29 Misc. 2d 648 | N.Y. Sur. Ct. | 1961
Objections to the account of the surviving trustee have been filed by the representatives of a deceased income beneficiary. The objections pertain to a charge against income for the beneficiary’s purported share of income tax payable for the year 1957. It is the contention of the objectants
Sales of trust securities in 1957 resulted in net capital gains of approximately $147,200 and an income tax, computed on such gains, was paid from the trust principal. The fact that the tax on a capital gain is chargeable against the principal account into which the gain is paid is a matter beyond dispute (Matter of Lissberger, 188 Misc. 811; Gilbert v. Wise, 192 Misc. 101; Matter of Hecht, 7 Misc 2d 326) and the question presented by the objections does not involve this fundamental rule of trust administration but arises solely by reason of the concept of “distributable net income ” which was introduced into the tax law by the 1954 Internal Revenue Code (§§ 643, 651, 652). Prior to that code the tax statute did not permit deductible items paid from a trust principal to be applied in reduction of the income currently taxable to the beneficiary and the result was that, in the absence of a tax liability payable from principal, such as a liability arising from a capital gain, principal deductions could not be utilized and were wasted. Under the 1954 code deductible items, such as attorneys’ fees and principal commissions, although charges against the trust principal, could be applied in reduction of the distributable net income. Unfortunately, the code permits such deductions to be applied against capital gains credited to principal only to such extent as the total of the available deductions exceeds the amount of the gross income required to be included in the distributable net income. The result is that deductible items paid from trust principal reduce the tax of the income beneficiary in the first instance and the result very well may be that trust principal will acquire no tax advantage from the charges which it has borne.
In his account the trustee charged the income beneficiary with the sum of $15,461.25 as her share of the income tax payment of $30,200, upon the basis that, had the Internal Revenue Code permitted the deduction of principal expenses from the capital gains, the tax payable by trust principal would have been but $6,500, rather than $30,200, and the tax on trust income would have been the amount charged the beneficiary in the account. The account states that ‘ ‘ The charge against income was limited to the lesser of (1) the saving which would have been incurred if the administration expenses payable from principal had been used as deductions from the capital gains taxable to principal and (2) the saving which was in fact incurred by reason of the use of such deductions in reducing distributable net income taxable to the income beneficiary.”
A situation which is somewhat analogous is found in the history of estate tax apportionment in this State. When the transfer tax, which assessed a tax upon the transfer of particular property to a particular person, was replaced by the estate tax, which assessed a tax upon the entire estate without regard to the identity of the transferees (Knowlton v. Moore, 178 U. S. 41; Matter of Hamlin, 226 N. Y. 407), the burden of the estate tax was imposed upon the residuary estate of a testator not only as to the testamentary property but also as to nontestamentary property required to be included in the taxable estate. The operation of the Tax Law was inequitable to residuary legatees, who in most estates were the widow,