Case ID: ohio-st_167/html/0373-01.html
Source: Caselaw Access Project
Author: {"author": "Weygandt, C. J. Taft, J.,", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

In re Estate of Chadwick: The Second National Bank of Warren, Admr., Appellant, v. Department of Taxation of Ohio, Appellee.
    (No. 35080
    Decided March 19, 1958.)
    
      
      Mr. James W. Frey and Messrs. Hoppe, Day $ Ford, for appellant.
    
      Mr. William Saxbe, attorney general, and Mr. Gerald A. Donahue, for appellee.
   Weygandt, C. J.

By reason of the uncertain and confusing manner in which the matter was handled by the Court of Probate, the initial question here presented is a procedural one.

The first determination in that court on September 7, 1955, was in conformity with the views of the plaintiff to the effect that the succession was not taxable. Then two days later on September 9, the defendant Department of Taxation wrote the court a letter reading in part as follows:

“We have application and entry determining tax in this estate before us.

“In schedule D is noted U. S. bonds held joint and survivorship between husband and wife, total of $10,006.57, of which one-half, or $5,003.29, are taxed. This does not appear to be in accordance with Amended Probate Court Bulletin No. 8. In other words, there is no finding in the entry by the probate judge that the survivor-widow made any money contribution to the purchase of said bonds.

“Also in our file we have application for consent to transfer:

“ ‘Retirement annuity contracts Nos. * * * John Hancock Mutual Life Insurance Company. Beneficiary, Nellie C. Chadwick, wife. Death benefit, approx. $7,920.’

“These are not listed for taxation. We believe that they are taxable. See Probate Court Bulletin No. 6.

“Please advise us on both the above matters.”

As a result of the letter, the Court of Probate, a month later on October 11, changed its original determination of the tax by approving a second journal entry adopting the suggestions made by the defendant Department of Taxation.

However, the defendant then discovered another respect in which it thought the Court of Probate in error. Hence, on October 17, it wrote the court still another letter suggesting a further change in the determination of the tax. When the court did not adopt this new suggestion, the defendant on November 7 filed a document captioned “Exceptions to Determination of Inheritance Tax.”

It is the contention of the plaintiff that the defendant had no right to file these exceptions to the determination since the letter of September 9, although not so labeled, was in fact an exception, and the defendant could not file a second exception.

To the contrary the defendant insists that the letter of September 9 was a mere letter; that it was not filed; that it was not denominated an exception; that it requested no hearing; and that it asked no judicial determination. .

This court is of the opinion that the lower courts were not in error in refusing to construe the letter of September 9 as a compliance with the requirement of Section 5731.38, Eevised Code, permitting a dissatisfied person to “file exceptions in writing with the Probate Court within 60 days.” Hence, the defendant’s formal exceptions of November 7 were properly so considered.

After the filing of the exceptions of November 7, the Court of Probate on March 14, 1956, again changed its determination of the tax by approving a third journal entry adopting the further views of the defendant. The plaintiff has appealed therefrom.

In addition to the foregoing procedural controversy, the plaintiff-appellant presents several questions of substantive law. The facts have been stipulated.

The first of these additional questions relates to assets from which the indebtedness of the estate may be deducted before imposition of the succession tax.

More specifically, may this estate’s indebtedness of $4,892.32 be deducted from so-called probate or administrable assets of $878.98 alone, or may the indebtedness be deducted from nonprobate or nonadministrable assets also if, as here, the former are insufficient to pay the indebtedness and the latter are adequate to meet the deficiency? Here the amount of the nonprobate assets is $18,175.40 — several times the amount of the estate indebtedness — but the estate itself is insolvent.

Counsel agree that the Ohio inheritance or succession tax imposed by Section 5731.02, Eevised Code, is an excise.

They agree, too, that the tax is on the right to receive property rather than on the amount or value of property owned by the decedent.

Furthermore, they agree that nonprobate assets are legally not part of the estate of a decedent and hence are legally not liable for the indebtedness of the estate.

But counsel are in sharp disagreement as to the materiality and importance of the single fact that part of the nonadministrable or nonprobate assets was used by the legatee widow to pay the remaining indebtedness of the insolvent estate.

The plaintiff-appellant contends that, although the non-probate assets were not liable for the estate indebtedness, their use therefor renders them valueless to the widow as a part of the succession, and hence such part should not be subject to the tax as such.

It, of course, was an honorable gesture for the widow to voluntarily use a portion of the nonprobate assets to discharge the unpaid balance of the estate indebtedness in excess of the probate assets which were beyond the reach of the estate creditors. But does this commendable use of part of the non-probate assets render succession to that part nontaxable?

