Connor v. O'Hara

• Decision Date: 20 May 1947
• Docket Number: 141.
• Parties: CONNOR v. O'HARA.
• Court: Maryland Court of Appeals

53 A.2d 33

188 Md. 527

CONNOR v. O'HARA.

No. 141.

Court of Appeals of Maryland

May 20, 1947

Appeal from Circuit Court of Baltimore City; Emory H. Niles, Judge.

Proceeding between Joseph P. Connor, register of wills for Baltimore County, and Josephine Mary O'Hara, executrix of the estate of James F. O'Hara, Jr., and trustee under the last will and testament of James F. O'Hara, Jr. involving application of the Maryland inheritance tax in case of exercise of a power of appointment by an adopted son. From the decree rendered, Joseph P. Connor appeals.

Decree affirmed in part and reversed in part and cause remanded.

Hall Hammond, Atty. Gen., and Richard W. Case, Asst. Atty. Gen both of Baltimore, for appellant.

Simon E. Sobeloff and Bernard M. Goldstein, both of Baltimore, for appellee.

Before MARBURY, C.J., and DELAPLAINE, COLLINS GRASON, HENDERSON and MARKELL, JJ.

MARKELL Judge.

Sarah E. O'Hara, who died in 1933, by will left the residue of her estate in trust for James F. O'Hara her legally adopted son, for life, with remainder to such persons as he might by will appoint. He died in 1944. He left by will his entire estate, including all property over which he might have power of appointment, and especially the power given him under his mother's will, one-third to his wife and two-thirds to her in trust for his three children until each reaches 25 and then to each child absolutely.

The instant case presents two questions: (1) Should property passing by the exercise of a testamentary power of appointment be regarded, for the purpose of the Maryland inheritance tax, as property passing to the beneficiaries from the donor of the power or from the donee? (2) For the purpoes of the Maryland inheritance tax, for legitimate natural children of an adopted child regarded as lineal descendants of the adopting parent?

The value of the estate which passed by the exercise of the power was $556,754.83. The State (appellant) contends that (1) the property must be regarded as passing from the donor of the power and (2) the children can not be regarded as lineal descendants of the donor. Hence the shares of both the widow and the children of the donee are subject to the collateral inheritance tax, at 5% (the rate in effect when the donor died), a total tax of $27,887.74. The taxpayer (appellee) contends that (1) the property must be regarded as passing from the donee and (2) in any event the children must be regarded as lineal descendants of the donor. Hence the shares of both the widow and the children are subject only to the direct inheritance tax of 1% (in effect when the donee died), a total tax of $5,567.55. If the State's first contention and the taxpayer's second are correct, the widow's share, $185,584.94, is subject to the collateral inheritance tax of $9,229.25, and the children's shares are not subject to tax, as there was no direct inheritance tax in effect when the donor died.

The lower court held that both of the taxpayer's contentions are correct and the total tax is $5,567.55.

1. Notwithstanding the able opinion of the lower court and argument of counsel and the American Law Institute's construction of the Maryland statute, it seems clear to us that for Maryland inheritance tax purposes the same rule is applicable as for other purposes, viz., that property passes by exercise of a testamentary power of appointment, not from the donee of the power but from the donor. In Maryland this rule of property is not only as fully applicable as elsewhere, but has been carried further than in many other jurisdictions. In England, and generally but not universally in this country, this rule is qualified by a rule that when a general power of appointment is exercised, equity will regard the property appointed as part of the donee's assets for the payment of his creditors in preference to the claims of his voluntary appointees. In such cases the appointed property is treated as equitable, not legal, assets of the donee's estate, and may pass to the executor, not by virtue of his office but as a matter of convenience and because he represents the rights of creditors. United States v. Field, 1921, 255 U.S. 257, 262, 263, 41 S.Ct. 256, 65 L.Ed. 617, 18 A.L.R. 1461. In Maryland this English rule has been rejected. Decisions or dicta of this court indicate that a donee has no power (unless expressly conferred) to appoint for payment of his own debts. Balls v. Dampman, 69 Md. 390, 16 A. 16, 1 L.R.A. 545; Price v. Cherbonnier, 103 Md. 107, 110, 111, 63 A. 209; cf. Wyeth v. Safe Deposit & Trust Co., 176 Md. 369, 376, 4 A.2d 753; appointed property is not part of the donee's estate, not subject to the jurisdiction of the Orphans' Court, and not subject to payment of the donee's debts. Prince de Bearn v. Winans, 111 Md. 434, 472, 74 A. 626. In O'Hara v. O'Hara, 185 Md. 321, 44 A.2d 813, 816, 163 A.L.R. 1444, it was held, with respect to this will of Sarah E. O'Hara, that the donee of the testamentary power could not during his life bind himself by contract as to the exercise of the power, and that 'the subject-matter of the power' was not his property, but 'the property of his mother'.

