro-
gate’s decision was motivated by factors other than those on
Footnote 7 Continued
Moreover, the underlying substantive rule in this case is based on state law
and this State’s highest court is the best authority on its own law. 387 U.S. at
465, 87 S.Ct. at 1782. The issue is the reasonableness of an attorney's fee and
the executor’s commission claimed as deductions in an estate administration
proceeding. Both fees are determined by State law. Both are allowed by State
statute, SCPA 2307. The executor’s commission is computed by a formula
contained in that statute. The attorney's fee is controlled by a standard set
forth by the holding of cases before the state’s highest court, Matter of Free-
man and Matter of Potts. As to the standard of review of a Surrogate’s exer-
cise of discretion in fixing attorney's fees, “the statute, the cases, and the
treatises suggest that the fixation of fees ... [is] discretionary without further
analysis (citations omitted].” In Re Estate of Aaron, 30 N.Y.2d 718, 720, 332
N. YS.2d 891, 283 N.E.2d 764 (1972). The Surrogate of Monroe County prop-
erly applied the statutory and caselaw, and thus his determination would not
even have been reviewable in state court, under Aaron. By contrast, in Bosch,
the Probate Court of Connecticut had to make a substantive determination of
the term “marital deduction” as it applied in a federal estate tax statute. See
Gallagher v. Smith, 223 F.2d 218, 222-23 (3d Cir. 1955); Estate of Bullock, 19
T.C.M. 1080 (1960). Thus Bosch supplies no authority for the IRS to seek
review of the Surrogate’s Decision in federal court, particularly when it could
not do so in state court. é
In the instant case the issue is not one of interpreting federal law. It is a case
of federal tax authorities refusing to accept the determination of a state court
of a matter involved in state administration and clearly dealt with in state law.
Thus, the Bosch case is distinguished from the instant case. In fact, under
Bosch, because the underlying substantive rule involved is based on state law
and the state's highest court has passed on the issue, then “federal authorities
must apply what they find to be the state law after giving ‘proper regard’ to
relevant rulings of other courts of the State.” 387 U.S. at 465, 87 S.Ct. at 1782.
The federal court then sits as a state court by application of the rule of Erie
Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938).
Id.
A-43
which deductibility depends, such as fraud, overreaching, or
excessiveness by the attorney or the Surrogate.* The IRS has not
done so here.
I do not consider the fact that Mr. White acted as executor and
attorney for the estate to be by itself evidence of fraud, over-
reaching, or excessiveness. That dual role is clearly permitted
pursuant to SCPA 2307.9 Whether or not that practice should
continue is a matter for the New York State Legislature to decide,
not Federal Court.'°
CONCLUSION
For the reasons set forth above, the Government’s motion for
an order compelling enforcement of its summonses is denied,
and this enforcement proceeding is dismissed. This dismissal is
without prejudice, however, to a refiling by the Government
should it determine that there is prima facie evidence of fraud,
. By analogy, New York statutory and case law is very clear on the circum-
stances (including fraud, newly discovered evidence, or clerical error) under
which a Surrogate’s order can be attacked. See, e.g., SCPA § 209; In re Estate
of Chodikoff, 54 Misc.2d 785, 786, 283 N.Y.S.2d 555 (Surr.Ct., Rensselaer
County 1967); Jn re Estate of Heller, 33 Misc.2d 798, 226 N. Y.S.2d 260 (Surr.
Ct., N.Y¥.County, 1962).
” An attorney/executor must differentiate between the services performed in
each capacity when seeking court approval of fees. See In re Tuttle’s Will, 4
A.D.2d 310, 164 N.Y.S.2d 573 (4th Dep’t 1957), aff'd, 4 N.Y.2d 159, 173
N.Y.S.2d 279, 149 N.E.2d 715 (1988). The reported cases collected in the Sup-
plementary Practice Commentaries to SCPA § 2110 (McKinneys) reflect
what can fairly be described as a heightened scrutiny by Surrogates for fee
applications from attorney/executors.
