Second National Bank of New Haven v. United States, 89

• Decision Date: 28 September 1965
• Docket Number: No. 89,Docket 28868.,89
• Citation: 351 F.2d 489
• Parties: The SECOND NATIONAL BANK OF NEW HAVEN, Executor of the Will of Frederick F. Brewster, late of Hamden, Deceased, Plaintiff-Appellee-Appellant, v. UNITED STATES of America, Defendant-Appellant-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

351 F.2d 489 (1965)

The SECOND NATIONAL BANK OF NEW HAVEN, Executor of the Will of Frederick F. Brewster, late of Hamden, Deceased, Plaintiff-Appellee-Appellant, v. UNITED STATES of America, Defendant-Appellant-Appellee.

No. 89, Docket 28868.

United States Court of Appeals Second Circuit.

Argued March 18, 1965.

Decided September 28, 1965.

Curtiss K. Thompson, New Haven, Conn. (John H. Weir, New Haven, Conn., of counsel), for plaintiff-appellee-appellant.

John B. Jones, Jr., Atty., Dept. of Justice, Washington, D. C. (Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Robert N. Anderson, Timothy B. Dyk, Attys., Dept. of Justice, Washington, D. C., of counsel; Robert C. Zampano, U. S. Atty., Dist. of Connecticut, on the brief), for defendant-appellant-appellee.

Before MOORE, KAUFMAN and MARSHALL,^* Circuit Judges.

MOORE, Circuit Judge.

The Second National Bank of New Haven, Executor of the Will of Frederick F. Brewster (referred to as the executor^† and the Bank), brought this suit to recover federal estate taxes in excess of $1,600,000 allegedly assessed erroneously and illegally against the estate and paid under protest. The facts are not in dispute.

Frederick F. Brewster, a resident of Connecticut, died on September 16, 1958. By will dated June 5, 1958, he made certain specific bequests and directed that "the rest, residue and remainder" be distributed: one-third "thereof" to the Bank as trustee in trust to pay the income therefrom to his wife, Margaret, for life and upon her death to convey the principal to three of his children; and two-thirds to the trustee to be held in separate trusts for his grandchildren, the trusts to terminate at various times specified in the will. On July 1, 1958, by codicil undoubtedly designed to qualify his wife's one-third for the marital deduction, as authorized by section 2056 of the Internal Revenue Code of 1954, he modified the will to give her a power of appointment over the principal of her one-third; if not exercised, the principal was to go to his three children originally named. In all other respects, except one specific bequest, the will was expressly republished and confirmed.

The will in its first paragraph¹ makes specific provision for the payment "out of my estate" of "death taxes" by directing the executor to pay them along with debts and funeral expenses. The taxes are defined as such as "may legally be assessed upon or with respect to any property which is required to be included in my gross estate under the provisions of any death tax law." To make doubly certain that the beneficiaries not be charged with estate taxes prorated against their shares, the testator provided that: "The provisions of any statute requiring the apportionment or proration of such taxes among the beneficiaries of this will or the transferees of such property, or the ultimate payment of such taxes by them, shall be without effect in the settlement of my estate." The direction and intent set forth in paragraph "One" would seem to be clear and unambiguous to the effect that taxes were to come out of his residual estate and that despite any contrary statute the testator specifically wished to avoid any proration.

When the federal estate tax return was filed, Margaret's one-third share of the residue was computed before the residue was reduced by federal taxes, thus placing the entire tax burden on the two-thirds share passing to the testator's grandchildren. Accordingly, the executor reported a gross estate of $13,201,347.91 from which it deducted specific bequests, debts and administration expenses, the marital deduction comprising Margaret's undiminished share of the residue augmented by a "widow's allowance" of $350,000 made by the Connecticut Probate Court for the District of Hamden but reduced by $281,752.70 of "other death taxes." A taxable estate of $8,392,892.80 was declared on which a tax liability of $4,028,613.85 was reported.

