CORY v. CONROY

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

ESTATE of Mary Anderson CONROY, also known as Mary A. Conroy, Mary Conroy, M. A. Conroy, and Mrs. Thomas F. Conroy, Deceased. Kenneth CORY, Petitioner and Appellant, v. Thomas Francis CONROY, Executor, Objector and Respondent.

Civ. 37996.

Decided: November 10, 1976

Myron Siedorf, Edwin Rosenthal, Dennis B. Anderson, San Francisco, for petitioner-appellant. Paul J. Sax, Roger L. Davis, Orrick, Herrington, Rowley & Sutcliffe, San Francisco, for respondent Thomas Francis Conroy.

The Controller of the State of California (hereinafter ‘Controller’) appeals from an order approving the amended report of the inheritance tax appraiser which did not include the assets of a trust created by Julia Quinn Anderson (hereinafter ‘Anderson’) in the estate of Mary Anderson Conroy (hereinafter ‘Conroy’).1

The question presented is whether Conroy's testamentary exercise of the limited power of appointment held over the assets of the Anderson trust is subject to California inheritance tax under section 13695 of the Revenue and Taxation Code.2 Section 13695 provides as follows: ‘Where a limited power of appointment given in conjunction with a disposition of property effected before 5 p. m. of June 25, 1935, by a donor who died prior to that date, is exercised after that date by the donee, the exercise of the power is a transfer subject to this part from the donee to the person appointed at the time of the exercise, as though the property to which the power relates belonged absolutely to the donee and is transferred by him by will.’

The parties have stipulated to the following facts: Anderson died prior to 5 p. m. on June 25, 1935. Under her will Anderson created a trust pursuant to the terms of which Conroy received a testamentary general power of appointment over the principal of said trust. By a document dated February 17, 1947, Conroy released the previously existing general power of appointment over the assets of the Anderson trust. On and after February 17, 1947, such power was exercisable only in favor of a class of persons, which class did not include any persons other than her spouse, her father, her descendants or the descendants of her spouse, descendants (other than herself) of her mother or father, spouses of such descendants, and donees described in sections 812, subdivision (d), and 861, subdivision (a)(3) of the Internal Revenue Code in effect on that date. At the time of her death Conroy possessed only a limited power of appointment with respect to the assets of said trust, which power could not be exercised for the benefit of herself, her estate, her creditors, or the creditors of her estate. The limited power of appointment remaining after the 1947 release of the general power of appointment was exercised by Conroy in her last will and testament.

In addition to the stipulated facts the record discloses that Conroy's last will and testament was executed on August 21, 1968, that a codicil thereto was executed on March 11, 1970, and that Conroy died on December 31, 1970.

A ‘power of appointment’ may be created by deed or will and is defined, generally, as a power or authority given to a person to dispose of property, or an interest therein, which is vested in a person other than the donee of the power. (Estate of Kuttler, 160 Cal.App.2d 332, 337, 325 P.2d 624; see Civ.Code, § 1382.1.) A more comprehensive definition is to be found in Black's Law Dictionary (4th ed.) wherein it is defined as ‘A power or authority conferred by one person by deed or will upon another (called ‘the donee’) to appoint, that is, to select and nominate, the person or persons who are to receive and enjoy an estate or an income therefrom or from a fund, after the testator's death or the donee's death, or after the termination of an existing right or interest.'

A power of appointment is ‘general’ or ‘special’ (see Civ.Code, § 1381.2). In the Revenue and Taxation Code a ‘special’ power of appointment is designated and referred to as a ‘limited’ power of appointment (see §§ 13692 and 13693). Civil Code section 1381.2, subdivision (a), defines a ‘general’ power of appointment as follows: ‘A power of appointment is ‘general’ only to the extent that it is exercisable in favor of the donee, his estate, his creditors, or creditors of his estate, whether or not it is exercisable in favor of others.' Section 13692 defines a ‘general’ power of appointment as ‘power which is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate . . ..’

A ‘special’ power of appointment is defined in subdivision (d) of Civil Code section 1381.2, as follows: ‘All powers of appointment which are not ‘general’ are ‘special.” In the Revenue and Taxation Code such a power is defined as follows: “Limited power of appointment’ means a power which does not qualify under the preceding section [13692] as a general power of appointment.' (§ 13693.)

