Gallagher's Will, In re

• Decision Date: 28 March 1953
• Docket Number: No. 5532,5532
• Parties: , 37 A.L.R.2d 149 In re GALLAGHER'S WILL.
• Court: New Mexico Supreme Court

Page 317

255 P.2d 317

57 N.M. 112, 37 A.L.R.2d 149

In re GALLAGHER'S WILL.

No. 5532.

Supreme Court of New Mexico.

March 28, 1953.

Quincy D. Adams, Albuquerque, for appellant.

Irwin S. Moise and Lewis R. Sutin, Albuquerque, for Thomas P. Gallagher, Jr., and Robert E. Gallagher.

John P. Dwyer, Albuquerque, for Thomas P. Gallagher, III and others.

Simms, Modrall, Seymour & Simms, Albuquerque, for Albuquerque Nat. Bank, trustee.

COORS, Justice.

Thomas P. Gallagher died testate in Albuquerque, New Mexico, in 1947. He left an estate which for federal estate tax purposes was comprised of community property, property held in joint tenancy with his surviving wife, Caroline M. Gallagher, and insurance proceeds. The total community assets amounted to $1,132,662.77 before allowable deductions. The jointly held property was valued at $57,390.02, and insurance benefits to the widow were paid in the sum of $75,986.84.

Decedent's will by its terms disposed of his separate estate and all of the community assets. A trust was provided thereby for the benefit of the wife and children (or the heirs of the body of children dying before termination of the trust) and the residuary estate was to go to the wife. She chose, however, to renounce the will and take her one-half of the community property and the property held jointly.

The Final Account and Report of the executors presented two alternate plans of distribution: Plan One, which was subsequently adopted by the lower court, provided for distribution charging the federal estate taxes to the entire community estate prior to distribution, except the amount of federal estate tax levied against jointly owned property and the proceeds of the life insurance, which was apportioned and charged solely to the widow. Plan Two charged all of such taxes to the one-half of the community property owned by the decedent.

Various objections were filed to the Final Account and Report, which objections were based upon conflicting views as to who should bear the ultimate burden of the payment of taxes to the state and federal governments, and the contention of the widow she should be subrogated to the claim against the estate of the Kanawha National Bank for $10,272.10 on a promissory note given by the decedent.

The lower court directed apportionment of the federal estate tax and charged the surviving wife's share of the property with taxes attributable to her one-half interest in the community, all of the insurance and the jointly held property. It allowed her claim of subrogation, and further ruled all taxes paid to the State of New Mexico should be borne solely by the decedent's half of the community property after division.

From certain of these rulings the widow appeals, and as to certain others the children and grandchildren of the decedent who take under his will and the Albuquerque National Bank, as testamentary trustee, have filed cross-appeals. Other facts necessary to a consideration of the problems here raised appear in the body of this opinion.

The first question raised on this appeal is whether or not the widow should bear a proportionate share of the burden of the federal estate tax when her share of the community is included in the estate of her deceased husband for federal estate tax purposes.

The federal estate tax enactment of 1942, 26 U.S.C.A. Sec. 811(e)(2), amended the earlier provision so as to include in the gross estate, for purposes of taxation of decedent's estate, the interest of the surviving spouse in community property. This statute, so far as here pertinent, reads as follows:

'The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside of the United States * * *.

'Community interests.--To the extent of the interest therein held as community property by the decedent and surviving spouse under the law of any State, Territory, or possession of the United States, or any foreign country, except such part thereof as may be shown to have been received as compensation for personal services actually rendered by the surviving spouse or derived originally from such compensation or from separate property of the surviving spouse. In no case shall such interest included in the gross estate of the decedent be less than the value of such part of the community property as was subject to the decedent's power of testamentary disposition.'

Although this provision has since been repealed, April 2, 1948, 62 Stat. 116, it was in effect at the time of the death of the testator in 1947.

The constitutionality of this statute was challenged in Wiener v. Fernandez, D.C., 60 F.Supp. 169 and Rompel v. United States, D.C., 59 F.Supp. 483, twin cases involving community estates in Louisiana and Texas respectively. The federal district courts in both instances held the taxes as levied violative of the due process clause of the federal Constitution. On appeal the United States Supreme Court reversed the decisions and held the tax constitutional. Fernandez v. Wiener, 1945, 326 U.S. 340, 66 S.Ct. 178, 90 L.Ed. 116 and United States v. Rompel, 1945, 326 U.S. 367, 66 S.Ct. 191, 90 L.Ed. 137.

