BISHOP TRUST COMPANY, Limited and Samuel W. Wilcox, Executors of the Estate of Elsie Hart Wilcox
v.
Edward J. BURNS, Director of Taxation of the State of Hawaii.
No. 4173.
Supreme Court of Hawaii.
March 25, 1963. Rehearing Denied May 17, 1963.*689 Harold S. Wright and J. Russell Cades, Honolulu (Smith, Wild, Beebe & Cades, Honolulu, on the briefs), for plaintiffs-appellants.
Nobuki Kamida, Deputy Atty. Gen. (Shiro Kashiwa, Atty. Gen., Honolulu, with him on the brief), for defendant-appellee.
Before TSUKIYAMA, C. J., CASSIDY and WIRTZ, JJ., HEWITT, Circuit Judge, in place of LEWIS, J., disqualified, and TASHIRO, Circuit Judge, in place of MIZUHA, J., disqualified.
WIRTZ, Justice.
This case involves the liability for inheritance taxes under R.L.H.1945, Chapter 103, as amended (now R.L.H.1955, Chapter 122[1]), on account of the transfer hereinafter outlined. On January 7, 1960, the parties to this proceeding filed in this court, pursuant to R.L.H.1955, § 227-1[2], an *690 Agreed Statement of Facts and requested this court to determine the question in difference. This statement set out, in substance, the following facts:
On February 21, 1938, Elsie H. Wilcox transferred certain shares of stock to Bishop Trust Company, Limited, as trustee, under an instrument which directed the trustee to pay the net income of the trust to the "Elsie H. Wilcox Foundation," a charitable trust, for and during her lifetime, and from and after her death to pay the net income, in equal shares, to certain named nephews and nieces or their lawful surviving issue, and upon default of issue, to the surviving nephews and nieces and their lawful surviving issue. The trust was to terminate twenty years after the death of the last survivor of the named nephews and nieces and at that time the trust property, together with all accumulated income, was to be distributed to the persons who were then entitled to the income of the trust. In the event, however, that all of the surviving issue of the named nephews and nieces should die prior to the expiration of the twenty year period, the trust would cease upon the death of the last of such surviving issue and the trust property would pass to those persons who would be the heirs at law of Miss Wilcox as if she had died intestate at that time. It was further provided that the settlor "shall have no power to revoke this Trust, nor to amend or alter the provisions hereof."
Previously, the charitable trust known as the "Elsie H. Wilcox Foundation" had been created by Miss Wilcox on February 15, 1938, by deed of trust which provided that the trust was organized and was to be operated "exclusively for religious, charitable, scientific, literary or educational purposes, or for the prevention of cruelty to children or animals," and that "no part of the net earnings of this trust shall inure to the benefit of any private shareholder or individual." The trust could not be "changed, amended or modified at any time * * * to prevent the application of the entire net income and principal of any of the property now or hereafter becoming subject to this trust from being applied and used solely for public charities[3] * * *."
After the death of Elsie H. Wilcox on June 30, 1954, the plaintiffs were duly appointed executors of her estate. Thereafter, the defendant[4] assessed against the *691 plaintiffs under R.L.H.1945, § 5552, as amended (now R.L.H.1955, § 122-2), and R.L.H.1945, § 5556 (now R.L.H.1955, § 122-6[5]), on account of the property transferred under the trust indenture of February 21, 1938, additional inheritance taxes and interest in the aggregate sum of $14,606.37 based on a valuation of the trust property of $238,490.51 and distributed according to law and the trust indenture among the heirs and legatees. The plaintiffs paid the amount of such additional inheritance taxes in the amount assessed, together with interest thereon, in the total amount of $14,606.37[6]. This amount was paid on June 7, 1956, to the defendant under an escrow agreement by the terms of which the defendant[7] agreed to hold the amount of the disputed taxes pending the determination of the controversy and to pay it over in accordance with the judgment entered by this court.
It is the contention of the defendant, under the submission, that R.L.H.1945, § 5552, as amended (now R.L.H.1955, § 122-2), "compels the imposition of the tax assessed on the ground that the entrusted property or an interest in or income therefrom was transferred by the said trust indenture of February 21, 1938 to the respective remaindermen, intended to take effect in possession or enjoyment after the death of the donor." On the other hand, the contention of the plaintiffs is "that the entrusted property is not subject to the taxes imposed by Section 5552 because the transfer irrevocably divested the settlor of all right, title and interest in the property, and the transfer was not `intended to take effect in possession or enjoyment after such death' within the meaning of the statute."
Under these contentions the question in difference as submitted is "whether the property entrusted under the terms and conditions of the aforementioned trust indenture of February 21, 1938 is subject to inheritance taxes imposed by Section 5552, Revised Laws of Hawaii 1945, as amended, (now Section 122-2, Revised Laws of Hawaii 1955), * * *."
The pertinent portion of R.L.H.1945, § 5552, as amended (now R.L.H.1955, § 122-2), provides:
"Sec. 5552. Tax imposed when, generally. All property which shall pass by will or by the intestate laws of the Territory, from any person who may die seized or possessed of the same which a resident of the Territory, or which, being within the Territory, shall pass, whether by the laws of the Territory or otherwise, from any person who may so die while not a resident of the Territory, or which or any interest in or income from which, shall be transferred by deed, grant, sale or gift, made in contemplation of the death of the grantor, vendor, or bargainer, or intended to take effect in possession or enjoyment after such death, to any person or persons, or to any body politic or corporate, in trust or otherwise, or by reason whereof any person or body politic or corporate shall become beneficially entitled, in possession or expectancy, to any property, or to the income thereof, shall be and is subject to a tax hereinafter provided for, to be paid to the tax commissioner of the Territory, as hereinafter directed, for the use of the Territory; * * *."
