T.C. Memo. 1999-46

UNITED STATES TAX COURT

ESTATE OF HARRY FAGAN, JR., DECEASED, FIRST 

CITIZENS BANK, EXECUTOR, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 4688-97. Filed February 16, 1999. 

Maria M. Lynch, for petitioner.

Edwina L. Charlemagne, for respondent.

MEMORANDUM OPINION

COHEN, Chief Judge: Respondent determined a deficiency in

the Federal estate tax of the estate of Harry Fagan, Jr., in the

amount of $84,899. The issues for decision are: 
- 2 -

(1) Whether the amount included in the gross estate as a

bequest from Viola K. Fagan should be increased to restore

amounts incurred for administrative expenses of her estate; and

(2) whether the amount of the charitable deduction should be

reduced by Federal estate and State inheritance taxes.

This case was submitted fully stipulated pursuant to Rule

122. Unless otherwise indicated, all section references are to

the Internal Revenue Code as in effect as of the date of

decedent's death, and all Rule references are to the Tax Court

Rules of Practice and Procedure. 

The stipulated facts are incorporated herein by this

reference. Harry Fagan, Jr. (decedent), died on May 3, 1993, a

resident of Wake County, North Carolina. The executor of

decedent's estate is First Citizens Bank, the principal office of

which was located in Raleigh, North Carolina, at the time of the

filing of the petition. 

Issue 1. Bequest From Viola K. Fagan

Background

Decedent was predeceased by his mother, Viola K. Fagan

(Mrs. Fagan), who died on March 5, 1992, a resident of North

Carolina. A portion of her estate passed to decedent under her

will. Pertinent excerpts from Mrs. Fagan's will are as follows: 

ARTICLE I
- 3 -

I desire and direct that all my just debts be paid

without unnecessary delay by my Co-Executors,

hereinafter named and appointed.

ARTICLE II

I direct that all federal estate taxes and all

costs of administration be paid from the residuary

portion of my estate, * * * in order that that portion

of my estate passing to my son, Harry Fagan, Jr. under

Article III of this Will, will not be diminished

because of the payment of federal estate taxes. I

further direct that all state inheritance taxes be

assessed against the receiving beneficiary.

ARTICLE III

I give and bequeath to my son, Harry Fagan, Jr.,

one-half of my gross estate. This bequest is not to be

diminished because of any federal estate taxes which

are assessed against my estate, but my son is

responsible for the payment of his state inheritance

taxes from his share.

* * * * * * *

ARTICLE XV

All the rest and residue of my property, after the

payment of federal estate taxes, shall be divided into

two equal shares [one share was to be paid to a

granddaughter and one share was to be held in trust for

a grandson]. * * * 

In calculating the amount of Mrs. Fagan's bequest to

decedent as reported on her Federal estate tax return, the

executor of Mrs. Fagan's estate subtracted administrative

expenses ($209,186) and debts ($11,765) from her gross estate

($4,875,844) and then multiplied the remaining amount by onehalf, for a result of $2,327,447. Respondent determined that the

amount included in decedent's gross estate as the bequest from

Mrs. Fagan's estate should be increased by $104,593 (half of the

total administrative expenses) on the ground that such expenses
- 4 -

should not have been deducted in determining the value of the

bequest. The parties do not dispute the subtraction of the debts

from Mrs. Fagan's gross estate before determining decedent's onehalf share.

Discussion

Generally, the value of the gross estate of a decedent

includes the value of all of the decedent's property, real or

personal, tangible or intangible, wherever situated, to the

extent of the decedent's interest therein at the time of death. 

Secs. 2031(a), 2033. State law determines property interests. 

Morgan v. Commissioner, 309 U.S. 78 (1940). Thus, our decision

on this issue involves a determination of decedent's property

rights under Mrs. Fagan's will pursuant to the laws of the State

of North Carolina.

Where the terms of a will are not clear, unequivocal, and

unambiguous, it is the responsibility of the courts to interpret

the will. Pittman v. Thomas, 307 N.C. 485, 492, 299 S.E.2d 207,

211 (1983). Under North Carolina law, "'the intention of the

testator is the polar star which is to guide in the

interpretation of all wills, and, when ascertained, effect will

be given to it unless it violates some rule of law, or is

contrary to public policy.'" Id. (quoting Clark v. Connor, 253

N.C. 515, 520-521, 117 S.E.2d 465, 468 (1960)). In determining a

testator's intent, the will is to be considered as a whole and in

light of the circumstances at the time the will was made. Id.

