I agree that the Federal estate tax is not an expense of administration, as used in the clause allowing for the deduction of "expenses of administration" in Section 2 of Chapter 1339, and that it should not be deducted from the estate of the decedent in order to ascertain the net estate left by him, upon which the tax imposed by Section 1 of said Chapter 1339 as "a tax upon the right to transfer" of the deceased is to be assessed.
As to the holding that the Federal estate tax is not to be deducted before the tax upon the "right to receive" is imposed by Section 5 of said Chapter 1339, I am constrained to dissent from the opinion of the majority of the court because, after careful study and consideration of the question, I have come to the conclusion that such deduction should be made.
The question is whether the Federal estate tax, imposed by act of Congress upon the estate of Mr. Hazard, should be deducted in ascertaining the full and fair cash value of the estate passing to Mrs. Hazard as residuary legatee of her husband's estate before assessing the tax imposed upon her by said Section 5 as a tax upon her "right to receive" such property.
This question arises upon the following facts. Rowland G. Hazard, a resident of South Kingstown, Rhode Island, died on the 23rd day of January, 1918, leaving a last will and testament. In and by said will, after a certain bequest, he *Page 459 gave the rest and residue of his estate to his widow, Mary P.B. Hazard, who, as such residuary legatee, is the petitioner in one of these cases. The will was duly proved and admitted to probate by the probate court of South Kingstown and letters testamentary issued to the petitioners, Mary P.B. Hazard and Rowland Hazard, who duly qualified as executors of said will.
Said executors in compliance with the provisions of Chapter 1339 of the Public Laws of 1916, known as the "Inheritance Tax Act of 1916," approved February 22, 1916, filed with the Board of Tax Commissioners an inventory under oath of the estate of said Rowland G. Hazard, and subsequently filed a supplementary statement containing additional information in regard to the estate, as required by said act. In this supplemental statement the executors claimed as a deduction the amount due the Federal Government under the provisions of the "Federal Estate Tax Law of 1916" as amended by the Acts of March 3, 1917, and October 3, 1917.
In compliance with the provisions of said "Federal Estate Tax Law," the executors filed a return with the Collector of Internal Revenue for the District of Connecticut and in due course a Federal estate tax was assessed against the estate of Rowland G. Hazard amounting to $343,228.48, which was paid by the executors, July 18, 1919, to said Collector of Internal Revenue.
The Board of Tax Commissioners on September 23, 1918, assessed a tax upon the net estate of Rowland G. Hazard amounting to $15,955.49, as a tax upon the right to transfer, imposed by Section 1 of said Chapter 1339, and also assessed a tax upon the transfer to Mary P.B. Hazard amounting to $82,229.28, as a tax upon her right to receive, imposed by Section 5 of said chapter, making a total assessment of $98,184.77. In making both of these assessments, the Board of Tax Commissioners refused to make a deduction of the amount paid as said Federal estate tax, although the petitioners duly claimed such deduction and on September *Page 460 23, 1918, the said Mary P.B. Hazard and Rowland Hazard, as executors, paid the two taxes so assessed by the Board of Tax Commissioners, less the discount of four per cent allowed by the act, making the total amount paid $94,895.60. These taxes were paid under protest to the General Treasurer of Rhode Island.
Thereafter said executors duly filed a petition in the Superior Court for the county of Providence for the abatement of said taxes or such parts thereof as should be found to be unfair, excessive or illegally assessed, and said Mary P.B. Hazard as residuary legatee filed a similar petition.
If the Board of Tax Commissioners had made a deduction of the amount of the Federal estate tax in ascertaining the value of the net estate of the decedent, Rowland G. Hazard, for the purpose of imposing the tax upon the right to transfer under said Section 1, it would have made a difference in favor of the estate (and consequently in favor of the residuary legatee) of $11,550.71.
If the Board of Tax Commissioners had made a deduction of the amount of the Federal estate tax in ascertaining the full and fair cash value of the property transferred to Mrs. Hazard, as residuary legatee, as a tax upon her right to receive, imposed under said Section 5, after allowing the discount for prompt payment, it would have made a difference in her favor of $9,834.56.
