Court Opinion

ID: 6753551
Source: CourtListenerOpinion
Date Created: 2022-07-21 00:25:06.574807+00
Date Added: 2024-06-11T16:02:21.311645
License: Public Domain

O’Neill, J.,
dissenting. In the instant case, Polk Laffoon, a nonresident of Ohio, placed intangibles in trust in the custody of a nonresident trustee and by the trust instrument granted to Emily Woodall Laffoon, his wife, the power to make disposition of the income and principal of this trust estate, in the following language:
“Donor grants to his wife, Emily Woodall Laffoon, the power to modify this trust at any time * * * to change the proportions, amounts and times of payment to the beneficiaries named above or their issue * * V’ (Emphasis added.)
Pursuant to this power, Mrs. Laffoon, while domiciled in Ohio, exercised her donated power of appointment and amended the original trust instrument to creat a new and completely different plan for the distribution of both income and principal of the trust from that provided in the original trust instrument. She directed the trustee in the following language:
“ * * * to retain the principal of said trust fund during my lifetime and to pay to me, Emily Woodall Laffoon, wife of the donor, the income arising therefrom so long as I shall live but I hereby annul and make void the provisions contained in said trust agreement and in my said modification of July 28, 1941, relating to the distribution of said trust fund upon my death. In lieu of said provisions, I hereby direct that said trustee on my death hold, administer and/or distribute said trust fund in accordance with the following provisions:
“I. (A) If my son, Polk Laffoon III, survive me, the trustee shall convey, transfer and pay over to him, free and clear of trust, four-fifths (4/5ths) of the trust fund.
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“II. (A) If both of the children of my daughter, Emily Brent Laffoon Randolph, deceased, survive me and shall have attained the age of twenty-five (25) years at the time of my death * * * the trustee shall convey, transfer and pay over, free and clear of trust, the remaining one-fifth (l/5th) of the trust fund to the children of my said daughter, in equal shares * *
Mrs. Laffoon died domiciled in Cincinnati, Ohio. Her estate was administered in Hamilton County, Ohio. Her son survived her, domiciled in Cincinnati, Ohio. The two children of her deceased daughter survived her; one was domiciled in Cincinnati, Ohio, the other was domiciled outside Ohio. Under the *105modification of the original trust instrument executed by Mrs. Laffoon, the son was entitled to receive four-fifths of the trust estate and the children one-tenth each. It is agreed that the exercise of the power of appointment by Mrs. Laffoon was effective in transferring title to the intangibles in this trust from the trustee to the beneficiaries.
The pertinent statutory law appears in Sections 5731.01 and 5731.02, Revised Code, which provide:
Section 5731.01. “As used in Sections 5731.01 to 5731.56, inclusive, of the Revised Code:
“(A) ‘Estate’ and '■property'’ include everything capable of ownership, or any interest therein or income therefrom, whether tangible or intangible, and, except as to real estate, whether within or without this state, which passes to any one person * * * from any one person whether by a single succession or not.” (Emphasis added.)
Section 5731.02.' “A tax is hereby levied upon the succession to any property passing, in trust or otherwise, to or for the use of a person * * * in the following cases:

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“(D) Whenever any person or corporation exercises a power of appointment derived from any disposition of property, such appointment when made shall be deemed a succession taxable under this section in the same manner as if the property to which such appointment relates belonged absolutely to the donee of such power and had been bequeathed or devised by said donee by will * * *;
“Such tax shall be upon the excess of the actual market value of such property over the exemptions made and at the rates prescribed in Sections 5731.01 to 5731.56, inclusive, of the Revised Code.” (Emphasis added.)
It is clear that the literal language of Section 5731.02, Revised Code, makes the succession of intangibles, which took place in the instant case, taxable. The statutory language is unambiguous and explicit.
The majority opinion makes no contention that the statute does not literally provide for taxing this succession.
There is no provision of the Ohio Constitution which denies the state the power to apply the provisions of this statute and *106levy and collect the tax upon the succession in this case. The majority does not contend that there is such a provision.
The majority opinion takes the position that the state of Ohio has no power to apply and enforce the provisions of this taxing statute with regard to this succession.
It is most interesting to note that nowhere in the majority opinion is there a statement, a reference or even a hint as to what provision of law denies Ohio the power to tax this succession.
An examination of the cases cited in the majority opinion and a reading of the other cases in this area of the law discloses that the only provision of law discussed in those cases as having the possibility of denying to Ohio the power to tax this succession is the due-process clause of the Fourteenth Amendment of the United States Constitution.
This is, of course, a federal question. The pronouncements of the Supreme Court of the United States are the controlling law upon the question of whether the due-process clause of the Fourteenth Amendment denies Ohio the power to tax in the instant case.
