Schneider v. Laffoon

212 N.E.2d 801, 4 Ohio St. 2d 89, 33 Ohio Op. 2d 468, 1965 Ohio LEXIS 429

• Court: Ohio Supreme Court
• Decided: December 22, 1965
• Docket: No. 39337
• Status: Published

Opinions

Taft, C. J.

The Tax Commissioner refers to the power involved in the instant case as “a limited or special power of appointment.” We believe that the term “limited or special power of appointment” does not describe completely the power' here involved. Thas, the donee was permitted to appoint to herself, antil her death in 1962, the income accrning from one-half of the trust after 1941 and from the other half after 3944. To that extent, this gave the donee income that she would have not received without such an exercise of the power. This was apparently permitted on the assumption that the “power * * * to change the proportions, amounts and times of payments to the beneficiaries named” would permit the donee to enlarge the amounts of and extend the times of payments to her of income since she was ‘“named” as a beneficiary of income from the trust although not named as a beneficiary of principal of the trust. To that extent, the power cannot be classified as a special power because “it can be exercised wholly in favor of the donee” at least for her lifetime. See 3 Restatement of the Law of Property 1828, Section 320. However, so far as it relates to the principal of the trust, all parties apparently recognize that the donor of the power expressed the intention that the power should be a “special power” and thus apparently agree that the donee could have appointed no part of that principal either to herself or her estate.

The Tax Commissioner does not contend that, to the extent that the power was exercised for the benefit of the donee by increasing the income payable to her during her lifetime, the income so received by her should be treated as, to use the words of Section 5731.02, Revised Code, “a succession taxable under this section in the same manner as if the property to which such appointment relates [*. e., the additional income paid to donee in her life] belonged absolutely to the donee * * * and had been bequeathed * * * by said donee by will.” Therefore, and since the only power dealt with by either party in the briefs or arguments is that part of the power relating to the principal of the trust estate, we will deal only with that portion. Thus, for the purposes of this opinion, we will consider, as the parties have considered, the power here involved as a power under which the donee had no authority to appoint anything to herself or her estate.

It should be noted further that, although the donee exercised the power during her lifetime, she could have exercised it again at any time before her death. Her failure to do so represented a nonexercise of the power. Hence, even though we should determine that the exercise of the power by a resident donee is not taxable as a sneeession, there would still remain the Tax Commissioner’s contention that her nonexercise of such power is taxable as a succession.

Therefore, the ultimate question to be determined may be stated as follows:

Where a power of appointment over intangible property was created by a trust set up outside Ohio by one who was never a resident, where the property subject to the power has always been outside Ohio in the custody of nonresident trustees, where the donee of the power had no authority to appoint any part of the property subject to such power to herself or to her estate and where the power was to be exercised only inter vivos by a modification of the trust “in writing signed by” the donee “and delivered to the trustee,” is either the exercise of such power by such donee when a resident of Ohio or her failure to exercise such power where such donee was a resident at her death taxable as a succession under Section 5731.02(D), Revised Code?

Section 5731.02(D), Revised Code, was first enacted in 1919. It is substantially the same as a statute which originated in and was first enacted in New York in 1897. A similar statute was enacted in Massachusetts in 1909. See Opinions of Attorney Ceneral (1922) 536, No. 3237.

In Matter of Lansing (1905), 182 N. Y. 238, 74 N. E. 882, a grandfather, before enactment of a statute substantially identical to Section 5731.02(D), Revised Code, left certain property to his daughter in trust for life, with remainder over to his granddaughter but subject to a power in the daughter to appoint the property by will to her heirs or to her collateral heirs. The daughter, after enactment of that statute, did exercise the power by appointing to the granddaughter who was the daughter’s only heir.

The granddaughter, who would have taken in default of any appointment, elected not to take under the appointment to her. She contended that she took only under her grandfather’s will which became effective before the statute levying the tax, and that it would be unconstitutional to permit the tax to cut down the value of what she took under that prior will. The New York court agreed and stated:

“ * * * The theory of a transfer tax is that it is a tax on the right accorded to take nnder a will or to succeed in case of intestacy which * * * are privileges that may he accorded or denied by the state.”

The court distinguished Matter of Delano (1903), 176 N. Y. 486, 491, 68 N. E. 871, on the ground that the appointee under the power there involved had to rely upon New York giving effect to a will of the donee of the power in order to get the property appointed, so that New York had power to tax the right of that appointee to take under the donee’s New York will.