We observe that these statutory definitions are of recent enactment. Sections 13692 and 13693 were added by the Statutes of 1965 (ch. 1070, p. 2716, § 6). Civil Code section 1381.2 was added by the Statutes of 1969, effective July 1, 1970. (Stats.1969, ch. 155, p. 403, § 1.) However, these definitions comport with existing definitions to be found in court decisions under the common law which remains in effect.3

Under the decisions a ‘general power of appointment’ is generally defined as one which may be exercised in favor of anyone, including the donee, and is, therefore, equivalent to a grant of absolute ownership. (Estate of Carter, 47 Cal.2d 200, 207, 302 P.2d 301; Estate of Kalt, 16 Cal.2d 807, 812, 108 P.2d 401; Estate of Kuttler, supra, 160 Cal.App.2d 332, 338; Dallapi v. Campbell, 45 Cal.App.2d 541, 547, 114 P.2d 646; Pennsylvania Co. for Insurance on Lives etc. v. Kelly, 134 N.J.Eq. 120, 34 A.2d 538, 545.) A ‘special power of appointment,’ on the other hand, is usually defined as one which may be exercised in favor of certain specified individuals or to a class of designated persons, not including the donee or his estate. (Pennsylvania Co. for Insurance on Lives etc. v. Kelly, supra; Brown v. Fidelity Union Trust Co., 126 N.J.Eq. 406, 9 A.2d 311, 321; see Morgan v. Commissioner, 309 U.S. 78, 60 S.Ct. 424, 84 L.Ed. 585.)

Adverting to the present case we observe that it is not disputed that Conroy had the authority to release the general power of appointment over the assets of the Anderson trust and to release such power in such manner as to reduce or limit the persons or objects, or classes of persons or objects, in whose favor such power would otherwise be exercisable.4 It is also undisputed that the release by Conroy had the effect of transmuting the general power of appointment given Conroy by Anderson into a limited power of appointment. The crucial question presented is whether exercise by Conroy of the limited power of appointment rendered the assets of the Anderson trust subject to California inheritance tax pursuant to the provisions of section 13695.

A similar fact situation was presented in Estate of Moore, 29 Cal.App.3d 481, 105 Cal.Rptr. 568. In Moore, Claus Spreckels created an irrevocable inter vivos trust on May 4, 1928. His wife, Ellis M. Spreckels, was the beneficiary of one-quarter of the income and was given a power to appoint by will one-quarter of the principal. Claus Spreckels died on January 12, 1935. By December 24, 1942, Ellis Spreckels had remarried; her husband was E. Clarence Moore. On December 24, 1942, Ellis (Spreckels) Moore executed an agreement by which she relinquished her right to appoint the one-quarter interest in the trust assets except to one or more persons who were designated as her spouse, the descendants of her spouse, the descendants of Claus Spreckels, and the spouses of any such descendants. Ellis (Spreckels) Moore died on October 26, 1967. In her last will she declared that she was exercising her power of appointment in favor of her surviving children and per stirpes to the surviving issue of any child who might predecease her.

In Moore taxability was sought to be imposed upon a four-sixteenth's interest in the Spreckels trust upon the basis that the 1942 agreement was a release of the general power of appointment within the meaning of section 13697 making taxable property which for such release would be taxable under section 13696 providing for taxability of property subject to a general power whether exercised or not exercised. (29 Cal.App.3d at p. 486, 105 Cal.Rptr. 568.)5 The controller argued that although the 1942 agreement was a transfer, the transfer was incomplete because the ultimate beneficiaries were not known until the death of Ellis Moore and therefore a taxable transfer took place at the time of her death. The reviewing court rejected this argument upon the ground that Mrs. Moore did not have a general power of appointment at the time of her death but a limited power of appointment created by the 1942 agreement and that therefore section 13696 was not applicable. The court noted that section 13696 makes taxable the exercise or the nonexercise of a general power of appointment possessed by a decedent at the time of his or her death. The court also observed that section 13697 was enacted in 1965 and that because Mrs. Moore released the general power before 1965, the release was not taxable as to do so would give section 13697 retroactive effect. Thus, the court concluded that the appointed property was not taxable under sections 13696 and 13697. (29 Cal.App.3d at p. 492, 105 Cal.Rptr. 568.)

