Estate of ANTONIO GIOLITTI, Deceased.
HOUSTON I. FLOURNOY, as State Controller, Claimant and Appellant,
v.
LEON H. WADE, as Executor, etc., et al., Objectors and Respondents.
Court of Appeals of California, Fifth District.
*329 COUNSEL
Myron Siedorf, Robert G. Harvey and Ralph W. Amerson for Claimant and Appellant.
W.A. Bloyd, Charles A. Zeller and Richard E. Johnson for Objectors and Respondents.
Spridgen, Barrett, Achor, Luckhardt, Anderson & James, Kirt F. Zeigler, William Howard Nicholas, Herman Phleger, George T. Cronin and William A. Farrell as Amici Curiae on behalf of Objectors and Respondents.
OPINION
BROWN (G.A.), J.
(1a) The sole issue is whether the amount of federal gift tax paid upon the transfer of property in contemplation of death when said property subsequently becomes subject to federal and state inheritance taxes is deductible from the appraised value of the property to determine the "clear market value" upon which the state inheritance tax is determined under circumstances where the amount of the federal gift tax paid is credited against the amount of the federal estate tax.
The facts are stipulated (see Appendix A). The question is one of law.
*330 Shortly before his death, Antonio Giolitti transferred without consideration virtually all of his property to his three children. The appraised market value of the transferred properties at the date of death was $453,586.86. It is stipulated the transfers were in contemplation of death (Rev. & Tax. Code, § 13642)[1] and they were subject to both the state gift and inheritance taxes and the federal gift and estate taxes. Federal and state gift tax returns were prepared and filed subsequent to death and the amount of the federal gift tax fixed and paid was $82,603.93 and the State of California gift tax $14,924.71. The federal government offset and reduced the federal estate tax liability by the sum paid as federal gift tax (26 U.S.C. § 2012). The State of California allowed the amount of the state gift tax as a credit against the state inheritance tax (§ 14059).
The rеspondents claimed the $82,603.93 paid as federal gift tax was a debt of the estate pursuant to section 13983 and should be allowed as a deduction from the appraised value of the estate for the purpose of determining the "clear market value" (§§ 13402, 13312). In his report, the inheritance tax appraiser disallowed the $82,603.93 as a deduction. Judge Donald R. Franson sustained respondents' objection to the report of the inheritance tax appraiser and determined that the federal gift tax is deductible. Judge Joseph L. Joy signed the order fixing the inheritance tax, from which order this appеal is taken.
If the amount of the federal gift tax is allowed as a deduction, there is no state inheritance tax liability (see Appendix A, Second Alternate). If it is not, the tax liability is $3,619.58 (see Appendix A, First Alternate). We have concluded that it should not be allowed as a deduction.
(2) The California inheritance tax is not a property tax but is a succession tax imposed by reason of beneficial succession of property upon the death of another (Kirkwood v. Bank of America (1954)
Under the statutory scheme enacted by the Legislature, the inheritance tax is imposed upon the "clear market value" of the property transferred whether or not the transfer was made during the lifetime of the transferor (§ 13402). Market value is determined as of the date of the transferor's death whether or not the transfer was made during his life (§§ 13311, 13951). The "clear market value" means the market value of any property *331 included in any transfer less any deductions allowable by law (§ 13312). The deductions specified in sections 13981 through 13991 "and no others" are allowed by the statute against the market value and nothing is allowed as a deduction "that does not actually reduce the amount of an inheritance or transfer" (§ 13981). The deductions must be "obligations of the decedent or his estate" (§ 13982, subd. (a)) and be paid "by the estate or the transferee" (§ 13982, subd. (b)). There is no specific provision authorizing the deduction of a federal gift tax. However, respondent seeks to bring this claimed deduction under the umbrella of section 13983, which provides: "Debts of a decedent owed by him at the date of his death are deductible from the appraised value of property included in any transfеr subject to this part made by the decedent."