As to the contention that the statute provided also that the failure or omission to exercise a power of appointment subjected the property to a transfer tax as if the donee of the power had owned the property and devised it by will, the New York court stated that the transfer was from the donor and not from the donee of the power, that transfer was before enactment of the tax statute, and that “where there is no transfer there is no tax.”

Because of this and similar holdings, New York amended its statute to eliminate those parts taxing the nonexercise of a power.

However, the same statute had been adopted in Massachusetts, and the Massachusetts court held it constitutional so far as it imposed a tax on the exercise or nonexercise of a power of appointment created before enactment of the statute over property located in Massachusetts and where both the donor and the donee of the power were residents of Massachusetts at the time of their death. Minot v. Treasurer and Receiver General (1911), 207 Mass. 588, 93 N. E. 973, 33 L. R. A. (N. S.) 236.

In Walker, Admr., v. Treasurer and Receiver General (1915), 221 Mass. 600, 109 N. E. 647, the will of the testator domiciled in Maryland had created a testamentary power of appointment over property held in Maryland by a trustee domiciled in Maryland. The donee of the power, who was domiciled in Massachusetts, exercised the power by her will, which was proved in Massachusetts. Massachusetts sought to levy a succession tax with respect to the property passing under the power of appointment. In holding that no such tax could be levied under a statute substantially identical with Section 5731.02(D), Revised Code, it is said in the court’s opinion by Rugg, C. J.:

“It is an implied condition of all statutes relating to taxation that they have no extraterritorial effect. * * * Massachusetts has no control either of the property or its owner. An excise tax may be upheld upon the succession to property where a direct property tax might not be sustained. But in such cases it can stand as a lawful exercise of the taxing power only when some necessary incident of the transfer of title depends for its efficacy upon the law of the state levying the tax. * * *

“ * * * where the property is not physically within the jurisdiction of the taxing power and its complete succession may be accomplished without invoking any privilege or sanction conferred by its laws, then there is nothing to which taxation can attach * * #.

it# * * ppg wjj[ 0f *- * * [the Maryland donor] in creating the power of appointment did not provide that the power must be exercised by a will executed according to the law of the domicile of the [Massachusetts] donee, to be proved and allowed in its courts. * * * A different question would be presented if that had been the case. Any instrument recognized by the courts of Maryland as an exercise of the power is sufficient. * # #

“It follows that no privilege by which the property passes, whether by exercise of the power or by failure to exercise it, is conferred by the law of this commonwealth. Hence no commodity exists here on which the tax can be levied. By resort to the courts of Maryland all questions as to the succession of this trust estate will be determined without invoking the law of Massachusetts. That will be settled without dependence upon the moral support or actual assistance of our laws. * * * There is nothing in this commonwealth upon which * * * [the statute corresponding to Section 5731.02(D), Revised Code] can operate.”

Undoubtedly, our G-eneral Assembly had those decisions before it when it determined to adopt as part of our law what is now Section 5731.02(D), Revised Code. See Opinions of Attorney General (1922) 536, No. 3237.

Since New York had subsequently amended its statute corresponding to what is now Section 5731.02(D), Revised Code, and Massachusetts had failed to recognize the constitutional in-firmaties found by New York in that statute, it is quite apparent that Ohio really adopted this statute from Massachusetts. See Opinions of Attorney General (1922) 536, No. 3237.

Thus, before 1919 when the General Assembly first adopted what is now Section 5731.02(D), Revised Code, from the statutes of New York and Massachusetts, it had before it holdings of the highest courts of both those states that a tax on a transfer under such a statute could only be levied on the exercise of rights or privileges that were accorded by the taxing state.

Four years before that adoption, the highest court in Massachusetts had held in the Walker case (221 Mass. 600) that a state has no power to tax the succession to property located outside the state where no incident whatever of the transfer of title to such property is in any way dependent for its effect upon the law of the taxing state, that to permit such a tax would be to give extraterritorial effect to the state’s taxing statutes, and that it is an implied condition of all statutes relating to taxation that they have no extraterritorial effect.

We agree that it is an implied condition of all statutes relating to taxation that they have no extraterritorial effect. Frick v. Pennsylvania (1925), 268 U. S. 473, 69 L. Ed. 1058; Singer Sewing Machine Co. v. Brickell, Atty. Genl. (1914), 233 U. S. 304, 58 L. Ed. 974; Union Refrigerator Transit Co. v. Kentucky (1905), 199 U. S. 194, 50 L. Ed. 150; Louisville and Jeffersonville Ferry Co. v. Kentucky (1903), 188 U. S. 385, 47 L. Ed. 513. See Cassidy v. Ellerhorst (1924), 110 Ohio St. 535, 540,144 N. E. 252. See, also, 50 American Jurisprudence 510, Section 487; 51 American Jurisprudence 88, Section 59; 50 Ohio Jurisprudence 2d 322, Section 345.