The controller in Moore explicitly disavowed any claim that the trust interest was taxable under section 13695. (29 Cal.App.3d at p. 487, 105 Cal.Rptr. 568.) The appellate court indicated, in a lengthy footnote, however, that the appointed property might arguably be taxable under section 13695. (At p. 487, fn. 4, 105 Cal.Rptr. 568.) In this case the Controller urges that under a very similar fact situation as that presented in Moore we should determine that the appointed property is subject to tax under section 13695. In support of his position he adopts much of the reasoning utilized in Moore in footnote four. The thrust of the rationale in said footnote is that it might reasonably be argued that the power of appointment, general by its creation but made limited by the act of the donee of the power, was “a limited power of appointment given in conjunction with a disposition of property effected before 5 p. m. of June 25, 1935, by a donor who dies prior to that date . . . exercised after that date by the donee” so as to make its exercise a taxable transfer under section 13695. (29 Cal.App.3d at p. 487, fn. 4, 105 Cal.Rptr. at p. 572.)

A review of the legislative history relative to the taxation of property subject to general or limited powers of appointment discloses that from 1917 to 1935 California followed the method whereby the exercise of a power of appointment or the failure or omission to exercise such power within the time provided, effective at the time of such failure or omission, was deemed to be a taxable transfer as though the property to which such appointment related belonged absolutely to the donee of such power and had been bequeathed or devised by such donee by will. (Stats.1917, ch. 589, § 2(6), pp. 882–883.)

In 1935 the ‘Inheritance Tax Act of 1935’ was adopted, effective June 25, 1935. (Stats.1935, ch. 358.) With respect to powers of appointment it provided that such a power was to be deemed a taxable transfer from the donor of said power to the donee thereof at the date of the donor's death; provided that where the donor died prior to June 25, 1935, and the power was exercised thereafter, the exercise of such power was to be deemed a transfer taxable as provided in subdivision 6 of section 2 of the Inheritance Tax Act of 1921 as amended in 1929. (Stats.1935, ch. 358, § 2(6), p. 1269.) Subdivision 6 of section 2 of the Inheritance Tax Act of 1921 as amended in 1929, provided that the exercise of a power of appointment shall be deemed to be a taxable transfer in the same manner as though the property to which the appointment related belonged absolutely to the donee of such power and had been bequeathed or devised by such donee by will. (Stats.1929, ch. 844, § 2(6), pp. 1836–1837.)

In 1943 the Legislature added sections 13301 to 16652, inclusive, dealing with inheritance tax, to the Revenue and Taxation Code. (Stats.1943, ch. 658.) Section 13693 provided as follows: ‘Where a general or limited power of appointment given in conjunction with a disposition of property effected before 5 p. m. of June 25, 1935, by a donor who died prior to that date, is exercised after that date by the donee, the exercise of the power is a transfer subject to this part from the donee to the person appointed at the time of the exercise, as though the property to which the power relates belonged absolutely to the donee and is transferred by him by will.’ (Stats. 1943, ch. 658, § 1, p. 2303.)

In 1965 former section 13693 was repealed and sections 13694, 13695 and 13696 were enacted. (Stats.1965, ch. 1070, § 6.) Section 13694 provides, essentially, that, except as otherwise provided, a gift of a general or limited power of appointment made in conjunction with a disposition of property effected before or after 5 p. m. of June 25, 1935, is a taxable transfer from the donor to the donee at the time of the donor's death. Section 13696 provides that if at the time of his death a decedent has a general power of appointment with respect to property, the exercise or nonexercise of the power is taxed as if the property to be appointed is transferred from the donee to the appointees or the takers in default. Accordingly, since 1965 the creation of a limited or general power of appointment is taxed as a transfer of the appointed property from the donor to the donee at the date of the donor's death, and when a general power of appointment is exercised or nonexercised the appointed property is again taxed at the time of the donee's death as a transfer from the donee to the appointees or takers in default.

Section 13695, with which we are here concerned, deals specifically with limited powers of appointment effected before 5 p. m. of June 25, 1935, by a donor who died before that date but which powers are exercised by the donee after that date. The statute provides that in such a case the exercise of the power is a taxable transfer from the donee to the person appointed at the time of the exercise as though the property to which the power relates belonged absolutely to the donee and is transferred to him by will. This statute retains the language of former section 13693 to the effect that only the exercise of such power is deemed to be a taxable transfer. Accordingly, such a limited power of appointment is not taxed at the time of its creation, but is only taxed at the time of its exercise. (See Estate of Dobbins, 258 Cal.App.2d 262, 271, 65 Cal.Rptr. 704; California Inheritance Tax Practice (Cont. Ed. Bar (1973)) §§ 5.47 and 5.49.)

