
    Matter of the Accounting of Henry R. Hoyt and Alexander T. Mason, as Executors of the Will of Charles P. Daly, Deceased.
    (Surrogate’s Court, Suffolk County,
    April, 1902.)
    Inheritance tax — Payment, in case of a legacy in trust for life with remainder over.
    The rule that inheritance taxes on a money legacy may be deducted . from the principal by the executors of the will does not apply to a legacy given them in trust for the benefit of one person for life with remainder to another, as neither of these latter persons succeeds to or has anything more than a legal night in the fund and from such right- no such deduction can be made.
    In such ease each beneficiary must pay his own tax and on the basis of his interest in the fund, and, failing payment, nothing can be sold but the right in the fund of the party making default.
    The tax of the life tenant is payable from income while the tax of the remainderman is presently payable by him unless, if it be a transfer tax, he gives a bond to pay it when he comes into actual possession or enjoyment of his beneficial interest.
    Objections by the Hew York Botanical Garddn to payments made by executors under the War Revenue Law, involYing similar payments made under Transfer Tax Law.
    
      Frederic D. Philips, for executors.
    Charles K. Carpenter, special guardian.
    Robert D. Benedict and Addison Brown, for Hew York Botanical Garden.
   Petty, S.

Under the objections the question for determination is from what source the taxes levied under the Transfer Tax Law and War Revenue Law are to be paid.

The will makes three bequests in which the Botanical Garden is interested. First, a legacy of $20,000 to the executors, as trustees, to pay the income to Rosalie Staples for life, reversion to the Garden; second, a legacy of $20,000 to the executors, as trustees to pay the income to Paul B. du Chaillu for life, one-twelfth reversion to the Garden; and third, a legacy to the Garden of one-twelfth of the residuary estate. The Garden has been exempted from the payment of any transfer tax, but has been taxed under the War Revenue Law as follows;

Value.

Reversion in Staples trust fund.....$10,786 20

Reversion in du Chaillu trust fund. .. 999 05

Residuary legacy................ 15,345 53

Tax.

$808 97 74 93 1,150 92

$27,130 78 $2,034 82

The entire tax assessed against the garden has been paid by the executors, the amount thereof being obtained by deducting it from the Garden’s residuary legacy. To this the Garden objects, claiming that the tax of $1,150.92 on the residuary legacy itself is alone deductible from it and that the tax of $808.97 on the garden’s reversion in the Staples trust and the tax of $74.93 on its reversion in the du Chaillu trust should be deducted from the principal of those trusts respectively. In other words the claim of the Garden is that the tax on its remainder is payable from the principal of the fund. The source of the payment of the tax on the life tenant’s interests is also to be considered.

It is well settled that inheritance taxes are not taxes on property nor on persons, but upon the “ transfer ” or passing ” of legacies or distributive shares. For the privilege to bequeath property the State exacts a certain percentage thereof which must be deducted before it reaches the hands of the beneficiary. United States v. Perkins, 163 U. S. 625; Knowlton v. Moore, 178 id. 41; Estate of Swift, 137 N. Y. 77. The Garden claims, therefore, that the tax assessed against it under the two trust funds should be deducted from those funds, citing also the New York Tax Law, §§ 223, 224, and Matter of Hoffman, 143 N. Y. 327.

I am prepared to agree with the position taken by the Garden so far as ordinary money legacies are concerned, but am of the opinion that the rule of deducting the tax from the principal applies to such legacies only and not to the principal of trust funds involving life estates and remainders. The only proper and legal test to be applied is to inquire what the legal method may be for the collection of these taxes when those whom the law charges with payment refuse to pay. Obviously whatever method the law provides to enforce payment must show the legal manner in which payment may be made voluntarily.