'° The MCBA has also argued that, because the IRS’s interpretation of the Trea-
sury Regulations is inconsistent with the plain language of the Tax Code, the
regulations are invalid. As set forth above, I believe the Regulations to be
consistent with the Tax Code, and the IRS’s interpretation of the Regulations
to be incorrect. Accordingly, like the Second Circuit in Smith, 510 F.2d at
483, and the Tax Court in Vatter, 65 T.C. 633, fn. 5, I find it unnecessary to
pass on whether Treas.Reg. § 20.2053-3 is invalid.
‘ A-44
overreaching, or some other reason to believe that the Surrogate
has not passed on the factors upon which deductibility depends
in this case. That burden is upon the Government.
In the absence of such evidence, the IRS must respect a deci-
sion of a Surrogate setting the amount of the attorneys’ fees and
the executors’ commissions set forth in a proceeding judicially
settling the estate and which fees (on their face) are fully in
accord with the requirements of the state law, particularly where
that determination takes into account all of the factors which the
IRS itself would consider. The fees, having been determined in a
state court proceeding by the proper application of the relevant
state law which is untainted by fraud, must be respected and
accepted by this Court as well as the IRS.
[4] The administration of estates is an area traditionally
reserved to the states, and federal laws dealing with the taxation
of decedents’ estates must accommodate and yield to judicial
determinations made under state law by state courts. This is not a
new doctrine. An important aspect of our Constitutional blue-
print. creates and respects certain spheres of authority, and leaves
to the people of the stats in the Tenth Amendment those responsi-
bilities and rights not committed to federal care.
ALL OF THE ABOVE IS SO ORDERED.
A-45
United States Court of Appeals
for the
Second Circuit
[United States Court of Appeals Seal: Filed Oct 06 1988]
Ata stated term of the United States Court of Appeals for the
Second Circuit, held at the United States Courthouse, in the City
of New York, on the 6th day of October, one thousand nine hun-
dred and eighty-eight.
UNITED STATES OF AMERICA, and JAMES M. SERLING,
E.tate Tax Attorney Internal Revenue Service,
Plaintiffs-Appellants,
v.
JAMES M. WHITE, as attorney for and as executor of
the ESTATE OF HLEN P. SMITH, deceased,
Defendant-Appellee.
A petition for rehearing containing a suggestion that the action
be reheard in banc having been filed herein by defendant-
appellee, James M. White, as attorney for and as executor of the
Estate of Helen P. Smith, deceased,
Upon consideration by the panel that heard the appeal, it is
Ordered that,said petition for rehearing is DENIED.
It is further noted that the Suggestion for rehearing in banc has
been transmitted 9 the judges of the court in regular active ser-
vice and to any other judge that heard the appeal and that no such
judge has requested that a vote be taken thereon.
ELAINE B. GOLDSMITH
Clerk
[signature]
A-46
[Department of the Treasury]
{Internal Revenue Service letterhead]
SUMMONS
[Government Exhibit 1]
In the Matter of Estate of Helen P. Smith
Internal Revenue District of Buffalo. Periods Date of Death:
November 10, 1982
The Commissioner of Internal Revenue
To James M. White, Executor and Attorney
At 624 Executive Office Building, Rochester, New York 14614
You are hereby summoned and required to appear before: James
M. Serling, Attorney (Estate Tax), an officer of the Internal Reve-
nue Service, to give testimony and to bring with you and to pro-
duce for examination the following books, records, papers and
other data relating to the tax liability or the collection of the tax
liability or for the purpose of inquiring into any offense con-
nected with the administration or enforceinent of the Internal
Revenue Laws concerning the period identified above for the per-
iods shown.
