IN RE: WILLIS' ESTATE.

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District Court of Appeal, Second District, Division 3, California.

IN RE: WILLIS' ESTATE. KUCHEL v. WILLIS.

Civ. 16620.

Decided: March 03, 1949

James W. Hickey, Chief Inheritance Tax Atty., of Sacramento, Morton L. Barker, of Los Angeles, and Raymond G. LaNoue, Deputy Inheritance Tax Attys., of Sacramento, for appellant. Arnold Praeger, of Los Angeles, for respondent.

Appeal by the State Controller from an order of the probate court directing a refund of a portion of an inheritance tax paid on a bequest of shares of corporate stock. The appeal is presented on an agreed statement of facts. Rules on Appeal, Rule 6; 22 Cal.2d 1, 6.

Charles Golden Willis died February 26, 1946. His will, duly admitted to probate, bequeathed to Bertram Paul Willis 691 shares of the common stock of C.G. Willis & Sons, a corporation, and half of the residue of his estate. The 691 shares of stock were appraised by the inheritance tax appraiser as having a value of $198,779.97 on the date of death. The appraiser made the appraisal on the basis of a balance sheet which the corporation submitted to him showing the assets and liabilities of the corporation as of February 26, 1946.

Bertram Paul Willis was taxed with the 691 shares of stock and with half of the residue. The total value of the estate taxed to him was $262,721.40 upon which the tax was reported to be $15,794.93. On April 14, 1947, an order was made fixing the tax in that amount. The tax was paid to the county treasurer. The order became final.

On December 12, 1947, the Commissioner of Internal Revenue for the United States levied a deficiency income tax for the years 1943 and 1944 against C.G. Willis & Sons in the sum of $17,802.58. The deficiency was paid by the corporation to the Collector of Internal Revenue on December 30, 1947. It is agreed that if the income tax deficiency had been determined by the Commissioner of Internal Revenue at or prior to the time the inheritance tax appraiser made his appraisal of the 691 shares of stock or prior to the time of payment of the inheritance tax the appraiser would have taken such deficiency into consideration in determining the value of the stock as of the date of death. The value of the 691 shares as of the date of death, had the income tax deficiency been established prior to that date, would have been $183,944.20, instead of $198,779.97, resulting in a reduction of $1,335.22 in the total amount of tax which would have been due from Bertram Paul Willis.

On March 9, 1948, Bertram Paul Willis filed a petition in the court below for a refund of the amount by which the inheritance tax would have been reduced had the value of the 691 shares of stock been reduced by the proper proportion of the income tax deficiency on the ground that the levy of the deficiency against the corporation served to reduce the value of the shares of stock and that he was entitled to a refund under the provisions of section 14401 of the Revenue and Taxation Code. The court ordered a refund as prayed. The Controller appeals.

The question for decision is whether respondent is entitled to the refund under the provisions of section 14401 of the Revenue and Taxation Code, which reads: “If any tax has been paid to the county treasurer on a transfer subject to a contingent incumbrance or any contingency which might burden, abridge, defeat, or diminish the estate or interest of the transferee, and the gift was valued without allowance for the incumbrance or contingency, upon the taking effect of the incumbrance or the happening of the contingency the person who paid the tax is entitled to a refund in an amount equal to the difference between the tax paid and any smaller tax that would have been paid on a valuation of the estate or interest actually enjoyed or of the estate or interest remaining after the taking effect of the incumbrance or the happening of the contingency.” The problem is whether the levy of the deficiency was such a contingency and whether respondent's interest in the shares of stock was burdened or diminished by the levy against the corporation.

Proceedings under tax statutes are in invitum and the statutes will be strictly construed in favor of the taxpayer and against the taxing power. Estate of Potter, 188 Cal. 55, 64, 204 P. 826; Estate of Steehler, 195 Cal. 386, 389, 233 P. 972; Uhl v. Badaracco, 199 Cal. 270, 282, 248 P. 917; People v. Mahoney, 13 Cal.2d 729, 739, 91 P.2d 1029; McDougald v. Boyd, 172 Cal. 753, 756, 159 P. 168.