The three questions which are controlling in the disposition of this case have been decided by the Supreme Court of the United States. The questions are :
First: Where a resident of a state, who owns intangible personal property which he has always kept in another state, places those intangibles in an irrevocable trust and relinquishes all control over those intangibles to a nonresident trustee, which trust instrument provides that the trustee is to pay the owner an income for life and upon his death the principal.of the trust estate is to be distributed one-half to each of his two children, both of whom are nonresidents of the domiciliary state, and where the trust instrument provides that it is to be construed and enforced under the laws of the state in which it was made, and when such owner dies and his estate is administered in the state in which he is domiciled, which was also his domicile at the time he established the trust, does the domiciliary state of the original owner of the intangibles have the power to levy an inheritance tax upon the transfer of this intangible property and measure the amount of the tax by the market value of the intangibles at the time of death of the original owner?
*107The answer to this question is: The state does have this power.
This precise question was decided by the Supreme Court of the United States in Central Hanover Bank & Trust Co. v. Kelly, Tax Commr. (1943), 319 U. S. 94, 98.
It should be noted here that the factual situation in the Hanover case, supra, is the same as the factual situation in the case before this court, with one exception. In this case, Mrs. Laffoon, by reason of a power of appointment, dictated the terms of the trust which made disposition of the property at her death, while in the Hanover case, supra, the original owner of the intangibles dictated the terms of the trust which made disposition of the property at his death. In each case, the person dictating the disposition of the trust estate at death directed that the intangibles should be retained by the trustee during his life and the income paid to him until his death.
The second question, and the central one in this case, is: For succession tax purposes, does the donee of a power of appointment stand in the same position as the original owner of intangible personal property?
The answer to this question is: Yes.
This precise question was decided by the Supreme Court of the United States in Graves v. Schmidlapp et al., Exrs. (1942), 315 U. S. 657, 660.
The third question which is presented by this case is: Does the fact that in this case Mrs. Laffoon had the power to appoint income from the trust estate to herself but did not have the power to appoint any of the principal of the trust estate to herself or to her estate deny the state the power to impose a succession tax upon the transfer of property?
The answer to this question is: No.
This precise question was decided by the Supreme Court of the United States in Whitney et al., Exrs., v. State Tax Commission (1940), 309 U. S. 530.
The answers to these three questions are dispositive of this case, and the law established by the Supreme Court of the United States in deciding these questions is controlling.
The controlling rule of law is stated in 85 Corpus Juris Secundum 860, 861, Taxation, Section 1117, paragraph c.
The most recent case to consider the question presented *108by the instant ease was Colorado v. Cooke (1962), 150 Colo. 52, 370 P. 2d 896.
The Colorado court followed the law as announced by the Supreme Court of the United States in the cases cited above and held that the state had the power to impose a succession tax. The Colorado court stated the rule as follows: A general or specific power of appointment exercised is a proper foundation upon which to impose a succession tax, even though the intangible assets are located in a state other than that where the person possessing the power of appoinment is domiciled.
The majority opinion criticizes the Colorado case, but upon analysis the criticism amounts to a disagreement with the pronouncements of law which have been made by the Supreme Court of the United States: Whitney v. Tax Commission (1940), supra; Graves v. Schmidlapp (1942), supra; and Central Hanover Bank & Trust Co. v. Kelly (1943), supra.
The conclusions made in the majority opinion, that where all paper evidences of the intangibles are located outside the taxing state, and where no incident whatever of the transfer of the title to such property is in any way dependent for its effect upon the law of the taxing state, and that to permit such a tax would be to give extraterritorial effect to the state’s taxing statutes, were all present in the Hanover case, supra, in which case the court held that they were not sufficient to deny the domiciliary state the power to tax.
The argument that the property was owned by a nonresident donor of the power of appointment was made in the case of Graves v. Schmidlapp, supra, and the court held that, for inheritance tax purposes, the donee of the power of appointment to dispose of intangible personal property stands on the same footing as the owner, and, for the purpose of inheritance tax, the power to dispose of property at death is the equivalent of ownership. The court’s exact and pointed language, at page 660, was as follows:
“For purposes of estate and inheritance taxation, the power to dispose of property at death is the equivalent of ownership. * * * Intangibles, which are legal relationships between persons and which in fact have no geographical location, are so associated with the owner that they and their transfer at death are taxable at the place of his domicile, where his person and the *109exercise of his property rights are subject to the control of the sovereign power. His transfer of interests in intangibles, by virtue of the exercise of a donated power instead of that derived from ownership, stands on the same footing. In both cases the sovereign’s control over his person and estate at the place of his domicile, and his duty to contribute to the financial support of the government there, afford adequate constitutional basis for the imposition of a tax. * * *” (Emphasis added.)
It was argued in the Hanover case, supra, that the transfer of the intangibles took place at the time of the execution of the trust and the delivery of the intangibles to the trustee, and that the trustee was then the owner, and, therefore, the tax could not he levied upon the transfer of the property from the trustee to the remaindermen and measured by the value of that property at the time of death of the original owner.
This is the same argument that the majority opinion makes that no incident of the transfer of title is in any way dependent for effect upon the law of the taxing state. The majority opinion concludes in this case that to do so would give extraterritorial effect to the taxing statute which is to be implied against.
