In re the Accounting of del Drago

Josephine del Drago died October 8, 1937, while a resident of New York State, leaving a last will and testament dated March 27, 1934, which was probated by the Surrogate of New York County, and Giovanni del Drago and Byron Clark, Jr., were appointed and thereupon qualified as executors of her estate. Upon an accouning by the executors to which all parties interested in the estate were parties, it appeared that, although no final determination has been made as to the amount of state and federal estate taxes properly assessable, the executors have already paid nearly $300,000 thereon out of the general assets of the estate. Before distribution to beneficiaries, the executors properly requested a determination of the question of whether the taxes so paid should be apportioned to, prorated among and deducted from the shares passing under the will to the several legatees and devisees or paid entirely from the remainder residuary estate.

The will contains no direction as to how, by whom or out of what portion of her estate so devised and bequeathed the estate taxes should be paid. By objections and answer to the account, specific legatees and guardians for infant legatees have suitably put in issue the constitutionality of chapter 709 of the Laws of 1930 (Decedent Estate Law, § 124 [Cons. Laws, ch. 13]) and chapter 710 of the Laws of 1930 as amended (Tax Law, § 249-t [Cons. Laws, ch. 60]) in so far as such statutes or either of them provide for the imposition, assessment or apportionment of the federal estate tax or any portion thereof against their legacies or interests in the estate of deceased. It is alleged that those

Article I of the Federal Constitution contains the uniformity clause and provides that “ the Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises * * *; but all Duties, Imposts and Excises shall be uniform throughout the United States * * * ” and “ To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers” (§ 8). Article VI contains the supremacy clause and reads in part: “ This Constitution, and the Laws of the United States which shall be made in Pursuance thereof * * * shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.” Section' 1 of the Fourteenth Amendment to the Constitution provides, among other things, that “ all persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States

Prior to the act of 1916, all federal acts imposing death duties made specific provision for the payment of the tax by the several legatees individually and severally out of their shares and not by the estate (1 U. S. Stat. 527, July 6, 1797; 12 U. S. Stat. 433, 485, 486, July, 1862; 13 U. S. Stat. 223, 285-291, June, 1864; 30 U. S. Stat. 448, 464-466, June, 1898, as amended by 31 U. S. Stat. 946 [1901]). They were emergency measures and made no provision for permanent excises. They provided for inheritance taxes and not estate taxes. A reading of the 1898 act would seem to indicate that the rate was based on the net estate but the individual legacies were taxed. The constitutionality of that scheme of death-duty taxation was sustained only by construction whereby it was held that the rate was fixed alone by the size of the legacy (Knowlton v. Moore, 178 U. S. 41 ). By 1916, forty-two states (including the State of New York) were imposing death duties upon individual beneficiaries of decedent’s estates. In no case was such imposition an estate tax. They were all strictly inheritance taxes and so defined. Never before 1916, except as emergency measures, had the federal government invaded the field of inheritance taxation which the states considered their exclusive preserve. The proposal of Congress to tap that field for additional revenue met powerful opposition by the states with the result that political expediency and practical and constitutional considerations impelled Congress to abandon that idea and turn to a tax upon the net estate as a unit of taxation, a new and hitherto unused source of federal revenue, and leave the imposition of a tax'upon the separate successions to the property of each legatee or distributee to the several states (Congressional Record, 64th Congress, vol. 53, pt. 11, particularly at p. 10657, and pt. 15, Appendix, pp.

Accordingly, by the provisions of the Revenue Act of September 8, 1916 (39 XJ. S. Stat. 777 et seq.; 6 XJ. S. Compiled Stat. 1916, ch. 10A, p. 7364, § 6336|a et seq.) the Congress imposed an “ estate tax ” as distinguished from an “ inheritance tax ” on estates of deceased persons and placed the burden of the tax upon the residuary estate rather than upon legacies (Matter of Hamlin, 226 N. Y. 407 ). In that act and in subsequent similarly worded acts including the act in effect at the death of Mrs. del Drago, it was provided

