Harkness v. United States

Mr. Harkness died in 1954. In his will, he provided for his wife, Rebekah (plaintiff), to receive half of his residuary estate. After deduction of relevant taxes, the remainder was to be divided equally in four trusts for the children of Mr. Harkness and Rebekah. The will was clear that no part of any taxes to be paid would be taken from the one-half of the estate passing to Rebekah. In 1955, Rebekah was paid $27,467,768.51. The four trusts received $8,436,295.75, divided equally. The federal fiduciary income-tax return reflected distributable net income for 1955 of $1,005,682.94, with a deduction of $826,758.68 for distributions of income to Rebekah and the trust beneficiaries (the remaining $178,924.26 was tax-exempt income). The Internal Revenue Code provided that if amounts distributed to all beneficiaries of an estate exceeded the distributable net income of that estate, then a beneficiary had to include within her gross income the amount bearing the same ratio to distributable net income as ratio of the total amount distributed to her to the total amount distributed to all beneficiaries. In this case, Rebekah received $27,467,758.51, which was 76.2907 percent of the total $36,004,082.23 distributed to all beneficiaries for the year. Multiplying that percentage against the taxable distributable net income of $826,758.68 provided a total of $630,740.04, which the government (defendant) indicated Rebekah should have included as income. However, Rebekah argued that she received taxable income of only one-half the total taxable income, which was $413,379.34. The government issued a deficiency for the difference plus interest. Rebekah paid the amount sought and filed a claim for refund as well as a suit. Rebekah’s argument was that the executors, acting in accordance with New York tradition, made payments concurrently to her and to other sources, so when nearly $19 million in state and federal death taxes were paid, she was paid an offsetting nearly $19 million, to be categorized as corpus and not income. Rebekah argued that she should be allowed to trace monies and limit her exposure to half of the taxable distributable net income and that the ratio approach was unconstitutional, as it contemplated Rebekah’s tax by referencing the income of the other four trusts, depriving her of due process of law.