ESTATE OF WARD

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No. 13109 I N THE SUPREME COURT OF THE STATE OF M N A A OTN 1975 T N THE MATTER OF THE ESTATE OF GRETCHEN G. WARD, Deceased. Appeal from: D i s t r i c t Court o f t h e S i x t h J u d i c i a l D i s t r i c t , Honorable J a c k Do Shanstrom, Judge p r e s i d i n g . Counsel of Record: For A p p e l l a n t : R o b e r t W. Corcoran a r g u e d , Helena, Montana For Respondent : Davidson, Veeder, R o b e r t s and Baugh, B i l l i n g s , Montana David A. Veeder a r g u e d , B i l l i n g s , Montana Submitted : Decided: Fi].ed: ]ti 9/kj November 10, 1975 OEC - 3 1975 Mr. J u s t i c e Frank I . Haswell d e l i v e r e d t h e Opinion o f t h e C o u r t . T h i s i s a n a p p e a l by t h e Montana Department of Revenue from a n o r d e r of t h e d i s t r i c t c o u r t , P a r k County, d e t e r m i n i n g a n i n h e r i t a n c e t a x o f $37,298.09 i n t h e Gretchen G. Ward e s t a t e . A t i s s u e i s whether t h e v a l u e o f E n g l i s h t r u s t p r o p e r t y c o n s i s t i n g of s t o c k s and bonds s u b j e c t t o d e c e d e n t ' s s p e c i a l power of appointment i s t a x a b l e under Montana i n h e r i t a n c e t a x laws. The d i s t r i c t c o u r t h e l d i t n o n t a x a b l e . W reverse. e Decedent i s Gretchen G. Ward who d i e d d o m i c i l e d i n Mont a n a on May 8 , 1973. H e r w i l l was a d m i t t e d t o p r o b a t e i n t h e d i s t r i c t c o u r t of Park County, Montana. During t h e c o u r s e o f p r o b a t e , a d i s p u t e a r o s e between t h e Montana Department of Revenue and t h e e x e c u t o r s of h e r e s t a t e o v e r t h e amount of s t a t e i n h e r i t a n c e t a x e s owing. The c r u x of t h e d i s p u t e w a s whether t h e v a l u e of c e r t a i n E n g l i s h t r u s t p r o p e r t y o v e r which d e c e d e n t h e l d a s p e c i a l power o f a p p o i n t m e n t s h o u l d be i n c l u d e d i n h e r g r o s s est a t e s u b j e c t t o Montana i n h e r i t a n c e t a x e s . The e x e c u t o r s c l a i m e d i t s h o u l d n o t , e x c l u d e d i t , and r e t u r n e d a g r o s s t a x a b l e e s t a t e o f $926,864.30 and a n i n h e r i t a n c e t a x o f $37,298.09. The Depart- ment o f Revenue contended t h a t t h e g r o s s t a x a b l e e s t a t e s h o u l d be i n c r e a s e d by $355,274.68, t h e value of t h e English t r u s t property on t h e d a t e o f d e c e d e n t ' s d e a t h , and t h a t a n a d d i t i o n a l i n h e r i t a n c e t a x o f $27,421.96 was due t h e s t a t e . D e c e d e n t ' s f a t h e r , George G e e , w a s a l i f e l o n g r e s i d e n t o f England and had n e v e r been a r e s i d e n t o f Montana o r t h e United States. He e s t a b l i s h e d a t r u s t under t h e t e r m s of h i s w i l l and p r o v i d e d t h a t a l l t r u s t income was t o be p a i d d e c e d e n t d u r i n g h e r lifetime. Mr. G e e ' s w i l l a l s o g r a n t e d d e c e d e n t a s p e c i a l power of appointment o v e r t h e c o r p u s of t h e t r u s t , i . e . a l i m i t e d power t o d i s p o s e of t h e t r u s t p r o p e r t y . t o dispose of t h e corpus Decedent was g i v e n t h e power " * * * t o h e r c h i l d r e n o r more remote i s s u e l i v i n g a t her death c o d i c i l appoint * * *: * * * a s s h e may by deed o r w i l l o r b u t i f decedent d i d n o t e x e r c i s e such power o f appointment t h e c o r p u s was t o be d i s t r i b u t e d upon h e r death " * * * among such c h i l d r e n o r r e m o t e r i s s u e i n e q u a l shares per s t i r p e s * * *." Decedent c o u l d n o t a p p o i n t t h e c o r p u s t o herself o r her e s t a t e . Decedent d i e d w i t h o u t