KUCHEL v. BANK OF AMERICA NAT. TRUST & SAVINGS ASS'N.*
This appeal was taken from an order overruling objections to the report of the inheritance tax appraiser determining the inheritance tax payable on the death of Charles Grant Butts.
The decedent and Augusta E. Butts were husband and wife. On January 30, 1948 he, as trustor, executed with his wife's written consent a trust agreement with appellant Bank of America N. T. and S. A. as trustee, wherein he made certain transfers in trust for the benefit of his wife and others.
Decedent passed away on December 22, 1949 leaving his widow, then aged 73, and their two sons William E., and C. Webster Butts, surviving. The appraiser assessed $5,389.36 as the tax against the widow's interest and $1,538.55 against the interest of each son, a total of $8,466.46.
The matter was tried on a written stipulation of facts without any oral testimony.
The corpus of the trust was entirely community property acquired prior to July 29, 1927 (when § 161a, Civil Code, went into effect).
The trust agreement provided for its amendment or revocation by the trustor. On May 14, 1948 the trustor revoked the original articles X, XI, and XII, and substituted new articles X, XI, and XII. Under the original article X if the widow survived her husband she was to receive all the net income from the trust estate during her life. The amended article X provided that if she survived the trustor the trustee was to divide the trust estate into two equal parts designated Part A and Part B. She was to receive during her life all the net income from both parts, with discretion in the trustee, should such income be insufficient for her needs, to resort to the corpus. It provided also that after the trustor's death his surviving wife had the right ‘to change or amend any provisions of the trust relative to the said Part A, and to revoke the trust as to said Part A in whole or in part and to take out of and remove from the operation of the trust any part or all of said Part A’, and she was also to have ‘the power to appoint the entire corpus of said Part A, including all of the income thereunto pertaining, free of the trust, to the fullest extent required by any law of the United States and/or any amendments thereto so that the estate of her said husband shall have the fullest possible exemption allowed by any such law.’
The amended article XII provided that:
‘Should the Trustor's said wife predecease the Trustor, then upon the death of the Trustor, the Trustee shall pay, deliver and convey all of the trust estate then remaining in its hands, including all accrued and/or undistributed net income thereunto pertaining and not required for any other purposes of this trust, in equal shares to the Trustor's said sons, William E. Butts and C. Webster Butts, or the survivor of them, and the surviving issue of either of them then deceased by right of representation, and should both of said sons be then deceased, neither of them leaving issue then surviving, then this trust estate shall revert to the estate of the Trustor.
‘Should the Trustor predecease his said wife, then upon the death of his said wife, the Trustee shall pay, deliver and convey all of the said Part B then remaining in its hands and that portion of what remains of said Part A over which the Trustor's said wife did not exercise any of the rights of hers set forth in the foregoing Article X hereof, in equal shares to the Trustor's said sons, William E. Butts and C. Webster Butts, or to the survivor of them and the surviving issue of either of them then deceased by right of representation, and should both of said sons be then deceased, neither of them leaving issue then surviving, then this portion of the trust estate shall revert to the estate of the Trustor.’
Issue number one:
Appellant states its principal contention as follows: ‘Upon the death of a husband the widow is entitled to one-half of the community property free from inheritance tax regardless of whether she takes her statutory interest, elects to take under the terms of her husband's will or takes pursuant to the terms of a revocable trust created with community funds during her husband's lifetime.’ (Emphasis added.) This is a very broad and sweeping statement.
Sections 13551 to 13556 of the Revenue and Taxation Code deal with the subject of community property. In these six sections the legislature has singled out and dealt separately with the different ways of disposing of such property. Section 13551 deals with ‘Death of husband’; § 13552 with ‘Election of surviving wife to take under will’; § 13553 with ‘Death of wife’; § 13554 deals with ‘Transfers of community property inter vivos between spouses'; § 13555 with ‘Personal property acquired out of State’, and § 13556 with ‘Presumptions and proof as to community character of the property.’
Appellant concedes ‘that the trust in this case was of the type which comes within the classification of inter vivos transfers made subject to the tax but contends that there was no taxable transfer from the decedent to the widow of the interest in the community property which already belonged to her.’ (Emphasis added.)
The property which became the corpus of this trust, all of which was admittedly community property, was appraised at $367,811.04 as of the date of decedent's death. Its net value after deductions, including the portion of the federal estate tax allocated to community property, was $336,564.40 (half of which is $168,282.20). Appellant argues that ‘Although the widow's one-half interest in the net community property was $168,282.20, the community property exclusion allowed to her by the * * * appraiser and approved by the Court was only $102,788.50. If the trust had not been created and the widow had taken her statutory portion of the community property or if she had taken exactly the same interest in a testamentary trust created by her husband's will she would have been entitled to and would have been allowed without question a community property exclusion of $168,282.20.’