*692 The above quoted language of R.L.H. 1945, § 5552, as amended (now R.L.H.1955, § 122-2), with only one substantial change made in 1909,[8] is found in the first paragraph of Section 1 of Act 102, S.L.H.1905, enacted by the legislature of the Territory of Hawaii at its regular session in 1905, which Act fathered the present inheritance tax.
This language of R.L.H.1945, § 5552, as amended (now R.L.H.1955, § 122-2), now before us for consideration as to the applicability of the questioned tax to the instant transfer, was first considered by this court in 1910, which stated that "the act is not open to construction and does not by any way of looking at it, without ignoring its clearly expressed provisions, require that only such property be taxed as passes by will or descent or by transfer from one dying seized or possessed of it." Brown v. D. L. Conkling, Treasurer, 20 Haw. 41, 44.
The above quoted pertinent language of the statute is readily susceptible to the following classification of taxable transfers of:
"All property (1) which shall pass by will or by the intestate laws of the Territory, from any person who may die seized or possessed of the same while a resident of the Territory, or (2) which, being within the Territory, shall pass, whether by the laws of the Territory or otherwise, from any person who may so die while not a resident of the Territory, or (3) which or any interest in or income from which, shall be transferred by deed, grant, sale or gift, (a) made in contemplation of the death of the grantor, vendor, or bargainer, or (b) intended to take effect in possession or enjoyment after such death, to any person or persons, * * *." (Emphasis and designating numerals and letters added for clarification of the ensuing discussion.)
From this it is seen that the antecedent of the words "which," wherever the same appear in the above quoted language of the statute, is "all property."
We have no difficulty in determining from this unmistakable language used in R.L.H.1945, § 5552, as amended (now R.L. H.1955, § 122-2), which is broad in its scope, that an inheritance tax is imposed: first, on successions from transfers by will or descent; and, secondly, on inter vivos successions from transfers (a) made in contemplation of death or (b) intended to take effect in possession or enjoyment after the death of the transferor. It is obvious from the contentions of the parties, as above set forth, that the submitted question in difference relates only to the latter type of transfer.
Applied to this situation the statute, as it relates to the type of transfer under question, then would naturally and literally read: "All property * * * which or any interest in or income from which, shall be transferred by deed, grant, sale or gift, * * * intended to take effect in possession or enjoyment after such death [of the grantor, vendor, or bargainor], to any person or persons, * * * in trust or otherwise, * * * shall be and is subject to a tax hereinafter provided for, * * *." This is the interpretation or construction advanced by the defendant in support of his contention.
The plaintiffs in passing allude to such an interpretation or construction of the statute "standing alone without qualification as to the residence of the donor or the situs of the property [as rendering the statute unconstitutional], as imposing an inheritance tax upon property owned by nonresidents not having a situs *693 in the state." Nowhere does it appear that the plaintiffs, or any of the beneficiaries under the trust indenture of February 21, 1938, are or would be affected by the intimated unconstitutional application of the statute. Their plea falls on unresponsive ears. Territory v. Sakanashi, 36 Haw. 661; Territory v. Reyes, 33 Haw. 180. Cf., Wilson v. Stainback, 39 Haw. 67. It does not necessarily follow that such a construction would inevitably result in an unconstitutional application of the tax. It is not enough for the plaintiffs to roil the waters, for theirs is the obligation in charting our course to steer us clear of the shoals of indetermination. Cf., Bishop v. Mahiko, 35 Haw. 608; In re Yerian, 35 Haw. 855. In this they have failed and we do not regard the constitutionality of the statute as necessary to a decision in this case. Territory v. Gaudia, 41 Haw. 213; Territory v. Reyes, supra, 33 Haw. 180; Andersen v. Arnold, 30 Haw. 526.
In support of their contention, the plaintiffs would construe the language of the statute to impose "the requirement that the decedent retain a beneficial interest in the property at the time of his death" by relating the pronoun "which," preceding the provision in question to: "All property * * * from any person who may die seized or possessed of the same while a resident of the Territory, or which, being within the Territory, shall pass * * * from any person who may so die while not a resident of the Territory * * *" and connecting it with the pertinent language: "* * * which or any interest in or income from which, shall be transferred by deed, grant, sale or gift, * * * intended to take effect in possession or enjoyment after such death, * * *."
Both parties rely on the Brown case, supra, 20 Haw. 41, to support their respective interpretations or constructions of the statute. To counter the statement made therein by this court that the act does not "require that only such property be taxed as passes by will or descent or by transfer from one dying seized or possessed of it" (20 Haw. 44), the plaintiffs point to the following language of the opinion:
"* * * The transfer made by the owner in this case, which secured to him the enjoyment of the property until his death, is strictly within the plain meaning of the act. It cannot be said that one who has the income of property does not enjoy it, although in order to dispose of it he would have to revoke its transfer and repossess himself of the muniments of title, as the stock certificates may be termed.
* * * * * *
"The act treats transfers of property, when so made that the beneficial rights to be derived from it remain with the transferrer during his lifetime, and that the transferree or others for whom he holds the property do not have the use or disposal of it until after the death of the transferrer, as the same in legal effect as they are identical in substance with testamentary acts. If the devolution of property by will is taxable when made directly and expressed in the usual terminology of last wills and testaments the same is true of dispositions of property which are made for the purpose of accomplishing the same object, namely, for testamentary purposes.
* * * * * *
"If one wishes to retain the benefit or use of his property while placing its custody with another under directions for its disposition upon his death, reserving the right to change the disposition so that if none is made the settlement takes the place of a will, the tax follows precisely as in case of a will." (Emphasis added by plaintiffs, 20 Haw. 44-47.)
In that case, the settlor had transferred shares of stock to a trustee with directions to pay the income to the settlor during his lifetime, and upon his death to pay the income to his children in equal shares, *694 and upon their death to deliver their proportionate shares to the heirs of each of them. In the event of the death of any child during the settlor's lifetime without leaving issue, the shares of stock allotted to that child were to revert to the settlor. The settlor reserved the right to vote the stock and the right to revoke the trust. This court held the transfer to be subject to the inheritance tax in question.
