Opinion
Page __
__ Cal.App.2d __ 318 P.2d 767 Matter of the ESTATE of Herbert Edward LAW, Deceased. WELLS FARGO BANK, as Executor of the Last Will and Testament of Herbert Edward Law, deceased, Appellant, v. Robert C. KIRKWOOD, Controller of the State of California, Respondent. Civ. 17563. California Court of Appeals, First District, Second Division Dec. 9, 1957Hearing Granted Feb. 5, 1958.
[318 P.2d 768] Pillsbury, Madison & Sutro, Harold I. Boucher, W. J. McFarland, Claude H. Hogan, Jr., Willis D. Hannawalt, San Francisco, for appellant.
James W. Hickey, Chief Inheritance Tax Attorney, J. D. Lear, Asst. Chief Inheritance Tax Attorney, Sacramento, Charles J. Barry, Asst. Chief Inheritance Tax Attorney, Milton D. Harris, Asst. Inheritance Tax Attorney, San Francisco, for respondent.
Robert C. Harris, Donald W. Falconer, Heller, Ehrman, White & McAuliffe, San Francisco, Janin & Morgan, Roos, Jennings & Haid, San Francisco, amici curiae, in support of appellant.
KAUFMAN, Presiding Justice.
Herbert E. Law died testate on June 18, 1952, leaving most of his estate to his wife, Leah L. Law. The state inheritance tax appraiser computed the marital exemption allowed to the wife under Revenue and Taxation Code, section 13805, to be $1,235,215.52. Appellant, Wells Fargo Bank, the executor of the estate, filed objections, claiming that the correct amount of the marital exemption was $1,444,666.08. This appeal is taken from the orders of the trial court overruling appellant's objections and fixing the amount of the exemption as computed by the respondent, State Controller.
The controversy between the parties is as to the method of computing the marital exemption for separate property provided by Revenue and Taxation Code, section 13805. The issue presented is whether in computing the wife's share of the decedent's separate property that is free of the state inheritance tax under Revenue and Taxation Code, section 13805, (1) the amount of the federal estate tax should be first deducted from the entire estate along with the expenses of administration and then the remainder divided in half to arrive at the wife's share, as the respondent contends, or (2) should the entire estate, less deductions other than the federal estate tax, be first divided in half to arrive at the wife's share, and then the amount of the federal estate tax deducted only from the husband's part of his separate property, as the appellant contends.
The appeal comes before this court on an agreed statement. The will left over half of the estate to Leah L. Law and directed that all taxes be paid out of the residue and not prorated among the various legatees, thus excluding the operation of Probate Code, sections 970-977. The entire taxable estate in the amount of $2,961,436.71 consisted of the decedent's separate property. The debts of the decedent, funeral and administration expenses other than the federal estate tax, amounted to $72,104.54. The amount of the federal estate tax is $418,901.13 which is allowed as a deduction from the state inheritance tax. Revenue and Taxation Code, § 13989. In computing amount of the marital exemption, the inheritance tax appraiser took the fair market value of the entire estate ($2,961,436.71) and deducted therefrom the funeral debts and administration expenses ($72,104.54) and the federal estate tax ($418,901.13). Then he divided the remainder ($2,470,431.04) by two to arrive at the amount of separate property to be received by Mrs. Law free of the inheritance tax ($1,235,215.52). The practical effect of this method of computation is to reduce the wife's share of separate property by one-half of the amount of the federal estate tax.
[318 P.2d 769] Appellant argues that the proper method of computation is to take the value of the entire estate ($2,961,436.71), deduct therefrom all of the allowable deductions ($72,104.54) except the federal estate tax, and divide the remainder ($2,889,332.17) by two to arrive at the wife's exempt share in the amount of $1,444,666.08. Thus the question is whether, for state inheritance tax purposes, the federal estate tax is a general charge against the entire estate which must be deducted from the entire estate before the marital exemption is computed, or whether the federal estate tax should be deducted only from the husband's portion of his separate property. Or, to put it another way, respondent contends that, for state inheritance tax purposes, the federal estate tax must be treated the same as an ordinary cost of administration, while appellant contends that for inheritance tax purposes the federal estate tax must be treated as a pro-rated charge against only a portion of the estate, just as if the pro-ration statute, Probate Code, sections 970-977, were applicable here.