Unfortunately for the widow, the inheritance or succession tax in this state is imposed on the right to the succession. Section 7, Article XII of the Constitution of Ohio, reads in part as follows:

“Laws may be passed providing for the taxation of the right to receive, or to succeed to, estates * * #.” (Italics supplied.)

In conformity therewith, Section 5731.02, Revised Code, reads in part as follows:

“A tax is hereby levied upon the succession to any property passing, in trust or otherwise, for the use of a person * * *.” (Italics supplied.)

Manifestly the widow had the “right” to the succession for whatever “use” she chose to make of it.

As was stated in the opinion in the case of In re Estate of Daniel, 159 Ohio St., 109, 111 N. E. (2d), 252, “the succession tax is not a tax upon the estate, but is a tax upon the succession or the right and privilege to receive. It is not a tax on property, but upon the right of succession to the property of a deceased person.”

It is obvious that the widow alone had the “right” to the succession and that she alone could “use” it as she chose. Under the law nothing further remained to be done to subject the succession to the tax. After this completion of the process, ■could the widow subsequently alter the status of the succession and lessen or abate the tax by the manner in which she happened to use her newly acquired.property? Neither the constitutional nor the statutory provisions intimate the existence of such a privilege, and this court is without the legislative authority to create it.

Counsel agree mat this precise question has not been determined previously by this court, and hence they cite several cases from other states. However, those decisions are of little assistance inasmuch as they are dependent on the particular provisions of the varying state laws. The matter is well summarized as follows in 110 A. L. R., 1255:

“Where the estate of a decedent is insolvent in that his debts exceed the value of property liable for their payment, so that the debts cannot be paid in full, but his gross estate for tax purposes includes property not liable for his debts, the question arises, under a statute allowing a deduction for the debts of a decedent in computing his net taxable estate, whether the total amount of the debts may be deducted, or the deduction must be limited to the value of the property liable for their payment, i. e., whether a deduction on account of the debts may be charged against property not liable for their payment as well as against property which is liable.

“This question, as the cases indicate, is entirely one of statutory construction, and the courts have frequently suggested that the legislative branch of the government may limit the right to deductions in this respect as it sees fit.”

A similar comment appears in 85 Corpus Juris Secundum, 1042, Section 1186.

The plaintiff’s next contention is that disallowance of estate debts as a deduction from nonprobate assets is a denial of equal'protection of the law as guaranteed by Section 1 of the Fourteenth Amendment to the federal Constitution. The answer to this is that all recipients of nonprohate assets are treated alike, and they have the right to receive such assets without reduction for payment of estate debts.

The plaintiff’s final contention is that the tax should not be imposed with respect to the cash surrender value of certain “retirement annuity” contracts acquired by the decedent under his employer’s pension trust plan arranged with an insurance company for the benefit of employees. The plaintiff insists that the name of these contracts is not conclusive; that in reality they contain both life insurance provisions and annuity provisions ; that the widow was paid under the life insurance provisions; and that hence the right to receive the proceeds is not taxable. However, the contracts provide simply that if the employee dies before his sixty-fifth birthday “an amount equal to the premiums paid” shall lie payable to the beneficiary. The single fact that an insurance company is involved is not controlling. The important question is what was the widow entitled to receive. Since the decedent died before retirement, the widow received merely a return of the contributions — the cash surrender value of the unconsummated annuity contract. The essential element of a risk was not involved.

The lower courts were not in error.

Judgment affirmed.

Zimmerman, Stewart and Matthias, JJ., concur.

Taft, Bell and Herbert, JJ., dissent.

Taft, J.,

dissenting. I agree with the judgment, to the extent that it holds that amounts paid under the “retirement annuity” contracts were not exempt from inheritance taxation as “proceeds of * * * life insurance” within the meaning of Section 5731.06, Revised Code. However, in my opinion, the refusal, in determining the inheritance tax, to permit deduction of any indebtedness of decedent’s estate, in excess of the amount of its probate assets, is erroneous for several reasons.

Taking approximate figures and disregarding $28 of the debts against this estate, it will simplify consideration of this case, without affecting the legal questions involved, to regard it as a case where there are $880 of probate assets, nonprobate assets including $10,000 of joint and survivorship U. S. bonds, $250 expenses of administration, $500 exempt from administration, a $3,000 widow’s allowance, and $1,120 of funeral expenses paid by the widow.

The $500 exempt from administration must first be deducted from the probate assets. Then, under Section 2117.25, Revised Code, the $250 administration expenses should next be deducted therefrom. This leaves only $130 available for funeral expenses and nothing for the $3,000 allowance to the widow.

