Opinion ID: 509535
Heading Depth: 3
Heading Rank: 1

Heading: I.R.C. Sec. 2053(a)(2)

Text: 21 Section 2053(a) of the Code sets forth certain deductions allowable in determining the value of a taxable estate. In relevant part, Sec. 2053(a) authorizes deductions of such amounts for administrative expenses as are allowable by the laws of the jurisdiction ... under which the estate is being administered. I.R.C. Sec. 2053(a)(2). White interprets the statute as making state court decrees which approve administrative expenses under state law conclusive and binding on the IRS; this, by inference, would render subsequent tax investigations of such expenses pointless. 22 We do not read the statute as giving state trial court decrees preclusive effect with regard to IRS investigations. To be sure, the plain language of Sec. 2053(a)(2) indicates that the federal deductibility of estate administrative expenses is governed by state law. Thus, under this statute, the state rules applicable to the allowability of these expenses have been absorbed as the relevant federal rules relating to the deductibility of such expenses. See C. Wright, The Law of Federal Courts Sec. 60, at 94-95 (4th ed. 1983) (sometimes the federal statute will direct that state law be applied, in which case the state rule has merely been absorbed as the relevant federal rule). Although the statute directs the IRS and federal courts to apply state rules, the deductibility of such expenses nonetheless remains a federal question. The statute does not address the effect of state trial court approval of estate administrative expenses on the deductibility of such expenses under federal law. In the absence of preclusive language in the statute, we are not persuaded that Congress unambiguously intended to make state trial court decrees determinative of the federal deductibility of such expenses to the exclusion of any federal inquiry. 23 Moreover, any suggestion that Congress intended to preclude IRS investigation into the deductibility of White's fees under state law is untenable in light of the Supreme Court's reasoning in Commissioner v. Estate of Bosch, 387 U.S. 456, 87 S.Ct. 1776, 18 L.Ed.2d 886 (1967). In Bosch, the Supreme Court addressed the problem of what effect must be given a state trial court decree where the issue addressed by such decree has federal estate tax consequences. Id. At issue in Bosch was a federal estate tax deduction whose validity under I.R.C. Sec. 2056(b)(5) depended on the invalidity under state law of an instrument executed by the decedent's wife. In a separate proceeding, to which the IRS was not a party, a state trial court held the instrument invalid, which conclusion was disputed by the IRS with regard to the claimed federal estate tax deduction. 24 In considering the effect of the state court determination in a subsequent federal tax proceeding, the Supreme Court found that Congress, in enacting I.R.C. Sec. 2056(b)(5), had intended to give proper regard and not finality to the interpretations of state law by state trial courts. If the Congress had intended state trial court determinations to have [a conclusive and binding] effect on the federal actions, it certainly would have said so--which it did not do. 387 U.S. at 464, 87 S.Ct. at 1782. Using diversity cases as its guide, the Bosch Court applied the rule of Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), that a federal court will give effect to a state court decree, if at all, only after independent examination of the state law as determined by the highest court of the State. 387 U.S. at 463, 87 S.Ct. at 1781 (emphasis added). Consequently, the Supreme Court concluded in Bosch that when the application of a federal statute is involved, the decision of a state trial court as to an underlying issue of state law should ... not be controlling. Id. at 465, 87 S.Ct. at 1782. While federal authorities are bound to apply state law as determined by the state's highest court, they need only give proper regard to relevant rulings of other courts in the state and may be said to be, in effect, sitting as a state court. Id. In Bosch, therefore, the Court found that the IRS was entitled to make an independent assessment as to the validity vel non of the instrument under applicable state law as determined by the state's highest court. 