# Estate of Madison

> California Supreme Court · May 31, 1945 · 26 Cal. 2d 453

URL: https://www.frixlaw.com/law-library/cases/9883273

## Case

- **Full name:** Estate of FRANK D. MADISON, Deceased. HARRY B. RILEY, as State Controller, Etc., Appellant, v. MARSHALL P. MADISON, as Executor, Etc., Et Al., Respondents
- **Court:** California Supreme Court
- **Decided:** May 31, 1945
- **Citations:** 26 Cal. 2d 453; 159 P.2d 630; 1945 Cal. LEXIS 168
- **Precedential status:** Published
- **Opinion:** Dissent by Schauer
- **Judges:** Raymond G. La Noue
- **Cited by:** 93 later opinions in the Frix Law Library

## Citator (automated)

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- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/9883273

## Opinion text

*466 SCHAUER, J.
I dissent. Under our system of govern ment wherein the basic power reposes in the people as distinguished from the state it is a fundamental principle that “tax proceedings are in invitum, tax laws are strictly construed in favor of the taxpayer and against the state . . . because presumptively the Legislature has given in plain terms all the power intended to be exercised. A statute will not be held to have imposed a tax unless it is clear and explicit.” (See 24 Cal.Jur. § 11, pp. 27-28, and cases there cited.) Here the involved statute provides that “A tax shall be and is hereby imposed upon the transfer of any property, real or personal, or of any interest therein or income therefrom, in trust or otherwise, to persons, institutions or corporations, . . . said taxes to be upon the market value of such property at the date of death of the decedent [transferor] ... in the following cases: ... (3) When the transfer is of property made by a resident . . . (a) In contemplation of the death of the grantor, ... or donor, or, (b) Intended to take effect in possession or enjoyment at or after such death, or in which a life income or interest is reserved by the grantor, either expressly or impliedly, or by the grantee promising to make payments to or care for the grantor . . . (d) By a revocable trust created before or after the taking effect of this act.
“When such person, institution or corporation becomes beneficially entitled to possession or expectancy to any property or the income therefrom by any such transfer, whether made before or after the passage of this act.
“In all transfers inter vivos the value of the property transferred shall be taken as of the date of death of the transferor and with the rates and exemptions then in effect. . . .” (Italics added. Leering ’s Gen. Laws, 1937, Act 8495, § 2, pp. 3955-3956.)
The trial court found upon ample evidence that the transfers in question were not made in contemplation of the death of the grantor. It is also indisputable that the trusts created were and are irrevocable, but the majority opinion, after a discussion of decisions of both the United States Supreme Court and the courts of other states, reaches the conclusion that the California Legislature intended by its use of the words “Intended to take effect in possession or enjoyment at *467 or after such death” to include as subject to an inheritance tax an irrevocable transfer in trust of property, made several years prior to the transferor’s death and at a time when he was in excellent health, even though by such transfer the transferor completely divested himself of all ownership or interest in the property transferred and of all power to control its use or disposition.
The sole ground advanced or relied upon by such opinion to justify imposition of the tax is that the trusts were to, and did, terminate at the end of a period of time measured by the transferor’s life; and the conclusion is asserted in face of the fact that séveral years before the transferor’s death the transfers had been completed and both enjoyment and possession of the property had passed irrevocably from the transferor to the joint unit of trustee and beneficiary in each of the respective trusts.
It apparently is not contended that if the duration of the trusts had been measured by any event other than the termination of the transferor’s life the transfers would have been subject to an inheritance tax upon the death of the transferor, and it is my opinion that the mere fact that the death of the transferor is selected as the event upon which the legal title to the corpora of the estates shall be conveyed by the trustees to the beneficiaries is not sufficient to justify us in holding that as a matter of law the transferor intended the transfer of the property “to take effect in possession or enjoyment at or after” his death within the meaning of those words as employed by the Legislature in the Inheritance Tax Act. The possession and enjoyment of the property, and its control, passed completely from the transferor when he created the trusts. Such possession, enjoyment, and control of the property, upon creation of the trusts, vested irrevocably in the trustees and beneficiaries. The effect of the majority opinion is to impose a penalty upon the beneficiaries solely because the transfers were made in trust for them instead of directly to them. I am aware of no policy of the law which justifies such a holding.