Any and all records and documents relating to the administration
of the Estate of Helen P. Smith including but not limited to the
correspondence file of the executor and attorney, administrative
records, records of purchase, sa!> and distribution of securities
of the decedent, bank statements, checking records, any plead-
ings, stock brokerage statements, legal documents prepared in
connection with the taxpayer, assignment or payments to the
heirs and beneficiaries of the estate, any diary or other records
maintained showing the attorney’s and/or executor’s activities,
tuiephone calls, conferences or court appearances and docu-
menis prepared for all the state and federal tax returns filed for
the estate.
A-47
Business address and telephone number of Internal Revenue Ser-
vice officer named above: Internal Revenue Service, 100 State
Street, Room 122, Rochester, New York 14614 (263-3170)
Place and time for appearance: at 100 State Street, Room 122,
Rochester, New York 14614 on the 17th day of May, 1985 at 10:00
o’clock A.M. issued under authority of the Internal Revenue
Code this 10th day of June, 1985
[James M. Serling signature] Attorney (Estate Tax)
Signature of Issuing Officer Title
a
A-48 A-49
Service of Summons, Notice ; : : ‘
be “ Signature: [James M. Serling} Title: [Attorney (Estate Tax)]
(Pursuant to section 7603, Internal Revenue Code)
I certify that I served the summons shown on the front of this
form on:
James M. White, Executor
Date: May 1, 1985 Time: 12:30 P.M.
How Summons Was Served
& I handed an attested copy of the summons to the person to
whom it was directed.
Signature: [James M. Serling] Title: [Attorney (Estate Tax)]
This certificate is made to show compliance with section 7609,
of Internal Revenue Code. This certificate applies only to sum-
monses served on third party recordkeepers and not to sum-
monses served on either third parties or any officer or employee
of the person to whose identity the summons relates nor to sum-
monses in aid of collection, to determine the identity of a person
having a numbered account or similar arrangement or to deter-
mine whether or not records of the business transactions or
affairs of an identified person have been made or kept.
I certify that within 3 days of serving the summons, I gave
notice (Form 2039 D) to the person named below on the date in
the manner indicated.
Date of Giving Notice: May 3, 1985
Name of Noticee: James M. White, Atty.
Address of Noticee (if mailed): 624 Executive Office Building,
Rochester, New York 14614
How Notice Was Given:
XM I gave notice by certified or registered mail to the last known
address of the noticee.
7
A-50
[Department of the Treasury]
[Internal Revenue Service letterhead]
SUMMONS
[COPY]
[Government Exhibit 2]
In the Matter of Estate of Helen P. Smith
Internal Revenue District of Buffalo. Periods Date of Death:
November 10, 1982
The Commissioner of Internal Revenue
To James M. White, Executor
At 624 Executive Office Building, Rochester, New York 14614
You are hereby summoned and required to appear before: James
M. Serling, Attorney (Estate Tax), an officer of the Internal Reve-
nue Service, to give testimony and to bring with you and to pro-
duce for examination the following books, records, papers and
other data relating to the tax liability or the collection of the tax
liability or for the purpose of inquiring into any offense con-
necied with the administration or enforcement of the Internal
Revenue Laws concerning the period identified above for the per-
iods shown.
Any and all records and documents relating to the performance
of the duties of executor of the Estate of Helen P. Smith, includ-
ing, but not limited to, the collection and conservation of the
decedent’s assets, payment of all debts, estate and all income
taxes, arrangement and payment of funeral and administration
expenses, correspondence file of the executor, administrative
records, records of purchase, sale and distribution of securities
of the decedent, bank statements, checking records, stock bro-
kerage statements, assignment or payments to the heirs and bene-
ficiaries of the estate, diary or other records maintained showing
executor’s activities, telephone calls, conferences, all statements
and schedules of accounts, court appearances, all documents
A-51
prepared for all state and federal tax returns filed for the estate
and all records rendered to the estate pertaining to all legal ser-
vices performed by James M. White, Attorney for the estate.
