WISDOM, Circuit Judge:
The plaintiffs, describing themselves as "custodians, next of kin and beneficiaries of the estate of J. E. Sexton, deceased", sue the United States to recover $75,848.19 in estate taxes. Sexton's will was not probated and there was no formal administration of the estate. The plaintiffs had established their rights to Sexton's estate through litigation based on Sexton's oral agreement with his brother to make mutual wills in favor of the plaintiffs. The plaintiffs contend that the effect of the litigation was to probate the will in the district court; that under Texas law there would be no formal administration of Sexton's estate, because there were no debts; that therefore attorneys' fees and other related expenses of the litigation are deductible as "administration expenses" under Section 2053(a) of the Internal Revenue Code of 1954. At first blush, the notion that administration expenses may be deductible when there is no administration seems too paradoxical for serious consideration. On reflection and after considering Texas law, and somewhat to our surprise, we find ourselves in agreement with the plaintiffs' theory of recovery.
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November 23, 1948, J. E. Sexton and his brother, W. H. Sexton, neither of whom had ever married, executed virtually identical mutual wills.
March 3, 1958, two days after J. E.'s death, Agnes Kirk, I. W. Kirk, and Gean Turner offered for probate in the County Court of Johnson County a document purporting to be J. E.'s last will. The document was dated March 23, 1954. Except for a few hundred dollars, the will left the entire estate to Agnes Kirk.
Each of the beneficiaries employed her own attorneys and each worked out separately the fees arrangements. Mrs. Murphy and Mrs. Beard each agreed to pay a fixed fee of $25,000 plus expenses, regardless of the outcome of the litigation. Mrs. Jacobs agreed to pay her attorney one-third of whatever he recovered for her, less $25,000 paid in advance. Mrs. Pitner agreed to pay her attorneys $31,500 regardless of the outcome.
The attorneys decided not to offer the 1948 will for probate. Instead, Mrs. Silvey, sister and sole-surviving heir of J. E., would contest the application for probate of the purported will filed by the Kirks in Johnson County. The nieces would sue in the district court in Rusk County in trespass to try title to the property of J. E. in that county, basing their suit on the contract between W. H. and J. E. to make mutual wills.
The plaintiffs were successful in both cases. In the Johnson County case the court denied the application of the Kirks to probate the will they offered; the court stayed further proceedings, pending the outcome of the Rusk County suit. As a result of this suit, the nieces acquired title to the Johnson, Hill, and Somervell properties as the intestate heirs of J. E. Sexton, their mother having died since the action was commenced.
The 1948 mutual will executed by J. E., which named Moselle Silvey Pitner and W. H. as independent executors, was never offered for probate. The estate tax return filed June 2, 1959, reported the total value of the estate at $1,468,981.32. The Commissioner of Internal Revenue assessed the tax at $304,471.47 and collected this sum by administrative levy on certain bank accounts in J. E. Sexton's name.
$31,288.98 went to court costs and related expenses. $66,271.39 was paid to an accountant, but this sum was not claimed as a deduction from the gross estate. The net sum the plaintiffs claimed as an authorized deduction under 26 U.S.C.A. § 2053(a) (2) was $218,426.77. The government stipulated that the $31,288.98 spent on court costs was a reasonable sum under the circumstances.
The District Director denied the claim for refund. The district court also rejected the claim: "There was never any formal legal administration of the Estate of J. E. Sexton. * * * The expenses claimed to be deductible were not incurred in any attempt to obtain property for the Estate * * * [but] were individual and personal expenses of the plaintiffs incurred by them for their individual benefit and were not administration expenses." Jacobs v. United States, E.D.Tex.1965, 248 F.Supp. 695.
Section 2053(a) of the 1954 Code permits the deduction "from the value of the gross estate such amounts * * * for administration expenses * * * as are allowable by the laws of the jurisdiction * * * under which the estate is being administered".