A share of stock constitutes an undivided share or interest in the property, assets, profits or business of the corporation. Newell–Murdoch Realty Co. v. Wickman, 183 Cal. 39, 45, 190 P. 359; Estate of Duffill, 180 Cal. 748, 756, 183 P. 337; MacDermot v. Hayes, 175 Cal. 95, 114, 170 P. 616; Burke v. Badlam, 57 Cal. 594, 601; Atkins v. Gamble, 42 Cal. 86, 99, 10 Am.Rep. 282; 6a Cal.Jur. 352, sec. 189. It is an interest in the corporation aliquot and undivided as to specific properties or assets. Fletcher Cyclopedia Corporations, Perm.Ed. Vol. 11, sec. 5100. “The stockholders are the joint owners of the franchise and property of the corporation, each being entitled to an undivided share thereof, and the only office of the certificate is to furnish the evidence of the quantum of interest held by the owner of the certificate.” Atkins v. Gamble, supra, 42 Cal. 86, 99, 10 Am.Rep. 282; see, also, Robbins v. Pacific Eastern Corp., 8 Cal.2d 241, 275, 65 P.2d 42; Jean v. Jean, 207 Cal. 115, 120, 272 P. 313; 6a Cal.Jur. sec. 189, p. 352. “* property is held by the corporation in trust for the stockholders, who are the beneficial owners of it in certain proportions called shares, and which are usually evidenced by certificates of stock. The share of each stockholder is undoubtedly property, but it is an interest in the very property held by the corporation. It is his right to a proportionate share of the dividends and other property of the corporation. *” (Italics added.) Burke v. Gamble, supra, 57 Cal. 594, 601. “When one purchases or acquires stock in a corporation, no matter at what time, he acquires a fractional interest in the capital stock, assets, profits, and liabilities of the corporation.” 13 Am.Jur. 465, sec. 412, In Gregory v. State of California, 77 Cal.App.2d 26, 36, 174 P.2d 863, 175 P.2d 542, it was held that a gift to a corporation was an indirect gift to the stockholders of the corporation.

The distinction is between legal and equitable ownership or title. The legal ownership and title is in the corporation. The beneficial or equitable ownership is in the stockholders. San Diego v. S.D. & L.A.R.R. Co., 44 Cal. 106, 116; Rossi v. Caire, 174 Cal. 74, 81, 161 P. 1161; W.F. Boardman Co. v. Petch, 186 Cal. 476, 481, 199 P. 1047; Miller v. McColgan, 17 Cal.2d 432, 437, 110 P.2d 419, 134 A.L.R. 1424; 13 Am.Jur. 465, sec. 411. In W.F. Boardman Co. v. Petch, supra, it was said, 186 Cal. at page 481, 199 P. 1050: “A corporation is the creature of its stockholders and it holds its property in trust for them. As between themselves and the corporation, the stockholders are the beneficial owners of the property held by the corporation. Havemeyer v. Superior Court, 84 Cal. [327], 362, 24 P. 121, 10 L.R.A. 627, 18 Am.St.Rep. 192; Ashton v. Dashaway Ass'n, 84 Cal. [61], 65, 22 P. 660, 23 P. 1091, 7 L.R.A. 809; Hobbs v. Tom Reed, etc., Co., 164 Cal. [[497], 499, 501, 129 P. 781, 43 L.R.A.,N.S., 1112; Rossi v. Caire, 174 Cal. 81, 161 P. 1161.”

It thus appears that respondent as a stockholder had a proportionate beneficial ownership in the assets of the corporation.

Was that share burdened or diminished by the happening of a contingency within the meaning of section 14401? A contingency is defined as: “The quality of being contingent or casual, the possibility of coming to pass; also an event which may occur; a casualty; a mere possibility of happening; an uncertain future event; some specified time, thing, or event, in the future, which may or may not occur; also a fortuitous event which comes without design, foresight, or expectation. ‘Contingency’ implies futurity, has the element of uncertainty and doubt, is in the nature of a casualty, accident, or chance, and results from an agency, the operation of which is uncertain, and is dependent on a possibility and on causes which are undetermined or unknown. *” 17 C.J.S., Contingency, p. 181. See, also, Verdier v. Roach, 96 Cal. 467, 474, 31 P. 554; Vandegrift v. Riley, 220 Cal. 340, 351, 30 P.2d 516. The levy of the deficiency income tax was a fortuitous event which came without design, foresight or expectation. At the date of death of the testator it was a contingency possible of happening. Applying the rule of construction which we have stated, it appears clear that the levy of the deficiency income tax was a contingency within the meaning of section 14401.

