Naylor v. Brown

• Decision Date: 02 July 1974
• Citation: 353 A.2d 709,166 Conn. 581
• Parties: Ralph A. NAYLOR, Executor (ESTATE OF Katherine W. DURYEA), et al. v. F. George BROWN, Tax Commissioner.
• Court: Connecticut Supreme Court

Page 709

353 A.2d 709

166 Conn. 581

Ralph A. NAYLOR, Executor (ESTATE OF Katherine W. DURYEA), et al. v. F. George BROWN, Tax Commissioner.

Supreme Court of Connecticut.

July 2, 1974.

William W. Sprague and Frank S. Berall, Hartford, for plaintiffs.

Irving L. Levine, Inheritance Tax Atty., with whom, on the brief, were Robert K. Killian, Atty. Gen., and Robert J. Hale, First Asst. Tax Commissioner, for defendant.

Before HOUSE, C.J., and SHAPIRO, LOISELLE, MacDONALD and BOGDANSKI, JJ.

HOUSE, Chief Justice.

This is an appeal from a decree of the Probate Court for the district of Madison which was reserved by the Superior Court for the advice of this court. The parties stipulated to the pertinent facts and submitted four questions upon which the advice of this court is sought. ¹

On February 15, 1967, J. Frank Duryea, hereafter referred to as the donor, died testate. In his will which he had executed on November 7, 1960, Duryea granted to his wife, Katherine W. Duryea, hereinafter referred to as the decedent or donee, a general testamentary power of appointment over the residue of a marital deduction trust created for her benefit. Under the terms of that will, upon the decedent's failure to exercise her general power of appointment, the trust residue would pass to one of the plaintiffs, George R. Ruryea, the son of the donor and the decedent's stepson.

The donor's net taxable estate was computed in the Probate Court to be.$4,094,200.49. Since it was impossible to ascertain who would succeed to the remainder interest in the trust because of the decedent's power to appoint, a compromise succession tax in the total amount of $378,067.43 was paid by the donor's estate on August 11, 1969, pursuant to the provisions of § 12-355 of the General Statutes. This statute permits a fiduciary and the tax commissioner to agree upon an equitable computation when 'the tax cannot be determined because of a contingency as to who will take.' Under the § 12-355 agreement, the decedent's life estate was valued at $174,789.66, and the remainder interest in the marital deduction trust was valued at.$1,855,193.28. A receipt for the payment of the taxes on the donor's estate was issued by the defendant tax commissioner on August 15, 1969.

The decedent had executed her will on March 8, 1962, and on June 6, 1967, she executed a codicil to that will wherein she exercised her power to appoint 'only to the extent of such taxes, federal or state, as may be levied or assessed against the non-exercise of said power of appointment, which I exercise for the benefit of my estate solely for the purposes of paying said taxes.' The decedent expressly did not exercise the power as to the remainder of the trust assets.

The decedent died on February 188 1971, her will and codicil were admitted to probate, and on March 12, 1971, the named plaintiff, Ralph A. Naylor, qualified as executor of her estate. As executor, the plaintiff reported as nontaxable the power of appointment granted the decedent by her husband. The defendant tax commissioner claimed that the decedent's exercise in part and nonexercise in part of the general power of appointment was a taxable transfer. The Probate Court agreed with the contention of the tax commissioner and held that 'both the exercise and non-exercise by the decedent of the power of appointment given her in the will of J. Frank Duryea, constitute at her death on February 18, 1971 a taxable transfer under Section 12-345a of the General Statutes.' The present appeal was taken from that decision.

The first question reserved for our advice is: 'Does Section 12-345a of the General Statutes permit taxation in the decedent's estate of the transfer of the marital deduction trust created under the will of her husband, J. Frank Duryea?'

The General Assembly first applied the succession tax to the devolution of property by the exercise or failure to exercise a power of appointment in 1909 (Public Acts 1909, c. 218, § 5). These tax provisions were revised in 1915 (Public Acts 1915, c. 332, § 13) and in 1923 (Public Acts 1923, c. 190, § 3). The 1930 Revision of the General Statutes did not contain a similar provision and appointed property remained nontaxable until the enactment of Public Acts 1969, No. 796, which was incorporated in the General Statutes as § 12-345a. This enactment was subsequently revised by Public Acts 1972, No. 290 (now General Statutes § 12-345b). See 3 Locke & Kohn, Conn. Probate Practice § 7; Wilhelm, Conn. Estates Practice, Death Taxes (Rev.Ed.) §§ 7, 40.

