State Board of Equalization v. Fall

The opinion of Mr. Chief Justice Adair holds that the mining property operated by the partnership was owned by the individual members of the firm and that therefore it is tangible property, real and personal, that passed by the death of David Perry, and not an interest in a partnership, which the Supreme Court of the United States has held to be "an intangible," within the purview of inheritance tax laws. The opinion of the Court by Mr. Justice Angstman, concurred in by Mr. Justice Metcalf and by Mr. Justice Choate, holds that the property was the property of the partnership, but that the interest of David Perry in the partnership, passing by his death, is not an intangible. The Court's opinion refuses to follow the holding of the United States Supreme Court, declares the judgment of that court is wrong, and holds that such a partnership interest is tangible property. With the opinion of the Court that the property operated by the partnership was partnership property, I agree. From the opinion and holding that the interest of David Perry in the partnership was not an intangible interest, I dissent.

To hold that the property was not owned by the partnership is, in my view of the record, impossible and directly contrary to the realities and the record. True the deed from Perry-Schroeder Mining Company, Inc., a Montana corporation, conveyed the property to the named grantees, reciting the share of each grantee named therein.

The grantees in the deed were the partners in the partnership of Perry-Schroeder Mining Company, and their interests in the firm were in the same shares as designated in the deed of the real property. Under the law as it was when this conveyance was made, it was the rule, generally held, that title to partnership real estate could not be held in the partnership name. This, because the partnership was not considered as a legal entity. Rockefeller v. Dellinger, 22 Mont. 418, 56 P. 822, 74 Am. St. Rep. 613. Also see note and cases cited in 1 A.L.R. 564. The Montana statute then in force did provide, however, that "property, whether real or personal, acquired with partnership funds, is presumed to be partnership property." Sec. 7988, Rev. Codes of Montana 1935.

For the evident reason that a partnership could not take title in the firm name, the conveyance of the property was to the individual partners. This was the usual and accepted manner of taking and holding partnership real estate. Now, however, the uniform partnership act, which was adopted and enacted by Montana in 1947, provides that real estate may be acquired and transferred by a partnership in the firm name. Chapter 251, Montana Session Laws 1947. That the property was owned by the partnership cannot in the face of the record be gainsaid.

This leaves to be considered the nature of David Perry's interest in the partnership, and how and where devolution of that interest under inheritance tax laws shall be taxed.

The Supreme Court of the United States holds that the interest of a partner in a general partnership is a "chose in action," and that each partner has a right to an accounting and settlement of the partnership business, and, upon dissolution and accounting, to distribution of his share of the proceeds of the assets. The court specifically declares this chose in action to be "an intangible." Blodgett v. Silberman, 277 U.S. 1, 48 S. Ct. 410,414, 72 L. Ed. 749. This is the opinion the Court refuses to follow. I cannot repudiate this holding of the Supreme Court of the United States. The rule of property classification thereby stated is too well grounded in the nature of the partnership relation, and in the whole conception thereof, and is too well supported by judicial opinion and decision to permit denial of it here.

In the Silberman case the decedent was a resident of the state of Connecticut. He left real estate and personal property in Connecticut but a large part of his estate consisted of a large interest, as general partner, in the partnership of Openhym Sons, doing business in the state of New York. This partnership interest of decedent was appraised at more than one million six hundred thousand dollars. The property of the partnership consisted of real estate, merchandise, chattels and credits in the state of New York and also in Connecticut. The principal question in the case was whether the interest transferred by death of decedent in the partnership was taxable by Connecticut, the state of his domicile. The court, after quoting provisions of the New York law to the effect that the partners' right to the specific property of the partnership vests not in the partner's administrator or executor but in the surviving partner; that his right in specific property is not subject to dower and the like, all as is the law in Montana, said: "It is very plain, therefore, that the interest of the decedent in the partnership of William Openhym Sons was simply a right to share in what would remain of the partnership assets after its liabilities were satisfied. It was merely an interest in the surplus, a chose in action. It is an intangible, and carries with it a right to an accounting." The court specifically pointed out that the fact that among the holdings of the partnership there were buildings and land did not change the nature of the partner's interest in the partnership from that of an intangible to tangible property. The opinion by Chief Justice Taft was concurred in by all the members of the court, and sustained the right of Connecticut, the state of decedent's domicile, to tax the succession as that of the transfer of an intangible.

