Docket No. 7259-72
Jerome Kamerman, for the petitioner. E. Noel Harwerth, for the respondent.
Jerome Kamerman, for the petitioner. E. Noel Harwerth, for the respondent.
1. Provision under will of decedent for payment of $200,000 to his surviving spouse under certain conditions did not give rise to a bequest for which a deduction was allowable under sec. 2056.
2. Decedent's will did not clearly direct that the Federal estate tax be chargeable solely to the interests of the life beneficiaries. The rule of apportionment prescribed by New York must be applied.
The respondent determined a deficiency in the Federal estate tax of the Estate of Anton L. Trunk, deceased, in the amount of $124,708.91.
Certain adjustment to the taxable estate having been conceded by the petitioner, the issues remaining for decision are:
(1) Whether an amount paid to the wife of the decedent, pursuant to her request, may be claimed by his estate as a marital deduction under section 2056, or whether such amount constitutes either a contingent bequest or nondeductible terminable interest under section 2056(b)(1).
All statutory references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.
(2) Whether a portion of Federal estate and State inheritance taxes attributable to life estates preceding charitable remainders should be charged against the corpus of the residuary trusts, thereby reducing the charitable deduction claimed by the estate of the decedent under section 2055.
FINDINGS OF FACT
Some of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.
Anton L. Trunk (hereinafter decedent), deceased, was a resident of New Rochelle, N.Y., at the time of his death on May 14, 1968. Clara P. Trunk (hereinafter petitioner), his widow, is the executrix of his estate. At the time the petition in this case was filed, she was a legal resident of Rye, N.Y. The Federal estate tax return was filed with the District Director of Internal Revenue, Manhattan District, N.Y.
Decedent died on May 14, 1968, leaving a gross estate valued at $1,879,004.96. His last will and testament named petitioner as residuary legatee after payment of certain bequests provided in paragraphs Sixth and Seventh, thereunder. Decedent's adjusted gross estate amounted to $1,242,381.45. Petitioner deducted the sum of $519,522.10 as a marital deduction under section 2056(a) and (c). Of that amount $200,000 is in dispute.
Paragraph Sixth of the will of decedent named St. John's Episcopal Church of Larchmont, N.Y., as a beneficiary of the trust established thereunder. Pursuant to said paragraph, property having a gross value of $372,000 was transferred to the trust subject to mortgages in the amount of $135,000 leaving a net value of the property in the trust in the amount of $237,000. The interest bequeathed to the St. John's Episcopal Church was a remainder interest having a net value of .3489 of the whole trust. Said paragraph Sixth reads, in part, as follows:
SIXTH: Notwithstanding the provisions of Paragraph THIRD thereof, I give, devise and bequeath to CHEMICAL BANK NEW YORK TRUST COMPANY of 277 Park Avenue, New york, New York, and to HAROLD J. TREANOR of 12 East 41st Street, New York, New York, AS TRUSTEES AND IN TRUST NEVERTHELESS, all of my property on the west side of 164th Street, Jamaica, Long Island, New York, now under lease to FIRST NATIONAL CITY BANK (formerly THE NATIONAL CITY BANK OF NEW YORK) upon part of which said Bank has erected a building, together with the lease to said Bank dated the 16th day of November, 1948, amended by agreement dated the 23rd day of October, 1953, and amended and consolidated by agreement dated the 24th day of September, 1956, and as may hereafter be amended, and I direct my said TRUSTEES to collect the entire income therefrom and apply and pay over said income as follows:
(a) To the payment and discharge of any and all liabilities and obligations arising out of or connected with the operation and maintenance of the trust property including, but not limited to, the payment of interest and amortization of mortgages, the discharge and satisfaction of mortgages, the payment of taxes and water charges, if any, as well as the payment of administration, legal expense and Federal and State Estate Taxes and Income Taxes.
(b) To the payment out of the remaining net income of the following amounts to the following named persons:
(1) To my wife, CLARA POEY TRUNK, during her life, the sum of TEN THOUSAND DOLLARS, annually, plus all of the annual rent income remaining after the payments required by subdivisions (2), (3), (4), and (5) hereof;
(2) To HELEN L. KENT, during her life, the sum of THREE THOUSAND DOLLARS, annually;
(3) To FRANK P. POEY, during his life, the sum of THREE THOUSAND DOLLARS, annually;
(4) To ANN K. MACKENZIE, during her life, (except as hereinafter provided in subdivision (c) hereof) the sum of ONE THOUSAND TWO HUNDRED DOLLARS, annually; and
(5) To LULU HAMMOND, during her life, the sum of ONE THOUSAND TWO HUNDRED DOLLARS, annually.