e x e r c i s i n g h e r power o f a p p o i n t ment. P u r s u a n t t o M r . Gee's w i l l , t h e c h i l d r e n and more remote i s s u e e n t i t l e d t o t h e corpus of t h e t r u s t a r e : William George Ward, son; Gretchen Ward D'Ewart, d a u g h t e r ; J e a n Ward C l o s e , d a u g h t e r ; and Wanda K . Swainson, g r a n d d a u g h t e r . The t r u s t p r o p e r t y h a s always been p h y s i c a l l y s i t u a t e d i n England. I t h a s been a d m i n i s t e r e d i n England i n a c c o r d a n c e with English l a w . income t a x e s . I t h a s been s u b j e c t e d t o E n g l i s h e s t a t e and The t r u s t p r o p e r t y was s u b j e c t t o d i s t r i b u t i o n under t h e t e r m s o f t h e t r u s t p u r s u a n t t o t h e l a w s o f England. Following h e a r i n g and submission o f b r i e f s , t h e d i s t r i c t c o u r t h e l d , i n e f f e c t , t h a t t h e v a l u e o f t h e E n g l i s h t r u s t prope r t y was n o t s u b j e c t t o Montana i n h e r i t a n c e t a x e s and d e t e r m i n e d t h e inheritance t a x accordingly. From t h i s o r d e r , t h e Department of Revenue a p p e a l s . The i s s u e s on a p p e a l c a n be summarized i n t h i s manner: (1) Is t h e v a l u e o f t h e E n g l i s h t r u s t p r o p e r t y exempt from Montana i n h e r i t a n c e t a x e s by t r e a t y between t h e United S t a t e s and t h e United Kingdom, 60 S t a t . 1391? ( 2 ) Is s e c t i o n 91-4404, R.C.M. 1947, o f t h e Montana i n - h e r i t a n c e t a x law u n c o n s t i t u t i o n a l a s a p p l i e d t o t h i s c a s e ? ( 3 ) I f n o t , s h o u l d c r e d i t be g i v e n f o r payment o f E n g l i s h d e a t h t a x e s a g a i n s t t h e Montana i n h e r i t a n c e t a x ? The e x e c u t o r ' s f i r s t c o n t e n t i o n i s t h a t Montana h a s no j u r i s d i c t i o n t o l e v y an i n h e r i t a n c e t a x on t h e E n g l i s h t r u s t p r o p e r t y under t h e p r o v i s i o n s of a t a x t r e a t y between t h e United S t a t e s and t h e United Kingdom. T h i s t r e a t y i s found i n 60 S t a t . 1391 and was proclaimed by t h e P r e s i d e n t on J u l y 30, 1946. Its s t a t e d purpose is: " * * * t h e a v o i d a n c e o f d o u b l e t a x a t i o n and t h e prevention of f i s c a l evasion with r e s p e c t t o t a x e s on t h e e s t a t e s of d e c e a s e d p e r s o n s * * *". The t a x e s s u b j e c t t o t h e t r e a t y a r e : " ( a ) I n t h e United S t a t e s o f America, t h e F e d e r a l e s t a t e t a x , and ( b ) I n t h e United Kingdom o f Great B r i t a i n and N o r t h e r n I r e l a n d , t h e e s t a t e d u t y imposed i n G r e a t Britain". A r t . I , Sec. (1). The t r e a t y a p p l i e s " * * * t o any o t h e r t a x e s of a s u b s t a n t i a l l y s i m i l a r c h a r a c t e r imposed by e i t h e r C o n t r a c t i n g P a r t y subsequently t o t h e d a t e o f s i g n a t u r e o f t h e p r e s e n t Convention o r by t h e government o f any t e r r i t o r y t o which t h e p r e s e n t Convention a p p l i e s under A r t i c l e V I I I o r A r t i c l e IX". Art. I(2). A r t i c l e V I I I pro- v i d e s a procedure f o r t h e extension o r l i m i t a t i o n of t h e scope of t h e t r e a t y t o e i t h e r c o n t r a c t i n g p a r t y ' s " * * * colonies, overseas t e r r i t o r i e s , protectorates, o r t e r r i t o r i e s i n respect of which it e x e r c i s e s a mandate, which imposes t a x e s s u b s t a n t i a l l y s i m i l a r i n c h a r a c t e r t o t h o s e which a r e t h e s u b j e c t o f t h e p r e s e n t Convention.