I dissent.
Melissa A. Potter died testate on November 30, 1916. On October 22, 1908, she made a gift to her son of property valued at $850,300. He took immediate possession of such estate but thereafter, during his mother's life, paid to her the whole income therefrom. The trial court found as a fact that from and after said transfer the son had been the *Page 77 owner of and in the possession of the property conveyed to him by his mother; that the transfers to said son "were intended to take effect in possession and enjoyment after death, and were made in contemplation of death within the meaning of the Inheritance Tax Law of the State of California"; "that said transfer was made without valuable and adequate consideration or valuable or adequate consideration and was a gift from Melissa Amelia Potter to her said son." These findings are not attacked because of the insufficiency of the evidence to sustain them, either by specification of insufficiency in the bill of exceptions or in the briefs of counsel, and hence must be taken as true (2 Cal. Jur., sec. 407, p. 708, and cases cited.) Notwithstanding that the findings are based upon a stipulation, the legal conclusion from these findings would seem to be that the mother, in contemplation of death, conveyed the legal title to her son without consideration as a gift, reserving a beneficial life estate to herself, with a remainder in the beneficial estate to the son, and that his ownership and possession during her life was in subordination to her equitable life estate, otherwise it could not be said that the transfer was intended "to take effect in possession and enjoyment after her death." The significance of these findings will be considered later in this opinion, when we discuss the method of appraisal for inheritance tax purposes.
It was stipulated between the parties that the gift was taxable under the inheritance tax law of 1905 in effect at the time of the transfers, and the court so decreed and that tax has been paid. (Estate of Felton, 176 Cal. 663 [169 P. 392].) Appellant has also paid the amount of $5,924.14 upon the legacy but contests the balance of the tax thereon as fixed by the court. The difference between the parties arises out of the claim of the state controller that the legacy is taxable at twelve per cent of its value. The twelve per cent rate, however, is only permissible upon the theory that the gift of $850,300 is to be taken into consideration in connection with the bequest of $146,773.57, as constituting the taxable entity at the death of the decedent, and that when thus considered the entire estate is to be taxed upon a basis of a total valuation of the sum of these two amounts, $997,073.57, taxable at the rate of twelve per cent on amounts over $500,000, under the inheritance tax law in *Page 78 force at the time of her death (Stats. 1913, p. 1066, as amended in 1915, p. 418). For convenience we will hereafter refer to this law as the law of 1913, and the law in force at the time of the transfer as the law of 1905.
This precise point raised by this appeal was involved in theEstate of Felton, supra, but by reason of the fact that the tax upon the legacy had been assessed and collected as a separate matter and the order fixing the tax had not been appealed from by the state, it was there held that the tax upon the transfer should be assessed without regard to the tax already assessed by the order of court, and theretofore paid. The first question involved is whether or not the legislature in enacting the law of 1913 intended to include property theretofore transferred as a part of the estate to be appraised at the time of the death as a basis of fixing the inheritance tax, and second, whether or not such intention can be enforced without violating the constitution. The first question can be determined from the terms of the act itself. Where property is transferred "in contemplation of death . . . or intended to take effect in possession or enjoyment at or after such death," such transfer is made taxable by section 2, subdivision 3, of the law of 1913. The inheritance tax appraiser is required to "ascertain and report to said superior court the amount of inheritance tax due upon any property passing in said probate proceeding, or a lien thereon, or upon any other property transferred within themeaning of subdivision 3 of section 2 of this act, to anyperson . . . taking property under and by virtue of saidprobate proceedings" (sec. 16). (Italics ours.) At the conclusion of his investigation it is provided that the appraiser must report to the court "the amount of inheritance or transfer tax chargeable against, or a lien upon such interests acquired by virtue of said probate proceedings or byany transfer within the meaning of this act to any person . . .acquiring any property by virtue of said probate proceedings . . ." (sec. 16). (Italics ours.)
Now, the son is a person who was a person taking property by "virtue of the probate proceedings" and hence the law expressly directed the appraisal of his legacy and also of the property transferred to him for the purpose of aster-raining the amount of the inheritance or succession tax to be paid by him. *Page 79
By section 4 of the law of 1913, all inheritance taxes remain a lien upon property passed or transferred by conveyance, by will or by succession (sec. 1, subd. c, sec. 4). This section also provides that "The tax so imposed shall be upon the market value of such property at the rates hereinafter prescribed and only upon the excess over the exemptions hereinafter granted; and provided, that in determining said market value no deduction shall be made for any family allowance made out of said estate." These rates are stated in section 6 of the law of 1913, as amended 1915 (Stats. 1915, pp. 418, 420), as follows: "When the market value of such property or interest passed or transferred to any of the persons mentioned in subdivision one of section five [husband, wife, lineal issue, etc.] exceeds twenty-five thousand dollars, the rates of tax upon such excess shall be as follows: (a) upon all in excess of twenty-five thousand dollars and up to fifty thousand dollars, two per centum of such excess . . . (e) upon all in excess of five hundred thousand dollars and up to one million dollars, twelve per centum of such excess . . ."