If any of the persons above named in this Paragraph SIXTH shall die prior to the termination of this trust leaving my wife, CLARA POEY TRUNK, surviving, I order and direct my TRUSTEES thereafter to pay over the income which such deceased person would have been entitled to receive, if living, to my said wife, CLARA POEY TRUNK, during her life and upon her death, such income payments, including those to which my wife, CLARA POEY TRUNK, would have been entitled to receive, if living, shall be paid to HELEN L. KENT, during her life. Upon the death of HELEN L. KENT, if she shall survive my wife, CLARA POEY TRUNK, or upon the death of my wife, CLARA POEY TRUNK, if she shall survive HELEN L. KENT, I order and direct my TRUSTEES to pay over the income to which the survivor of either CLARA POEY TRUNK or HELEN L. KENT would have been entitled to receive, as aforesaid, to CLARA M. GIRVIN; and upon the death of CLARA M. GIRVIN or if she shall not survive my wife, CLARA POEY TRUNK, and HELEN L. KENT, I order and direct my TRUSTEES to pay over the net income of this trust to LILIAS P. GIRVIN and BARBARA G. MAHONEY, in equal shares, and, upon the death of either of them, to the survivor of them.
(d) I direct that said TRUSTEES are not to mortgage said property constituting the trust for more than the amount of any mortgage indebtedness on said property at the time of my decease except that if, in the exercise of sound judgment, said TRUSTEES determine that there is need for increased mortgage indebtedness, and my said TRUSTEES shall so certify in writing, then and in that event, said TRUSTEES have the right to mortgage said property in an amount exceeding the amount of the mortgage indebtedness existing at the time of my decease, provided that the proceeds from any such increased or additional mortgage indebtedness be applied to and used solely and directly for the maintenance, benefit or improvement of said property.
Anything hereinabove to the contrary notwithstanding, in the event FIRST NATIONAL CITY BANK (formerly THE NATIONAL CITY BANK OF NEW YORK) or any institution as successor thereof is no longer the lessee or tenant, the TRUSTEE may, in the exercise of sound discretion, mortgage the property constituting the trust for an amount in excess of that in existence at the time of my decease, provided the proceeds from such increased or additional mortgage are used to improve the property constituting the trust by the erection of a new building or buildings and/or enlargement of any existing building and/or its repair, alteration or modernization.
No obligation under the foregoing provisions shall be imposed upon any mortgagee to inquire or determine if the proceeds of any such mortgage loan are used and applied as above permitted; nor shall the violation of the aforesaid direction by my TRUSTEES in the use and application of the proceeds of such mortgage loan in any wise affect or impair the validity of any mortgage affecting the real property or the leases made in connection therewith, constituting the corpus of this trust.
(e) I expressly direct that my TRUSTEES shall not sell, exchange, or deed out any of the real property being part of this trust as long as FIRST NATIONAL CITY BANK (formerly THE NATIONAL CITY BANK OF NEW YORK) or any institution as successor thereof or of approximately similar repute is the lessee or tenant of the property constituting this trust.
Paragraph Seventh of the will of decedent named the Presbyterian Home for Aged Women in the city of New York as a beneficiary in a trust established under that paragraph of the will. Pursuant to the said paragraph, property having a gross value of $750,000, subject to a mortgage in the amount of $247,765.63, was transferred to the trust leaving a net value of the property in the trust in the amount of $502,234.37. The interest bequeathed to the Presbyterian Home for Aged Women in the city of New York was a remainder interest having a net value of .3525 of the whole trust. Said paragraph Seventh reads, in part, as follows:
SEVENTH: Notwithstanding the provisions of Paragraph THIRD hereof, I give, devise and bequeath to CHEMICAL BANK NEW YORK TRUST COMPANY of 277 Park Avenue, New York, New York, and to HAROLD J. TREANOR of 12 East 41st Street, New York, New york, AS TRUSTEES AND IN TRUST NEVERTHELESS, all my right, title and interest in and to certain premises at the northeast corner of John and Nassau Streets, Borough of Manhattan, City of New York, known as 33-35-37-39 John Street and 76-78 Nassau Street, and I direct my said TRUSTEES to collect my share of the income therefrom and apply and pay over the said income as follows:
(a) To the payment and discharge of any and all liabilities and obligations arising out of or connected with the operation and maintenance of the trust property including, but not limited to, the payment of interest and amortization or mortgages, the discharge and satisfaction of mortgages, the payment of taxes and water charges, if any, as well as the payment of administration, legal expenses and Federal and State Estate Taxes and Income Taxes.
