Estate of Lake (1982)

Estate of EDNA LOUISE LAKE, Deceased. KENNETH CORY, as State Controller, Petitioner and Appellant, v. CROCKER NATIONAL BANK, Objector and Respondent.

(Opinion by Miller, J., with Rouse, Acting P. J., and Smith, J., concurring.)

COUNSEL

Myron Siedorf, Edwin Rosenthal and R. E. Sanderson for Petitioner and Appellant.

Jay M. Jacobus for Objector and Respondent.

OPINION

MILLER, J.

The State Controller appeals from an order fixing inheritance tax made by the superior court. fn. 1 The order sustained objections filed by the executor of the estate of Edna Louise Lake to the report of the inheritance tax referee.

Edna Louise Lake's will provided that her estate be distributed in the following order: 1) tangible personal property to be distributed to 14 legatees; 2) a conditional devise of mining lands to one James L. Lake; 3) a direction to sell all other real property and to add the proceeds to [130 Cal. App. 3d 327] her residuary estate; 4) pecuniary bequests totalling $234,000 to 13 individuals and charitable institutions; 5) the residue to be set up in trust. The will then provided that all taxes, occasioned by the testator's death, be paid by the estate as part of the expenses of administration and charged to the residuary estate. Finally, the decedent granted a power of sale to the executor.

In settling the estate securities were sold for $503,759 sustaining a loss on the sale of $42,270. Pursuant to the direction of sale, one piece of real property was sold for a loss of $28,884. Therefore, total losses from the sale of estate property amounted to $71,154.

Although it is unclear from the record how he reached such a figure, the inheritance tax referee allowed deductions for a loss of only $53,266. fn. 2 The trial court determined that deductions should be allowed for all losses sustained on sales during administration. Accordingly, the total inheritance tax due from named beneficiaries was reduced from $276,200 to $271,907.

The single issue on appeal is one of first impression; namely, when specific monetary bequests are made by will and the executor is given full power and authority to sell, are losses from the sale of decedent's property to make distributions deductible pursuant to inheritance tax regulation (Cal. Admin. Code, tit. 18, § 13988.4) when there is insufficient cash at the time of death to pay such bequests.

The California inheritance tax is not a tax upon property as such but is imposed upon the privilege of succeeding to property. (Estate of Rosenfeld (1965) 62 Cal. 2d 432, 435 [42 Cal. Rptr. 447, 398 P.2d 783]; Estate of Radovich (1957) 48 Cal. 2d 116, 121 [308 P.2d 14]; Estate of Webb (1966) 241 Cal. App. 2d 85, 87 [50 Cal. Rptr. 397].) "Section [130 Cal. App. 3d 328] 13951 fn. 3 of the Revenue and Taxation Code requires that property subject to the inheritance tax be appraised at its market value as of the date of death; ..." (Estate of Rosenfeld, supra, at p. 433.) Section 13982 of the Revenue and Taxation Code specifies the conditions for making deductions in the computation of the inheritance tax. This section provides: "In determining the market value of property included in any transfer subject to this part, the deductions specified in this article, and no others, are allowed against the appraised value of the property, if the deductions: [¶] (a) Are obligations of the decedent or his estate, except as otherwise indicated in this article; and [¶] (b) Are paid by the estate or the transferee." Specified deductions include debts owed at death (§ 13983), expenses of last illness and of the funeral (§ 13986), tax and assessment liens (§ 13987), ordinary expenses of administration (§ 13988), certain extraordinary expenses of administration (§ 13988.1) and uncompensated loss due to casualty (§ 13991).

The regulation covering the ordinary expenses of administration, and particularly losses on the sale of property, prescribed by the State Controller provides that a deduction is allowable for losses suffered when the net proceeds realized from the sale of decedent's property is less than the appraised value of the property provided 1) the sale was directed by the decedent's will, 2) the sale was necessary in order to raise funds to pay taxes, debts, or costs of administration, or 3) the property was taken in a condemnation proceeding. (Cal. Admin. Code, tit. 18, § 13988.4.) This regulation is the subject of the instant dispute.