This argument, which is based on several hypotheses, gets away from the realities of the case. The trust was created; there was no will hence no testamentary trust, and the widow did not take under the laws of succession.1
The widow took under an inter vivos transfer (to which she consented) and not in any of the hypothetical ways suggested by appellant.
The most extreme position taken by appellant is its argument ‘that there was no taxable transfer from the decedent to the widow of the interest in the community property which already belonged to her.’ (Emphasis added.)
It is not necessary to attempt to define herein the wife's interest in that which appellant calls ‘the community property which already belonged to her’ before the creation of the trust. It is sufficient to say that it was pre-1927 community property and her interest was certainly substantial and more than that of an heir. In re Estate of Brix, 181 Cal. 667, 186 P. 135; Stewart v. Stewart, 199 Cal. 318, 249 P. 197.
However, the appraiser's problem did not concern the wife's interest in the community property before the transfer, but did concern the interest which she received on her husband's death by virtue of the transfer.
At the outset we stated the principal provisions of the trust instrument. It appears therefrom that the primary purpose and intent of the trustor was that the two sons should ultimately own all this property in equal shares, but that during their mother's life she should have at least a life interest therein (and more than that if she desired or needed it). It was also his purpose that neither on his death, nor hers, should there be any probate proceedings. The husband was the transferor, see Strong v. Strong, 22 Cal.2d 540, 140 P.2d 386; Riley v. Gordon, 137 Cal.App. 311, 30 P.2d 617; 3 Cal.Jur. Ten Yr.Supp. 593, with his wife's consent. At the time of the transfer she had the power of restraint, §§ 172, 172a, Civ.Code, but instead of exercising it by withholding her signature, see Strong v. Strong, supra, 22 Cal.2d 540, 544, 140 P.2d 386, she signed the following formal consent with the advice of counsel:
‘I, Augusta Eilenberger Butts, wife of Charles Grant Butts, Trustor in the foregoing Trust Agreement, hereby declare that I have read the said Agreement and fully understand the same and approve each and all of the terms and conditions thereof and consent that the property subject to the terms of said agreement shall be held administered and distributed in accordance therewith.
Dated: this 30th day of January, 1948.
‘Augusta Eilenberger Butts
‘Approved: George H. Koster
Attorney for Augusta Eilenberger Butts,
San Francisco, Calif.'
Attached to the amendment is an approval thereof in substantially similar form, dated May 14, 1948, likewise signed by Mrs. Butts and approved by her attorney.
Whatever her rights might have been in that which appellant calls ‘the community property which already belonged to her’, before the transfer, they became totally different as soon as she signed this consent. The marital community status was thereby broken up and she became vested with a new interest in the same property.
Obviously Mrs. Butts was thoroughly in accord with her husband's plan and design in creating this trust. It accomplished the purpose of ultimately vesting all the property in their two sons; it gave her all the income of a $336,564.40 corpus as long as she lived (with other valuable rights as well); it disposed of the property in such a way that on her death there would be no inheritance tax to pay,2 and it avoided probate proceedings on the death of both spouses.
If at the time of the widow's death Part A remains as it now stands, it will belong to the two sons in equal shares as transferees of their father by virtue of the terms of the trust, hence this part of the corpus will not be subject to inheritance tax on Mrs. Butts' death. The same may be said respecting Part B.2 These factors were unquestionably important and persuasive considerations in the conception of the whole trust plan.
Section 13648, Rev. & Tax.Code, declares that it is ‘the intent and purpose * * * to tax every transfer made in lieu of or to avoid the passing of property by will or the laws of succession.’ Such language by no means indicates that the law covering inter vivos transfers should be read, as appellant contends, in connection with and as part of § 13551, dealing with succession, or § 13552 dealing with wills. It would seem rather to indicate the opposite.
The transfer in question was certainly designed in lieu of and ‘to avoid the passing of property by will or the laws of succession’, § 13648, supra, and appellant has supplied neither authority nor convincing argument that the sections dealing with succession or wills have any influence whatever on the operation or interpretation of § 13554, Rev. & Tax.Code, a section designed to govern an altogether different, and wholly unrelated, situation. That section deals with ‘Transfers of community property inter vivos between spouses' and reads as follows: ‘Where community property is transferred within the provisions of Chapter 4 of this part other than by will or the laws of succession from one spouse to the other: (a) One-half of the property transferred is subject to this part if the wife is the transferee. (b) None of the property transferred is subject to this part if the husband is the transferee.’ (Emphasis added.) It was under this section that the tax was assessed.