In Reinecke v. Northern Trust Co. (1929), 278 U.S. 339 [ 49 S.Ct. 123 , 73 L.Ed. 410 ], the decedent, several years before his death and at a time when there was no federal gift tax, created five trusts with life estates in the incomes on terms not disclosed in the opinion. “In one the life interest was terminable five years after the death of the settlor or on the death *468 of the designated life beneficiary should she survive that date, with a remainder over. In the other four, life interests in the income were created, terminable five years after the settlor’s death or on the death of the respective life tenants, whichever should first happen, with remainders over. The settlor reserved to himself power to supervise the reinvestment of trust funds, to require the trustee to execute proxies to his nominee, to vote any shares of stock held by the trustee, to control all leases executed by the trustee, and to appoint successor trustees. With respect to each of these five trusts a power was also reserved ‘to alter, change or modify the trust,’ which was to be exercised in the case of four of them by the settlor and the single beneficiary of each trust, acting jointly, and in the case of one of the trusts, by the settlor and a majority of the beneficiaries named, acting jointly.
“The settlor died without having . . , modified any of the five trusts except one, and that in a manner not now material.” ( 278 U.S. at p. 344 .) The federal estate statute imposed a tax “upon the transfer of the net estate of every decedent” and provided that in calculating the tax there should be included in the gross estate all property, tangible and intangible, “To the extent of any interest therein of which the decedent has at any time made a transfer, or with respect to which he has at any time created a trust, in contemplation of or intended to take effect in possession or enjoyment at or after his death. ’ ’
The Supreme Court, in holding that the transfers were not subject to the federal estate tax, stated (pp. 346-348 of 278 U.S.), “Nor did the reserved powers of management of the trusts save to decedent any control over the economic benefits or the enjoyment of the property. He would equally have reserved all these powers and others had he made himself the trustee, but the transfer would not for that reason have been incomplete. The shifting of the economic interest in the trust property which was the subject of the tax was thus complete as soon as the trust was made. [Italics added.] His power to recall the property and of control over it for his own benefit then ceased and as the trusts were not made in contemplation of death, the reserved powers do not serve to distinguish them from any other gift inter vivos not subject to the tax. . . .
“In its plan and scope the tax is one imposed on transfers at death or made in contemplation of death and is measured by the value at death of the interest which is transferred. *469 ... It is not a gift tax. . . . One may freely give his property to another by absolute gift without subjecting himself or his estate to a tax, but we are asked to say that this statute means that he may not make a gift inter vivos, equally absolute and complete, without subjecting it to a tax if the gift takes the form of a life estate in one with remainder over to another at or after the donor’s death. It would require plain and compelling language to justify so incongruous a result and we think it is wanting in the present statute. ... In the light of the general purpose of the statute and the language of § 401 explicitly imposing the tax on net estates of decedents, we think it at least doubtful whether the trusts or interests in a trust intended to be reached by the phrase in § 402 (c) ‘to take effect in possession or enjoyment at or after his death, ’ include any others than those passing from the possession, enjoyment or control of the donor at his death and so taxable as transfers at death under § 401. That doubt must be resolved in favor of the taxpayer.”
It is argued in the majority opinion that the Reinecke case has been weakened by subsequent decisions of the Supreme Court. Suffice it to point out that such case has not been overruled, that its sound logic remains unimpaired, and that the facts and circumstances of the litigation now before us present a manifestly stronger case for the taxpayer than did those of the Reinecke case. Here the transferor reserved no control over the property conveyed and all of it vested immediately in full possession and enjoyment in the respective units of trustees and beneficiaries. Furthermore, our statute undertakes to specifically enumerate the “cases” in which the tax shall be operative and in such enumeration lists a transfer “By a revocable trust created before or after the taking effect of this act.” (Italics added.) This statute is creative and in such a case it is a well established rule of construction that the enumeration of certain powers or items is exclusive of all others. (23 Cal.Jur. § 118, p. 740; 2 Sutherland, Statutory Construction (Horack’s ed. 1943) §4915, p. 414; People v. McCreery (1868), 34 Cal. 432, 442 ; San Joaquin etc. Irri. Co. v. Stevinson (1912), 164 Cal. 221, 234 [ 128 P. 924 ]; Pasadena University v. Los Angeles County (1923), 190 Cal. 786, 790 [ 214 P. 868 ]; Gruben v. Leebrick & Fisher, Inc. (1938), 32 Cal.App.2dSupp. 762, 765 [ 84 P.2d 1078 ]; see, also, Johnston v. Baker (1914), 167 Cal. 260, 264-265 [ 139 P. 86 ]; Moore v. Webb (1933), 219 Cal. 304, 309 [ 26 P.2d 22 , 89 A.L.R. 925 ]; *470 In re Peart (1935), 5 Cal.App.2d 469, 472 [ 43 P.2d 334 ].) There is no sound basis for assuming that the Legislature would have specifically designated a “revocable trust” as being subject to the tax, without any mention of irrevocable trusts, if it had intended also to tax the latter.
