The opinion of the court was delivered by: MUIR
Frank E. Rodgers, a resident of Pennsylvania, died testate on September 7, 1966. The Plaintiff-executor filed an estate tax return which reflected a gross estate of $3,338,226.13 and a tax of $413,045.83. The Commissioner of Internal Revenue Service assessed a deficiency of $119,955.83 plus interest which Plaintiff paid. Plaintiff has brought this suit for refund of the disputed sum. Only a portion of the claim remains contested at this time.
This case turns on whether the marital trust set up by the will should bear any share of the federal and state death taxes. Basic to the resolution of this question are three provisions of the will: (1) that the inheritance and estate taxes are to be paid from the residuary estate; (2) that the residuary estate is to be held in trust for decedent's wife, son and grandchildren, with 50% of the residue to be placed in the trust for his wife, 25% for his son and 25% for his grandchildren; and (3) that notwithstanding any other provision of the will, the Executor shall not have any duties or authority if or to the extent that such would disqualify the wife's trust from the maximum marital deduction.
The Commissioner's contention that Rodgers intended to have the residue after taxes shared in a ratio of 2:1:1, between the trusts for his spouse, son and grandchildren, respectively, is based on two aspects of the bequest in trust: (1) the division of the residue into trust corpora in a precise ratio of 2:1:1;
and (2) the provision that the wife, son and grandchildren receive from their trusts minimum monthly payments of $3,000.00, $1,500.00 and $1,500.00 respectively, payments which are also in a ratio of 2:1:1. In order to achieve an after-tax ratio of the trusts of 2:1:1, the spouse's trust would have to be charged with a pro rata share of the death taxes. Thus the Commissioner concludes that not all of the spouse's half of the residue should receive the marital deduction.
In the leading Pennsylvania case of Erieg's Estate,
the decedent gave 67% of the residue of his estate to his wife and 33% to his niece. The will provided, as Rodgers' will does, that all taxes were to be paid from the residuary estate. The niece argued that the taxes should be deducted prior to the computation of the residuary legatees' shares; i.e., that the testator intended to give her 33% of the residue after taxes. The Pennsylvania Supreme Court rejected this argument. Stating that a widow is to be deprived of her favored tax treatment only on a clear showing that such was the testator's intention,
it found that the niece had not made the requisite showing. The Court noted that the provision for the taxes to be paid from the residuary estate was not probative of the critical question: from whose share of the residue the taxes should be taken.
The Court found that this "pay tax" provision had probably been included because
"at the time the will was written, Oct. 20, 1965, the statutory scheme of proration required that all beneficiaries, including those receiving specific pecuniary legacies, had to share the burden of paying the estate taxes. Act of August 24, 1951, amended by Act of December 22, 1965, P. L. 1204, 20 P. S. § 883(d). In light of this provision the decedent might well have added Item IV, which is not an uncommon clause, in order to insure the integrity of his specific bequests, and non-probate assets and not with any thought to affecting the proration of taxes between the two residuary legatees."
The Pennsylvania Supreme Court's view of the "pay tax" clause in Erieg applies with equal force to the similar clause in the instant will since there were no relevant legislative changes between October 20, 1965, the date of the will at issue there, and July 29, 1966, the date on which Rodgers' will was signed.
Another difference, and one of critical importance, is that Rodgers' will in para. VIIA3 (b) states
"3. I provide and direct that notwithstanding any other provisions contained herein, . . .
(b) That the Executor and trustee shall not have any rights, powers, privileges, duties, authority, immunities, or discretion, given by any other provision of this, my Last Will and Testament, if or to the extent that such would disqualify Trust A for the maximum marital deduction." (Emphasis supplied).
If the executor were to charge the taxes generally to the residue, the wife's share in residue would bear a portion of the taxes which would disqualify it from the maximum marital deduction. Such payment of taxes from the residue would be in direct conflict with para. VIIIA3(b), and the testator has directed that in such an event para. VIIIA3(B) prevails. Likewise, if the ratio of 2:1:1 of the minimum monthly payments were interpreted to require the executor to set up corpora in a ratio of 2:1:1 by charging the death taxes generally to residue before computing the distributive shares, the conflicting direction to obtain the maximum deduction for the marital trust would take precedence.
The direction to obtain the maximum marital deduction is the clearest and the predominant evidence of Rodgers' intent. His primary objective can be achieved here only if the wife's ...