Amicus Curiae Brief — Stebbins v. Riley

Supreme Court brief1925

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SUBJECT INDEX.

Seen

SraTeMEnt.

Vv The common Federal question .......

The California provision involved ....

California’s new Inheritance Tax Act

of 1921 allows deduction of the

Federal estate tax ..............

Recent decisions of this Court defining

the nature of the Federal estate

SUN FUNDER RESSORLEMKURTKo Codes

A majority of the States allow deduc-

tion of the Federal estate tax....

ARGUMENT.

California’s Supreme Court erred in

sustaining the validity of the provi-

sion that ‘‘In determining the market

value of the property transferred, no

deduction shall be made for any in-

heritance tax or estate tax paid to

the Government of the United

MOUNEND cacdccvascdsanskdencdaeaes

PAGE

List or Cases Crrep ix Tus Barer.

PAGE

Benson, Matter of, 120 Misel. 136.... .. 5, 10,18

Bierstadt, Matter of, 179 App. Div. 497. 5

Bingham’s Admr. v. Commonweal’' —~ +

Oh Wie UE Seb ba bundesccncocccscceces 14

Bugbee v. Roebling, 94 N. J. L. 438 .......-. 15

Canda, Matter of, 197 App. Div. 597..... 5

Carnegie, Matter of, 236 N. Y. 517....... 5, 10,18

Corbin v. Townshend, 92 Conn. 501....... 13

Edwards vy. Slocum, 264 U. S. 61......... 3,8

Frick v. Commonwealth of Pennsylvania,

inveee U.S. ........ (awaiting deci-

GROTED adn sc caccccccccccccccececcccce 2

Hamlin, Matter of ,226 N. ¥. 407 ......... 18

Inman’s Estate, 101 Or, 182 ...........+. 15

Kennedy, Estate of, 157 Cal. 157 ......... 2,12

Knowlton v. Moore, 178 U.S. 41 ..... 8, 16, 18, 19

Magoun vy. Illinois Trust & Sav, Bk., 170

We Se hhc dsc ccciencccecsccecces 16

Maxwell v. Bugbee, 250 U.S. 525 ......... 17,19

Miller, Estate of, 184 Cal. 674 ............ 2,12

Nesbit, Matter of, 237 N. Y.527........... 5

New York Trust Co. v. Eisner, 256 U.S.345 5, 8

Nichols, Matter of, 120 Misel. 228........ 5

Old Colony Trust Co. v. Burrell, 238 Mass.

SE. cdbbnX euh0bne6nckedeeecececcess 14

Young Men's Christian Ass’n v. Davis, 264

Sg Se nS

RARER eee NTRS ARE EL:C= IRIN NRE RRR) RADE PEERS

ea i ae ee

SUPREME COURT OF THE UNITED STATES.

Lucy Warp Srespins and Frank J.

Huruey, as Executrix and Executor

of the Will of Henrmrra Pierce

Warkiyson, deceased,

Plaintiffs in Error, | N®- 227

' October Term,

1924.

vs.

Ray L. Ritey, Controller of the State

of California,

Defendant in Error.

no ;

JOINT BRIEF AMICI CURIAE FOR CERTAIN

DECEDENTS’ ESTATES IN NEW YORK.

Statement.

By permission of the Court upon the consent of

counsel for the respective parties, this joint brief is

filed amici curiae on behalf of certain decedents’ estates

in New York.

The common Federal question.

The assignment of errors herein (T. R., pp. 31-33)

presents the following Federal question affecting the

taxation of inheritances in a large number of States,

including New York, having ‘‘legacy’’, as distinguished

from ‘‘estate’’, taxes at progressive rates:

Has a State the power in imposing progres-

sive rate legacy taxes to require arbitrarily that

the applicable rate, and measure of such tax. be

° . . »rs Corea

A me ae, a ee —

determined by attributing to the value of the

legacy the amount of the Federal estate tax?

No state statute so providing has been passed on by

this Court. The only case now before the Court pre-

senting a similar question but not involving the more

marked discrimination on account of graded rates, is

Frick v. Commonwealth of Pennsylvania, Nos. 442-445,

October Term, 1923, argued but not decided.

The California provision involved.

California’s prior Inheritance Tax Act was construed

in Estate of Kennedy, 157 Cal. 157; 108 Pac. 280 and

Estate of Miller, 184 Cal. 674; 195 Pac. 413, as allowing

deduction of the Federal estate tax. Such holding gave

rise to the provision quoted below, the invalidity of which

is claimed herein: (Stat. 1917, ch. 589, §2, subd. 10)

“In determining the market value of the prop-

erty transferred, no deduction shall be made for

any inheritance tax or estate tax paid to the Gov-

ernment of the United States.’’ (italics through-

out this brief are ours, except titles)

California’s new Inheritance Tax Act of 1921 allows

deduction of the Federal estate tax.

Although the instant case arose under the statute of

1917 as quoted above, for the Court’s information the pro-

vision of California’s new Inheritance Tax Act (Ch.

821, Laws 1921 as amended by Ch. 337, Laws 1923) now

in force is as follows:

«410. In determining the market value of the

property transferred, the following deductions

and no others shall be made from the appraised

value thereof: (a, b, ¢ and d are immaterial sub-

divisions)

**(e) The amount due or paid the govern-

ment of the United States as a federal inheritance

or estate tax; provided, however, that the amount

of such tax allowable herein as a deduction shall

be limited to a computation thereof (commencing

at the primary rates) made by the acting state

inheritance tax appraiser upon his own valuations

of that portion of such property only, the transfer

of which is taxable under the provisions of this

act, by applying to such valuations the exemptions

and rates of the federal inheritance or estate tax

in force at the date of such transfer.’’

Recent decisions of this Court defining the nature of the

Federal estate tax.

In Edwards v. Slocum, 264 U. 8S. 61, 62, the nature

of the Federal estate tax was clearly defined:

‘“‘But this is not a tax upon a residue, it is a

tax upon a transfer of his net estate by a de-

cedent, a distinction marked by the words that

we have quoted from the statute, and previously

commented upon at length in Knowlton vy. Moore,

178 U.S. 41, 49, 77. It comes into existence be.

fore and is independent of the receipt of prop-

erty by the legatee. It taxes, as Hanson, Death

Duties, puts it in a passage cited in 178 U. S.

49, ‘not the interest to which some person suc-

ceeds on a death, but the interest which ceased

by reason of the death.’ ””

Again in Young Men’s Christian Association v. Davis,

264 U.S. 47, 50, the priority thereof was emphasized :

‘“‘Congress was thus looking at the subject from

the standpoint of the testator and not from the

immediate point of view of the beneficiaries. * * *

Congress was in reality dealing with the testator

before his death. * * * In §408 it is declared to be

the intent and purpose of Congress that as far

as it is practicable and unless otherwise directed

by the testator, the tax is to be paid out of the

estate before distribution.”’

Aside from the sovereign paramount power of the

Federal government, an estate tax has a logical priority

over a legacy tax. The latter is upon what remains after

payment of the former.

The New York Statute.

The ‘‘transfers’’? which are taxable under Article 10

of the New York Tax Law are defined by Section 243

thereof, as amended in 1910:

“The word ‘transfer’ as used in this Article

shall be taken to inelude the passing of property

or any interest therein in the possession or enjoy-

ment, present or future, by inheritance, descent,

devise, bequest, grant, deed, bargain, sale or gift,

in the manner herein prescribed.’’

The similarity of the New York Transfer Tax Law

to California’s Inheritance Tax Act is apparent from the

following excerpt from the same section:

“The words ‘estate’ and ‘property’, as used

in this article, shall be taken to mean the prop-

erty or interest therein passing or transferred

to individuals or corporate legatees, devisees,

heirs, next of kin, grantees, donees or vendees,

and not as the property or interest therein of the

decedent, grantor, donor or vendor and shall in-

clude all property or interest therein, whether

situated within or without the state.’’

Prior to 1910, the tax policy of New York was

quite the reverse. The words ‘estate’? and ‘‘property”’

were then defined to mean ‘‘the property or interest

therein of the testator, intestate, grantor,’’ ete. passing

or transferred and ‘‘not as the property or interest

therein passing or transferred to individual legatees,

devisees,’’ etc.

ences

The provisions now in force above quoted have been

construed, so far as decedents’ estates are concerned, as

meaning that the New York Transfer Tax Law imposes a

legacy tax measured by the beneficial interest passing.

Matter of Zborowski, 213 N. Y. 109, 113.

New York Trust Co. vy. Eisner, 256 U.S. 345.

In further construction, it has been held that no

deduction of the Federal estate tax is permissible under

the terms of the New York statute.

Matter of Sherman, 222 N. Y. 540.

Matter of Carnegie, 236 N. Y. 517.

No federal question was raised in the above cases.

Kver since the Sherman case, this has been the prac-

tice in New York.

Matter of Woolworth, 206 App. Div. 768; appeal

denied 207 App. Div. 828; 239 N. Y. (not yet

reported).

Matter of Taylor, 209 App. Div. 299.

Matter of Nesbitt, 204 App. Div. 504; aff’d 237

N. Y. 527.

Matter of Bierstadt, 179 App. Div. 497.

Matter of Wittman, 112 Misel. 168.

Matter of Canda, 114 Misel. 161; reversed on

other grounds 197 App. Div. 597.

Matter of Nichols, 120 Misel. 228.

Matter of Benson, 120 Miscl. 136.

In this connection, the regulations of the State Tax

Commission provide:

‘“‘Article 158—Estate, transfer and inherit-

ance taxes.—Federal estate taxes, * * * imposed

upon decedent’s estate, are not deductible under

any circumstances, either from the residuary

estate or from a specific bequest, and this is true

regardless of any provision the will of a decedent

may contain.’’

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A majority of the States allow deduction of the Fed-

eral estate tax.

An analysis of the situation in the various states

shows that legacy taxes are imposed in all but four—

Alabama, Florida, Mississippi and Utah. The first two

do not tax legacies or estates in any form. The latter

two have estate, in place of legacy, taxes. It might also

be mentioned that Oregon and Rhode Island have the

dual form of both legacy and estate taxes.

The States (28) listed below now allow deduction of

the Federal estate tax in measuring their taxes upon

legacies:

By Statute: California, Iowa, Kentucky, Montana,

New Jersey and North Carolina.

Under court decision in the absence of specific statu-

tory provision: Connecticut, Jilinois, Indiana, Massa-

chusetts, Minnesota, Ohio and Oregon.

In practice, without specific statutory or court

authority: Arkansas, Delaware, Georgia, Idaho, Maine,

Maryland, Missouri, Nebraska, New Mexico, North Da-

kota, Oklahoma, Tennessee, Texas, Vermont and Vir-

ginia.

The states (16) which do not allow deduction of the

Federal estate tax include:

By Statute: Colorado, Pennsylvania, Rhode Island

and South Dakota.

Under court decision in the absence of specific statu-

tory provision: Kansas, Louisiana, Michigan, New

Hampshire, New York, Washington and Wisconsin.

In practice, without specific statutory or court

authority:

Arizona, Nevada, South Carolina, West Virginia and

Wyoming.

In New York and other states, where Federal estate

taxes may not now be deducted, legatees are without

recourse except on the grounds hereafter discussed, and

in the brief for the plaintiffs in error, showing that states

exceed their powers in arbitrarily denying such deduc-

tions.

ARGUMENT

California’s Supreme Court erred in sustaining the validity

of the provision that “In determining the market value of

the property transferred, no deduction shall be made for

any inheritance tax or estate tax paid to the Government of

the United States.”

The constitutionality of the present Federal estate

tax law was upheld in New York Trust Company v.

Eisner, 256 U.S. 345. The priority of the taxes imposed

thereby was established in Young Men’s Christian Asso-

ciation v. Davis, 264 U. S. 47 and in Edwards v. Slocum,

264 U.S. 61.

By this valid exercise of sovereign power, the Fed-

eral Government has excluded ab initio such part of

decedents’ estates, thus appropriated, from disposition

by decedents and likewise has limited the State’s taxing

jurisdiction to the balance.

