Amicus Curiae Brief — New York Trust Co. v. Eisner

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SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1920.

No, 286,

New Yorn Trust COMPANY and ALBERT W, PRoss,

us executors of the last will and testament of

A. TEARSEN Purpy, deceased,

Plaintif[s in Error,

Vs,

MAK Mixxer, Colleetor,

Defendant in Brror,

BRIEF ON BEHALF OF STATE OF MINNE-

SOTA, SUBMITTED BY ITS ATTORNEY

GENERAL AS AMICUS CURIAE.

CLIFFORD L. HILTON,

Attorney General,

ERGBERT 8. OAKLEY,

Assistant Attorney General,

° For Minnesota.

SUBJECT INDEX.

Page.

Statement of the question discussed......... 1

DOI 05a se 5 5 SRR SR RAEEE CARE EAH COON 4

1. Statement of principles bearing upon

the question discussed ..............

Difference between “Estate Tax Act”

and the Act involved and construed in

Knowlton v. Moore pointed out......

Application of certain principles made

in Knowlton v. Moore discussed and an-

MD Soe ncavuseweamneenns aaveces

The question of burden of State power

of regulation of successions must be de-

termined hy the mode of the imposition

of the exaction, and its operation and

effect as enforced, and noi by mere

name or characterization of the parti-

PNR RRS eh eer ee tee ete ERO

Sh RS Se AP Ee | SEMPRE RC ENp NT TET ROA hg

at oR ee

Mow!

Snie

fee enh ih aes

GATE wel

toe a

Mba

do. The scope and boundaries of state pow-

Oe GU, cos io ees eee 22

6. The exaction attempted to be imposed

by the Act of September Sth. 1916,

Whether considered as attaching to the

interest that ceases at death or as at-

taching to the interest to which some

person succeeds at death, by its opera-

tion and effect as enforced, is a form of

regulation of snecessions, and directly

interferes with and casts a burden up-

on state power of regulation ......... 28

7. Any construction of the Act which would

permit the state to deduet its tax before

computation of the Estate Tax, cannot

affect or militate against the conten-

tion that the states’ power of regula-

tion or its laws of succession, are bur-

dened or impaired to the extent of the

MI, ote ne aa ee Care oe 46

S. The question of power is not to be de-

termined by the amount of the burden

attempted to he cast ..........c-..;:. 48

I rls eer gens Git oe pn ew wee Ss i-Xi

TABLE OF CASES.

SUPREME COURT OF THE UNITED STATES.

Page

Ambrosini v. United States, I8S7 U.S. 1... 32

Ashley v. Ryan, 153 U.S. 486.......... 21

Blackstone y. Miller, 88 U.S. 189... ... 23

Boyd v. United States, 116 U.S. 616.. ‘i 4s

brown vy. [linois, 227 U. a 33

Brown v. Maryland, 12 Wheaton 419. ... 13

Byers v. McAuley, 149 U.S. GOS... 23-31-32

Carpenter vy, Pennsylvania, 17 Howard

cgvigal EE et eS 2 NO 24

Chanter vy. Kelsey, 205 U.S. 466... ... 23

Collector v. Day, 11 Wallace 11B........ 32

Fairbank vy. United States, 181 U.S. 283. 49

Fargo v. Hart, 193 U.S. 490............ 20

Flint v. Stone Tracy Co., 220 U.S. 107 32

Galveston, H. & S. AL Ry. Co. y. Texas,

ccnclibe a < ._, Se 5-20-21

Gibbons v. Ogden, 9 Wheaton 1, 199. .4-13-22-36-47

Gloucester Ferry Company v. Pennsyl-

wae, BEG TT. OOG ............... 520

Henderson et al v. Mayor of the City of

New York, 92 UL Ss. 25a 43

Sr ee

wtae ea

RSE BENE RR IY

PEE)

me:

aga ty

PPP See eRe Mee pee ee

International Paper Company v. Mas-

gncnusctta, 246. U. ©. 180 «66 oc ees

Kansas City v. Botkin, 240 U.S, 227.....

Knowlton v. Moore, [78 UL S. 41... .5-10-

Leisy v. Hardin, 135 U. S. 100..........

License Cases, 5 Howard, 504 ..........

Looney vy. Crane Co,, 245 U.S. 178......

McCulloch vo Marvland, 4 Wheaton 316. .

Mager v. Grima, 8 Howard, 490 ........

Magoun v. [linois Trust Co., 170 ULS, 283

Maxwell v. Buaehbee, 250 UL 8S, 525.......

Mever v. Wells Fargo & Co., 223 U.S. 208

Mugler v. Kansas, 123 U.S. 623 ........

Philadelphia & S. 8S. 8. Co. vy. Pennsyl-

peo by Me oy A ER TG <i

Presser v. [mnois, 116 U. S. 252........

St. Louis Ss. W. OR. Co. ve. Arkansas, 235

fe Se rca Outs areas

Scholey v. Rew, 23 Wallace 331.........

Snyder v. Bettman, 190 U.S. 249.......

Tilt v. Keleey, 207 U. &. 48............

United States v. Perkins, 168 UL S. 625...

United States v. Pox, 94 U.S. 315.00...

Veazie Bank v. Fenno, S Wallace 533...

Wall v. Rissell. 126 T. G. 382... 20.6365.

Welton v. Missouri, 91 U.S. 275

Western Union Telegraph Co. v. Kansas,

OAD

20-25

23-82

23-24

Se > Ee rete.

Yonley vy. Lavender, 21 Wallace 276

23-31

STATE DECISIONS.

Corbin v. Townshend, 92 Conn, 501.....

Estate of Week, 169 Wis. 316..........

People vy. Northern Trust Co. 289° TIL.

Se a 0 I ek a wea cek

People v. Pasfield, 284 Tl, 450..........

Plunkett v. Old Colony Trust Co., 233

mane 491,7 AS TR. OUR. kis

Knight's Estate, 261 Pa. State Rep. 537..

Re Hamlin, 226 N, Y. 407, 7 A. L. R. Pe

Re MeKennan (S. Dak.) 33 L. R-.

(N.

et Ps sce TET Oe ECT Te ee

PEE Riess ste’ oulenne Te en

“tate ve Probate Court, 189 Minn.

9-38

9-30

en)

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1920.

No, 286,

New York TrRust COMPANY and ALBERT W. PRoss,

as executors of the last will and testament of

J. THArRsSEN Purpy, deceased,

Plaintiffs in’ Error,

Vs.

Mark E:snxer, Collector,

Defendant ino Rrvor,

BRIEF ON BEHALF OF STATE OF MINNE-

SOTA, SUBMITTED BY ITS ATTORNi:Y

GENERAL AS AMICUS CURIAE.

cd bl rn i

STATEMENT,

In the case above entitled there has been drawn

in question the constitutionaliiy of the act of Con-

gress of September &, 1916, (389 Statute 777), gen-

Cys each RSS Meas a Be ae a a ii OR LT Beal ae

erally known as the Estate Tax Aet, and its valid-

ity has been assailed upon several grounds, among

others, upow the ground that the act “attempts to

levy a tax upon the operation of the laws of the

several states, and ¢o diminish and impair the exer-

cise by the several states of their exclusive consti-

tutional right to control and regulate the admini-

sthition of the esrates of decedents.’

The state of Minnesota will necessarily be af-

ane

fected by the decision of this court upon the ques-

tion raised by the ground of attack above quoted.

seReaw

rt lt is not interested in the discussion of any other

2 grounds of alleged invalidity of the law. Hence,

5 this brief submitted on behalf of the state will be

4 limited solely to a discussion of the proposition

4 Whether or not the aet in question by its operation

a and eifect, so far invades the field of its exclusive

; jurisdiction in the matter of sueeessions, as to

4 burden, interfere With or impair its power of regu

: lation in that field.

; There is, of course, no thought or intention on

] the part of the state to claim or contend here that

hecause the power of regulation of successions: is

vested in the states, the United States may not tax

transfers of property effected by death. The power

to do so on the part of the Pederal Government is

fully acknowledged so long as its exercise is so

provided for as not to invade the powers of the

states’ regulation, which for obvious constitution

v} reasons, must remain forever inviolate.

Were it possible, by any reasonable construction

of the act, to so restrict its operation as to avoid

the results here complained of, there would, of

course, be no valid objection to this act on the part

of the state, but because we believe that a serious

invasion of the state's exclusive right of regulation

is inevitable if the act is to be given the operation

intended by Congress, we deem it our duty to sub-

mit to the serious consideration of this court. the

contentions upon which this conclusion is reached,

knowing full well that this Court would not. hesi-

tate to protect and preserve inviolate the reserved

power of the states involved in the operation of

this et.

ARGUMENT,

Before undertaking to show the operation of the

act in question it is well to call the attention of

the Court to some of the well settled principles of

constitutional how whieh bear directly upen the

solution of the main question here, and whieh may

be sumorized as follows:

First: The Federal Government is supreme

within the scope of its delegated powers, and the

State governments are eqmially supreme in the exer

cise of those powers not delegated hy them nor in-

hibited to them and that when these supreme fine

tions are exercised by the Federal and State gov

ernments within their respective limitations, they

never come into contliet,

Necond: Vout if either government enacts a haw

upon a matter whieh is within the exclusive con

cern and power of regulation of the other, the valid:

ity of aneh bow depends upon the supremacy of the

power by whieh it was enaeted,

Gibbons vs, Qaden, WY Wheat. 1, 100.205,

License Cases, 3 Taw, S04-588,

Thirds The United States, not possessing, us

the States do, the right to regulate stecessions,

when the United States calls into pliy its teuing

power over the subject of the passage ov receipt of

property by death, the extent of its authority is to

he measured solely by the scope of the taxing power

conferred hy the constitution,

Nnowlton vs, Moore, VIS US, Al.

Fouwth: While the taxing power of Congress

extends to all usual subjects of taxation, ineluding

receipt or transmission of praperty occasioned by

death, vet its power to tax, eamnot be so exercised,

in the constitutional sense, as to impose burdens on

the exclusive power of the states to regulate sue-

COSSTONS,

Nnowlion vs. Moore, VIS US. 4 OO, and

enses cited,

Fifth: Whether an exercise of the taxing power

by Congress, as manifested by the act in question,

does or does not burden or impair the States’ power

of regulation of successions, depends upon the op-

eration and effect of the act as enforced, and not

upon the manner in which the taxing scheme has

heen characterized,

Western Union Teleg, Co. vs, Kansas, 216-0,

Ss. 1,

Galveston vs, Teras, 210 U.S. 217,

Gloucester Perry Co vs, Pennsylvane, 14

US. 196,

2. DIrrerence ReTween “Esrare TAX Aer”

AND THE ACT INVOLVED AND CONSTRUED IN) KNowl.

TON vs, Moore, romnrep our,

Before discussing the application of the princi

ples above stated, it is proper at the outset to ex-

amine the salient provisions of the Estate Aet in

question, Which give rise to Che main question under

consideration, The full text of the act will be

found in the appendix at the end of this brief.

By section 201 of the Act, a tax equal to certain

percentages of the value of the net estate to be de-

termined as provided in Section 203, is imposed

upon the “transfer of the net estate’ of every de-

cedent dying after the passage of this aet.

By Section 202 the value of the gross estate is

determined by including the value at the time of

his death, of all property wherever situated, to the

extent of the interest of the decedent at the time

of his death, which, after his death, is subject to

the payment of the charges against his estate and

the expenses of his administration, and is subject

to distribution as a part of his estates including

i so any interest of which the decedent had, at any

9 time, made a transfer, in contemplation of death or

to take effect at death, and alse to the extent of wy

interest of certain jointly held property,

: By Section 203 it is provided that for the pur:

. poses of the tax, the value of the net estate shall

i he determined by dedueting from the value of the

gross estate, certain amounts for fineral expenses,

administration expenses, claims against the estate,

ele, and a specific exemption of $50,000.

By subsequent sections a tax is made due and

Payable within one year after the decedent's death,

and penaltios are provided for its hon-payment

Within due time, The exeentor is required to make

a return to the collector contiining certain de.

tailed information as to the value of the estate, the

deductions allowed by the act and the value of the

het estate, and the Commissioner of Internal

Revenue is by law directed to make all assessments

Of the tax under the authority of the existing pro-

Visions of law relating to the assessment and col-

lection of taxes. The executor is required to pay

the tax to the collector, and the collector is. re-

quired to grant to the person paving the tax dupli-

eile receipts which shall entitle the executor to

he credited and allowed the amount of such tax

by any court: having jurisdiction to settle his ae.

counts,

By Section 208, if the tay is hot paid within Go

days, the collector is required to bring suit for the

enforcement of the tax and by said section it is pro-

vided that “it being the purpose and intent of this

tithe that se far as is practicable, and unless other-

Wise directed by the will Of the decedent, the tax

shall be paid out of the estate hefore its distribu.

tion,”

By section 209, it is provided that the tax shall

hea lien for ten Yes upon the gross estate of the

decedent and by subsequent sections all general

provisions of law for the HASESSINONT And collection

PARES

of taxes are made applicable, and the commissioner

of internal revenue with the approval of the Secre-

tary of the Treasury, is directed to make such reg:

ulations as he may deem necessary to carry out the

provisions of said act.

A cursory examination of the Act reveals the

faci that the tax is imposed upon the “transter of

net estate” urifhout reference to the persons to

to irhom the property passes, or the mnount of

henesit taken by them, but is levied indifferently,

whether they are relatives of the decedent) or

strangers in’ blood, and without reference to

any seltled policy of any state in the requlation

of suecessions, Ut seives upon the net estate en

messe, asa unit for taxation, graduated according

to the valne of the entire net estate, and the tar

does not at all depend upon the way in which the

property passing becoues distributed upon the

death of the owner,

That such is the manifest intention of the aet,

is confirmed by the Regulations No. 37, promulgat-

ed pursuant to the provision of the act, reading as

follows:

“ARTICLE TF. Neither a property nor a

legacy tax. The Federal Estate Tax is im

posed upon the transfer of the net estate, de

termined in the manner prescribed, of every

person dying after September 8, 1916. The

tax is not laid upon the property, but upon its

transfer from the decedent to others. The

subject of tax is the transfer of the entire net

estate not any particular legacy, devise, or

distributive share. Tt is not. an individual in-

heritance tax. The value of the separate in-

terests and the relationship of the beneficiary

to the decedent have no bearing upon the ques-

tion of liability or the extent thereof. The

transfer of property is taxable, although it

escheats to the State for lack of heirs.

“ARTICLE II. Nature of transfer.—The

statute embraces transfers by will or under

the intestate laws, and also transfers made by

the decedent in his lifetime, when made in con-

templation of death or intended to take effect

in possession or enjoyment at or after his

death. The statute also enumerates certain

special cases not strictly of either character

just described. The practical test of the ex-

istence of a taxable transfer is whether the

statute directs that the property in question

be included in the gross estate.

ARTICLE 46.0 (Which has reference to the

deductions authorized by Sec, 203 of the Act);

* * * ‘No estate, succession, legacy or inherit-

ance tax is deductible.’ ”

and by the state decisions where the question was

directly involved.

In ve Hamlin, 226 N. Y. 407, 124 N. E. a5 %

A. L. BR. 701 and note.

Plunkett rs. Old Colony Trust Co., 233 Mass.

471, 124 N. E. 265, 7 A. L. R. 696.

Knight's Estate, 261 Pa, St. 587-538.

In the cases above cited, the courts, construed the

act as one imposing an “Estate Tax” as distinguish-

ed from any inheritance or succession tax: that is

to say, that the tax is on the interest that ceased

by reason of death, and not on the interest to which

soe person succecds at death.

The distinction between the character of the

two kinds of taxes was clearly pointed out in the

case of Anoirlton vs, Moore, 17S CLS. 41, where the

court quoted approvingly from TLanson’s Death

Duties; referring to the estate duty imposed by the

English finance Net of ISO:

“What it taxes is not the interest to which

some person succeeds on a death, but the inter

est whieh ceased by reason of the death.”

And in sustaining the tax in the Anoirlton case,

usa taX on passing of a legaey, to be measured by

the value of each separately determined legacy or

share, the court, in rejecting constructions of the

act, Which would measure the tax upon each legacy

by the whole value of the personal estate, said:

“Indeed, the confusion which gives rise to

both of the constructions of the statute which

we have just considered comes from the want

of insight pointed out by Tlanson ina passage

Which we have heretofore quoted; that is, it

arises from not keeping in mind the distinetion

hetween a tax on the interest to which some

person succeeds on a death and a tax on the

interest whieh ceased by reason of the death,

the two being different objects of taxation.”

The court will observe that in the respect refer:

red to this act is fundamentally different from any

state inheritance tax law, or any federal law here-

tofore existing. It is unique in the feature of im-

posing a tax upon the estate itself, instead of on

each distributive share. Tt seems to have been

framed without any reference to prior federal or

state legislation on the subject. In whatever as-

pect regarded, it is obvious that the aet is radically

different from the one considered and involved in

Nnoiwlton vs. Moore, 178 U.S Al.

3. APPLICATION OF CERTAIN PRINCIPLES MADE IN

Knowlton vs. Moore, DISCUSSED AND ANALYZED.

