IN RE: KNAPP'S ESTATE.

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District Court of Appeal, Second District, Division 1, California.

IN RE: KNAPP'S ESTATE. GODLEY v. STATE.

Civ. 17350.

Decided: September 13, 1950

Heaney, Price, Postel & Parma, Santa Barbara, for appellant. James W. Hickey, Chief Inheritance Tax Attorney, Sacramento, Morton L. Barker, Los Angeles, and Raymond G. LaNoue, Deputy Inheritance Tax Attorney, Sacramento, Bert G. Wetherby, Assistant Inheritance Tax Attorney, Los Angeles, for respondent.

George Owen Knapp, a resident of Santa Barbara County, died on July 21, 1945. By his last will (admitted to probate on August 20, 1945), his son William Jared Knapp (hereinafter referred to as William) was bequeathed an annuity of $10,000 per year from each of five testamentary trusts aggregating a total of $50,000 per year for life. Upon the death of William, his wife Louise Allen Knapp (herein referred to as Louise), if then living, was to receive an annuity of $15,000 per year from each of the said five trusts, or $75,000 per year for her life. Upon the death of Louise, or the death of William, if Louise predeceased him, the remainders were to go to specified grandchildren of the testator.

On July 12, 1947, the state inheritance tax appraiser in the instant estate filed his report in which the various interests under the will were valued in accordance with section 13953, Revenue & Taxation Code, using the mortality tables therein specified. However, on July 19, 1947, before any action was taken on that report, William, the first annuitant, died leaving Louise surviving.

On August 17, 1948, said inheritance tax appraiser filed his second report, pursuant to section 13955, Revenue & Taxation Code, to-wit:

‘Valuation of annuity or life estate terminated prior to fixing of tax. If an annuity or a life estate is terminated by the death of the annuitant or life tenant or by the happening of a contingency, and the tax upon the transfer of the annuity or estate has not been determined, the value of the annuity or estate is the present value, at the date of the transferor's death, of the amount of the annuity or income actually paid or payable to the annuitant or life tenant during the period he was entitled to the annuity or was in possession of the estate.’

In the first report, William's interest was valued at $463,161.35 upon which a tax of $33,834.52 was assessed. In the second report which was based on the amount actually paid to him, sec. 13955, supra, William's interest was reduced to $99,726.03 and a tax of $3,139.04 was imposed.

According to the first report, Louise's interest was appraised at $96,346.65 and taxed at $7,534.67; in the second report her interest was increased to $546,032.04 and the tax assessed at $66,804.81.

The total tax imposed in the first report against the various interests under the will was $43,907.67; the second report assessed a total tax of $71,174.49.

On August 19, 1948, the executor of the Estate of George Owen Knapp, deceased, filed objections to the second report. A stipulation of facts was filed, and the matter submitted on written briefs. Thereafter, the court overruled the objections to said report and on May 9, 1949, made an order fixing the inheritance tax in accord with the second report. This appeal is from that order.

It was stipulated, among other things, that (a) at the death of William, the tax upon his life estate under the will had not been determined; (b) that no issue was made by objector to the correctness of the inheritance tax imposed by reason of the death of the testator, George Owen Knapp, except as to the tax charged against Louise.

It is here urged that for tax purposes the interest of Louise became fixed on the death of testator, and it was error to raise the tax on her interest upon the death of William, the first annuitant; that although section 13955, supra, ‘controls the valuation of William's interest, it has no effect whatsoever on the value of Louise's interest.’ Accordingly, it is contended that the order appealed from wherein it reads ‘Louise Allen Knapp (daughter-in-law) 546,032.04 66,804.81’, should be changed to read ‘Louise Allen Knapp (daughter-in-law) 96,346.65 $7,534.67’ pursuant to the first report.

Appellant argues that while section 13955, supra, must be followed for the purpose of taxing William's interest, ‘it is error to use the value of William's interest thus arrived at as a factor in computing the taxable value of Louise's interest. In other words, the taxable value of Louise's interest is arrived at by deducting from the ‘entire property’ the value of William's interest as computed under section 13953 and not by deducting from the ‘entire property’ the value of William's interest as computed under section 13955.' Louise's remainder, as thus valued, should then be taxed pursuant to section 13411. That section reads as follows:

‘Transfers subject to a contingency or condition. In the case of a transfer made 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, the tax is computed as though the contingency or condition has occurred, and at the highest rate possible.’