Section 13981 provides, among other things, that "This article [§§ 13981-13991] is a limitation on deductions allowable." Deductions allowable are not necessarily the same as those paid by the estate (Estate of Skinker (1956)
(3) While it is true that where doubt arises a taxing statute must be construed in favor of the taxpayer and against the government (Estate of Kirshbaum (1968)
An inter vivos transfer in contemplation of death (§ 13642) is testamentary in character and as such is a taxable event under the inheritance tax law the same as if the property had been transmitted by will. The purpose of this provision is to prevent the evasion of the inheritance tax (§ 13648; Estate of Vai (1966)
(4) The federal estate tax is not a dеductible expense expressly allowed by the California Inheritance Tax Law. It is not an expense of administration (§ 13988) or debt of the decedent (§ 13983). It has not been allowed as a deduction since the repeal of section 13989 in 1959, which prior to that time expressly authorized the deduction of the federal estate tax (Estate of Fabris, supra,
To permit the deduction of a federal gift tax paid on a gift in contemplation of death under circumstances where, to the extent it is a credit allowed by Internal Revenue Code section 2012 (26 U.S.C. § 2012) the payment is essentially and in reality a payment of the federal estate tax, would be to sanction the circumvention of the law which does not permit the deduction of the federal estate tax and would authorize a deduction which is not expressly provided for and which does not actually reduce the value of the transferred estate at the date of the transferor's death.
In the case at bench, if the gift had not been made, the tax obligation owed to the federal government would have been precisely the same except that it would have been paid only in the form of the federal estate tax. The gift having been made in contemplation of death, there is no difference in substance where the federal estate tax is paid qua federal gift tax. The federal estate tax is still assessed against the same property as of the same date. (5) To the extent the gift tax paid is in reality a federal estate tax payment it cannot be converted into a deductible debt of the decedent by the mere mechanics of filing a gift tax return. The amount *333 of the gift tax allowed as a credit against the estate tax becomes, in effect, a prepayment of the estate tax.
If such a procedure were аuthorized, a decedent as in this case could avoid a California inheritance tax by the simple expedient of making a gift in contemplation of death and thereby converting what is not deductible, that is, prepaid federal estate tax, to that which would be deductible. Such a position violates the policy of section 13648, which is "... to tax every transfer made in lieu of or to avoid the passing of property by will or the laws of succession." Further, it violates the established principle that "... where two interpretations of the provisions of a statute imposing taxes are urged, that onе should, if possible, be adopted which lays the burden of taxation uniformly upon those who bear that burden and who stand in the same degree with relation to the tax, ..." (Estate of Steehler, supra,
Lastly, we are persuaded that the gift tax payment is not deductible under section 13983 to the extent a credit for such payment is applied to the estate tax obligation because it "does not actually reduce the amount of an inheritance or transfer" (§ 13981). On the face of it, the deduction of $82,603.93 from the appraised market value of the estate would obviously reduce the amount each heir would receive from the estate. However, in actuality it does not reduce the value оf the estate transferred inter vivos below that which would have been received by the transferees had no gift in contemplation of death been made as the same obligation would be imposed on the testamentary transfer in the form of a federal estate tax. We should look to the basic essence of the transaction and not to outward form. If the gift tax obligation were to be viewed as a debt, then, assuming it was paid, it would become a corresponding credit in the amount of the gift tax payment which would be applied to the federal estate tax obligation. The debt and credit оffset each other. It appears to us that the proper method to arrive directly at the substance of the transaction is to disregard both the debt and the credit, rather than to complicate the *334 transaction by treating them as offsetting bookkeeping entries in the computation of the state inheritance tax. (Estate of Rosenfeld (1965)
The State of New Jersey, upon analogous facts and under similar provisions in that state's law, has held that a federal gift tax paid on a gift made in contemplation of death is nondeductible from the appraised value of an estate in computing the state inheritance tax liability (In re Estate of Shivers (1969)
Likewise, upon comparable reasoning, the federal government denies as a deduction in computing federal estate taxes the amount of any state gift tax paid on a gift in contemplation of death which is subsequently credited to the state inheritance tax (Internal Rev. Bull. 1971-31, Rev. Rulings 71-355).
