Opinion
No. 306.
Argued May 1, 1970. —
Decided June 2, 1970.
APPEAL from an order of the county court of Jefferson county: CHARLES E. KADING, Judge. Affirmed.
For the appellants there was a brief by Schultz, Slechta D'Aoust of Jefferson, and oral argument by Dean C. D'Aoust.
For the respondent the cause was argued by E. Weston Wood, assistant attorney general, with whom on the brief was Robert W. Warren, attorney general.
This is an inheritance tax case. A petition for probate of the will of Winifred Rose Mueller, a/k/a Winifred R. and Winifred M. Mueller, was presented to the Jefferson county court on July 17, 1967. This appeal is from that part of an order of the court determining inheritance taxes of $133,357.67 were due to this state. The facts involved are undisputed: The decedent, Winifred Rose Mueller, was born in 1895 in Illinois. In 1919 she became a resident of the state of Wisconsin. On July 10, 1967, she died in Jefferson county, Wisconsin, and was at the time of her death a domiciliary of the state of Wisconsin.
On December 23, 1934, Richard Pierce Moffott, father of the decedent, died, a resident of the state of Illinois. By his last will and testament, a trust of his residual estate was created in the state of Illinois with the First National Bank of Chicago appointed trustee of this testamentary trust. Under the terms of the trust, the decedent became the income beneficiary of one half of the trust estate on the death of her mother, Barbara Moffott, who died on December 25, 1943. Upon the death of Barbara Moffott, the appellants herein, the two children of Winifred Mueller, became the equal distributees of the other half of the trust estate. In addition, the trust provided that when the decedent reached the age of fifty, she would have a limited right to invade the principal of her one half of the trust estate. Also, her father's will gave her a general testamentary power of appointment over the trust estate remaining at her death. The will provided that in the event of her failure to exercise this power of appointment, her share of the trust estate was to go to her living lawful descendants per stirpes.
On February 29, 1944, the decedent partially released her power of appointment so that it was no longer a general power, by limiting her right to appoint the trust estate to her husband, to her lineal descendants, to spouses of her lineal descendants and to certain charitable organizations. At this time she also released her limited right to invade the principal of the trust estate on her fiftieth birthday.
On November 15, 1962, E. Philip Mueller, decedent's husband and also a resident of Jefferson county, Wisconsin, died. Subsequently, on June 28, 1963, decedent executed her last will and testament wherein she provided that it was her intention not to exercise the power of appointment conferred upon her by her father's will. Thereafter, upon her death on July 10, 1967, the trust assets were distributed to her children in accordance with the terms of her father's testamentary trust. These assets, consisting of intangible personal property, were at all times since the inception of the trust situated in the state of Illinois, with title vested in an Illinois corporate trustee. The value of the assets in the trust estate was $960,389.41 at the date of her death.
Deceased's two children, as coexecutors of her will, petitioned the Jefferson county court for probate of their mother's will. None of the trust assets was included in the deceased's taxable estate for inheritance tax purposes.
The Wisconsin Department of Revenue filed its objection to the exclusion of the assets of the trust from inheritance taxation in Wisconsin. The county court ordered that these assets be included in the Wisconsin inheritance tax determination. The deceased's children, takers on the nonexercise of the special power of appointment as to half of the trust assets, appeal.
Such children are already earlier takers of the other half of the trust assets as per decedent's father's will.
Statute involved.
Sec. 72.01, Stats., provides, in pertinent part:
"72.01 Subjects liable. A tax shall be and is hereby imposed upon any transfer of property, real, personal or mixed, or any interest therein, or income therefrom in trust or otherwise, to any person, association or corporation, in the following cases, except as hereinafter provided:
". . .
