Opinion
No. 38206
Decided December 23, 1964.
Taxation — Succession tax — Community property in California — Remains so after husband and wife move to Ohio — Descent to wife upon husband's death — Subject to succession tax — To extent of one-half of total value.
1. Personal property acquired by husband and wife during coverture and while domiciled in the state of California becomes community property under the law of that state and remains so after the husband and wife have moved to Ohio.
2. One-half of the property so acquired becomes the property of the wife upon the death of the husband.
3. Community property under the law of California owned by a husband and wife after their removal to Ohio constitutes, within the meaning of Section 5731.02, Revised Code, relating to succession taxes, "property * * * held by two or more persons jointly, so that upon the death of one of them the survivor has a right to the immediate ownership or possession and enjoyment of the whole property."
4. With respect to such community property so acquired by the wife upon the death of the husband, the wife "shall be deemed to have a succession taxable to the extent of one-half the total value of" such property. (Section 5731.02, Revised Code, construed and applied.)
APPEAL from the Court of Appeals for Lucas County.
The facts are stated in the opinion.
Mr. William B. Saxbe, attorney general, and Mr. Daronne R. Tate, for appellant.
Messrs. Marshall, Melhorn, Bloch Belt and Mr. George F. Medill, for appellees.
This matter is before this court on an appeal on questions of law by the Tax Commissioner, a motion to certify the record having been allowed, from the judgment of the Court of Appeals for Lucas County affirming the judgment of the Probate Court of such county overruling the exceptions of the Tax Commissioner to the determination of succession tax in the estate of Louis R. Kessler, deceased. Various exceptions were considered and disposed of in the proceedings in the lower court, and only one item excepted to is now before this court for determination.
Appellant claims that the full value of certain personal property acquired by the deceased and his wife while residents of the state of California is liable for taxation by the state of Ohio. The facts are comparatively simple and are not in dispute.
From 1947 until 1957, the decedent and his wife lived in the state of California. While there the husband acquired and had issued in his name certain shares of stock which, although slightly changed as to form and number of certificates, remained in his possession until his death in Ohio in 1961. Decedent and his wife, from 1957 until the date of death on January 20, 1961, lived in the state of Ohio. Decedent died testate. His executor, an appellee herein, both for inventory and tax purposes, determined that one-half of 28,700 shares of stock acquired while the couple was domiciled in California became, upon the husband's death, the outright property of the widow under the law of the state of California relating to community property. The courts below upheld this contention and determined that no tax was due as to her half of the above shares.
The concept of community property is a basic law of property in eight states. These states have in common an early inheritance of French or Spanish civil law as distinguished from the common law generally prevalent in the remainder of the states. Although the community-property states differ one from the other in various respects, the basic concept is the same, to wit, that property acquired during coverture, other than by gift or descent, is the joint property of husband and wife and is properly designated as "community property." On the other hand, property held both in use and title for the exclusive benefit of either husband or wife is "separate property." It is particularly in the state of California, the community-property state with which we are here concerned, that various community-property principles have been reduced to statute, apparently for the sake of clarity and certainty. There is no doubt that the property involved here became community property when it was acquired by Louis R. Kessler during the period of the family's residence in California. The California Civil Code provides in regard to such property that "the respective interests of the husband and wife in community property during continuance of the marriage relation are present, existing and equal interests under the management and control of the husband." Section 161a, California Civil Code.
It is generally recognized that the character of community property, even though it is personality, does not change as to the nature of the holding, where the married couple remove themselves from a community-property state to a common-law state. The converse is also true, that is, the character of property acquired in a common-law state is not altered merely by the removal of the couple to a community-property state. 15 American Jurisprudence (2d), 832, Community Property, Sections 15, 16 and 17; annotation, 171 A.L.R., 1343. See, also, Succession of Popp, 146 La. 464, 83 So. 765, citing Succession of Packwood, 9 Rob., 438, 41 Am. Dec., 341, the latter case apparently being the first of its kind since it arose shortly after the first of the community-property states, Louisiana, was admitted to the Union. People, ex rel., v. Bejarano (1961), 145 Colo. 304, 358 P.2d 866; In re Will of Clark (1955), 59 N.M. 433, 285 P.2d 795. An attempt of the state of California by legislation to alter this general rule by creating a species of holding known as "quasi community property" was declared to be unconstitutional by the Supreme Court of California in In re Estate of Thornton, 1 Cal.2d 1, 33 P.2d 1, 92 A.L.R., 1343.
