*

Honorable Jesse E. Eschbach, Senior U.S. Circuit Judge for

the Seventh Circuit, sitting by designation. 

United States Court of Appeals,

Eleventh Circuit.

No. 94-8287.

ESTATE OF Otis C. HUBERT, Deceased, C & S Soveran Trust Company

(Georgia), N.A., a National Banking Association, Co-Executor,

Petitioners-Appellees,

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.

Sept. 12, 1995.

Appeal from a Decision of the United States Tax Court (Georgia

Case). (Tax Court No. 22333-90).

Before DUBINA, Circuit Judge, RONEY and ESCHBACH*

, Senior Circuit

Judges.

RONEY, Senior Circuit Judge:

 On appeal by the Government in this estate tax case, we

affirm the United States Tax Court holding that the marital and

charitable deductions are to be reduced only by the portion of

administration expenses allocated to principal and not by amounts

allocated to income. Estate of Otis C. Hubert v. Commissioner of

Internal Revenue, 101 T.C. 314, 1993 WL 414716 (1993). This

holding brings us in conflict with the two other circuits which

have decided the issue. Estate of Street v. Commissioner, 974 F.2d

723 (6th Cir.1992); Burke v. United States, 994 F.2d 1576

(Fed.Cir.), cert. denied, --- U.S. ----, 114 S.Ct. 546, 126 L.Ed.2d

448 (1993). The Tax Court, in a reviewed decision, concurred in by

15 of the 17 Tax Court judges, specifically declined to accept the

reasoning in Street in a comprehensive opinion.
Since the Tax Court wrote a careful analysis of every argument

that is made by the Commissioner on this appeal, and we agree with

the reasoning in that opinion, we simply attach that part of the

opinion found at 101 T.C. at 320-30 as an Appendix and adopt it as

our own, as completely as if we had set it forth herein.

We note just four points that may assist in understanding the

analysis made in the portion of the Tax Court opinion attached.

First, the Tax Court was confronted with other issues not

raised on this appeal so that the portion attached deals only with

the issue on this appeal. Critical to understanding that opinion,

however, is the following footnote on page 2 of the original

opinion:

We are using the terms "marital portion" and "charitable

portion" to mean the amounts received by the spouse and the

charity, respectively, under the settlement agreement.

Pursuant to the settlement agreement, the marital and

charitable portions include income accumulated to the date of

distribution. The terms "marital portion" and "charitable

portion" should not be confused with the terms "marital share"

and "charitable share" or "marital deduction" and "charitable

deduction." 101 T.C. at 350 n. 1.

Second, this case involves the $30,000,000 estate of Otis C.

Hubert, a Georgia resident. There was considerable other

litigation in connection with the estate. The settlement agreement

referred to in the portion of the opinion published here was the

result of some prior litigation.

Third, Georgia law authorizes allocation of expenses to income

rather than principal, if the will so provides. Ga.Code Ann. §§

53-2-101, 53-15-3 (Michie 1982). Hubert's will authorized such an

allocation. See Estate of Warren v. Commissioner, 981 F.2d 776

(5th Cir.1993) (allocation of administrative expenses to income
 1

With due respect to the dissenting opinion, the two cases

cited as binding authority are inapplicable to this case.

In Ballantine v. Tomlinson, 293 F.2d 311 (5th

Cir.1961), neither the will nor Florida law permitted the

expenses there involved to be paid out of income. "The

decedent, by his will directed that the wife's share of the

residuary estate should not be charged with any part of the

estate tax. There was no such provision or other direction

with respect to administration expenses or other charges

against the estate." (emphasis added). 293 F.2d at 312. 

"[W]e find nothing in the Florida statutory law requiring

payment of administration expenses from estate income. We

are likewise unable to agree ... (that a state case) ...

requires that administration expenses be paid from estate

income." 293 F.2d at 314. Unlike Ballantine, the Georgia

law in this case provided for the payment of these expenses

from income if the will permitted.

Likewise in Alston v. United States, 349 F.2d 87 (5th

Cir.1965), though Georgia law permitted it, there was no

provision in the will for the payment of the administration

expenses there involved from income. Georgia law required

them to be paid from the residue of the estate. "Although

there is no specific reference in Georgia statutes to

administration expenses as such, there are provisions that,

unless otherwise directed, debts should be paid out of the

allowed by state law did not reduce the charitable deduction).