By what it said, the General Assembly expressed an intention that a widow’s allowance for support (pursuant to Section 2117.20, Revised Code) up to $3,000 should not be subject to any inheritance tax. Section 5731.03, Revised Code.

Previous decisions of this court have indicated that the allowance to a widow for support, now provided for in Section 2117.20, Revised Code, may be satisfied out “of any property which” her husband “owns and of which he retains the right of disposition and control up to the time of his death,” even though such property does not become a part of his estate. Bolles v. Toledo Trust Co., Exr., 144 Ohio St., 195, 58 N. E. (2d), 381, 157 A. L. R., 1164, and Neville v. Sawicki, Exr., 146 Ohio St., 539, 67 N. E. (2d), 323. Admittedly, the decedent owned the $10,000 of U. S. bonds and retained the right of disposition and control thereof, up to his death.

What reason is there for refusing to permit the widow in the instant case to consider $3,000 of those $10,000 bonds as a satisfaction of her widow’s allowance, an allowance that is admittedly not subject to inheritance tax? If those bonds had been so held in the names of the decedent and someone else, instead of the decedent and his widow, the widow could have had her allowance satisfied out of their amount, with the result that not more than $7,000 of the $10,000 amount thereof would have been subject to an inheritance tax.

In arguing against permitting any deduction on account of funeral expenses, it is contended that the widow was a volunteer in paying those expenses. Perhaps, because it would rarely be contended that a widow does not have a duty to bury her deceased husband where she is financially able to do so and his estate is not, there is little authority in Ohio as to whether she has such a duty. What authority there is is to the effect that she has such a duty. See Farley v. Carson, 8 Dec. Rep., 119, 5 W. L. B., 786; 21 Ohio Jurisprudence 372, Section 45.

Even if it is not a widow’s legal duty to bury her husband where she is financially able to do so and his estate is not, it is certainly the widow’s moral duty to do so; and we should not impute to the General Assembly an intention, in the enactment of the inheritance tax laws, to discourage performance of such a moral duty, unless that intention has been clearly expressed.

In the instant case, both parties recognize that these bonds pass to the widow, not by reason of any inheritance or because they are part of any estate, but because of a contract made by the decedent for the benefit of his widow. In re Estate of Hatch, 154 Ohio St., 149, 93 N. E. (2d), 585. See Bauman v. Walter, 160 Ohio St., 273, 276, 277, 116 N. E. (2d), 435, and cases cited therein. The General Assembly has expressed an intention to tax what a widow gets under such a contract, apparently because it represents something she gets as a gratuity by reason of her husband’s death. In re Suderov’s Estate, 282 N. Y. Supp., 405, 408, affirmed without opinion in 249 App. Div., 763, 292 N. Y. Supp., 468, which was affirmed without opinion in 274 N. Y., 525, 10 N. E. (2d), 531. By reason of that same death, she receives a corresponding legal or at least moral obligation to pay for her husband’s decent burial if, as here, his estate is unable to do so. If the widow performs that obligation imposed upon her by her husband’s death, the cost of its performance necessarily reduces what such widow otherwise receives as a result of his death. To tax what she otherwise receives, without reducing it by the amount she pays for such funeral expenses, is to disregard reality and tax the widow not merely on the net amount that she actually receives by reason of her husband’s death, but upon something more. This appears to be inconsistent with the attitude of this court, in recognizing that there should be inheritance taxation only on what is received after payment of debts, including payment of the federal estate tax, even though the General Assembly did not express any such intention. Tax Commission, ex rel. Brice Atty. Genl., v. Lamprecht, Admr., 107 Ohio St., 535, 140 N. E., 333, 31 A. L. R., 985. Thus, after a complaint about the “deficiencies, ambiguities, and uncertainties, and * * * imperfections * * *' and * * * difficulties * * * in * * * administration” of the inheritance tax law, it is stated in part at the end of the opinion in that case at page 550:

“If * * * we assume that the Legislature intended to be just and to tax only the actual amount received by each beneficiary * * * then the conclusion must be reached that the Legislature also intended that every kind of debt, charge, expense, and claim of a valid nature against a decedent’s estate should be deducted, and the succession tax be computed only upon.the net balance.”

Furthermore, as stated in the syllabus in that case, “the Ohio inheritance tax is a succession tax on the beneficial interest of each heir, legatee, devisee, or other beneficiary of a decedent’s estate.”