Both taxes, as assessed by the Board of Tax Commissioners, were paid under protest to the general treasurer by the executors; and it is to secure the repayment of these amounts that these petitions were brought.
The case of Knowlton v. Moore, 178 U.S. 41, is illuminating upon the subject of estate taxes, and it is stated therein, "state duties (taxes) are distinct from Legacy or Succession duties (taxes), and what it taxes is not the interest to which some person succeeds on a death, but the interest which ceased by reason of the death." p. 49. "Confusion of thought may arise from not keeping in mind the distinction between a tax on the interest to which some person *Page 461 succeeds on a death, and a tax on the interest which ceased by reason of the death, the two being different objects of taxation." p. 77.
The law imposing the Federal Estate Tax is entitled "Estate Tax." Section 6336 1/2-B (Act of September 8, 1916, Chapter 463, Section 201) provides: "A tax . . . is hereby imposed upon the transfer of the net estate of every decedent dying after the passage of this act, whether a resident or nonresident of the United States." Section 6336 1/2-H provides: "The executor shall pay the tax to the collector or deputy collector. . . . The collector shall grant to the person paying the tax duplicate receipts, either of which shall be sufficient evidence of such payment, and shall entitle the executor to be credited and allowed the amount thereof by any court having jurisdiction to audit and settle his accounts."
The Federal law imposes an "estate tax," as its title and construction shows, upon the whole net estate of the decedent, as distinguished from a "legacy" or "succession" tax, and requires this "estate tax" to be paid by the executor before the distribution of the estate. By no reasonable construction can this law be construed as a tax on legacies.
The Rhode Island "Inheritance Tax Act of 1916," known also as Chapter 1339 of the Public Laws, 1916, took effect upon its approval, February 22, 1916. It was prepared by the Board of Tax Commissioners and recommended by them for passage. In the Fifth Annual Report of the Board, speaking of the "Inheritance Tax Act of 1916," they say, "The principal departure from the usual form of law in force in the United States was in the imposition of a separate tax upon both the net estate, and upon the devise, legacy or bequest. The tax upon the net estate is a tax upon the right to transfer, and the tax upon the devise, legacy or bequest a tax upon the right to receive."
The Act is entitled, "An Act taxing the net estates of decedents, and inheritances, legacies and gifts." Section 1 provides, "A tax shall be and is hereby imposed upon the *Page 462 net estate of every resident decedent . . . as a tax upon the right to transfer. Such a tax shall be imposed at the rate of one-half of one per centum upon the excess value of each said estate over $5,000, . . ."
Section 2 provides for the ascertainment of the net estate mentioned, permitting certain specified deductions to be made from the gross estate in order to ascertain the net estate upon which the tax is imposed by Section 1.
Section 3 provides, "The tax imposed by Section 1 of this act shall be assessed upon the full and fair cash value of the net estate determined by the board of tax commissioners as hereinbefore provided and notice of the amount of said tax shall be mailed to the executor, administrator, or trustee by said board, . . . Such tax shall be due and payable by the executor, administrator, or trustee of the estate immediately upon notification of the amount thereof, . . . Said tax shall be paid direct to the general treasurer of the state for the use of the state, and shall be and remain a lien upon the estate until the same shall be paid, and the executors, administrators, or trustees shall be personally liable for such tax until the same is paid."
Section 4 provides, . . . Any executor, administrator or trustee may appeal from the assessment of said tax as provided in Section 26 of this act."
It will be noticed that this right of appeal does not include legatees, and that the 2nd, 3rd and 4th sections are enacted solely for the purpose of providing for the imposition of the tax imposed by Section 1 and have no reference to the imposition of the legacy tax imposed by the next Section 5.