(b) To the payment quarter-annually to my wife, CLARA POEY TRUNK, of all of my share of net income from the aforesaid property during her life, and, upon her death, all of my share of net income from the aforesaid property to LILIAS P. GIRVIN and BARBARA G. MAHONEY, in equal shares, and, upon the death of either of them, to the survivor of them.
(c) Upon the death of the survivor of the beneficiaries mentioned in subdivision (b) hereof, this trust shall cease and terminate and thereupon I direct my TRUSTEES to transfer, deliver and convey the property constituting the principal of this trust to the PRESBYTERIAN HOME FOR AGED WOMEN IN THE CITY OF NEW YORK, presently located at 49 East 73rd Street, New York, New York, to be its property, absolutely and forever, but subject nevertheless, to existing mortgages, leases, encumbrances, taxes, and liens, if any. As this bequest is to commemorate my wife's memory and to give recognition to her charitable labors, I direct that this gift be known as, and referred to as, THE CLARA POEY TRUNK FUND.
In the event my TRUSTEES shall certify in writing that it is requisite, necessary or desirable to borrow a sum of money, my said TRUSTEES are hereby authorized and empowered to do so up to, but not in excess of, the sum of $200,000.00 and, for such purpose, to mortgage my aforesaid interest in the property constituting the corpus of this trust, and to make, issue and deliver such bond or note and mortgage and any other instruments as may be proper and necessary. Said some so borrowed shall be turned over, in whole or in part, to my wife, CLARA POEY TRUNK, if so requested by her in writing and/or used, in whole or in part, to pay and discharge any Federal of (sic) New York State Estate of Inheritance Taxes, under any of the provisions of this, my Will.
I hereby authorize and empower my TRUSTEES to sell the property constituting the principal of this Trust when and if in their sound judgment it is expedient, desirable and advantageous to do so and they shall so certify in writing and I request my TRUSTEES, if they shall decide to sell the trust property, advise the co-owners of the property of their decision.
I direct that, in the event of any sale of my share of said premises, the net proceeds derived therefrom (including any mortgage or mortgages) shall constitute the principal of the trust created under this Paragraph SEVENTH and I direct that my said TRUSTEES invest the proceeds (other than the mortgage or mortgages) in accordance with the provisions of Paragraph TENTH (A) hereof with a view to deriving from such investment (including income from the aforesaid mortgage or mortgages) an income for the trust as nearly equal as possible to that theretofore being derived from my share of the premises immediately prior to such sale and pay over the net income thereof in accordance with the provisions of this Paragraph SEVENTH.
I also authorize my TRUSTEES to renew, extend, replace, increase, modify, consolidate or satisfy any mortgage or mortgages on the premises constituting the corpus of this trust for the purpose of, but not limited to, altering or repairing the existing building on the premises above described or erecting a new building in its place and stead.
I further authorize my TRUSTEES to make, execute and deliver any lease or leases and any renewals, replacements, extensions, modifications or cancellations thereof which affect or pertain to the premises constituting the corpus of this trust including but not limited to, the modification, change or cancellation of any agreement in existence at the time of my decease if in their judgment it is advisable to do so.
