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


Civ. 16821.

Decided: October 20, 1949

James W. Hickey, Chief Inheritance Tax Attorney, Sacramento, Morton L. Barker, Senior Inheritance Tax Attorney, Los Angeles, Vincent J. McMahon, Assistant Inheritance Tax Attorney, Sacramento, for appellant. Leon W. Delbridge, Pasadena, Brady & Nossaman, Los Angeles, for respondent. McCutchen, Thomas, Matthew, Griffiths & Greene, Los Angeles, amici curiae in behalf of respondent.

Charles E. Newton died a resident of New York October 19, 1921. By his will he provided for a testamentary trust, including a power of appointment which is as follows: ‘As to the said four-fifths part of my said residuary estate, to pay the net income thereof equally to my two sons, Charles E. Newton, Jr., and Arthur B. Netwon, during their joint lives, and upon the death of either, to pay one-half of the said principal sum of said four-fifths unto the sruvivor of them to whom I give, devise and bequeath the same absolutely. As to the remaining on-half of said principal sum, I give and grant unto my son who shall first die the power and right to give, devise and bequeath the same by his last Will and Testament, to his wife and children, or any or either of them.’

The property of the trust estate consists of intangibles, and has always been situate in the state of New York. The will was admitted to probate and the trustees function under the laws of that state.

Arthur B. Newton, the son, made his will in the state of New York while a resident thereof, May 2, 1930, and exercised the power of appointment in favor of his wife. Later he came to California, and died a resident of this state March 11, 1943. He was the first of the two brothers mentioned in the father's will to pass away. Hereafter Arthur B. Newton will be referred to as the decedent.

During probate in California of decedent's estate the Inheritance Tax Appraiser reported to the Superior Court that decedent and his widow held in joint tenancy a home and furnishings and $61.99 cash; also that some months prior to death decedent transferred an automobile to his wife, of the value of $1,575, which should be taxed.

In addition to the foregoing items, the report presented to the Court, to be taxed, $412,510.30, the value fixed by the Appraiser upon the transfer pursuant to the power of appointment.

Objections to the latter part of the Report of the Inheritance Tax Appraiser were filed by the widow. These objections were sustained by the Superior Court.

The only question involved in this appeal is whether the appointment by the decedent donee may be taxed by the state of California. If the property which goes to the widow by appointment is taxable, the inheritance tax will be $31,119.27; if not, her tax will be $14.08.

The foregoing facts are not in dispute; and are quite similar to those in Re Estate of Bowditch, 189 Cal. 377, 208 P. 282, 23 A.L.R. 735, decided in 1922. Indeed, the only material difference is that the power in this case is special, and the power in the Bowditch case is general. Objector relies upon the Bowditch case, which holds that the power of a donee, a resident of California, to direct disposition of the corpus of a testamentary trust is not ‘property’ within the purview of the California Inheritance Tax Act, Gen.Laws, Act 8495, when the situs and corpus of the trust are in another state.

The State Controller relies upon Graves v. Schmidlapp, 315 U.S. 657, 62 S.Ct. 870, 86 L.Ed. 1097, 141 A.L.R. 948. The Schmidlapp case was decided in 1942, twenty years after the Bowditch case.

The opinion in the Bowditch case cites United States v. Field, 255 U.S. 257, 41 S.Ct. 256, 65 L.Ed. 617, 18 A.L.R. 1461, in support of its holding of nontaxibility. In 1926 the United States Supreme Court in Wachovia Bank & Trust Co. v. Doughton, 272 U.S. 567, 47 S.Ct. 202, 71 L.Ed. 413, followed United States v. Field. But in 1942 the same eminent Court, in Graves v. Schmidlapp, supra, expressly overruled Wachovia Bank & Trust Co. v. Doughton. Hence, the State Controller argues with ability and forcefulness that the Bowditch case stands overruled in California.

Of course, when the United States Supreme Court speaks with reference to a matter governed by the Federal Constitution every court in the land is bound thereby. The Schmidlapp case held that the Fourteenth Amendment does not deny to the several states the right to tax the exercise by a donee of a power of appointment when the situs of the property is in a state other than the residence of the donee decedent. ‘This transmission of wealth at death by a resident is not a forbidden source of revenue to the state.’ [315 U.S. 657, 62 S.Ct. 875.]