Upon audit, the District Director of Internal Revenue (the Director) disallowed the $350,000 widow's allowance as a part of the marital deduction (one-third, $116,666.67 was allowed because it would otherwise have passed to the marital trust) and decreased the marital trust from $3,630,243.95 to $1,682,846.59. The latter reduction was based upon the Director's construction of paragraph "One" of the will as requiring the deduction from the gross estate of all federal, state and state succession taxes before the marital trust of one-third of the residue could be computed. Thus, all the residuary legatees were required to share the tax burden equally. To arrive at his figure, he submitted an "explanation of items" showing an adjusted gross estate of $12,380,897.22 from which he deducted certain bequests, various state taxes and a federal estate tax ($5,108,442.48), leaving a residue of $5,048,539.76, one-third of which, $1,682,846.59, he allowed as the marital trust. Upon the basis of this adjustment, the Director by 30-day letter asserted a tax deficiency of $1,336,468.40 which the executor paid. This suit for refund followed on the theory that Margaret's share should not have been diminished by federal taxes, thus increasing the marital deduction and eliminating the assessed deficiency.

After receipt of the 30-day letter, the executor in November 1961 applied to the Probate Court in Connecticut for a determination as to how, under Conn.Gen. Stat. sections 12-400, 401(a), 404, 405 (1964 Rev.), the federal estate tax on the residuary bequests should be prorated between those bequests.² The Probate Court approved the executor's proposed proration on the theory that it could not say that under state law there was "a clear and unambiguous direction against proration among shares of the residue; and such it must be if there is to be no proration in the residue citing cases."

Upon motion by the plaintiff-executor for summary judgment, the District Court held (1) that the widow's allowance of $350,000 did not qualify as part of the marital deduction; (2) that the Connecticut proration laws apply because there was no "clear and unambiguous direction" to the contrary; (3) that the federal court was not bound by the Probate Court's determination in virtually a non-adversary proceeding; and (4) that the marital trust was not to be reduced by any portion of federal estate tax liability.

Upon appeal the Government asserts error in the trial court's conclusion that the language of paragraph "One" of the will is not a clear and unambiguous direction against proration.

The problem to be resolved is succinctly stated (in its brief) by the Executor:

"* * * if the Connecticut proration statutes do not apply, as the United States contends, all of the federal estate tax is payable from the estate before the residuary is determined, the widow\'s trust of one-third of the residue bears one-third of the amount of the federal estate tax and the amount of the marital deduction is reduced by that one-third amount. On the other hand, if the Connecticut proration statutes do apply, as plaintiff contends, the amount of the widow\'s trust is determined before the payment of the federal estate tax, at least on the residue; that trust, being itself exempt from tax as part of the marital deduction, bears no part of such tax; and the marital deduction is the full amount of the property passing to the widow. Thus, the basic issue is whether or not the Connecticut proration statutes apply in this case."

It would be difficult to conceive of a clearer direction expressing the thought that death taxes, together with debts and funeral expenses, were to be paid out of the estate. The first sentence of Article One ("I direct my executors to pay out my just debts and funeral expenses and any death taxes * * *") has been held in cases where similar language was construed not only to shift the tax burden to the residue as an expense of administration, Starr v. Watrous, 116 Conn. 448, 165 A. 459 (1933), but also as the equivalent of a direction against proration among the residuary legatees. Crump v. Crump, 20 Conn.Supp. 471, 140 A.2d 143 (Super.Ct.1957). The "inclusion of them taxes in the same classification as debts, funeral expenses * * *" is an expression of "an intention that they should be paid out of the estate in the same way and from the same funds as these other charges." Starr v. Watrous, supra, 116 Conn. at 453, 165 A. at 460.

Any far-fetched doubt as to the testator's intent in the first sentence of paragraph "One" is quickly dispelled by the second sentence in which he specifically declares that "the provisions of any statute requiring the apportionment or proration of such taxes among the beneficiaries * * * shall be without effect in the settlement of my estate." The trial court conceded that "the first sentence shifts the tax burden to the residue"; but was of the opinion that "the clause in the second sentence of Article one referring to the ultimate payment of taxes by them the beneficiaries" created a conflict with the first sentence and, therefore, an ambiguity in the direction against proration.

There are two fallacies in the trial court's position. First is the assumption that the "beneficiaries" in the second sentence are intended as the residual legatees only and, second, is the assumption, built upon the first, that the...