                  IN THE COURT OF APPEALS OF TENNESSEE
                               AT JACKSON
                                 On Brief September 14, 2005

    IN RE: ESTATE OF RICHARD L. LEATH,, ET AL. v. DAVID LEATH

                A Direct Appeal from the Chancery Court for Fayette County
               No. P-3-102   The Honorable Dewey C. Whitenton, Chancellor



                   No. W2005-00195-COA-R3-CV - Filed December 8, 2005


This case concerns the payment of income taxes, including penalties and interest, incurred by an
estate. The trial court held that the taxes and interest due were to be prorated among the various
heirs, devisees and distributees in proportion to the amount of the distribution that each party
received. The trial court further held that all penalties on the taxes were to be paid by David Leath,
executor of the Estate of Richard L. Leath, individually. Lastly, the trial court ordered that the court
costs were to be paid one-half by the executor and one-half by the other heirs and distributees. The
parties appeal. We affirm in part, reverse in part, and remand.


Tenn. R. App. P. 3; Appeal as of Right; Judgment of the Chancery Court Affirmed in Part;
                            Reversed in Part; and Remanded

W. FRANK CRAWFORD , P.J., W.S., delivered the opinion of the court, in which ALAN E. HIGHERS,
J. and DAVID R. FARMER , J., joined.

Larry E. Parrish of Memphis, Tennessee for Appellant, David Leath, Individually and as Executor
of Estate of Richard Leath

John S. Wilder, Sr., and Lee S. Saunders of Somerville, Tennessee for Appellees, Michael Tapp,
Bryant Tapp, Raymond Tapp, Richard Leath and Sarah Jane Leath
                                                   OPINION

        Richard L. Leath (“Testator”) died December 25, 1996. His Last Will and Testament was
admitted to probate by order of January 2, 1997.1 Pursuant to the will, the Testator's son, David K.
Leath (“Executor/Appellant”), was appointed executor. The will reads, in pertinent part, as follows:

                  FIRST: I desire and direct that all of my just debts, funeral expenses,
                  and the cost of administering my estate, be first paid by my Executor
                  out of any funds coming into his hands as such Executor.
                                  *     *      *
                  FIFTH:....
                  (a) I hereby will devise and bequeath to my daughter, Peggy Leath
                  Tapp, the sum of One dollar.
                  (b) After the payment of debts, funeral expenses, and the costs of
                  administering my estate, if there is any money left in my estate; I
                  hereby will, devise and bequeath the same to my grandchildren,
                  namely; Sarah Jane Leath, David Richard Leath, Raymond Tapp,
                  Michael Tapp, and Bryan Tapp, in equal shares, one-fifth to each of
                  them, share and share alike.
                  (c) All of the rest and residue of my estate, of every kind, I hereby
                  will, devise and bequeath to my son, David K. Leath, in fee simple
                  absolutely.
                  (d) I hereby nominate and appoint my said son, David K. Leath,
                  Executor [], and I direct that he [be] allowed to serve as such
                  Executor without bond, inventory or settlement with any Court.

        David K. Leath was the sole devisee of the Decedent's real estate. On March 14, 1997, the
testator's daughter, Peggy Leath Tapp, and three of the five Heirs2 under the will, Bryant Tapp,
Richard Tapp and Raymond Tapp (“Legatees”), filed a petition to remove the Executor. The
Legatees argued that David Leath should not be allowed to continue as executor because, among
other reasons, he was the major debtor of the Estate of Richard L. Leath (“Estate”) and that his
interest was wholly adverse to that of the other beneficiaries under the will. Subsequently, by
consent order of August 12, 1998, Paul R. Summers was appointed as a Special Master. On
February 18, 1999, an order was entered denying the petition to remove Executor. On April 1, 1999,
the Legatees, Michael Tapp, Bryant Tapp and Raymond Tapp filed a second petition for removal of
Executor, and for a temporary injunction alleging a conflict of interest on the part of the Executor


        1
             In presenting the pertinent procedural history relating to the original motions filed by the parties, we
paraphrase from our previous decision in In re Estate of Richard L. Leath v. David K. Leath, No. W 2003-01816-COA-
R3-CV, 2004 W L 57087 (Tenn. Ct. App. 2004).