Appellant contends that the inheritance tax referee correctly allowed deductions both for losses on the sale of real property directed to be sold in the will and for losses on sale of property that had to be sold to raise money to meet expenses for items specified in section 13988.4. It argues that it is not proper to deduct additional losses sustained in the sale of property when the purpose of the additional sale is to make distributions to the legatees.

[1] On the other hand, respondent maintains that when a testator makes specific monetary bequests, gives the executor full power to sell and there is insufficient cash on hand to make such distribution, the authorization for sale is converted into a direction by implication. We agree. [130 Cal. App. 3d 329]

Although it is true that not all expenses incurred in the proper administration of an estate are deductible (see, e.g.,Estate of Skinker (1956) 47 Cal. 2d 290 [303 P.2d 745, 62 A.L.R.2d 1137]; Estate of Watkinson (1923) 191 Cal. 591 [217 P. 1073]; Estate of Koerner (1975) 44 Cal. App. 3d 447 [118 Cal.Rptr. 752]), those deductions enumerated in the statutes are allowed. (Rev. & Tax. Code, § 13982, Estate of Webb, supra, 241 Cal. App. 2d 85, 88.) Administrative Code, title 18, section 13988.4 authorizes a deduction for losses sustained from the sale of property when the sale was directed by the decedent's will. When a testator makes specific pecuniary bequests and there is insufficient cash in the estate to make such bequests, the power of sale given to the executor by will becomes an implied direction to sell for the purpose of making the bequests. It is unreasonable to expect living persons to keep large assets in cash, rather than in investments, so that cash will be available after death to make specific monetary distributions.

This fact appears to have been recognized by the State Controller in the past. In Estate of Sharp (1971) 18 Cal. App. 3d 565 [95 Cal. Rptr. 816] an $18 million estate was distributed according to terms of the testator's will. A major asset in the estate was the decedent's ranch which was appraised as of the date of death for approximately $10 million by the inheritance tax appraiser. An amended appraisal by a successor appraiser gave the ranch a date-of-death value of $8.5 million. Although not an issue in the case, the trial court found that "in the computation of California inheritance taxes a special deduction equal to the difference between the amended appraised value of $8,500,000 and the total of the sales prices of $5,290,400 was allowed under Revenue and Taxation Code section 13988 and section 13988, subdivision (3) of the Inheritance Tax Regulations." fn. 4 (P. 576.) Pursuant to Evidence Code sections 452, subdivision (d) and 459, subdivision (a) this court, on its own motion, has taken judicial notice of the last will and testament of Thomas E. Sharp included in the appellate records of that case. fn. 5 No direction to sell was contained in the testator's will. It is obvious from Sharp, as in the case at bench, that losses due to the sale of estate property for the purpose of distribution to legatees are deductible in the computation of the inheritance tax. [130 Cal. App. 3d 330]

The judgment is affirmed.

Rouse, Acting P. J., and Smith, J., concurred.

FN 1. Such an order is appealable pursuant to Probate Code section 1240, subdivision (r).

FN 2. In its opening brief appellant gives the following explanation: "In computing inheritance tax owing, the Inheritance Tax Referee allowed a deduction for some losses on sale of estate property, that is, a deduction for the difference between the appraised value of the property in the inventory and the net proceeds received from the property on sale during probate. In computing this deduction, the Referee took into consideration only the sales directed by decedent's will and those necessary in order to raise funds to pay taxes, debts, or costs of administration. In computing this deduction, he did not allow all losses on sales, and specifically he did not allow losses on sales made to raise money to pay bequests in cash. Thus of total losses on sale of estate property of $71,154, the referee allowed a deduction of $53,266."

FN 3. Section 13951 of the Revenue and Taxation Code states in pertinent part: "For the purpose of this part, the value of property included in any transfer subject to this part, ... is the market value of the property as of the date of the transferor's death."

