Transfer (Inheritance, Estate, Gift) Taxes

Transfer (Inheritance, Estate, Gift) Taxes.—As a state has authority to regulate transfer of property by wills or inheritance, it may base its succession taxes upon either the transmission or receipt of property by will or by descent.448 But whatever may be the justification of their power to levy such taxes, since 1905 the States have consistently found themselves restricted by the rule in Union Transit Co. v. Kentucky,449 which precludes imposition of transfer taxes upon tangible which are permanently located or have an actual situs outside the State.

448 Stebbins v. Riley, 268 U.S. 137, 140-41 (1925).

In the case of intangibles, however, the Court has oscillated in upholding, then rejecting, and again sustaining the levy by more than one State of death taxes upon intangibles. Until 1930, transfer taxes upon intangibles by either the domiciliary or the situs (but nondomiciliary) State, were with rare exceptions approved. Thus, in Bullen v. Wisconsin,450 the domiciliary State of the creator of a trust was held competent to levy an inheritance tax on an out-of-state trust fund consisting of stocks, bonds, and notes, as the settlor reserved the right to control disposition and to direct payment of income for life. The Court reasoned that such reserved powers were the equivalent to a fee in the property. Cognizance was taken of the fact that the State in which these intangibles had their situs had also taxed the trust.451

On the other hand, the mere ownership by a foreign corporation of property in a nondomiciliary State was held insufficient to support a tax by that State on the succession to shares of stock in that corporation owned by a nonresident decedent.452 Also against the trend was Blodgett v. Silberman,453 wherein the Court defeated collection of a transfer tax by the domiciliary State by treating coins and bank notes deposited by a decedent in a safe deposit box in another State as tangible property.454

In the course of about two years following the Depression, the Court handed down a group of four decisions which placed the stamp of disapproval upon multiple transfer taxes and—by inference—other multiple taxation of intangibles.455 The Court found that "practical considerations of wisdom, convenience and justice alike dictate the desirability of a uniform rule confining the jurisdiction to impose death transfer taxes as to intangibles to the State of the [owner's] domicile."456 Thus, the Court proceeded to deny the right of nondomiciliary States to tax intangibles, rejecting jurisdictional claims founded upon such bases as control, benefit, protection or situs. During this interval, 1930-1932, multiple transfer taxation of intangibles came to be viewed, not merely as undesirable, but as so arbitrary and unreasonable as to be prohibited by the due processclause.

449 199 U.S. 194 (1905) (property taxes).. The rule was subsequently reiterated in 1925 in Frick v. Pennsylvania, 268 U.S. 473 (1925). See also Treichler v. Wisconsin, 338 U.S. 251 (1949); City Bank Co. v. Schnader, 293 U.S. 112 (1934). In State Tax Comm'n v. Aldrich, 316 U.S. 174, 185 (1942), however, Justice Jackson, in dissent, asserted that a reconsideration of this principle had become timely.

450 240 U.S. 635, 631 (1916). A decision rendered in 1926 which is seemingly in conflict was Wachovia Bank & Trust Co. v. Doughton, 272 U.S. 567 (1926), in which North Carolina was prevented from taxing the exercise of a power of appointment through a will executed therein by a resident, when the property was a trust fund in Massachusetts created by the will of a resident of the latter State. One of the reasons assigned for this result was that by the law of Massachusetts the property involved was treated as passing from the original donor to the appointee. However, this holding was overruled in Graves v. Schmidlapp, 315 U.S. 657 (1942).

451 Levy of an inheritance tax by a nondomiciliary State was also sustained on similar grounds in Wheeler v. New York, 233 U.S. 434 (1914) wherein it was held that the presence of a negotiable instrument was sufficient to confer jurisdiction upon the State seeking to tax its transfer.

452 Rhode Island Trust Co. v. Doughton, 270 U.S. 69 (1926).

453 277 U.S. 1 (1928).

454 The Court conceded, however, that the domiciliary State could tax the transfer of books and certificates of indebtedness found in that safe deposit box as well as the decedent's interest in a foreign partnership.

455 First Nat'l Bank v. Maine, 284 U.S. 312 (1932); Beidler v. South Carolina Tax Comm'n, 282 U.S. 1 (1930); Baldwin v. Missouri, 281 U.S. 586 (1930); Farmer's Loan Co. v. Minnesota, 280 U.S. 204 (1930).

456 First National Bank v. Maine, 284 U.S. 312, 330-31 (1932).

The Court has expressly overruled only one of these four decisions condemning multiple succession taxation of intangibles. In 1939, in Curry v. McCanless,457 the Court announced a departure from the "doctrine, of recent origin, that the Fourteenth Amendment precludes the taxation of any interest in the same intangible in more than one State…" Taking cognizance of the fact that this doctrine had never been extended to the field of income taxation or consistently applied in the field of property taxation, the Court declared that a correct interpretation of constitutional requirements would dictate the following conclusions: "From the beginning of our constitutional system control over the person at the place of his domicile and his duty there, common to all citizens, to contribute to the support of government have been deemed to afford an adequate constitutional basis for imposing on him a tax on the use and enjoyment of rights in intangibles measured by their value… But when the taxpayer extends his activities with respect to his intangibles, so as to avail himself of the protection and benefit of the laws of another State, in such a way as to bring his person or . . . [his intangibles] within the reach of the tax gatherer there, the reason for a single place of taxation no longer obtains, . . . [However], the State of domicile is not deprived, by the taxpayer's activities, elsewhere, of its constitutional jurisdiction to tax."