Fourth, the estate included a generous amount of income

producing property. From 1986 until 1991, the estate generated

over $4,500,000 of income and incurred over $2,000,000 in

administration expenses. The executors allocated $506,989 to the

principal of the estate and paid the rest of the administration

expenses from post-death income and deducted it on the estate's

income tax returns.

Our reasons for disagreeing with the Sixth Circuit's analysis

in Street are the same as those which addressed that case in the

Tax Court opinion. The later decided case of Burke by the Federal

Circuit simply relied on Street and added nothing new to the

discussion.1
residuum." (emphasis added). 349 F.2d at 88.

There is nothing in either opinion that would indicate

a result contrary to the one the tax court reached in this

case. 

AFFIRMED.

APPENDIX

ESTATE OF OTIS C. HUBERT, DECEASED, C & S/SOVRAN TRUST COMPANY

(GEORGIA), N.A., A NATIONAL BANKING ASSOCIATION, CO-EXECUTOR,

Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

(Docket No. 22333-90, October 19, 1993, 101 T.C. 314, 320-30 [1993

WL 414716]).

Allocation of Expenses

The second issue for decision is whether the marital and

charitable deductions must be reduced by expenses allocated to

income of the estate.

The 1982 will gave the executors of decedent's estate the

power "to charge any expenses against income or principal or

apportion the same." The executors allocated $506,989 as funeral

and administration expenses to the principal of the estate. All

other administration expenses were allocated to income.

Respondent argues that the amount of a marital or charitable

deduction must be reduced by the entire amount of administration

expenses, whether those expenses are allocated to principal or to

income. Respondent cites section 20.2056(b)-4(a), Estate Tax

Regs., and the legislative history of section 2056 as support for

the proposition. In addition, respondent argues that the courts

have "uniformly recognized" that administration expenses reduce the

marital and charitable deductions regardless of whether those

expenses are paid out of income or principal. Respondent contends

that both Georgia law and the language of the settlement agreement
also mandate such a result. We disagree.

Before considering this issue in detail, it is helpful to

consider an overview of the operation of estate accounting and

estate taxes. The starting point for determining Federal estate

taxes is the date-of-death (or alternate valuation date) value of

the property of the estate. Deductions are allowed for various

expenses of the estate, as well as for claims against the estate

and bequests to the decedent's spouse and to charity. Income

earned by the estate has no effect on the estate for Federal estate

tax purposes. It is accounted for separately in the estate's

probate account and is taxed separately on the estate's Forms 1041.

Executors have been granted significant flexibility in

accounting for the estate's administration expenses, both for

estate and income tax purposes, and for probate accounting

purposes. Congress has granted the executor the option of

deducting administration expenses on either the estate return, Form

706, or the fiduciary income tax return, Form 1041. Sec. 642(g).

In addition, many States give the decedent the option of

authorizing the executor to allocate such expenses to principal or

to income at the executor's discretion. If the administration

expenses were paid out of principal, they would reduce the amount

of such principal received by the beneficiaries and would reduce

the marital and charitable deductions. However, we conclude that

the administration expenses that are allocable to income in this

case do not change the amount of the estate principal received by

the spouse or the charity and do not reduce the marital and

charitable deductions. Administration expenses are incurred and
accrue during administration and should not be confused with the

claims against the estate which existed and accrued at the date of

death.

Our conclusion that the marital and charitable deductions are

not reduced by payment of administration expenses allocated to

income does not lead to a double deduction in violation of section

642(g). Section 642(g) prohibits a deduction under section 2053 or

2054 for any administration expenses deducted on the estate's

income tax return. However, section 642(g) does not prohibit or

reduce deductions under section 2055 or 2056. The deductions under

sections 2055 and 2056 are based on the date-of-death value of the

property received by the charity and the spouse from the gross

estate. The executor's ability to preserve the value of the

marital and charitable bequests by allocating administration

expenses to income is in no way barred by section 642(g).

The allocation of the expenses in the case before us is

governed by Georgia law. Georgia law authorizes allocation of

expenses to income rather than principal, if provided in the will.

Ga.Code Ann. §§ 53-2-101, 53-15-3 (Michie 1982). The 1982 will

authorized such an allocation, and this provision was not affected

by the settlement agreement. To the extent the executor exercised

its discretion and allocated administration expenses to income, the

marital and charitable deductions are not reduced by payment of

those expenses.