In this connection, and before proceeding more

in detail with the question of the effect of operation

of this act upon state’s power, it is proper here

to consider the application of principles upon which

the decision in Anoilton vs. Moore, was rested, as

against the objection that the tax there involved,

burdened the states power of regulation.

The consideration of the Nnoirlton case seems

also desirable at this point, because it is believed

that the opinion of the court in that case has been

misunderstood and misinterpreted.

The Anowlton case, in our view, has been decided

with due regard for the principles of constitutional

law stated at the head of this argument, and the

argument here is founded upon the application of

the same principles, respecting the limitations of

powers of respective governments, as were dis:

cussed in that case.

EE Pe

At the outset it should be observed that in’ the

Knowlton case, the tax was not an “Estate Tax,”

but a tax on “legacies and distributive shares.” In

the Knowlton case the subject of taxation was the

“transmission or receipt of property occasioned by

death” and the argument of counsel that the tax

there imposed cast a burden upon the state's ex-

elusive power of regulation was based upon the as-

stuption that the tax on the “transmission or re-

ceipt of property oecasioned by death” is imposed

on the exelusive power of the state to regulate,

overlooking the imporGaint circumstance, as stated

by Mr. Justice White in the opinion, that ‘the

thing forming the universal subject of taxation up-

on Which inheritance and legaey taxes rest is the

transmission or receipt, and not the right existing

to regulate.”

The fallacy of that argument was clearly pointed

out by Mr. Justice White in his opinion (178 UL 8.

59-60). This fallacy consisted in the assumption

that the two governments finding exercise of their

powers through measures of the same description,

must come in collision solely because the subject

matter of the tax imposed by Congress was at some

time or some point within the state power of regu-

lation, overlooking the important fact, that at some

point the power of the states to regulate becomes

expended and regulation ceases, and that thereupon

an object or a subject arises which is introduced

throngh the medium of the states power of regula-

tion and hecomes open to the taxing power of Con-

—

gress. That this must be so is clearly evident from

the conclusion drawn in the opinion in the course

of which Mr. Justice White said (178 U8. 60):

“Certainly a tax placed upon an inheritance,

diminishes to the extent of the tax, the valne

of the right to inherit or receive, but this is a

burden cast upon the recipient, and wot apon

the power of the state to regulate.”

In reaching this conclusion, the court first con-

ceded that the power of regulation resides in the

states and not in Congress, and that Congress may

hot interfere with nor burden an exelusive power

of the states. Et must be obvious therefore, that

the tax was sustained in the Knowlton case, solely

| upon the principle of the recognition of Che state's

power of regulation, as a factor in the (ransmission

or the receipt of the legacy, and that the power of

Congress to tax successions, may be given full play,

only at the point when the power of state regula:

tion has ceased. The application of tie same prin-

ciple is Hlustrated by a variety of cases in’ this

court, involving validity of state enactments, ob-

noxious to the exclusive power of Congress to regu-

late intersiate commerce, or inhibiting the states

from taxing imports,

Gibbous vs. Ogden, 9 Wheat. 1, 199-205,

Brown vs. Maryland, ete., 12 Wheat. 419,

Welton vs. Missouri, 91 U.S. 275,

Leisy vs. Hardin, 85 0. 8. 100,

In Brown vs. Maryland, supra, the conrt, while

recognizing the difficulty in drawing the line of

distinction between the restriction upon the power

of states to lay a duty on imports, and their ac-

knowledged power (o tax persons and property,

(saving that the two, though quite distinguishable

When they do not approach each other, may vet,

like the intervening colors between white and black,

approach so nearly as to perplex the understanding,

as colors perplex the vision in marking the distine-

tion between them) kid down the principle that

the power of one government to tax cannot he

brought into play. until the power of regulation

of the other lias heen so far expended, as to intro-

duce a new taxable object open to both,

So in Welton vs. Vissouri, supra. this court

denied the validity of state enactment levying a tax

on sale of goods, upon the ground that it was a tax

on the goods themselves and was therefore a burden

upon the interstate commerce, and that the exclu-

sive power of Congress to regulate commerce ex-

tended to and protected the goods from state tanxa-

tion even after the property had entered the state,

and until it has mingled with and become a part

of the general property of the country.

Soin Leisy vs. Hardin, 15 U.S. 100. supra. a

law of the state of Lowa which forbade the receipt

of an imported article, or its sale, was held in vio-

lation of the power of Congress to regulate com-

merce; that such power protected the property un-

til it was received at the destination and sold in

original packages and that to hold otherwise, is to

burden the commerce.

Many other cases familiar to the court may be

cited to the same effect, but the principle enunciat-

ed in all of them, which bears directly upon the

reasons for the decision in Knowlton case, is: pre-

cisely the same. That principle is that with refer-

ence to any usual subject of taxation, when the ex-

clusive power of one government to regulate the

particular matter shall have been exhausted or ex-

pended, the power to tax may extend to both goy-

ernments to such a new subject. Tt is only when

the principle considered is thus viewed that the

respective powers of the two governments, having

no claim to identity, and between which no analogy

may be drawn, may find expression, each within its

proper sphere, and have operation to the attain-

ment of its own particular ends, without conflict

nor interference by one of any right or authority

of the other.

Thus it is, that when the court found ino the

Knowlton case by the application of the principle

last discussed, that the “transmission or receipt of

property by death” was the usual subject of taxa-

tion open to both governments, the conclusion was

inevitable that no burden was cast upon the state's

power of regulation. But the finding by the court

that the burden was cast upon the recipient and

not upon the state power could be justified only

pon the theory that the states power of regulation

was in no way involved in the particular subject

of the tax; or that the power of states regulation

no longer extended to the particular subjeet. or,

SR iN tT

rad

SEILER ET REE ne PPE EELS,

SRS Ea ane

that the rights or privileges with whieh the power

of the state had concern, had found consumunation

in the subject taxed before the incidence of the tax,

In other words, the finding of the court that the

burden was cast upon the recipient was not the

reason for finding that no burden was cast upon

the state, but a necessary conclusion from the prey:

ious determination that “tramsmission or receipt

of property occasioned by death” was at the time

of the incidence of the tax a usual subject of taxa-

tion upon which, the power of regulation of the

state has been cousuimmated, Upon no other

theory is it possible to reconcile Che Knowlton case

with the principles of constitutional law. If the

question of the invasion of the exercise of an ex-

clusive power of one government by the other was

to be tested, by the determination of the sole fact

of the burden of the tax falling upon the persons

immediately concerned then such cases as Brown

rs. Maryland, Western Union vs. Kansas, Galves-

ton vs, Tevas, were all wrongly decided. Thus the

argument in Brown vs. Maryland, that the burden

was on the importer because he must pay the tax,

in Western Union vs. Kansas, that the burden was

on the telegraph company because it must pay the

tax, or in Galveston vs, Texas that the burden was

on the Railway Company because it must pay the

tax, and that therefore no burden would be con-

ceived to be east upon the power of Congress to

regulate interstate commerce, should have pre-

vailed, but in each of those cases the fallacy of sueh

17%

argument was exploded and the question of the in-

vasion or burden of the exclusive power of the

federal government was determined by other con-

sideratious in conformity to the principles above re-

ferred to,

It must be conceded in any event, that had the

court found in the Knowlton case hat the act there

involved was a burden upon the power of the state

regulation of successions, the decision of the court

would have been the other way, whieh makes ob-

vious the conclusion that the Knowlton case is not

an authority for the proposition that Congress cian

tax transfers of property eiYected by death, regard:

less of the effect of such taxation upon the state

power of regulation, On the contrary, in reaching

the conclusion as the court did, that the burden

Was cast upon the recipient and not upon the state

power, the decision stands as an entirely consist-

ent authority for the preposition that Congress

Cannot so tax successions as to cast a burden upon

the states exclusive power of regulation, It should

not be overlooked in this connection that the con-

clusion of the court as to the casting of the burden

upon the recipient was of the very essence of the

decision, is put beyond doubt by the dissenting

opinion of Mr. Justice White in Snyder vs, Bett-

man, 190, UL Ss, 249-258, where referring to his con-

clusion in the Knowlton case, that the burden was

cast upon the recipient and not upon the states

power, he said: “This conclusion was absolutely

essential to the construction of the statute in

Knowlton vs. Moore.”

OE A NEI

jae dns

1A pa ee

as 4 ae

oes

Now the very question for decision here is

whether a burden is cast upon the power of the

state to regulate successions, and this question can:

not be answered merely by saying, that because in

the Knowlton case, it was held that no burden was

cust upon the state, therefore no burden can be said

to be cust upon the state by the act under consider:

ation.

As already noticed, the acts are radieally differ.

ent, and are designed to have wholly different op-

eration; therefore, while the Knowlton case is de-

cisive on the question of casting of burden by the

aet there considered, it did net invelve the ques:

tion as to whether a tax levied by Congress upon

the mass of the estate, regardless of its destination,

and in utter disregard of any state policy of regu.

lation of successions, can be said to be a valid exer-

cise of the taxing power of Congress, when the op-

eration and effect of the act is shown to have di-

rect effect upon the state power. In other words,

when the court decided in the Knowlton ease, that

the tax was upon the “transmission or receipt of

property occasioned by death,” thus giving full ef-

fect to state power of regulation, by which a new

object was introduced, open to taration by Con-

gress, the conclusion that no burden was cast upon

the state power was inevitable, since no burden up-

on state power could be conceived, when the object

of taxation was found not to be a subjeet of the

state’s power of regulation, when intercepted by

the tax,

OF RPGULATION OF SUCCESSIONS MUST BE DETER:

THE QUESTION OF BURDEN oF Stare Power

MINED BY THE MODE OF THLE TMPOSITION OF TILE EX-

ACTION, AND ITS OPERATION AND EF PDCT AS ENFORCED,

AND NOT BY MERE NAME OR CILARACTERIZATION OF

THR PARTICULAR TAX,

Here the subject of the tax and the manner of

its imposition, being radically different from that

involved in the Knowlton case, the question wheth-

er the act does impose a burden or interfere with

the state power of regulation, must be determined

by the effect and operation of the act as enforced

and not by the name given to the tax, and if in the

manner and effect of its operation, it is shown to

impair, interfere with or burden the state's power

of regulation, then the act cannet be regarded as a

lawful exercise of the taxing power of Congress,

and its invalidity cannot be saved by the mere

name or characterization which the act gives to that

particular tax,

That this is the true test to be applied to the act

in question is illustrated by the many cases decided

by this court, involving the validity of state enact-

ments, with respect to their operation and effect, as

a burden upon the power of Congress to regulate

interstate commerce.

The subjects of taxation in all these cases, are

generally either the privileges of exercising cor-

porate franchises within the state, or the property

emploved in their business—all usual subjects of

Ter Se eee

DOE ROLE ES OE TORE Se TEE

bine te al

DA ee as $ OS

taxation, within the acknowledged taxing power

of states. Yet, because of the exclusiveness of the

power of Congress to regulate commerce being in-

volved, this court invariably looked beyond the par-

ticular characterization of the tax, and determined

the question of the burden on comerce power, by

the operation and effect of the act as applied and

enforced, and not by the name given to the tax.

Western Union Telegraph Co. vs. Kansas, 216

a); Ss

(iloucester Ferry Co. vo Pennsylvania, 114 0.

Ss. 196;

Philadelphia & S. Mail 8.8. Co. v. Pa. 122 U.

S. 326;

Meyer v. Wells, Fargo & Co., 223 U.S. 298;

Galveston TH. & S. ALR. Co. vy. Texas, 210 U0.

8. 217;

Fargo v. Hart, 193 U.S. 490;

International Paper Co. vs. Massachusetts,

246 U.S. 135;

Looney vs. Crane Co, 245 U.S. 178;

Kansas City vs. Botkin, 240 U.S. 227.

As was said in Kansas City, Po S. & M. RL Ry. v.

Botkin, 240 U.S. 231. in discussing whether a state

exaction burdened the interstate commerce power

of the national government:

“In determining whether a tax has such a

direct: relation to interstate commerce as to

he an exercise of power prohibited by the com-

merce clause, our decision must regard the

substance of the exaction—its operation and

effect as enforced—and cannot depend upon

the manner in which the taxing scheme has

been characterized.”

And again, in Mugler v. Kansas, 123 U.S. 623:

“The courts are not bound by mere forms,

nor are they to be misled by mere pretenses.

They are at) liberty-—indeed, and under a

solemn duty—to look at the substance of

things, whenever they enter upon the inquiry

Whether the Legishiture has transcended the

limits of its authority.”

In Galveston Hl. & S.A. R. Co. v. Texas, 210 U.

S. 217, 227, which involved the validity of Texas

Statute, imposing an annual tax equal to one per

cent of gross receipts on each railroad lying wholly

Within the state, the court, in condemning the

statute said :

“Neither the state courts, nor the legisla-

tures, by giving the tax a pariicufar name, or

by the use of some form of words, can take

away our duty to consider its nature and ef-

fect.”

Again in Ashley v. Ryan, 158 U.S. 436, the court

said :

“Whether the charge be viewed as i tax, a

license or a fee, if its exaction violated the in-

terstate commerce clause * * * or involved

the assertion of the right of a state to exercise

its powers of taxation beyond its limits, it was

void, whatever might be the technical ehar-

acter affixed to the exaction.”

Again in St. Louis 8. W. R. Co. vy. Arkansas, 235

UL SS. 350, 363, the court said:

]

tad

‘3

ope)

“We must regard the substance rather than

the form, and the controlling test is to be

found in the operation and effect of the law

as applied and enforced.”

It thus appears that in considering the question

of burdening the state power of regulation by the

act in question, itis not so important to look at the

hame given to the tax by the act, as it is important

to look into the operation and effect) of the

act, as it) bears upon the State's exclusive

power of regulation. But, manifestly, before the

operation and effect of the act, can be properly ex-

posed to view, we must first ascertain the function,

scope and extent of the state power in question, so

as to intelligently inquire whether and to what ex-

tent it is or will be burdened or interfered with, by

the federal enactment in question.

> THE Score AND BOUNDARIES OF STATE POWER

oF REGULATION,

Upon this phase of the question, what was said

by Chief Justice Marshall in Gibbons vs. Ogden,

supra, in defining “regulation” is in point:

“To regulate implies in its nature full power

over the thing to be regulated; it excludes ne-

cessarily the action of all others that would

perform the same operation on the same thing.”

** * A regulation when adopted is designed

for the entire result, and the production of a

uniform whole.”

This court will notice judicially that at the time

of the pasage of the Estate Act, Congress found

the several states in the exercise of their respective

powers of regulation, by the enactment of laws, in-

tended to operate upon the devolution of property

effected by death. In doing so, each state has the

exclusive right to prescribe the couditions, attach

privileges or grant exemptions, as it sees fit, to the

exercise of the right to transmit or to receive prop-

erty on death.

That such regulation, in whatever form it may

he exercised by each state, is designed for the en-

tire result and the production of a uniform whole

is but a necessary deduction from the nature of the

power itself; and that such power must be allowed

full exercise, without interference of another gov-

ernment, for the consummation of its purpose, is

of the very essence of the power itself.

That the power to regulate descent and succes-

sion of property on death is a sovereign power,

and belongs exclusively to the states, is so well at-

tested by a variety of cases decided by this court,

that it seems unnecessary to do more than to cite

a few of them by way of illustration.

United States v. Fox, 94 U. S. 315.

Yonley vy. Lavender, 21 Wall. 276.

Chanler v. Kelsey, 205 U.S. 466.

Blackstone v. Miller, 188 U.S. 189.

Maxwell v. Bugbee, 250 U.S. 525.

Tilt v. Kelsey, 207 U. 8. 438.

United States v. Perkins, 168 U.S. 625,

Mager y. Grima, 8 How. 490.

Byers vy. MeAuley, 149 U.S. 608.

SES

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p= 5 77,

ape

ASNT TET POA

a ee oes otal

‘

Manifestly, if regulation is designed “for the

entire result and the production of uniform whole”

as stated by Chief Justice Marshall in the Gibbons

case, then the boundaries of that power must be

coextensive with the attainment of such entire ce-

sult, and since the power is admitted]y both sover-

eign and exclusive, the state may impose any con-

ditions it sees fit, in the exercise of that power, be-

fore the designed result is produced, without inter:

ference or embarrassment by another government,

Hence it is that this court has repeatedly said, that

the so-called succession or inheritance tax enaet-

ments by several states was out ar exercise of the

power of regulating the devolution of property by

death.

Mager v. Grima, 8 Tow, 40.

Magoun vs. Iinois Trust Co., 170 UL 8, 283,

280, 200.

Carpenter vo Pennsvivania, 17 How. £56.

United States v. Perkins, 168 U.S. 625.

The point we wish to make here is that death

duties, under whatever name, imposed by the sey-

eral states, while in some aspects may be regarded

as taxes, exacted in the exercise of power of taxa-

tion, vet in their essence, as attested by the cases

decided by the court, all such laws may be and are

generally sustained, as manifestations of the ex-

elusive power of regulation. This consideration is

important, as marking sharply © > boundaries be-

tween a amere power to tar (possessed by Congress

in the matier under consideration) and a tax by a

state imposed as a measure adopted in the exer-

cise of a sovereign power of regulation. The dis-

tinction between the two makes obvious the limita-

tions of the federal government to far “usual sub-

jects of taxation” in the exercise of taxing power

and a like measure adopted by a state in the exer-

cise of its power of regulation.