I find nothing in the State or Federal statutes requiring the tax on the interest of the Garden to be paid out of the principal of the trust funds. It is conceded that each beneficiary must pay his own tax. In the case of a money legacy no question arises. The tax is deducted from it and the balance paid to the legatee. It is clear also that the statutes contemplate but one rule for all interests whether direct legacies in money, specific legacies, direct devises or life interests in personal or real property. It is equally clear that there can be no actual deduction in case of life tenants and remaindermen because neither are given a sum from which' such deduction can be made. Section 224 of the State Tax Law provides that an administrator or executor having any legacy or property for distribution “ shall deduct the tax therefrom.” So much for money legacies, i. e., legacies payable once and for all to the legatees specified in the will. The same section, however, provides further “ if the legacy or property be not in money, he shall collect the tax thereon upon the appraised value thereof from the person entitled thereto,” and the same provision is made for the tax on specific legacies and real estate. A sharp distinction is, therefore, drawn between money legacies and other interests. From the latter no deduction can he made because there is nothing to deduct from. Bearing in mind that it is only what “ passes,” what is transferred ” which can he considered, it follows that what passes to the Garden is not money nor a money legacy. The transfer ” to the Garden is of a right to receive $20,000 at a certain time. What is “ transferred ” to the life tenant is the right to receive the income which may accrue on the $20,000 during her life. She gets none of the property or estate left by the testator hut something which accrues after his death. Each gets a right under the will from which there can he no deduction. The collection of the tax on these interests must, therefore, he made in the manner prescribed for interests other than money legacies and this is to collect the tax from the beneficiaries themselves. § 224, supra.

I am aware that it has been held that the tax on the life interest is payable out of income and the tax on the remainder out of principal (Matter of Johnson, 20 N. Y. St. Repr. 134; 6 Dem. 146), and with so much of Surrogate Lott’s opinion as provides for the payment of the life tenant’s tax out of income I agree. I join with Surrogate Ransom, however, in his dissent from the view that the tax on the remainder is payable from the principal. Estate of Beal Cockey, Surr. Decs. 1893, p. 182; Matter of McMahon, 28 Misc. Rep. 697; Matter of Clark’s Estate, 5 N. Y. Supp. 199; 1 Con. 431.

To deduct the tax on the interest of the Garden from the principal of the trust funds it must first be held that the trustees to whom the fund has been paid are legatees and this is in fact the claim of the contestant. They are not, however, legatees within the meaning of the statute.

True, they have the legal title to the $20,000 just as direct legatees have the legal title to their respective legacies. But there is this distinction. Direct legatees have the legal title and own the legacy to do with as they will. The money is theirs as against all mankind. The trustees cannot do as they will with the trust fund nor can it he applied to their own use. It is of no benefit to them whatever but rather a burden. The legatee within the meaning of the statute is he to whom a legacy is payable once and for all, payment of which discharges all obligations as to that sum of money and he may the next moment squander it, destroy it, do with it as he will without fear of legal criticism. Hot so with trustees. They take, it is true, the bare legal title but for the sole benefit of others, nor«can they hold such title beyond a specified time. Their legal designation is not legatees but rather custodians. They are like plaintiffs in interpleader suits who apply to the court for advice saying we are merely stakeholders of so much money, various defendants each claim the fund, we have no interest therein save to protect ourselves from litigation by making proper payment thereof and ask the court to determine to which defendant we may properly pay. They are like agents designated by an absent landlord to collect the rents from his real estate. The testator denies this right to both the life tenant and remainderman but charges it as a duty upon the trustees. They are not the real parties in interest nor are they in fact taxed. It would simplify matters much and relieve the courts from much labor if they could be regarded as legatees. If so regarded, the two notices required by the statute, without which the taking of the tax would be illegal (Matter of Daly, 34 Misc. Rep. 148; 69 N. Y. Supp. 494, citing Matter of McPherson, 104 N. Y. 306), would be sent to them only. The life tenant and remainderman would not be parties. Section 232, directing computation of the interests for life and in remainder by the Insurance Department would be wholly nullified and the $20,000 trust fund would be taxed at 5 per cent, and the $1,000 tax deducted therefrom the same as if it were a direct legacy. It would be but an additional step to hold that every executor is a legatee of the entire personal estate of his testator, having the legal title thereto, and that he alone should be notified and taxed.

