Appendix — Cory v. White

80-1556

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ake Supreme Court, U.S,

_

.

f

No. : MAR 22 1008

IN THE secur —o VAS,

Supreme Court of the United States

OcToBER TERM, 1980

CONTROLLER OF THE STATE OF CALIFORNIA AND

COUNTY TREASURER OF THE COUNTY OF LOS ANGELES,

Petitioners,

VS.

ATTORNEY GENERAL OF THE STATE OF TEXAS, ef al.,

Respondents.

APPENDIX TO

PETITION FOR WRIT OF CERTIORARI

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

Of Counsel:

MyYRON SIEDORF

Chief Inheritance Tax

Attorney

Division of Inheritance

& Gift Tax

107 South Broadway

Los Angeles, CA 90012

JEROME B. FALk, Jr.*

MakrTIN R. GLICK

STEVEN L. MAYER

HowakrbD, Prim, RICE,

NEMEROVSKI, CANADY &

POLLAK

A Professional Corporation

650 California Street, Suite 2900

San Francisco, California 94108

(415) 434-1600

DONALD Scott THOMAS

RHONDA H. BRINK

Pau. J. VAN OSSELAER

CLaRK THOMAS,

WINTERS & SHAPIRO

Capital National Bank Building

Post Office Box 1148; 12th Floor

Austin, Texas 78767

(512) 472-8442

Attorneys for Petitioners

*Counsel of Record

Appendix A

No. 79-2898.

United States Court of Appeals

FirTH Circuit.

Oct. 27, 1980.

WILLIAM RIcE LumMIs,

Texas Temporary Administrator

of the Estate of

Howard R. Hughes, Jr., Deceased,

Plaintiff-Appellant

Cross Appellee,

V.

Mark Wuite, Bos BULLOCK,

KENNETH Cory, H. B. ALvorp, et al.,

Defendants-Appellees.

KENNETH Cory, H. B. ALvorp,

Defendants- Appellees

Cross Appellants.

Appeals from the United States District Court

for the Western District of Texas.

Before VANCE and SAM D. JOHNSON, Circuit Judges, and

THOMAS, District Judge*.

VANCE, Circuit Judge:

* District Judge of the Southern District of Alabama, sitting by

designation.

2a

Howard Robard Hughes, Jr. died on April 5, 1976, leaving

an estate that state taxing authorities estimate at $1.1 billion

and the administrators estimate at $167 million.' Hughes’

assets primarily consisted of the stock of Summa Corporation, a

wholly-owned Delaware corporation. Administrators were

appointed in each of the five states where the estate’s property

is located: Texas, California, Nevada, Delaware, and Loui-

siana.2 The claimants include twenty-one heirs who have

entered a settlement agreement, about 386 other alleged heirs

who have appeared in various state administration proceedings,

twelve law firms, two states, an alleged wife, and a medical

institution. Numerous purported wills have been offered for

probate.

Both Texas and California claim Hughes as a domiciliary

and assert their rights to levy state death taxes on his estate.3

The administrators, however, allege that Hughes was domiciled

in Nevada, and it is not surprising that Nevada has no state

inheritance taxes. If both Texas and California levy death

taxes, the total of those taxes and the federal estate tax might

* District Judge of the Southern District of Alabama, sitting by

designation.

‘The Internal Revenue Service estimated that the estate was

worth approximately $465,000,000. The California inheritance tax

referee valued the estate at $1,106,345.516. The administrators, by

contract, asserted that its value was $166,800.000.

2 The Texas court appointed William Rice Lummis and Annette

Gano Lummis, Hughes’ aunt and Lummis’ mother, as temporary co-

administrators. Annette Gano Lummis died and her powers vested in

Lummis. In Delaware and Louisiana, Lummis was appointed

administrator. Richard Gano was appointed administrator in Califor-

nia. The First National Bank of Nevada was originally appointed

administrator in Nevada, but Lummis was subsequently named co-

administrator.

3 Each state seeks to tax the estate’s tangible assets located within

its borders and all of its intangible property.

Tangible personal property and realty are constitutionally

subject to taxation only at the place of situs. See Union

Refrigerator Transit Co. v. Kentucky, 199 U.S. 194 [26 S.Ct. 36,

50 L.Ed. 150]; City Bank Farmers Trust Co. v. Schnader, 293

U.S. 112 [55 8.Ct. 29, 79 L.Ed.228]... [I]ntangible personal

property may, at least theoretically, be taxed only at the place of

the owner's domicile. First Nat. Bank v. Maine, 284 U.S. 312 [52

S.Ct. 174, 76 L.Ed. 313]

California v. Texas, 437 US. at 602 n.1, 98 S.Ct. at 3108 n.1

(Stewart, J., concurring).

3a

equal over 100 percent of Hughes’ estate.4 Because of this

impossibility the administrators seek a binding determination of

Hughes’ domicile.

After an eleven-week trial, a jury in a Texas probate court

rejected the “Mormon will,” which had been offered for

probate, and determined that Hughes was domiciled in Texas

at the time of his death. Three days before the Texas trial

began, California, seeking a determination that Hughes was not

domiciled in Texas, petitioned the United States Supreme Court

for leave to file a complaint against Texas under the Court’s

original jurisdiction. See U.S. Const. Art. III § 2, cl. 2; Texas v.

Florida, 306 U.S. 398, 59 S.Ct. 563, 83 L.Ed. 817 (1939)(in-

volving Hetty Green’s fortune). In California v. Texas, 437

U.S. 601, 98 S.Ct. 3107, 57 L.Ed2d 464 (1978), however, the

Court unanimously denied California’s motion. In concurring

opinions, four members of the Court suggested that the admin-

istrators might obtain a domicile determination binding on both

Texas and California under the federal interpleader statute, 28

U.S.C. § 1335, because Edelman v. Jordan, 415 U.S. 651, 94

S.Ct. 1347, 39 L.Ed.2d 662 (1974), had undermined the

rationale of Worcester County Trust Co. v. Riley, 302 U.S. 292,

58 S.Ct. 185, 82 L.Ed. 268 ( 1937).

William Rice Lummis, the Texas temporary administrator,

then filed this interpleader action under 28 U.S.C. §§ 1335 and

1397 in district court and named state and local taxing officials

of California, state taxing officials of Texas, the California

special administrator of the Hughes estate, and the Nevada

administrators of the estate as defendants. The court realigned

the defendant administrators with the plaintiff administrators

because it found that they were working in unison toward a

4 Lummis asserts that assuming Texas and the Internal Revenue

Service will use the Internal Revenue Service valuation of the estate

and that California will use its own valuation, see note | supra, the

estate will be liable for $763,400,000 in estate taxes. This assertion is

based on the supposition that the Internal Revenue Service will assess

estate taxes at the applicable marginal rate of 77 percent minus 16

percent state death tax credit, that Texas will assess at the applicable

rate of 16 percent, and that California will assess at its applicable rate

of 24 percent.

4a

common goal. See City of Dawson v. Columbia Avenue Saving

Fund, Safe Deposit, Title & Trust Co., 197 U.S. 178, 180-81, 25

S.Ct. 420, 421, 49 L.Ed. 713 (1905). It then dismissed the

action because it found that the diversity requirement of section

1335 was not satisfied. Lummis now appeals the dismissal by

the district court.

The Texas taxing officials assert that Worcester County

Trust Co. bars Lummis’ suit and that the parties to the suit do

not fulfill the section 1335 diversity requirement. The Califor-

nia officials contend that the district court has jurisdiction to

grant relief under section 1335 only if the asserted heirs are

joined as parties-plaintiff and their citizenship is considered for

purposes of diversity.5 Although we find that the asserted heirs

need not be joined, we conclude that the district court erred in

denying Lummis the remedy of interpleader.

Interpleader enables a person holding a fund to compel

persons asserting conflicting claims to that fund to adjudicate

their rights to the fund in a single action. State Farm Fire &

Casualty Co. v. Tashire, 386 U.S. 523, 534, 87 S.Ct. 1199, 1205,

18 L.Ed.2d 270 (1967); Texas v. Florida, 306 U.S. at 405-06,

59 S.Ct. at 567; F. James, Civil Procedure § 10.21 (1965); 3A

Moore’s Federal Practice 4 22.02[1], at 22-4 (2d ed. 1979).

The remedy developed in equity and is governed by equitable

principles. Fulton v. Kaiser Steel Corp., 397 F.2d 580, 583 (Sth

Cir. 1968); see Texas v. Florida, 306 U.S. at 406-07, 59 S.Ct. at

567-568.6

5 The California taxing officials also argue that the district court

erred in denying its motion to transfer venue to the District of

Colorado under 28, U.S.C. § 1404(a). We find, however, that the

court did not abuse its discretion in denying the transfer of venue

motion. See Marbury—Pattillo Constr. Co. v. Bayside Warehouse Co.,

490 F.2d 155, 158 (Sth Cir. 1974); see generally Gulf Oil Corp. v.

Gilbert, 330 U.S. 501, 508, 67 S.Ct. 839, 843, 91 L.Ed. 1055 (1947).

6 Because the modern statutory remedy of section 1335 is equi-

table in origin and remedial in nature, courts must construe it liberally

“so as not to result in injustice.” Austin v. Texas-Ohio Gas Co., 218

F.2d 739, 746 (5th Cir. 1955); Aetna Cas. & Sur. Co v. Ahrens, 414

F.Supp. 1235, 1254 (S.D. Tex. 1975).

5a

The common law history of this remedy begins with

detinue actions and continues with the equitable strict bill of

interpleader. Under the traditional strict bill of interpleader,

the stakeholder did not assert an interest in the fund or contest

the extend of the liability. Hazard & Moskovitz, An Historical

and Critical Analysis of Interpleader, 52 Calif.L.Rev. 706,

735-49 (1964); 3A Moore's Federal Practice, supra J 22.03; 7

C. Wright & A. Miller, Federal Practice and Procedure § 1701

(1972); see 4 J. Pomeroy, Equity Jurisprudence § 1322 (Sth ed.

S. Symons 1941). The stakeholder simply brought the money

or property into court and was discharged, leaving the rival

claimants to litigate their entitlement to the fund. See Texas v.

Florida, 306 U.S. at 406, 59 S.Ct. at 567; 3A Moore’s Federal

Practice, supra 4 22.02[{1]. Because the strict bill of inter-

pleader did not afford relief to all stakeholders, courts gradually

developed the bill in the nature of interpleader. Texas v.

Florida, 306 U.S. at 406, 59 S.Ct. at 567; Chafee, Modernizing

Interpleader, 30 Yale L.J. 814, 839 (1921); Hazard & Mosko-

vitz, supra at 745-47. Through a bill in the nature of inter-

pleader, a stakeholder that asserted an interest in the fund or

denied liability to one or more of the claimants called “upon

the court to exercise its jurisdiction to guard against the risks of

loss from the prosecution in independent suits of rival claims.”

Texas v. Florida, 306 U.S. at 406-07, 59 S.Ct. at 568. Accord,

Hazard & Moskovitz, supra at 745, 747; see generally D.

Louisell & G. Hazard, Pleading and Procedure 760-64 (3d ed.

1973); A. Scott & R. Kent, Civil Procedure 917-18 (2d rev. ed.

1967). Both remedies, strict bills of interpleader and bills in the

nature of interpleader, were embodied in the Federal Inter-

pleader Act of 1936, 28 U.S.C. § 1335,” and in the form of

7 Other parts of this Act were codified at 28 U.S.C. §§ 1397,

2361. Section 1335 provides,

(a) The district courts shall have original jurisdiction of any

civil action of interpleader or in the nature of interpleader filed

by any person, firm, or corporation, association, or society having

in his or its custody or possession money or property of the value

of $500 or more, or having issued a note, bond, certificate, policy

of insurance, or other instrument of value or amount of $500 or

more, or providing for the delivery or payment or the loan of

money or Property of such amount or value, or being under any

obligation written or unwritten to the amount of $500 or more, if

(Footnote continued on following page)

6a

interpleader provided in 1938 by Rule 22(1) of the Federal

Rules of Civil Procedure. Haynes v. Felder, 239 F.2d 868, 871

(5th Cir. 1957); 3A Moore’s Federal Practice, supra J 22.07, at

22-47; 7 C. Wright & A. Miller, supra § 1701, at 357, 360.8

Presently there are two types of interpleader in federal

courts: statutory interpleader under section 1335 and traditional

equitable interpleader governed by Rule 22. See generally F.

James, supra at 513-14; C. Wright, The Law of Federal Courts

362-63, 365-66 (3d ed. 1976). The salient difference is that

section 1335 interpleader enjoys more liberal procedural rules:

the statute reduces the jurisdictional amount to $500, requires

only minimal diversity among the claimants, authorizes venue

in any district where any claimant resides, and affords nation-

wide service of process. 28 U.S.C. §§ 1335, 1397, 2361. By

contrast, Rule 22 interpleader falls under the usual rules for

civil actions: a jurisdictional amount of $10,000, complete

diversity between the stakeholder and the claimants (unless

there is a federal question), venue where all plaintiffs or all

defendants reside or where the claim arose, and statewide

service of process. id. §§ 1332(a)(1), 1391(a); Fed.R.Civ.P. 4.

See generally M. Green, Basic Civil Procedure 92-93 (2d ed.

1979).

(Footnote continued from previous page)

(1) Two or more adverse claimants, of diverse citizenship as

defined in section 1332 of this title, are claiming or may claim to

be entitled to such money or property, or to any one or more of

the benefits arising by virtue of any note, bond, certificate, policy

or other instrument, or arising by Virtue of any such obligation;

and if (2) the plaintiff has deposited such money or property or

has paid the amount of or the loan or other value of such

instrument or the amount due under such obligation into the

registry of the court, there to abide the judgment of the court, or

has given bond payable to the clerk of the court in such amount

and with such surety as the court or judge may deem proper,

conditioned upon the compliance by the plaintiff with the future

order or judgment of the court with respect to the subject matter

of the controversy

(b) Such an action may be entertained although the titles or

claims of the conflicting claimants do not have a common origin,

or are not identical, but are adverse to and independent of one

another.

8 See Chafee, The Federal Interpleader Act of 1936: I, 45 Yale

L.J. 963, 970-71 (1936); S.Rep. No. 558, 74th Cong., Ist Sess. 1, 4-5

(1935).

