Wecker, Theodore S.

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St. John's University School of Law

St. John's Law Review Volume 6 Number 2 Volume 6, May 1932, Number 2 Article 29 June 2014 Inheritance Taxation--Intangibles--Determination of Situs--Constitutional Law Theodore S. Wecker Follow this and additional works at: https://scholarship.law.stjohns.edu/lawreview Recommended Citation Wecker, Theodore S. (1932) "Inheritance Taxation--Intangibles--Determination of Situs--Constitutional Law," St. John's Law Review: Vol. 6 : No. 2 , Article 29. Available at: https://scholarship.law.stjohns.edu/lawreview/vol6/iss2/29 This Comment is brought to you for free and open access by the Journals at St. John's Law Scholarship Repository. It has been accepted for inclusion in St. John's Law Review by an authorized editor of St. John's Law Scholarship Repository. For more information, please contact selbyc@stjohns.edu. TAX COMMENTEditor-THEoDoRE S. WECKERINHERITANCE TAXATION-INTANGIBLES-DETERMINATION OFSITUS-CONSTITUTIONAL LAw.-"A constitution states or ought tostate not rules for the passing hour, but principles for the expand-ing future." I Thus, in the interpretation of due process, "the mean-ing of today is not always the meaning of tomorrow." 2 A strikingdemonstration for this theorem may be derived from the trend, evi-denced in recent Supreme Court decisions,3 to construe the dueprocess clauses so as to do away with "the evils of multi-state taxa-tion" 4 of the same economic interest, resulting in the overthrow offairly definite preconceptions about the operation of the FourteenthAmendment on jurisdiction to tax intangibles. 5The first indication of the scope of the changes to be wroughtby the Farmers Loan and Trust Co. case 1 and subsequent decisionsof the Supreme Court 7 was the decision in Safe Deposit & TrustCo. v. Virginia,8 where the court held that intangibles having a per-manent situs are taxable in that state. A trust having been estab-lished in Virginia, the beneficiaries being domiciled in Maryland andhaving no control over the corpus, the court held that the trust hadacquired a situs in Virginia and that the Fourteenth Amendmentcould be applied to a decision of the case.9 Although Justice Stone'CARDOZO, NATURE OF THE JUDICIAL PRocEss (1921) p. 83.*Ibid. at 84.'Safe Deposit and Trust Co. v. Virginia, 280 U. S. 83, 50 Sup. Ct. 59(1929); Farmers Loan and Trust Co. v. Minnesota, 280 U. S. 204, 50 Sup.Ct. 98 (1930), (1930) 4 ST. JOHN's L. Rlv. 322; Baldwin v. Missouri, 281U. S. 586, 50 Sup. Ct. 436 (1930), (1930) 5 ST. JOHN'S L. RFv. 136; Beidlerv. So. Carolina Tax Comm., 282 U. S. 1, 51 Sup. Ct. 54 (1930), Note (1930)5 ST. JOHN's L. REv. 288; Susquehanna Power Co. v. State Tax Comm., 283U. S. 297, 51 Sup. Ct. 436 (1931), Note (1931) 6 ST. JOHN'S L. REV. 173,175; First National Bank of Boston v. State of Maine, 52 Sup. Ct. 174 (1932).'See Note (1928) 28 COL. L. ZEv. 806; Note (1930) 43 HARV. L. REV.641. The writers enumerate the serious difficulties and burdens of multiplestate taxation, and propose legislative reform.See Mason, Jurisdiction for the Purpose of Imposing Inheritance Taxes(1931) 29 MIcE. L. REv. 324; Lowndes, Bases of Jurisdiction in State Taxa-tion of Inheritances and Property (1931) 29 Micr. L. REv. 850, 851. For ahistory of the development of the vexatious problems of jurisdiction to taxpersonal property, see Beale, The Exercise of Jurisdiction in Rein to CompelPayment of a Debt (1913) 27 HARV. L. Rxv. 107; Beale, Jurisdiction to Tax(1919) 32 HARv. L. Rv. 587; Powell, Extra-territorial Inheritance Taxation(1920) 20 COL. L. Rav. 1.'Supra note 3.7Supra note 3.'Supra note 3.' Safe Deposit & Trust Co. v. Virginia, supra note 3 at 93, 50 Sup. Ct. at 61:"Here we must decide whether intangibles-stocks, bonds-in the hands of theTAX COMMENTconcurred in the result, he did not agree with the reasoning of thecourt,10 thus definitely foreshadowing the forthcoming split in theunity of the Supreme Court on the question of multiple statetaxation."A radical change in the law of taxation was effected when theSupreme Court in the Farmers Loan and Trust Ca. case 12 held thatan inheritance tax could be assessed against a debt only at the domicileof the creditor, and not at that of the debtor. 