Good's Estate, In re

• Decision Date: 15 February 1963
• Citation: 213 Cal.App.2d 45,28 Cal.Rptr. 378
• Court: California Court of Appeals Court of Appeals
• Parties: In the matter of the ESTATE of Cornelia Wheeler GOOD, sometimes known as Cornelia Good and Cornelia W. Good, deceased. Alan CRANSTON, Controller, State of California, Inheritance Tax Division, Petitioner and Respondent, v. Stanley Wells GOOD, Jr. and Laurence Howard Good, Objectors and Appellants. Civ. 20745.

Page 378

28 Cal.Rptr. 378

213 Cal.App.2d 45

In the matter of the ESTATE of Cornelia Wheeler GOOD, sometimes known as Cornelia Good and Cornelia W. Good, deceased.

Alan CRANSTON, Controller, State of California, Inheritance Tax Division, Petitioner and Respondent, v. Stanley Wells GOOD, Jr. and Laurence Howard Good, Objectors and Appellants.

Civ. 20745.

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

Feb. 15, 1963.

Rehearing Denied March 4, 1963.

Hearing Denied April 9, 1963.

O'Donnell & Waiss, San Francisco, for appellants.

Charles J. Barry, Chief Inheritance Tax Atty., Milton D. Harris, John D. O'Hara, Assistants, San Francisco, for respondent.

KAUFMAN, Presiding Justice.

The taxpayers, as executors of the will of Cornelia Wheeler Good, appeal from an order overruling objections and fixing an additional inheritance tax pursuant to section 13441 of the Revenue and Taxation Code.

Appellants contend that the lower court's interpretation of section 13441 of the Revenue and Taxation Code is erroneous and contrary to legislative intent and that the statute is unconstitutional.

The facts are not in dispute. Cornelia Wheeler Good died on March 30, 1958, leaving an estate appraised at a little over $2,000,000. In May, 1957, she had made gifts totaling over $1,000,000 to her three children, who are also the beneficiaries under the will. Appellants, as executors, filed California and federal gift tax returns for the decedent and paid the respective gift taxes. Appellants considered that the 1957 gifts were made in contemplation of death and thus reported these gifts as such in the California inheritance tax affidavit and federal estate tax return. Therefore, the property on which the 1957 gift taxes had been paid was also subject to California death taxes and included in the estate for federal estate tax purposes. Both the Revenue and Taxation Code (§ 14059) and the Internal Revenue Code of 1954 (§ 2012) provide that such gift taxes shall be credited against the respective death taxes.

The problem in the instant case arises because the federal credit for state death taxes under section 2011 of the Internal Revenue Code of 1954 is calculated without any credit for gift taxes. Section 2011 [based on similar provisions in sections 810 and 813(b) of the Internal Revenue Code of 1939] also provides that any reduction of the credit for state death taxes, since it increases the amount of the federal estate tax, likewise increases the amount of the gift tax credit in cases where the credit is limited to a certain proportion of the estate tax. The purpose of the section, which has been a part of the federal estate tax law since its enactment was to enable the states to divert into their own treasuries, without additional burden to taxpayers, money which would otherwise be exacted by federal authority (see Highfield, for Use of State v. Delaware Trust Co. (1930), 4 W.W.Harr. 306, 34 Del. 306, 152 A. 124, and cases collected in 147 A.L.R. 467).

As the section 2011, Internal Revenue Code of 1954 credit, in order to be obtainable must arise from a state enactment, most states enacted a 'pickup' statute designed to absorb any federal credit of which the advance might otherwise be lost. Thus, section 13441 of the Revenue and Taxation Code provides: 'In the event that a Federal estate tax is payable to the United Stats [sic] in a case where the inheritance tax payable to this State is less than the maximum State tax credit allowed by the Federal estate tax law, a tax equal to the difference between the maximum credit and the inheritance tax payable is hereby imposed.' [Emphasis added.]