But the Schmidlapp case does not direct the state of California to tax or not to tax the exercise of such a power. The decision of a state court of last resort construing a state law is conclusive and presents no federal question. Stebbins v. Riley, 268 U.S. 137, 45 S.Ct. 424, 69 L.Ed. 884, 44 A.L.R. 1454; Castillo v. McConnico, 168 U.S. 674, 18 S.Ct. 229, 42 L.Ed. 622; Schuylkill Trust Co. v. Pennsylvania, 302 U.S. 506, 58 S.Ct. 295, 82 L.Ed. 392; McGregor v. Hogan, 263 U.S. 234, 44 S.Ct. 50, 68 L.Ed. 282; Bailey v. Magwire, 22 Wall. 215, 89 U.S. 215, 22 L.Ed. 850, 11 Am.Jur. 742. Therefore, unless changed by statute, the Bowditch case is still the law of California, binding upon this and every other court in the state except our own Supreme Court.

Having come to this conclusion, it is unnecessary to determine the interesting question of liability for inheritance tax of a transfer under a special power, as in this case, or under a general power, as in the Bowditch case.

Has the state of California by statute changed the rule set forth in Estate of Bowditch?

Section 2, Subdivision 7, of the inheritance Tax Act of 1935, as amended in 1941, Stats.1941, Ch. 177, p. 1222, and which was the law in effect on March 11, 1943, the date of Arthur B. Newton's death, reads as follows:

[7] ‘Whenever any person or corporation shall be given a general or limited power of appointment by virtue of any disposition of property made before or after 5 p.m. of June 25, 1935, such gift of power of appointment shall, under the provisions of this act, including Subdivision (10) of this section, be deemed a taxable transfer made from the donor of said power to the donee thereof at the date of the donor's death, except that:

‘(a) Where the donor of a power of appointment died prior to 5 p.m of June 25, 1935, and the power is exercised thereafter, the exercise of said power of appointment shall be deemed a transfer taxable as provided in Subdivision (6) of Section 2 of the Inheritance Tax Act of 1921, as amended in 1929.’

As stated, Arthur B. Newton's father, the donor, died October 19, 1921. Therefore it is argued that sub-paragraph (a) as quoted authorizes and directs taxation of this transfer of property.

Other sections of the Inheritance Tax Act which the Controller suggests should be read in connection with this inquiry are as follows:

‘(6) Whenever any person, trustee or corporation shall exercise a power of appointment derived from any disposition of property made either before or after the passage of this act, such appointment, when made, shall be deemed a transfer taxable under the provisions of this act, in the same manner as though the property to which such appointment relates belonged absolutely to the donee of such power, and had been bequeathed or devised by such donee by will.’ Subdivision 6, Section 2, of the Inheritance Tax Act of 1921, as amended in 1929, Stats.1929, Ch. 844, pp. 1836, 1837.

‘A tax shall be and is hereby imposed upon the transfer of any property, real or personal, or of any interest therein or income therefrom, * * * in the following cases': Section 2, and Subdivision 2 of Section 1, Stats. 1941, Ch. 177, pp. 1220, 1221.

‘(2) The words ‘estate’ and ‘property’ as used in this act shall be taken to mean the real and personal property or interest therein of the testator, * * * and shall include all intangible personal property of resident decedents within or without the State or subject to the jurisdiction thereof, * * *.' Section 1, Subdivision 2, Inheritance Tax Act of 1935, stats. 1935, Ch. 358, p. 1266.

When read in connection with the Bowditch case, it is apparent that there is nothing in the statute law of California which constitutes a legislative mandate to the Superior Court to order a tax in cases like this. Nor may any other conclusion be reached by speculation as to the legislative intent. It would seem that if it had been the intent of the Legislature to tax such transfers as this, the language employed in the Inheritance Tax Act would have been explicit to that effect. Moreover, it may properly be assumed that the Legislature intended to follow the Bowditch case, with its implication of fairness to taxpayers, protecting them against the possibility of double taxation—first in the state where property is situate, and, secondly, in the state where the power of appointment becomes effective.

The order is affirmed.

DRAPEAU, Justice.

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

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Docket No: Civ. 16821.

Decided: October 20, 1949

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

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