Therefore, one-half of the shares involved here remained the community property of the wife upon the removal of the couple from California to Ohio in 1957. In other words, her interest in the community property "vested" as of the date and place of acquisition and, as stated by the California statute, her interest in such property was present, existing and equal.
It is necessary, however, to consider the real nature of the interest acquired by the wife in order to determine its status in respect to the succession tax. This matter has been the subject of constant litigation in those states recognizing the community-property arrangement, and the interest has been extensively refined and considered in many respects, a few of which are here itemized: Insurance bought by the husband on his wife's life with community funds becomes the husband's separate property; the recovery for injuries to a person becomes community property in California but in other community-property states it is otherwise by statute; a recovery for wrongful death is not community property; community property may be used by the husband to benefit his separate property, and the wife would have at the most a lien for the original amount used; the husband has almost total management and control of the community property with power to dispose of it otherwise than by total gift; and the husband may pledge community property, may pay outlawed indebtedness, may dissipate or diminish the same through the exercise of bad judgment, and may deal in such property as if he were the owner thereof. It is subject to his separate debts and is also subject to fines and taxes levied against the husband. Community-property states differ as to whether community property is liable for the husband's torts, but such property is nevertheless subject to liability for torts arising from the husband's method of management. Community property is subject to community debts contracted by the husband.
This is but a brief listing of the many restrictions and limitations upon the wife's ownership of such property during coverture.
Although it has been said, as pointed out in the arguments of counsel, that the wife's interest in the community property is more than a mere expectancy, it is equally certain that the interest accorded her by the community-property law generally, and more specifically by the California statute, is certainly not in the nature of outright ownership until the dissolution of the marriage, as upon the death of the husband. The nature of the wife's interest in community property is summarized in Willcox v. Penn. Mutual Life Ins. Co. (1947), 357 Pa. 581, 55 A.2d 521, 174 A.L.R., 220, wherein the Supreme Court of Pennsylvania found legislation attempting to establish the principle of community property in that state to be unconstitutional. The court observes:
"* * * it is obvious that an alleged interest in property over which another person has the right of control, management and disposal, which creditors of such other person can take in satisfaction of his debts, and as to which there is no practical means of protection, is not a genuine right of property no matter what name or alleged title of ownership may have been given it."
It thus appears that, although one-half of the shares here in question became the outright property of the wife upon the death of the husband, the transition from community property to property of which the wife is the sole owner is a matter of real and substantial value which may become the basis for a succession tax.
In Fernandez, Collr., Internal Revenue, v. Wiener (1945), 326 U.S. 340, 90 L. Ed., 116, 66 S. Ct., 178, the Supreme Court discusses at length the ultimate and complete vesting of community property in one spouse upon death of the other as a taxable succession. Subparagraph (2) (b) of paragraph one of the syllabus is pertinent:
"Upon the termination of a Louisiana marital community by the death of either the husband or wife, there occurs, by virtue of state law, a redistribution of powers and restrictions upon power with respect to the entire community property which affords an appropriate occasion for the levy of an excise tax measured by the value of the entire community property, although from the moment the community was established the respective rights of the spouses in the community were in every sense `vested,' and it was certain that the changes in legal and economic relationships to property which occasion the tax would occur."
The court states further on page 355:
"With these general principles in mind, we turn to their application to federal death taxes laid with respect to the interests in community property. As we have seen, the death of the husband of the Louisiana marital community not only operates to transfer his rights in his share of the community to his heirs or those taking under his will. It terminates his expansive and sometimes profitable control over the wife's share, and for the first time brings her half of the property into her full and exclusive possession, control and enjoyment. The cessation of these extensive powers of the husband, even though they were powers over property which he never `owned,' and the establishment in the wife of new powers of control over her share, though it was always hers, furnish appropriate occasions for the imposition of an excise tax."
The determination that the wife's acquisition of sole and complete ownership of one-half of the community property constitutes a taxable succession is further recognized and determined in In re Hunter's Estate (1951), 125 Mont. 315, 236 P.2d 94. The taxable nature of the succession, even though it be a gift, is also recognized in Commonwealth v. Terjen (1956), 197 Va. 596, 90 S.E.2d 801.