Under articles 10 (L. 1909, ch. 62, as amd.), and 10-A (L. 1925, ch. 143, as amd.) the New York Legislature imposed inheritance taxes upon individual legacies. Under article 10-B (L. 1925, ch. 320) it was provided that the

After much agitation and effort in and out of the Legislature, a new state tax law applicable to estates of persons dying after September 1, 1930, was passed by the Legislature and became effective on that date (L. 1930, ch. 710, amdg. L. 1909, ch. 62, by adding a new article to be known as 10-C). By the provisions of the act itself, history of inheritance tax legislation of the state and proceedings antecedent to its passage, it was clearly shown that the act was passed for the purpose (1) of imposing death duties upon those who received the benefit and not upon the estate of the deceased and (2) to compel similar distribution of the

The Federal Revenue Act of 1918, in essential respects similar to the act of 1916 so far as the point at issue is concerned, was held in Y. M. C. A. v. Davis (supra, p. 50) to be “ an excise upon the transfer of an estate upon death of the owner ” and “ not a tax upon succession and receipt of benefits under the law or the will. It was death duties as distinguished from a legacy or succession tax. What this law taxes is not the interest to which the legatees and devisees succeeded on death, but the interest which ceased by reason of the death.” So far as material, identical provisions are contained in the Federal Estate Tax Law applicable to the estate under consideration. Similar provisions to those contained in the 1916 act were construed

“ It is a principle firmly established that to the law of the State in which the land is situated we must look for the rules which govern its descent, alienation and transfer, and for the effect and construction of wills and other conveyances ” (DeVaughn v. Hutchinson, 165 U. S. 566 , 570). Nevertheless, every sovereignty, whether state or federal, possesses the power of regulating the maimer and terms upon which property, both real and personal, within its dominion may be transmitted by will and of prescribing who shall and who shall not be capable of taking it (11 Am. Juris., Conflict of Laws, § 169; Mager v. Grima, 8 How. [U. S.] 490; United States v. Perkins, 163 U. S. 625 ; Blythe v. Hinckley, 180 U. S. 333 ; Nielsen v. Johnson, 279 U. S. 47 ; Snyder v. Bettman, 190 U. S. 249 , 252; Santovincenzo v. Egan, 284 U. S. 30 , 40; Knowlton v. Moore, supra; Johnson v. Olson, 92 Kan. 819 ; L. R. A. 1915E, 327 and note; Rixner’s Succession, 48 La. Ann. 552 ; 32 L. R. A. 177 ; Easton v. Huott, 95 Iowa, 473 ; 31 L. R. A. 177 ). Under all sorts of conditions, control over the right to hold and over the use, devolution and transmission of real and personal property of citizens within the United States has been exercised by Congress under the Constitution. It is a subject so broad that time and space and lack of importance to the present decision forbid extensive and detailed references. The right to impose an estate tax and to regulate

The state’s right to taxation is subordinate to that of the federal government and when the latter has acted in a particular field, the full import and all the implications of that act must control. The Congress has not only acted in the field of decedents’ estate taxation to levy and collect duties but has expressly directed the manner of payment of such duties and excluded specific legatees from bearing the burden of any such levy. Such exclusion was final and conclusive and beyond the power of the state to vary or change. But if it be urged that failure of Congress to be more specific as to its purpose to exercise complete control of the incidence of the estate tax to the exclusion of state interference indicates an intent that the state might legislate on the subject, the answer is that silence does not give consent but implies only that there shall be no interference with the federal scheme (Prigg v. Pennsylvania, 16 Pet. [U. S.] 539; United States v. Snyder, 149 U. S. 210 ; W. U. Tel. Co. v. Boegli, 251 U. S. 315 ; Hines