         2
             Bryant Tapp, Richard Tapp, Raymond Tapp, Richard Leath and Sarah Jane Leath, collectively, are referred
to in this opinion as the “Heirs.”

                                                        -2-
in that the Executor was a debtor of the Estate and that he had breached his fiduciary duty. The
petition also sought to enjoin Executor from disposing of the real estate in any way so as to
encumber his ability to pay his debt to the Estate. On that same date, the Legatees filed a notice of
Lien Les Pendens alleging that the Executor had no means of paying his debt to the Estate other than
pledging the real estate described in the notice.

        On September 17, 1999, a consent order was entered whereby the Executor agreed to pay a
sum certain plus interest into the Estate within thirty days from the date of entry of the order as well
as various Special Master and attorneys’ fees. Executor further agreed that the Estate would be
closed and the Executor discharged within thirty days from the date of entry of the order "or as soon
thereafter as practical." On October 29, 1999, a fieri facias was issued against the Executor
personally in the sum of $148,793.60, representing the amount of debt, including interest, owed by
the Executor to the Estate. Execution was directed upon the real property of the Executor. By order
of November 12, 1999, and by consent of the parties, Barbara W. Walls was appointed as Special
Master to conduct a sale of the real property executed upon by Attachment and Execution and to
distribute the proceeds in accordance with the provisions of the trial court's September 17, 1999,
order and the Last Will and Testament of the Testator. Prior to the close of 1999, the Executor paid
the Estate $148,793.60, preventing the sale of the real property. This amount represented $114,000
of principal due the Estate by the Executor and more than $33,000 in interest due. Due to the
repayment of the loan and other monies paid into the Estate during 1999, federal income taxes, as
well as income taxes imposed by the State of Tennessee, would be due by the Estate on April 15,
2000.

        An order was entered on February 4, 2000, which provided that the parties had appeared in
court and jointly announced a mutual agreement which provides, in part, as follows:


                       This cause came on to be heard on the 7th day of January,
               2000, before the Honorable Dewey C. Whitenton, Chancellor of the
               Chancery Court of Fayette County, Tennessee, upon the Plaintiff’s
               Objection to Accounting and Motion to Compel Reimbursement of
               Monies to the Estate, upon the written response of the
               Executor/Defendant, upon statements of counsel and upon the entire
               record in this cause, from which it appears that the parties jointly
               announced in open Court a mutual agreement of the parties resolving
               the issues as follows:
               *      *      *
                       1. That David K. Leath be, and is hereby ordered, to
               reimburse the estate the amount of $5000.00 which amount is to be
               satisfied by monies currently in the custody of the Special Master.




                                                  -3-
                       2. That the amount of $3,400.00, representing the balance of
               the attorneys’ fees at issue are properly chargeable to the estate and
               not the individual responsibility of David K. Leath.
                      3. That all funds currently in the Somerville Bank & Trust
               Company account in the name of the Estate of Richard Leath be
               immediately released and placed into the custody of the Special
               Master, Barbara W. Walls.
                      *      *     *
                      6. That Barbara W. Walls be and is hereby ordered to make
               all disbursements of money for purposes of closing out the
               administration of the estate, in place of and instead of the Executor,
               David K. Leath, the provisions of the Order of Settlement dated
               September 17, 1999 notwithstanding; and, further, that the
               disbursements shall include payment of the Court costs to the Clerk
               and Master, the fee due to Paul R. Summers, Special Master, in the
               amount of $2,500.00; Edward B. Johnson's attorney fee in the amount
               of $550.00, and the Wilder & Saunders attorney fee in the amount of
               $8,000.00, all of which were approved by the Court by Order of
               Settlement filed and entered on September 17, 1999; and further, said
               disbursements shall include payment of the fee due to Barbara W.
               Walls, Special Master and Tracy Walsh, attorney for the estate, both
               in amounts as earlier approved in this order; and, further, after
               payment of the above referenced expenses of administration, the
               Special Master should disburse to Peggy Leath Tapp the amount of
               $1.00; and further, the remaining funds of the estate should be
               disbursed, in equal shares, to the beneficiaries, as follows: Michael
               Tapp, Bryant Tapp, Raymond Tapp, Richard Leath, and Sarah Jane
               Leath.