The effect of the California statute is precisely

what this Court condemned in Knowlton v. Moore, 178

U. S. 41, most recently cited with approval in Edwards

v. Slocum (supra).

In Knowlton v. Moore, the constitutionality of the

War Revenue Act of 1898 (20 Stat. 448) was upheld.

Such Act, unlike the present Federal estate tax law, but

similar to the California statute, imposed graded taxes

upon legacies. However, the then Federal administra-

tive officials insisted upon the practice of basing the

applicable tax rates upon the value of the whole estate

instead of the amount thereof actually passing to the

legatee. In holding such taxing methods invalid, this

Court said: (p. 76)

‘‘In other words, the construction proceeds

upon the assumption that Congress intended to

tax the separate legacies, not by their own value,

but by that of a wholly distinct and separate

thing. But this is equivalent to saying that the

principle underlying the asserted interpretation

is that the house of A, which is only worth one

thousand dollars, may be taxed, but that the rate

of the tax is to be determined by attributing to

A’s house the value of B’s house, which may be

worth a hundredfold the amount.’’

The discrimination and inequality resulting from the

arbitrary requirement of the California statute that the

rate of the legacy taxes in such State be fixed by the

amount of the Federal estate tax plus the value of the

beneficial interest actually received, is only different in

degree from that given in the above example.

If taxation of legacies by a rate dependent upon a

wholly distinct and separate thing independent of the

value thereof, is violative of constitutional limitations,

manifestly California has exceeded its power in this

regard.

As a more concrete illustration of the palpable arbi-

trariness of measuring a legacy tax upon a basis in ex-

cess of the value of the beneficial interest, this Court

continued in Knowlton v. Moore: (p. 76)

‘‘The gross inequalities which must in-

evitably result from the admission of this theory

are readily illustrated. Thus, a person dying,

and leaving an estate of $10,500, bequeaths to a

hospital ten thousand dollars. The «ate of tax

would be five per cent, and the amcunt of tax

five hundred dollars. Another person dies at the

“~=*2 £9

same time, leaves an estate of one million dollars,

and bequeaths ten thousand dollars to the same

institution. The rate of tax would be 121% per

cent, and the amount of the tax $1250. It would

thus come to pass that the same person, occupy-

ing the same relation, and taking in the same char-

acter, two equal sums from two different persons,

would pay in the one case more than twice the tax

that he would in the other. In the arguments

of counsel tables are found which show how in-

evitable and profound are the inequalities which

the construction must produce. Clear as is the

demonstration which they make, they only serve

to multiply instances afforded by the one example

which we have just given.’’

Sufficient illustration of the arbitrariness of not

allowing deduction of the Federal estate tax is given by

the actual cases of

Matter of Carnegie, 236 N. Y. 517.

Matter of Benson, 120 Misel. (N. Y.) 186.

Mrs. Carnegie actually received as residuary legatee

$2,268,088.44. Under the arbitrary terms of the Trans-

fer Tax Law as applied by court decisions denying the

right to deduct the Federal estate tax, her legacy was

assessed upon the assumption that she had received

$5,343,125.94. The difference, $3,075,037.50 represented

the Federal estate tax paid out of the residuary estate

before distribution.

The Benson case was even more extreme. Therein

the New York transfer tax upon the residuary estate

was sustained, under the arbitrary requirements of the

statute as applied by the New York courts, although the

entire residuary estate had been exhausted by payment

of the Federal estate tax. Here the residuary legatee

had the choice of renouncing the legacy or paying the

tax out of pocket.

In this instance, the residuary estate consisted only of

the amount needed to meet the Federal estate tax on the

entire estate. Yet the transfer tax in New York was

wholly measured by the said residuary legacy, wiped out

though it was to meet the estate tax paid to the Federal

Government and regardless of the fact that the legatce

never received one penny of such legacy.

Could a more arbitrary provision be conceived? Sel-

dom would two different residuary legatees, occupying

the same relation and taking in the same character and

receiving legacies of the same amount, pay the same tax

under such a statute.

Obviously legacy taxes thus imposed constitute a de-

nial of the equal protection of the laws and the taking of

property without due process of law.

Such drastic statutory provisions are not sanctioned

by the fundamental principles of law, irrespective of eon-

stitutional limitations, as indicated in Knowlton v. Moore,

(supra): (p. 77)

‘‘It may be doubted by some, aside from ex-

press constitutional restrictions, whether the taxa-

tion by Congress of the property of one person,

accompanied with an arbitrary provision that the

rate of tax shall be fixed with reference to the sum

of the property of another, thus bringing about

the profound inequality which we have noticed,

would not transcend the limitations arising from

those fundamental conceptions of free government

which underlie all constitutional systems.’

This Court could not have stated more graphically the

fundamental reason why the California Inheritance Tax

Act is invalid. In effect, the California statute arbi-

trarily provides that the rate of tax shall be fixed with

reference to the sum of the property of another—the

Federal estate tax paid to the United States.

In construing the old Act, California’s court of last

resort strongly condemned the arbitrary practice of the

State officials in not allowing deduction of the Federal

estate tax and held that such deduction should be made.

Estate of Kennedy, 157 Cal. 517; 108 Pae. 280.

The Kennedy opinion states: (108 Pac., p. 283)

‘*It would appear to be a most absurd and in-

equitable provision that imposed a tax on one for

the privilege of succeeding as heir, devisee, or

legatee to certain property of the decedent, where

the very property to which he is so held to sue-

ceed is lawfully diverted by the probate court

= other purposes and never can be distributed to

m.’’

The same holding was made in Estate of Miller, 184

Cal. 674; 195 Pac. 413, wherein the court said: (p. 679)

“The state tax, then, being a succession tax,

a tax upon what the transferee receives, and the

federal tax being an estate tax, a tax upon what

the decedent leaves, there would seem to be no

escape from the conclusion that the federal tax

must be deducted in order to determine the

amount upon which the state tax should be levied,

since it is plain that what the transferee receives

is only the portion of what the decedent left which

remains after the federal estate tax is taken.’’

It should be noted here that California adopted the

prov'sion of 1917 involved herein without changing the

nature of the tax. In other words, after California vol-

untarily selected the legacy tax as the condition therein

upon inheritances, more revenue was sought by a wholly

inconsistent change in such policy derogatory to the con-

stitutional rights of beneficiaries.

The courts of last resort in many states have recog-

nized that the inclusion of the Federal estate tax as

part of the measure of a state legacy tax is too arbitrary

to be countenanced.

Cotonavo. People v. Bemis, 68 Col. 48; 189 Pac. 32.

“The federal tax is ‘imposed upon the trans-

fer of the net estate * * *’. Therefore it is the

power to transfer upon death that is taxed by the

national law, and the estate, upon the death is,

to the extent of the tax, instantly depleted (citing

authorities) and, thus diminished goes to the

legatees * * *,

“*It follows that the state tax must be measured

by the estate less the $87,000 [Federal tax].’’

Coxseecticut. Corbin vy. Townsend, 92 Conn. 501;

103 Ath 647, 649.

“The tax [Federal estate tax] is no part of

the estate at the time of distribution ; it has passed

from the estate, and the share of the benficiaries

is diminished by just so much.”’

Inuaxow. People v. Pasfield, 284 Ill. 450; 120 N. E.

286, 288.

“The federal Estate Tax Act of September

S, 1916, necessarily operated to lessen, by the

amount of such tax, the clear value of the benefi-

cis! interest which passed to the heirs and legatees

in the instant case and prevented their receiving

any part of that tax, and the ruling of the county

court that the same should be deducted before

computing the state tax was correct.”

Ixotana. State v. First Calumet Trust & Savings

Bank, 71 Ind. App. 467; 125 N. E. 200, 202.

“*The tax paid to the fed: ‘al government upon

the net estate before distribution cannot in any

sense be held to have been any part of the

beneficial interest of the respective legatees or dis-

tributees, and the market value of such beneficial

interest must of necessity be the value after de-

ducting the federal tax, the same having been de-

ducted from the net estate before distribution was

made thereof, and it necessarily follows that the

state inheritance tax should be computed upon

the residue after deducting from the net estate

the amount of such federal estate tax.’’

Kentucky. Bingham’s Admr. v. Commonwealth,

244 S. W. 781, 787.

‘(We think it clear that our statute, although

it makes no provision for any deductions, provides

that the tax shall be estimated upon the fair mar-

ket value of the beneficial interest of the trans-

feree, and that the Legislature by so providing

intended that that interest should be estimated at

the time and in the condition that he would re-

ceive it, rather than at the time and in the con-

dition that technically the title thereto vested in

him. This construction besides being entirely con-

sistent with the language employed, relieves the

statute of the manifest injustice of requiring the

transferee to pay an inheritance tax upon the

amount of the federal tax; * * *’’ (The Federal

tax in this case was $7,509,283.65).

Massacuuserts. Old Colony Trust Co. v. Burrell,

938 Mass. 544; 131 N. KE. 321, 323.

‘“‘The United States estate tax should have

been wholly deducted. In its nature such a tax

is a charge upon the net estate transferred by

death, and not upon the succession resulting from

death (citing authorities). The estate upon the

death is, to the extent of the tax, instantly de-

pleted.”’

Minnesota. State v. Probate Court, 139 Minn. 210;

166 N. W. 125.

‘The federal tax operated to lessen, by the

amount of such tax, the clear value of the bene-

ficial interest which passed to the two children,

and the ruling of the probate court was correct.”’

New Hampsuire. Williams vy. State, 125 Atl. 661,

668.

‘The state tax is imposed upon or measured

by the amount passing to each legatee or heir.

Laws 1915, c. 106, §1. If by virtue of federal leg-

islation or for any other reason a less amount

passes under the laws of this state, a less tax is

imposed.’’

New Jersey. Bugbee vy. Rochling, 94 N. J. L. 438;

111 Atl. 29, 30.

“* * * the executor never has or can have a

title free of the federal tax. The result is that to

ascertain the clear market value of the taxable

transfer the amount of the federal tax must be

deducted.”’

Ono. Tax Com. v. Lamprecht, 107 Oh. St. 535; 140

N. E. 333.

““* * * the conclusion must be reached that

every kind of debt, charge, expense, and claim of

valid nature against a decedent’s estate should be

deducted, and the succession tax be computed only

upon the net balance.’’

Orecon. Inman’s Estate, 101 Or. 182; 199 Pace. 615,

620.

“The federal estate tax, or the tax upon the

right to transmit, is, in the final analysis, meas-

ured by the net value of the old interest which

ceased with death; while the inheritance taxes, or

the tax upon the right to receive, are measured

respectively by the values of the several new in-

terests which were created by death. * * * The

federal estate tax paid to the national government

by the executors reduced the value of the prop-

erty which passed to the legatees and devisees to

the extent of such payment; and hence, when the

widow and daughters were required to pay an in-

heritanee tax on any part of the amount of the

federal estate tax, they were required to pay a tax

on property which never passed to them.”’

The opinion herein below (T. R., pp. 41-45) summar-

ily dismisses the claim of invalidity, without reference to

Knowlton vy. Moore, (supra), by the flat assertion that

the Federal Constitution is inapplicable to inheritance

taxes because of the State’s plenary power with refer-

ence to the succession of property and because such taxes

are not upon property.

Evidently the Court overlooked Magoun v. Illinois

Trust € Savings Bank, 170 U. 8S. 283, involving the con-

stitutionality of the Illinois State Inheritance Act, where-

in it is stated in the opinion:. (p. 292)

““The power of the States over successions may

be as plenary in the abstract as appellee contends

for, nevertheless it must be exerted within the

limitations of that [Federal] constitution. If the

power of devise or of inheritaace be a privilege,

it must be conferred or regulated by equal laws.’’

Mr. Justice Brewer, in writing a dissenting opinion

holding that the Illinois Inheritance Tax Act was repug-

nant to the Fourteenth Amendment, agreed with the ma-

jority of the Court that a state’s power in imposing

legacy taxes was limited by this constitutional restraint.