* * *" Article I X relates entirely t o estate duties imposed i n N o r t h e r n I r e l a n d . The t r e a t y h a s n o t been e x t e n d e d t o cover s t a t e i n h e r i t a n c e t a x e s s i n c e i t s inception. The t r e a t y a t i t s i n c e p t i o n d i d n o t c o v e r s t a t e i n h e r i tance taxes. The Commissioner of I n t e r n a l Revenue o f t h e United S t a t e s , w i t h a p p r o v a l of t h e S e c r e t a r y o f t h e T r e a s u r y , a d o p t e d r e g u l a t i o n s implementing t h e t r e a t y , among which was t h e f o l l o w ing provision: "The p r o v i s i o n s o f t h e c o n v e n t i o n a r e r e s t r i c t e d t o t h e e s t a t e t a x imposed by t h e United S t a t e s , t h e e s t a t e d u t y imposed i n G r e a t B r i t a i n , and t h e e s t a t e d u t y imposed i n Northern I r e l a n d , and do n o t comprehend any o f t h e e s t a t e , i n h e r i t a n c e , l e g a c y , and s u c c e s s i o n t a x e s imposed by t h e S t a t e s ~erritories,the District of Columbia, and possessions of the United States or the legacy and succession duties imposed in Great Britain and Northern Ireland. (Articles I and IX of the Convention.)" Treasury Dept. Regulations, Sec. 82-102. Thus the tax treaty has no application to Montana's inheritance taxes, and the provisions of the treaty are irrelevant to any issue in the instant case. The principal issue is whether the application of section 91-4404, R.C.M. 1947, to the facts of this case violates the "due process" clause of the Federal and State Constitutions. In analyz- ing this question we find no basis for any distinction between the "due process" clause in the Federal Constitution and that in the State Constitution as applied to this issue. The fundamental contention of the Department of Revenue is that domicile alone is a constitutionally permissible basis for imposing an inheritance tax here, and there is no distinction as to taxability between a general or special power of appointment, whether exercised or not exercised. The ultimate conten- tion of the executors on the other hand is that there are only two constitutionally permissible bases on which a domiciliary state can impose an inheritance tax on intangibles located in a foreign country, viz. the "ownership" principle and the "benefit" principle, neither of which is satisfied under the facts of this case. Section 91-4404 provides: "Transfers under power of appointment. Whenever any person or corporation shall exercise a power of appointment derived from any disposition of property, made either before or after the passage of this act, such appointment, when made, shall be deemed a transfer taxable under the provisions of this act, in the same manner as though the property to which such appointment relates belonged absolutely to the donee of such power, and had been bequeathed or devised by such donee by will; and whenever any person or corporation possessing such a power of appointment so derived shall omit or fail to exercise the same within the time provided therefor, in whole or in part, a transfer taxable under the provisions of this act, shall be deemed to take place to the extent of such omission or failure, in the same manner as thouqh the persons or corporations thereby becoming entitled to the possession or enjoyment of the property to which such power related, had succeeded thereto by a will of the donee of the power failing to exercise such power, takinq effect at the time of such omission or failure." (Emphasis supplied.) A review of the broad constitutional principles applicable to state inheritance taxation of intangibles is appropriate at the outset. Rights in intangibles are not related to physical things and the power of the government over them cannot be exercised through control over any physical thing whose situs can be fixed in one place; rights in intangibles are but relationships between