Merchants National Bank & Trust Co. v. United States

• Decision Date: 06 August 1957
• Docket Number: No. 11976.,11976.
• Citation: 246 F.2d 410
• Parties: MERCHANTS NATIONAL BANK and TRUST COMPANY OF INDIANAPOLIS, successor by consolidation to The Indiana Trust Company, executor and trustee under the will of Guy E. Street, deceased, Plaintiff-Appellee, v. UNITED STATES of America and Gary Campbell, district director of internal revenue, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

246 F.2d 410 (1957)

MERCHANTS NATIONAL BANK and TRUST COMPANY OF INDIANAPOLIS, successor by consolidation to The Indiana Trust Company, executor and trustee under the will of Guy E. Street, deceased, Plaintiff-Appellee, v. UNITED STATES of America and Gary Campbell, district director of internal revenue, Defendants-Appellants.

No. 11976.

United States Court of Appeals Seventh Circuit.

June 20, 1957.

Rehearing Denied August 6, 1957.

Charles K. Rice, Asst. Atty. Gen., Carolyn R. Just, Attorney, Tax Division, U. S. Department of Justice, Washington, D. C., Jack C. Brown, U. S. Atty., Indianapolis, Ind., Harry Baum, Atty., Department of Justice, Washington, D. C., James L. Miller, Asst. U. S. Atty., Indianapolis, Ind., for appellant.

Arthur H. Northrup, Indianapolis, Ind., for appellee.

Before LINDLEY, SWAIM and SCHNACKENBERG, Circuit Judges.

SCHNACKENBERG, Circuit Judge.

Plaintiff sued defendants in the district court for a refund of a payment made to the defendant Campbell, covering an estate tax net deficiency (and interest thereon) assessed against the estate of Guy E. Street, who died August 16, 1950 and whose will was probated in the Probate Court of Marion County, Indiana. Plaintiff is the executor and trustee under said will and is also referred to herein as the taxpayer.

We now state facts, as stipulated by the parties, or otherwise shown by the record before us, and as found by the district court.

By his will, deceased left certain personal property to his wife, other personal property to his daughter, and made specific bequests to four relatives. The rest of his estate by Item V of the will was placed in trust, 2% of the principal to be distributed during a ten year period to his wife, daughter and other beneficiaries in named percentages; and the income of the trust to be distributed to various beneficiaries, including 4/10 to his wife for life, at her death to their daughter, and at her death to grandchildren; the trust to continue for the lives of the various beneficiaries, the principal of the trust to be then distributed as provided in the will. The will provided, in part:

"Item I.

"I direct that all federal estate and state inheritance and estate taxes that may be assessed upon my estate or payable by any beneficiary thereof on account of the provisions hereof made in their behalf be paid from and out of my residuary estate.

"Item V.

"* * * 10. My Trustee is specifically authorized and empowered: * * * to apply the principal of the trust estate to the payment of any and all inheritance, estate, succession or other taxes, State or Federal, levied or assessed against my estate or any beneficiary thereof by reason of the transfers herein; * * *."

On February 14, 1951, the widow renounced the provisions made for her in the will and elected to take under the laws of descent of Indiana, reserving, however, her interest in life insurance policies of which she was beneficiary, her rights as surviving tenant by the entirety in certain real estate and all right, title and interest in property as to which decedent died intestate. The document containing her renunciation also stated, in part:

"It is not intended hereby and I do not release the Executor under the last will and testament of the said decedent and his estate from existing obligations to make payment of all federal estate taxes imposed upon any and all property hereinabove referred to, and all state inheritance and estate taxes."

In a proceeding for construction of the will and for instructions filed by the taxpayer in the Marion County Probate Court, the widow, heirs, legatees and beneficiaries of the trust were named as defendants, and proceedings were had, terminating in a decree directing, inter alia, the executor to pay all federal estate taxes and all inheritance taxes assessed by the United States, the state of Indiana or any other state, by virtue of the death of decedent or any transfer made by him, and not to receive reimbursement from any person. The United States was not a party to the probate court proceeding.¹

In an estate tax return filed by the executor on November 16, 1951, a marital deduction² to the widow as surviving spouse was claimed. The commissioner of internal revenue determined that the marital deduction should be $280,933.55, which was computed by deducting from the amount of $344,925.59³ (an adjusted value of property passing to the widow) the amounts of federal estate tax ($53,770.01) and state inheritance tax ($10,222.03) applicable to the property involved. The net assessed deficiency, resulting from this and other adjustments not here in issue, and amounting to $19,266.51, plus interest of $3,064.67, or a total of $22,331.18,⁴ was paid to the district director on July 15, 1954. The claim for refund was filed and rejected.

