United States Trust Co. of New York v. Sears

• Decision Date: 16 October 1939
• Docket Number: No. 81.,81.
• Citation: 29 F. Supp. 643
• Court: U.S. District Court — District of Connecticut
• Parties: UNITED STATES TRUST CO. OF NEW YORK et al. v. SEARS.

29 F. Supp. 643

UNITED STATES TRUST CO. OF NEW YORK et al. v. SEARS.

No. 81.

District Court, D. Connecticut.

October 16, 1939.

COPYRIGHT MATERIAL OMITTED

Mark C. Candee, of Greenwich, Conn., for plaintiffs.

Keogh & Candee, of South Norwalk, Conn., for defendant.

CLARK, Circuit Judge (acting as District Judge pursuant to statutory designation).

This action has been submitted for adjudication upon the pleadings and upon memoranda of the parties stating their claims of law. The pleadings consisted of a complaint and an amendment thereto by the plaintiffs, defendant's answers to both the complaint and its amendment admitting all allegations of fact and stating two partial defenses and one complete defense, and plaintiffs' reply admitting the allegations of fact of these three defenses. The reply is not authorized, Rule 7(a), Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c, but the present proceeding is essentially one wherein all parties move for judgment on the facts shown of record and it is appropriate to consider admissions made by the parties, whether within or without the formal pleadings.¹ Since, therefore, all statements of fact made on behalf of either the plaintiffs or the defendant stand admitted in the documents on file, no formal findings of fact by the court are required. Rule 52(a), F.R.C.P.

The plaintiffs, executors of the will of Austin L. Smithers, deceased, have paid the United States the federal estate tax of $19,572.63 assessed upon the estate in their charge and now seek reimbursement from the defendant for a part of the tax paid. The defendant was the beneficiary in the amount of $100,353 on a policy of insurance procured by the testator upon his life. As required by law, the sum of $60,353, the proceeds of this policy above the statutory exemption of $40,000, was included in the estate of the deceased in computing the federal estate tax. 26 U.S.C.A. § 411(g), I.R.C. § 811(g), 26 U.S.C.A. § 811(g).² This proceeding is brought upon § 314(b) of the Revenue Act of 1926, 44 Stat. 79, 26 U.S.C.A. § 426(c), I.R.C. § 826(c), 26 U. S.C.A. § 826(c), in force at the time of the testator's death, providing as follows: "If any part of the gross estate 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, in excess of $40,000, of such policies bear to the net estate. If there is more than one such beneficiary the executor shall be entitled to recover from such beneficiaries in the same ratio." Since the action is based on a federal statute and the amount in controversy exceeds $3,000, exclusive of interest and costs, jurisdiction of this court appears.

Notwithstanding the seemingly clear language of the quoted statute, various interpretations of it as applied to the situation here presented are proffered by the parties and still others seem at least arguable. The result claimed by the defendant in her complete defense to the action may be considered first. She asserts that the statutory right of reimbursement does not here obtain because the testator has directed otherwise in his will. Testator's will was executed February 9, 1927, while application for the insurance in question was made November 18, 1926, and the policy was dated November 23, 1926. Death occurred on September 12, 1936. The will contained the following provision: "I direct that all transfer, inheritance and estate taxes, to which my property or the transfer of any part thereof may be liable, shall be paid out of my residuary estate as an expense of administration and that no devise, legacy or bequest herein contained shall be diminished by any such tax." Notwithstanding the lack of exception in the statute, obviously a testator may vary the extent of his bounty among his beneficiaries as he wishes and place the burden of charges against his estate upon his residuary legatees so long as he makes his desires manifest. Hence the question is one of interpretation of this clause of the will.