Bearing in mind the distinction heretofore referred to between a tax on the interest which ceased by reason of the death, and the interest to which some person succeeds on a death, it will be apparent that the taxes imposed under the Federal Estate Tax Law and under Section 1 of the Inheritance Tax Act are "estate taxes"; and that the measure of these "estate taxes" is the same, namely, the fair cash value of the decedent's net estate as of the date of his death. *Page 463
Section 5 provides, "A tax shall be and is hereby imposed upon any transfer by a resident of this state of any real property within the state, or any tangible or intangible personal property, or interest therein or income therefrom, . . . to any person or persons, in trust or otherwise, as a tax upon the right to receive, in the following cases: (1) When the transfer is under a will or by the statutes of descent and distribution of this state . . ."
Section 6 provides, "All taxes imposed by Section 5 of this act shall be assessed by the board of tax commissioners upon the full and fair cash value of the property transferred at the rate hereinafter described and only upon the excess of the exemption hereinafter granted, . . . and all executors, administrators, or trustees shall be personally liable for any and all such taxes until the same are paid . . . Said taxes shall be and remain a lien upon the property transferred, . . . until the said taxes are paid . . ."
Section 7 provides, "When any property or any beneficial interest therein or income therefrom shall pass to or for the use of any . . . wife, . . . the tax so imposed upon the full and fair cash value of such property, beneficial interest therein or income therefrom shall be as follows: . . ." (then follow the rates).
Section 10 provides, "All taxes imposed by Section 5 of this act, unless otherwise herein provided, shall be due and payable six months after the first appointed executor or administrator liable therefor shall file his bond, . . ."
Section 18 provides, "Unless the will or other instrument under which any gift or transfer is made shall direct the taxes imposed by Section 5 of this act to be paid from the residue or as an expense of administration, and the residue is sufficient to pay such taxes, the following provisions shall apply: Any executor, administrator, or trustee having in charge or in trust any legacy or property for distribution subject to the tax imposed by Section 5 of this act shall deduct such tax therefrom. If such legacy or property be not in money, he shall collect the tax thereon upon the value *Page 464 thereof as determined by the board of tax commissioners from the person entitled thereto. He shall not deliver or be compelled to deliver any specific legacy or property subject to tax under Section 5 of this act to any person until he shall have collected the tax thereon. . . . Legatees, distributes, or other donees shall be personally liable for the taxes imposed by Section 5 of this act until the same are paid over by them to the executor, administrator, or trustee. . . ."
It will be noticed that the foregoing sections apply only to taxes imposed by Section 5, and not to those imposed by Section 1
The tax imposed by Section 5 is a "legacy tax," as distinguished from an "estate tax," and the measure of the tax imposed by said Section 5 upon the legatee's "right to receive" is the full and fair cash value of the property transferred to such legatee; and not upon the net estate of the decedent, as is the "estate tax" imposed by Section 1.
Section 33 provides, "Sections 20 to 32 inclusive of this act shall apply to the taxes imposed under the provisions of Section 1 and Section 5 of this act."
Section 22 provides, "Every executor and administrator . . . shall within thirty days after his appointment, file with the board of tax commissioners an inventory under oath showing the full and fair cash value of the estate both real and personal of the decedent, . . . and shall within one year thereafter file with said board of tax commissioners a further statement under oath showing the gain or loss in the value of such estate during the settlement thereof, the amounts paid out from such estate for funeral expenses and expenses of administration, for the support of the widow and family of the decedent as fixed by the probate court, and for the settlement of all claims allowed against such estate."
Section 24 provides that if the Board of Tax Commissioners considers the inventory or statement erroneous or incomplete, they may summon the executor to appear before *Page 465 them for examination; and the Board is authorized to appoint an appraiser. The appraiser is to make a report to the Board of Tax Commissioners of the full and fair cash value of the property; and "from such report of appraisal, and other proof relating to such estate or property before said board of tax commissioners, said board shall determine the full and fair cash value of the estate or property upon which all taxes imposed by this act are computed and the amount of taxes to which the same is liable. If no appraiser be appointed by said board as hereinbefore provided the said board may determine the value of the property upon which all said taxes are computed and the amount of taxes to which the same is liable."
Section 30 provides, "Except as otherwise provided in this act, every net estate, inheritance, devise, bequest, legacy or gift upon which a tax is imposed under this act shall be appraised at its full and fair cash value as of the date of the death of the decedent."