It is apparent from the foregoing legislative history that prior to 1965 the exercise or nonexercise of both a general and a limited power of appointment was a taxable transfer from the donee to the person to whom the property was appointed or to whom it passed by virtue of the nonexercise of the power. The real question is whether the enactment of sections 13694, 13695 and 13696 altered this rule of taxability. In approaching the question we take cognizance of the established rules of construction when courts are called upon to interpret statutes levying taxes. Thus it is the rule that laws imposing taxes are in invitum and are to be strictly construed in favor of the taxpayer. (Barker Bros., Inc. v. Los Angeles, 10 Cal.2d 603, 608, 76 P.2d 97.) It is also an established principle that “A tax can never be extended by construction to things not named or described in the statute as the subject of taxation.” (County of Los Angeles v. Jones, 13 Cal.2d 554, 562, 90 P.2d 802, 806.) “‘In case of doubt, construction is to favor the taxpayer rather than the government.”’ (Estate of Kirshbaum, 268 Cal.App.2d 155, 160, 73 Cal.Rptr. 711, 715.)

It is clear from a reading of section 13695 that it applies solely to a ‘limited power of appointment given in conjunction with a disposition of property effected before 5 p. m. of June 25, 1935, by a donor who died prior to that date.’ In the instant case Anderson, the donor who died prior to June 25, 1935, did not give Conroy a limited power of appointment in conjunction with the disposition of property effected before said date. The power of appointment given by her was a general power of appointment. By its very provisions section 13695 is therefore inapplicable in the present case. Nor are sections 13694 and 13696 applicable. As already noted, section 13694 taxes a transfer by way of general or special power of appointment from the donor to the donee and not to a transfer from the donee to his appointee or appointees. Section 13696 by its language specifically applies only to a general power of appointment. It is significant to note here that in each of these statutes the Legislature was meticulous in its designation of the type of power of appointment embraced by the provisions of the statute.

It is an established principle that the Legislature has the right to determine whether or not transfers through the means of power of appointment may be the subject of inheritance taxes. (Estate of Elston, 32 Cal.App.2d 652, 660, 90 P.2d 608.) Accordingly, in keeping with this principle the Legislature may provide reasonable rules, rates and exemptions for its execution. (Estate of Elston, supra.) In its wisdom the Legislature, by virtue of the specific language used in sections 13694, 13695 and 13696, has evinced an intention not to deem the exercise after June 25, 1935, of a limited power of appointment to be a taxable transfer where such limited power of appointment results from the release, after said date, of a general power of appointment effected prior to that date and the donor of the general power of appointment died prior to that date.

The Controller argues that when Conroy executed the partial release in 1947 she was only giving up part of the rights which she obtained in 1934. He contends that these retained rights became the limited power of appointment over the Anderson trust and that, accordingly, the limited power of appointment could only have been given in conjunction with the disposition of property effected before 5 p. m. of June 25, 1935. Thus the Controller is contending that the partial release did not create something new but was tantamount to a modification of a preexisting right. Alternately, the Controller urges that Conroy was in effect acting as a conduit between Anderson and the ultimate takers under the power.

We are not persuaded by the Controller's arguments. As already noted, there is a distinct and substantial difference between a general power of appointment and a special power of appointment. The former is one that may be exercised in favor of anyone, including the donee, and it is equivalent to a grant of ownership. The latter is a limited and restricted power and it may not be exercised in favor of the donee, his estate, his creditors, or creditors of his estate. In the present case the power of appointment given by Anderson to Conroy in conjunction with the disposition of the property which was the subject of the Anderson trust was ‘general.’ It did not change its form or character until 1947 when Conroy elected to release the general power of appointment. It was then that the special or limited power of appointment came into being.

The effect of the release agreement executed by Conroy in 1947 was to transmute the general power of appointment into a special or limited power of appointment. This transmutation occurred because it was made pursuant to a statute permitting it, i. e., former section 1060 of the Civil Code (now Civ.Code, § 1388.2).6 When Conroy exercised the special or limited power of appointment, which exercise is here sought to be taxed as a taxable transfer, it was no longer a general power of appointment. It was a special or limited power of appointment created by Conroy after Anderson's death and after June 25, 1935. It was not given in conjunction with a disposition of property effected before that date. It is not, therefore, the species of limited powers of appointment the exercise of which is a taxable transfer under section 13695.