Paragraph Eighth of the will of decedent named St. John's Episcopal Church of Larchmont, N.Y., as a beneficiary of the trust established thereunder. Pursuant to said paragraph, property having a gross value of $140,633.94 was transferred to the trust. Said paragraph Eighth reads, in part, as follows:
EIGHTH: Notwithstanding the provisions of Paragraph THIRD hereof, I give, devise and bequeath to EDMUND F. WAGNER of 37 Vernon Road, Scarsdale, New York, and to CHEMICAL BANK NEW YORK TRUST COMPANY of 277 Park Avenue, New York, New York, AS TRUSTEES AND IN TRUST NEVERTHELESS, all my right, title and interest in and to a certain Agreement dated the 12th day of April, 1960 (between HALAT REALTY CORPORATION, INC., of 11 East 44th Street, New York, New York, and ANTON L. TRUNK, the Testator herein) including, but not limited to, the stock referred to therein and all payments of principal due and to become due under and pursuant to the terms, provisions and conditions of the aforesaid Agreement and I direct my said TRUSTEES to collect all such principal and apply and pay over the same to ST. JOHN'S EPISCOPAL CHURCH OF LARCHMONT, NEW YORK, except as hereinafter provided in subdivisions (a), (b) and (c) hereof:
(a) To the payment and discharge of any and all liabilities and obligations arising out of or connected with the operation and maintenance of the trust including, but not limited to, Federal and State Estate Taxes and Income Taxes, if any.
(b) To the payment to my wife, CLARA POEY TRUNK, during her life, of the annual net instalments of principal as they accrue and, upon her death:
While the said Agreement dated the 12th day of April, 1960 remains in effect, my share of the corporate TRUSTEE's commissions, as fixed by said Agreement, shall be a charge upon and paid out of the principal of the trust. The corporate TRUSTEE's commissions shall be paid before any disbursements of principal herein provided.
By letter dated July 23, 1971, addressed to Harold J. Treanor, Esq., as trustee, Clara Poey Trunk, decedent's spouse, requested that the trustee ‘turn over and deliver to me the sum of $200,000 as my elective bequest as provided in Paragraph Seventh of Tony's last will and testament.’ The letter further stated:
As you know Tony always thought of me as the most important beneficiary of his estate and willed the residuary to me. Because of debts and administrative expenses, the amount remaining outright to me as residuary beneficiary was less than $365,000.00 out of an estate of $1,800,000.00. It was to provide against a contingency such as this that Tony gave me the election of requesting up to an additional amount of $200,000.00. Although I know it will result in less of a bequest to the Presbyterian Home for Aged Women in the City of New York, I know that it would be Tony's wish that I receive this amount in view of the small remainder of the residuary which passes to me.
In reply, by letter dated August 2, 1971, Harold J. Treanor, as trustee, acknowledged Mrs. Trunk's request, stating that in his judgment ‘it is most desirable that your request for your elective bequest in the amount of $200,000.00 should be met as Tony provided under Paragraph Seventh of the Will.’ Mr. Treanor advised Mrs. Trunk that he would proceed to raise the necessary funds.
By letter dated August 10, 1971, Harold J. Treanor, as trustee, delivered to Mrs. Trunk a check drawn on Trust No. 2 for the sum of $198,500. Said letter concluded:
This amount represents an outright distribution to you (less legal expenses) of the elective bequest provided for in paragraph SEVENTH of Tony's Will. No part of this bequest is subject to estate tax since the entire bequest qualifies for the marital deduction from the taxable estate.
In order to raise the requested funds, it would have been necessary for the trustee to sell certain bonds purchased from the First National City Bank. In lieu thereof, the trustee temporarily borrowed sufficient funds from the bank to make the payment. The property held in trust pursuant to paragraph Seventh of the will was subsequently sold for $500,000.
In an account filed by the trustee with the Surrogate's Court, County of Westchester, for the period from June 11, 1968, to April 30, 1973, Harold J. Treanor, as trustee, reported on Schedule D a distribution of principal in the amount of $200,000 to Clara P. Trunk, wife of the decedent. Said accounting was duly agreed to and accepted by all of the beneficiaries, including the St. John's Episcopal Church of Larchmont, N.Y. In the estate tax return filed on behalf of the decedent's estate, the sum of $200,000 was included in the amount claimed as a marital deduction under section 2056(a) and (c).
In the estate tax return filed on behalf of the decedent's estate, a charitable deduction in the aggregate amount of $223,385.83 was claimed on account of the bequests to St. John's Episcopal Church of Larchmont pursuant to Paragraph Sixth and Paragraph Eighth of the will and to the Presbyterian Home for Aged Women in the city of New York pursuant to Paragraph Seventh of the will. In determining the value of the charitable remainders, the petitioner did not charge the Federal estate taxes and State inheritance taxes attributable to the life estates preceding the charitable remainders against the corpus of the trusts providing for such charities.