Where he differed was that he considered the classifica-

tions in the Illinois statute were arbitrary and therefore

exceeded the State’s constitutional power. He force-

fully explained why a State has no plenary power by

which it ean arbitrarily ignore the Fourteenth Amend-

ment with regard to inheritances: (p. 302)

““The argument is that because the State may

regulate inheritances and the extent of testament-

ary disposition it may impose thereon any burdens,

including therein taxes, and impose them in any

manner it chooses. * * * True, the State may

regulate, but it has no arbitrary power in the mat-

ter. The property of a decedent does not at death

become the property of the State, nor subject to

its disposal according to any mere whim or faney.’?’

This true rule was also given expression in Maxwell

v. Bugbee, 250 U. S. 525, 537:

““* * * the assessment of such taxes [inheri-

tance] is, of course, subject to applicable limita-

tions of the state and federal constitutions.”’

The classifications of the Illinois statute imposing

progressive rate legacy taxes sustained in the Magoun

case, were based upon the relationship of the beneficiary

to the decedent and upon the value of the beneficiary ’s

interest.

What this Court said with reference to the latter

feature indicates the limit to which a State may go: (p.

300)

‘‘The tax is not on money; it is on the right to

inherit; and hence a condition of inheritance, and

it may be graded according to the value of that

inheritance. The condition is not arbitrary be-

cause it is determined by that value * * *”?,

Contra, when legacy taxes are graded by something

else than, and in excess of, the value of the legacy (as by

the inclusion of the Federal estate tax) the condition of

inheritance is purely arbitrary. This is obviously so

when a statute like California’s specifically provides that

“‘market value’’ includes the Federal estate tax.

As the New York statute (Subd. 8, Section 220, Tax

Law) imposes the tax ‘‘upon the clear market value’’,

the disallowance of the deduction of the Federal estate

tax by court construction, results in a similar arbitrary

condition upon inheritance.

Where there is a residuary estate, the burden of the

inequality of such arbitrary provision is borne alone by

the residuary legatee because the Federal estate tax is

a charge against the estate as a whole. This makes the

invalidity of the statute more pronounced.

Matter of Hamlin, 226 N. Y. 407.

See also T. R., p. 26.

It is no answer to say that all residuary legatees are

treated alike. They are not. The taxes on their legacies

depend upon the extrinsic circumstance of the Federal

estate tax which varies with the size of each estate. The

rate therefore, in the same invalid manner as was con-

demned in Knowlton v. Moore, (supra) depends on the

value of something not received. The Carnegie and Ben-

son cases (supra) showed that.

In fact, no two residuary legatees, of different estates,

occupying the same relation and taking in the same char-

acter, and having beneficial interests of equal net value,

would pay the same amount of taxes unless the entire

taxable estate in each instance were also equal in

value—a condition too rare to sustain the constitutional-

ity of a classification.

Citizens of the United States are protected from ar-

bitrary state legislation by the Constitution. Certainly

no state has power to impose upon them legacy taxes for

the privilege of inheritance and then measure such taxes

on a value in excess of the value of the beneficial inter-

est.

The practical effect resulting from the inclusion of

the Federal estate tax is

(a) to tax an amount not received,

(b) which amount bears no necessary relation in

value to the value of the beneficial interest ac-

tually received;

impose in some cases a higher tax rate upon

amounts not received (Federal estate tax) than

in other cases, where, notwithstanding, in both

instances the beneficial interests actually re-

ceived are of the same value and the recipient

beneficiaries of the different estates occupy the

same relation and take in the same character.

As held in Mazwell vy. Bugbee, supra, whatever power

states may have with respect to legacies, it does not in-

clude the enactment of measures: (250 U.S. at p. 542)

“‘so wholly arbitrary and unreasonable to be be-

yond the legitimate authority of the State.”’

It is respectfully submitted that the California pro-

vision under consideration clearly violates the ‘due

process of law’’ and “‘equality’’ clauses of the Four-

teenth Amendment and the rule in Knowlton v. Moore

(supra).

Martin Saxe,

Samven P. GoLpMaAN.

Cuarues R. McSparren,

Wituiam F. Unecer,

of Counsel.

2 RET

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Table of Contents

STATEMENT OF THE FEDERAL QUESTION IN-

VOLVED AND THE MANNER IN WHICH THEY

Ea a CR A en pire Ute

py ER ae

en Oe MRR, sy s2 40 nn dev doe dd adden anes

MATERIAL PARTS OF THE CALIFORNIA STATUTE

(INHERITANCE ACT OF 1917)..................--

THE SUPREME COURT OF CALIFORNIA IN ITS

OPINION IGNORES THE CONSTITUTION OF TIE

STATE OF CALIFORNIA AND OF THE UNITED

STATES IN DEFINING THE POWER OF THE

STATE IN LEVYING AN INHERITANCE TAX

0D Reyer orc tear aero eae ee ary

IN CALIFORNIA THE XIGHT. OF HEIRS, LEGA-

TEES OR DEVISEES BECOME VESTED RIGHTS

AND MAY NOT BE SUBJECTED TO UNJUST BUR.

DENS OR ARBITRARY RULES IN THE LEVYING

OF TAXES CONSISTENTLY WITH TIE FOUR.

TEENTH AMENDMENT TO THE CONSTITUTION

OF THE UNITED STATES (POINT II)..........

THE TAX ON THE INTEREST OF THE BENEFI-

CIARY OR HEIR CAN ONLY BE COMPUTED ON

THE NET CLEAR VALUE OF SUCITL INTEREST

AS HE ACTUALLY TAKES ON DISTRIBUTION AS

BENEFICIARY OR HEIR CONSISTENTLY WITT!

THE FOURTEENTH AMENDMENT TO THE CON

STITUTION OF THE UNITED STATES (POINT IID)

ASSUMING THAT THE INHERITANCE TAX OF

CALIFORNIA IS A PRIVILEGE TAX, THE ACT

OF 1917 UNCONSTIZIZTIONALLY IMPOSES A RULE

THAT THE TAX eax A PRIVILEGE RUNNING

TO ONE PERSON SHALL BE MEASURED BY A

DISTINCTLY DIFFERENT PRIVILEGE RUNNING

TO ANOTHER PERSON (POINT IV).......-..--+-

Page

4 = lic

ii TABLE OF CONTENTS

Page

SUBDIVISION 10 OF SECTION 2 AND SECTION 3 OF

THE ACT OF 1917 ARE AN INTERFERENCE WITH

THE POWER OF CONGRESS TO LEVY AND COL-

LECT TAXES, DUTIES, ETC., UNDER CLAUSE 1

OF SECTION 8 OF ARTICLE I OF THE CONSTI-

TUTION OF THE UNITED STATES (POINT V)... 44

CONCLUSION ..ccccccsccccsccccnssscccsctcesrestsese 45

ed Dae debe ee ok pee ta Ue tee ete ee Petes ee LL prepmeraneenet

Table of Cases Cited

(Constitution and Statutes)

Paves

Aivway Electric Appliance Corporation v. Day, U.S. Sup.

Ct. Adv, op. Nov. 1924, pp. 13-14

Campbell v. California, 200 U.S. 87.................. Is, :

Civil Code of California, Sees. 1341, 1342, 1384.......... 20

Chanley v. Keleey, 206 U. 8. 480... 0... ccc ccc ccc ec ncce 24

Constitution of California, Section 25 of Article IV...... 17

Constitution of California, Section & of Article XX...... 17

Dana v. Jackson, 256 U.S. 599

mabale-Of Mite, VEO Cah, BOB. on. k ccs ccccccsccccccces 15

Estate of Kennedy, V7 Cal. 517.................. 15, 23. 34

Betate of Martin, 158 Cal. BBB. oon. c cc ccccccccccccccccee 3s

Estate of Miller, 184 Cal. 674....0.000000000.... 2, 8, 11, 15, 45

Estate of Potter, 188 Cal. 55-60. ............cccccce eae

Bolate of Stanford, 126 Cal. 199... .6....ccccccccccccece rd |

Estate of Watkinson, 191 Cal. 597.................. c. -

Estate of Woodard, 153 Cal. 39..............ccccecccc. 23

Inheritance Tar Act of 1917... 0.6 occ 7. 8 9 44, 46, 47

hy Fe oe |: ere

Knowlton v. Moore, 178 U.S. 41...........055. 10, 30, 34. 47

Magoun v, Illinois Trust & Savings Bank, 170 U.S 233

ipp ks Ca Mac ERCRERAK KES ERE EO OCR is eee bea ee 18, 25, 4

McCullough v. Maryland, 4 Wheat, 17 UL S. 316....... i)

New York Trust Co, v. Eisner, 256 U.S. 845........ oe ae

eG, SS, DE OR, OE I Fh hic dak Soka cddegucdeccenan 18

Plummer v, Cole, 178 U. 8. 194......cccccccccccccccscs vi

State Controller, Biennial Report... 6.060.000.0000 00 00 00

Truar v. Corrigan, 257 U. 8. 312....... 66. cc aee cceoe me

Trippit v. State, 149 Cal. 529............0cc000s ‘caacel ee

United States v. Por, 94 ULB. BU... ccc ccc ccc cease ¢

United States v. Perkins, 163 U.S. G28......0.0.0000085 18

United States v. San Juan County, 280 Fed, 120........ 4

ae Dk ee a ee ee eee. ne eae

ee er ee Oe EE Es eee Ee ee eee eee

Iu the Supreme Court

OF THE

United States

OcToBerR TERM, 1924

Leey Warp Srespins and Frank J. Homer, |

as exXeeutrix and executor of the will of

Henrietta Pierce Watkinson, deceased,

Plaintiffs in Error,

Vs. r No. 227

Ray L. Ruvey, Controller of the State of

California,

Defendant in Error.

1’ ERROR TO THE SUPREME COURT OF THE

STATE OF CALIFORNIA

BRIEF FOR PLAINTIFFS IN ERROR

STATEMENT OF THE FEDERAL QUESTIONS INVOLVED

AND THE MANNER IN WHICH THEY ARE RAISED.

The legislature of the State of California in 1917

passed an Inheritance Tax Act which was one of a

series of sneh acts, the Act of 1917, however, repeal-

ing previews acts. In this Act of 1917 it was pro-

“= TE AO LN INS IE oe BENG DW Se IIT LELRI™ BP REL LN OA eee

vided, in Subdivision 10 of Section 2 thereof that,

in determining the market value of the property

transferred, no deductions shall be made for any

inheritance tax or estate tax paid to the Government

of the United States. Previous acts did not contain

this deduction and the Supreme Court of the State

of California in the Estate of Miller, 184 Cal. 674,

in interpreting these acts, held that the California

inheritance tax was a tax on the beneficial interest

of each beneficiary or heir. The Supreme Court of

the state held that if there be more than one bene-

ficiary or heir, there is a separate tax on the in-

terest of each, computed on its net clear value and

chargeable against it (Estate of Miller, 184 Cal.