persons which the law recognizes by attaching to them certain sanctions enforceable in the courts; they cannot be dissociated from the persons from whose relationships they are derived. Curry v. McCanless (1939), 307 U.S. 357, 59 S.Ct. 900, 83 L ed 1339. The constitutional and jurisdictional basis for the imposition of a state inheritance tax on intangibles is the state's control over the person and estate of its domiciliary and his duty to contribute to the support of the government there. Central Hanover Bank Co. v. Kelly (1943), 319 U.S. 94, 63 S.Ct. t 2945, 87 L ed 1243%; Graves v. Schmidlapp (1942), 315 U.S. 657, 62 r8 S.Ct. 870, 86 L ed 1097. The imposition of a state inheritance tax on intangibles on this basis does not violate the "due process" clause of the United States Constitution. Graves v. Schmidlapp, supra; Central Hanover Bank Co. v. Kelly, supra. Nor does the imposition of an inheritance tax by another state render an inheritance tax of the domiciliary state constitutionally impermissible. Curry v. McCanless, supra. The right of a state to impose an inheritance tax on a power of appointment, i.e. a right to control the disposition of property, is constitutionally well established. Bullen v. Wisconsin (1916), 240 U.S. 625, 36 S.Ct. 473, 60 L ed 830; Saltonstall v. Saltonstall (1928), 276 U.S. 260, 48 S.Ct. 225, 72 L ed 565; Curry v. McCanless, supra; Graves v. Elliott (1939), 307 U.S. 383, 59 S.Ct. 913, 83 L ed 1356; Whitney v. Tax Commission (1940)r309 U.S. 530, 60 S.Ct. 635, 84 L ed 909; Graves v. Schmidlapp, supra. A power of appointment over property is equiv- alent to ownership of the property for state inheritance tax purposes. Bullen v. Wisconsin, Graves v. Elliott, Curry v. Mc- Canless, supra. Thus, the value of the property is a proper measure of a state inheritance tax. Graves v. Elliott, supra. A state may constitutionally impose an inheritance tax on a general (unlimited) power of appointment over intangibles which is exercised. Saltonstall v. Saltonstall, Curry v. McCanless, Graves v. Schmidlapp, supra. A state may also constitutionally impose an inheritance tax on a general power of appointment over intangibles which is not exercised. Graves v. Elliott, supra. And a state may constitutionally impose an inheritance tax on an exercised special power of appointment, i.e. where the power of disposition over the property cannot be used to transfer the property to the holder of the power of appointment or his estate. Whitney v. Tax Commission (1940), 309 U.S. 530, 60 S.Ct. 653, 84 L ed 909. As far as we have been able to determine, there is no United States Supreme Court ruling on the constitutionality of a state inheritance tax on an unexercised special power of appointment. As we understand it, the executors do not attack the constitutionality of P4ontanaVsstatute imposing such an inheritance tax on its face. Instead, they contend that the imposition of such inheritance tax as applied to the instant case violates "due process", principally because the sole contact between the state of Montana and the English trust property is the domicile of a decedent who did not exercise her special power of appointment and that such contact is an insufficient basis for imposing an inheritance tax. There are two decisions of state supreme courts on this issue reaching opposite conclusions. The Colorado Supreme Court upheld the constitutionality of such inheritance taxation, People v. Cooke (1962) 150 Colo. 52, 370 P.2d 896, 900, while the Ohio Supreme Court denied the state's power, Schneider v. Laffoon (1965), 4 Ohio St.2d 89, 212 N.E.2d 801. In Cooke, a Colorado domiciliary held a special power of appointment over intangibles in a New York trust. She died with- out exercising her special power of appointment, expressly providing in her will that she did not intend to