It should be borne in mind that the word "transfer" as used in the act includes the passing of property both by deed and by will. (sec. 1, subd. c, defining transfer). So that when section. 4 directs the market value of the interest "passed or transferred" it includes the gift as well as the legacy. There is no suggestion that the property transferred by deed should be assessed separately from the property passing by will. The tax in both instances is upon the right of succession, accruing and payable at death. Section 8 of the law of 1913 expressly provides that all taxes imposed by the act, unless otherwise therein provided for, "shall be due and payable at the death of the decedent . . ."
It would be doing violence to the requirement concerning appraisal to hold that there should be a separate appraisal of property passing by deed and by will, and that the succession tax should be reduced by allowing double exemptions and by starting again in each instance at the basis rate. In view of the nature of the tax and of the fact that the tax upon conveyances is only in aid of the tax upon the right of succession at death, there is no reason for a segregation of the two interests passing to one person, one by deed and one by will. In contemplation of the law he *Page 80 receives each by succession, one part actually, the other constructively, and the tax is upon the right of the individual who receives the property to take by succession. It is reasonable to assume that the legislature would treat the property so received as an entity unless otherwise clearly indicated. The system of a taxation by a graduated scale of percentages upon the value of the property shows the intention so to do. It is apparent from these provisions that where a legatee or devisee takes property by will and also by reason of a previous transfer, the entire amount of the tax is to be assessed and collected as a whole. It is clear, therefore, that as to transfers and devises and bequests made after the enactment of the law of 1913, the tax upon the legacy in question being assessed as a part of the whole, the property received by the legatee or devisee will be assessed as property over $850,000 and under $1,000,000, to wit, at the rate of twelve per cent.
The recent decisions of this court in Estate of Miller,184 Cal. 674 [16 A. L. R. 694, 195 P. 413], and Chambers v. Lamb,186 Cal. 261 [199 P. 33], bear upon the question of appraisement for purposes of taxation. The former holds that where a remainder is predicated upon the decedent's life, that remainder is to be appraised at its market value at the time of death of the life tenant, less deductions from the estate due to the federal tax which was held to be a tax upon the whole estate at death, in that case amounting to $4,000,000, rather than upon the right of the beneficiaries of the estate to succeed. That decision was based upon section 5 of the law of 1905, which specially provides for the assessment of an estate in remainder. The law of 1913 contains a similar provision in section 9 which, under that decision in the case at bar, would require the appraisal of the appellant's estate in remainder if it be such at its value at the time of death. In Chambers v.Lamb it was held that where the transfer in contemplation of death was of the fee, the tax should be fixed upon the market value at the time of the transfer and not at the time of death, which, if appellant's title was a fee, would require its appraisal at the date of the transfer. In that case, however, the tax was collected in a separate action, and the question of its constituting a part of the estate assessable to a legatee who also receives property under a will was neither involved nor *Page 81 discussed, as that question was involved in this case then pending on a rehearing.
For the reasons stated I think it clear that where a person takes property by deed and later also takes an estate by will or succession from the grantor, and where both are taxable under the inheritance law of 1913, the value of both should be considered in fixing the rate to be paid by the owner of the property. That is to say, if the law of 1913 had been in effect both at the date of the deed and of the death of the testatrix the gift of $850,300 and the legacy of $146,773.57 should be assessed as an entity. The gift is assessed as of the date of the gift, if a fee is conveyed, or if a remainder only is conveyed as of the date of death; and the legacy as of the date of death.
The fact that part of the property received by the beneficiary is by conveyance does not alter the fundamental rule that succession or inheritance taxes relate to the death of the donor, and are a tax upon the right of succession. If I am correct in the conclusion that the law of 1913 permits and requires that property thereafter conveyed should be taxed as a part of the estate received by the donee at death, it would follow that had the grant to the son been made after the passage of the law, he would have been taxed thereon at the rate of twelve per cent on all over $500,000. The law of 1913 does not expressly except from its terms conveyances made before its passage, nor expressly deal with that subject except that in repealing previous inheritance tax laws there is a clause saving the right of the state to taxes under the provisions of the acts so repealed.
If the transfer by deed in the case at bar was not taxable at all at the time it was made, as was the case in Hunt v. Wicht,174 Cal. 205 [L.R.A. 1917C, 961, 162 P. 639], it might be said that the inheritance tax law should not be given a retroactive effect and therefore should not be construed as affecting such a transfer, even if there were no constitutional objection to such a retroactive law. But in the case at bar the provisions of the law requiring a taxation of such transfers have been in existence since 1905 and the provisions of the law of 1913 are mere continuations of the law then in existence, notwithstanding that the form *Page 82 of amendment was by a new enactment. After the law of 1905, transfers before death, if taxable, were a part of the estate to be appraised at death for taxation purposes.
I am not for the moment considering the tax rate to be applied to the property transferred before death, but am considering only the system or scheme provided by the law of 1913 for the appraisement of transfers and bequests, for the purpose of calling attention to the fact that neither the language of the act construed according to its natural import nor the principle of law that the tax is one upon the right of succession either justifies or requires taxation of the transfer as a separate entity, but, on the other hand, clearly requires the taxation of both as a single entity.