678). The Supreme Court of California then held

that the state tax, being a tax upon what the trans-

feree receives, and the federal tax being an estate

tax upon what the decedent leaves, there was no

escape from the conclusion that the federal tax must

be deducted in order to determine the amount upon

which the state tax should be levied, since it was

plain that what the transferee receives is only the

portion of what the decedent left which remains

after the federal tax is taken (Estate of Miller, 184

Cal. at pp. 679-680). The Supreme Court of Cali-

fornia declared that it would appear to be a most

absurd and inequitable provision that imposed a tax

on one for the privilege of succeeding as heir,

devisee or legatee to certain property of the deced-

ent when he never sneceeded to such property. ‘This

was the construction which the Supreme Court of

ea ae ee en Se _—

California placed upon the Inheritance Tax Acts

of 1905, 1911, 1913 and 1915,

In 1917, as already pointed out, the legislature

of the State of California, ignoring the demands of

justice and equality, as pointed out by the Supreme

Court of California, interpolated into the inheri-

tance tax act of that year the provision we have

already referred to and which is being attacked here,

that in determining the market value of the prop-

erty transferred, no deduction should thereafter be

made for any inheritance tax or estate tax paid the

United States Government. This provision re-

mained in the Inheritance Tax Act of California

until 1921, when it was repealed. The Inheritance

Tax Act of 1921 provided, in Subdivision 10 of

Section 2, as follows:

“10. In determining the market value of the

— property transferred, the following deductions

and no others shall be made from the appraised

value thereof:

(a) Debts of decedent owing at date of

death ;

(b) Expenses of funeral and last illness:

which are a lien against said property at the

date of death;

(d) The ordinary expenses of administra-

tion, including the ordinary fees allowed execu-

tors and administrators and the ordinary fees

of their attorneys under the provisions of see-

tions one thousand six hundred eighteen and

one thousand six hundred nineteen of the

Code of Civil Procedure of California;

OE ETA EET FOR rte? FRE A ET FED YR TRG YF YA EST COE oD

(e) The amount due or paid the govern-

ment o! the United States as a federal inheri-

tance of estate tax; provided, however, that the

amount of such tax allowable herein as a de-

duction Shall be limited to a computation there-

of (conmencing at the primary rates) made

by the acting state inheritance tax appraiser

upon hs own valuations of that portion of such

property only, the transfer of which is taxable

under fe provisions of this act, by applying to

such yiuations the exemptions and rates of

the fed@ral inheritance or estate tax in force

at the «ate of such transfer;

(f) The amount due or paid any state or

states f the United States (excepting Califor-

nia) asa state inheritance, succession or trans-

fer tax provided, however, that the amount of

such tax allowable herein as a deduction shall

be limited to a computation thereof (commenc-

ing at he primary rates) made by the acting

state pheritance tax appraiser upon his own

valuatims of that portion of such property

only, tle transfer of which is taxable under the

provisins of this act, by applying to such

valuatims the exemptions and rates of such

state irheritance, succession or transfer tax in

foree a the date of such transfer.”” (Statutes

of 1921 Chap, 821, page 1500.) -

The provsion of the Act of 1917 was repealed

upon the ypcommendation of the Controller of the

state for the Teason that it was unjust and inequit-

able. The listory of this provision and the recom-

mendation of the Controller are found in the bi-

ennial repo't of the State Controller for 1918-1920,

pp. 21-22, « follows:

LER APOE. ny

a OO RS IN ABET MR AAO SIN | RR CVI A IPS RO BAL LETS IEE

“FepERAL Estate Tax SHoutp BE ALLOWED AS

A Depuction In Cauirornia.

In 1917 the legislature ordained that:

‘In determining the market value of the

property transferred, no deduction shall be

made for any inheritance or estate tax paid to

the Government of the United States’.

It will be remembered that at the time the

provision was enacted the United States had

not yet entered the World War, and the im-

perative need for federal revenue that later re-

sulted as the immediate effect of that war was

not then in existence. It was at that time the

opinion of all the states, as well as of the legis-

lature of California, that in enacting a law

levying a federal estate or inheritance tax Con-

gress had invaded a source of revenue and was

exercising a taxing prerogative that in justice

to the respective states should be preserved

solely to them. It was felt that in comparison

with the sources of revenue available to the

federal government, the states were at great

and obvious disadvantage and that, therefore,

federal inheritance taxation should be resisted

and rebuked in every legitimate way.

Accordingly, the legislature of California said

that in determining the clear market or net

value of property passing by inheritance no de-

duction should be allowed for the payment of

the federal estate tax.

Today conditions are vastly different. Tt is

now apparent that the federal estate tax will be

with us for at least many years. The need of the

United States for governmental revenue must

necessarily continue to be very great for an

indefinite period. I, therefore, recommend that

in all fairness and equity, the legislature should

repeal our present provision, and ordain the

federal estate tax to be a proper legal deduction

a ees Sen ee IRA SREY ER AEN Hh ge ey rte RRR

in arriving at the clear market value of an

inheritance. My reasons are that unless we

allow it as a deduction, we really tax a man

for something he does not get. He receives an

inheritance diminished to the extent of the

taxes he is compelled to pay by law, vet is com-

pelled to pay an inheritance tax on the false

assumption that he receives the full amount

undiminished. This is neither fair nor equit-

able. The one consideration above all others

which has made this law the most popular of

all tax laws is its appeal to fairness and equity.

Its wholesome purpose has been to rightfully

place upon the wealthy a larger share of the

burden of taxation which only too often weighs

unevenly and hard upon those least able to

bear it. But this purpose should only be

achieved ‘rightfully’, and it is not right or just

to tax a party for property he does not receive,

but on the contrary is diverted from him by

operation of law. I respectfully recommend

that the present provision denying the exemp-

tion of the federal estate tax as a deduction be

repealed, and that it be expressly recognized as

a proper legal deduction to be allowed in de-

termining the clear market value of inheri-

tance.”’

It was agreed by all persons concerned therefore,

including the officers of the State of California, and

the attorneys of the Controller in the present action,

that the provision of the Inheritance Tax Act of

1917 was unjust and inequitable. The case comes

to this court on a writ of error directed to the

Supreme Court of California which, in spite of its

previous ruling that such a provision would be un-

just and inequitable, in the present case held, on

aac il ii ah oki te NEE eee ee ee

appeal from the order refusing to modify the re-

port of the Inheritance Tax Appraiser for the

State of California so as to allow the deduction of

the federal estate tax in arriving at the net value

of the estate, that said provision of the Act of 1917,

Subdivision 10 of Section 2, Was not unconstitu-

tional.

The federal question was first raised in the objec-

tions to the report of the Inheritance Tax Appraiser

in the Probate Court of the State of California, as

Will be seen by reference to the transcript of record,

folios 44-50. The federal question was pressed

strongly upon the Supreme Court of the State of

California, but was dismissed in a short paragraph

(see folio 88, Transcript of Record),

The question before this court, therefore, resolves

itself into this: Does the provision of the California

Inheritance Tax Act of 1917, Subdivision 10 of See-

tion 2, which is admittedly an unjust and inequitable

provision, and inconsistent with the spirit and mean-

ing of the Inheritanee Tax Act of California, vio-

late the fundamental principles of our Government ?

This provision of the Inheritance Tax Act of 1917

admittedly compels the heir, devisee or legatee to

pay a tax on the property which he never receives,

and admittedly the State of California attempts to

tax the separate legacies not by their own value, but

by that of a wholly distinct and separate thing.

Admittedly by this arbitrary provision, the rate of

tax is fixed with reference to the sum of the prop-

Biter eeoemencneemoe

erty of another person. Admittedly, the tax im-

posed under the law of 1917 is upon a privilege or

right running to one person, but measured by a

distinctly different privilege or right running to

another person.

It will be our purpose to show that the unjust

burden and profound inequalities arising from the

imposition of this tax subject the individual to the

arbitrary exercise of the powers of Government un-

restrained by the established principles of private

right and distributive justice, thus violating the

“due process’? and “equal protection’’ clause of the

Fourteenth Amendment to the Constitution of the

United States.

We respectfully urge upon this court to keep con-

tinually in mind in this discussion that the inheri-

tance tax act of California is a legacy tax, a tax

upon what the transferee receives, and not a trans-

fer tax, as are the federal estate tax and the inheri-

tance taxes of many states. Argument upon the

nature of the California tax is precluded by the

Estate of Miller, 184 Cal. 674, and kindred cases.

‘The question is also raised that these provisions

of the California Inheritance Tax Act of 1917 are

repugnant to clause 1 of Section 8 of Article I of

the Constitution of the United States in that they

interfere with the power of Congress to levy and

collect taxes, duties, imports and excises, to pay the

debts and provide for the common defense and

general welfare of the United States.

ASSIGNMENTS OF ERROR.

(Transcript of record, folios 66-70, pp. 31-32.)

First: The court erred in adjudging and decid-

ing that the provisions of the “Inheritance Tax Act”’

of the State of California, as amended in 1917,

statutes of California 1917, page 880, chapter 589,

in respect to Subdivision 10 of Section 2 thereof,

are not in conflict with and in violation of the pro-

visions of the Fourteenth Amendment of the Con-

stitution of the United States for that the State of

California by and through the provisions of said

statute assumes and seeks to deprive and does de-

prive plaintiff in error and certain citizens and per-

sons within the jurisdiction of the State of Cali-

fornia of (fol. 67) property without due process of

law. That said Subdivision 10 of Section 2 of said

statute provides as follows:

“In determining the market value of. the

property transferred, no deduction shall be

made for any inheritance tax or estate tax

paid to the Government of the United States.”

Seconp: That the court erred in adjudging and

deciding that the provisions of the “Inheritance

Tax Act’? of the State of California, as amended

in 1917, statutes of California 1917, page 880, chap-

ter 589, in respect to Subdivision 10 of Section 2

thereof, are not in conflict with and in violation of

the provisions of the Fourteenth Amendment of the

constitution of the United States for that the State

of California by and through the provisions of said

. a tae Pee See UR PRET IN Tes me ae? x

RARE IN AI ASS ITIL ELIS ION ITT TG GP ARIE PDN ta RA RAVE. . 7 Re + - niThs

eee Ame : un; he ‘

statute assumes and seeks to deny and does deny to

plaintiff in error herein and certain citizens and

persons within the jurisdiction of the State of Cali-

fornia the equal protection of the law.

TuHirp: The court erred in holding that by the

provisions of said statute plaintiff in error is not

deprived of property without due process of law.

FourtH: The court erred in holding that by the

provisions of said statutes plaintiff in error is not

denied the equal protection of the law.

Firru: That the court erred in adjudging and

deciding that the provisions of the “Inheritance Tax

Act”’ of the State of California as amended in 1917,

Statute of California, 1917, page 880, chapter 589,

in respect to Subdivision 10 of Section 2 thereof,

are not in conflict with and in violation of the pro-

visions of the Fourteenth Amendment of the Con-

stitution of the United States, and erred in ignoring

the rule laid down in the case of Knowlton v. Moore,

178 U. S. page 41, which rule applies particularly

to the case at bar and which (fol. 68) is to the effect

that an arbitrary provision fixing the rate of a

succession tax with reference to the sum of the prop-

erty of another brings about such a profound in-

equality that it would transcend the limitations

arising from the fundamental conceptions of a

free Government which underlie all constitutional

systems.

SixtH: That the court erred in adjudging and

deciding that said “Inheritance Tax Act’? and par-

RS RINE RL Ces aeRO HER HNN RN SE I AEM. RO STD AT SSCA SOROS re AIOE ee ES

ticularly Subdivision 10 of Section 2 thereof does

not contravene the Fourteenth Amendment of the

Constitution of the United States in view of the fact

that the “Inheritance Tax Act” of the State of

California has been decided to be a succession tax,

that is to say, a tax upon what the transferee re-

ceives (Estate of Henry Miller, 184 Cal. 674), and

the Federal tax being an estate tax, that is to say,

a tax upon what the decedent leaves, there is no

escape from the conclusion that the Federal estate

tax must be deducted in order to determine the

amount upon which the succession tax should be

levied.

SEVENTH: That the court erred in adjudging and

deciding that said ‘‘Inheritance Tax Act”’ of the

State of California is valid for the reason that by

the terms of said act it provides for a tax upon

property belonging to the United States Govern-

ment and provides for a lien thereon. Section 3

of said ‘Inheritance Tax Act” providing as follows:

“See. 3. Such taxes shall be and remain a

lien upon the property passed or transferred

until paid; provided, that said lien shall be

limited to the property chargeable therewith,

and the person to whom the property passes or

is transferred and all administrators, executors

and trustees of every estate so transferred or

passed, shall be liable for any and all such taxes

until the same shall have been paid as herein-

after directed.”’