Appellant argues that the purpose of the legislature in taxing inter vivos transfers is to prevent evasion and not to impose greater tax burdens upon inter vivos transfers than upon transfers by will or the laws of succession, and cites Kelly v. Woolsey, 177 Cal. 325, 170 P. 837. The court in that case, however, was not confronted with any such question since there the trial court had found that the transfers were not made in contemplation of death. The court in the Kelly case, 177 Cal. at page 328, 170 P. at page 838, quoting Ross on Inheritance Taxation § 111, says: ‘It is the purpose of such statutes to preclude, so far as possible, this evasion of taxation, whether with fraudulent intent or not, and to secure to the state its revenue on all transfers which have their occasion in the death of the transferred; but it is not the purpose of the statute to inhibit ordinary transfers, by gift or otherwise, if not made in contemplation of death, or not postponed in enjoyment or possession until after the death of the donor or grantor.’ (Emphasis added.)
There is nothing in the inheritance tax law indicating that in dealing with inter vivos transfers the legislature is held to any particular standard or must be controlled by the tax on some other type of transfer. For this reason we are not convinced by appellant's unsupported argument that ‘The tax determined in the present case can be sustained only if it is determined that a greater tax is imposed upon such inter vivos transfers than is imposed upon transfers at death * * *.’
Issue number two:
There is a second issue on this appeal arising out of a miscalculation made by the appraiser which is only indirectly related to the first and principal issue just discussed. In the briefs both sides have agreed that this mistake was made, and they have agreed as to its rectification, in case of affirmance, as follows: the tax against the widow's interest instead of being $5,389.36 should be $4,580.17, and against each son's interest the tax instead of being $1,538.55 should be $1,769.75, thus reducing the total tax from $8,466.46 to $8,119.67. In view of the informal stipulation contained in the briefs there is no necessity to discuss the details of such error in calculation.
In re Estate of Loewenstein, 37 Cal.2d 843, 236 P.2d 566, was also an appeal from an order approving the report of an inheritance tax appraiser. The order was affirmed. There also certain items were miscomputed. The court said, 37 Cal.2d at page 848, 236 P.2d at page 570: ‘If there are such miscomputations the affirmance herein is not to be deemed to preclude a recomputation to accord with the views expressed herein.’ In the instant case both sides have stipulated to the correct amounts under the second issue in the event of an affirmance on the main issue, and we see no reason to remand merely to make such rectifications. In accordance with the rule in Estate of Loewenstein a recomputation can and should be made by the trial court in accordance with the stipulation.
The order appealed from is affirmed without costs to either party.
Stripped of nonessentials the basic question involved in this case is this: ‘Did the legislature in adopting section 13554, Rev. & Tax.Code, intend to impose a greater inheritance tax upon a wife to whom or for whose benefit community property is transferred by the husband by an inter vivos transfer to take effect upon his death than it would impose by section 13551 upon a transfer of the same community property to the wife or for her benefit if it occurred upon the husband's death?’
The legislative purpose of the tax upon inter vivos transfers in contemplation of, or to take effect upon, the transferor's death is expressed in section 13648, Rev. & Tax.Code: ‘It is hereby declared to be the intent and purpose of this part to tax every transfer made in lieu of or to avoid the passing of property by will or the laws of succession.’ It is an ‘in lieu’ tax, and is intended to insure that the state shall not be deprived of the equivalent of the inheritance tax that it would otherwise receive by any inter vivos transfer intended by the transferor as a substitute for a transfer by will or intestate succession. It may reasonably be said of the taxes imposed upon the two types of transfer as has been said of the sales and use taxes (to paraphrase): ‘(t)hat the two taxes are complemental to each other with the aim of placing (the taxpayers) on an equal footing.’ Chicago Bridge & Iron Co. v. Johnson, 19 Cal.2d 162, 165, 119 P.2d 945.
As construed by the order appealed from the wife has admittedly had a greater burden of taxation imposed upon her in the case of this inter vivos trust than would have been imposed upon her had the identical trust been created by her husband's will.
The question squarely presented is, did the legislature intend this result when it enacted sec. 13554, Rev. & Tax.Code?