Another consideration also leads to the conclusion that the legislature intended that transfers and bequests made after the passage of the act should be considered together as a taxable unit, that is to say, the matter of exemptions, which are provided for in section 7 of the law of 1913. This exemption to a son is $10,000 (sec. 7, sub. 2), to be deducted from the first 25,000 (sec. 5, supra). If the transfer and bequest are considered together the application of the exemption to the first $25,000 of the estate is simple enough, but if the two are regarded as separate entities for taxation purposes, it would hardly be contended that the legislature intended to allow two exemptions of $10,000 each, where it only provided for one exemption. If we regard a transfer by deed, as a separate entity for taxation purposes, fixing the value of each gift as of the date of transfer (Chambers v. Lamb, supra), we would be compelled to allow as many exemptions as there were transfers, for section 5 provides: "When the property . . . passed or transferred exceeds in value the exemption hereinafter specified and shall not exceed in value twenty-five thousand dollars, the tax hereby imposed shall be," etc. It would follow that in the case of a son, inheritance taxes could be entirely avoided by splitting the estate into separate parcels, each less than $10,000, and making separate deeds of gift for each. Such a construction is obviously inconsistent with the entire scheme of the law, and leads to an absurd result destructive of the entire purpose of the taxation of transfers in and of a succession tax. In the case at bar there were in fact a number *Page 83 of transfers, all of which we have so far considered as one entity as the parties have stipulated should be done.
So far I have only considered the proper construction of the law of 1913 as applied to transfers and legacies thereafter vesting. I will now turn to the question of the effect of the constitution and our decisions thereunder upon the appraisal and taxation of estates where a part of the property passesbefore the law of 1913 became effective but after the law of 1905 was in effect. Before taking up that question it should be said that in our former opinion we relied upon a clause in section 2 of the act of 1913 as showing an express intent to tax transfers theretofore made, under its provisions. This provision of section 2 of the act was thus referred to in the opinion: "The Inheritance Tax Act of 1913 (Stats. 1913, p. 1066), provides for a tax upon all transfers 'whether made before or after the passage of this Act (Sec. 2).' " This statement was in accordance with the contention of the respondent as follows: "Section 2 of Chapter 595 of the Statutes of 1913 provided that where any decedent might die subsequent to the passage of said statute all transfers made by said decedent, 'whether made before or after the passage of this Act,' should be taxable at the rates in said act provided."
The appellant merely stated in reply: "Respondent baldly alleges this (sec. 2) covers all property transferred, before or after the enactment of the law. The statute clearly shows that it refers only to such cases wherein the property vests after the act, under a transfer made at any time. That the time of 'vesting' is the essential and not the time of making the provision under which the vesting may occur."
These two statements constituted the entire argument upon the subject. The meaning of that clause of section 2 had not been previously passed upon by this court. It was before the court in Hunt v. Wicht, supra. The phrase, "whether made before or after the passage of the act," is considered, and it is thereconceded for the purpose of the decision that it was the intention of the legislature by this clause to tax transfers made before the act took effect and that case was decided upon that assumption.
An elaborate petition for rehearing on this point called our attention to the judicial and legislative history of this section in this state and in the state of New York, from *Page 84 which it was adopted. A rehearing was granted in order that this point might receive further consideration. The point was extensively briefed and argued, and after such argument I am satisfied that the proper interpretation of this clause is so doubtful that it should not be greatly relied upon in determining the point in issue in this case. It is suggested that it is void and unconstitutional as to vested estates, but valid as to contingent interests conveyed by deed before the passage of the act, but vesting in possession or enjoyment after the passage of the law. This construction of the New York law, from which our statute of 1911 and 1913 is claimed to have been adopted by our legislature, was said to be untenable inIn re Craig, 97 App. Div. 289 [89 N.Y. Supp. 971], cited by this court in Hunt v. Wicht, supra; although the statement was perhaps obiter dicta. The question was directly determined later in Re Smith, 150 App. Div. 805 [135 N.Y. Supp. 240], wherein it was held that the constitution forbade the taxation of a contingent remainder, granted in a deed executed before the law took effect, where the contingency happened and the estate vested after the law went into effect. In this and other cases it was held by the New York courts that the terms of the statute were broad enough to include all transfers made before the passage of the act and were only made ineffective because of the constitutional guarantees against the taking of property without compensation and against the impairment of the obligation contracts.
I think that the language of section 2 above quoted is broad enough, if unrestricted by constitutional inhibitions, in its plain import to include all transfers made before the passage of the act, and this seems to have been the view of the New York courts in In re Birdsall's Estate, 22 Misc. Rep. 180 [49 N Y Supp. 450, 462]; In re Harbeck's Estate, 43 App. Div. 188 [59 N.Y. Supp. 362]; In re Pell's Estate, 171 N.Y. 48 [89 Am. St. Rep. 791, 57 L.R.A. 540, 63 N.E. 789], as well as of our own court (Hunt v. Wicht, supra). What it has been or will be construed to mean in the light of its legislative and judicial history and under our constitution is a question merely incidentally involved in our consideration of the general scheme of legislation, and I refrain from placing a definite construction thereon, leaving that matter for further consideration when it arises. *Page 85
Assuming, then, that the whole scheme of legislation shows that prior taxable transfers were to be added to subsequent taxable bequests in fixing the rate of taxation, it remains for us to consider the effect of our constitution upon this whole legislative scheme as it affects a transfer made before its passage, and in that inquiry it is important to bear in mind that the transfer of property is not taxable as a transfer, but because the transfer is made in contemplation of death, and is in lieu of a transfer at death. Such a transfer, if permitted to go untaxed, would open the door for a defeat of all effective taxation upon the right of succession. If the tax were a mere transfer tax it would unquestionably be violative of our constitutional restrictions upon the subject of taxation, but considered as a part of a scheme for the taxation of the right of succession, it has been uniformly upheld. The appropriate time for fixing of taxes upon the right of succession is at the death of the donor, as our law provides. We have held, however, that the legislature cannot increase the tax upon a gift, in contemplation of death, after the transferinter vivos has been fully consummated, and the title entirely vested, for the reason that to do so would be to take property without compensation, because the donee takes the property subject to a lien of the inheritance or transfer tax then fixed by law; and to subsequently increase the amount of that lien would be to that extent a taking away from the donee of that which is already vested in him. (Hunt v. Wicht, supra; Estateof Felton, supra.)
