Mel v. Franchise Tax Board

Each of the taxpayers in these companion cases was a wife who had survived her husband, and who had received under her husband’s will a life interest in a residuary trust—or, in one case, a life annuity to be paid first from trust income. In each instance the trust corpus included the husband’s one-half share of certain community assets.

The estate of each decedent husband underwent probate administration in a California court. Under our probate law as it then existed, all of the community property of the decedent husband and his surviving spouse was included in the probate administration.^[1]

The facts of the present case, like those of its companion appeals, are not in dispute, and may be summarized as follows.

Charles Mel (hereinafter decedent) died on December 10, 1967. All of his property subject to probate administration was community property. At the time of his death, he and his wife Florence also owned as joint tenants $123,611 in bank accounts.

Charles’ will, dated March 14, 1967, was admitted to probate in Alameda County; his daughter, Dorothy Kulp, was appointed executrix. Since under the applicable provisions of the Civil Code all of the community property had been subject to Charles’ management and control, all of that property, including Florence’s one-half share, was administered in his estate pursuant to Probate Code section 202 as then enacted.

Charles’ will did not require any election by his spouse and provided for the disposition of only his share of the community property. It left his interest in the family home'and furnishings to his wife Florence and

All of the community property was included for inheritance tax purposes in the “fair market value” of Charles’ estate, as shown on the report of the inheritance tax appraiser. The report fixed the value of the estate at $5,908,152.98. The probate court confirmed the appraiser’s report and fixed inheritance taxes accordingly. There were substantial debts, expenses and taxes to be paid in the administration of the estate. Portions of the community property—including both Charles’ and Florence’s shares—were sold by the executrix in the course of probate to pay those debts and charges.

Subsequently, Florence sold portions of her own share of the community assets. In computing gain or loss on the sales in her personal income tax returns for 1968 and 1969, Florence used as a tax basis the value of those assets as of the date of her husband’s death.^[3] Thereafter, on or about January 15, 1971, the Franchise Tax Board issued notices proposing to assess additional income taxes in the amount of $62,133.96 plus interest for 1968, and in the amount of $17,545.09 plus interest for 1969, on the ground that Florence’s interest in the assets did not qualify for a new tax basis.

Florence filed a written protest with the board on March 13, 1971. She died on March 30, 1972; her executor paid the proposed assessments, and on October 21, 1975, the board disallowed claims for refund. The executor and Florence’s three children then brought this action.

Respondents argue, as do each of the taxpayers in these companion appeals, that in disposing of her own interest in community assets which already had been administered in her decedent husband’s estate and thereafter computing her capital gains for personal income tax purposes, the surviving wife was entitled to use as her (stepped-up) basis the fair market value of each asset as of the date of her husband’s death—a claim based upon Revenue and Taxation Code sections 18044 and 18045,^[5] as those sections read during the tax years in question, and particularly upon former subdivision (e) of section 18045.^[6] The board insists that a review of these same code sections, in conjunction with other relevant statutes then in effect, compels a different result.

The pertinent portions of sections 18044 and 18045 provided, at the time here in issue, as follows: “18044. . .. The basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, ... be the fair market value of the property at the time of its acquisition.

“18045. . .. For purposes of section 18044, the following property shall be considered to have been acquired from or to have passed from the decedent: ...(e) In the case of decedents dying after April 8, 1953, property which represents the surviving spouse’s one-half share of community property held by the decedent and the surviving spouse ... if at

Given the uncontradicted nature of the facts before us, the question of statutory construction becomes one of law. (Mount Vernon Memorial Park v. Board of Funeral Directors & Embalmers (1978) 79 Cal.App.3d 874 , 884 [ 145 Cal.Rptr. 275 ]; Killian v. City & County of San Francisco (1978) 77 Cal.App.3d 1 , 7 [ 143 Cal.Rptr. 430 ].) And so we are not bound by, and “cannot rest upon,” the findings or decision of the trial court. (Chase Brass & Copper Co. v. Franchise Tax Bd. (1970) 10 Cal.App.3d 496 , 502 [ 95 Cal.Rptr. 805 ].)

The parties agree that section 18045 was enacted to bring California personal income tax law into conformity with federal law. Except for its effective date and statutory cross-referencing, former subdivision (e) of section 18045—as enacted in 1955—was identical to subdivision (b)(6) of section 1014 of the federal Internal Revenue Code of 1954. ( 26 U.S.C.A. § 1014 (b).)