Revenue and Taxation Code, section 13989, which provides for a deduction of the amount of federal estate tax for state inheritance tax purposes, reads as follows: 'Any amount due or paid the Government of the United States as a Federal inheritance or estate tax in the estate of any decedent is deductible from the appraised value of property included in any transfer subject to this part made by the decedent. The amount deductible is limited to an amount computed by the inheritance tax appraiser upon an application of the Federal inheritance or estate tax exemptions and rates (commencing at the primary rates) in force at the date of decedent's death to that portion of the decedent's property the transfer of which is subject both to the tax imposed by this part, and to any Federal estate tax law, and upon his own valuation of that portion.'
The parties agree on the amount of the deduction under Revenue and Taxation Code, section 13989, but disagree as to whether it should be subtracted before or after the wife's exempt share under Revenue and Taxation Code, section 13805, is computed. This section which defines the wife's share of separate property that is not subject to the inheritance tax, reads as follows: 'Property equal in amount to the clear market value of one-half of the decedent's separate property shall, if transferred to the spouse of the deceased, be exempt from the tax imposed by this part. A transfer, for the purpose of this exemption, shall include a transfer of property in trust with a general or limited power of appointment in the surviving spouse. This exemption shall be in addition to all other exemptions under this part.' The controversy here is as to the correct interpretation of the words 'clear market value of one-half of the decedent's separate property.'
Revenue and Taxation Code, section 13805, was modeled after the federal martial deduction statute, Internal Revenue Code of 1939, section 812(e), 26 U.S.C.A. § 812(e), which reads as follows:
'§ 812. Net estate
'For the purpose of the tax the value of the net estate shall be determined, in the case of a citizen or resident of the United States by deducting from the value of the gross estate----
'(a) * * *
'(b) * * *
'(c) * * *
'(d) * * *
'(e) Bequests, etc., to surviving spouse
'(1) Allowance of marital deduction
'(A) In general. An amount equal to the value of any interest in property which passes or has passed from the decedent to his surviving spouse, but only to the extent that such interest is included in determining the value of the gross estate.
'(B) * * *
'(C) * * *
'(D) * * * [318 P.2d 770] '(E) Valuation of interest passing to surviving spouse. In determining for the purposes of subparagraph (A) the value of any interest in property passing to the surviving spouse for which a deduction is allowed by this subsection----
'(i) there shall be taken into account the effect which a tax imposed by this chapter, or any estate, succession, legacy, or inheritance tax, has upon the net value to the surviving spouse of such interest; and
'(ii) * * *
'(F) * * *
'(G) * * *
'(H) Limitation on aggregate of deductions. The aggregate amount of the deductions allowed under this paragraph (computed without regard to this subparagraph) shall not exceed 50 per centum of the value of the adjusted gross estate, as defined in paragraph (2).
'(2) Computation of adjusted gross estate
'(A) General rule. Except as provided in subparagraph (B) of this paragraph the adjusted gross estate shall, for the purposes of paragraph (1)(H), be computed by subtracting from the entire value of the gross estate the aggregate amount of the deductions allowed by subsection (b) of this section.'
Revenue and Taxation Code, section 13805, provides for an exemption so that it is a part of the tax computation which decreses the amount taxable in the lower tax brackets (In re Estate of Steehler, 195 Cal. 386, 233 P. 972; In re Estate of Harrison, 110 Cal.App.2d 717, 243 P.2d 528) while the federal provision is a deduction which is subtracted before starting to compute the estate tax. It should be noted that the 1957 Amendment to Revenue and Taxation Code, section 13989 (1957 Reg. Session, Ch. 502) provides that for purposes of Section 13989 the exemption provided by Section 13805 shall be treated as an exclusion. (Apparently, the purpose of the 1957 Amendment was to put the marital exemption on the same footing as the community property exclusion which comes off the higher tax brackets. See 43 C.L.R. 49 at 58 and 59 for examples.)
