SCHNACKENBERG, Circuit Judge.
Plaintiff sued defendants in the district court for a refund of a payment made to the defendant Campbell, covering an estate tax net deficiency (and interest thereon) assessed against the estate of Guy E. Street, who died August 16, 1950 and whose will was probated in the Probate Court of Marion County, Indiana. Plaintiff is the executor and trustee under said will and is also referred to herein as the taxpayer.
We now state facts, as stipulated by the parties, or otherwise shown by the record before us, and as found by the district court.
By his will, deceased left certain personal property to his wife, other personal property to his daughter, and made specific bequests to four relatives. The rest of his estate by Item V of the will was placed in trust, 2% of the principal to be distributed during a ten year period to his wife, daughter and other beneficiaries in named percentages; and the income of the trust to be distributed to various beneficiaries, including 4/10 to his wife for life, at her death to their daughter, and at her death to grandchildren; the trust to continue for the lives of the various beneficiaries, the principal of the trust to be then distributed as provided in the will. The will provided, in part:
On February 14, 1951, the widow renounced the provisions made for her in the will and elected to take under the laws of descent of Indiana, reserving, however, her interest in life insurance policies of which she was beneficiary, her rights as surviving tenant by the entirety in certain real estate and all right, title and interest in property as to which decedent died intestate. The document containing her renunciation also stated, in part:
In a proceeding for construction of the will and for instructions filed by the taxpayer in the Marion County Probate Court, the widow, heirs, legatees and beneficiaries of the trust were named as defendants, and proceedings were had, terminating in a decree directing, inter alia, the executor to pay all federal estate taxes and all inheritance taxes assessed by the United States, the state of Indiana or any other state, by virtue of the death of decedent or any transfer made by him, and not to receive reimbursement from any person. The United States was not a party to the probate court proceeding.
In an estate tax return filed by the executor on November 16, 1951, a marital deduction
The district court entered judgment in favor of the taxpayer on September 24, 1956, from which defendants appealed.
1. Defendants in this court argue in support of this proposition:
Counsel for both sides rely on Riggs v. Del Drago, 317 U.S. 95, 63 S.Ct. 109,
We must, therefore, ascertain and apply the law of Indiana to the questions presented on this appeal. On that subject we have the assistance of counsel, who have discussed that law in their briefs.
By renouncing the will and electing to take under the Indiana laws of descent, the widow received one-third of the estate after payment of debts.
The language of testator's direction in Item I, pertaining to the payment of federal estate and state inheritance and estate taxes "that may be assessed upon my estate or payable by any beneficiary thereof on account of the provisions hereof made in their behalf * * *", includes, not only that property which the testator intended to transmit by his will, but also such property as the insurance policies involved in this case, and intestate estate. It can hardly be denied that intestacy embraces not only property which the decedent failed to mention in his will but also that property which passed as intestate upon the widow's renunciation of the provisions made in the will for her. All of this property — life insurance, property passing by the will, and property passing under the laws of intestacy of Indiana — was subject to federal estate taxes. As to all of these classes of property the duty devolved upon the executor, by virtue of Item I, to pay the federal estate and state inheritance taxes because they were assessed upon the decedent's estate. Accordingly they were paid by the executor. In so doing it was required of it that such payments be made "from and out of my residuary estate."
In Rawley v. Sanns, 141 Ind. 179, 40 N.E. 674, at page 676, in speaking of a surviving husband, the court said:
That which passed to the widow at the death of her husband became subject to federal estate taxes, inasmuch as testate as well as intestate estate passing to a widow was subject to the classes of claims listed by the Indiana statute.
The Illinois law in respect to a renunciation by a widow is the same as the Indiana law. Therefore In re Estate
A similar view was taken in In re Uihlein's Will, 264 Wis. 362, 59 N.W.2d 641, 38 A.L.R.2d 961, which, on the facts, is directly in point in this case. The court, 264 Wis. at page 377, 59 N.W. 2d at page 649, said:
We, therefore, determine, pursuant to Indiana law, that the ultimate impact of the federal estate tax fell on the residuary estate, including the part of the estate passing to the widow as intestate property, and the insurance policies. The effect thereof is to reduce the marital deduction herein to $280,933.55. It follows therefore that the claim for refund was properly rejected.
2. Plaintiff relies upon the decree of the Marion County Probate Court and states that the proceeding in that court was sharply adversary in form and in fact, and was clearly not collusive. It also argues that the probate court decree was not a consent decree or one obtained by collusion. It contends that the burden is on defendants to show consent, collusion or fraud. It relies on finding 6 by the district court which reads:
Defendants take issue with these contentions and insist that the probate court proceedings were collusive in the sense that all parties joined in the submission of the issues and sought the same decision, which would adversely affect the tax rights of the government, which was not a party to those proceedings, as we have pointed out. We must, therefore, consider the facts appearing in the record which are relevant to the issues thus raised by the parties.