Eigutu: That the court erred in adjudging and

deciding that said provisions of the “Inheritance

Fi A ier MBs I le alte NEY he A Ow sng ite

Tax Act” are not repugnant to clause 1 of Section

8 of Article I of the Constitution of the United

States in that they interfere with the power of

Congress to levy and collect (fol, 69) taxes, duties,

imports and excises, to pay the debts and provide

for the common defense and general welfare of the

United States.

NintH: That the court erred in ordering judg-

ment for the defendant in error herein.

STATEMENT OF FACTS.

The above named decedent, Henrietta Pierce

Watkinson, died testate August 7, 1920, leaving an

estate passing under the Inheritance Tax Laws of

California which became effective July 27, 197,

In computing the inheritance taxes due the state.

the Inheritance Tax Appraiser in his report made

no deduction on account of moneys paid the United

States Government as a federal estate tay.

Under the provisions of the Revenue Act of 1918,

the executors were required to and did pay to the

United States Government from and out of the

estate as and for a federal tax thereon, the sum of

#128,730.08, The state inheritance tax appraiser in

thereafter making his appraisement and report upon

such estate, refused and failed to deduet any part

of this payment in arriving at the net market value

of the legacies subject to the state inheritance tax.

The report thereon as to the state tax duc was con-

sequently $26,205.75 greater in ammount than such

tax would have aggregated had such deduction been

made, and the legacies bore the burden of this in-

crease. The court, over the objection of the execu- f

tors, confirmed said report as te this particular r

portion thereof (Transeript of Record, folios 1-10),

and from its order so made and entered, an appeal

Was taken to the Supreme Court of the State of

California (Transcript of Reeord, folios 10, 60-61),

The Supreme Court of California wrote two opin-

lons—one upon the first submission of the Case

(folio 81), filed May 24, 1923. and an opinion upon

rehearing, tiled August 15, 1923 (folio 85). The

latter opinion is the reported opinion and is found

reported in Volume Ol of the California Reports,

at page SOT,

From this decision of the Supreme Court of the

State of California a writ of error was taken to

this court,

The Material Parts of the California Statute Are the Title

and Parts of Section 2 and Section 3 of the Statutes of

California, Chap. 589, Statutes of 1917, p. 883.

“Inheritance Tax Act of 1917.

An act to establish a tax on gifts, legacies,

inheritances, bequests, devises, successions and

transfers, to provide for its collection and to

direct the disposition of its proceeds; to pro-

vide for the enforcement of liens created by f

this act and by any aet hereby repealed and for &

Suits to quiet title against claims of liens aris- :

ing hereunder, or under an act hereby repealed,

to be known as the ‘Inheritance Tax Act’: and

STR RI cee

eghlatae

hss re cet ,; = be

eae

Bix pauep bein

to repeal Chapter five hundred ninety-five of

the laws of the session of the legislature of

California of 1913, approved June 16, 19138,

known as the ‘Inheritance Tax Act’, and all

amendments thereto and to repeal all acts and

parts of acts in confliet with this act. (Approved

May 23, 1917. In effect July 27, 1917.)

* * * - * * *

Sec, 2. A tax shaw be and is hereby imposed

upon the transfer of any property, real, per-

sonal or mixed, or of any interest therein or

income therefrom in trust or otherwise, to per-

sons, institutions or corporations, not herein-

after exempted, to be paid te the treasurer of

the proper county, as hereinafter directed, for

the use of the state, said taxes to be upon the

market value of such property at the rate here-

inafter preseribed and only upon the exeess

over the exemptions hereinafter granted, in the

following cases:

* * * * * * %

10. In determining the market value of the

property transferred, no deduction shall be

made for any inheritance tax or estate tax paid

to the government of the United States.

See. 3. Such taxes shall be and remain a

lien upon the property passed or transferred

until paid; provided, that said lien shall be

limited to the property chargeable therewith,

and the person to whom the property passes or

is transferred, and all administrators, executors

and trustees of every estate so transferred or

passed shall be liable for any and all such taxes

until the same shall have been paid as herein-

after directed. The provisions of the Code of

Civi! Procedure relative to the limitation of

time of enforcing a civil remedy shall not apply

to any proceeding or action taken to levy, ap-

praise, assess, determine, or enforce the collec-

el Pale Ate Stal A Bs taba <4

tlon of any tax or penalty preseribed by this

article, and this section shall be construed as

having been in effect as of date of the original

enactment of the inheritance tax law; provided,

that unless sued for Within five vears after they

are due and legally demandable, such taxes, or

any taxes accruing under any act herein re

pealed, shall cease to be a lien as against any

bona fide purchaser of said property : and, pro-

vided, that no such lien shall cease within two

Years from the date of the Passage of this act.”’

The Supreme Court of California has held that

the California tax is a succession tax, a tax on the

beneficial interest of each beneficiary or heir, If

there be more than one beneficiary or heir there is

t separate tax on the interest of each, computed on

its net clear value and chargeable against it. The

court will forgive this reiteration, but we invite

aeareful perusal of the case of the Estate of Miller,

184 Cal. 674,

The Supreme Court of California has also held

that the plain purpose of the act was that the clear

market value of the beneficial interest transferred

should be its net elear value. This has been the

construction given it in actual administration by

the courts.

Estate of Miller, 184 Cal. 674;

Estate of Kennedy, 157 Cal. O17;

Estate of Hite. 159 Cal, 392,

SUDO tiie te lin tab me ve et

Point IL.

THE SUPREME COURT OF CALIFORNIA IN ITS OPINION

IGNORES THE CONSTITUTION OF THE STATE OF CALI-

FORNIA AND OF THE UNITED STATES IN DEFINING

THE POWER OF THE STATE IN LEVYING AN INHERI.-

TANCE TAX.

The Supreme Court of California summarily

disposes of the arguments addressed to the Four-

teenth Amendment to the Constitution of the

United States and to the Constitution of the State

of California, with a general statement that the

state has full and unlimited power to attach condi-

tions and burdens to the privilege of succeeding to

property. The Supreme Court of California de-

clares that the State of California has power to

confiscate such portion of the estate of a decedent

as it sees fit and its opinion makes no allowance for

its own Constitution or the Fourteenth Amend-

ment to the Constitution of the United States de-

spite the facet that its own court, as well as. this

court, has repeatedly declared that taxes, excise, or

otherwise, must be levied so as not te produce un-

equal burdens, arbitrary discriminations or ea-

pricious confiscation. The opinion of the eourt of

California is therefore fundamentally unsound un-

der our principles of government and it erroneous-

lv assumes that the fundamental principle is the

right of the state to compel a contribution from

the estate of any decedent, which right of the state

it assumes to be unlimited. This is the omniscient,

infallible and all-sufficient principle with which the

Di aera helical ReAS son

Bedi in won

Supreme Court of California answers every argu-

ment advanced in this case.

The opinion of the Supreme Court of California

ignores those provisions of the state constitution

Which recognize the right to inherit in California

and protect that right so that the right to inherit

nay no longer be said to be a creature of the legis-

lature in this state.

Section 25 of Article IV of the Constitution of

the State of California provides:

“The legislature shall not pass local or spe-

cial laws in any of the following enumerated

cases, that is to say:

Twelfth: Affecting estates of deceased per-

Sous, Minors or other persons under legal dis-

abilities.

Thirtieth: Changing the law of descent or

succession.’

Section & of Article XX of the State Constitution

provides:

“All property, real and personal, owned by

either husband or wile before marriage, and

that acquired by cither of them afterward by

gift, devise or descent, shall be their separate

property.”’

These provisions of the California constitution

recognize the laws of descent. At least they place

some restraint upon the power of the state.

The opinion of the Supreme Court of California

ignores the limitations which the Supreme Court

of the United States has always placed upon the

PAD eyo)

;

SA ots Stn, Fy

tapbbiaer ite Sak Sal aches aA ea

cna Spain iats,

AS eb ate

ba iketiae es

A I stl ee

exercise by a state of its power to regulate the right

to inherit. Those limitations may be summed up in

the expressions of Magoun v. illinois Trust & Sav-

ings Bank, 170 U.S. 283; Campbell v. California,

200 U. S. 87: Orr uv. Gilman, 183 U.S. 278.

Defining these limitations this court said in Orr

uv. Gilman, supra, at page 287:

“Tn the light of the principles thus estab-

lished we are unable to see in this legislation

of the State of New York, as construed by its

highest court, any infringement of the salutary

provisions of the Fourteenth Amendment.

There are involved no arbitrary or unequal

regulations, prescribing different rates of taxa-

tion on property or persons in the same condi-

tion. The provisions of the law extend alike

to all estates that deseend or devolve upon the

death of these who onee owned them. The

moneys raised by the taxation are applied to the

lawful uses of the state, in which the legatees

have the same interests with the other citizens.

Nor is it claimed that the amount or rate of

the taxation is cxcessive to the extent of con-

fiscation.”’

This court also said. in United States ve Perkins,

163 U.S. 628:

“Though the general consent of the most en-

lightened nations has, from the earliest his-

torieal period, recognized a natural right in

children to inherit the preperty of their par-

ents, we know of no legal principle to prevent

the legislature from taking away or limiting

the right of testamentary disposition or im-

posing such conditions upon its exercise as it

may deem condueive to public good.”

It is not at all settled, then, that there is no such

thing as a natural right to inherit, and this court

has never held that all property of a decedent may

be confiscated to the state, and there are well de-

fined limitations upon the burdens which the state

may impose upon inherited estates. In the ordinary

dealings between man and man, the courts are not

over-careful in guarding their language as to the

rights of heirs, devisees and legatees, They are

very liable to call them vested rights, It is only

where the taxing power of the state is involved that

they resurrect the old theory of grace and privilege

and, creatures of the state.

So in this case of the Estate of Watkinson, 191

Cal. 597, the Supreme Court of California said:

“The fundamental answer to the most. of

these constitutional objections is to he found in

the proposition above set forth, that an inheri-

tance tax is not a property tax, but is essen-

tially a tax upon the statutory privilege of tes-

tamentary transfer or succession, and that the

state in extending the privilege may place such

limitations upon it as it deems proper in the

way of burdens upon its exercise,”’

This is the sole answer of the Supreme Court of

California to the constitutional argument made in

this case even in face of its previous holdings that

such an exaction as that complained of here would

be unjust and inequitable. Under the reasoning of

the Supreme Court in the Estate of Watkinson, the

heirs, legatees and devisees would not be entitled to

any deductions from the gross value of the estate

BS 4

ra et ae

phe Se

Sie Babee wd

Re ee a ene Oe

even though the previous decisions of the Supreme

Court required these deductions where no provi-

sion was made in the statute for them.

However that may be, the legislature of Cali-

fornia since its earliest history has extended this

right or privilege to all its citizens, and thereafter

in administering these rights or privileges it may

not place unjust burdens upon them consistently

with the Constitution of the United States.

The following sections of the Civil Code provide:

Sec 1541:

‘“When devises and bequests vest. Testa-

mentary dispositions, including devises and be-

quests to a person on obtaining majority, are

presumed to vest at the testator’s death.”

Sec. 1542:

“When cannot be divested. A testamentary

disposition, when vested, cannot be divested un-

less upon the occurrence of the precise contin-

geney prescribed by the testator for that pur-

pose.”’

Sec. 1384:

“Tntestate’s estate, to whom passes. The

property, both real and personal, of one who

dies without disposing of it by will, passes to

the heirs of the intestate, subject to the control

of the probate court, and to the possession of

any administrator appointed by that court, for

the purposes of administration.”

Tt has been held by the Supreme Court of Cali-

fornia in the long line of authorities that the rights

of the heirs, legatees or devisees become vested im-

mediately upon the death of the testator or in-

testate.

Point IT.

IN CALIFORNIA THE RIGHTS OF HEIRS, LEGATEES OR

DEVISEES BECOME VESTED RIGHTS AND MAY NOT BE

SUBJECTED TO UNJUST BURDENS OR ARBITRARY

RULES IN THE LEVYING OF TAXES CONSISTENTLY

WITH THE FOURTEENTH AMENDMENT TO THE CON.

