#### FARMERS LOAN & TRUST COMPANY, GEORGE ARENTS, JR., AND ANNIE A. ARENTS, AS EXECUTORS OF THE LAST WILL AND TESTAMENT OF GEORGE ARENTS, DECEASED, v. THE UNITED STATES

[No. D-218.

Decided February 20, 1928]

*On the Proofs*

*Income tax; return t>y executors; deduction of State estate-trcmsfer tax.*— Where the executors of an estate, in conformity with a regulation of the Commissioner of Internal Revenue, which is afterwards overruled by the courts, omit to deduct in their return of net income for the year 1918 a State estate-transfer tax paid during that year, and pay over an income tax thereon, they are, under the revenue laws, entitled to sue for and recover the income tax so paid notwithstanding the absence of protest. .Section.252, revenue act of 1918, and other statutes construed.

*517*The Reporter's*statement of the case:

*Mr. Heber Smith*for the plaintiff. *Mr. John D. Watkins*and *Miller <& OhevaHer*were on the brief.

*Mr. Ottamar Hamele,*with whom was. *Mr. Assistant Attorney General Herman J.*Galloway, for the defendant. *Mr. J. Robert Anderson*was on the brief.

The court made special findings of fact, as follows:

I. George Arents, a citizen of the United States and a resident of the city, county, and State of New York, died on the 22d day of February, Í918, leaving a last will and testament and codicils thereto, ,which will and codicils were duly admitted to probate in the surrogate’s court of the county of New York on the 5th day of March, 1918, and letters testamentary thereon were issued to the Farmers Loan & Trust Company, George Arents, jr., and Annie A. Arents, executors, by said court on the same date. Said executors thereupon duly qualified and entered upon the performance of their duties, and have ever since continued, and are now acting as such.

The Farmers Loan & Trust Company, George Arents, jr., and Annie A. Arents, the executors of the last will and testament of George Arents, deceased, were at the time of the filing of this action, and are now, citizens of the United States; the Farmers Loan & Trust Company being a corporation organized under the laws of the State of New York and having its principal place of business at No. 16 William Street, in the Borough of Manhattan, city of New York; the said George Arents, jr., residing in the town of Harrison, county of Westchester, State of New York, and the said Annie A. Arents residing at No. 820 Fifth Avenue, in the Borough of Manhattan, city of New York.

II. The items or paragraphs of the last will and codicils thereto of George Arents that are material in the consideration of this case are as follows:

*“*Second. I give and devise to my wife, Annie A. Arents, to be hers, absolutely, the lot, and dwelling house thereon, in the city of New York, which I occupy as a residence, and now known as Number Thirty-eight West Fifty-seventh *518Street, with the appurtenances thereto; also the household furniture, carpets, rugs, books, pictures, ornaments, statuary, silver plate, linen, china, stores, and all other personal property therein contained used in connection therewith; also my electrical vehicles, motor cars, and stable or garage'equipment of every kind in the city of New York.

“ Third. I give and bequeath to my sai.d wife the sum of two hundred thousand dollars.

“ Fourth. I give and bequeath to my son, George Arents, junior, the sum of two hundred thousand dollars.

“ Fifth. I give and bequeath to my granddaughter, Dorothy Humphreys, the sum' of one hundred thousand dollars.

“ Sixth. I direct the executors of this my will to set apart out of my estate, either in cash or in stocks, bonds, or other securities at a value to be determined absolutely by them, and whether-securities in which a trustee is authorized by law to invest or not, or partly in cash, and partly in such stocks, bonds, or other securities, a fund of one hundred thousand dollars, which fund I give and bequeath to the Farmers Loan & Trust Company of New York, in trust, nevertheless, to invest and. reinvest the same; to collect and receive the income thereof; to apply so much of the net income thereof as it may deem necessary and proper to the use of George Arents Humphreys, the son of my granddaughter Dorothy Humphreys, but only in connection with his education, until he shall attain the age of twenty-one years, and to accumulate during his minority the balance thereof for his benefit; and to pay over, transfer, and deliver the principal of such trust fund, with any such accumulations, to him on his attaining the age of twenty-one years, to be his absolutely; but if he shall die under the age of twenty-one years, then upon the happening of that event to pay over, transfer, and deliver the principal of said trust fund and any such accumulations to his mother, Dorothy Humphreys, to be hers absolutely.

“ The receipt of the mother of my said great-grandson, or in case of her death, the receipt of his guardian, shall be a full acquittance of said trustee for all sums herein directed to be applied to his use during his minority.

“ SeveNth. I give and bequeath the sum of .fifty thousand dollars to each of my sisters, Joana B. Arents, Grace Arents, and Minnie E. Young.

