Estate of Mears

• Decision Date: 23 March 1979
• Citation: 90 Cal.App.3d 885,153 Cal.Rptr. 566
• Court: California Court of Appeals Court of Appeals
• Parties: ESTATE OF Claire M. MEARS, Deceased. Kenneth CORY, Controller of the State of California, Petitioner and Appellant, v. Alfred L. BROWN, Objector and Respondent. Civ. 43653.

Page 566

153 Cal.Rptr. 566

90 Cal.App.3d 885

ESTATE OF Claire M. MEARS, Deceased.

Kenneth CORY, Controller of the State of California, Petitioner and Appellant, v. Alfred L. BROWN, Objector and Respondent.

Civ. 43653.

Court of Appeal, First District, Division 2, California.

March 23, 1979.

Myron Siedorf, Edwin Rosenthal, William F. Seeley, Inheritance Tax Attys., San Francisco, for petitioner and appellant.

H. Stanton Orser, Garrison, Townsend & Hall, San Francisco, for objector and respondent.

ROUSE, Associate Justice.

The principal question presented by this appeal is whether section 13851 of the Revenue and Taxation Code is constitutional. ¹ That section provides for an unconditional exemption from inheritance taxation for intangible personal property owned by residents of the United States living outside of California. The exemption is extended to residents of foreign countries only on condition that the country of residence (1) impose a like tax, and (2) exempt residents of California from such tax. The question set before us for resolution is whether section 13851 denies nonresidents of the United States equal protection of the law because such nonresidents are governed by a different inheritance tax exemption than United States residents living outside of California. We hold that it does not.

Decedent Claire M. Mears died testate in 1974, a resident of Mexico and citizen of the United States. At the time of her death, Mexico imposed no inheritance tax on intangibles owned by residents or nonresidents. ² She left to Alfred L. Brown, objector and respondent in this case, and to others, the corpora of two revocable trusts held in California. The corpora of the trusts consisted of shares of stock in various corporations, government bonds and notes, and a bank account. The inheritance tax referee reported the clear market value of the trusts at $877,578. Because Mexico imposed no inheritance tax on property of this nature, the referee reported a total California inheritance tax due of $119,479, in accordance with the provisions of section 13851.

Brown filed objections to the referee's findings, contending, Inter alia, that subjecting the intangible personalty of a deceased, nonresident citizen of the United States to an inheritance tax while unconditionally exempting from such a tax the same property of a deceased resident of another state of the United States, constituted an unreasonable and arbitrary classification, and thereby denied him equal protection of the law. The probate court ruled in Brown's favor, finding the statute unconstitutional and declaring that no inheritance tax was due from the estate. The court also determined that section 13303, subdivision (b), of the Revenue and Taxation Code, exempts, from such taxation, securities of corporations doing business outside of California held in the trust accounts.

Kenneth Cory, Controller of the State of California, appeals from this judgment. He contends, first, that the classifications made by section 13851 of the Revenue and Taxation Code are not arbitrary or unreasonable, and are therefore constitutional. ³ Appellant questions whether the proper rule for determining the existence of equal protection was applied by the trial court in arriving at its decision.

In ordinary equal protection cases not involving suspect classifications (e. g., one based upon race) or the alleged infringement of a fundamental interest (such as the right to vote or to pursue a lawful occupation), a state statutory classification will be upheld if it bears a rational relationship to a legitimate state purpose. (Weber v. City Council (1973) 9 Cal.3d 950, 958-959, 109 Cal.Rptr. 553, 513 P.2d 601.) Legislative classifications drawn in a taxing scheme are subject to the "ordinary-traditional" test of equal protection. (Helton v. City of Long Beach (1976) 55 Cal.App.3d 840, 844, 127 Cal.Rptr. 737.) The legislative determination as to what is a sufficient distinction to warrant a classification will not be overthrown unless it is palpably arbitrary. (Henry's Restaurants of Pomona, Inc. v. State Bd. of Equalization (1973) 30 Cal.App.3d 1009, 1017, 106 Cal.Rptr. 867.) In City of San Jose v. Donohue (1975) 51 Cal.App.3d 40, 45, 123 Cal.Rptr. 804, this court held that a tax statute or ordinance which distinguishes between parties does not violate the equal protection or due process clause if the distinction rests upon a rational basis, and it must be presumed to rest upon that basis if there is any conceivable state of facts which would support it.