The cases cited in support of the proposition that

astate succession or inheritance tax, is but a mea-

sure adopted in the exercise of the power of regula-

tion, are all illustrations of the application of the

same principle in another line of cases involving

the reverse proposition, namely, that of the en-

croachment of the state power to tax “usual sub-

jects of taxation” upon subjects which at the time,

are within the exclusive power of Congress to regu-

late. In all such cases as already noticed, this

court has never hesitated to condemn the tax by

whatever name, or combination of words, it might

have been characterized, as soon as it found that

the particular subject attempted to be taxed by the

state, Was at the time subject to the regulating com-

merce Clause. Among the large number of cases

already cited on the proposition just mentioned,

this court in Philadelphia & Southern Steamship

Company vs. Pennsylvania, 122 U. S. 326, where

the right of a state to tax gross receipts of an inter-

state steamship company was involved, and was

defended upon the ground that the tax was not on

commerce, did not hesitate to sav:

“Tt cannot be pretended that the state could

constitutionally regulate or interfere with that

commerce itself. But taring is one of the

forms of regulation. [tis one of the principal

forma. 122 U. S. 326, 336.

That statement by the court is pertinent here,

not only as indicating that taxation Is one of the

principal forms of regulation, but also that taxa-

tion by way of regulation belongs ecclusively to

the sovereign possessing the power of regulation,

and may not be usurped or interfered with by an-

other government. Further illustrations of such

regulation by way of taxation may be found in that

line of cases decided in this court (collected in: 12

Corpus Juris, p. YS See, 1s) where a tax by a

state was attempted to be exacted upon property

while in transit from one state to another. This

court invariably condemned the tax, whether the

tax is laid by the state of origin, or the state of

destination, upon the ground that in one case the

protection of the commerce chiuse has attached,

and in the other such protection has not ceased.

It being manifest that regulation of successions

is designed as well as exerted to produce certain

results, it must deal with all the property within

the state’s dominion. It is designed to define and

specify the rights of those who succeed to property

in death, and the proportion each shall take, as

well as to impose conditions on such taking, and

while revenne is an incident to such regulation, it

is Obvious that the ultimate object of the power, is

to define and determine the manner, the tenure, and

the conditions upon which all property within the

state's jurisdiction may be acquired or received on

the occasion of death.

It is inconceivable that the results Gus to be pro-

duced in the exercise of exclusive regulation can

be produced by a sovereign government otherwise

than by entire freedom of action, and as this power

of regulation from its very nature is brought into

exercise at the very point of death, its exclusive-

ness and freedom of action begins at that point,

and must obviously continue until the specitic

rights and interests of the successors are produced

and defined, in accordance with rules prescribed

by such regulation. Therefore, “the interest that

ceases on death” is the primary thing with which

the power deals, and the right or privilege of the

owner to transmit it on death, or the exercise of

that right, is the very first step in state regulation,

or the inception of regulation.

For the federal government to step fm and im-

pose an exaction at any point between the incep-

tion of regulation, and until the full rights of sue-

cessors are defined and produced, is, on principle,

just as much an usurpation of the power as it is

for a state to impose a tax upon property in transit

from one state to another, whether such tax is laid

by the state of origin or the state of destination.

Ae ENO A ae OAS SDE. art

Fae

i. THE EXACTION ATTEMPTED TO BE LMPOSED BY

THE ACT OF SEPTEMBER STH, 1916, WHETHER CON-

SIDERED AS ATTACHING TO THE INTEREST ‘THAT

CHASES AT DEATIL, OR AS ATTACHING TO INTEREST To

WHIHCH SOME PERSON SUCCEEDS AT DEATH, BY ITS OP-

ERATION AND EFPPECT AS ENFORCED, IS A) FORM oF

REGULATION OF SUCCESSIONS, AND DIRECTLY INTER:

PERES WITH AND CASTS A BURDEN UPON STATE POWER

OF REGULATION,

As already noticed, in determining the question

Whether the exaction here has such relation to, or

bearing upon, the state regulation of succession, ibs

to amount to exercise of the power prohibited to

Congress, we must regard the operation and effect

of the exaction, and not the name by which the

taxing scheme has been characterized. dn this as-

peet, therefore, it| is not important whether the

exaction is by the act intended to attach to the in-

terest that ceases at death, or to the interest: to

Which some person succeeds ona death, if in either

case by its manner of imposition and enforcement,

it operates as a form of regulation of suecessions,

or interferes with or burdens the paramount pow-

erof the state regulation.

It is manifest in anv aspect, that the exaetion

imposed by this Act is some kind of a death duty

which concerns property of a decedent, but its im-

position, acernal and enforcement is not postponed

to the time of the ascertainment or emergence of

any specific beneticial interest in successors, and in

this respect as already noticed, it is radically dif-

ferent from any federal death duty heretofore con-

sidered by this court. What then is the operation

of this act?

By Section 201, the tax is levied upon the “trans:

fer of net estate” which is specifically detined in

subsequent sections, solely by reference to the value

of the estate, after making ceriain deductions,

Without reference to the persons to whom the prop-

erty may pass, and in utter disregard of the amount

of benefit taken by them, or any of them, and with:

out reference to any conditions or exemptions im-

posed upon or granted to the successors by the par:

ticular poliey of the state. Nowhere in the act is

there any recognition of the distribution of the

estate, whether by will or under intestate laws,

and the amount of the tax is not made to depend

upon how and to whom the estate is to be distri-

Iated,

The imposition of the tax is not postponed to the

completion of administration, but on the contrary

the time of its payment is fixed solely by reference

to the time of death (section 204). Again its pay-

ment is required to be made hy the personal rep-

resentative (section 207). and if not paid, “the

property of the decedent” is to be sold under decree

Of court for the satisfaction of the tax. (Section

208). By the same section, the intent is Clearly

expressed, that the “undistributed estate’ shall

bear the burden of the tax. ‘it heing the purpose

i a

and intent of this tithe that so far as practicable

and unless otherwise directed by the will of the

decedent, the Gax shall be paid before its distrita

tion.” Thos if would seem that in one view the

taiN is dimposed upon the “estate of the decedent,

“the interest that ceases on death’ and ot upon

levatees or devisees. This view was taken by sev:

eral state courts where the controversy arose is

between legatees and residiary beneficiaries as to

whether this tax fell upon the estate or upon the

partionlar legatees or devisees,

Re. Hamlin, 226 N.Y. 407, 7 AT. RR. TOb and

Hotes.

Plinkett vs, Old Colony Trust Co., 233° Miss,

WIS TALL. RR. 696,

Knight's Estate, 261 Pas St. 5387,

Some courts have also decided that this tax be-

ing imposed upon the estate of the decedent, and

being payable out of net estate, is no part of the

estate at the time of its distribution, but is a

charge or expense against the estate, before distri-

bution.

Corbin vs. Townsend, 92 Conn, SOT.

People vs. Pasetield, 284 TH. 450.

State vs. Probate Court, 139 Minn. 210,

People vs. Northern Trust Co, 280 TIL 4%:

ALL. Ro 709 and notes,

See Contra:

Estate of Week, 169 Wis. 316.

Re. Sherman, 166 N.Y. Sup. 1) Caflirmed 222

N. ¥. 340).

Looking then upon the mode of imposition and

enforcement of the exaction here, as being one in

total disregard of any transfer to the successors or

legatees, but directly upon the “net estate as de-

fined by the Aet, then manifestly it amounts to

nothing else than a direct tax on property, and

void for want of apportionment commanded by the

cOMSTItUtiOn,

If, on the other damd., by giving some effect or

meaning to the words “transfer” the exaction be

viewed as one not upon the transfer to the beneficial

suecessors, but upon the transitory or intermediate

transfer from the decedent to the exeeutor or ad-

mninistrator whieh takes place on death, then clear:

lv the exaction would be objectionable as a tax up-

on the state itself, or upon its instrumentalities,

The transfer of the estate to the exeentor or ad-

Winistrator, if it can be regarded in any sense as

such, is not a transfer to them of any beneticial

interest, but a transfer solely in trust for the pur-

poses of carrying out the regulations of the state

in that behalf prescribed. “The legal effect of

vranting letters testamentary or administrative is

to place the whole estate, real and personal, within

the custody of the law and leave it there until the

administration has heen completed.”

Yonley vs, Lavender, 21 Wall, 276.

Byers vs. MeAulev, 149 0 8. G08,

In that view, the personal representative is noth-

ing more nor less than an instrumentality of the

state for the purposes of carrying out its regula-

tions.

Tilt vs, Kelsey, 207 UL 8. 43, 55.

In fact this intermediate transfer to the personal

representative, cannot be viewed otherwise than as

a transfer required and commanded by the laws of

the state in the exercise of its sovereign and ex-

clusive power te regulate and control the descent

and distribution of the estate, as shown by a var

iety of cases,

Tilt vs. Kelsey, 207 UL 8. 43.

Wall vs. Bissell, 125 U.S. 382.

vers vs. MeAnley, 149 U8. 608,

This transitory transfer, as the court) will ob

serve, of the “interest that ceases on death’ is the

very initial step in the administration of every

estate, by the exercise of the state regulation, and

upon whieh every subsequent preceeding ino the

state regulation is founded. A] tax upon such

transfer cannot be regarded otherwise than as a

tax upon the state ageney or instrumentality pro-

vided by its sovereign will, and is obviously objec-

tionable under our dual system of government.

Collector vs. Day, 11 Wall, 113.

Ambrosini vs. United States, IST UL 8S. 1,

Veazie Bank vs. Fenno, 8 Wall, 5383-541,

lint vs. Stone Tracy Co. 220 U.S. 107, 155.

Moreover, to view the exaction as one attaching

upon the transfer to the personal representative, is

mei a

_—

to intercept the passage of property from the de-

cedent to the beneticial successors, at a point where

the power of state regulation is in the very act of

operation, and would be as objectionable, and for

the same reisons thata tax by a state upon prop

erty in transit: from one state to another, is con-

denned as a burden upon interstate commerce, 12

SAGES A le RO

Corpus Juris, 9s,

In Brown vs. Ulineis, 227 U.S. 504, the court ;

said f

“This argument proceeds upon a miseon-

ception of the ground upon whieh the power 3

to tax articles actually moving in interstate f

transportation is denied to the states. That ,

denial rests upon the supremacy of the Federal

power to regulate interstate commerce, Its

postulate is the necessary freedom of that com-

merce from the burden of such local exactions

as are inconsistent with the control and pro:

tection of that power, The fact that sueh a

burden is sought to be imposed by the state

of the domicile of the owner, upon property

moving in interstate commerce, creates no ex-

ception, That state enjoys no prerogative to

muatke levy upon such property passing through

it, because it may belong to its citizens. They,

as well es others, are under the shelter of the

commerce clause. The question is determined

not by the residence of the owner, but by the

nature and effect of the partienlir state ae-

tion with respect toa subject whieh has come

teder the sway of a paramount authority.”

Paraphrasing the principle thus expressed by the

quotation above, we say that the ground on whieh

: al

: 34

the denial of the power of congress to tax the

transitory passage of property while it is in the

custody of the state and upon which the state pow-

SPARE RI Tie PS 4

er is at the time being wielded, rests, is the suprem-

acy of the state to regulate successions.

Its postulate is the wecessary freedom of that

regulation from the burden of such federal exac-

; tions as are inconsistent with the control and pro-

tection of that power, The question is determined

not by the name of the exaction, but by the nature

and effect of the particular federal action with

s respect toa subject which has come under the sway

: of a paramount authority.

: If on the other hand we look upon the exaction

: aus one not directly upon the net estate and not

upon the transitory transfer to the executors, but

: us an exaction upon the transfer of aggregate bene-

ficial interesis which the state has undertaken to

effect in the successors of the decedent, the imposi-

tion cannot escape the condemnation as one casting

a burden upon state power when its operation and

effect as enforced are given due weight.

It will be observed at the outset, that all death

duties, imposed by the various states, are by the

overwhelming weight of authority. regarded as a

tax in the nature of a bonus exacted by the state

for the privilege granted by its laws of inheritance

or succecding to property on (he death of the own-

ers. Thev are generally regarded as being upon

the interest to which persons succeed on a death,

und not upon the interest that ceases by reason of

BP scttaix: Pon vee? ta

——

death; such taxes are commonly called “inherit-

anee” or “succession” or “transfer” taxes.

(See collection of cases in note to Re. Mclsen-

nan, 33: L. RAL ON. SS.) 606.)

It is undoubtedly true that the taxing power of

Congress, extends to and may be exercised upon

“the interest that some person succeeds at death,”

but the imposition of the exaction must be so pro-

vided for, that the state’s power of regulation, as

a factor in the transmission or the receipt of prop-

erty on death, is first given full play, which is but

DEERE LIES ONE SS PR

another way of saying, that the power of congress

to tax does not begin or attach until the state regu-

lation upon the particular subject had ceased, or

has heen so far expended as to produce a definable

or ascertainable subject, no longer under the sway

of the paramount power.

It was upon the application of that) principle

that a tax on a legacy or receipt, was sustained in

Knowlton vs. Moore and Scholey vy. Rew, 28 Wall,

331, and there are no federal cases holding that

a federal inheritance or succession tax ever at-

tached or became a charge against any interest,

until by the process of state requlation and by its

authority, there emerged or was introduced a sub-

ject for the exercise of federal taxing power.

But here by the manner of the imposition of the

tax, and its enforcement, it is manifestly impos-

sible to give effect to or enforce the tax, without

at the same time, to so far disregard the states

power of regulation, as a factor in the transmis-

nohe

ISTE OES

hkcrbtises

sion, as to interpose the federal exaction as a fac-

tor or a condition in such transmission.

by intercepting the consummation of the “trans-

fer” in the beneficiaries, as this act does, before the

transfer is completed and the respective rights of

the successors are defined, as by state law com-

manded, the exertion of the federal power, as mani-

fested in’ the act, hecomes an intermeddling or

regulating factor, ov a price er a coudition of the

transmission.

Measuring the tax as it does here, solely by the

mass of the estate in its process of transmission,

Without reference to its beneficial desiination, and

in utter disregard of the state’s regulations, relat-

ing to its final distribution, it manifestly presents

the state from performing its operation, or carry:

ing out its sovereign will, according to its own

pol

“v

Sl,

Pertinent are the remarks of Chief Justice Mar-

shall in Gibbons vrs. Ogden: “To regulate implies

in its nature full power over the thing to be regu-

lated; if ercludes necessarily the action of all others

that would perform the same operation on the

same thing.”

But how can the action of the federal govern:

ment be deemed to have been excluded in the state

regulation, when by the very design of the act, the

state is prevented from performing its operation,

by the intermeddling of another power, which at

the same time reaches over and withdraws from

that operation, and appropriates to its purpeses, the

very object of that operation?

—

Certainly a tax imposed as this one is, measured

by the mass of the estate diminishes not only to the

extent of the tax, the “net estate,” but also the sep-

arate shares of the successors. Bearing in mind

this diminution of the net estate, as well as the sep-

| arate shares which must result from the enforce- :

| ment Of the tax in its method of imposition, the :

following results are inevitable: :

(a) A condition or price is imposed upon the gy

successors which must be complied with before i

; they may take their shares in the residue. e

(b) There is withdrawn from the operation of F

the state’s power a part of the thing (net estate) #

which the state by its laws has conceded to the

successors, as well as a part of the same thing :

which the state has exacted or reserved for itself,

In either case, the power of the state is thus sen- :

sibly burdened and directly invaded; (a) by im- :

posing a condition or a price before a successor

may take his share in the residue, it denies to the ;

state its paramount right to say what shall pass

to such successor, to the extent of the imposition,

and (b) by withdrawing from the state regulation

the part of the thing which the state has exacted

for itself, it denies to the state to the extent of the

tax, its paramount right to determine for itself

what part of the thing shall be exacted as a condi-

tion of the transfer.

Had the exaction been measured by the value of

each specific distributive share, and enforced after

each such share was ascertained, or made ascertain-

able by means of state regulation, it is obvious that

no burden upon or invasion of state power could

then be conceived, but by the very design of the

act, this is made impossible, since the measurement

of the tax and the method of its imposition and en-

forcement, expressly forbid the taking into account

of the separate value of each distributive share,

but on the contrary the command of the act, is to

measure and enforce the tax by the value of the

mass of the estate, regardless of its destination.

A few examples by way of illustration of the op-

eration and effect of the exaction upon the state's

power of regulation may be appropriate here.