Respondent claims that at the death of testator, William had a vested life estate followed by future contingent interests, and that these contingent interests made it necessary to tax the ‘entire property’ tentatively to Louise under section 13411. Therefore, the second report considered ‘as a report returned on the highest possible contingency, correctly assessed the entire remainder of the corpus to Louise.’ Briefly, that where contingent interests are involved the vested life interest is never computed under section 13953.

A settlement of the instant controversy requires a construction of the various applicable sections of the State Inheritance Tax Law, sections 13301–14901, Revenue and Taxation Code.

As stated in 24 Cal.Jur. 27, section 11:

‘Since tax proceedings are in invitum, tax laws are strictly construed in favor of the taxpayer and against the state * * * because presumptively the legislature has given in plain terms all the power intended to be exercised.

‘A statute will not be held to have imposed a tax unless it is clear and explicit. No presumption is indulged in favor of the right to take property or of any intention that is not distinctly expressed in the statute under which it is sought to be taken. Nor may a tax be extended by construction to those not named or described in the statute. * * * equitable construction * * * is not applicable to a taxing statute.’ See, also, In re Estate of Potter, 188 Cal. 55, 64, 204 P. 826; In re Estate of Steehler, 195 Cal. 386, 389, 233 P. 972.

It is a fundamental rule of law that property transferred by will is valued as of the date of testator's death. Secs. 13951, 13311, Rev. & Tax. Code. See, also, 24 Cal.Jur. 463, sec. 422; 30 A.L.R. 478.

‘And when a will creates separate interests or estates in the property disposed of, such as a limitation over after a life estate or other precedent interest, the separate values of each of the successive interests must be ascertained. The value of a life estate is computed by the use of tables prepared by actuaries for ascertaining the expectancy of life for purposes of life insurance, and the value of the remainder is the value of the property as a whole over and above the value of the life interest.’ 28 Am.Jur. 117, sec. 232.

Section 13952 of Rev. & Tax. Code reads: ‘Same (Valuation as of date of transferor's death): Estates for life or years: Estates determinable upon contingency: Reversions, remainders, etc. In the case of a transfer of any estate, income, or interest (a) for a term of years or for life, or (b) determinable upon any future or contingent event, or (c) constituting a remainder, reversion, or other expectancy, the entire property by which the estate, income, or interest is supported, or of which it is a part, is valued as of the date of the decedent's death.’

Having thus provided the date for valuation and the estates which are affected, section 13953 then sets forth the method for determining the value of the particular interests here involved:

‘Future, contingent or limited estate, income or interest: Use of mortality tables: Rate of interest. The value of a future, contingent, or limited estate, income, or interest is determined in accordance with the rules, methods, and standards of mortality and value that are set forth in the actuaries' combined experience tables of mortality, as extended, for ascertaining the values of life insurance policies and annuities and for determining the liabilities of life insurance companies, save that the rate of interest used in computing the present value of the estate, income, or interest is four (4) per cent per annum.’

That respondent customarily followed the method laid down by the foregoing rules is evidenced by regulations of the Inheritance Tax Department contained in Title 18, secs. 793 and 786 of the California Administrative Code:

‘Sec. 793: Remainders. The present worth of a remainder is obtained by computing the present worth of the precedent or outstanding estate and subtracting the amount thereof from the total value of the property involved. The difference will represent the present worth of the remainder. Example: A by will gives the annual income from $100,000 to B for life, with a remainder over to C. B at the time of the gift is 40 years of age. By an application of the method set forth in sec. 787 for determining the present value of a life estate, B's life interest is found to be $67,164.50. The latter subtracted from $100,000 results in a difference of $32,835.50, the present value of C's remainder.’