The federal provision, we find, was first enacted as part of the Revenue Act of 1948. “Section 1014(b)(6) was designed to equalize the incidence of taxation between community-property and common-law states, not to provide a special benefit to community-property taxpayers.” (Willging v. United States (9th Cir. 1973) 474 F.2d 12 , 14; see also Bath v. United States (S.D.Tex. 1962) 211 F.Supp. 368 , 369; aff. per curiam (5th Cir. 1963) 323 F.2d 980 .)^[7]

In the Senate Finance Committee’s report on the 1948 act, section 1014, subdivision (b)(6) was described as follows: “The amendment prescribes for the surviving spouse, after the death of the decedent, a new basis for her portion of the property held, at the time of such death, by the decedent and his spouse as community property. Under existing law, the surviving spouse’s basis for such property is the same

“The amendment applies only if at least one-half of the whole of the community interest in such property was includible in determining the value of the decedent’s gross estate under section 811 [of the Internal Revenue Code of 1939]. Thus a husband will not have a new basis for his part of the community property upon the death of his wife in those situations in which her interest in their community property is not subject to estate tax because of the limited nature of her interest, as is the case with community property under the law of Nevada and New Mexico, and certain community property, under the law of Cali? fornia, acquired by the community prior to April 16, 1923.” (Sen.Rep. No. 1013, 1948 U.S. Code Cong. & Admin. News at pp. 1251-1252.)

It follows then that under analogous federal tax law, a taxpayer may not claim a stepped-up basis unless at least one-half of the property^[1] in question was subject to federal estate taxation, without deduction or exemption. (See Collins v. United States, supra, 318 F.Supp. 382 , 387.)

If, as we think, former subdivision (e) of section 18045, was to have been consonant with the federal legislation on which it was modeled, it must be construed so as to equate the phrase “includible in ... decedent’s gross estate under Chapter 3” with “subject to state inheritance tax under Chapter 3 of that law.” (Italics added.) In order, therefore, to obtain a stepped-up basis under former subdivision (e), a taxpayer must show that at least one-half of the whole of the community property held by the decedent and the taxpayer—as the surviving spouse—was subject to state inheritance taxation under chapter 3 of the Revenue and Taxation Code.^[8]

Because the language of former subdivision (e) focuses upon each item of community property, such an approach must be taken respecting individual community assets. If at least one-half of the community’s

It follows that we reject respondents’ argument that the term “includible in determining the value of the decedent’s gross estate under Chapter 3” must be interpreted as referring to community property merely subject to administration in a decedent husband’s estate.

Respondents’ position, we find, rests upon two contentions, neither of which we think supportable. The first is that their statutory analysis is consistent with the legislative history, and with the purpose of the statute to conform California law to the federal practice of affording a stepped-up basis to the surviving spouse in every case except where the wife died first owning pre-1923 community property.^[9] Second, respondents stress that, during the years in question, it was the practice of the California Inheritance Tax Department of the Controller’s office to value a decedent’s “gross estate” by including therein all the community property—the interest of both spouses. Citing Estate of Coffee (1941) 19 Cal.2d 248 [ 120 P.2d 661 ], and Estate of Atwell (1948) 85 Cal.App.2d 454 [ 193 P.2d 519 ], respondents contend that inclusion of the community interest of both spouses in determining the value of a gross estate was not only done by the inheritance tax appraiser here, but was also required by law.

In our view respondents’ interpretation of former subdivision (e) of section 18045 is strained. By making all community property eligible for a new tax basis, it in effect eliminates the section 18045, subdivision (e) condition which clearly by its terms would afford a stepped-up basis only if at least one-half the value of the community interest in an asset could have been included in determining the value of the gross estate.^[10]

Our conclusion that former subdivision (e) of section 18045 as reasonably construed refers to property “subject to” taxation under chapter 3 of the Revenue and Taxation Code, is also consistent with the emphasis of chapter 3—as it existed during the period in issue—which was clearly upon the delineation of forms of community and quasi-community property transfers to be considered “subject to” the Inheritance Tax Law. Respondents’ interpretation, on the other hand, gives no plausible reason for the reference in section 18045, subdivision (e) to chapter 3,^[11] and strikes us as anomalous. Interpretive guidelines instruct us that statutes should be construed to avoid anomalies. (State of South Dakota v. Brown (1978) 20 Cal.3d 765 , 775 [ 144 Cal.Rptr. 758 , 576 P.2d 473 ]; Estate of Boyd (1979) 98 Cal.App.3d 125 [ 159 Cal.Rptr. 298 ]; County of Orange v. Cory (1979) 97 Cal.App.3d 760 , 768 [ 159 Cal.Rptr. 78 ].)