Thus, looking at the table for compnting the estate

tax prepared by the Commissioner, (Article 8,

Regulations No. 37), insofar as it applies to the

act of September Sth, 1916, the following appears:

Upon an estate of $250,000 the tax amounts to

$5,500.00; upon an estate of $1,000,000.00 the tax

is $41,000.00; upon an estate of $5.000,000.00° the

tax is $341,000.00. and upon an estate of 810,00,

000.00 the tax is $841,000.00. These sums com-

prising the taxes are obviously parts of such sev-

eral estates before their distribution in accordance

with the siate regulations. Obviously the with-

drawal of those sums from the estate prevents the

states from exercising their power of regulation

thereon. In other words, the sums mentioned,

representing the estate tax, and ranging from

$5,500.00 to $841,000.00 never come within the

sway of the state’s power. It must follow, there-

fore, that to the extent oO. the imposition, the fed-

eral power becomes a factor or a condition in the

transmission, and to that extent invades and di-

rectly burdens the exclusive power of state regu-

lation, by denying to the state, to the extent of the

imposition, its paramount right to say what shall

pass to the successor, as well as by denying to the

state, to the same extent, its paramount right to

determine for itself what part of the estate shall

he exacted for itself as a condition of the transfer

or succession.

Ifad the act in question in express words provid-

ed—“that to the extent of the tax hereby imposed,

no state shall permit the succession to property of

any decedent dying after the passage of this aet”’—

would any one then pretend that the power of

states’ regulation was not directly burdened or em-

barrassed in its operation, to the extent of such

express prohibition? Would it not then be obvious

that Congress had imposed a condition upon the

laws of descent of every state as well as a condi-

tion upon each state's paramount right of regula-

tion of succession or descent of property? Would

anyone then pretend that such law was a valid ex-

ercise of taxing power of Congress? Why not?

Obviously, because the power of regulation of sue-

cessions is not within the province of the national

government, but is vested exclusively in the states.

Tt is beyond doubt that the taxing power knows

no limitations upon its exercise, when within its

lawful sphere, save only the will or discretion of the

legislative body, and so, here, if Congress may thus

impose its taxation upon the occasion of death, it

may do so to any extent. If the power so to do be

conceded, is it not manifest that by an increase of

the rates to, say, fifty per cent, or one hundred per

cent of the vales of net estates, that the enactment

must operate to inhibit to the states to the same ex-

tent and the same thing, the operation of their laws

respecting devolution of property on death? — Is it

not apparent from mere statement, that an inter

diction of the states power in such manner must be

as effectual as if expressly worded as above? — [tis

too obvious to require discussion, that whatever is

withdrawn by Congress from the operation of the

states power and before that power can be ex-

pended, may not come within the operation of that

power,

Hence, if the mode of its imposition, operation

and enforcement be given, as it must be, due weight,

the exaction here operates precisely in the same

way and produces the same result which would have

ee ean — — ne - a — — — -

eS NF = 2 cera ee te a PES Te rece he eae GEN, © ne So ss Fa OP Mey at Oe

4 5b ets, Ba oF renee PPE alin epi Sg on ee rok ie are eel :

been accomplished, had the act in question in. ex-

aor

Fai Shr Tea

press words contained the prohibition to the states

in the words above quoted. Thus is revealed the

iNegality of the exaection. /n substance the exac-

cal

tion is not only a tax upon transfer of property

cae

effected by death, but by its operation and effect,

by withdrawal of part of the estate from state regu-

lation it necessarily operates as a regulation of

descent of property and thereby casts a direct bur:

den upon the states’ paramount power of such reen-

lation.

The act in question presents the problem whether

it and the states laws taken with respect to the

regulation of the transmission of property on death,

may, concurrently, have operation upon the same

subject without resulting conflict.

The solution of the question requires that in con-

sidering the nature and intended operation of the

Act of Congress, that due consideration be also

given to the operation of such state laws, and the

power given expression by them, relating to the

subject with which the Act deals; and so, when it

is admitted that those laws are the exercise of a

paramount authority respecting the subject) in

hand committed exclusively to the states, and that

the operation of those laws may not be interfered

OE ELLIE ELIE NIL AE ELE ER

with by Congress, the question resolves itself into

one whether the Act of Congress may have opera-

tion. 4

The states may not be trammelled in the exercise 4

of their power. Thus full operation must be ae-

corded the states laws. How then may the Aet of

Congress have force and effect? If its operation

is to embarrass or burden the states power then 4

it must be promptly conceded that it may not be

given effect, Statutes must be interpreted, if pos-

sible, so as to make them consistent with the Con-

stitution and the paramount law. Presser rs. [Ii-

nois, 116 U.S, 252.

Now, were it to be argued, that there must be

ascribed to “the transfer of the net estate” the

significance or meaning of the transfer which the

siutes effect in successors, it must appear from the

demonstration that has been made, that, if such be

the conception of what is the subject of taxation,

the states are never permitted to effect: transmis-

sion or the transfer to successors of that portion of

of estates comprising the Federal exaction,

The tax is measured by the mass of what

is defined by the Aet to be cnet estate’ and is de-

ducted from that mass, and provision is made hy

the Net, Sec. 207, for the isstanmee by the collector

of a receipt evidencing payment whieh “shall en-

title the executor to be credited and allowed the

amount thereof by any court having jurisdiction to

audit or settle his accounts.” Tt is to be observed

that what the states prescribe shall be taken by

persons designated as successors, is) the residue

only of estates of decedents shown by the account

of administration upon allowance and settlement,

So that, the deduction of this tax before or at the

point of the definition of what shall pass to sue-

cessors clearly diminishes that whieh the states

may pass to successors. In other words, the oper-

ation and effect of the tax, through the mode of

measurement and the deduction or withdrawal of

the amount from estates before the shares to pass

to suecessors can be measured, defined or ascertain-

ed, and the deduction or withdrawal of which

sensibly lessens the shares which the states may

pass to successors, militates against such being the

subject of taxation. Sueh a construction immedi-

ately exposes the tax as a condition exacted by

—

Congress of the states or of the successors which

must be performed before the states may define or

pass, or the successors may receive, the residue,

The difficulty is found in the plain wording of the

enactinent, whieh by the mode of imposition and

enforcement denies the conception that such is the i

subject of taxation. As already noticed, there is if

no word of recognition in the Act of persons stand: H

ing us successors; nor of the relation or want of :

relation of successors to a decedent; nor of refer: ;

ence to the distribution of the estate; nor of state i

laws regulating the transmission and succession H

to property; but on the contrary the net estate as i

defined in the Act is seized upon as the unit of tax-

ation and the tax thereon is graduated in accord:

ance with its value, without regard to the provisions é

of state laws determining the manner property on ;

death shall he split and divided between persons ,

designated as successors.

‘

This court in /lenderson vo Wickham, Mayor, 92 ‘

US. 259, speaking in reference to the Act of sev- i

eral states requiring shipmasters to give a bond

for each passenger landed by them, in the penal

sum of $300 to indemnify the states against expense

for relief or support of the passenger named, or

alternatively to pay $1.50 for each passenger land-

ed, held the Acts to be invalid regulations of com-

merce, and said:

“In whatever language a statute may be

framed, its purpose must be determined by its

natural and reasonable effect; and if it is ap-

parent that the object of this statute as judged

by that criterion, is to compel the owners of

vessels to pay a sum of money for every pas-

senger brought by them from a foreign shore

* * * if is as much a tax on passengers if col-

lected from them, or a tax on the vessel or

owners for the exercise of the right of landing

their passengers * * * as was the statute held

void in the Passenger Cases, (7 Tow, 283.)

* 8 * The effective operation of this law

commences at the other end of the voyage,

The master requires of the passenger, before

he is admitted on board, as a part of the pas:

sage money, the sum which he knows he must

pay for the privilege of landing him in’ New

York, Tt is, as we have already said, in effeet,

a tax on the passenger, whieh he pays for the

right to make the voyage-—a voyage only com:

pleted when he hinds on the Amerioan shore”

*? @#

So here whatever be considered the subject. of

taxation, the effective operation of this law com-

mences at the beginning of the voyage, and requires

toll from all that whieh is to pass, before the states,

giving direction to the voyage, may determine what

shall pass toa certain destination,

Paraphrasing what was said in Western Union

rs, Kansas, supra, (216 U.S. on page 380), we say:

Looking then at the natural and reasonable effect

of the statute, disregarding mere forms of expres:

sion, it is clear that the exaction here, is in its es-

rence not simply a tax upon a transmission or re:

ceipt of property occasioned by death, but a form

of regulation of successions as well, and therefore

PERSE

a burden upon and an usurpation of the states

paramount power of regulation. In other words,

the subject of taxation, as actually revealed by the

operation and effect of the Act, is in fact broader

than the boundaries of the taxing power of Con-

gress, and therefore cannot be regarded as a legi-

timate subject of taxation,

As in the Western Cnion vo Nansas case, the

court, While yielding to the state its unlimited

power to impose a tax upon a foreign corporation

asa condition of its right to do local business in

Kansas, declared the tax invalid because by its

measurement and imposition, it) was based upon

something more than the business of the corpora:

tion solely within the state and thereby burdened

interstate commerce; so here, while acknowledging

to Congress its power to tax legitimate subjects

of taxation, the exaetion by the mode of its im-

position, measurement and enforcement, is ob-

viously based upon, and includes within it, some-

thing more than the mere transmission of property

occasioned by death; to-wit: the exaction, in facet,

overreaches the houndaries of that subject of taxa-

tion and by its own force and at the same time,

operates as a regulation of descent—a_ subject

within the sway of another paramount power and

therefore prohibited to Congress,

The power to tax is the power to destroy, WeCul-

loch v. Maryland, 4 Wheat. 316, which principle is

pertinent only where there is no power to tax:

Nnoielton rv. Moore, supra,

FLOP ELODIE LOL TITLE ERATED ALOE RDO TR IT =

7. ANY CONSTRUCTION OF TILE ACT WHICH WOULD

PERMIT TILE STATE TO DEDUCT IPS TAN BEFORE COM-

PUTATION OF THE ESTATE TAN, CANNOT AFPPECT On

MILITATE AGAINST THE CONTENTION THAT TILE

STATES POWER OF REGULATION OR TTS LAWS OF SUC:

CESSION, ARE BURDENED OR IMPAIRED TO TILE EXTENT

OF THE EXNACTION,

If it be once conceded, as we think it must be,

that by its operation, enforcement and effect, the

exaction here withdraws to the extent of the tax,

a part of the estate upon which the power of the

state is being at the time wielded, and thereby ex.

cludes its operation to that extent, it is obvious

that any construction of the Aet whieh would

merely permit the state to deduct its tax before the

computation of the Estate Tax can in noe way im

pair or militate against the soundness of the con-

tention that even then the state's power is never:

theless burdened and denied to the extent of the

exaction,

To demonstrate the soundness of this proposi-

tion, requires mereiy recalling to the attention of

the court, the force of two considerations whieh

hear upon this question: (a) as universally consid:

ered by the vast majority of state courts, and alse

by this court, the so-called “inheritance, “sucees-

sion” or “transfer” taxes exacted by the states, are

in reality a bonus or price which the state has a

right to and does exact, as a condition or considera-

tion for such inheritance, succession or transfer.

_ —

This bonus or price is exacted for the performance

by the state of certain result, viz: effectuating the

succession or the transfer in conformity to its laws

of regulation of successions. (hb) “Regulation

when adopted is designed for the entire result, and

the production of a uniform whole” (Gibbons vr,

Ogden.)

“tar

Bearing in mind these considerations, the val-

idity of which cannot be disputed, the question is:

how can the state produce the certain result, by

the mere receipt of the consideration for it, when

it is shown as here, that the performance of the

very result, for which the consideration is exacted,

is interrupted and burdened by the intervention of '

another power coming in and withdrawing from

the operation of such performance, a part of the

sume thing upon which the state had undertaken

to perform that certain result?

It is true that by such deduetion, the state's ex-

action is satisfied, but has the state performed the

result for which it exacted the bonus? Certainly

not, Manifestly the result whieh it undertook to

perform is nevertheless diminished to the extent

of the federal exaction, and to that extent the law

of the State has been nullified or denied,

8. TILE QUFSTION OF POWER IS NOT TO BE DETER-

MINED BY THE AMOUNT OF THE BURDEN ATTEMPTED

TO BE CAST,

Were it to be contended that the Act complained

of cannot be considered as casting a burden upon

the states’ power in a relatively immediate way,

because in many or most cases the tax must be com-

paratively small or insignificant, the sufficient an-

swer must be that the extent of an injury never

measures the rightfulness of the act producing it.

Indeed, it can hardly be claimed that a tax which

withdraws from the operation of the states’ power,

or burdens that power in its exercise, to the extent

noted in the foregoing illustrations (and mate-

rially greater under the Revenue Act of 1918 by

increased rates reaching one-quarter of all estates

in excess of $10,000,000) is or can be other than

substantial, immediate and direct.

This court having occasion to consider the ques-

tion of the compulsory production of the books and

papers of persons charged with violation of the

revenue laws of the United States, as an unwar-

ranted search and seizure within the meaning of

the Fourth Amendment, said in Boyd rv, United

States, 116 U.S, 616,

“Though the proceeding in question is di-

vested of many of the aggrevating incidents of

actual search and seizure, vet, as before said,

it contains their substance and essence, and

effects their substantial purpose. It may be

that it is the obnoxious thing in its mildest

| —

and least repulsive form; but illegitimate and

unconstitutional practices get their first foot-

ing in that way, namely: by silent approaches

and slight deviations from legal modes of pro-

cedure, This can only be obviated by adhering

to the rule that constitutional provisions for

the security of persons and property should be ;

liberally construed, A close and literal con- _

struction deprives them of half their efticacy ;

and leads to gradual depreciation of the right, é

as if it consisted more in sounds than in sub- ,

stance. It is the duty of courts to be watchful i

for the constitutional rights of the citizen, and ;

against any stealthy encroachments thereon. %

Their motto should be obsta principiis.” :

Again in Fairbank v. United States, 181 U.S.

288, which reviewed a conviction for issuing an 4

export bill of lading without affixing thereto an bs

internal revenue stamp of ten cents required by the if

Act of June 18, 1898, the constitutionality of which :

Act was assailed as in violation of the provision

that no tax or duty shall be laid on any articles

exported from any state, this court speaking in

reference to the small amount of the tax, said:

“e * * The question of power is not to

be determined by the amount of the burden

attempted to be cast. The constitutional lan-

guage is, ‘no tax or duty. A 10-cent tax or

duty is in conflict with that provision as cer-

tainly as a 100-dollar tax or duty. Constitu-

tional mandates are imperative. The question

is never one of amount, but one of power.

The applicable maxim is, ‘obsta principtis’,

not *De minimis non curat ler!”

* * * * *

or the reasons which have been advanced, the

State of Minnesota deems that Tithe TL, Estate

Tax, of the Act of Congress, September Sth, 116,

entitled “An Aet to increase the revenue, and for

other purposes,” is an encroachment upon and in

terference with its exclusive power to regulate the

transmission of property on death, and impedes,

embarrasses and burdens the exercise of that pow-

er, and in consequence that the tax laid is in viola-

tion of its sovereign rights, and the Constitution

of the United States.

Respectfully submitted,

CLIFFORD L. HILTON,

Attorney General,

EGBERT Ss. OAKLEY,

Assistant Attorney General,

For Minnesota.

——

APPENDIX.

Provisions of the Estate Tax Act of 1916.

Estate Tax Law of 1916 (Revenue Act of 1916,

Title Il).

Sec, 200. That when used in this tithe—

The term “person” includes partnerships, cor

porations, and associations ;

The term “United States” means only the Staies,

the Territories of Alaska and Hawaii, and the Dis-

trict of Columbia ;

The term “executor” means the executor or ad-

ministrator of the decedent, or, if there is no exe-

cutor or administrator, any person who takes pos:

session of any property of the decedent; and

The term “collector” means the collector of in-

ternal revenue of the district in) which was the

domicile of the decedent at the time of his death,

or. if there was no such domicile in’ the United

States, then the collector of the distriet in which is

situated the part of the gross estate of the deced-

ent in the United States, or, if such part of the

gross estate is situated in more than one district,

then the collector of internal revenne at Baltimore,

Marvland.

oe as

PEELED ENGIN SPX

ROT ARLES IES IIS, FOILS

Sec. 201. That a tax (hereinafter in this title

referred to as the tax), equal to the following per-

centages of the value of the net estate, to be deter-

mined as provided in section two hundred and

three, is hereby imposed upon the transfer of the

net estate of every decedent dying after the pas-

sage of this Act, whether a resident or nonresident

of the United States:

One per centum of the amount of such net estate

not in excess of S50,000;

Two per centum of the amount by which such

net estate exceeds S50,000 and does not exceed

$150,000 ;

Three per centum of the amount by which such

net estate exceeds S150,000 and does not exceed

$250,000;

Four per centum of the amount by whieh such

net estate exceeds $250,100 and does not exceed

$450,000 ;

Five per centum of the amount by which such

net estate exceeds $450,000 and does not exceed

$1,000,000;

Six per centum of the amount by which such net

estate exceeds $1,000,000) and does not exceed

$2,000,000.

Seven per centum of the amount by which such

net estate exceeds $2,000,000 and does not exceed

$3,000,000 ;

Fight per centum of the amount by which such

net estate exceeds $38,000,000 and does not exceed

$4,000,000 ;

_—

Nine per centum of the amount by which such

net estate exceeds $4,000,000 and does not exceed

$5,000,000 5 and

Ten per centum of the amount by which such

net estate exceeds 35,000,000.