7a

Lummis’ action, brought under section 1335, is a bill in the

nature of interpleader to determine Hughes’ domicile at the

time of his death. California v. Texas, 437 U.S. at 610-11, 98

S.Ct. at 3113 (Stewart, J., concurring); cf. Texas v. Florida, 306

U.S. at 401, 59 S.Ct. at 565. As administrator of Hughes’

estate, Lummis disputes the extent of the estate's liability to the

taxing authorities of Texas and California, asserting that

Hughes was domiciled in Nevada when he died. Through the

equitable remedy of statutory interpleader, Lummis and the

other administrators joined with him as plaintiffs seek “to

require litigation of the inconsistent tax claims in a single forum

in order to avert the risk of loss to the estate that would result

from separate adjudications.” California v. Texas, 437 U.S. at

611, 98 S.Ct. at 3113 (Stewart, J., concurring) (emphasis in

original).

In Worcester County Trust Co. v. Riley, 302 U.S. 292, 58

S.Ct. 185, 82 L.Ed. 268 (1937), as in this case, the executor of

an estate threatened with the assessment and collection of death

taxes by two states brought a section 1335 action for a

determination of the decedent’s domicile. The Supreme Court,

however, found that the suit was actually a suit against the

state, and thus that it was barred by the eleventh amendment.®

Id. at 300, 58 S.Ct. at 188.

In his concurring opinion in California v. Texas, Justice

Stewart, joined by Justice Powell and Justice Stevens, observed

that “this holding has been substantially undercut by

subsequent developments.” 437 U.S. at 608 n.10, 98 S.Ct. at

3112 n.10. Justice Powell, concurring separately in the same

case, emphasized that

in light of Edelman v. Jordan, 415 U.S. 651, [94 S.Ct.

1347, 39 L.Ed.2d 662] (1974), this Court’s decision in

Worcester County Trust Co. v. Riley, 302 U.S. 292, [58

® The eleventh amendment limits judicial power as follows:

The Judicial power of the United States shall not be

construed to extend to any suit in law or equity, commenced or

prosectued against one on the United States by Citizens of

another State, or by Citizens or Subjects of any Foreign State.

S.Ct. 185, 82 L.Ed. 268] (1937), no longer can be

regarded as a bar against the use of federal interpleader by

estates threatened with double death taxation because of

possible inconsistent adjudications of domicile.

Id. at 615, 98 S.Ct. at 3116. Justice Brennan, also concurring,

quoted Justice Powell’s statement with approval. /d. at 601, 98

S.Ct. at 3108. In the absence of any opposing view, this court

should not ignore the guidance provided by four members of

the Supreme Court.

Worcester County Trust Co. was based on the view that the

eleventh amendment barred all suits in which plaintiffs sought

to restrain or to compel the action of state officials performing

official duties imposed by constitutional state laws. 302 U:S. at

296-300, 58 S.Ct. at 186-188. Thirty-seven years later, the

Court in Edelman clarified

that the Eleventh Amendment bars only suits “by private

parties seeking to impose a liability which must be paid

from public funds in the state treasury,” [Edelman v.

Jordan,| 415 US., at 663 [94 S.Ct., at 1356] and not

actions which may have “fiscal consequences to state

treasuries ... [that are] the necessary result of compliance

with decrees which by their terms [are] prospective in

nature,” id., at 667-668 [94 S.Ct., at 1357-1358] at least in

a case such as this, where the very controversy is a result of

our federal system. An interpleader action to prevent

competing States’ taxing officials from levying death taxes

on the basis of possible inconsistent adjudications of

domicile unquestionably would fall into the latter category.

California v. Texas, 437 U.S. at 616, 98 S.Ct. at 3116 ( Powell,

J., concurring). Because Lummis requests only prospective,

equitable relief the eleventh amendment does not preclude his

suit. See generally Milliken v. Bradley, 433 U.S. 267, 289-90, 97

S.Ct. 2749, 2761-62, 53 L.Ed.2d 745 (1977); Gay Student

Services v. Texas A & M University, 612 F.2d 160, 164-65 (Sth

Cir. 1980).10

10 Although the district court acknowledged that “the Eleventh

Amendment bar may have been removed by Edelman,” nevertheless

it found that “the Worcester court's finding that the acts of the state

taxing officials were not unconstitutional” precluded Lummis’ suit.

9a

The federal interpleader statute was enacted under the

authority of the Constitution in article III, section 2, clause 1,

which grants federal courts original jurisdiction over civil cases

that arise between citizens of different states. Treinies v.

Sunshine Mining Co., 308 U.S. 66, 71-72, 60 S.Ct. 44, 47, 84

L.Ed. 85 (1939). To enable a federal court to have jurisdiction

over an action, therefore, section 1335 requires that “Two or

more adverse claimants, of diverse citizenship as defined in

section 1332 of this title, are claiming or may claim to be

entitled to [the] money or property.” 28 U.S.C. § 1335(a)(1).

In State Farm Fire & Casualty Co. v. Tashire, 386 U.S. 523, 87

S.Ct. 1199, 18 L.Ed.2d 270, (1967), the Supreme Court

interpreted this provision “to require only ‘minimal diversity,’

that is, diversity of citizenship between two or more claimants.”

Id. at 530, 87 S.Ct. at 1203. Accord, Haynes v. Felder, 239 F.2d

at 871; see J. Cound, J. Friedenthal & A. Miller, Civil Procedure

627-28 (2d ed. 1974).

The district court found that the parties in this case lack

minimal diversity and dismissed the action for want of jurisdic-

tion. It concedes that Alvord, the acting county treasurer for

Los Angeles County, was a citizen of California for diversity

purposes, citing Moor v. County of Alameda, 411 U.S. 693, 93

S.Ct. 1785, 36 L.Ed.2d 596 (1973), overruled on other grounds,

Monell v. Department of Social Services, 436 U.S. 658, 98 S.Ct.

2018, 56 L.Ed.2d 611 (1978). The district court, however,

summarily concluded that the administrators “are certainly not

claimants for the purpose of this statutory interpleader action.”

It then reasoned that the state of Texas rather than the named

state taxing officials was the real party in interest in the action,

see Craig v. Southern Natural Gas Co., 125 F.2d 66, 67 (Sth

Cir. 1942), and that a state is not a citizen of itself for diversity

purposes, Postal Telegraph Cable Co. v. Alabama, 155 U.S. 482,

487, 15 S.Ci. 192, 194, 39 L.Ed. 231 (1894). Because the

United States is also not a state citizen for purposes of diversity,

Kent v. Northern California Regional Office, 497 F.2d 1325,

1327 (%h Cir. 1974); 3A Moore’s Federal Practice, supra

4 22.09[3], at 22-77, under the district court’s analysis, abso-

lutely no diversity exists among the parties. This conclusion

10a

provides little consolation to Lummis and the other adminis-

trators who are charged in their letters of administration with

preserving and protecting the estate's assets, but are confronted

with the complete depletion of the estate that may result from

the collection of domicile-based death taxes by two different

states. The incongruity of such a result is manifest in a case in

which scores of interested persons spread over the entire

western United States and at least three different sets of

government taxing authorities are vying over an enormous sum

of money.

The controversy in this case is “between each State and the

decedent's estate as to the legal obligation to pay death taxes.”

California v. Texas, 437 U.S. at 611, 98 S.Ct. at 3113 (Stewart,

J., concurring). The action is a bill in the nature of inter-

pleader, not a strict bill of interpleader. /d. at 610-11, 98 S.Ct.

at 3113. Lummis claims an interest in protecting the assets of

the Hughes estate from double death tax liability, and asserts

that Hughes was domiciled in Nevada, which has no state

death tax. Because of his legal duty of preserving the estate's

assets, Lummis is an interested stakeholder, not a disinterested

one."!

This circuit has not decided whether the citizenship of an

interested stakeholder may be considered for purposes of

establishing the minimal diversity required by section 1335.

Boston Old Colony Insurance Co. v. Balbin, 59\ F.2d 1040, 1042

n.5 (Sth Cir. 1979). In the Treinies decision in 1939, the

Supreme Court held that the citizenship of a stakeholder who

did not claim any interest in the deposited fund did not destroy

diversity for a strict bill of interpleader although the stake-

holder and one of the claimants were citizens of the same state.

308 U.S. at 71-72, 60 S.Ct. at 47. The Court did not discuss

whether the citizenship of an interested stakeholder similarly is

irrelevant for purposes of diversity. A stakeholder who brings a

't In addition, the result of our decision is that the district court

will determine Hughes’ domicile at death, which will resolve where

his intangible property will be administered. In turn, that will

determine which administrators will and which will not receive the

statutory fee for administering Hughes’ intangible property. That fee

may well amount to tens of millions of dollars. Because this lawsuit

will influence their entitlement to that administration fee, the various

administrators are interested parties.

bill in the nature of interpleader asserts a claim to the fund that

is adverse to that of the defendant claimants. Because section

1335 requires only that two or more adverse claimants be of

diverse citizenship, we hold that the citizenship of an interested

stakeholder may be considered for purposes of establishing

diversity under section 1335. Accord, Builders & Developers

Corp. v. Manassas Iron & Steel Co., 208 F.Supp. 485, 488

(D.Md.1962); see Pan American Fire & Casualty Co. v. Revere,

188 F.Supp. 474, 477 & n.8 (E.D.La.1960),'2

Section 1335 provides that the adverse claimants must be

“of diverse citizenship as defined in [28 U.S.C. ] section 1332.”

Under section 1332's diversity rules, as long as the adminis-

trator was not named solely for the purpose of creating

diversity, Green v. Hale, 433 F.2d 324, 326-31 (Sth Cir. 1970),

the citizenship of the administrator, rather than that of the

decedent or the heirs, controls the question whether the federal

court has diversity jurisdiction. Bush v. Carpenter Brothers,

Inc., 447 F.2d 707, 710-11 (Sth Cir. 1971); Harris v. Johnson,

345 F.Supp. 516, 517 (N.D.Miss.1972). As Hughes’ first

cousin and one of his prospective heirs, Lummis clearly has

more than a nominal interest in the administration of his estate.

Therefore, he clearly was not chosen to be the administrator

collusively or “joined to invoke the jurisdiction of [the district}

court.” 28 U.S.C. § 1359. Because the pleadings indicate that

Lummis is a citizen of Nevada, he is a claimant whose

citizenship is diverse from that of an adverse claimant, Alvord,

the acting county treasurer for Los Angeles County and a

‘2 Professors Wright and Miller note,

The declining importance of the classic limitations on inter-

pleader and the acceptance of jurisdiction based on minimal

diversity under the statute are evidence of a trend toward the

broadest availability of interpleader relief that has been under-

way since the adoption of the federal rules. Allowing statutory

interpleader [when the defendant claimants are citizens of the

same state, but an interested stakeholder is diverse,] would be

consistent with that trend.

7C, Wright & A. Miller, supra § 1710, at 406 ( footnote omitted). Bur

see 3A Moore's Federal Practice, supra J 22.09{ 1}.

12a

citizen of California. This satisfies the diversity requirement of

section 1335.13

The California taxing officials argue that the district court

erred in failing to join Hughes’ prospective heirs as parties

under Rule 19 of the Federal Rules of Civil Procedure. Rule

17, however, provides that “[e]very action shall be prosecuted

in the name of the real party in interest,” and that an “executor,

[or] administrator . .. may sue in his own name without joining

with him the party for whose benefit the action is brought.”

Fed.R.Civ.P. 17(a). In performing his duty of preserving the

assets of the estate imposed by Texas law, see Tex.Prob.Code

Ann. §§ 231-33 (Vernon 1980), Lummis is the real party in

interest, and the prospective heirs need not be joined. See

Proctor v. Gissendaner, 579 F.2d 876, 880 (Sth Cir. 1978).

IV

In this case we must decide whether the federal system that

has spawned Lummis’ dilemma of double taxation provides

him with a remedy. California v. Texas, 437 U.S. at 616, 98 -

S.Ct. at 3116 ( Powell, J., concurring) (quoting Chafee, Federal

Interpleader Since the Act of 1936, 49 Yale L.J. 377, 388

(1940)). We hold that it does.

Under the common law of Texas as well as that of

California, a decedent has only one domicile for death tax

purposes. California v. Texas, 437 U.S. at 603, 98 S.Ct. at 3109

(Stewart, J., concurring); see Texas v. Florida, 306 U.S. at 408,

59 S.Ct. at 568. Because “neither Texas nor California is or will

become a party to the proceedings in the other’s courts, neither

will be bound by an adverse determination of domicile in the

13 The only administrator whose citizenship differs from that of

Lummis is Richard Gano, the California administrator. Because only

minimal diversity is required, we find that Gano’s California citizen-

ship will not deprive the district court of jurisdiction under section

1335. See State Farm Fire & Cas. Co. v. Tashire, 386 U.S. at 530, 87

S.Ct. at 1203.

13a

other’s forum.” /d., 98 S.Ct. at 3109. Lummis seeks only a

determination that will bind both sets of taxing officials'* and

will thus preserve the estate’s assets from either total or near-

total depletion. Such a determination, rather than impeding the

states in enforcing their laws, would effectively implement their

rules that death taxes may be imposed only by a state in which

a decedent is domiciled at his death and that a decedent may

have only one domicile. The equitable bill in the nature of

interpleader, codified in section 1335, enables Lummis to

obtain a binding domicile determination from a federal tribu-

nal. We hold that the district court has jurisdiction over

Lummis’ suit; thus we reverse its dismissal order.

REVERSED AND REMANDED

Lummis also seeks a declaration of Hughes’ domicile for

federal estate tax purposes. The United States, however, asserts that

such a declaration is barred by 28 U.S.C. § 2201. Section 2201

enables federal courts to “declare the rights and other legal relations

of any interested parts” in actual controversies within its jurisdiction

“except with respect to Federal taxes.” See California v. Texas, 437

USS. at 609 n.10 98 S.Ct. at 3112 n.10 (Stewart, J., concurring). The

district court’s determination that it lacked diversity jurisdiction

caused it to dismiss the case as to all parties and claims, and it did not

reach the United States’ contentions. Generally, “a reviewing court

should remand a case to the district court for consideration of a

question not previously considered there . . .” Boire v. Miami Herald

Publishing Co., 343 F.2d 17, 25 (Sth Cir. ), cert. denied, 382 U.S. 824,

86 S.Ct. 56, 15 L.Ed.2d 70 (1965). Accord, Connolly v. Pension

Benefit Guaranty Corp., 581 F.2d 729, 734-35 (9th Cir. 1978) cert.

denied, 440 U.S. 935, 99 S.Ct. 1278, 59 L.Ed2d 492 (1979). We

therefore decline to consider this issue until the district court has

decided it on remand.

