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Lederer, Collector of Internal Revenue v Northern Trust Co. et al.

Taxation-Collateral Inheritance Federal Tax-"Netor Gross" Estate

-Act of Congress of September 8, 1916.

It appears to be settled in Pennsylvania that the collateral inheritance tax is an estate tax, not a succession tax, and that as such it is levied upon and made a charge against the estate of the decedent.

The collateral tax of Pennsylvania clearly falls within the provision of the Federal Act as a "charge" against the estate of a decedent "allowed by the laws of the jurisdiction

under which the estate is being settled," and is, therefore, properly deducible from the gross estate in determining the net estate against which the Federal tax under the Act of Congress of September 8, 1916 is assessed.

In Error to the District Court of the United States for the Eastern District of Pennsylvania. No. 2496 October Term. 1919.

Robert J. Sterrett, Ass’t U. S. Attorney, Francis Fisher Kane, U. S. Attorney, for plaintiff-in-error.

Wm. Henry Snyder and Wm. M. Stewart, Jr., of Philadelphia, for defendantin-error.

W. D. Stewart, of Pittsburgh, amicus curiae. Before BUFFINGTON and WOOLLEY, Circuit Judges, and MORRIS, District Judge.

Wooley, Circuit Judge, January 13, 1920.—The Collector of Internal Revenue assessed the decedent's estate with a tax under the provisions of Sections 201, 202 and 203 of the Act of Congress of September 8, 1916, entitled “An Act to increase the revenue and for other purposes,” 39 Stat. 777; Comp. St., 1918, Sections 63361/2 b., 63361/2 c., 633672 d. The executors claimed that in ascertaining the value of the decedent's “net estate” as a basis of assessment, in the way provided by Section 203 of the act, there should have been deducted from the gross estate the collateral inheritance tax of $39,450.92, due and subsequently paid the Commonwealth of Pennsylvania under the Act of Assembly of May 6, 1887 (P. L. 79). This deduction, had it been allowed, would have reduced the net estate of the decedent in the amount of the state tax, and, correspondingly, would have reduced the assessment of the Federal tax in the sum of $2,331.56. The Collector of Internal Revenue refused to allow the deduction. On appeal, the Commissioner of Internal Revenue approved the Collector's assessment. The executors paid the tax under protest and brought this suit to recover it. By stipulation, the issue was tried before the District Judge, who, on an opinion reported at 257 Fed., 812, entered judgment for the executors of the estate for the latter sum and interest. This writ, prosecuted by the Collector, brings the judgment here for review.

The applicable provisions of the cited statutes are as follows:
The Act of Congress of September 8, 1916, provides, inter alia;
Title II, Estate Tax.

"Section 201. That a tax (hereinafter referred to as the tax), equal to the following percentages of the value of the net estate, to be determined as provided in Section 203, is hereby imposed upon the transfer of the net estate of every decedent dying after the passage of this Act."

“Section 203. Net Value of the Estate, How Determined. For the purpose of the tax the value of the net estate shall be determined

(a) In the case of a resident, by deducting from the value of the gross estate

(1) Such amounts for funeral expenses, administration expenses, claims against the estate,

* * * and such other charges against the estate, as are allowed by the laws of the jurisdiction,

under which the estate is being administered.”

Lederer, Collector of Internal Revenue v Northern Trust Co. et al

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The Collateral Inheritance Tax of the General Assembly of Pennsylvania of May 6, 1887, provides, inter alia: “Section 1. that all estates,

passing from any person who may die seized or possessed of such estates

to collaterals “shall be

subject to a tax of five dollars on every hundred dollars of the clear value of such estate or estates

to be paid to the use of the Commonwealth

*. All owners of such estates, and all executors and administrators and their sureties shall only be discharged from liability for the amount of such taxes

by having paid the same over for the use as aforesaid."

Section 5 provides that before the executors or administrators shall pay any legacy or share in the distribution of an estate subject to the collateral inheritance tax, he shall deduct therefrom the tax at the rate prescribed in Section 1 and pay it to the Commonwealth.

Section 9 provides that the Register shall issue duplicate receipts for the tax when paid by an executor or administrator, which, when countersigned by the Auditor General, shall be "a proper voucher in the settlement of the estate."

Section 15 authorizes the Orphans' Court, on discovery by the Register that the tax has not been paid, to cite the executor or administrator to appear and show cause why the tax should not be paid. Woolley, Circuit Judge (after stating the case as above) The question is: Whether the collateral inheritance tax imposed by the Pennsylvania Act of 1887 falls within the deductions allowed by Section 203 of the Federal estate tax act of 1916 in arriving at the value of the "net estate" on which alone the Federal Act imposes the tax. In other words: Is the amount which the decedent's estate paid the Commonwealth of Pennsylvania as a collateral inheritance tax either (a) "an administration expense,” or (b) "a claim against the estate," or (c) one of "such other charges against the estate, as are allowed by the law of the jurisdiction

under which the estate is being administered?"

