Estate of Fasken

Decision Date05 May 1977
Docket NumberS.F. 23409
Citation563 P.2d 832,19 Cal.3d 412,138 Cal.Rptr. 276
CourtCalifornia Supreme Court
Parties, 563 P.2d 832 ESTATE of Inez G. FASKEN, Deceased. Kenneth CORY, as State Controller, Petitioner and Appellant, v. David FASKEN, as Executor, etc., Objector and Respondent.

Myron Siedorf, Milton D. Harris, Edwin Rosenthal and William F. Seeley, San Francisco, for petitioner and appellant.

Sullivan, Roche & Johnson, Mullins, Wise & Dickman, Vincent J. Mullins and Richard H. Wise, Jr., and Norbert J. Dickman, San Francisco, for objector and respondent.

WRIGHT, Justice (Retired Chief Justice of the Supreme Court sitting under assignment by the Acting Chairman of the Judicial Council.)

The State Controller appeals from an order fixing inheritance taxes in the matter of the estate of Inez G. Fasken, who died in 1968 while a resident of California. Decedent devised and bequeathed her entire estate, consisting of real and tangible personal property located in California and Texas, to her son David Fasken, the executor herein. He objected to the report of the inheritance tax referee purporting to determine death taxes due pursuant to provisions of the Revenue and Taxation Code. The court sustained the objections and fixed the tax at an amount $463,858.00 less than that claimed by the Controller. The estate has paid the tax as so fixed.

At issue is the validity of the California procedure for calculation of that element of the tax which arises out of a federal 'credit' of a portion of the federal estate tax, when such credit is allocable to California and one or more other states. The California procedure is prescribed in a regulation which is set not in the margin. 1 We have concluded for reasons which follow that the regulation infringes jurisdictional limitations under federal due process concepts and that the trial court fixed the tax at its jurisdictional limit. We accordingly affirm the judgment.

Because this case springs from a complicated and evolving relationship between federal and state tax law which empowers California to 'pick-up' tax revenue made available through a federal credit, it is helpful in the ascertainment of congressional and legislative intent to review pertinent statutory and case law developments in this area.

Development of Rules Relative to ,'pick-up' Taxes

Since 1916 section 2001 of the Internal Revenue Code 2 has imposed a federal estate tax on all specifically nonexempt (see Int.Rev.Code, §§ 2011--2014, 2052--2056) property owned by persons residing in the United States at the time of their death. In the early years following enactment of the federal estate tax, a backlash of opposition emerged in Congress and among various other high placed government officials to the very concept of the federal government taxing a person's property at death. 3 Concurrent with this attitude of general resentment for the federal government's incursion into an area providing 'a traditional source of revenue to the states' (Turner, The Gross Estate and the Death Tax Credit (1971) 28 Wash. & Lee L.Rev. 254, 257 (hereafter cited as Turner)), several states nevertheless repealed long- standing death tax statutes, 4 'this being done to induce wealthy persons to move within their borders.' (Cogburn at p. 123.)

Congressional response took form in the Revenue Act of 1924 (ch. 234, § 301(b), 43 Stat. 253, 304) giving birth to what is now commonly referred to as the federal estate credit for state death taxes. (Int.Rev.Code, § 2011.) Section 2011, subdivision (a) of the Internal Revenue Code permits legal representatives of estate to deduct from the total federal estate tax obligation 5 a limited scheduled 6 credit for all death taxes actually paid 7 to any state on account of property taxable as part of the gross federal estate. 8 Architects of the credit clearly intended individual states to benefit from its creation, for section 2011 assures states a certain minimum of tax revenue at the expense of the federal treasury.

The original version of section 2011 set the federal state death tax credit at a maximum of 25 percent. Although a decedent's estate located in a state without a death tax would still incur the same federal liability as an estate situated in a state which imposed the tax, existence of the federal credit enabled all estates for the first time to share in receipt of federally assessed tax revenue merely by enacting or amending their existing laws to pick up the federal credit. 9 Despite this incentive for states to take advantage of available tax revenue, dilatory and even contrary legislative action by some states quickly dispelled any notion that the 25 percent credit would provide a panacea for alleviation of resentment to federal government involvement or elimination of interstate death tax competition. 10 One commentator explained the situation that prevailed following passage of the 25 percent credit in 1924: '(D)ue to the action of some states, it became apparent that if this matter were left solely to the states, competition would arise among the several states to revoke or lower their death taxes in an attempt to lure wealthy elders into those states with lower or non-existent death tax burdens.' (Turner, at pp. 257--258.) In 1926, therefore, Congress raised the federal tax credit to a maximum level of 80 percent (4 CCH Inheritance, Estate and Gift Tax Reporter, § 2500, p. 80,421) as a further attempt 'to induce states to enact laws imposing death taxes.' (Cogburn, at p. 124.)