Although the power of a testator to vary the incidence of the federal estate tax from that made by the law is assumed in the cases, it is held that the direction must be clear and in case of doubt the burden should be left where the statute has placed it. Thus, in Gaede v. Carroll, 114 N.J.Eq. 524, 169 A. 172, 176, the court said: "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 residuary estate." So, also, Commercial Trust Co. v. Millard, 122 N.J.Eq. 290, 193 A. 814, allowed reimbursement of federal estate and other taxes from the trustees under an inter vivos trust. Decisions of a similar nature, involving state death taxes, are Ericson v. Childs, 124 Conn. 66, 198 A. 176, 115 A.L.R. 907, and Hackett v. Bankers Trust Co., 122 Conn. 107, 187 A. 653. Compare annotation in 115 A.L.R. 916. These cases hold that a testamentary provision effective to make a change in the burden of a tax should be apt and unambiguous for the specific purpose, and directions concerning transfer taxes on other property, as on the share "herein given" (Gaede v. Carroll, supra) or "in respect to my estate or any of the bequests of this my will" (Ericson v. Childs, supra 124 Conn. 66, 198 A. 177, 115 A.L.R. 907), are not sufficient to shift the normal burden of taxes on property not passing as a part of the estate of the deceased at his death. Such judicial caution seems justified, for with increasing taxes a residuary legatee under a will made long previous may find himself with an undue burden, even though, as is often the case, the residuary legatee is a special object of the testator's affection. The recent depression has shown that testators often do not give the proper forethought to the effect which unexpected developments may have upon the bequests made even to their dearest kin. Certainly the plight of the residuary legatee should not be made worse by judicial construction of vague and uncertain testamentary directions. In the present case the provision relied on is not apt for the purpose claimed. It refers to taxes "to which my property or the transfer of any part thereof may be liable," and directs "that no devise, legacy or bequest herein contained shall be diminished by any such tax." These expressions do not naturally include the proceeds of a policy upon the testator's life — proceeds which were neither his "property" nor the subject of a legacy or bequest by him. If, when he made his will, he had had in mind this policy so recently taken out, it would seem probable that he would have said so more explicitly. The complete defense to the action must therefore fail.

If, however, reimbursement in some amount is to be had, the fixing of the amount presents difficulties. These difficulties are chiefly connected with the meaning of the term "net estate" in the statute. The executors' reimbursement is to be "such portion of the total tax paid as the proceeds, in excess of $40,000, of such policies bear to the net estate." 26 U.S.C.A. § 426(c), I.R.C. § 826(c), 26 U.S.C.A. § 826 (c). Postponing for the time being certain queries which concern other terms in the statute, we may turn first to the major claims of the opposing parties based upon their interpretation of the phrase "net estate."

The gross estate of the deceased, including the proceeds of the non-exempt insurance, was $254,591.06. Lawful deductions of $47,944.91 left a balance of $206,646.15. Our problem arises with respect to the statutory exemption before the tax rates apply. By 26 U.S.C.A. § 412, I.R.C. § 812, 26 U.S.C.A. § 812 "the value of the net estate" "for the purpose of the tax" is the value of the gross estate after deducting not only the lawful deductions there specified, but also "an exemption of $100,000." The "net estate" would then be $106,646.15. Plaintiffs therefore claim that the reimbursement to which they are entitled is such portion of the tax paid ($19,572.63) as the insurance proceeds ($60,353) are to the net estate ($106,646.15) or $11,075.19. Defendant claims that for reimbursement purposes the deduction of the $100,000 specific exemption is not authorized, and that the "net estate" is $206,646.15. She claims, therefore, that she owes only $5,716.37 ($206,646.15 is to $60,353 as $19,572.63 is to $5,716.37). Should this contention not be supported, she offers an alternative based upon the fact that the "net estate" in 26 U.S.C.A. § 412, I.R.C. § 812, supra, is for the purpose of computing the "basic" estate tax, and that beginning in 1932, Congress provided for an additional estate tax involving a substantial increase in the tax, wherein the exemption, first set at $50,000, in 1935 became, and now remains, $40,000. 26 U.S.C.A. § 535 (c), as amended, I.R.C. § 935(c), 26 U.S.C. A. § 935(c). So at the very least she would limit the statutory exemption to this figure in computing the reimbursement and set the "net estate" at $166,646.15. The result, therefore, would be $7,088.47 ($166,646.15 is to $60,353 as $19,572.63 is to this figure).

The strength of the plaintiffs' case lies in the fact that they make use of the technical meaning of the term "net estate." And this conclusion is supported by a section dealing with "definitions," 26 U.S.C.A. § 530, I.R.C. § 930, 26 U.S.C.A. § 930, providing that "when used in this subchapter," "the term `net estate' means the net estate as determined under the provisions of section 412 812 or 461 861." (Section 412 contains the definition of net estate cited above; section 461 is a similar definition applicable in the case of non-resident and non-citizen decedents, except that no exemption is allowed.) The weakness of plaintiffs' case lies in the harshness, if not even...