Deductible attorneys' fees are those which an "executor or administrator * * * has * * * paid or an amount which at the time of filing [of the estate tax return] may reasonably be expected to be paid". 26 C.F.R. § 20.2053-3(c) (1).
Under the 1948 will the plaintiffs' mother, Mary Sexton Silvey, could have qualified as an "independent executrix", but she never acted in that capacity. Even when she contested the 1958 will in the Johnson County action, she was acting in her capacity as sole heir-in-law in the event of intestacy rather than in the capacity of a personal representative of the estate. In the Rusk County action, the plaintiffs proceeded in their individual capacities to enforce the oral contract upon which the 1948 wills were based rather than as official representatives under the will to enforce the will itself. Finally no expenses were ever paid out of the estate: $41,041.18 was paid from a joint bank account to which all the plaintiffs contributed, and the remaining $177,385.59 was paid out individually by the plaintiffs.
A. A formal probate proceeding is not a prerequisite to a deduction for federal estate tax purposes under § 2053 (a). Commissioner of Internal Revenue v. Bronson, 8 Cir. 1929, 32 F.2d 112; Lewis v. Bowers, S.D.N.Y.1937, 19 F.Supp. 745, 747; 4 Mertens, Law of Federal Gift and Estate Taxation § 26.16, pp. 38-41 (1959). Even where there is a probate proceeding, administration expenses may be deducted, if reasonable,
Section 2053(a) requires only that the deduction be "allowable" by the laws of the jurisdiction under which the estate is being administered. See Commercial Nat. Bank v. United States, 4 Cir. 1952, 196 F.2d 182, 30 A.L.R.2d 1103; Smyth v. Erickson, 9 Cir. 1955, 221 F.2d 1. The term "allowable" was used in the 1954 Code for the first time, replacing the phrase "as are allowed", which had been used in the Internal Revenue Code of 1939, § 812(b), and all earlier versions of this section. This change seems to imply that the policy of the Code is not to rely upon formal probated actions in determining permissible deductions. The Eighth Circuit has suggested the reason for this policy: Section 2053(a) is meant to apply any-where in the world, "even in countries where administration of estates is had otherwise than through courts, if any such countries exist." (Emphasis added.) Commissioner of Internal Revenue v. Bronson, 8 Cir. 1929, 32 F.2d 112, 114. Succession laws of Texas present us with just such a situation. Although Texas law establishes a formal court proceeding for the proving of wills, see Tex Prob.Code §§ 81-94, V.A.T.S., in some situations a will need not — indeed, may not — be administered through a formal court proceeding.
The administration of a decedent's estate under the eye of a probate judge is a means to protect creditors, widows, and minor children. When no such protection is necessary Texas courts tend to reject petitions for formal court-supervised administration on the ground that such a proceeding would be a waste of time and money.
Under the new Texas Probate Code, applicable to the present case, formal judicial administration is permitted only if the court hearing the application finds that a necessity for such administration exists.
In the case before us it is reasonable to assume that had the plaintiffs sought letters of administration, their petition would probably have been rejected on the ground of no necessity: No claims remained outstanding against the estate and no beneficiaries existed whose interests would have required the protective supervision of the courts.
No reason exists under Texas law to deny allowance of expenses incurred in informally administering the decedent's estate.
B. In Estate of P. A. Chapman, 1927, 8 B.T.A. 1071, relied on by the Government, the decedent died intestate, leaving only community property. The estate was not administered under Texas statutes, but was settled through family administration. At the death of the decedent one of his children took charge of the estate pending distribution and retained counsel to advise him concerning proper distribution of the assets. The Tax Court held that attorneys' fees were not deductible, reasoning that since Texas courts would not allow an "administration", since it was not necessary, there could be no "expenses of administration". But this decision was rendered under the Revenue Act of 1921, § 403, which provided for deduction only of such administrative expenses "as are allowed by the laws of the jurisdiction * * *." As we have already seen, this language no longer prevails, but has been supplanted by later language relaxing emphasis on formal administration as a prerequisite to the deduction of administration expenses. Moreover, cases decided since Chapman have allowed deductions without formal probate proceedings, the primary concern being whether these deductions would in any event have been allowable under state law. E. g., Commissioner of Internal Revenue v. Bronson, 8 Cir. 1929, 32 F.2d 112. Finally, the lack of formal state administration proceedings would, under Chapman, also preclude deduction of appraisers' fees — deductions which, as administration expenses, are expressly allowed in Treas.Regs. § 20.2053-3(d). We therefore accord no weight to the Chapman decision.
