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