Estate of Tessmer v. Commissioner

"All the rest, residue and remainder of my estate and property, real, personal and mixed, of every nature and description, or wheresoever situate * * * I give, devise and bequeath to the Young Men's Christian Association," etc.

This fact affords a clear and conclusive presumption that all charges imposed by the law or by the testator should be paid out of the estate before any rights should ripen in behalf of the residuary devisees or legatees under this item. * * * [Y.M.C.A. v. Davis, supra at 115.]



Even though Y.M.C.A. v. Davis, supra, involved the payment of Federal estate taxes, the above language applies to the payment of debts and expenses generally. This is illustrated by the following statement:

The single question in this case is whether the executor, who has paid the federal tax from the general assets of the estate in his hands, shall collect the amount of that tax from the specific devisees and legatees in the respective portions of their several devises and bequests, or shall deduct it, together with other charges, debts, and costs*426 of administration, from the total assets, in finding the "rest, residue, and remainder" of the estate bequeathed to the residuary legatees. [Y.M.C.A. v. Davis, supra at 115; emphasis added.]

Petitioner relies primarily on In re Dickey's Estate, 94 N.E.2d 223, 224 (Ohio Ct. App. 1949). In Dickey's Estate, the testator in his will left numerous specific and general legacies and a specific devise of real estate, and the will contained a residuary clause. Id. The issue in Dickey's Estate was whether the Probate Court properly charged, solely to the residuary share, the payment of attorney's fees and other expenses incurred in the successful defense by the executor of a will contest suit, or whether the fees and expenses should have been apportioned equitably among the several legatees and devisees. In relying on Y.M.C.A. v. Davis, supra, the Ohio Court of Appeals outlined the*427 general rule regarding the payment of administration expenses of an estate as follows:

In the absence of a contrary intention expressed in the will the general rule is that all expenses of administration are chargeable against the estate and that when the estate is being administered under a will wherein specific or general legacies or specific devises are given and a residuary estate is created, the expense of administration falls on the residuary estate, exempting the specific legacies or devises. * * * [In re Dickey's Estate, supra at 226 (citing Y.M.C.A. v. Davis, supra; 69 C.J., Wills, sec. 2571 (1934)).]

In Dickey's Estate, the appellant conceded that residuary legatees bear the burden of "ordinary expenses of administration of the estate". In re Dickey's Estate, supra at 226. Nevertheless, the appellant argued that the attorney's fees and other expenses incident to the defense of the contest suit were "extraordinary expenses", and as such, should be apportioned equitably among the several legatees and devisees. The Ohio Court of Appeals disagreed, concluding as follows:

In our opinion the beneficiaries*428 under the will of Arthur C. Dickey to whom were given a specific or general legacy, or a specific devise of real estate, had a legal right to receive such property exempt from the burden of the cost of administration, since there was a residuary estate out of which the costs of administration could be paid. [Id. at 228].

Similarly, in Berger v. Berger, 304 N.E.2d at 268, the parties agreed that while the will made no express provision for the "payment of costs and expenses of administration or estate and other taxes, * * * the primary burden for the payment of such obligations falls upon the residuary estate." In its "Conclusions of Law" the court provided:

Costs and expenses of administration, federal and Ohio State taxes, federal and Ohio income taxes (if any), and Ohio personal property taxes, are chargeable primarily against the general residuary estate * * *

If the general residuary estate is not large enough to pay the above obligations, the amount still due is chargeable secondarily against the general bequest of "all other personal property," * * * [Id. at 272.]

In In re Estate of Coleman, 564 N.E.2d 116 (Ohio Ct. App. 1988),*429 the Ohio Court of Appeals, in the syllabus, stated that "Administrative expenses, including attorney fees, are not to be assessed pro rata against each beneficiary's share of the estate." In the opinion portion of Estate of Coleman, the Ohio Court of Appeals stated:

Such attorney fees are to be treated as an expense of administration of the estate. They are generally paid entirely out of the residuary estate after all general and special legacies have been distributed, if there are sufficient funds, even though an heir which benefitted from the attorney's services does not thereby contribute to the payment of the attorney fees. * * * [Id. at 117 (citing In re Estate of Dickey, supra).]

The Probate Court in Shively v. Perrine, 67 N.E.2d 32, 37 (Ohio P. Ct. 1946), also relied on Y.M.C.A. The issue in Shively was whether a specific devisee of land encumbered by a mortgage was to receive the land free of the mortgage, leaving the residue liable for the debt. Id. at 33. The Probate Court concluded that the obligation fell on the residuum. Id. at 38-39.*430 In addition to quoting at length the language of Y.M.C.A., the Probate Court also provided the following statements regarding the residuum of an estate:

According to Page on Wills, * * * "The residuum of an estate is that part of it left after paying the debts of testator and the expenses of administration and undisposed of by the rest of the will." [Id. at 36.]

By the term "residue" is meant the balance left after the payment of all debts of the estate and the payment of all specific, demonstrative and general legacies. It means everything not otherwise disposed of. A residuary clause is the clause in a will by which that part of the property is disposed of which remains after satisfying previous bequests and devises. * * * [Id. at 36-37.]

"A residuary legatee is entitled only to what remains after all the debts of an estate are paid." [Id. at 37 (quoting Kuerze v. Western German Bank, 12 Ohio App. 412, 421 (1919)).]

