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RUSSELL v. UNITED STATES

August 5, 1966

WILLIAM E. RUSSELL, EXECUTOR OF THE ESTATE OF LILLIAN L. RUSSELL, PLAINTIFF,
v.
UNITED STATES OF AMERICA, DEFENDANT.



The opinion of the court was delivered by: Julius J. Hoffman, District Judge.

    MEMORANDUM OF DECISION

This action is brought by the plaintiff, William E. Russell, in his capacity as the executor of the estate of Lillian L. Russell, his mother. Jurisdiction over the subject matter of the suit is created by 28 U.S.C. § 1346(a)(1), the complaint being one against the United States for the recovery of a tax erroneously collected under the internal revenue laws, in that it was allegedly in excess of the amount properly due.

The cause was tried to the court without a jury, and pursuant to Rule 52(a) of the Federal Rules of Civil Procedure, this memorandum of decision will constitute the court's findings of fact and conclusions of law.

It appears from the evidence that the decedent, Lillian L. Russell, died on January 9, 1960. The plaintiff, who is the duly qualified executor of her estate, filed an estate tax return for the decedent's estate on April 10, 1961, reporting the taxable estate as $236,545.43, and asserting the federal estate tax due as $58,146.54 which amount was paid on the date the return was filed.

On March 14, 1963, the plaintiff filed an amended estate tax return, reporting the taxable estate as $76,084.33 and computing the estate tax due as $14,003.61. If that figure is determined to be correct, the conclusion would be that there had been an overpayment of $44,142.93. A claim was filed with the District Director of Internal Revenue at Chicago for a refund of this amount on April 23, 1966. This claim was disallowed, and after an audit of the estate, the District Director increased the value of the taxable estate above that reported on the original return and assessed additional taxes in the sum of $48,778.61. This amount was paid by the plaintiff on December 31, 1963. On December 30, 1963, the plaintiff filed an amended claim for a refund, seeking the sum of $92,802.21, which is the amount sought to be recovered in this suit. This sum is the aggregate of the original refund claimed plus the amount paid pursuant to the deficiency assessment. On April 27, 1964, the plaintiff paid an additional assessment of $8,044.00 representing the interest due on the deficiency assessment paid on December 31, 1963. On April 27, 1964, the plaintiff filed a further amended claim for refund to include this interest payment, increasing the claim to $100,542.99. This claim was disallowed on July 1, 1964.

The rejection by the District Director of the plaintiff's claimed deductions or exclusions from the gross estate and the concomitant disallowance of the claims for refund constitute the basis of this action.

A. CLAIMS AGAINST THE ESTATE BY PATRICK AND MARY RUSSELL

The first issue to be dealt with is the allegation that Patrick Russell and Mary St. Marie, children of the decedent and brother and sister of the plaintiff, had valid claims against the decedent's estate which should have been allowed as deductions from the gross estate, and which were improperly denied as such by the District Director of Internal Revenue.

These shares were distributed to Lillian Russell, along with Peerless shares distributed to her as an individual and along with certain other trust assets which need not be detailed here. Following the death of the senior Russell, and up to December 28, 1950, dividends were paid on the Peerless shares held in trust by Lillian in the following sums: $1,890.00 in dividends on those shares of Peerless held in trust for Patrick, and $4,770.00 on those held for Mary. On December 28, 1950, the Peerless shares held by Lillian for Patrick were sold for $64,250.00 as were those held for Mary, for a total of $128,500.00.

Patrick reached the age of 21 on July 13, 1954 and Mary attained the same age on November 30, 1957. Lillian Russell did not at either time inform them of the trusts created by their father's will, and neither was aware of the existence of those trusts until after the death of their mother. Prior to her death, Lillian made no distribution to either beneficiary of any part of the sums held in trust for Patrick and Mary.

Letters testamentary were issued in connection with the will of the decedent, Lillian Russell, on January 19, 1960, appointing the plaintiff and the American National Bank & Trust Co. as co-executors. The bank subsequently resigned as an executor. Twenty-three months after the issuance of these letters, Patrick and Mary initiated proceedings in the Probate Court of Cook County, Illinois, seeking the removal from the inventory of the decedent's estate the sums held in trust for them by their mother, at her death. As a result of these proceedings, the Probate Court, on December 7, 1962, awarded to Patrick and Mary the sum of $207,961.00. This figure included the principal plus interest. The parties have stipulated that this figure included $14,778.56 of interest accruing after the death of Lillian Russell, and that this amount is neither excludable nor deductible from the gross estate.

The plaintiff claims that this sum, with the adjustment for the post-death interest, should have been allowed as a deduction under the terms of 26 U.S.C. § 2053(a)(3), which provides:

  "* * * the value of the taxable estate shall be
  determined by deducting from the value of the
  gross estate such amounts * * * (3) for claims
  against the estate * * * as are allowable by the
  laws of the jurisdiction * * * under which the
  estate is being administered."

The controversy on this issue concerns the question of whether or not the claims of Patrick and Mary are deductible under this statute. The executor argues that this point has been concluded against the defendant by the decree of the probate court removing $207,961.00 from the decedent's estate as an award to the children. The plaintiff is unquestionably correct in his position that a valid order of a state court conclusively determines property interests as a matter of state law, and that such an order is binding on a federal court for estate tax purposes. I cannot agree, however, that the probate court order under present examination is binding upon this court. The Government has made a successful collateral attack upon that order; it is void and of no effect.


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