Business address and telephone number of Internal Revenue Ser-
vice officer named above: Internal Revenue Service, 100 State
Street, Room 122, Rochester, New York 14614 (263-3170)
Place and time for appearance: at 100 State Street, Room 122,
Rochester, New York 14614 on the 4th day of March, 1986 at 9:30
o’clock A.M. issued under authority of the Internal Revenue
Code this 3rd day of February, 1986
[James M. Serling signature] Attorney (Estate Tax)
Signature of Issuing Officer Title
A-52
Service of Summons, Notice
and Recordkeeper Certificates
(Pursuant to section 7603, Internal Revenue Code)
I certify that I served the summons shown on the front of this
form on:
James M. White, Executor
Date: February 3, 1986 Time: 4:45 P.M.
How Summons Was Served
X I handed an attested copy of the summons to the person to
whom it was directed.
A-53
[Monroe County Surrogate’s Court letterhead]
February 25, 1985
James M. White, Esq.
624 Executive Office Building
Rochester, New York 14614
Re: Estate of Helen P. Smith
Your File No. E:E:1210:JMS
Dear Mr. White: i
You have asked for a review of the commission and fee approval
granted by this Court in a decree of judicial settlement made J uly
17, 1984. In reviewing the amount submitted at that time, I have
noted that the total principal and interested accounted for are in
excess of $455,000.
The commission for the executor was therein fixed by statute and
was allowed in the amount of $17,548.13.
The attorney fee allowed in that proceeding was the sum of
$16,800.
This is to advise that the fee set is in keeping with our ordinary
and customary guidelines which have been followed in this Court
for several years. Moreover, it conforms to the criteria estab-
lished by the Court of Appeals in this state as enunciated in Mat-
ney for the estate. In those instances, I personally have been care-
ful to attempt to keep the fees for attorney-executors below a full
commission. In this particular estate, you have complied. In con-
clusion, I state to you that a re-review of the file and the account
A-54
submitted justify in every respect both the commission and fee
approval. These are not done in an arbitrary fashion but rather
as indicated following the application of the various criteria.
You are free to use this letter with respect to any taxing proceed-
ings.
Very truly yours,
[signature]
ARNOLD F. CIACCIO
Monroe County Surrogate
OPPOSITION
BRIEF
In the Supreme Court of the Bnited
OcToBER TERM, 1988
JAMES M. WHITE, ETC., PETITIONER
Vv.
UNITED STATES OF AMERICA AND JAMES M. SERLING
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
BRIEF FOR THE RESPONDENTS IN OPPOSITION
WILLIAM C. BRYSON
Acting Solicitor General
JAMES I.K. KNAPP
Acting Assistant Attorney General
CHARLES E. BROOKHART
JOAN |, OPPENHEIMER
Attorneys
Department of Justice
Washington, D.C. 20530
(202) 633-2217
QUESTION PRESENTED
Whether the approval of executor’s commissions and at-
torney’s fees by a state probate court precludes the
enforcement of an Internal Revenue Service summons
seeking records relating to the administration of the estate
for the purpose of determining the allowability of federal
estate tax deductions claimed for such commissions and
fees.
(I)
TABLE OF CONTENTS
Page
eh, ote a ds cau ee Saag phew eessevacdes l
ei ak oes ctabnhnetes aks pawes ubbne l
es Ol i eek ee ee re £beCens Kasbdkae ee nee l
i LG nd goku necro teeh tense eed ebee: « hee 5
Te ine enn ee ee ees eal es o's od clneies 11
TABLE OF AUTHORITIES
Cases:
Brehm, In re, 37 App. Div. 2d 95, 322 N.Y.S. 2d 287
ee. bla dc swcceececetbees 9
Commissioner v. Estate of Bosch:
RE 5, 7,8,9
363 F.2d 1009 (2d Cir. 1966) ........... 2c cee ceees 8
Estate of Jenner v. Commissioner, 577 F.2d 1100 (7th
es as nbc kdeeeese'eeie 10
Estate of Park v. Commissioner, 475 F.2d 673 (6th Cir.
eae e ck ws neaeaveccenudecaneed 10
Estate of Roth, In re, 29 App. Div. 2d 941, 289 N.Y.S.2d
SRT ET REAR ORE See 9
Freeman, In re, 34 N.Y.2d 1, 311 N.E.2d 480, 355 N.Y.S.
