In re Watson's Estate

• Decision Date: 20 May 1919
• Citation: 123 N.E. 758,226 N.Y. 384
• Parties: In re WATSON'S ESTATE.
• Court: New York Court of Appeals Court of Appeals

226 N.Y. 384

123 N.E. 758

In re WATSON'S ESTATE.

Court of Appeals of New York.

May 20, 1919.

Appeal from Supreme Court, Appellate Division, First Department.

In the matter of the transfer tax upon the estate of Charles W. Watson, deceased. From an order of the Appellate Division (186 App. Div. 48,174 N. Y. Supp. 19), affirming an order of the surrogate (104 Misc. Rep. 212,172 N. Y. Supp. 29) which denied an appeal by the Comptroller of the State of New York and confirmed report of appraisers in fixing a transfer tax, the Comptroller appeals. Reversed.

(Per Crane, Cuddeback, and Hogan, JJ.) Hiscock, C. J., and Collin and McLaughlin, JJ., dissenting.Lafayette B. Gleason, Alexander Otis, and John B. Gleason, all of New York City, for appellant.

Eustace Conway, of New York City, for respondents.

Rumsey & Morgan, Stetson, Jennings & Russell, and Louis O. Van Doren, all of New York City, and Brackett, Todd, Wheat & Wait, of Saratoga Springs, for interveners.

CRANE, J.

[1] The question presented for determination is whether section 221b of the Tax Law (Cons. Laws, c. 60), added by chapter 700 of the Laws of 1917, is constitutional. The lower courts have held it to be unconstitutional. The section reads as follows:

‘ Additional Tax on Investments in Certain Cases.-Upon every transfer of an investment, as defined in article fifteen of this chapter, taxable under this article, a tax is hereby imposed, in addition to the tax imposed by section 221a, of five per centum of the appraised inventory value of such investment, unless the tax on such investment as prescribed by article 15 of this chapter or the tax on a secured debt as defined by former article 15 of this chapter shall have been paid on such investment or secured debt and stamps affixed for a period including the date of the death of the decedent or unless the personal representatives of decedent are able to prove that a personal property tax was assessed and paid on such investment or secured debt during the period it was held by decedent; or unless the decedent was actually engaged in the bona fide purchase and sale of investments as a business, and at the time of his death had maintained an office or place of business in this state for the carrying on of the actual bona fide business of purchasing and selling investments, as distinguished from the purchase thereof for investment purposes, and had owned and held such investment for sale for the purpose of his business and not as an investment for a period of not more than eight months prior to his death.’

The personal property of an individual, resident in the state of New York, was, at the time of this enactment, subject to two methods of assessment and taxation. By section 6 and section 8 of the Tax Law he was to be assessed on the full value of his personal property in the tax district where he resided, allowance being made for his debts.

By article 15 of the Tax Law the owner of personal property coming within the description of investments therein defined could pay to the state a tax of 75 cents per hundred dollars upon the face value of such investments and be exempted from any other local or state tax.

Under this system of assessment and taxation certain well-known facts and conditions existed regarding taxation upon personal property which must have been in the mind of the Legislature at the time of the above enactment. A man was not compelled to tax himself or to present to the tax officers of his residence district a full and complete list of his securities. Assessments upon personal property or investments were thereupon made according to such meager information as the assessors could obtain or else according to appearance, reputation, or surmise. It was also a well-known fact that in many local communities no attempt was made to assess personalty at its full value, as according to the tax rate it would have worked extreme hardship.

Under the Laws of 1911, c. 802, as thereafter amended, the tax provided by the state upon investments was permissive and not compulsory; the alternative being that, if the bonds were not submitted in accordance with the methods provided by that law, they were subject to an assessment by the locality as before stated.

[2] Under these conditions it was a matter of common knowledge that some owners submitted all or part of their bonded investments to the state tax, others paid upon a limited local assessment, and others not at all, and that a very large part of this kind of property went untaxed altogether.

Such were the facts as developed in this estate of Charles W. Watson, deceased, which is typical and not exceptional. When he died in August, 1917, leaving a net estate of $470,256.95, $109,470.73 of this consisted of assessable bonds upon which his last assessment in 1914 amounted to only $30,000; since 1914 he had acquired securities valued at $59,284.54 which had not been assessed at all. The bonds had not been submitted under the state Tax Law. Thus Charles W. Watson had possessed for some years $168,755.27, of which only $30,000 had paid a tax.