It is interesting to note that the taxpayer there made the same contention now advanced "* * * that the gift was made inter vivos and took effect as such at the date of the assignment and therefore was not a transfer within the purview of the statute which, although it includes gifts which do not take effect in enjoyment or possession until after the death of the donor, nevertheless, as the plaintiff claims, is confined to property of which the decedent died seized and possessed, whether it passes by will or under the law of descents and distribution of property of persons dying intestate or by deed, grant, sale or gift. In this view the statute provides, as the plaintiff claims, that `all property which shall pass from any person who may die seized or possessed of the same or which shall be transferred by deed or gift made by one so seized or possessed in contemplation of the death of the grantor or intended to take effect in possession or enjoyment after death, shall be subject to a tax,' etc. * * *." (Emphasis added, 20 Haw. 43, 44.)
This contention was disposed of by this court in a single short paragraph, portions of which are herein relied on, as seen, by both parties, as follows:
"The act is not open to construction and does not by any way of looking at it, without ignoring its clearly expressed provisions, require that only such property be taxed as passes by will or descent or by transfer from one dying seized or possessed of it. The transfer made by the owner in this case, which secured to him the enjoyment of the property until his death, is strictly within the plain meaning of the act. It cannot be said that one who has the income of property does not enjoy it, although in order to dispose of it he would have to revoke its transfer and repossess himself of the muniments of title, as the stock certificates may be termed." (20 Haw. 44.)
The remaining language of the opinion, set forth above, was utilized by this court in disposing of the further contention of the taxpayer therein advanced that the portion of the act in question was unconstitutional if construed so as not to require the settlor to have died "possessed of this property in order to subject its transfer to a tax" in that it would be "unequal and unjust in its operation" and "constitutes double taxation." The reason for the court's use of language, in terms of testamentary disposition, in describing the transfer there under consideration thus becomes readily apparent.
The language used by this court in disposing of the contention of the inapplicability of the act to the transfer there under consideration was utilized merely to describe how the transfer was "strictly within the plain meaning of the act" and does not, in our opinion, limit the application of the tax only to situations where the settlor reserves to himself some interest in, or control over, the transferred property.
The transfer described by this court in the Brown case covers a situation which has been universally considered as taxable. We do not understand the plaintiffs to dispute this. This was the most common type of transfer, made in avoidance of an inheritance tax, to come before the courts for consideration. It is noteworthy that other courts, having passed on such transfers and, in applying the tax, employed language similar to that found in the Brown case, have had no difficulty in addressing themselves to the application of the tax to transfers where no beneficial interest in or control over the transferred property was retained. Bryant v. Hackett, *695 118 Conn. 233, 171 A. 664, 668; Chase v. Commissioner of Taxation, 226 Minn. 521, 33 N.W.2d 706, 6 A.L.R. 2d 214, in view of In re Estate of Rising, 186 Minn. 56, 242 N.W. 459. It was only natural for this court in Brown to have used the language it did to the effect that a transfer of property in which the transferor retains the benefits of property during his life is in effect and substance the same as a testamentary disposition for such language was apt in view of the particular circumstances under consideration in that case.
In the Brown case, this court held in its answer to the taxpayer's contention therein precisely framing that issue that the statute did not require that a transferor die "seized or possessed" of transferred property in order to render taxable the passing of possession and enjoyment at his death. This recognizes the purpose of the legislature in enacting the statutory provision imposing a tax on inter vivos transfers intended to take effect in possession and enjoyment at or after the death of the transferor, which is to prevent the avoidance of the inheritance tax by reaching transfers analogous or akin to testamentary dispositions. Hartford v. Martin, 122 N.J. L. 283, 4 A.2d 31, 121 A.L.R. 354; Bryant v. Hackett, supra, 118 Conn. 233, 171 A. 664; Hackett v. Bankers Trust Co., 122 Conn. 107, 187 A. 653. A contrary construction of the statute requiring that the transferred property have reference to property owned by a transferor at the time of his death would defeat the fundamental intent of the legislature to also tax transfers where ownership had passed from him during his life but which were to become effective at or after his death.
Plaintiffs, however, argue that such holding is not literally so, but that "the statement by the court [in Brown] that the act does not `require that only such property be taxed as passes by will or descent or by transfer from one dying seized or possessed of it' * * * construed in context" compels the conclusion "that the court merely wished to make it clear that the words `seized or possessed' should be broadly construed to include a transfer whereby the donor retained all of the income of the property during his lifetime, even though in form the reservation of such an interest in the property might not be understood as `seisin' or `possession' under the technical refinements of property law." Accordingly, plaintiffs' conclusion is that in the Brown case "the court held that the reservation of a beneficial interest in the property by the transferor was an essential ingredient of the tax."
It now becomes apparent that, under the construction of the statute advocated by the plaintiffs, not only is the language relating to seisin or possession present in the portion of the act dealing with transfers by will or descent to be transferred to that portion of the act dealing with inter vivos transfers, contrary to the usual rules of grammar, but also, this technical language is there to be given a different meaning than it logically possesses where physically found in the act. By way of understatement, this would indeed result in a strained construction of the statute.
It is apparent to us that the Brown case does not close the door on the imposition of the tax provided in R.L.H.1945, § 5552, as amended (now R.L.H.1955, § 122-2) on a transfer of property in trust in which the actual possession and enjoyment of the beneficiary takes place at or after and is made dependent on the death of the transferor, despite the lack of retention of any beneficial interest in the transferred property by the transferor. Since we are not persuaded that the strained construction of the statute demanded by the plaintiff is compelled by the holding and language of this court in the Brown case, it behooves us to look to the cases, decided in other jurisdictions, cited by the plaintiffs in support of such construction.
