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HAFFNER v. UNITED STATES

April 25, 1984

CHARLES C. HAFFNER III AND THE NORTHERN TRUST COMPANY, AS EXECUTORS OF THE WILL OF CHARLES C. HAFFNER, JR., DECEASED, PLAINTIFFS,
v.
UNITED STATES OF AMERICA, DEFENDANT.



The opinion of the court was delivered by: Will, District Judge.

MEMORANDUM OPINION

This is an action against the government filed by the executors of the will of Charles C. Haffner, Jr. (the executors) asserting a claim for refund of $614,905.69 in estate tax, plus costs and interest. Our jurisdiction is predicated on 28 U.S.C. § 1346(a)(1). The parties have filed cross motions for summary judgment based on the undisputed facts in the record before us. For the reasons hereinafter stated, the executors' motion is granted and the government's motion is denied.

Charles C. Haffner, Jr. (decedent), a resident of Lake Forest, Illinois, died on February 13, 1979 leaving a will that the Circuit Court of Lake County, Illinois admitted to probate on March 15, 1979. The plaintiffs were named in the will and duly appointed as executors of the decedent's estate by the Lake County Circuit Court.

The executors, on November 13, 1979, filed the United States Estate Tax Return (the Return) for the decedent's estate with the District Director of Internal Revenue at Chicago, Illinois (the District Director), and paid the tax showed due thereon in the amount of $9,071,713.30. Schedule B, appended to the Return, disclosed the following public housing agency Project Notes, which are the subject matter of this litigation:

  $85,000 par value Anne Arundel Co., Md., dated
  4/11/78, 3.79% project note due 4/13/79
  $1,000,000 par value Oklahoma City, Oklahoma,
  dated 5/9/78, 4.12% project note due 5/11/79

Although listing the Project Notes on Schedule B, the executors stated that they were not taxable, relying on section 11(b) of the Housing Act of 1937, 42 U.S.C. § 1437i(b) ("section 11(b)"),*fn1 pursuant to which the Project Notes had been issued.

The District Director disagreed, taking the position, upon audit of the Return, that the $1,085,000 par value Project Notes were includible in the decedent's gross estate at a value, including interest, of $1,113,901.42. That adjustment and one other made by the District Director resulted in the assessment of an additional estate tax of $630,808.76. The executors have paid that additional assessment.

After receiving a National Office Technical Advice Memorandum elucidating the IRS's position that the Project Notes were subject to estate taxation, the executors, on November 10, 1982, filed with the District Director a claim for refund of the $614,905.69 of tax plus interest that was allocable to the Project Notes. That claim was denied on June 10, 1983 and this suit for refund was timely filed thereafter.

The question presented by these cross motions for summary judgment is one solely of law. Section 11(b) provides that obligations like the Project Notes owned by the decedent and the interest on them "shall be exempt from all taxation now or hereafter imposed by the United States whether paid by such agencies or by the United States." A March 1977 circular of the Department of Housing and Urban Development, titled "Short Term Tax-Exempt Project Notes," explained that "[section 11(b)] provide[s] that the Notes including interest thereon . . . shall be exempt from all taxation now or hereafter imposed by the United States." (Emphasis original.) Although the provision in question has been the applicable law since 1937, we are required to decide what is apparently an issue of first impression: whether the section 11(b) exemption includes federal estate taxes.

The estate tax is not a direct tax "on" the Project Notes themselves. Rather, it is an excise or duty, imposed with reference to the value of the notes, on their passage to the decedent's legatees. This principle, which has been developed in the context of the Constitutional apportionment decisions, is firmly entrenched. See e.g., Plummer v. Coler, 178 U.S. 115, 130, 20 S.Ct. 829, 835, 44 L.Ed. 998 (1900); Greiner v. Lewellyn, 258 U.S. 384, 387, 42 S.Ct. 324, 324, 66 L.Ed. 676 (1922); United States v. United States Manufacturers National Bank, 363 U.S. 194, 198, 80 S.Ct. 1103, 1106, 4 L.Ed.2d 1158 (1960). Though the distinction bears a somewhat formalistic stamp, Justice Holmes has commented that it is supported by "a page of history . . . worth a volume of logic." New York Trust Co. v. Eisner, 256 U.S. 345, 349, 41 S.Ct. 506, 507, 65 L.Ed. 963 (1921). And the executors disavow any intention to travel the "primrose path" that would be indicated by a challenge to the notion that the estate tax is not a direct tax.

As a kind of corollary to this indirect nature of the estate tax, it has long been established that an exemption of securities or bonds from "taxation" or "all taxation" — despite the apparent literal force of the language — does not necessarily operate as an exemption from estate or inheritance taxes. See e.g., Murdock v. Ward, 178 U.S. 139, 145-147, 20 S.Ct. 775, 777-78, 44 L.Ed. 1009 (1900); United States Trust Co. v. Helvering, 307 U.S. 57, 60, 59 S.Ct. 692, 693, 83 L.Ed. 1104 (1939); Iglehart v. Commissioner, 77 F.2d 704, 712 (5th Cir. 1935); Greene v. United States, 171 F. Supp. 459, 145 Ct.Cl. 259 (1959).*fn2 The executors do not seek to controvert the established general rule, now embodied in Treas. Reg. § 20.2033-1 (1963),*fn3 that an exemption from all taxation without exception generally does not affect the imposition of estate and other excise taxes.

The executors' argument is bottomed on the premise, recognized in Greene v. United States, supra, and followed in Jandorf's Estate v. Commissioner, 171 F.2d 464 (2d Cir. 1948), that where there is a "strong indication" in a particular statute and its legislative history that Congress intended an exemption from "all taxation" to encompass excise taxes as well, the specific Congressional intention should override the general rule of Murdock v. Ward, supra; United States Trust Co., supra, and similar cases. The executors argue that the terms and legislative history of the Housing Act of 1937, Pub.L. No. 75-412, 50 Stat. 888 (1937) ("the 1937 Act"), from which section 11(b) is derived, contain sufficient indicia of a Congressional intent to exempt Project Notes from estate taxes so as to preclude application of the Murdock v. Ward and United States Trust Co. rule.

The 1937 Act created the former United States Housing Authority (the Authority) as an agency of the Department of the Interior. Section 3(a). It acknowledged the existence of "public housing agencies" defined as "any State, county, municipality, or other government entity or public body (excluding the Authority), which is authorized to engage ...


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