City Bank Farmers Trust Co. v. Bowers

• Decision Date: 08 January 1934
• Docket Number: No. 61.,61.
• Citation: City Bank Farmers Trust Co. v. Bowers, 68 F.2d 909 (2nd Cir. 1934)
• Parties: CITY BANK FARMERS' TRUST CO. v. BOWERS.
• Court: U.S. Court of Appeals — Second Circuit

68 F.2d 909 (1934)

CITY BANK FARMERS' TRUST CO. v.BOWERS.

No. 61.

Circuit Court of Appeals, Second Circuit.

January 8, 1934.

Winthrop, Stimson, Putnam & Roberts, of New York City(William C. Chanler, Henry Steitz, and John E. Parsons, all of New York City, of counsel), for plaintiff.

Thomas E. Dewey, U. S. Atty., of New York City(Frank Chambers, Asst. U. S. Atty., of New York City, of counsel), for defendant.

Before MANTON, L. HAND, and CHASE, Circuit Judges.

L.HAND, Circuit Judge.

This is an action against a collector of internal revenue to recover estate taxes erroneously collected, tried upon stipulated facts before a judge, who gave judgment for the plaintiff for part of the amount claimed.The facts are as follows: The plaintiff's testatrix, Voronoff, was a citizen and resident of France who died in Paris in March, 1921.She had property real and personal both in the United States and elsewhere, of about $4,270,000, of which $435,000 was outside the United States; her total debts and administration expenses were somewhat over $1,000,000.Securities amounting to $1,049,000, pledged with a bank (the plaintiff), in the sum of $557,000, were among the American assets.In assessing the estate tax the commissioner included in the gross estate the total value of the pledged securities, instead of only the surplus after deducting the loans; and in allowing deductions, he followed section 403 (b)(1) of the Act of 1918(40 Stat. 1098), which in the case of a non-resident limited allowable deductions to 10 per cent. of the gross estate.The plaintiff paid the tax as assessed, and sued to recover the excess over a tax computed, first, by excluding from the gross estate the amount of the loans secured by the pledge; and, second, by allowing as deduction that share of the debts which the American assets bore to the gross estate both here and abroad.Its position is that the limit fixed by section 403 (b)(1) was unconstitutional; and that section 402 (a) meant to include only the surplus of the pledge in the gross estate.The judge ruled with the plaintiff on the first point, and against it on the second and both sides appealed.

The more troublesome question is the first, for the section undoubtedly fixed a standard, altogether unfair and unreasonable in its incidence, as Congress itself recognized in 1928.Section 401 (a) of the Act of 1928, 26 USCA § 1095 (a).Its unconstitutionality does not, however, inevitably follow.The argument is in two parts: First, that to ignore the decedent's debts in computing an estate tax is to levy a direct tax, not an excise, and is unconstitutional for that reason (section 9, art. 1); second, that even if the tax be an excise, the resulting inequality violates the Fifth Amendment.As to the first, the theory is that creditors do not succeed to the decedent's property by his death; they could collect before and they may equally collect thereafter; death is not the "generative source" of their right.Therefore, a succession tax based upon the gross estate, or indeed upon any part of the property which is required to pay creditors, is not a succession tax at all.Even so, it might be possible to defend the greater part of the tax at bar; for when a nonresident owns property outside the United States, Congress might perhaps require the executor to marshal the indebtedness first against the foreign assets, treating the property within the United States so relieved as passing by death.However, this would not here be enough, because the foreign assets would not pay the debts and other charges; and the larger question must be answered.

