### IN THE COURT OF APP EALS OF TENNESS EE AT JAC KSON O n B ri ef S ep te m be r 14, 200 5

IN RE: E STATE OF RICHARD L. LE ATH,, ET AL 

### . v. DA VID LEA TH

A Dire ct A ppeal f

romthe Chancer y Court for F ayett e County No. P -3-102 The Honorable Dewey C. Whitenton, Chancellor

No. W2005-00195-C OA-R3-C V - F iled Dece m ber 8, 2005

This case conce rns the payment of income ta x es, including penalties a nd interest, in curr ed by an estate. The trial court he ld that the tax es and inter est due we re to be prorated among the various he ir s, de vis e e s a nddis tr ibu te es in pr op ortio n to the a mou nt o f the dis tr ibu tio n th a t e a c h p art y
rec eived. The trial court f urther he ld that all penalties on the taxes we re to be paid by David L eath, executor of the E state of Richa rd L

. L eath, indivi dually

. L astly , the trial court ordere d that the court costs wer e to be paid one-ha lf by the ex ecutor and one-half by the other he irs and distributees. The parties a ppeal. We af

firm in part, re verse in part, and r emand.

Tenn. R. App . P . 3; Appeal as of Right; Judgme nt of th e Chancer y Court Affi rm ed in Par t; Reve rsed in Par t; and Rem anded

W. F RAN K C RAW FORD , P.J ., W.S ., delivere d the opi nion of the c ourt, in which A L AN E. H I G H ERS , J . and D AVI D R. F ARMER , J ., joined.

L arry E. Parrish of Me mphis, Tenne ssee f or Appe llant, David L eath, Individually and as Executor of Es ta te of Ric ha rdL e a th

J ohn S. W ilde r, S r. , an d L ee S. Saunder s of Somerville, Tenne ssee f or Appe llees, Michae l Tapp, B ry a nt T app , Ray mon d T app , Ri c ha rdL e a th andSara

h Jan e L e a thI n pr es ent i ng t he pert i nen t procedur al hi s t ory r el at i ng t o t he ori gi nal mo t i ons f i l ed by t he part i es , we 1

p arap hras e f

rom our p revi o us d eci si o n i n In re E sta te o f R ic h a rd L . L e a th v . D a v id K . L e a th , N o. W 20 03

- 01 81 6- COAR 3

- C V , 20 0 4 W L 5 7 0 8 7 (T enn. C t

. A p p

. 20 0 4 ).

B r y ant T app, Ri cha r d T app, Ray mo nd T app, R i cha r d Le at h and Sar ah Jan e Lea t h, col l ect i vel y , ar e r ef er r ed 2

to in this o p inio n a s the “H e irs.”
-2- OP IN ION

Richard L . L eath ( “Te stator”) died Dec ember 25, 1996. His L ast Wil l and Testame nt was admitted to probate by order of J anuary 2, 1997. Pursuant to the will, the Testator' s son, David K. 1 L e a th ( “ Exe c uto r/Ap pe lla nt” ), wa s a pp oin te d e xec uto r. Th e wi ll re a ds , in pertin e nt part , a s f oll ow s:

F I RST : I de sir e a nddir e c t th a t a ll o f m y jus t de bts , f

un e ra l e xpe ns e s, and the cost of administering my estate, be first paid by my Ex ecutor out of any funds coming into his hands as such Executor. * * * FIFTH :.... (a ) I he re by wi ll d e vis e a ndbe qu e a th t o my daug hte r, Pe g g y

L e a th Tapp, the sum of O ne dollar. (b) Af ter the pay ment of debts, fune ral ex penses, a nd the costs of

a dmi nis te ri ng my

e state , if the re is an y mo ne y

le ft in m y e state ; I here by will, de vise and bequeath the same to my gra n d children, namely ; Sarah Jane L eath, Da vid Richard L eath , Ray mond Tapp, Michae l Tapp, and B ry an Tapp, in e qual share s, one-f ifth to eac h of them, share and shar e alike. (c) All of the re st and residue of my es t at e, o f every kind, I here by wi ll, de vis e a ndbe qu e a th t o my so n, Da vidK. L e a th, in f e e sim ple absolutely

. (d) I h er eb y n o minate and a ppoint mysaid son, David K. L eath, Ex ecutor [] , and I

direc t that he [be] allowed to s er v e as suc h Exe c uto r w ith ou t bo nd , in ve nto ry or se ttl e me nt w ith a ny

Cou rt

.
David K. L eath wa s the sole devisee of the De cede nt's r eal e state. On Marc h 14, 1997, the testator' s d au g hter, Peg g y L eath Ta pp, and thre e of the five He irs under the will, Bry ant Tapp, 2 Richard Ta

pp an d R ay mond Tapp (“ L eg atee s”), f iled a petition to remove the Ex ecutor . The L eg atee s arg ued t hat David L eath should not be a llowed to continue as e x ecutor beca use, among oth e r r e a so ns , h e wa s th e maj or deb tor of the Es ta te of

Ric ha rdL . L e a th ( “ Es ta te ” ) andthat hi s in t er es t wa s wholly

adver se to that of the other benef iciarie s under the w ill. S ubsequently , by consent orde r of Aug ust 12, 1998, Paul R

. S u m m er s was appointed a s a Specia l Master. On Fe bruary 18, 1999, an orde r wa s entere d deny ing the petition to re move Ex ecutor