The attorney for the executor and the attorney for the widow were members of the same firm of lawyers.
With the exception of several formal answers merely calling for strict proof of the allegations of the complaint, and the widow's answer which expressly consented to the relief prayed for in the complaint, the only answer to the complaint of the taxpayer in the probate proceeding was filed on behalf of William McClenon, as guardian ad litem for two minor children and unborn children of himself and decedent's daughter Ruth
The probate court held an oral hearing October 23, 1951, and ordered briefs filed. After briefs were filed on behalf of the executor and the widow,
Mr. Travis, on behalf of his clients, filed a motion for new trial on March 11, 1952, alleging that the decision of the probate court was contrary to law, and that Ruth Gladys McClenon, decedent's daughter, a necessary party, was not represented at the trial and no judgment of default was entered against her, so that the decree was void as to all defendants. On March 18, 1952, at the express direction of his client, Mr. Travis withdrew the motion for new trial and also his appearance as counsel. The probate court on March 21, 1952 entered a second decree identical with the first except for an additional finding and judgment of default against decedent's daughter. According to the record before us, the defendants represented by Mr. Travis on and prior to March 18 were not represented by any lawyer after that date. Mr. Travis testified as a witness for defendants at the trial in the district court, where his testimony was to the effect that "his clients" informed him they were in accord with the order of the probate court, that they were in agreement with the contentions advanced by the executor and the widow, and that it was not desired that he proceed further with his motion for a new trial. He also testified that the minors, for whom his client as guardian ad litem acted, were the primary residuary legatees under the will.
He also testified that, after briefs had been filed in the probate court on behalf of the executor and the widow (these two briefs were in agreement that the federal estate taxes should be paid by the executor and no portion thereof charged to the widow), he was instructed to file a brief. The brief for the widow was given to Mr. Travis on January 9, 1952. He proceeded to prepare his brief. He completed only the first nine pages thereof. In that portion he stated, in effect, that the widow was liable for her contribution to the estate for the full amount of the inheritance taxes payable on property which she received and which is taxable under the terms of the law, and in the district court he testified that, had he been permitted to do so, he would have filed a brief to that effect.
He further testified that he never knew that there was a judgment entered in the probate court until after it was entered, that he had never been shown the judgment and had never discussed it with anyone.
He further testified that he had originally been retained by Mr. McClenon to represent his two children in the probate court proceedings, and that he advised Mr. McClenon that the interests of his children were adverse to the widow, and the case was tried on that basis.
The probate court allowed Travis' law firm compensation for his services and reimbursement for his expenses incurred in procuring a bill of exceptions for use on a possible appeal from the court's decision, as requested in a petition presented to the court.
Not only in this court and in the district court did plaintiff contend that the probate court decree was entered as the result of an adversary proceeding and not by consent, but it uniformly made a similar contention in a protest in regard to federal estate taxes filed with the internal revenue agent under date of
In view of the contentions of both parties made in this court, as well as the statements heretofore made by plaintiff to the internal revenue agent, it is apparent that both sides agree that, if the probate court final decree was entered by consent of the parties or in a nonadversary proceeding, it is not binding upon defendants in this federal estate tax litigation. It is, therefore, unnecessary for us to pass upon the validity of that proposition of law and we are relieved of any obligation to consider and reconcile a number of seemingly conflicting federal courts of appeals cases.
Although we have hereinbefore referred to a finding of fact made by the district court on this subject, we are not prevented by Rule 52(a) of the Rules of Civil Procedure
On this state of the record, when the decree was entered, it was, according to plaintiff, binding upon the United States of America, although it was not a party to the proceeding and, therefore, plaintiff maintains that federal estate taxes in a substantial amount cannot be collected from plaintiff.
On these undisputed facts, we hold that, when the decree relied upon by plaintiff was entered by the probate court, insofar as it affected federal estate tax liability, it was consented to by all parties except two minors and unborn persons, who were incapable of giving consent and who were not then represented by counsel. When the decree was entered the proceeding was undefended and was nonadversary.
For the reasons hereinbefore set forth, the judgment from which this appeal was taken is reversed.
