revenue act, increased the rate imposed upon every portion of the total income, including the annuity itself, and yet under this method the annuitant would receive from the trustees in exoneration of the annuity no portion of the increased amount of tax upon the annuity consequent upon the increased rate of income tax and surtax. The result would be that by reason of the annuity an increased burden of income taxation has been placed upon the beneficiary, and contrary to the intention of the testator no portion of such increased burden is carried by the trustees.

The second method suggested is as follows:

"(2) By computing the tax upon the beneficiary's entire income from all sources and subtracting therefrom the tax which would be imposed if the beneficiary received no annuity from the trustees, and considering the balance as the amount of tax payable by the trustees."

This method is unfair to the trust estate and results in a payment by the trustees of a portion of the beneficiary's income tax which is in excess of the amount necessary to exonerate the annuity. By reason of the fact that the beneficiary's other income is placed in the same total with the annuity, the rates and the amount of tax ascribable to each

item of income are increased and

yet by this second method suggested

the whole increase is ascribed to the annuity and the whole of such increase would be paid by the trustees in exoneration of the annuity, thus relieving the other income of the beneficiary from all of the added burden of taxation placed upon it by reason of the fact that it had become a component part of a larger total of income. The purpose of the testator was that the beneficiary should receive the annuity free and clear of all income taxes and duties. It cannot, however, fairly be construed as his intention that the trustees should relieve the annuitant of any portion of the burden of increased taxation imposed upon that bene

ficiary's other income, even though under the revenue act such increase might result from the testator's bounty in creating the annuity.

The third possible method suggested for determining the portion. of the beneficiary's total income tax which should be paid by the trustees in exoneration of the annuity is as follows:

"(3) By computing the tax upon the beneficiary's entire income and apportioning it between the trustees and the beneficiary ratably in proportion to the amount of the annuity and the amount of income received from other sources, and considering the amount of tax so apportioned to the trustees as payable by them."

of annuity free

This appears to us to be the equitable method. The annuity and the Wills-bequest other income of the from taxationmethod of combeneficiary are each putation. component parts of

the total income. To the combination of them both should be ascribed the increased rate and the increased amount of tax, and between them, to each in the same proportion that its amount bears to the total amount of the income, should the total tax be apportioned.

Solicitors for the parties have not been able to cite to us any American authority bearing upon these subjects, and we have not discovered following English cases: any. Counsel have cited to us the

ring, 34 Times L. R. 575 (Ch. Div. 1918); Re Doxat, 125 L. T. N. S. 60 (Ch. Div. 1920); Wordie v. Wordie (1921) 59 Scot. L. R. 39Ct. of Sess.; Re Bowen [1925] W. N. 206. Although the English income tax acts differ in some respects from the American, in circumstances analogous to those presented here the English cases appear to support the principle of apportionment involved in the third method approved by us.

The third method is, however, subject to certain limitations which arise by reason of provisions of the revenue act. It has been pointed

-income subject to surtax only-apportionment.

out to us that certain parts of the income of some, if not all, of these beneficiaries can be identified as subject only to certain taxes; for instance, dividends of domestic corporations are subject only to surtax and the amount of such dividends should only enter into the apportionment of surtaxes, and not into the apportionment of the normal tax. Again, certain deductions which may be definitely allocated to a class of the beneficiary's income should be deducted from that beneficiary's income other than the annuity. An instance would be a loss in the sale of the beneficiary's property. In such case the trustees should receive no benefit from the reduction unless the loss exceeds the beneficiary's income exclusive of the annuity, and the balance of the loss of income is deducted from the annuity, in which case such balance of loss would cut down the amount of tax ascribable to the annuity and payable by the trustees. We approve the following statement of the effect of these limitations: "Any income which can be identified as taxable at a certain rate shall be taxed at such rate, and any deduction which can be definitely ascribed to certain income shall be deducted from such income."

Another question has been presented to us. Shall the income tax previously paid by the trustees upon a beneficiary's annuity be regarded as a part of the annuity under the provisions of the will and codicils and like the annuity itself be paid free from income tax, or should it be regarded as part of the beneficiary's income, other than the annuity, which has been paid to the beneficiary to enable her to receive the annuity itself free and clear of income tax and duty? We regard it as the latter. The -deduction of codicil provides tax on taxes that the annuity paid.

shall be paid free of taxes. Such provision does not admit of the construction that the distribution on account of such taxes shall also be made free of taxes. Such construction would lead to the unreasonable result that it was within the testator's intention that in each year the trustees should pay out of the trust estate an income tax not only upon the annuity, but also upon the constantly increasing items of income arising from the payment of income taxes upon income taxes paid in the past.

On March 11, 1927, at 10 o'clock a. m. the parties may present a form of decree in accordance with this opinion.

