In Re the Accounting of Tuttle

300 N.Y. 1 | NY | 1949

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] The question for decision in this case is whether an insurance company, which promptly paid the proceeds of a life insurance policy directly to the beneficiary on the death of the insured, is liable to the executor of the latter for that portion of the Federal estate tax attributable to the proceeds of such policy which were paid by the executor to the Federal taxing authority. The problem arises because the beneficiary, having squandered the proceeds of the policy, died destitute, before it was realized or determined that the proceeds of the policy should have been included in the gross estate for Federal estate tax purposes. The Appellate Division has reversed the Surrogate's ruling that the carrier is liable for such tax. The issue thus presented involves the determination of whether section 124 of the Decedent Estate Law or any applicable provisions of the Internal Revenue Code (U.S. Code, tit. 26) authorize collection by the executors from the insurance carrier. Stated otherwise, the question is whether under either State or Federal law an insurance carrier is constituted a withholding agent for the collection of estate taxes so as to impose liability upon it for possible taxes assessable against the proceeds of policies paid over to a beneficiary.

Bernhard Zahn, the insured under a $50,000 policy issued by the Equitable Life Assurance Society of the United States, died in May, 1937. In July, 1937, Ada E. Zahn, beneficiary, received the entire proceeds of the policy. In 1940, upon a reaudit of the estate after a claim by the executors for refund of Federal estate taxes, the Treasury Department increased the gross estate by including therein the amount of the $50,000 policy and assessed a deficiency, on the authority of the ruling of the Supreme Court of the United States in Helvering v. Hallock (309 U.S. 106). The ruling was said to be applicable because the insurance moneys were payable to the executors of the insured's estate in the event that the beneficiary pre-deceased the insured. The executors effected a compromise and paid the claim on May 31, 1941. Thereafter they undertook a final settlement of their accounts and petitioned for an order directing payment by the proper parties of proportionate shares of estate taxes paid by the executors. Ada E. Zahn and Equitable were named in the alternative as holders of taxable interests. Ada E. Zahn had died, destitute, in 1940, having previously dissipated the funds of the policy received by her. It was not until the filing of the executors' supplemental account and petition in 1945 that any formal action was taken to have that portion of the Federal estate tax allocable to the policy of life insurance charged against the insurance carrier.

The executors have appealed from the order of the Appellate Division on the ground that section 124 of our Decedent Estate Law and section 827 of the Internal Revenue Code compel a conclusion that Equitable is liable for the tax.

The purpose in enacting section 124 was to alleviate the burden of an entire estate tax falling on the residuary estate of a decedent and to provide statutory authority for an equitable apportionment of both Federal and State estate taxes as against all transfers of property included in the gross estate (Report of Comm. to Investigate Defects in the Laws of Estates, N.Y. Legis. Doc., 1930, No. 69, p. 197). Estate taxes are to be apportioned among the "persons interested in the estate". Generally such apportionment will be made before any distribution of funds by the executor, and no difficulty will be encountered in charging the prorata share of taxes to individual bequests. However, where property required to be included in the gross estate does not come into the possession of the executor, he must seek reimbursement of the proportionate share of taxes attributable to such property. The statute specifically provides for this contingency. In such cases the executor shall be entitled, and it shall be his duty, to recover the proportionate amount of the tax from "whomever is in possession" of the taxable property or from the "persons interested in the estate". By reference to section 249-m of the Tax Law we are given the definition of "persons interested in the estate". Such persons are those "who may be entitled to receive or who have received any property or interest which is required to be included in the gross estate of a decedent, or any benefit whatsoever with respect to any such property or interest".

The executors' right to seek reimbursement from the insurance carrier under authority of section 124 depends upon whether the insurance carrier reasonably falls within one of the two classes of persons named in the statute. Under the facts of the instant case, the insurance carrier cannot be said to be either one in possession of the property or a person interested in the estate.