Also, where the Ohio General Assembly has adopted statutory provisions from another state after those provisions have been construed by the highest court of that state, such construction will be given great weight in this state and will usually be followed. McNary v. State (1934), 128 Ohio St. 497, 191 N. E. 733; Black River Lumber Co. v. Kent (1931), 124 Ohio St. 20, 176 N. E. 662; Chapel State Theatre Co. v. Hooper (1931), 123 Ohio St. 322, 175 N. E. 450, affirmed, 284 U. S. 588, 76 L. Ed. ; Cohen v. P. J. Spitz Co. (1929), 121 Ohio St. 1, 166 N. E. 804, 64 A. L. R. 1421; Ives v. McNicoll (1899), 59 Ohio St. 402, 53 N. E. 60. See, also, 82 Corpus Juris Secundum 860, Section 372; 50 Ohio Jurisprudence 2d 282, Section 299.

Furthermore, a court should, if possible, give a statute such construction as -will permit it to operate lawfully and constitutionally. Kent v. Dulles, Secy. of State (1958), 357 U. S. 116, 2 L. Ed. 2d 1204; American Power & Light Co. v. Securities & Exchange Comm. (1946), 329 U. S. 90, 91 L. Ed. 103; Alabama State Federation of Labor v. McAdory (1945), 325 U. S. 450, 89 L. Ed. 1725; National Labor Relations Board v. Jones & Laughlin Steel Corp. (1937), 301 U. S. 1, 81 L. Ed. 893; Porter, Aud., v. Investors Syndicate (1932), 286 U. S. 461, 76 L. Ed. 1226; Singer Sewing Machine Co. v. Brickell, Atty. Genl., supra; Wilson v. Kennedy (1949), 151 Ohio St. 485, 86 N. E. 2d 722; Chambers v. Owens-Ames-Kimball Co. (1946), 146 Ohio St. 559, 67 N. E. 2d 439, 165 A. L. R. 1373; Winslow-Spacarb, Inc., v. Evatt, Tax Commr. (1945), 144 Ohio St. 471, 59 N. E. 2d 924; State, ex rel. Mack, Judge, v. Guchenberger, Aud. (1942), 139 Ohio St. 273, 39 N. E. 2d 840. See, also, 16 American Jurisprudence 2d 345, Section 144; 16 Corpus Juris Secundum 357 et seq., Sections 98 and 99.

In the instant case, the power of appointment was to be, and was, exercised by a simple “modification” of the trust “in writing signed by” the donee of the power “and delivered to the trustee.” Such exercise of the power could not take effect until delivered to the trustee. That delivery was outside Ohio. With regard to such execution of the power, to use the words of the New York Court of Appeals in the Lansing case, Ohio provided no “privileges that may be accorded or denied by the state”; and, to use the words of the Supreme Judicial Court of Massachusetts in the Walker case, “no privilege by which the property passes, whether by exercise of the power or by failure to exercise it, is conferred by the law of” Ohio and “all questions as to the succession of this trust estate will be determined without involving the law of” Ohio.

Matter of Canda (1921), 197 App. Div. 597, 189 N. Y. Supp. 917, held that the execution by a resident of a power given by the will of a nonresident to dispose of trust property located in another state was not taxable because tbe will exercising tbe power was probated in tbe other state so that no assistance from the laws of New York was necessary to pass title to tbe property. To tbe same effect see Matter of Thomas (1902), 39 Misc. 136, 78 N. Y. Supp. 981; Matter of Brett (1922), 123 Misc. 507, 205 N. Y. Supp. 154; and Matter of Burch (1936), 160 Misc. 342, 289 N. Y. Supp. 966.