This order became final on March 6, 2000. No where in the consent order was there a mention of
an income tax debt of the Estate for 1999, nor was there any mention of who would be responsible
for the payment of said debt.

       The Executor’s attorney, Tracy Walsh, by letter dated March 2, 2000 and filed with the court
March 3, 2000, alerted the Clerk and Master, Barbara Walls, serving as Special Master, as to the
unpaid income tax debt of the Estate for 1999, as all the Estate funds had been placed into the
custody of the Special Master. The letter reads, in pertinent part, as follows:


               I have discussed the 1999 taxes for the estate with [the accountant]
               Vernon Tapp. He has indicated that the estate will owe both federal



                                                -4-
               and state taxes for 1999. The preliminary figure he has given me for
               the federal taxes is quite large.


               Mr. Tapp is currently working on the tax returns and should have
               more definite figures to me shortly. In light of this information, I feel
               that it is unwise to make disbursements on the estate until all of the
               debts of the estate have been made.


               It may be possible to do a partial distribution until the final tax
               amounts are due. Please call me to discuss this further.


The Executor’s attorney copied Mr. Lee Saunders, the attorney for Michael Tapp, Bryant Tapp and
Raymond Tapp. In response, Mr. Saunders, the attorney for the three grandchildren, by letter dated
March 7, 2000, and filed with the court that same day, advised the Special Master, Barbara Walls,
to proceed with disbursement of the funds of the Estate. The letter reads, in pertinent part, as
follows:

               I am advised that the Order entered by the Court on February 4, 2000
               became final on March 6, 2000. It is our position that disbursement
               of the funds in accordance with the final Order is now appropriate,
               not withstanding the tax issues raised by Ms. Tracy Walsh’s letter of
               March 2, 2000.

On March 8, 2000, the Special Master disbursed the funds of the Estate including one dollar to
Peggy Leath Tapp, and the remainder of monies in equal shares to Sarah Jane Leath, David Richard
Leath, Raymond Tapp, Michael Tapp, and Bryan Tapp,

         On March 29, 2000, the Executor filed a motion to recover funds previously disbursed to the
heirs in order to pay the taxes of the Estate and other related expenses. The motion reads, in pertinent
part:

               1. On January 7, 2000, a hearing was held before this Court on an
               Objection to Accounting and Motion to Compel Reimbursement of
               Monies to the Estate filed by certain heirs of the estate.

               2. An order resolving said objection was entered on February 4,
               2000.

               3. Said order also resolved several other issues relating to the claims
               and debts of the estate, although it did not purport to resolve all



                                                  -5-
                      monetary issues. The order allowed Special Master to make
                      disbursements for said claims.

                      4. Subsequent to the hearing on January 7, 2000, the Executor
                      received the tax documentation necessary for the 1999 estate tax
                      returns.3 Due to the repayment of a loan and other monies paid into
                      the estate during 1999, a sizeable tax debt has arisen.

                      5. The executor employed Vernon R. Tapp of Sommerville,
                      Tennessee to prepare the tax returns on behalf of the estate.

                      6. Said returns have been prepared and the Richard L. Leath Estate
                      owes federal estate taxes in the sum of $10,507.00,4 as well as,
                      $1,768.005 to the Department of Revenue for the State of Tennessee.

                      *      *    *
                      10. The taxes due are properly chargeable to the estate and should be
                      paid from estate funds.