Finally, equating the phrase “includible in determining the value of the decedent’s gross estate under Chapter 3” with “subject to taxation under Chapter 3” is the only interpretation of the statute which harmonizes section 18045 with chapter 3 to produce a reasonable result, for respondents’ contrary construction fails entirely to rationally relate section 18045, subdivision (e) to chapter 3. A perusal of chapter 3 (community property) shows it to be contained in part 8 (inheritance tax) of the code. It begins with section 13551 which provided during the

Respondents point out that only by virtue of the 1961 and 1965 amendments to section 13551 is the decedent’s share of transferred community property exempted from inheritance taxation. When section 18045 was enacted, in 1955, section 13551 of chapter 3 provided that upon the death of a husband his one-half share of community property was subject to taxation, thereby entitling all surviving spouses to a stepped-up basis under the section 18045, subdivision (e), reference to chapter 3. Respondents argue that the 1961 and 1965 amendments to section 13551 did not modify former subdivision (e) of section 18045; that the reference to chapter 3 therein must be limited to section 13551 as it existed when section 18045, subdivision (e) was originally enacted, or a disfavored repeal by implication of section 18045, subdivision (e) results.^[12]

While it is true that nothing in the legislative history of the 1961 and 1965 amendments to section 13551 reveals any purpose of influencing the operation of section 18045,^[13] we nevertheless conclude that the reference to chapter 3 in former subdivision (e) applies to those subsequent amendments. That conclusion is buttressed by section 9 of

Therefore, absent any express exclusion, by its terms section 9 automatically updated the statutory reference in section 18045, subdivision (e), to include both the 1961 and 1965 amendments to section 13551. This approach is consistent, too, with the practical operative effect of section 18045, subdivision (e); if the reference in it to chapter 3 is to have any meaning, it must be to the chapter as it existed at the death of the decedent—otherwise the result under section 18045, subdivision (e), would not depend upon the actual transfer made by the decedent at death.^[14]

Moreover, section 18045, subdivision (e), as construed here, was not impliedly repealed, as respondents argue, by the amendments to section 13551: former subdivision (e) operated in the same manner, in conjunction with chapter 3, both before and after the amendments.

Respondents submit that the ultimate tax result produced by this updated application of former subdivision (e) is inconsistent with the federal scheme, under which taxpayers were afforded a stepped-up basis because the decedent’s share of a community asset was included in his gross estate for federal estate tax purposes. We find no such inconsistency. The discrepancy in personal income tax results was due, not to any difference in personal income tax provisions, but resulted from the more favorable inheritance tax treatment afforded California taxpayers by section 13551, which affected state personal income tax. The objective of conformity is preserved by our interpretation of former subdivision (e) of section 18045 stated herein.^[15]

However, in the present case, as in its companion appeals, the estate contained sufficient assets to allow for distribution of all specific bequests in full, with the remainder passing into the residuary trust. Consequently, the debts and expenses were attributable to the residuary trust. Since the wife benefitted from the trust—which included the decedent’s share of community assets—we conclude that the payment of debts and expenses out of trust assets rendered the one-half share of the surviving spouse in those same assets ineligible for a new tax basis under section 18045, subdivision (e).

A community asset used to pay the family allowance is, for inheritance tax purposes, treated as a transfer of a bequest to the surviving wife, rather than as a debt or expense; it is a transfer subject to taxation under chapter 4 of the Inheritance Tax Law. (§ 13623.) It is not subject to taxation under chapter 3 of the Inheritance Tax Law, and, therefore, does not qualify the surviving spouse’s share of each community property asset used to pay the family allowance for a stepped-up tax basis.^[17]

As to community property assets transferred to persons other than the surviving spouse, or which can be traced to such transfers, the surviving spouse is entitled to a new tax basis upon the subsequent sale of her share thereof under section 18045, subdivision (e), because those community assets were subject to taxation pursuant to chapter 3. (§ 13551, subd. (b).) The board has stipulated to partial judgment with regard to all community property assets which fit within this category, and we agree with the principles embodied in that stipulation.^[18]

As a result of the transfer of the remaining community assets to the surviving wife, including the residuary trust from which she benefitted, less than “one-half of the whole” of each such asset was “includible in determining the value of decedent’s gross estate under Chapter 3 of the Inheritance Tax Law” as we have herein defined that term. (§ 13551, subd. (a).)

We decline respondent’s suggestion that we apportion the allowable stepped-up basis in accordance with the percentage of the decedent husband’s share of the community property asset actually transferred to the wife.^[19] Such an approach would deny a new tax basis only for the proportion or percentage of a community property asset which represents the share of that asset actually transferred to the surviving wife.

While reasonable, an apportionment of the tax basis is not suggested by the statute. Instead, section 18045, former subdivision (e), by its terms, requires the court to determine if “at least one-half of the whole of the community interest in such property was includible in determining the value of the decedent’s gross estate under Chapter 3.... ” (Italics added.) If so, the statute provides for a new tax basis for such “property.” Section 18045, subdivision (e), does not contemplate an “apportioned basis.” We conclude that each community property asset must qualify as a “whole,” or not at all.