Tax Com'r v. Bissell's Estate

• Decision Date: 05 July 1977
• Citation: 377 A.2d 305,173 Conn. 232
• Parties: TAX COMMISSIONER v. ESTATE of Lebbeus F. BISSELL et al.
• Court: Connecticut Supreme Court

Page 305

377 A.2d 305

173 Conn. 232

TAX COMMISSIONER v. ESTATE of Lebbeus F. BISSELL et al.

Supreme Court of Connecticut.

Argued March 3, 1977.

Decided July 5, 1977.

James F. Dawson, Atty. Gen., with whom were Robert J. Hale, First Asst. Tax Commissioner, and, on the brief, Carl R. Ajello, Atty. Gen., for appellant (plaintiff).

John S. Mason, Jr., for appellee (named defendant).

Before HOUSE, C. J., and LOISELLE, BOGDANSKI, LONGO and SPEZIALE, JJ.

SPEZIALE, Associate Justice.

This is an appeal from a decree of the Probate Court for the district of Ellington applying the Connecticut succession tax (General Statutes, c. 216) to the named defendant's estate. The action was reserved by the Superior Court for the advice of this court. The parties stipulated to the pertinent facts and submitted three questions upon which the advice of this court is requested. ¹ Practice Book §§ 738, 739; Naylor v. Brown, 166 Conn. 581, 353 A.2d 709.

Lebbeus F. Bissell, hereafter also referred to as the decedent or donor, died testate on April 15, 1972. He was survived by his wife, Katherine S. Bissell, hereafter also referred to as the donee, her two sons by a prior marriage (the donor's stepsons), and several issue of these sons. The donor's will, dated March 24, 1972, contained a frequently used estate planning design involving two trusts, a "marital deduction trust" and a residuary trust. Under the will, Mrs. Bissell was to receive all of the annual net income of the trust for her life and was given both the unlimited power to withdraw principal at any time during her life and a general power of appointment over the trust assets at her death. In the event these powers were not exercised in full, the amount not withdrawn or appointed was to be added to the residuary trust upon her death. This residuary trust, upon Mrs. Bissell's death, was to be divided into equal portions for her sons and their respective issue. In general terms, each portion would be held for the benefit of the respective son for his life and, upon his death, it would be distributed to his issue in accordance with a prescribed timetable.

Mrs. Bissell, the donee, died testate on June 17, 1972, before the succession tax due in her husband's estate had been computed. She had only partially exercised her general power of appointment over the marital deduction trust, by directing in her second codicil that the portion of the federal estate taxes and state succession taxes attributable to inclusion of the marital deduction trust in her estate, determined at the highest applicable rate, be charged against the marital deduction trust. The unappointed bulk of the assets in the marital deduction trust, therefore, passed into the residuary trust according to the terms of her husband's will.

Because Mrs. Bissell, under her husband's will, was the donee of a general power of appointment over the marital deduction trust at the time of her death, succession taxes were imposed on her estate for the value of the trust pursuant to §§ 12-345b [173 Conn. 235] through 12-345e of the General Statutes. ² Mrs. Bissell's estate agreed with the tax commissioner's valuation of the marital deduction trust and with his computation of the succession tax due in her estate.

The subject of the questions reserved is the amount of succession taxes which were due in Mr. Bissell's (the donor's) estate for the value of the marital deduction trust because he had transferred the property at his death subject to a general power of appointment of which he was the donor. General Statutes § 12-345e. ³ In computing this succession tax, the tax commissioner determined that because of the donee's power to appoint, it was impossible at the date of the donor's death to ascertain who would ultimately take the property and in what amount. Accordingly, the tax commissioner offered the donor's estate a compromise computation of the tax 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." Naylor v. Brown, 166 Conn. 581, 583, 353 A.2d 709, 710. The tax commissioner's offer sought to impose a rate of succession tax as if the beneficial succession in the marital deduction trust at the time of the donor's death was a life use in Mrs. Bissell, with successive life uses in his two stepsons, and the remainder in fee to the stepsons' issue. The donor's estate rejected the compromise computation, arguing that for succession tax purposes the marital deduction trust passed entirely to Mrs. Bissell at her husband's death, and, therefore, because there were no contingencies as to who would take, § 12-355 was inapplicable.

