Schroeder v. Zink, A--56

• Decision Date: 06 February 1950
• Docket Number: No. A--56,A--56
• Citation: 4 N.J. 1,71 A.2d 321
• Parties: SCHROEDER v. ZINK.
• Court: New Jersey Supreme Court

Page 1

4 N.J. 1

71 A.2d 321

SCHROEDER v. ZINK.

No. A--56.

Supreme Court of New Jersey.

Argued Dec. 5, 1949.

Decided Feb. 6, 1950.

Ralph E. Lum, Jr., Newark argued the cause for the appellants (Lum, Fairlie & Foster, Newark, attorneys).

William A. Moore, Trenton, argued the cause for the respondent (Theodore D. Parsons, Attorney General, attorney).

The opinion of the court was delivered by

ACKERSON, J.

This appeal involves the applicability of the Transfer Inheritance Tax Act, R.S. 54:34--1(c), N.J.S.A., to the transfer of corporate stock under the circumstances disclosed by the following stipulated facts. On July 23, 1937, Arthur F. Schroeder and his brother, Leslie, were officers of and the principal stockholders in a New Jersey corporation known as Atlas Refinery (hereinafter referred to as the Refinery). Each brother owner a total of 527 shares of the common stock of that company out of a total of 1095 then outstanding. Arthur was then forty-three years of age, Leslie was thirty-eight, and both were in good health. On that date they entered into an agreement in writing whereby each bound himself to sell to the corporation, through his executor or administrator, at his death, and the company bound itself to buy 250 shares of his stock at $100 per share. The stock then had a market value of less than $100 per share. Payment for said shares was to be made from the proceeds of insurance policies taken out by the Refinery on the lives of the brothers.

Arthur F. Schroeder died testate on April 2, 1947, nearly ten years after making the agreement, having retained his 527 shares of which 277 passed by his will to his wife and son and the remaining 250 were delivered to the Refinery by his executrix pursuant to the aforesaid contract at the agreed price of $100 per share, totaling $25,000.

The Transfer Inheritance Tax Bureau thereupon levied an inheritance tax against the beneficiaries under decedent's will on the $25,000 thus received for the 250 shares of stock acquired by Refinery under the aforesaid contract, and at the same time assessed the remaining 277 shares passing to the beneficiaries under the will on the basis of $420 per share which, it is stipulated, was its fair market value on the date of the decedent's death. These assessments were paid without dispute.

The Bureau also levied a transfer tax against Atlas Refinery based on the difference of $320 per share between the contract price of $100 per share and the fair market value of the other common stock, i.e., $420 per share. This difference, amounting to $80,000, was assessed under R.S. 54:34--1(c), N.J.S.A., on the theory that it was a transfer, to that extent without consideration, 'intended to take effect in possession or enjoyment at or after such death'. The tax thereon, amounting to $6,400 was paid with interest by Refinery under protest and on appeal this assessment was affirmed by the Appellate Division of the Superior Court, 4 N.J.Super. 40, 66 A.2d 456, whose judgment is brought here for review on certification granted pursuant to Rule 1:5--2 on application bh the executrix of the aforesaid estate and the Refinery. The validity and enforceability of the contract involved is not in issue. We are concerned only with the validity of the tax imposed upon the transfer of the stock to the Refinery as hereinabove described.

The appellants contend that the transfer of the stock to Refinery is not a taxable transfer within the intendment of the applied statute, R.S. 54:34--1(c), N.J.S.A. They argue that the statute is restricted in operation to transfers that are substitutes for testamentary dispositions and this transfer is not of that character. Further it is said that the transaction in question was performed for a full and adequate consideration, and therefore, in the absence of a donative element, is not taxable. It is also argued that the effect and operation of the contract and the adequacy of the consideration supporting it are to be tested under the circumstances existing in 1937 when the contract was made and not in the light of subsequent events.

R.S. 54:34--1 and 1(c), N.J.S.A., impose a tax on all Inter vivos transfers of a resident's property of the value of five hundred dollars or over, in trust or otherwise (except those specifically exempted by R.S. 54:34--4, N.J.S.A.), passing 'by deed, grant, bargain, sale or gift made in contemplation of the death of the grantor, vendor or donor, or Intended to take effect in possession or enjoyment at or after such death' (Italics supplied). R.S. 54:33--1, N.J.S.A., defines the term 'transfer' as including 'the passing of property, or any interest therein, in possession or enjoyment, present or future, by distribution by statute, descent, devise, bequest, grant, deed, bargain, sale or gift'.