SS TT ED PY Pn ee 2,8
Magavern v. United States, 550 F.2d 797 (2d Cir.), cert.
ne y
Second Nat'l Bank vy. United States, 351 F.2d 489 (2d
Cir. 1965), aff'd, 387 U.S. 456 (1967) ................ 8-9
United States v. Arthur Young & Co., 465 U.S. 805
NRT a ee Deaieuc heh «es waeede 10
United States v. Powell, 379 U.S. 48 (1964) ............ 4, 6
Statutes and regulation:
‘nternal Revenue Code of 1954 (26 U.S.C.):
ed ee eee bl cde y aces keeedbe e 6
Airtel. cn wes ios tink ore be cee 00be'e 3
rhe ee thi Oa as ot bid bod Capen 10
N.Y. Surr. Ct. Proc. Act § 2307 (McKinney 1967 &
Pri CL GL Ce Uhl as hedé'sé'sbeends bedede 2
Treas. Reg. § 20.2053-1(b)(2) (26 C.F.R.) ............. 3, 5, 6
(III)
—
In the Supreme Court of the Gnited States
OCTOBER TERM, 1988
No. 88-928
JAMES M. WHITE, ETC., PETITIONER
V.
UNITED STATES OF AMERICA AND JAMES M. SERLING
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT UF APPEALS
FOR THE SECOND CIRCUIT
BRIEF FOR THE RESPONDENTS IN OPPOSITION
OPINIONS BELOW
The opinion of the court of appeals (Pet. App. Al-A24)
is reported at 853 F.2d 107. The opinion of the district
court (Pet. App. A26-A44) is reported at 650 F. Supp.
904.
JURISDICTION
The judgment of the court of appeals was entered on
August 2, 1988. A petition for rehearing was denied on
October 6, 1988 (Pet. App. A45). The petition for a writ
of certiorari was filed on December 3, 1988. The jurisdic-
tion of this Court is invoked under 28 U.S.C. 1254(1).
STATEMENT
1. Petitioner was named as the executor of the estate
of Helen P. Smith, and he also chose to act as the estate’s
(1)
_— —
2
attorney. For his services, he claimed an executor’s com-
mission of $17,548 and an attorney’s fee of $16,800, to be
paid out of the gross estate of $455,000.' Petitioner ob-
tained from the New York State Surrogate Court a decree
of judicial settlement, which had the effect of fixing and
approving his claimed executor’s commissions and at-
torney’s fees. This proceeding was not adversarial, and
petitioner did not file an affidavit detailing his services as
an attorney. Pet. App. A5-A6, A28-A30. ‘
On the estate’s federal estate tax return, petitioner
deducted as administrative expenses an attorney’s fee of
$16,530 and an executor’s commission of $17,450.?
Respondent Serling, an Internal Revenue Service (IRS) at-
torney, was assigned to review the estate tax return. He in-
formed petitioner that the decree of judicial settlement did
not eliminate the need to justify the claimed deduction of
legal fees, and he requested that petitioner provide the IRS
with documentation of the work performed and time spent
on the estate’s legal work. In response, petitioner for-
warded to respondent Serling a letter obtained from the
Surrogate for use in the audit (see Pet. App. A53-A54), in
which the Surrogate explained that the attorney’s fee con-
formed to the criteria of reasonableness applicable under
' New York law provides that the executor’s commission is deter-
mined by a formula based on the value of the gross estate. An
allowable attorney’s fee is compensation that is “just and reasonable.”
N.Y. Surr. Ct. Proc. Act § 2307 (McKinney 1967 & Supp. 1989). The
New York Court of Appeals in Jn re Freeman, 34 N.Y.2d 1, 311
N.E.2d 480, 355 N.Y.S. 2d 336 (1974), has described the factors that
are relevant in determining whether a claimed fee is “just and
reasonable.” See Pet. App. A36-A37.