Ib

Appendix B

United States Court of Appeals

FirtH Circuit

Gilbert F, Ganucheau Office of ive Clerk Tel 504-589-6514

Clerk 600 Camp Street

New Orleans, LA. 70130

December 12, 1980

TO ALL PARTIES LISTED BELOW:

No. 79-2898 WiLLiaM Rice LuMMIS, etc.

vs.

Mark WHITE, et al.

Dear Counsel:

This is to advise that an order has this day been entered

denying the petition( ) for rehearing, and no member of the

panel nor Judge in regular active service on the Court having

requested that the Court be polled on rehearing en banc ( Rule

35, Federal Rules of Appellate Procedure; Local Fifth Circuit

Rule 16) the petition( ) for rehearing en banc has also been

denied.

See Rule 41, Federal Rules of Appellate Procedure for

issuance and stay of the mandate.

Very truly yours,

GiLBert F. GANUCHEAU, Clerk

Oe crmicadenall BRENDA.HAUCK...............

Deputy Clerk

cc: ALL COUNSEL OF RECORD

Ic

Appendix C

U.S. COURT OF APPEALS

FILED

JAN 23 - 1981

Gitpeat F. Ganucneay, Cle

United States Cowt of Appeals

For THE FirtH Circuit

No. 79-2898

WILLIAM Rice Lummis,

Texas Temporary Administrator

of the Estate of

Howard R. Hughes, Jr., Deceased,

Plaintiff-Appellant

Cross Appellee,

Vv.

Mark Wuite, Bos BULLOCK,

KENNETH Cory, H.B. ALvorp, et al.,

Defendants-Appellees

KENNETH Cory, H.B. ALVorp,

Defendants-Appellees

Cross Appellants.

Appeals from the United States

District Court for the

Western District of Texas

ORDER:

It Is OrpeReED that appellees and cross appellants, Ken-

neth Cory and H. B. Alvord’s motion for leave to file a second

petition for rehearing out of time is DENIED.

Id

Appendix D

FILED

JUL 27 - 1979

Cuarces W. Vacner, Clerk

By

Deputy

UNITED STATES DISTRICT COURT

WESTERN DistRICT OF TEXAS, AUSTIN DIVISION

WILLIAM Rice Lummis and

ANNETTE GANO LuMmMIS

| CIVIL ACTION

Vv. NO. A-78-CA-148

Mark ‘WHITE, ef al

ORDER

On July 10, 1979, oral arguments were heard on the

Motions to Dismiss of Defendants Cory and Alvord (here-

inafter referred to as the “California Defendants” or “Califor-

nia”) and Defendants White and Bullock (hereinafter referred

to as the “Texas Defendants” or “Texas”). After careful

consideration of the briefs and the arguments of counsel, the

Court is of the opinion that the Motions to Dismiss are

meritorious and should be granted.

In the way of background suffice it to say that the present

action was brought after the State of California petitioned the

United States Supreme Court for leave to file a complaint

seeking to invoke that court’s original jurisdiction. In June of

1978, a unanimous court denied California’s motion. Califor-

nia v. Texas, 437 U.S. 801 (1978). In concurring opinions four

members of the court suggested that the Hughes estate might

obtain a judgment under the Federal Interpleader Statute (28

U.S.C. § 1335) that would be binding on both Texas and

California and thereby avoid the possibility of conflicting state

2d

court determinations of domicile and death tax liability. Short-

ly after this opinion the Texas Administrators of the Hughes

estate filed the present interpleader action.

After considering the briefs and arguments of able counsel

the court is persuaded the interpleader action should be dis-

missed as this court is without subject matter jurisdiction over

the statutory interpleader claim. The Statutory Interpleader

Act, 28 U.S.C. § 1335, provides in pertinent part:

“The District Court shall have original jurisdiction of any

civil action... in the nature of interpleader filed by any

person having in his... custody or possession money or

property of the value of $500.00 or more... if... [t]wo

or more adverse claimants, of diverse citizenship as de-

fined in Section 1332 of this title, are claiming or may

claim to be entitled to such money or property...”

It is the position of the Texas and California Defendants

that the Plaintiffs’ action does not involve two or more adverse

claimants of diverse citizenship as the statute requires. We

agree.

By the terms of the statute a claimant must be both adverse

and claiming or may claim to be entitled to the money or

property in the custody of the stakeholder. The court is of the

view that of the parties named by the Plaintiffs in this action,

only the United States and the California and Texas taxing

officials are claimants under the interpleader statute.

The adverseness in this instance is among the various

taxing authorities for they are the only parties “claiming or

[who] may claim to be entitled to such money or property”

held by the stakeholder. The Plaintiffs argue that the Adminis-

trators of the Hughes estate in Nevada and other states are

claimants, but it is clear that none of the Administrators have a

claim against the money or property in the custody or posses-

sion of the plaintiff stakeholder; accordingly none meets the

requirement for a claimant. See Fulton v. Kaiser Steel Corpo-

ration, 397 F.2d 580 (Sth Cir. 1968).

3d

The court also notes that the Texas Administrators, the

Plaintiffs in this action, and the Administrators of the Hughes

estate in other states, named Defendants in the present cause,

have the same ultimate interest in the outcome of this litigation.

At the hearing on the motions to dismiss Mr. William Rice

Lummis, the Texas Administrator and Plaintiff in this matter,

admitted during cross-examination that the Plaintiff Adminis-

trators and the Defendant Administrators were working in

unison toward a common goal. As Professor Wright noted,

“[i]t is the court’s duty to ‘look beyond the pleadings, and

arrange the parties according to their sides in the dispute.’ ”

Wright, Miller & Cooper, Federal Practice and Procedure:

Jurisdiction § 3607 citing City of Dawson v. Columbia Trust

Company, 197 U.S. 178 (1905). The court thus feels that in

aligning parties according to their interests it is duty bound to

realign the named Defendant Administrators of the Hughes

estate with the Plaintiff Administrators. As Plaintiff Adminis-

trators, the Administrators of the Hughes estate from the states

of Nevada, Delaware, Louisiana, and California are certainly

not claimants for the purpose of this statutory interpleader

action.

With the United States and the Texas and California

taxing Officials identified as claimants in this cause, the court

now turns its attention to the question of diverse citizenship that

the statute requires of the claimants. The Federal Interpleader

Act, 28 U.S.C. § 1335, refers to “adverse claimants, of diverse

citizenship as defined in Section 1332 of this title.” Section

1332 of Title 28, United States Code, provides in pertinent part:

“The district courts shall have original jurisdiction of all

civil actions ... between. . . citizens of different States...”

There is no question that the United States is not a “citizen

of a state” for diversity purposes. Kent v. Northern California

Regional Office of American Friends Service Committee, 497

F.2d 1325 (9th Cir. 1974). Likewise, there is no question that

Defendant H.B. Alvord, the acting County Treasurer for the

County of Los Angeles, California is a citizen of the state of

California for diversity purposes. Moor v. County of Alameda,

411 U.S. 693 (1973). The Court need not consider whether

Defendant Kenneth Cory, the acting Controller of the state of

4d

California, is a citizen of that state for diversity purposes as such

a finding would not add a “diverse citizenship” to that of Mr.

Alvord’s.

In determining the citizenship of parties for diversity

purposes, the court looks not to the named parties in the

complaint, but to the real parties in interest in the litigation.

“The general rule is that the citizenship of the real party in

interest is determinative in deciding whether diversity jurisdic-

tion exists; the presence of a nominal or formal party is

irrelevant for purposes of measuring the court’s subject matter

jurisdiction.” Wright & Miller, Federal Practice and Proce-

dure: Civil § 1556. Were this not the case, parties could

circumvent the limits on federal jurisdiction by creating or

destroying jurisdiction by merely adding nominal parties to an

action.

This principle has been applied in the context of actions by

or against state officers or officials where the real party in

interest is the state. The Defendants cite the case of Craig v.

Southern Natural Gas Co., 125 F.2d 66 (Sth Cir. 1942), for the

proposition that a suit against a state taxing official, growing out

of his official duties as a collection agent for the state, is a suit

against the state. We agree and find the existence of a similar

situation here. The authority by which the Texas Attorney

General ( White) and the Texas Comptroller ( Bullock) act for

the state is well documented. See Tex. Tax-Gen. ANN. arts.

1.032, 1.032A, 1.10, 14.01, 14.13-14.22; and Tex. Rev. Civ.

Stat. ANN. arts. 4396 and 4407. As it is clear that the Texas

Attorney General and Comptroller act not as individuals, but as

agents of the state, and the state is the sole beneficiary of those

actions, we find those parties to be purely nominal parties in

this action with the state being the real party in interest.

It has long been held that a state is not a citizen of itself for

federal diversity purposes. Postal Telegraph Cable Co. v.

Alabama, 155 U.S. 482 (1894). Thus, the inclusion of the

nominal parties White and Bullock does not provide a “claim-

ant of diverse citizenship.” After examining all of the “adverse

claimants” the court finds that only one has a citizenship for

federal diversity purposes. While only minimal diversity is

5d

required under 28 U.S.C. § 1335 [ State Farm Fire and Casualty

Co. v. Tashire, 386 U.S. 523 (1967)], the statute does require

that at least two claimants be of diverse citizenship as defined in

28 U.S.C. § 1332. Here as in Kent v. Northern California

Regional Office of American Friends Service Committee, 497

F.2d 1325 (9th Cir. 1974), “the requisite diversity is lacking.”

Id. at 1327. Accordingly, the interpleader claim should be

dismissed.

The Plaintiffs seek to avoid this result by claiming in their

First Amended Complaint that the state taxing officials are

acting unconstitutionally. They claim that such action brings

those officials under the doctrine of Ex Parte Young, 209 U.S.

123 (1908) where it was held that a suit against a state official

alleged to be acting unconstitutionally is not a suit against the

state for purposes of the Eleventh Amendment. The Plaintiffs

argue that by analogy the court should look to the individual

defendant rather than the state in determining the citizenship

for federal diversity purposes. The validity of the analogy is a

moot point for it is clear that the actions complained of are not

unconstitutional.

The Plaintiffs’ claim that the threatened collection of a

death tax by more than one state constitutes a deprivation of

property without due process of law and a denial of equal

protection of the laws was considered by the Supreme Court in

Worcester County Trust Co. v. Riley, 302 U.S. 292 (1937). Ina

case strikingly similar to the present action, the court held that

the constitution did not forestall the possibility of conflicts of

decisions of the courts of two states. Jd. at 298. Plaintiffs seek

to avoid that precedent by referring to the concurring opinions

in California v. Texas, 437 U.S. 801 (1978) where a minority

of the court intimated that an interpleader action like that in

Worcester County would no longer be barred by the Eleventh

Amendment. This court finds that the fact that the Eleventh

Amendment bar may have been removed by Edelman vy.

Jordan, 415 U.S. 651 (1974), has nothing to do with the

continuing validity of the Worcester court's finding that the acts

of the state taxing officials were not unconstitutional. Indeed,

Justice Stewart, author of the principal concurring opinion in

6d

California v. Texas, specifically noted that “there is no con-

stitutional impediment to both California and Texas imposing

death taxes upon the Hughes estate by proceedings in their own

Courts.” California v. Texas, 46 U.S.L.W. at 4798 n.13

(Stewart, J., concurring).

The Plaintiffs having failed to establish jurisdiction for

their statutory interpleader claim, the court now turns to the

additional claims the Plaintiffs raised in their First Amended

Complaint. In Counts II and III of the complaint the Plaintiffs

attempt to establish this court’s jurisdiction independent of the

interpleader statute. Count II alleges that jurisdiction exists

under 28 U.S.C. § 1331, the federal question statute, as the state

taxing authorities of Texas and California are violating Plain-

tiffs’ rights because the state court proceeding in neither state

can protect the estate from being found liable for death taxes in

other states.

This argument warrants little attention. Justice Stone,

writing for a unanimous court in Worcester County Trust Co. v.

Riley, 302 U.S. 292 (1937), noted:

“Neither the Fourteenth Amendment nor the full faith and

credit clause requires uniformity in the decisions of the

courts of different states as to the place of domicil, where

the exertion of state power is dependent upon domicil

within its boundaries. Hence it cannot be said that the

threatened action of respondents involves any breach of

state law or of the laws or Constitution of the United

States.” (citations omitted ).

As previously noted, Justice Stewart in his concurring opinion in

California v. Texas, supra, pointed out that there was no

constitutional impediment to the actions the Plaintiffs complain

of. Accordingly, this claim must be dismissed for failure to state

a claim upon which relief can be granted.

In Count III of the complaint Plaintiffs allege that the

Defendant taxing officials are in violation of the provisions of

42 U.S.C. § 1983. Although some of the claims raised in this

Count are quite imaginative, the court is not persuaded by any

of these claims. After careful consideration of each point the

7d

court is of the opinion that this count of the complaint should be

dismissed as the claims fail to state a claim upon which relief

can be granted, or the Plaintiffs are not the proper parties to

advance them, or the claims do not present a constitutionally

ripe case or controversy.

Having examined the additional grounds raised by the

Texas and California Defendants in their Motions to Dismiss

and finding them unpersuasive, the court is of the opinion that

this action should be dismissed for the reasons set out above.

In closing, the court wishes to note that it is not unsym-

path[et]ic to the potential plight of the Plaintiffs in this action;

however, it is incumbent upon this court, and indeed any

federal court, that scrupulously confine its own jurisdiction to

the precise limits which a federal statute has defined. Victory

Carriers, Inc. v. Law, 404 U.S. 202 (1971). It is accordingly

ORDERED, ADJUDGED AND Decreep that the Motions to

Dismiss of the California Defendants and the Texas Defen-

dants be, and hereby are, GRANTED.

Entered this 27th day of July, 1979, at Austin, Texas.

JacK ROBERTS

United States District Judge

Appendix E

FILED

AUG 8 - 1979

Cuarces W. Vaoner, Clerk

By

Deputy

UNITED STATES DISTRICT COURT

WESTERN District OF Texas, AUSTIN DivisiON

v. | CIVIL ACTION

NO. A-78-CA-148

WILLIAM Rice Lumois, et al.

Mark WHITE, et al.

J

ORDER

This Court’s Order of December 4, 1978, on the Motion of

Defendants Cory and Alvord to Add Defendants is hereby

withdrawn and the following Order is substituted in its stead.

On November 21, 1978, this Court held a hearing on

Defendants Cory and Alvord’s Motion to Add Defendants.

After careful consideration of the arguments and brief relative

to this motion, the Court is of the opinion that Defendants Cory

and Alvord’s Motion to Add Defendants is without merit, and

should be denied.

