Bannon's Estate, Matter of

• Decision Date: 29 December 1976
• Docket Number: No. 2--775A160,2--775A160
• Citation: 171 Ind.App. 610,358 N.E.2d 215
• Parties: In the Matter of The ESTATE of Luther M. BANNON, Violet F. Bannon, Co-Executor and Co-Trustee, Merle Calvert, Co-Executor and Co-Trustee. . 1
• Court: Indiana Appellate Court

Page 215

358 N.E.2d 215

171 Ind.App. 610

In the Matter of The ESTATE of Luther M. BANNONViolet F. Bannon, Co-Executor and Co-TrusteeMerle Calvert, Co-Executor and Co-Trustee.

No. 2--775A160.

Court of Appeals of Indiana, First District. ¹

Dec. 29, 1976.

Rehearing Denied Feb. 7, 1977.

Theodore L. Sendak, Atty. Gen., Walter F. Lockhart, Deputy Atty. Gen., Indianapolis, for appellant.

Richard L. Gilliom, Stewart, Irwin, Gilliom, Fuller & Meyer, Indianapolis, for appellee.

LYBROOK, Judge.

The Inheritance Tax Division of the Department of Revenue(State) appeals the judgment of the Marion Probate Court that Violet F. Bannon was not required to pay any state inheritance tax on money she received following the death of her husband.We affirm.

The payment in question arose from a contract of employment, executed on June 26, 1969, between decedent Luther M. Bannon and Ra Dis Co., Inc.The provision which provided for the payment to Bannon's ($20,000.00) per annum for five (5) years,

'Bannon accepts employment with the Corporation for a period of ten (10) years, at a salary of Twenty Thousand Dollars ($20,000,00) per annum for five (5) years, beginning June 1, 1969, and for a salary of Ten Thousand Dollars ($10,000.00) per annum for a period of five (5) years beginning June 1, 1974.If Bannon should die before the end of the ten (10) year period described above, then, if his wife should survive him, Corporation agrees to pay to her Five Thousand Dollars ($5,000.00) per annum for the years remaining in said ten (10) year term but in no event to continue beyond her death.'

Until his death on June 25, 1972, Bannon remained with the corporation in an advisory capacity.Pursuant to the terms of the agreement, an annuity totalling $34,600 thus became payable to his widow for the remainder of the ten year period.

The probate court ruled on the attendant tax consequences in response to the State's Petition for Rehearing, Reappraisement and Redetermination of Inheritance and Transfer Tax and the estate's Motion for Partial Summary Judgment.The court concluded in part:

'1.The annuity from Ra-Dis-Co., Inc. in the amount of Thirty-four Thousand Six Hundred Dollars ($34,600) is non-taxable for the reason that there was no transfer of a property interest from decedent on payment or the obligation of payment of said annuity from Ra-Dis-Co., Inc. to decedent's widow.'

From this judgment, the State appeals.

The inheritance tax statute in effect at the time of decedent's death, IC 1971, 6--4--1--1 (Burns Code Ed.), reads in pertinent part as follows:

'A tax is hereby imposed, under the conditions and subject to the exemptions and limitations hereinafter described, upon all transfers, in trust or otherwise, of the following property, or any interest therein or income therefrom:

'When the transfer is from a resident of this state, of real property situated in this state, or of any tangible personal property except such as has an actual situs without this state, or of any and all intangible personal property wherever situated.

'All transfers enumerated in this section shall be taxable . . . if made by gift or grant intended to take effect in possession or enjoyment at or after the death of the transferor . . .'

'Transfer' is defined by IC 1971, 6--4--1--32 (Burns Code Ed.) to include 'the passing of property or any interest therein in possession or enjoyment, present or future by inheritance, descent, devise, bequest, grant, bargain, sale or gift, in the manner herein described or the exercise of the right of survivorship in cases of joint ownership.'

In determining whether the present transfer is taxable under this statute, we are guided by a number of cases from other jurisdictions which have dealt with related problems.²The cases are divided according to two distinct theories of taxation.³Under the 'receipt' or 'succession' theory, the taxable event is an enlargement of the beneficiary's interest at the transferor's death, regardless of whether the transferor retained an interest in the property during his lifetime.In contrast, under the 'ownership' or 'divestment' theory, property passing to a transferee at decedent's death will escape taxation if the decedent had no interest in it at his death.

The estate urges us to align our statute with the 'ownership' theory and to require, as prerequisites to taxation, (1) a transfer from decedent (2) of an interest in property which the decedent owned at death.As authority for its contention that this transfer fails to meet either requirement, the estate cites cases from 'ownership' jurisdictions.⁴The State, on the other hand, relies upon cases from 'receipt' jurisdictions to support the imposition of tax.⁵

We are of the opinion that our statute, on the whole, utilizes the 'ownership' theory.In each of the transfers specifically enumerated by the statute the decedent retained some control over the property.SeeState Department of Revenue, Inheritance Tax Division v. Estate of Powell (1975), Ind.App., 333 N.E.2d 92.Furthermore, the 'ownership' test reflects a basic distinction which underlies our inheritance tax system.The inheritance tax is directed toward transfers of property by will, by intestate succession, and by other such transfers that substitute for testamentary depositions.The death tax is not intended to apply to absolute inter vivos gifts.Armstrong v. State ex rel. Klaus(1919), 72 Ind.App. 303, 120 N.E. 717.The only meaningful distinction between an inter vivos gift and a testamentary gift is that in the latter the transferor enjoys the property throughout his life.SeeNote, The 'Transfer Intended' Clause in Indiana, Inheritance Tax, 35 Ind.L.J. 519(1960).

The decisive question, then, is whether the decedent had an interest in the property which passed to the beneficiary upon his death.In the case at bar the salary payable to decedent for his services must be distinguished from the annuity payable to his widow upon his death.The right to receive salary payments while alive during the ten year period was the only property right which decedent possessed under the agreement and that right ceased with his death.The decedent had no interest in the annuity which was payable to his widow.The payment was not a transfer from decedent, rather, it came directly from the corporation in response to a contract for valuable consideration.SeeIn re Estate of Dolbeer(1962), 117 Ohio App. 517, 193 N.E.2d 174;In re Estate of Kramer (Probate Ct.Ohio 1964), 30 Ohio Ops.2d 370, 1 Ohio Misc. 76, 203 N.E.2d 271.

Even if we accept the State's characterization of this arrangement as one involving deferred compensation, we are not persuaded that this fact, standing alone, qualifies as a sufficient property interest under the 'ownership' test.⁶The only reported case from an 'ownership' state to consider this question is Cameron Estate(1958), 15 Pa.Dist. & Co.R.2d 557.The corproation there entered into a contract with its employee to pay a deferred compensation of $50,000 over a period of ten...