"(5) TRANSFER UNDER POWER OF APPOINTMENT. Whenever any person or corporation shall exercise a power of appointment derived from any disposition of property, made either before or after April 1, 1903, such appointment, when made, shall be deemed a transfer taxable under ss. 72.01 to 72.24 in the same manner as though the property to which such appointment relates belonged absolutely to the donee of such power, and had been bequeathed or devised by such donee by will; and whenever any person or corporation possessing such a power of appointment so derived shall omit or fail to exercise the same within the time provided therefor, in whole or in part, a transfer taxable under ss. 72.01 to 72.24 shall be deemed to take place to the extent of such omission or failure, in the same manner as though the persons or corporations thereby becoming entitled to the possession or enjoyment of the property to which such power related had succeeded thereto by a will of the donee of the power failing to exercise such power, taking effect at the time of such omission or failure. For the purpose of this section, the term `power of appointment' means any power to appoint exercisable by any person either alone or in conjunction with any other person, except a power to appoint within a class which excludes the donee of the power and is restricted to the husband, wife, lineal issue, the wife or widow of a son and the husband of a daughter of the creator of the power; provided, that such power was created on or after October 21, 1942, or if created prior to October 21, 1942, was subsequently modified or limited by release or otherwise to the type of restricted power described herein; . . . ."
A single comprehensive issue is presented on this appeal: When a Wisconsin resident dies possessed of a special testamentary power of appointment over the intangible assets of an irrevocable trust established by the will of an Illinois resident, administered in Illinois by an Illinois corporate trustee, which power had previously been limited by the Wisconsin resident from a general power to a special power to appoint to certain people, though not limited enough to include the power within the exception from taxation provided in sec. 72.01(5), Stats., and when such Wisconsin resident was during her life the beneficiary of one half of the income from such trust, and such Wisconsin resident elected not to exercise her self-limited testamentary power of appointment, thereby causing the trust assets to be distributed to her children according to the settlor's plan in the event of a default in exercise, can such trust assets be constitutionally included in the Wisconsin resident's estate for the purposes of Wisconsin inheritance tax?
It is undisputed that the deceased, when she voluntarily executed a limitation on her general testamentary power of appointment over the trust assets, failed to limit the power sufficiently to bring it within the exception to powers taxation found in sec. 72.01(5), Stats. Thus, it seems that the power held by deceased is, on its face, within the definition of the statute and the transfer resulting from the decedent's failure to exercise the power of appointment would be taxable under the explicit terms of the statute. The real question, therefore, is not the meaning of the statute, for that is clear, but rather, whether Wisconsin can constitutionally tax the transfer of the trust assets occurring as a result of the nonexercise of testatrix's limited power of appointment.
In Montague v. State, this court held that a transfer resulting from the failure of a Wisconsin-residenced donee of a power to appoint concerning Wisconsin real estate was subject to Wisconsin inheritance tax equally with a transfer resulting from an appointment.
(1916), 163 Wis. 58, 157 N.W. 508.
Appellants contend that Montague is distinguishable on the ground that that case involved Wisconsin real estate, whereas the instant case involves intangible property located in Illinois.
It should be noted, however, that here we are not dealing with a tax on property nor the taxing of a power of appointment. The focal point is a tax on the transfer of property from a decedent who by virtue of her power of appointment is by the express language of the statute deemed to be the absolute owner of the property to which her power of appointment relates.
See Estate of Rohnert (1944), 244 Wis. 404, 409, 12 N.W.2d 684. See generally: Thompson, Inheritance Taxation and Powers of Appointment, 1939 Wis. L. Rev. 254; Annot. (1951), 19 A.L.R. 2d 1415.
Two recent cases have been decided by the courts of Ohio and Colorado which presented questions similar to the one here raised. Those two courts reached opposite conclusions on the facts presented. Because of the similarity between those two cases and this case an extended discussion of them is in order.
Colorado. v. Cooke is almost identical to the instant situation. In that case, the mother of the decedent, while both were residents of Connecticut, established a trust with a New York trustee, with the income to be paid to decedent for her life and with a general power of appointment in the decedent. The trust assets consisted of intangibles which were kept in New York at all times. Subsequently, the decedent, while a resident of New Jersey, reduced her general power to a special power by limiting her right to appoint the principal of the trust to her spouse, her descendants, a brother or sister, or descendants of a brother or sister. In 1957 she died domiciled in Colorado and by her will admitted to probate there, she declined to exercise the power of appointment. In accordance with the terms of the trust, the assets were then distributed to decedent's children.
(1962), 150 Colo. 52, 370 P.2d 896.
