Opinion
For Opinion on Rehearing, see 103 Cal.Rptr. 38.
Opinion on pages 921 to 931 omitted.
REHEARING GRANTED
See 26 Cal.App.3d 327 for subsequent opinion.
W. A. Bloyd, Reedley, Charles A. Zeller and Richard E. Johnson, Stockton, for petitioners and respondents.
[101 Cal.Rptr. 654]Ralph W. Amerson, Associate Inheritance Tax Atty., Myron Siedorf, Chief Inheritance Tax Atty., Robert G. Harvery, Asst. Chief Inheritance Tax Atty., Sacramento, for appellant.
OPINION
GEO. A. BROWN, Associate Justice.
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 of determine the 'clear market value' upon which the state inheritance tax is determined under circumstanes 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.
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) and they were subject to both the state gift and inheritance taxes and the federal gift and 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 (Internal Revenue Code, § 2012). The State of California allowed the amount of the state gift tax as a credit against the state inheritance tax (§ 14059).
References to code sections in this opinion, unless otherwise indicated, will be to the Revenue and Taxation Code of the State of California.
The respondents 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 appeal 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.
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) 43 Cal.2d 333, 338-339, 273 P.2d 532), and it is settled that the Legislature has the power to provide which deductions are allowable in arriving at the value upon which those beneficially interested must pay (Estate of Fabris (1962) 200 Cal.App.2d 408, 411, 19 Cal.Rptr. 397).
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 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). [101 Cal.Rptr. 655] 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 transfer 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) 47 Cal.2d 290, 294, 303 P.2d 745), and the taxpayer must be able to place his finger upon the precise provision of the statute which secures it to him (Estate of Webb (1966) 241 Cal.App.2d 85, 93, 50 Cal.Rptr. 397).
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) 268 Cal.App.2d 155, 160, 73 Cal.Rptr 711; Cal. Motor etc. Co v. State Bd. of Equal. (1947) 31 Cal.2d 217, 223-224, 187 P.2d 745), nevertheless deductions, exemptions or credits applicable thereto are to be narrowly construed in favor of the state and against the taxpayer (Great Western Financial Corp. v. Franchise Tax Bd. (1971) 4 Cal.3d 1, 5, 92 Cal.Rptr. 489, 479 P.2d 993; Estate of Steehler (1925) 195 Cal. 386, 396, 233 P. 972, remittitur corrected 197 Cal. 67, 239 P. 718).
An inter vivos transfer in contemplation of death (§ 13642) is testamentary in characted 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) 65 Cal.2d 144, 154, 52 Cal.Rptr. 705, 417 P.2d 161; Kirkwood v. Bank of America, supra, 43 Cal.2d 333, 339, 273 P.2d 532). However, under federal law when such such an inter vivos transfer is subject to the federal estate tax, to avoid double taxation a credit and offset for the gift tax paid is allowed (Internal Revenue Code, § 2012). A like credit is allowed against the state inheritance tax for the state gift tax paid on a lifetime transfer which is subject to the state inheritance tax (§ 14059). Both the federal and state jurisdictions have construed the gift tax in such an instance to be a down payment on the estate or inheritance tax, as the case may be, and in substance and effect a part payment of such estate or inheritance tax. The court said in Estate of Kirshbaum, supra, 268 Cal.App.2d 155, 158, 73 Cal.Rptr. 711, 714:
'It seems rather clear, therefore, that if the transfer originally subject to a gift tax is ultimately subject to an inheritance tax, the credit provision contained in the above statute makes the payment of such gift tax tantamount to a down payment on the inheritance tax. Federal courts have thus viewed a similar gift tax credit provided by section 2012, Internal Revenue Code; thus, in Ingalls v. Commissioner of Int. Rev. (4th Cir. 1964) 336 F.2d 874, 876, the court stated that 'Double taxation, if any, of the transfer is avoided by allowance of a credit for the earlier paid gift tax. The taxes are not always mutually exclusive. The gift tax amounts to a down payment on the estate tax.' In so holding, the court took cognizance of the declaration in Smith v. Shaughnessy, 318 U.S. 176, 179, 63 S.Ct. 545, 547, 87 L.Ed. 690, 692, that 'the [federal] gift tax amounts in some instances to a security, a form of down-payment on the estate tax which secures the eventual payment of the latter; . . .''
As previously mentioned, the federal estate tax is not a deductible 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 [101 Cal.Rptr. 656] section 13989 in 1959, which prior to that time expressly authorized the deduction of the federal estate tax (Estate of Fabris, supra, 200 Cal.App.2d 408, 19 Cal.Rptr. 397).
