In re Estate of Miller

This is an appeal by the state and the state controller, in whose charge is the matter of collecting inheritance taxes, from a portion of a common order and judgment, entered in three different proceedings, determining and fixing the inheritance taxes payable upon the death of one Henry Miller. Miller was a resident of California and died, testate, October 14, 1916. On April 17, 1913, he had executed a deed of trust to Nellie Miller Nickel and J. Leroy Nickel,

Immediately prior to the transfer, but not going into effect until afterward, the state of Nevada adopted an inheritance tax law (Stats. Nev. 1913, p. 411), and thereafter, and prior to Miller’s death, the United States adopted the existing federal tax act (Revenue Act of 1916, title- II, 39 U. S. Stats, at Large, 777-780 [U. S. Comp. Stats., secs. 6336Ja-63361-m]). Under these laws, the United States makes claim for taxes in the amount of nearly four million dollars on the transfer mentioned, and the state of Nevada makes claim for some forty-eight thousand dollars. The validity of both these claims is in contest and as yet undetermined. Such being the situation, the trustees named, when it came to fixing the inheritance taxes on the transfer under the California law, claimed that in case the claims of the United States and Nevada should be finally upheld, the amount of those claims, as established, should be deducted from the value of the stock transferred in order to obtain the value upon which the California tax should be computed. The claim of the state and the state controller, on the other hand, was that no such deduction should be made. The lower court sustained the contention of the trustees, and the order or judgment appealed from provides, among other things, for such deduction to the extent that the validity of the claims of the United States and Nevada may be finally established. It is from this portion of the order and judgment that the appeal is taken.

We are, of course, not concerned here with the validity of the claims of the United States and Nevada. We are concerned only with the result upon the amount of tax due the state of California in case those claims are valid and finally so established. For the purposes of discussion, then, we may assume their validity. It will also simplify somewhat the discussion of the primary question involved if we assume that it is not material that the transfer was made prior to Miller’s death and prior to the going into effect of both the Nevada and the United States tax acts. Our discussion will, there

[1] The California act [Stats. 1911, p. 713] contains no provision as to how the principal upon which the tax is to be computed is to be ascertained other than that it is designated as the “clear market value” oí the “beneficial interest” transferred, and that there are provisions which plainly imply that the decedent’s debts and the commissions of executors are to be deducted to ascertain this “clear market value.” In this connection it should be noted that this designation of the principal upon which the tax is to be computed is one common to the inheritance tax acts of many other states and in particular is the designation in the acts under consideration in most of the decisions from other states which we subsequently cite. But while this is the designation in our act, and the only provisions for deductions are for the deduction of debts and executors’ commissions, the plain purpose of the act was that the clear market value of the beneficial interest transferred should be its net clear value. This has been the construction given it in actual administration and by the courts (Estate of Kennedy, 157 Cal. 517 , [ 29 L. R. A. (N. S.) 428 , 108 Pac. 280 ], Estate of Hite, 159 Cal. 392 , [Ann. Cas. 1912C, 1014, 32 L. B. A. (N. S.) 1167, 113 Pae. 1072 ]); and the deduction of expenses of administration, sums allowed by way of family allowance, and the value of property set aside as a family homestead, as well as of debts, has been sanctioned and has been commonly made. The primary question, or, rather, questions, in the present case are, therefore: (1) In determining the net clear value of the beneficial interest transferred, should the federal estate tax be deducted, and (2) for the same purpose should the Nevada inheritance tax on the stock of a Nevada corporation, owned by a resident of this state at the time of his death, be also deducted ? These two questions are not the same, and we shall consider first that concerning the federal tax.

[3] The federal tax under the act of 1916, on the other hand, is not a succession tax, but an estate tax, not a tax on what comes to the beneficiaries or heirs, but upon what is left by the decedent. In this respect it differs from the legacy tax imposed by the United States War Revenue Act of 1898, [30 Stats. 448], The act of 1916 entitles the tax an “estate tax” and in terms imposes it upon the net estate of the decedent as a unit. It is not apportioned among the various transferees and bears no relation to the separate amounts which they are to receive. The distinction between a succession tax and an estate tax is a recognized distinction, and, so far as we are aware, it has been held without exception that the federal tax, under the act of 1916, is of the latter character. It is not possible, in our judgment, to take any other reasonable view of it.

The nature of the federal tax is discussed in In re Roebling’s Estate, 89 N. J. Eq. 163 , and it is said (page 166, [ 104 Atl.

