Hooker v. Drayton

• Decision Date: 02 July 1943
• Docket Number: No. 1658.,1658.
• Citation: 33 A.2d 206
• Parties: HOOKER et al. v. DRAYTON et al.
• Court: Rhode Island Supreme Court

33 A.2d 206

HOOKER et al.

v.DRAYTON et al.

No. 1658.

Supreme Court of Rhode Island.

July 2, 1943.

COPYRIGHT MATERIAL OMITTED.

Suit by Henry S. Hooker and others against John Drayton and others for the construction of the last will of Henry Coleman Drayton, deceased. The cause was certified to the Supreme Court for determination in accordance with General Laws 1938, chapter 545, § 7.

Decree in accordance with opinion.

Sheffield & Harvey, of Newport, for complainants.

Burdick, Corcoran & Peckham and William A. Peckham, all of Newport, for respondents John Drayton and William M. Cruikshank and William Cruikshank, trustees under will of Caroline Webster Astor.

Raymond J. McMahon, of Providence, and Nathan J. Sokoletsky, of Fall River, Mass., for respondents Arthur John Allen and Margaret Allen.

Leo L. Tobak, of Newport, representative for certain persons unascertained and not in being.

CONDON, Justice.

This is a bill in equity for the construction of the last will and testament of Henry Coleman Drayton, late of the city of Newport, deceased. Upon being ready for hearing for final decree in the superior court, the cause was certified to this court for our determination in accordance with General Laws 1938, chapter 545, § 7.

The principal question raised in the bill is whether the testator intended, by the direction contained in the sixth clause of his will, to charge his residuary estate with the burdens of the federal estate tax and the New York and Rhode Island inheritance taxes which were assessed or were assessable on his exercise of the power of appointment given to him under the will of his grandmother, Caroline Webster Astor, late of New York, in the state of New York, deceased on October 30, 1908. That clause is as follows: “I direct that all the foregoing gifts, devises, bequests and life interests shall, so far as possible, be paid free and clear of all succession, inheritance or estate taxes, which taxes I direct shall be paid out of the principal of my residuary estate.” In the preceding clauses, besides making dispositions of his own estate by way of devise, bequest and annuity, the testator had exercised the above-mentioned power.

While the bill seeks an answer as to the incidence of the New York and Rhode Island taxes, it would appear from the briefs that the parties are primarily, if not solely, concerned with the incidence of the federal estate tax. We shall therefore confine our consideration at this time to that tax. It appears that the parties have assumed that such tax is legally assessable on the exercise of this particular power by a donee thereof domiciled in Rhode Island, and that they seek instruction only as to which estate shall bear the burden of that tax-the estate of the donee of the power or the trust estate of the donor. Whatever is said hereinafter is, therefore, to be understood as in no sense expressing any opinion on the legality of such tax.

From the evidence which was admitted in the superior court it appears that the testator's estate is valued at $293,559.68, and that the estimated value of the property passing under the exercise of the power of appointment is $208,214.16. The estimated federal estate tax on the total estate is $103,000, and excluding the appointed property it is $33,000. If the total tax is charged to the estate of the testator and there is no diminution in the estimated value of such estate, the residue after the payment of taxes will amount only to $5,214.16. If there should be any considerable diminution in the value of the estate-and there is evidence that there may be as much as $36,000-then not only would there be no residue with which to set up a residuary trust which the testator has expressly provided for his nephew and the latter's issue, but there would also arise the necessity of determining what legacies were subject to abatement and the extent thereof. Whether or not we should take such latter evidence into consideration in determining the testator's intention as to whether his estate alone should bear the burden of the federal estate tax, we leave for discussion later in this opinion.

Before seeking to find the testator's intention by construing the language of the sixth clause, it is desirable at this point to state some well-established principles pertaining to powers of appointment under the law of this state and also to their taxability under the federal estate tax law. The respondents appear to contend, if we understand them correctly, that the property subject to the power of appointment in the instant cause is, by force of the federal law, deemed to be a part of the testator's estate. And they further contend that, as a part of such estate, such property is to be treated in law as his own and made subject to the same rules as govern his own estate. One of those rules, they urge, is “that, ‘failing any testamentary provision to the contrary, death, charges and all obligations upon an estate must be paid out of the residue”’ of an estate. Hazard v. Board of Tax Commissioners, 43 R.I. 431, 444, 113 A. 469, 474, 23 A.L.R. 826. Therefore, they insist that, since even without the testamentary language of the sixth clause, the federal estate tax would thus be charged against testator's residuary estate there is all the more reason for construing such clause as an express direction of the testator to the same effect.