 Respondent argues that section 20.2056(b)-4(a), Estate Tax

Regs., controls this question. That section states, in relevant

part:
Marital deduction; valuation of interest passing to surviving

spouse.—(a) In general. * * * The marital deduction may be

taken only with respect to the net value of any deductible

interest which passed from the decedent to his surviving

spouse, the same principles being applicable as if the amount

of a gift to the spouse were being determined. In determining

the value of the interest in property passing to the spouse

account must be taken of the effect of any material

limitations upon her right to income from the property. An

example of a case in which this rule may be applied is a

bequest of property in trust for the benefit of the decedent's

spouse but the income from the property from the date of

decedent's death until distribution of the property to the

trustee is to be used to pay expenses incurred in the

administration of the estate. [Emphasis added.]

We do not interpret section 20.2056(b)-4(a), Estate Tax Regs., as

mandating a setoff against the marital deduction for administration

expenses allocable to income. That section is merely a valuation

provision which requires material limitations on the right to

receive income to be taken into account when valuing the property

interest passing to the surviving spouse. The fact that income

from property is to be used to pay expenses during the

administration of the estate is not necessarily a material

limitation on the right 

APPENDIX—Continued

to receive income that would have a significant effect on the

date-of-death value of the property of the estate.

On the facts before us, we find that the trustee's discretion

to pay administration expenses out of income is not a material

limitation on the right to receive income. Under section

2056(b)(4) and section 20.2056(b)-4(a), Estate Tax Regs., the value

of the interest passing to the spouse and the effect of any

encumbrance on that interest shall be determined "as if the amount

of a gift to the spouse were being determined." Therefore, we look
to the gift tax provisions and consider how they treat the payment

of expenses out of the income of a trust that was given to a

spouse. Under section 2523(e), in order for a donor to be entitled

to a deduction for a gift in trust to his spouse over which the

spouse has a general power of appointment, the spouse must be

entitled to all of the income from the trust. Under section

25.2523(e)-1(f)(3), Gift Tax Regs., a spouse is considered to

receive all of the income from a trust even if "trustees'

commissions, and other charges" are paid out of income, provided

the spouse is not deprived of substantial beneficial enjoyment.

That section is similar to section 20.2056(b)-(5)(f)(3), Estate Tax

Regs. In interpreting those sections, respondent has considered

the effect of a power "To charge to income or principal, executor's

or trustee's commissions, legal and accounting fees, custodian

fees, and similar administration expenses" on the marital

deduction. Respondent concluded that such a power "does not result

in the disallowance or diminution of the marital deduction."

Rev.Rul. 69-56, 1969-1 C.B. 224 (emphasis added). While we

recognize that the revenue ruling is not binding precedent, it does

present respondent's position on this subject. Crow v.

Commissioner, 85 T.C. 376, 389 [1985 WL 15387] (1985).

In the case before us, the power is essentially the same as

the power in the revenue ruling. Moreover, the income used to pay

administration expenses is insubstantial compared to the lifetime

of income Mrs. Hubert will receive from the property. Therefore,

she is not deprived of substantial beneficial enjoyment, and she

would be treated, under section 25.2523(e)-1(f)(3), Gift Tax Regs.,
as having received all of the income from the trust. If Mrs.

Hubert is treated as having received all of the income from the

trust, there can be no material limitation on her right to receive

income.

We also reject respondent's interpretation of the legislative

history of the marital deduction, which states that claims against

the estate paid out of income increase the residue by purchase, not

bequest, and therefore "the value of any such additional part of

the residue passing to the surviving spouse can not be included in

the amount of the marital deduction." S.Rept. 1013 (Part II), 80th

Cong., 2d Sess. (1948), U.S.Code Cong. and Admin.News 1948 p. 1163,

1228, 1948-1 C.B. 331, 335. The Senate report describes the result

only if income is use to pay claims against the estate; it does

not discuss administration expenses at any point. There is a clear

distinction between claims against the estate and administration

expenses which are allocable to income, and this distinction

mandates different treatment of the two. Claims against the estate

are, by definition, in existence at the date of death; therefore,

by their very nature, claims against the estate relate to corpus

and must be charged thereto. By contrasts, administration expenses

come into existence only after the death of the decedent and may

relate to both income and corpus. As a result, administration

expenses logically can be charged to either income or corpus. Here

they were charged to income in accordance with the will and Georgia

law. Accordingly, the legislative history cited by respondent does

not control the treatment of administration expenses in the case

before us.
This Court has spoken on this issue in Estate of Richardson v.