In the instant case, the disputed sum of $17,527.09 claimed by the state, is the amount by which the credit against the federal estate tax for state death taxes pursuant to section 2011 of the Internal Revenue Code of 1954 exceeds the California inheritance tax. Appellants argue that as the application of section 13441 of the Revenue and Taxation Code to the facts of this case increases the aggregate federal and state death taxes by $17,527.09, they have a right to effect a tax saving in this amount by waiving the credit and paying the amount of the California additional tax to the federal treasury rather than to the State of California.

The controversy centers around the proper interpretation of the word 'allowed' in section 13441 of the Revenue and Taxation Code. Appellants' first contention on appeal is that the term means only the credit actually allowed; that if they exercise their right to waive the credit granted by section 13441 of the Revenue and Taxation Code and pay the amount thereof to the federal treasury, no credit has been actually allowed and the state cannot collect the additional tax. ¹

The state argues that the term means 'allowable'; that in accordance with paragraph (c) of section 2011 of the Internal Revenue Code of 1954 and section 13441 of the Revenue and Taxation Code, it has assessed a tax equal to eighty per cent of the federal credit as computed in the appellants' federal estate tax return; that actual allowance in appellants' federal estate tax determination is not a condition to the state's right to assess the tax; that although the provisions were enacted for the benefit of the taxpayer, the fact that appellants do not benefit therefrom because of the gifts in contemplation of death is not significant.

As we see the case, to accept the appellants' argument would require us to hold that the state tax was dependent on the actual allowance of the credit by the federal government, and we are unwilling so to decide for the simple reason that such is not the true meaning of the language of the statute. The state's view is amply supported by logic and the weight of authority. It is well established that the state's right to the additional tax does not depend on the actual existence of the section 2011 credit. The leading case of In re Thalmann's Estate, 177 Misc. 1055, 32 N.Y.S.2d 695, held under a similar 'pickup' statute that New York State could impose the additional tax even though the taxpayer had failed to claim the credit Wells et al. v. Gay (Fla.1952), 58 So.2d 690, in which the taxpayer paid the state taxes too late to claim the federal credit is to the same effect. ² State v. Wiess (1943), 141 Tex. 303, 171 S.W.2d 848, 147 A.L.R. 460, is also relevant as there, as in this case, decedent's estate for estate tax purposes included a number of substantial gifts in contemplation of death. The relevant Texas inheritance tax statute, like section 13441 of our Revenue and Taxation Code, fixed the tax due to the state as the difference between tax due under any other state law and eighty per cent of the federal estate tax. The taxpayer compromised with the federal government and stipulated that the amount paid to the federal government was subject to no deductions for state inheritance taxes. The court upheld the state's right to the additional tax, saying that: 'As we interpret its opinion, the Court of Civil Appeals holds that, since our statute, Article 7144a, was passed only to take advantage of the provisions of the Federal Revenue Act of 1926, which allows an estate taxpayer credit for inheritance tax payments made to States up to eighty per cent. of the taxes due the Federal Government under such Federal Revenue Act, and since it is the intention of our act not to increase the tax burden on any taxpayer, but only to take advantage of the eighty per cent. provisions of the Federal act, the State cannot collect any additional inheritance taxes in this instance, because to allow it to do so would be to increase the tax burden on this estate, in violation of Article 7144a. This conclusion is based on the theory that this estate compromised with the Federal authorities, and under the terms of such compromise agreement the estate was allowed no credit for the inheritance taxes that might accrue under Article 7144a. It is true that our statute was passed to take advantage of the eighty per cent. credit provisions of the Federal Revenue Act of 1926. It is also true that our statute was, and is, intended to be applied so as not to increase the tax burden on any taxpayer. In spite of all this, we cannot approve a rule that will make it possible for this State to be deprived of its right to tax under Article 7144a because an estate sees fit to compromise with the Federal authorities.' [Emphasis supplied.] (P. 852.)

Our view is further supported by the fact that under law in effect prior to 1942 (§ 813(a)(1)(2) and (b) of the Internal Revenue Code of 1939) appellants would have had no cause for complaint. Under the provisions of the Internal Revenue Code of 1939, the gift tax credit was allowed prior to the state death tax credit. The 1942 legislation [Act of Oct. 21, 1942, § 410] reversed the order so...