We think it obvious that the happening of the contingency—the levy of the deficiency assessment—imposed a burden upon and diminished respondent's interest in the corporation. The noun “burden” is defined as “that which is grievous, wearisome, or oppressive; also, an encumbrance of any kind”, and, as a verb, to “oppress with anything which is borne with difficulty or trouble; surcharge; as to burden a nation with taxes.” 1 Century Dict. 724. Webster defines a “burden” as “an obligatory expense which inconveniences.” Webster's New Int.Dict., 2d Ed., p. 357; see, also, 12 C.J.S., Burden, p. 559. The word has been frequently used with reference to taxes. Hewitt v. Dean, 91 Cal. 5, 13, 27 P. 423; Pioneer Express Co. v. Riley, 208 Cal. 677, 687, 284 P. 663; 24 Cal.Jur., sec. 9, p. 25. In Wells v. City of Savannah, 181 U.S. 531, 541, 21 S.Ct. 697, 701, 45 L.Ed. 986; the court said: “The word ‘burthen’ * is certainly sufficiently comprehensive to include municipal taxes.” Cf. Savings & Loan Society v. Austin, 46 Cal. 415, 495; see, also, Cook v. Pennsylvania, 97 U.S. 566, 24 L.Ed. 1015. The deficiency assessment was a burden upon the assets of the corporation. It follows that it was likewise a burden upon respondent's share or interest in those assets. It was an “obligatory” expense which was paid out of assets. It reduced both the quantum and value of respondent's interest.

Respondent's interest was likewise diminished. “Diminish” is defined as: “to make less in any manner; to reduce in bulk, amount, or degree; to lessen.” Webster's New Int.Dict., 2d Ed., p. 732. From a practical as well as a legal point of view, shares of stock have no value other than the value of the assets which they represent. Burke v. Badlam, supra; People v. Nat. Bk. of D. O Mills & Co., 123 Cal. 53, 60, 55 P. 685, 45 L.R.A. 747, 69 Am.St.Rep. 32. Spokane & Eastern Trust Co. v. Spokane County, 153 Wash. 332, 280 P. 3. When the deficiency assessment was paid out of corporate assets, thereby decreasing them, respondent's interest was correspondingly decreased. After payment of the deficiency, respondent's 691 shares of stock evidenced a smaller quantum of tangible property; although his absolute title to the shares was not affected, his equitable interest in the corporate assets was reduced in amount. If the assessment had been so great as to consume all of the corporate assets, his interest would have disappeared completely, for the value of his stock would then represent nothing but the paper upon which the certificates were printed. The value of a share of stock is measured by and corresponds proportionately to the value of the corporate capital, property and assets. Chesebrough v. City & County of San Francisco, 153 Cal. 559, 563, 96 P. 288; People v. National Bank of D.O. Mills & Co., 123 Cal. 53, 60, 55 P. 685, 45 L.R.A. 747, 69 Am.St.Rep. 32; Fletcher Cyclopedia Corporations, Perm.Ed., Vol. 11, sec. 5100. In Chesebrough v. City & County of San Francisco, supra, 153 Cal. 559, at page 563, 96 P. 288, 289, the court observed: “Shares of stock represent the value of all the assets of the corporation. People v. National Bank of D.O. Mills & Co., 123 Cal. 60, 55 P. 685, 45 L.R.A. 747, 69 Am.St.Rep. 32. As the shares of stock represent no value independent of the corporate property, when all such property is assessed to the corporation, it would be double taxation to assess the shares as well as the corporate property.” “Taxation of corporations and taxation of stockholders are separate and distinct matters, although of course a tax on a corporation is indirectly a tax on all the stockholders.” Cooley Taxation, 4th Ed., Vol. 3, sec. 969. “When the property of the corporation is assessed to it, and the tax thereon paid, who but the stockholders pay it? It is true that it is paid from the treasury of the corporation before the money therein is divided, but it is substantially the same thing as if paid from the pockets of the individual stockholders. * In the case of the corporation, take away all of its property, which, it must be remembered, includes its franchise, and the shareholder no longer has any property.” Burke v. Badlam, supra, 57 Cal. 594, 601. If the corporation makes, it is the stockholders' gain, and if it loses, they bear the loss. San Diego v. S.D. & L.A.R.R. Co., supra, 44 Cal. 106, 116. This is in effect agreed to by the parties, for, as we have stated, the agreed statement of facts says that the appraiser made his appraisal on the basis of the assets and liabilities of the corporation on the date of death; that if the income tax deficiency had been determined at that time he would have taken it into consideration in determining the value of the stock; and that it would have resulted in a reduction of $1,335.22 in the total tax which would have been due from respondent.