The court dismissed these arguments as immaterial in the Hanover case, supra, in the following language:
‘ ‘ The execution of the present trust agreement in New York, the circumstance that the remaindermen as well as the trustee were nonresidents of the taxing state are quite immaterial. Domicile is the single controlling consideration in this situation, as it is in the case of the taxation of income derived from activities outside the state. # *
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“* * * And if the transfer to the sons is assumed to have taken place only at the time of the grantor’s death, there is no constitutional reason why the result need be different. The fact that he did not then ‘own’ the property is inconsequential. * * * The significant facts are that the rights of the remaindermen derived solely from the trust agreement and that the grantor died domiciled in New Jersey.” (Emphasis added.) • •
In the instant case, the rights of the son to four-fifths of the trust estate and the two children of the deceased daughter to one-tenth each of the trust estate derived solely from the *110amendment of the trust instrument made by Mrs. Laffoon pursuant to the exercise of her power of appointment. She was domiciled in Ohio at the time she executed the amendment to the trust and she was domiciled in Ohio at the time of her death, and her estate was administered in Ohio. As the court said in the Hanover case, supra, at page 97, “domicile is the single controlling consideration in this situation.”
In the Whitney case, supra, Cornelius Vanderbilt established a trust and in the trust agreement gave to his wife an income for life and the power of appointment to make disposition of the principal of the trust estate at her death. She exercised this power, and the question arose in that case as to whether the state had the power to levy an inheritance tax upon the value of the property which was transferred by the exercise of her power of appointment effective at her death since she had no power to appoint any of the principal to herself or to her estate and, thus, it was argued, she never received any “beneficial interest” from the principal of this trust estate and, thus, the title did not pass from her to the remaindermen, but from the original donor of the power to the remaindermen, and the state had no power to tax this transfer and measure it by the value of the property at the time of her death. Justice Frankfurter, in upholding the power of the state to levy the tax, said, at page 538:
“* * * Mrs. Vanderbilt, to be sure, had, in the conventional use of that term, no ‘beneficial interest’ in the property which she transferred through the exercise of her power of appointment. She could not, that is to say, use the corpus of the trust herself or appoint it to her estate; nor could she have applied it to her creditors. These qualifications upon Mrs. Vanderbilt’s power over the appointive property had a significance during her lifetime which death transmuted. For when the end comes, the power that property gives, no matter how absolutely it may have been held, also comes to an end — except in so far as the power to determine its succession and enjoyment may be projected beyond the grave. But the exercise of this power is precisely the privilege which the state confers and upon which it seises for the imposition of a tax. It is not the decedent’s enjoyment of the property — the-‘beneficial interest’ — which is the ,occasion for the tax, nor even the acquisition of such enjoyment *111by the individual beneficiaries. Presumably the policy behind estate tax legislation like that of New York is the diversion to the purposes of the community of a portion of the total current of wealth released by death.
“In making this diversion, the state is not confined to that kind of wealth which was, in colloquial language, ‘owned’ by a decedent before death, nor even to that over which he had an unrestricted power of testamentary disposition. It is enough that one person acquires economic interests in property through the death of another person, even though such acquisition is in part the automatic consequence of death or related to the decedent merely because of his power to designate to whom and in what proportions among a restricted class the benefits shall fall.” (Emphasis added.)
The majority opinion relies upon the case of Walker, Admr., v. Treasurer and Receiver General (1915), 221 Mass. 600, 109 N. E. 647, which is an early case in this field, decided a few years after a statute similar to Ohio’s was enacted in Massachusetts. The reasoning in that case was that title to property transferred by the exercise of a power of appointment by the donee of that power passed from the donor of the power rather than the donee, and that the donor of the power was the owner of the property, and, therefore, an attempt by a state, which was the domicile of the donee, to tax the transfer of the property was, when the donor was a nonresident of that state, a tax upon the transfer of the donor’s property and gave an extraterritorial effect to the statute which was not permissible.
This reasoning was accepted by the United States Supreme Court in the case of Wachovia Bank & Trust Co., Admr., v. Doughton, Commissioner of Revenue (1926), 272 U. S. 567, 71 L. Ed. 567, 47 S. Ct. 202, and was the law until the case of Graves v. Schmidlapp, supra, where this reasoning was rejected, and the Wachovia case, supra, which embodied this reasoning, was specifically overruled by name.
Under the facts of the instant case, under the Ohio statute, the correct rule of law, as evolved from a series of cases decided by the Supreme Court of the United States in the field of inheritance tax law, is as follows:
For the purposes of inheritance and estate taxation of intangible personal property, a donee of a special power to make *112disposition of such property stands on the same footing as the owner of the property and when such donee exercises that power and makes the transfer of that intangible property effective upon his death, the state which was his domicile at the time he exercised the power of appointment and which was his domicile at the time of his death has the power to levy an inheritance tax upon the transfer of the intangibles pursuant to his direction and measure the amount of such tax by the value, at the time of his death, of the intangible property transferred.
The majority opinion in this case is a classic example of the court permitting its own determination of what the law ought to be to override what the Legislature has explicitly enacted the law to be and what the highest court of the land has declared the law to be.
The judgment should be reversed, and the cause remanded to the Probate Court of Hamilton County for a proper determination of the amount of the tax.
ZimmermaN and Matthias, JJ., concur in the foregoing dissenting opinion.