FN 4. Section 13988, subdivision (e) is the predecessor regulation to section 13988.4.

FN 5. Opinions from two appeals were certified in Estate of Sharp (See 18 Cal. App. 3d 565 [95 Cal. Rptr. 816] and 257 Cal. App. 2d 851 [65 Cal. Rptr. 438].)

[Civ. No. 52896. Court of Appeals of California, First Appellate District, Division Two. March 3, 1982.]

ELFRIEDA MAITLAND, Plaintiff and Respondent, v. EMPLOYMENT DEVELOPMENT DEPARTMENT et al., Defendants and Appellants.

(Opinion by Rouse, Acting P. J., with Miller and Smith, JJ., concurring.)

COUNSEL

George Deukmejian, Attorney General, Thomas Warriner, Assistant Attorney General, and Charlton G. Holland, Deputy Attorney General, for Defendants and Appellants.

Peter F. Goldscheider for Plaintiff and Respondent.

OPINION

ROUSE, Acting P. J.

[1] This appeal involves the question whether an individual is eligible for unemployment benefits if she voluntarily terminates her employment after (1) receiving a job reclassification and reduction in salary, and (2) being advised by her supervisor that she would be eligible for unemployment insurance benefits if she quit her job.

The facts are undisputed: Plaintiff Elfrieda Maitland quit her job with Coherent, Inc., on February 1, 1980, having been employed by [130 Cal. App. 3d 333] that company for three months. Initially, Mrs. Maitland was hired by Coherent as an "A" quality assurance inspector at a pay rate of $6.50 an hour. Upon the completion of her three-month probationary period, Mrs. Maitland's supervisor informed her that she was to be reclassified as a "B" inspector and that her pay rate would be reduced from $6.50 to $6 an hour. Mrs. Maitland then inquired whether she would be eligible for unemployment benefits if she quit her job, and her supervisor assured her that she would.

Mrs. Maitland voluntarily terminated her employment on February 1, 1980, and filed an application for unemployment insurance benefits on February 5, 1980. Her application was denied by defendant Employment Development Department (department) on February 25, 1980, and plaintiff then obtained a hearing before an administrative law judge on March 31, 1980. That judge upheld the department's decision which held that plaintiff was ineligible for unemployment insurance benefits because she had quit her job without good cause. Plaintiff appealed to the California Unemployment Insurance Appeals Board (board), and in a decision mailed on July 3, 1980, the decision of the administrative law judge was affirmed.

Plaintiff then commenced this action against the department and the board, seeking a writ of mandate to compel the payment of unemployment insurance benefits. Based upon its review of the administrative record, the trial court found that the pay reduction from $6.50 to $6 an hour would have constituted a hardship to plaintiff and her family; also, that plaintiff was informed by a representative of her employer that if she quit her job due to this cut in pay, she would be entitled to receive unemployment insurance benefits. The court concluded that plaintiff had cause to leave her employment "based on her cut in pay and the incorrect information given to her by her employer." In view of this conclusion, the court expressly refrained from determining whether defendants were estopped from denying plaintiff's application for unemployment insurance benefits. The court granted plaintiff a peremptory writ of mandate compelling defendants to set aside and reconsider their decision to deny plaintiff unemployment insurance benefits. Department and the board had each appealed from this decision.

On appeal, each defendant takes the position that, as a matter of law, the trial court erred in holding that plaintiff had good cause for quitting [130 Cal. App. 3d 334] her job with Coherent, Inc. They point out that section 1256 of the Unemployment Insurance Code provides, in pertinent part, that "An individual is disqualified from unemployment compensation benefits if the director finds that he left his most recent work voluntarily without good cause ...."