It is to be noted that the Supreme Court in May v. Heiner (1930), 281 U.S. 238, 244 [ 50 S.Ct. 286 , 74 L.Ed. 826 , 67 A.L.R. 1244 ], followed the Reineeke case and that Helvering v. Hallock (1940), 309 U.S. 106 [ 60 S.Ct. 444 , 84 L.Ed. 604 , 125 A.L.R. 1368 ], does not purport to overrule it. In fact the author of the opinion in the Helvering case expressly states (p. 110 of 309 U.S.) that “Whether the transfer made by the decedent in his lifetime is ‘intended to take effect in possession or enjoyment at or after his death’ by reason of that which he retained, is the crux of the problem.” (Italics added.) As previously observed, in the case now before us, the grantor retained nothing. In Fidelity-Philadelphia Trust Co. v. Rothensies (1945), -U.S. - [ 65 S.Ct. 508 , 89 L.Ed. -], the Supreme Court again had a tax question before it but again did not depart from the Reineeke holding. Mr. Justice Douglas, in a concurring opinion, specifically pointed out that “The District Court found that this trust was ‘intended to take effect in possession or enjoyment at or after’ the death of the decedent. The Circuit Court of Appeals agreed. Certiorari was not granted on that question but only on the question whether the entire value of the corpus of the trust at the time of decedent’s death should be included in her gross estate. ’ ’ The trust involved was one in which the grantor reserved to herself during her life the income of the trust.
Subsequent to the execution of the trust grants here involved the people of this state enacted the Gift Tax Act of 1939. Such act provides a tax upon the transfer of property as an inter vivos gift and specifically provides that the word “transfer,” as used therein, “includes the passing of property or any interest therein, in possession or enjoyment, present or future, by gift, or any transfer made with donative intent” (Gift Tax Act of 1939, Deering’s Gen. Laws, Act 8495c, §4) and that “The tax applies whether the transfer is in trust or otherwise, whether the gift is direct or indirect ...” (Id., § 13). It seems to me that common honesty and fairness to the taxpayer, let alone that plane of integrity which is due from the state in its dealings with its citizens, demand that we ap *471 praise the transactions now before us as being either inter vivos gifts or as transfers in contemplation of, or to take effect upon, death. We cannot fairly classify such transactions as having two inconsistent characters. It would be sharp dealing, unworthy of a democracy, to look back upon a transaction preceding the Gift Tax Act, which transaction clearly amounted to a gift inter vivos and not to a transfer in contemplation of death or to take effect only upon death, and to classify it as subject to inheritance tax purely for the sake of garnering income to the state.
The Inheritance Tax Act has not been materially amended in its pertinent application to this case since the creation of the trusts in controversy. If those trusts, created in 1935, are properly subject to inheritance tax, then the same trusts, if created now, would be subject to such tax. Surely my brethren of the majority opinion would not go so far as to hold that the transfers of 1935 were “in contemplation of the death” of the grantor or to “take effect in possession or enjoyment at or after such death” within the meaning of the Inheritance Tax Act and at the same time classify them as transfers inter vivos so as to subject them to the gift tax. Manifestly if the property interests did not pass until death of the grantor then the transfers are subject to inheritance tax but equally manifest is it that if such property interests in their full value were transferred when the trust grants were executed then such transfers would be, if made after enactment of the Gift Tax Act, subject to the gift tax. The mere fact that they were made prior to the enactment of the Gift Tax Act of 1939 cannot operate to bring them within the otherwise inapplicable Inheritance Tax Act. Certainly, unless we are prepared to hold that the transfers now before us, if they were to take place subsequent to the enactment of the Gift Tax Act, would nevertheless be subject to the Inheritance Tax Act and not to the Gift Tax Act, we should not hold that they are subject to such Inheritance Tax Act merely because they originated prior to the enactment of the Gift Tax Act.
Lastly, it must be noted that the trial court found as a fact, upon conflicting inferences, in substance that the transfers in question were intended to, and did, take effect immediately upon the execution of the trust grants and that they were not “intended to take effect in possession or enjoyment [only] at or after such [the grantor’s] death.” The majority opinion lists a number of facts and circumstances in evidence which *472 it argues support the inference that the transfers were intended to take effect in possession or enjoyment at or after the grantor’s death. But the drawing of such inferences and the effect to be given them were matters properly for the determination of the trial court. The rule is that an “appellate court will accept or adhere to the interpretation [of a document] adopted by the trial court—and not substitute another of its own— . . . where parol evidence was introduced in aid of its interpretation, and such evidence ... is such that conflicting inferences may be drawn therefrom.” (4 Cal.Jur. 10-Yr.Supp. 1943 rev. §192, pp. 146-147; see, also, 2 Cal. Jur. § 549, pp. 934-935.)
Unless we are to depart from long established law, including the basic principle that the people are to be served before the state, the judgment should be affirmed.
Sherik, J., concurred.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/9883273. Public record. Not legal advice.