Recognizing that the purpose of the possession and enjoyment provision of the statute is to reach transfers testamentary in substance and in effect, we must *696 also bear in mind, in our consideration of these cases, that R.L.H.1945, § 5552, as amended (now R.L.H.1955, § 122-2), being an inheritance tax, imposes the tax on the right or privilege of a beneficiary of receiving or succeeding to property upon the death of the prior owner rather than on the transmission of the benefits of property as in the case of an estate tax. "The thing burdened is the right to receive." Leach v. Nichols, 285 U.S. 165, 169, 52 S. Ct. 338, 340, 76 L. Ed. 681. See also, Buffinton v. Mason, 327 Mass. 195, 97 N.E.2d 538, 541, 37 A.L.R. 2d 1; In re Rath's Estate, 10 Cal. 2d 399, 75 P.2d 509, 512, 115 A.L.R. 836. Accordingly, the possession and enjoyment provision in an inheritance tax statute taxes the succession to, and not the transmission of, the benefits of property. Saltonstall v. Saltonstall, 276 U.S. 260, 48 S. Ct. 225, 72 L. Ed. 565, affirming Saltonstall v. Treasurer & Receiver General, 256 Mass. 519, 153 N.E. 4.
The nature of the tax and the purpose of the possession and enjoyment provision in an inheritance tax statute were thoroughly treated in the much cited opinion by Chief Justice Rugg of the Supreme Judicial Court of Massachusetts in Coolidge v. Commissioner of Corp'ns & Tax'n, 268 Mass. 443, 167 N.E. 757:[9]
"* * * The present excise under the statute was levied on the succession, not on the transmission, of the trust fund. As already pointed out succession is a quite different thing from transmission. It is manifest from the terms of the declaration of trust that the death of the survivor of the settlors was expressly fixed as the effective date of succession by the final beneficiaries to the enjoyment of the principal and income of the trust estate. The excise statute here controlling and already quoted is designed to include within its sweep all methods of succession to property to take effect in possession or enjoyment after the death of the grantor or donor other than those made inter vivos for a bona fide consideration. By express words it embraces succession created by deed. Whenever property is conveyed upon such limitation that it will vest in interest, possession or enjoyment by reason of the death of the grantor or donor, such succession falls within the descriptive words of the statute. The succession to any of these attributes of property occurring as the result of the death of the grantor or donor constitutes the taxable commodity. Magee v. Commissioner of Corporations and Taxation, 256 Mass. 512, 515, 153 N.E. 1." (167 N.E. 759, 760.)
Since it is the succession that is taxable it was deemed to be unnecessary that the property interests pass directly from the donor at the time of his death:
"* * * If the beneficiary under the instrument of gift succeeds to an interest in the property not previously enjoyed, which bears a distinct and necessary relation to the death of the grantor or settlor, that is a succession subjected to the excise by the terms of the statute." (167 N.E. 760.)
To the same effect is Saltonstall v. Treasurer & Receiver General, supra, 256 Mass. 519, 153 N.E. 4, aff'd, Saltonstall v. Saltonstall, supra, 276 U.S. 260, 48 S. Ct. 225, 72 L. Ed. 565. See also, Hartford v. Martin, supra, 122 N.J.L. 283, 4 A.2d 31.
This basic difference in the nature of an inheritance tax as contrasted with that of an estate tax is the principal distinguishing feature of most of the cases relied on by the plaintiffs and rendering them inapplicable to our problem. Of course there are other differences in some of these cases which will be indicated as they are considered.
*697 Reinecke v. Northern Trust Co., 278 U.S. 339,[10] 49 S. Ct. 123, 73 L. Ed. 410, was properly concerned, in construing the Federal Estate Tax Law, with the effect of the transfer on decedent's estate, namely, what the donor had retained up to the time of his death, and so affords no criterion for our guidance. As stated in Y. M. C. A. v. Davis, 264 U.S. 47, 50, 44 S. Ct. 291, 292, 68 L. Ed. 558; "* * * What this law [Federal Estate Tax] taxes is not the interest to which the legatees and devisees succeeded on death, but the interest which ceased by reason of the death." If a decedent during his lifetime conveyed away all interest in his property, it cannot be said that there remains in his estate at his death any of the rights to property and the Federal Estate Tax does not apply. This was the basis of the Reinecke case and has no application to the Hawaii inheritance tax.
The plaintiffs' remaining cases fall into three categories: First, those where "possession or enjoyment" had no direct relationship to the death of the donor. Downes v. Safe Deposit & Trust Co., 163 Md. 30, 161 A. 400; In re Glosser's Estate, 355 Pa. 210, 49 A.2d 401; In re Dolan's Estate, 279 Pa. 582, 124 A. 176, 49 A.L.R. 858; In re Taxation of Masury's Estate, 28 A.D. 580, 51 N.Y.S. 331, aff'd without opinion in 159 N.Y. 532, 53 N.E. 1127;[11] In re Carnegie's Estate, 203 A.D. 91, 196 N.Y.S. 502, aff'd, 236 N.Y. 517, 142 N.E. 266; People v. Armiger, 372 Ill. 415, 24 N.E.2d 355; Department of Revenue v. Kentucky Trust Co. (Ky.1958), 313 S.W.2d 401. Cf., People v. Northern Trust Co., 330 Ill. 238, 161 N.E. 525, 529, where the court observed that "[t]he provisions as to the grantor's death only served as an alternative limitation of the time of the accumulation [of income], the other alternative being the end of 21 years." Consequently, the language of these cases relied upon by the plaintiffs in support of their contention has only the persuasive force of dicta. In the majority of these cases, the sole question was whether a reserved power of revocation, or similar power, in itself rendered taxable a transfer which otherwise had no reference to the donor's death as the condition of possession or enjoyment. While we might disagree with those courts on the effect of a reserved power of revocation on taxability, in view of Thomson v. McGonagle, 33 Haw. 594, still none directly focuses its attention on the point at issue here, namely, on gifts "intended to take effect in possession or enjoyment" after the death of the donor.