I. Introductory, 455.

II. In general:

V. Gift by codicil, 481.

I. Introductory.

In considering the construction and effect of devises or bequests free from taxes, it will be assumed that, unless otherwise provided by the will, the tax or duty will fall upon the devisee or legatee, which is the rule as stated in 26 R. C. L. 228; as, for example, in Re Bush (1925) 124 Misc. 674, 209 N. Y. Supp. 776, where the court says that, as the will and codicil are both silent on the question of the payment of the transfer or inheritance taxes on legacies, such taxes must be paid by the legatees.

And the statute imposing the tax usually makes it the duty of the executor or administrator to pay the tax to the state before paying or transferring the gift to the donee under the will, and usually, also, makes him personally liable for such tax if he pays over or transfers the gift without deducting the amount of the tax.

In Goodrich v. Rochester Trust & S. D. Co. (1916) 173 App. Div. 577, 160 N. Y. Supp. 454, it is held that a clause in a will directing that "all legacy, transfer, and succession taxes which may be payable in respect to bequests and devises in this will contained, I direct to be paid out of the body of my estate and before any division thereof," does not put upon the executor any other or greater liability to the state than as if the clause had been omitted from the will altogether, its only purpose being to indicate out of what funds of the estate such taxes should be paid in order that the legacies should be paid in full without any deduction for their taxes; and certainly it could not operate to impose on a

New York executor a liability to the state of Michigan, where the testator owned property, to pay to such state a succession or inheritance tax there imposed.

In Frick's Estate (1923) 277 Pa. 242, 121 Atl. 35, it is held that a testator cannot, by directing "that all inheritance taxes shall be paid out of the capital of my residuary estate," alter the amount which the state imposing the tax is entitled to receive, except to the extent the taxing statute itself specifies when it directs that certain direct descendants shall only pay 2 per cent and collaterals 5 per cent; but such direction only operates, as between the two classes of gifts, to fix the ultimate payment upon the residuary devisees and legatees, in relief of the others, each of whom, but for that clause, would suffer an abatement of his or her devise or bequest, to the extent of the tax imposed upon its value. The court says: "If this was not so, and a testator was permitted to reduce the amount payable to the state, by simply charging upon the residuary estate all the taxes paid elsewhere, the sovereign power of the state to impose them as it pleases, subject only to the requirement of equality and uniformity, would be made subject also, in this class of cases, to the unrestrained directions of a testator. Under such circumstances, a decedent who had a relatively large amount of property elsewhere might, by the device stated, greatly embarrass and perhaps largely or wholly defeat the claim of the domiciliary state, even upon the value of the property within her own borders."

This case, as to taxes upon property without the state, is reversed in (1925) 268 U. S. 473, 69 L. ed. 1058, 42 A.L.R. 316, 45 Sup. Ct. Rep. 603.

It may be stated as a general rule that where a testator directs in express terms that legacies or devises shall be paid free from taxes or duties, or where he uses language which the court interprets to mean a direction to pay legacies or devises free from taxes or duties, the intention of the testator will be carried out, and the legacy or devise will be paid without deduction of such tax, which will be paid out of the testator's general estate.

Such, for example, is the general proposition as laid down in King's Estate (1875) 11 Phila. (Pa.) 26, 32 Phila. Leg. Int. 74, where the court says: "While an annuity is chargeable with the tax, precisely as a legacy or distributive share, yet if it be expressly relieved by the terms of the will, or such intention of the testator can be gathered therefrom, it cannot be doubted that the estate would be liable to pay the tax." And in Re Bass (1908) 57 Misc. 531, 109 N. Y. Supp. 1080, it is held that the transfer tax upon a house, lot, and furnishings, left in trust to the use of a person named in the will, must be paid out of the income from the residuary estate, where the will so provides.

II. In general.

a. Provisions expressly mentioning taxes or duties.

A direction by a testator, in express terms, that transfer taxes should be borne by the residuary estate rather than by a legacy or devise, will be obeyed, as he has the right to specify how and from what fund such charges should be paid. Re Ham (1924) 123 Misc. 889, 206 N. Y. Supp. 508. In the majority of the cases, however, it is assumed, rather than held, that the express directions of the testator in regard to the payment of legacies or devises, tax or duty free, will be obeyed, and the question for the consideration of the court is usually as to the effect of such a direction.

1. As affecting succession or estate taxes or duties.

In Re Lea (1900) 194 Pa. 524, 45 Atl. 337, a testator, after devising certain real property subject to an annuity of a certain amount, directs that "all the bequests of money in this will made are to be paid without deductions for state tax;" and it was held that the inheritance tax upon the annuity should be paid out of the testator's residuary estate, the court saying that "this general intent that the residuary estate shall pay the tax is sufficiently clear to constrain us to so hold."