We have found no Texas cases directly in point. Our discussion in the previous section suggests that, considering the nature of the problem and the lack of necessity for administration proceedings in Texas, we believe that Texas courts would actually allow deduction of such attorneys' fees as are under present consideration. Decisions from other jurisdictions, not directly resting on statutory provisions or judicial action in those jurisdictions, reinforce our belief. In each case the successful will contestant was allowed a deduction from the estate for attorneys' fees expended in the course of the will contest.
In Smith v. Haire, 1917, 138 Tenn. 225, 197 S.W. 678, the question presented to the court was "whether the attorneys for the successful contestants of a will are entitled to payment of their fees out of the estate as part of the expenses of administration." The court said:
Accord, Carmack v. Fidelity-Bankers Trust Co., 1933, 180 Tenn. 571, 177 S.W.2d 351; In re Failing's Estate, 1924, 113 Or. 6, 228 P. 821, 231 P. 148. See also Craven v. Shoults, 8 Cir. 1938, 97 F.2d 299; Schmalstig v. Conner, S.D. Ohio 1942, 46 F.Supp. 531; Estate of Helen Dow Peck, 1963, 40 T.C. 238. The court in Carmack v. Fidelity-Bankers Trust Co. referred by analogy to the principle that "attorneys attacking and setting aside as fraudulent a preferential conveyance, at the instance of an injured claimant [i. e. "employed acting for their client"] are entitled to an allowance from the fund involved of reasonable counsel fees for the services thus rendered. 177 S.W.2d at 355 (emphasis added.)
In Commissioner of Internal Revenue v. Bronson, 8 Cir. 1929, 32 F.2d 112, the deceased had executed a trust deed and a will, both of which, for all practical purposes, covered the same property. The executors elected not to probate the will, and there was never any probate proceeding had; hence there was no opportunity to have a court approve any attorneys' fees paid. The attorneys' fees were deducted from the adjusted gross estate and the Commissioner contended that they were not deductible. The Tax Court, viewing the Treasury regulation interpreting the section on deduction of administrative expenses, observed:
The Eighth Circuit, quoting and approving the above language, further said that the items specified in the Code section "are not specifically named; the amounts are not specifically fixed, nor are they left to be determined by any named court * * *. All of these sections * * * show that the words `administrative expenses' are used in a broad sense, and are not limited to such expenses as shall be allowed by a probate court or other court of like jurisdiction." 32 F.2d at 114.
Cases arising in the New York courts have viewed attorneys' fees of successful contestants in a will contest situation as chargeable to the estate.
Similarly, in In re Hirsch's Estate, Surr. Ct.1935, 154 Misc. 736, 278 N.Y.S. 255, the question presented was whether attorneys' fees were to be charged "upon the estate as a whole" or upon merely the share of the party instituting the contest litigation. The court, viewing the effect of the attorneys' efforts as creating "the estate where otherwise none would have existed", held:
Accord, Re Levine's Estate, 1951, 279 App.Div. 663, 107 N.Y.S.2d 939.
The reasoning in the above cases is no less applicable to the present case arising out of Texas, and no reason has been suggested to this Court why Texas courts would not follow it when the appropriate case should arise.
