Case Name: Thomas DeC. Ruth, Sally W. Ruth, and Walter N. Ruth, Executors of the Estate of Frederick S. Ruth, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent
Court: United States Board of Tax Appeals
Jurisdiction: United States
Decision Date: 1937-06-22
Citations: 36 B.T.A. 191
Docket Number: Docket No. 80840
Parties: Thomas DeC. Ruth, Sally W. Ruth, and Walter N. Ruth, Executors of the Estate of Frederick S. Ruth, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
Judges: 
Reporter: Reports of the United States Board of Tax Appeals
Volume: 36
Pages: 191–200

Head Matter:
Thomas DeC. Ruth, Sally W. Ruth, and Walter N. Ruth, Executors of the Estate of Frederick S. Ruth, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
Docket No. 80840.
Promulgated June 22, 1937.
O. H. Chmillon, Esq., Robert N. Miller, Esq., Ewing Everett, Esq., for the petitioners.
L. S. Pendleton, Esq., for the respondent.

Opinion:
OPINION.
Black :
The issue in this proceeding requires that this Board construe the meaning of section 303 (a) (1) of the Revenue Act of 1926 and how it is to be applied where an estate in probate is insolvent and where the gross estate for Federal estate tax purposes, as determined under the provisions of section 302, is greater than the estate in probate under the laws of the jurisdiction of the domicile of the decedent.
The issue as to the application of section 303 (a) (1) under the facts here arises in the following way. Under the laws of Florida, the proceeds of life insurance policies taken out on his own life by a decedent, made payable to beneficiaries other than his estate and not taken out for the benefit of creditors, are exempt from the claims of creditors and do not go into the hands of the executor of an estate. Compiled General Laws of Florida, 1927, section 7065; Bradford v. Watson, 65 Fla. 461; 62 So. 484; Milam v. Davis, 97 Fla. 916; 123 So. 668. Although such life insurance policy proceeds are not part of the decedent's estate for purposes of probate, they are part of the gross estate for purposes of Federal estate taxation. Congress, in the Revenue Act of 1919, added the provision (section 302 (g) of the Revenue Act of 1926) requiring that proceeds of insurance in excess of $40,000 received by beneficiaries should be included in the gross estate. Congress intended an estate tax on such proceeds. An anomalous situation results, for the gross estate for Federal estate taxis greater than the decedent's estate subject to the payment of claims of creditors and expenses incident to death and administration and the literal application of section 303 (a) (1), permitting deduction of the amount of the claims of creditors against the decedent's estate to the extent allowed by the laws of the jurisdiction under which the estate is being administered, results in claims for deductions in an amount that may not be received by creditors where the estate is insolvent. So, in this proceeding, the estate is valued at $1,157,127.11; the claims of creditors exceed $1,342,119.89. These are valid bona fide claims which the laws of Florida allow; i. e., they are entitled to payment in full and would be paid out of the estate if it were solvent. The claims may not be paid in full out of the decedent's estate that we are concerned with here. But the arithmetical calculations in computing net estate for Federal estate tax are such that there is no estate tax. In our opinion this is the proper' result of applying section 303 (a) (1) under the facts before us, and the respondent is in error in limiting the deductions for claims of creditors to a sum no greater than the value of the probated estate subject to the payment of the claims.
The pertinent statutory provision does not limit deductions for valid claims of creditors to those which are both allowed by local probate laws and paid or payable. The statute specifically states that deductions may be made for the amount of claims that are allowed. Congress was aware of the fact that proceeds of insurance policies are, in some states, exempt from claims of creditors. But Congress has not provided that deductions for claims of creditors may not be allowed from a gross estate including the proceeds of life insurance in excess of the amount which is payable from the estate in probate. Congress has provided in section 303 (a) (1) that all claims which were incurred or contracted bona fide and for an adequate and full consideration in money or money's worth and are allowed by the laws of the jurisdiction under which the estate is being administered, shall be deducted from the gross estate.
The Report of the House Committee on Ways and Means (64th Cong., 1st sess., Report No. 922, Estate Tax), in discussing the provision of the law here involved, among other things, says:
In determining the value of the net or taxable estate, deductions for all valid claims against the estate are allowed from the gross value of the estate .
See also Report of the Senate Finance Committee, 64th Cong., 1st sess., Report No. 793, part 1.
We believe the wording of section 303 (a) (1) requires application as the petitioner contends and that any other application and construction would require us to supply that which the respondent contends is an omission in the statute by construing section 303 (a) (1) to allow deductions only to the extent of the value of the estate available to pay them. We may not undertake legislative functions. See Edith M. O'Donnell, 35 B. T. A. 251.
This issue, under similar facts, has been before this Board and the courts several times. In each instance it has been held that the full amount of valid claims incurred or contracted bona fide and for an adequate and full consideration in money or money's worth, and which are allowed by the laws of the jurisdiction under which the estate is being administered, is deductible from the gross estate. See Union Guardian Trust Co., 32 B. T. A. 996; Mary Q. Hallock, 34 B. T. A. 575; Edna F. Hays et al., Executors, 34 B. T. A. 808; Edith M. O'Donnell, supra; Commissioner v. Strauss, 77 Fed. (2d) 401; Commissioner v. Ames, 88 Fed. (2d) 388; Commissioner v. Windrow, 89 Fed. (2d) 69; Helvering v. Northwestern National Bank, 89 Fed. (2d) 553.
On the authority of the decisions cited above, the action of the respondent in this case is reversed.
Reviewed by the Board.
Decision will be entered- for the petitioner.