Section 124 in effect provides that an executor, after paying the Federal and State estate taxes, may apply to the Surrogate to have the amount of the tax so paid (unless the will of the decedent otherwise directs) "equitably prorated among the persons interested in the estate to whom such property is or may be transferred or to whom any benefit accrues." The second paragraph of section 124 reads in part as follows: "In all cases in which any property required to be included in the gross estate does not come into the possession of the executor as such, he shall be entitled, and it shall be his duty, to recover from whomever is in possession, or from the persons interested in the estate, the proportionate amount of such tax payable by the persons interested in the estate with which such persons interested in the estate are chargeable under the provisions of this section, and the surrogate may by order direct the payment of such amount of tax by such persons to the executor."

Since Equitable paid out the entire proceeds of the policy to the beneficiary in 1937, it is not now in fact "in possession" of any of the proceeds of the policy. According to the Surrogate, Equitable might be deemed still in possession on the theory that the proceeds were segregated into two separate funds at the moment of insured's death (one for the payment of the tax, the other for the beneficiary) and Equitable failed to pay over to the proper party the fund segregated for payment of taxes. Under the Surrogate's theory, the insurance company becomes in effect a withholding agent for the taxing authorities. Section 124 is an apportionment statute, not a taxing statute; collection by the executor or administrator is authorized merely to insure that apportionment will be accomplished. Alternative categories are described to insure prompt and equitable reimbursement of the executors. If the "person interested in the estate" is not in possession of the property, the statute authorizes collection from "whomever is in possession". The period for determining "possession" is at the time when the executor seeks reimbursement. In Matter of Scott (249 App. Div. 542, affd.274 N.Y. 538) we affirmed the holding of the Appellate Division that an insurance company could be held liable for the proportionate share of the tax attributable to proceeds of insurance policies held on deposit by it. It was there thought that a sufficient change in the nature of the holding had taken place to justify an assertion that the insurance company was "in possession" of the property though the funds had not been segregated from the general funds of the company. That case did not hold, however, that the funds on deposit with the company had been segregated so as to reserve a portion for taxes and the remainder for the beneficiaries.

Appellants urge that liability should be imposed upon the insurance company as a "person interested in the estate", since it "received" the property and obtained a "benefit" upon discharge of its obligation. Such an interpretation is an unnecessarily strained application of the statute and results in an unwarranted distortion of the definition. We hold that a "person interested in the estate" can only mean a person who has a beneficial interest in the estate and who expects to share, or has received a share of assets left by the decedent.

Since section 124 furnishes no authority for the executors' attempt to recover from the insurance carrier, we must look therefore to the provisions of the Internal Revenue Code for any sanction for their action.

The Internal Revenue Code makes no provision generally for apportionment of Federal taxes assessed against an estate. The tax is upon the gross estate as such and is paid by the executor from the estate. He alone is liable to the Federal Government. The ultimate incidence of the estate tax is a matter of State law (Riggs v. Del Drago, 317 U.S. 95). However, the Federal statute specifically provides for recovery by the executor of taxes paid on proceeds of insurance receivable by a beneficiary other than the executor (U.S. Code [1940 ed.], tit. 26, § 826, subd. [c]). Under that section 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" (emphasis supplied). It is clear that under this section a beneficiary of insurance proceeds is the only one upon whom liability is cast. Subdivision (b) of section 827 imposes personal liability for the proportionate share of unpaid taxes attributable to property not coming into the hands of the executor but liability under this section is limited to a "transferee, trustee, or beneficiary". An insurance company is not a transferee or trustee and is therefore not covered by the statute. (John Hancock Mut. Life Ins. Co. v. Helvering,128 F.2d 745 [C.A.D.C., 1942]; Hughes v. Sun Life Assur. Co.,159 F.2d 110 [C.C.A. 7th, 1946].)

There may be good reasons for making the insurance company responsible for the tax. There are equally good, if not more impelling, reasons why such a course would be undesirable. In view of the uncertainty of the amount of the tax until the entire gross estate is ascertained, a lapse of several years could ensue before payment might be made under a policy. The instant case furnishes a good example of the difficulties which might be encountered. Liability should be imposed, if at all, only upon clear and unmistakable statutory language to that effect.

The order of the Appellate Division should be affirmed, without costs.

LOUGHRAN, Ch. J., LEWIS, CONWAY, DESMOND, DYE and FULD, JJ., concur.

Order affirmed.