. On April 1, 1999, the L eg atee s, Michael Ta

pp, Bry ant Tapp a nd Ray mond Tapp filed a second pe tition for removal of Ex ecutor , and for a temporary injunction a lleg ing a conflict of intere st on the part of the Ex ecutor-3-

in that the Ex ecutor

was a debtor o f t h e E s t at e and that he ha d brea ched his fiduc iary duty . The pe tit ion a lso so ug ht to enjo in E xec uto r f ro m di sp os ing of

the re a l e state in any

way so a s to encumbe r his ability

to pay his debt t o the Est ate. On that same date , the L eg atee s filed a notice of L ien L es Pendens a lleg ing that the Ex ecutor had no means of pay ing his de bt to the Estate other tha n pledg ing the rea l estate de scribed in the notice

.
O n S e p t e m b e r

1 7 , 1 9 9 9 , a

c o n s e n to r d e r

w a s e n t e r e d w h e r e b y th e E x e c u t o r a g r e e d t o p a y a
su m c e rt a in p lus int e re st i nto the Es ta te wi thi n th irty da y s f ro m th e date of e ntry of the or de r a s w e ll

as various Special Master and at t o rn ey s’ fe es. Executor further a g ree d that the Estate would be closed a nd the Executor dischar g ed within thirty day s from the date of e ntry of the orde r " or as soon there afte r as pr actica l." On O ctober 29, 1999, a fieri facias was issued a g ainst the Executor persona lly

in the sum of $148,793.60, re prese nting the amount of debt, including interest, owe d by the Executor to the Estate. Execution was directed upon the re al prope rty of the Executor. B y

order of Nove mber 12, 1999, a nd by consent of the parties, Ba rbar a W. Walls was appointed a s Special Ma ste r t o c on du c t a

sa le of the real pr op e rt y

e xec ute d u po n b y

At ta c hme nt andExe c uti on a ndto distribute the proce eds in ac co rd ance with the provisions of the trial c ourt' s September 17, 1999,

or de r a ndthe L a st Wi ll a ndTe sta me nt o f the Te stator

. Pr ior to the c los e of 19 99 , the Exe c uto r p a id the Estate $148,793.60, pr eventing the sale of the re al prope rty . This amount repre sented $114,000 of principa l due the Estate by the E x ec u t or and more than $33,000 in interest due. D ue to the repay ment of t he loan and other monies paid into the Estate during 1999, fede ral income taxes, as well as income taxes im posed by the State of T en n es s ee, would be due by the Estate on April 15, 2000.

An or de r w a s e nte re d o n F e br ua ry 4, 20 00 , w hic h p ro vid e d th a t th e pa rt ie s h a d ap pe are d in

c ou rt a ndjoi ntl y

a nn ou nc e d a

mutua l a g re e me nt w hic h p ro vid e s, in p art , a s f oll ow s:

T h i s c a u s e c a m e o n t o b e h e ar d o n t h e 7 d a y o f J a n u ar y, th 2000, befor e the Honor able De wey C. W hitenton, Chancellor of the Chance ry Court of Fay ette County , Tenne ssee, upon the Plainti ff’ s Objection to Ac counti ng and Motion to Compel R eimbursement of Monie s to th e E s tate , u p o n th e w r it te n r e s p o n s e o f the Ex ecutor /Defe ndant, upon statements of c ounsel and upon the e ntire

re c or d in thi s cau se, fr om w hic h it app e ars that th e pa

rt ie s jo int ly

announce d in open Court a mutual ag ree ment of the pa rties re solving the iss ue s a s f

oll ow s: * * * 1. Th a t D a vidK. L e a th be, and is he re by or de re d, to reimburse the estate the amount of $5000.00 which amount is to be satisfied by

monies curr ently

in the custody

of the Spec ial Master.-4- 2. That the amount of $3,400.00, repre senting the balanc e of the attorne y s’ fe es at issue a re pr operly

char g eable t o t h e estate and not the individual responsibilit y of Da vid K. L eath. 3. T h a t a l l f

u n d s c u rr e n t l y i n t h e S o m e r v i l l e B a n k & Tr us t Company acc ount in the name of the Estate of Richard L eath be immedi ately

rele ased a nd place d into the custody of the Spec ial Master, B arba

ra W. Walls. * * * 6. That Ba

rbar a W. Walls be and is he reby order ed to make all disbursements of m o n ey for pur poses of c losing out the administration of the estate , in place of and instead of the Executor, David K. L eath, the pr ovisions of the Orde r o f S ettlement dated September 17, 1999 notwithstanding ; and, furthe r, that the disbursements shall include pay ment of the Court costs to the Clerk and Master , the fe e due to Paul R. Summer s , S p ec ial Master, in the amount of $2,500.00; Edwar d B. J ohnson' s attorney fee in the amount of $550.00, and the Wil der & Saunders attorney fee in the amount of $8, 0 0 0

. 0 0 , a ll o f w h ic h w e r e ap p r o v e d b y th e Co u r t b y O r der of Se ttl e me nt f

ile d an d e nte re d o n Se pte mbe r 1 7, 19 99 ; a ndfu rthe r, sa id d is b u r s e me n ts s h a ll in c lu d e p a y me n t of th e f e e d u e to B ar

b ar a W. Wal ls, Spe c ia l Ma ste r andTr a c y Wal sh , att orne y fo r the e state , b oth in amounts a s ea rl ier a

pproved in this order ; and, furthe r, af ter pay ment of the a

bove re fer ence d expenses of administration, the Special Master

should disburse to Pegg y L eath Ta pp the amount of $ 1

. 0 0 ; and furthe r, the re maining f unds of the esta te should be disbursed, in equa l shares, to the be nefic iaries, a s follows: Michael Tapp , Br y ant Tapp, Raymond Tapp, Richar d L eath, a nd Sarah Jane L eath.