Sec, 202. That the value of the gross estate of :

the decedent shall be determined by including the

value at the time of his death of all property, real

or personal, tangible or intangible, whatever sit- 5

uated : b

(a) To the extent of the interest therein of the é

decedent at the time of his death which after his e

death is subject to the payment of the charges :

against his estate and the expenses of its admini- i

stration and is subject to distribution as part of e

his estate. 5

(b) To the extent of any interest therein of 8

which the decedent has at any time made a trans- 3

fer, or with respect to which he has created a trust, 4

in contemplation of or intended to take effect in

possession or enjoyment at or after his death, ex- :

cept in case of a bona fide sale for a fair consider- :

ation in money or money's worth. Any transfer :

of a material part of his property in the nature of :

a final disposition or distribution thereof, made

by the decedent within two years prior to his death

without such a consideration, shall, unless shown

to the contrary, be deemed to have been made in

contemplation of death within the meaning of this

title; and

iii

can

(ec) To the extent of the interest therein held

jointly or as tenants in the entirety by the deced-

ent and any other person, or deposited in banks or

ocher institutions in their joint names and pruay-

able to either or the survivor, except such part

thereofias may be shown to have originally belonged

to such other person and never to have belonged

to the decedent.

lor the purpose of this tithe stock in a domestic

corporation owned and held by a nonresident de-

cedent shall be deemed property within the United

States, and any property of whieh the decedent his

made a transfer or with respect to whieh he has

created a trust, within the meaning of subdivision

(hid of this section, shall be deemed to be situated

in the United States, if so situated either at the

time of the transfer or the creation of the trust,

or at the time of the decedent's death.

See, 203. That for the purpose of the tax the

vilue of the net estate shall be determined—

tat) In the ease of a resident, by deducting from

the valne of the gross estate

(1) Such amounts for funeral expenses, ad-

Ininistration expenses, claims against the estate,

unpaid mortgages, losses incurred during the set-

tlement of the estate. arising from fires, storms,

shipwreck, or other casnaliv, and from theft, when

such losses are not compensated for by insurance

or otherwise, support during the settlement of the

estate of those dependent npon the decedent. and

such other charges against the estate, as are al-

_——

lowed by the laws of the jurisdiction, whether with-

in or without the United States, under which the

estate is being administered; and

(2) An exemption of 350,000;

(b) In the case of a nonresident, by deduecing

from the value of that pari of lis gross estate which

ut the (ime of his death is situated in the United

States that proportion of the deductions specitied

in paragraph (1) of subdivision (ay of Chis see-

tion Which the value of sieh pari bears to the value

of his entire gross estate, wherever situated. But

SPA PRS a aay sieasees

no deductions stall be allowed in the case of a non-

resident unless the executor includes in the return 7

required to he filed under seetion two hundred and )

five the value at the time of his death of that part :

of the gross estate of the nonresident not situated ’

in the United States. A

Sec, 204. That the tax shall be dune one vear

after the decedent's death. If the tax is paid: be- :

fore it is due a discount at the rate of five per cent- q

Win per annum, calenlated from the time payment x

is made to the date when the tax is dve, shall be de- d

dueted. Tf the tax is not paid within ninety days :

after if is due interest at the rate of teu per centum :

per annum from the time of the decedent's death

shall be added as part of the tax, unless because of

claims against the estate, necessary litigation, or

other unavoidable delay the collector finds that the

tax cannot be determined, in which case the inter:

est shall be at the rate of six per centum per an-

num from the time of the decedent's death mutil the

cause of such delay is removed, and thereafter at

the rate of ten per centum per annum. Litigation

to defeat the payment of the tax shall not be deemed

necessary litigation.

See. 205. That the executor, within thirty days

after qualifying as such, or after coming into pos-

session of any property of the decedent, whichever

event first occurs, shall give written notice to the

collector, The executor shall also, at such times

and in such manner as tay be required by the regu-

lations made under this title, tile with the collector

a return under oath in duplicate, setting forth (a)

the value of the gross estate of the decedent at the

time of his death, or, in case of a non-resident, of

that part of his gross estate situated in the United

States; (b) the deductions allowed under section

two hundred and three (¢) the value of the net

estate of the decedent as defined in section two

hundred and three; and (d) the tax paid or pay-

able thereon; or such part of sueh information as

may at the time be ascertainable and such supple-

mental data as may be necessary to establish the

correct tax.

Return shall be made in all cases of estates sub-

ject to the tax or where the gross estate at the

death of the decedent exceeds $60,000, and in the

case of the estate of every nonresident any part of

whose gross estate is situated in the United States.

If the executor is unable to make a complete return

as to any part of the gross estate of the decedent,

he shall include in his return a description of such

part and the name of every person holding a legal

or beneficial interest therein, and upon notice from

the collector such person shall in like manner make

a return as to such part of the gross estate. The

Commissioner of Iniernal Revenue shall make all

ussessinents Of the tax under the authority of exist-

ing administrative special and general provisions

of law relating to the assessment and collection of

taxes.

See, 206. That if no administration is granted

upon the estate of a decedent, or if no return is

filed as provided in section two hundred and five,

ov if a return contains a false or incorrect state-

ment of a material fact, the collector or deputy col-

lector shall make a return and the Commissioner

of Internal Revenue shall asess the tax thereon.

Sec, 207. That the executor shall pay the tax

to the collector or deputy collector. If for any

reason the amount of the tax cannot be determined,

the payment of a sum of money sufficient, in the

opinion of the collector, to discharge the tax shall

be deemed payment in full of the tax, exeept as in

this section otherwise provided. If the amount so

paid exceeds the amount of the tax as finally deter-

mined, the Commissioner of Internal Revenue shall

refund such excess to the executor. Tf the amount

of the tax as finally determined exceeds the amount

so paid the commissioner shall notify the executor

of the amount of such excess. From the time of

such notification to the time of the final payment

vii

yer

seis.

RED Ry

5S Sen a

ON RT

of such excess part of the tax, interest shall be

added thereto at the rate of ten per centum per

wnnom, and the amount of such excess shall be a

lien Upon the entire gross estate, except such part

thereof as may tatve been sold to a bona fide pur-

chaser fora fair consideration in money or money's

worth.

The collector shall grant to the person paving

the tax duplicate receipts, either of whieh shall be

sufficient evidence of such payvinent, and shall en-

title the exeentor to he evedited and allowed the

amount thereof by auy court having jurisdiction to

andit or settle his necounts.

See, 2OS. That if the tax herein imposed is not

paid within sixty days after itis due, the collector

shall, unless there is reasonable cause for further

delay, commence appropriate proceedings in any

court of the United States, in the name of the Unit

ed States, to subject the property of the decedent

to be sold under the judgment or decree of) the

court, From the proceeds of such sale the amount

of the tax, together with the costs and expenses of

every description to be allowed by the court, shall

be first paid, and the balanee shall be deposited ae:

cording to the order of the court, to be paid under

its direction to the person entitled thereto, Tf the

tax orany part thereof is paid by, or collected out

of that part of the estate passing to or in the pos

session of, any person other than the exeentor in

his capacity as such, such person shall be entitled

to reimbursement ont of any part of the estate et

viii

_—

a ee eae

undistributed or by a just and equitable contribu-

tion by the persons whose interest in the estate of

the decedent would have been reduced if the tax

had been paid before the distribution of the estate

or whose interest is subject to equal or prior lia-

bility for the payment of taxes, debts, or other

charges against the estate, it being the purpose and

intent of this title that so far as is practicable and

unless otherwise directed by the will of the deced-

ent the tax shall be paid out of the estate before its

distribution,

Sec, 200. That unless the tax is sooner paid in

full, it shall be a lien for ten years upon the gross

estate of the decedent, except that such part of the

vross estate as is used for the payment of charges

against the estate and expenses of its administra:

tion, allowed by any court) having jurisdiction

thereof, shall be divested of sueh lien.

If the decedent makes a transfer of, or creates a

trust with respect to, any property in contempla-

tion of or intended to take effect in possession or

enjoyment at or after his death (except in the case

of a bona fide sale fora fair consideration in money

or money's worth) and if the tax in respect thereto

isnot paid when due, the transferee or trustee shall

he personally diable for sueh tax, and such prop-

erty, to the exient of the decedents interest there-

incat the time of such transfer, shall be subjeet to

a dien equal to the amount of such tax. Any part

of sneh property sald by such transferee or trustee

tou bons tide purchaser fora fair consideration in

FRASER Oh Rea Ee S

SOA PHI ESO

ht od

eeeenerneerenemenenennnnemeemeetinminemnnneneeeat ay

money or money's worth shall be divested of the

lien and a like lien shall then attach to all the

property of such transferee or trustee, except any

part sold to a bona tide purchaser for a fair cou.

sideration in money or money's worth.

See, 20. That whoever knowingly makes any

false statement in any notice or return required to

he filed by this tithe shall be liable to a penaliy of

not exceeding 35,000, or imprisonment not exceed:

ing one year, or both, in the diseretion of the court.

Whoever fails to comply with any duty imposed

upon him by section two hundred and five, or hav-

ing in his possession or control any record, file, or

paper, containing or supposed to contain any in-

formation concerning the estate of the decedent,

fails to exhibit the same upon request to the Com-

missioner of Interne! Revenue or any collector or

law officer of the United States, or his duty author-

ized deputy or agent, who desires to examine the

same in the performance of his duties under this

title, shall be liable to a penalty of not exceeding

S500, to be recovered, with costs of suit, in a civil

action in the name of the United States,

Sec. 211. That all administrative, special and

general provisions of law, including the laws in re-

lation to the assessment and collection of taxes, not

heretofore specifically repealed are hereby made to

apply to this title so far as applicable and not in-

consistent with its provisions,

see, 212.) That the Commissioner of Internal

Revenue, with the approval of the Secretary of the

Treasury, shall make such regulations, and pre-

scribe and require the use of such books and forms,

ws he may deem necessary to carry out the provi-

sious of this title.

Supreme Court of the Cnited States

OCTOBER TERM, 1920

No. 286

NEW YORK TRUST COMPANY AND

ALBERT W. PROSS

AS EXECUTORS OF THE LAST WILL AND TESTAMENT OF

J. HARSEN PURDY, DECEASED

PLAINTIFFS IN ERROR

Vv.

MARK EISNER

COLLECTOR

DEFENDANT IN ERROR

BRIEF ON BEHALF OF THE COMMONWEALTH

OF MASSACHUSETTS, SUBMITTED BY

ITS ATTORNEY-GENERAL AS

AMICUS CURIAE

J. WESTON ALLEN

Attorney-General

CONTENTS.

1. Statement, .

2. Argument, .

First: The Federal estate tax cannot be sustained upon the

grounds on which succession taxes were sustained in

Knowlton v. Moore, 178 U. 8. 41, and Scholey v.

Rew, 23 Wall. 331, .

Second: The Federal estate tax is an encroachment upon the

exclusive power of the several states to regulate the

descent and distribution of property of decedents

domiciled therein, and is for that reason, unconsti-

tutional and void,

I. The several states possess the exclusive power to regu-

late and control the descent and distribution of prop-

erty,

II. The Federal estate tax imposed by the Act of Septem-

ber 8, 1916, is in its operation and effect an invasion

of the sovereign power of the states to regulate the

descent and distribution of property to decedents,

Third: The Federal estate tax is a direct tax and therefore

unconstitutional because not apportioned in ac-

cordance with the requirements of the Federal Con-

stitution,

3. Conclusion,

AUTHORITIES CITED.

PAGE

Brown v. Maryland, 12 Wheat. 419, — . : ‘ : > ; , 13

Carpenter v. Pennsylvania, 17 How. 456, _ ; . ‘ : 14

Collector v. Day, 11 Wall. 113, — . , ; : : : : ; 12

Collins vy. New Hampshire, 171 U.S. 30, 2... he ae ; 25

Cook v. Pennsylvania, 97 U. 8. 566, . ; : rede : ; 13

Cooley, Thomas M., d ; . ; : ; d . 24

Corbin vr. Tow saad! 92 Conn. 501, . ; 3

Dawson v. Kentucky Distilleries & W: aeiel Co. — U. s.

—— (decided February 28,1921), . 2. 2... 28

Estate of Henry Miller, ——— mt, , decided Jan. 18,1921, — . 3

Farrington v. Tennessee, 95 U. 8. 679, . : : : ; ; 11

Flint v. Stone Tracy Co., 220 U. Fou | () aa 2 = - 24

Galveston, Harrisburg & San Antonio v. Texas, 210 t. Ses oe 27

Gloucester Ferry Co. v. Pennsylvania, 114 U. 8. 196, ; . : 13

Hanson, Alfred, ae 6 ree Me Ae Meee Lemathe Fy’ 6

Knight’s Estate, 261 Pa. St. 5337, ane ve ORS a, Sue 3

Knowlton v. Moore, 178 U. 8. 41, f : . 2,7, 19; 20; 22

Ludwig v. Western Union Telegraph Co., 216 U. S16, me

MeCoach vr. Minehill & Schuylkill Haven R.R., 228 U.S. 295, 24

Mager v. Grima, 8 ay. 490, ee See ee en ns

Nicol vr. Ames, 173 U.S. 509, me, te ; 23

Northern Trust Co. rv. raceme 257 Fed. 12: affirmed in Lederer

v. Northern Trust Co., 262 Fed.52,. . . . . . . 3

Orr v, Gilman, 183 U. 8. 278, Velie uate <p “ee° Pir eae Oe 14

People e. Bemis, (Colo.) 189 Pac. 32, . . . . . ... 3

People v. Pasfield, 284 Ill. 450, . a a ns 3

Philadelphia & Southern Steamship Co. v. Pa, 122 U. S. 326, , 13

Pollock v. Farmers’ Loan & Trust Co. 157 U. 8. 429, ; , 22,23, 27

Pullman Company v. Kansas, 216 U.S. 56, %; ach ata oa” 12

Scholey v. Rew, 23 Wall. 331, Se ee et nS el a ee 2

Snyder rv. Bettman, 190 U.S. 249,

South Carolina v. United States, 199 U. 8. 437,

State v. First Calumet ete., Co. (Ind.) 125 N. FE. 200,

State v. Probate Court, 139 Minn. 210,

State v. Switzler, 143 Mo, 287,

Strode v. Commonwealth, 52 Pa. St. 181,

Thomas v. United States, 192 U. 8. 363,

Tilt v. Kelsey, 207, U. 8. 48,

United States vr. Fox, 94 U.S. 315,

United States rv. Cruishank, 92 U.S. 542,

Western Union Tele —s 0,2 aneoe, 216'U. 8. ko | SS

Woodward et al. v. U. S.,—— U. 8S. Court of Claims — (March

14, 1921), : : ; : ; P : ; : , 4

Supreme Court of the United States

October Term, 1920.

No. 286.

NEW YORK TRUST COMPANY anp ALBERT

W. PROSS, as Execurors oF THE Last WILL

AND TESTAMENT OF J. HARSEN Purpy, DEcEAseEpD,

PLAINTIFFS IN Error,

MARK EISNER, CoLLector, DEFENDANT IN ERROR.

BRIEF ON BEHALF OF THE COMMON WEALTH

OF MASSACHUSETTS, SUBMITTED B x

ITS ATTORNEY-GENERAL AS AMI 'US

CURIAE.

STATEMENT.

In the above entitled case, the constitutionality

of the Federal estate tax, imposed by the Revenue

Act of 1916 (39 Statute, 777) has been attacked upon

the following grounds, among others: — that the tax

is an usurpation of the sovereign power of states to

regulate descent and distribution, and that it is a direct

tax and invalid because not apportioned.

om —

The Commonwealth of Massachusetts has three

reasons for being interested in the question of the con-

stitutionality of the act, these being:

First. — That the tax being measured by the whole.

estate and taken out before distribution, burdens and

impairs its sovereign right to regulate descent and

distribution;

Second. — That the exaction is in such form that it

reduces the revenues of the state as it is taken out be-

fore computing the toll which the state exacts in the

exercise of its power to regulate descent and distribu-

tion;

Third. — That it represents the citizens of the Com-

monwealth, who are damaged in that they are uncon-

stitutionally required to pay a larger proportion of the

total amount raised by the Federal Government from

this death duty than they would be required to pay if

it were constitutionally apportioned, as it is a direct

tax and should be apportioned among the states upon

the basis of population.

ARGUMENT.

First.

The Federal Estate Tax cannot be sustained upon the

Grounds on which the Succession Taxes were sus-

tained in Knowlton v. Moore, 178 U.S. 41, and

Scholey v. Rew, 23 Wall. 331.

The taxes considered in those cases were succession

taxes imposed on the exercise of the right of legatees or

distributees to receive a share of a decedent’s estate.

The Federal estate tax imposed by the Revenue

Act of 1916 is a tax upon the property owned by the

decedent at the time of his death. This distinction

is recognized in numerous cases.

Corbin v. Townshend, 92 Conn. 501.

Knight’s Estate, 261 Pa. St. 537.

People v. Pasfield, 284 Ill. 450.

State v. Probate Court, 139 Minn. 210.

People v. Bemis (Colo.), 189 Pac. 32.

State v. First Calumet ete. Co. (Ind.) 125

N. E. 200.

Northern Trust Co. v. Lederer, 257 Fed. 812

(affirmed in Lederer v. Northern Trust

Co, 262 Fed. 52).