Second, those where the question of statutory construction is obviated, as the statutory language therein involved clearly and expressly includes the words "dying seized or possessed," or words of like import, in the "possession or enjoyment" *698 provision of the statute. Downes v. Safe Deposit & Trust Co., supra, 163 Md. 30, 161 A. 400; Highfield v. Equitable Trust Co., [4 W.W.Harr.] 34 Del. 509, 155 A. 724. As stated by the Delaware court in Highfield: "A crucial word of the statute is the word `belonging.'" (155 A. 726.) These cases scarcely compel the transposition of the words "dying seized or possessed" into the pertinent portion of our statute by way of construction.
Third, those which factually support the contention of the plaintiffs on the issue before us. These are the remaining five cases, representing the three jurisdictions of Ohio, Illinois and Michigan. In re Heine's Estate (P.Ct.Ohio 1950), 100 N.E.2d 545; State v. Welch's Estate, 235 Mich. 555, 209 N.W. 930; In re Rackham's Estate, 329 Mich. 493, 45 N.W.2d 273; People v. Moses, 363 Ill. 423, 2 N.E.2d 724; People v. Northern Trust Co., supra, 330 Ill. 238, 161 N.E. 525.[12] These cases seem concerned with the fine distinctions of the law of future interests and place determinative emphasis on the vesting of the legal title and right to possession and enjoyment. Such a view does not move us, as it ignores the real purpose of the possession and enjoyment provision to tax a succession completed after the death of the transferor. Formal distinctions pertaining to the law of real property, as well as the niceties of the art of conveyancing or of the law of contingent and vested remainders are "irrelevant criteria in this field of taxation." Helvering v. Hallock, supra, 309 U.S. 106, 111, 60 S. Ct. 444, 448, 84 L. Ed. 604. See also, Commissioner v. Estate of Church, supra, 335 U.S. 632, 643, 69 S. Ct. 322, 93 L. Ed. 288. It is interesting to note that such technical basis for nontaxability becomes incongruous in the face of the usual and general holding that the transfer of the vested and nondivestible remainder interest in a trust in which a life estate was reserved by the transferor is taxable.
A study of the language utilized in the foregoing cases, and upon which the plaintiffs rely, discloses a subtle, if sometimes unconscious, concern of the courts over what remains after the transfer in the hands of the donor until his death. Despite the assigned reasons for nontaxability and while these courts have given recognition, and even emphasis, to the purpose of the possession and enjoyment provision of the tax to reach transfers testamentary in substance, yet the nature of an inheritance tax to burden the recipient has been ignored, or at least overlooked. In the light of this, the true legislative intent has become clouded through the confusion resulting from the application of estate tax principles to situations involving an inheritance tax.
In view of the lack of persuasive support to be found in the above reviewed cases for the strained construction of R.L.H.1945, § 5552, as amended (now R.L.H.1955, § 122-2), pressed by the plaintiffs, this construction takes on even more of an air of unwarranted distortion, rendering it too improbable for acceptance. The concept "seized or possessed" is consistent with, and logically applicable to, testate and intestate successions while inconsistent with, and logically inapplicable to, inter vivos successions.
On the other hand, when recognition is given by the courts not only to the purpose of the possession and enjoyment provision of statutes similar to that of Hawaii[13] but also to the nature of an inheritance *699 tax, no difficulty is experienced in applying such statutes, as read and interpreted normally, employing only the rules of grammar and punctuation while adhering to the commonly accepted meaning of the language. Accepting such statutes at their face value, succession being the taxable incident, the tax has been applied whenever actual succession, possession and enjoyment takes place at, is dependent upon and is brought about by, or is withheld until, the death of the transferor. Bethea v. Sheppard (Tex.Civ.App.1940), 143 S.W.2d 997; Gregg v. Commissioner of Corp'ns & Tax'n, 315 Mass. 704, 54 N.E.2d 169, 150 A.L.R. 1280; Hackett v. Bankers Trust Co., 122 Conn. 107, 187 A. 653; Schroeder v. Zink, 4 N.J. 1, 71 A.2d 321; Koch v. McCutcheon, 111 N.J.L. 154, 167 A. 752; In re Hollander's Estate, 123 N.J.Eq. 52, 195 A. 805; In re Green's Estate, 153 N.Y. 223, 47 N.E. 292; In re Cruger, 54 A.D. 405, 66 N.Y.S. 636, aff'd, 166 N.Y. 602, 59 N.E. 1121; In re Patterson's Estate, Sur.Ct., 127 N.Y.S. 284, aff'd, 146 A.D. 286, 130 N.Y.S. 970,[14] aff'd without opinion, 204 N.Y. 677, 98 N.E. 1109; In re Madison's Estate, 26 Cal. 2d 453, 159 P.2d 630; Chase v. Commissioner of Taxation, supra, 226 Minn. 521, 33 N.W.2d 706, 6 A.L.R. 2d 214. As the New Jersey court succinctly stated in Koch v. McCutcheon, supra, the test of taxability is whether "there is an estate passing at the death of the donor" (167 A. 753). Or as observed by the Minnesota court in Chase v. Commissioner of Taxation, supra, reliance is placed "upon the statutory expression `intended to take effect in possession or enjoyment' as having reference to the donee's acquisition of final and complete title, rather than to the action of the donor in divesting himself of power and control at the time the transfer is made." (33 N.W.2d 710.)
In Hackett v. Bankers Trust Co., supra, the Connecticut court pointed out that the retention by a donor of the enjoyment of or dominion over property until his death does not have the same significance in an inheritance tax which is levied upon the beneficiary for the privilege or right of succession to property as it does in the case of the Federal Estate Tax which is on the transfer, at death, of property from the decedent; for in the case of the inheritance tax the important consideration is whether there is a shifting of the benefits of property occasioned by and occurring at or after the death of the "former owner" thereof. See also, Bridgeport-City Trust Co. v. McLaughlin, 2 P-H, Inh. & Trans. Tax Serv. (Conn.1941), § 1010, p. 1025.
