The opinion of the court was delivered by: RYAN
This is an action to recover a refund of Federal estate taxes in the amount of $15,112.15 plus interest. Jurisdiction is based upon Title 28, U.S.C., Section 1346(a)(1). The refund sought consists of two items: a claimed overpayment due to an improper computation of the marital deduction, and a credit for Canadian estate taxes paid subsequent to the filing of the United States estate tax return.
Both parties cross move for summary judgment. (Rule 56 Fed. Rules Civ. Proced.). Summary Judgment is granted for Plaintiffs.
The decedent, Sidney Lewald, a resident of the State of New York, died testate on August 6, 1958. His executors, the plaintiffs herein, filed an estate tax return on November 5, 1959. The return showed a gross estate of $956,251.87, and adjusted gross estate of $874,293.22. Of this latter amount, the total property interests passing to the surviving spouse was $442,336.29 ($14,923.38 the value of specific bequests and $427,412.91 the value of one-half of the residuary estate). The estate paid a net estate tax of $111,896.17, and $56,601.56 of this amount was charged against the one-half of the residuary estate left to the decedent's wife. The net value of the property interests passing to the surviving spouse, therefore, were $385,734.73 and this amount was taken as the marital deduction pursuant to Section 2056(b)(4)(A) of the Internal Revenue Code, which states that for the purpose of determining the value of any interest in property passing to the surviving spouse for which a deduction is allowed, there shall be taken into account the effect which any estate tax has on the net value of such interest.
On May 22, 1962, the executors filed a claim for refund in the amount of $15,112.15, of which $14,806.62 was alleged to be due on the ground that, pursuant to Section 124 of the New York Decedent Estate Law no part of the estate taxes should have been allocated to or charged against the portion of the residuary trust passing to the surviving spouse, which qualified for the marital deduction. Therefore, according to plaintiffs, the surviving spouse was entitled to a marital deduction of $437,146.61, which represents one-half of the adjusted gross estate. While the total bequests to the surviving spouse were valued at $442,336.29, the estate is limited to a marital deduction of one-half of the adjusted gross estate - Section 2056(c)(1), Internal Revenue Code of 1954. If $437,146.61 is taken as the marital deduction rather than $385,734.73, the taxes due are only $97,089.55. Plaintiffs allege that they are entitled to the difference between this amount and $111,896.17, the tax originally paid.
Plaintiffs also allege that they are entitled to $305.53 on the ground that the estate paid this amount in Canadian estate taxes and never claimed a credit in its tax return.
The Government contends that not only was the original return correct in reducing the marital deduction by a portion of the federal estate tax, but in addition, the return should have further reduced the marital deduction by a pro-rata share of the New York State death taxes. While the time for an additional assessment by the Government has expired, the Government nevertheless contends that the claim for credit for taxes paid to Canada must be offset by the increase in tax due to the Government by the estate's alleged failure to reduce the marital deduction by an aliquot share of the state death taxes.
The principal dispute between the parties concerns the application of Section 124 of the New York Decedent's Estate Law.
Both parties agree that for the purpose of computing the marital deduction, the allocation of estate taxes should be determined pursuant to state law. Riggs v. Del Drago, 317 U.S. 95, 87 L. Ed. 106, 63 S. Ct. 109 (1942). In Riggs, the Supreme Court held that Section 124 is not in conflict with the federal estate tax law.
"We are of the opinion that Congress intended . . . that the applicable state law as to the devolution of property at death should govern the distribution of the remainder and the ultimate impact of the federal tax . . . Its legislative history indicates clearly that Congress did not contemplate that the Government would be interested in the distribution of the estate after the tax was paid, and that Congress intended that state law should determine the ultimate thrust of the tax." pp. 97-98.
Section 124 provides in effect that, except as otherwise directed by the decedent's Will, the burden of any federal death taxes paid by an executor shall be spread proportionately among the distributees or beneficiaries of an estate.
Decedent's Will was executed on June 22, 1948, and the codicil thereto was executed on January 12, 1956. After certain specific bequests, the testator by his will bequeathed the residue of the estate to trustees, in trust, to pay the income and principal as follows:
(a) 1/4 of the income to his mother, and upon her death, the said portion to be added to his wife's share.
(b) 3/4 of the income to his wife (Janet), until she reaches the age of fifty.
(c) When his wife (Janet) reaches the age of fifty, 1/2 of the principal is to be paid to her.
(d) 3/4 of the income from the remaining 1/2 of the principal is to be paid to Janet until she reaches the age of sixty, at which time the other 1/2 ...