It is further recognized in regard to a private premarital contract properly executed under the civil law of a foreign country in In re Estate of Walk (1948), 192 Misc. 237, 79 N.Y. Supp. (2d), 645.
The sole reported authority contra is People, ex rel., v. Bejarano, supra ( 145 Colo. 304), wherein the Supreme Court of Colorado determined that, under the peculiar circumstances of that case involving the contributions of a deceased husband to a retirement fund, the acquisition of the fund by the wife under the theory that there was a succession by way of a gift or a grant effective upon death "did not, under the present statute, give rise to a taxable event."
It therefore becomes necessary to examine whether this specific succession is one upon which a tax is levied by the Ohio statute.
The inheritance tax of Ohio has been determined repeatedly to be a succession tax, that is, a tax on the right to succeed to property or an interest therein and as such is grossly comparable to the taxes in the cases cited above concerning both the federal and state taxing laws. Somewhat analogous to the taxation of a succession such as this is the law of Ohio which imposes a tax upon one-half of the amount of a succession passing to husband or wife by virtue of a joint and survivorship contract owned by them, as determined in Bowers, Tax Commr., v. Evans, Exrx. (1962), 173 Ohio St. 137. The controlling point seems to be in all instances that the acquisition of the right to the full and complete enjoyment of property by virtue of the death of another creates a taxable succession to the property, where the enjoyment prior to death was something less than full and complete.
Since the whole concept of community property is unknown to the substantive law of Ohio, it is not to be expected that statutes levying taxes in this state would specifically contemplate any method of taxing this particular type of holding in so many words. Nevertheless, Ohio must recognize the property right involved, which property right provides a complete and total ownership of one-half of the community property in one spouse upon the death of the other. As already observed, it has been determined or admitted, wherever the question has arisen, that this transition from a partial and qualified ownership to total ownership is a taxable succession provided the statute of the particular taxing jurisdiction actually levies a tax.
Such a tax, if any, is levied by Section 5731.02, Revised Code, wherein it is provided that a tax is levied upon the succession to any property passing to or for the use of a person in certain categories, and it should be observed, of necessity, in those categories only. Among such categories is subsection (E) of the section cited, which provides:
"Whenever property is held by two or more persons jointly, so that upon the death of one of them the survivor has a right to the immediate ownership or possession and enjoyment of the whole property, the accrual of such right by the death of one of them shall be deemed a succession taxable under this section, in the same manner as if the enhanced value of the whole property belonged absolutely to the deceased person, and he had bequeathed the same to the survivor by will provided when the persons holding said property jointly are a husband and wife, the survivor shall be deemed to have a succession taxable to the extent of one-half the total value of the property without regard to enhancement."
The problem arises whether a party to a community-property relationship has a right to the immediate ownership or possession and enjoyment of the "whole property" upon the death of the other party to the joint ownership. If, in regard to community property, the "whole property" is the entirety of the community holding, obviously, subsection (E) does not apply because the survivor does not succeed to the entirety of the community property but to only one-half thereof. However, under the concept of community property each spouse has, during the life of the community, a qualified and restricted ownership in the whole which, upon the death of one of the parties, becomes an outright and total ownership of one-half; but, whether accrued or not, the one-half interest of the survivor in community property exists in one form or another at all times and, upon the death of one, vests "the right to the immediate ownership or possession and enjoyment of the whole property" in the survivor. It is by virtue of the death that the previously commingled and inseparable ownership of either of the parties in the whole property becomes complete and ascertainable as to one-half, so that when community property exists the survivor, upon death, does become entitled to the immediate ownership and possession and enjoyment of the whole of his share of the community property.
Subsection (E), with which we are here concerned, provides that, when the joint owners of such property as described above are husband and wife, the survivor shall be deemed to have a taxable succession to the extent of one-half of the total value of the property without regard to enhancement.
The total value of the property here is the number of shares standing in the husband's name upon death, multiplied by the then market value thereof. The taxable succession to the wife as the survivor of the community ownership is one-half of such total value.
In this case, by virtue of the death of Louis R. Kessler, his wife acquired the full and complete enjoyment of one-half of the shares of stock acquired as community property in California totally divested of the many restrictions and contingencies which had theretofore diluted her vested interest in that property. It is, accordingly, held that the acquisition by the widow, through the operation of the community-property law, of one-half of the 28,700 shares of stock in the name of her husband at his death constitutes a taxable succession under the succession tax law of Ohio.
