Grell v. Kelly

• Decision Date: 04 April 1944
• Citation: 36 A.2d 874
• Parties: GRELL v. KELLY, State Tax Com'r. In re NICKLAS' ESTATE.
• Court: New Jersey Prerogative Court

36 A.2d 874

GRELL

v. KELLY, State Tax Com'r.In re NICKLAS' ESTATE.

Prerogative Court of New Jersey.

April 4, 1944.

Proceedings in the matter of the transfer inheritance tax in the Estate of C. Aubrey Nicklas, deceased, on petition of Harry W. Grell, executor of the last will and testament of decedent, to review the tax levied by William D. Kelly, State Tax Commissioner.

Levy modified in accordance with opinion.

1. A transfer inheritance tax is the creature of statute, and liability to such taxation must reside in the language or plain intendment of the tax act.

2. Whether or not a transfer comes into enjoyment or possession at the transferor's death is a matter of a realistic examination of the shifting of economic burdens and benefits, the actual succession to property.

3. The primary object of the statute, in its relation to inter vivos transfers, is to envelop all those which in reality are chosen substitutes for testamentary dispositions. The factual circumstances of each case must be investigated in the process of inclusion and exclusion.

4. The equitable principle that recognizes a vested beneficial interest in the vendee upon the execution of a contract of sale of real property, is likewise applicable to agreements for the sale of corporate stock.

5. In construing the provisions of a statute patterned after that of a sister state, the construction given it in that state is entitled to great weight and will be followed, unless it is contrary to some declared legislative policy of this state.

6. An inter vivos transfer, even one obviously donative in purpose and essentially a gift, if complete and immediately effective, is not taxable by our statute unless it was made in contemplation of death. Accordingly, a transfer is not taxable merely because of a disparity in favor of the transferee between the market value of the property and the contract price.

7. In the construction of instruments, if both the recitals and the operative part are clear, but inconsistent with each other, the operative part is to be preferred.

8. Proof of a fact inheres in the probative and persuasive effect of competent and relevant evidence.

9. Good will is an asset. Its existence for tax purposes does not depend upon whether or not the corporation carries it as an asset on its books.

10. The value of good will is usually computed on the basis of profits for normal years.

11. Stockholder's agreement to sell his stock in a corporation, and the latter's agreement to purchase it, immediately effective and irrevocable, at a price to be determined by a formula therein recited, and the performance of which may be exacted upon the demand of either of the parties, or at the death of the stockholder by or against his estate, held, on the facts, not a transfer by deed, grant, bargain, sale or gift intended to take effect in possession or enjoyment at or after death.

Scammell, Knight & Reese, of Trenton, for petitioner.

Walter D. Van Riper, Atty. Gen. and William A. Moore, Sp. Asst. Atty. Gen., for respondent.

JAYNE, Vice Ordinary.

Albeit the range of our transfer inheritance tax decisions is extensive, one branch of the present appeal introduces a question which in its factual and legal incidents seems to have escaped an exact adjudication in this jurisdiction.

C. Aubrey Nicklas, who was a resident of Spring Lake, Monmouth County, New Jersey, died testate on March 7, 1942. His last will and testament dated September 5, 1933, designated his widow and children as the recipients of his bounty. Among the securities in his possession at death were 680 shares of the capital stock of the Empire Construction Company. On June 15, 1934, the decedent and his wife entered into a contract with the Empire Construction Company, the operative covenants of which read: ‘The party of the second part [Nicklas], his heirs, executors, administrators and assigns and the party of the third part [Mrs. Nicklas] specifically agree that they will sell to the party of the first part [Empire Company] the stock heretofore mentioned at the value arrived at on the basis of the above formula on demand. Likewise the party of the first part agrees to buy said stock on demand of the party of the second part, his heirs, executors, administrators and assigns. * * *’ All other stockholders of the company approved the agreement.