Commissioner, 89 T.C. 1193 [1987 WL 257908] (1987), and Estate of

Street v. Commissioner, T.C.Memo 1988-553 [1988 WL 128662], aff'd

in part and rev'd in part, 974 F.2d 723 (6th Cir.1992). In Estate

of Richardson, the decedent left to his wife the amount of his

residuary estate necessary to maximize all of his estate tax

deductions in order to make his estate nontaxable for Federal

estate tax purposes. The decedent's executors were given the power

to allocate expenses between income and principal. Respondent

argued that the marital deduction should be reduced by the amount

of interest payable on the estate's Federal estate taxes and State

inheritance taxes, even though the executors had allocated the

interest to income.

We concluded: "Whether an expenditure on behalf of an estate

is chargeable to principal, or the income produced thereby, depends

on the law of the State wherein decedent was a resident at the time

of his death, or upon the terms of decedent's will." Estate of

Richardson v. Commissioner, supra at 1201. In that case, there

were no provisions of State law dictating where the interest should

be charged. Therefore, we looked to the language of the will and

determined that, based on the decedent's intent to minimize taxes,

the executors had the power to charge the interest against income

and, thereby, not reduce the marital deduction.

In Estate of Street, on similar facts we held that Tennessee

law permitted a decedent to grant the power to allocate

administration expenses between income and principal. We held that

the marital deduction was not reduced by the amount of the expenses
 2

Respondent has now accepted the holding that the payment of

interest on estate and inheritance taxes allocated to income does

not reduce the marital deduction. Rev.Rul. 93-48, 1993-25 I.R.B.

9. Respondent has specifically limited her change in position to

payments of interest and has reaffirmed her position regarding

all other administration expenses. As we explain below, we see

no valid distinction between interest and other administration

expenses. 

allocated to income.

We note that the fact that the marital bequest in Estate of

Street was in trust did not affect our reasoning in that case.

Respondent argues that the fact of the trust should make a

difference, because if Mrs. Hubert is receiving only an income

interest and part of the income is used to pay expenses, the value

of the interest passing to Mrs. Hubert is reduced. However,

respondent ignores the fact that, because Mrs. Hubert has a general

power of appointment over one of the trusts and the other trust is

a qualified terminable interest trust, Mrs. Hubert is treated as

having received the entire value of both trusts, not just the

income portions.

On appeal, the Court of Appeals for the Sixth Circuit reversed

our holding in Estate of Street with regard to administration

expenses, concluding that payment of such expenses reduces the

marital deduction whether the payment is allocated to income or to

principal. However, the court upheld our holding that the payment

of interest on estate taxes and inheritance taxes allocated to

income does not reduce the marital deduction. Estate of Street v.

Commissioner, 974 F.2d 723 (6th Cir.1992), aff'g in part, rev'g in

part and remanding.2

On the issue of the administration expenses, the Court of
Appeals determined that section 20.2056(b)-4(a), Estate Tax Regs.,

was controlling. The Court of Appeals concluded that the

regulation mandates a setoff against the marital deduction for

administration expenses paid from income. The court reasoned:

Income earned by the estate during * * * [the administration]

period builds up the marital share. Expenses paid from income

during this period have the effect of decreasing the amount of

estate property distributable to the spouse. Therefore, the

payment of administration expenses from income must operate to

reduce the size of the marital deduction, otherwise the spouse

would receive a deduction which exceeded the amount which was

actually in the estate, and available for distribution. * *

* [Id. at 727].

The court found support for this reasoning in the legislative

history of the marital deduction.

The Court of Appeals distinguished administration expenses

from interest on estate and inheritance taxes on two grounds.

First, citing Estate of Richardson, the court stated that the

interest on taxes accrues after death, whereas administration

expenses "accrue at death." As a result, the court determined that

payment of interest on taxes from estate income does not affect the

principal of the estate as it existed at the time of decedent's

death, but payment of administration expenses from such income

"will serve to build up the gross estate." Id. at 727. Second,

the court noted that section 20.2056(b)-4(a), Estate Tax Regs.,

specifically mentions administration expenses in it example, but it

does not mention interest on taxes. Therefore, the court held that

the regulation was inapplicable to interest on taxes. Id. at 729.