"Property constituting the residuum of the testator's estate and disposed of by the residuary clause in his will is to be applied*431 in payment of his debts before any of the property otherwise disposed of in the absence of any testamentary provisions to the contrary. * * *" [Id. (quoting 69 C.J., Wills, sec. 2571 (1934)). ⁹]

In addition to the above cases, Page on Wills, provides the following:

If there is a residuary clause and if testator's estate is insufficient to satisfy the specific, demonstrative, and general legacies, and leave anything for the residuary legacies (after paying testator's debts, where such debts exist), the legacies which are given in the residuary clause abate first, unless the will, when read in connection with the surrounding circumstances shows a contrary intention; and no payment can safely be made under a residuary clause until all the other classes of legacies have been paid in full. The reason underlying this rule is that, *432 as testator bequeaths in a residuary clause only that part of his property left after the payment of the bequests and devises previously given, his intention will be best given effect by using the residuum first in paying testator's debts. * * * [6 Bowe & Parker, Page on the Law of Wills, sec. 53.5 (3d ed. 1962); emphasis added; fn. refs. omitted (citing Y.M.C.A. v. Davis, supra).]

Respondent attempts to minimize the importance of Dickey's Estate and argues that Y.M.C.A. is distinguishable from the facts herein since "the will at issue [in Y.M.C.A.] contained numerous specific bequests and a residuary clause, but apparently no general bequests. Thus, the rights of general devisees and legatees could not have been at issue." We do not agree with respondent's narrow reading of Y.M.C.A. We find that the controlling point of law, as provided in the syllabus, that the residuary is the "last lienholder, after all prior lawful claims and charges have been satisfied out of the estate", coupled with the remainder of the Ohio Supreme Court's opinion in Y.M.C.A., stands for the proposition that under Ohio law, debts and expenses*433 of the estate first reduce the residuary share, leaving a general gift secondarily liable. Moreover, we find that Dickey's Estate, and the other cases cited above, stand for the same proposition.

Respondent argues that we should follow the analysis in In re Estate of Guthrie, 29 Ohio N.P. (n.s.) 357 (Ohio P. Ct. 1931). In Estate of Guthrie, the decedent gifted "one-fourth of all her property" to her surviving husband. The husband argued that "the residue of an estate is always chargeable with the debts and costs and expenses of administration, and since there was a residuary clause in this Will, the costs and debts should be charged against the residue." Id. at 357-358. The Probate Court held that the gift to the husband "was not such a specific bequest as to make the residue liable for the debts and costs of administration." Id. at 358.

While Estate of Guthrie, a Probate Court decision, supports respondent's contention, we have already found that Y.M.C.A. v. Davis, supra, an Ohio Supreme Court decision, stands for the proposition that the*434 residue should be exhausted by the debts and expenses of an estate before specific or general gifts -- "A residuary devisee or legatee is presumed in law to be in the position of the last lienholder, after all prior lawful claims and charges have been satisfied out of the estate." Y.M.C.A. v. Davis, 140 N.E. at 114. Based on Y.M.C.A. v. Davis, and on the cases discussed above, we do not believe the Supreme Court of Ohio would follow Estate of Guthrie. Accordingly, we decline to follow Estate of Guthrie. See Commissioner v. Estate of Bosch, 387 U.S. 456, 465 (1967).

Respondent for the first time on reply brief contends that Estate of Street v. Commissioner, 974 F.2d 723 (6th Cir. 1992), revg. T.C. Memo. 1988-553, requires a finding that the gift to Ms. Tessmer be proportionately reduced by the debts of the estate of $ 5,400,343. ¹⁰ Here, venue for appeal lies to the Court of Appeals for the Sixth Circuit. In Golsen v. Commissioner, we stated that we will "follow a Court of Appeals decision which is squarely in point where appeal from our decision*435 lies to that Court of Appeals and to that court alone." 54 T.C. 742, 757 (1970), affd. 445 F.2d 985 (10th Cir. 1971) (fn. ref. omitted). In our view, however, the facts and applicable State law supporting the Court of Appeals' decision in Estate of Street are distinguishable from the facts and controlling State law presented here.

In Estate of Street v. Commissioner, T.C. Memo. 1988-553, this Court held that a marital deduction (comprising a single marital trust of the entire residue) is not reduced by administrative expenses that were charged, under State law, against the income of *436 the estate and not the principal. In Estate of Street v. Commissioner, 974 F.2d at 727, the Court of Appeals for the Sixth Circuit disagreed and held that "the payment of administrative expenses from income [of an estate] 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."

We recently distinguished Estate of Street in Estate of Allen v. Commissioner, 101 T.C. 351 (1993). In Estate of Allen, we stated: "Initially, we note that the fact that the administration expenses were deducted for income tax purposes does not, in and of itself, necessitate a reduced marital deduction." Id. at 357. In Estate of Allen, we distinguished Estate of Street on the following grounds: (1) In Estate of Allen, the residue was divided into two shares, a marital and nonmarital share, whereas in Estate of Street v. Commissioner, supra, the marital trust comprised the entire residue; and (2) in Estate of Allen v. Commissioner, supra,*437 under the will and Oklahoma law, the amount of death taxes and administrative expenses was to be charged to the nonmarital share, not the marital share. Id. at 358.

The facts before us provide similar grounds for distinguishing Estate of Street v. Commissioner, supra: (1) Decedent's Last Will and Testament divided the property of the estate into two shares: a marital share (a general gift) as described in "ITEM II", and a nonmarital share (a residuary gift) as described in "ITEM III"; and (2) under Ohio law, the debts of the estate are first charged to the residuary gift, the nonmarital share. ¹¹

Based on the foregoing, and since the assets in the residuary share were sufficient to pay the debts of the estate, we hold that the property interest passing to Ms. Tessmer, which qualifies for the marital deduction allowable under section 2056(a), should not be reduced by the debts of*438 the estate.

Decision will be entered under Rule 155.