This order be came final on Mar ch 6, 2000. No whe re in the c onsent order was ther e a me ntion of

a n in c ome ta x de bt o f the Es ta te fo r 199 9, no r w a s th e re a ny me nti on of

wh o w ou ld b e re sp on sib le for the pay ment of said debt.

The Executor’s attorney , Trac y Walsh, by letter dated Marc h 2, 2000 and filed with the court M ar ch 3, 2000, ale rted the Cler k and Master , Ba

rbar a Walls, serving as Specia l Master, a s to the

u n p a id in c o me ta x d e b t o f th e E s tate f o r 1 9 9 9 , a s a ll th e E s tate f u n d s h a d b e e n place d into the

c us tod y of the Spe c ia l Ma ste r. Th e le tte r r e a ds , in pe rt ine nt p art , a s f oll ow s:

I ha ve dis c us se d th e 19 99 ta xes f or the e state wi th [the a c c ou ntant] Vernon Tapp. He has indicated that the estate w ill owe both fede ral-5- and state ta x es for

1999. The pre liminary

fig ure he has g iven me for the fe dera l tax es is quite larg e.

Mr. T ap p i s curr ently

working on the tax returns and should have more de finite fig ures to me shortly

. I n light of this information, I fee l that it is unwise to make disbursements on the es tate until all of the debts of the e state have been ma de.

I t may b e p o s s ib le to d o a p ar ti a l d is trib u ti o n u n ti l th e f inal tax amounts are due. Please call me to discuss this further

.

The Executor’s attorney

copied Mr. L ee Saunde rs, t he attorney for Michael Tapp, Bry ant Tapp and Ray mond Tapp. I n response , Mr. Saunders, the attorne y for the thr ee g randc hildren, by letter dated Ma rc h 7 , 2 00 0, a ndfi le d w ith the c ou rt that sa me da y , a dv ise d the Spe c ia l Ma ste r, B arb ara Wal ls, to pr o c e e d w ith d is b u r s e me n t o f th e f u n d s o f th e E s tate

. T h e le tt e r r e a d s , in p e r ti n e n t p art, as fo llo ws :

I am advised that the Orde r enter ed by the Court on Fe bruary

4, 2000 beca me final on Mar ch 6, 2000. It is our positi on that disbursement of the funds in a ccor dance with t h e fi nal Orde r is now appr opriate, not withstanding the ta x issues raised by Ms. Trac y Walsh’s letter of Marc h 2, 2000.

On Ma rc h 8 , 2 00 0, the Spe c ial Maste r d isb ur se d th e fu nd s o f the Es ta te inc lud ing on e do lla r t o Peg g y L eath Ta pp, and the r emainder of m onies in equal shar es to Sarah Jane L eath, Da vid Richard L eath, Raymond Tapp, Michae l Tapp, and B ry an Ta pp,

On M arc h 29, 2000, the Executor filed a motion to recover

funds pre viouslydisbursed to the heirs in orde r t o pay the taxes of the Estate a nd other re lated expenses. The motion reads, in pertinent pa rt :

1. O n Ja n u ar y 7 , 2 0 0 0 , a h e ar in g w a s h e ld b e f o r e th is Court on a n Obj ec t i on to Accounting and Motion to Compel R eimbursement of Monies to the Estate filed by certain heirs of the estate.

2. An orde r re solving said objec tion was en tere d on Fe bruary 4, 2000.

3. Sa id o rd e r a lso re so lve d se ve ra l oth e r iss ue s r e la tin g to the c la ims

a ndde bts of

the e state , a lth ou g h it

didno t pur po rt to re so lve a llT he E xecut o r i s ref erri ng t o t he i nco m e t ax ret urns due f o r y ear1 9 9 9 by t he E st at e o f R i chard Leath. 3

T he $ 1 0 , 5 0 7 represent s fed eral i nco m e t axes d ue b y t he E st at e o f R i chard Le at h t o t he In te rn a l R evenue 4
Ser vi ce.

T he $ 1 , 7 6 8 represent s st at e i nco m e t axes d ue b y t he E st at e o f R i chard Leath t o t he T enness ee D ep art m ent 5
of Reven ue.
-6-

monetary issues. The orde r allowe d Spe ci al Master to make dis bu rs e me nts fo r s a id c la ims

.
4. S u b sequent to the he aring on J anuary 7, 2000, the Executor

r e c e iv e d th e ta x d o c u me n tati o n n e c e s s ar y f o r th e 1 9 9 9 e s tate ta x
re turns

. Du e to the re pa y me nt of a loan a ndoth e r m on ie s p a id i nto 3 the estate during 1999, a sizeable tax debt has arisen.

5. The e x ecutor

employ ed Ve rnon R. Tapp of Sommerville, Tenne ssee to pre pare the tax returns on beha lf of the e state.

6. Sa id r e turns ha ve be e n p re pa re d a ndthe Ric ha

rdL . L e a th E state
ow e s f e de ra l e state ta xes i n th e su m of $1 0, 50 7. 00 , a s w e ll a s,

4 $1,768.00 to the Depa

rtment of R evenue for the State of Tenne ssee. 5

* * * 10. The taxes due ar e properly char g eable to the estate and should be pa id f ro m e state fu nd s.