The Controller, citing Civil Code section 3536 stating that ‘The greater contains the less,’ advances the theory that a general power of appointment includes a limited power of appointment and that, therefore, a limited power of appointment was ‘given in conjunction with a disposition of property effected before 5 p. m. of June 25, 1935.’ However, this legal maxim ‘does not apply when the Legislature has established separate categories or classifications and thereafter enacts legislation specifically designating one or more of such classes or categories by name.’ (Thornton v. Board of Trustees, 262 Cal.App.2d 761, 764, 68 Cal.Rptr. 842, 844.) In this state the Legislature has established two categories of powers of appointment for inheritance tax purposes. It has defined each and has provided different rules with respect to the treatment of each for tax liability. The legal maxim that ‘the greater contains the less' is therefore not applicable to this case.

We perceive that the Controller's arguments may have merit from a property law standpoint but not for inheritance tax purposes. In California Inheritance Tax Practice (Cont. Ed. Bar (1973)) section 5.43, pages 110–111, the distinction is stated thusly: ‘From a property law standpoint, assets subject to a power of appointment pass from the donor of the power to the appointee, or, if the power is not exercised, to the taker in default of appointment. Estate of Baird (1953) 120 CA2d 219, 260 P2d 1052. However, for inheritance tax purposes, there is first a transfer from the donor to the donee when a power of appointment is created. When its exercise, nonexercise, or release is taxable, it constitutes a further transfer from the donee to the appointee or to the taker in default. Rev & TC §§ 13696–13697.’

The judgment is affirmed.

FOOTNOTES

1.  Probate Code section 1240 provides that an appeal may be taken from an order ‘fixing an inheritance tax or determining that none is due.’ In a document entitled ‘Decision,’ which is signed and filed, the Honorable G. Brooks Ice of the Superior Court of San Mateo County, after specifying his reasons therefor, stated ‘The amended Report of the Inheritance Tax Referee is hereby approved.’ ‘However, since no particular language is requisite for an order, a trial judge's written statement of his views on the law and the proper decision may be treated as an order when it is signed and filed and when it constitutes his final judicial determination on the merits.’ (Martino v. Concord Community Hosp. Dist., 233 Cal.App.2d 51, 56, 43 Cal.Rptr. 255, 258.) The use of the phrase ‘is hereby approved’ would clearly indicate that the document entitled ‘Decision’ was intended to be a final determination of the matter on the merits and therefore an order and should be treated as such although not properly labeled.

2.  Unless otherwise indicated all statutory references are to the Revenue and Taxation Code.

3.  Civil Code section 1380.1 provides: ‘Except to the extent that common law rules governing powers of appointment are modified by statute, the common law as to powers of appointment is the law of this state.’

4.  At the time the instant release agreement was executed in 1947, former section 1060 of the Civil Code read in part as follows:‘1. Any power, which is exercisable by deed, by will, by deed or will, or otherwise, whether general or special, other than a power in trust which is imperative, is releasable, either with or without consideration, by written instrument signed by the donee and delivered as hereinafter provided unless the instrument creating the power provides otherwise.‘2. A power which is releasable may be released with respect to the whole or any part of the property subject to such power and may also be released in such manner as to reduce or limit the persons or objects, or classes of persons or objects, in whose favor such powers would otherwise be exercisable. No release of a power shall be deemed to make imperative a power which was not imperative prior to such release, unless the instrument of release expressly so provides. . . .’(Stats.1945, ch. 318, pp. 777–778, § 1, repealed Stats.1969, ch. 155, p. 409, § 2, superseded by Civ.Code, § 1388.2.)

5.  Section 13696, in pertinent part, reads: ‘If at the time of his death a decedent has a general power of appointment with respect to property, the exercise of the power is subject to this part as a transfer of the property from the decedent to the person to whom the property is appointed and the decedent's failure to exercise the power is subject to this part as a transfer of the property from the decedent to the person to whom the property passes by virtue of the nonexercise of the power. . . .’Section 13697, in pertinent part, reads: ‘The exercise or release by the decedent during his lifetime of a power with respect to property which, but for such exercise or release would be subject to tax by virtue of the preceding section [§ 13696], is a transfer subject to this part if the exercise or release is of such a nature that if it were a transfer of property owned by the decedent such transfer would be subject to this part . . ..’

6.  We have heretofore set out the pertinent provisions of former section 1060 of the Civil Code in footnote 4.

MOLINARI, Presiding Justice.

SIMS and ELKINGTON, JJ., concur.

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