‘Sec. 786: Generally. The value of a limited, contingent, or future estate, income or interest in property is generally the present value or worth of such estate, income or interest at the applicable valuation date. In this connection, the Inheritance Tax Law specifically provides that such present value or worth is to be determined in accordance with the Actuaries' or Combined Experience Tables of Mortality employed in ascertaining the value of life insurance policies and annuities and the liabilities of life insurance companies, save that the rate of interest shall be 5(4) per centum per annum in the case of future and contingent estates * * *.’

While as stated by respondent, the regulations promulgated by the State Controller's office are not binding on the courts, nevertheless, they are persuasive authority because designed to be interpretations of the statutes to which they point. See In re Estate of Atwell, 85 Cal.App.2d 454, 468, 193 P.2d 519.

The foregoing sections of the Inheritance Tax Law comprise the authority pursuant to which Louise's interest should be valued and taxed.

As hereinabove noted, William died prior to a determination of the tax upon his interest, and it is conceded by both sides herein that it became necessary to compute the value of his estate under section 13955, supra.

An examination of the terms of that section reveals that it is authority for taxing at actual value an interest terminated by death, but it does not provide for taxing at face value an interest that is accelerated because of that death. Statutory authority is required to overcome the effect of section 13952. This is supplied by section 13955, but only insofar as William's interest is concerned. Louise's remainder must be valued under section 13952 which directs that such valuation be made as of the date of death of testator, to-wit: at its persent worth and not at its face value.

Respondent contends that under section 13411, supra, the ‘entire property’ passing under the will at the date of death of testator must be assessed to Louise, because such an assessment will provide the highest rate of tax.

That section reads: (Computation and rate of tax) ‘Transfers subject to a contingency or condition. In the case of a transfer made 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, the tax is computed as though the contingency or condition has occurred, and at the highest rate possible.’

Said action cannot be applied to William's interest which vested on testator's death; but only to that part of the entire property which comprises the contingent estate.

As pointed out by appellant, that part of the entire property which was neither future nor contingent was William's vested life estate. Therefore, section 13411 can apply only to that portion of the entire property which is left after deducting the present value of William's life estate, to-wit: its value as of the date of death of testator.

Again respondent's regulation, Sec. 856, Title 18, California Administrative Code, supports this construction of said section: that it applies only to the contingent remainder and not to the entire property.

The regulation provides:

‘Contingent and Conditional transfers. If a taxable transfer is made subject to a contingency or condition upon the occurrence of which the interest of any transferee of the property involved may, in whole or in part, be created, defeated, extended or abridged, the tax is computed at the highest rate possible upon the happening of the contingency or condition. For example, A by will gives B, who is 50 years of age, a life interest in property valued at $100,000, and C, D and E, or the survivor, a remainder interest in the property at B's death. C, who is not related to A, is 25 years of age at the date of the gift. D and E, who are brothers of A, are, respectively, 62 and 70 years of age at the date of the gift. In such case the tax on the remainder will be computed on the supposition that the property will go to C, since a tax on a remainder to C would be computed at higher rates than on a remainder going to D or E, see Section 852. Any person who pays the tax so computed may secure a refund in the event that D or E survives B's death, in an amount equal to the difference between the tax paid and the tax which would have been paid had the tax been computed on the basis of a transfer to the actual survivor, see Section 919.

‘The payment of a tax due on a contingent or conditional transfer may be deferred on the filing of a bond, see Section 880, and may under proper circumstances be subject to a compromise, see Section 882.’

Both parties have cited New York cases in support of their contentions. And it appears that New York does have statutory authority which permits the taxing of a contingent remainder in accord with respondent's theory. Moreover, the enactment in this state in 1911 of paragraph 6, section 15 of the Inheritance Tax Law, Stats.1911, Ch. 395, P. 721, would here support respondent, but that support has been withdrawn with the repeal of that section in 1941, Stats.1941, Ch. 833, P. 2393.

By reason of the foregoing principles of law and the construction placed by this court upon the applicable sections of the Inheritance Tax Law, the method used by respondent in valuing and taxing Louise's contingent remainder was erroneous.

The order appealed from is reversed, and the trial court is directed to value and fix the tax on the interest of Louise Allen Knapp bequeathed to her under the will of testator in accordance with the views herein expressed.

DRAPEAU, Justice.

WHITE, P. J., and DORAN, J., concur.

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