                      11. The Richard Leath Estate cannot be closed until these taxes are
                      paid.

                              Therefore, the Executor asks the Court for an order
                      compelling Michael Tapp, Bryant Tapp, Raymond Tapp, Richard
                      Leath and Sara Jane Leath, to reimburse the estate the amount
                      necessary to compensate Vernon R. Tapp and Tracy B. Walsh for
                      their professional services rendered on behalf of the estate, sufficient
                      funds to pay the 1999 federal and state taxes owed by the estate, as
                      well as, any interest and penalties which have accrued thereon. The
                      Executor additionally asks that these funds be reimbursed to the estate
                      as soon as possible in order to avoid further costs.

       The Legatees responded to this motion alleging that the federal and state income taxes due
were rightfully the responsibility of the executor, David K. Leath. The trial court entered an order
denying the motion. Following the filing of that order, the Legatees filed a motion to require the
Executor to pay the federal income taxes due plus interest and penalties. They further moved that

           3
               The Executor is referring to the income tax returns due for year1999 by the Estate of Richard Leath.

           4
               The $10,507 represents federal income taxes due by the Estate of Richard Leath to the Internal Revenue
Service.

           5
                The $1,768 represents state income taxes due by the Estate of Richard Leath to the Tennessee Department
of Revenue.

                                                            -6-
Executor be required to pay to the Tennessee Department of Revenue income tax incurred by the
Estate, if it had not, in fact, been paid.


        On April 2, 2003, Executor filed a motion to discharge the notice of Lien Les Pendens
previously filed in this matter. He requested that the trial court conduct a hearing to determine the
validity of the Lien Les Pendens and to deny the motion previously filed requesting that he be
required to pay the income taxes aforementioned. The trial court entered an order on June 27, 2003,
reciting that before the court was the motion to order David Leath to pay income taxes owed by the
Estate, his answer to the motion and his motion to discharge the notice of Lien Les Pendens, and
upon the entire record. The court ruled that the Executor, David Leath, shall be responsible for
payment of penalties and interest accrued but "the court makes no rulings as to who is responsible
for the payment of taxes except to order that taxes be paid according to the law of the State of
Tennessee and the Internal Revenue Service." An amended order was entered July 1, 2003, which
states as follows:


                        After further consideration, the Court finds that the order
                recently entered concerning the payment of taxes, penalties and
                interest should be amended and modified as follows:
                         The payment of the taxes due shall be determined by the laws
                and regulations of the State of Tennessee, the United States of
                America, and the Internal Revenue Service, and shall be paid by those
                heirs, legatees and/or devisees found to be legally responsible, along
                with the penalties and interest. However, the Court further finds that
                it is equitable that the Executor, David K. Leath, shall reimburse, to
                those persons who actually pay the taxes, penalties and interest, the
                total amount of penalties and the interest that has accrued through
                April 30, 2003, and if David K. Leath is found to be personally liable
                for any portion of the taxes, then he will also pay his pro-rata share of
                the interest that accrues after April 30, 2003.


        The Executor appealed the July 1, 2003, order of the trial court, contending that the trial court
was in error in failing to rule who was responsible for payment of the income taxes, interest and
penalty to the Internal Revenue Service and the State of Tennessee, and in failing to order the
beneficiaries to repay sums previously disbursed to them sufficient to pay the taxes. This Court
found that with the exception of having ruled on the payment of penalty and interest, the trial court
had not ruled upon the issue of the party or parties responsible for the payment of the taxes and had
not rendered a decision on the motion to remove the Lien Les Pendens. See In re Estate of Richard
L. Leath v. David K. Leath, No. W2003-01816-COA-R3-CV, 2004 WL 57087 (Tenn. Ct. App.
2004). As a result, this Court held that the previous appeal was from an non-final judgment and
therefore not appealable as of right. The appeal was dismissed on Jan. 9, 2004. Id. at *3.