2 The record does not reveal why the amounts claimed as deduc-
tions on the estate tax return were slightly smaller than the amounts
awarded by the Surrogate.
3
New York law and that he did not act arbitrarily in ap-
proving it. Jd. at A6, A31.
Thereafter, respondent Serling issued two ad-
ministrative summonses to petitioner (see Pet. App.
A46-A47, A50-A51), requesting all records relating to the
administration of the estate, including records of peti-
tioner’s activities as attorney and executor. Petitioner
refused to comply with the summonses, relying on the Sur-
rogate’s prior approval of his attorney’s fees. The govern-
ment then brought this action in the United States District
Court for the Western District of New York to enforce the
summonses. Jd. at A6-A7.3
2. The district court refused to enforce the summonses
(Pet. App. A26-A44). The court held that “the IRS has not
made the necessary showing that the investigation will be
conducted pursuant to a legitimate purpose” (id. at A33).
The court noted that the governing statute, Section
2053(a) of the Internal Revenue Code (26 U.S.C.), permits
the deduction of administrative expenses allowable under
state law, and the court relied upon the fact that the rele-
vant Treasury regulation, 26 C.F.R. § 20.2053-1(b)(2),
provides that a local court’s determination to allow an ad-
ministrative expense “will ordinarily be accepted [for
federal estate tax purposes] if the court passes upon the
facts upon which deductibility depends.” The court
reasoned that the IRS therefore could not ordinarily
disallow the expenses approved by the Surrogate Court,
* The government also issued a notice of deficiency against the
estate, in which it disallowed the claimed attorney’s fees and reduced
the claimed deduction for the executor’s commission from $17,450 to
$16,804. Petitioner did not contest the reduction in the executor’s
commission. After paying the deficiency, however, he sought a re-
fund, contesting the disallowance of the attorney’s fees deduction.
That separate refund suit is pending in district court, and this case
does not involve the refund claim. Pet. App. A6-A7.
4
and the court held that it would not enforce a summons
designed to evalute the reasonableness of such approved
expenses unless the IRS makes “a prima facie showing that
the Surrogate’s decision was motivated by factors other
than those on which deductibility depends, such as fraud,
overreaching, or excessiveness by the attorney or the Sur-
rogate” (Pet. App. A42-A43).
3. The court of appeals reversed (Pet. App. Al-A24).
The court held that the government had clearly met the re-
quirements set forth in United States v. Powell, 379 U.S.
48 (1964), for the enforcement of a summons. Indeed, ihe
court stated that the district court’s additional requirement
that the IRS make a prima facie showing that the Sur-
rogate’s decision was motivated by impermissible factors
such as fraud was “virtually the same” as the proposition
rejected by this Court in Powell, namely, that the IRS
must make an advance showing of probable cause to
suspect fraud in order to obtain enforcement of a sum-
mons designed to investigate fraud (Pet. App. A20).
Because “the district court’s requirement would be equally
likely to hamper the IRS in carrying out investigations it
thinks are warranted, and has already forced the IRS to
litigate and prosecute an appeal on the very subject it
desires to investigate,” the court of appeals rejected the
district court’s additional requirement as “an invalid
restraint on the summons power of the IRS” (ibid.).
The court of appeals also rejected the district court’s
conclusion that the statute and Treasury regulation
preclude the IRS from investigating the deductibility of
petitioner’s fees. The court declared that the statute re-
quires the IRS to apply state rules, but that the deductibili-
ty of the expenses remains a federal question that is not
controlled by the determination of a state trial court (Pet.