The argument proceeds that, since no excise may be levied upon the property which passes to creditors, the calculation of the succession tax upon what passes to legatees must not include property allocable to creditors, either in the base or in the determination of the rate.Frick v. Pennsylvania, 268 U. S. 473, 45 S. Ct. 603, 69 L. Ed. 1058, 42 A. L. R. 316, is said so to hold.In that casethe state tried to defend a succession tax levied on all the property of a resident inside and outside the state, on the theory that it might levy a tax upon the succession to the property within the state, calculated as though all the property was within it.But the court said no, because that would indirectly tax the property outside, though in Maxwell v. Bugbee, 250 U. S. 525, 40 S. Ct. 2, 63 L. Ed. 1124, a state had been allowed to use such property to fix the rate of taxation upon the succession to local property.In both cases the question was only of the Fourteenth Amendment; but Frick v. Pennsylvania, supra, 268 U. S. 473, 45 S. Ct. 603, 69 L. Ed. 1058, 42 A. L. R. 316, certainly did hold that a succession tax upon property within the power of a taxing state may not be computed by including within the base property beyond its power; and it seems to us to make no difference whether in the case of a state the property is beyond its borders, or in the case of the United States the tax is beyond its powers as defined by the Constitution.Thus the question cannot be avoided whether the succession to creditors is a proper subject for an excise.The defendant invokes that part of Frick v. Pennsylvania in which the court allowed the base to include property taken by the United States for its own estate taxes.The court did not say, however, that a tax upon the passage of that property was an excise; that question could not arise, and the case is no authority as to it.Nor do we see that Plummer v. Coler, 178 U. S. 115, 20 S. Ct. 829, 44 L. Ed. 998, is material.The point appears to be res integra.

It is of course true that death does not create the decedent's debts, as it does create the claims of legatees and next of kin.But the debts were the decedent's and he has died; how far they shall constitute claims against another person, his executor or his legatees, is obviously another question; the dead man's promises may bind them, or they may not; that is a question on which the law must speak, and its voice has never been unequivocal.Thus it by no means follows that death may not be an occasion on which to levy an excise.It would be hazardous to attempt a definition of that term; but we think it safe to say that it includes an event or transaction which determines legal relations, Knowlton v. Moore, 178 U. S. 41, 47, 20 S. Ct. 747, 44 L. Ed. 969; or the exercise of a single one of those powers whose aggregate makes up the concept of property, Bromley v. McCaughn, 280 U. S. 124, 50 S. Ct. 46, 74 L. Ed. 226.It will be enough, if the death of the debtor has a substantial legal effect upon the creditor's remedies or rights; if he cannot pursue the same remedies, or any remedies, or get recognition of his right, except through the intervention of the state.

Historically there can be no doubt that death had important results.The notion of a continuation of a dead man's personality came very slowly in the common law; representation was not easily evolved.Even today it is not universal; many duties die with the obligor.In early times the testator had even to direct his executor to pay debts; they were like legacies (II Pollock & Maitland, 341); and while by the end of the Thirteenth Century the action of debt lay against the executor(II Pollock & Maitland 345; III Holdsworth, 578, 579), it was limited to cases where the testator could not wage his law.Assumpsit did not follow till the Sixteenth Century, and very doubtfully even then, until Slade's Case (4 Coke 92 (b)), in 1602; (III Holdsworth, 451, 452); account was not possible until the Eighteenth Century; (III Holdsworth, 579); and though detinue came earlier, it was a most inadequate remedy.The complete remedies of creditors as we now know them, are the result of a long and tentative series of steps.

If, disregarding history, we look at the present position of creditors, the same thing is true.A dead man cannot be sued; his creditors must wait until his representative is appointed, or must get one appointed on their own motion; and though he may be sued, collection must await the distribution of the estate.All debts must be brought into hotchpot and share ratably.Back of this too lies a long and confused history, resulting in an active intervention of the court.So it seems to us that as matter of constitutional interpretation, it is not true to say that the passage of property to a decedent's representative may not be the occasion of an excise even upon so much of tthe property as must inevitably pass to creditors.

That, however, does not answer the second argument, drawn from the unfair discrimination of a tax reckoned on the gross estate; it may violate the Fifth Amendment, though an excise.We might find too great difficulties, if it were applied to residents; certainly its incidence would be a matter of pure accident; the legatees of a testator who left no debts would pay no more than those of one, most of whose assets were necessary to pay his debts.It is the distributees who feel the pinch of succession taxes, and it would be hard to find any rational justification for such a distribution of burdens.Moreover, the 10 per cent. allowance does not cure the evil; every decedent leaves some...