Death taxes are not taxes on property, but on transfer of property, i. e., estate taxes on transmission by the decedent, inheritance taxes on receipt by the beneficiaries. Good Samaritan Hospital v. Dugan, 146 Md. 374, 126 A. 85. For present purposes the difference between estate and inheritance taxes is not material.

In United States v. Field, 1921, 255 U.S. 257, 41 S.Ct. 256, 65 L.Ed. 617, 18 A.L.R. 1461, it was held that, in a state where the English rule is in force, property passing under a general power of appointment is not property in which the donee had any interest within the meaning of the estate tax provisions of the Revenue Act of 1916, 39 Stat. 777. In 1917 the Estate Tax Regulations had provided that property passing under a general power of appointment was to be included as part of the estate of the donee. The Revenue Act of 1918, § 402(e), 40 Stat. 1097, expressly included 'property passing under a general power of appointment exercised by the decedent' within his estate. In Leser v. Burnet, 46 F.2d 756 (Circuit Court of Appeals, Fourth Circuit, 1931), it was held that in Maryland an otherwise 'general' power of appointment is not a 'general power of appointment' within the meaning of the federal estate tax law, Revenue Act 1921, § 402(e), 42 Stat. 279, because the power would not permit the appointment of the donee, his estate or his creditors. Cf. Morgan v. Commissioner, 309 U.S. 78, 82, 626, 60 S.Ct. 424, 84 L.Ed. 585, 1035. In Helvering v. Safe Deposit & Trust Co., 316 U.S. 56, 62 S.Ct. 925, 86 L.Ed. 1266, 139 A.L.R. 1513, it was held that an unexercised power of appointment is not an 'interest' in the property subject to the power. The Revenue Act of 1942, § 403, 26 U.S.C.A. Int.Rev.Acts, page 330, made property subject to a power of appointment (not limited within specified classes) whether exercised or not, part of the estate of the donee and permitted the donee, during his life, to release the power in order to avoid the tax. The Act of 1943, ch. 870, Code Supp.1943, Art. 93, secs. 345A-345C, purports to authorize such releases, in whole or in part, of powers of appointment. Whether the decision in Leser v. Burnet, supra, is in accord with Maryland law, and whether a donee may validly release his power under the Act of 1943, are questions on which we intimate no opinion. For thirty years the relation of the federal estate tax to property passing under a testamentary power of appointment has thus been, particularly in Maryland, a subject of controversy, administrative rulings, legislation and litigation.

Throughout this period and ever since 1844, when the Maryland collateral inheritance tax was established, there has been no such uncertainty as to the Maryland inheritance tax, but an unbroken administrative recognition that for tax purposes, as for other purposes, property passing under a power of appointment is regarded as received from the donor of the power, not from the donee. It was so ruled by Judge Henderson (when Deputy Attorney General or Assistant Attorney General), (1940) 25 Op. Atty. Gen. 674; (1937) 22 Op.Atty.Gen. 738; (1937) 22 Op.Atty.Gen. 698 and by the Attorney General's office before and since, (1932) 17 Op.Atty.Gen. 395; (1935) 20 Op.Atty.Gen. 882; (1940) 26 Op.Atty.Gen. 438; (1945) 30 Op.Atty.Gen. 165. In legislation and in opinions of this court property passing under a power of appointment has been considered like other contingent remainders. Fisher v. State, 1907, 106 Md. 104, 66 A. 661; Safe Deposit & Trust Co. of Baltimore v. Bouse, 1943, 181 Md. 351, 29 A.2d 906.

The lower court quotes a remark by Chief Judge Bond in Darnall v. Connor, 1931, 161 Md. 210, 213, 155 A. 894, 895: 'The rule that the exercise of a power of

disposition relates back and dates from a previous deed creating the power does not affect the time of taking here. Never a rule for all purposes, it is commonly denied application under inheritance tax statutes.' This remark was not the basis of the decision, as it was noted in the next sentence that there was no power 'created by the previous deed', only a power 'reserved from that deed.' The remark had reference to the factor of time or 'date', which in the doctrine of 'relation back' is only a minor factor, and for tax purposes is usually dealt with by legislatures and courts as a statutory detail of the subject of contingent remainders. Cases cited by Judge Bond relate to use for taxation of criteria different from rules of property, and particularly to taxation of transfer of property by exercise (or nonexercise) of a power of appointment, by a statute in force (or a...