In a recent California case, Estate of Henry Miller,

decided January 18, 1921, the Court distinguishes the

two kinds of tax thus:

“The federal tax under the act of 1916, on the other hand,

is not a succession tax, but an estate tax, not a tax on what

comes to the beneficiaries or heirs, but upon what is left by the

decedent. In this respect it differs from the legacy tax im-

posed by the United States War Revenue Act of 1898. The

Act of 1916 entitled the tax an ‘estate tax’ and in terms

imposes it upon the net estate of the decedent as a unit. It

is not apportioned among the various transferees and bears no

relation to the separate amounts which they are to receive.

The distinction between a succession tax and an estate tax is

a recognized distinction, and, so far as we are aware, it has

been held without exception that the federal tax, under the act

of 1916, is of the latter character. It is not possible, in our

judgment, to take any other reasonable view of it.

“The nature of the federal tax is discussed in In re Roebling’s

Estate, 89 N. J. E. 163, and it is said (p. 166): ‘To be more

precise, it is imposed upon the estate, transferred by death, and

not upon the succession resulting from death. The distinction

is well defined and recognized in countries where both kinds

of tax exist. The federal tax resembles the probate duty of

the act of 1862, chapter 119 (12 U.S. Stats., p. 483), which

was payable by the executor out of the estate, while the legacy

duty therein provided for was payable by the beneficiaries,

The tax occupies the same field of death duty as does the

‘Estate Tax’ in England. By the Finance Act of IS04 an

estate duty is levied upon the principal value of all property,

real or personal, which passes on the death of a person and

is imposed upon the estate and is payable by the executor as

an administration expense. In addition to this tax, there is

also a legacy tax, and a succession duty upon the realty,

payable by the recipients. Speaking of the death duty, Mr,

Hanson in his opening chapter — Hans. D.D. (6th ed.), says:

“*The new duty imposed by the Finance act, 1894, and

called estate duty, supersedes probate duty; but the key to

the construction of the Finance act, 1894, and the amending

act lies in remembering that the new estate duty, although it

is leviable on property which was left untouched by probate

duty, such as real estate, yet is in substance of the same nature

as the old probate duty. What it taxes is not the interest to

which some person succeeds on a death, but the property in

respect of which an interest ceased by reason of the death.

Unless this principle is clearly kept in view, the mind is con-

stantly tempted by the wording of the act to revert to prin-

ciples of succession duty, which have no real connection with

the subject.’ ”

The nature and effect of the Federal Estate tax

was considered at length in the case of Woodward et

al., Executors, v. United States, decided by the Court

of Claims of the U. 8., March 14, 1921.

The Court, after discussing the provisions of the

Federal Estate Tax Law of 1916, says:

—

“The various provisions thus recited seem to clearly indicate

that the tax is a charge upon the estate. The statute calls

it an ‘estate tax’. In Knowlton v. Moore, 178 U. S. 41, 65,

the use of the heading ‘legacies and distributive shares of

personal property’ in the act was taken as indicative of what

was in fact taxed. Here it is ‘estate’. There the tax was

upon the passing of legacies or distributive shares. The tax

under consideration is imposed upon the transfer of the net

estate. In Knowlton v. Moore, the statute under considera-

tion was the act of 1898, and it was declared to mean either

that the tax was imposed on the passing of the whole amount

of the personal estate, or on the passing of legacies or dis-

tributive shares of personalty, determined either by the sep-

arate sum of each legacy or distributive share or by the

volume of the whole personal estate. The court, speaking

through Mr. Justice (now Chief Justice) White, says (p. 65):

‘The statute clearly imposes the duty on the particular lega-

cies or distributive shares, and not on the whole personal estate.

It does not say that the tax is levied on the personal estate

left by the deceased person, but it is imposed on legacies or

distributive shares arising from such property’.

“It must be recognized that the Congress, in considering

the act of 1916, was familiar with the act of 1898, and the

construction of it by the Supreme Court in Knowlton v. Moore.

Indeed by reference to the report of the Committee on Ways

and Means (Report No, 922, 64th Cong., Ist sess.), having the

bill in charge, it appears that the distinction between an estate

tax upon the transfer of the estate and a tax upon the shares

passing to distributees or legatees was had in view by the com-

mittee. It was said ‘Your committee deemed it advisable to

recommend a Federal estate tax upon the transfer of the net

estate rather than upon the shares passing to heirs and dis-

tributees or devisees and legatees.’ See upon this point In re

Hamlin, 226 N. Y. 407, where the court considers the proceed-

ings in Congress upon the passage of the bill.”

aan

The Court then calls attention to various State

and Federal cases in which the Federal estate tax is

distinguished from the succession tax, and concludes

as follows:

“It thus appears from the terms of the statute itself and

its declared purpose that the estate tax is a tax which is levied

upon, and payable out of, the estate in the hands of the exec-

utors, and that the euthorities in some instances hold it to be

a charge of administration, while all of them hold it to be pay-

able out of the estate.”

In Hanson’s Death Duties (6th ed., pages 1 and 2)

the author in referring to the English estate duty

levied ‘“‘upon the principal value . . . of all property

. which passes on the death” of persons, says, in

distinguishing the estate tax from the succession tax:

“The new duty! imposed by the Finance Act, 1894, and

called Estate duty, as has been said above, supersedes probate

duty; but the key to the construction of the Finance Act,

1894, and the Amending Acts lies in remembering that the

new Estate duty although it is leviable on property which was

left untouched by probate duty, such as real estate, vet is in

substance of the same nature as the old probate duty. What

it taxes is not the interest to which some person succeeds on a

death, but the property in respect of which an interest ceased

by reason of death. Unless this principle is clearly kept in

view, the mind is constantly tempted by the wording of the

Act to revert to principles of succession duty which have no

real connection with the subject.”’

“Tt is leviable in respect of the property, both real and per-

sonal, which passes or is deemed to have passed on the death

of the deceased.”” Hanson’s Death Duties, page 2.

i Finance Act, 1894 (57 and 58 Vict. c. 30).

This Court, in Knowlton v. Moore, 178 U. 8S. 41,

48, 77, referring to this distinction made in Hanson’s

treatise, said:

“Indeed, the confusion which gives rise to both of the con-

structions of the statute which we have just considered, comes

from the want of insight pointed out by Hanson in a passage

which we have heretofore quoted; that is, it arises from not

keeping in mind the distinction between a tax on the interest

to which some person succeeds and a tax on the interest which

ceased by reason of the death, the two being different objects of

taxation.”

It is not to be supposed, however, that this Court,

in recognizing this distinction, intended to say that

Congress could levy a valid estate tax. In considering

such question, it is obvious that the validity of an

estate duty in England is wholly independent of con-

stitutional restrictions, whereas in the United States

such a tax must meet the requirements of the Federal

Constitution, — and the question whether it is a direct

tax or an indirect tax, and the question whether it

is in its essence an encroachment upon the exclusive

powers of states to regulate the devolution of property,

become of vital importance.

SECOND.

The Federal Estate Tax is an Encroachment upon the

Exclusive Power of the Several States to regulate the

Descent and Distribution of Property of Decedents

Domiciled therein, and is, for that Reason, Uncon-

stitutional and Void.

I. The several States possess the exclusive power to

regulate and control the descent and distribution of prop-

erty.

In Mager v. Grima, 8 Howard 493, 490, this Court

sustained the constitutionality of a tax imposed by

the State of Louisiana upon a legacy payable to an

alien. The Court (Taney, C.J.) said, concerning the

power of the state to regulate the descent of property:

“Now, the law in question is nothing more than an exercise

of the power which every state and sovereignty possesses, of

regulating the manner and term upon which property real or

personal within its dominion may be transmitted by last will

and testament, or by inheritance; and of prescribing who shall

and who shall not be capable of taking it. Every State or nation

may unquestionably refuse to allow an alien to take eithér real

or personal property situated within its limits, either as heir or

legatee, and may, if it thinks proper, direct that property so

descending or bequeathed shall belong to the State. In many

of the States of this Union at this day, real property devised

to an alien is liable to escheat. And if a State may deny the

privilege altogether, it follows that, when it grants it, it may

annex to the grant any conditions which it supposes to be

required by its interests or policy. This has been done by

Louisiana. The right to take is given to the alien, subject to

a deduction of ten per cent. for the use of the State.

| —

“In some of the States, laws have been passed at different

times imposing a tax similar to the one now in question, upon

its own citizens as well as foreigners; and the constitutionality

of these laws has never been questioned. And if a State may

impose it upon its own citizens, it will hardly be contended

that aliens are entitled to exemption; and that their property

in our own country is not iiable to the same burdens that may

lawfully be imposed upon that of our own citizens.”

In United States v. Fox, 94 U. S. 315, this Court, in

affirming a decree of the Court of Appeals of New

York holding that a devise to the United States of

land in New York was void because not permitted by

laws of the State of New York, said:

“The power of the State to regulate the tenure of real prop-

erty within her limits, and the modes of its acquisition and

transfer, and the rules of its descent, and the extent to which

a testamentary disposition of it may be exercised by its owners,

is undoubted. It is an established principle of law, everywhere

recognized, arising from the necessity of the case, that the dis-

position of immovable property, whether by deed, descent or

any other mode, is exclusively subject to the government

within whose jurisdiction the property is situated. MeCormick

t. Sullivant, 10 Wheat. 202. The power of the State in this

respect follows from her sovereignty within her limits, as to all

matters over which jurisdiction has not been expressly or by

necessary implication transferred to the Federal Government. The

title and modes of disposition of real property within the State,

Whether inter vivos or testamentary, are not matters placed

under the control of federal authority. Such control would be

foreign to the purposes for which the Federal Government was

created, and would seriously embarrass the landed interests of

the State.”

Se —

In Tilt v. Kelsey, 207 U. 8S. 48, 55, this Court, in

considering the extent of the power of the several

states in the matter of succession to property on death,

said:

“When the owners of property die, that property, under the

conditions and restrictions of the law applicable, is transmitted

to their successors named by their wills or by the laws regu-

lating inheritance in cases of intestacy. For a suitable time it

is essential that the property should remain under the control

of the State, until all just charges against it can be discovered

and paid, and those entitled to it as new owners can be ascer-

tained. It is in the public interest that the property should

come under the control of the new owners, after such delays

only as will afford opportunity for investigation and hearing to

guard against mistake, injustice, or fraud. It is the duty of

the sovereign to provide a tribunal, under whose direction the

just demands against the estate may be determined and paid,

the succession decreed, and the estate devolved to those who

are found to be entitled to it. Sometimes this duty is per-

formed by conferring jurisdiction upon a single court and

sometimes by dividing the jurisdiction among two or three

courts. The courts may be termed ecclesiastical, probate,

orphans’, surrogate or equity courts. The jurisdiction may be

exercised exclusively in one, or divided among two or more, as

the sovereign may determine. But somewhere the power must

exist to decide finally as against the world all questions which

arise in the settlement of the succession. Mistakes may occur

and sometimes do occur, but it is better that they should be

endured than that, in a vain search for infallibility, questions

shall remain open indefinitely. As was said by Mr. Justice

Bradley, speaking on this subject in Broderiek’s Will, 21 Wall.

503, p. 519: ‘The world must move on, and those who claim

an interest in persons and things must be charged with knowl-

edge of their status and condition, and of the vicissitudes to

“i

——

which they are subject. This is the foundation of all judicial

proceedings in rem’. It is therefore within the power of the

sovereign to give to its courts the authority, while settling the

succession of estates in their possession through their officers,

the executors or administrators, to determine finally as against

the world all questions which arise therein.”’

“In respect to the settlement of the successions to property

on death the States of the Union are sovereign and may give to

their judicial proceedings such conclusive effect, subject to the

requirements of due process of law and to any other constitutional

limitation which may be applicable.”

This Court has repeatedly asserted the principle that

the United States may not interfere with the exercise

by the <overeign states of those powers reserved to

the states.

“Yet every State has a sphere of action where the authority

of the National government may not intrude. Within that

domain the State is as if the Union were not. Such are the

checks and balances in our complicated but wise system of

State and National polity.” Farrington v. Tennessee, 95 U. S.

679, O85.

“The people of the United States resident within any State

are subject to two governments; one State, and the other

National; but there need be no conflict between the. two.

The powers which one possesses, the other does not. They

are established for different purposes, and have separate juris-

dictions. Together they make one whole, and furnish the

people of the United States with a complete government,

ample for the protection of all their rights at home and

abroad.” United States v. Cruikshank, 92 U. S. 542, 550.

“It is a familiar rule of construction of the Constitution of

the Union, that the sovereign powers vested in the State

RESON §

governments by their respective constitutions, remained un-

altered and unimpaired, except so far as they were granted to

the government of the United States...

“The general government, and the States, although both

exist within the same territorial limits, are separate and dis-

tinct sovereignties, acting separately and = independently of

each other, within their respective spheres. The former in its

appropriate sphere is supreme; but the States within the limits

of their powers not granted, or, in the language of the Tenth

Amendment, ‘reserved’, are as independent of the general

government as that government within its sphere is inde-

pendent of the States.”’ Collector v. Day, 11 Wall. 115, 124.

II. The Federal Estate Tax imposed by ihe Act of

September 8, 1916, is in its operation and effect an in-

vasion of the sovereign power of the States to regulate the

descent and distribution of property of decedents.

In the consideration of this question, a helpful an-

alogy is found in the cases affecting the Federal con-

trol of interstate and foreign commerce. These cases

clearly establish the principle that any state tax af-

fecting interstate or foreign commerce is such an in-

vasion of the exclusive federal power to regulate as to

invalidate the tax.

When the State of Kansas undertook to impose a

tax on a foreign corporation engaged in interstate com-

merce, this Court said:

“A State may not exert its concededly lawful powers in such

a manner as to impose a direct burden-on interstate commerce.

This is so elementary as to require no reference to the mul-

titude of authorities by which it is sustained.”” Pullman Co. ¢.

Kansas, 216 U. 8. 56, 65.

—_—

“And all restraints by exactions in the form of taxes upon

such transportation, or upon acts necessary to its completion,

are so many invasions of the exclusive power of Congress to

regulate that portion of commerce between the States.”

Gloucester Ferry Co. v. Pennsylvania, 114 U.S. 196, 214.

In Philadelphia & Southern Steamship Co. v. Penn-

sylvania, 122 U.S. 326, in holding invalid a tax on the

gross receipts of a steamship company engaged in in-

terstate and foreign commerce, the Court said:

“.., it cannot be pretended that the State could consti-

tutionally regulate or interfere with that commerce itself. But

taxing is one of the forms of regulation. It is one of the

principal forms.” 122 U.S. 336,

In Brown v. Maryland, 12 Wheat. 419, this Court

held a tax on the sales of an importer was a tax on the

import, and in Cook v. Pennsylvania, 97 U. S. 566,

held that a tax on auctioneers’ sales of imported goods

in original packages, was a tax on imports, and both

were invalid, as the State taxed subjects of taxation

within the exclusive power of Congress.

The validity of a statute is to be determined by its

effect and operation.

“According to the well-settled rules of statutory construc-

tion, the validity of a statute, whatever its language, must be

determined by its effect or operation, as manifested by the

natural and reasonable meaning of the words employed. Hen-

derson v. Mayor of New York, 92 U. S. 259, 268. If a statute

by its necessary operation, really and substantially burdens

the interstate business of a foreign corporation seeking to do

business in a State, or imposes a tax on its property outside

of such State, then it is unconstitutional and void, although

—

the State legislature may not have intended to enact an invalid

statute.” Ludwig v. Western Union Telegraph Co. 216 U. s.

146, 162.

If the necessary operation and effect of a tax is to

burden interstate commerce, the validity of the tax is

not saved because the state expressly disclaims any

purpose by the statute in question to obstruct or em-

barrass interstate commerce. Western Union Tele-

graph Co. v. Kansas, 216 U.S. 1, 27.

It is submitted that the practical operation and

effect of the Federal estate tax interferes with the

State’s power of control over decedent’s estates. This

exclusive power of the State begins at the instant of

the decedent’s death and continues until the time for

distribution of the estate arrives.

In Carpenter v. Pennsylvania, 17 How. 456, this

Court said:

“But, until the period for distribution arrives, the law of the

decedent’s domicile attaches to the property, and all other

jurisdictions refer to the place of the domicile as that where

the distribution should be made. . . . The rights of the donee

are subordinate to the conditions, formalities and administrative

control, prescribed by the State in the interests of its public

order, and are only irrevocably established upon its abdication

of this control at the period of distribution.”

The passage just quoted was referred to with approval

in Orr v. Gilman, 183 U. 8. 278, 285.

The power and purpose of the State’s control extends

to the determination of the rights of creditors of the

decedent, the vesting of the decedent’s property in

accordance with the laws of the State governing descent

and distribution, and to the exaction of whatever price

or toll the state may see fit to impose as the condition

of the exercise by it of its control and administration

of the decedent’s estate.

“The law takes every decedent's estate into custody, and

administers it for the benefit of creditors, legatees, devisees

and heirs, and delivers the residue that remains, after dis-

charging all obligations, to the distributees entitled to receive

Bee's 269 And it is not until this work of administration is per-

formed, that the right of succession attaches.” Strode vr. Com-

monwealth, 52 Pa. St. 181, 189.