Where possible, effect is to be given to every clause, phrase,
- 5 -

and word. Coppedge v. Coppedge, 234 N.C. 173, 176, 66 S.E.2d

777, 779 (1951). Technical words are presumed to have been used

in their technical sense unless the other language of the will

evidences a contrary intent, in which case the words will be

given their ordinary and popular meaning. Kale v. Forrest, 278

N.C. 1, 6, 178 S.E.2d 622, 625 (1971). "[T]he use of particular

words, clauses or sentences must yield to the purpose and intent

of the testator as found in the whole will." Id. 

Petitioner argues that Mrs. Fagan's will is ambiguous in

that Article II states that the payment of both administrative

costs and Federal estate taxes is to come from the residue, but 

that the purpose is to not diminish her son's bequest by Federal

estate taxes. It is petitioner's position that Mrs. Fagan's

intent was to relieve her son's share only of Federal estate

taxes. Petitioner also points to the second sentence in Article

III, which reads: "This bequest is not to be diminished because

of any federal estate taxes", as exonerating the bequest to

decedent only from Federal estate tax. In addition, petitioner

argues that Mrs. Fagan did not intend the term "gross estate" in

Article III in a technical sense but in the sense opposite to

that of "net estate"; in other words, meaning "not reduced by

federal estate tax". On the basis of the foregoing, petitioner

maintains that decedent's share of Mrs. Fagan's estate should be

reduced by one-half of the administrative expenses of that

estate. 
- 6 -

Respondent's position is that the term "gross estate" was

meant in the technical sense used for Federal estate tax purposes

and that Mrs. Fagan intended for decedent to receive one-half of

all of the property in which she had an interest at the time of

her death. The only diminution was that resulting from the

instruction in Article I to pay her debts. Respondent points to

Article II as clearly stating Mrs. Fagan's intent that her son's

share not be decreased by either the Federal estate tax or the

administrative costs, in that she instructed that those items be

paid from the residuary estate, and his portion was a specific

bequest, not part of the residue.

Petitioner's interpretation of Mrs. Fagan's will would

render void her direction that "all costs of administration be

paid from the residuary portion of my estate". Paying the costs

out of the residue does not contradict or interfere with the

purpose of not diminishing decedent's share by Federal estate

taxes. Paying such costs out of the residue gives effect to the

first sentence of Article II and of Article III. Although, under

this construction, the term "gross estate" does not totally

coincide with the term as used on the Federal estate tax return,

to wit, assets before deduction of debts, charging administrative

costs to the residue is more consistent with that meaning. 

Moreover, no language in Mrs. Fagan's will expresses an intent

contrary to the use of "gross estate" as a technical term.

The final clause in the first sentence of Article II,

referring only to estate taxes, and similar limiting language in
- 7 -

Article III merely reflect that, absent any reference to Federal

estate taxes, the burden of such taxes would have been allocated

to all the legatees, including decedent, under the apportionment

provision of chapter 28A, article 27, of the General Statutes of

North Carolina (1997). Specific language preventing this

consequence with respect to administrative costs was unnecessary

because there is no provision of North Carolina law apportioning

such costs.

We sustain respondent's position on this issue.

Issue 2. Decedent's Charitable Bequests

Background

On June 17, 1988, decedent executed a will and a trust

agreement. The trust agreement was between decedent as grantor

and First Citizens Bank as trustee. Decedent also named First

Citizens Bank as executor of his will. In decedent's will, he

left his automobile to his son and the rest of his tangible

personal property to his daughter. Decedent made no other

specific bequests and left the residue of his estate to the

trust. 

Decedent's will contains the following pertinent provisions: 

ARTICLE I

DIRECTIONS TO EXECUTOR

1.01 Claims against My Estate. I direct my

Executor, hereinafter named, to pay out of the general

funds of my estate the cost of the administration of my

estate, all my legal debts, expenses of last illness,

and funeral expenses.

1.02 Payment of Taxes. I direct my Executor

to pay out of my residuary estate, otherwise passing
- 8 -

under Article III hereof, and as soon as practical, all

inheritance, estate, transfer, and succession taxes

payable by reason of my death (including interest and

penalties thereon in the discretion of my Executor)

assessed on my property or interest included in my

gross estate for tax purposes. I direct that my

Executor shall not require that any part of such taxes

by [sic] recovered from, paid by, or apportioned among

the recipients of, or those interested in, such

property.