11. The Richard L eath Estate cannot be closed until these taxes are paid.

There fore , the E x ec u tor asks the Court for an orde r compelli n g Michae l Tapp, B ry ant Tapp, Raymond Tapp, Richar d L eath and Sara Jane L eath, to r ei m b u rse the estate the a mount
nece ssary to compensate Ver n o n R. Tapp and Tr acy B. Walsh for their prof essional servic es re ndere d on behalf of the e state, suffic ient funds to pay

the 1999 fe dera l and state taxes owed b y t he estate, as well as, a ny

interest and penalties which have a ccr ued ther eon. The Exe c uto r a dd iti on a lly

a sk s th a t th e se fu nd s b e re imb ur se d to th ee s t a te
a s so on a s p os sib le in o rd e r t o a vo id f urthe r c os ts.

The L eg atee s responde d to this m otion alleg ing that the fede ral a nd state income ta x es due

wer e rig htfully

the re sponsibili ty

of the executor, David K. L eath. The trial court e ntere d an orde r deny ing the motion. Following the f iling of tha t order, t h e L eg atee s filed a motion to require the Ex ecutor to pay the fe dera l income taxes due plus interest and penalties. The y further moved that-7-

Ex ecutor be re quired to pay

to the Tenne ssee De partment of Re venue inc ome tax incurred b y the Estate, if it had not, in fac t, been pa id.

On April 2, 2003, Ex ecutor filed a motion to discharg e the notice of L ien L es P en d ens previously

filed in this matter. He r equeste d that the trial court conduct a hearing to de termine the validity of the Lien L es Pendens a nd to deny the motion previously

filed re questing that he be require d to pay the i ncome tax es af oreme ntioned. The trial c ourt enter ed an or der on June 27, 2003,

rec iting that bef

ore the court wa s the motion to order David L eath to pay income taxes owed by

the Estate, his answe r t o t h e m o tion and his moti on to discharg e the notice of Lien L es Pendens, a nd upon the entire rec ord. The c ourt ruled t h at the Executor, David L eath, sha ll be responsible for pa y me nt o f p e na lti e s a ndint e re st a c c ru e d but " the c ou rt make s no rul ing s as to w ho is r e sp on sib le for the pay ment of taxes except to order that taxes be pa id acc ording to the law of t h e S t at e of Tenne ssee a nd the I nterna l Revenue Ser vice." An amende d order was e ntere d J uly

1, 2003, which state s a s f oll ow s:

After

further considerat i on, the Court finds that the orde r
re centlyenter ed conc erning the payment of taxes, penalties and int e re st s ho uldbe a me nd e d a ndmod if ie d a s f oll ow s: The pa y ment of the taxes due shall be determined by the laws and re g ulations of t h e S t at e of Te nnessee , the United States of Am e ri c a , a ndthe I nte rn a l Re ve nu e Se rv ic e , an d s ha ll b e pa id b y tho se heirs, leg atee s and/or devisee s found to be leg ally responsible, a long with the penalties a nd interest. Howe ver, the Court further finds that it i s equ ita

ble that the Exe c uto r, Da vid K. L e a th, sh a ll r e imb ur se , to those persons who a ctually pay the taxes, penalties and in t er est, the t o t al am o u n to f p en al t i es an d t h e i n t er es tt h at h a s ac cr u ed t h ro u gh Ap ri l 30 , 2 00 3, a nd if

Da vidK. L e a th i s f

ou ndto b e pe rs on a lly

lia ble for any portion of the taxes, then he will also pay his pro-rata share of the intere st that acc rues a fter A pril 30, 2003.

The Executor a

ppeale d the J uly

1, 2003, order

of the trial c ourt, contending that the trial court was in er ror in fa iling to r u le who wa s responsible for pay ment of the income taxes, int ere st and penalty to the I nterna l Revenue Ser vice a nd the State of Te nness ee , an d i n failing to order the benef iciarie s to repay

sums previously

disbursed to them sufficie nt t o p ay the taxes. This Court found that wit h the ex ception of having ruled on the pay ment of pena lty and intere st, the trial court had not ruled upon the issue of t he party or parties responsible for the pay ment of t he tax es and ha d not rende red a dec ision on the moti on to remove the L ien L es Pendens. Se e In re Est ate of Ric har d L. Leath v. David K. Leath, No. W2003-01816-COA-R3-CV, 2004 WL 57087 (Tenn. Ct. App. 2004). As a r esult, this C ourt held that t h e p re v i o u s appea l was fr om an non-fina l judgment a nd there fore not appea lable as of rig ht. The appe al was dismissed on J an. 9, 2004. Id. at *3.-8-

On September

10, 2004, Michae l Tapp, B ry ant Tapp, a nd Ray mond Tapp filed their motion to determine liability

for the pay ment of i ncome taxes owed by the Estate a nd to order the Ex ecutor to close the Estate . The L eg atee s urg ed the tria l c ourt to de termine who would be re quired to pay the lia bil iti e s o f the Es ta te . O n D e c e mbe r 17 , 20 04 , the tr ia l c ou rt iss ue d a fi na l de c re e that r e a ds , in p e rt ine nt p art :

IT I S, THEREFOR E , OR DE R E D, AD J UD GE D A ND DE C R EED by the Cou rt that th e ta xes a

re to b e pr o r a te d a mon g the va ri ou s h eir s, devisee s and distribu t ees in proportion to the amount of the distribution t hat ea ch per son rec eived.