In his notice of deficiency, the respondent has determined that the deduction on account of the charitable remainders referred to above should be reduced by the amount of said taxes allocable to the life estates preceding the charitable remainders as a charge against the corpus of the trust. The respondent thereby has increased the taxable estate in the amount of $22,379.31.
Decedent died on May 14, 1968. In his last will and testament, the decedent made various specific bequests of properties comprising a portion of his estate to Chemical Bank New York Trust Co., and Harold J. Treanor, as trustees, to pay the income therefrom, after the deduction of certain expenses and charges to his wife during her life and to certain named individuals. Upon her death or upon the death of the survivor of them, the properties in question were bequeathed to St. John's Episcopal Church of Larchmont and the Presbyterian Home for Aged Women, respectively. Both bequests qualify as charitable deductions under section 2055.
In addition to the specific bequests made by the decedent in his will, by letter dated July 23, 1971, addressed to Harold J. Treanor, Esq., as trustee, Clara Poey Trunk requested Payment of an additional sum of $200,000 as ‘my elective bequest as provided in Paragraph Seventh’ of the will. The trustee duly complied with her request. In filing the Federal estate tax return, the petitioner, as executrix of the decedent's estate, included $200,000 received pursuant to that request in the residuary estate of the decedent for purposes of computing the marital deduction under section 2056(a).
SEC. 2056. BEQUESTS, ETC., TO SURVIVING SPOUSE.(a) ALLOWANCE OF MARITAL DEDUCTION.— For purposes of the tax imposed by section 2001, the value of the taxable estate shall, except as limited by subsections (b), (c), and (d), be determined by deducting from the value of the gross estate an amount equal to the value of any interest in property which passes or has passed from the decedent to his surviving spouse, but only to the extent that such interest is included in determining the value of the gross estate.
Section 2056(a) provides that the marital deduction is computed by deducting from the value of the gross estate an amount equal to the value of any interest in property passing from a decedent to his surviving spouse, subject to the limitations in subsections (b), (c), and (d).
Respondent argues that section 2056(b)(4) provides that, in determining the value of any interest in property passing to the surviving spouse for which a deduction is allowed under subsection (a), any encumbrance or obligation to which such interest is subject is to be taken into account in the same manner as if the amount of a gift were being determined.
Thus, respondent's position is that the language of paragraph Seventh of decedent's will is clear. The decedent directed that the trust property be mortgaged not for the purpose of delivering to petitioner an additional $200,000 bequest outright, but for the purpose of paying Federal estate and State inheritance taxes under any provision of his will. Respondent contends that the bequest is ‘contingent’ in that the bequest could be appropriated to the payment of taxes.
In the alternative, respondent also contends that if in fact an interest in property passed to the surviving spouse, such interest fails to qualify for the marital deduction since it constitutes a terminable interest under section 2056(b)(1).
Under this approach respondent argues that petitioner possessed a restricted right to invade corpus which would terminate at her death, and the trust corpus, of which the interest in question was a part, would pass to a beneficiary other than petitioner or her estate.
Petitioner contends that the language contained in paragraph Seventh of decedent's will is unclear, and that parol evidence of the intent of the decedent should be admitted to aid construction thereof. On the basis of such evidence as was proffered by the petitioner, it is claimed that an unemcumbered ‘elective bequest’ was intended rather than a contingent bequest, and that, in any event, the bequest was not a nondeductible terminable interest, but rather a discretionary power of appointment which qualifies for the marital deduction under section 2056(b)(5).
Both parties thus construe paragraph Seventh of the will as embodying an additional bequest of up to $200,000 to the wife of the decedent, albeit that the respondent argues that such bequest is conditional or terminable and does not qualify for the marital deduction.
In the opinion of the Court both parties may be in error in thus construing the language of paragraph Seventh of decedent's will. The Court is unable to find any intent on the part of the decedent to bequeath an additional $200,000 to his wife in paragraph Seventh of the will.
Our conclusion in this respect is predicated upon a comparison of paragraph Sixth of the will and paragraph Seventh of the will. Both provided for the income of the respective trusts to be applied first to the payment of certain expenses ‘as well as the payment of administration, legal expenses and Federal and State Estate Taxes and Income Taxes.’