13 Following this case,the Supreme Court denied Missouri the right to levy an inheritancetax upon the transfer of bonds and promissory notes physically pres-ent in Missouri at the time of the non-resident owner's death, or uponcredits for deposits in Missouri banks owned by her at the time ofher death. 14 In other words, the mere presence of a promissorynote or a bond, which represent mere symbols and not the tangibleproperty, did not alone confer jurisdiction to tax. In Beidler v.South Carolina Tar Comm.,"' the court held that the mere fact thatthe debtor was domiciled within the state gave it no jurisdiction toimpose an inheritance tax upon the transfer of the debt from a de-cedent who was domiciled in another state, overthrowing the theorythat a state could exact a quid pro quo in a form analogous to aprivilege tax for the protection accorded to the debt.'0 In this case,as well as in. the cases of Fdrmers Loan and Trust Co. v. Minnesotaand Baldwin v. Missouri, the court explicitly refused to rule on thelegal title with definite taxable situs at its residence, not subject to change bythe equitable owner, may be taxed at the latter's domicile in another state.We think not.""° Safe Deposit & Trust Co. v. Virginia, supra note 3 at 95, 50 Sup. Ct. at 61,Justice Stone in his concurring opinion said: "I concur in the result. * * *But the question whether the Fourteenth Amendment forbids a tax on thebeneficiaries, * * * seems to me not to be presented by the record, and so ***ought not to be decided."' In the Farmers Loan and Trust Co. case, supra note 3, Justices Holmesand Brandeis dissented; in Baldwin v. Missouri, supra note 3, Justices Holmes,Stone and Brandeis dissented; in the decision of Beidler v. So. Carolina TaxComm., supra note 3 at 10, 51 Sup. Ct. at 55, Justice Holmes wrote: "Thedecisions of last term cited by the Chief Justice seem to sustain the conclu-sion reached by him. Therefore, Mr. Justice Brandeis and I acquiesce, with-out repeating reasoning that did not prevail with the court"; in First NationalBank of Boston v. State of Maine, supra note 3, Justices Holmes, Stone andBrandeis dissented.'Supra note 3." For a discussion of the interstate economic factors involved in allowingeither creditor or debtor states to tax, see Lowndes, supra note 5 at 878 et seq.;Rottschaeffer, Power of the States to Tax Intangibles (1931) 15 MINN. L.REv. 741."4 Baldwin v. Missouri, supra note 3.' Supra note 3."Mason, mpra note 5 at 338: "Jurisdiction no longer may be tested onlyby an inquiry whether the state renders an equivalent to the taxpayer by fur-nishing a law governing or controlling the transfer, but the scheme of inheri-tance taxation adopted by many of the states of the Union must be revokedto conform to a new doctrine that due process of law prohibits the exactionof more than one tax in return for the privilege incident to the transfer."ST. JOHN'S LAW REVIEWquestion of whether intangibles, having acquired a business situs ina state, are to be taxed in the domestic or foreign state,17 and it isbecause of the caveat contained in the reservation of this questionthat great uncertainty exists as to the law involved.' 8For the last sixty years,19 it had been undisputed that corporatestocks owned by non-residents were taxable at the domicile of thestockholder 19a and also at the domicile of the corporation, 9 b and thisdoctrine had been restated during the last decade. 20  Whether thetrend shown by the recent Supreme Court decisions 21 implied anegative upon the jurisdiction of the state of incorporation was aquestion which admitted of much doubt,22 and the situation wasfurther complicated by the decision of the Supreme Court in thecase of Susquehanna Power Co. v. State Tax Comm.23  However,the issue was squarely met in First National Bank of Boston v. Stateof Maine,24 and was decided in favor of the stockholder's domicile,a decision which was in accord with the thoughts of writers.25 Inthe same manner that the situation before Farmers Loan. and Trust1 Farmers Loan and Trust Co. v. Minnesota, supra note 3 at 213, 