I T I S FURTHE R ORDERED, ADJ UDGED AND DE CREED by the Court that the interest due on the taxes shall be pro r ated a mong the various heir s, devisee s and distributees in proportion to the amount of distribution that each pe rson re ceive d.

I T I S FURTHER OR DERED, ADJ UDGED AND DECREED by the Court that all penalti es o n t he taxes shall be paid by David L eath, i n d i v i d u a l l y. * * *

I T I S F URTHER ORDERED, ADJUDGED AND DE CREED by the Court that the Court costs, including litigation tax , are to be paid one half by David L eath, indivi dually , and the other one half by the other heirs and distributee s, for a ll of which execution may issue.

All the parties a

ppeal. The Appellant, Da vid L eath, pr esents the following issues for re view, as stated in his brief :

1. Th e Tria l Co urt w a s in e rr or in f indin g D e fe nd a nt/Ap pe lla nt, David L eath, r esponsibl e fo r t he payment of taxes, interest and penalties to the Interna l Revenue Ser vice a nd the State of Te nnessee

.

2. The Trial Court w as in e rror in r uling that be nefic iaries to whom the estate funds had be en disbursed to re pay sufficie nt funds to the

e state to p a y

the ta xes, int e re st a ndpe na lti e s.-9-

De sp ite Ap pe lla nt’ s st a te me nt o f the secon d is su e , it app e ars fr om h is a

rg ume nt that he , in fa c t, arg ues that the trial c ourt err ed in not ordering the heirs to re pay sufficie nt funds to the Estate to pay the ta xes, int e re sts a ndpe na lti e s in fu ll. The Appe llees, who a

re the five g randc hildren of the T estator, Micha el Tapp, B ry ant Tapp, Ray mond T app, Richard L eath and Sarah J ane L eath, (“H eirs/Appellee s”) prese nt th e f o l l owing issues for re view, as state d in their brief :

1. The Trial Court was in err or in finding Appellee s responsible for pay ment of the incom e t ax es and intere st to the I nterna l Revenue Service and the State of

Tenne ssee.

2. The Trial Court w as in err or in finding Appellee s responsible for pa y me nt o f o ne -h a lf

(1 /2) of the Cou rt Cos t.

The Ex ecutor arg ues that the income taxes due by the Estate should have been paid out of monies held by the Est ate prior to the disbursement to the He irs, and that the Executor, a s a re siduary benef iciary who rec eived only persona l and rea l pr operty under the will, is not liable for any portion of the taxes, interest or pe nalties. Furthermore , the Ex ecutor contends that by the consent order filed with the trial court on F ebrua ry 4, 2000, all monies being hel d by the Estate we re pla ced in the custody of the Spec ial Master, B arba ra Walls, which pre vented the E x ecutor from paying the fede ral and state inc ome taxes due by the Estate f

or 1999, which c ame due on April 15, 2000.

The He irs contend that the E x ecutor enter ed into the conse nt order dated Fe bruary 4, 2000, knowing that the conse nt order did not include a provision for payment of income taxes. The He irs

arg ue that th e Exe c uto r h a d th e re sp on sib ili ty to f ile the inc ome ta x re turn f or the Es ta te be fo re it could be cl o s ed, and that the disbursements ag ree d upon in the consent orde r did not exhaust the assets of the E state, as the r esiduary estate still contained personal pr operty and re al prope rty

valued

over $ 2 0 0 , 0 0 0

. Thus, the Heir s arg ue that the Executor knowing ly reta ined the re sponsibili ty , as Ex ecutor , to pay

the income taxes out of the re siduary estate.

Th e g ra va me n o f the iss ue be fo re thi s c ou rt is wh o sh ou ld pa y the fe de ra l a ndstate inc ome taxes due by

the Estate of Richard L

. L eath for t he y ear 1999, and who should pay the intere st and pe na lti e s t h a th a v e a c c ru e d o n t h e s e i n c o m e t a xe s

. T h e t r i a l c o u r t ’ s d e t e r m i n a t i o n o f w h o s h o uld pa y the inc ome ta xes, int e re st a ndpe na lti e s o f E state of Ri c ha rdL . L e a th f

or the y e ar 1 99 9, is a qu e sti on of

la w. As su c h, ou r r e vie w o f th e tr ial cou rt or de r i s de novo upon the re cord w ith no presumption of corr ectne ss a ccompa ny ing the trial court’s c onclusions of law. See Tenn. R. App. P. 1 3( d) ; Waldron v. Delffs, 98 8 S. W. 2 d 1 82 , 184 (T e nn . Ct . A pp . 1 99 8) ; Sims v . St e war t, 973 S.W .2d 597, 599-600 (Te nn. Ct. App. 1998).T. C.A . § 30 -2 -3 17 , Prioriti e s a ndpr e fe re nc e s; c on te ste d o r u nmatur e d c la ims , r e a ds : 6 (a) All claims or demands ag ainst the estate of any dece ased pe rson shall be divided into the following c lassifications, which sha ll have priority in the order

shown: (1) F irst: Cost s of administration, including, b u t n o t limit ed to, pre miums on t he fiduciary bonds and re asonable compensa tion to the personal re prese ntative and the pe rs on a l r e pr e se ntativ e ' s c ou ns e l; (2 ) S e c on d: R e a so na

ble fu ne ra l e xpe ns e s; (3) Third: Ta x es and a ssessments imposed by the fe dera l or any

state g overnme nt or subdivision thereof; a nd (4) F ourth: A l l o t h er de mands which may be filed a s afor ementioned within four