“ ‘The new duty imposed by the Finance Act, 1894, and called estate duty, supersedes probate duty; but the key to the construction of the Finance Act, 1894, and the amending act lies in remembering that the new estate duty, although it is leviable on property which was left untouched by probate duty, such as real estate, yet is in substance of the same nature as the old probate duty. What it taxes is not the interest to which some person succeeds on a death, but the property in respect of which an interest ceased by reason of the death. Unless this principle is clearly kept in view, the mind is constantly tempted by the wording of the act to revert to principles of succession duty, which have no real connection with the subject.’ ”

See, also, to the same effect, Corbin v. Townshend, 92 Conn. 501 , [ 103 Atl. 647 ]; Knight’s Estate, 261 Pa. St. 537 , [ 104 Atl. 765 ]; People v. Pasfteld, 284 111. 450, [ 120 N. E. 286 ]; State v. Probate Court, 139 Minn. 210 , [ 126 N. W. 125 ]; People v. Bemais, 68 Colo. 48 , [ 189 Pae. 32 ]; State v. First Calumet etc. Co. (Ind.), 125 N. E. 200 , and Northern Trust Co. v. Lederer, 257 Fed. 812 , affirmed in Lederer v. Northern Trust Co., 262 Fed. 52 .

[4] The state tax, then, being a succession tax, a tax upon what the transferee receives, and the federal tax being an estate tax, a tax upon what the decedent leaves, there would seem to be no escape from the conclusion that the federal tax

The identical question presented here as to whether the federal tax should or should not be deducted in computing a succession tax has been presented in a number of other jurisdictions, and the overwhelming weight of authority is that it should be deducted. It was so held in all of the cases we have cited above as to the nature of the federal tax. The discussion of the question by many of them is full and convincing and makes unnecessary here anything more than the rather brief discussion we have given to it.

We are cited to but three authorities as holding to the contrary. While one of them is not in point, the other two are, and it may not be amiss as to the latter to point out wherein we think they are in error. The case to which we have referred as not in point is In re Sanford’s Estate (Iowa), 175

The two cases referred to which are in point are Estate of Sherman, 179 App. Div. 497 , [ 166 N. Y. Supp. 19 ], affirmed in 222 N. Y. 540 , [ 118 N. E. 1078 ], and Estate of Bierstadt, 178 App. Div. 836 , [ 166 N. Y. Supp. 168 ], which may be considered as one, and In re Week’s Estate, 169 Wis. 316 , [ 172 N. W. 732 ]. The New York case or cases go apparently upon the ground that the federal tax is unconstitutional and upon the authority of Estate of Gihon, 169 N. Y. 443 , [ 62 N. E. 561 ]. The question as to the constitutionality of the federal tax is not presented here, and, as we have said, its validity must be assumed. As to the authority of the Estate of Gihon, the two later New York decisions under discussion fail to recognize the difference between the federal legacy tax under the law of 1898, which was involved in Estate of Gihon, and the federal estate tax under the law of 1916, which was involved in them. The legacy tax of 1898 was a succession tax, as its name would indicate, and it is upon this fact that the decision in Estate of Gihon is rested. It is said: “In our judgment the vital error in this argument [the argument for the deduction of the federal legacy tax] lies in the assumption that the ‘taxes are primarily payable out of the estate. ’ The federal tax is of exactly the same nature as the state tax—a tax not on property but on succession; that is to say, a tax on the legatee for the privilege of succeeding to the property. ’ ’ The decision, therefore, cannot be considered as authority for not deducting an estate tax, and affords no justification for the later cases in so holding. On the contrary, the implication from it is that such a tax should be deducted.

As to the Wisconsin case, it proceeds solely upon the proposition that the statute makes no express provision for any deduction whatever. It recognizes the fact that this ground would forbid a deduction of any .sort from the gross value of the estate left by the decedent, even a deduction of expenses of administration, and yet it also recognizes that it was the established practice in Wisconsin to make a deduction for expenses of administration, and by expressly refusing to dis

[5] As to the deduction of the Nevada tax, the question is quite different and its correct answer by no means so certain. Very little attention is paid to it by counsel on either side, undoubtedly because of the small amount of tax claimed as compared with the amount of tax claimed by the United States. But the Nevada tax, like our own, is a succession tax, a tax on what the transferee receives, and it is quite permissible to have two taxes on the same thing, and ordinarily where such taxes are levied, neither is to be deducted in computing the other.

