Boston Safe Deposit & Trust Co. v. Comm'r of Internal Revenue (In re Estate of Rice)

• Decision Date: 06 December 1963
• Docket Number: Docket No. 1631-62.
• Citation: 41 T.C. 344
• Parties: ESTATE OF ALBERT L. RICE, DECEASED, BOSTON SAFE DEPOSIT AND TRUST COMPANY, EXECUTOR UNDER WILL OF ALBERT L. RICE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

41 T.C. 344

ESTATE OF ALBERT L. RICE, DECEASED, BOSTON SAFE DEPOSIT AND TRUST COMPANY, EXECUTOR UNDER WILL OF ALBERT L. RICE, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 1631-62.

Tax Court of the United States.

December 6, 1963

Paul B. Sargent, for the petitioner.

Lawrence A. Wright, for the respondent.

Held, that the value of the interest of the surviving spouse in property passing to her from the decedent must be reduced, in computing the amount of the marital deduction under section 2056 of the Internal Revenue Code of 1954, by the amount of Federal estate tax and Massachusetts inheritance tax attributable thereto, since, as of the date of the death of the decedent, such interest was, under the laws of Massachusetts, burdened with such taxes.

OPINION

ATKINS, Judge:

The respondent determined a deficiency in estate tax in the amount of $2,270.57, based in part upon the reduction, by $3,331.90, of the amount of $145,134.15 claimed as the marital deduction. The only issue presented is whether the respondent erred in making such reduction. All of the facts are stipulated and are incorporated herein by this reference.

The decedent, Albert L. Rice, who was a resident of Braintree, Mass., died testate on September 2, 1959. He was survived by his wife, Martha C. Rice, and two daughters. Letters testamentary were granted on October 28, 1959, by the Norfolk County Probate Court of Dedham, Mass., to Boston Safe Deposit & Trust Co. (hereinafter referred to as the bank), as executor under the decedent's will.

By the terms of his will, which was executed on December 30, 1958, the decedent bequeathed and devised all his property, real and personal, to his wife, Martha, provided she survived him for 30 days; otherwise to his two daughters equally. The will contained no provision especially providing for the payment of estate or inheritance taxes. On December 30, 1958, the decedent also executed an amendable and revocable indenture of trust designating the bank as trustee, and transferred certain property to the trustee. The value of the trust estate at the date of the decedent's death was approximately $264,000.

The trust instrument provided that the trustee should pay over to the donor during his lifetime any income of the trust and also such amount of principal as the donor might from time to time request. It further provided that upon the death of the donor, if his wife, Martha, should survive him, the trustee should set aside as a separate trust fund, to be known as ‘Trust A,‘ a sum equal to one-half of the value of the donor's ‘adjusted gross estate‘ as defined in the Internal Revenue Code of 1954, such sum to be reduced, however, by the value as finally determined for Federal estate tax purposes of all other property passing to the donor's wife under the provisions of his will or by operation of law or otherwise, and qualifying for the marital deduction. The trustee was directed to pay the entire net income from Trust A to Martha C. Rice during her lifetime, and to also pay to or for her benefit such amounts of principal as the trustee in its sole discretion might deem necessary or advisable for her comfort, maintenance, and support. It was provided that upon her death the trustee should pay the entire remaining principal of Trust A to or for such person or persons as Martha C. Rice might by her will direct and appoint, including the right in her to appoint to her own estate. It was further provided that in default of any such appointment, such remaining trust principal should be added to and consolidated with a second trust created by the same indenture and designated as ‘Trust B.‘

The trust indenture provided that the balance of the trust estate, or all thereof if the donor's wife should not survive him, should be retained by the trustee as Trust B. The trustee was directed to pay to Martha C. Rice during her life the net income from Trust B and so much of the principal thereof as the trustee might from time to time deem necessary or advisable for her comfort, maintenance, and support. It was further provided that upon the death of the survivor of the donor and his wife, the beneficiaries of the income and principal of the trust were the children and grandchildren of the donor.