mon ths a ft e r the da te of

no tic e to c re dit or s. (b) All dema nds ag ainst the estate sha ll be paid by the persona l r epre sentative in the order in which they are classed, and no demand of one cla ss shall be paid until the claims of all prior c lasses ar e satisfied or provided for ; and if there shall not be sufficie nt a ssets to pay the whole of any one class, the c laims in such class shall be paid pro rata. (c ) De bts du e up on bil ls sin g le , bo nd s, bil ls of e xch a ng e a nd pr omiss ory note s, whether with or without seal, and upon se ttled and liquidated acc ounts sig ned by the d e b t o r , ar e o f

e q u a l d i g n i ty, u n l e s s o th e r w i s ep r o v i d e d , an d a r et o b ep ai d

a c c o r d i n g l y. (d ) T he pe rs on a l r e pr e se ntativ e sh a ll h olda sid e su ff ic ie nt f un ds or oth e r a sse ts t o pay eac h contested or

unmatured c laim (or the pr oper r atable portion thereof, a s the

c a se ma y be ) w ith int e re st (if

the c la im b e on e be ari ng int e re st) , u nti l it is de te rm ine d w he the r o r n ot s uc h c la im is to be pa id, or un til su c h un ma tur e d c la im has re ache d maturity , also sufficie nt as sets to meet the expenses of pe nding lit ig a tio n a ndc os ts o f c ou rt a nda ny un pa id t a xes.

-10- The moneta

ry assets of the E state should not ha ve been disbursed befor e the income taxes for 1999 we re pa id. Tennesse e law r equire s that taxes due by an esta te must be paid bef ore disbursement of the estate funds or that sufficie nt funds to pay the taxes be held aside be fore disbursement to bene ficiaries. See T.C.A. § 30-2-317. As previously noted, the trial c ourt’s orde r 6 of F ebrua

ry 4, 2000, did not make any provisions for pay ment of t he Estate income tax es. As the Heirs c ontend, under

Tenne ssee law a “de cre e and e specia lly a consent decr ee may

not be set aside or alter ed unless ente red throug h fraud or mistake. ” Bringhur st v . T ual , 598 S.W .2d 620, 622 (T en n

. C t

. Ap p

. 1 9 8 0 ) ( ci t i n g Cor by v . M att he ws, 541 S.W .2d 789, 793 (Tenn. 1976) ). Howe ver, mistake is exactly

what occ urre d in this case.

The Executor should have notified the co u rt p ri o r t o the entering of the Fe bruary

4, 2000, consent orde r of the pe nding ta x es due by the Estate. He did not. The t ri al court had no way of kn ow ing wh e n th e c on se nt o rd e r w a s file d th a t th e Es ta te wo uldow e inc ome ta xes f or 19 99 pa y able by April 15, 2000. Neve rtheless, the Executor attempted to corre ct this mist ake. B ec au s e all the Estate funds ha d been pla ced into the custody of the Special Master, the Ex ecutor sent a letter da tedI n t h e t r i al c ou r t ’ s O pi n i on da t ed Se pt embe r 10, 2004, t h at c ou r t s t at ed: 7
I t i s u n f or t u n at e t h at t h e t ax es , w h i ch w er e du e on Apr i l 15, 2000, for t h e y ea r 1999,

were no t pa i d out o f

t he asse ts a n d fu n d s o f t he est at e p ri o r t o dis t ri b ut i o n. T he C ou r t f i n ds t h a t t h e Ex e c u t or w a s e i t h e r a w a r e , or s h ou l d h a v e be e n a w a r e , t h at i n come t ax es wer e du e a t t h e t i me of t h e en t r y of

t h e Cons en t O r der on Fe br u ar y 4, 2000. T h e Exe cu t or ’ s a t t or n ey w as c ert ai nl y a wa r e at t h e t i me of h er l et t er on M arch 3, 20 0 0

. T he at t o rney for the b enef i ci ari es was al so aware o f t he t axes at t he t i me of h i s l et t er on M ar ch 7, 2000.

M e rte n s L a w o f F e d e ra l In c o m e T a x a tio n § 3 5 E :1 0 sta te s: 8
T he i nco m e i n res p ect of a d eced ent m ust be i ncl ud ed , i n t he y ear o f rece i p t , i n t he g ro ss in c o m e o f eithe r th e d e c e d e n t' s e sta te o r th e p e rs o n w h o a c q u ire d the rig h t t o
r ec ei v e s u ch i n come

. I n come i n re s pec t of a dec ede n t i s t h e amou n t of a l l i t ems of g r os s i n come t h at w er e n ot pr oper l y i n cl u di bl e i n t h e dec ede n t ' s t ax abl e i n come for t h e y ea r of

dea t h or an y pre v i ou s y ea r

. W h et h er re ce i v ed by t h e e s t at e or a pe r s on who acq ui red t he ri ght t o recei ve t he i nco m e, t he charact er o f su c h in c o m e i s t he

same as i f

t he d eced ent had recei ved s uch am o unt be fo re t he d eced ent ' s d eat h.

-11- Marc h 2, 2000, and filed with the court Mar ch 3, 2000, see supra, alerting the S pecia l Master, the tr ia l c ou rt a ndthe He ir s’ a tto rn e y

a s to the un pa id i nc ome ta x de bt o f the Es ta te fo r 1 99 9. De sp ite having rec eived notice of the Estate ’s tax debt, on March 7, 2000, the H eirs’ attorney sent a letter to the Special Master , se e su pr a , advising her to pr ocee d with disburse ment of the re maining f unds of the Estate . This was a mistake by the Heirs’ attorney

. We a g ree with the trial court’ s Opinion that it i s “ un fo rtun ate th at th e tax e s .