Upon considering the foregoing sections of the Inheritance Tax Act it will be seen that Section 1 imposes a tax on the net estate of every decedent as a tax upon "the right to transfer"; and that Section 5 imposes a separate and distinct tax upon the transfer to any person as a tax upon "the right to receive."
The value of the net estate to be used as the measure of the estate tax imposed by Section 1 upon "the right to transfer" is ascertained under the provisions of Section 2 by making certain specified deductions from the gross estate; and the full and fair cash value of the net estate of the decedent shall be determined by the Board of Tax Commissioners.
The measure of the legacy tax imposed by Section 5 upon "the right to receive" is the full and fair cash value of the property transferred to the legatee. This tax is to be paid by the executor in the first instance, and after the executor pays the tax he is to deduct the amount of it from the legacy before the transfer is made by him to the legatee under the *Page 466 provisions of the 18th section of said act. This legacy tax is made a lien upon the property transferred and is not a lien against the net estate of the decedent as is the estate tax imposed under Section 1.
Section 30 provides that every "net estate . . . legacy or gift upon which a tax is imposed . . . shall be appraised at its full and fair cash value as of the date of the death of the decedent." This means that the stocks, bonds and other personal property, as well as the real estate, shall be appraised at the full and fair cash value prevailing at the date of the decedent's death. It is necessary to fix the value of the estate left by the decedent, as of the date of his death, in order to compute the amount of the state tax imposed by Section 1 upon his net estate, as well as the Federal estate tax imposed thereon; and also the value of any specific legacies, and the value of the property ultimately to be transferred to the residuary legatee.
The right of the decedent to have all of his property transferred upon his death, and the right of the living to receive all of said property, are not correlative and co-extensive. The law makes provision for certain deductions before imposing the estate tax under Section 1; and other debts, claims or allowances may be made by the probate court, still further reducing the amount of property the residuary legatee may be entitled to receive, subject to the tax to be imposed under provisions of Section 5.
The full and fair cash value of the property transferred as a legacy to the residuary legatee may be ascertained by either of two methods: (1) By making a list of all of the property transferred to the residuary legatee and taking the value of each item of such property from the appraisal made under said Section 30, and the sum of such values will be the full and fair cash value of the property transferred to the residuary legatee to be used as the measure of the tax to be imposed under Section 5; (2) By taking the inventory of the estate and the appraisal thereof made under said Section 30 and deducting therefrom all items of credit *Page 467 allowed by the probate court in the settlement of the executor's accounts, including his final account which would show the balance to be distributed to the residuary legatee. These accounts would show the payment of general and specific legacies and also include the amounts paid by the executor, for the Federal estate tax, the estate tax imposed under Section 1, and the balance will be the full and fair cash value of the property to be transferred to the residuary legatee to be used as the measure of the legacy tax to be imposed by Section 5.
