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Court of Appeal, First District, Division 4, California.

The ESTATE of Inez G. FASKEN, Deceased. Kenneth CORY, as State Controller, etc., Petitioner and Appellant, v. David FASKEN, as Executor, etc., Objector and Respondent.

Civ. 34905.

Decided: November 07, 1975

Mullins, Wise & Dickman, Vincent J. Mullins, Richard H. Wise, Jr., San Francisco, for executor, objector and respondent, Kenneth Cory, State Controller, Milton D. Harris, Asst. Chief Inheritance Tax Atty., William F. Seeley, Associate Inheriance Tax Atty., San Francisco, for petitioner and appellant.

Inez G. Fasken, a resident of Marin County, died, leaving her entire estate to David Fasken, the taxpayer-objector. She left a gross estate of $25,015,575.50, of which 54.6869 percent was located in Texas and 45.3131 percent in California. The maximum federal estate tax credit allowed to the states under section 2011 of the Internal Revenue Code for an estate of this size is $3,407,198.33.

The crux of this appeal is the constitutionality of California's method of calculating an additional inheritance tax under California Inheritance Tax Regulations 13441–13442. California computed its tax under this regulation by the following calculations:

The problem arises due to the fact that Texas has a pickup statute which takes precedence over its normal inheritance tax in cases involving a federal estate tax credit. Under its pickup statute the percentage of the estate in Texas (in this case 54.6869) is multiplied by the total credit available to all the states (in this case $3,407,198.33) for a total tax of $1,863,291.14. As Texas actually taxed and collected this amount, the taxpayer argues that there is only $34,627.87 excess federal credit to be picked up by the State of California. The Inheritance Tax Referee calculated the excess federal credit on the basis of Texas' normal tax (as is required by Regulations 13441–13442) and additional tax of $498,485.87 was found owing to the State of California.

Taxpayer Fasken filed an objection to this report on December 8, 1972, which was sustained by the Superior Court of the County of Marin. The Controller of the State of California made a timely appeal from this judgment on December 31, 1973.

Section 2011 of the Internal Revenue Code provides a federal estate tax credit, within specified maximum limits, for any estate, inheritance, legacy or succession taxes actually paid to any state. As a state's normal inheritance tax does not generally absorb all of the federal estate credit, most states have imposed an additional tax to pick up any excess. In California, sections 13411–13442 of the Revenue and Taxation Code were adopted for this purpose.

‘§ 13411. In the event that a Federal estate tax is payable to the United States in a case where the inheritance tax payable to this State is less than the maximum State tax credit allowed by the Federal extate tax law, a tax equal to the difference between the maximum credit and the inheritance tax payable is hereby imposed.’

‘§ 13442. If no inheritance tax is payable to this State in a case where a Federal estate tax is payable to the United States, a tax equal to the maximum State tax credit allowed by the Federal estate tax law is hereby imposed.’

This additional tax, commonly referred to as a ‘pickup tax,’ enables the state to divert into its own treasuries, without any additional burden to the taxpayer, money which would otherwise be exacted by the federal authority. (Estate of Good, 213 Cal.App.2d 45, 28 Cal.Rptr. 378.) The California Inheritance Tax Regulations 13441–13442 interpret the pickup statutes in situations in which the decedent leaves property in two or more states.

‘Reg. 13441–13442. In a case where a decedent leaves property the transfer of which is subject to the Inheritance Tax Law of this State, and leaves other property which is subject to the inheritance tax laws of other states, and the total of the taxes imposed by all of the states (excluding any additional or pick-up tax from any state's tax) is less than the maximum state tax credit allowed against the federal estate tax on the total estate by the federal estate tax law, an additional tax will be imposed by California in an amount which bears the same ratio to the difference between the total of the taxes imposed by all of the states and the maximum state tax credit as the net value of the property subject to the Inheritance Tax Law of this State bears to the net value of the property subject to the inheritance tax laws of all the states.

‘As to disallowance of the 5 percent discount for prompt payment of inheritance tax under Section 14161 if additional tax is imposed under Section 13411 or 13422, see Regulation 14161.’

The taxpayer, in the lower court and on appeal, contends that the additional tax of $498,485.87, which was assessed against his estate under the regulation is illegal and violates the due process clauses of the California and United States Constitutions in that it taxes property located outside the state's jurisdiction. The court below held that although the statute is constitutional so long as it is read to impose a tax only on California property, the regulation on the other hand, could not be saved.

The law is unambiguous that ‘with respect to real property and tangible personal property, . . . the only state which may constitutionally levy an inheritance tax is the one where the property is located at the time of the decedent's death, and not the state of his domicile.’ (Marsh, Multiple Death Taxation In The United States, 8 U.C.L.A.L.Rev. (1961) 69, 70; Frick v. Pennsylvania, 268 U.S. 473, 45 S.Ct. 603, 69 L.Ed. 1058; Treichler v. Wisconsin, 338 U.S. 251, 70 S.Ct. 1, 94 L. Ed. 37.) A decedent's domicile is a basis for jurisdiction only in cases dealing with intangible property.