Respondents urge several other points which are persuasive though not controlling in this matter. (6) It is argued that the office of the State Controller has previously allowed as a deduction from the market value of a decedent's estate the payment of a federal gift tax on inter vivos transfers in contemplation of death though the payment or a part thereof has been treated as a credit toward the federal estate tax obligation. The references cited by the parties are far from conclusive on this matter and the Controller is unwilling to concede the complete validity of the point; however, we are inclined to believe that such a deduction was most likely allowed at least prior to the repeal of section 13989 (federal estate tax deduction) in 1959 and to the extent claims for such a deduction were not challenged by the Controller prior to the court's decision in Estate of Kirshbaum, supra,
"While the construction of a statute by officials charged with its administration, including their interpretation of the authority invested in them to implement and carry out its рrovisions, is entitled to great weight, nevertheless `Whatever the force of the administrative construction ... final responsibility for the interpretation of the law rests with the courts.' [Citation.] Administrative regulations that alter or amend the statute or enlarge or impair its scope are void and courts not only may, but it is their obligation to strike down such regulations. [Citations.]" (Morris v. Williams (1967)
Pursuant to respondents' request, we have taken judicial notice of a memorandum from the State Controller's office dated December 18, 1970, addressed to "Attorneys, Examiners and Appraisers." It sets forth the Controller's posture to disallow the gift tax deduction under circumstances as in the instant case (Evid. Code, §§ 459, 452, subd. (c)). The language of this memorandum suggests that the Controller's statements regarding the disallowance of the federal gift tax deduction are predicated on the judicial interpretations of the Kirshbaum case that the gift tax payment, to the extent it is a credit toward the estate tax, is a down payment or prepayment of the estate tax.
(7) We believe the Controller has an obligation to conform state policy and procedure with the laws of California as they are interpreted by the courts of this state (cf. Estate of Newton (1950)
Respondents assert that the Controller's position disallowing the federal gift tax payment as a deduction from the market value of the estate to the extent such payment is a credit allowed toward the federal estate tax obligation can only be sanctioned by the enactment of new legislation and not by judicial construction. We reject this contention simply by reference to the controlling statutes and case law now existing and upon which we have relied. The result we reach does not amend or alter any existing legislative enactment but is consonant with and required by the statutes in force as construed by the existing cases.
Next, respondents direct our attention to Internal Revenue Code sectiоns 2012 (26 U.S.C. § 2012) and 2053 (26 U.S.C. § 2053) and Treasury Regulation sections 20.2012-1 and 20.2053-6 to demonstrate that the federal government permits both a credit and a deduction for federal gift tax payments in computing federal estate tax. Treasury Regulation section 20.2012-1, subdivision (a), provides in pertinent part: "A credit is allowed under section 2012 against the Federal estate tax for gift tax paid under chapter 12 of the Internal Revenue Code, or corresponding provisions of prior law, on a gift by the decedent of property subsequently included in the decedent's gross estate. The credit is allowable even though the gift tax is paid аfter the decedent's death and the amount of the gift tax is deductible from the gross estate as a debt of the decedent."
Though our courts have at times looked to the federal taxing statutes and relevant history for aid in construing our state taxing statutes (cf. Douglas v. State of California (1942)
Respondents argue that as the tax is imposed only on the "clear market value" and is to be determined according to the "beneficial succession" to property (Estate of Skinker, supra,
(8) What a willing buyer will pay for the estate assets as of the date of death has little legal relationship to the "clear market value." The appraised value is a value fixed by an appraisal process as of the date of death without regard to the obligations or liens that may be required to be paid from the estate аssets to eliminate liens or obligations against the estate. Thus a willing buyer would purchase the assets of the estate without regard to the gift tax liability so long as the money paid stands in place of the asset purchased.