It has also been held that the right of the state to this tax has so far vested that the law cannot be subsequently repealed, for the reason that to do so would in effect be a gift of the property of the state, in violation of the inhibition of the constitution (Estate of Stanford, 126 Cal. 112 [45 L.R.A. 788, 58 P. 462]). In short, applying the principle of these cases to the transfer by way of gift in the case at bar, the son thereby became entitled to the estate valued at $850,300, subject to a lien in favor of the state for a succession tax of $22,094, payable upon the death of the grantor, and the value of his vested interest protected by the constitution represented the difference between these two amounts, $828,206.
The tax resulting from the gift is not in dispute and the only question in the case at bar is whether the legislature *Page 86 had the power to include, and intended to include, the value of the gift in estimating the succession tax to be paid by the son upon the property received by him by gift and bequest in order to fix the rate to be paid upon the bequest.
As a transfer made in contemplation of death is only taxable in aid of a succession tax, it would seem that the legislature in fixing the rate of taxation upon the property passing at the time of death has always power to consider all property which has theretofore passed to the legatee by gift in contemplation of death. That it has no power to increase the amount of tax upon the property already vested in the legatee in no way bears upon the question of the power of the legislature to consider that element in fixing the tax to be paid by the legatee for property transferred at death. The question at issue resolves itself into this: "Has the legislature in fixing a succession tax the right to consider, in fixing the rate, the total amount of property to which the heir succeeds?" As the taxes are only permissible as succession taxes and as the legislature has full power to fix the amount of that tax by any standard or method it chooses, it would follow that the legislature has power to include previous transfers in contemplation of death, taxable only because, in a sense, they evade the taxation at the time of death, in estimating the percentage that is to be paid on the property which passes at the time of death.
We properly ignore the date of a will in determining the inheritance tax, and hence do not consider whether the rate of taxation has been increased by statute enacted after the execution of a will, because the will is ineffective to pass property until death, but from a constitutional standpoint, the only essential distinction between a legacy and a giftinter vivos in contemplation of death is that the legacy does not vest in the legatee until the death of the testator, and consequently the right of the legatee is inchoate until the death of the testator, while in the case of a gift inter vivos the title passes at once. It is because of the vested right of the donee and not because of the date when the intent of the donor becomes fixed that the tax on a gift inter vivos cannot be increased by subsequent legislation. But there is no greater constitutional reason for the separation of the two, the transfer and the legacy, in taxing the right of succession on the legacy, than there would be constitutional reason *Page 87 for excluding a bequest in a will in considering a subsequent bequest in a codicil. In the latter case both are to be considered together in fixing, the tax on the second bequest, and it would seem equally clear that the previous transfer may also be considered in fixing a tax on a legacy given thereafter.
I conclude that the legislature had the power to require that taxable gifts inter vivos should be taken into consideration in determining the total tax to be paid by the donee where the donee takes under a will made effective by the death of the testator after the passage of the law. As I have shown, it was the intent of the legislature that transfers in contemplation of death, or intended to take effect in possession or enjoyment at or after such death, should be added to legacies to ascertain the taxable unit. No distinction is made in the law of 1913 as to the method of taxing transfers made before and after the act, the legislature leaving the taxation officers and courts to apply the constitutional restrictions to their general scheme of taxation. The constitution requires that the tax, in this instance, should not exceed $22,094 on the gift of $850,300, while the total tax upon an estate of $850,000, plus $146,773.57, that is of $997,073.57, under the law of 1913, would be $99,238.83, being a total of $81,686 on the first $850,300 and of $17,552.83 on the last $146,773.57. Under the law of 1905, applicable to the gift, the tax thereon cannot exceed $22,094, that being the total tax at the time title vested, hence the tax under the law of 1913 on the first $850,300 when fixed in the manner required by that act is too much by the difference between the amount figured on the basis of the law of 1913 ($81,686) and figured on the basis of the law of 1905 ($22,094), and that difference is $59,592. By subtracting this amount to make the total tax conform to the constitution we have as the total tax $99,238.83, minus $59,592, and this is $39,646.83. (Hunt v. Wicht, supra.) In other words, the act fixes the tax to be paid by appellant at $99,238.83, but the constitution requires a deduction from that amount of $59,592, for the reason that to the extent of $59,592 the tax interferes with a vested right.