This suit to determine the domicile of the late Howard

Hughes is brought as a statutory interpleader action under 28

U.S.C. § 1335. In California v. Texas, US. , 46

U.S.L.W. 4795 (June 22, 1978), four members of the Supreme

Court suggested such an action as a means of reaching a single,

binding determination of the decedent's domicile. The admin-

istrators of the Hughes Estate brought the present action in

order to reach such a binding determination, and thereby avoid

2e

the possibility of estate taxation by more than one state.

Defendants Cory and Alvord (Movants) contend that in order

to reach such a binding determination a group of 22 persons,

who hold themselves out as the only known heirs of Mr.

Hughes, need be joined as Defendants in this action. This

Court, indeed all parties to this action, share the Movants’

concern with reaching a just, single, and binding resolution of

this matter, however, the Court’s examination of pertinent

authority does not point toward joining this group of heirs as a

means to that end.

The Movants claim this group of heirs must be joined as

persons needed for the just adjudication of this matter pursuant

to Rule 19 of the Federal Rules of Civil Procedure. Rule 19

provides in pertinent part:

“A person who is subject to service of process

and whose joinder will not deprive the court of

jurisdiction over the subject matter of the action shall

be joined as a party in the action if (1) in his absence

complete relief cannot be accorded among those

already parties, or (2) he claims an interest relating

to the subject of the action and is so situated that the

disposition of the action in his absence may (i) as a

practical matter impair or impede his ability to

protect that interest or (ii) leave any of the persons

already parties subject to a substantial risk of in-

curring double, multiple, or otherwise inconsistent

obligations by reason of his claimed interest. . . .”

It is the opinion of this Court that Rule 17 of the Federal

Rules of Civil Procedure provides better guidance for the

resolution of this matter. Rule 17 provides in pertinent part:

“Every action shall be prosecuted in the name of

the real party in interest. An executor, administrator,

guardian, bailee. . . or a party authorized by statute

may sue in his own name without joining with him

the party for whose benefit the action is brought... .”

It is the substantive law of the state where the federal court

sits that determines the authority of an administrator to act as

3e

the real party in interest. Boeing Airplane Company v. Perry,

322 F. 2d 589 ( 10th Cir. 1963). It is clear that under the Texas

law the administrator is authorized to act on behalf of the heirs

in this matter. See Tex. Rev. Civ. Start., art. 1981, and Texas

ProBaTE Cope §§ 231-233.

The wisdom and common sense behind Rule 17 is

especially evident in a situation such as this where an action

need be taken to protect the assets of the Estate, but there has

yet to be a determination of heirship (or even that Mr. Hughes

died intestate ).

The fears that the heirs would not be bound by the actions

of the administrator would seem to be laid to rest by the

Advisory Committee Note to the 1966 Amendment to Rule 17

which pointed out:

“[ T]he modern function of the rule in its negative

aspect is simply to protect the defendant against a

subsequent action by the party actually entitled to

recover, and to insure generally that the judgment

will have its proper effect as res judicata.”

The relationship between Rule 17 and Rule 19 has been

set out by Professor Moore as follows:

“Rule 17(a) deals in terms with joinder in the case of

fiduciaries, providing that an executor, administrator,

guardian, bailee, .. . or a party authorized by statute

may sue in his own name without joining with him

the party for whose benefit the action is brought. The

party for whose benefit the action is brought nor-

mally is not, then, a person to be joined if feasible

under Rule 19, though they may be if the interest of

the fiduciary or representative are antagonistic to

those of the parties represented.”

3A Moore’s Federal Practice | 19.01-1[ 5-2].

It is very clear that the present case does not fall within the

exception Professor Moore noted. Here the interests of the

Administrators and the heirs are exactly the same. The

Administrator brought this action in order to avoid double

4e

taxation of the estate, and to preserve as much of the estate as

possible for distribution. No argument can be made that the

interests of the heirs and that of the Administrator are

antagonistic in this suit. Indeed here, the Administrator is also

an heir.

Movants cite as dispositive precedent for the applicability

of Rule 19 the cases Bry-Man’s, Inc. v. Stute, 312 F.2d 585 (Sth

Cir. 1963) and Gottlieb v. Vaicek, 69 F.R.D. 672 (N.D. 111.

1975). The Court notes that neither of these cases are Rule 17

cases, and if they were, they would fall within the exception

Professor Moore noted. In both of these cases a party in privity

with another party was required to be joined, but in both

instances the person already a party to the suit was found to be

incapable of representing the interest of the non-party with

whom they were in privity. As previously noted, such is not the

case here.

Additional evidence of the binding nature of the present

action is found in Sea-Land Services, Inc. v. Gaudet, 414 U.S.

573 (1974). There the Supreme Court noted:

“And while the general rule is that nonparties to the first

action are not bound by a judgment or resulting determi-

nation of issues, several exceptions exist. The pertinent

exception here is that nonparties may be collaterally

estopped from relitigating issues necessarily decided in a

suit brought by a party who acts as a fiduciary representa-

tive for the beneficial interest of the nonparties.”

In the recent case of Southwest Airlines v. Texas Inter-

national Airlines, 546 F.2d 84 ( 5th Cir. 1977), the Fifth Circuit

Court of Appeals provides an excellent discussion of instances

where federal courts have repeatedly held that indgments can

bind persons not party to the litigation in question. The court

first notes that at common law this preclusive effect extended

only to those in privity with the parties. The court then explains

that the term “privity” is a legal conclusion that reflects that the

relationship between the party of record and the non-party is

sufficiently close to afford application of the principle of pre-

clusion. Jd. at 95. The court finally lists several types of

Se

relationships deemed to be “sufficiently close” to justify pre-

clusion. Of interest here is the third instance the court cited.

The present action falls under the heading, “federal courts will

bind a non-party whose interests were represented adequately

by a party in the original suit”. Jd. Citing Heckman v. United

States, 224 U.S. 413 (1912) (United States represents the

interest of American Indians), Kerrison v. Stewart, 93 U.S. 155

(1876) (trustee represents interests of beneficiaries), Aerojet-

General Corp. v. Askew, 511 F.2d 710 (Sth Cir. 1975) (state

represents interests of home-rule county), and Berman v.

Denver Tramway Corp., 197 F.2d 946 (10th Cir. 1952) (local

government represents interests of the public. The present

cause clearly falls under this heading.

The Movants devoted considerable attention to the issue of

where the liability attaches for the payment of the California

inheritance tax. Movants contend that it falls on the heirs, and

therefore they must be joined. The Court notes that under

California law the Administrator is initially responsible for the

payment of the tax, and is required to deduct any such tax due

prior to distribution of estate assets to the beneficiaries. See

Cat. Rev. & Tax. Cope §§ 14101 and 14121 and Cat. Pros.

Cope § 1024. See also Cohn v. Cohn, 123 P.2d 833, 835

(1942).

Under California law Mrs. Lummis is the sole intestate

heir. Mrs. Lummis is a party to the present action, therefore

there is no need to add the heirs as parties when the sole heir

under California law is already a party to this suit.

The Movants argue that by signing the agreement with the

21 other heiis the Movants seed to add, Mrs. Lummis has made

them liable for the payment of the inheritance tax. This is

clearly not the case. Liability for the payment of the tax

attaches on the death of the decedent, and parties may not later

shift the liability by agreement. Cohn v. Cohn, 123 P. 2d 833,

835 (1942).

The Movants also claim that Mrs. Lummis would not be

bound by a judgment rendered against her in her representative

capacity, and would therefore be free to relitigate this matter.

Movants cite Professor Moore for the proposition that “a

person appearing in a representative capacity is not bound by a

6e

judgment rendered against him as an individual”. 1B Moore’s

FEDERAL Practice 90.411 [1]. While this is a proper state-

ment of the law, it is totally unrelated to the issue at hand.

Here we are concerned with whether a judgment against a

person in a representative capacity would be binding on that

same person as an individual. It is clear that it would be

binding on that individual as it would be on any other member

of the group for which the person appeared as a representative.

Additionally, the Supreme Court of California has held

that, “[w]here a party though appearing in two suits in

different capacities is in fact litigating the same right, the

judgment in one estops him in the other”. Bernhard v. Bank of

America National Trust & Savings Association, 122 P. 2d 892

(1942).

The Court notes in closing that there are various means

available to insure that the matters in this suit are not reliti-

gated. See 28 U.S.C. § 2283.

While the Court shares the Movants’ concern for a final,

binding adjudication, it is clear that with the present parties to

this action this Court’s judgment would bind the Adminis-

trators, the heirs, and the taxing authorities of Texas and

California. No more is required.

Pursuant to 28 U.S.C. § 1292(b), this Court finds that the

motion of Defendants Cory and Alvord and this Order involve

a controlling question of law as to which there is substantial

ground for difference of opinion and that an immediate appeal

for this order may materially advance the ultimate termination

of this litigation.

It is accordingly ORDERED, ADJUDGED AND DECREED that

the Motion of Defendants Cory and Alvord to Add Defendants

be, and hereby is, DENIED.

Entered this 8th day of August, 1979, at Austin, Texas.

Jack ROBERTS

AAO REe EE EEE E EERE EE EEEREEEEE OSES ES EEEEEEEEEEESEEEERESEOEEREEEEEER EEE EE EONS

United States District Judge

If

Appendix F

FILED

AUG 8 - 1979

Cares W. Vacner, Clerk

By

‘ Deputy

UNITED STATES DISTRICT COURT

WESTERN District OF TEXAS, AUSTIN DIVISION

WILLIAM Rice LumMis, et al.

v. CIVIL ACTION

NO. A-78-CA-148

MarRK WHITE, et al.

ORDER

This Court’s Order of December 4, 1978 on the Motion of

Defendants Cory and Alvord to Change Venue is hereby

withdrawn and the following Order is substituted in its stead.

On November 21, 1978, this Court held a hearing on the

Motion of Defendants Cory and Alvord to Change Venue.

After careful consideration of the arguments and briefs relative

to this motion, the Court is of the opinion that the Motion of

Defendants Cory and Alvord to Change Venue is without

merit, and should be denied.

Defendants Cory and Alvord seek to have venue in this

cause changed to the United States District Court for the

District of Colorado, or in the alternative, to the Central District

of California.

Change of venue is provided for in 28 U.S.C. § 1404,

which provides in pertinent part:

J

2f

“For the convenience of parties and witnesses, in the

interest of justice, a district court may transfer any civil

action to any other district or division where it might have

been brought.”

The answer to where the present cause might have been

brought is found in 28 U.S.C. § 1397. According to this

provision:

“Any civil action of interpleader or in the nature of

interpleader under section 1335 of this title may be

brought in the judicial district in which one or more of the

claimants reside.”

This action was brought by the Texas Administrators of

the Hughes Estate in an effort to protect against multiple estate

taxation. In a companion motion, the taxing authorities of the

state of California (Defendants Cory and Alvord) sought to

add as Defendants a group of heirs of Howard Hughes, one of

whom allegedly resides in Colorado. The Motion of Defend-

ants Cory and Alvord to Add Defendants was denied by Court

Order on November 27, 1978. As no claimant in this action

resides in Colorado, Colorado is not a forum in which this

action might have been brought, and accordingly, Colorado is

not a forum to which a change of venue might be had.

In the alternative, Movants sought transfer of this cause to

the Central District of California. In arguing that a change of

venue to Colorado would be in the interest of justice, counsel

for the Movants claimed that a Texas jury would have a

pecuniary interest in the outcome, that regional pride might

interfere with an objective verdict, and that there had been too

much local publicity. Counsel for the Movants admitted in

court that these same claims are not applicable to the State of

California. Counsel in effect, if not in fact, has admitted the

only factor to look to regarding a change of venue to California

is the convenience of parties and witnesses.

Generally, the burden is on the moving party to justify the

transfer, and the balance need usually be strongly in the

movants favor. See Wm. A. Smith Contracting Co., Inc., v.

Travelers Indemnity Co., 467 F. 2d 662 (10th Cir. 1972). See

3f

also Vasquez v. Falcon Coach Co., Inc., 376 F. Supp. 815

(D.N.D. 1976). While it is clear that the California forum

would be more convenient to the California Defendants and

witnesses, it is equally clear that this forum is the more

convenient for the Texas Defendants, the Administrator of the

Estate, and the Texas witnesses. As transfer is not appropriate

if it would merely shift the inconvenience from one party to

another, the Movants have failed to justify the transfer of this

cause. See Hess Oil Virgin Islands Corporation v. UOP, Inc.,

447 F. Supp. 381 (N.D. Okla. 1978) and Residex Corporation

v. Farrow, 374 F. Supp. 715 (E.D. Penn. 1974).

Pursuant to 28 U.S.C. § 1292(b), this Court finds that the

motion of Defendants Cory and Alvord and this Order involves

a controlling question of law as to which there is substantial

ground for difference of opinion and that an immediate appeal

for this order may materially advance the ultimate termination

of this litigation.

It is accordingly OrpDERED, ADJUDGED and DECREED that

the Motion of Defendants Cory and Alvord to Add Defendants

be, and hereby is, DENIED.

Entered this 8th day of August, 1979, at Austin, Texas.

Jack ROBERTS

SOO REE EEE E EE EEE EES EERE EE EEE EREEEEEER TEESE EE EEEEEEEEEEEEEER ESTEE EEE EEEEE HEED

United States District Judge

Appendix G

FILED

AUG 20 - 1979

Cuarces W. Vacner, Clerk

By

Deputy

IN THE

UNITED STATES DISTRICT COURT

For THE

WESTERN District OF TEXAS AUSTIN DIVISION

WituiiaM Rice Lumais, Surviving Tex-

as Temporary Administrator of the Es-

tate of Howard R. Hughes, Jr., De-

ceased,

Plaintiff,

vs.

Mark White, Attorney General of the

State of Texas; Bop BULLOCK, Comp-

troller of Public Accounts of the State

of Texas; KENNETH Cory, Controller

of the State of California; H. B. AL-

vorp, County Treasurer for the Coun-

ty of Los Angeles; WiLLiAM RICE

Lummis and First NATIONAL BANK OF CIVIL ACTION

Nevapa, Nevada Co-Special Adminis» [ NO. A-78-CA-148

trators of the Estate of Howard R.

Hughes, Jr., Deceased; WILLIAM RICE

Lummis, Delaware Ancillary Adminis-

trator of the Estate of Howard R.

Hughes, Jr., Deceased; WILLIAM RICE

Lummis, Louisiana Provisional Admin-

istrator of the Estate of Howard R.

Hughes, Jr., Deceased; RICHARD

Gano, California General Adminis-

trator of the Estate of Howard R.