The "clear market value" concept, on the other hand, is strictly a statutory concept. It is arrived at only by allowing those specific deductions outlined by the inheritance tax law. The deductions listed are limitations on the deductions allowed (§ 13981), and the deductions specified in the article "... and no others, are allowed against the appraised value of thе property, ..." (§ 13982) and, as heretofore pointed out, the deductions allowed are not necessarily the same as those paid by the estate (Estate of Skinker, supra, 47 Cal.2d. 290, 294; Estate of Webb, supra,
Cases cited by respondents to support their position that the federal gift tax should be deductible under section 13983 or 13987 are inapposite *338 since none involved situations where the tax was a credit against a federal or state inheritance tax. Estate of Williams (1913)
In passing we note another of respondents' contentions that the result of our decision in this case will bring about an inequity in the treatment of taxpayers who, after making inter vivos transfers of property in contemplation of death, pay the federal gift tax prior to death. Under such circumstances respondents suggest the amount of the tax paid to the federal government is never inventoried as part of the decedent's estate, having passed out of possession prior to death; however, the federal credit is still allowed toward the estate tax, resulting in a nontaxablе windfall passing to the transferees. The Controller disagrees with respondents in this regard and points out that the subsequent credit which is allowed toward the estate tax obligation under such circumstances is treated by his office as an uninventoried asset in the inheritance tax report and identified as "prepaid federal estate tax." Thus the federal credit becomes a taxable asset of the decedent's estate. In support of his position the Controller relies heavily on the language of Estate of Krishbaum, supra,
(1b) The order is reversed.
Stone, P.J., and Gargano, J., concurred.
Respondents' petition for a hearing by the Supreme Court was denied September 7, 1972.
*339 APPENDIX A
The following statements were and are agreed upon by the parties to this appeal as the result of a stipulation (C.T. 18), Addendum (C.T. 22), and Clarification (C.T. 53) reduced to writing and presented to the trial court prior to the submission of this matter:
1. That the decedеnt Antonio Giolitti, also known as A. Giolitti, died on May 9, 1966, a resident of the County of Fresno, State of California, leaving no estate subject to administration under the California Probate Code.
2. That at the time of his death said decedent already had disposed of all of his property, principally by inter vivos transfers subject to inheritance tax under provisions of the Inheritance Tax Law (sections 13301 et seq., California Revenue and Taxation Code), through or concurrently with his creation of the so-called A. Giolitti Trust(s).
3. That at the time of said decedent's death the market value of the property included in said trаnsfers was $453,586.86. (The parties to this stipulation mutually understand and agree that said sum is the appraised value of said property, that said appraised value did not make any allowance for any liability for payment of the federal gift tax due and payable on said transfers, that said federal gift tax was fixed and paid after the decedent's death and after said appraised value already was determined without allowance for said federal gift tax liability, that said transfers were made in part subject to a trust instrument authorizing and directing the trustee "to pay any gift taxes that may be due the federal or state governmеnt caused by any gifts made during trustor's life," and that said federal gift tax accordingly was paid pursuant to said decedent's authorization and direction in said trust instrument.)
4. That said transfers were also made subject to gift tax under provisions of the Gift Tax Law (sections 15101 et seq., California Revenue and Taxation Code), with the property included therein valued as of the date of said transfers; and accordingly, petitioners Leon N. Wade as "executor" and Joseph Giolitti (also son and transferee of said decedent) as "trustee" on or about April 13, 1967, filed with the State Controller a gift return of said transfers, whereupon (during the month of August, 1969) a gift tax determination was made by the State Controller and the gift tax as thus determined was paid by the said Leon N. Wade and/or Joseph Giolitti in the sum of $14,924.71.
5. That said transfers were likewise made subject to both estate and gift taxes imposed by the United States Government under sections 2001 et seq. of the Internal Revenue Code of 1954, with the result that the taxes thereunder imposed upon said transfers, which now have been finally fixed and paid by said decedent's lawful representative(s), insofar as pertinent to the determination of inheritance tax herein, were fixed and paid as follows: The federal gift tax was fixed and paid in the sum of $82,603.93, and this sum then was credited against the federal estate tax in accordance with section 2012 of said code. Furthermore, the California gift tax, determined and paid as hereinabove stated, was credited to the extent of approximately $4,830 (the maximum sum allowed by the federal estate tax law) against the federal estate tax in accordance with section 2011 of said code. Thus the federal estate tax as finally fixed and paid under said code was offset by sums already fixed and paid as federal and California gift taxes upon said transfers.