25 We believe the ruling in Bosch supports the view that the Surrogate's decree is not conclusive and binding on the IRS under I.R.C. Sec. 2053(a)(2). Like the statutory provision at issue in Bosch, I.R.C. Sec. 2053(a)(2) gives no indication that Congress intended the Surrogate's decision to be preclusive. We conclude that, with regard to the federal deductibility of White's fees, the IRS is entitled to make an independent assessment of the validity of White's fees under applicable state law as determined by the state's highest court. Contrary to White's claim, the mere fact that the Surrogate issued a decree does not preclude the IRS from investigating the deductibility of White's fees under state law. 26 The district court in this case interpreted Bosch differently. Because the New York Court of Appeals has already set forth the factors to be considered when determining the validity of attorney's fees in estate practice, see In re Estate of Freeman, 34 N.Y.2d 1, 311 N.E.2d 480, 355 N.Y.S.2d 336 (1974), and since the Surrogate's letter to White stated that it had applied these factors, the district court concluded that the IRS is bound by the Surrogate's decision. 650 F.Supp. at 911 n. 7. We do not agree with this interpretation of Bosch. The Erie approach taken in Bosch assumes that state law, as announced by the state's highest court, is to be followed by both the state trial court and federal authorities. However, even assuming that the state trial court properly applied such state law, the Bosch court found that when the application of a federal statute is involved, the decision of a state trial court as to an underlying issue of state law should ... not be controlling. 387 U.S. at 463, 87 S.Ct. at 1782. Rather, federal authorities may make an independent examination of the state law as determined by the highest court of the state. Id. at 465, 87 S.Ct. at 1781-82. In this case, although the IRS is bound by the factors established by the New York Court of Appeals in Freeman, it is not bound by the Surrogate's application of these factors. Rather, according to Bosch, the Surrogate's ruling only need be given proper regard as one court's interpretation of applicable state law. 27 White and at least one amicus argue that the New York Court of Appeals may not overturn the Surrogate's factual determination of reasonableness, that as a practical matter that Court does not hear appeals from the Surrogate's determinations of fees, and that it has delegated its power to the Surrogate. While all this may be true, under New York law the Court of Appeals retains the authority to review a Surrogate's decision to ensure that it complies with New York law. That the Court rarely exercises its prerogative does not deprive the federal authorities of their jurisdiction to consider the same issues. 28 Subsequent to Bosch, we have stated that, even if proper regard is accorded to a state court's adjudication, it would only be as valid as its evidentiary base, and that [w]e have not hesitated to disregard state court judgments affecting federal tax liability where the factual questions involved were not contested in state court, see Lowe v. Commissioner, 510 F.2d 479 (2d Cir.), cert. denied, 423 U.S. 827, 96 S.Ct. 44, 46 L.Ed.2d 44 (1975), or where a lower state court made an erroneous application of state law, see Cheng Yih-Chun v. Federal Reserve Bank, 442 F.2d 460 (2d Cir.1971). United States v. Bosurgi, 530 F.2d 1105, 1112 (2d Cir.1976). It follows that the IRS is entitled to make an initial assessment of the proper regard to be accorded a state trial court decree in a particular case. 29 We note that, at this summons enforcement stage, the validity of the Surrogate's decree is not at issue. Since the purpose of a summons is not to accuse, but to inquire, Bisceglia, 420 U.S. at 146, 95 S.Ct. at 919, the IRS is merely seeking to inquire into the factors that have a bearing on the deductibility of White's fees--this is not the same as accusing the Surrogate of error. Thus, our discussion of Bosch and subsequent cases is intended solely to demonstrate that, contrary to White's claim, the IRS may indeed inquire under Sec. 2053 into the allowability of White's fees under state law. 30 On the basis of the plain language of Sec. 2053(a)(2) and the Supreme Court's reasoning in Bosch, we conclude that there is no statutory support for White's proposition that the Surrogate's decree is binding on the IRS in subsequent federal tax proceedings nor for the assertion that the statute bars the IRS from investigating the deductibility of White's attorney's fees. As previously mentioned, however, the district court found support for White's proposition primarily in the statute's associated regulation, Treas.Reg. Sec. 20.2053-1(b)(2), which we consider next.