The provisions of the Federal estate tax law of

September 8, 1916, assume a large measure of control

over the estates of decedents.

Section 200 of the Act defines “executor” as follows:

“The term ‘executor’ means the executor or administrator

of the decedent, or if there is no executor or administrator, any

person who takes possession of any property of the decedent.”

Section 205 imposes on the executor so defined, the

obligation within thirty days after qualifying as such

executor, or after coming into possession of any property

of the decedent, whichever event first occurs, to give

written notice thereof to the Collector. The executor

is also required at such times and in such manner as

may be called for by regulations to furnish detailed

information as to the estate.

Section 204 provides that the tax shall be due one

year from the decedent’s death, and if the tax is not

paid within ninety days after it is due, interest shall

be added to the tax at the rate of ten per cent from

the time of the decedent’s death.

Section 208 authorizes proceedings in the United

States Court to enable the United States to subject

the property of the decedent to be sold under judgment

or decree of the Court, and authorizes the tax to be

paid out of the proceedings of such sale,

Section 209 provides that the tax, unless sooner paid,

shall be a lien for ten years upon the gross estate of the

decedent, except such part of the gross estate as is

used for the payment of charges against the estate and

expenses of its administration.

No provision in the act contains the suggestion that

this Federal power of control is subordinate in any re-

spect to that of the State. On the contrary, the Act

of September 8, 1916, obviously contemplates a para-

mount control of Congress as to the matters therein

provided.

The Bureau of Internal Revenue in certain cases

assumed a certain amount of control over those in pos-

session of the property before the State’s own officers

have been appointed to take possession of the same.

The Act recognizes in a measure executors who have

been appointed by the State’s Probate Court, but it

subjects them to its own rules and regulations and

penalties for violation of such regulations, and_pro-

vides that the Collector’s receipt for the payment of

the tax “shall entitle the executor to be credited and

allowed the amount thereof by any court having juris-

diction to audit or settle his accounts”, thus imposing

an obligation upon the Probate Courts of States which

both in form and in substance is unquestionably an

interference with the State’s own control.

The Federal estate tax obviously becomes a prio!

lien upon the assets of a decedent, paramount to that

of the State. In this respect, it impairs the control of

the State and imposes a burden upon the State: — in

the first place, to the extent of the Federal tax, the

very subject matter of the State’s control is diminished,

and in theory at least, might be wholly destroyed; in

the second place, by diminishing the amount of the es-

tate which comes within the control of the State, it

prevents pro tanto the collection by the State of the

amount of the price or toll which the State.is entitled

to exact as a condition precedent to the right of the

distributees to receive their respective shares of the

estate,

A few illustrations of the necessary effect and oper-

ation of the law will demonstrate the extent of the

interference authorized by the Act of September 8,

1916.

Example I. — Assume an intestate decedent with no

surviving wife or kindred; his property escheats to

the State. The Federal estate tax is in terms ‘imposed

on the transfer of the net estate of every person”’, and

the Commissioner of Internal Revenue has ruled that

the tax applies to property that escheats to the State

for lack of heirs.

“The Federal estate tax is imposed upon the transfer of the

net estate, determined in the manner prescribed, of every per-

son dying after September 8, 1916. The tax is not laid upon

the property, but upon its transfer from the decedent to others.

The subject of tax is the transfer of the entire net estate, not

any particular legacy, devise, or distributive share. It is not

an individual inheritance tax. The value of the separate inter-

ests and the relationship of the beneficiary to the decedent

have no bearing upon the question of liability or the extent

thereof, ‘The transfer of property is taxable, although it es-

cheats to the State for lack of heirs.” Art. 1, Regs, 7.

Thus where a net estate of $10,000,000 escheats to

the State, the latter must pay a tax, under the 1916

law, of $841,000, and under the present law, $1,681,500,

The State is required to pay a tax of from 8% to 16%

upon property which is vested in the State solely by

virtue of its own laws. The natural and necessary

effect of this application of the estate tax is that the

State is subjected to a tax upon its property in viola-

tion of the established principle that property of the

several states is not subject to taxation by the Federal

Government.

“The exemption of the State's property and its functions

from Federal taxation is implied from the dual character of our

Federal system and the necessity of preserving the State in all

its efficiency."” South Carolina ¢. U.S. 199 U.S. 437, 456.

Example II. — Suppose a net estate consisting of

personal property of $20,000,000, and a will giving

specific legacies to various collaterals amounting to

$16,000,000 and the residue to the testator’s child.

The estate tax under the 1916 law would be $1,-

841,000, and under the present law, $4,181,500. The

residue of $4,000,000 given to the child would thus

be reduced to $2,159,000 under the 1916 law and under

the higher rates of the present law, would be wholly

extinguished. Can it be said that a death duty which

so alters the proportion between the several shares of

distributees is not an interference with the power of

the State to regulate the devolution of property?

Example III, — Suppose a net estate of $20,000,000

with real estate of $16,000,000 given to the children,

and the residue, consisting of personalty, to the testa-

tor’s widow.

_ ——

The result is the same as in Example II. Under

the present law, the widow’s interest is extinguished;

under the 1916 law it is reduced from $4,000,000 to

$1,841,000. This results from the provisions of these

laws making the tax payable so far as possible from

the personal preperty which comes into the executors’

custody.

The foregoing examples seem to show that the Estate

Tax in its natural and necessary effect not merely

diminishes the distributive shares, but alters the pro-

portion between them.

In Knowlton v. Moore, the succession tax was sus-

tained because it was a tax on the recipient. The

government in this case says there is no difference in

principle between that tax and the 1916 estate tax.

It is respectfully submitted that there is this very

marked difference:

The burden of the succession tax fell upon the re-

cipient of the legacy or devise, and was measured by

the value of such legacy or devise. The estate tax is

generously measured by the aggregate of all the suc-

cessions and may be paid wholly from the share of one

of many distributees and thus establish a new devolu-

tion of the testator’s property.

Since the decision in the case of Knowlton v. Moore,

it has been settled law that when the administration of

decedents’ estates has proceeded to the point where

the rights of distributees to receive their respective

shares has been determined, the exercise of such rights

to receive may be made the subject of a constitutional

Federal excise tax.

The tax considered in Knowlton v. Moore, supra,

Was not imposed until the exercise cf a State’s power

‘

—

of control had been so far completed that there had

emerged distinct rights of distributees to receive, and

the burden of the tax was cast by the exercise of those

rights upon the distributees and not upon the State in

the exercise of its power of control.

In Knowlton v. Moore, the majority of the Court,

through Mr. Justice White, met the objection that the

succession tax under consideration was an interfer-

ence with the power of the State in the following

manner:

“Certainly, a tax placed upon an inheritance or a legacy

diminishes to the extent of the tax the value of the right te

inherit or receive, but this is a burden cast upon the recipient

and not upon the power of the State to regulate.”’

And later, Mr. Justice White, in his dissenting opin-

ion, in Snyder v. Bettman. 190 U.S. 249. 258, referring

to the passage above quoted, said:

“This conclusion was absolutely essential to the construction

of the statute in Knowlton v. Moore.”

The Federal estate tax does not attach itself to the

exercise of rights determined by the instrumentalities

of the State. It attaches cr may attach its burden to

the estate before the machinery of State regulation

has started. (Sections 200, 205, 206 and 207.)

It imposes duties, obligauions and penalties upon

executors appointed by the State. It diminishes the

distributive shares upon which States levy their toll as

the price for the devolution and administration of de-

cedents’ estates, and thus diminishes the amount of

such toll or price. It alters the proportion of distribu-

| —

tive shares in the case of estates passing by will, — in

sume cases destroying entirely the residuary estate.

In the case of escheat, it imposes a tax upon property

which has vested in the State solely by virtue of its

own power of regulation, and, to the extent of the tax,

removes from the control of the State a portion of the

estate which is the subject matter of the exclusive and

paramount control of the State.

For these reasons it is submitted that the Act of

September 8, 1916, is unconstitutional and void.

THIRD.

The Federal Estate Tax is a Direct Tax and therefore

Unconstitutional because not Apportioned in Ac-

cordance with the Requirements of the Federal Con-

stitution.

The population of the State of Massachusetts, accord-

ing to the Census of 1920, was 3,852,356, or 3.64 per

cent of the population of the United States. The report

of the Commissioner of Internal Revenue for the year

1920 shows (page 50) that during the year which

ended with June 30, 1920, Massachusetts estates paid

Federal estate taxes in the amount. of $6,481,764,

which was 6.25 per cent of the whole amount collected

in the United States during the same year, approxi-

mately twice the amount that would have been col-

lected in Massachusetts if the same aggregate had

been apportioned according to the Constitutional rule.

The average amount collected per capita in Massa-

chusetts was $1.68 while the per capita average for

the whole country was 98 cents. The per capita

average for the State of Alabama was 7.2 cents and

for the State of Oklahoma 2.7 cents, as shown by the

same authorities. Combined, the six New England

states plus New York, New Jersey, Pennsylvania,

Delaware, Maryland and the District of Columbia

paid 63.59 per cent of the total tax, although they have

but 30.06 per cent of the total population. These

figures indicate the extent of the injury by reason of

the failure to observe the rule of apportionment.

This Court considered at length the distinction

between direct and indirect taxes in the case of Pollock

v. Farmers Loan & Trust Co., 157 U. 8. 429, and later

in the case of Knowlton v. Moore, 178 U.S. 41, 89,

and cited many instances of taxes deemed to be excise

taxes. It is believed that the invariable test is that

in the case of a direct tax there is always present the

element of absolute and unavoidable demand. — In

the case of indirect taxes that element is lacking. In

other words, an indirect tax can always be avoided by

foregoing the exercise of the privilege to which the tax

attaches.

The principle was stated by Alexander Hamilton

in the twenty-first number of the Federalist:

“Tmiposts, excises, and in general all duties upon articles of

consumption, may be compared to a fluid which will in time

find its level with the means of paying them. The amount to

be paid by each citizen will in a degree be at his own option

and can be regulated by an attention to his resources.”

Hamilton’s view is entitled to great weight because

it represents contemporaneous opinion when the Con-

stitution was adopted.

In holding valid a stamp tax (30 Stat. 448) imposed

on sales of stock by brokers, in Thomas v. U. 5., 192

U.S. 363, as the exercise of a privilege, the Court said:

“The statap duty is contingent on the happening of the

event of sale, and the element of absolute and unavoidable

demand is lacking.”

In Pollock v. Farmers Loan & Trust Co., 157 U. S.

429, this Court adopted the same distinction:

“Ordinarily, all taxes paid primarily by persons who can

shift the burden upon someone else, or who are under no legal

compulsion to pay them, are comsidered indirect taxes; but a

tax upon property holders in respect of their estates, whether

real or personal, ... and the payment of which cannot be

avoided, are direct taxes.” (157 U.S. 429, 558.)

In Nicol v. Ames, 173 U. 8. 509, this Court in dealing

with an excise tax imposed on the privilege of selling

at boards of trade, said:

“We think the tax is in effect a duty or excise laid upon the

privilege, opportunity or facility offered at boards of trade, or

exchanges, for the transaction of business mentioned in the

act.” (173 U.S. 509, 519.)

“In order to tax it, the privilege or facility must exist in

fact, but it is not necessary that it should be created by the

Government. . . . A tax upon the privilege of selling prop-

erty at the exchange, and of thus using the facilities there

offered in accomplishing the sale, differs radically from a tax

on every sale made in any place. The latter tax is really and

practically upon property.” (173 U.S. 521.)

In South Carolina v. U. S., 39 Court of Claims, 257

(affirmed 199 U. S. 437), direct taxes and excise taxes

were distinguished in the following language:

“A tax is obligatory; from it there is no escape. An excise

is voluntary; a purchaser who would pay it cannot be com-

pelled to purchase.”

It is not enough to justify an excise tax that it be

imposed upon a privilege of use. There must be pre-

sented also the exercise of the privilege of use. This

was distinctly held in McCoach v. Minehill, ete., Rail-

way, 228 U.S. 295.

Cooley, Constitutional Limitations, 7th Edition, 680,

defines ‘‘excises’’ thus:

“Excises are taxes laid upon the manufacture, sale or con-

sumption of commodities within the country, upon licenses to

’

pursue certain occupations, and upon corporate privileges,’

This definition was adopted in Flint v. Stone Tracy

Co., 220 U. 8. 107.

Instances of excise taxes might be multiplied in-

definitely, but it is believed that no adjudicated case

can be found in this country of an excise tax where

there e sted ‘the element of absolute and unavoid-

able demand.”’

Excise taxes as well as other indirect taxes can al-

ways be avoided by foregoing the exercise of the privi-

lege to which they attach. From the Federal Estate

Tax, however, no escape is possible. The tax attaches

to all property at the instant of the owner’s death pre-

cisely as local property taxes attach to property owned

by a living person on April first or on such other date

as may be fixed by State law. Like certain local prop-

erty taxes, it becomes a lien on the property itself and

is collectible out of the property itself. It has all the

attributes of a direct tax.

Section 201 of the Act of September 8, 1916, provides:

“That a tax... is hereby imposed upon the transfer of

the net estate of every decedent.”

It is submitted that if the words “the transfer of”

were omitted, it would not occur to any one to suppose

that the tax was anything but a direct tax. The omis-

sion of these words would not in any way affect the

other provisions of the act, and it is a fair inference

that the sole purpose of the insertion of these words in

Section 201 was to give the tax the semblance of an

excise tax. ;

In Collins v. New Hampshire, 171 U.S. 30, this Court

said:

“The direct and necessary result «! > statute must be taken

into consideration when deciding as to its validity, even if that

result is not in so many words either enacted or distinctly pro-

vided for. In whatever language the statute inay be framed,

its purposes must be determined by its natural and reasonable

effect.”’

Applying this rule to the act in question, it is felt

that it has all the attributes of a direct tax. Its direct

and necessary result is to levy a tax upon the property

owned by a decedent at the time of his death, measured

by the value of such property and collectible out of such

property, without reference to the shares passing to

legatees or distributees, and without reference to their

relationship to the decedent.

That this tax is in effect a tax on property and not

a tax upon the transfer of property by death, is indi-

cated by those provisions of the act which undertake

to tax transfers which were completed during the

testator’s lifetime.

Section 202 contains the arbitrary provision that

the gross estate of the decedent shall include the value

at the time of his death of all property

“to the extent of any interest therein of which the decedent has

at any time made a transfer, or with respect to which he has

created a trust in contemplation of, or intended to take effect,

in possession, at or after his death, except in case of a bona

fide sale for a fair consideration in money or money’s worth,”

and further

“to the extent of the interest therein held jointly or as tenants

in the entirety by the decedent and any other person, or de-

posited in banks or other institutions in their joint names and

payable to either, or the survivor, except such part thereof as

may be shown to have originally to have belonged to such

other person and never to have belonged to the decedent.”

These provisions are inconsistent with the claim

that the Federal estate tax is a tax upon the transfer

of property or the transmission of property by death.

In both cases the transfer took place prior to death.

If the tax is valid, its natural and necessary effect

is to impose a tax at the end of man’s life not only upon

property which he owned at the time of his death but

also property which he had ceased to own at the time

of his death.

The meaning of the word ‘transfer’? involves the

existence of a transferor, as well as a transferee, and

an act in which both participate.

The decedent cannot be regarded as a transferor.

His title and ownership cease at the instant of his

death, and not until his death is there a change of

ownership. That change of ownership results from no

act of the former owner, but is wholly created by the

operation of the State law.

If it be true that the tax in its real essence is a direct

tax upon property, the fact that it is labelled as a tax

on the transfer of property should not prevent. its

being declared unconstitutional because not appor-

tioned in accordance with the requirements of the

Federal Constitution.

This Court in Galveston, Harrisburg & San Antonio

R. R. v. Texas, 210 U.S. 217, 227, said:

“Neither the state courts nor the legislatures by giving the

tax a particular name or by the use of some form of words can

take away our duty to consider its.nature and effect.”

And in Pollock v. Farmers Loan & Trust Co., 157

U.S. 429, 581, this Court said:

“If it be true that by varying the form the substance may

be changed, it is not easy to see that anything would remain

of the limitations of the Constitution or of the rule of taxation

and representation so carefully recognized and guarded in

favor of the citizens of each state. But constitutional provi-

sions cannot be thus evaded. It is the substance and not the

form which controls, as has indeed been established by repeated

decisions of this Court.”

The Supreme Court of Missouri in State v. Switzler,

143 Mo. 287, 327, 328, considered the constitutionality

of an erroneously so-called succession tax statute. In

holding the tax to be a tax on property it said:

“The General Assembly has declared that it intended to

levy a ‘collateral succession tax’, and we all agree that by

whatever name this exaction may be called, it is referable to

the taxing power of the state. The controlling question is,

upon what did it authorize that the tax be levied, upon the

property or estate of the deceased person, or upon the right or

eo ey

privilege of his beneficiaries to receive his estate by inheritance

or devise? If upon the latter, it is settled by the great weight

of authority that it does not fall within the ordinary taxation

of property which our Constitution requires shall be in propor.

tion to its value.”