6. That in dеtermining the clear market value of said transfers under the Inheritance Tax Law, deductions totaling $23,668.50 are allowable; and that the sum of $23,668.50 accordingly shall be allowed as deductions in fixing the inheritance tax herein in lieu of all deductions that may be set forth in the report of inheritance tax appraiser herein. (The appraiser, Mr. Vergil L. Gerard, concurred in this stipulation.)
7. That except for their objection that the aforesaid federal gift tax in the sum of $82,603.93 should likewise be allowable and allowed as a deduction, said petitioners and their attorney expressly waive all objections to said repоrt, waive all *340 claims to further deductions (whether or not set forth in any petition(s) or objection(s) or report(s) herein filed), and agree that no other deductions of any kind whatever now are or hereafter may be allowable or allowed in determining the clear market value of any property or interest therein passing from said decedent subject to inheritance tax.
8. That the said sum of $82,603.93 paid as federal gift tax on said transfers has not been and will not be allowed as an exemption or deduction in determining the value of said decedent's taxable estate under sections 2051 et sеq. of the Internal Revenue Code of 1954, but said sum was in fact paid on or about April 7, 1967, by Joseph Giolitti as trustee of the said A. Giolitti trust(s). Said petitioners and their attorney state that the payment of said sum has not been refunded in whole or in part and it now stands as a final, nonrefundable payment by or in behalf of said decedent's transferee(s).
9. That said petitioners and their attorney may file and serve herein an amended objection to said report, limited to points and authorities in regard to the deductibility of said sum of $82,603.93 as a debt of said decedent, and may therein assert by whatever theory they choose, the contention that the aforesaid market value should have been reduced by the sum of $82,603.93 (in addition to the sum of $23,688.50) in arriving at the clear market value of the property transferred by the decedent subject to inheritance tax.
10. That if said petitioners' amended objection is overruled, the inheritance tax due upon said transfers is calculated as follows:
FIRST ALTERNATE
Fair Market Value ............... $453,586.86
Total Deductions ................ 23,668.50
___________
Clear Market Value .............. $429,918.36
Joseph Giolitti, Son Tax
43.62% $187,530.39 $9,277.13
Gift Tax Cr. 7,575.77
_________
$1,701.36
Virginia Tavlan, Daughter
28.17% $121,193.99 $4,633.58
Gift Tax Cr. 3,674.47
_________
$959.11
Marian Schultz, Daughter
28.19% $121,193.99 $4,633.58
Gift Tax Cr. 3,674.47
_________
$959.11
_________
$3,619.58
=========
*341 11. That if said petitioners' amended objection is sustained, there is no inheritance tax due upon said transfers, calculated as follows:
SECOND ALTERNATE
(Deductions increased by the sum of $82,603.93)
Fair Market Value ................ $453,586.86
Total Deductions ................. 106,272.43
___________
Clear Market Value .............. $347,314.43
Joseph Giolitti, Son Tax
43.62% $151,498.55 $6,754.90
Gift Tax.Cr. 6,754.90 0
_________
Virginia Tavlan, Daughter
28.19% $97,907.94 $3,066.32
Gift Tax Cr. 3,066.32 0
_________
Marian Schultz, Daughter
28.19% $97,907.94 $3,066.32
Gift Tax Cr. 3,066.32 0
____________ _________
$347,314.43 0
NOTES
Notes
[1] References to code sections in this opinion, unless otherwise indicated, will be to the Revenue and Taxation Code of the State of California.
[2] Furthermore, as we read the language of the now existing regulations promulgated by the State Controller to implement the state Inheritance Tax Law in this respect (18 Cal. Admin. Code, §§ 13983(a)-13983(e)), we find no inconsistencies or contradictions contained therein which would have required amendment to accommodate this recently expressed policy.