Hughes, Jr., Deceased; and THe

Unitep STaTes Or AMERICA,

Defendants.

J

28

ORDER

This Court having concluded in its Order of July 27, 1979,

that it did not have subject matter jurisdiction of this action,

It is OrnpDERED, ADJUDGED and Decreep that the above

styled and numbered action is DisMIsSED as to all parties and as

to all claims and the Clerk is directed to enter a judgment

conforming hereto.

DATED: August 20, 1979.

Jack ROBERTS

United States District Judge

Ih

Appendix H

JUDGMENT ON DECISION BY THE COURT

Uuited States District. Court

For THE

WESTERN District OF TEXAS, AUSTIN DIVISION

WittiaM= Rice Lummis,

Surviving Texas Temporary

Administrator of the Estate

of Howard R. Hughes, Jr.,

Deceased

vs.

Mark WHITE, Attorney

General, State of Texas, et

al.

CIVIL ACTION FILE

+ No. A-78-CA-148

JUDGMENT

This action came on for trial (hearing) before the Court,

Honorable Jack Roberts, United States District Judge, pre-

siding, and the issues having been duly tried (heard) and a

decision having been duly rendered,

It is Ordered and Adjudged that the above styled and

numbered action is DisMIsseD as to all parties and as to all

claims and final judgment is herewith entered.

Dated at Austin, Texas, this Z0th day of August 1979.

Clerk of Court

iudeadesiel WANDA. V...PETERSON..............

Wanda V. Peterson, Deputy Clerk

li

Appendix I

A. Before the passage of AB 2092 in 1980, Sections 14104,

14791 and 14793-95, of the California Revenue & Taxation

Code read as follows:

California Revenue & Taxation Code § 14104:

§ 14104, Payment to county treasurer

Every tax imposed by this part shall be paid to the county

treasurer as provided in this chapter.

California Revenue & Taxation Code § 14791:

§ 14791. Duty to receive payment of taxes, etc.

The treasurer of each county shall receive payment of all

taxes and other money that may be due and payable under this

part.

California Revenue & Taxation Code § 14793:

§ 14793. Payment to State Treasurer; time; statement

With the exception of such money as he may pay out from

time to time pursuant to this part, the county treasurer shall pay

to the State Treasurer all money received by him under this part

within 15 days after the receipt of the money; provided that

counties of less than 25,000 population may elect to make

payments to the State Treasurer on a monthly basis, in which

case, such payments shall be made to the State Treasurer within

five days following the close of the monthly period. The county

treasurer shall submit with the payment a statement in such

form and containing such particulars, including the name of the

estate, if any, from which the money was received, as the

Controller shall prescribe.

California Revenue & Taxation Code § 14794:

§ 14794, Interest on money not paid to State Treasurer

On all money received by him under this part which he

does not pay to the State Treasurer within the time prescribed

by Section 14793, the county treasurer shall pay interest at the

rate of 10 percent per annum.

2i

California Revenue & Taxation Code § 14795

§ 14795. Commissions

(a) For services performed pursuant to this part, the

county may retain out of the inheritance taxes paid to and

accounted for by the county treasurer each fiscal year, com-

mencing July | and ending June 30, commissions as follows:

If the collections are: The commissions are:

Not over $250,000...........cccccssscssssesssssesseeessees 2.5% of the collections

Over $250,000 but not

IE nrvenieeteinivctnstneimiersamensavinsinses $6,250 plus 1%

of excess over $250,000

Over $1,000,000 but not

| _______eE $13,750 plus 0.5%

of excess over $1,000,000

Over $2,000,000 but not

Ee setcnentscinetenntinsinminisneesenennes $18,750 plus 0.4%

of excess over $2,000,000

Over $8,000,000 but not

GUE BESO O Oe cesessnceceresninesensneiornnnsceenee $42,750 plus 0.16%

of excess over $8,000,000

Over $100,000 ,000 ...........cccccscccssesseeseeeseeesees $189,950 plus 0.1%

over $100,000,000

(b) A county may retain an additional 20 percent of the

commissions computed pursuant to subdivision (a), if such

county contains:

(1) An area exceeding 10,000 square miles or,

(2) A population density of less than five per square mile

at the time of the last regular federal census.

(c) A county qualifying under both paragraph (1) and

paragraph (2) of subdivision (b) shall be entitled to only one

20-percent increment in commissions.

B. On January 1, 1981, Assembly Bill No. 2092 (Chapter

634 of the 1980 California Statutes) became effective. It reads

in full as follows:

3i

TAXATION —INHERITANCE AND GIFT TAXES

CHAPTER 634

ASSEMBLY BiLL No. 2092

An act to amend Sections 657, 1001, 1004, 1024, and 1174

of the Probate Code, and to amend Sections 13311, 13801,

13802, 13803, 13805, 14104, 14128, 14143.5, 14211,

14345, 14347, 14774, 15310, 15421, 15422 and 15423 of,

to add Sections 13311.5, 14180, 14181, 14182, and 14902

to, and to repeal Sections 13314, 13551, 13552.5, 13554,

13554.5, 13555, 13556, 13556.5, 13557, 14141, 14142,

14143, 14144, 14342, 14343, 14344, 14346, 14791, 14792,

14793, 14794, 14795, and 14798 of, and to repeal Sections

15104.5, 15301, 15301.5, and 15303.5 of, the Revenue and

Taxation Code, relating to taxation, and making an

appropriation therefor, to take effect immediately, tax

levy.

LEGISLATIVE COUNSEL’S DIGEST

Under California’s existing Inheritance Tax Law, a death

tax is imposed in the form of an inheritance tax measured by

the share of a decedent’s estate passing to each beneficiary, with

the tax rates varying in accordance with the amount received by

each such beneficiary and in accordance with such beneficiary's

relationship to the decedent. Under existing law, procedures

have been established for the determination and payment of

such inheritance taxes.

This bill would re’ se such procedures, and would general-

ly exempt all property transferred to a spouse from inheritance

and gift taxes, and would increase the existing amounts which

are exempt from these taxes.

The existing provisions of the Probate Code prohibit an

order or decree distributing an estate unless all inheritance taxes

have been paid or unless the State Controller has consented to

the distribution.

This bill would repeal those provisions in the Probate Code

prohibiting distribution unless the inheritance taxes have been

paid.

4i

This bill would appropriate $400,000 to the Controller for

the purpose of administering the act.

This bill would take effect immediately as a tax levy and

shall apply in the computation of inheritance and gift taxes with

respect to the computation of gifts and death occurring on and

after January 1, 1981.

The people of the State of California do enact as follows:

SECTION |. Section 657 of the Probate Code is amended to

read:

657.

(a) Upon the filing of a petition pursuant to Section 650,

the court shall immediately appoint one inheritance tax referee

who shall appraise the property described in the petition in the

same manner provided in Section 605 and file an inheritance

tax report or certification that no tax is due with the clerk of the

court. Upon the filing of the inheritance tax report, the court

shall enter an order fixing the inheritance tax in the same

manner and subject to all other provisions of law relating to the

administration of the estate of a decedent which is not subject

to the provisions of this article. The filing of an inheritance tax

report and the entry of an order fixing the inheritance tax under

this article shall not limit the filing of additional reports and the

entry of additional orders fixing the inheritance tax as to any

other property of the deceased spouse giving rise to additional

inheritance tax liability. * * *

(b) * * * The petitioner shall furnish the referee with a

copy of the petition and all other necessary information and

documentation as may be required by law for the referee to

prepare the inheritance tax report or issue the certification that

no tax is due with reference to the property described in the

petition. Within 60 days after the receipt of the petition and

information and documentation by the referee, as may be

evidenced by an affidavit which is filed in the proceedings by

the petitioner and served by mail on the reieree, the referee

shall make the appraisal and file the inheritance tax report or

deletion by asterisks * * *

Si

the certification that no tax is due with the clerk of the court. If

the referee does not comply with the provisions of this subdivi-

sion, the court may issue any orders which may be necessary to

effect compliance.

Sec. 1.3. Section 1001 of the Probate Code is amended to

read:

1001.

If, at the hearing, it appears that all of the allegations of

the petition are true, that the estate is but little indebted * * *

and the legacy, devise or share of the estate or any portion

thereof may be distributed without loss to the creditors or injury

to the estate or any person interested therein, the court shall

make an order requiring the executor or administrator to

deliver the share, or shares, of the estate or such portion or

portions thereof as the court may direct, to the person or

persons entitled thereto, upon receiving from such person or

persons a bond or bonds executed and payable to the executor

or administrator, in such sum or sums as the court may

designate, conditioned on the payment whenever required of

the proportion of the debts due from the estate, not exceeding

the amount of the legacy or portions of the estate so ordered to

be delivered; or if the time for filing claims has expired and all

claims are paid or sufficiently secured the court may so order

distribution with or without bond as it may determine.

Sec. 1.4. Section 1004 of the Probate Code is amended to

read:

1004.

When the time for filing or presenting claims has expired

and all uncontested claims have been paid or are sufficiently

secured by mortgage, or otherwise, but the estate is not in a

condition to be finally closed and distributed, the executor or

administrator to whom authority has been granted to adminis-

ter the estate without court supervision, in accordance with

Article 2 (commencing with Section 591) of Chapter 8 of

Division 3, may petition the court for authority to distribute a

deletion by asterisks * * *

6i

portion of the estate to the person or persons entitled thereto.

Such petition need not include an accounting, provided that

when the petition seeks authority to distribute to a trustee the

petition shall include an accounting unless the trustee consents

to the distribution without an accounting. The total amount of

the property distributed under this section shall not exceed 50

percent of the net value of the estate. The clerk shall set the

petition for hearing by the court and give notice thereof for the

period and in the manner required by Section 1200, but the

court may order the notice to be given for a shorter period or

dispensed with. If the court shall determine that all of the

allegations of the petition are true, that the estate is but little

indebted, * * * that the property to be distributed does not

exceed 50 percent of the net value of the estate, and that the

distribution may be made without loss or injury to the estate or

any person interested therein, the court shall make an order

authorizing the executor or administrator to distribute the

property to the person or persons entitled thereto. For purposes

of this section “net value of the estate” means the excess of the

value of the assets of the estate reflected by all inventories and

appraisements on file with the court over the total amount of all

creditors’ claims filed or presented and liens and encumbrances

recorded or known to the executor or administrator not reflect-

ed in any creditors’ claims filed or presented, excluding death

tax liens occasioned by the decedent's death.

Sec. 1.5. Section 1024 of the Probate Code is amended to

read:

1024,

Before any decree of distribution is made all personal

property taxes due and payable by the estate shall be paid

Sec. 1.6. Section 1174 of the Probate Code is amended to

read:

1174,

Such petition, or affidavits in support thereof, may be

received in evidence and acted upon by the court with the same

deletion by asterisks * * *

7i

force and effect as if the petitioner or affiants were personally

present and testified to the fact set forth, and the court may

render judgment thereon establishing the fact of the death,

which judgment shall be prima facie evidence of the fact of the

death. The presumption established by this section is a

presumption affecting the burden of producing evidence. * * *

Sec. 2. Section 13311 of the Revenue and Taxation Code

is amended to read:

13311.

“Market value,” in respect to property included in any

transfer, means the market value of the property as of the date

of the transferor’s death, whether or not the transfer was made

during the lifetime of the transferor.

Sec. 2.3. Section 13311.5 is added to the Revenue and

Taxation Code, to read:

13311.5.

(a) Certain qualified real property shall be valued based

on use in accordance with this section.

(1) If—

(A) The decedent was (at the time of his or her

death) a citizen or resident of the United States, and

(B) The executor elects the application of this section

for purposes of the tax imposed by this part, then, for

purposes of this part, the value of qualified real property

shall be its value for the use under which it qualifies, under

subdivision (b), as qualified real property.

(2) The aggregate decrease in the value of qualified real

property taken into account for purposes of this chapter which

results from the application of paragraph (1) with respect to

any decedent shall not exceed five hundred thousand dollars

($500,000).

deletion by asterisks * * *

(b) Qualified real property is as follows:

(1) For purposes of this section, the term “qualified real

property” means real property located in the United States

which was acquired from or passed from the decedent to a

qualified heir of the decedent and which, on the date of the

decedent’s death, was being used for a qualified use, but only

if—

(A) Fifty percent or more of the adjusted value of the

clear market value of the estate consists of the adjusted value of

real or personal property which—

(i) On the date of the decedent’s death, was being used for

a qualified use, and

(ii) Was acquired from or passed from the decedent to a

qualified heir of the decedent.

(B) Twenty-five percent or more of the adjusted value of

the clear market value of the estate consists of the adjusted

value of real property which meets the requirements of

subparagraphs (A)(ii) and (C),

(C) During the eight-year period ending on the date of the

decedent's death there have been periods aggregating five years

or more during which—

(i) Such real property was owned by the decedent or a

member of the decedent's family and used for a qualified use,

and

(ii) There was material participation by the decedent or a

member of the decedent’s family in the operation of the farm or

other business, and

(D) Such real property is designated in the agreement

referred to in paragraph (2) of subdivision (d).

(2) For purposes of this section, the term “qualified use”

means the devotion of the property to any of the following:

(A) Use as a farm for farming purposes, or

(B) Use in a trade or business other than the trade or

business of farming.

9i

(3) For purposes of paragraph (1), the term “adjusted

value” means—

(A) The value of the estate for purposes of this chapter

(determined without regard to this section), reduced by any

amounts allowable as a deduction for unpaid mortgages on, or

any indebtedness in respect of, property where the value of the

decedent’s interest therein, undiminished by such mortgage or

indebtedness, is included in the value of the estate, or

(B) In the case of any real or personal property, the value

of such property for purposes of this chapter (determined

without regard to this section), reduced by any amounts

allowable as a deduction in respect of such property for unpaid

mortgages on, or any indebtedness in respect of, property

where the value of the decedent’s interest therein, undiminished

by such mortgage or indebtedness, is included in the value of

the estate.

(c) Tax treatment of dispositions and failures to use for a

qualified use are as follows:

(1) If, within 15 years after the decedent's death and

before the death of the qualified heir—

(A) The qualified heir disposes of any interest in

qualified real property (other than by a disposition to a

member of his or her family), or

(B) The qualified heir ceases to use for the qualified

use the qualified real property which was acquired (or

passed) from the decedent, then there is hereby imposed

an additional tax.

