Pearcy v. Citizens Bank & Trust Co. of Bloomington

• Decision Date: 02 March 1951
• Docket Number: No. 18101,18101
• Court: Indiana Appellate Court
• Parties: PEARCY et al. v. CITIZENS BANK & TRUST CO. OF BLOOMINGTON.

Page 918

96 N.E.2d 918

121 Ind.App. 136

PEARCY et al. v. CITIZENS BANK & TRUST CO. OF BLOOMINGTON.

No. 18101.

Appellate Court of Indiana, in Banc.

March 2, 1951.

Hickam & Hickam, Willis Hickam and Elliott Hickam, all of Spencer, Evens & Baker and Leroy Baker, all of Bloomington, for appellant.

Regester & Regester, J. Frank Regester and James R. Regester, all of Bloomington, for appellee.

ROYSE, Judge.

This appeal presents the question of whether the administrator of a decedent's estate is required to apportion federal estate taxes on property not part of decedent's estate. This is the first time this question has been presented to this or our Supreme Court.

The uncontradicted facts may be summarized as follows: Arthur Day died intestate April 17, 1947. He was survived by his widow (appellee Mary E. Day, hereinafter referred to as the widow) who was a second childless wife, and by appellants who are decedent's children by a former marriage. In addition to the personal estate passing into the hands of the administrator, the gross estate for federal tax purposes included life insurance, $16,584.72 of which was paid directly to the widow and $9,000 to appellants; real estate owned by decedent and his widow as tenants by the entirety valued at $57,611.30; jointly owned bonds and bank account which went to the widow as survivor valued at $4,182.90; and $16,000 worth of real estate owned by decedent, in which the widow's life estate was valued at $2,061.51 and appellants' fee simple interest at $13,938.49. The total gross taxable estate was $160,579.59, of which $80,440.43 went directly to the widow and $22,938.49 to appellants. The total federal estate tax assessed and paid was $16,497.07. The administrator paid only one-third of this tax out of the widow's share of decedent's estate and two-thirds out of appellants' share.

Appellants sought by exceptions to the administrator's final report to require it to apportion the federal estate tax among appellants and the widow. The trial court overruled the exceptions and entered judgment approving the administrator's final report. This appeal followed.

Two questions are presented by this appeal: (1) Did the trial court err in refusing to require the administrator to apportion among the widow and appellants the federal estate tax on the proceeds of policies of insurance on the life of decedent paid directly to each of them? (2) Did the trial court err in refusing to require the administrator to apportion among these parties said tax on other property included in decedent's gross estate for tax purposes but which was not part of his estate and went directly to the widow?

The following provisions of the Federal Tax Statute, 6 F.C.A. Title 26, 26 U.S.C.A., must be considered in deciding these questions:

Section 810 imposes a graduated tax 'upon the transfer of the net estate' of the decedent. Sec. 811 enumerates the assets which shall comprise the 'gross estate', from which debts, expenses, exemptions and other items not here in issue may be deducted as provided in § 812, and the remainder determines the 'net estate', the value of which shall be the basis for fixing the amount of tax.

The 'gross estate' provided in § 811, in addition to all the decedent's property at the time of his death, shall include: the decedent's interest in real estate held by the decedent and his wife as tenants by the entirety and his interest in all property held as joint tenants by the decedent and another in their joint names and payable to the survivor, § 811(e), the amount receivable by all beneficiaries (other than his estate) as insurance under policies upon the life of the decedent, § 811(g)(2) and § 811(g)(1) life insurance paid to the estate. Also embraced in the 'gross estate' are all transfers made by the decedent in contemplation of death, § 811(c), and powers of appointment, § 811(f), neither of which is directly involved in this appeal.