With respect to the property bequeathed in trust pursuant to paragraph Sixth of the will, however, the trustees could not sell, encumber, or otherwise dispose of the property except under specific conditions. In other words, paragraph Sixth of the will left the trustees little or no discretion to encumber or to invade the corpus of the trust for any purposes other than the maintenance and preservation of the trust property.
On the other hand, in paragraph Seventh of the will the decedent gave the trustees discretion to borrow funds against the security of the trust property either to pay and discharge ‘any Federal or State inheritance taxes or to make distribution to the decedent's wife. The pertinent section of paragraph Seventh reads as follows:
In the event my TRUSTEES shall certify in writing that it is requisite, necessary or desirable to borrow a sum of money, my said TRUSTEES are hereby authorized and empowered to do so up to, but not in excess of, the sum of $200,000. * * * Said sum so borrowed shall be turned over, in whole or in part, to my wife, CLARA POEY TRUNK, if so requested by her in writing and/or used, in whole or in part, to pay and discharge any Federal of (sic) New York State Estate or Inheritance Taxes under any provisions of this, my Will. * * *
Nothing additional was bequeathed by this language. Rather, the decedent was providing a source of funds to meet the liability for inheritance taxes, or the bequests to his wife otherwise provided for in the will. See Estate of Amory Lawrence Haskell, 58 T.C. 197 (1972).
In the determination of the estate tax, the burden rests on this Court to interpret the will, irrespective of any proceedings in the State courts. Commissioner v. Estate of Bosch, 387 U.S. 456 (1967). While our interpretation of the will would seem to be in conflict with the consent of the Presbyterian Home for Aged Women to the accounting filed by the trustee showing the distribution of an additional $200,000 to Mrs. Trunk, this may prove nothing. Reading between the lines, Mrs. Trunk's letter requesting the payment of the $200,000 reminded the trustees and the other beneficiaries that her share of her husband's estate pursuant to the will was less than she would have been entitled to receive under New York law if she had renounced the will. N.Y. Est., Powers & Trust Law sec. 5-1.1 (McKinney 1967).
Nevertheless, in view of the differing interpretations of that language by the respondent, the petitioner, and the Court, we will assume for purposes of considering petitioner's proffer of proof that decedent's intent cannot be determined solely from a reading of the will. If the petitioner had proffered proof of circumstances which might serve to clarify the language in dispute, the Court would be prepared to admit such proof. Estate of Tilyou v. Commissioner, 470 F.2d 693 (2d Cir. 1972).
Petitioner proffered the testimony of Harold J. Treanor, decedent's attorney, who drafted the will. Mr. Treanor sought to testify with respect to conversations with the decedent when they lunched together after the will had been executed. In substance, he would testify that the decedent told him it was his intention to give his wife $200,000 if she needed it. When the witness was asked why he did not suggest to the decedent that the will be so drawn, the witness replied that the deceased would not have accepted such advice.
This testimony did not concern facts and circumstances surrounding the execution of the will. According to such testimony, paragraph Seventh was written in the exact language demanded by the decedent. Such testimony with respect to the declared intent of the decedent, as distinguished from circumstances evidencing such intent, is not admissible. Estate of Edward N. Opal, 54 T.C. 154, 160 (1970), affd. 450 F.2d 1085 (2d Cir. 1971), and cases cited therein. The petitioner was unable to establish on the basis of any admissible evidence, either received or proffered, that the decedent thereby intended to give Mrs. Trunk the unqualified right to demand and receive an additional $200,000 under the will.
Accordingly, it is the opinion of the Court that petitioner has failed to establish that the will of the decedent provided for an unconditional bequest to her, as wife of the decedent, or an additional $200,000 which will qualify for the marital deduction. Petitioner's alternative contention, that decedent intended to confer an absolute power of appointment upon her, also much fail for lack of proof.
With respect to the second issue, respondent has charged a proportionate share of the Federal estate and New York inheritance taxes to the corpus of each of the trusts provided for by paragraph Sixth and paragraph Seventh of the will, thereby reducing the value of the charitable remainders.
Section 2055(a)(2) provides that the taxable estate should be determined by deducting from the value of the gross estate the amount of all bequests, legacies, devises, or transfers exclusively for religious, charitable, scientific, literary, or educational purposes Pursuant to section 2055(c) where the Federal estate tax or any estate, succession, legacy, or inheritance tax is payable out of property transferred to the charity, the value of the charitable bequest must be reduced by the amount of such taxes in determining the amount deductible from the gross estate.