App. Al4). And the court of appeals found that this
c- «>»
=F ss
5
Court’s decision in Commissioner v. Estate of Bosch, 387
U.S. 456 (1967), supported its conclusion that “the Sur-
rogate’s decree is not conclusive and binding on the IRS”
(Pet. App. Al5). Correspondingly, the court concluded
that Treas. Reg. § 20.2053-1(b)(2) “makes it clear that the
IRS is entitled to make an independent assessment of ap-
plicable state law as interpreted by the state’s highest
court,” and therefore it can “independently assess[] the
deductibility of [petitioner’s] fees under state law” (Pet.
App. A18-A19). Thus, the court held that an inquiry into
the basis for petitioner’s claimed fees was a legitimate pur-
pose for the issuance of the summonses. The court em-
phasized that “the validity of the Surrogate’s decree is not
at issue”; rather, the court’s discussion was “intended sole-
ly to demonstrate that, contrary to [petitioner’s] claim, the
IRS may indeed inquire under § 2053 into the allowability
of [petitioner’s] fees under state law” (id. at Al7).
ARGUMENT
Petitioner contends that the court of appeals erred in
directing the district court to enforce the summonses. The
court of appeals’ decision, however, is correct, and does
not conflict with any decision of this Court or of another
court of appeals. Indeed, the decision below is virtually
compelled by summons enforcement principles well
established by decisions of this Court. Accordingly, fur-
ther review is not warranted.
1. It must be emphasized that, despite petitioner’s
statement of the question presented (Pet. i; see also Pet.
19-25), the issue in this case concerns only the validity of
IRS investigative summonses. It has been well established
by this Court that a summons must be enforced when it
. has been issued by the IRS in good faith to further a
legitimate tax investigation — specifically, if the IRS shows
6
that “the investigation will be conducted pursuant to a
legitimate purpose, that the inquiry may be relevant to the
purpose, that the information sought is not already within
the Commissioner’s possession, and that the ad-
ministrative steps required by the Code have been fol-
lowed.” See, e.g., United States v. Powell, 379 U.S. 48,
57-58 (1964). There is no doubt that the Commissioner
followed the prescribed administrative steps, that he did
not possess the requested information, and that the sum-
monses were not issued for any purpose other than the
legitimate one of determining the tax liability of the estate.
Hence the summonses should have been enforced.
The essence of petitioner’s contention is the assertion
that the IRS is “bound under section 2053(a) of the Inter-
nal Revenue Code to accept the state court’s determination
as to the amount of a reasonable attorney’s fee” (Pet. 9). If
SO, petitioner reasons, the documents requested by the
summonses are not relevant to a legitimate tax investiga-
tion purpose because, regardless of the outcome of the in-
vestigation, the IRS is powerless to disallow a claimed
deduction for fees that have been approved by the Sur-
rogate. But the premise of petitioner’s contention is
manifestly erroneous. Section 2053 directs the IRS to ap-
ply state rules in determining whether fees are “allowable,”
but the statute does not purport to give preclusive effect to
the decree of a state trial court. In implementing this
Statute, Treas. Reg. § 20.2053-1(b)(2) states only that a
local lower court decree “will ordinarily be accepted [for
federal estate tax purposes] if the court passes upon the
facts upon which deductibility depends” (emphasis
added), and it flatly declares that the decree of a lower
State court “will not be accepted if it is at variance with the
law of the State.” Accordingly, even the district court
recognized that the IRS is not necessarily bound to allow a
deduction in the amount approved by the Surrogate, but
7
instead may depart from the state court decree in some cir-
cumstances (see Pet. App. A42-A43). Thus, even under
the district court’s reading of the statute, the IRS must be
permitted to inquire into the circumstances underlying the
claimed deduction, and therefore the summonses in this
case were issued for a legitimate purpose and satisfy the
Powell criteria.‘
In fact, the circumstances under which the IRS may
depart from the determination by the Surrogate are
broader than those recognized by the district court. In
Commissioner v. Estate of Bosch, 387 U.S. 456 (1967),
this Court held that, where a federal estate tax deduction
depended upon a question of state law, the federal court
was not bound by the determination of a state trial court.
