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Hartwick College v. United States

decided: September 18, 1986.


Appeal by the government from an order of the United States District Court for the Northern District of New York, McCurn, J., granting the plaintiffs a tax refund as residuary beneficiaries of a decedent's estate. Affirmed.

Author: Pierce

Before: MANSFIELD, CARDAMONE and PIERCE, Circuit Judges.

PIERCE, Circuit Judge:

This is an appeal from an order of the United States District Court for the Northern District of New York, Neal P. McCurn, Judge, granting the plaintiffs a refund of taxes paid on income earned by the estate of Jessie Smith Dewar during the period from May 28, 1976 through April 30, 1977. After the income tax was paid, appellees filed this tax refund suit on behalf to the estate subsequent to the executors of the estate having been duly discharged in the Surrogate's Court of Otsego County, New York, for all purposes except the filing of amendments to the estate's state and federal fiduciary income tax return and the subsequent filing with the Surrogates's Court of a supplemental accounting with respect to these amended tax filings. Appellees are charitable organizations under the Internal Revenue Code of 1954 ("IRC"), 26 U.S.C. § 170(c) and residuary legatees of the estate. Appellees have claimed that the estate was due a refund, under IRC § 642(c), for amounts "permanently set aside" for them as charitable organizations.

After the district court issued decisions holding that the appellees had properly filed for the refund, 588 F. Supp. 926, and that the estate could take a deduction under IRC § 642(c), the parties were still unable to agree as to the amount of the deduction available to the estate. The gravamen of this remaining dispute was whether the income tax deduction allowed the estate under IRC § 642(c) was required to equal the amount to be received by the charities once income taxes were paid or the amount " permanently set aside", pre-tax, under the terms of the will. The district court ruled that the pre-tax amount provided the appropriate basis for the deduction. 611 F. Supp. 400. The government appeals this ruling and, in addition, challenges the subject matter jurisdiction of the district court to hear this case on the ground that the appellees had not exhausted their administrative remedy before the Internal Revenue Service ("IRS"). We reject both of the government's challenges and affirm the rulings of the district court.


On May 28, 1976, Jessie Smith Dewar dies testate leaving an estate of approximately $49 million. Her will established the following priorities for distribution of the estate. First in priority were "all . . . debts and funeral and administrative expenses." Further, "all inheritance, estate, transfer, succession and death taxes" were specifically directed to be paid out the "general estate as expenses of the administration thereof." Following in priority were several specific individual bequests. Finally, the will directed that the residuary estate be apportioned among the appellees and two additional charitable organizations.

On June 8, 1976, the last will and testament of the decedent and a codicil thereto were admitted to probate in the Surrogate's Court of Otsego County, New York. Rutson R. Henderson, Wendell F. Couse and Charles H. Bissell were designated to serve as co-executors of the estate.

On August 19, 1977, the co-executors filed a Fiduciary Federal Income Tax Return (Form 1041) with the IRS for the period May 28, 1976 through April 30, 1977. The return reported a total income of $3,583,840 and various deductions and exemptions totaling $1,752,775 resulting in a taxable income of $2,431,065. The executors took no deduction for amounts permanently set aside for charitable purposes. The income tax liability, which was paid with the return, totaled $1,728,879.

In November 1978, the co-executors filed a final accounting and petition for judicial settlement of the account with the Surrogate's Court. The appellees filed objections to this accounting claiming that the co-executors had failed to claim a charitable income tax deduction to which the estate was entitled under IRC § 642(c) and had thereby overpaid the income taxes of the estate. On December 29, 1978, Surrogate Robert A. Harlem ruled that, since the possibility was more than negligible that income taxes would consume the remainder of the estate and eliminate the charitable gift, "the court [was] not constrained to direct the fiduciaries to file amended income tax returns with respect to income earned during the course of administration to claim a charitable deduction."

In the same ruling the surrogate granted appellee Hartwick College's motion to compel the executors to take a deduction on the fiduciary income tax return for estate taxes paid during the administrative period. In all other respects, however, the surrogate accepted the accounting of the co-executors, subject to revision by a subsequent accounting to reflect submission of amended fiduciary income tax returns to claim the deduction for estate taxes paid. At this point, the co-executors were discharged for all purposes except the filing of the revised return and the submission of this additional accounting.*fn1 The co-executors filed the amended federal tax return, and included $330,208 in additional deductions and $35,774 in additional income, on July 17, 1979. On February 16, 1981, the IRS issued a refund of $189,557 to the estate, representing the allowance on the additional deductions claimed.

On March 5, 1980, after the co-executors had filed the amended return but before the IRS had issued the refund, the IRS received another amended return on behalf of the estate, signed by Philip S. Wilder, Jr., the president of appellee Hartwick College. This return claimed an additional charitable deduction under IRC § 642(c) in the amount of $2,431,765 which reduced the taxable income of the estate to zero and supported a refund of the $1,728,879 in income taxes previously paid by the estate.

On August 11, 1980, an attorney for the estate informed the IRS that the amended return signed by Wilder was not filed at the direction or with the authorization of the representatives of the estate and that the estate was not seeking a refund based upon a claimed charitable deduction. Therefore, the IRS took no action to allow or deny the purported claim for refund filed by Wilder.

Six months later, appellees filed this tax refund suit in the United States District Court for the Northern District of New York. Appellees claimed that each of them was a residuary legatee of the estate, that as such they were qualified to file a suit for refund because the accounts of the co-executors discharged as to the issues raised in the complaint. Appellees also alleged that the tax returns filed by the co-executors on behalf of the estate for the period of administration were incorrect and that the estate was entitled to a charitable deduction in an amount equal to the entire income of the estate. Since they claimed the entire income of the estate ...

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