Taxpayer Fasken, in support of his contention that California is taxing property outside its jurisdiction, relies on the United States Supreme Court decision, Treichler v. Wisconsin, supra, 338 U.S. 251, 70 S.Ct. 1, 94 L.Ed. 37. In Treichler, the court held that Wisconsin's Emergency Inheritance Tax was invalid in that it taxed tangible property outside the state's juridiction. ‘But when a state reaches beyond its borders and fastens upon tangible property, it confers nothing in return for its exaction. Since the state of location has all but complete dominion over the physical objects sought to be measured for tax [citations], no other state can offer a quid pro quo. A state is not equipped with the implements of power and diplomacy without its boundaries which are at the root of the Federal Government's undoubted right to measure its tax upon foreign property. [Citations.] And if the state has afforded nothing for which it can ask return, its taxing statute offends against that due process of law it is our duty to enforce.

‘We hold that Wisconsin's emergency inheritance tax is invalid insofar as it is measured by tangible property outside Wisconsin.’ (Id., at pp. 256–257, 70 S.Ct., at p. 4.)

Although the calculations in Treichler are similar to those of California in the present case, we agree with the state controller that the instant case is not controlled by the result in Treichler. The state contends that Treichler is not precedent for the taxpayer's position because it considers a 30 percent emergency tax rather than an inheritance tax. This fact is not controlling as the tax was imposed on the transfer of property on the death of an individual, and the basic constitutional issues involved are the same as in the present case. What is significant is that the Supreme Court expressly did not consider the question presented by the California regulation—that is, whether a state would be taxing property outside its jurisdiction should it multiply the percentage of property within the state by the federal credit remaining after the normal state taxes are subtracted.

The controller argues that as the decedent died a domiciliary of California, the state could constitutionally tax the entire estate, citing Maxwell v. Bugbee, 250 U.S. 525, 40 S.Ct. 2, 63 L.Ed. 1124. The Maxwell held that where an estate consists of assets in two or more states, the inheritance tax can first be ascertained on the entire estate and is then apportioned and assessed in the proportion that the taxable estate within the state bears to the entire estate. That is, a state can consider the entire estate for purpose of setting the tax rate, but for purpose of measuring the tax due, only property within the jurisdiction of the state can be used. The amount of the federal tax credit is based on the value of the total taxable estate. But the division of that credit between the several states involved must be in proportion to the value of estate within each of those several states.

Thus, California could, if the statute so provided levy a tax that is the same amount as the whole federal tax credit as long as that tax is not measured by property outside of California. But, when California claims 58 percent of the whole federal tax credit, by first taking its normal inheritance tax (and Texas taking its inheritance tax), and then claiming 45 percent of the remainder, it is measuring the tax, in part, by property in Texas, and the tax therefore is unconstitutional.

The statute, however, does not require this result. It is a basic principle of statutory construction that a statute susceptible of two interpretations will, if possible, be construed as constitutional. (Shealor v. City of Lodi, 23 Cal.2d 647, 653, 145 P.2d 574; Palermo v. Stockton Theatres, Inc., 32 Cal.2d 53, 60, 195 P.2d 1.) It is true, as the controller contends, an administrative application of the language of an act is entitled to respect by the courts, and unless clearly erroneous, is a significant factor to be considered. (Mantzoros v. State Bd. of Equalization, 87 Cal.App.2d 140, 143, 196 P.2d 657.) However, if the administrative application will result in an unconstitutional interpretation, it cannot be followed.

The purpose of the ‘pickup tax’ (Rev. & Tax.Code, § 13441) is to give to the state or states the whole federal tax credit in the event the normal inheritance does not equal the tax credit. This is the purpose and legislative intent of Revenue and Taxation Code section 13441.

The statute must be read in the light of constitutional due process. The statute, on its face, contemplates a situation in which only property in California is involved, so in applying the statute to an estate with real property in several states, the statute must be interpreted so as to be within the rule of Maxwell.

The controller, in the interpretation of section 13441, relies on the Estate of Good, supra, 213 Cal.App.2d 45, 28 Cal.Rptr. 378. Good, however, did not involve property in two or more states. The fault of the controller's reliance in Good in interpreting section 13441 in the instant case lies not in the fact that it results in a higher tax for the taxpayer but in the fact that the tax due is measured by property outside the jurisdiction of the state.

The trial court construed the statute to bring it into conformity with the Constitution by holding that California was only entitled to that proportion of the federal tax credit as property within the jurisdiction of California bears to the total estate property. With this we agree.

The judgment is affirmed.

CALDECOTT, Presiding Justice.