ESTATE OF BIXBY
140 Cal.App.2d 326 (1956)

PROCEDURAL POSTURE: Appellants, guardian and trustees, challenged a ruling from the Superior Court of Los Angeles County, which ordered preliminary distribution of decedent's estate to decedent's widow in the amount of certain dividends less the portion of the income taxes paid by respondent executor. The payment was allocable against the dividends.

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 penally 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

ISSUE: If the trust corpus suffers in tax payment strategies must the trustee reallocate enough of the tax savings to the principal account to make whole the detriment suffered by the trust corpus?

RULE OF LAW: If the trust corpus suffers in tax payment strategies the trustee must reallocate enough of the tax savings to the principal account to make whole the detriment suffered by the trust corpus

HOLDING AND DECISION: (Fox, J) The Superior Court, Los Angeles County, Clyde C. Triplett, J., made an order for preliminary distribution in a decedent's estate proceeding, and appeals were taken. The District Court of Appeal, Fox, J., held that where an executor in making fiduciary tax returns elects to deduct administration expenses for federal income tax purposes rather than for federal estate tax purposes, and residuary beneficiaries would otherwise be thereby deprived of benefit of the deduction, the equitable solution is to reallocate enough of the tax saving to the principal account to offset the detriment to the corpus.
Order reversed and trial court directed to enter new order for preliminary distribution in accordance with views expressed in opinion.

DISPOSITION: The court reversed the trial court's order for preliminary distribution of decedent's estate and directed the trial court to enter a new order in accordance with the court's opinion.