(2) Amount of additional tax—

(A) The amount of the additional tax imposed by para-

graph (1) with respect to any interest shall be the amount equal

to the lesser of —

(i) The adjusted tax difference attributable to such inter-

est, or

(ii) The excess of the amount realized with respect to the

interest (or, in any case other than a sale or exchange at arm's

10i

length, the fair market value of the interest) over the value of

the interest determined under subdivision (a).

(B) For purposes of subparagraph (A), the adjusted tax

difference attributable to an interest is the amount which bears

the same ratio to the adjusted tax difference with respect to the

estate (determined under subparagraph (C)) as—

(i) The excess of the value of such interest for purposes of

this chapter (determined without regard to subdivision (a))

over the value of such interest determined under subdivision

(a), bears to

(ii) A similar excess determined for all qualified real

property.

(C) For purposes of subparagraph (B), the term “adjust-

ed tax difference with respect to the estate” means the excess of

what would have been the tax liability but for subdivision (a)

over the tax liability. For purposes of this subparagraph, the

term “tax liability” means the tax imposed by this part reduced

by the credits allowable against such tax.

(D) For purposes of this paragraph, where the qualified

heir disposes of a portion of the interest acquired by (or passing

to) such heir (or a predecessor qualified heir) or there is a

cessation of use of such a portion—

(i) The value determined under subdivision (a) taken

into account under subparagraph (A)(ii) with respect to such

portion shall be its pro rata share of such value of such interest,

and

(ii) The adjusted tax difference attributable to the interest

taken into account with respect to the transaction involving the

second or any succeeding portion shall be reduced by the

amount of the tax imposed by this subdivision with respect to

all prior transactions involving portions of such interest.

(3) If the date of the disposition or cessation referred to in

paragraph (1) occurs more than 120 months and less than 180

months after the date of the death of the decedent, the amount

of the tax imposed by this subdivision shall be reduced ( but not

below zero) by an amount determined by multiplying the

amount of such tax (determined without regard to this para-

graph) by a fraction—

li

(A) The numerator of which is the number of full months

after such death in excess of 120, and

(B) The denominator of which is 60.

(4) In the case of an interest acquired from (or passing

from) any decedent, if subparagraph (A) or (B) of paragraph

(1) applies to any portion of an interest, subparagraph (B) or

(A), as the case may be, of paragiaph (1) shall not apply with

respect to the same portion of such interest.

(5) The additional tax imposed by this subsection shall

become due and payable on the day which is six months after

the date of the disposition or cessation referred to in paragraph

(1).

(6) The qualified heir shall be personally liable for the

additional tax imposed by this subdivision with respect to his or

her interest unless the heir has furnished a bond which meets

the requirements of subdivision (e)( 11).

(7) For purposes of paragraph (1)(B), real property

shall cease to be used for the qualified use if—

(A) Such property ceases to be used for the qualified use

set forth in subparagraph (A) or (B) of subsection (b)(2)

under which the property qualified under subdivision (b), or

(B) During any period of eight years ending after the date

of the decedent’s death and before the date of the death of the

qualified heir, there had been periods aggregating three years

or more during which—

(i) In the case of periods during which the property was

held by the decedent, there was no material participation by the

decedent or any member of his or her family in the operation of

the farm or other business, and

(ii) In the case of periods during which the property was

held by any qualified heir, there was no material participation

by such qualified heir or any member of his or her family in the

operation of the farm or other business.

(d) Elections and agreements are as follows—

(1) The election under this section shall be made not later

than the time prescribed by Section 14103 (including exten-

12i

sions thereof), and shall be made in such manner as the

Controller shall by regulations prescribe.

(2) The agreement referred to in this paragraph is a

written agreement signed by each person in being who has an

interest (whether or not in possession) in any property desig-

nated in such agreement consenting to the application of

subdivision (c) with respect to such property.

(e) For purposes of this section—

(1) The term “qualified heir” means, with respect to any

property, a member of the decedent’s family who acquired such

property (or to whom such property passed) from the dece-

dent. If a qualified heir disposes of any interest in qualified real

property to any member of his or her family, such member shall

thereafter be treated as the qualified heir with respect to such

interest.

(2) The term “member of the family” means, with respect

to any individual, only such individual’s ancestor or lineal

descendant, a lineal descendant of a grandparent of such

individual, the spouse of such individual, or the spouse of any

such descendant. For purposes of the preceding sentence, a

legally adopted child of an individual shall be treated as a child

of such individual by blood.

(3) In the case of real property which meets the require-

ments of subparagraph (C) of subdivision (b)(1), residential

buildings and related improvements of such real property

occupied on a regular basis by the owner or lessee of such real

property or by persons employed by such owner or lessee for

the purpose of operating or maintaining such real property, and

roads, buildings, and other structures and improvements func-

tionally related to the qualified use shall be treated as real

property devoted to the qualified use.

(4) The term “farm” includes stock, dairy, poultry, fruit,

furbearing animal, and truck farms, plantations, ranches, nurs-

eries, ranges, greenhouses or other similar structures used

primarily for the raising of agricultural or horticultural com-

modities, and orchards and woodlands.

(5) The term “farming purposes” means—

13i

(A) Cultivating the soil or raising or harvesting any

agricultural or horticultural commodity (including the raising,

shearing, feeding, caring for, training, and management of

animals) on a farm;

(B) Handling, drying, packing, grading, or storing on a

farm any agricultural or horticultural commodity in_ its

unmanufactured state, but only if the owner, tenant, or operator

of the farm regularly produces more than one-half of the

commodity so treated; and

(C)(i) The planting, cultivating, caring for, or cutting of

trees, or

(ii) The preparation (other than milling) of trees for

market.

(6) Material participation shall be determined in a man-

ner similar to the manner used for purposes of paragraph (1)

of Section 1402(a) of the Internal Revenue Code (relating to

net earnings from self-employment).

(7) Method of valuing farms as follows—

Except as provided in subparagraph (B), the value of a

farm for farming purposes shall be determined by dividing—

(i) The excess of the average annual gross cash rental for

comparable land used for farming purposes and located in

the locality of such farm over the average annual state and

local real estate taxes for such comparable land, by

(ii) The average annual effective interest rate for all new

Federal Land Bank loans.

For purposes of the preceding sentence, each average annual

computation shall be made on the basis of the five most recent

calendar years ending before the date of the decedent’s death.

The formula provided by subparagraph (A) shail not be

used—

(i) Where it is established that there is no comparable

land from which the average annual gross cash rental may be

determined, or

(ii) Where the executor elects to have the value of the

farm for farming purposes determined under paragraph (8).

141

(8) In any case to which paragraph (7)(A) does not

apply, the following factors shall apply in determining the value

of any qualified real property:

(A) The capitalization of income which the property can

be expected to yield for farming or closely held business

purposes over a reasonable period of time under prudent

management using traditional cropping patterns for the area,

taking into account soil capacity, terrain configuration, and

similar factors.

(B) The capitalization of the fair rental value of the land

for farmland or closely held business purposes.

(C) Assessed land values in a state which provides a

differential or use value assessment law for farmland or closely

held business.

(D) Comparable sales of other farm or closely held

business land in the same geographical area far enough re-

moved from a metropolitan or resort area so that nonagricul-

tural use is not a significant factor in the sales price, and

(E) Any other factor which fairly values the farm or

closely held business value of the property.

(9) Property shall be considered to have been acquired

from or to have passed from the decedent if—

(A) Such property is so considered under Section 1014(b)

of the Internal Revenue Code (relating to basis of property

acquired from a decedent),

(B) Such property is acquired by any person from the

estate in satisfaction of the right of such person to a pecuniary

bequest, or

(C) Such property is acquired by any person from a trust

in satisfaction of a right (which such person has by reason of

the death of the decedent) to receive from the trust a specific

dollar amount which is the equivalent of a pecuniary bequest.

(10) If the decedent and his or her surviving spouse at

any time held qualified real property as community property,

the interest of the surviving spouse in such property shall be

taken into account under this section to the extent necessary to

15i

provide a result under this section with respect to such property

which is consistent with the result which would have obtained

under this section if such property had not been community

property.

(11) If the qualified heir makes written application to the

Controller for determination of the maximum amount of the

additional tax which may be imposed by subdivision (c) with

respect to the qualified heir’s interest, the Controller (as soon as

possible, and in any event within one year after the making of

such application) shall notify the heir of such maximum

amount. The qualified heir, on furnishing a bond in such

amount and for such period as may be required, shall be

discharged from personal liability for any additional tax im-

posed by subdivision (c) and shall be entitled to a receipt or

writing showing such discharge.

(f) If qualified real property is disposed of or ceases to be

used for a qualified use, then—

(1) The statutory period for the assessment of any

additional tax under subdivision (c) attributable to such dis-

position or cessation shall not expire before the expiration of

three years from the date the Controller is notified (in such

manner as the Controller may by regulations prescribe ) of such

disposition or cessation (or if later in the case of an involuntary

conversion to which an election under subdivision (h) applies,

three years from the date the Controller is notified of the

replacement of the converted property or of an intention not to

replace); and

(2) Such additional tax may be assessed before the

expiration of such three-year period notwithstanding the provi-

sions of any other law or rule of law which would otherwise

prevent such assessment.

(h) Special rules for involuntary conversion of qualified

real property are as follows:

(1)(A) If there is an involuntary conversion of an interest

in qualified real property and the qualified heir makes an

election under this subdivision—

16i

(i) No tax shall be imposed by subdivision (c) on such

conversion if the cost of the qualified replacement property

equals or exceeds the amount realized on such conversion, or

(ii) If clause (i) does not apply, the amount of the tax

imposed by subdivision (c) on such conversion shall be the

amount determined under subparagraph (B).

(B) The amount determined under this subparagraph

with respect to any involuntary conversion is the amount of the

tax which (but for this subdivision) would have been imposed

on such conversion reduced by an amount which—

(i) Bears the same ratio to such tax, as

(ii) The cost of the qualified replacement property bears to

the amount realized on the conversion.

(2) For purposes of subdivision (c)—

(A) Any qualified replacement property shall be treated

in the same manner as it if were a portion of the interest in

qualified real property which was involuntarily converted,

except that with respect to such qualified replacement

property—

(i) The 15-year period under paragraph (1) of subdivi-

sion (c) shall be extended by any period, beyond the two-year

period referred to in Section 1033(a)(2)(B)(i) of the Internal

Revenue Code, during which the qualified heir was allowed to

replace the qualified real property, and

(ii) The phaseout period under paragraph (3) of subdivi-

sion (c) shall be appropriately adjusted to take into account the

extension referred to in clause (i).

(B) Any tax imposed by subdivision (c) on the in-

voluntary conversion shall be treated as a tax imposed on a

partial disposition, and

(C) Paragraph (7) of subdivision (c) shall be applied —

(i) By not taking into account periods after the in-

voluntary conversion and before the acquisition of the qualified

replacement property, and

17i

(ii) By treating material participation with respect to the

converted property as material participation with respect to the

qualified replacement property.

(3) For purposes of this subdivision—

(A) “Involuntary conversion” means a compulsory or

involuntary conversion within the meaning of Section 1033 of

the Internal Revenue Code.

(B) The term “qualified replacement property” means—

(i) In the case of an involuntary conversion described

in Section 1033(a)(1) of the Internal Revenue Code, any

real property into which the qualified real property is

converted, or

(ii) In the case of an involuntary conversion described

in Section 1033(a)(2) of the Internal Revenue Code, any

real property purchased by the qualified heir during the

period specified in Section 1033(a)(2)(B) of the Internal

Revenue Code for purposes of replacing the qualified real

property.

Such term only includes property which is to be used for the

qualified use set forth in subparagraph (A) or (B) of subdivi-

sion (b)(2) under which the qualified real property qualified

under subdivision (a).

(4) The rules of the last sentence of Section

1033(a)(2)(A) of the Internal Revenue Code shall apply for

purposes of paragraph (3)(b)(ii).

(5) Any election under this subdivision shall be made at

such time and in such manner as the Controller may by

regulations prescribe.

Sec. 2.5. Section 13314 of the Revenue and Taxation

Code is repealed.

Sec. 3. Section 13551 of the Revenue and Taxation Code

is repealed.

Sec. 4. Section 13552.5 of the Revenue and Taxation

Code is repealed.

Sec. 5. Section 13554 of the Revenue and Taxation Code

is repealed.

Sec. 6. Section 13554.5 of the Revenue and Taxation

Code is repealed.

Sec. 7. Section 13555 of the Revenue and Taxation Code

is repealed.

Sec. 8. Section 13556 of the Revenue and Taxation Code

is repealed.

Sec. 9. Section 13556.5 of the Revenue and Taxation

Code is repealed.

Sec. 10. Section 13557 of the Revenue and Taxation Code

is repealed.

Sec. 11. Section 13801 of the Revenue and Taxation Code

is amended to read:

13801.

(a) Property of the clear market value of * * * forty

thousand dollars * * * ($40,000) transferred to* * * a minor

child of the decedent is exempt from the tax imposed by this

part.

(b) Property of the clear market value of * * * an

amount equal to ten thousand dollars * * * ($10,000) multi-

lied by the excess of 21 over the age (in years) of a child of the

decedent who is under the age of 18 at the date of death of the

decedent, provided the decedent de#s not have a surviving

spouse and that such child, immedia.¢ty after the death of the

decedent, has no known parent, is exempt from the tax imposed

by this part. * * *

(c) * * * Property of the clear market value of * * *

twenty thousand dollars * * * ($20,000) transferred to any

other class A transferee, other than the spouse of the decedent,

is exempt from the tax imposed by this part.

Sec. 12. Section 13802 of the Revenue and Taxation Code

is amended to read:

deletion by asterisks * * *

19i

13802.

Property of the clear market value of * * * ten thousand

dollars * * * ($10,000) transferred to any class B transferee is

exempt from the tax imposed by this part.

Sec. 13. Section 13803 of the Revenue and Taxation Code

is amended to read:

13803.

Property of the clear market value of three * * * thousand

dollars * * * ($3,000) transferred to any class C transferee is

exempt from the tax imposed by this part.

Sec. 15. Section 13805 of the Revenue and Taxation Code

is amended to read:

13805.

* * * None of the property transferred to the spouse of

the decedent is subject to this part, except that if a limited

power of appointment over any portion or all of the decedent's

property is given to the spouse of the decedent, the value of

such property is subject to this part; provided, however, that the

value of any interest, other than the power itself, given to the

spouse of the decedent in such property is not subject to this

part.

Sec. 15.2. Section 14104 of the Revenue and Taxation

Code is amended to read:

14104,

Every tax imposed by this part shall be paid to the * * *

Controller by remittance payable to the State Treasurer.