In Kingsbury v. Bazeley (1908) 75 N. H. 13, 139 Am. St. Rep. 664, 70 Atl. 916, 20 Ann. Cas. 1355, the question as to whether inheritance or succession taxes are a charge against the estate, or are to be deducted from the several legacies, is made plain as to individual legacies by a portion of a clause in the will wherein the testatrix directed "that my executors pay from my estate any and all inheritance and succession taxes that may become due upon any legacies given by this will to individuals, so that said legatees may be benefited to the full amount of their respective legacies;" but a gift to two named trustees for the purpose of establishing a summer home for poor children and their mothers does not come within this clause, as it was not the testatrix's intent that the individuals named as trustees should benefit by the fund, and the persons to be benefited, while individuals, are not named as such, but only as a class.

In Cockerell v. Essex (1884) L. R. 26 Ch. Div. (Eng.) 538, it is held that under a direction in a will, “all the legacies left by my will and codicil to be paid free of legacy duty," the executors should pay the legacy duty on specific bequests as well as pecuniary legacies; the court stating that while the word "paid" primarily includes only pecuniary legacies, a specific legacy is as much a legacy as a pecuniary legacy, and the effect to be given this word, read in conjunction with the other words of the direction, is not sufficient to cut down the gift.

In Cockerell v. Essex (Eng.) supra,

it is held that a direction by a testatrix, as follows: "I direct all the legacies left by my will and codicil to be paid free of legacy duty," is not a direction to her executor to pay the succession tax upon a leasehold house; the court holding that a succession tax was so essentially different in its nature from a legacy duty, that it could not be paid under the testatrix's instructions.

In Kirkpatrick v. Bedford (1878) L. R. 4 App. Cas. (Eng.) 96—H. L., a testator, by a holographic will, left numerous legacies, and upon the margin of one page of his will, opposite the clauses in which he left several legacies to his servants, he wrote, "All free of legacy duty," and signed it. The contention was that this direction applied only to those legacies which were opposite this direction upon the page of the will, but it was held that the direction applied to all the legacies in the will; the court stating that it felt compelled to "construe this as an independent sentence written in the margin of the will of the testator," and that, if the testator had not meant to include all the legacies in his will, he would have indicated, by means of some sign, in the nature of a circumflex, or otherwise, those legacies to which he wished the direction to apply.

In White v. Lake (1868) L. R. 6 Eq. (Eng.) 188, a testator, after making several pecuniary and specific legacies, directed that "all the legacies and bequests hereby by me given to be paid or satisfied free of duty," and thereafter, after certain devises of his real estate, directs that his residuary real estate be held by trustees, upon trust for a certain person for life, then to sell and hold the proceeds upon the same trusts as were limited upon a specific legacy of stock theretofore given by a previous clause of the will. The object of the suit here brought, in which the residuary legatees are plaintiffs, and the executors are defendants, is to obtain a declaration that the executors were not bound to retain any portion of the testator's personal estate to provide for the duty which would become payable in re

spect of the proceeds of the sale of the real estate. The court held that the legacy duty upon the produce of the sale of the real estate was not payable out of the residuary personal estate, upon the ground that the testator did not mean to class the produce of real estate as a legacy.

In Fisher v. Brierley (1861) 30 Beav. 265, 54 Eng. Reprint, 891, a testatrix bequeathed a legacy of a certain amount to a husband and wife, and then directed that each of her servants be paid a full year's wages and that they be given suits of mourning. She then proceeded: "I also give and bequeath the several legacies hereinafter mentioned" to persons and in amounts named, "all which legacies I direct to be paid free from legacy duty. I also give" to persons and in amounts named, "all which said legacies or sums of money I direct shall be paid free from legacy duty." Other legacies were thereafter given, some directed to be free from legacy duty and others as to which nothing was said as to the duty. The husband and wife, the legatees first mentioned, contended that their legacy was given free from the legacy duty, but it was held that as their legacy preceded, in a separate clause, the legacies directed to be given free from duty, it was not included within the class of those directed to be so paid.

In Re Morrison (1910) 102 L. T. N. S. (Eng.) 530, a testator gave to trustees a large sum, "subject to death duties," upon certain trusts. Thereafter numerous other legacies were given, which were followed by a clause providing that "all the legacies given by this my will (except where expressly stated to be subject to death duties) be paid free from duty, which (whether presently or presumptively or prospectively payable) shall be paid out of my general personal estate." And by another clause the testator instructed his trustees "to sell and convert into money my said real and personal estate . to pay

the expenses of and incidental to the execution of the last preceding trust, and my debts, testamentary and funeral expenses." The question before the