* * * * * * *

ARTICLE III

DISPOSITION OF RESIDUARY ESTATE

All the rest, residue and remainder of my

property, real and personal, tangible and intangible,

wheresoever situate and howsoever held, including any

property over which I may have a power of appointment,

herein referred to as my residuary estate, I give,

devise, and bequeath to First-Citizens Bank & Trust

Company, as Trustee under that certain Trust Agreement

dated the 17th day of June, 1988, wherein I am the

Grantor and First-Citizens Bank & Trust Company is

Trustee, to be held and administered as a part of the

trust hereby [sic] created.

* * * * * * *

ARTICLE V

ADMINISTRATIVE PROVISIONS

* * * * * * *

5.02 Payments By Trustee to Executor. Under

that Trust Agreement referred to in Article III above,

I provided that the Trustee thereunder shall pay to my

Executor certain amounts as required by my Executor for

payment of debts, funeral expenses, costs of

administration of my estate and the inheritance and

estate taxes payable upon my estate by reason of my

death. I expressly authorize and empower my Executor

to request from time to time, in writing from said

Trustee, the required amounts for payment of such

debts, expenses and taxes.
- 9 -

The trust agreement established a trust of the proceeds of

certain life insurance policies on the life of decedent to be

received by the trustee as beneficiary, plus other property

received by the trustee from decedent or third parties. The

trust was revocable by decedent, who also reserved the right to

receive the income and such portions of principal as decedent

requested. 

Article IV of the trust agreement provides for the

disposition of the trust estate remaining at the time of

decedent's death, including property devised or bequeathed under

decedent's will, by dividing the remaining estate into three

shares designated as shares A, B, and C. Shares A and B, each

equal to one-fifth of the trust estate, were to be placed in

trust for decedent's daughter and son, respectively. Share C,

constituting three-fifths of the trust estate, was to be

distributed one-fourth to each of four charitable organizations. 

The trust agreement provided "that the portions disposed of under

Share C shall not be reduced by any taxes chargeable against the

Grantor's gross estate." 

In addition, Article V of the trust agreement provides: 

5.02 Use of Trust Funds to Pay Estate Debts. 

The Trustee shall pay to the Executor or Administrator

of the estate of the Grantor from the principal of the

trust of Shares A and B, such sum or sums as such

Executor or Administrator certified to be necessary to

discharge the liability of the estate of the Grantor

for all inheritance, legacy, succession or estate taxes

due from or assessed against the estate of the Grantor,

and such further sum or sums as the Executor or

Administrator may certify to the Trustee as being
- 10 -

required in order to pay the debts of the Grantor, his

funeral expenses, cost of Grantor's last illness and

any other expenses of the administration of his estate.

On decedent's Federal estate tax return, the executor

reported a gross estate of $5,037,386. The value of the assets

contained in the trust and included in the gross estate was

stated as $2,417,846. Stocks and bonds owned by decedent were

reported at a value of $1,550,615. The gross estate included

$242,301 in proceeds from life insurance policies on decedent's

life, owned by and payable to the trust as beneficiary. The

trust was also the beneficiary of annuities totaling at least

$300,000. Additionally, the estate reported real estate,

mortgages, notes, bank accounts, and other miscellaneous assets

valued at more than $500,000. The executor reported four

charitable bequests totaling $2,929,683, three-fifths of the

estate's residue. No taxes were listed as being payable out of

this property. The estate reported and paid a tax of $166,818. 

 Respondent determined that the total amount of the

charitable bequests should be reduced by $150,142 for a portion

of the estate's Federal and State taxes. On brief, respondent

concedes that, due to a mathematical error, the adjustment should

have been only $147,791. 

Discussion

Section 2055(a) allows a deduction from the value of the

gross estate for the value of charitable bequests. Section

2055(c) provides that, if the Federal estate tax, 
- 11 -

or any estate, succession, legacy, or inheritance

taxes, are, either by the terms of the will, by the law

of the jurisdiction under which the estate is

administered, or by the law of the jurisdiction

imposing the particular tax, payable in whole or in

part out of the bequests, legacies, or devises

otherwise deductible under this section, then the

amount deductible under this section shall be the

amount of such bequests, legacies, or devises reduced

by the amount of such taxes. 

"Section 2055(c) in effect provides that the deduction is based

on the amount actually available for charitable uses, that is,

the amount of the fund remaining after the payment of all death

taxes." Sec. 20.2055-3, Estate Tax Regs.