                                                  -7-
        On September 10, 2004, Michael Tapp, Bryant Tapp, and Raymond Tapp filed their motion
to determine liability for the payment of income taxes owed by the Estate and to order the Executor
to close the Estate. The Legatees urged the trial court to determine who would be required to pay
the liabilities of the Estate. On December 17, 2004, the trial court issued a final decree that reads,
in pertinent part:


               IT IS, THEREFORE, ORDERED, ADJUDGED AND DECREED by
               the Court that the taxes are to be pro rated among the various heirs,
               devisees and distributees in proportion to the amount of the
               distribution that each person received.


               IT IS FURTHER ORDERED, ADJUDGED AND DECREED by the
               Court that the interest due on the taxes shall be pro rated among the
               various heirs, devisees and distributees in proportion to the amount
               of distribution that each person received.


               IT IS FURTHER ORDERED, ADJUDGED AND DECREED by the
               Court that all penalties on the taxes shall be paid by David Leath,
               individually.
               *      *     *


               IT IS FURTHER ORDERED, ADJUDGED AND DECREED by the
               Court that the Court costs, including litigation tax, are to be paid one
               half by David Leath, individually, and the other one half by the other
               heirs and distributees, for all of which execution may issue.


        All the parties appeal. The Appellant, David Leath, presents the following issues for review,
as stated in his brief:


               1. The Trial Court was in error in finding Defendant/Appellant,
               David Leath, responsible for the payment of taxes, interest and
               penalties to the Internal Revenue Service and the State of Tennessee.


               2. The Trial Court was in error in ruling that beneficiaries to whom
               the estate funds had been disbursed to repay sufficient funds to the
               estate to pay the taxes, interest and penalties.


                                                 -8-
Despite Appellant’s statement of the second issue, it appears from his argument that he, in fact,
argues that the trial court erred in not ordering the heirs to repay sufficient funds to the Estate to pay
the taxes, interests and penalties in full.
        The Appellees, who are the five grandchildren of the Testator, Michael Tapp, Bryant Tapp,
Raymond Tapp, Richard Leath and Sarah Jane Leath, (“Heirs/Appellees”) present the following
issues for review, as stated in their brief:


                1. The Trial Court was in error in finding Appellees responsible for
                payment of the income taxes and interest to the Internal Revenue
                Service and the State of Tennessee.


                2. The Trial Court was in error in finding Appellees responsible for
                payment of one-half (1/2) of the Court Cost.


         The Executor argues that the income taxes due by the Estate should have been paid out of
monies held by the Estate prior to the disbursement to the Heirs, and that the Executor, as a residuary
beneficiary who received only personal and real property under the will, is not liable for any portion
of the taxes, interest or penalties. Furthermore, the Executor contends that by the consent order filed
with the trial court on February 4, 2000, all monies being held by the Estate were placed in the
custody of the Special Master, Barbara Walls, which prevented the Executor from paying the federal
and state income taxes due by the Estate for 1999, which came due on April 15, 2000.


        The Heirs contend that the Executor entered into the consent order dated February 4, 2000,
knowing that the consent order did not include a provision for payment of income taxes. The Heirs
argue that the Executor had the responsibility to file the income tax return for the Estate before it
could be closed, and that the disbursements agreed upon in the consent order did not exhaust the
assets of the Estate, as the residuary estate still contained personal property and real property valued
over $200,000. Thus, the Heirs argue that the Executor knowingly retained the responsibility, as
Executor, to pay the income taxes out of the residuary estate.


        The gravamen of the issue before this court is who should pay the federal and state income
taxes due by the Estate of Richard L. Leath for the year 1999, and who should pay the interest and
penalties that have accrued on these income taxes. The trial court’s determination of who should
pay the income taxes, interest and penalties of Estate of Richard L. Leath for the year 1999, is a
question of law. As such, our review of the trial court order is de novo upon the record with no
presumption of correctness accompanying the trial court’s conclusions of law. See Tenn. R. App.
P. 13(d); Waldron v. Delffs, 988 S.W. 2d 182, 184 (Tenn. Ct. App. 1998); Sims v. Stewart, 973
S.W.2d 597, 599-600 (Tenn. Ct. App. 1998).



