WIDMANN v. CORY

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Court of Appeal, Second District, Division 2, California.

ESTATE OF Florence E. KOERNER, Deceased. Patricia WIDMANN, Executrix of the Estate of Florence E. Koerner, Deceased, Respondent, v. Kenneth CORY, State Controller, Appellant.

Civ. 63897.

Decided: June 29, 1982

Myron Siedorf, Margaret Groscup, Los Angeles and Phyllis K. Fairbanks, Van Nuys, for appellant. Hill, Farrer & Burrill by Robert P. Hess, Los Angeles, for respondent.

Decedent Florence E. Koerner's 1973 will provided inter alia that:

“TENTH:  I direct that all inheritance, estate, or other death taxes that may, by reason of my death, be attributable to my probate estate or any portion of it, or to any property or transfers of property outside my probate estate, shall be paid by my executor out of the residue of my estate disposed of by this will without adjustment among the residuary beneficiaries and shall not be charged against or collected from any beneficiary of my probate estate, or from any transferee or beneficiary of any property outside my probate estate.”

Her 1978 first codicil to that will provided that:

“Notwithstanding anything herein contained to the contrary, in the event any beneficiary disclaims any interest in real or personal property to which he is entitled under the provisions of this Will, such property or portion thereof which is disclaimed, after deducting therefrom all Federal Estate Taxes payable as a result of my death shall be distributed to a qualified charitable organization.   It is my specific “intention that all Federal Estate Taxes shall be paid from any disclaimed property before resort will be made to any other property in my estate.”

On the petition of respondent Patricia Widmann, decedent's daughter and executrix, the probate court made its order that “in the event any beneficiary of the decedent's estate disclaims any interest in any property he or she might be entitled to under the provisions of the decedent's Will, such disclaimed property or the proceeds from the sale thereof shall be used to pay Federal Estate Taxes and the balance of such disclaimed property, if any, or the proceeds from the sale thereof shall be distributed to a qualified charitable organization.  * * * ”

Decedent died March 6, 1979.   Her residuary beneficiaries, said Patricia Widmann and Thomas H. Koerner, decedent's son, respectively on July 17 and August 8, 1979, executed and filed in the probate proceedings documents disclaiming any and all interest in certain specified government and corporate bonds valued at $658,541.   These bonds were then used to pay most of the $696,349 federal estate tax levied as the result of decedent's demise.

The conceptual effect of this maneuver was to vest the interest in the assets referred to in a charitable legatee, with the practical result, of course, that that beneficiary would not possess all the assets, which instead would be paid to the federal government with a small remainder to the charity.   A similar maneuver was attempted in Estate of Koerner (1975) 44 Cal.App.3d 447, 118 Cal.Rptr. 752 (Koerner I ), wherein it was held that for purposes of California inheritance tax, moneys used in payment of the federal estate tax are nevertheless “transferred” to some beneficiary, the rationale being that if that beneficiary is exempt from inheritance tax as are charities, the latter liability will be reduced.

In Koerner I, respondent at bench was the executrix of the estate of her father.   His will charged the residue of his estate with the payment of inheritance and estate taxes with the excess thereof divided between respondent and her brother.   At bench the residue is devised to a qualified charity, but charged with the payment of taxes.   The trial court in Koerner I refused to allow a deduction.   The executrix appealed.   Her contention on that appeal and the court's disposition thereof is made clear by that court as follows:

“Appellant's first argument is that the portion of decedent's estate required to pay federal estate taxes cannot be regarded as property that was ‘transferred’ to the beneficiaries' estate within the meaning of Revenue and Taxation Code sections 13304 and 13401.  Section 13401 imposes the inheritance tax ‘on every transfer’ and section 13304 of the code defines ‘transfer’ to include ‘the passage of any property, or any interest therein or income therefrom, in possession or enjoyment, present or future, in trust or otherwise.’   Appellant argues that the money used to pay the federal tax never was actually ‘transferred’ to the residuary beneficiaries, within the meaning of the above definition and therefore those funds cannot be included in the determination of state inheritance taxes.

“We do not agree.   Appellant construes the term ‘transfer of property’ too narrowly.   The residuary beneficiary need not actually receive the funds to be taxed on those funds.  ‘It is the privilege of receiving and neither the property itself nor the actual receiving of it which is taxed.’  (Estate of Varian (1968) 264 Cal.App.2d 248, 252, 70 Cal.Rptr. 335 * * *.)”  (Estate of Koerner (1975) 44 Cal.App.3d 447, 450, 118 Cal.Rptr. 752.)

The court in Koerner I after detailed discussion concluded by affirming the trial court's order.   The executrix appealed.

In the case at bench, the fact that the residuary beneficiary did not actually receive all of the residue does not negate the fact that the entire residue was devised to it as a qualified charity and was thus transferred to it.

Following the disclaimers at bench and in due course of administration, an Inheritance Tax Referee's Report declined to recognize the intended import of the repudiations and, to the contrary, taxed the residuary beneficiaries on values which included the amounts purportedly passing to the charitable legatee.   When respondent objected to the report, the probate court made its order sustaining the objections and fixing inheritance tax on the basis the disclaimers were valid for the purpose they were meant to achieve.   This appeal followed.   We affirm.

