53 A.2d 33 | Md. | 1947
Sarah E. O'Hara, who died in 1933, by will left the residue of her estate in trust for James F. O'Hara, her legally adopted son, for life, with remainder to such persons as he might by will appoint. He died in 1944. He left by will his entire estate, including all property over which he might have power of appointment, and especially the power given him under his mother's will, one-third to his wife and two-thirds to her in trust for his three children until each reaches 25 and then to each child absolutely.
The instant case presents two questions: (1) Should property passing by the exercise of a testamentary power of appointment be regarded, for the purposes of the Maryland inheritance tax, as property passing to the beneficiaries from the donor of the power or from the donee? (2) For the purposes of the Maryland inheritance tax, are legitimate natural children of an adopted child regarded as lineal descendants of the adopting parent?
The value of the estate which passed by the exercise of the power was $556,754.83. The State (appellant) contends that (1) the property must be regarded as passing from the donor of the power and (2) the children can not be regarded as lineal descendants of the donor. Hence the shares of both the widow and the children of the donee are subject to the collateral inheritance tax, at 5 per cent. (the rate in effect when the donor died), a total tax of $27,887.74. The taxpayer (appellee) contends that (1) the property must be regarded as passing from the donee and (2) in any event the children must be regarded as lineal descendants of the donor. Hence the shares of both the widow and the children are subject only to the direct inheritance tax of 1 per cent. (in effect when the donee died), a total tax of $5,567.55. If the State's first contention and the *530 taxpayer's second are correct, the widow's share, $185, 584.94, is subject to the collateral inheritance tax of $9,229.25, and the children's shares are not subject to tax, as there was no direct inheritance tax in effect when the donor died.
The lower court held that both of the taxpayer's contentions are correct and the total tax is $5,567.55.
1. Notwithstanding the able opinion of the lower court and argument of counsel and the American Law Institute's construction of the Maryland statute, it seems clear to us that for Maryland inheritance tax purposes the same rule is applicable as for other purposes, viz., that property passes by exercise of a testamentary power of appointment, not from the donee of the power but from the donor. In Maryland this rule of property is not only as fully applicable as elsewhere, but has been carried further than in many other jurisdictions. In England, and generally but not universally in this country, this rule is qualified by a rule that when a general power of appointment is exercised, equity will regard the property appointed as part of the donee's assets for the payment of his creditors in preference to the claims of his voluntary appointees. In such cases the appointed property is treated as equitable, not legal, assets of the donee's estate, and may pass to the executor, not by virtue of his office but as a matter of convenience and because he represents the rights of creditors. United States v. Field,
1921,
Death taxes are not taxes on property, but on transfer of property, i.e., estate taxes on transmission by the decedent, inheritance taxes on receipt by the beneficiaries. GoodSamaritan Hospital v. Dugan,
In United States v. Field, 1921,
Throughout this period and ever since 1844, when the Maryland collateral inheritance tax was established, there has been no such uncertainty as to the Maryland inheritance tax, but an unbroken administrative recognition that for tax purposes, as for other purposes, property passing under a power of appointment is regarded as received from the donor of the power, not from the donee. It was so ruled by Judge Henderson (when Deputy Attorney General or Assistant Attorney General), (1940) 25 Op. Atty. Gen. 674; (1937), 22 Id. 738; (1937) 22 Id. 689 and by the Attorney General's office before and since, (1932) 17 Id. 395; (1935) 20 Id. 882; (1940) 26 Id. 438; (1945) 30 Id. 165. In legislation and in opinions of this court property passing under a power of appointment has been considered like other contingent remainders. Fisher v. State, 1907,
The lower court quotes a remark by Chief Judge Bond in Darnallv. Connor, 1931,
The lower court also construes Art. 81, § 111, as amended in 1936, 1937 and 1941, 1943 Supp., as providing in effect, "that property passing by the exercise of a power of appointment shall be taxed as though forming part of the estate of the donee of the power."
The court quotes the statute as follows:
"The taxes imposed by the two preceding sections [inheritance and collateral inheritance] shall apply * * * to all * * *property * * * passing either by will or under the intestate laws of this state, or by deed, gift, grant, *534
bargain or sale, made in contemplation of death, or intended to take effect in possession or enjoyment at or after the death of a decedent * * * including property over which the decedentretained any dominion during his lifetime * * *. Thereservation of a beneficial interest in favor of the decedent or of a power of revocation * * * or of a power of appointment bywill or otherwise, in or over any property passing subject to the tax imposed by this sub-title, shall be deemed to constitutedominion within the meaning of this section. * * *" (Italics supplied.) We think the provisions quoted have no relation to "property passing by the exercise of a power of appointment" in the ordinary sense, but in effect only reaffirm the decision of this court in Darnall v. Connor, supra, regarding "reservation" of a "power of appointment," and change the law as construed inDownes v. Safe Deposit Trust Co., 1932,
As the American Law Institute states its construction of the Maryland statute, without its reasons, (Restatement, Property, § 333, note c), we can only say that we are unable to concur in that construction.
2. Whether an adopted child is excepted from the application of a collateral inheritance tax depends upon the scope of the adoption statute and the tax statute. The collateral inheritance tax statute excepts "the father, *535 mother, husband, wife, children or lineal descendants" of the decedent. Art. 81, § 110; Code of 1924, Art. 81, § 124, as amended by Acts of 1929, ch. 226, sec. 105, in force at the death of Sarah E. O'Hara. The adoption statute (which originated in the Act of 1892, ch. 244) entitles an adopted child to "the same rights of inheritance and distribution as to the [adopting parent's] estate, and the same rights of protection, education and maintenance as if born to [the adopting parent] in lawful wedlock, and * * * where such child inherits property from its adopted * * * parents, upon it dying intestate without issue the property thus inherited shall descend and be distributed to the same persons who would take the same by inheritance and in course of distribution if the child had been the child of the adopted parents born to them in lawful wedlock, * * *." Code, 1939, Art. 16, § 81.
The uniform administrative construction of these statutes has been that the collateral inheritance tax is not applicable to transfer to an adopted child from an adopting parent. (1923) 8Op. Atty. Gen. 376; (1924) 9 Id. 244; (1935) 20 Id. 798; (1938) 23 Id. 644. In other words, the rights of inheritance of a natural child include inheritance free from collateral inheritance tax.
The Attorney General concedes (properly we think) the correctness of this construction, but contends that the collateral inheritance tax is applicable to transfer from an adopting parent to the legitimate natural children of an adopted child. Judge Henderson (when Assistant Attorney General) ruled that the collateral inheritance tax is not applicable to such children. (1938) 23 Op. Atty. Gen. 644. In the instant case the lower court so held. The Attorney General argues that this amounts to reading words into the statute. We think not. Children of a child are lineal descendants of the child's parent. For inheritance tax purposes, an adopted child is a "child" of the adopting parent. It follows that children of such a "child" are "lineal descendants" of the adopting parent. *536
In view of the scope of the adoption statute, it would seem that if the children of an adopted child are not "lineal descendants" of the adopting parent within the tax statute, they cannot inherit from the adopting parent. It is understandable that when Congress excepted "lineal issue" from an inheritance tax it meant children by blood, not children created by state laws (Kerr v. Goldsborough, 150 F. 289, Circuit Court of Appeals, Fourth Circuit, 1906) or that a state may authorize adoption of children without adoption of tax exemptions.Commonwealth v. Nancrede, 1859,
Decree affirmed in part and reversed in part, and causeremanded for decree in accordance with this opinion, costs to bepaid out of the estate. *537