The controlling factor is not whether the right to future possession and enjoyment is vested in the donee at the time of the making and delivery of the instrument of gift but whether the fruition of that right is necessarily postponed during the life of the donor and his death is the requisite to the termination of the postponement. Hartford v. Martin, 122 N.J.L. 283, 4 A.2d 31, 121 A.L.R. 354, affirming 120 *700 N.J.L. 564, 1 A.2d 13, which aff'd 122 N.J. Eq. 489, 194 A. 800; In re Cruger, supra; In re Green's Estate, supra. As pointed out by the New Jersey court in Hartford v. Martin, supra, "* * * the dispositive question is whether the shifting of the possession and enjoyment of the subject matter of the succession is dependent upon the settlor's death." (4 A.2d 33.)
The test of taxability is not whether there is a complete divesting of the transferor's interest or ownership at the time of execution and delivery of the instrument of transfer or whether he reserved some interest or power until his death but rather whether complete succession takes place at or after his death. State Street Trust Co. v. Treasurer & Receiver General, 209 Mass. 373, 95 N.E. 851; In re Hollander's Estate, supra, 123 N.J.Eq. 52, 195 A. 805; Bryant v. Hackett, supra, 118 Conn. 233, 171 A. 664; Hartford v. Martin, supra, 122 N.J.L. 283, 4 A.2d 31, affirming 120 N.J.L. 564, 1 A.2d 13, which aff'd 122 N.J.Eq. 489, 194 A. 800; In re Madison's Estate, supra, 26 Cal. 2d 453, 159 P.2d 630; Chase v. Commissioner of Taxation, supra, 226 Minn. 521, 33 N.W.2d 706, 6 A.L.R. 2d 214. The Massachusetts court in State Street Trust Co. v. Treasurer & Receiver General, supra, thus posed the question: "* * * The test [of nontaxability depends] * * * upon the passing of the property with all the attributes of ownership independently of the death of the transferror. * * *" (95 N.E. 852.) The California court in the case of In re Madison's Estate, supra, stated that "the issue is not whether the donor retained some power or interest until his death, but rather whether he tied up the property with so many strings, which could not be loosened until his death, that the transfer may be regarded as having been intended to take effect in possession or enjoyment at his death within the meaning of the statute." (159 P.2d 633.) The New Jersey court puts it another way in the case of In re Hollander's Estate, supra, by concluding: "* * * Where there is a transfer of a specific interest in property and the succession of the transferee does not become, and under the terms of the transfer is not to become, complete until a time at or after the death of the transferor, that transfer is taxable. * * *" (195 A. 808.)
A gift inter vivos is complete and not taxable under an inheritance tax if it has no reference to the death of the donor as the condition of possession and enjoyment by the donee. In re Estate of Rising, supra, 186 Minn. 56, 242 N.W. 459. So tested the transfers in the present case were not completed and nontaxable inter vivos gifts. The Minnesota court went on to point out that if in a gift the donor makes his death both the condition on and the occasion for his donee's coming into actual possession and enjoyment, for all practical purposes death plays the same part as it does in the case of intestacy. Analogizing the gift of the remainder there involved with gifts causa mortis, and those made by will, the court noted that the remainderman had no more right to succeed to the possession of the property than legatees or devisees under a will.
It is this recognition of both the nature of the tax imposed by the possession and enjoyment a tax on succession and of its purpose to prevent the avoidance of the inheritance tax by reaching transfers analogous or akin to testamentary dispositions that have resulted in the decisions that a gift of property in trust is taxable if the donee's possession and enjoyment has been withheld from him until the death of the donor. In principle there is no difference between property passing by an instrument intended to take effect in possession or enjoyment after the death of the donor and the same property passing by will. Crocker v. Shaw, 174 Mass, 266, 54 N.E. 549. As far as succession by the donee is concerned, whether the donor has reserved a life use for himself or has withheld a use measured by his life for the benefit of another, it takes place only at or after the death of the donor. Bryant v. Hackett, supra, 118 Conn. 233, 171 A. 664. *701 A transfer involving the latter type of withholding from the donee is no less testamentary in character than the former which, admittedly, is taxable. Hackett v. Bankers Trust Co., supra, 122 Conn. 107, 187 A. 653. Furthermore, there is also in principle and in effect no less a succession by the donee in both types of transfers than the succession by a beneficiary under a will.
And here the succession by Miss Wilcox's nephews and nieces and their issue taking place from and after her death is none the less so by her having made the income from the entrusted property payable to the "Elsie H. Wilcox Foundation" than had she provided for the payment of the same income to herself.
The opinion in Bryant v. Hackett, supra, makes clear that:
"* * * This purpose and policy might be as completely defeated by a transfer of property in such a way that the owner has parted with all control and dominion over it as by one where he reserves such control. Such a reservation might perhaps make taxable a transfer which otherwise would not be, but the lack of it does not prevent the taxation of transfers falling within the terms of the statute. Nor can any valid distinction be made between cases where, as in those before us in the Guaranty Trust Co. Case, the transferor, by a irrevocable grant, transferred property with a reservation of a life use to himself and those where, by a like grant, he gives the life use to another with remainder over." (171 A. 668.)