In support of appellant's contention certain decisions by the New York courts are cited (In re Hodges' Estate, *Page 88 215 N.Y. 447 [109 N.E. 559]; In re Thompson's Estate, 167 App. Div. 356 [153 N.Y. Supp. 164]; In re Meserole's Estate, 98 Misc Rep. 105 [162 N.Y. Supp. 414]; In re Garcia's Estate, 183 App. Div. 712 [170 N.Y. Supp. 980].) By the New York statute all taxes imposed upon transfers are made due and payable at the time of the transfer, while in this state they are due and payable at the death of the decedent. In Estate of Hodges,supra, it is said: "Where the transfers are thus distinct in character, one being a gift inter vivos taxable when made, and the other a legacy taxable only upon the death of the testator, there appears to be no warrant in law for adding them together and considering them as one transfer." Thus it appears that the decisions of the New York courts are based upon the distinction between their statute and ours. If any aid on the question under discussion is to be derived from the legislation of other states on the subject not on all-fours with ours, the case ofIn re Stephenson's Estate, 171 Wis. 452 [177 N.W. 579], decided May 4, 1920, by the supreme court of Wisconsin would seem to be as helpful as any case on the subject. It was held by that court that the gift inter vivos was to be added to the legacy to determine the amount of the tax on the latter. In that connection the court said:
"The statute contemplates but one estate for each decedent, else there would be but little object in graduating the tax according to amount, for the estate could easily be split up into a number of gifts, trusts, or wills and intestate property, and thus the graduated feature of the statute could be entirely defeated. The law provides for transfer by will, by intestate law, and by gift in contemplation of death. These all connote testamentary or intestate disposition of an estate. Gifts made in contemplation of death for taxing purposes under the statute become a part of the estate of the decedent. A deceased person can leave but one estate. All property owned by him at the time of his death is a part of his estate, and gifts previously made in contemplation of death for taxing purposes merge in the estate. Such is the obvious scope and purpose of the law, such has been the administration under it, and such has been the construction given it by this court. . . .
"Language could not very well be more clear and explicit to the effect that for taxing purposes the tax accrues and *Page 89 the transfer takes place as of the time of the death of the transferor. In State v. Bullen, 143 Wis. 512 [128 N.W. 109], transfer of property made in contemplation of death was treated as part of the estate. So, also, in State v. Thompson,154 Wis. 320 [142 N.W. 647]; in Estate of Ebeling, 169 Wis. 432 [172 N.W. 734]; and in Estate of Week, 169 Wis. 316 [172 N.W. 732]. In the latter case it is said: 'The transfer contemplated occurs at the instant of death.' (169 Wis. 318.) . . . Our conclusion is the county court properly added the value of the property passing under the trust to the value of the property passing under the will and applied the correct rate to the sum thereof."
The appellant points out, however, that this case cannot be followed in this state, for it holds that the increased tax rate in a law passed after the transfer could be applied to such transfer and is therefore contrary to our decisions (Hunt v. Wicht, supra; Estate of Felton, supra; Nickel v. State,179 Cal. 126 [175 P. 641]; Estate of Brix, 181 Cal. 667 [186 P. 135]), but these cases were decided upon the proposition that the constitution compelled such a construction. The Wisconsin case is authority upon the proposition that the language of our statute contemplates a single unit of assessment, and hence that such language should control in the absence of constitutional objection, and as far as permissible by the constitution.
In considering the constitutional question involved, the fact that the son's exemption under the law of 1905 is upon the first $4,000, estimated at one per cent (Estate of Timken,158 Cal. 51 [109 P. 608], or $40 tax, and under the law of 1913 is $10,000 at the same rate, or $100 tax, is discussed. The point presents some difficulty, but if two matters are borne in mind the difficulty is capable of a simple solution. First, there is no vested right in an exemption, in effect at the time of the transfer, or in the mode or manner of fixing the tax. Second, in fixing the tax under the law of 1913 upon a unit basis the exemption is allowed. Thus, the amount of $99,238.83 above stated as the total tax under the law of 1913 is the amount fixed after allowance of the exemption of $10,000, while the amount of the exemption under the law of 1905 ($4,000) is allowed in figuring the tax of $22,094 upon the gift of $850,300, and hence the amount to be deducted, $59,592, from the tax *Page 90 estimated under the 1913 basis, $99,238.83, is to that extent increased, that is, by $40, being one per cent upon $4,000. The fact that there is no vested interest in an exemption, existing at the time of a transfer, is clearly shown by assuming a case where the exemption exceeds the gift. It would hardly be contended that such surplus exemption could be carried over and deducted from a subsequent legacy, where the exemption then in effect was also deducted therefrom. The matter of exemption is of relatively little importance except as it bears upon the question as to whether the estate is to be taxed as one or as two units. As the matter of exemptions is involved and is discussed by counsel, I will proceed with the discussion on that subject before fully disposing of the constitutional question involved, as the consideration of that subject is germane to the constitutional question. In this discussion I adopt the following from the majority opinion vacated by rehearing:
"The appellant suggests rather than argues that an exemption of $10,000 should have been allowed in taxing the legacy. The amount of this exemption, as contended for by the appellant, would be $1,200. That is to say, twelve per cent upon a $10,000 exemption. Unless we hold that the bequest is to be considered alone, as the appellant contends it should be, it is obvious that the position of the appellant with reference to the exemption cannot be maintained. By both the law of 1905 and the law of 1913, the amount of the exemption is deducted from the first $25,000. As the tax upon the first $25,000 under both laws is one per cent, it follows that the exemption under the law of 1913 cannot, in any event, decrease the total tax by more than $100. Under the law of 1905 the exemption of $4,000 could not decrease the tax by more than $40. In other words, the difference between an exemption of $4,000, allowed under the law of 1905, and the $10,000, allowed under the law of 1915, would be, in terms of the tax, $60. It is obvious, therefore, that if we decrease the total tax on the transfer and the legacy by $100 we have given to the appellant the total exemption allowed by the law of 1913. This is exactly what was done by the trial court. The parties had stipulated that the proper tax upon the gift inter vivos was $22,094. This result was arrived at by computing the tax as follows: $4,000 was allowed as exempt, the balance *Page 91 of the first $25,000, to wit, $21,000, was taxed at one per cent; the next $25,000 at one and one-half per cent; the next $50,000, at two per cent; the next $400,000 at two and one-half per cent, and the balance, $350,300, at three per cent. The court disregarded the stipulation of the parties as to the amount of the tax upon the transfer and fixed the tax as follows: $10,000 was allowed as exempt, the next $15,000 was taxed at one per cent, the next $25,000 at one and one-half per cent, the next $50,000 at two per cent, the next $400,000 at two and one-half per cent, the balance of $350,300 at three per cent. The amount of the tax thus obtained was $22,034. The difference between the two amounts of the tax ($60) represents the allowance of the $6,000 exemption. That is to say, it represents one per cent on $6,000. No exemption was allowed upon the legacy, which was taxed at twelve per cent. In fixing the tax upon the transfer, as we have already seen, the tax is to be computed under the law of 1905 in force at the time of the transfer. Consequently, the amount of the principal exempt from taxation is $4,000. This exemption could not constitutionally be increased by subsequent legislation (Estate of Stanford, 126 Cal. 112 [45 L.R.A. 788, 58 P. 462].) The result arrived at by the court in disregard of the stipulation of the parties was erroneous as the total tax upon the transfer should have been $22,094, as stipulated. We have then to consider what is the result from the fact that the law of 1913 permits an exemption of $10,000, or of a total diminution of the tax of one per cent on that amount, namely, $100. This is an increase of $6,000 over and above the exemption allowed by the law of 1905. If we deduct the tax upon this $6,000 exemption, which, under the law of 1913, amounts to $60, from the total tax figured under the law of 1913 upon the legacy, it will decrease the total tax thereon as estimated by the court by the amount of $60, so that the total tax thereon will amount to $17,552.83 instead of $17,612.83. But the total tax will amount to the same as that fixed by the court. That is to say, the court, in fixing the tax upon the transfer, estimated it $60 too little, and in fixing the tax upon the legacy, estimated it at $60 too much. There was, therefore, no error in the gross amount of the tax fixed, to wit: $39,646.83. *Page 92
"In the stipulation filed by the parties, after stating the issue between the state and the appellant was whether the tax on the legacy should be $5,924.14, or should be $17,612.83, it is agreed that the court is 'to adjudge and determine as the only issue unsettled in this matter, the method of the determination of and the amount of said tax payable on the legacy provided to said Jesse Sheldon Lux Potter and the clear market value of the residue of said estate to which he is shown in said report to be entitled.' It is also stated in the stipulation and in the findings that the appellant had already paid into the county treasury the sum of $28,194.67. It thus appears that the appellant has paid the entire amount of the stipulated tax upon the transfer to him made in contemplation of death, to wit, $22,094, and also the tax upon the legacy computed upon the basis upon which he contends that tax should be computed, to wit, $5,924.14, and that the only question involved before the court was as to the amount of tax to be fixed upon the legacy. The court correctly fixed the total tax payable and the balance due."
Upon the question of the propriety of a unit estate for purposes of taxation appellant argues the injustice of such a rule and offers the following hypothetical case:
"If on the day Mrs. Potter died, another mother had also died, leaving her entire estate of $146,773.57 to her son (and he had not been the transferee of any taxable transfers made by her in life), the tax assessed against him would be $5,924.14, whereas for the same inheritance, in the same form, and under the same statute, the tax imposed upon the appellant is $17,612.83, which has been assessed against him on account of a past transfer which might have been untaxed at the time of its occurrence (as in Hunt v. Wicht), or taxable at the time of its occurrence at a lower rate (as in this case). If the computation of the court below were upheld, these two sons, receiving identical amounts at death, would be put in different classifications for a purely arbitrary reason, namely, because of an event which had taken place in an era either of no taxation or of lower taxation. Such a classification, is invalid under Mordecai v. Board, 183 Cal. 434 [192 P. 40].
"If the statute of 1905 had provided that all transfers after that date between the same donor and donee should *Page 93 be added together in computing the tax, we have no doubt that the provision would have been valid. But as we have seen, it did not do so."