“ Eighth. I give and bequeath to Mary Walter Edey, my wife’s sister, the sum of one hundred thousand dollars.

“ Ninth. I give and bequeath to my nephew, Lewis Ginter Young, son or the late Albert Young, the sum of one hundred thousand dollars.

*519“ Tenth. I direct the executors of this my will to set apart out of my estate, either in cash or in stocks, bonds, or other securities at a value to be determined absolutely by them, and whether securities in which a trustee is authorized by law to invest or not, or partly in cash and partly in such stocks, bonds, or other securities, a fund of one hundred thousand dollars, which fund I give and bequeath to the Farmers’ Loan & Trust Company of New York, in trust nevertheless, to_ collect and receive the income thereof, and to pay over the net income thereof to my niece, Edna Young Benchley, daughter of the late Albert Young, during her lifetime; and upon her death I give and bequeath the principal of said fund to her daughter, Grace Dietrich, if then living, to be hers absolutely; and if her said daughter be not then living, then in that event I give and bequeath the same to the next of kin to my said niece, per stirpes and not per capita.

“ EleveNth. I give and bequeath to my secretary, J. S. Gillespie, if he be in my employment at the time of my death, the sum of five thousand dollars.

“ Twelfth. All ■ the rest, residue, and remainder of my property, real and personal, and of every kind and description, and wheresoever situated, which I shall own at the time of my death, I direct my executors, hereinafter named, to divide into six equal parts, which I give, devise, and bequeath as follows:

“ I. To my said wife, one of said parts, to be hers absolutely.

“ II. To my said son, two of such parts, to be his absolutely.

“III. To the Farmers’ Loan & Trust Company of New York, one of said parts, in trust nevertheless, to invest and reinvest the same; to collect and receive the income thereof; and to pay over to my wife the net income thereof during her lifetime, and upon her death I give, devise, and bequeath the principal of such part to my son, George Arents, junior, to be his absolutely.

“IV. To the Farmers’ Loan & Trust Company of New York, two of said parts, in trust nevertheless, to invest and reinvest the same; to collect and receive the income thereof, and to apply the net income thereof to the use of my granddaughter, Dorothy Humphreys, during her minority; and thereafter to pay over to her such net income during her lifetime. Upon the death of my said granddaughter, I give, devise, and- bequeath the principal of said two parts to her issue then living, per stirpes and not per capita, to be theirs absolutely; and in default of such issue of hers then living, I give and bequeath the same to my son, George Arents, junior, to be his absolutely.

*520“The receipt of the guardian of my said granddaughter shall be a full acquittance to said trustee for all sums herein directed to be applied to her use during her minority.

“ FotjrteeNth. I direct that any and all transfer, succession, or legacy taxes that may be levied on my estate or become payable in respect of any interest passing under this will, including all such taxes upon interest for life or in remainder in my said residuary estate, be paid by my said executors out of the principal of my residuary estate.”

That part of the first codicil that is material in the consideration of this case is as follows:

“ First. I give and devise to my granddaughter, Dorothy Arents Humphreys, for and during her natural life, the lands and premises, with their appurtenances, situated in the township of ‘Morris, county of Morris, and State of New Jersey, which she now occupies as a residence, and being the same lands and premises conveyed by her and Frederick P. Humphreys, her husband, to me by deed dated the ninth day of February, in the year one thousand nine hundred and seventeen, and upon her death I give and devise the same to her issue then living, per stirpes and not per capita, to be theirs absolutely, and in default of such issue of her then living, I give and devise the same to my son, George Arents, junior, to be his absolutely.”

III. During the year 1918, the Farmers’ Loan and Trust Company, George Arents, jr., and Annie A. Arents, as executors of the will of George Arents, deceased, instituted in the surrogate’s court of the county of New York a proceeding for the determination of the transfer tax which might be due the State of New York in respect to the property transferred by the will of George Arents, deceased. In said proceeding, William J. Campbell, appraiser, filed in the surrogate’s court his appraisal of the estate of George Arents, deceased, and on or about the 4th day of November, 1918, an order was made and entered by said surrogate’s court therein assessing a transfer tax upon the interests passing under the will of said George Arents, deceased, in the sum of $864;816.56. The appraiser valued the gross personal estate left by George Arents at $9,894,648.42; the gross real estate at $146,000, and the total estate consisting of both real estate and personalty at $10,040,643.42. Certain *521deductions from the gross estate were allowed and the value of the net taxable estate was fixed at $9,496,152.35. The net estate passed to the legatees and devisees named in the will of said George Arents, deceased, and after deduction of exemptions was taxable to them in the following

proportions:

Annie A. Arents_$2, 235, 359.60

George Arents, jr- 3, 760, 765. 58

Dorothy Humphreys- 2,219,440. 00

George Arents Humphreys- 51, 392.00

Joana B. Arents_ 50, 000.00

Grace Arents_ 50,000.00

Minnie B. Young_ 50,000.00

Mary Waiter Edey_ 100, 000. 00

Lewis Ginter Young_ 100,000.00

Edna Young Benchley- 70, 826.00

J. S. Gillespie_ 5, 000.00

George Arents, 3d_ 51,358.00

Trustees for the benefit of persons of the 1 per cent

class_ 669, 259. 00

Trustees for the benefit of persons of the 5 per cent class_ 27,984.00

The surrogate’s court by a proper order assessed transfer taxes against the interests passing under said will as follows:

Beneficiary Tax

Annie A. Arents_$86,164.38

George Arents, jr_ 147,180.62

Dorothy Humphreys_ 85, 527.60

George Arents Humphreys- 777.84

Joana B. Arents_ 1,250.00

Grace Arents- 1,250.00

Minnie E. Young_ 1,250. 00

Mary Walter Edey_ 5, 750.00

Lewis Ginter Young_ 5, 750.00

Edna Young Benchley_ 3,999.56

J. S. Gillespie_ 250.00

George Arents, 3d_ 777.16

Trustees for the benefit of persons of the 1 per cent class- 23, 520.36 Trustees for the benefit of persons of the 5 per cent class- 1,429.04

Total_ 364, 876. 56

On the 19th day of August, 1918, the said executors paid on account of said transfer tax assessed by said order of November 4, 1918, the sum of $340,000, and on November 19, 1918, they paid the sum of $6,981.83, which after deduct*522ing a discount of $17,894.73 allowed to the executors for payment within six months after the death of said George Arents, paid in full the transfer tax of $364,876.56.

IY. The total gross income received by the executors of said estate during the period from February 22, 1918, to December 31, 1918, was $509,784.67, of which $172,604.94 was income accrued to February 22, 1918, and $337,179.73 was income accrued after February 22, Í918.

Y. On the 15th day of March, 1919, the executors of the estate caused to be prepared and filed with the Collector of Internal Revenue for the Second District of New York returns of the income received by them during the year 1918. In making said returns they did not take into- consideration the fact that they had paid the transfer tax to the State of New York and did not claim any deductions from the income tax on account of the payment of the said transfer tax because at that time they were of the belief that under the law and the regulations of the Treasury Department they were not entitled to make any deductions on account of the payment of said transfer tax.

These returns were audited by the collector, and as a result of such audit an additional tax upon the gross income, as shown by the returns, amounting to $249.16, was added by the collector.

The whole of said taxes so assessed against the plaintiffs, as shown by the returns, was duly paid to the collector, as follows:

On Mar. 15, 1919-$20,089.93

On June 13, 1919_ 19, 560.32

On Sept. 12, 1919- 19, 560.33

On Dec. 14, 1919- 19, 560. 32

No protest of any kind was made by plaintiffs at the .time they made the payments of said tax, but said payments were made, as plaintiffs believed, in compliance with the regulations and rulings of the Treasury Department then in force and ,to avoid the imposition of penalties and the seizure and sale of property belonging to the estate.

Thereafter the said collector demanded the additional tax of $249.16, which the plaintiffs on the 23rd of December, 1920, paid under protest.

*523VI. Thereafter and on or about the 14th day of June, 1922, plaintiffs filed with the Collector of Internal Revenue for the Second District of New York a claim for. the ref mid of the whole of said tax of $79,020.06, and accompanied the same by an amended return of income. received by said executors during the year 1918, whereupon the amount of said tax so paid to the comptroller of the State of New York as a transfer tax was deducted from such income. The amended return shows no net taxable income for the year 1918.

VII. The claim for refund of $79,020.06 income tax paid for the year 1918 was rejected by the Commissioner of Internal Revenue and plaintiffs were notified of the rejection by letter addressed to the Farmers Loan & Trust Company, one of the coexecutors of the estate, and received by the Farmers Loan & Trust Company on March 10,1924, which letter is as follows:

“ Farmers Loan and Trust Co.,

“ *Executors Estate of George*Arents,

“ *William Street, New■ York, N. Y.*

“ Sirs : The claim for the refund of $79,020.06 income tax for the year 1918, filed for the estate of George Arents, has been examined.

*“*The claim is based on a duplicate assessment of taxes and a deduction for New York and New Jersey transfer taxes.

“Adjustment of the tax liability for this year, which has been explained in a separate communication from this office, results in an additional tax of $8,272.26. In arriving at the correct tax liability, credit has been given for the duplicate assessment.