By more than tripling the maximum available federal state death tax credit, Congress achieved a lasting solution to the twin problems of interstate death tax competition and general opposition to federal death taxation. 11 When state legislatures finally realized that the federal government actually intended to divert from its own treasury to individual state coffers vast sums of federally assessed tax revenue, the response was overwhelming: interstate death tax competition soon vanished, and at the present time every state in the nation except Nevada and the Dakotas levies death taxes which at least exhaust the state death tax credit. (4 CCH Inheritance, Estate and Gift Taxes Reporter, Multistate Compendium, pp. 70,111--70,633: 1100, p. 80,041.) Enactment of a state death tax credit enabling states to acquire all but 20 percent of estate tax revenues previously retained entirely by the federal government, moreover, placated critics of federal involvement in the death tax area by satisfying their 'clamor for abolition of Federal death taxation.' (Cogburn, at p. 125.) Having placated its critics, however, Congress wasted little time in enacting an additional estate tax not subject to any credit, and the current credit as now scheduled in Internal Revenue Code section 2011 results from a combination of the two estate taxes in the 1954 recodification of the Code with the credit never exceeding 16 percent of the combined tax. (See fn. 6, Ante.)

Obviously cognizant of federal determination to furnish states with a larger portion of estate tax revenue, our Legislature adopted a pickup tax in 1927 (Rev. & Tax.Code, §§ 13441, 13442) calculated to assure this state its full share of the credit for state death taxes. 12 If an inheritance tax obligation falls short of the maximum credit for state death taxes scheduled in section 2011 of the Internal Revenue Code, section 13441 of the Revenue and Taxation Code imposes a pick-up tax equal to the difference. Section 13441, moreover, has been construed in the absence of multistate claims to the federal credit as vesting the state with an independent right to receive the entire credit differential between the allowable 13 state death tax credit and state death taxes, with or without the benefit of the enabling authority of section 2011 of the Internal Revenue Code, irrespective of whether a decedent's estate waived the credit and paid the full estate tax to federal authorities, 14 and even though compliance with the state's demand forces the estate to assume the onus of double taxation. 15 (Estate of Good, supra, 213 Cal.App.2d 45, 48--50, 28 Cal.Rptr. 378; see also Estate of Callaway (1968) 263 Cal.App.2d 795, 798--801, 69 Cal.Rptr. 921; Estate of Amar (1967) 255 Cal.App.2d 404, 407--409, 63 Cal.Rptr. 444; accord Wells v. Gay (Fla.1952) 58 So.2d 690; State v. Wiess (1943) 141 Tex. 303, 171 S.W.2d 848; Matter of Thalmann (N.Y.1941) 177 Misc. 1055, 32 N.Y.S.2d 695.)

The Conflict in Claims to the State Death Tax Credit

Although Good, Amar, Callaway and other decisions by sister states firmly establish state individual entitlement to the full credit differential, even when both federal and state payments are thereby forced upon a taxpayer, these cases do not by themselves substantiate the Controller's present claim for unpaid taxes. The executor in the instant case does not dispute a state's authority to levy a pick-up tax covering the full credit differential when all tangible estate property is located in one state. He argues instead that California purports to tax only a pro rata share of the full credit differential in an estate having multistate property, but utilizes a constitutionally impermissible apportionment to determine that share.

The regulation urged by the Controller as warranting the challenged procedures was promulgated in its present form in 1945. It purports to implement the same federal objective of picking up tax revenue made available to states as do the statutes adopted by legislative action in 1927. It is concerned, however, with only those particular estates, like decedent's in the present case, which consist of both California and out-of-state property. The governing statutes, on the other hand, do not expressly deal with such particular situations. The regulation, accordingly, provides for the application of statutes in a particular situation in which the statutes are silent. 16

In the instant case California...

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