Since Congress had the power to lay and collect taxes on decedents' estates and determine where the burden should rest (New York Trust Co. v. Eisner, supra), those acts are the supreme law of the land and the state legislative acts in question, if in conflict with the federal law, are a nullity though enacted in the exercise of concurrent and not controverted powers (Gibbons v. Ogden, 9 Wheat. [U. S.] 1, 24, 211; Florida v. Mellon, 273 U. S. 12 , 17). That the federal and state statutes are in conflict on the question of where the burden of the federal tax shall fall is beyond doubt. The federal acts place the incidence of the tax upon the net residuary estate payable by the executor before distribution without recourse to the individual legatees; the state acts, though requiring the executor to pay, impose the burden of the federal estate tax upon the specific legatees and require the executor to deduct the pro rata burden from each legacy or collect such share or the part thereof he has paid from such legacy. So far as federal excises are concerned, the burden may not be regulated, distributed or apportioned by the state. Distribution must be accomplished under the federal law within the field within which Congress purports to act and has acted consistently and continually since long prior to 1930 when the state acts under attack went into effect. Repugnancy of the state acts to the federal acts render the former inoperative in so

In neither of the cases relied upon, in part at least, by the learned Surrogate (Matter of Scott, 274 N. Y. 538 ; certiorari denied, 302 U. S. 721 ; Edwards v. Slocum, 287 Fed. Rep. 651 ; affd., 264 U. S. 61 , and Y. M. C. A. v. Davis, 264 U. S. 47 ) was the question here presented raised or decided or a determination thereof necessary for the decision. The only satisfaction that respondents may derive from those cases is eked out of isolated sentences from the opinions which are pure dicta. In the Scott case the deceased left various life insurance policies with benefits payable periodically to beneficiaries named in the policies and the questions propounded and decided were whether (1) the benefits were included in the gross estate of deceased and fell within the intendment of section 124 of the Decedent Estate Law and (2) whether, if applicable, the section was repugnant to due process and involved unconstitutional impairment of the obligation of contracts. The only questions involved in the Edwards case were the power of the federal government to impose an estate tax upon the gross net estate of a deceased where a part passed to charity and the scope of the Federal Estate Tax Law as to the imposition of such a tax. In the Davis case (p. 48), arising in Ohio, the question was what effect payment toy an executor of the federal estate tax should “ have in the distribution of the estate among the legatees and beneficiaries under the will ” under the provisions, properly construed, of the applicable Federal Estate Tax Law.

The question of the justice or equity of placing the burden upon the residuary estate is entirely irrelevant to the question under consideration. Whether it is just and' equitable in all cases to impose the tax upon the estate as a whole and not upon the specific legatees on the benefits they

It follows that in so far as section 124 of the Decedent Estate Law or section 249-t of article 10-C of the State Tax Law authorize, require or direct distribution and apportionment of the federal estate taxes levied and to be levied upon the estate of the deceased among the legatees, they are repugnant to the provisions of the Federal Estate Tax Act of 1926 and amendments thereto, the Congress being competent to legislate on the subject of estate excises, and to the uniformity and supremacy clauses of the Federal Constitution and are, therefore, unconstitutional. Since what we have said above is decisive of the issue here involved, it is unnecessary to consider other grounds of unconstitutionality which appellants urge. The question of the repugnancy of the legislative acts to the New York State Constitution is not before us on this record and nothing said above is to be considered an expression of opinion on that subject.

(dissenting). The appellants are general legatees under the will of Josephine del Drago. Over their objection the Surrogate, in this accounting proceeding, prorated the federal estate tax equitably “ among the persons interested in the estate ” and ordered the executor to charge the prorated amounts against the persons so interested, including appellants. All this was in obedience to the command of section 124 of the Decedent Estate Law, applicable to this estate, since testatrix did not direct otherwise in her will. In this court there is raised by appellants only one objection to this prorating and apportionment, namely, that section 124, in so far as it directs such prorating and apportionment, is invalid as being 'in conflict with the “ Supremacy Clause ” of the Federal Constitution (Art. VI, cl. 2).