We are sensitive to the fact that in a setting similar to that present here the court in Estate of Sagal (1979) 89 Cal.App.3d 1003, 153 Cal.Rptr. 128, held to the contrary.   There, so far as affects our decision, successive “renunciations” also were claimed as having resulted in vesting in charitable legatees the interest represented by sums used to discharge the federal estate tax liability.   On appeal that claim was rejected on the dual bases the renunciations were invalid as (a) pertaining to a non-disclaimable interest, and (b) having been made after acceptance of the interest.   Without detailing fully the reasoning relied upon for the opinion in that case, we are of the view that pertinent aspects of Sagal are found in the following considerations.

Express disallowance by our Legislature of the federal estate tax as a deduction for California inheritance tax purposes was manifested by the repeal in 1959 of Revenue and Taxation Code section 13989, a statute formerly authorizing such a deduction.   The disclaimer provisions of the Probate Code (§§ 190 et seq.) were enacted in 1972 without reference to the Revenue and Taxation Code insofar as federal tax liability was concerned.

Accordingly, because “ ‘every statute should be construed with reference to the whole system of law of which it is a part so that all may be harmonized and have effect’ ” (Estate of Sagal, supra, 89 Cal.App.3d 1003, 1014, 153 Cal.Rptr. 128), what is not allowed directly may not be countenanced indirectly, since to do so “would be to sanction the circumvention of the law which does not permit the deduction of the federal estate tax and “ * * * authorize a deduction which is not expressly provided for * * * ”  (Estate of Schmalenbach (1975) 15 Cal.3d 102, 107, 123 Cal.Rptr. 490, 539 P.2d 58;  see also Estate of Giolitti (1972) 26 Cal.App.3d 327, 330–332, 103 Cal.Rptr. 38.)

In Koerner I ‘The residue of the estate was given equally to [two beneficiaries] and the will also provided that all federal taxes were to be paid out of the residue * * * the referee treated each residuary beneficiary as having received one-half of the residue of the estate before payment of federal estate taxes.   In fact each residuary beneficiary received a smaller sum * * *.’  (Estate of Koerner, supra, 44 Cal.App.3d 447, 449, 118 Cal.Rptr. 752.)   In Koerner I, the beneficiaries contended that the substantial portion of the money in the residue of the estate was used to pay estate taxes, that they did not receive the money used to pay estate taxes and therefore the alleged transfer was in effect no transfer.   As we point out above, the court in Koerner I held there was a valid transfer to the residuary legatees and petitions for hearing and rehearing were denied in that case.

The single legal difference in Koerner I and the facts at bench is that the residuary legatee at bench is a qualified charitable institution and is not required to pay state inheritance taxes.   The one case called to our attention which on the facts sheds any doubt upon the tax avoidance thus effected is Sagal which we discussed above.

It is established that taxpayers have the unqualified right to avoid payment of taxes.   The right to file disclaimers is not questioned.   At bench the effect of the disclaimer filed was to transfer the disclaimed legacies to the residue of the estate.

We conclude therefore that the judgment of the trial court was proper and should be and is hereby affirmed.

I concur but I wish to set forth in simple terms my conception of this case in order to expose what I view as the unfair and inequitable stance which the State has taken.

The amount of tax at issue is merely the amount which would be assessed on the sum paid to the federal government by way of estate tax.

Koerner I, which is my opinion was wrongly decided, held that money which had been paid to satisfy the federal estate tax—money on which the beneficiary never laid hands—was nonetheless taxable as part of the property bequeathed to the beneficiary.

In the present case some of that same property which had heretofore been doubly taxed must again be used to satisfy the federal estate tax.

The use of the disclaimer here was obviously designed to avoid a repetition of the untoward results of Koerner I.   That is perfectly proper.   The motive is irrelevant so long as the law is complied with.

Probate Code section 190 et seq. provides for a disclaimer and further provides that the interest disclaimed shall be distributed as if the disclaiming beneficiary had predeceased the testator.   The reason for the disclaimer is of no significance.

The effect of the disclaimer here then was that the property disclaimed became part of the residual estate.   The testator, again in perfectly valid fashion, had directed that the residual estate be burdened with the federal estate tax.

Applying the rule of Koerner I, the interest of the residual beneficiary was then subject not only to the federal estate tax but the state inheritance tax on the amount used to pay the federal estate tax.   If that amounts to a “loophole” for the disclaiming beneficiaries, so be it.   The fault, if any, lies with the Legislature.

In an unconscionable effort to collect its “pound of flesh” the State, which was the moving party in obtaining the ruling in Koerner I, now asks this court to change the rules of the game and hold that in spite of a perfectly valid disclaimer, the disclaiming beneficiaries should be taxed on the interest disclaimed.   To this I say “enough is enough.”

ROTH, Presiding Justice.

BEACH, J., concurs.