50 Sup.Ct. at 101; Baldwin v. Missouri, supra note 3 at 594, 50 Sup. Ct. at 438;Beidler v. So. Carolina Tax Comm., supra note 3 at 8, 9, 51 Sup. Ct. at 55.'Beale, The Exercise of Jurisdiction in Rem to Compel Painnent of aDebt, siprn note 5 at 107, 113, contending that the assignment of a situs to adebt is a fiction. See also Carpenter, Jurisdiction over Debts for the Purposesof Administration, Garnishment, and Taxation (1918) 31 HARv. L. REv. 905;Moore, The Doctrine of the Federal Courts as to the Situs of Personal Prop-erty for Purposes of Taxation (1927) 14 VA. L. REv. 31. For a critical anddetailed analysis of the problem here involved, see Powell, The Business Situsof Credits (1922) 28 W. VA. L. Q. 89."' Tappan v. Merchant's National Bank, 19 Wall 490 (U. S. 1873).a Hawley v. Malden, 232 U. S. 1, 12, 34 Sup. Ct. 201, 202 (1914)."b Corry v. Baltimore, 196 U. S. 466, 472, 25 Sup. Ct. 297, 298 (1915).' See Frick v. Pennsylvania, 268 U. S. 473, 45 Sup. Ct. 603 (1925) ; In reHallenback's Estate, 231 N. Y. 409, 132 N. E. 131 (1931) ; Benson v. State,236 N. W. 626 (Minn. 1931).' Supra note 3.' Lowndes, Bases of Jurisdiction in State Taxation of Inheritances andProperty, supra note 5 at 893: "The restriction of jurisdiction to tax sharesof stock to the stockholder's domicile seems desirable. However, jurisdiction to atax where the corporation is incorporated is so firmly imbedded in the practiceand divisions on the subject that little short of judicial dynamite can effectthe change."'Supra; note 3. The Maryland Court of Appeals had asserted that sinceMaryland had power to create the corporation, it could fix the situs of thecorporate shares within the state. Susquehanna Power Company v. State TaxComm., 159 Md. 334, 151 Atl.. 29 (1930). The Supreme Court, while it af-firmed the decision of the State Court, did not affirm its reasoning, but dealtwith the question as one involving the distinction between tax subject and taxmeasure. For a discussion of the problem of tax subject and. tax measure,see Isaacs, The Subject and Measure of Taxation (1926) 26 COL. L. REv. 939.'52 Sup. Ct. 174 (1932).' Supra note 22; Rottschaeffer, Power of States to Tax Intangibles, supranote 13 at 749 et seq.: Beale, Jurisdiction to Tax ,supra note 5 at 602; Note1925) 38 HARv. L. REv. 809, 811, 815; Note (1926) 39 HARV. L. REv. 485;00DRICH, CONFLICT OF LAWS (1929) 92.TAX COMMENTCo. presented the vexatious possibility of four jurisdictions taxingthe transfer of credits and bonds,26 a problem which was solvedby that decision, so the Firqt National Bank v. Maine case deter-mines which of five possible jurisdictions shall tax the inheritanceof a share of stock.27In this case, Maine sought to levy an inheritance tax uponproperty consisting of shares of stock in a Maine corporation, whichhad most of its property in that state. Maine, allowing as a creditthe tax for which Massachusetts, the state of testator's domicile, hadalready made his estate liable by a statute akin to that of Maine,brought an action of debt for the balance. Applying the maximmobilia sequentur personant, the Supreme Court denied Maine theright to tax the property, restricting the right of taxation to thestate where the owner of the shares had been domiciled. The court,reaffirming most strongly its determination to obviate multi-statetaxation, stated:"In its application to death taxes, the rule rests for itsjustification upon'the fundamental conception that the trans-mission from the dead to the living of a particular thing,whether corporeal or incorporeal, is an event which cannottake place in two or more states at the same time." 28All of the reasons which previously existed for granting to thedomicile of the corporation the right to tax 29 were swept away bythe court:"' Previous to the decision in the Farmers Loan and Trust Co. case, supranote 3, the following four jurisdictions could subject the transfer of credits andbonds to inheritance taxes: 1. The state of the debtor's domicile. Blackstonev. Miller, 188 U. S. 189, 23 Sup. Ct. 277 (1903); 2. The state wherein thenotes of a non-resident were kept for safe-keeping. Wheeler v. Sohmer, 233U. S. 434, 34 Sup. Ct. 607 (1914) ; 3. The state in which credits had a businesssitus. Bristol v. Washington County, 177 U. S. 133, 20 Sup. Ct. 585 (1900) ;Met. Life Ins. Co. v. B'd of Assessors, 221 U. S. 346, 31 Sup. Ct. 550 (1911) ;see Powell, The Business Situs of Credits, supra note 18; 4. The creditor'sdomicile. That the only state entitled to tax should be that of the creditor'sdomicile was argued by Beale, Jurisdiction to Tax, supra note 5 at 587; Dennis,Notes on Some Recent Supreme Court Cases Relating to the Situs of In-tangible Property for Purposes of Taxation (1915)' 15 COL. L. REv. 377, 381;GOODRICH, supra note 25 at 110.' Lowndes, Bases of Jurisdiction in State Taxation of Inheritances andProperty, supra note" 5 at 890 et seq., discusses the following possibilities ofjurisdiction: 1. The domicile of the stockholder, see Hawley v. Maiden, supranote 19a. 2. The domicile of the corporation, see Corry v. Baltimore, supra note19b. 3. The presence of the corporate property. This possibility was negated byRhode Island Hospital Trust Co. v. Doughton, 270 U. S. 69, 46 Sup. Ct. 256(1926). 4. The presence of the stock certificates. This was negated byBaldwin v. Missouri, supra note 3. 5. The presence of the transfer office. SeeMasury v. Arkansas Nat. Bank, 87 Fed. 381 (W. D. Ark., 1898).'First Nat. Bank of Boston v. Maine, supra note 24 at 176, 177.1 Among the arguments that have been advanced is the distinction betweenstocks and bonds; while bondholders are creditors, the bond merely existing asa symbol, the stockholders own undivided interests in corporate property.ST. JOHN'S LAW REVIEW"A distinction between stocks and bonds for the essentiallypractical purposes of taxation is more fanciful than real.Certainly, for such purposes, the differences are not greaterthan the differences between tangible and intangible prop-erty, or between bonds and credits. When things so dis-similar as bonds and household furniture may not besubjected to contrary rules in respect to the number ofstates which may tax them, there is a manifest incongruityin declaring that bonds and stocks, possessing for the mostpart the same or like characteristics, may be subjected tocontrary rules in that regard." 30The court points out that "the reciprocal inheritance statutesnow in force in a preponderating number of states of the Unionmake no distinction between the various classes of intangible per-sonal property." 31The chain of decisions fixing one situs for the taxation of in-tangibles, that situs being the domicile of the owner, seems now tobe almost complete. The last link will have been added when thecourt considers the situs of intangibles which have been given bythe owner a business situs in a state other than that of the owner'sdomicile, the lack of agreement among the members of the court mak-ing this an extremely speculative question. Even if complete pro-hibition of multi-state taxation be taken as already achieved, thereremains the question of how the court will determine future caseswhich may present the problem of whether a single economic interestis presented for review, and whether some single economic interestsmay be treated as supporting a series of legally recognized intereststherein. 2THEODORE S. WECKER.STATE TAXATION-INTERSTATE PEDDLING.From early times in England and America there have been stat-utes regulating the occupation of itinerant peddlers and requiringDEWING, FINANCIAL POLICY OF CORPORATIONS (1929) c. I. Another argu-ment is that the state, having created the corporation and protected it, itshould be allowed to tax its own creature.'o Supra note 24 at 177.' Ibid. at 177, citing the GEN. LAWS OF N. Y. 1930, Sec. 249-m (g) whichincludes "deposits in banks, mortgages, debts, receivables, shares of stock,bonds, notes, credits, evidences of an interest in property, evidences of debt,and choses in action generally." (Italics ours.)'This problem is analyzed very closely by Rottschaeffer, Power of theStates to Tax Intangibles, supra note 13 at 748 et seq.

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Inheritance Taxation--Intangibles--Determination of Situs--Constitutional Law

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