The Wiener case like the Rompel case, arose upon an action to recover the amount of the federal estate tax which was attributable to the inclusion in the decedent's gross estate of his wife's share in the community. For present purposes, the nature of the interest of husband and wife in the community in Louisiana is essentially the same as that existing in New Mexico, except that in Louisiana if the wife dies first, her share of the community estate goes to her heirs or designees, subject, however, to the payment of community debts. See Louisiana Civil Code, 1945, articles 2406, 2409 and 2430, LRS-C.C.

In the Wiener case it was contended that since the husband and wife each own a present, vested one-half interest in the community from the moment of its initiation, the death of either spouse effects no transfer of that interest, except as to the one-half owned by the decedent before death, and the survivor acquires no new or different interest in his other half of the property because of the death of the spouse. It was therefore urged that upon the death of husband or wife there was no event which could bring more than one-half of the community property under the power of Congress granted by Article 1, Sec. 8, of the Constitution to 'lay and collect * * * Imposts and Excises', [326 U.S. 340, 66 S.Ct. 181,] and that the taxing of the entire value of the community property on the death of either spouse was a denial of due process in that the tax so imposed was measured by property belonging to another than the decedent.

The Supreme Court of the United States ruled in response to these contentions that the power of Congress to impose death taxes is not limited to the taxation of transfers at death, but that it 'extends to the creation, exercise, acquisition, or relinquishment of any power or legal privilege which is incident to the ownership of property.' The court likened the situation to that where the tax had been upheld when measured by the entire interest on tenancies by the entirety and joint tenancies in Tyler v. United States, 1930, 281 U.S. 497, 50 S.Ct. 356, 74 L.Ed. 991, 69 A.L.R. 758 and United States v. Jacobs, 1939, 306 U.S. 363, 59 S.Ct. 551, 83 L.Ed. 763. With respect to changes occurring in the interest of the wife in the community property upon the death of the husband, the court said

'* * * the death of the husband of the Louisiana marital community not only operates to transfer his rights in his share of the community to his heirs or those taking under his will. It terminates his expansive and sometimes profitable control over the wife's share, and for the first time brings her half of the property into her full and exclusive possession, control and enjoyment. The cessation of these extensive powers of the husband, even though they were powers over property which he never 'owned', and the establishment in the wife of new powers of control over her share, though it was always hers, furnish appropriate occasions for the imposition of an excise tax.

* * *

* * *

'This redistribution of powers and restrictions upon power is brought about by death notwithstanding that the rights in the property subject to these powers and restrictions were in every sense 'vested' from the moment the community began. It is enough that death brings about changes in the legal and economic relationships to the property taxed, and the earlier certainty that those changes would occur does not impair the legislative power to recognize them, and to levy a tax on the happening of the event which was their generating source.'

While the reasoning on which the constitutionality of the Act of 1942 was upheld has been severely, and we believe properly, criticized, see 1 de Funiak, Principles of Community Property, Sec. 255; Taxation of Community Property; The Wiener Case, 18 Tulane L. Rev. 525; The Estate and Gift Tax Amendments: Revenue Act of 1942, 31 Cal.L.Rev. 60; and In re Monaghan's Estate, 1946, 65 Ariz. 9, 173 P.2d 107, there can be no question of the validity of the tax imposed, and our concern here is, as above stated, whether or not the amount of the tax which is attributable to the interest of the surviving wife in the community property should be ultimately borne by her.

The Supreme Court of the United States has declared in Riggs v. Del Drago, 1942, 317 U.S. 95, 63 S.Ct. 109, 87 L.Ed. 106, 142 A.L.R. 1131, that the federal estate tax provisions do not describe who shall ultimately bear the brunt of the payment of the tax, but the matter is one for local control. The opinion in Hooker v. Drayton, 1943, 69 R.I. 290, 33 A.2d 206, 209, 150 A.L.R. 723, gives a concise resume of the matter prior to and under the Del Drago case:

...