The appellants are general legatees under the will of Josephine del Drago. Over their objection the Surrogate, in this accounting proceeding, prorated the federal estate tax equitably "among the persons interested in the estate" and ordered the executor to charge the prorated amounts against the persons so interested, including appellants. All this was in obedience to the command of section 124 of the Decedent Estate Law, applicable to this estate, since testatrix did not direct otherwise in her will. In this court there is raised by appellants only one objection to this prorating and apportionment, namely, that section 124, in so far as it directs such prorating and apportionment, is invalid as being in conflict with the "Supremacy Clause" of the Federal Constitution (Art. VI, cl. 2).
The estate of Josephine del Drago became subject at her death to a tax imposed by the United States on the estates of decedents. No one questions that the tax so imposed is a true estate tax, falling on the estate itself and payable from the estate, and is not an inheritance tax which falls on the separate shares of the estate which go to the several beneficiaries. It is an excise tax laid upon the privilege of transmitting property rights at death. (Matter of Vanderbilt, 281 N.Y. 297, 311,315.) To make this entirely clear, Congress provided (U.S. Code, tit. 26, § 826, par. [b]) that "so far as is practicable and unless otherwise directed by the will of the decedent the tax shall be paid out of the estate before its distribution." Congress never directed that the tax was to be paid out of the residuary estate and it "is not a tax upon a residue." (Edwards v. Slocum, 264 U.S. 61, 62.) Nor did Congress ever attempt to forbid the local probate courts to fix the *Page 81 final incidence of the tax by apportioning its burden among the several beneficiaries, after the executor has paid it. Indeed, there is much evidence from various sources that Congress was not at all concerned about this matter of final incidence and that its only intent was to set up a simple system whereby there should be taken out of sizable estates, before any distribution was had in those estates, a sum fixed by the federal statute. Congressman Kitchin, Chairman of the House Ways and Means Committee, said on the floor of the House in answer to a question: "We levy the tax on the transfer of the flat or whole net estate. We do not follow the beneficiaries and see how much this one gets and that one gets, and what rate should be levied on lineal and what on collateral relations, but we simply levy on the net estate. This also prevents the Federal Government, through the Treasury Department, going into the courts contesting and construing wills and statutes of distribution" (Congressional Record, 64th Congress [1916], pt. 15, p. 1942). The Senate Committee on Finance adopted this language in its own report on the bill (quoted in Matter of Hamlin, 226 N.Y. 407, at pp. 415, 416). The federal statute was, therefore, so drawn as not to control or determine the final incidence of the tax. As Circuit Judge HOUGH said in Edwards v. Slocum (287 Fed. Rep. 651, 653): "So far as the words of the statute are concerned, the United States does not care who ultimately bear the weight of this tax; it announces the sum and demands payment from the executors; if the legatees and devisees cannot agree as to the burden bearing, the state courts can settle the matter."
In affirming the decision of the Circuit Court of Appeals inEdwards v. Slocum, the Supreme Court (264 U.S. 61, 63) gave at least seeming approval to the position taken by the Attorney-General that "the distribution of the burden of taxation among the several beneficiaries is a matter of state regulation." On the same day, February 18, 1924, the Supreme Court announced its decision in Y.M.C.A. v. Davis (264 U.S. 47). There, in discussing the effect on charities, ordinarily exempt from federal taxation of the *Page 82 deduction of this federal estate tax from the residue in which the charities took a share, the Supreme Court held that the charities were not exempted from the final burden of the tax despite the fact that the statute in computing the net estate, deducted amounts bequeathed to charities. Comparing the situation of the charities with that of a beneficiary who might take under a will the first $50,000 of an estate (this first $50,000 being at that time similarly exempted in computing the net estate) the Supreme Court remarked that the legatee who took that $50,000 might ultimately have to stand his share of the Federal estate tax, "if by the law of the state, such should be its incidence" (p. 51).
We need not take time for a careful inquiry as to whether or not these expressions in the federal decisions are dicta. Dicta or not, binding on us or not, they cannot be ignored, particularly when they have been so long regarded as stating the law, and when they agree with the expressed views of the members of Congress and with the logic of the situation. Why should Congress concern itself as to the ultimate resting place of this tax? Having seen to it that the federal government's toll shall always be taken before the beneficiaries divide up the estate, having commanded the executor to pay the tax before the distribution begins, and having provided adequate penalties for his failure so to do, what matters it to Congress how local law afterwards apportions the tax among the legatees or devisees? Long before the turn of the legatees and devisees comes, the United States Collector of Internal Revenue has gotten the government's tax money and closed the books on the estate. Thus in no real or reasonable sense can it be said that a later apportionment interferes with the enforcement of the Federal Tax Law, or modifies or changes that tax.
Early in the history of the federal statute, and before New York State had an apportionment statute, this court held that the executor was bound to charge the whole federal tax to the residue, as the state law then stood. (Matter of Hamlin,226 N.Y. 407; certiorari denied, *Page 83 250 U.S. 672.) This decision does not rest on any federal statute directing that the tax be charged finally, or in the first instance, upon the residue, for there is no such statute. The federal statute says only that the tax "shall be imposed upon the transfer of the net estate" (U.S. Code, tit. 26, § 810) and that "so far as is practicable and unless otherwise directed by the will of the decedent the tax shall be paid out of the estate before its distribution" (U.S. Code, tit. 26, § 826). From these statutory provisions directing the executor to pay the tax to the Collector out of the net estate before distributing it, it follows mathematically, in most estates, that the original source of payment is the residue of the estate. It is quite a long jump from that interpretation of the "net estate" provision in the federal statute, to the position, here taken by appellants, that the statute somehow amounts to a prohibition against any prorating of the tax by a state among beneficiaries after it has been paid to the United States out of the residue.