. . we re no t paid o ut o f the a sse ts a ndfu nd s o f the e state pr ior to dis tr ibu tio n” a ndthe fa

ult fa lls on bo th p art ie s. 7

Consequently , it is i ncumbent upon this Court to determine liabilityfor the pay ment of the fe de ra l a nd state inc ome ta xes, int e re st a ndpe na lti e s o we d b y the Es ta te of

Ric ha rdL . L e a th, a s if the disbursement of E s t at e fu n ds was neve r made . The trial c ourt held that the income taxes and

acc rued inter est wer e to be prorated among the various bene ficiaries in proportion to the amount of the dist ri b u t i o n that eac h benef iciary rec eived. F urthermor e, the tria l court held that pe nalties

a c c e sse d for la te pa y me nt sho uld be pa id by the Exe c uto r. Ho we ve r, thi s cou rt do e s n ot a g re e wi th the tr ia l c ou rt s d e te rm inatio n o f l ia bil iti e s a mon g the pa

rt ie s.

The Estate of Richar d L eath r ece ived income in 1999 from the repay ment of the promissory note held by

the Estate f

rom the Executor in the amount of $148,793.60. This income g ener ated a tax debt t o t h e I n t er nal Revenue Service for $10,507, a nd $1,768.00 due to the De partment of Revenue for the State of

Tenne ssee. The taxes owed by the Estate we re ta x es occ urring beca use of “income in r espec t of a de cede nt” or “ I RD.” I RD includes the amount of g ross income to which a dece dent was e ntitled but that was not inc ludible in his f inal income tax return for

the period ending

on the date of hi s death. 26 U.S.C.A. § 691. Se e als o MERTENS § 35E:10. Taxes resulting f rom 8 I RD are income taxes pay able by the per son rec eiving that income which would have been r ece ived2 6 U .S.C .A .§ 6 9 1 (a)(1 )(A ) R ec i p i en t s o f i nc o m e in resp ec t o f

d ec ed en t s rea d s: 9 (a) In clusion i n gro ss i nc o m e.(1 ) G en era l rule. T he a m o u n t o f a ll i t em s o f gro ss i nco m e i n res p ect of a d eced ent whi ch are not p rop erl y i ncl ud i b l e i n res p ect of t he t axab l e p eri o d i n whi ch f al l s t he d at e o f hi s d eat h or a p ri o r peri o d (i ncl ud i ng t he

a m o u n t o f all it e m s o f gro ss in c o m e in re sp e c t o f a p rio r d e c e d e n t, if t h e r igh t t o
r ec ei v e s u ch a mou n t w as a cqu i r ed by re as on of t h e de at h of

t h e pr i or de ce den t or b y be q uest , d evi se, o r i nheri t ance f rom t he p ri o r dece d ent ) s hal l be i ncl ud ed i n t he g ro ss in c o m e , f

o r th e tax a b le ye a r w h e n re c e ive d , o f: (A ) t he est at e o f

the d eced ent , if

t he ri ght t o recei ve t he am o unt i s acq ui red b y t he d e c e d e n t' s e sta te fro m the d e c e d e n t.

-12- by the decedent ha d he lived. Id. at § 691(a ). I f it is the estate whic h actua lly rec eives the IRD, the estate is taxed. Id. at § 691(a )(1) (A). 9 Under Tenne ssee law , state inheritanc e and f eder al estate taxes are not included in the “ex penses of

administration” or “ expenses of the e state.” Ame ric a n N a t. Ba nk & T

r us t Co . v. Ma nde r, 253 S.W .2d 994, 998-99 (Te nn. Ct. App. 1952). Howeve r, in this St ate, unde r authorities here inafter

cited, in c o m e taxes d u e b y t he esta te of a dece dent ar e included in the a dminist rative

e xpe ns e s o f the e state . I n C. J.S., it s a y s:

I nc ome Ta xes. An e xec uto r o r a dmi nis tr a tor ma y in the us ua l c ou rs e of ad m i nistration pay

income taxes constituting debts of the de c e de nt’ s e state , a ndit h a s b e e n h e ld p ro pe r t o f ile a c la im a g a ins t the est ate for

su ms d ue the g ov e rn me nt u nd e r p ro vis ion s o f a g ro ss income tax law.

34 CJS EX ECU TO RS § 4 09 . I n A .L .R. , in c ome ta xes a re inc lud e d a s a dmi nis tr a tiv e e xpe ns e s:

The fe dera l tax imposed upon t h e income of a n estate is not an inheritanc e tax and is to be paid as an e x pense of administration of the estate , and not cha

rg ed ag ainst the respe ctive leg atee s.

I f a n e state re c e ive s a n I RD , a nd inc ome ta xes re su lt fr om the re c e ipt of the I RD , th e n th e inc ome t a x e s b e c o m e a n a d m i n i s tr a t i v e e x p e n s e o f t h e e s t a t e

. In t h e p r e s e n tc a s e , t h e E s t a t e o f R i c h ar d L. L e a th r e c e ive d a n I RD in the a mou nt o f $ 14 8, 79 3. 60 , w hic h g e ne rate d Federal a ndSta te inc ome taxes. Those tax es ar e an a dminist rative e x pense of the Estate.