exercise it. The trust property, none of which was physically situated in Colorado, was distributed to her children under the provisions of the New York trust. Colorado assessed an inheritance tax on the entire value of the New York trust property under a statute essentially the same as Montana's. The Colorado Supreme Court held such inheri- tance taxation did not violate the "due process" clause of either the Federal and State Constitution. The rationale of the Colorado Court is summarized in the following language: "We fail to perceive a distinction between the situation which arises from the non-exercise of a general power and that which arises from the non-exercise of a special power. In either case, beneficiaries named in the trust receive their bounty by the inaction of the decedent. The failure to act affects the course of succession just as fully as if the power had been exercised, and until the failure is complete the succession is not fully determined. Where the donee of the power of appointment holds the power, he is in control of the succession. He can allow it to go to the persons named in the trust or he can appoint others within the limits of the power of appointment--limits which, by the way, the donee in this case imposed upon herself." In Schneider, an Ohio domiciliary held a special power of appointment over intangibles in a Kentucky trust. The trust was created by a person who was never a resident of Ohio, the trust property was always outside Ohio in the custody of nonresident trustees, the donee of the power of appointment had no power to appoint any of the trust property to herself or her estate and could only exercise her power of appointment inter vivos in writing signed by her and delivered to a nonresident trustee. She did not exercise her special power of appoint- ment and the trust property apparently passed to two children under the provisions of the Kentucky trust. Under an inheri- tance tax statute similar to that of Montana, the Ohio Supreme Court held that neither the exercise nor the nonexercise of the special power of appointment by its domiciliary was taxable as a succession. The gist of its rationale was that imposition of an inheritance tax under the facts of the case was unconstitutional where succession to the trust property was not dependent on Ohio law and no privilege by which the property passed was conferred by Ohio law. While some differences exist in the facts of the two cases, they are unimportant to the divergent principles on which the two decisions rest. As applied to inheritance taxation of a special power of appointment over intangibles in a foreign trust, Colorado recognizes domicile alone as a constitutional basis and holds the right to control disposition equivalent to ownership; Ohio denies constitutionality based on domicile alone, requiring some benefit or privilege to be accorded by the laws of the domiciliary state. We consider the Colorado case the better reasoned and more in accord with the constitutional principles enunciated by the United States Supreme Court. Domicile has long been recog- nized as a constitutional basis for inheritance taxation without r e g a r d t o whether s u c c e s s i o n was e f f e c t e d under t h e laws of t h e s t a t e of d o m i c i l e . supra. Curry v . McCanless, Graves v . E l l i o t t , For p u r p o s e s of e s t a t e and i n h e r i t a n c e t a x a t i o n t h e power t o d i s p o s e o f p r o p e r t y a t d e a t h i s t h e e q u i v a l e n t of ownership. supra. Graves v . Schmidlapp, s u p r a ; Graves v . E l l i o t t , Although b o t h Schmidlapp and E l l i o t t i n v o l v e d a n un- e x e r c i s e d g e n e r a l power of a p p o i n t m e n t , a n u n e x e r c i s e d s p e c i a l power o f appointment i n v o l v e s no less t h e power t o d i s p o s