Estate of Miller, 184 Cal. 674, 195 P. 413, 16 A.L.R. 694, involved a transfer of stock made in contemplation of death, subject to tax. After the transfer and before the death of the transferor, the United States adopted the federal estate tax law. The United States made claim against the estate for taxes under this law. The validity of the claim was contested and was undetermined when the inheritance tax was reported in the administration of the Miller estate. The transferees—trustees—when it came to fixing the inheritance taxes on the transfer under California law, claimed that in case the claim of the United States should be finally upheld, the amount of the claim as established should be deducted from the value of the stock transferred in order to obtain the value upon which the California tax should be computed. In sustaining the claim of the trustees the Supreme Court said, 184 Cal. at page 677, 195 P. 414, 16 A.L.R. 694: “* the plain purpose of the act was that the clear market value of the beneficial interest transferred should be its net clear value”, and, 184 Cal. at page 680, 195 P. 415, 16 A.L.R. 694: “* It is plain that what the transferee receives is only the portion of what the decedent left which remains after the federal [estate] tax is taken.” The court quoted from Estate of Kennedy, 157 Cal. 517, 526, 108 P. 280, 29 L.R.A.,N.S., 428, as follows: “It would appear to be a most absurd and inequitable provision that imposed a tax on one for the privilege of succeeding as heir, devisee, or legatee to certain property of the decedent, when the very property to which he is so held to succeed is lawfully diverted by the probate court (in this case by operation of law) to other purposes and never can be distributed to him.”

Our conclusion is fortified by reference to other provisions made in the law for refund. The Inheritance Tax Law is Part 8 of Division 2 of the Revenue and Taxation Code. Chapter 10, of Part 8 treats of “Refunds.” Article 1 provides for a refund of the tax where the order fixing the tax is subsequently modified or reversed. Article 2 provides for a refund of any payment made in excess of the amount specified in the order fixing the tax. Article 3 provides for a refund of any additional tax if it is later found to exceed, or when added to the amount of the inheritance tax imposed by the state, to result in a total tax in excess of, the maximum state tax credit allowed by the federal estate tax law. Article 4 provides for a refund if a donee of a gift of a power of appointment on which a tax has been paid to the county treasurer irrevocably exercises, or obligates himself to exercise, the power, in whole or in part, in favor of a charitable beneficiary, and the superior court modifies its original order fixing the tax by a new order eliminating the gift as a taxable transfer to the extent that the power is so exercised, or obliged to be exercised. Article 4 also provides for a refund if property subject to a power of appointment on the gift of which a tax has been paid to the county treasurer goes, in whole or in part, to a charitable beneficiary as the result of a nonexercise of the power, in whole or in part, by the donee of the power, and the superior court modifies its original order fixing the tax by a new order, eliminating the gift as a taxable transfer to the extent that the property goes to the charitable beneficiary. In neither case is any time limit fixed for the exercise of the power or the making of the obligation to exercise it. Section 14401 is in Article 5, headed “Tax Where Property Valued Without Allowance for Incumbrance or Contingency.” Article 6 provides for a refund if any tax has been paid to the county treasurer at the highest rate possible on a transfer subject to a contingency or condition, upon the occurrence of which the right, interest, or estate of the transferee may, in whole or in part, be created, defeated, extended or abridged, and thereafter on the happening of the contingency or condition the property involved, or any part of it, goes to a person to whom a transfer of the property is exempt or to a person to whom a transfer of the property is taxable at a rate less than the rate on which the tax paid was computed. No time limit is fixed within which the contingency or condition must happen. Article 7 provides for a refund if any debt is proved against an estate after the distribution of any property, on the transfer of which the tax imposed has been deducted from the property or collected from the transferee, and the latter is required by order of the court to pay the debt, or any part of it. Article 7 expressly provides in section 14424, “there is no limitation governing the time within which debts may be proved against the estate of a decedent after the distribution of any property in the estate.” See, also, sec. 13985. Section 13984, which is in Article 2, “Deductions,” provides that if any deduction for a debt was erroneously allowed, the court may enter an order assessing the tax on the amount erroneously deducted, and says that “* there is no limitation governing the time within which it may be proved that any deduction for a debt was erroneously allowed, nor the time within which an order assessing tax on the amount erroneously deducted may be made.”