Most of the cases relied upon by tbe Tax Commissioner, that involved powers created by nonresidents in resident donees over out-of-state property, are distinguishable from tbe instant case because they each involved some reliance upon tbe law of tbe domicile of the donee of tbe power to effect passage of title to tbe property subject to tbe power as justification for imposing a tax on exercise of tbe power. Cases of this kind are Matter of Delano, supra (176 N. Y. 486) (so distinguished in Matter of Lansing, supra [182 N. Y. 238]); Graves v. Schmidlapp et al., Exrs. (1942), 315 U. S. 657, 663, 86 L. Ed. 1097 (“* * * tbe New York will is the implement of its exercise, made effective as a will by New York law whose aid tbe decedent [donee] invoked for the exercise and enjoyment of tbe property right [a general power] conferred on him by tbe Massachusetts will”); Matter of Wendell (1918), 223 N. Y. 433, 119 N. E. 879 (power to appoint by will or deed exercised by deed of New York real estate, which deed was necessarily dependent for its validity and effect on law of taxing state); Commonwealth v. Davis, Exr. (1958), 200 Va. 308, 105 S. E. 2d 819; Kuchel, Controller, v. Newton (1950), 35 Cal. 2d 830, 221 P. 2d 959; Ream v. Department of Revenue (1951), 314 Ky. 539, 236 S. W. 2d 462; State, ex rel. Smith, Atty. Genl., v. Probate Court (1914), 124 Minn. 508, 145 N. W. 390; Matter of Walworth (1901), 66 App. Div. 171, 72 N. Y. Supp. 984. See, also, Whitney et al., Exrs., v. Tax Comm. (1940), 309 U. S. 530, 84 L. Ed. 909.

Some authorities relied upon by tbe Tax Commissioner have indicated that tbe power of disposition over property until death may be sufficiently equivalent to property so as to justify imposition of a tax on tbe extinguishment of that power by death of tbe donee on tbe theory that something thereby passes from tbe one having such power. Curry, Tax Commr., v. McCanless, Commr. (1939), 307 U. S. 357, 83 L. Ed. 1339; Graves et al., Commrs., v. Elliott (1939), 307 U. S. 383, 83 L. Ed. 1356; Bullen v. Wisconsin (1916), 240 U. S. 625, 60 L. Ed. 830; Pennsylvania Co. for Insurance on Lives v. Kelly, Tax Commr. (1943), 134 N. J. Eq. 120, 34 A. 2d 538; State, ex rel. Smith, Atty. Genl., v. Probate Court, supra (124 Minn. 508). It may be noted that in each of those cases, except the one from Minnesota, the creator and holder (i. e., donor and donee) of the power was the same person. Furthermore, in each of those cases, including the Minnesota ease, the power of disposition involved was such as to enable the holder thereof to vest title to the property subject thereto in himself or his estate. In such an instance, it is reasonably arguable that the extinguishment of the power by death of the holder or the donee thereof results in a passage of some interest in the property from such holder or donee. In the instant case, it is conceded that the donee of the power could not have given any interest in the property subject to the power (i. e., the principal of the trust) to herself or her estate. Hence, no interest in the principal of the trust would pass from her on her exercise of that power or on her death without fully exercising it or without re-exercising it. The decisions of this court have recognized that an inheritance or succession tax can be levied under our statutes with respect to a succession to property only if some interest of the decedent in that property passes from the decedent. See In re Estate of Kessler (1964), 177 Ohio St. 136, 139 to 142, inclusive, 144, 203 N. E. 2d 221; In re Estate of Evans (1962), 173 Ohio St. 137, 140, 141, 180 N. E. 2d 827; and Tax Commission v. Hutchison (1929), 120 Ohio St. 361, 366, 368, 369, 166 N. E. 352. The Ohio succession “tax is * * * levied upon the succession [*. e., “passing of property,” Section 5731.01 (B), Revised Code] to any property [i. e., “everything capable of ownership # * # which passes to any one person * * * from any one person.” Section 5731.01 (A) Revised Code] passing * * # to or for the use of a person # * Section 5731.02, Revised Code.

The only authority which tends to support the Tax Commissioner’s position in the instant case is Colorado v. Cooke (1962), 150 Colo. 52, 370 P. 2d 896.

This court is unable to agree with the decisive conclusion of the Colorado court in that case that there is no “distinction between * * * tbe nonexercise of a general power and * # * the nonexercise of a special power.” As hereinbefore pointed ont, we are of the opinion there are substantial differences. For example, the donee of a special power of appointment over property, nnlike the donee of a general power, has no power to appoint the property to himself or his estate. Therefore, nnlike the donee of a general power, the donee of the special power has nothing which may reasonably be regarded as representing an interest of the donee in that property. Hence, no interest in the property passes from the donee thereof on the nonexercise of such a special power.

Furthermore, the 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. See Matter of Lansing, supra (182 N. Y. 238); Walker, Admr., v. Treasurer and Receiver General, supra (221 Mass. 600); and Graves v. Schmidlapp et al., Exrs., supra (315 U. S. 657). 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.