e o f p r o p e r t y a t d e a t h a l b e i t t o a more l i m i t e d e x t e n t . The power t o c o n t r o l t h e d i s p o s i t i o n of p r o p e r t y a f t e r d e a t h i s t h e t a x a b l e e v e n t , and t h i s c o n t r o l i s a s e f f e c t i v e l y m a i n t a i n e d by t h e n o n e x e r c i s e of a s p e c i a l power o f a p p o i n t m e n t a s by i t s e x e r cise. I n e i t h e r c a s e decedent determines t h e u l t i m a t e disposi- t i o n of t h e p r o p e r t y and t h e c o u r s e of s u c c e s s i o n . For t h e s e r e a s o n s we h o l d t h a t "due p r o c e s s " i s n o t v i o l a t e d by r e q u i r i n g t h e i n c l u s i o n o f t h e v a l u e o f t h e E n g l i s h t r u s t p r o p e r t y on t h e d a t e of d e c e d e n t ' s d e a t h i n t h e t a x a b l e e s t a t e o f Gretchen G. Ward under s e c t i o n 91-4404. The f i n a l c o n t e n t i o n o f t h e e x e c u t o r s i s t h a t i n any e v e n t t h e e s t a t e i s e n t i t l e d t o c r e d i t i n t h e amount o f t h e E n g l i s h d e a t h d u t y p a i d a g a i n s t t h e Montana i n h e r i t a n c e t a x . The answer simply i s t h a t t h e r e i s no l a w p e r m i t t i n g s u c h c r e d i t . As p r e v i o u s l y set f o r t h , t h e t a x t r e a t y between t h e United S t a t e s and t h e United Kingdom ( 6 0 S t a t . 1391) i s i n a p p l i c a b l e . The Montana i n h e r i t a n c e t a x law l i m i t s t a x c r e d i t s t o i n h e r i t a n c e t a x e s p a i d t o o t h e r s t a t e s and t e r r i t o r i e s of t h e United S t a t e s . S e c t i o n 91-4412, R.C.M. 1947, i s a s f o l l o w s : " C r e d i t a l l o w a n c e on i n h e r i t a n c e t a x e s p a i d by r e s i d e n t d e c e d e n t s t o o t h e r s t a t e s . The t a x imposed by s e c t i o n 91-4401 t o 91-4411 s h a l l , a s t o - a r e s i d e n t o f t h e s t a t e o f Montana who d i e d d o m i c i l e d i n Montana, be c r e d i t e d w i t h t h e amount of any v a l i d i n h e r i t a n c e , e s t a t e , l e g a c y o r s u c c e s s i o n t a x e s a c t u a l l y p a i d t o any s t a t e o r t e r r i t o r y of t h e United S t a t e s [ o t h e r t h a n t h e s t a t e of Montana], o r t o t h e D i s t r i c t o f Columbia. P r o v i d e d , however, t h a t t h e amount t o be s o c r e d i t e d s h a l l i n no e v e n t exceed t h a t amount which t h e r e s i d e n t d e c e d e n t was t a x e d on t h a t p r o p e r t y i n Montana." (Emphasis s u p p l i e d . ) There a r e no o t h e r p r o v i s i o n s o f l a w on which t o b a s e a t a x c r e d i t . W e have n o t e d t h e s u b o r d i n a t e arguments and c o n t e n t i o n s o f t h e e x e c u t o r s , f i n d them t o be w i t h o u t m e r i t , and deem it unn e c e s s a r y t o d i s c u s s them i n t h i s o p i n i o n . W have answered t h e e p r i n c i p a l contentions of t h e executors with t h e reasons f o r our rulings. The o r d e r o f t h e d i s t r i c t c o u r t i s r e v e r s e d . The c a u s e i s remanded t o t h e d i s t r i c t c o u r t w i t h d i r e c t i o n s t o i n c l u d e a n a d d i t i o n a l $355,274.68 v a l u a t i o n i n d e c e d e n t ' s t a x a b l e e s t a t e , t o i n c r e a s e t h e i n h e r i t a n c e t a x owing t h e s t a t e o f Montana by a n a d d i t i o n a l $27,421.96 by r e a s o n t h e r e o f , and t o e n t e r a p p r o p r i a t e o r d e r s f o r d e t e r m i n a t i o n and payment of t h e t o t a l amount o f t h e Montana i n h e r i t a n c e t a x , s u b j e c t t o d i s c o u n t a s p r o v i d e d by l a w , c o n s i s t e n t with t h i s opinion. Justice i i' Chief J u s t i c e

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