STITUTION OF THE UNITED STATES.

In the Estate of Stanford, 126 Cal. 112, the Su-

preme Court of California held that the right of the

state to an inheritance tax was a vested right which

became vested immediately upon the death of the

decedent. In the Estate of Stanford, at page 119,

the Supreme Court says:

“The state here, from the death of the dle-

cedent, had a present fixed right of future en-

joyment to the five per cent of his estate. This

is property or a thing of value belonging to

the state.

The following from the Civil Code is merely

reciting the common law: ‘The ownership of a

thing is the right of one or more persons to

possess and use it to the exclusion of others.

In this code the thing of which there may be

ownership is called ‘property’. (Civ, Code.

See. 654.) ‘There may be ownership of all in-

animate things which are capable of appropria-

tion or of manual delivery; of all domestic ani-

mals; of all obligations: of such products of

labor or skill, as the composition of an author,

goodwill of a business, trademarks and signs:

and of rights created or granted by statute.

Be.

ST ie Rede SR Ae

ee We en ee

RRR a Rectan aa gE TE Foe Pe Me eee eR OT ON

inte

= Any

ee a rs aie £283 Cs pat Son ewe

THREES ESS ERE ONE LOM SS

Rests

(Civ. Code, sec. 655.) It is, therefore, not

the possession alone, but the right to possess

which constitutes the ownership; and owner-

ship may be ‘of rights created or granted by

statute’, as the case here. It would be alto-

gether a new definition in the law to hold that

one who had not obtained possession of a thing

or had parted with its possession could not be

the owner of such thing. This would be con-

trary to the teachings of elementary law, which

recognizes a right in action as well as a right in

possession. The rule contended for would make

ownership depend altogether upon strength and

agility in obtaining and holding possession of

thines.”’

To be consistent, in order to support this right

of the state, the Supreme Court summoned to its

support its former holdings that the right of the

beneficiary or heir vested immediately upon the

death of the decedent.

So in the case of Trippett v. State, 149 Cal. 529,

the Supreme Court of California said:

“The beneficiary under the will, or the heir,

is in no way deprived of the benefit of these

provisions because the statute enacts or the

court holds that the state’s right to the tax vests

on the decedent’s death. The right, although

vested, is still, as to actual collection, subject

to the appraisement provided for. There is no

legal inconsistency in the idea of a right being

vested, although the possession may be post-

poned or contingent upon the performance of

certain acts. An apt erample is to be found in

the right of the heir himself. It is the settled

law of this state that upon the death of an

owner of property, intestate, his estate at once

descends to and vests in his heirs, subject to the

possession of the administraioy for all purposes

of administration. (Civ. Code, see. 1384; Bates

v. Howard, 105 Cal. 173. (38 Pac. 715); Bren-

ham v. Story, 39 Cal. 179.) But the heir must

await the completion of administration and the

determination of his heirship by the deeree of

distribution before he can enter upon the enjov-

ment and possession of his vested right. So

here, the fact that the right of the state to the

tax is vested on the death of the decedent does

hot carry with it the right to take POSSCSSIO0ii

of the interest so vested without performance

of the conditions (of appraisement, notice, ete.)

to which its right of possession mav be sub-

ject. The mere fact that the right of the state

to its proportion of the gift or inheritance is

declared to vest prior to any appraisement docs

not deprive the beneficiary or heir of any sub-

stantial right where the law affords him the

opportunity to be heard as to the amount of

the tax before there is any aetual collection or

payment thereof.”’

Also see the following cases:

Estate of Woodard, 153 Cal. 39:

Estate of Martin, 153 Cal. 295:

Estate of Kennedy, 157 Cal. O17;

Estate of Potter, 188 Cal. 55-60.

It follows, therefore, that we are dealing with

vested rights in dealing with the rights of inheri-

tance or rights of beneficiaries under a will. As a

matter of right reasoning, therefore, it would seem

that these vested rights may not be subjected to

unjust burdens or arbitrary rules either at the

moment of vesting or at anv time thereafter. To

make a distinction giving the state the right to

serene Sets

oo]

oat

levy an unjust tax because it was levied at. the

moment of vesting, a right which admittedly it

could not exercise thereafter, leads us into the

realm of metaphysics, and this court has never

favored metaphysics in dealing with constitutional

rights.

As is said by Mr. Justice Holmes in the case of

Chanler vu. Kelsey, 205 U.S. 480:

“Tf then a given state tax must be held to be

a succession tax in order to maintain its va-

lidity, or if in fact it is held to he a suecession

tax by the state court of which it is the province

to decide that matter, it follows that such a

tax cannot be levied except where there is a

¥ succession, and when some element or step

necessary to complete it is wanting when the

tax law goes into effect. If some element is

wanting at that time, the suecession depends,

for taking effect, on the continuance of the

permission to succeced or grant of the right on

the part of the State; and, as the grant may be

withdrawn, it may be qualified by a tax. But if

there is no succession, or if the succession has

fully vested, or has passed bevond dependence

upon the continuing of the State’s permission

or grant, an attempt to levy a tax under the

power to regulate succession would be an at-

tempt to appropriate property in a way which

the Fourteenth Amendment has been construed

to forbid. No matter what other taxes might

be levied, a succession tax could not be, and so

it has been decided in New York. Matter of

Pell, 171 N.Y. 48, 55: Matter of Seaman, V7

N.Y. @”

Under the decisions of the Supreme Court. of

California, the estate of the heir or beneficiary had

become vested at the time that the tax was levied.

There was no element or step necessary to complete

the vesting at that time.

In the case of Magoun v. Mlinois Trust & Savings

Bank, 170 U.S. 283. a4 Pp. 289, this court pointed

out, quoting from United States ¢. For, 94 UL 8,

O15, that the power of the state to regulate the

tenure of real Property within her limits included

the transfer and acquisition of such property dur-

ing life as well as after death and the disposition

of such property whether by deed, descent or any

other mode. Tt needs no argument to demonstrate

that the state may not place unjust burdens upon or

make arbitrary rules for the ¢ ‘ansfer or acquisition

of property by deed. To apply a different rule,

therefore, to the vesting of property by the testa-

mentary or intestate laws of the state leads us again

into the realm of metaphysies, which may not be

tolerated under the Fourteenth Amendment. The

basis of the power of the state is the same in both

cases,

As is said by Mr. Justice Brewer in his dissent-

ing opinion in the Magoun ease, p. 302 (and this

language is not inconsistent with the majority

opinion) :

“True, the state may regulate, but it has no

arbitrary power in the matter. The property

of a decedent does not at his death become the

property of the State. nor subject to its dis-

posal according to any mere whim or faney,

And vet if it is a purely arbitrary power T

meng

ere rere

do not see what constitutional objection could

be raised to any disposition which a legislature

might make of the property of any decedent.

Take the illustration made by counsel for ap-

pellant: Could the legislature of Illinois, which

passed this statute, constitutionally enact that

the estate of every person dying within the

limits of the State should be given to the mem-

hers of that legislature? Or, if the matter of

personal benefit be interposed as against the

validity of such legislation, could it enact that

the property of A, on his death, should pass

to the State; the property of B to some religious

or charitable institution; and the property of

C be divided among his children? Can there

be a doubt that such inequality of legislation

would vitiate it?) But whatever may be the

power of the legislature, [Mlinois had regulated

the matter of descents and distributions and

had granted the right of testamentary disposi-

tion. And now by this statute upon property

passing in accordance with its statutes a tax

is imposed; a tax unequal because not propor-

tioned to the amount of the estate: unequal

because based upon a classification purely arbi-

trarv, to wit, that of wealth—a tax directly

and intentionally made unequal. T think the

Constitution of the United States forbids such

inequality.”

Poixr IIL.

It ix not 2 matter of iuportance under the

Fourteenth Amendment Whether we define the in-

terest of the heir or beneficiary as the result of a

right or a privilege. He Inmay not be taxed for prop-

erty which he never reccives nor for a privilege

Which he never exercises; and the rate of the tax

upon What he does receive may net be fixed ae-

cording to an arbitrary standard. that standard

being the property, right or privilege of some other

person. Even in dealing with matters over which

the state has purely arbitrary power such as the

granting to a forcien corporation of the right to

do business, this cour has held that the state in

extending that privilege is hound by the Fourteenth

Amendment from arbitrary or capricious acts,

This court said in the recent’ case of Airway

Electric Appliance Corporation v. Day, U.S. Su-

preme Court: Advance Opinions, 1924-1925, Novem-

her 1, 1924, at pp. 13-14:

“The fee determined by the lower court, as

well as that fixed by the state officers, is arhj-

trary. Without holding that such a charge

must be measured by the value of the privilege

for which it is imposed, it may be said that

some relation to such value ic a reasonable

requirement.”

* * * + * + * *

Se aT RE, EE EN ITY

tia hates

Kon

es 3h

Diiesincowaes cowie

“Tt is clear that the mere number of author-

ized nonpar-value shares is not a reasonable

basis for the classification of foreign corpora-

tions for the purpose of determining the amount

of such annual fees. Such a classification is

not based on anything having relation to the

purpose for which it is made. Southern R. Co.

v. Green, 216 U.S. 400, 417, of Le ed. 556, 541,

30 Sup. Ct. Rep. 287, 17 Ann. Cas. 1247;

F.S. Royster Guano Co. vo Virginia, 295 CLS.

412, 415, 64 L. ed. 989, 990, 40 Sup. Ct. Rep. 560.

The act has no tendeney to produce equality ;

and it is of such a character that there is no

reasonable presumption that substantial equal-

itv will result from its application. Martin vy.

District of Columbia, 205 U.S. 185, 139, 51 1.

ed. 743, 744, 27 Sup. Ct. Rep. 440; Gast Realty

& Invest. Co. ve. Schneider Granite Co., 240

U.S, 55, 58, 60 L. ed. 528, 525, 36 Sup. Ct. Rep.

254; Kansas City Southern R. Co, v. Road Imp.

Dist., 256 U.S. 658, 660, 65 L. Ed. 1151, 1156,

41 Sup. Ct. Rep. 604. The act violates the equal

protection clause of the 14th Amendment.”

Likewise, Mr. Chief Justice Taft in the cease of

Truar ve Corrigan, 257 CLS. 312, discusses again

the limits of the Fourteenth Amendment and. its

equal protection clause in language which reminds

one of the early fathers, and in the course of his

discussion he says, at page 334:

“Tt is beside the point to sav that plaintiffs

had no vested right in equity relief and that

taking it away does not deprive them of due

process of law. If, as is asserted, the granting

of equitable remedies falls within the police

power and is a matter which the legislature

may vary as its judgment and discretion shall

dictate, this does not meet the objection under

the equality clause which forbids the granting

Se ee

of equitable relief to one nan and the denying

of it to another under like circumstances and in

the same territorial] Jurisdiction. — The Four-

teenth Amendment as this court said in Barbier

V. Connolly, already eited, intended ‘not only that

there should he ne arbitrary deprivation of life

or liberty, or arbitrary spoliation of Property,

but that equal protection and security should be

given to all under like cireumstanees in the Ch

Jovment of their personal and civil rights: that

all persons should. be equally entitled to pursue

their happiness and acquire and enjoy prop-

erty; that they should have like access to the

courts of the country for the protection of their

persons and property: the Prevention and re-

dress of Wrongs, and the enforcement. of eon-

tracts; that no impediment should he interposed

to the pursuits of ay one except as applied to

the same pursuits hy others under like circum.

stances; that no greater burdens should be laid

Upon one than are laid upon others in the same

calling and condition, and that in the adminis-

tration of criminal Justice no different or higher

punishment should be Imposed upon one than

such as is prescribed to all for like offences’.

There are many subjects over which the legisla-

Mure exercises the power of regulation, and “vested

rights’ is a more op less indefinite phrase, new

meanings being added as the principles of Justice

and equality may demand.