The difficulty here is caused by the fact that the federal marital deduction is designed to fit the federal tax which is tax on the decedent's right to transfer property, while the California marital exemption is part of an inheritance tax imposed on the transferee's privilege of succeeding to property. Under the rule laid down in Riggs v. Del Drago, 317 U.S. 95, 63 S.Ct. 109, 87 L.Ed. 106, and U. S. Treasury Regulation, section 81.47(c), local state law is determinative of the question of whether the wife's share of separate property exempt from the state inheritance tax in the instant case, is or is not subject to reduction by the federal estate tax. There can be no doubt that the State Legislature has the power to provide that the widow's share of separate property, belonging to her free of the inheritance tax, shall be ascertained before the amount of the federal estate tax is deducted. The question here involved is whether the Legislature has so provided by enacting Revenue and Taxation Code, section 13805.
This is a case of first impression in this state on a question of considerable importance. We shall consider first the authorities in our state relating to the computation of the widow's share of community property that is exempt from inheritance tax, as in enacting Revenue and Taxation Code, section 13805, in 1950 after the 1948 Amendments to the Internal Revenue Code, the Legislature intended the same inheritance tax results for widows who take separate property as widows who take community property; second, as the entire estate here consisted of separate property and the provisions of the will excluded the pro-ration statute, it is useful to see how other jurisdictions have solved the problem.
First, as to our own authorities relating to the computation of the wife's share of [318 P.2d 771] community property that is exempt from inheritance tax.
In Re Estate of Coffee, 19 Cal.2d 248, 120 P.2d 661, it was held that under Probate Code, section 202, debts of the husband and ordinary costs of administration must be deducted from the entire community before the wife's share which is free from inheritance tax is computed. At the time of the decision in the Coffee case (1941), there was no special provision in the Internal Revenue Code relating to the taxation of community property for federal estate tax purposes. Section 811(a) of the Internal Revenue Code provided: 'To the extent of the interest therein of the decedent at the time of his death.' Under this section it was held that, as to pre-1927 community property, the husband had sufficient interest so as to require taxation of the entire community as part of his gross estate (Talcott v. United States, 9 Cir., 23 F.2d 897); while as to post-1927 community property, because of the interest given to the wife by Civil Code, section 161a, it was held that only one-half was taxable to the husband, the other half being taxable to the wife. United States v. Goodyear, 9 Cir., 99 F.2d 523; Crocker First Nat. Bank of San Francisco v. United States, 9 Cir., 183 F.2d 149.
Subsequently, effective October 21, 1942, Section 811(e)(2) was added to the Internal Revenue Code and other changes made, the net effect of which was to provide that all community property, whenever acquired, except earnings of the wife, was included in and taxable as a part of the community property of the husband upon his death. This section was relied upon in Re Estate of Atwell, 85 Cal.App.2d 454, 193 P.2d 519, which held that the federal estate tax should be deducted from the entire community estate before the amount of the widow's exempt one-half for inheritance tax purposes was computed.
In 1948, effective as of January 1, 1948, Section 811(e)(2) and the related provisions were repealed, so that as to post-1927 community property only one-half was again to be included for federal estate tax purposes in the estate of the first spouse to die. Then in order to equalize the estate tax between residents of community and non-community property states [see H.R.Rep. No. 1274, 80th Cong., 2nd Sess. 21 (1948); Sen.Rep. No. 1013, 80th Cong., 2nd Sess. 22 (1948)], the marital deduction section 812(e) (quoted above) was added. Under this section, pre-1927 community property as well as the husband's separate property is entitled to the martial deduction. The wife's half of post-1927 community property is not included in the adjusted gross estate for the purpose of determining the marital deduction (36 C.L.R. 223). The effect of these changes in the federal law upon the method of computing the widow's exempt share of the community property for inheritance tax purposes was placed before the court in Re Estate of Cushing, 113 Cal.App.2d 319, 248 P.2d 482. In an excellent opinion to which we are greatly indebted, the court held: 1) As the wife's share of post-1927 community property is not a part of the husband's gross estate for federal estate tax purposes under the federal statute, the wife's share of post-1927 community property for state inheritance tax purposes should be computed before subtracting the federal estate tax from the entire community; 2) As to the wife's share of pre-1927 community property, In re Estate of Atwell, supra, 85 Cal.App.2d 454, 193 P.2d 519, was controlling, so that the amount of the federal estate tax should be deducted from the entire community before the widow's exempt half is computed.