Thus, the Court of Appeals concluded that payment of administration

expenses from income of the estate should reduce the marital

deduction, but payment of interest on estate and inheritance taxes
from income should not reduce the marital deduction. See also

Burke v. United States, 994 F.2d 1576 (Fed.Cir.1993), and Fisher v.

United States, 28 Fed.Cl. 88 (1993), which rely on the rationale of

Estate of Street with respect to administration expenses.

Respectfully, we disagree with the reasoning of the Court of

Appeals and decline to follow its decision in Estate of Street. As

stated above, we interpret section 20.2056(b)-4(a), Estate Tax

Regs., to be a valuation provision. Therefore, unlike the Court of

Appeals, we find that the regulation does not control the case

before us. In addition, as noted previously, we conclude that the

legislative history of the marital deduction does not mandate a

different conclusion.

Moreover, we take issue with the Court of Appeals' analysis of

the effect of income and expenses on the marital share. The court

stated that income earned on estate property increases the marital

share, and presumably the marital deduction, leading to a deduction

greater than the amount distributed if payment of expenses from

income does not reduce the marital deduction. However, income

earned on estate property is not included in the gross estate.

Alston v. United States, 349 F.2d 87 (5th Cir.1965). As a result,

under section 2056(a), such income does not lead to an increase in

the amount of marital deduction requiring a corresponding decrease

for payment of administration expenses chargeable against income of

the estate.

Finally, we disagree with the Court of Appeals' distinction

between interest on estate and inheritance taxes and administration

expenses. The fact that section 20.2056(b)-4(a), Estate Tax Regs.,
explicitly refers to administration expenses but does not mention

interest on taxes is not relevant because the reference to

administration expenses is "An example of a case in which this rule

may be applied." Sec. 20.2056(b)-4(a), Estate Tax Regs. (emphasis

added). Application of the regulation, when appropriate, is

clearly not limited to administration expenses. Regardless of the

regulation's treatment of administration expenses and interest on

taxes, it does not provide a useful distinction between the two.

In addition, administration expenses and interest on taxes

cannot be distinguished according to the time at which they accrue.

Both accrue after the date of death. Administration expenses, by

their very nature, are incurred over the entire period of the

estate's administration and can vary significantly from estate to

estate. As a result, administration expenses are too uncertain at

the date of death to accrue at that time. Our analysis in Estate

of Richardson v. Commissioner, 89 T.C. 1193 [1987 WL 257908]

(1987), therefore applies to administration expenses as well as to

interest on taxes, and we will follow our holding in that case.

Both respondent and the Court of Appeals cite Estate of Roney

v. Commissioner, 33 T.C. 801 [1960 WL 1078] (1960), aff'd, 294 F.2d

774 (5th Cir.1961), as support for their positions. In Estate of

Roney, the decedent left the residue of his estate to his wife.

The will made no provision as to the source of payment of

administration expenses. The executor deducted the administration

expenses on the estate's fiduciary income tax returns and did not

reduce the marital deduction on the estate tax return by the amount

of those expenses. In that case, we looked to Florida law and
determined that the executor was required to pay administration

expenses out of the residuary estate. Since the residuary estate

does not include income, we determined that the marital deduction

should be reduced by the amount of the expenses because the amount

of principal received by the spouse was reduced to that extent.

 The holding in Estate of Roney is not inconsistent with the

result we reach in the case before us. We merely held in Estate of

Roney that when administration expenses are required to be

allocated to principal, the marital deduction is reduced by the

amount of those expenses. Whether the deduction for the

administration expenses is taken on Form 706 or Form 1041 is

immaterial and irrelevant. See also Alston v. United States,

supra.

Although Estate of Wycoff v. Commissioner, [59] T.C. 617 [1973

WL 2679] (1973), aff'd, 506 F.2d 1144 (10th Cir.1974), was not

cited by either party, we find it appropriate to discuss that case

here. In Estate of Wycoff, the decedent's will provided:

all inheritance, estate and transfer taxes due by reason of my

death shall be paid out of that portion of my estate which is

not included in the Marital Trust to be administered by my

Trustee, unless, in the best business judgment and sole

discretion of my executor, such taxes could be more prudently

paid from any assets in my estate without respect to what is

or is not included in the Marital Trust * * * [Id. at 619.]

Based upon the above election available to the executor, we

concluded that the marital trust might be charged with those taxes

and that the marital deduction was accordingly reduced. We

distinguish that case on its facts.