The prescribed formula was sustained in Dulles v. Johnson, 273 F.2d 362 (2d Cir. 1959).
The apportionment of Federal and State inheritance taxes is governed by State law. Riggs v. Del Drago, 317 U.S. 95 (1942). Section 2-1.8 of the New York law provides, in part, as follows:
(a)Whenever it appears in any appropriate action or proceeding that a fiduciary has paid or may be required to pay an estate or other death tax, under the law of this state or of any other jurisdiction, with respect to any property required to be included in the gross tax estate of a decedent under the provisions of any such law (hereinafter called ‘the tax’), the amount of the tax, except in a case where a testator otherwise directs in his will, and except where by any instrument other than a will (hereinafter called a ‘non-testamentary instrument’) direction is given for apportionment within the fund of taxes assessed upon the specific fund dealt with in such non-testamentary instrument shall be equitably apportioned among the persons interested in the gross tax estate, whether residents or non-residents of this state to whom such property is disposed of or to whom any benefit therein accrues (hereinafter called ‘the persons benefited’) in accordance with the rules of apportionment herein set forth, and the persons benefited shall contribute the amounts apportioned against them.
(b) Unless otherwise provided, when a disposition is made by which any person is given an interest in income or an estate for years or for life or other temporary interest in any property or fund, the tax apportionable against such temporary interest and the remainder limited thereon is chargeable against and payable out of the principal of such property or fund without apportionment between such temporary interest and remainder. The provisions of this paragraph apply although the holder of the temporary interest has rights in the principal, but do not apply to a common law annuity.
(c) Unless otherwise provided in the will or non-testamentary instrument:
(1) The tax shall be apportioned among the persons benefited in the proportion that the value of the property or interest received by each such person benefited bears to the total value of the property and interest received by all persons benefited, the values as finally determined in the respective tax proceedings being the values to be used as the basis for apportionment of the respective taxes.
It is settled law in New York that the apportionment provided for by statute controls in the absence of clear direction by the testator to the contrary. In re Dettmer's Will, 179 Misc. 844, 40 N.Y.S. 2d 99 (Kings County Surr. Ct. 1943). In the case of the decedent's will, the Court is unable to find a clear expression of intent that the Federal and State estate or inheritance taxes not be apportioned to the charitable remainder interest in accordance with law.
The petitioner relies primarily on the order of payment of income by the trustees as set forth in paragraph Sixth and paragraph Seventh of the will. In the case of the trusts set up under those paragraphs, the will specifically directs the trustee to apply the income to the payment of applicable Federal and State estate taxes prior to the distribution of any of such income to the beneficiaries. On the other hand, a similar direction with respect to the order of payment appears in paragraph Eighth of the will although the amounts distributable thereunder are described as installments of ‘principal.’ The direction there applies to receipts of both principal and income. Furthermore, where the decedent intended that there be a charge to the corpus of the trust without apportionment, as in the case of the trustees' commissions on account of the payments bequeathed in trust under paragraph Eighth, the will's direction is clear and unequivocal.
From a reading of the will as a whole, therefore, it is the opinion of the Court that in the disposition of the income of the trusts in paragraph Sixth and paragraph Seventh the decedent was not intending to negate the rule of apportionment. Rather, the language relied on by petitioner refers to the source of the funds to be used in order to pay all costs, including taxes, rather than the apportionment of such taxes as between the interest passing to the life beneficiaries and the interest passing to the charitable remainders. The logic of this conclusion is further supported by the provision in paragraph Seventh empowering the trustees to borrow up to $200,000 against the corpus of that trust in order to pay such taxes.
Respondent further argues that payment of any of the Federal or New York estate taxes out of the income of the trust would require an accumulation of income for the purpose of paying such taxes which would be void under section 9-2.1 of the New York law. Cf. In re Talbot's Will, 170 Misc. 138, 9 N.Y.S. 2d 806 (Orange County Surr. Ct. 1939). In view of our construction of the will, we need not consider that question.
N.Y. Est., Powers & Trusts sec. 9-2.1 (McKinney 1967).
Decision will be entered under Rule 155.