Sec. 15.3. Section 14128 of the Revenue and Taxation

Code is amended to read:

14128.

Within 30 days after the date of the deduction or collection

of a tax by him or her, the executor, administrator, or trustee

shall pay the tax to the * * * Controller by remittance payable

to the State Treasurer.

deletion by asterisks * * *

20i

Sec. 15.4. Section 14141 of the Revenue and Taxation

Code is repealed.

Sec. 15.5. Section 14142 of the Revenue and Taxation

Code is repealed.

Sec. 16. Section 14143 of the Revenue and Taxation Code

is repealed.

Sec. 16.5. Section 14143.5 of the Revenue and Taxation

Code is amended to read:

14143.5.

If the Controller finds that payment of any tax imposed by

this part * * * would result in undue hardship to the estate, he

may enter into a written agreement for payment of the tax with

the executor, administrator, trustee or transferee liable for its

payment upon such terms and conditions as the Controller in

his discretion may provide, and provided that the Controller

finds that payment of the tax plus interest due thereon is

adequately secured.

Undue hardship shall include, but not be limited to, the

hardship resulting from the payment of taxes imposed pursuant

to the provisions of this part on class A or class B beneficiaries

ou a qualified family property, and shall include the inability to

secure a loan against such qualified property at a rate of interest

at the rate specified in subdivision (b) of Section 14211 or less

or the necessity for selling an interest in a family business to

unrelated persons. * * *

Sec. 16.7. Section 14144 of the Revenue and Taxation

Code is repealed.

Sec. 17. Section 14180 is added to the Revenue and

Taxation Code, to read:

14180.

The Controller may, for reasonable cause, provided that

the Controller finds that payment of the tax plus interest is

adequately secured, extend the time for payment of any part of

the amount determined as the tax imposed by this part, or any

deletion by asterisks * * *

21i

part of any installment under Section 14105, 14181, or 14182

for a reasonable period not in excess of 10 years from the date

prescribed by Section 14103 for payment of the tax or, in the

case of an installment amount referred to in this section, if later,

not beyond the date which is 12 months after the due date for

the last installment.

For purposes of this section, “reasonable cause” includes

the circumstances of a taxpayer who is a beneficiary of some or

all of the decedent’s works of art, if the decedent is an artist and

if the value of an interest in works in art created by such

decedent artist which is included in determining the gross estate

of a decedent artist exceeds:

(a) Thirty-five percent of the value of the gross estate of

such decedent artist, or

(b) Fifty percent of the taxable estate of such decedent

artist.

For purposes of this paragraph, “works of art” are defined

pursuant to paragraph (1) of subdivision (a) of Section 217,

and an “artist” is an individual who creates such “works of art.”

Sec. 18. Section 14181 is added to the Revenue and

Taxation Code, to read:

14181.

(a)(1) Ifthe value of an interest in a closely held business

which is included in determining the market value of the estate

of a decedent who was (at the date of his or her death) a

‘citizen or resident of the United States exceeds 65 percent of the

clear market value of the estate, the executor may elect to pay

part or all of the tax imposed by this part in two or more (but

not exceeding 10) equal installments.

(2) The maximum amount of tax which may be paid in

installments under this subdivision shall be an amount which

bears the same ratio to the tax imposed by this part (reduced

by the credits against such tax) as—

(A) The closely held business amount, bears to

(B) The amount of the clear market value of the estate.

22i

(3) If an election is made under paragraph (1), the first

installment shall be paid on or before the date selected by the

executor which is not more than five years after the date

prescribed by Section 14103, and each succeeding installment

shall be paid on or before the date which is one year after the

date prescribed by this paragraph for payment of the preceding

installment.

(4) No election may be made under this section by the

executor of the estate of any decedent if an election under

Section 14182 applies with respect to the estate of such

decedent.

(b)(1) For purposes of this section, “interest in a closely

held business” means any of the following:

(A) An interest as a proprietor in a trade or business

carried on as a proprietorship.

(B) An interest as a partner in a partnership carrying on a

trade or business, if either of the following applies:

(i) Twenty percent or more of the total capital interest in

such partnership is included in determining the market value of

the estate of the decedent.

(ii) Such partnership had 15 or fewer partners.

(C) Stock in a corporation carrying on a trade or business

if either of the following applies:

(i) Twenty percent or more in value of the voting stock of

such corporation is included in determining the market value of

the estate of the decedent.

(ii) Such corporation had 15 or fewer shareholders.

(2) For purposes of paragraph (1):

(A) Determinations shall be made as of the time immedi-

ately before the decedent’s death.

(B) Stock or a partnership interest which—

(i) Is community property of a husband and wife (or the

income from which is community income), or

23i

(ii) Is held by a husband and wife as joint tenants, or

tenants in common, shall be treated as owned by one share-

holder or one partner, as the case may be.

(C) Property owned, directly or indirectly, by or for a

corporation, partnership, estate, or trust shall be considered as

being owned proportionately by or for its shareholders, part-

ners, or beneficiaries. For purposes of the preceding sentence a

person shall be treated as a beneficiary of any trust only if such

person has a present interest in the trust.

(D) All stock and all partnership interests held by the

decedent or by any member of his family (within the meaning

of Section 267(c)(4) of the Internal Revenue Code) shall be

treated as owned by the decedent.

(3) For purposes of the 65-percent requirement of para-

graph (1) of subdivision (a), an interest in a closely held

business which is the business of farming includes an interest in

residential buildings and related improvements on the farm

which are occupied on a regular basis by the owner or lessee of

the farm or by persons employed by such owner or lessee for

purposes of operating or maintaining the farm.

(4) For purposes of this section, value shall be value

determined for purposes of this part.

(5) For purposes of this section, “closely held business

amount” means the value of the interest in a closely held

business which qualifies under subdivision (a)(1).

(6) (A) If the executor elects the benefits of this para-

graph (at such time and in such manner as the Controller shall

by regulations prescribe), then—

(i) For purposes of paragraph (1)(B)(i) or (1)(C)(i)

( whichever is appropriate ) and for purposes of subdivision (c),

any capital interest in a partnership and any nonreadily trad-

able stock which (after the application of paragraph (2)) is

treated as owned by the decedent shall be treated as included in

determining the value of the market value of the decedent's

estate, and

(ii) The executor shail be treated as having selected under

subsection (a)(3) the date prescribed by Section 14103.

24i

(B) For purposes of this paragraph, the term “nonreadily

tradable stock” means stock for which, at the time of the

decedent’s death, there was no market on a stock exchange or

in an over-the-counter market.

(c) For purposes of this section, interests in two or more

closely held businesses, with respect to each of which there is

included in determining the value of the decedent’s gross estate

more than 20 percent of the total value of each such business,

shall be treated as an interest in a single closely held business.

For purposes of the 20-percent requirement of the preceding

sentence, an interest in a closely held business which represeiits

the surviving spouse’s interest in property held by the decedent

and the surviving spouse as community property or as joint

tenants or tenants in common shall be treated as having been

included in determining the value of the market value of the

decedent’s estate.

(d) Any election under subdivision (a) shall be made not

later than the time prescribed by Section 14103. If an election

under subdivision (a) is made, the provisions of this chapter

shall apply as though the Controller were extending the time

for payment of the tax.

(e) If an election is made under subdivision (a) to pay

any part of the tax imposed by this part in installments and a

deficiency has been assessed, the deficiency shall (subject to the

limitation provided by paragraph (2) of subdivision (a)) be

prorated to the installments payable under subdivision (a).

The part of the deficiency so prorated to any installment the

date for payment of which has not arrived shall be collected at

the same time as, and as a part of, such installment. The part of

the deficiency so prorated to any installment the date for

payment of which has arrived shall be paid upon notice and

demand from the Controller. This subdivision shall not apply if

the deficiency is due to negligence, to intentional disregard of

rules and regulations, or to fraud with intent to evade tax.

(f) If the time for payment of any amount of tax has been

extended under this section—

(1) Interest payable under Section 14211 on any unpaid

portion of such amount attributable to the first five years after

the date prescribed by Section 14103 shall be paid annually.

25i

(2) Interest payable under Section 14211 on any unpaid

portion of such amount attributable to any period after the 5-

year period referred to in paragraph (1) shall be paid annually

at the same time as, and as a part of, each installment payment

of the tax.

(3) In the case of a deficiency to which subdivision (e)

applies which is assessed after the close of the 5-year period

referred to in paragraph (1 ), interest attributable to such 5-year

period, and interest assigned under paragraph (2) to any

installment the date for payment of which has arrived on or

before the date of the assessment of the deficiency, shall be paid

upon notice and demand from the Controller.

(4) If the executor has selected a period shorter than five

years under paragraph (3) of subdivision (a), such shorter

period shall be substituted for five years in paragraphs (1),

(2), and (3) of this subdivision.

(g)(1)(A) If—

(i) One-third or more in value of an interest in a

closely held business which qualifies under paragraph (1)

of subdivision (a) is distributed, sold, exchanged, or

otherwise disposed of, or

(ii) Aggregate withdrawals of money and other

property from the trade or busines, an interest in which

qualifies under paragraph (1) of subdivision (a), made

with respect to such interest, equal or exceed one-third of

the value of such trade or business,

then the extension of time for payment of tax provided in

subdivision (a) shall cease te apply, and any unpaid portion of

the tax payable in installments shail be paid upon notice and

demand from the Controller.

(B) In the case of a distribution in redemption of stock to

which Section 303 of the Internal Revenue Code (or so much of

Section 304 of the Internal Revenue Code as relates to Section

303) applies—

(i) Subparagraph (A)(i) does not apply with respect

to the stock redeemed; and for purposes of such subpara-

graph the interest in the closely held business shall be

considered to be such interest reduced by the value of the

stock redeemed, and

261

(ii) Subparagraph (A)(ii) does not apply with re-

spect to withdrawals of money and other property dis-

tributed; and for purposes of such subparagraph the vaiue

of the trade or business shall be considered to be such

value reduced by the amount of money and other property

distributed.

This subparagraph shall apply only if, on or before the date

prescribed by paragraph (3) of subdivision (a) for the pay-

ment of the first installment which becomes due after the date

of the distribution (or, if earlier, on or before the day which is

one year after the date of the distribution), there is paid an

amount of the tax imposed by this part not less than the amount

of money and other property distributed. :

(C) Subparagraph (A)(i) does not apply to an exchange

of stock pursuant to a plan of reorganization described in

subparagraph (D), (E), or (F) of Section 368(a)(1) of the

Internal Revenue Code nor to an exchange to which Section

355 of the Internal Revenue Code (or so much of Section 356

of the Internal Revenue Code as relates to Section 355) applies;

but any stock received in such an exchange shall be treated for

purposes of subparagraph (A)(i) as an interest qualifying

under paragraph (1) of subdivision (a).

(D) Subparagraph (A)(i) does not apply to a transfer of

property of the decedent to a person entitled by reason of the

decedent’s death to receive such property under the decedent’s

will, the applicable law of descent and distribution, or a trust

created by the decedent.

(2)(A) If an election is made under this section and the

estate has undistributed net income for any taxable year ending

on or after the due date for the first installment, the executor

shall, on or before the date prescribed by law for filing the

income tax return for such taxable year (including extensions

thereof), pay an amount equal to such undistributed net income

in liquidation of the unpaid portion of the tax payable in

installments.

(B) For purposes of subparagraph (A), the undistributed

net income of the estate for any taxable year is the amount by

which the distributable net income of the estate for such taxable

27i

year (as defined in Section 643 of the Internal Revenue Code)

exceeds the sum of all of the following:

(i) The amounts for such taxable year specified in para-

graphs (1) and (2) of Section 661(a) of the Internal Revenue

Code (relating to deduction for distributions, etc. ).

(ii) The amount of California and federal income taxes

imposed for the taxable year on the estate;

(iii) The amount of the tax imposed by this part (in-

cluding interest) paid by the executor during the taxable year

(other than any amount paid pursuant to this paragraph); and

(iv) The amount of federal estate tax (including interest)

paid by the executor during the taxable year.

(3) If any installment under this section is not paid on or

before the date fixed for its payment by this section (including

any extension of time for the payment of such installment), the

unpaid portion of the tax payable in installments shall be paid

upon notice and demand from the Controller.

(h)(1) If—

(A) A deficiency in the tax imposed by this part is

assessed,

(B) The estate qualifies under paragraph (1) of

subdivision (a), and

(C) The executor has not made an election under

subdivision (a), the executor may elect to pay the defi-

ciency in installments. This subdivision shall not apply if

the deficiency is due to negligence, to intentional disregard

of rules and regulations, or to fraud with intent to evade

tax.

(2) An election under this subdivision shall be made not

later than 60 days after issuance of notice and demand by the

Controller for the payment of the deficiency, and shall be made

in such manner as the Controller shall by regulations prescribe.

(3) If an election is made under this subdivision, the

deficiency shall (subject to the limitation provided by para-

28i

graph (2) of subdivision (a)) be prorated to the installments

which would have been due if an election had been timely

made under subdivision (a).

The part of the deficiency so prorated to any installment

the date for payment of which would have arrived shall be paid

at the time of the making of the election under this subdivision.

The portion of the deficiency so prorated to installments the

date for payment of which would not have so arrived shall be

paid at the time such installments would have been due if such

an election had been made.

(i) The Controller shall prescribe such regulations as may

be necessary to the application of this section.

Sec. 19. Section 14182 is added to the Revenue and

Taxation Code, to read:

14182.

(a) If the value of an interest in a closely held business

which is included in determining the market value of the estate

of a decedent who was (at the date of his death) a citizen or

resident of the United States exceeds either—

(1) Thirty-five percent of the market value of the

estate of such decedent, or

(2) Fifty percent of the clear market value of the

estate of such decedent, the executor may elect to pay part

or all of the tax imposed by this part in two or more (but

not exceeding 10) equal installments. Any such election

shall be made no later than the time prescribed by Section

14103, and payment shall be made in such manner as the

Controller shall by regulations prescribe. If an election

under this section is made, the provisions of this chapter

shall apply as though the Controller were extending the

time for payment of the tax.

(b) The maximum amount of tax which may be paid in

installments as provided in this section shall be an amount

which bears the same ratio to the tax imposed by this part

(reduced by the credits against such tax) as the value of the

interest in a closely held business which qualifies under subdivi-

sion (a) bears to the market value of the estate.

29i

(c) For purposes of this section, the term “interest in a

closely held business” means any of the following:

(1) An interest as a proprietor in a trade or business

carried on as a proprietorship.