“A ‘succession’ tax, as the words indicate and the history

of such taxes clearly establishes, is an excise or duty upon the

right of a person or corporation to receive property by devise

or inheritance from another under the regulation of this state,

Wherever properly laid this is the distinguishing feature in

contradistinction from a property tax... . When it is clear

that the tax is upon the succession, it is computed not on the

aggregate valuation of the whole estate of the decedent con-

sidered as a unit for taxation, but on the value of the separate

interest into which it is divided by the will or by the statute

laws of the State, and is a charge against each share or interest

according to its value and against the person entitled thereto.”

“Section 1 (a) requires the tax to be levied upon the ap-

praised value of the whole estate left by the deceased. The

tax is at once levied upon that estate, and the personal repre-

sentatives of the deceased, not the devisees and legatees, are

required to pay the tax. How such a tax differs from general

taxes upon the property of the deceased under our system we

are not able to state. The mere calling of such a tax a sue-

cession tax does not make it different from an ordinary tax on

property when the effeet and operation are identical with an

ordinary property tax.”’

The case of Dawson v. Kentucky Distilleries &

Warehouse Company, decided by the United States

Supreme Court February 28, 1921, has a bearing on

the question whether the Federal estate tax is a direct

tax.

The question arose under a Kentucky statute im-

posing a tax of fifty cents a gallon upon every person

_—

engaged in the business of manufacturing whiskey or

“in the business of owning and storing” the same in

bonded warehouses within the State, the tax being

called in the Statute an “annual license tax’’, but

being payable only when such whiskey was either

withdrawn from bond or transferred in bond from

Kentucky to a point outside the State.

The case was on appeal from the District Court of

Kentucky which had granted an injunction against

the collection of the tax. It was admitted by the At-

torney-General of Kentucky that the tax was void

under the Kentucky constitution if it was a tax on

property. The only questions considered in the Su-

preme Court were (1) whether the case was one for

equitable relief and (2) whether the tax was void under

the Kentucky constitution. It was recognized that

the latter was a question of State law, but not having

been passed by the State Courts, it was necessary that

it should be determined in the Federal Courts. The

decision was against the State on both points.

The Court in unanimously holding the tax to be a

direct tax on property said:

“The question is whether as to such this fifty cents a gallon

tax is an occupation tax or is a property tax.”

“The name by which the tax is described in the statute is,

of course, immaterial. Its character must be determined by

its incidents; and obviously it has none of the ordinary inci-

dents of an occupation tax.”

“In fact the tax is one imposed upon each lot of whiskey

at the time it is removed frem bond within the State. The

tax might be said to be upon the act of removal from the

bonded warehouse within the State. But as stated by the lower

court, ‘the thing really taxed is the act of the owner in taking

his property out of storage into his own possession (absolute or

qualified) for the purpose of making some one of the only

uses of which it is capable, i.¢., consumption, sale or keeping

for future consumption or sale... . The whole value of the

whiskey depends upon the owner's right to get it from the

place where the law has compelled him to put it, and to tax

the right is to tax the value’, To leey a tax by reason of

ownership of property is to tax the property. Compare Thomp-

son, Auditor, ve. Kreutzer, 112 Miss. 165; Thompson, Auditor

v. McLeod, 112 Miss. 383. /t can not be made an occupation

or license tax by calling it so. See Flint ve. Stone Tracy Co.,

220 U.S, 107, 148-150; Zonne ve. Minneapolis Syndicate, 220

U.S. IS7; United States e. Emery, 287 U.S, 28,"

The estate tax in its natural and necessary effect

is the analogue of local property taxes. The provisions

in Section 209 declaring the tax to be a lien upon the

estate of the decedent, and the provisions in Section

208 providing for the collection of the tax froin the

proceeds of the sale of the property are patterned in a

general way upon long established systems in effect

for the collection of local taxes upon real estate.

It is submitted that a tax, the only necessary and

essential condition of which is ownership of property

at a particular instant of time is in substance and effect

a direct tax on property, that the Federal estate

tax is such a tax, and therefore invalid because not

apportioned according to Constitutional requirements.

CONCLUSION.

For the reasons which have been stated, it is respect-

fully submitted that the estate tax imposed by the

Act of Congress of September 8, 1916 (39 Stat. 756,

777), is unconstitutional for the reasons:

1. That its necessary operation and effect burden

and impair the sovereign rights of the States to regulate

descent and distribution; and

9. That in substance and effect, it is a direct tax

without apportionment among the States on the basis

of population.

J. WESTON ALLEN,

Attorney-General.

INDEX.

BRIEF.

PAGE

Poist I. The Estate Tax is void if its necessary

effect is to require the deduction of the

Estate Tax in the adjustment of the State

a Coded ieee CeCe ddan es eee 1

Point II. The tax is upon the transfer of the

net estate to the beneficiaries and is paid by

them or for their account proportionately ;

for no one else has any money to pay it.. 13

Query, if the tax is not valid, if con-

strued as a legacy tax.............. 22

Point ILI. If the tax is ‘‘an estate tax” it

is void as a regulation of the transfer,

and asa tax on property without appor-

ES ee ee ere 23

AUTHORITIES CITED.

Austin, Lectures on Jurisprudence.......... 23-25

Bierstadt, Matter of, 178 App. Div. 836......

Billings v. U. S., 282 U. S. 261.............. 31

Cooley Const. Limitations. ................. 15

Dawson v. Kentucky D. & W. Co., U.

eee 13, 29

Flint v. Stone-Tracy Co., 220 U. S. 107...... 31

Garcia, Matter of, 183 App. Div. 712...... 9, 17, 18

Gihon, Matter of, 169 N. Y. 443............. ee

Gleason v. Thaw, 236 U. S. 558.............. 14

eee wre

‘ II

: PAGB

Hales v. Petit, 1 Plowden 253...........-+-- 6

Hamlin, Matter of, 226 N. Y. 407.........--- 11

Hooper v. Bradford, 178 Mass, 95.....-+++++- x

. Kingsbury v. Chapin, 186 Mass, 533. ......- 8

9 Knowlton v. Moore, 178 U.S. 41........--22 , 30, 32

q Mager, 7. Grima, 8 How. ep chy eek Chee Oe 26

4 Maxweil v. Bugbee, 250 U.S. 525.......-5. a

4 Meyer, Matter of, 209 N. Y. ie epee eR ete EP 10

x Miller, estate of, 61 Cal. Dec. 90.........-- ; 3

: Nicol v. Ames, 173 U.S. 500... 6... eee ee eee 5

3 Orvis, Matter of, 223 N. Y. 1......-. 0+ + eee )

: Pollock v. Farmers Loan & Trust Co., 157 U.

s So cig key bee a es ESAS eee CoE Oe Bt

; Penfold v. State Comptroller, 248 U.S. 537.. 3

i Ramsdill, Matter of, 190 N.Y. 492.......--- .

3 Sherman, Matter of, 179 App. Div. 497....-- 2, 12

: Scholey v. Rew, 23 Wallace 331......-.-+++- 30, 31

: Snyder v. Bettman, 180 U. 5. 240. .......+-- 26

¢ Watson, Matter of, 226 N. Y. 384............ 25, 26

STATUTES CITED.

New York Tranefor Tax. .....:.s.ssescceee. 7

American Inheritance Tax Statutes......... 12

English Estate Duty of 1S04.........--55+5: 12

Federal Estate Tax, Section of........ 13, 17, 18, 19

Bese. Bri tay or

_ pa neitenn

14 — |

Supreme Court of the Anited States,

OCTOBER TERM, 1920.

No. 286.

New York Trust Co. et al., as

Executors, etc.,

Plaintiffs-in-Error,

MARK EISNER.

BRIEF SUBMITTED BY JOHN B.

GLEASON IN BEHALF OF THE

STATE COMPTROLLER OF NEW

YORK.

POINT I.

The Estate Tax is void if its necessary

effect is to make a deduction from the

estate or from the transfer prior to the

imposition of the State Transfer tax, or

if the State tax must be adjusted as

stated at page 48 of the brief of the So-

licitor General.

At page 48 of the brief of the Solicitor General,

after correctly stating the decision in Matter of

(ihon, 169 N, Y. 443, refusing to make a deduction

EET HETERO IL ET GL IIIT RE LEN PIAS

Net ta ESS IRS

from the New York transfer tax on account of the

Federal legacy tax of 1898, it is said:

“Of course a different rule would have ap-

plied if one of the taxes had been an estate tax,

which must be paid before the amount for dis-

tribution and, therefore, the amount to be re-

ceived by the legatees and devisees could be

ascertained. In such cases, of course, the

estate tax is first deducted, and the legacy tax

is imposed on the amount to which the legatee

is entitled after the estate tax has been de-

ducted from the net estate. In the present case

it happens that the estate tax—that is, the tax

which must be paid before the share of the

legatee can be ascertained,—is the tax levied by

the Federal Government.”

But the State of New York refuses to permit any

duction on account of the estate tax;

Matter of Bierstadt, 178 App. Div. 836.

Matter of Sherman, 179 App. Div. 497;

affirmed without opinion, 222 N. Y. 540.

In each of these cases, in my brief for the State

Comptroller, the constitutionality of the Federal

estate tax was directly challenged, if construed

otherwise than as a legacy tax. In the Bierstadt

case, the court expressed the opinion that if the tax

was not a legacy tax it was void as a direct tax on

property. In the Sherman case the court decided

that the New York transfer tax law did not con-

template or permit any deduction on account of the

Estate Tax, and also said:

“The conditions of transfer have been em-

bodied by the State in the Transfer Tax Law.

If the Federal Government may impose an in-

heritance tax which is entitled to be deducted

from the estate prior to the assessment of the

State Transfer Tax, it has interfered with such

conditions, and has diminished the amount

Ae nec Ral

which the State has appropriated as a condi-

tion of the transfer being had, by the percent-

age upon the sum appropriated by the Federal

Government. The State Transfer Tax will thus

have become one not upon the whole estate

transmitted, but upon the whole estate less the

amount of the Federal tax * * *# The con-

stitutionality of a Federal act entitled to such

construction and effect might well be doubted.”

In Matter of Penfold, 216 N. Y. 163, the residuary

legatee complained because in adjusting the trans-

fer tax upon the transfer to him, the tax was

measured upon the value of the property as of the

date of death, although as the result of large losses

in realizing upon the securities, he actually received

much less; also he complained because no deduc-

tions were allowed on account of the transfer taxes

of other States. The Court of Appeals having up-

held the method of taxation, he obtained a writ of

error to this court, which was dismissed for want of

jurisdiction (Penfold vy. State Com ptroller, 248

U.S. 587).

In my brief in that case, it was claimed that the

power of the State was plenary, and that no Federal

question was presented.

As regarded the assignment of error for refusal to

deduct the inheritance taxes of other States, the

brief of the plaintiffs-in-error in the Penfold case

urged many and more reasons than those announced

by the Supreme Court of California in Estate of

Miller, Calif. (61 Calif., Dec. 90, decided

Jan., 1921), where that court held that the inherit-

ance tax of Nevada must be deducted from the Cali-

fornia estate before computing the California trans-

fer tax, because the authority of the State of Nevada

over the stock of one of its corporations was

superior to the law of the domicil, ete. That court

eo VAT ERNE AO HIND AR LON PUI READ NE MLE NALIN PRAT RGD APAM CBRL NALA bce pRB Me NLEDY sarah

also decided that, assuming the validity of the

Federal estate tax, it must also be deducted.

It seems that the dismissal of the writ of error in

the Penfold case sanctions the position that it is for

the State to say whether or not it will permit the

deduction of the Federal estate tax, and that this

court will not so construe this tax as requiring the

State to measure its tax in the manner indicated by

the brief of the Solicitor General; for then the

statute will regulate the transfer tax law of New

York, and the difference between such regulation

and the present operation of the New York transfer

tax law is a difference of some millions of dollars

vearly.

The 1919 rates take 25% of all suias over

$10,000,000, which would here mean a loss to the

State of one-fourth of its tax at its highest graded

rate.

E.ramples of requlation of transfer:

1. Transfer without residuary clause.

NR i a ye ie ad Kawi ke eae $13,240,000

Debts and expenses........... 1,000,000

SE Ss bdacc kita pesaseRe s $12,240,000

oe er re $12,240,000

2. Under will with residuary clause.

Ss cw od a 0 ok oe $13,240,000

Debts and expenses........... 1,000,000

A er $12,240,000

Passing to legatee A.......... $10,000,000

Passing to residuary legatee R. 2,240,000

- ey be om 1072 SIN ADEPT HEA Oy ire wralr® WAM ENR OES EER TRAD) TR ASA HORM RNY SA ON

DOORS Nee RN AOS WS he Sy ee

Legatee A in each case receives $10,000,000, no

matter by what name the tax is called. The rest

equals the estate tax at 1919 rates. In the second

example the entire residuary estate equals the

| estate tax. The tax at 1916 rates is $1,065,000.

: The foregoing instance is approximated to an

actual case in the New York transfer tax office

| where, however, the estate tax is larger and does

not exactly equal the residuary estate. Any ex-

ample is adequate, but the foregoing is easy to fol-

low and it will be seen that each increase of

$4,000,000 over the above example would be a loss

of $1,000,000 of property taxable by the State, if

the estate tax should be deducted before the com-

putation of the State tax. If we must do this, it is

respectfully submitted that, hy whatever name the

tax is called, and we should prefer to call it by

some hard name, the law of property of the State

of New York has been regulated by the Federal

statute. To follow the reasoning of this court by

Mr. Justice Peckham in Nicol v. Ames, 173 U. 8.

509, 515, et seq., ina passage rather too long to

quote ‘no abstruse or subtle distinction, or miero-

scopic examination is called for, or any scientific

or economical problem. This is a practical matter

and a court’

OPPRESSED NEE Een EERE Sy

SALT per aay 27

AP geerme

SPER SANE BOS EMO

oF ena

i ee i a a aes

“would not be justified in placing it in a class

different from which its practical result would

consign it. Taxation is eminently practical,

and is, in fact brought to every man’s door, and

for the purpose of deciding upon the validity

a tax should be regarded in its actual practical

results” (id).

ae at

POET

In New York it is a law of property that a man

Shall have more than a life estate in his property,

upon condition of the payment at death of a per-

a CARA B88 Re OL A a

centage called the transfer tax. If, for example,

the State had adopted a “fee-farm” tenure of real

estate, reserving to itself the title and a perpetual

rent, the interest of the feoffee would be transmitted

at his death, nor could Congress by an estate tax

diminish the rights of the State. The matter will

be further considered infra,

In point of fact, the State transmits by as many

different transfers as there are legatees. Each act

of transmission is not divisible into parts, as in the

rule of Se offendendo, laid down in Hamlet follow-

ing /lales y. Petit, 1 Plowden, 2538,

There is an instant vesting at death in the lega-

tees of that part of ownership of the net estate

Which made the ownership of the decedent greater

than a life estate, and deemed to be of its value

at the date of death,

The entire net estate is lawfully in the transmis:

sion, and Congress imposes its tax upon the value

at death of the property in the transfer, If the

case is the descent of real estate worth $12,240,000

to the heir, with no other property or debts, there

is no inch of this real estate which does not descend

to the heir, but the whole of the property is received

by him at the instant of death, and the tax is

properly computed upon the full value of the prop-

erty transmitted. Inasmuch as there is no property

to pay the tax except the property in the transfer,

the transferee must pay it. Title of the transferee

is unquestionable and the situation is as if he gave

his individual bond, for the immediate payment of

the tax on account of this valid transfer to him, and

secured by mortgage upon the property.

te oe ae et

New York requlation of transfers wherein death

is a determining factor.

Tax Law, 8. 220. “A tax shall be and is hereby

imposed upon the transfer of any property

* * * to persons and corporations * * #

I, When the transfer js hy will or by the intes-

tate laws of this state from any person dying

seized or possessed thereof while a resident of

the state” ete,

(ross Estate,

In the adjustment of the tax, the actual value

of the gross estate at the date of death is taken as

the starting point (as is also the case with the

Federal estate tax). From this value is deducted

the debts and expenses of administration. It isa

rule of property in New York that the portion of

the gross estate which is appropriated by law to

the payment of debts and administration expenses

does not vest in the beneficiaries—does not pass to

them.

Matter of Gihon, 169 N.Y, 448.

Expenses of Administration.

These are incidental disbursements made, sub-

ject to the approval of the surrogate, for counsel

fees, advertising for creditors and the like, but the

executor in making up his accounts is not always

careful to discriminate between the fund for the

obligations of the decedent incurred in his lifetime,

and his official disbursements, and disbursements

in fact for the account of certain of the legatees.

Net Estate.

The remainder (as in the Federal statute) is the

net estate, which is deemed to be transferred to the

;

See ee ee ee

ae,

hat 5 oe att ot

itirr sated

Bieter:

beneficiaries proportionately, so that in the second

example above given there is

A fund not passing to the legatees..... $1,000,000

A transfer to legatee A............555 10,000,000

A transfer to residuary legatee R...... 2,240,000

ce ean ibew ne $13,240,000

In this regulation, the interest of the residuary

legatee is as definite and certain as is the interest

of any other legatee, although it will inevi

This text is long and has been trimmed here. Open the source document for the complete record.

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