The executor's choices in Estate of Wycoff were between two

shares of the estate, the marital trust and the nonmarital trust,
both of which were included in the gross estate, and not between

principal and income, where only principal would be included in the

gross estate and income would be accounted for and taxed

separately, as noted above.

We decline to read Estate of Wycoff more broadly to make the

result depend entirely on the discretion of the executor. We will

confine Estate of Wycoff to its facts and to the more narrow

interpretation which we believe was intended by the Court.

Respondent cites Ga.Code Ann. section 53-2-101 (Michie 1982)

as support for the contention that Georgia law requires expenses to

be allocated to principal rather than income. However, that

section only requires allocation of expenses to the principal if no

other provisions are made by the will. Ga.Code Ann. section 53-15-

3 (Michie 1982) allows decedents to grant their executors the power

to allocate expenses between principal and income. Decedent, in

this case, clearly granted such power to his executors.

Finally, we conclude that the settlement agreement did not

alter decedent's grant of the power to allocate expenses. The

settlement agreement merely set forth a formula for determining the

final amounts of both income and principal to be received by Mrs.

Hubert and the charity. That this is the case is demonstrated by

the fact that both parties agree the marital portion, as calculated

under the settlement agreement, should be reduced by income in

order to determine the marital deduction. The fact that the

settlement agreement provided for allocation of expenses between

the marital and charitable portions does not preclude the executors

from allocating those expenses to income rather than principal
within those portions pursuant to the 1982 will.

Respondent cites a variety of cases in support of the

contention that the marital and charitable deductions must be

reduced by expenses. However, none of those cases is on point.

They deal with situations in which the will made no provision for

the allocation of expenses and, therefore, the statute controlled

the allocation. Here, we clearly have a provision in the will

which controls the allocation.

We hold that the allocation of petitioner's expenses to income

was permitted by Georgia law, and the marital and charitable

deductions are not reduced by expenses so allocated.

DUBINA, Circuit Judge, dissenting:

I.

Because I am convinced that the majority has erred in adopting

the tax court's analysis in this case, I respectfully dissent. I

disagree with the majority's holding for two reasons: First, the

holding disregards fundamental federal estate taxation principles

in light of state law which allows administration expenses to be

paid out of post-mortem income, and second, it contravenes binding

circuit precedent.

II.

In this case, both the decedent's will and relevant state law

allowed administrative expenses to be paid out of post-mortem

income; however, "the allowable sources of payment for

administration expenses under state law does not necessarily affect

the source from which the deduction for administrative expenses

must be made under federal law." Burke v. U.S., 994 F.2d 1576,
 1

I.R.C. § 2032 provides an alternative valuation scheme

which is not relevant to this case. 

 2In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th

Cir.1981), this court adopted as binding precedent all decisions

of the former Fifth Circuit handed down prior to October 1, 1981. 

1580 (Fed.Cir.) (emphasis in original), cert. denied, --- U.S. ----

, 114 S.Ct. 546, 126 L.Ed.2d 448 (1993) (citing Lyeth v. Hoey,

Collector of the Internal Revenue, 305 U.S. 188, 193-94, 59 S.Ct.

155, 158, 83 L.Ed. 119 (1938)).

Section 2031 of the Internal Revenue Code ("I.R.C.") defines

the value of the gross estate as "the value at the time of [the

decedent's] death."1 At the decedent's death, the estate has the

obligation to pay administration expenses. I.R.C. § 2053;

Ballantine v. Tomlinson, 293 F.2d 311, 312 (5th Cir.1961).2 Also,

contrary to the Tax Court's assertion, administration expenses,

although unascertained on the date of death, are deemed to accrue

at the decedent's death. Alston v. United States, 349 F.2d 87, 88

(5th Cir.1965) ("at the decedent's death his estate had the

obligation of paying estate taxes, debts, charges and expenses of

administration") (citation omitted). See also Estate of Street v.

Commissioner, 974 F.2d 723, 727 (6th Cir.1992). "[R]egardless of

the source of payments for administration expenses, such payments

are charges against the gross estate and must be accounted for

accordingly." Burke, 994 F.2d at 1581 (citing Estate of Street,

974 F.2d at 728-29; Alston, 349 F.2d at 88; Rifkind v. United

States, 5 Cl.Ct. 362, 374 (1984)).