Rather, the federal court was required to conduct an “in-
dependent examination of the state law as determined by
the highest court of the State” and not to follow the state
trial court’s determination if it did not accord with the
principles promulgated by the highest court of the State
(id. at 463). Thus, the Court concluded that, “when the ap-
plication of a federal statute is involved, the decision of a
state trial court as to an underlying issue of state law
should * * * not be controlling” (id. at 465). The principles
+ The district court's holding that the summons should not be en-
forced unless the IRS can make a prima facie showing that there exist
circumstances that would justify departing from the Surrogate’s
decree was correctly rejected by the court of appeals as plainly incon-
sistent with Powell. See Pet. App. A20. Just as the IRS in Powell did
not have to demonstrate fraud in order to obtain enforcement of a
summons in a case where the statute of limitations would have expired
if there were no fraud, so too the IRS does not have to show the ex-
istence of the circumstances that would justify departing from the Sur-
rogate’s decree before it undertakes its investigation. The IRS is en-
titled to make an inquiry, and to use its summons power for that pur-
pose, in order to determine if such circumstances exist.
of Bosch indicate that the IRS and the federal courts —in
considering the estate’s federal estate tax liability — are en-
titled to make an independent assessment of whether the
fees approved by the Surrogate were in fact “just and
reasonable” under New York law as interpreted by the
New York Court of Appeals.’
Petitioner argues (Pet. 13-16) that Bosch should not ap-
ply in this context. First, petitioner argues that Bosch ap-
plies only when the case concerns a rule of law that has not
been settled by the highest court of the state, and that the
federal courts must follow a state trial court’s ruling when
that court is merely applying an established rule of state
law to a particular set of facts. But there is no indication in
Bosch that the decision should be so limited, and, in fact,
the court of appeals opinions in the two cases that were
before the Court in Bosch do not indicate whether the rele-
vant state law rule had been settled at that time by the
State’s highest court. See Commissioner v. Estate of
Bosch, 363 F.2d 1009 (2d Cir. 1966) (validity of release of
general power of appointment), rev’d, 387 U.S. 456
(1967); Second Nat'l Bank v. \/nited States, 351 F.2d 489
(2d Cir. 1965) (whether will negated application of state
> Petitioner objects (Pet. 19) that the summoned materials “are not
even potentially relevant” to an application of New York law because
of their alleged “emphasis on ‘time spent’ and ‘hourly rates.’ ” But the
IRS is not seeking information only with respect to the time petitioner
spent performing legal work, which is, in any event, one of the factors
that the New York Court of Appeals aas deemed relevant to
reasonableness. The summonses also seek material relating to peti-
tioner’s work as attorney that would establish the work he performed,
the difficulty of the questions presented, and the results obtained, all
of which are recognized under New York law as relevant to the
reasonableness of the fees. See Jn re Freeman, supra; Pet. App.
A%6-A37.
9
proration statute), aff'd, 387 U.S. 456 (1967).* Second,
petitioner argues (Pet. 15-16) that, even under the prin-
ciples of Bosch, the federal courts must treat the Sur-
rogate’s approval as conclusive because, in practice, the
New York Court of Appeals almost never reviews the
legitimacy of fees awarded by the Surrogate. As the court
of appeals found (Pet. App. A1l6), however, it is un-
disputed that the New York appellate courts have the
authority to review the Surrogate’s determination to en-
sure that it complies with New York law (see, e.g., /n re
Brehm, 37 App. Div. 2d 95, 97, 322 N.Y.S.2d 287, 290
(4th Dept. 1971); In re Estate of Roth, 29 App. Div. 2d
941, 289 N.Y.S.2d 575 (ist Dept. 1968)), and therefore the
Surrogate’s determination is not a conclusive statement of
state law; “[{t}hat the [New York] Court [of Appeals] rarely
exercises its prerogative does not deprive the federal
authorities of their jurisdiction to consider the same
issues” (Pet. App. Al6).
In any event, the degree of deference that is due the Sur-
rogate’s de
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