“ The transfer taxes paid or accrued to the States of New York and New Jersey are not allowable as a deduction from the income of the estate. They are, however, allowable to the beneficiaries, and deductions'therefore will be made on their returns.

“ The claim, therefore, will be rejected.

“ The rejection will officially appear on the next schedule to be approved by the commissioner.

“ Respectfully,

“ J. C. Bright,

*“Deputy Commissioner,*

“ By-,

“ *Head of*Division.”

*524The court decided that plaintiffs were entitled to recover the sum of $79,020.06, with interest on the following amounts, parts thereof: $20,089.98 from March 15, 1919; $19,560.32 from June 13, 1919; $19,560.33 from September 12, 1919; $19,560.32 from December 14, 1919; and $249.16 from December 23, 1920, all to date of judgment, the total amount of recovery being $119,594.28.

Graham, Judge,

delivered the opinion of the court:

The plaintiffs are the executors of the last will of George Arents, who died on February 22, 1918. During the year 1918 plaintiffs paid to the State of New York a transfer tax of $364,876.56 on the estate of the decedent. On March 15, 1919, they made an income-tax return for the estate for the year 1918, and failed to claim a deduction of the transfer tax referred to, and voluntarily and without protest made payment to the United States in 1919 of the taxes due on said return amounting to $78,770.90. Thereafter the commissioner assessed an additional tax of $249.16, which was paid by plaintiffs under protest on December 23, 1920. Had the plaintiffs deducted the transfer tax there would have been no taxable income.

Plaintiffs on June 14, 1922, filed a claim for refund of the taxejs paid for 1918, and on March 10,1924, the commissioner rejected the claim on the ground that the transfer tax was not allowable as a deduction from the income of the estate but was allowable as a deduction to the beneficiaries and that the deduction would be made on their returns.

At the time this tax was paid the regulations of the Commissioner of Internal Revenue, who was authorized by statute, with the approval of the Secretary of the Treasury, to make regulations (section 1309, revenue act of 1918, 40 Stat. 1143; section 3447, Revised Statute/s), did not allow a deduction of a transfer tax paid on the estate of a deceased person. On April 12,1926, the Supreme Court of the United States, in *Keith*v. Johnson,, 271 U. S. 1, 9, decided that such a tax was deductible from the income of the estate during administration for the purpose of computing the net income subject to Federal income tax.

*525The defendant admits that if there had been a protest in this case, as there was in the ca^e of *Keith*v. Johnson, that case would be controlling. It claims there was no protest in this case and that for this reason the plaintiffs have no right to recover. It seems sufficient to rest this case upon section 252 of the act of 1918, 40 Stat. 1085, and other statutes to be mentioned.

> “ Sec. 252. That if, upon examination of any return of income made pursuant to this act, * * * ,it appears that an amount of income, war-profits, or excess-profits tax has been paid in excess of that properly due, then, notwithstanding the provisions of section 3228 of the Eevised Statutes, the amount of the excess shall be credited against any income, war-profits, or excess-profits taxes, or installment thereof, then due from the taxpayer und$r any other return, and any balance of- such excess shall be immediately refunded to the taxpayer: *Provided,*That no such credit or refund shall be allowed or made after five years from the date when the return was due, unless before the expiration of such five years a claim therefor is filed by the taxpayer.”

See also section 1316 (a) of the revenue act of 1918, 40 Stat. 1145, amending section 3220, Eevised Statutes, and section 252 of the revenue act of 1921, 42 Stat. 227. Section 1014 (a) of the revenue act of 1924, 43 Stat. 343, amending section'3226, Eevised Statutes, should also be considered, as it authorizes the suit whether there was payment under protest or not and gives expression to the intent and meaning of the acts above mentioned. It being made the commissioner’s duty to credit or refund the tax when the amount has been paid “ in excess of that properly due,” the purpose of the acts would be defeated if the credit or refund be confined to those payments which were made under protest. The acts were designed for the relief of the taxpayers who in the unsettled construction of many of the income-tax provisions coufd not have been apprised of the amounts due. The taxes were being audited. If too small an amount of taxes had been paid the commissioner would require an additional amount; if toó large a sum had been paid, it was simply a matter of justice that the refund should be made.

*526We bold that under the applicable acts no protest was necessary. There being no question as to the excess payment, plaintiffs are entitled to recover the amount claimed, with interest (see *Keith*v. Johnson, supra, and *United States*v. Emery, 237 U. S. 28), and it is so ordered.

Moss, *Judge;*Booth, *Judge;*and Campbell, *Chief Jus*tice, concur.