Such illustrations are not very helpful in construing the law, because so many different conditions may exist. For instance, we might assume that Mrs. Potter had an estate of $2,000,000, which she wishes to divide equally between her two sons. One was a minor and the other an adult. For that reason in 1908 she conveys to the adult son an estate valued at $850,000, retaining the income during her life. She retains the title to $850,000 intended for the minor son and bequeathes to him this amount plus his half interest in the $300,000 which she divides equally between the two brothers in her will. Under our decision the younger brother would not only be required to pay a tax of $81,650 upon the $850,000 he received by will as against $22,085 paid by his brother upon the property of the same value deeded to him, but he is also required to pay a tax of $18,000 upon his $150,000 received by will, while his brother would have to pay $6,150 only on his legacy of $150,000. Thus the total tax paid by the younger son would be $99,650, while the older son would pay $30,945. The amount paid by the younger brother would thus exceed that paid by the older brother $68,705, this difference resulting from the application of the constitutional inhibition to the legislative action. If the legislature attempted to place the brothers on an equality with relation to the last $150,000 received by the older brother, which is as far as the legislature could go in view of the constitution, I do not think we could say that such legislative action would work an injustice to the older brother, but, on the contrary, that it would indicate an intention to place both brothers on an equality so far as it had the power so to do. Or, assume that both the gift and the will became effective under the law of 1913, and that the mother died the day after the transfer, would anyone contend that justice required that the younger son should be taxed $81,650 and the older brother taxed upon two entities, the gift and bequest, which would reduce his tax $11,850 below the younger brother?
We do not think it can be said that any inherent injustice can be worked upon a beneficiary by treating the property received by way of gift and by way of will or succession *Page 94 as an entity for the purposes of taxation, and where the constitutional provision against taking property without due process of law operates to relieve a beneficiary of any higher rate upon his gift than that in force at the time of the vesting of the gift, his rights are fully protected.
There is another line of reasoning which would tend to support the conclusion that the constitution permitted and the legislature intended that the rate upon the bequest to the son should be fixed by including both gift and legacy in the entity tax for the purpose of fixing the rate upon the bequest. This reasoning was elaborated upon by Mr. Justice Olney in his concurring opinion, found in 204 P. 844. This reasoning may be summarized as follows: The law of 1905 in force at the time of the gift to the son not only fixed the rates of taxation to be applied to the gift but also provided that if the donor subsequently bequeathed or devised property to her son, the gift should be included in the entity taxable for the purpose of fixing the amount of the tax on the legacy. In other words, the law of 1905 provided that the tax upon the $146,773.57, if she should subsequently bequeath so much, would be three per cent instead of one per cent upon the first $25,000 (less a deduction of $4,000 exemption), one and one-half per cent upon the next $25,000, two per cent upon the next $50,000, and two and one-half per cent upon the $46,773.57. The legislature had no power to increase the rate of taxes upon the gift, but it retained power to increase the rate of tax upon the legacy. The law of 1913 is virtually a reenactment of the law of 1905 so far as the matters under consideration are concerned except as to the rates of taxation and amounts of exemption, and also contemplates the including of the gift and the bequest as a single entity. The situation then is as suggested by Justice Olney, as if the legislature had entered into an agreement with Mrs. Potter providing, first, that the gift should be taxed at a certain amount; second, that the tax upon future legacies should be computed by adding those legacies to that gift, and, third, that the rate of tax upon such legacies should be three per cent in the event that such legacies did not exceed $150,000. Subsequently the legislature enacts a law which provides, first, for an increased rate of tax upon the gift without expressly providing for the case of a gift made under the *Page 95 law of 1905, the new law also providing that the gift and legacy should be considered together as an entity for the purpose of fixing the rate of tax to be paid upon the entity; third, providing that the rate paid upon the bequest should be twelve per cent instead of three per cent. There is no question as to the right of the legislature to increase the tax upon the legacy. If at the time the gift was made there was no obligation to pay a tax thereon, as was the case inHunt v. Wicht, supra, it should no doubt be said that the attempt to increase the tax to the son upon a legacy under a law subsequently enacted would be an invalid attempt to penalize the son because he had received a non-taxable gift. Where, however, at the time of the gift it is not only taxable, but also as a part of the taxation scheme it was provided that it should be included in the entire estate received by the donee for the purpose of fixing the tax payable by him, the increase of the rate of tax upon the legacy resulting from this system of estimating the tax would amount to no more than an increase of the rate upon the legacy. I think this is a legitimate argument tending to show the purpose and to illustrate the power of the legislature, and particularly as indicating that there is no injustice in including in the entity to be taxed all of the estate received by the person taxed which is subject to the tax.
I have thus endeavored to ascertain the intention of the legislature in enacting the law of 1913 with reference to gifts, and have concluded that taking the act by its four corners, it was the intention of the legislature to include such gifts in the taxable unit at death where other property is left by will or inheritance. I find no recognition by the legislature in the law of 1913 of the difference between transfers made before and those made after the passage of the law, and hence must refer the distinction in classification to the constitution, which protects vested rights instead of to the inheritance tax laws, which apparently ignore them.
It is suggested that rules of construction aid in the proper interpretation of the law of 1913; first, that laws, if possible, should be interpreted so as to conform to constitutional restrictions, even if it requires a strained construction of the language of the statute rather than to impute to *Page 96 the legislature an attempt to violate the constitution; second, that tax laws should be construed strictly in favor of the property holder. A brief consideration of these propositions is desirable.