Having completed the cycle, we return to our starting point that the statute is clear and perfectly understandable when read in the light of the ordinary rules of grammar. Brown v. Treasurer, supra. There is no necessity to transpose any portion of the statute or to give like phrases double meanings to glean the intent of the legislature, otherwise clearly expressed. It is fundamental that in construing or interpreting a statute, in order to ascertain the intent of the legislature, the language used therein is to be taken in the generally accepted and usual sense. Courts will presume that the words in a statute were used to express their meaning in common usage. In re Taxes, Hawaiian Pineapple Co., 45 Haw. 167, 177, 363 P.2d 990. This principle is equally applicable to a tax statute. Crane v. Commissioner, 331 U.S. 1, 6, 67 S. Ct. 1047, 91 L. Ed. 1301; In re Taxes, Hawaiian Pineapple Co., supra; In re Taxes, Johnson, 44 Haw. 519, 530, 356 P.2d 1028. The rule of strict construction advocated by the plaintiffs is only to be resorted to as an aid to construction when an ambiguity or doubt is apparent on the face of the statute, and then only after other possible extrinsic aids of construction available to resolve the ambiguity have been exhausted. In re Taxes, Haw'n Pineapple Co., supra. R.L.H.1945, § 5552, as amended (now R.L.H.1955, § 122-2), is clear and certain in its terms. "Where the language of the statute is plain and unambiguous there is no occasion for construction and the statute must be given effect according to its plain and obvious meaning." Kauai v. McGonagle, 33 Haw. 915, 920.
The plaintiffs have called our attention to a scholarly and comprehensive law review article dealing with Taxation of Transfers Taking Effect in Possession at Grantor's Death, written in 1941 by Henry Rottschaefer, Professor of Law, University of Minnesota Law School, appearing in 26 Iowa L.Rev. 514. Quotations therefrom favorable to the plaintiffs' position were referred to in their briefs and are included in the fuller excerpts set out below. The Professor commences his discussion thusly:
"The inheritance tax was never intended to be a gift tax. Its aim was the more limited one of taxing successions occurring as a result of the death of the owner of the transferred property in situations in which such owner had enjoyed the economic benefits of the property until the moment of his death. The complete realization of that objective *702 demanded that something more be taxed than transfers by will or under the laws of intestate succession. * * The provision of existing state inheritance tax statutes which includes among the taxable transfers those intended to take effect in possession or enjoyment at or after the death of the transferor was one of the earliest employed to prevent tax avoidance. It has given rise to a veritable flood of litigation. * * *."
In discussing transfers similar to the one here under consideration he continues:
"The decisions in which particular transfers have been held not includable among those intended, etc., [to take effect in possession or enjoyment at or after the death of the transferor] have frequently stressed the factor that the grantor has, by the transfer in question, completely divested himself of his entire interest in the transferred property. The question arises whether this alone suffices to make the transfer nontaxable. The language of the statute suggests that it does not, since some of the interests created may be limited to take effect in possession or enjoyment at or after the grantor's death within a not unreasonable interpretation of that expression. * * * Whether the taxation of an interest, created by a deed by which the grantor completely disposes of his entire interest in the property, merely because that interest is limited to take effect in possession or enjoyment at or after the grantor's death accords with the real purposes underlying the taxation of transfers intended, etc., [to take effect in possession or enjoyment at or after the death of the transferor] may well be doubted. It amounts to the taxation of completed gifts not made in contemplation of death. It is however, within the strict letter of the statutory provision. * *." (Emphasis added, 26 Iowa L.Rev. 536, 537.)
And again, he observes:
"* * * While a transfer by which a grantor divests himself of his entire interest in the property should be tax-free as a matter of principle, the succession to interests created thereby is frequently held taxable if they are limited to commence in possession or enjoyment at or after the grantor's death. * * *." (Emphasis added, 26 Iowa L.Rev. 539.)
In his conclusion, he states:
"* * * The cases reviewed have covered a long period during which the reasoning employed has undergone important changes. The courts in the earlier cases sought solutions of the problems involved by what may be described as rather technical lines of reasoning. It is impossible to wholly avoid this, but the more recent decisions have shifted the emphasis from them to the theory that the really important factor is the shifting of the real economic benefits effected by a transfer. If that is in any manner dependent upon the grantor's death, taxability is affirmed. * * *." (Emphasis added, 26 Iowa L.Rev. 547.)
It is seen that Professor Rottschaefer has accepted, as has this court, the realities of life and that principles in taxation are resolved by legislative fiat, albeit contrary to personal feelings in the matter. The imposition of a tax is a legislative function and in its application the courts have no choice but to follow the intent of the legislature. Here that intent is clearly and plainly expressed so as to apply to the transfer under consideration. Any feelings of apparent inequity dissolve if we bear in mind that "the thing burdened is the right to receive." Leach v. Nichols, supra, 285 U.S. 165, 169, 52 S. Ct. 338, 340, 76 L. Ed. 681.
Accordingly, the question in difference under the submission is answered in the affirmative that "the property entrusted under the terms and conditions of the aforementioned *703 trust indenture of February 21, 1938, is subject to inheritance taxes imposed by Section 5552, Revised Laws of Hawaii 1945, as amended (now Section 122-2, Revised Laws of Hawaii 1955). Judgment will be entered for the defendant affirming the assessment and requiring the defendant, or his successor in office, to pay the said sum of $14,606.37 held in escrow over to the Director of the Department of Taxation.
On Petition for Rehearing.
Before TSUKIYAMA, C. J., CASSIDY and WIRTZ, JJ., TASHIRO, Circuit Judge, in place of MIZUHA, J., disqualified, and KING, Circuit Judge, in place of HEWITT, Circuit Judge, retired.
PER CURIAM.
The petition for rehearing in the above-entitled cause is denied without argument.
NOTES
[1] Elsie H. Wilcox died on June 30, 1954, and the assessment in controversy in this case was made under the Revised Laws of Hawaii 1945.
[2] R.L.H.1955, § 227-1:
"To supreme court; affidavit. Parties to a question in difference which might be the subject of a civil action in the tax appeal court, circuit court or supreme court may, without action, agree upon a case containing the facts upon which a controversy depends and present a submission of the same to the supreme court; but it must appear by affidavit that the controversy is real and the proceedings in good faith to determine the rights of the parties; provided, that the supreme court may, in its discretion, require the case to be first submitted to a circuit judge at chambers subject to appeal."