Both appellant and respondent in the instant case rely chiefly on the Cushing case. Appellant argues that the wife's share of separate property exempt from state inheritance tax should be computed like post-1927 community property in the Cushing case, while respondent argues that the proper method of computation is that applied to pre-1927 community property in the Cushing case.
According to respondent, the weakness in appellant's argument is that the conclusion as to post-1927 community property reached by the court in the Cushing case was based [318 P.2d 772] on the court's conclusion that under Sections 822, 826 and 827 of the Internal Revenue Code the federal estate tax was a lien only upon the gross estate of the decedent and not upon the probate estate of the decedent. In the Cushing case, the wife's share of post-1927 community property was clearly not in the gross estate of the husband for federal estate tax purposes, and the marital deduction provisions of the federal statute were not involved. In the instant case, the decedent's entire estate consisted of separate property, all of which would be included in his gross estate for federal estate tax purposes, and then the marital deduction allowed, assuming all other qualifications for inclusion and deduction are met, which need not concern us here. Respondent's argument, which is in effect that the Coffee and Atwell cases should be followed, would be a meritorious one even though these cases were decided on the basis of a federal statute different from 812(e), if the State Legislature had not enacted Revenue and Taxation Code, section 13805.
Central to the appellant's case is the argument that the California marital exemption of Section 13805 is measured by the separate property passing to the surviving spouse, rather than by one-half of the decedent's entire net separate estate. The basis of the argument is that the inheritance tax is levied only on the 'clear market value' of the share of the estate passing to each beneficiary. Revenue and Taxation Code, section 13312, defines 'clear market value' as follows: "Clear market value' means the market value of any property included in any transfer, less any deductions allowable by this part.' California Administrative Code, Title 18, Volume 1, Sections 837 and 848, translate the above to mean the market value of property included in all taxable transfers to particular distributees, less any deductions allowable to that distributee. Therefore, correctly, argues appellant, 'clear market value' must have the same meaning in computing the marital exemption of Section 13805.
Respondent argues that the marital exemption under Section 13805 is measured by one-half of the decedent's entire net separate estate, as the section was modeled after the federal marital deduction statute, Internal Revenue Code, section 812(e), quoted above, and operates in the same manner. Internal Revenue Code, section 812(e)(1)(H) limits the amount of the marital deduction to one-half of the 'adjusted gross estate' which is defined in paragraph (2) as the net separate property in the decedent's estate. As a result the federal marital deduction is limited to the lesser of two amounts: (1) the value of the property passing to the surviving spouse or (2) one-half of the net separate property in the decedent's estate. (The 1939 and 1948 Internal Revenue Codes are applicable here as the 1954 Internal Revenue Code applies only to decedents dying on or after August 17, 1954.)
As pointed out above, the survivor's half of post-1927 community property is not part of the adjusted gross estate for federal tax purposes, while pre-1927 community property is considered as property passing to the wife to the extent that she takes it. Talcott v. United States, supra, 23 F.2d 897. For the purposes of the first limitation on the federal marital deduction, that is, the value of the property passing to the surviving spouse, it matters not whether the surviving spouse takes pre- or post-1927 community property. For the purposes of the second limitation on the federal marial deduction, which is the one in issue here, that is, the one-half of the net separate property in the decedent's estate, there is no requirement that the property pass to the surviving spouse. Section 13805, argues respondent, which operates like the federal provision, limits the amount of the marital exemption for state inheritance tax purposes, to the lesser of two amounts: (1) the value of the property, separate or community, passing to the surviving spouse or (2) one-half of the net separate property in the decedent's estate. Respondent contends that the section therefore means that the exemption extends to any type of [318 P.2d 773] property passing to the spouse, the amount to be limited to one-half of the separate property in the decedent's entire estate. (Emphasis supplied.)