The district court entered judgment in favor of the taxpayer on September 24, 1956, from which defendants appealed.

1. Defendants in this court argue in support of this proposition:

"The marital deduction claimed by the estate for the value of property passing to the widow was properly reduced by the Commissioner by the portion of the Federal estate tax and State inheritance tax attributable to this property."

Counsel for both sides rely on Riggs v. Del Drago, 317 U.S. 95, 63 S.Ct. 109, 87 L.Ed. 106. The court in that case held that the federal estate tax should be paid out of the estate as a whole. It also held that the applicable state law as to devolution of property at death should govern the distribution of the remainder and the ultimate impact of the federal tax. In Riggs v. Del Drago, § 124 of the New York Decedent Estate Law⁵ was upheld because it was found not to be in conflict with the federal estate tax law, 26 U.S.C.A. § 800 et seq.

We must, therefore, ascertain and apply the law of Indiana to the questions presented on this appeal. On that subject we have the assistance of counsel, who have discussed that law in their briefs.

By renouncing the will and electing to take under the Indiana laws of descent, the widow received one-third of the estate after payment of debts.⁶ Indiana has no statute for apportionment of federal estate taxes.

The language of testator's direction in Item I, pertaining to the payment of federal estate and state inheritance and estate taxes "that may be assessed upon my estate or payable by any beneficiary thereof on account of the provisions hereof made in their behalf * * *", includes, not only that property which the testator intended to transmit by his will, but also such property as the insurance policies involved in this case, and intestate estate. It can hardly be denied that intestacy embraces not only property which the decedent failed to mention in his will but also that property which passed as intestate upon the widow's renunciation of the provisions made in the will for her. All of this property — life insurance, property passing by the will, and property passing under the laws of intestacy of Indiana — was subject to federal estate taxes. As to all of these classes of property the duty devolved upon the executor, by virtue of Item I, to pay the federal estate and state inheritance taxes because they were assessed upon the decedent's estate. Accordingly they were paid by the executor. In so doing it was required of it that such payments be made "from and out of my residuary estate."

In renouncing the provisions made for her in the will, the widow attempted to retain the benefit which would have inured to her under Item I. This she could not do under the law of Indiana, because the provisions made in the will for the widow were in lieu of her statutory rights in the estate. She may not take both. In Clark v. Clark, 132 Ind. 25, 31 N.E. 461, at page 462, the court said:

"* * * Such a contention would be in the face of all the authorities by which wills are construed and enforced. * * *"

In Rawley v. Sanns, 141 Ind. 179, 40 N.E. 674, at page 676, in speaking of a surviving husband, the court said:

"* * * The law cast on him absolutely one-third of both the real and personal property owned by his wife at her death, and no more. Burns\' Rev.St.1894, § 2642 (Rev. St.1881, § 2485); Burns\' Rev.St. 1894, § 2649 (Rev.St.1881, § 2488). This he could take against her will, or any will she might make. But, as against such a will, he could take no more than such one-third. He could not, as we have seen, take the one-third absolutely, and take the use, rents, issues and profits of the other two-thirds, or a life estate therein."

That which passed to the widow at the death of her husband became subject to federal estate taxes, inasmuch as testate as well as intestate estate passing to a widow was subject to the classes of claims listed by the Indiana statute.⁷ It was said in Cornet v. Guedelhoefer, 219 Ind. 200, 207, 36 N.E.2d 933, 935, 37 N.E.2d 681, that, "In order to confirm the rights of the heirs or of beneficiaries of a will, it is essential that those obligations of the decedent or of his estate which by law are made superior claims against the assets, shall be paid or otherwise settled." The court referred to the classes of claims listed in the statute, the fourth class being taxes accrued upon the real and personal estate of the deceased at his death, and taxes assessed upon the personal estate during the course of administration. In that case both federal estate and state inheritance taxes were involved. Referring to the various classes of claims, including the fourth class, the court (219 Ind. at page 208, 36 N.E.2d, at page 936) stated: "We summarize the items which under the seven clauses of the statute must be paid before legacies * * *." In the summary the court included the federal estate tax.⁸

The Illinois law in respect to a renunciation by a widow is the same as the Indiana law. Therefore In re Estate of Donovan, 409 Ill. 195, 98 N.E.2d 757, 29 A.L.R.2d 215 is helpful in considering the effort of the widow in the case...