Accordingly, the judgment of the Court of Appeals is, hereby, reversed, and the cause is remanded to the Probate Court for further proceedings in accordance with this opinion.
Judgment reversed.
ZIMMERMAN, O'NEILL and GRIFFITH, JJ., concur.
TAFT, C.J., HERBERT and GIBSON, JJ., dissent.
HOVER, J., of the First Appellate District, sitting by designation in the place and stead of MATTHIAS, J.
Section 5731.02, Revised Code, levies a tax upon the succession to any property passing to or for the use of a person, institution, or corporation in seven specified cases. Without question, at least one-half of the 28,700 shares of stock acquired by the decedent while he and his wife were domiciled in California belonged to decedent and thus is subject to the Ohio succession tax. The sole question before this court then is whether the Ohio succession tax should have been assessed against the remaining one-half of the 28,700 shares. The answer to this question requires an evaluation of the nature of the interest, if any, which Mrs. Kessler may have in the remaining one-half of the shares.
Mrs. Kessler's interest, if any, in the 28,700 shares of stock acquired by her husband while they were domiciled in California is to be determined by California law. Restatement, Conflict of Laws, Section 290; 15 American Jurisprudence (2d), 831, Community Property, Section 13. Since 1872, the California Civil Code has provided that a husband and wife may hold property as joint tenants, tenants in common, or as community property. Section 161, California Civil Code. Separate property of the wife is defined by Section 162, and separate property of the husband is defined by Section 163. Unless acquired as separate property, all other property acquired by husband or wife, during marriage and while domiciled in California, is community property. Sections 164 and 687, California Civil Code. There is no question that the 28,700 shares of stock were acquired as community property.
The litigants disagree only as to the nature of Mrs. Kessler's interest in this community property. On the one hand, the Tax Commissioner contends that even in California the wife had only a mere expectancy in the community property until the termination of the marriage relation in California by divorce or death. On the other hand, the appellees contend that Mrs. Kessler acquired a vested ownership interest in one-half of the community property while domiciled in California, and that this identifiable one-half interest continues to be hers, even though she and the decedent were domiciled in Ohio at the time of his death.
Section 161a, California Civil Code, enacted in 1927, provides as follows: "The respective interests of the husband and wife in community property during continuance of the marriage relation are present, existing and equal interests under the management and control of the husband as is provided in Sections 172 and 172a of the Civil Code. This section shall be construed as defining the respective interests and rights of the husband and wife in community property." The plain meaning of this provision is that the wife's ownership interest is equal to the husband's. If he has a vested interest, as he obviously does, then she also has a vested interest, otherwise the word, "equal," means nothing. If she has no vested interest then he can have none, which would be absurd. The words, "present" and "existing," reinforce the conclusion that both husband and wife have equal vested interests in community property in California. The California courts have defined the wife's ownership interest in community property as a vested interest during the continuance of the marriage relation. See Harris, Exr., v. Harris (1962), 57 Cal.2d 367, 369 P.2d 481; Berry v. Berry (1956), 140 Cal.App.2d 50, 294 P.2d 757; Horton v. Horton (1953), 115 Cal.App.2d 360, 252 P.2d 397; Louie v. Hagstrom's Food Stores, Inc. (1947), 81 Cal.App.2d 601, 184 P.2d 708; Cooke v. Cooke, Exrx. (1944), 65 Cal.App.2d 260, 150 P.2d 514; Sidebotham v. Robison, Admr. (C.C.A., 9, 1954), 216 F.2d 816; Brooks v. United States (S.D. Cal., 1949), 84 F. Supp., 623.