The lower court held that Colorado taxation of the succession to the trust assets would contravene the fourteenth amendment. The Colorado Supreme Court reversed the lower court and sustained the application of a Colorado statute identical in all material respects to our sec. 72.01(5), Stats. The Colorado court reasoned as follows:
(a) The state in which the owner of intangibles is domiciled may impose an inheritance tax on those intangibles even though the paper evidence of the intangibles is situated outside the state of domicile of the decedent owner. Central Hanover Bank Trust Co. v. Kelly.
(1943), 319 U.S. 94, 63 Sup. Ct. 945, 87 L.Ed. 1282.
(b) The power to dispose of property at death is the equivalent of ownership for estate and inheritance tax purposes. Graves v. Schmidlapp.
(1942), 315 U.S. 657, 62 Sup. Ct. 870, 86 L.Ed. 1097.
(c) A succession tax in the state of the domicile of the decedent on intangibles situated in another state does not violate the due process clause by reason of the fact that there is a failure to exercise the general power of appointment. Graves v. Elliott.
(1939), 307 U.S. 383, 59 Sup. Ct. 913, 83 L.Ed. 1356.
(d) A special power of appointment is in the same class as a general power of appointment for purposes of inheritance or estate taxes. Whitney v. Tax Commission.
(1940), 309 U.S. 530, 60 Sup. Ct. 635, 84 L.Ed. 909.
(e) Thus, a general power of appointment, exercised or not, 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 appointment is domiciled.
The Colorado court, concluding that the nonexercise of a special power of appointment over intangibles located in another state was a taxable transfer, constitutionally permissible, said:
"We fail to perceive a distinction between the situation which arises from the nonexercise of a general power and that which arises from the nonexercise of a special power. In either case, beneficiaries named in the trust receive their bounty by the inaction of the decedent. The failure to act affects the course of succession just as fully as if the power had been exercised, and until the failure is complete the succession is not fully determined. Where the donee of the power of appointment holds the power, he is in control of the succession. He can allow it to go to the persons named in the trust or he can appoint others within the limits of the power of appointment — limits which, by the way, the donee in this case imposed upon herself."
Colorado v. Cooke, supra, footnote 4, at page 60.
We adopt the analysis by the Colorado court.
As opposed to Cooke, a divided Ohio Supreme Court decided the case of Schneider v. Laffoon. In that case a Kentucky resident created an inter vivos trust by irrevocably conveying certain intangible assets to a Kentucky trustee. The income beneficiary of the trust was the settlor's wife who subsequently became an Ohio resident. This beneficiary was given a general power of appointment over the trust income and a special power of appointment over the trust principal. None of the trust assets had any relationship to Ohio. The power was exercisable only by a modification of trust in writing signed by the donee and delivered to the trustee. The donee exercised the power twice during her lifetime; first, by specifying in writing that the income from the trust be paid to her for life and then by specifying in writing that on her death her son was to receive four fifths and the children of her deceased daughter one fifth of the trust estate.
(1965), 4 Ohio St.2d 89, 212 N.E.2d 801.
The Ohio court noted that although the donee exercised the power during her lifetime, since she could have exercised it again at any time before her death, her failure to do so represented a nonexercise of the power.
The Ohio Tax Commission, relying on Cooke, contended that for the purposes of inheritance taxation, Ohio could validly tax the privilege of succession to appointive property irrespective of that property's physical location.
The Ohio court rejected the Colorado conclusion that there is no "distinction between . . . the nonexercise of a general power and . . . the nonexercise of a special power." by stating:
Colorado v. Cooke, supra, footnote 4, at page 60.
". . . [T]he Colorado court failed to recognize that the exercise of a power, requiring some aid from the law of the state where the donee of the power resides, furnishes a justification for a tax which is not present where the power can be exercised so as to transfer title to the appointed property without any help whatever from the law of that state. . . . Where there is a nonexercise of a power created by a nonresident to appoint property outside the state, the law of the state where the donee resides contributes nothing to the passing of title that can provide any justification for an inheritance or succession tax on that passing."
Schneider v. Laffoon, supra, footnote 10, at page 100.