In the determination of deducibility 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 "administration expense" within the meaning of that term as it is used in the statute, and that the amount sought 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 deductions under section 2053(a) (2). In most instances the interest of the federal government in protecting its revenues will coalesce with the interest of the state in protecting its citizens, and the state law may be relied upon as a guide to what deductions may reasonably be permitted for federal estate tax purposes. In some cases, however, the state law on its face or in its application may not be responsive to the interests traditionally protected by the state. In other cases, such as the one before us, the state might justifiably feel that it had no interests to protect, and consequently fail to create rules to govern the situation one way or the other. When for any of these reasons state law fails in adequately representing the interest of the federal government, a framework still exists grounded in federal law defining the limits to which an expense may go and still be considered deductible for federal estate tax purposes.
The government contends that the expenses incurred by the plaintiffs were not essential to the settlement of the estate and were incurred for the benefit of the plaintiffs alone. The government bases this argument on the fact that the litigation brought no new assets to the estate but served only to establish the plaintiffs' rights to the assets already there. We agree that the plaintiffs were acting in their own self-interest but we reject the conclusion that the litigation they undertook was not at the same time essential to the proper settlement of the estate.
The Regulations refer to expenditures necessary to the "settlement" of the estate, not merely to its aggrandizement. Such expenses would include, in the words of § 20.2053-3(a), those incurred "in the collection of assets, payment of debts, and distribution of property to the persons entitled to it." (Emphasis added.) If the litigation in which the expenses were incurred facilitated the distribution of the property to the persons entitled to it then the expenses come within the statute.
Section 20.2053-3(c) (3) of the Treasury Regulations provides that attorneys' fees incurred by beneficiaries incident to litigation as to their respective interests are not administration expenses, and therefore, are not deductible. We view this section as applying where beneficiaries are suing to determine their share in the estate as against other beneficiaries, not, as here, where parties have sued to have their interest in the estate in general — the total estate — recognized as opposed to others with no legitimate interest in the estate whatsoever.
By successfully opposing the Kirk will in the Johnson County action, the plaintiffs accomplished the distribution of the assets of the estate in accordance with the will J. E. Sexton had agreed to make. Had the plaintiffs been acting as the official representatives of the 1948 will they would have had no choice but to contest the will presented by the Kirk group. In that case the right of plaintiffs to have their litigation expenses deducted from the gross estate for tax purposes could not have been questioned.
The plaintiffs should be permitted to deduct the expenses of the Rusk County action as well. The action in that case was one to clear title, and was based on the contract underlying the will rather than on the will itself. The effect on the estate, however, was the same as if the plaintiffs had brought the 1948 will to probate. The plaintiffs' right to the property held by the estate was established once and for all by a court of competent jurisdiction. When such a transfer of a decedent's property is accomplished under Texas law, and the transfer is subject to a federal estate, it seems reasonable to infer that the expenses incurred in bringing about that transfer must be considered in determining the net estate for federal tax purposes. Haggart's Estate v. Commissioner of Internal Revenue, 3 Cir. 1950, 182 F.2d 514.
The only question left to decide is whether the attorneys' fees incurred by the plaintiffs in the prosecution of this litigation are reasonable in light of the services rendered. The Government has already stipulated as to the reasonableness of the court costs. Since the litigation for which the fees were charged was quite complicated and might require the finding of additional facts before a decision as to reasonableness can be made, we remand this question to the court below.
We reverse and remand for further proceedings consistent with this opinion.
(a) General Rule. — For purposes of the tax imposed by section 2001, the value of the taxable estate shall be determined by deducting from the value of the gross estate such amounts —
as are allowable by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered.
Even if there is a question concerning identity of a decedent's heirs, the Texas Probate Code provides for a procedure for the determination of heirship that can be used in the absence of administration. Tex.Prob.Code §§ 48-56.
Accord, Hart v. Hart, Tex.Civ.App.1914, 170 S.W. 1071, writ ref'd w. o. m.
It cannot be doubted that the purpose — and effect — of the suits brought by the plaintiffs, for which attorneys' fees are being sought, was "ascertainment of those persons who are heirs".