Thurston's Estate, In re

• Decision Date: 24 October 1950
• Citation: 36 Cal.2d 207,223 P.2d 12
• Parties: In re THURSTON'S ESTATE. KUCHEL, Controller, v. TRAMMELL et al. L. A. 21236.
• Court: California Supreme Court

Page 12

223 P.2d 12

36 Cal.2d 207

In re THURSTON'S ESTATE KUCHEL, Controller, v. TRAMMELL et al.

L. A. 21236.

Supreme Court of California, in Bank.

Oct. 24, 1950.

Rehearing Denied Nov. 20, 1950.

James W. Hickey, Chief Inheritance Tax Attorney, Sacramento, Morton L. Barker, Deputy Inheritance Tax Attorney, Walter H. Miller, Los Angeles, and J. D. Lear, Assistant Inheritance Tax Attorney, Sacramento, for appellant.

Geo. W. Trammell, in pro per.

West, Vizzard, Howden & Baker, Bakersfield, amici curiae on behalf of respondents.

TRAYNOR, Justice.

On October 3, 1941, decedent conveyed two parcels of real property to his children, respondents herein, and reserved to himself a life estate in each. The transfer was made without consideration, and a gift tax was paid thereon, measured by the market value of the remainder interests transferred. On December 29, 1942, decedent relinquished to respondents his life estate in one of the two parcels, for which they paid him $10,000. The controller concedes that the consideration is adequate for the transfer of the life estate and does not contend that the original transfer of the remainder interests or the subsequent relinquishment of decedent's life estate in one of the parcels was made in contemplation of death. Decedent retained his life estate in the other parcel until his death on May 19, 1946.

The controller contends that an inheritance tax is due upon the transfer of both parcels by the deed of October 3, 1941, measured by their market value at the date of decedent's death less the consideration paid for the relinquishment of the life estate in one parcel, subject to a credit for the gift tax paid upon the original transfer. Respondents concede that the tax is properly imposed upon the transfer of the parcel in which decedent retained a life estate until his death. They object, however, to the report of the inheritance tax appraiser including as taxable the transfer of the parcel in which decedent relinquished his life estate. The trial court sustained respondent's objections and entered an order fixing the inheritance tax due. The controller appeals from that order.

Section 13644 of the Revenue and Taxation Code provides that 'A transfer conforming to Section 13641 and under which the transferor expressly or impliedly reserves for his life an income or interest in the property transferred is a transfer subject to this part.' No provision is made for the avoidance of the tax by the subsequent relinquishment of the reserved life estate. The controller therefore contends that the taxable event is the transfer with the reservation of a life estate, that the tax attaches at that time, and that its imposition is not affected by the subsequent relinquishment of the life estate upon which the tax is predicated. Respondents contend, however, that the tax is imposed only upon the beneficial succession to property at death and that, unless a transfer of ownership is effected at the death of the decedent, the tax cannot be sustained.

The inheritance taxi is primarily a tax upon the succession to property at death. The statute expressly includes as subjects of inheritance taxation transfers of property by will, succession, or survivorship, and transfers of the proceeds of life insurance. An inheritance tax limited to the taxation of transfers from the dead to the living, however, could be easily avoided. 'The common and perhaps not unnatural aversion of property owners to the burden of taxation appears to have applied with special force to the diminution of the estates left by them at death through the imposition of estate, inheritance, or succession taxes. The early statutes taxing property passing by will or inheritance were followed by resort to various means for avoiding subjection to the tax. Among the devices most simple and commonly resorted to were gifts in contemplation of death, and transfers, in trust or otherwise, whereby the transferor reserved to himself the life use or income for life. These artifices were met by provisions in the taxing statutes calculated to close such avenues of tax avoidance.' Blodgett v. Guaranty Trust Co. of N. Y., 114 Conn. 207, 211-212, 158 A. 245, 246; Matter of Keeney, 194 N.Y. 281, 287, 87 N.E. 428; Helvering v. Bullard, 303 U.S. 297, 302, 58 S.Ct. 565, 82 L.Ed. 852; Milliken v. United States, 283 U.S. 15, 20, 51 S.Ct. 324, 75 L.Ed 809; Estate of Potter, 188 Cal. 55, 63, 204 P. 826. Revenue and Taxation Code sections 13641-13648 accordingly provide for the taxation of specified inter vivos transfers by which the owner of property retains such an interest therein or imposes such restrictions upon the use thereof that for tax purposes he is regarded as the owner of the property at his death and his transfer thereof as a testamentary disposition. 'The statute taxes not merely those interests which are deemed to pass at death according to refined technicalities of the law of property. It also taxes inter vivos transfers that are too much akin to testamentary dispositions not to be subjected to the same excise.' Helvering v. Hallock, 309 U.S. 106, 112, 60 S.Ct. 444, 448, 84 L.Ed. 604; Estate of Potter, supra, 188 Cal. 63, 204 P. 826; Chambers v. Lamb, 186 Cal. 261, 266, 199 P. 33; Klein v. United States, 283 U.S. 231, 234, 51 S.Ct. 78, 75 L.Ed. 738; Goldstone v. United States, 325 U.S. 687, 692, 65 S.Ct. 1323, 89 L.Ed. 1871; Commissioner v. Cardeza's Estate, 3 Cir., 173 F.2d 19, 27; Commissioner v. Hager's Estate, 3 Cir., 173 F.2d 613, 616; In re Estate of Rising, 186 Minn. 56, 63-64, 242 N.W. 459; Cochran v. McLaughlin, 129 Conn. 176, 182, 27 A.2d 120; Blodgett v. Guaranty Trust Co., 114 Conn. 207, 219, 161 A. 83; see 1 Paul, Estate and Gift Taxation, § 2.13, p. 140; Eisenstein, Another Glance at the Hallock Problem, 1 Tax L.Rev. 430, 438-439; cf. Helvering v. Clifford, 309 U.S. 331, 334, 60 S.Ct. 554, 84 L.Ed 788; Du Pont v. Commissioner, 289 U.S. 685, 689, 53 S.Ct. 766, 77 L.Ed. 1447. The tax is imposed on the inter vivos transfer but its collection is postponed until the death of the transferor, and it is measured by the market value of the transferred property at the date of his death. Revenue and Taxation Code, § 13402; Chambers v. Lamb, 186 Cal. 261, 266, 199 P. 33; Estate of Potter, 188 Cal. 55, 59, 204 P. 826; Chambers v. Gibb, 186 Cal. 196, 198, 198 P. 1032; Estate of Murphy, 182 Cal. 740, 744, 747, 190 P. 46; Central Hanover Bank & Trust Co. v. Kelly, 319 U.S. 94, 97-98, 63 S.Ct. 945, 87 L.Ed. 1282; see also Fidelity-Philadelphia Trust Co. v. Rothensies, 324 U.S. 108, 110, 65 S.Ct. 508, 89 L.Ed. 782; Flick's Estate v. Commissioner, 5 Cir., 166 F.2d 733, 739; 58 Yale L. Jour 313, 316. The transfer of October 3, 1941, by which decedent reserved a life estate in the property was therefore taxable under section 13644.