The Ohio court pointed out why, in its opinion, the Colorado court's reliance on the various United States Supreme Court cases was misplaced. For example, the Laffoon court states that in Central Hanover Bank Trust Ca. v. Kelly, the owner of intangible property had set up a trust in a state other than his domicile under which the trust income was to be paid to that owner for life with remainders over. According to Laffoon, in Central Hanover Bank the owner was domiciled in the taxing state not only at his death but also at the time the trust was created and the precise holding was "`that the creation of the . . . remainders . . . was a "transfer" . . . in contemplation of . . . death and intended to take effect in possession or enjoyment at or after . . . death; and that it was that transfer . . . on which the tax was laid.'"
Id. at page 101.
Further, the Laffoon court states that Graves v. Schmidlapp did not decide that "`for succession tax purposes . . . the donee of a power of appointment' always stands `in the same position as the original owner of intangible personal property.'" According to Laffoon, if this were true then Graves v. Schmidlapp would not have said "`. . . it is the exercise of the power to dispose of the intangibles which is the taxable event . . . .'"
Id.
Id.
In addition, Laffoon observes that in Whitney v. Tax Commission the donor and donee of the power were both at all times domiciled in New York, and the property subject to the power was New York property; the holding was that the exercise of the power by a New York will was taxable in the estate of the donee.
However, as the sharp dissenting opinion notes, upon analysis the majority's criticism of the Colorado decision amounts to a disagreement with the pronouncements of law which have been made by the Supreme Court of the United States. At best, the distinctions drawn are without difference.
Schneider v. Laffoon, supra, footnote 10, dissenting opinion at page 108.
In addition, the Ohio case distinguishes itself from the instant case when that court says:
"In the instant case [Laffoon], the transfer sought to be taxed is dependent for its effect upon no Ohio will or other Ohio instrument or upon no Ohio law whatever or upon no other privilege that Ohio confers. The power was exercised, and could only be exercised, by delivery of an instrument in Kentucky to the Kentucky trustees. It could not even have been exercised by an Ohio will."
Id., majority opinion at page 102.
Here, the power could have been exercised by a Wisconsin will and was, in fact, specifically not exercised by a Wisconsin will of a Wisconsin domiciliary.
Accordingly, the county court emphasized the fact that the decedent's will was admitted to probate in Wisconsin when it stated:
". . . The succession depended upon her exercise (or nonexercise) of the power. She chose not to exercise the power given her and employed her last will as the instrument by which direction was given to the First National Bank of Chicago for distribution of the trust. The admission of her will to probate in the county court of her domicile in Wisconsin was the authority which enabled the trustee to act.
"The decedent thereby made a very definite use of the courts and laws of the state of Wisconsin to transfer this property . . . ." The county court was entirely correct when it, in essence, concluded that there was a sufficient nexus to permit Wisconsin to tax. This nexus includes:
See generally: Pabst v. Department of Taxation (1963), 19 Wis.2d 313, 120 N.W.2d 77.
1. The fact that the nonexercise of the power as indicated in decedent's Wisconsin will triggered the transfer to her children who would have been the natural objects of her bounty anyway had she decided to exercise her power.
2. The fact that she received income for life from the trust while in Wisconsin.
3. The fact that she voluntarily in 1944 reduced the power from general to special here in Wisconsin using Wisconsin lawyers and Wisconsin practice methods to do so.
4. The fact that her children, takers in default, are Wisconsin residents.
5. The fact that she was at the time of her death and at the time of her decision not to exercise the power, a Wisconsin domiciliary. As was said in Graves v. Schmidlapp, ". . . 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 government there, afford adequate constitutional basis for the imposition of a tax."
Supra, footnote 6, at page 660. See also: Curry v. McCanless (1939), 307 U.S. 357, 59 Sup. Ct. 900, 83 L.Ed. 1339, 123 A.L.R. 162.
Moreover, we think that this court's recent decision in Estate of Perry, militates strongly in favor of the imposition of a tax in this case. In Perry, the decedent had established a revocable trust while a resident in Illinois and had then moved to Wisconsin. At his death this state properly taxed the succession to the intangible assets of the trust, although the property never was physically within Wisconsin, since under sec. 72.01(5), Stats., the succession resulting from the exercise or nonexercise of a general or special power of appointment (except a special power expressly excluded from the statute) is taxable in the same manner as though the property belonged to the donee of the power.
(1967), 35 Wis.2d 412, 151 N.W.2d 58.
We conclude that Wisconsin has jurisdiction to tax in this case.
By the Court. — Order affirmed.