McClung v. Commissioner

HU L. MCCLUNG AND W. E. MONDAY, EXECUTORS, ESTATE OF B. R. STRONG, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. McClung v. Commissioner Docket No. 12468. United States Board of Tax Appeals 13 B.T.A. 335; 1928 BTA LEXIS 3265; September 12, 1928, Promulgated *3265 Decedent's will bequeathed the residue of his estate to an educational institution. A contest of the will was compromised, the residuary legatee and the contestants agreeing that the latter should receive one-half of the residue. Held, that the entire residue was permanently set aside by the terms of the will for the educational institution and the income is deductible by the executors. L. M. G. Baker, Esq., M. W. Egerton, Esq., and H. H. Shelton, Esq., for the petitioners. V. J. Heffernan, Esq., for the respondent. ARUNDELL *335 Deficiencies in income taxes for the years 1920 and 1921 in the respective amounts of $91,024.05 and $11,328.73 are involved. The main issue is whether the income from decedent's residuary estate is deductible as being permanently set aside for an exempt institution. Subsidiary issues are raised as to the gain or loss on the sale of real estate comprising the corpus of the residuary estate, the amount of *336 income received from rents, and the proper treatment of administration expenses and attorney's fees. FINDINGS OF FACT. Hu L. McClung and W. E. Monday are the duly qualified executors of*3266 the estate of B. R. Strong, who died a resident of Knox County, Tenn., on March 2, 1915, leaving a last will and testament. The estate is in process of administration under the jurisdiction of the County Court of Knox County, Tennessee. The will after providing a number of specific bequests including two to the University of Tennessee left the residue of the estate to the University. Shortly after the death of Strong the executors presented his will for probate. Some of Strong's heirs filed notice of contest on the grounds of mental incapacity and undue influence. The latter ground was abandoned. Two jury trials on the contest were had, both resulting in mistrials. In each of those trials very heavy costs and expenses were incurred by the parties. In the fall of 1919, before the case came on for a third trial one of the trustees of the University asked executor McClung whether he would have any objection to compromising the contest. The suggestion of compromise was made in view of the exceedingly heavy costs that were being incurred in the trials. The executor replied that he would take no part in compromising the case but that he would interpose no objection. Thereupon*3267 representatives of the University negotiated with the attorneys for the contestants, and it was agreed that the will should be probated, that its provisions should be carried out, except that two legacies aggregating $3,000 were waived by the legatees, and the University agreed that the heirs should receive one-half of the residue. The executors took no part in the negotiations which led to the compromise agreement. One of the Strong heirs was not sui juris and because of that fact the compromise agreement was submitted to the Chancery Court of Knox County for approval. The court confirmed the agreement by decree of December 17, 1919. On the same date the will was probated in solemn form in the Circuit Court of Knox County, the jury finding in favor of the will, and on December 19, 1919, a transcript of the probate proceedings was certified to the County Court of Knox County and ordered to be entered of record. Within a few days thereafter the executors paid all the specific bequests from funds on hand. During the years 1920 and 1921 the executors received $377,317.50 from the sale of 64 parcels of real estate which comprised the greater part of the residuary estate, *3268 and collected rents and interest. All of the property in their hands in those years was a part of the residue *337 of the estate. The executors kept their accounts so as to show separately the amounts paid to the heirs and to the University. OPINION. ARUNDELL: We have included in our findings only such facts as are necessary to dispose of the principal question presented. There is in the record a great deal of evidence bearing on other issues raised by the pleadings, but in the view we take of the case these subsidiary issues will not require decision, and accordingly we have made no findings concerning them. The main issue is whether the income from the residuary estate is deductible by the executors under section 219(b) of the Revenue Acts of 1918 and 1921, as "paid to or permanently set aside for" the University of Tennessee, which is admitted by the respondent as being within the class of corporations enumerated in section 219(b). The respondent further concedes that the one-half of the income of the estate which under the compromise agreement was to go to the University, is not subject to tax. The first argument of respondent is that no showing is made of*3269 the amounts, if any, that were actually paid to the University in the taxable years. Under the construction that has been placed on section 219, payment is not a necessary condition precedent to the deduction. It is enough if under the will the income was permanently set aside. , and cases cited. There is no question but that under the terms of the will itself the residue of the estate was left to the University, and that any income arising out of the sale of such residue would be tax exempt. So much is conceded by the respondent in his brief. But it is contended that the decree of the chancery court confirming the compromise agreement governed the disposition of the properties and in effect nullified certain provisions of the will. This contention is not in accord with the law in Tennessee as we understand it. See ; . In that case the decedent English bequeathed all his property to his widow. A contest of the will instituted by the heirs of English was withdrawn upon the agreement of the widow to deed to them one-half of the land comprising*3270 the estate. Suit was then brought to determine whether the value of the property deeded to the contesting heirs was subject to the collateral inheritance tax. It was held: The defendants [the heirs] do not derive their title from C. B. English, but from the deed of Mary J. English, the widow. In an action of ejectment to recover these lands, the defendants would deraign their title from the deed of Mary J. English and not by descent cast, as heirs and distributees of C. B. English. The defendants do not take by inheritance, will, deed, grant, gift, or otherwise from C. B. English. * * * Mrs. English derived her title from *338 C. B. English under the will, while defendants derived their title from Mrs. English by deed. The courts in other jurisdictions whose decisions we have examined hold to the same effect, and the law seems to be well established that in such cases as we have here, the contesting heirs who receive a part of the residue take solely under the contract and not under the will. ; *3271 . ; . The compromise agreement does not become a part of the will (; ), and is not a modification of it. ; . Upon being admitted to probate the will speaks as of the time of the testator's death (; ; ; ), and the residuary legatee becomes as of that date the absolute owner of the residue. ; ; . Whatever the contestants received as a consideration was paid to them out of what the residuary legatees obtained from the estate (), and whatever right they have to any property of the estate is based upon the agreement and not on the will. *3272 ; . The fact that the executors divided the account of the residue on their books and kept their accounts so as to show separately the amounts paid to the heirs is of no significance. The executors could not, by any act of theirs change the directions contained in the will. . Nor do we think that the waiver of the two minor legacies referred to in the findings of fact can operate to defeat the deduction allowed by law. The residue of the testator's estate having been permanently set aside by the terms of his will for the University of Tennessee, the income from such residue constitutes a proper deduction from the income of the estate. Reviewed by the Board. Judgment will be entered for the petitioner.