They claim that the reduction in plaintiff's wages did not constitute good cause for voluntarily terminating her employment because the reduction was relatively insignificant, in that a drop in pay from $6.50 to $6 an hour amounts to only a 7-2/3 percent reduction in wages. Defendants also point out that, at the hearing before the administrative law judge, plaintiff testified that the reduction in wages, standing alone, would not have caused her to quit her job, without first finding other employment, had she known that she was ineligible for unemployment compensation benefits. In her brief, plaintiff concedes that "it may be true that the reduction of pay by itself may not have constituted good cause" for her to quit her job.

Support for defendants' position is found in Bunny's Waffle Shop v. Cal. Emp. Com. (1944) 24 Cal. 2d 735, 743 [151 P.2d 224], where the California Supreme Court held that a "substantial reduction in earnings" (in that instance a 25 percent wage cut) would generally be regarded as good cause for leaving employment. (P. 743.) Plaintiff has directed our attention to no authority, nor are we aware of any, for the proposition that a far smaller reduction in wages, such as plaintiff's 7-2/3 percent reduction, would constitute good cause for voluntarily leaving employment. The conclusion that such a reduction would not furnish good cause for leaving one's employment is especially compelling here in view of plaintiff's own testimony that the wage reduction would not have caused her to quit her job, without first obtaining other employment, but for her belief that she was eligible for unemployment compensation benefits.

The question remaining, then, is whether the reduction in plaintiff's wages, coupled with the representation by her supervisor that she would be eligible for unemployment insurance benefits if she quit her job, entitled her to such benefits. Perales v. Department of Human Resources Dev. (1973) 32 Cal. App. 3d 332, 340, footnote 8 [108 Cal. Rptr. 167], appears to be the only case containing language applicable to this issue. In dicta, the Perales court stated: "We can also imagine an atypical situation where a claimant himself states ... that he had become [130 Cal. App. 3d 335] unemployed voluntarily without good cause simply because he preferred receiving unemployment benefits to working; would anyone suggest that the department would be powerless to find the claimant disqualified?"

Here, plaintiff appears to bring herself precisely within this language by her own testimony at the hearing before the administrative law judge. She acknowledged that she would not have quit her employment with Coherent, Inc., without first obtaining other employment, merely because of the reduction in her wage rate, and that her primary reason for quitting her job consisted of her belief that she was eligible for unemployment compensation benefits. Such admission appears to demonstrate that plaintiff did not consider the wage reduction "good cause" for leaving her employment; further, that she merely wished to avail herself of the opportunity to obtain unemployment insurance benefits after leaving her job without good cause. Her conduct not only falls within the quoted language from the Perales case but also runs contrary to the purpose of the unemployment insurance system, which is to provide benefits for persons unemployed through no fault of their own and to act as a buffer against the sudden and unexpected loss of one's livelihood. (Unemp. Ins. Code, § 100; Zorrero v. Unemployment Ins. Appeals Bd. (1975) 47 Cal. App. 3d 434, 439 [120 Cal. Rptr. 855].)

One further point requires discussion. Although, as we have previously noted, the trial court expressly refrained from passing upon the issue of estoppel, plaintiff now asserts that defendants should be estopped from denying plaintiff unemployment compensation benefits because plaintiff's supervisor made a representation to the effect that she was entitled to such benefits. Plaintiff suggests that if her estoppel argument is rejected, employers will be encouraged to use promises of unemployment insurance benefits to induce unwanted employees to quit their jobs voluntarily, while their employers would avoid having their reserve accounts charged for unemployment insurance benefits.

The flaws in this argument are twofold. First, plaintiff was faced with only a relatively slight reduction in her wage rate, a fact which lends no support to her suggestion that her employer was attempting to induce her to quit her job. Secondly, eligibility for unemployment insurance benefits is determined by the appropriate state agency, and not by plaintiff's employer. Obviously, such agency was not bound by the representation of plaintiff's employer; hence plaintiff's reliance upon that [130 Cal. App. 3d 336] representation, without first checking with the department, cannot be deemed the sort of reasonable reliance which gives rise to an estoppel.

The judgment is reversed.

Miller, J., and Smith, J., concurred.