To permit the deduction of a gift tax paid on a gift in contemplation of death under circumstances where payment is essentially and in reality a payment of the estate tax would be to sanction the evasion of the rule 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 amount paid to the federal government would have been precisely the same except that it would have been paid only in the name of the federal estate tax. The gift having been made in contemplation of death, there is no difference in substance when 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. That which is in reality an estate tax cannot be converted into a deductible gift tax by the mere mechanics of filing a gift tax return when the amount of the gift tax is allowed as a credit against the estate tax.
If such a procedure were authorized, 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, a 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 one 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, 195 Cal. 386, 402, 233 P. 972, 979, remittitur corrected 197 Cal. 67, 239 P. 718.) (See also Koenig v. Johnson (1945) 71 Cal.App.2d 739, 751, 163 P.2d 746.) To permit the result urged by respondents would penalize those who choose to transfer their property by will or by the laws of intestacy rather than by a transfer in contemplation of death and would cause the burden of the tax to fall other than uniformly upon those who bear that burden and who stand in the same degree with relation to the tax. It would also violate the principle that the amount of the tax should be proportionate to the benefit received (Estate of Rath (1937) 10 Cal.2d 399, 405, 75 P.2d 509).
Lastly, we are persuaded that the tax is not deductible under section 13983 because it 'dose 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 of 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 offset 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 transaction by treating them as offsetting bookkeeping entries in the computation of the state inheritance tax. (Estate of Rosenfeld (1965) 62 Cal.2d 432, 42 [101 Cal.Rptr. 657] Cal.Rptr. 447, 398 P.2d 783; Estate of Knapp (1951) 37 Cal.2d 827, 833, 236 P.2d 372.)
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 non-deductible from the appraised value of an estate in computing the state inheritance tax liability (In re Estate of Shivers (1969) 105 N.J.Super. 242, 251 A.2d 771, 775). In that case the court said:
'There is no obligation to pay the gift tax as a separate liability, in the case of gifts made in contemplation of death, when the same items are included in the federal estate tax return. If a gift tax on such gifts has been paid before the donor dies, it does not affect the computation of the federal estate tax, and the gifts in contemplation of death are includible as assets of the donor's estate and subject to federal estate tax. A gift tax paid on such gifts is a mere credit on account of the calculated federal estate tax. If the gift tax has not been paid, the estate simply receives no credit. In the final analysis, the tax paid, by whatever label is put on it by the executor, is the federal estate tax.'
Likewise, upon comparable reasoning, the federal government denies as a deduction in computing federal estate taxes any state gift tax paid on a gift in contemplation of death and subsequently credited to the state inheritance tax (Internal Revenue Bulletin 1971-31, Revenue Rulings 71-355).
Cases cited by respondents to support their position that the federal gift tax should be deductible under section 13983 or 13987 are inapposite since none involved situations where the tax was a credit against a federal or state inheritance tax. Estate of Williams (1913) 23 Cal.App. 285, 137 P. 1067 involved the deductibility of inheritance tax in an estate passing to the first devisee in the estate of the second devisee where it had not been paid at the death of the first devisee. Estate of Hill (1960) 54 Cal.2d 39, 4 Cal.Rptr. 1, 351 P.2d 33 allowed a deduction specifically provided for under section 13987 for county property taxes. National Ice etc. Co. v. Pacific F. Exp. Co. (1938) 11 Cal.2d 283, 79 P.2d 380 involved a challenge to the application of the Retail Sales Tax Act--not the state inheritance tax. Equally inapplicable and for the same reason are references to income taxes unpaid at death and gift taxes which are not a credit against the estate or inheritance tax.
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, 47 Cal.2d 290, 302, 303 P.2d 745 (Carter, J., dissenting); Riley v. Zellerbach (1942) 53 Cal.App.2d 196, 199, 127 P.2d 597; 26 Cal.Jur.2d 781), the $82,603.93 in federal gift tax must necessarily be deducted from the appraised market value as no willing buyer would pay the appraised value of the estate unless that sum was deducted. But it is inappropriate to attempt to equate 'clear market value' and 'net succession' with the test for determining market value, that is, the price which a willing buyer would be willing to pay and a willing seller to accept, both having full knowledge of all the pertinent facts and neither being under compulsion to buy or sell.
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 market 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 assets 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 [101 Cal.Rptr. 658] (§ 13981), and the deductions specified in the article '. . . and no others, are allowed against the appraised value of the 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, 303 P.2d 745; Estate of Webb, supra, 241 Cal.App.2d 85, 88-91, 50 Cal.Rptr. 397). As we have hereinabove iterated, the federal gift tax paid under circumstances where it is credited against the federal estate tax is not one of those deductions.
The order is reversed.
STONE, P. J., and GARGANO, J., concur.
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 decedent 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 transfers 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 government 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 impowed 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 maximim 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 [101 Cal.Rptr. 659] 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 determining 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 deduction 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 report, waive all 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 detrmining the value of said decedent's taxable estate under sections 2015 et seq. 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 pertitioners 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 --------- ---------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