In support of their position, counsel for the trustees advance the reasoning and authority of Corbin v. Townshend, 92 Conn. 501 , [ 103 Atl. 647 ], and Van Beil’s Estate, 257 Pa. St. 155 , [ 101 Atl. 316 ]. That reasoning is that the tax of the foreign state “must be paid before the executor or administrator can reduce the [foreign] bonds or stock to possession These cannot be transferred until the [foreign] state tax is paid and the value of the security so transferred is reduced by the amount of the tax which the executor or administrator has had to pay” (Corbin v. Townshend, supra). This reasoning is hardly sufficient. The stocks and bonds cannot, of course, be transferred until the tax is paid and the administrator or executor must pay it. But this is true of the tax by the state of the decedent’s domicile as well. The point is that while each tax must be paid, and paid by the administrator or executor, both are a tax on the same thing, the interest of the transferee, and both are chargeable against it and finally paid out of it. If the two taxes were levied under concurrent or equal authority, we would have little hesitation in holding that, without express provision to the contrary in the statute, neither should be deducted in computing the other. Such was the situation and ruling in Estate of Gihon, supra, where the two taxes involved were the federal legacy tax, under the law of 1898, and the state succession tax. It is

[6] But there is, we believe, a difference between two succession taxes, one federal and one state, and two succession taxes, both state, one imposed by the state having actual control over the subject matter of the transfer, and the other imposed by the state of the domicile of the decedent. The two states do not have equal and concurrent authority in such a case. The authority of the state having actual control of the subject matter, either because it is personal property within its limits or because, as in this case, it is the stock of one of its corporations, is, of necessity, the superior. The state of the decedent’s domicile can deal with the property only after the requirements of the state of its actual situs are satisfied. Putting it another way and concretely, the stock of Henry Miller in the Nevada corporation comes into his California estate, there to be administered upon and taxed, only after the requirements of Nevada are complied with, and the only thing over wdiich California secures authority is what remains after Nevada has taken its tax. It would seem reasonable to say, under such circumstances, that so far as California is concerned, the value of the interest transferred by death, or in contemplation of death, is the value of the corporate stock after the Nevada tax had been paid. This, we believe, is the justification of Corbin v. Townshend and Van Beil’s Estate, which hold that the foreign tax should be deducted. It is a reason hinted at in both and may in fact be the thought which underlies them, too briefly expressed to be entirely clear to us. The Matter of Penfold, 216 N. Y. 171 , [ 110 N. E. 499 ], is a decision to the contrary, but it proceeds solely on the authority of Estate of Gihon, which, because of the distinction stated, we do not think in point. At any rate, for the reasons given, we are ready to follow the authority of Corbin v. Townshend and Van Beil’s Estate, and to hold in this ease that the Nevada tax should be deducted.

[7] There remains only the question as to whether or not the conclusion so reached as to both the federal and the Nevada tax is affected by the circumstances that the particular trans

When the dates of transfer and death are the same, that is, in the usual case where the transfer is by death, the question does not arise, and the statute plainly contemplates a valuation as of the joint date of transfer and death. There

This provision is plainly one for the valuation of future, contingent, or limited estates. It appropriately requires an appraisal, both of the property as a whole out of which such estates are carved, and of the particular estates into which it is carved. Grammatically, the “market value thereof,” as those words are used, would refer to the market value of the property as a whole, but a consideration of the purpose of the provision and of the character of the estates with which it is dealing makes it evident that it is the market values of the particular estates which are to be determined in the manner provided by section 15. It is these values upon which the tax must be computed, and the method of their ascertainent is what the section is seeking to provide for. Section 15 in turn appropriately provides that the value of future, contingent, or limited estates is to be determined in accordance with the mortality tables. The provision of section 5, particularly significant upon the point under discussion, is that the appraisal in such eases, whether the taxable transfer be by death or inter vivos, be made “imme

We should, perhaps, say that the conclusion so reached, based, as it is, on the particular provisions of section 5 as to the appraisal of future, contingent, or limited estates, does not involve a determination of the question as to whether it is the date of transfer or the date of death of the transferor as of which the appraisement should be made in eases of taxable transfers inter vivos which do not create estates of that particular character. That question is not involved here, and should not be determined. It is worthy of note, however, that in a case recently argued before us, where the question is involved, the position of the state, contrary to that which it must necessarily take here, was that the property was to be valued as of the date of death of the transferor,

Since, then, the appraisal in this case must be made under our statute as of the date of Miller’s death, and at that time the federal and Nevada statutes had gone into effect, and the net clear value of the beneficial interests transferred had been reduced by the amounts of any valid taxes under those statutes, it is this reduced value which our statute prescribes shall be taken as the basis of computation. It follows that it is not material that the transfer was made before the going into effect of the federal and Nevada statutes, and that the conclusion reached upon a discussion of the case as one of a transfer by death remains unaffected.

Judgment and order affirmed.

Shaw, J., Sloane, J., Wilbur, J., Lawlor, J., Angellotti, O. J., and Lennon, J., concurred.