Although it is easy to confuse management rights with ownership rights, it is clear that the management rights conferred upon the husband by Section 172, California Civil Code, do not detract from the wife's vested ownership rights in community property acquired during the marriage relation. To say that the husband's powers of management and control over the wife's equal interest in the community property are property rights owned by the husband would be to deny that the wife has the equal interest in the community property which Section 161a confers. In fact, it is well settled in California that the husband, in exercising his right of management, acts as a fiduciary with respect to the one-half interest in the community property owned by the wife. Vai v. Bank of America National Trust Savings Assn. (1961), 56 Cal.2d 329, 364 P.2d 247; Jorgensen v. Jorgensen (1948), 32 Cal.2d 13, 193 P.2d 738; Fields v. Michael, Exrx. (1949), 91 Cal.App.2d 443, 205 P.2d 402; Poe, Collr., v. Seaborn (1930), 282 U.S. 101, 110; 41 Corpus Juris Secundum, 1070, Husband and Wife, Section 502c; Defuniak, Commonwealth v. Terjen: Common Law Mutilates Community Property, 43 Va. L. Rev., 49 (1957).
When the Kesslers returned to Ohio in 1957, Kessler no longer was authorized by community property law to exercise management rights over Mrs. Kessler's interest in the shares of stock, and Ohio law does not provide for such management and control. But as a practical matter, since the shares of stock stood in his name, it may be assumed that he continued to manage and control the stock with Mrs. Kessler's assent or acquiescence.
Property interests in personality acquired in one state continue after the personality is moved to another state. This basic rule is set forth in Section 291 of the Restatement, Conflict of Laws, as follows: "Interests in movables acquired by either or both of the spouses in one state continue after the movables have been brought into another state until the interests are affected by some new dealings with the movables in the second state." The specific application of the rule to community property is stated in Section 292 thus: "Movables held by spouses in community continue to be held in community when taken into a state which does not create community interests." See Restatement (Second), Conflict of Laws (Tentative Draft No. 5, April 24, 1959), Section 292; 15 American Jurisprudence (2d), 834, Community Property, Section 17.
The Tax Commissioner contends that under Section 140.5, California Civil Code, and Section 201.5, California Probate Code, if the shares of stock had been acquired in Ohio solely in the decedent's name and moved to California, they would have acquired quasi-community property status if the decedent and Mrs. Kessler had been domiciled in California at the time of his death. These statutes, however, are concerned with the rearrangement of property rights in the event of divorce or death. Every state imposes statutory controls over property in the event of divorce or death, including Ohio. See Section 3105.18, Revised Code (distribution of property as alimony); Section 2105.06, Revised Code (statute of descent and distribution); Section 2107.39, Revised Code (authority for election to take by descent and distribution rather than under will). The commissioner also overlooks In re Estate of Thornton (1934), 1 Cal.2d 1, 33 P.2d 1, 92 A.L.R., 1343; Estate of Krey (1960), 183 Cal.App.2d 312, 6 Cal. Rep., 804; 15 American Jurisprudence (2d), 833, Community Property, Section 16; and 10 California Jurisprudence (2d), 668, Community Property, Section 6. The proper rule is summarized in Restatement, Conflict of Laws, Section 293, as follows: "Interests in movable held separately by either spouse remain separate interests although the movables are taken into a state which creates community interests therein."
Since Mrs. Kessler had acquired a vested ownership interest equal to that of the decedent in the 28,700 shares of stock acquired as community property in California, the only conceivable property that could have passed to her upon the death of her husband was the right to full control and management of the stock, which we have assumed the decedent continued to exercise after they returned to Ohio. In applying federal death taxes to community property interests, the Supreme Court of the United States in Fernandez, Collr., v. Wiener (1945), 326 U.S. 340, 355, 90 L. Ed., 116, aptly observed: "* * * As we have seen, the death of the husband of the Louisiana marital community not only operates to transfer his rights in his share of the community property to his heirs or those taking under his will. It terminates his expansive and sometimes profitable control over the wife's share, and for the first time brings her half of the property into her full and exclusive possession, control and enjoyment. The cessation of these extensive powers of the husband, even though they were powers over property which he never `owned', and the establishment in the wife of new powers of control over her share, though it was always hers, furnish appropriate occasions for the imposition of an excise tax." (Emphasis added.)
Although the General Assembly apparently could lawfully impose a tax upon the cessation of an exercise of powers of management and control of a vested community property interest, even if we assume there was such a cessation at the death of the decedent in the instant case, the General Assembly has not done so.
In my opinion, one-half interest in the 28,700 shares of stock acquired by Mr. Kessler while the Kesslers were domiciled in California belonged to Mrs. Kessler at the time of the death of her husband in Ohio, and thus were not subject to the Ohio succession tax.
TAFT, C.J., and HERBERT, J., concur in the foregoing dissenting opinion.