This kind of property, therefore, divided itself into three classes, or, if we prefer, varied in three different ways under the operation of the Tax Law, by reason of circumstances and conditions. Some of the investments yielded to local assessment, others submitted to the state tax, and still a large part yielded no tax.

These facts were before the Legislature when they sought to reach this untaxed property in the methods devised by section 221b of the Tax Law. Article 10 of that law had already established an inheritance tax varying in amount according to the degrees of relationship of the transferee. To this was added, by section 221b, an additional tax of 5 per cent. upon those investments passing by will or distribution which had not been assessed locally or paid the state stamp tax.

In considering the constitutionality of this provision, it has been suggested that, while the state may enact an inheritance tax, it must treat all personal property alike and cannot classify it according to nature or kind. Why this suggestion should separate personal property from realty I need not now stop to consider. That in the development of taxation personal property has varied in treatment and in disposition is evidenced by the Mortgage Tax Law (People ex. rel. Eisman v. Ronner, 185 N. Y. 285, 77 N. E. 1061), the bank stock assessment (People ex rel. Bridgeport Savings Bank v. Feitner, 191 N. Y. 88, 83 N. E. 592;Amoskeag Savings Bank v. Purdy, 231 U. S. 373, 34 Sup. Ct. 114, 58 L. Ed. 274), the stock transfer tax (People ex rel. Hatch v. Reardon, 184 N. Y. 431, 77 N. E. 970,8 L. R. A. [N. S.] 314, 112 Am. St. Rep. 628,6 Ann. Cas. 515;Matter of Ball, 161 App. Div. 79,146 N. Y. Supp. 499;Matter of Church, 176 App. Div. 910,162 N. Y. Supp. 1114), and the special franchise tax (People ex rel. Met. St. Ry. Co. v. State Bd. Tax Commissioners, 174 N. Y. 417, 67 N. E. 69, 63 L. R. A. 884, 105 Am. St. Rep. 674).

[3][4][5] In dealing with a law's constitutionality, we are examining the question of legislative powers, or, to be accurate, the limitation placed by Constitutions upon power. Whether the Legislature has acted wisely, made a proper choice, created difficulties, worked hardships, or been unfair to a class or to a particular kind of property, is never indicative of a limitation. Limitations are to be found in the words and intendment of the Constitution and the fundamental principles of government embodied therein. The taxing power, both direct and through an inheritance tax, is very broad and submits to few restrictions. Such laws need not be submitted to courts for their approval and can only meet with disapproval when some fundamental principle has been violated. In speaking of the legislative power, whether it be a police power, a taxing power, or any other power of like nature, we have no ready-made formula which can be easily applied, but must be governed by the principles developed in the law, either by a long series of legislation or by custom, or by judicial expression. However accurate may be our logical process, we must not start with assumed premises, but with those furnished us by the authorities.

Although repeating what has heretofore been said by this court, we turn to a few of these authorities to ascertain the rule which must be applied to the new state of facts arising in this case.

This court said, through Gray, J., in People ex rel. Eisman v. Ronner, 185 N. Y. 285, 289,77 N. E. 1061, 1062, regarding the Mortgage Tax Low:

‘I cannot perceive any valid reason why the Legislature could not devise a scheme for raising revenues for the general government and for the various local governments by the apportionment of the proceeds of a tax laid upon a certain species, or class, of possessions. * * * It [the Legislature] may change the methods, or rate, of taxation, and may classify new subjects for taxation. * * * The purpose of a system of taxation, the apportionment of a tax and the property, or persons, to be affected are matters within the legislative discretion. * * * There is no constitutional guaranty that taxation shall be just and equal; though underlying this great governmental power, and implied from the nature of our political institutions, is the principle that taxation shall be equal, in the sense that it shall not be arbitrary and that there shall be no discrimination against persons, by laying greater burdens upon one than are laid upon others in the same calling or condition.’

We said in People ex rel. Hatch v. Reardon, 184 N. Y. 431, 77 N. E. 970,8 L. R. A. (N. S.) 314, 112 Am. St. Rep. 628,6 Ann. Cas. 515, regarding the constitutionality of the Stock Transfer Act:

‘The classification made by selecting one kind of property and taxing a transfer of that only is assailed as so arbitrary, discriminating, and unreasonable as to deprive certain persons of their property without due...