The difficulty with this argument of the respondent is that it is attempting to treat the state inheritance tax as if it were a transfer tax, levied on the entire estate of the decedent, like the federal estate tax rather than an inheritance tax levied on the interest of each beneficiary or heir. Revenue and Taxation Code, §§ 13401-13408; 13601-13723; In re Estate of Simpson, 43 Cal.2d 594, 275 P.2d 467, 47 A.L.R.2d 991; In re Estate of Miller, 184 Cal. 674, 195 P. 413, 16 A.L.R. 694. As explained in California Administrative Code, Title 18, at page 89: 'Unlike the Federal estate tax, which is a tax on the right of a decedent to transmit property and is measured by the size of the decedent's net estate, the inheritance tax is measured by the share of a decedent's net estate passing to each particular beneficiary the rates imposed varying according to the amount received or succeeded to by the beneficiary and his relationship to the deestate passing to each particular beneficiary, is computed separately and there are as many computations of inheritance tax in an estate as there are transfers of a decedent's property. Cal.Admin.Code, Title 18, § 848. Each beneficiary whose share in the estate is chargeable with part of the administration expense giving rise to the deductions is entitled to a deduction proportionate to his share of the expense; if his share is not chargeable with an expense of administration, he is not entitled to deduct any of that expense. Revenue and Taxation Code, § 13981; Cal.Adm.Code, Title 18, §§ 837, 848, 849.
The language of Section 13805, 'Property equal in amount to the clear market value of one-half of the decedent's separate property shall, if transferred to the spouse of the deceased, be exempt from the tax imposed by this part,' (Emphasis supplied) also operates against respondent's argument. Under respondent's argument, the language should be read to mean 'one-half of the clear market value of decedent's separate property.'
As under Revenue and Taxation Code, section 13989, the federal estate tax is deductible by those beneficiaries whose shares contribute to and are reduced by the federal tax, and the portion of Mr. Law's separate property passing to Mrs. Law did not contribute to the federal tax, appellant next argues, Mrs. Law is not entitled to any federal estate tax deduction in computing the inheritance tax imposed on this share of the estate. For this argument, appellant relies on In re Estate of Buckhantz, 120 Cal.App.2d 92, 260 P.2d 794, in which it was held that the widow is entitled to have her share in the community property under the will computed before the deduction of the federal estate tax. That case, however, was decided on the basis of the pro-ration statute, Probate Code, section 970-977, which is not applicable here as the will has specifically excluded it. Matter of Wolf's Estate, 307 N.Y. 280, 121 N.E.2d 224; In re Campe's Estate, 205 Misc. 699, 129 N.Y.S.2d 362; Id., Sur., 130 N.Y.S.2d 458; In re Mattes' Estate, 205 Misc. 1098, 130 N.Y.S.2d 270, affirmed 285 A.D. 867, 137 N.Y.S.2d 836, cited by the appellant, were also decided under a pro-ration statute. In the Wolf case, the court said 121 N.E.2d at page 227: 'In a situation where taxes are not to be apportioned, the formula for determining a widow's intestate share under Section 18, subd. 1, par. (a) is to deduct the total of estate taxes from the net estate and then give the widow one half the balance. * * * Where, however, as here--under section 124 [the N.Y. proration statute]--the taxes are to be apportioned, the correct formula is to give the widow one half of the net estate before taxes and then deduct from her share any tax chargeable against that share, see Matter of Peters, 275 A.D. 950, 89 N.Y.S.2d 651.'