(2) An interest as a partner in a partnership carrying

on a trade or business, if either of the following applies:

(A) Twenty percent or more of the total capital

interest in such partnership is included in determining the

gross estate of the decedent.

(B) Such partnership had 10 or less partners.

(3) Stock in a corporation carrying on a trade or

business, if either of the following applies:

(A) Twenty percent or more in value of the voting

stock of such corporation is included in determining the

gross estate of the decedent.

(B) Such corporation had 10 or less shareholders.

For purposes of this subdivision, determinations shall be made

as of the time immediately before the decedent’s death.

(d) For purposes of subdivisions (a), (b), and (h)(1),

interests in two or more closely held businesses, with respect to

each of which there is included in determining the market value

of the decedent’s estate more than 50 percent of the total value

of each such business, shall be treated as an interest in a single

closely held business. For purposes of the 50-percent require-

ment of the preceding sentence, an interest in a closely held

business which represents the surviving spouse’s interest in

property held by the decedent and the surviving spouse as

community property shall be treated as having been included in

determining the market value of the decedent's estate.

(e) If an election is made under subdivision (a), the first

installment shall be paid on or before the date prescribed by

Section 14103 for payment of the tax, and each succeeding

installment shall be paid on or before the date which is one year

after the date prescribed by this subdivision for payment of the

preceding installment.

30i

(f) If an election is made under subdivision (a) to pay

any part of the tax imposed by this part in installments and a

deficiency has been assessed, the deficiency shall (subject to the

limitation provided by subdivision (b)) be prorated to such

installments. The part of the deficiency so prorated to any

installment the date for payment of which has not arrived shall

be collected at the same time as, and as a part of, such

installment. The part of the deficiency so prorated to any

installment the date for payment of which has arrived shall be

paid upon notice and demand from the Controller. This

subdivision shall not apply if the deficiency is due to negligence,

to intentional disregard of rules and regulations, or to fraud

with intent to evade tax.

(g) Ifthe time for payment of any amount of tax has been

extended under this section, interest payable under Section

14211 on any unpaid portion of such amount shall be paid

annually at the same time as, and as part of, each installment

payment of the tax. Interest, on that part of a deficiency

prorated under this section to any installment the date for

payment of which has not arrived, for the period before the

date fixed for the last installment preceding the assessment of

the deficiency, shall be paid upon notice and demand from the

Controller.

(h)(1)(A) If—

(i) Aggregate withdrawals of money and other prop-

erty from the trade or business, an interest in which

qualifies under subdivision (a), made with respect to such

interest, equal or exceed 50 percent of the value of such

trade or business, or

(ii) Fifty percent or more in value of an interest in a

closely held business which qualifies under subdivision (a)

is distributed, sold, exchanged, or otherwise disposed of,

then the extension of time for payment of tax provided in this

section shall cease to apply, and any unpaid portion of the tax

payable in installments shall be paid upon notice and demand

from the Controller.

31i

(B) In the case of a distribution in redemption of stock to

which Section 303 of the Internal Revenue Code (or so much of

Section 304 of the Internal Revenue Code as relates to Section

303) applies—

(i) Subparagraph (A)(i) does not apply with respect

to withdrawals of money and other property distributed;

and for purposes of such subparagraph the value of the

trade or business shall be considered to be such value

reduced by the amount of money and other property

distributed, and

(ii) Subparagraph (A)(ii) does not apply with re-

spect to the stock redeemed; and for purposes of such

subparagraph the interest in the closely held business shall

be considered to be such interest reduced by the value of

the stock redeemed.

This subparagraph shall apply only if, on or before the date

prescribed by subdivision (e) for payment of the first in-

stallment which becomes due after the date of the distribution,

there is paid an amount of the tax imposed by this part not less

than the amount of money and other property distributed.

(C) Subparagraph (A)(ii) does not apply to an exchange

of stock pursuant to a plan of reorganization described in

subparagraph (D), (E), or (F) of Section 368(a)(1) of the

Internal Revenue Code nor to an exchange to which Section

355 of the Internal Revenue Code (or so much of Section 356

of the Internal Revenue Code as relates to Section 355) applies;

but any stock received in such an exchange shall be treated for

purposes of such subparagraph as an interest qualifying under

subdivision (a).

(D) Subparagraph (A)(ii) does not apply to a transfer of

property of the decedent by the executor to a person entitled to

receive such property under the decedent’s will or under the

applicable law of descent and distribution.

(2)(A) If an election is made under this section and the

estate t.as undistributed net income for any taxable year after

its fourth taxable year, the executor shall, on or before the date

32i

prescribed by law for filing the income tax return for such

taxable year (including extensions thereof), pay an amount

equal to such undistributed net income in liquidation of the

unpaid portion of the tax payable in installments.

(B) For purposes of subparagraph (A), the undistributed

net income fo the estate for any taxable year is the amount by

which the distributable net income of the estate for such taxable

year (as defined in Section 643 of the Internal Revenue Code)

exceeds the sum of all of the following:

(i) The amounts for such taxable year specified in para-

graphs (1) and (2) of Section 661(a) of the Internal Revenue

Code (relating to deduction for distributions, etc. ).

(ii) The amount of California and federal income taxes

imposed for the taxable year on the estate.

(iii) The amount of the tax imposed by this part (in-

cluding interest) paid by the executor during the taxable year

(other than any amount paid pursuant to this paragraph).

(iv) The amount of federal estate tax (including interest)

paid by the executor during the taxable year.

(3) If any installment under this section is not paid on or

before the date fixed for its payment by this section (including

any extension of time for the payment of such installment), the

unpaid portion of the tax payable in installments shall be paid

upon notice and demand from the Controller.

(i)(1) If—

(A) A deficiency in the tax imposed by this part is

assessed after the date of the enactment of this section, and

(B) The estate qualifies under paragraph (1) or (2)

of subdivision (a),

the executor may elect to pay the deficiency in installments.

This subdivision shall not apply if the deficiency is due to

negligence, to Intentional disregard of rules and regulations, or

to fraud with intent to evade tax.

33i

(2) An election under this subdivision shall be made not

later than 60 days after the issuance of notice and demand by

the Controller for the payment of the deficiency.

(3) If an election is made under this subdivision, the

deficiency shall (subject to the limitation provided by subdivi-

sion (b)) be prorated to the installments which would have

been due if an election had been timely made under this section

at the time the estate tax return was filed.

The part of the deficiency so prorated to any installment

the date for payment of which would have arrived shall be paid

at the time of the making of the election under this subdivision.

The portion of the deficiency so prorated to installments the

date for payment of which would not have so arrived shall be

paid at the time such installments would have beer due if such

an election had been made.

(j) The Controller shall prescribe such regulations as may

be necessary to the application of this section.

Sec. 20. Section 14211 of the Revenue and Taxation Code

is amended to read:

14211.

(a) The tax does not bear interest if it is paid prior to the

date on which it otherwise becomes delinquent. However, if it

is paid after that date it bears interest at the rate of 12 percent

per annum from the date it became delinquent and until it is

paid or, in the case of any tax being paid in installments

pursuant to Section 14105, * * * 14143.5, 14181, or 14182, at

the adjusted rate of interest provided in subdivision (b) of this

section or at 12 percent per annum, whichever is lower, until the

date prescribed for payment of such installment, and thereafter

at the rate of 12 percent per annum.

(b) The initial adjusted rate of interest shall be 11 percent

per annum. The Controller shall establish an adjusted rate of

interest for the purpose of this section not later than October 15

of any year if the adjusted prime rate charged by banks (that

being 90 percent of the average predominate rate quoted by

deletion by asterisks * * *

34i

commercial banks to large businesses, as determined by the

Board of Governors of the Federal Reserve System) during

September of that year, rounded to the nearest full percent, is at

least a full percentage point more or less than the adjusted rate

of interest which is then in effect. Any such adjusted rate of

interest shall be equal to the adjusted prime rate charged by

banks, rounded to the nearest full percent, and shall become

effective on February | of the immediately succeeding year.

Any adjustment provided for under this * * * subdivision may

not be made prior to the expiration of 23 months following the

date of any preceding adjustment under this * * * subdivision

which changes the rate of interest.

Sec. 21. Section 14342.of the Revenue and Taxation Code

is repealed.

Sec. 22. Section 14343 of the Revenue and Taxation Code

is repealed.

Sec. 23. Section 14344 of the Revenue and Taxation Code

is repealed.

Sec. 24. Section 14345 of the Revenue and Taxation Code

is amended to read:

14345.

No * * * trust company, corporation, bank, other in-

stitution, or person in possession, control, custody, partial

control, or partial custody of any securities, deposits, or other

property, including shares of the capital stock of or other

interest in any such organization or institution, belonging to or

standing in the name of a decedent, whether resident or

nonresident, shall deliver or transfer any such property to or

upon the order or request of any executor of the will, adminis-

trator of the estate, legatee or heir of the decedent; nor deliver

or transfer any such property to or upon the order of any agent,

deputy, attorney, trustee or successor in interest of the decedent

after receipt of actual notice of the death of the decedent; nor

deliver or transfer any securities or other property, including

any shares of the capital stock or other interest in any such

organization or institution, standing in the joint names of the

deletion by asterisks * * *

35i

decedent and one or more other persons, to or upon the order

or request of such other person or persons after receipt of actual

notice of the death of the decedent; and no bank or other

institution having custody of any deposit standing in the joint

names of a decedent and any other person or persons or

standing in the name of the decedent subject to the right of any

other person or persons to draw upon or withdraw the same

shall pay or deliver such deposit to or upon the order of such

other person or persons after receipt of actual notice of the

death of the decedent by the officer or manager in charge of the

office or branch of such bank or other institution at which such

deposit is carried or by the employee thereof who pays or

delivers said deposit:

(a) Without retaining a sufficient portion or amount of the

property to pay any tax and interest which may thereafter be

assessed pursuant to this part; and

(b) Without first giving notice of the time and place of the

delivery or transfer to the Controller and county treasurer at

least 10 days prior to the delivery or transfer.

The Controller, or any person authorized in writing by the

Controller, may consent in writing to the delivery or transfer, in

which event compliance with this section is not required.

The Controller or his or her authorized agent may examine

any property specified in this section at the time of its delivery

or at any other time.

Sec. 25. Section 14346 of the Revenue and Taxation Code

is repealed.

Sec. 26. Section 14347 of the Revenue and Taxation Code

is amended to read:

14347.

Any * * * trust company, corporation, bank, other in-

stitution, or person required to comply with the provisions of

this article but failing to do so is liable to the state for the

amount of any tax, interest or penalty due and payable under

this part on the transfer of the property involved, if solely by

reason of such transfer or payment the state is unable to recover

the same.

deletion by asterisks * * *

36i

The liabilities imposed by this section may be enforced by

the Controller in an action brought in any court of competent

jurisdiction.

Sec. 27. Section 14774 of the Revenue and Taxation Code

is amended to read:

14774,

For the services performed by him or her pursuant to this

part, the inheritance tax referee shall be paid out of the

Inheritance Tax * * * Fund:

(a) Such reasonable compensation as the * * * Con-

troller shall fix.

(b) Such actual and necessary traveling and other in-

cidental expenses, including fees paid to witnesses subpoenaed

by him or her, as the * * * Controller shall allow.

No payment shall be made unless the claim for payment is

first approved by the Controller.

Any payment under this section is in addition to any other

payment to the referee pursuant to Section 609 of the Probate

Code.

Sec. 28. Section 14791 of the Revenue and Taxation Code

is repealed.

Sec. 29. Section 14792 of the Revenue and Taxation Code

is repealed.

Sec. 30. Section 14793 of the Revenue and Taxation Code

is repealed.

Sec. 31. Section 14794 of the Revenue and Taxation Code

is repealed.

Sec. 32. Section 14795 of the Revenue and Taxation Code

is repealed.

Sec. 33. Section 14798 of the Revenue and Taxation Code

is repealed.

Sec. 34. Section 14902 of the Revenue and Taxation Code

is amended to read:

deletion by asterisks * * *

37i

14902.

The money in the Inheritance Tax Fund is hereby appro-

priated as follows:

(a) To pay the refunds authorized by this part and by

Part 9.5 (commencing with Section 16700) of this division.

(b) To pay the compensation and expenses of the referee

referred to in Section 14774.

(c) the balance of the money in the fund shall, on order of

the Controller, be transferred to the State General Fund.

Sec. 35. Section 15104.5 of the Revenue and Taxation

Code is repealed.

Sec. 37. Section 15301 of the Revenue and Taxation Code

is repealed.

Sec. 38. Section 15301.5 of the Revenue and Taxation

Code is repealed.

Sec. 39. Section 15303.5 of the Revenue and Taxation

Code is repealed.

Sec. 40. Section 15310 of the Revenue and Taxation Code

is amended to read:

15310.

* * * In the case of a transfer to either spouse by the

other, none of the property transferred is subject to this part,

except that if a limited power of appointment over any portion

or all of the donor’s property is given to the donor’s spouse, the

value of such property is subject to this part; provided, how-

ever, that the value of any interest, other than the power itself,

given to the donor’s spouse in such property is not subject to

this part.

Sec. 41. Section 15421 of the Revenue and Taxation Code

is amended to read:

15421.

Property of the clear market value of * * * forty thousand

dollars * * * ($40,000) transferred to a minor child of the

donor, and of * * * twenty thousand dollars * * * ($20,000)

transferred to any other class A donee, other than the spouse of

the donor, is exempt from the tax imposed by this part.

deletion by asterisks * * *

38i

Sec. 42. Section 15422 of the Revenue and Taxation Code

is amended to read:

15422.

Property of the clear market value of * * * ten thousand

dollars * * * ($10,000) transferred to any class B donee is

exempt from the tax imposed by this part.

Sec. 43. Section 15423 of the Revenue and Taxation Code

is amended to read:

15423.

Property of the clear market value of three * * * thousand

dollars * * * ($3,000) transferred to any class C donee is

exempt from the tax imposed by this part.

Sec. 45. The sum of four hundred thousand dollars

($400,000) is hereby appropriated to the Controller for the

purpose of administering this act.

Sec. 46. This act provides for a tax levy within the

meaning of Article IV of the Constitution and shall go into

immediate effect. However, the provisions of this act with

respect to the computation of inheritance taxes shall apply only

to the estates of decedents dying on and after January 1, 1981,

and with respect to the computation of gift taxes, shall apply

only to gifts made on and after January 1, 1981. All other

provisions of this act relating to probate procedure and tax

administration and collection, shall apply to all estates, effective

January 1, 1981.

Approved July 19, 1980.

Filed July 20, 1980.

deletion by asterisks * * *