[3] Miss Wilcox, however, did reserve the complete power to determine the uses and purposes for which the trust income or principal might be applied, the amount or proportion thereof to be so used or paid to other charitable organizations coming within the scope of the foundation, and to determine and regulate the accumulation of income. This reserved power, however, is not considered to be material to the determination of the question in difference, as the case is considered on the theory of the plaintiffs "that the settlor irrevocably divested herself of all title, possession and enjoyment of the property which was transferred in trust" and the defendant does not contest this position by his assertion that the statute does not require the retention of a substantial beneficial interest in the property by the transferor during his lifetime in order to render the transfer taxable.
[4] This case was submitted on the agreed statement of facts on January 7, 1960, on which filing date Earl W. Fase was Tax Commissioner of the State of Hawaii. On the day following, January 8, 1960, the Office of the Tax Commissioner was redesignated the Department of Taxation, under Executive Order No. 4 issued by the Governor of Hawaii, and Mr. Fase was appointed the director thereof. Thereafter, Edward J. Burns succeeded Mr. Fase in office and by stipulation between the parties, filed herein on February 27, 1963, was substituted as the defendant in this proceeding in the place of Earl W. Fase.
[5] This section deals with the imposition of the tax on contingent interests and is not the subject of this litigation.
[6] Under related provisions of R.L.H.1945, Chapter 103, as amended (now R.L.H. 1955, Chapter 122), the personal representatives of the deceased are required to file the inheritance tax return and are jointly liable with the beneficiaries for the tax, which is also a lien on the property transferred. The estate cannot be distributed or closed, nor the representatives discharged from their fiduciary duties, until the tax has been paid. The tax, however, is collectible by the representatives from the beneficiaries, who are actually the object of the tax assessed and ultimately bear its burden.
[7] See footnote 4. Under the stipulation of February 27, 1963, Edward J. Burns was "fully substituted in place of said EARL W. FASE as a party to the escrow agreement dated June 7, 1956, * * *."
[8] Act 147, S.L.H.1909, inserted the words "whether by the laws of the Territory or otherwise" at the place they are now found in R.L.H.1945, § 5552, as amended, and the word "so" previously present before the word "pass" immediately preceding the foregoing insertion was deleted. All other changes up to and including the 1955 revision of the laws of the Territory of Hawaii relate only to form and style.
[9] Although the case was reversed on appeal to the United States Supreme Court (Coolidge v. Long, 282 U.S. 582, 51 S. Ct. 306, 75 L. Ed. 562), the reversal was grounded on the retroactive application of the statute being in contravention of the contract and due process clauses of the Federal Constitution.
[10] Subsequent decisions of the United States Supreme Court have impaired, if not almost nullified, the authority of the Reinecke case. See Helvering v. Hallock, 309 U.S. 106, 60 S. Ct. 444, 84 L. Ed. 604; Fidelity Philadelphia Trust Co. v. Rothensies, 324 U.S. 108, 65 S. Ct. 508, 89 L. Ed. 782; Commissioner v. Estate of Field, 324 U.S. 113, 65 S. Ct. 511, 89 L. Ed. 786; Commissioner v. Estate of Church, 335 U.S. 632, 69 S. Ct. 322, 93 L. Ed. 288, and Estate of Spiegel v. Commissioner, 355 U.S. 701, 69 S. Ct. 301, 93 L. Ed. 1079.
[11] The surrogate in the case of In re Patterson's Estate, Sur.Ct., 127 N.Y.S. 284, 286, recognized that the language in the Masury case, now relied on by the plaintiffs, was dictum "* * * superfluous to the decision of the point at issue in that case, and does not seem to be followed by later authority." See discussion infra. Factually, in Masury, there was no succession of economic benefit at the donor's death, only a change of the person of the guardian. As the court there pointed out: "* * * If they [the beneficiaries] were in the enjoyment of the property, or the income from the property, prior to the death of the grantor, and if their relations to the property were not changed by the fact of such death," then the transfer was not taxable. In re Taxation of Masury's Estate, supra, 28 A.D. 580, 51 N.Y.S. 331, 333.
[12] As seen above, the alternative period of 21 years in lieu of the donor's death, if it occurred sooner, for effective possession or enjoyment, makes it arguable that the donor did not intend the gift to take effect in "possession and enjoyment" after his death.
[13] The language relating to the type of transfer here in issue and found in the statutes considered by the courts in these cases is essentially the same as that employed in R.L.H.1945, § 5552, as amended (now R.L.H.1955, § 122-2). All impose a tax on transfers "intended to take effect in possession or enjoyment [at or] after" the death of the transferor. Texas, Massachusetts, Connecticut, New Jersey, New York, California and Minnesota. However, unlike the Hawaii statute all of these statutes qualify the subject matter of the transfer as to the residence of the donor or the situs of the property. Most of them have clarifying language in the designation of the various categories and types of transfer by appropriate numerals and letters. New Jersey, New York, California and Minnesota.
[14] The opinion of the appellate division, 146 A.D. 286, 130 N.Y.S. 970, emphasizes the fact that although one of the remaindermen had a vested interest he could not take possession and enjoyment unless he survived the donor. This fact is also present in the case at bar. The possession and enjoyment of the secondary income beneficiaries (Miss Wilcox's seven named nephews and nieces or their issue) would depend upon their surviving the donor, and the possession and enjoyment of the corpus by the issue of the nephews and nieces could take effect only if they were alive 20 years after the death of the last survivor of the nephews and nieces. In other words, their possession and enjoyment was contingent on survivorship and became effective at a time after Miss Wilcox's death. This additional ground is not relied on inasmuch as the other grounds considered in the opinion are decisive of the issue.