This controversy concerns broadly the privileges which governments make the subject of “death duties"—the privilege of giving and the privilege of receiving property on death, and the conditions imposed and price exacted by the State for the exercise of those privileges. Magoun v Illinois Trust & Savings Bank, 170 U. S., 283, 287; Maxwell v Bugbee, 250 U. S.

The question here turns on the nature of the two taxes, Federal and State. It concerns the Federal tax, which both parties concede to be an estate tax, that is, a tax that relates not to an interest to which some person has succeeded by inheritance, bequest, or devise, but to an interest which has ceased by reason of death; and it is imposed not upon the interest of the recent owner or upon his privilege to dispose of it, but upon the transfer of the interest in its devolution. The nature of the Federal tax being conceded, the matter for decision concerns particularly the nature of the collateral inheritance tax of Pennsylvania, and raises the question, whether that tax is an estate tax, which, like the Federal tax, concerns an interest which has ceased upon death, the burden of which is imposed upon the estate of the decedent, as claimed by the executors, or is a legacy or succession tax, which concerns the privilege of receiving such an interest, the burden of which is imposed upon the legatec or other beneficiary, as claimed by the Collector.

The bearing of this question on the case in hand is, that if the collateral inheritance tax of Pennsylvania is an estate tax and is therefore a "charge” against the estate “allowed” in its settlement by the laws of Pennsylvania, then the refusal of the Collector to deduct the amount of the

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Lederer, Collector of Internal Revenue v Northern Trust Co. et al.

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tax from the gross in ascertaining the net estate of the decedent as basis of assessment was unwarranted. If, on the other hand, it is a tax charged not against the estate, but against the legatee as a condition imposed upon the transfer of the legacy, then the net estate of the decedent, determined without deducting the collateral inheritance tax paid the Commonwealth of Pennsylvania, was properly computed under the Federal Act and the tax assessed against the same was lawful.

The nature of the collateral inheritance taxes has been the subject of many decisions, both Federal and State. The general principle of such of them as are termed legacy and succession taxes, when not otherwise affected by statutory provisions, is that the tax is upon the legacy before it reaches the hands of the legatee, whose property it becomes only after it has yielded its contribution to the State and after it has suffered a diminution to the amount of the tax in return for the legislature's assent to the bequest. Knowlton v Moore, 178 U. S., 41, following United States v Perkins, 163 U. S., 625; Magoun v Illinois Trust & Savings Bank, 170 U. S., 283; Magee v Grima, 8 How., 490, 493.

But in looking for the nature of the collateral inheritance tax under consideration, it is not necessary to seek light from statutes and decisions of other states, for the act shows its nature by it own clear expressions aided by interpretations repeatedly made by the Supreme Court of Pennsylvania. The act provides that "all estates"

"shall be subject" to the tax; that executors and administrators shall pay the tax; that until they pay it they should not be discharged; that the Auditor General's receipt for its payment shall be a proper voucher in the settlement of the estate; and that in stating an account in the Orphans' Court the tax shall be allowed and deducted before a balance for distribution is struck.

The tax, which operates practically as a deduction from the share of the beneficiary, is, nevertheless, charged against and paid by the estate. In using the words “all estates” shall be subject to the tax, the Supreme Court of Pennsylvania has held that the legislature contemplated the property of the decedent, not the interest therein of the legatee or distribution, DeBusto's Estate, 24 Legal. Intell. 474; Howell's Estate, 147 Pa., 164; that the tax is imposed only once, and at is before the legacy has reached the legatee and before it has become his property; that it must be retained and paid by the executor or administrator who has the decedent's property in charge; that which the legatee really receives is not taxed at all; his property is that which is left after the tax has been taken off. Finnen's Estate, 196 Pa., 72. In Jackson v Myers, 257 Pa., 104, where the question was squarely raised, the Supreme Court decided that the collateral inheritance tax of Pennsylvania is not levied upon an inheritance or legacy but upon the estate of the decedent, 'holding that what passes to the legatee is simply the portion of the estate remaining after the State has been satisfied by receiving the tax.

These decisions by the Supreme Court of Pennsylvania, construing a statute of its own state, are binding on this court in a case of this kind. From these decisions it appears to be settled in Pennsylvania that the collateral inheritance tax of that state is an estate tax, not a legacy tax, and that as such it is levied upon and made a charge against the estate of the decedent.

Consistently with this view, the Supreme Court of Pennsylvania recently held, in a situation just the reverse of this, that in determining the amount of a decedent's estate for the purpose of assessing the Pennsylvania collateral inheritance tax, the Federal estate tax under consideration should

Lederer, Collector of Internal Revenue v Northern Trust Co. et al.