Section 827(a) provides that the estate tax 'shall be a lien for ten years upon the gross estate of the decedent', and § 827(b) provides that 'If the tax herein imposed is not paid when due, then the spouse, * * * surviving tenant, * * * or beneficiary, who receives * * * property included in the gross estate under section 811(b), (c), (d), (e), (f), or (g), to the extent of the value, at the time of the decedent's death, of such property, shall be personally liable for such tax * * *.' Sec. 827(c) provides that the discharge of the executor from personal liability for payment of tax shall not release any part of the gross estate for any beneficiary that may thereafter be determined to be due.

The tax 'shall be paid by the executor to the collector' § 822(b), but 'The term 'executor' means the executor or administrator of the decedent, or, if there is no executor or administrator appointed, qualified, and acting within the United States, then any person in actual or constructive possession of any property of the decedent'. § 930(a).

Section 826(c), dealing with liability of life insurance beneficiaries to reimburse the administrator, provides: 'Unless the decedent directs otherwise in his will, if any part of the gross estate upon which tax has been paid consists of proceeds of policies of insurance upon the life of the decedent receivable by a beneficiary other than the executor, the executor shall be entitled to recover from such beneficiary such portion of the total tax paid as the proceeds of such policies bear to the sum of the net estate and the amount of the exemption allowed in computing the net estate, determined under section 935(c). If there is more than one such beneficiary the executor shall be entitled to recover from such beneficiaries in the same ratio.'

Section 826(b) provides: 'Reimbursement out of estate. 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 or whose interest is subject to equal or prior liability for the payment of taxes, debts, or other charges against the estate, it being the purpose and intent of this subchapter ( §§ 800 to 931 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.'

In the case of Gaede v. Carroll, 1933, 114 N.J.Eq. 524, 531, 169 A. 172, 175, 176, the widow appealed from so much of a decree that the executor was entitled to reimbursement for the proportionate amount of federal estate taxes paid by him on the proceeds of life insurance policies paid directly to her and also on the value of real property, title to which testator and wife held in his life as tenants by the entirety. The ninth clause of testator's will provided as follows: 'I direct that any and all inheritance taxes whatsoever, that may be levied or assessed against the share herein given by any of the provisions hereunder to my said wife, shall be paid out of my said estate, it being my intention and wish that the bequests or provisions herein made to her or for her benefit shall go to her free from any and all inheritance or other taxes.' The court then quoted the following conclusions of the Chancellor: 'It is urged in behalf of the testator's widow that all taxes paid by the testator's executor were properly chargeable to the residuary estate, and that the executor is not entitled to re-imbursement from her for taxes represented by Glen Ridge property and insurance moneys received by her. The concluding part of the aforesaid testamentary clause expressing the testator's intention and wish that 'the bequests or provisions herein made to her or for her benefit shall go to her free from any and all inheritance or other taxes' manifests that the testator did not contemplate payment from his estate of taxes on the Glen Ridge property (title to which was held by testator and his wife as an estate by the entirety) or of taxes on moneys payable directly to his widow, on policies of insurance issued upon his life in which she was designated as beneficiary. The fact that the executor was obliged under federal laws to include the amount of insurance carried on the life of the testator as part of the testator's gross estate for the purpose of computing federal inheritance taxes payable is of inconsequence in the matter sub judice. The federal law required the executor to pay from the testator's estate the amount of inheritance taxes payable on such insurance moneys which were included as part of testator's gross estate, but, notwithstanding, the testator's widow as beneficiary named in the policies of insurance and to whom the insurance money was paid is required to reimburse the executor therefor. The fact that the testator reserved in his contracts of insurance the right to make a change in the designation of the beneficiary named in the policies issued upon his life is of no consequence in the matter sub judice as between the executor and the testator's widow. The federal law contemplates payment of inheritance taxes by executors, and the executors are entitled to reimbursement from the person receiving the moneys upon which the inheritance tax is paid, and if such person and the executor cannot agree with respect to such reimbursement recourse may be had to state courts for a settlement of the matter.' In upholding these conclusions, the court said: 'We agree with these conclusions. The federal statute specifically provides for reimbursement by the beneficiary of life insurance policies to the executor for taxes paid, and the will in the instant case cannot be said to impose this tax upon the...