Under the inheritance tax law of the State of

California, as interpreted by the decisions of the

Supreme Court, the beneficiary or heir becomes en-

titled to the net clear Value of his legacy, devise or

hequest. and this right vests, upon the death of the

‘

;

PERO EN I EE Wee

oof)

decedent, although the possession and enjoyment is

postponed.

The Supreme Court of California has decided that

the California inheritance tax is a tax upon the lega-

cies, devises or bequests, in other words, upon what

the beneficiary or heir actually receives. To fix a

computation of this tax according to a purely arbi-

trary standard (and by arbitrary standard is meant

—without some relation to the value of the prop-

erty received), violates the Fourteenth Amendment,

and in the language of Campbell v. California,

supra, is “beyond — the pale of governmental

authority”.

We come now to the case of Kuowlton v. Moore,

178 U.S. 41. which sums up and is decisive of this

question. This great case which is the basis of the

later decisions of this court and the guide and refuge

of both the taxing powers and the taxpayers of the

United States, is too well understood by this court

for extended reference. But it deals with just such

a situation as confronts us in the case at bar and it

gives concrete examples such as we will give later

in this brief of the result of measuring a tax on

legacies or devises by purely arbitrary standards.

On pages 76-77 Mr. Justice White says:

“Granting, however, that there is doubt as

to the construction, in view of the consequences

which must result from adopting the theory

that the act taxes each separate legacy by a

rate determined, not by the amount of the

legacy, but by the amount of the whole per-

sonal estate left by the deceased, we should be

compelled to solve the doubt against the inter-

pretation relied on. The principle on which

such construction rests was thus defended. in

argument. The tax is on each separate legacy

or distributive share, but the rate is measured

by the whole estate. In other Words, the con-

struction proceeds upon. the assumption that

Congress intended to tax the separate legacies,

hot by their own value, but by that of a wholly

distinct and separate thing. But this is equiva-

lent to saving that the principle underlying the

asserted interpretation is that the house of A,

Which is only worth one thousand dollars, may

be taxed, but that the rate of the tax is te be

determined by attributing to A’s house the

value of B's house, which may be worth a hun-

dredfold) the amount. The ‘gross inequatlitics

Which must inevitably result from the admiis-

sion of this theory are readily illustrated. Thus,

a person dying, and leaving an estate of £10,500,

hequeathes to a hospital ten thousand dollars.

The rate of tax would be fire per cent, and the

amount of tax five hundred dollars. Another

person dies at the same time, leaves an estate

of one million dollars, and hequeathes ten

thousand dollars to the same institution, The

rate of tax would he 1214 per cent, and the

amount of the tax #1250. It would thus come

to pass that the same person, eccupving the

same relation, and taking in the same character,

two equal sums from two different Hersons,

would pay in the one case more than twice the

tax that he would in the other. In the argu-

ments of counsel tables are found which show

how inevitable and profound are the inequali-

ties which the construction must produce. Clear

as is the demonstration which they make, they

only serve to multiply instances’ afforded by

the one example which we have just given.

We are, therefore, bound to give heed to the

rule, that where a particular construction of a

statute will occasion great inconvenience or

produce inequality and injustice, that view is

to be avoided if another and more reasonable

interpretation is present in the statute. Bate

Refrigerating Co. v. Sulzeberger, 157 0.8.1, a4;

Wilson v. Rousseau, + How. 646, 680; Bloomer

vy. McQuewan, 14 How. 539, 995; Blake v. Na-

tional banks, 23 Wall. 307, 320; United States

v. Kirby, 7 Wall. 482, 486. Indeed, the con-

fusion Which gives rise to both of the construe-

tions of the statute which we have just consid-

ered comes from the want of insight pointed out

by Hanson in a passage which we have hereto-

fore quoted; that is, it arises from not keeping

in mind the distinction between a tax on the

interest to which some person suceeeds on a

death and a tax on the interest which ceased by

reason of the death, the two being different

objects of taxation.

It may be doubted by some, aside from: ex-

press constitutional restrictions, whether the

taxation by Congress of the property of one

person accompanied with an arbitrary pro-

vision that the rate of tax shall be fixed with

reference to the sum of the property of another,

thus bringing about the profound inequality

which we have noticed, would not transcend the

limitations arising from those fundamental

conceptions of free government which underlic

all constitutional systems. On this question,

however, in any of its aspects, we do not even

intimate an opinion, as no occasion for doing

so exists, since, as we understand the law, we

are clearly of opinion that it does not sustain

the construction which was placed on it by the

court below.”’

It cannot be that the Supreme Court of Califor-

nia kept in mind in deciding the case at bar, as it

undoubtedly did in the Estate of Miller, supra, the

distinction between a tax on the interest to which

some person succeeds on a death and a tax on the

interest which ceased by reason of that death, the

two being different objects of taxation.

The Supreme Court of California Was too enam-

oured of the doctrine that the rights of beneficiaries

and heirs were the creatures of legislation as in-

terpreted by itself.

The Supreme Court of California overlooked the

fact that when privileges or rights are extended or

granted they must be by laws operating equally

upon all its citizens and that laws which capriciously

and arbitrarily lay unjust burdens upon its citizens

whether you call their relations to the state privi-

leges or rights, natural op otherwise, violate the

Fourteenth Amendment and the fundamental prin-

ciples of our Government. That unjust burdens

lead to profound inequalities is as true as the law

of gravitation.

The arbitrary standard of m ‘asurement of the

California Act of 1917 in including the federal

estate tax in the market value of the interest to be

taxed is of the same nature as the arbitrary meas-

urement of the tax condemned in Knowlton v.

Moore, supra.

Under the California Act of 1917 the federal tax

paid the United States Government is a part of the

Sross estate, tust as the debts and charges of ad-

ministration are a part of the gross estate in so far

i |

VOR REL

ee ye

as the beneficiary or heir is concerned. For the

California tax is a legacy tax and not a transfer

tax. If the reasoning of the Supreme Court of

California is true, the reasoning of Mr. Justice

White in Knowlton v. Moore, supra, is fallacious.

Because, under the doctrine of the California court,

a legacy tax could and should be measured according

to the value of the gross estate.

Counsel for the State of California rely upon

New York Trust Company v. Eisner, 256 U.S. 345.

which points out that in all taxing statutes there

are inequalities which cannot be avoided. The

point, however, is that when a tax law directly

necessarily and intentionally creates an inequality

of burden, it comes in conflict with the Constitu-

tion of the United States (Magoun v. Illinois Trust

d Savings Bank, supra).

In 1910 in the Estate of Kennedy, 157 Cal. 517.

the Supreme Court of California pointed out that

it would be unjust and inequitable to tax the heir

and beneficiary for an interest which they never

received. In the face of this declaration, the legis-

lature purposely inserted in the Act of 1917 the

provision that the federal tax should not be de-

ducted in estimating the market value of the inter-

est transferred.

The tax in question here does not fall within the

rule sanctioned in Magoun v. Minois Trust & Sav-

ings Bank, supra, wherein it is said at p. 300:

“The rule does not require, as we have seen,

exact equality of taxation. It only requires

that the law imposing it shall operate on all

alike under the same circumstances. The tax

is not on money; it is on the right to inherit;

and hence a condition of inheritance, and it

may be graded according to the value of that

inheritance. The condition is nol arbitrary

because it is determined by that value: it is not

unequal in operation because it does not levy

the same percentage on every dollar; does not

fail to treat ‘all alike under like circumstances

and conditions, both in the privilege conferred

and the liabilities imposed.’ ”’

But falls within the rule stated in Dana v. Jach-

son, 256 U.S. 599, wherein it is said:

“A state tax law will be held to conflict with

the Fourteenth Amendment only where it pro-

poses, or clearly results in, such flagrant and

palpable inequality between the burden imposed

and the benefit received, as to amount to the

arbitrary taking of property without compensa-

tion—‘to spoliation under the guise of exerting

the power of taxing.’ ”’

There can be no more glaring example of flagrant

and palpable inequality between the burden imposed

and the benefit received than that of taxing the heir

or beneficiary for a privilege which was never eXx-

tended, a right which is never enjoyed or property

Which is never received,

Peres tah

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POINT IV.

ASSUMING THAT THE INHERITANCE TAX OF CALIFORNIA

IS A PRIVILEGE TAX, THE ACT OF 1917 UNCONSTITU-

TIONALLY IMPOSES A RULE THAT THE TAX FOR A

PRIVILEGE RUNNING TO ONE PERSON SHALL BE

MEASURED BY A DISTINCTLY DIFFERENT PRIVILEGE

RUNNING TO ANOTHER PERSON.

It becomes evident that the legislature cannot, if

we accept the doctrine of Knowlton v. Moore, tax

one man for a privilege granted to another, and yet

the operation of the portion of the act in question

does result in this unconscionable situation.

The decedent in her life time is the possessor of a

privilege to transmit property by deed or will or

the laws of succession, though the exercise of that

right is taxable only at death; the donee, legatee or

heir is the possessor of a privilege to receive, tax-

able only upon the death of the donor, testator or

relative.

We do not question the reasonable amount or per-

centage that might be levied by the state upon either

privilege, but we do question its power to tax the

beneficiary’s right to receive based in whole or in

part upon the decedent’s right to transmit.

By the act in question as construed by the court

the state, in effect, savs to the legatee in this and

similar cases:

“The price you must pav for your privilege

fo receive is a certain percentage of what vou

actually receive and in addition you are taxed

a further sum for the privilege granted to the

testatrix to transmit. We define your privilege

Paes PA ee

and fix a percentage tax on what you receive

measured by the market value, and then collect

an additional tax from you upon a privilege

granted to the testatrix although she, through

the executors, has alr ‘ady paid to the govern-

ment a tax for her privilege. Your tax. is

measured in part by the value of the privilege

given to the testatrix and for Which privilege

she has paid a tax to the Federal Government.’

This is direetly opposed to the view expressed by

Chief Justice White in Knowlton “. Moore, supra.

There the attempted rate of the federal legacy tax

Was based, not upon the value of the legacy re-

ceived, but upon the value of all legacies in the

cutire estate, and therefore was hased upon the com-

bined rights of other legatees, and only a strained

construction saved the act from being declared

invalid,

In the case of a residuary legatee who is alse a

general or specific legatee, the enforcement of our

act would frequently deny to him all right to the

bounty of the testator by reason of the illegal mea-

surement of his tax.

Take as an instance the computation of the tax

payable by the first legatee named in the order

modifying and confirming the report of the inheri-

tance tax appraiser in the case at bar, as shown in

folio 5 of the Transcript of Record, to wit:

errmere:

Name, relationship

to deceased, character Exemption

and value of interest and rates Tax

Constance Heeley, $500.00

stranger: 24,500.00 at 5° 0 $ 1,225.00

25,000.00 ** 10°; 2 500.00

Money ......... # 25,000.00 50,000.00 “15°, 7,500.00

1/7 Residue 162,335.78 87,335.78 “206, 17,467.16

$187,335.78 428,692.16

If the residue was entirely depleted by payment

of the federal estate tax, as has happened within

the knowledge of attorneys for plaintiffs in error

5S Pie ADR BIEL BR MI DE PAS Foe SR

the operation of the act in question in conformity

with the opinion of the Supreme Court of Califor-

nia would also entirely wipe out the money legacy

of $25,000.00, for the inheritance tax exacted is in

excess of that amount.