"For the purpose of the tax the value of the net estate shall be determined, in the case of a citizen or resident of the United States by deducting from the value of the gross estate —
* * * * *
* * * * *
"(E) Valuation of interest passing to surviving spouse. In determining for the purposes of subparagraph (A) the value of any interest in property passing to the surviving spouse for which a deduction is allowed by this subsection —
"(i) there shall be taken into account the effect which a tax imposed by this chapter, or any estate, succession, legacy, or inheritance tax, has upon the net value to the surviving spouse of such interest; and
* * * * *
"(A) such interest is bequeathed or devised to such person by the decedent; or
"(B) such interest is inherited by such person from the decedent; or
* * * * *
"(G) such interest consists of proceeds of insurance upon the life of the decedent receivable by such person. * *"
This section provides in effect that, except as otherwise directed by decedent's will, the burden of any federal death taxes paid by the executor or administrator shall be spread proportionately among the distributees or beneficiaries of the estate.
"Widow. — If a husband die testate or intestate, leaving a widow, one-third of his real estate shall descend to her in fee simple, free from all demands of creditors: Provided, however, That where the real estate exceeds in value ten thousand dollars ($10,000), the widow shall have one-fourth only, and where the real estate exceeds twenty thousand dollars ($20,000), one-fifth only, as against creditors."
§ 6-2319, (now § 6-301) thereof, provides:
"Widow's interest in personal estate. — If a man die testate leaving a widow, one-third of his personal estate shall descend to said widow, subject, however, to its proportion of the debts of said decedent: Provided, however, That nothing in this act shall be construed to reduce the interest which the law now gives a widow in the estate of a deceased husband: And provided, further, That such widow may elect to take under the will of said decedent instead of this or any other law of descent of this state, which election shall be made within ninety (90) days after said will has been admitted to probate in this state, and in the same manner as widows are now required by law to elect."
§ 6-2334 (now § 6-303) provides:
"Election — How made. — Any surviving husband or wife desiring to renounce the provisions made for him or her in any such will shall file his or her election in writing, * * *. In such election, such husband or wife shall state that he or she renounces the provisions made for him or her in such will and that he or she elects to take the interest in such estate that is given to him or her under the laws of descent of the state of Indiana. After making such election, such husband or wife shall receive none of the provisions made for him or her in such will."
"[U]nless otherwise provided in this act, the debts and liabilities of a decedent, shall, if his estate be solvent, be paid in the following order of classes:
"First. The expenses of administration.
"Second. The expenses of the funeral of the deceased.
"Third. The expenses of his last sickness.
"Fourth. Taxes accrued upon the real and personal estate of the deceased at his death, and taxes assessed upon the personal estate during the course of the administration.
"Fifth. Debts secured by liens upon the personal and real estate of the decedent, * * *
"Sixth. A sum not exceeding fifty dollars ($50.00) for wages due any employee for work and labor performed for the decedent within two (2) months prior to this death."
"All debts and taxes having preference under the laws of the United States."
"Said judgment of Marion County Probate Court is binding on the Commissioner of Internal Revenue.
"The United States Supreme Court has held at least twice that the Commissioner of Internal Revenue is bound by valid decisions of state courts in the absence of fraud or collusion. * * *
"A judgment obtained by fraud, collusion, or agreement, does not come within the rule which has been clearly established by the cases cited above."
Plaintiff, in said protest, also said:
"The proceeding was adverse not only in form but in fact. * * * Thus the record amply discloses the impossibility of collusion, consent, or agreement, * * *."
In the protest it also stated:
"* * * Said judgment of Marion County Probate Court has established the law of the case, the time for appeal has now lapsed * * *."
B. In the supplemental brief plaintiff contended:
"* * * Under Indiana law, it cannot be maintained that the will, as construed by the court in a bona fide adversary proceeding, is not controlling."
"* * * the Marion Probate Court in a bona fide adversary proceeding considered the Pearcy case [Pearcy v. Citizens Bk. & Tr. Co., 121 Ind.App. 136, 96 N.E.2d 918] and held it irrelevant to the facts of the Street case."
It further contended:
"* * * In the face of a decision by the Marion Probate Court which establishes this as the law of Indiana, following a bona fide adversary proceeding, it simply cannot be reasonably maintained that such was not the law of Indiana, * * *."
Cf. Morgan v. C. I. R., 309 U.S. 78, 60 S.Ct. 424, 84 L.Ed. 585; Sharp v. C. I. R., 303 U.S. 624, 58 S.Ct. 748, 82 L.Ed. 1087, reversing 3 Cir., 91 F.2d 802; Blair v. C. I. R., 300 U.S. 5, 57 S.Ct. 330, 81 L.Ed. 465; Freuler v. Helvering, 291 U.S. 35, 54 S.Ct. 308, 78 L.Ed. 634.