Judge O’Neill’s opinion seems to find in three United States Supreme Court cases the answers to questions which he states “are controlling in the disposition of this case.” We believe that his opinion reads determinations and declarations of law into those three cases which simply cannot be extracted from them.

The first is Central Hanover Bank & Trust Co. v. Kelly, Tax Commr. (1943), 319 U. S. 94. In an effort to make the facts of that case fit the facts of this case, it is contended that the factual situation there was the same as in the instant case “with one exception.” However, that exception is very important.

There, 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. That owner was domiciled in the taxing state not only at his death but also at the time the trust was created. The precise holding of the lower court that was affirmed 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.” (319 U. S. at 96.)

The Kentucky intangibles in the instant case were owned by Mr. Laffoon, who wets domiciled in Kentucky at all times and set up the trust in Kentucky. Those intangibles were never owned by any one domiciled in Ohio.

As stated at the end of the opinion (319 U. S. 97, 98):

“The determination by the New Jersey courts of the kind of interest transferred and the time when it was effected is a matter of local law binding on us. * # # a state may * * * make the transfer inter vivos the taxable event and then measure the tax by the value of the property at time of death. # # # The significant facts are that the rights of the remaindermen derived solely from the trust agreement [“made by one of” the taxing state’s “domiciliarios”] and that the grantor died domiciled in New Jersey [the taxing state].” (Emphasis added.)

Certainly, the rights of those who took under the power of appointment in the instant case were not “derived solely from” Mrs. Laffoon’s exercise of the power of appointment. Those rights were primarily derived from the creation in Kentucky of the trust and of the power of appointment and from the conveyance of the Kentucky trust assets by Mr. Laffoon, who always lived in Kentucky, to the Kentucky trustees.

It should be noted also that the Kelly case did not even involve any power of appointment.

Graves v. Schmidlapp et al., Exrs. (1942), 315 U. S. 657, did not decide, as apparently contended, 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. ” If it did, the court would not have stated (315 U. S. at 662 and 663):

“* # # it is the exercise of the power to dispose of the intangibles which is the taxable event * * *.

<<# # *

“Whether the New York tax statute would apply if the New York will were ineffective to transfer the intangibles because it failed to comply with the requirements of the Massachusetts will or statutes, is for the New York courts to decide. Whether in such a case the statute could be constitutionally so applied is a question not presented by the record. But if, as is assumed, the power has been effectively exercised, the New York will is the implement of its exercise, made effective as a will by New York law whose aid the decedent invoked for the exercise and enjoyment of the property right conferred on him by the Massachusetts will. Its exercise is a subject over lohich the sovereign power of taxation extends.'” (Emphasis added.)

In the instant case, 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.

Also, the case of Wachovia Bank & Trust Co. v. Doughton, 272 U. S. 567, overruled in the Graves case, dealt only with (315 U. S. 664) “power of a state to tax the effective exercise of a testamentary power.” We are not confronted with any such question in the instant case.

We fail to see what relevance Whitney et al., Exrs., v. State Tax Commission (1940), 309 U. S. 530, has in the instant case. There, 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.

As hereinbefore pointed out, Massachusetts had decided in 1911 that such an exercise of a power of appointment or even its nonexercise (which New York has never sought to tax since amendment of its statutes to conform with the holding in Matter of Lansing, supra [182 N. Y. 238]) was taxable under a statute almost identical to Section 5731.02 (D) even where such statute was enacted after creation of the power, if both the donor and the donee of the power were residents of the taxing state at the time of their death. Minot v. Treasurer and Receiver General, supra (207 Mass. 588). That decision was rendered four years before Walker, Admr., v. Treasurer & Receiver General, supra (221 Mass. 600), which latter decision was rendered fonr years before this state adopted what is now Section 5731.02 (D) from the statutes of Massachusetts. See Opinions of Attorney General (1922), 536, No. 3237.

In our opinion, none of the subsequent decisions of the Supreme Court of the United States are such as to persuade this court to abandon the settled interpretation of Section 5731.02 (D) made by the highest court of Massachusetts in the Walker case four years before this state adopted that statute from Massachusetts.

Judgment affirmed.

Silbert and BrowN, JJ., concur. Herbert, J., concurs in the syllabus and judgment. ZimmermaN, Matthias and O’Neill, JJ., dissent. Silbert, J., of the Eighth Appellate District, sitting for SCHNEIDER, J.