It must be remembered that the assessment here involved is not based upon the theory of an Inter vivos gift made in contemplation of death, but upon the alternative theory expressed in the statute of a transfer 'intended to take effect in possession of enjoyment at or after such death'. The test for determining when a transfer takes effect in order to fall within the latter theory for taxing purposes is whether possession or enjoyment of the property is intended, to take effect at or after the transferor's death, irrespective of the time when title is to vest. The important question is 'whether the shifting of the possession ad enjoyment of the subject-matter of the succession is dependent upon the settlor's death. Is his death a determinative factor in the devolution of the possession and enjoyment of the estates granted?' Hartford v. Martin, 122 N.J.L. 283, 287, 4 A.2d 31, 33 (E. & A. 1938). The thing taxed under our transfer inheritance tax statute is the transfer of the interest or property withheld from possession and enjoyment until the transferor's death. Avery v. Walsh, 138 N.J.Eq. 80, 88, 46 A.2d 912 (Prerog.1946); In re Hollander's Estate, 123 N.J.Eq. 52, 57, 195 A. 805 (Prerog.1938); Koch v. McCutcheon, 111 N.J.L. 154, 156, 167 A. 752 (Sup.Ct. 1933); Hartford v. Martin, supra; Note: 6 A.L.R., 2d, 223, et seq. In this view there can be no doubt that the present transfer took effect in possession and enjoyment at or after Arthur Schroeder's death.

The broad purpose of the statute is to tax successions at death. It will be noted that the language used is broad enough to include such transfers made in exchange for a consideration of equal value received by the transferor. From the history and purpose of the legislation, however, it is obvious that it was not intended to tax transfers of that kind, even though made in contemplation of death or intended to take effect at death. The result of such transfers, at full value, would in nowise defeat the statutory purpose; the estate would not be depleted but merely changed in form. So by necessary implication such transfers have been excluded from the operation of the statute, and the principal reason for so doing is that by such transfers the estate of the transferor is not depleted. In re Kraft's Estate, 103 N.J.Eq. 543, 546 et seq., 143 A. 764 (Prerog.1928); Hartford v. Martin, supra, 122 N.J.L. at page 287, 4 A.2d 31; Note, 157 A.L.R. 965, 979. Obviously, then, it is only when an adequate valuable consideration of substantially equal value to the property transferred is received by the transferor, that the transfer intended to take effect at his death is not taxable. In re Kraft, supra, 103 N.J.Eq. at page 548, 143 A. 764; In re Deutz's Estate, 105 N.J.Eq. 671, 149 A. 257 (Prerog.1930); Hartford v. Martin, supra.

It follows as a natural corollary of the foregoing principles that, to the extent the consideration paid for a transfer intended to take effect at or after the death of the transferor is 'inadequate' in value as compared to the value received, the excess is tantamount to a gift and deemed donative in nature. Therefore, since there is a succession thereto at death, it is regarded as a substitute for a testamentary disposition and taxable. In re Deutz's Estate, supra, 105 N.J.Eq. at page 677, 149 A. 257. Cf. Hartford v. Martin, supra, 122 N.J.L. at page 287, 4 A.2d 31; Hagy v. Kelly, 135 N.J.Eq. 436, 446, 39 A.2d 386 (Prerog.1944); In re Kraft, supra; Fidelity Union Trust Co. v. Thayer-Martin, 118 N.J.L. 277, 288, 192 A. 74 (Sup.Ct.1937), affirmed, 119 N.J.L. 426, 197 A. 41 (E. & A. 1937); In re Huggins's Estate, 96 N.J.Eq. 275, 282, 125 A. 27 (Prerog.1924), affirmed, sub nom. Fairleigh v. Bugbee, 130 A. 923, 3 N.J.Misc. 1072 (Sup.Ct.1925), affirmed, 103 N.J.L. 182, 134 A. 917 (E. & A. 1926); In re Hollander's Estate, supra, 123 N.J.Eq. at page 58, 195 A. 805; 28 Am.Jur. (Inheritance, Estate and Gift Taxes) § 184, p. 98.

It is not necessary, as the appellant suggests, in transfers of this type, that there be a donative Intent when the contract is made; the statute is not so phrased; it reaches all transfers (except those specifically exempted) made to take effect in possession or enjoyment at or after the death of the transferor to the extent that they are not supported by a full and adequate consideration. In re Deutz's Estate, supra; Hartford v. Martin, supra. A contrary interpretation would furnish an easy method for evading the legislative purpose. That the statute is not confined to transfers which are wholly donative in character is further evidenced by the inclusion therein of transfers 'by deed, grant, bargain, sale' to take effect at or after the death of the 'grantor, vendor or donor'. The class of taxable transfers includes those accomplished by contract since they fall within the statutory scope of a 'bargain' or 'sale'. In re Gemmell's Estate, 123 N.J.Eq. 315, 320, 197 A. 428 (Prerog.1938); In re Deutz's Estate, supra, 105 N.J.Eq. at page 677, 149 A. 257; In re Huggins, supra.

In taxing Inter vivos transfers the substance rather than the form of the transfer controls. Hartford v. Martin, supra, 122 N.J.L....