The rate of the legacy tax imposed by Section 5 depends upon the value of the property passing to the legatee and the value of the property is fixed as of the date of the death of the testator. Before the estate can be settled and the property transferred and given into the possession of the residuary legatee, the Federal estate tax must first be paid, for it is required by the express terms of the Federal act "that the tax must be paid before distribution by the executor." The state appropriates a portion of the decedent's estate at the moment of his decease under Section 1, as a tax upon his right to transfer; and the United States appropriates a portion of the decedent's estate at the moment of his decease under the Federal estate tax and imposes personal liability upon the executor for the payment thereof; and the value of the estate to be used as the measure of the tax imposed upon the residuary legatee, as a tax upon her right to receive under Section 5, is diminished by the amount of these two estate taxes paid by the executor; therefore the money required to pay the Federal estate tax and the State estate tax cannot be considered a part of the residuary estate which the residuary legatee is entitled to receive. Not to deduct the Federal estate tax in order to ascertain the value of the estate which the residuary legatee receives, would require the residuary legatee to pay a tax upon property which she never received and would not have the right to receive. Such a construction of the law would be unjust and inequitable and there is nothing in the Inheritance Tax Act of 1916 requiring such a construction. *Page 468
In administering the Inheritance Tax Act of 1916, it has been the uniform practice of the Board of Tax Commissioners, for nearly five years, to deduct the amount of the estate tax imposed upon the estate of the decedent, under Section 1, as a tax upon the "right to transfer," in ascertaining the full and fair cash value of the property transferred, to be used as a measure in imposing the tax under Section 5 upon a person as a tax upon his "right to receive." This tax act was enacted as the result of the investigation, report and recommendation of the Board of Tax Commissioners. They knew what it meant and how it was intended to operate, and their administration and construction of the law may be considered in interpreting and applying it. In their seventh annual report they state that the tax imposed by Section 1 of the "Inheritance Tax Act of 1916" is nearly identical with the Federal estate tax. In the instant case the Board has deducted the estate tax imposed by Section 1 before imposing the legacy tax under Section 5, and under the same construction of a similar law the estate tax imposed by the Federal Estate Tax Law should be deducted; for the Federal estate tax imposed on the net estate of the decedent is practically the same as that imposed on the net estate of the decedent under Section 1.
Article VI of the Constitution of the United States provides, among other things, "that the constitution and laws of the United States which shall be made in pursuance thereof, . . . shall be the supreme law of the land; and the judges in every state shall be bound thereby, anything in the constitution or laws of any state to the contrary notwithstanding." As we have seen, the Federal Estate Law imposes an estate tax upon the net estate of every decedent and requires his executor to pay the same; and it states that the receipt given to the executor for the payment of said tax shall be sufficient evidence of such payment and shall entitle him to be credited and allowed the amounts thereof by any court having jurisdiction to audit and settle his accounts. The reasonable construction *Page 469 of this law requires the Board of Tax Commissioners to credit and allow the executor with the payment of the Federal estate tax shown by the tax receipt. By operation of Federal law the net estate left by the decedent has been depleted by the amount of the tax, and the deceased was deprived of the right to transfer so much of his net estate as would be required to pay the Federal estate tax. The decedent had the right to dispose of only so much of his net estate as would be left after the deduction and payment of the Federal estate tax, and the residuary legatee had the right to receive from the decedent only so much of his estate as would be left after the deduction and payment of the Federal estate tax. For the Board of Tax Commissioners to include in the value of the property transferred to the residuary legatee the amount of money paid by the executor as the Federal estate tax would be to charge her with receiving property which she never received and never had the right to receive. A tax based upon such a valuation would be an illegal tax because the residuary legatee never had property, to the amount of said Federal estate tax, transferred to her, and never had the right to have it transferred to her. Such procedure would ignore the validity and effect of the Federal estate law imposing such tax; requiring its payment by the executor and providing that the receipt given to the executor for the payment of the same would entitle him to be credited therefor; and it would deprive the residuary legatee, to the amount of such illegal tax, without due process of law and of the equal protection of the laws.
The principle contended for by the petitioners, namely, that the amount of the Federal estate tax imposed upon the net estate of the deceased should be deducted or excluded in ascertaining and computing the full and fair cash value of the property transferred and passing to the residuary legatee for the purpose of assessing a tax against her under said Section 5, as a tax upon her "right to receive" such property, is neither novel nor unreasonable. It appears to be just and equitable. The question is not so much a question of *Page 470 law, or the construction of our Inheritance Tax Act of 1916, as it is a question of the application of the law to admitted facts. This principle is supported by decisions of the highest courts in the states of Massachusetts, Connecticut, New Jersey, Pennsylvania, Illinois, Indiana, Minnesota and Colorado.
As the Board of Tax Commissioners refused to make such a deduction, and included the amount of the Federal estate tax ($343,228.48) in computing and ascertaining the full and fair cash value of the property transferred and passing to the residuary legatee, and assessed the tax imposed by said Section 5 thereon, I am of the opinion that so much of said tax as was assessed upon the amount of said Federal estate tax is unfair and illegal and should be abated.
Mr. Justice VINCENT concurs in this dissent.