                                                   -9-
        The monetary assets of the Estate should not have been disbursed before the income taxes
for 1999 were paid. Tennessee law requires that taxes due by an estate must be paid before
disbursement of the estate funds or that sufficient funds to pay the taxes be held aside before
disbursement to beneficiaries. See T.C.A. § 30-2-317. 6 As previously noted, the trial court’s order
of February 4, 2000, did not make any provisions for payment of the Estate income taxes. As the
Heirs contend, under Tennessee law a “decree and especially a consent decree may not be set aside
or altered unless entered through fraud or mistake.” Bringhurst v. Tual, 598 S.W.2d 620, 622
(Tenn. Ct. App. 1980) (citing Corby v. Matthews, 541 S.W.2d 789, 793 (Tenn. 1976)). However,
mistake is exactly what occurred in this case.

       The Executor should have notified the court prior to the entering of the February 4, 2000,
consent order of the pending taxes due by the Estate. He did not. The trial court had no way of
knowing when the consent order was filed that the Estate would owe income taxes for 1999 payable
by April 15, 2000. Nevertheless, the Executor attempted to correct this mistake. Because all the
Estate funds had been placed into the custody of the Special Master, the Executor sent a letter dated



6
    T.C.A. § 30-2-317, Priorities and preferences; contested or unmatured claims, reads:
         (a) All claims or demands against the estate of any deceased person shall be divided
         into the following classifications, which shall have priority in the order shown:
         (1) First: Costs of administration, including, but not limited to, premiums on the
         fiduciary bonds and reasonable compensation to the personal representative and the
         personal representative's counsel;
         (2) Second: Reasonable funeral expenses;
         (3) Third: Taxes and assessments imposed by the federal or any state government
         or subdivision thereof; and
         (4) Fourth: All other demands which may be filed as aforementioned within four
         months after the date of notice to creditors.
         (b) All demands against the estate shall be paid by the personal representative in the
         order in which they are classed, and no demand of one class shall be paid until the
         claims of all prior classes are satisfied or provided for; and if there shall not be
         sufficient assets to pay the whole of any one class, the claims in such class shall be
         paid pro rata.
         (c) Debts due upon bills single, bonds, bills of exchange and promissory notes,
         whether with or without seal, and upon settled and liquidated accounts signed by the
         debtor, are of equal dignity, unless otherwise provided, and are to be paid accordingly.
         (d) The personal representative shall hold aside sufficient funds or other assets to
         pay each contested or unmatured claim (or the proper ratable portion thereof, as the
         case may be) with interest (if the claim be one bearing interest), until it is
         determined whether or not such claim is to be paid, or until such unmatured claim
         has reached maturity, also sufficient assets to meet the expenses of pending
         litigation and costs of court and any unpaid taxes.


                                                   -10-
March 2, 2000, and filed with the court March 3, 2000, see supra, alerting the Special Master, the
trial court and the Heirs’ attorney as to the unpaid income tax debt of the Estate for 1999. Despite
having received notice of the Estate’s tax debt, on March 7, 2000, the Heirs’ attorney sent a letter
to the Special Master, see supra, advising her to proceed with disbursement of the remaining funds
of the Estate. This was a mistake by the Heirs’ attorney. We agree with the trial court’s Opinion that
it is “unfortunate that the taxes . . . were not paid out of the assets and funds of the estate prior to
distribution” and the fault falls on both parties.7

        Consequently, it is incumbent upon this Court to determine liability for the payment of the
federal and state income taxes, interest and penalties owed by the Estate of Richard L. Leath, as if
the disbursement of Estate funds was never made. The trial court held that the income taxes and
accrued interest were to be prorated among the various beneficiaries in proportion to the amount of
the distribution that each beneficiary received. Furthermore, the trial court held that penalties
accessed for late payment should be paid by the Executor. However, this court does not agree with
the trial courts determination of liabilities among the parties.