Section 13851 is derived from the Inheritance Tax Act of 1935. (Stats.1935, ch. 358, p. 1273, § 6.) It was amended several times before being conformed to the Uniform Reciprocal Transfer Tax Act in 1943. (Stats.1943, ch. 658, p. 2307, § 1.) In 1965, the statute was amended to grant to residents of the United States living outside of California an exemption from California's inheritance tax on intangibles located within its jurisdiction. (Stats.1965, ch. 1181, p. 2989, § 1.) Such exemption existed whether or not the other state imposed a tax similar to California's or granted any exemption to such a tax. Nonresidents of the United States remained subject to the conditional exemption granted in 1943.

It is apparent that by adopting section 13851 in its present form, the Legislature has evidenced an intent to avoid Double taxation, but not taxation by a single jurisdiction. Such an objective is reasonable; it is equitable that a decedent's estate, while eluding the burden of double taxation, should be subject to the tax of at least one jurisdiction. Although the pre-1965 statute served this purpose with respect to both residents and nonresidents of the United States, we conclude that the statute does not now lack a rational basis because it unconditionally exempts only residents of the other states from the tax. Such exemptions are enacted "to meet a domestic problem, a question frequently arising between neighboring states, and one appealing to a sense of fairness. And this state might or might not extend the exemption. Having extended it and included within its scope all that is necessary to satisfy the domestic condition intended to be dealt with the classification in question is germane to its purpose and proper under the constitutional provisions cited." (In re Miller's Estate (1942) 239 Wis. 551, 2 N.W. 256, 259.) In a case involving a statute and situations similar to those present in this appeal, the Supreme Judicial Court of Massachusetts pointed out that the state may have refrained from any attempt to collect a tax "on the transfer of intangibles of deceased residents of other States in the hope that other States would reciprocate and refrain from similarly taxing intangibles of Massachusetts decedents. . . . Similar 'comity' with foreign countries has no meaning when dealing with (the sharing of tax revenues)." (Frost v. Commissioner of Corporations & Taxation, Mass., (1973) 293 N.E.2d 862, 873-874.)

Although the Massachusetts court was there dealing with its own state " pick-up" tax, the principle proclaimed is viable when applied to the statute which is here in question. The Legislature is given broad discretion in drawing classifications for taxation purposes. (Helton v. City of Long Beach, supra, 55 Cal.App.3d at p. 844, 127 Cal.Rptr. 737.) It may have wished to further ease the domestic problem of double taxation of intangibles by levying no such tax on the residents of sister states. The interest of this state in exacting from property its proper share of the tax burden within the state outweighs any concern over the competing tax claims of a foreign government. And when there is no tax levied on the property by the foreign government, the interest of the state is even stronger to have the property "pay its way" for the protection it has received from California's laws.

Respondent maintains that the domestic problem of double taxation in this area is no longer a problem so nettlesome as to require the blanket exemption granted to residents of the United States by the 1965 amendment. This is an arguable point. While the domestic problem of double taxation may lack its past intensity, there is every reason to assume that, in our current revenue-seeking environment, such exemption continues to alleviate the potential for double taxation on an on-going basis. Furthermore, because of the imperfect meshing of several states' reciprocal exemption statutes, some estates would be subject to double taxation unnecessarily. (Indiana Dept. of State Revenue v. Griffith's Estate (1959) Ind.App., 156 N.E.2d 395.) California avoids this result by granting its unconditional exemption. ⁴ It tends to maintain a state of healthy good will between the states which might quickly evaporate should California regress to its pre-reciprocity position. ⁵

The rule announced by the United States Supreme Court in Maxwell v. Bugbee (1919) 250 U.S. 525, 40 S.Ct. 2, 63 L.Ed. 1124, lends further support to the statute as now enacted. There, the court held that "The question of equal protection must be decided as between resident and nonresident decedents as classes, rather than by the incidence of the tax upon the particular estates whose representatives are here complaining. Absolute equality is impracticable in taxation, and is not required by the equal protection clause. And inequalities that result not from hostile discrimination, but occasionally and incidentally in the application of a system that is not arbitrary in its classification, are not sufficient to defeat the law." (P. 543, 40 S.Ct. p. 7.)

The concept of equal protection of the laws means simply that persons similarly situated with respect to the legitimate purpose of the law receive like treatment. (Weber v. City Council, supra, 9 Cal.3d at pp. 961-962, 109 Cal.Rptr. 553, 513 P.2d 601 (citing People ex rel. Younger v. County of El Dorado (1971) 5 Cal.3d 480, 502, ...