Even without a state prorating statute, there are cases where, mathematically, the tax cannot be paid out of the residue, but must be charged immediately on the several bequests or devises. Suppose a case where there is no residue, as where the general legacies equal or exceed the actual net estate. In such a case the executor, paying the federal tax from the "net estate," is in fact deducting it from the amount available for the general legacies. Would he then not have to prorate it against those legacies, whether or not any statute so directed?
The Hamlin case (supra) and the later cases of Farmers'Loan Trust Co. v. Winthrop (238 N.Y. 488) and Matter ofOakes (248 N.Y. 280) held, we have seen, that under the statutes as they then stood the tax was ordinarily a charge upon the residue, "primarily at least" (Oakes opinion at p. 282). The resulting situation had its difficulties. The New York State Commission to Report Defects in the Law of Estates, which included among its members some of the recognized experts in the field, reported as follows in 1930: "Experience has demonstrated that in most estates the residuary legatees are the widow, children, or nearer and *Page 84 more dependent relatives. This has been one of the objections to the Federal Estate Tax Law in New York. The burden of the tax has been imposed upon the residuary legatees not only as to the property passing under the will, but also upon transfers whether by gift or inter vivos trust, or other form of transfer taking effect at death. These transfers are included in both the Federal Estate Tax Law and under the proposed New York State Estate Tax Law as subject to taxation. Thus the residuary legatees have been compelled to pay the entire estate tax, including the tax assessed on testamentary transfers and those taking effect at death." (Combined Reports of Commission to Investigate Defects in Laws of Estates [1928-1933], Reprint ed., p. 338.) The Commission then proposed what is now section 124 of the Decedent Estate Law, to provide statutory authority for the equitable apportionment of the estate taxes, both federal and state, citing as authority for the legality of such an apportionment statute, Edwards v.Slocum (supra).
Section 124, so proposed, was enacted by the Legislature and became effective in 1930. At least one other state, Pennsylvania, has a similar prorating statute (Pennsylvania Stat. Annotated [Purdon], tit. 20, § 844), passed in 1937. So far as appears, no court, state or federal, has ever held that a state is without power to pass such an act. The constitutionality of section 124 as against other claims of invalidity was upheld by this court inMatter of Scott (274 N.Y. 538; certiorari denied,302 U.S. 721). In that case there was not advanced at all the theory of unconstitutionality for which appellants here contend, i.e., that section 124 is in conflict with the so-called Supremacy Clause of the United States Constitution (Art. VI, cl. 2).
We do not find here any such interference by the state with the federal taxing power, or any attempt by the state statute to assert supremacy. We see no possible conflict between the command of the federal estate tax statute that, unless otherwise directed by the will, the tax be paid out of the net estate and the provision of section 124 that, unless otherwise directed by the will, the tax be *Page 85 apportioned. We have shown, above, that the interest and activity of the United States ceases when the executor has paid the tax, that the federal statute not only does not make the tax a non-transferable charge on the residue, but does not command payment from the residue at all. How then can there be any conflict? Surely appellants are not claiming that the field of estate taxation is one altogether sacred to the federal power, or that it is one of those fields from which the states are excluded, once Congress has entered in. Both the national and the state governments have power to impose such taxes (Snyder v.Bettman, 190 U.S. 249). The power of Congress so to legislate is not superior to that of the State Legislatures: "* * * in considering the power of Congress to impose death duties, we eliminate all thought of a greater privilege to do so than exists as to any other form of taxation, as the right to regulate successions is vested in the States, and not in Congress" (Knowlton v. Moore, 178 U.S. 41, 58). Having in fullest measure the power of "regulating the manner and term upon which property real or personal within its dominion may be transmitted by last will and testament, or by inheritance" (Mager v.Grima, 8 How. [U.S.] 490, 493), a state, it would seem, may enact any reasonable measure to control such transmittal at death, by the levying or apportionment of taxes. So complete is the state's power in this respect that it may impose such a tax on the United States of America itself, when the United States is a legatee (United States v. Perkins, 163 U.S. 625, 627) and may tax an estate or a legacy consisting entirely of United States bonds, although the bonds were issued under a federal statute declaring them to be exempt from state taxation in any form (Plummer v. Coler, 178 U.S. 115). Our conclusion that the Congress has not attempted to restrain the states from fixing the final incidence of this federal estate tax, is strengthened by the authorities just cited which go far toward holding that such an attempted restraint by the Congress on the states would be an invasion of the state's power to regulate the manner and term of transmitting property by will or inheritance. *Page 86
Finally, there is a strong presumption in favor of a state statute, that it conforms to, and does not conflict with, the Federal Constitution. "Doubts on this point are to be resolved in favor of, and not against, the State" (Corporation Commission v. Lowe, 281 U.S. 431, 438). Practical considerations impel us to the same result. Why should we strain to hold this statute unconstitutional, when in so holding, we produce a result which the testatrix plainly did not intend? The will here, carefully drawn and disposing of a large estate, was made in 1934, four years after section 124 went into effect. Testatrix and her advisers are presumed to have known and must have known that, by the terms of section 124, she could, by inserting a few words in her will, forbid apportionment of the estate taxes and command their payment from the residue. She chose not to do so. We should not do it for her.
The order of the Surrogate should be affirmed, with costs against appellants.
FINCH, LEWIS and CONWAY, JJ., concur with RIPPEY, J.; DESMOND, J., dissents in opinion in which LEHMAN, Ch. J., and LOUGHRAN, J., concur.
Order reversed, etc. (See 287 N.Y. 764.)