       The Estate of Richard Leath received income in 1999 from the repayment of the promissory
note held by the Estate from the Executor in the amount of $148,793.60. This income generated a
tax debt to the Internal Revenue Service for $10,507, and $1,768.00 due to the Department of
Revenue for the State of Tennessee. The taxes owed by the Estate were taxes occurring because of
“income in respect of a decedent” or “IRD.” IRD includes the amount of gross income to which a
decedent was entitled but that was not includible in his final income tax return for the period ending
on the date of his death. 26 U.S.C.A. § 691. See also MERTENS § 35E:10.8 Taxes resulting from
IRD are income taxes payable by the person receiving that income which would have been received




       7
            In the trial court’s Opinion dated September 10, 2004, that court stated:
                   It is unfortunate that the taxes, which were due on April 15, 2000, for the year 1999,
                   were not paid out of the assets and funds of the estate prior to distribution. The
                   Court finds that the Executor was either aware, or should have been aware, that
                   income taxes were due at the time of the entry of the Consent Order on February 4,
                   2000. The Executor’s attorney was certainly aware at the time of her letter on
                   March 3, 2000. The attorney for the beneficiaries was also aware of the taxes at the
                   time of his letter on March 7, 2000.

        8
            Mertens Law of Federal Income Taxation § 35E:10 states:
                  The income in respect of a decedent must be included, in the year of receipt, in the
                  gross income of either the decedent's estate or the person who acquired the right to
                  receive such income. Income in respect of a decedent is the amount of all items of
                  gross income that were not properly includible in the decedent's taxable income for
                  the year of death or any previous year. W hether received by the estate or a person
                  who acquired the right to receive the income, the character of such income is the
                  same as if the decedent had received such amount before the decedent's death.

                                                           -11-
by the decedent had he lived. Id. at § 691(a). If it is the estate which actually receives the IRD, the
estate is taxed. Id. at § 691(a)(1)(A).9
      Under Tennessee law, state inheritance and federal estate taxes are not included in the
“expenses of administration” or “expenses of the estate.” American Nat. Bank & Trust Co. v.
Mander, 253 S.W.2d 994, 998-99 (Tenn. Ct. App. 1952). However, in this State, under authorities
hereinafter cited, income taxes due by the estate of a decedent are included in the administrative
expenses of the estate. In C.J.S., it says:

                  Income Taxes. An executor or administrator may in the usual course
                  of administration pay income taxes constituting debts of the
                  decedent’s estate, and it has been held proper to file a claim against
                  the estate for sums due the government under provisions of a gross
                  income tax law.


34 CJS EXECUTORS § 409. In A.L.R. , income taxes are included as administrative expenses:

                  The federal tax imposed upon the income of an estate is not an
                  inheritance tax and is to be paid as an expense of administration of
                  the estate, and not charged against the respective legatees.

If an estate receives an IRD, and income taxes result from the receipt of the IRD, then the income
taxes become an administrative expense of the estate. In the present case, the Estate of Richard L.
Leath received an IRD in the amount of $148,793.60, which generated Federal and State income
taxes. Those taxes are an administrative expense of the Estate.

        In the first section of the will of Richard L. Leath, the testator directs that “all of my just
debts, funeral expenses, and the cost of administering my estate, be first paid by my Executor out
of any funds coming into his hands as such executor.” (Emphasis added). “Fund” is defined as “[a]
sum of money or other liquid assets established for a specific purpose.” Black’s Law Dictionary 682
(7th ed. 1999). Thus, by the clear directive of the testator, the administrative expenses, including
the income taxes, were to be paid first out of money received by the Executor coming into his hands

       9
           26 U.S.C.A.§ 691(a)(1)(A) Recipients of income in respect of decedents reads:
                  (a) Inclusion in gross income.(1) General rule. The amount of all items of gross
                  income in respect of a decedent which are not properly includible in respect of the
                  taxable period in which falls the date of his death or a prior period (including the
                  amount of all items of gross income in respect of a prior decedent, if the right to
                  receive such amount was acquired by reason of the death of the prior decedent or
                  by bequest, devise, or inheritance from the prior decedent) shall be included in the
                  gross income, for the taxable year when received, of:
                  (A) the estate of the decedent, if the right to receive the amount is acquired by the
                  decedent's estate from the decedent.