In People v. Beckers, Admr., 413 Ill., 102, 105, 108 N. E. (2d), 5, it is said in the opinion by Hershey, J.:

“* * * It is the beneficial interest against which the inheritance tax is assessed. In general, the beneficial interest is what remains after the payment of the indebtedness of the estate and the expenses of administration, and it is this excess over debts and expenses of administration which is subject to the tax. * * *

“Clearly, we are not concerned at all with the application of estate assets to the payment of debts. Indebtedness of the estate need not even be paid from estate assets, if actual beneficiaries in good faith compromise the claim or pay it or become liable for it, for such debt to be a valid deduction in computing the inheritance tax. (People v. Tatge, 267 Ill., 634.) There is no authority which implies that the source of payment of a decedent’s debts controls their allowance as deductions.”

In People v. Tatge, supra, it was said by Dunn, J.:

“ * * * it is only the excess over such indebtedness and expenses which is subject to the tax. It is not material that the claim was not presented to and allowed by the Probate Court. If the claim was an actual indebtedness of the estate and the beneficiaries of the estate actually paid it, then the amount of the estate to which the beneficiaries actually succeeded was reduced. [by] the amount paid.”

Besides those inheritance tax cases from Illinois, there are quite a number of other cases which support the taxpayer’s contention, that all debts of the decedent’s estate should be deductible in determining inheritance or estate taxes although the probate assets are not sufficient to discharge such debts; and there is apparently little, if any, authority to the contrary. See annotation, 110 A. L. R., 1255.

It has been suggested that estate tax cases should not be persuasive in determining whether such a contention of the taxpayer should be sustained. An inheritance tax is admittedly levied against the right of persons to receive property from an estate (or on the death of a decedent) and is therefore measured by the value of what is received. On the other hand, an estate tax is levied against the right of a decedent to transfer property and is therefore measured by the value of what is transferred. Tax Commission, ex rel. Price, Atty. Genl., v. Lamprecht, Admr., supra, 538 (107 Ohio St., 535). If debts may be deducted in determining what is received, it is obvious that they should be deducted in determining what is transferred, and vice versa. Generally speaking, what is received will equal, or at least not exceed, what is transferred. If, as in the instant case, there are substantial amounts of nonprobate assets not reachable for payment of debts, a decedent may thereby be enabled to transfer such nonprobate assets, free of debts which probate assets are insufficient to satisfy. However, such a decedent will be unable to so transfer any more of such non-probate assets than those who benefit from his estate (and are subject to inheritance tax) will receive. Hence, cases determining that debts in excess of probate assets may be deducted from nonprobate assets in determining estate taxes even though such nonprobate assets are not liable for their payment, should be persuasive in determining whether such debts may be so deducted in determining inheritance taxes.

In the estate tax ease of In re Suderov’s Estate (N. Y.), supra, after noting that the tax on life insurance proceeds, as does the tax on proceeds received under the contract in the instant case, represents “an arbitrary selection of a subject for taxation,” the opinion states:

“Even as a matter of abstract justice to the state, which is hardly a pertinent consideration in the interpretation of a statute based upon arbitrary fiat and not on legal principles or logical conclusions [a reference to the taxing of nonprobate assets], it is difficult to perceive any cause for its [the state’s] complaint. * * * Under the determination of the appraiser the state receives precisely the same sum which it would receive were all the assets of the ‘gross estate’ liable for the obligations of the decedent. If any one has a right to complain, it is either the creditors, who will not be paid in full or the beneficiaries ® * * whose contract rights have been partially curtailed and invaded in order to supply needed revenue for the government.”

Finally, it may be observed that Section 5731.02, Revised Code, which provides the only statutory basis for any inheritance tax at all with respect to the $10,000 of U. S. bonds involved in the instant case, reads so far as pertinent:

“A tax is hereby levied upon the succession to any property passing, in trust or otherwise, for the use of a person, institution, or corporation, in the following cases:

“(E) Whenever property is held by two or more persons jointly, so that upon the death of one of them the survivor has a right to the immediate ownership or possession and enjoyment of the whole property, the accrual of such right by the death of one of them shall be deemed a succession taxable under this section, in the same manner as if the enhanced value of the whole property belonged absolutely to the deceased person, and he had bequeathed the same to the survivor by will Si * * ■>■>

If the decedent had bequeathed these $10,000 of bonds to his widow by will, she would have taken only that portion of that amount not required to pay the debts of the decedent’s estate. Hence, it would appear that the General Assembly by what it said clearly expressed an intention to levy an inheritance tax in a case such as this only on that portion.

Bell and Herbert, JJ., concur in the foregoing dissenting opinion.