In conformity with the formula specified in the agreement, the value of each share was calculated at the death of the decedent to be $146.7485. In acquittance of the covenants of the agreement, the sale of decedent's stock to the company was in fact completed by his executor on December 7, 1942, at the formula price. Such was the value imputed to the stock by the executor in his report to the Tax Commissioner. The Commissioner does not intimate that the shares were distributable as a part of the decedent's estate. His assessment at a substantially increased value is constructed upon the conclusion that the agreement made on June 15, 1934, the eventual transmission of the stock in obedience to its terms, was a transfer ‘intended to take effect in possession or enjoyment at or after’ the death of the decedent-R.S. 54:34-1, subd. c, N.J.S.A. 54:34-1, subd. c; that for tax purposes the sale price fixed by the agreement should be ignored and the cash value of the stock reflecting also the proceeds of an insurance policy held by the company on the life of the decedent should be adopted. R.S. 54:34-12, N.J.S.A. 54:34-12.

The propriety of the present assessment is accordingly considered in the form and posture in which it is presented. It is, of course, categorical that a transfer inheritance tax is the creature of statute, and liability to such taxation must reside in the language or plain intendment of the tax act. If the transfer now under observation is not encompassed by our statute, the process of evaluating it for taxation is not implicated in the present appeal.

Whether or not a transfer comes into enjoyment or possession at the transferor's death is a matter of a realistic examination of the shifting of economic burdens and benefits, the actual succession to property. Was it the result of a purpose that the transferee should or might have and enjoy, after the death of the transferor, the property transmitted? Would the transfer have been made in the absence of such purpose? Squier v. Martin, 131 N.J.Eq. 263, 24 A.2d 865.

Since the statutory phrases are incapable of precise literal exposition, the factual circumstances of each case must be investigated in the process of inclusion and exclusion. MacGregor v. Martin, 126 N.J.L. 492, 20 A.2d 427. In its relation to inter vivos transfers, the primary object of the statute is to envelop all those which in reality are chosen substitutes for testamentary dispositions. Therefore, in each case the intrinsic nature and substantial character of the transaction should be detected to test its incompatibility with or subjection to the clauses of the statute.

The inter vivos agreement in which the decedent engaged manifestly obligated him to sell his stock to the company at any time on its demand. The agreement seems to be a valid and enforceable contract supported by mutual and reciprocal covenants. It became effective immediately upon its execution. It is not revocable. The death of the decedent was not made an event or contingency which under the contract would imperatively defer or govern the time of its performance. The agreement was enforceable against the decedent in his lifetime and against his estate in the event of his death. In it, no beneficent or donative motive is conspicuously perceptible.

A case identical in factual characteristics has not to my knowledge been adjudicated in this state. The decision of In re Deutz' Estate, 105 N.J.E.q. 671, 149 A. 257, does not afford guidance in determining the initial or basic point involving the taxability of the present transfer because in that case the decedent expressly provided that the transfer should take place at or after his death. The opinion of the Court of Errors and Appeals in Bente v. Bugbee, 103 N.J.L. 608, 137 A. 552, 58 A.L.R. 1137, is said to have some distant analogy because in the instant case the company could have obtained a decree against the executor commanding him to specifically complete the sale in fulfillment of the ante mortem contractual obligation of the decedent. I have before me the conclusion of the Vice Ordinary in the appeal in Re Ferris' Estate, 94 N.J.E.q. 726, 121 A. 692, to which counsel have not referred. That case bears a discernible resemblance in factual features to the present one. There the decedent in his lifetime had contracted to sell to one Magovern shares of common stock of the Ferris Company, retaining the right to vote the stock during his own lifetime, or so long as it should be necessary to enable the decedent to maintain his majority vote in the corporate affairs of the company. The taxing authority contended ‘that the result of this contract was that the ownership of the shares of stock in question remained in Mr. Ferris, with a transfer thereof to Magovern, to take effect at the death of Ferris.’ The Vice Ordinary stated: ‘It is clear to my mind that such was not the situation in fact, at least as to the entire beneficial ownership of the shares of stock.’ It was resolved that by virtue of the contract, an immediate transfer of the beneficial ownership or equitable ownership of the shares from Ferris to Magovern was effectuated; i.e., that Magovern owned the stock, less the voting power reserved by Ferris. The equitable principle that recognizes a vested beneficial interest in the vendee upon the execution of a contract of sale is likewise applicable to agreements for the sale of corporate stock. Martindell v. Fiduciary Counsel, Inc., 133 N.J.E.q. 408, 30 A.2d 281. In the instant case, there is no lifetime reservation by the decedent of any right or power incident to the ownership of...