                                                          -12-
as executor, prior to distribution of any monies from the Estate to the Heirs. Therefore, the income
taxes should have been paid out of monies of the Estate, and no part should be taxed against the
residuary estate. This position is supported by the fifth section of the will which states, in pertinent
part, as follows:
                (b) After the payment of debts, funeral expenses, and the costs of
                administering my estate, if there is any money left in my estate; I
                hereby will, devise and bequeath the same to my grandchildren,
                namely; Sarah Jane Leath, David Richard Leath, Raymond Tapp,
                Michael Tapp, and Bryan Tapp, in equal shares, one-fifth to each of
                them, share and share alike.
                (c) All the rest and residue of my estate, and every kind, I hereby will,
                devise and bequeath to my son, David K. Leath, in fee simple
                absolutely.

The Testator’s will makes it clear that the Heirs would receive the money remaining in the Estate,
if, and only if, there was any money left after the payment of debts, funeral expenses, and the costs
of administering the Estate. Consequently, the Heirs, Sarah Jane Leath, David Richard Leath,
Raymond Tapp, Michael Tapp, and Bryan Tapp, must pay, in equal shares, the income taxes due by
the Estate of Richard L. Leath to the Internal Revenue Service and the Department of Revenue of
the State of Tennessee.

        Significant interest and penalties have accrued on the income tax debt of the Estate since the
due date of April 15, 2000. The trial court prorated the interest payments between the Executor and
Heirs in proportion to the amount of distribution that each person received. Further the trial court
held that the Executor should be held liable for all penalties on the income taxes due by the Estate.
 The trial court found that the Executor caused numerous delays in the proceedings involving the
Estate and that his inaction led to the appointment of two special masters in an attempt to expedite
the proceedings. Additionally, the trial court found that the Executor, who was or should have been
aware of the income tax debt of the Estate, agreed to the premature distribution of the monies in the
Estate under the consent order of February 4, 2000. Tennessee law allows for an executor to be
surcharged for any penalties and interest charged against an estate if the penalties and interest
accrued due to an executor’s lack of due diligence in managing the estate. McFarlin v. McFarlin,
785 S.W.2d 367, 372 (Tenn. Ct. App. 1989); Love v. First Nat’l Bank, 646 S.W.2d 163, 166 (Tenn.
Ct. App. 1982); In re Inman’s Estate, 588 S.W.2d 763, 767 (Tenn. Ct. App. 1979). However, in
the present case the trial court also found that the Heirs were at fault by improperly encouraging the
premature disbursement of the monies of the Estate after they had been notified of the pending
income tax debt. As well, it is the Heirs who have had the benefit of the prematurely disbursed funds
for over five years. Therefore, it is the position of this Court that the interest and penalties due by
the Estate of Richard L. Leath to the Internal Revenue Service and the Department of Revenue of
the State of Tennessee that have accrued on the income tax debt of the Estate since the due date of
April 15, 2000, be paid one-half by the Executor and one-half by the Heirs.

        The final issue before this Court is the division of court costs assessed by the trial court one-
half to each party. As discussed above, both parties have played a role in the mishandling of the

                                                  -13-
Estate, and the premature disbursement of funds which led to the prolonged litigation of these
matters. We agree with the trial court’s determination that court cost assessed by the trial court
should be paid one-half by the Executor, and one-half by the Heirs.
       In sum, the order of the trial court is affirmed in part, reversed in part, and the case is
remanded to the trial court for entry of an order consistent with this Opinion. Costs of the appeal are
assessed one-half to Appellant, David Leath, and his surety, and one-half to the Appellees, Sarah
Jane Leath, David Richard Leath, Raymond Tapp, Michael Tapp, and Bryan Tapp.




                                       _________________________________________
                                       W. FRANK CRAWFORD, PRESIDING JUDGE, W.S.




                                                 -14-