The authority given the executor to enforce collection of the ■tax by a sale of the property while it mentions the property as that of the decedent (§ 224, sufra), must be held to mean not -the property of the testator indiscriminately for then property given to one exempt from tax might be seized in satisfaction. It must rather be held to mean the property of the decedent passing ” to each beneficiary. Upon the refusal of the life tenant, therefore, to pay the tax the property subject to sale is her interest in the trust fund or what “ passes ” or is “ transferred ” to her by the will. Likewise it is what passes to the remainderman which is subject to sale. In neither case is it the actual property owned by the testator at his death.

Analogous cases are those involving the determination of the assessment of damages against real property held by a life tenant and remainderman for improvements made under statutory authority. The general rule in these cases is well settled. Both life tenant and remainderman are assessed according to the value of their respective interests in the property, not according to the value of the property itself and each must pay his own tax. Should payment of such assessment be enforced against either by sale it is the interest of each in the property which is subject to sale not the property itself. To sell the property itself to collect the tax against one would be selling in part the property of the other. Chamberlin v. Gleason, 163 N. Y. 214.

The tax in this ease should be enforced the same as if the $20,000 trust fund were a specific legacy or real estate. If a life use of 20,000 books were bequeathed to Mrs. Staples for life, remainder to the Garden the books could not be sold to pay either the tax on the life interest or on the remainder. The right to use the books for the life of the tenant could be sold as could the remainder in the books but the books, i. e., the principal, would remain intact. So of life interests and remainders in real estate. If either or both are taxed, sell the life estate or the remainder as the case may be to raise the tax but never the real estate or principal itself.

Thus one rule is provided for all cases and one which is fair to all. In money legacies deduct the tax from the legacy. In other interests collect the tax from the beneficiaries or sell their interests. In every case it is what passes ” that is taxed and subject to sale whether under the State or the Federal statute.

I conclude, therefore, that the tax on the life interests in the two trust funds is payable from the income accrued thereon and that the tax upon the remainder interests is payable by the remainderman, neither tax to be deducted from the principal of the trusts. I understand that the executors have proceeded on this theory, at least in effect.

This conclusion, however, must not be taken as authorizing executors to deduct at their pleasure taxes on remaindermen’s interests from direct legacies due such remaindermen. Under section 226 of the State law the remainderman has the right to elect whether he will pay his tax now or when he comes into the actual possession of the principal. Ho statutory authority in fact exists for such a deduction at any time, the remedy being a sale of the interest in case the remainderman neither pays the tax nor gives the bond.

The same sale being provided for in the Federal statute, the remainderman must either pay, if the above conclusion is correct, or suffer a sale of his interest and bear the costs and expenses in addition. The deduction and payment of the Federal tax as made by the executors is, therefore, in the interest of the Garden and it can hardly complain at this time that its property was not sold for the payment of the tax involving, as such procedure would, considerable loss to itself in addition to its tax.

The objections to the form of the executors’ account necessarily fail under the above ruling. The account will, therefore, be approved as filed.

The objection to counsel fees was not insisted upon and in any event I doubt the power of a court to control the future services of counsel. Ho direction, therefore, will be made in this regard.

As to the retention of part of the assets in the executors’ hands for future contingencies I deem it reasonable that they be allowed to retain something for working capital in view of the large amount of assets on hand unconverted and at present of nominal value, in case such assets should within a reasonable time become of some worth. The entire residuum, however, belongs to the residuary legatees and such part as may be retained by the executors must be held by them in trust for such residuary legatees with payments in any other direction to be made only on application to the court and notice to such legatees. On such money also' the executors must pay interest. They may retain the sum of $5,000.

Settle all remaining matters on notice.

Decreed accordingly.  