With reference to the first rule it should be observed that the case of Hunt v. Wicht, supra, holding that the legislature was powerless to impose a tax upon conveyances that were not taxable when made, was rendered in January, 1917, and even then it was conceded in that case for the purpose of the decision that section 2 of the law of 1905 applied ex vi termini to transfers made and title vested before the passage of the act. Immediately after that decision the legislature then in session passed a new inheritance tax law (Stats. 1917, c. 589, p. 880), expressly providing for the taxation of the entire estate passing to a single person as a unit. The provision is as follows (p. 883): "(9) When more than one transfer within the meaning of any of the preceding subdivisions of this section has been made, either before or after the passage of this act, by a decedent to one person, the tax shall be imposed upon the aggregate market value of all of the property so transferred to such person in the same manner and to the same extent as if all of the property so transferred were actually transferred by one transfer."
The decision in Estate of Felton, supra, wherein it was held that the tax rate to be applied to a gift was that in force at the time of the gift was not decided until December 12, 1917, after the legislature of 1917 adjourned, although pending for decision during the legislative session. Thus, the question of the right to tax a gift made at a time when there was no tax, or at a new rate when there was a provision for a tax on the transfer in force at the time the transfer was made, was not decided until long after the statute of 1913 was enacted. Under these circumstances it seems to be the rational method of construction to take the legislation under consideration at its face value to determine its meaning from its context and then apply the constitutional restrictions necessary to protect the property owner in his vested rights. The law of 1913 was passed at a time when the constitutional questions involved in inheritance tax matters were in grave doubt, and in actual litigation between the officers of the state and those from whom it was *Page 97 sought to collect such taxes. The legislature, under these circumstances, made the following declaration in section 25 of the law of 1913:
"Sec. 25. If any section, subsection, sentence, clause or phrase of this act is for any reason held to be unconstitutional, such decision shall not affect the validity of the remaining portions of this act. The legislature hereby declares that it would have passed this act, and each section, subsection, sentence, clause and phrase thereof, irrespective of the fact that any one or more other sections, subsections, sentences, clauses or phrases be declared unconstitutional."
If this declaration has any value at all in construing the statute it certainly amounts to this much: "If the courts declare this act unconstitutional as applied to gifts made before its passage, either as to taxability or rate, we nevertheless declare that our plan of taxation of the estate as an entity, a single unit, shall still be applied in fixing the rates upon property passing after the passage of this law." However, I do not particularly rely upon this clause in construing the statute, although it is apparent that this was exactly what the legislature was willing to do if the statute of 1917 (sec. 2, subd. 9) is any criterion. Although I do not rely upon either the subsequent act of 1917 or section 25,supra, in arriving at any conclusion, they show the difficulties of applying general considerations of justice or policy or strict construction in determining the intent of the legislature as to the method of taxing bequests, or the rate thereon, where there is a previous gift. I conclude on this branch of the subject that there is no room for the application of the rule of strict construction to the plain language of the statute, for there is no doubt as to its meaning, and that the appellant must rely on the constitution for his protection rather than this rule of statutory construction.
I conclude, then, that the entire estate going to the beneficiary subject to an inheritance tax should be treated as an entity under the law of 1913, regardless of the fact that $850,300 worth of such estate was conveyed to the beneficiary while the law of 1905 was in effect; that the constitutional rights of the defendant as determined in Hunt v. Wicht, supra, and Estate of Felton, supra, are fully protected by deducting from the total tax so determined *Page 98 the difference between the taxes estimated on the first $850,300 under the law of 1913 and the tax upon that amount estimated under the law of 1905, and that with this deduction the appellant should be required to pay the balance of the tax so estimated. In view of the tax already paid by the appellant and of the stipulation of the parties with relation to the taxes, that the judgment should be affirmed.
The majority opinion states that to construe the law as I contend it should be construed, namely, as requiring that taxable gifts made before the passage of the law should be included in the taxable unit at death, would convict the legislature of acting upon motives of revenge or disappointment. And this is advanced as a reason for an opposite conclusion. With all due respect to my associates, it seems to me that the above-quoted provision from the law of 1917, enacted at the earliest opportunity after the decision of this court in Hunt v. Wicht, supra, is a sufficient answer to that line of reasoning, for in that act the legislature expressly did what the majority think it was inconceivable the legislature would do, under such circumstances, and what I think it clear they intended to do in the act of 1913. My own view is that the legislature of 1913 felt that it was acting in a legislative field of great difficulty, and upon questions then pending for decision in this court which might with good reason be decided for either contestant, and that in these circumstances it left to the courts the application of the very general constitutional principles protecting vested rights. That these principles are difficult of application is evident from the fact that in the first opinion of this court the majority of the justices were of the view now presented in this dissent, and that the majority after further argument, investigation, and reflection are now of the opposite opinion (two of the justices concurring in the majority opinion on the former hearing have left the court).
Section 25 of the act above quoted makes this very clear, as it attempts to make provision for the possibility of a part of the law being "held to be unconstitutional." I concede the force of the reasoning of the chief justice, but the conclusion arrived at, namely, that the legislature contemplated *Page 99 the assessment of two distinct entities at death, with two complete exemptions to the son, and with application of the basis rate to both estates, is, in my judgment, a conclusion that does violence to the legislative intent as expressed in plain and unambiguous language, and that such a conclusion is to be arrived at, if at all, only because of and only so far as required by the constitution. In other words, it is a question of the legislative power and not the legislative intent. That the legislature had power to require the property received by the appellant to be treated as an entity for inheritance tax purposes where both the gift and legacy are liable to succession taxation, is not doubted. That they so intended I think is clear.
Sloane, J., concurred.