'(T)he question whether any particular transfer is or is not taxable should logically depend on the terms of the statute in force at the time when the transfer takes place.' Blodgett v. Union & New Haven Trust Co., 97 Conn. 405, 409, 116 A. 908, 910. The applicable law at the time of the decedent's death was then § 12-345a of the General Statutes, enacted as Public Acts 1969, No. 796, § 3 of which provided that '(t)his act shall take effect January 1, 1970, and shall apply to estates of persons dying on or after that date.' ²

The plaintiffs rely heavily on McMurtry v. State, 111 Conn. 594, 151 A. 252, for their claim that the estate to which the quoted provisions of § 12-345a refer is not taxable as a part of the estate of the donee since under settled common-law principles applicable to future interests an appointee under a testamentary power of appointment derives title from the will of the donor and that legal title to the appointed property never vests in the donee and forms no part of his estate. In McMurtry the concept was stated thusly (p. 601, 151 A. p. 255): 'The appointee really takes from the original testator, the donee of the power acting as a mere conduit of the former's bounty,' quoting Bartlett v. Sears, 81 Conn. 34, 42, 70 A. 33.

In the McMurtry case, decided in 1930, this court held that Connecticut could not constitutionally levy a succession tax under the 1923 tax provision upon the transfer of the principal of a trust by the exercise of a Connecticut resident's general power of appointment when New York was the situs of the trust and the place of residence of the donor of the power. The court in McMurtry felt compelled, under the authority of Wachovia Bank & Trust Co. v. Doughton, 272 U.S. 567, 47 S.Ct. 202, 71 L.Ed. 413, to hold that 'it was not within the power of this State to impose a succession tax upon the transfer of this fund.' McMurtry v. State, supra, 111 Conn. 605, 151 A. 256. The Wachovia decision was, however, later expressly overruled in Graves v. Schmidlapp, 315 U.S. 657, 62 S.Ct. 870, 86 L.Ed. 1097, 141 A.L.R. 948, decided in 1942. In Graves, as in Wachovia and in McMurtry, the question presented to the court was the extent to which a state could levy a succession tax upon an extraterritorial appointive estate. The court in Graves concluded (315 U.S. p. 662, 62 S.Ct. p. 874): 'Since it is the exercise of the power to dispose . . . which is the taxable event, the mere fact that the power was acquired as a donation from another is without significance. We can perceive no ground for saying that its exercise by the donee is for that reason any the less the enjoyment of a property right, or any the less subject to taxation at his domicile.'

The basis of the succession and transfer tax is 'the right of possession or enjoyment of property rather than the vesting in interest . . .. Dolak v. Sullivan, 145 Conn. 497, 502, 144 A.2d 312.' Pape v. Sullivan,151 Conn. 39, 43, 193 A.2d 480, 482; Seymour Trust Co. v. Sullivan, 152 Conn. 282, 206 A.2d 420. The taxable incident is 'the shifting of the enjoyment of property-the economic benefits thereof or economic interests therein.' Miller v. Connelly, 142 Conn. 144, 148, 112 A.2d 202, 204; Pape v. Sullivan, supra; Fabian v. Walsh, 134 Conn. 456, 460, 58 A.2d 384; 42 Am.Jur.2d, Inheritance, Estate, and Gift Taxes, § 105. Upon her death, the decedent by will was free to bequeath the subjectmatter of the power to whomever she wished, including her own estate, and the donor's son received no less as the taker in default under the donor's testamentary trust than he would have received had the decedent expressly exercised the power on his behalf. "(T)axation is not so much concerned with the refinements of title as it is with the actual command over the property taxed.' (Citations omitted.)' Estate of Sanford v. Commissioner of Internal Revenue, 308 U.S. 39, 43, 60 S.Ct. 51, 56, 84 L.Ed. 20.

Taxing statutes are to be strictly construed. Connecticut Light & Power Co. v. Sullivan, 150 Conn. 578, 582, 192 A.2d 545. In the enactment of Public Acts 1969, No. 796, however, it is obvious that the General Assembly did not deal with what Mr. Justice Frankfurter called the 'recondite niceties of property law.' Estate of Rogers v. Helvering, 320 U.S. 410, 414, 64 S.Ct. 172, 88 L.Ed. 134. That act unequivocally reaches the transfer of economic benefits to an appointee upon an exercise of a power of appointment by a donee and to a taker in default by the omission of its exercise notwithstanding prior taxation in the donor's estate. See In re Estate of Grady, 79 Wash.2d 41, 483 P.2d 114; Thompson, 'Inheritance Taxation and Powers of Appointment,' 1939 Wis.L.Rev. 254, 263-70; cf. Wilhelm, Conn. Estates Practice, Death Taxes § 40; 42 Am.Jur.2d, Inheritance, Estate, and Gift Taxes, §§ 40, 139; notes, 18 A.L.R. 1470, 1475, 23 A.L.R. 738, 64 A.L.R. 740, 741, 124 A.L.R. 653, 655, 141 A.L.R. 954, 955, 150 A.L.R. 730, 732, 174 A.L.R. 635, 637. 'The imposition of a tax is a legislative function and in its application the courts have no choice but to follow the intent of the legislature. Here that intent is clearly and plainly expressed so as to apply to the transfer under consideration. Any feelings of apparent inequity dissolve if we bear in mind that 'the thing burdened is the right to receive.' Leach v. Nichols, . . . 285 U.S. 165, 169, 52 S.Ct. 338, 340, 76 L.Ed. 681.' Bishop...