RRP Sel EE RE EP CEREAL BRR) SCP

Take the following illustration:

Net Taxable Estate #2,000,000,00

: Federal Tax (act of 1917, effective

: Oct. 4, 1917) € 202,000.00

90,000 at 2 1,000

100,000 at 44 4,000

100,000 at 6% 6,000

200,000 at 8% 16,000

300,000 at 10% 30,000

250,000 at 10% 25,000

500,000 at 12% 60,000

Let us say that X, a stranger, is given by will,

a legacy of $25,000 and is also residuary legatee,

and that the residuum amounts to $202,000

ecco RRA TORIC IDS PN OR IST AE OE EE

The value of estate upon which X is taxed under f

the State Act of 1917 is:

Legacy $ 25,000

i Residuum — 202,000

#£227,000

The State Tax on #227.000 to a stranger is

$37,975.00:

24,500 at 5%, 1,225.00

25,000 at 10°, 2,500.00

50,000 at 15% 7,500.00

4 100,000 at 20°; 20,000.00

| 27,000 at 25% 6,750.00

$37,975.00

From the above it is clear that the legatee X,

is deprived of his legacy of $25,000 by reason of

the fact that the Act of 1917 declares that he must

; Pay a tax, not only on $25,000, but also on an addi-

tional $202,000 which he never received,

If the Watkinson estate were of greater value

(and additional legacies bequeathed) the residue

would all be used in payment of the federal estate

tax, and yet the residuary legatee would be eom-

pelled to pay a tax that would entirely deplete the :

money legacy of $25,000.00; in other words, the

legatee of a specified sum who is also named as a

residuary legatee, would be compelled to pay a tax ;

governed by the value of the entire estate, a situa- 4

tion that is so forcefully condemned in Knowlton v. ;

Moore, supra, where the court calls attention to the

gross inequality of taxation upon a basis that at-

aeRO ————EE a

tributes **to A’s house the value of B’s house, which

may be worth a hundredfold the amount.”

The loss of her share of the residue in such an

event is not the fault of the Act of 1917 in question,

and we make no complaint concerning it, for that

loss is occasioned by a valid tax levied by the Federal

Government, but the loss of the + vney legacy of

$25,000.00 is occasioned because he, state inheri-

tance lar was measured, not alone by what she re-

ceived, but mainly by the testatric’s right to trans-

mit, though the exercise of the latter right was fully

paid for out of the general estate.

Under the illustration above set forth, where the

residue is depleted by the payment of the federal

estate tax, the testator, if the Act of 1917 is valid,

in attempting to give more to a legatee already

given a specific sum of money in the will, by adding

thereto a residuary bequest, succeeds only in depriv-

ing the legatee of all the testator attempted to give,

including the specitie sum of money.

Thus a testator dying while the act was in force

gives a legacy to A, a stranger, in the sum of

#25,000.00, and the legatee pays a state inheritance

tax of $1,225.00, leaving the net amount to be re-

ceived by him $23,775.00. The testator also makes a

bequest to B, a stranger, in the sum of $25,000.00

and then names him as residuary legatee, and in

such case B suffers the loss of part or all of his

legacy of $25,000.00 by reason of the inequitable

provision of the Act of 1917 exacting a tax upon a

residue that he never received,

noe ies t's Cer tian

As repeatedly stated, the inheritance tax in

California is a succession tax and not an estate

or transfer tax, and an estate tax lessens the :

value of the whole estate and maty result in a pro

rata reduction of all legacies in the event that the

residue is not sufficient to pay the federal estate tax

in full, but in the illustration last given there ean

be no proportionate reduction, because the state

inheritance tax is assessed against B and he must

pay it even though it entirely depletes his bequest

of a specific sum of money,

prs ere

The same inequality arises in case of intestacy,

Let us assume two cases, the estates of Smith and

of Jones,

First: let us asstime that Smuth leaves a net

estate, after payments of debts and expenses of

administration, of $100,000, and that the estate goes ;

in equal shares to his two heirs, A and B. Deduet- 4

ing the federal estate tax of 2" on $50,000 thereof

(the first $50,000 of the estate being exempt), or

#1000 for the tax, leaves £99,000 for distribution, or

9,500 to each of the two heirs,

URE preg er? ELT RETIN FN VEIT Pee ee

Next: let us assume that Jones leaves a net estate

| of exactly $49,500, which all gees to his sole heir, C.

| Now we readily concede that the state is not re-

sponsible for the fact that A and B, by reason of

the imposition of the federal estate tax, together

receive no more from the F100,000 estate left by

Smith than C receives from the $49,500 estate left

by Jones. That is a matter ever which the state has

—

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no control, and which cannot be helped. But. the

state, by its legislation of 1917 attempts to say that

A and B shall pay a state inheritance tar larger

than C, upon the assumption that A and B have

each received #50,000, and C but $49,500. The state

imposes ifs own far in such a manner that A and B

actually have less distributed to each of them, after

deducting the taxes, than has (. Why this dis-

crimination against A and B?. It is not the result of

paying the federal tax—after payment of that tax

there are legacies of equal value available for dis.

tribution to A, Band (. It is beeause the state at-

tempts to levy a greater tax against A and B than it

does against C, concededly based upon something

they do not receive. Because Smith's estate has al-

ready contributed to the federal government, the

state, for that very reason and no other, takes an

additional sum from his heirs, which it does not

take from Jones’ heir.

In other words, the legislature attempts to tax the

several inheritances, not according to their value to

the heirs, but by a wholly distinet and different

measure, bearing no relation to the benefits con-

ferred upon the persons thus taxed. There is no

reasonable ground for this discrimination against

A and B and in favor of C. The provision of the

Act of 1917 which requires A and B to pay greater

state inheritance taxes than C, and leaves Jess to be

distributed to each of them from the $100,000 estate

of Smith than it leaves to be distributed to @ from

a ia aed 4

» the $49,500 estate of Jones, is arbitrary, unfair, and

"runs counter to the constitutional provision.

. Indeed, if we assume that the state, as the Opinion

basis for cueulating inheritance taxes, then it could

just as well declare that the taxes should be levied

on the basis of the Yross estate of the decedent, and

holds, may make auy such arbitrary rule as the

that no deduction should be made for debts or ex-

penses of administration, Then we would

have such examples of lack of uniformity as

| this: Smith leaves an estate of — $100,000,

but of a net value of only $10,000. The

b inheritance tax, let Us assume, is 106 of $100,000,

or $10,000, so that the entire net estate is consumed

and Smith's heirs get nothing. But Jones leaves an

estate of only $50,000 OF which $10,000 js net. The

inheritance tax of 10% on $50,000 being deducted

leaves $5000 for distribution to the heirs, Although

both estates are of the same net value the heirs of

the $100,000 estate get nothing, but the heirs of the

£50,000 estate get $5000! Clearly this is neither

uniform law nor due Process, And if it is not, then

it is equally certain that it is not uniform law to

tax one person a greater amount than another, for

the privilege of enjoving an inheritance, “merely

because the one has already contributed to the Fede-

tal Government and the other has not,

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POINT V.

SUBDIVISION 10 OF SECTION 2 AND SECTION 3 OF THE

ACT OF 1917 ARE AN INTERFERENCE WITH THE POWER

OF CONGRESS TO LEVY AND COLLECT TAXES, DUTIES,

ETC., UNDER CLAUSE 1 OF SECTION 8 OF ARTICLE I

OF THE CONSTITUTION OF THE UNITED STATES.

It appears from the histery given by the State

Controller quoted in the first part of our brief under

“Statement of the Questions Invelved” that it was

the evident intention of the legislature by inserting

these provisions in 1917 te rebuke and resist inheri-

tance taxation by the Federal Government. [t was

intended to deny the paramount right in the Fed-

eral Government to first collect its estate tax. This

would seem to be so by virtue of the provisions of

Section 3 of the Aet of 1917, combined with Subdi-

vision 10 of Seetion 2. Under Section 3, the tax

to be paid pursuant to the statute shall remain a

lien upon the property passing or transferred until

paid. In other words, by the terms of this act, the

tax is made a lien uper a fund which belongs in

effect to the United States Government and on

which the United States Government has a first len.

It might well oceur by reason of the arbitrary

measure of taxing required by Subdivision 10 of

Section 2, that a combined state and federal tax

would be imposed exceeding the value of the

property.

We understand this very condition has occurred

in the probate court in some of eur counties in Cali-

fornia. The question of priority then arises. On

this question of priority we think the case of United

States v. San Juan County, 280 Fed, 120, is sound,

and the ease of McCullough v. Maryland, 4 Wheat.

17 U.S. 316, 431, is applicable. This question was

fully discussed in the case of Frick " Common-

wealth, No. 442-No. 445, now pending in this court.

But the Act of 1917 of the Stat» of California is a

more flagrant disregard of the paramount power of

the United States Government for the reason that

the tax provided therein is purely a legacy tax upon

the net clear value of the interests received and still

the act provides for a lien upon the fund which

goes to the United States Government and which

should be deducted before determining the net clear

value, but which said act refused to deduct. This is

a direct attack upon the paramount taxing power of

the United States Government.

CONCLUSION.

The state tax, then, being a succession tax, a tax

upon what the transferee receives, and the federal

tax being an estate tax, a tax upon what the decedent

leaves, there would seem to be no escape from the

conclusion that the federal tax should be deducted

in order to determine the amount upon which the

state tax should be levied, since it is plain that what

the transferee receives is only the portion of what

the decedent left which remains after the federal

tax is taken.

Estate of Miller, 184 Cal. 679-680,

TPS te oer any.

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Srctinbitte wi 62 8.

44)

The Inheritance Tax Act of iv17 of the State of

California, in Subdivision 10, Section 2, provided

that in determining the clear market or net value

of property passing by inheritance or will, no de-

ductions should be allowed for the payment of the

federal estate tax.

When a tax law directly, necessarily and inten-

tionally creates an inequality of burden, it then

becomes imperative to -inquire whether this in-

equality thus intentionally created can find any

constitutional justification.

Mr. Justice Brewer in Magoun v. Illinois

Trust & Savings Bank.

The legislature of the State of California in 1917

directly, necessarily and intentionally imposed an

unjust burden upon beneficiaries and heirs in the

State of California by taxing them for an interest

which they never received. (See Report of State

Controller, p. 5 of brief.) This burden is not

one of those inequalities which arise in the exercise

of the taxing power and cannot be avoided, but

was intentionally created by the legislature.

Whatever may be the power of the legislature

California had granted the right of testamentary

disposition and the right of inheritance to its

citizens and these rights become vested upon the

death of the testator or intestate, and unjust bur-

dens may not be imposed upon them at the moment

of vesting, or thereafter.

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3 Pe <

‘ -

+ 47

Admittedly these provisions of the Inheritance

Tax Act of 1917 compelled the beneficiary or heir

to pay a tax on property which he never receives ;

and

Admittedly the State of California attempts to

tax the separate legacies, not by their own value,

but by that of a Wholly distinet and separate thing.

Admittedly the rate of tax is fixed with reference

to the sum of the property of another person.

Admittedly the tax imposed under the law of

1917 is upon a privilege or right running to one

person, but measured by a distinetly different

privilege or right running to another person.

This arbitrary standard of measurement results

IN gross inequality and “transcends the limitations

arising from those fundamental conceptions of free

government which underlie al] constitutional sys-

tems.”’

Knowlton v. Moore. supra.

Tn every case of this nature which has come before

this court, this court has emphasized the rule that

“in assessing a tax upon such right or privilege

the state may lawfully measure or fix the amount

of the tax by referring to the value of the property

passing. ”’

Plummer v. Cole, 178 U.S. 134,

Subdivision 10 of Section 2 and Section 3 of the

Act of 1917 are a consciously direet and intentional

interference with the power of Congress to levy and

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collect its taxes, duties, imposts and excises, to pay

the debts and provide for the common defense and

general welfare of the United States.

The issues in this case are far-reaching.

An admittedly unjust and arbitrary tax.

The power of the state invoked on the one hand

as an unlimited power to regulate testamentary

disposition and inheritance.

On the other hand the limitations of the Four-

teenth Amendment.

The issue prophesied by Chief Justice White in

Knowlton v. Moore is here at last. The results

will be far-reaching and deeply impressed.

Dated, San Francisco,

January 26, 1925.

Respectfully submitted,

CarREY VAN FLEET,

JoserH G. Dr Forest,

SIpNEY M. EHRMAN,

Maurice E. Harrison,

Winniam M. Mappen,

Attorneys for Plaintiffs in Error.

Luoyp M. RoBBINs,

LUTHER ELKINS,

Of Counsel,

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