Plaintiffs herein, executors and trustees under the will of Samuel Kapnek, deceased, seek to recover from the defendants, who are his beneficiaries by virtue of certain insurance policies and inter vivos transactions, such amount as is required to pay the state inheritance taxes, the federal succession taxes and administration expenses in connection with the above entitled estate. The facts in connection herewith are as follows:
Samuel Kapnek died on August 18, 1950 leaving a will which was admitted to probate by the Atlantic County Surrogate's Court on October 6, 1950. So far as here pertinent, said will provided:
"9. I direct that all estate, inheritance and succession taxes, on property passing under this will or otherwise, upon my estate, shall be paid out of principal thereof, to the same effect as if said taxes were expenses of administration, and all legacies, devises, and all other gifts of principal or income made by this will or any codicil hereto, or chargeable to such estate on account of any transaction included in any calculation for any such tax purposes, shall be free and clear therefor. In the absolute discretion of my executors they may pay such taxes immediately, or they may postpone payment of such taxes on future or remainder interests until the time possession thereof accrues to the beneficiary."
The entire estate of the said Samuel Kapnek consisted of personalty finally appraised at $59,822.81. The debts of said estate amounted to $17,245.62, leaving a net balance of $42,577.19. Inheritance taxes were levied by the State of New Jersey in the sum of $3,933.69 and succession taxes were levied by the United States in the sum of $66,553.73. There is therefore a deficit in the estate of $27,910.23 for taxes and such additional sum as may be required to pay the fees, charges and costs incident to the settlement of the estate.
In computing the foregoing taxes, there were included the proceeds of life insurance policies amounting to $78,042.35 and property transferred in contemplation of death, as well as the corpus of a trust created by the deceased during his lifetime, which latter items were valued at $194,499.94.
There is no dispute as to the right of the plaintiffs to recover and reimburse themselves. The sole question is the proportion of the tax deficit and administration expenses which the defendants must bear.
The Internal Revenue Code 1939, section 826(c) and (d), 26 U.S.C.A. § 826 (c, d), provides that unless the decedent had directed otherwise in his will, life insurance beneficiaries and recipients of properties over which the decedent had a power of appointment shall bear such portion of the federal estate tax as the value of the property received by them bears to the net estate of the decedent and the amount of the exemption allowed in computing that estate for federal estate tax.
The normal presumption arising under the Internal Revenue Code and the decisions interpreting the same, except under the foregoing circumstances, is that the tax should be paid out of the residue of the estate, without reimbursement from the beneficiary.
The Internal Revenue Code, section 826, subsections (c) and (d) read as follows:
"(c) Liability of life insurance beneficiaries.
Unless the decedent directs otherwise in his will, if any part of the gross estate upon which tax has been paid consists of proceeds of policies of insurance upon the life of the decedent receivable by a beneficiary other than the executor, the executor shall be entitled to recover from such beneficiary such portion of the total tax paid as the proceeds of such policies bear to the sum of the net estate and the amount of the exemption allowed in computing the net estate, determined under section 935(c). If there is more than one such beneficiary the executor shall be entitled to recover from such beneficiaries in the same ratio. In the case of such proceeds receivable by the surviving spouse of the decedent for which a deduction is allowed under section 812(e) (the ...