It is only by considering sec. 13554 in a vacuum that this result can be justified, but the accumulation of judicial experience in the field of statutory construction is opposed to this in vacuo method of statutory construction. I need only cite a few relatively recent statements of our own supreme court to explode the fallacy of construing a statutory provision in isolation from its context, its purpose and its effect.
‘It is fundamental that the objective sought to be achieved by a statute as well as the evil to be prevented is of prime consideration in its interpretation.’ Rock Creek Water Dist. v. County of Calaveras, 29 Cal.2d 7, 9, 172 P.2d 863, 865. ‘A statute should be read and considered as a whole to determine the legislative intent.’ People v. Trieber, 28 Cal.2d 657, 663, 171 P.2d 1, 4. ‘(W)hen two constructions appear possible, this court follows the rule of favoring that which leads to the more reasonable result.’ Metropolitan Water Dist. of Southern California v. Adams, 32 Cal.2d 620, 630–631, 197 P.2d 543, 549. ‘The interpretation adopted must be reasonable, and where the language is fairly susceptible of two constructions, one which, in application, will render it reasonable, fair, and harmonious with its manifest purpose, and another which would be productive of absurd consequences, the former construction will be adopted.’ Warner v. Kenny, 27 Cal.2d 627, 629, 165 P.2d 889, 890.
Standing alone sec. 13554(a) would authorize the tax here imposed on the transfer to the wife: ‘One-half of the property transferred is subject to this part if the wife is the transferee.’ But sec. 13554 does not stand alone. It is subject to the qualification of sec. 13551(b) which provides the basic foundation of the tax: ‘The one-half of the community property which belongs and goes to the surviving wife pursuant to Section 201 of the Probate Code is not subject to this part.’ It is also to be construed in the light of its own purpose as expressed by the legislature in sec. 13648: ‘to tax every transfer made in lieu of or to avoid the passing of property by will or the laws of succession.’
Having in mind the purpose of the ‘in lieu’ tax imposed by sec. 13554 that a transfer of that sort shall not escape its fair burden of taxation and construing the statute as a whole with its basic exemption of the ‘one-half of the community property which belongs and goes to the surviving wife’, the fair and reasonable construction of sec. 13554 is that the same measure exempting a full one-half of the value of the community property should be applied in laying the tax on those transfers of community property to the wife covered by that section. So construed the tax burden is equally laid on every type of taxable transfer, the legislative purpose expressed in sec. 13648 is fully and fairly accomplished and no unreasonable burden is imposed on any type of transfer subject to the tax. In the absence of clear evidence of an intent to create a discriminatory burden of taxation in certain cases I cannot ascribe such a purpose to the legislature.
The fact that appellant consented in writing to the creation of the trust should not change this result. She consented to an arrangement which resulted in her getting an interest which has been appraised at a value in excess of one-half of the value of all the community property. By law she was entitled to one-half of the community property. To say that by her agreement she subjected herself to a greater tax than if the same provision had been made for her by will and she had then elected to take under the trust rather than under Prob.Code, sec. 201 is to put form above substance.
I would reverse with directions to exclude the value of one-half of the community property in fixing the tax upon the wife's interest.
1. If ‘the widow had taken her statutory portion’ it would have been under § 201, Probate Code, reading: ‘Upon the death of either husband or wife, one-half of the community property belongs to the surviving spouse; the other half is subject to the testamentary disposition of the decedent, and in the absence thereof goes to the surviving spouse, * * *’ and § 13551, Rev. & Tax.Code, would have been applicable, reading: ‘Upon the death of a husband: (a) At least one-half of the community property is subject to this part. (b) The one-half of the community property which belongs and goes to the surviving wife pursuant to Section 201 of the Probate Code is not subject to this part. (c) All of the community property passing to anyone other than the wife is subject to this part.’Had there been a testamentary trust in substantially similar terms, § 13552 would have been applicable, reading: ‘When a husband by a will making a testamentary disposition of the community property forces his surviving wife to elect whether to share in his estate under the will or to take her one-half of the community pursuant to Section 201 * * * and she elects to take under the will, the property thus taken up to a value not exceeding one-half of the value of the community is not subject to this part.’
2. In his supplemental memorandum filed December 4, 1952 respondent states:‘We wish to assure the court that in our opinion no tax will be due hereafter from these remaindermen on the death of the widow should she fail to amend, revoke or appoint. The report of the Appraiser as drawn will be final in so far as any transfer of the trust property by Mr. Butts is concerned, and under no conceivable theory would their interests, when vested, be construed as a transfer from Mrs. Butts. Section 13411, so far as these remaindermen are concerned, will not be involved under any circumstances.’
NOURSE, P. J. concurs.