I n th e fi rst se c tio n o f the wi ll o f R ic ha rdL . L e a th, the te stator

dir e c ts that “ a ll o f m y

jus t debts, funer al expenses, and the c ost of administering my estate, be fir

st paid by m yEx ecutor

out
o f a n y funds coming into his hands as such executor.” ( Emphasis added) . “F und” is define d as “[a] sum of money

or other liquid assets established for a specific purpose.” Bla ck’s L aw Dic tionary 682 (7th ed. 1999). T hus, by

the clea r direc tive of the testator , the administrative expenses, incl u d i ng the i ncome tax es, we re to be paid fir st out of money

rec eived by

the Executor coming into his hands-13-

a s e xec uto r, prior

to d ist ri bu tio n o f an y mon ie s fr om the Es tate to the He ir s. Th e re fo re , th e inc ome taxes should have been paid out of monies of the Estate, and no pa rt should be taxed ag ainst the residuary estate. This position is supported by the fifth sec tion of the wil l which states, in pertinent pa rt , a s f oll ow s: (b) Af ter the pay ment of debts, fune ral e x penses, a nd the costs of

a dmi nis te ri ng my

e state , if the re is any mon e y

le ft in m y e state ; I here by will, devise and b eq u eath the sa me to my g randc hildren, namely ; Sarah Jane L eath, Da vid Richard L eat h , Ray mond Tapp, Michae l Tapp, and Bry an Tapp, in equal sha res, one -fifth to ea ch of them, share and shar e alike. (c ) A ll the re st a ndre sid ue of my e state , an d ev e ry kin d, I he re by wi ll, de vis e a ndbe qu e a th t o my so n, Da vidK. L e a th, in f e e simple absolutely

.
The Te stator’s will makes it clea r that the He irs would rec eive the mone y rema ining in the Estate, if, a ndon ly

if , th e re wa s a ny

mon e y le ft a ft e r the pa y me nt o f d e bts , f un e ra l e xpe ns e s, a ndthe c os ts of administering the Estate. Conseque ntly , the Heir s, Sarah Jane L eath, Da v i d R i ch ard L eath, Ray mond Tapp, Michae l Tapp, and B ry an Ta pp, must pay , in equal shar es, the income taxes due by the Estate of

Richard L . L eath to the Interna l Revenue Se rvice and the De partment of Re venue of the State of Te nnessee

. Significa nt interest and pe nalties have acc rued on the income tax debt of the Estate since the due date of April 15, 2000. The trial court pr orate d the interest payments betwee n the Executor and Heirs in proportion to the amount of distribution that eac h person r ece ived. Further the tria l court held that t he Executor should be he ld liable for a ll penalties on the income ta x es due by the Estate. The trial c ourt found that the Executor c aused nume rous delay s in the proce edin gs involving the Es ta te a nd that his ina c tio n led to the app oin tme nt o f t wo sp e c ia l ma ste rs in an a tte mpt to e xpe dit e the proc eeding s. Additionally , the t rial court found t hat t he Ex ecutor , who was or should have be en
awa re of the income tax debt of the Estate, ag ree d to the prema ture distribution of the monies in the Estate under

the conse nt o rd er o f Fe b ruary 4, 2000. Tenne ssee law allows for a n executor to be

su rc ha rg e d f or a ny pe na lti e s a nd

int e re st c harge d a g a ins t a n e state if the pe na lti e s a ndint e re st
acc rued due to an executor’ s lack of due diligenc e in manag ing the estate. Mc Far lin v . M c Far lin, 78 5 S. W.2 d 3 67 , 3 72 (T e nn . Ct . A pp . 1 98 9) ; Love v. First Nat’l Ban k, 646 S.W .2d 163, 166 (Tenn. Ct. Ap p. 19 82 ); In re Inm an’s Estat e, 58 8 S.W. 2d 76 3, 76 7 (T e nn

. Ct. Ap p. 19 79 ). Ho we ve r, in the pre sent ca se the trial c ourt also found t hat t he Heirs wer e at fault by improperly encour ag ing the premature disburseme nt of the m o n ies of the Estate afte r they had bee n notified of the pe nding income tax debt. As well, it is the Heirs who have had the benefit of the pr emature ly disbursed funds for over five y ear s. There fore , it is the pos ition of t his Court that the i ntere st and penalties due by the Estate of

Richard L . L eath to the Int ernal Revenue Service a nd the Depa rtment of Reve nue of the State of Te nnessee that have a ccr ued on the income tax debt of the Estate since the due date of Ap ri l 15 , 2 00 0, be pa id o ne -h a lf by the Exe c uto r andon e -h a lf by the He ir s.

The fina l issue befor e this Court is the division of court costs assessed by the trial court onehalf to ea ch party . As discussed above , both parties have p l ay ed a r ole in the mishandling of the-14-

Es ta te , a ndthe pr e ma tur e dis bu rs e me nt o f f un ds wh ic h le d to the pr olo ng e d li tig a tio n o f the se matters. We ag ree with the trial court’ s determination that court cost assessed by the trial court should be paid one- half by the Executor, and one -half by the Heir s. I n s um, the or de r o f the tr ia l cou rt is af fi rm e d in pa

rt , r e ve rs e d in pa

rt , a ndthe c a se is

rema nded to the trial c ourt for e ntry of an order consistent with this Opinion. Costs of the a ppeal a re assessed one -half to Appe llant, David L eath, an d h i s surety , and one- half to the Appe llees, Sarah J ane L eath, Da vid Richard L eath, Raymond Tapp, Michae l Tapp, and B ry an Ta pp.

_________________________________________ W. F RA NK

CR AW F OR D, P RE SID IN G JU DG E, W .S.