In accordance with this line of reasoning, the domicile of a decedent (Tennessee) and the state where a trust received securities conveyed from the decedent by will (Alabama) were both allowed to impose a tax on the transfer of these securities. "In effecting her purposes," the testatrix was viewed as having "brought some of the legal interests which she created within the control of one State by selecting a trustee there, and others within the control of the other State, by making her domicile there." She had found it necessary to invoke "the aid of the law of both States and her legatees" were subject to the same necessity.458

457 307 U.S. 357, 363, 366-68, 372 (1939).

On the authority of Curry v. McCanless, the Court, in Pearson v. McGraw459 sustained the application of an Oregon transfer tax to intangibles handled by an Illinois trust company, although the property was never physically present in Oregon. Jurisdiction to tax was viewed as dependent, not on the location of the property in the State, but on the fact that the owner was a resident of Oregon. In Graves v. Elliott,460 the Court upheld the power of New York, in computing its estate tax, to include in the gross estate of a domiciled decedent the value of a trust of bonds managed in Colorado by a Colorado trust company and already taxed on its transfer by Colorado, which trust the decedent had established while in Colorado and concerning which he had never exercised any of his reserved powers of revocation or change of beneficiaries. It was observed that "the power of disposition of property is the equivalent of ownership, . . . and its exercise in the case of intangibles is . . . [an] appropriate subject of taxation at the place of the domicile of the owner of the power. Relinquishment at death, in consequence of the nonexercise in life, of a power to revoke a trust created by a decedent is likewise an appropriate subject of taxation."461

458 These statements represented a belated adoption of the views advanced by Chief Justice Stone in dissenting or concurring opinions which he filed in three of the four decisions during 1930-1932. By the line of reasoning taken in these opinions, if protection or control was extended to, or exercised over, intangibles or the person of their owner, then as many States as afforded such protection or were capable of exerting such dominion should be privileged to tax the transfer of such property. On this basis, the domiciliary State would invariably qualify as a State competent to tax as would a nondomiciliary State, so far as it could legitimately exercise control or could be shown to have afforded a measure of protection that was not trivial or insubstantial.

459 308 U.S. 313 (1939).

460 307 U.S. 383 (1939).

461 307 U.S. at 386. Consistent application of the principle enunciated in Curry v. McCanless is also discernible in two later cases in which the Court sustained the right of a domiciliary State to tax the transfer of intangibles kept outside its boundaries, notwithstanding that "in some instances they may be subject to taxation in other jurisdictions, to whose control they are subject and whose legal protection they enjoyed." In Graves v. Schmidlapp, 315 U.S. 657, 660, 661 (1942), an estate tax was levied upon the value of the subject of a general testamentary power of appointment effectively exercised by a resident donee over intangibles held by trustees under the will of a nonresident donor of the power. Viewing the transfer of interest in the intangibles by exercise of the power of appointment as the equivalent of ownership, the Court quoted from McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 429 (1819) to the effect that the power to tax "'is an incident of sovereignty, and is coextensive with that to which it is an incident."' Again, in Central Hanover Bank Co. v. Kelly, 319 U.S. 94 (1943), the Court approved a New Jersey transfer tax imposed on the occasion of the death of a New Jersey grantor of an irrevocable trust despite the fact that it was executed in New York, the securities were located in New York, and the disposition of the corpus was to two nonresident sons.

The costliness of multiple taxation of estates comprising intangibles can be appreciably aggravated if one or more States find that the decedent died domiciled within its borders. In such cases, contesting States may discover that the assets of the estate are insufficient to satisfy their claims. Thus, in Texas v. Florida,462 the State of Texas filed an original petition in the Supreme Court against three other states who claimed to be the domicile of the decedent, noting that the portion of the estate within Texas alone would not suffice to discharge its own tax, and that its efforts to collect its tax might be defeated by adjudications of domicile by the other States. The Supreme Court disposed of this controversy by sustaining a finding that the decedent had been domiciled in Massachusetts, but intimated that thereafter it would take jurisdiction in like situations only in the event that an estate was valued less than the total of the demands of the several States, so that the latter were confronted with a prospective inability to collect.

462 306 U.S. 398 (1939). Resort to the Supreme Court's original jurisdiction was necessary because in Worcester County Trust Co. v. Riley, 302 U.S. 292 (1937), the Court, proceeding on the basis that inconsistent determinations by the courts of two States as to the domicile of a taxpayer do not raise a substantial federal constitutional question, held that the Eleventh Amendment precluded a suit by the estate of the decedent to establish the correct State of domicile. In California v. Texas, 437 U.S. 601 (1978), a case on all points with Texas v. Florida, the Court denied leave to file an original action to adjudicate a dispute between the two States about the actual domicile of Howard Hughes, a number of Justices suggesting that Worcester County no longer was good law. Subsequently, the Court reaffirmed Worcester County, Cory v. White, 457 U.S. 85 (1982), and then permitted an original action to proceed, California v. Texas, 457 U.S. 164 (1982), several Justices taking the position that neither Worcester County nor Texas v. Florida was any longer viable.

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