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first be deducted as a charge against the estate. Knight's Estate, 261 Pa., 537.

We are of opinion that the collateral inheritance tax of Pennsylvania clearly falls within the provision of the Federal Act as a "charge” against the estate of a decedent "allowed by the laws of the jurisdiction under which the estate is being settled," and is, therefore, properly deductible from the gross estate in determining the net estate against which the Federal tax is assessed. There is, therefore, no occasion to go further and decide the other question raised at the argument, whether the State collateral inheritance tax is also an “administration expense," or a "claim against the estate,” similarly deductible under Section 203 of the Federal Act in ascertaining the decedent's net estate as a basis of taxation. A consideration of these aspects of the tax would require us to reconcile at least two opposing decisions rendered under state statutes with different provisions, Corbin v Townsend, * Conn.

103 Atl., 647; In re Sherman's Estate, 166 N. Y., Supp. 19; and to determine whether the terms "administration expenses” and “claims against the estate," as found in the statute, are restricted to or expanded beyond their ordinary meaning.

As this case arose before the Act of February 24, 1919, by which the terms of the Act of September 8, 1916 were materially changed, this decision has no bearing on the later dispute.

The judgment below is affirmed.

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A divorce was granted where it was alleged that the marriage had been procured by fraud and had not been consummated, the fraud consisting in respondent's not disclosing to libellant the fact that he was afflicted with a venereal disease.

In Divorce. No. 1531 July Term, 1917. C. P. Allegheny County.

Albert G. Liddell, for libellant.

SHAFER, P. J., December 18, 1917.—The libel in this case alleges that the marriage was procured by fraud and has not been consummated, and the fraud consists in respondent's not disclosing to the libellant the fact that he was afflicted with a venereal disease. While no case has been pointed out in the courts of this state in which this was held to be a fraud, such as to authorize the annulment of a marriage, we can see no difference in principle between this case and the cases wherein concealment of pregnancy has been held to be such a fraud, as in Allen's Appeal, 99 Pa., 196, and other

That the concealment of such a fact amounted to fraud was held in Smith v Smith, 171 Mass., 404, and in Svenson v Svenson, 178 N. Y., 54. It is therefore ordered that a divorce be granted.

cases.

Dando y Order Independent Americans. Pleading and Practice-Affidavit of Defense-Questions of Law Judgment.

Under the Practice Act of 1915, judgment for want of a sufficient affidavit of defense cannot be entered when the affidavit of defense filed raised questions of law only.

Rule for Judgment. No. 55 March Term, 1919. C. P. Schuylkill County.
Roads & Roads, for plaintiff.
N. C. Watkins, for defendant.

BECHTEL, P. J., November 17, 1919.-This case comes before us on an affidavit of defense raising questions of law.

1. That the plaintiff's statement shows no cause of action.

2. That it does not contain a copy of the local laws, but only a part thereof.

3. That it does not show the basis upon which the plaintiff's claim is computed, nor how the amount is made up.

4. That it is incomplete and not self-sustaining.

The plaintiff's statement alleges, inter alia, “the citizenship of the plaintiff and the incorporation of the defendant. That Thomas Dando was for years prior to his death a member of the defendant Council and was in good standing and not three months in arrears for weekly dues. That by reason of the death of Thomas Dando and in accordance with the provisions of its By-Laws under Article Six, “Death Benefits,' a copy of which is hereto attached and made part hereof, the said defendant Association became indebted to the plaintiff, Mary Dando, in the sum of three hundred and ten ($310.00) dollars' death benefits."

Attached to the plaintiff's statement is a copy of Article Six of the By-Laws of the defendant Association. This article provides, inter alia, "that on receipt of the enrollment of any person becoming a member of the Council, his widow shall be entitled to the following benefits, provided he is not three months' due in arrears. From 1 to 90 days..

$ 62.50 From 91 to 180 days..

125.00 From 181 to 270 days..

187.50 From 271 and over

310.00 Provided they lived together at the time of his death, and if not, the Council shall defray his funeral expenses and the balance, if any, be paid over to his legal heirs, unless the brother makes a will, then the Council pay it as directed by the deceased brother.

It will be noted that there is nothing to show what is meant by the words, "from one to ninety days." We do not know whether any of the other articles of the By-Laws or anything in the constitution contains an explanation of this language, but do not feel that the article in question contains sufficient to enable us to interpret it intelligently. We therefore feel that a complete copy of the By-Laws of the defendant Council should be attached to the declaration.

It is also to be noted that there is no allegation that the husband and wife lived together at the time of the death of Thomas Dando, nor is there any allegation relative to whether or not the brother made a will. We, therefore, feel that the declaration is not sufficient.

And now, December 22nd, 1919, the affidavit of defense is herewithi sustained and plaintiff is given fifteen days from this date in which to file a supplementary statement in accordance with the views expressed herein.

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