The estate of Josephine del Drago became subject at her death to a tax imposed by the United States on the estates of decedents. No one questions that the tax so imposed is a true estate tax, falling on the estate itself and payable from the estate, and is not an inheritance tax which falls on the separate shares of the estate which go to the several beneficiaries. It is an excise tax laid upon the privilege of transmitting property rights at death. (Matter of Vanderbilt, 281 N. Y. 297 , 311, 315.) To make this entirely clear, Congress provided (U. S. Code, tit. 26, § 826, par. [b]) that “ so far as is practicable and unless otherwise directed by the will of the decedent the tax shall be paid out of the estate before its distribution.” Congress never directed that the tax was to be paid out of the residuary estate and it “ is not a tax upon a residue.” (Edwards v. Slocum, 264 U. S. 61 , 62.) Nor did Congress ever attempt to forbid the local probate courts to fix the

In affirming the decision of the Circuit Court of Appeals in Edwards v. Slocum, the Supreme Court ( 264 U. S. 61 , 63) gave at least seeming approval to the position taken by the Attorney-General that “ the distribution of the burden of taxation among the several beneficiaries is a matter of state regulation.” On the same day, February 18, 1924, the Supreme Court announced its decision in Y. M. C. A. v. Davis ( 264 U. S. 47 ). There, in discussing the effect on charities, ordinarily exempt from federal taxation of the

We need not take time for a careful inquiry as to whether or not these expressions in the federal decisions are dicta. Dicta or not, binding on us or not, they cannot be ignored, particularly when they have been so long regarded as stating the law, and when they agree with the expressed views of the members of Congress and with the logic of the situation. Why should Congress concern itself as to the ultimate resting place of this tax? Having seen to it that the federal government’s toll shall always be taken before the beneficiaries divide up the estate, having commanded the executor to pay the tax before the distribution begins, and having provided adequate penalties for his failure so to do, what matters it to Congress how local law afterwards apportions the tax among the legatees or devisees? Long before the turn of the legatees and devisees comes, the United States Collector of Internal Revenue has gotten i the government’s tax money and closed the books on the estate. Thus in no real or reasonable sense can it be said that a later apportionment interferes with the enforcement of the Federal Tax Law, or modifies or changes that tax.

Early in the history of the federal statute, and before New York State had an apportionment statute, this court held that the executor was bound to charge the whole federal tax to the residue, as the state law then stood. (Matter of Hamlin, 226 N. Y. 407 ; certiorari denied, 250

Even without a state prorating statute, there are cases where, mathematically, the tax cannot be paid out of the residue, but must be charged immediately on the several bequests or devises. Suppose a case where there is no residue, as where the general legacies equal or exceed the actual net estate. In such a case the executor, paying the federal tax from the “ net estate,” is in fact deducting it from the amount available for the general legacies. Would he then not have to prorate it against those legacies, whether or not any statute so directed?

The Hamlin case (supra) and the later cases of Farmers’ Loan & Trust Co. v. Winthrop ( 238 N. Y. 488 ) and Matter of Oakes ( 248 N. Y. 280 ) held, we have seen, that under the statutes as they then stood the tax was ordinarily a charge upon the residue, “ primarily at least ” (Oakes opinion at p. 282). The resulting situation had its difficulties. The New York State Commission to Report Defects in the Law of Estates, which included among its members some of the recognized experts in the field, reported as follows in 1930: “ Experience has demonstrated that in most estates the residuary legatees are the widow, children, or nearer and

Section 124, so proposed, was enacted by the Legislature and became effective in 1930. At least one other state, Pennsylvania, has a similar prorating statute (Pennsylvania Stat. Annotated [Purdon], tit. 20, § 844), passed in 1937. So far as appears, no court, state or federal, has ever held that a state is without power to pass such an act. The constitutionality of section 124 as against other claims of invalidity was upheld by this court in Matter of Scott ( 274 N. Y. 538 ; certiorari denied, 302 U. S. 721 ). In that case there was not advanced at all the' theory of unconstitutionality for which appellants here contend, i. e., that section 124 is in conflict with the so-called Supremacy Clause of the United States Constitution (Art. VI, cl. 2).

We do not find here any such interference by the t with the federal taxing power, or any attempt by state statute to assert supremacy. We see no possi» conflict between the command of the federal estate ta statute that, unless otherwise directed by the will, the tai be paid out of the net estate and the provision of section 124 that, unless otherwise directed by _ the will, the tax be

The order of the Surrogate should be affirmed, with costs against appellants.

Finch, Lewis and Conway, JJ., concur with Rippey, J.; Desmond, J., dissents in opinion in which Lehman, Ch. J., and Loughran, J., concur.

Order reversed, etc. (See 287 N. Y. 764 .)