The trust indenture also contains the following provisions:

ARTICLE NINTH: Notwithstanding any other provision hereof, on the death of the Donor, the Trustee may in its discretion pay to the Executor of his Will or to the Administrator of his estate such sum or sums from Trust B as such Executor or Administrator shall in writing request for the payment of legacies, debts, expenses of administration, and of legacy, succession, inheritance and estate taxes, or other death duties, or to reimburse such Executor or Administrator for the making of any such payments or may pay any of such taxes directly to the taxing authorities involved; * * * . The provisions of this article shall not, however, confer upon any person any right, either as beneficiary or otherwise, to share in this trust, or to require that any such payment be made, nor shall it impose upon the Trustee any duty to concern itself in any way with the preparation of any tax, and the determination of the Trustee as to whether to make any such payments and as to the amount of any payment made shall be final and binding upon all persons taking any interest hereunder.

ARTICLE TWELFTH: This trust is created under, it is governed by, and is to be construed and administered according to the laws of the Commonwealth of Massachusetts.

Pursuant to the provisions of Article Ninth of the trust indenture, the bank, as executor, requisitioned from itself, as trustee, from Trust B (the nonmarital trust), an amount sufficient to pay the Massachusetts inheritance tax and the Federal estate tax.

An estate tax return was filed by the executor with the district director of internal revenue for the district of Massachusetts on December 2, 1960. Therein a marital deduction was claimed in the total amount of $145,134.15, composed of $122,223.02 representing the value of the property in Trust A, and. $22,911.13 representing the value of other property included in the gross estate and passing to the widow. In computing the claimed marital deduction the executor did not reduce the value of any of these properties by any portion of the Massachusetts inheritance tax or the Federal estate tax paid.

In the notice of deficiency the respondent determined that, in computing the marital deduction, the property interests passing to the surviving spouse under Trust A should be reduced by the Massachusetts inheritance tax and the Federal estate tax applicable to those property interests in the amount of $3,331.90.

There are set forth in the margin pertinent provisions of section 2056 of the Internal Revenue Code of 1954.¹ Under section 2056(a) the value of the taxable estate is determined by deducting from the value of the gross estate an amount equal to the value of any interest in property passing from the decedent to his surviving spouse. Section 2056(b)(4)(A) provides that in determining the value of any such interest so passing for which a deduction is allowed, there shall be taken into account the effect which the tax imposed by section 2001, or any estate, succession, legacy, or inheritance tax, has on the net value to the surviving spouse of such interest. Thus, the marital deduction is based upon the net value of the interest passing to the surviving spouse, taking into consideration the liability of such interest for the payment of, among other things, State inheritance and estate taxes and Federal estate taxes. Thompson v. Wiseman, (C.A. 10) 233 F.2d 734, and Estate of Newton B. T. Roney, 33 T.C. 801, affd. (C.A. 5) 294 F.2d 74. In determining whether the surviving spouse's interest in property is charged with such taxes, State law is governing. See Riggs v. Del Drago, 317 U.S. 95; Estate of Rosalie Cahn Morrison, 24 T.C. 965; Estate of Charles Juster, 25 T.C. 669; and Estate of Rose Gerber Jaeger, 27 T.C. 863.

The State of Massachusetts imposes both an estate tax (ch. 65A, sec. 1, Mass. Ann. Laws) and an inheritance tax (tax on legacies and successions under ch. 65, sec. 1, of such annotated laws). The stipulation of facts in the instant case indicates that the amount of $3,331.90, by which the respondent reduced the claimed marital deduction, was composed of Federal estate tax and Massachusetts inheritance tax, but with no breakdown as to the amount of each. The stipulation of facts thus seems to indicate that no Massachusetts estate tax was paid.

It is the petitioner's contention that, in computing the marital deduction, the value of the property passing to the decedent's spouse under the provisions of Trust A should not be reduced by any portion of the Federal estate tax or the Massachusetts inheritance tax, because, it contends, under chapter 65A, section 5, of the Annotated Laws of Massachusetts,² no part of such taxes is payable from the corpus of such trust property. Such statute provides that if an executor, administrator, or trustee is required to pay an estate tax under the Massachusetts statutes or under the estate tax laws of the United States, and any portion of the property with respect to which such taxes are levied or assessed is held under the terms of an inter vivos trust, such proportion of the net amount of such taxes shall, except as otherwise provided or directed by the trust instrument or the decedent's will, be charged to and paid from the corpus of the trust property as the net amount of the property of such trust included in the measure of such taxes bears to the amount of the net estate. The net estate is defined in such Massachusetts statute as the gross estate as defined by the estate tax laws of the United States, less the deductions allowed by the provisions of such Federal laws.

At the outset it is to be noted that section 5...