Appellant argues that when section 14401 speaks of a transfer subject to a contingency, it can only have reference to a contingency imposed or created by the testator himself. The argument is without merit. It will be seen by a reference to the sections we have referred to in Article 10 that every conceivable contingency that may be created by the testator himself is covered by other sections of the inheritance tax law. We know of no contingency that can be created by a testator himself which is not covered by sections other than section 14401 and appellant has not advised us of any. If the contingency referred to in section 14401 means only one imposed or created by the testator himself, the section is a dead letter. Section 14401 authorizes a refund in appropriate cases irrespective of the facts giving rise to the contingency. Since it is the policy of the Inheritance Tax Law to tax only the net value of the property received by the transferee the section should be construed as applying to a contingency arising entirely apart from the transfer. Its plain meaning is to authorize a refund where a tax has been imposed on the transfer of an estate or interest which for any reason is subject to “any contingency” which later happens. The section is grounded on equitable principles and was enacted to permit refunds to the extent that inheritance taxes have been paid upon the transfer of an estate or interest in property which, due to the happening of an uncertain but possible event—a contingency—, is not “actually enjoyed” by the taxpayer. The word “contingency”, in our opinion, refers to an event, the nature and possibility of which are determined by facts existing at the date of transfer, the occurrence of which is uncertain or contingent. Obviously a “contingency”, within the meaning of section 14401, is neither a change in market value after the date of death, or a subsequent destruction of the property transferred, or the happening of any other event extraneous to the interest transferred at the date of death but which subsequently affects it. Here we are not dealing with subsequent depreciation in value, but with actual value at the date of death of the testator. We are concerned with a then existing dormant liability of the corporation,—the transfer of an interest subject to a contingency, which happened on the levy of the deficiency. “Liability for income taxes arises, and in some sense it may be said that the tax accrues, at the time the income is received, and does not depend upon an assessment.” 27 Am.Jur. 433, sec. 225. A “deficiency” is the excess of the amount determined to be the correct amount of the tax over the amount reported by the taxpayer. It is an amount of tax due representing the difference between the amount returned by the taxpayer and the amount which, in fact and in law, is due the government. Mertens, Law of Federal Income Taxation, Vol. 9, p. 15, secs. 49.13, 49.14.

Appellant's argument that a refund may not be had because the order fixing the tax had become final before respondent applied for the refund is untenable. The same contention was made by appellant in Estate of Brown, 196 Cal. 114, 236 P. 144, and there held to be without merit. See, also, Estate of Rath, 10 Cal.2d 399, 408, 75 P.2d 509, 115 A.L.R. 836. A casual perusal of the provisions of chapter 10 of the law exposes its fallacy.

The interest actually enjoyed by respondent and the interest remaining after the happening of the contingency was the value of the shares of stock as fixed by the appraiser less the proper proportion of the income tax deficiency. The refund ordered was that proportion.

Order affirmed.

VALLÉE, Justice.

SHINN, P.J., and WOOD, J., concur.

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