Rhode Island Hospital Trust Co. v. Sanders

• Decision Date: 23 July 1956
• Docket Number: No. 2410,2410
• Citation: 84 R.I. 347,125 A.2d 100
• Parties: RHODE ISLAND HOSPITAL TRUST COMPANY, Ex'r, v. Catherine Bartow SANDERS et al. Eq.
• Court: Rhode Island Supreme Court

Page 100

125 A.2d 100

84 R.I. 347

RHODE ISLAND HOSPITAL TRUST COMPANY, Ex'r, v. Catherine Bartow SANDERS et al.

Eq. No. 2410.

Supreme Court of Rhode Island.

July 23, 1956.

Tillinghast, Collins & Tanner, Thomas R. Wickersham, Providence, for complainant.

Fred A. Otis, Providence, for certain respondents.

Corcoran, Peckham & Hayes, Zalman D. Newman, Newport, for other respondents.

PAOLINO, Justice.

This is a bill in equity for the construction of the last will and testament of Emily Coddington Williams, late of the city of Newport in this state, deceased, and for instructions relative thereto. When the cause was ready for hearing for final decree in the superior court it was certified to this court for our determination in accordance with General Laws 1938, chapter 545, § 7.

A stipulation was filed by all the parties hereto that for the purposes of this case the facts set forth in the bill of complaint are true. None of the parties is a minor and all were duly represented by counsel. The following facts among others appear from the pleadings and exhibits.

The testatrix died testate on August 8, 1952, a resident of the city of Newport. Her last will and testament, dated January 12, 1950, was duly probated in the probate court of that city and the Rhode Island Hospital Trust Company was appointed executor of her estate. For federal estate tax purposes the gross estate was valued in excess of $12,000,000.

The questions raised concern clauses First and Seventh of the will. Clause First provides:

'First: I direct my executor, hereinafter named, to pay from my residuary estate all my just debts, funeral expenses and expenses of administration, including as part of such expenses of administration all legacy, estate, inheritance and succession taxes of every kind.'

In the next following clauses the testatrix made certain provisions for her burial, several specific bequests of personal belongings and sums of money, and then in clause Seventh she provided for the division of her residuary estate as follows:

'Seventh: I direct that all the rest, residue and remainder of my estate, both real and personal, of every kind, nature and description and wheresoever situated, of which I may die seized or possessed and whensoever and howsoever acquired or over which I may have any power of appointment or disposition whatsoever, be divided into twenty (20) equal parts or shares, and I give, devise and bequeath the same as follows * * *.'

Four of the beneficiaries named in the residuary clause were individuals and six were charitable organizations. The Newport Reading Room, not being a charitable organization, will be treated here as one of the individuals. We shall refer to the beneficiaries respectively as the noncharitable group and the charitable group. Thus the number of shares given to the noncharitable group totals sixteen and one-half twentieths, or 82.5 per cent, and the number of shares given to the charitable group totals three and one-half twentieths, or 17.5 per cent, of the whole residuary estate. This latter group qualifies for exemption under sec. 162(a) of the United States Internal Revenue Code of 1939, 53 Stat. 66, 26 U.S.C.A. § 162(a). However, the noncharitable group does not so qualify.

Section 162(a) of that code provides that in computing the net income of an estate subject to federal income tax there shall be allowed as a deduction, without limitation, any part of the gross income which, pursuant to the terms of the will, during the taxable year is paid or permanently set aside for the purposes and in the manner specified in sec. 23(o), 26 U.S.C.A. § 23(o), or which is to be used exclusively for religious, charitable, scientific, literary or educational purposes.

Section 162(c) of the 1939 Int.Rev.Code, 53 Stat. 66, provides that in the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the estate the amount of the income of the estate for its taxable year which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary.

On or about June 15, 1954 the executor as fiduciary filed its federal income tax return for the fiscal year ended March 31, 1954. This return shows that after taking all deductions authorized by law, except the charitable deduction authorized by sec. 162(a), there was an income of $90,116.43 taxable to the fiduciary.

The complainant alleges in the tenth paragraph of the bill of complaint: 'That on said income tax return, in computing the amount of income subject to tax, there was deducted from gross income pursuant to section 162(a) of the Internal Revenue Code of 1939 the amount of $15,770.38, as and being the portion of the undistributed income set aside for and belonging to the charitable organizations referred to in paragraph numbered (8) hereof.' This amount was determined to be three and one-half twentieths, or 17.5 per cent, of said gross income of $90,116.43. There then remained as net income taxable to the fiduciary the amount of $74,346.05 ($90,116.43 minus $15,770.38). The executor computed the federal income tax on this sum to be $46,635.27 and it paid that amount to the district director of internal revenue.

Thus there remains for ultimate distribution $43,481.16 ($90,116.43 minus the tax paid of $46,635.27). The question presented is: 'Whether the estate's federal income tax for the fiscal year ended March 31, 1954 should be charged to income generally and deducted pro rata from the shares of all parties having an interest in the estate's income, or whether it should be deducted pro rata only from the shares of those parties whose portions of undistributed income are not deductible from gross income by the estate pursuant to section 162(a) of the Internal Revenue Code of 1939.'

Stated in another way the question is whether the ultimate tax burden shall be borne by all the owners of the residuary estate in proportion to their interests therein or only by the noncharitable group, since in determining the income tax payable a deduction was taken for the full amount of the charitable group's share of income.

The noncharitable group contends that the estate's federal income tax for the year in question should be charged to income generally and deducted pro rata from the shares of all the parties having an interest in the income of the estate and that it should not be deducted pro rata solely from the shares of those parties whose portions of undistributed income are not deductible from gross income pursuant to sec. 162(a) of the 1939 Int.Rev.Code, 53 Stat. 66. Accordingly the noncharitable group maintains that all of said balance of income, namely, $43,481.16, should be transferred to the residue intact, and that sixteen and one-half twentieths, or 82.5 per cent, amounting to $35,871.96, should be distributed to them and only three and one-half twentieths, or 17.5 per cent, namely, $7,609.20, be distributed to the charitable group.

On the other hand, the charitable group contends that no part of the estate's federal income tax should be charged to income generally or deducted pro rata from the shares of all the parties having an interest in the income of the estate, and more particularly that no part of said income tax...