The rules outlined above by the New York Court have been followed in most other jurisdictions. Weinberg v. Safe Deposit & Trust Co., 198 Md. 539, 85 A.2d 50, 37 A.L.R.2d 188; Wachovia Bank & Trust [318 P.2d 774] Co. v. Green, 236 N.C. 654, 73 S.E.2d 879; Baylor v. National Bank of Commerce of Norfolk, 194 Va. 1, 72 S.E.2d 282; In re Will of Uihlein, 264 Wis. 362, 59 N.W.2d 641, 38 A.L.R.2d 961; Campbell v. Lloyd, 162 Ohio St. 203, 122 N.E.2d 695; Moorman v. Moorman, 340 Mich. 636, 66 N.W.2d 248. Illinois recently reached the same result in Northern Trust Co. v. Wilson, 344 Ill.App. 508, 101 N.E.2d 604, on the grounds that the federal estate tax constituted a just claim against the estate which must be deducted before apportioning the renouncing widow's share. All of the above were decided in the absence of pro-ration statutes. In Lincoln Bank & Trust Co. v. Huber, Ky., 240 S.W.2d 89, the court reached a different result but relied on its long established judicial pro-ration rule; the same is true of South Carolina. See Pitts v. Hamrick, 4 Cir., 228 F.2d 486.
The same argument made by appellant here, that the wife's share was to be computed before a reduction by the amount of the federal estate tax, as her share did not add anything to the federal tax burden, was placed before the court in Thompson v. Wiseman, 10 Cir., 233 F.2d 734. In rejecting this argument the court said at 738: 'Even if we were inflenced by the equitable considerations as to the federal tax burden not being increased by giving her this advantage, we find nothing in the will which would support the conclusion that the testator intended the burden of the federal tax to fall only upon the trust for his sons and to be borne entirely by their share of the residue.' In Harrison v. Northern Trust Co., 317 U.S. 476, 63 S.Ct. 361, 87 L.Ed. 407 and Rogan v. Taylor, 9 Cir., 136 F.2d 598, it was argued that since the residuary charitable bequests added nothing to the federal estate tax, the amount of such bequests should be calculated without first deducting taxes. (The Senate Committee Report on the marital deduction provision in the Internal Revenue Code points out that this provision is substantially the same as that provided in Section 812(d) of the 1939 Code relating to bequests to charity.) This argument was rejected because the courts found no basis in the will or state law for calculating the bequests differently from other similar bequests to individuals. The question would then appear to be whether Revenue and Taxation Code, section 13805, provides such a basis.
We think that it does. The statute provides that the widow's share of separate property shall be exempt from the inheritance tax. The use of the word 'exempt' by the legislature in Revenue and Taxation Code was not an arbitrary choice of language, as the word has a well defined meaning in this state. In Re Estate of Steehler, supra, 195 Cal. 386, at page 399, 233 P. at page 978, the court said: 'It is to be clearly kept in mind, however, that exemptions in any event are but deductions from the whole of the estate transferred and are important as affecting the inheritance tax to be computed only when the bases of computation of such tax upon the remainder of such property are to be affected by such deduction.'
It is a well settled rule that as taxing statutes are in invitum, the provisions of an inheritance tax act are to be construed strictly in favor of the taxpayer and against the state. In re Estate of Potter, 188 Cal. 55, 204 P. 826. 'If the legislative act expresses an intention to exempt certain property judicial construction is not appropriate to defeat the exemption.' In re Estate of Bendheim, 100 Cal.App.2d 398, at page 401, 223 P.2d 874, at page 876. Following the above rules, we conclude that the appellant's method is the proper one.
In view of the foregoing the judgment must be reversed with directions to the trial court to make the computation in accordance with this opinion.
Judgment reversed with directions.
DRAPER, J., concurs.
DOOLING, Justice.
I concur. I am Personally much impressed by the argument of amici curiae that the construction of Revenue and Taxation [318 P.2d 775] Code, section 13805 contended for by respondent would result in the widow receiving a greater or smaller marital exemption, depending on the purely fortuitous circumstance of whether the takers of the balance of the estate were, or were not, entitled to Federal Estate Tax deductions. Under that construction, as the total federal estate tax on estates of the same value will vary depending on the existence and amount of deductions to which the various takers are entitled, so would the marital exemption vary accordingly. I agree with the statement in the amici curiae brief: 'It is unreasonable to suppose that the Legislature intended the amount of marital exemption to be determined by federal deductions available to third party legatees and having no effect on the amount of property actually distributed to the surviving spouse.' Since a reasonable construction of a statute is always preferred to an unreasonable one (23 Cal.Jur., Statutes, § 140, p. 766) this furnishes an additional ground favoring the construction which we are placing on the section in question.