Because an agreement was not reached, the tax commissioner, pursuant to § 12-355(b), then issued a final computation of the tax at the highest rate, which happened to be the same as the compromise computation. The donor's estate challenged the correctness of this computation on the same basis that it rejected the compromise offer. The Probate Court, after a hearing, agreed with the contention of the donor's estate and issued a decree holding that the marital deduction trust should be treated as passing entirely to the donor's wife at the time of his death and ordered that the succession tax in the donor's estate be recomputed entirely at the AA rate, the lowest rate. The tax commissioner filed an appeal from this decree with the Superior Court which reserved the legal questions for the advice of this court.

The real dispute here is over the rate of taxation. The donor's estate contends that the marital deduction trust should be taxed as though it passed entirely to the widow (AA rate); the tax commissioner claims, however, that the marital deduction trust should be taxed as if there were: a life use in the widow (AA rate), with a successive life use in the stepsons (B rate), and a remainder interest in the issue of the stepsons (C rate).

The position of the donor's estate results in a significantly smaller amount of tax, because the rate of the Connecticut succession tax depends not only on the value of the property passing on a decedent's death, but also on the identity of the persons inheriting the property. Section 12-344 of the General Statutes establishes classes of beneficiaries depending upon their relationship to a decedent, with the lowest rates applicable to class AA (spouse), comparable rates but lower exemptions applicable to class A (ancestors and descendants), higher rates applicable to class B (certain in-laws, siblings, stepchildren, etc.), and the highest rates applicable to class C (all other beneficiaries). Mrs. Bissell (the spouse) would thus be a class AA beneficiary, her sons (the donor's stepsons) would be class B beneficiaries, and their issue (falling in the class of "all other beneficiaries") would be class C beneficiaries. Computed entirely at the AA rate (an outright passing to Mrs. Bissell), the succession tax in the donor's estate would be $810,234, whereas the tax commissioner's computation (life use in Mrs. Bissell, class AA; successive life uses in the donor's stepsons, class B; remainder in their issue, class C) produces a succession tax of $1,026,963.20.

In support of its contention that the marital deduction trust should be taxed in the donor's estate entirely at the lowest rate (AA), as if it passed completely to Mrs. Bissell upon the donor's death, the donor's estate relies largely on an "economic benefits" theory, Naylor v. Brown, supra; and on statutory construction of § 12-345e, which was amended by the italicized language, in 1974, to read as follows: "Nothing contained in sections 12-345b to 12-345e, inclusive, shall be deemed to relieve from taxation, under this chapter, in the estate of the donor of a general power of appointment, the transfer of the property subject to such power. FOR PURPOSES OF COMPUTING THE RATE OF TAXATION UNDER THIS CHAPTER IN THE ESTATE OF THE DONOR, THE PROPERTY TRANSFERRED SUBJECT TO SUCH POWER SHALL BE DEEMED TO PASS TO THE DONEE OF THE POWER, AND THE DONEE OF THE POWER SHALL BE DEEMED TO TAKE SUCH PROPERTY. The provisions of section 12-340 shall apply with respect to any tax imposed by this section." Public Acts 1974, No. 74-46.

Death taxes are generally divided into estate or transfer taxes and inheritance or succession taxes. An estate or transfer tax, such as the federal estate tax, is a tax imposed on the privilege of transmitting property at death. An inheritance or succession tax is a tax imposed on the privilege of receiving property from a decedent at death. Lowndes, Kramer and McCord, Federal Estate and Gift Taxes (3d Ed.) § 1.2; 42 Am.Jur.2d, Inheritance, Estate, and Gift Taxes, § 2. "If a testamentary transfer be likened to pitching and catching a ball, an estate or transfer tax would be a tax upon the privilege of pitching the ball, and an inheritance or succession tax would be a tax upon the privilege of catching the ball." Lowndes, Kramer and McCord, op. cit., p. 3.

The rationale of Connecticut's succession tax was recently discussed by this court: "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." Naylor v. Brown, 166 Conn. 581, 586-87, 353 A.2d 709, 712. This tax is " 'not so much concerned with the refinements of title as it is...