Using income to pay administration expenses can be of great

benefit to an estate, especially where no other liquid assets are
 3

There was no specific state statute regarding

administration expenses, but the court determined that the source

of payment of the expenses was the residuum of the estate. 

available to pay the expenses; yet, income earned by an estate

during administration is not part of the gross estate. See Alston,

349 F.2d at 88; Fisher v. United States, 28 Fed.Cl. 88

(Fed.Cl.1993). Allowing administration expenses to be paid out of

income earned during the administration of the estate, without

reducing the gross estate by the amount of the charges against it,

has the effect of increasing the gross estate by the amount of

post-mortem income. See Alston, 349 F.2d at 89.

III.

The Alston case is binding precedent. At the time Alston was

decided, state law required administration expenses to be paid out

of the residuum of the estate.3

 The holding of Alston, however,

was based upon an interpretation of the statutory definition of the

gross estate, which is a matter of federal law. See id.

In Alston, the residue of the decedent's estate was left to a

qualified charity. The executors of the estate filed an estate tax

return with a gross estate of approximately $5.9 million. One

thousand forty-two dollars and forty-one cents ($1,042.41) in

funeral and administration expenses were deducted along with other

deductions, leaving an amount of approximately $4.4 million in

residue for the charitable deduction. Id. at 88. The next year,

the executors filed the estate's income tax return, claiming

administration expenses totalling $66,827.33 as deductions. The

executors had charged this amount against the estate's principal

account. Because the executors had failed to deduct these
administration expenses from the gross estate in computing the

residue for the charitable deduction, the Commissioner asserted an

estate tax deficiency. Thereafter, the executors changed their

book entries to charge the expenses to the estate's income, rather

than the principal, paid the deficiency, and instituted a suit to

recover the amount of the deficiency. Id.

The executors argued that "where expenses of administration

are paid out of post-mortem income, the amount of corpus available

for charity is not diminished by such payments." Alston, 349 F.2d

at 89. The court rejected the executors' argument and held that

the source of the deduction was the gross estate and that

"administration expenses must be deducted from the gross estate

even though paid out of post-mortem income." Id. See also

Ballantine, 293 F.2d at 313 (the gross estate must be reduced by

the amount of the administration expenses even though those

expenses are met from another source). The court reasoned that the

"effect of yielding to the executors' argument here would be to

increase the amount of the gross estate by the amount of

post-mortem income—a result directly contrary to the statutory

definition of gross estate." Alston, 349 F.2d at 89 (emphasis

added).

We are bound by the Alston court's interpretation of federal

law. Moreover, we are bound by precedent which specifically

rejects the Tax Court's interpretation of the relevant legislative

history of the marital deduction. See Ballantine, 293 F.2d at 313.

The legislative history provides:

The interest passing to the surviving spouse from the decedent

is only such interest as the decedent can give. If the
decedent by his will leaves the residue of his estate to the

surviving spouse and she pays, or if the estate income is used

to pay, claims against the estate so as to increase the

residue, such increase in the residue is acquired by purchase

and not by bequest.

S.Rep. No. 1013 (Part II), 80th Cong., 2d Sess. (1948), reprinted

in 1948 U.S.C.C.A.N. 1163, 1228 (emphasis added). In the present

case, the Tax Court erroneously held that administration expenses

are not "claims" because they come into existence only after the

death of the decedent. Going further, the court distinguished

administration expenses from claims against the estate reasoning

that administration expenses relate to both the corpus and the

income of the estate. Therefore, the court held that the

legislative history cited above does not control the treatment of

administration expenses.

In Ballantine, a decision that is binding on this court, the

court rejected the executors' argument that the term "claims" as

used in the legislative history referred to debts and excluded

administration expenses. Specifically, the court held that there

was no "logical basis for such a narrow construction" and that

"[t]he reason for including the one applies to the other."

Ballantine, 293 F.2d at 313 (citation omitted). Thus, the

majority's adoption of the Tax Court's interpretation of the

legislative history contravenes binding circuit precedent setting

forth what I believe is the more logical interpretation.

IV.

In sum, the precedent set forth in Alston and Ballantine

should be followed in this case. As a consequence, the Tax Court's

judgment in favor of the estate should be reversed.
Although state law in this case allows administration expenses

to be paid out of income earned by the estate during

administration, federal law requires the gross estate to be reduced

by the amount of the administration expenses, irrespective of the

source of the payment. Accordingly, the marital and charitable

deductions should be reduced by the amount of administration

expenses that were paid out of income earned by the estate during

administration.