Estate Of Bixby

140 Cal.App. 2d 326 (1956)

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Nature of the Case

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Facts

Dividends were received by the estate on stock owned. These amounted to $76,000. The shares of stock that produced these dividends were to go to Mrs. Bixby as the legatee. Under IRS rules administrative expenses are allowable as a deduction only once and the executor is afforded an election as to whether to apply the deduction against the estate tax or against the income tax. The executor must, therefore, determine under which estate it is more advantageous to apply the administration deductions. The normal executor will apply them to optimum advantage to the estate so that its aggregate amount of taxes payable to the federal government will be diminished. Under these facts, the executor took the administrative expenses as an income tax deduction even though they were borne by the principal of the residuary estate. By doing this, he reported $160,000 in income and paid a tax of $18,728.16. If he had not used this deduction as he did, the tax burden would have been $120,378.11. There was a tax savings of $101,649.95. However, the effect on the corpus resulted in a penalty to them of $58.932.44. The court charged Mrs. Bixby with $8,713.40, that being her part of the $18,728.16 in federal and state income taxes paid which is allocable to the dividends on the stock. This appeal resulted.