This is a plausible argument, but it fails because its premises are faulty. The federal estate tax law does not make property appointed under a general power a part of the decedent donee's estate. It merely includes such property in the estate of such decedent for the purposes of assessing and collecting the tax. Int.Rev.Code, § 811(f), 26 U.S.C.A. Int.Rev.Code, § 811(f). As a question of property and its devolution it is a subject of state law. Until October 21, 1942, the federal law was silent as to the incidence of the tax. On that date an amendment to the law providing for apportionment was approved and is now § 826 (d) of the Internal Revenue Code, 26 U.S. C.A. Int.Rev.Code, § 826(d), but that amendment is not applicable here since the testator died on March 22, 1942, before it became effective.

The fact that the statute provides that the tax is to be paid by the executor before distribution of the estate has led to some confusion in that certain state courts have construed it as a mandate of Congress charging the tax upon the decedent's residuary estate. Matter of Hamlin, 226 N.Y. 407, 124 N.E. 4, 7 A.L.R. 701; Matter of Oakes, 248 N.Y. 280, 162 N.E. 79; Dexter v. Jackson, 245 Mass. 333, 140 N.E. 267, and Bemis v Converse, 246 Mass. 131, 140 N.E. 686. But at least since 1922 the interpretation of the Treasury has been that it was not interested in the incidence of the burden of the estate tax. See Art. 85, Regulation 63, and subsequent regulations. And it was held by the Federal Circuit Court of Appeals of the 2d Circuit in 1923 that “so far as the words of this statute are concerned, the United States does not care who ultimately bear the weight of this tax; it announces the sum and demands payment from the executors; if the legatees and devisees cannot agree as to the burden bearing, the state courts can settle the matter.” Edwards v. Slocum, 287 F. 651, 653, affirmed 264 U.S. 61, 44 S.Ct. 293, 68 L.Ed. 564.

Notwithstanding that decision, the New York Court of Appeals adhered to the view that Congress had definitely provided that the burden of the tax rested upon the decedent's residuary estate. That court went even to the extent of holding that a New York statute which provided for apportionment of the tax violated both the supremacy and uniformity clauses- Art. VI, cl. 2 and Art. I, sec. 8, cl. 1-of the the federal constitution. Matter of Del Drago's Estate, 287 N.Y. 61, 38 N.E.2d 131. That case, however, prompted the United States Supreme Court to grant certiorari in order finally to determine the question. It was there definitely decided “that Congress intended that the federal estate tax should be paid out of the estate as a whole and that the applicable state law as to the devolution of property at death should govern the distribution of the remainder and the ultimate impact of the federal tax.” Riggs, Jr. v. Del Drago, November 9, 1942, 317 U.S. 95, 63 S.Ct. 109, 110, 87 L.Ed. -, 142 A.L.R. 1131. While that case did not involve a power of appointment, the construction of the federal statute therein made is, in our opinion, equally applicable to a case involving a power, at least to a case arising as the instant one does, under the statute as it stood before the amendment of October 21, 1942, I.R.C. § 826 (d), 26 US.C.A. Int.Rev.Code, § 826(d). Whether or not such amendment has affected any material change in the applicability of state law to cases arising since its enactment we, therefore, need not consider.

Now what is the applicable state law here? It is true that the rule here is, as it is generally, that, in the absence of a contrary testamentary direction, the burden of all debts, charges and obligations falls upon the residue of the estate. Hazard v. Board of Tax Commissioners, supra. But the rule as thus stated is applicable only to the true estate of the testator within the meaning of our law of property. Under that law, property which is transmitted by a testator in the exercise of a power granted to him by another to appoint by will is neither in law nor in fact a part of the testator's estate. Van Allen v. Bliss, 49 R.I. 379, 142 A. 671. An act of Congress containing a provision expressly designed to facilitate the collection of the federal revenue does not alter the law of property of this state. So the federal estate tax statute, “while it assumes that the entire tax should be paid out of the residuary estate, does not propose to regulate the question.” 1 Paul, Federal Estate & Gift Taxation, § 9.26, p. 476. “It did not undertake in any manner to specify who was to bear the...