Even though a tax attaches to a transfer when the transferor has reserved a life estate in the property, however, it can be avoided by the subsequent relinquishment of the life estate before the death of the transferor, if such relinquishment is not made in contemplation of death. The express purpose of the provisions for the taxation of specified inter vivos transfers is to reach 'every transfer made in lieu of or to avoid the passing of property by will or the laws of succession.' Revenue and Taxation Code, § 13648; Estate of Potter, supra, 188 Cal. 63, 204 P. 826, and only such transfers are subject to taxation. The tax is not imposed on transfers not in contemplation of death to transferees whose interest in and possession or enjoyment of the property are not affected by whether the transferor lives or dies. It is immaterial whether such a transfer is accomplished by a single transaction or, as in the present case, by an initial transfer and the subsequent relinquishment, not in contemplation of death, of the only interests retained in the first transfer whose retention until the death of the transferor would have resulted in the estate or inheritance taxation of the transfer. Allen v. Trust Co. of Georgia, 326 U.S. 630, 636, 637, 66 S.Ct. 389, 90 L.Ed. 367.

Although the inter vivos transfer is the subject of the tax, Helvering v. Hallock, supra, 309 U.S. 112, 60 S.Ct. 444, 84 L.Ed. 604, its taxability is determined by the restrictions on the enjoyment and possession of the property at the death of the transferor, and not by the restrictions at the time of the transfer. If, notwithstanding that the transfer was taxable at the time it was made, the only retained interest upon which taxation may be predicated is extinguished before the death of the transferor, the inter vivos transfer is not subject to the inheritance tax. See, Rottschaefer, Taxation of Transfers Taking Effect in Possession at Grantor's Death, 26 Iowa L.Rev. 514, 526. 'The disappearance of a decedent's reversionary interest, together with the resulting estate tax liability, prior to death through events beyond the decedent's control is a possibility in many situations such as the one in issue. * * * But the imposition and computation of the estate tax are based upon the interests in actual existence at the time of the decedent's death.' Goldstone v. United States, 325 U.S. 687, 693, 65 S.Ct. 1323, 1326, 89 L.Ed. 1871; Allen v. Trust Co. of Georgia, supra, 326 U.S. 637, 66 S.Ct. 389, 90 L.Ed. 367; Fidelity-Philadelphia Trust Co. v. Rothensies, 324 U.S. 108, 111, 65 S.Ct. 508, 89 L.Ed. 782; Estate of Madison, 26 Cal.2d 453, 457, 462-463, 159 P.2d 630. This reasoning has been invoked by several state courts to permit the avoidance of inheritance taxation by the inter vivos relinquishment of a reserved life estate under statutes, providing for the inheritance taxation of a transfer in which such life estate was reserved. Lamb's Estate v. Morrow, 140 Iowa 89, 117 N.W. 1118; Brown v. Guilford, 181 Iowa 897, 165 N.W. 182; People v. Welch's Estate, 235 Mich. 555, 209 N.W. 930; see, Rottschaefer, supra; cf. Hartford v. Martin, 122 N.J.L....