Generally, "Congress intended that the federal estate tax

should be paid out of the estate as a whole, and that the

applicable state law as to the devolution of property at death

should govern the distribution of the remainder and the ultimate

impact of the federal tax". Riggs v. Del Drago, 317 U.S. 95, 97-

98 (1942). In limited situations, Congress has specified where

the estate tax burden would fall. See secs. 2206 (life

insurance), 2207 (powers of appointment), 2207A (marital

deduction property), and 2207B (reserved life estate). These

situations deal with property that does not pass through the

executor's hands in administering the estate. See Riggs v. Del

Drago, supra at 102. Section 2206 provides in part: 

Unless the decedent directs otherwise in his will,

if any part of the gross estate on which tax has been

paid consists of proceeds of policies of insurance on

the life of the decedent receivable by a beneficiary

other than the executor, the executor shall be entitled

to recover from such beneficiary such portion of the
- 12 -

total tax paid as the proceeds of such policies bear to

the taxable estate. * * * [Fn. ref. omitted.]

Chapter 28A, article 27, of the General Statutes of North

Carolina is entitled "Apportionment of Federal Estate Tax." N.C.

Gen. Stat. sec. 28A-27-2 provides in part:

(a) Except as otherwise provided in subsection (b)

of this section, or * * * [computational statutes] the

tax shall be apportioned among all persons interested

in the estate in the proportion that the value of the

interest of each person interested in the estate bears

to the total value of the interests of all persons

interested in the estate. The values as finally

determined for federal estate tax purposes shall be

used for the purposes of this computation.

(b) In the event the decedent's will provides a

method of apportionment of the tax different from the

method provided in subsection (a) above, the method

described in the will shall control. * * * [Emphasis

added.]

The section then provides for exceptions not applicable to the

instant case.

N.C. Gen. Stat. sec. 28A-27-5(a) provides in part:

(a) Any interest for which a deduction or

exemption is allowed under the federal revenue laws in

determining the value of the decedent's net taxable

estate, such as * * * gifts or bequests for charitable,

public, or similar purposes shall not be included in

the computation provided for in G.S. 28A-27-2 to the

extent of the allowable deduction or exemption. * * *

Petitioner's position is that decedent's charitable bequests

should not be reduced by any taxes. Petitioner argues that

decedent's intent to pass the bulk of his estate to charity free

of tax is clear from reading the provisions of the will and trust

together. Alternatively, petitioner argues, if one looks only to

the will, decedent's instructions as to apportionment within the
- 13 -

residue are ambiguous and, therefore, the North Carolina

apportionment statute applies to the apportionment of the taxes

within the residue, causing the charitable portion to be exempt

from apportionment. 

Respondent's position is that decedent clearly instructed in

his will that all taxes payable by reason of his death be paid

from the residuary estate, without apportionment, prior to its

distribution to the trust as residuary beneficiary, and that,

because of that clear instruction, apportionment as provided in

the North Carolina statutes is avoided. Respondent argues that

the provision in the trust regarding apportionment to the

noncharitable trust beneficiaries applies only to those taxes

required to be paid from trust assets; that is, if the residuary

portion of the estate were insufficient to pay all debts,

expenses, and taxes. 

We agree with respondent. Decedent's instructions were

clear as to where the burden of the taxes should fall. Paragraph

1.02 of his will provided that all taxes payable by reason of his

death on his property or interest included in his gross estate

were payable from the residuary portion of his estate. He also

expressly provided that there be no apportionment among the

recipients of, or those interested in, such property. Because of

decedent's instructions in his will on this subject, neither

section 2206 nor the method of apportionment found in chapter
- 14 -

28A, article 27, of the General Statutes of North Carolina

applies to the apportionment of the Federal estate tax. 

Petitioner's position seeks to import into the will the

apportionment provision of a separate document, namely, the trust

agreement, in order to determine how decedent's residuary estate

should be distributed. See generally Shoup v. American Trust

Co., 245 N.C. 682, 97 S.E.2d 111, 115 (1957) (as a general rule

the construction of a will is not to be influenced by provisions

of other nontestamentary documents). Petitioner ignores the

distinction between determining how an estate is to be divided

and how the burden of taxes is allocated. The apportionment

clause in the trust agreement deals with an allocation of the tax

burden on property that the beneficiaries of the trust are

entitled to receive from the trust, not what the trust is

entitled to receive from the grantor-decedent's estate.

 Accordingly, we hold that the amount of decedent's

deductions for charitable bequests is to be reduced by the amount

of Federal estate and State inheritance taxes. 

In accordance with the parties' concessions and the above

holdings, 

Decision will be entered

under Rule 155.