In re Oakes

• Decision Date: 29 May 1928
• Citation: 162 N.E. 79,248 N.Y. 280
• Parties: In re OAKES.
• Court: New York Court of Appeals Court of Appeals

248 N.Y. 280

162 N.E. 79

In re OAKES.

Court of Appeals of New York.

May 29, 1928.

In the matter of the judicial settlement of the account of Francis J. Oakes, Jr., individually and as executor of the last will and testament of Francis J. Oakes, deceased. From so much of an order of the Appellate Division (220 App. Div. 758,222 N. Y. S. 864) as affirmed a part of a decree of the Surrogate Court (127 Misc. Rep. 779, 217 N. Y. S. 638), surcharging the executor's account with the amount of the federal estate tax on 1,510 shares of the capital stock of the Oakes Manufacturing Company and interest thereon, he appeals.

Order and decree reversed as to such part, and proceeding remitted to the Surrogate Court.

Andrews and Kellogg, JJ., dissenting.Appeal from Supreme Court, Appellate Division, First department.

Archibald R. Watson, and John Lehman, both of New York City, for appellant.

H. Lewis Brown, and Charles S. Day, Jr., both of New York City, for respondent.

CARDOZO, C. J.

Francis J. Oakes, the owner of 1,510 shares of stock of the Oakes Manufacturing Company, made delivery of his certificates to be held in escrow for the benefit of his son. Delivery was accompanied by a writing which described the conditions of the escrow as follows:

‘I, Francis J. Oakes, hereby deliver irrevocably the certificates of stock of the Oakes Manufacturing Company owned by me for 1,510 shares of the stock of said company, to John D. Kernan and Archibald R. Watson in escrow, to be delivered by them or the survivor of them upon my death to my son Francis J. Oakes, Jr., subject to all state and national taxes thereon being paid, and said Kernan and Watson, or the survivor of them, being fully indemnified and protected against the same.’

If the son died before the father, the certificates were to be held upon other conditions which it is unnecessary to state. The donor retained the right to vote upon the stock, and to enjoy its profits and dividends, during life. A will, executed the same day, confirmed the delivery in escrow upon the conditions stated in the writing, and bequeathed to the son ‘any right, title and interest in and to the stock in said company that I may have and which is not otherwise effectually disposed of.’

[1][3] Upon the death of Oakes, Sr., the executor, Francis J. Oakes, Jr., paid out of his own moneys the tax assessed upon the transfer of the shares under the statutes of New York. He paid out of the residuary estate the tax due upon the transfer of the shares under the revenue act of Congress. The New York transfer tax is laid upon the transfer of the separate interests passing to the donees or legatees, and is payable by them severally in proportion to the value of the gifts. The federal tax, on the contrary, is laid upon the transfer of the estate as a whole, and, primarily at least, is a charge upon the residue. Matter of Hamlin, 226 N. Y. 407, 124 N. E. 4, 7 A. L. R. 701. Gifts in contemplation of death or to take effect upon death, though made by separate instruments, are for that purpose to be consolidated with those passing under the will, and the tax payable by the executor is to be computed according to the net value of the aggregate. Farmers' Loan & Trust Co. v. Winthrop, 238 N. Y. 488, 144 N. E. 769;Y. M. C. A. v. Davis, 264 U. S. 47, 44 S. Ct. 291, 68 L. Ed. 558. What is taxed is ‘not the interest to which some person succeeds on a death, but the interest which ceased by reason of death.’ Nichols v. Coolidge, 274 U. S. 531, 537, 47 S. Ct. 710, 712 (71 L. Ed. 1184, 52 A. L. R. 1081).

The question to be determined here is the incidence of the federal tax as between the donee of the shares, who was also the executor, upon the one hand, and the legatees of the residuary estate, upon the other. There can be no doubt that the executor was justified in discharging the tax out of the residue unless the incidence of the burden has been changed by the conditions of the escrow. The surrogate (disapproving the report of a referee to the contrary) and the Appellate Division found that such a change had been wrought, and that the donee by the acceptance of the gift had assumed by implication the payment of the tax in exoneration of the residue. We hold a different view.

The command of the statute is explicit as to the incidence of the burden. ‘If the tax or any part thereof is paid by, or collected out of that part of the estate passing to or in the possession of, any person other than the executor in his capacity as such, such person shall be entitled to reimbursement out of any part of the estate still undistributed or by a just and equitable contribution by the persons whose interest in the estate of the decedent would have been reduced if the tax had been paid before the distribution of the estate, * * * it being the purpose and intent of this title, that so far as is practicable and unless otherwise directed by the will of the decedent the tax shall be paid out of the estate before its distribution’ 40 Stat. 1096, 1100, c. 18, § 408, Revenue Act of Feb. 24, 1919 [Comp. St. § 6336 3/4 i]; Farmers' Loan & Trust Co. v. Winthrop, supra, page 497 (144 N. E. 771, 772)....