Our statute provides that "When a partnership exists between the decedent, at the time of his death, and any other person, the surviving partner has the right to continue in possession of the partnership, and to settle its business, but the interest of the decedent in the partnership must be included in the inventory, and be appraised as other property. The surviving partner must give a bond, with sufficient sureties, in favor of the executor or administrator, in a sum at least equal to the value of the interest of the deceased partner in the property of the partnership. * * *" Sec. 10261, Rev. Codes 1935. The surviving partner or partners settle the partnership affairs. They sell the property and assets of the partnership, pay the obligations thereof, the expenses, etc., and account to the administrator for what is due as the decedent's partnership interest upon their liquidation of the partnership. Mayhap the deceased partner was indebted to the firm for more than his share of withdrawals or otherwise. The entire disposition of the partnership assets rests with the surviving partners, subject to accounting to the administrator for what may be due decedent thereon. There is no provision of statute that gives to the heir of decedent any specific property of the partnership. It is clear from the statute that all that the administrator accounts for is the "interest of the decedent in the partnership." That is what is inventoried; that is what is appraised. It is no part of any specific tangible property. And even though by some agreement between surviving partners and heirs and administrator, some specific property of the partnership is not sold, or if there is property left after the surviving partner accounts to the administrator, which is divided by the surviving partners and the heirs, still the interest that passes upon the death of the partner is the "chose in action," the intangible partnership interest. No specific property of the partnership may be sold by the administrator. Only the "chose in action," the partnership interest, may be sold by him. This court on more than one occasion has stated the oft repeated and settled rule that, "The property of the partnership * * * is in no sense property of the decedent, or property to be administered as a part of his estate." White v. Prahl, 94 Mont. 345,22 P.2d 315, 316; Mares v. Mares, 60 Mont. 36, 199 P. 267.

"A partner's interest in the partnership" is declared by the Uniform Partnership Act, section 26, Chapter 251, Laws of 1947, to be "his share of the profits and surplus, and the same is personal property." While this act was passed since the instant case arose, the rule has long been the law and the act does not change it. Fourth Nat. Bank v. New Orleans C.R.R. Co., 11 Wall. 624, 20 L. Ed. 82. Thus, no matter whether the assets of the partnership consist of personal property, or real property, or both, the partner's interest therein is personal property. And it is an intangible. Long before the Silberman case the United States Supreme Court said, "It has repeatedly been determined, both in the British and American courts, that the property or effects of a partnership belong to the firm and not to the partners, each of whom is entitled only to a share of what may remain after payment of the partnership debts and after a settlement of the accounts between the partners." And, quoting from a still earlier decision, the court further said, "A party coming in to the right of a partner (in any mode, either by purchase from such partner, or as a personal representative, or under an execution, or commission of bankruptcy) comes into nothing more than an interest in the partnership, which cannot be tangible, [emphasis mine] cannot be made available, or be delivered but under an account between the partnership and the partner." Fourth Nat. Bank v. New Orleans C.R.R. Co., supra. The Circuit Court of Appeals of the First Circuit also states the rule that the partner's interest is an intangible and says: "The representative of a deceased partner does not succeed to any right to specific partnership property. In substance the deceased partner's interest, to which his representative succeeds, is a chose in action, a right to receive in cash the sum of money shown to be due him upon a liquidation and accounting." McClennen v. Commissioner of Internal Revenue, 131 F.2d 165, 167, 144 A.L.R. 1127.

The Silberman case is cited and followed in the taxation of inheritances by Oklahoma. Wootten v. Oklahoma Tax Commission,185 Okla. 259, 91 P.2d 73. No case in a jurisdiction where the rule as to partnership property is as is in Montana, holding contrary to the Silberman case and the other cases classifying a general partner's interest in the partnership as "an intangible," has been found.

Mr. Justice Angstman, writing for the majority of the Court, thinks that the court in the case of Blodgett v. Silberman "was too much concerned with the character of the property of the decedent in his own estate and not enough concerned with the character of the property passing to the heir," and he says that "Whether the property be tangible or intangible depends upon what the heir receives." The answer is, that the heir receives as an inheritance the property of decedent. If some of decedent's property consisted of intangibles that is what the heir receives. It is elementary that in contemplation of law the decedent's property vests in the heir at the time of death. At that time it was an interest in a partnership. That is what the decedent owned; that is what, at the moment of death of decedent, became vested in the heir. At the time of death, by operation of law, the transfer was made. It is that transfer that is taxed by the inheritance tax law; not any subsequent transfer, transaction, or transmutation. The fallacy of the argument contra is that it assumes the false premise that the transfer to the heir is not at the time of death, as the law declares, but at some indefinite later time after liquidation. There are one or two isolated cases that use language pertaining to "distribution" of estates that might upon casual reading lead one to think the taxable transfer is of the property "distributed" after partnership accounting has been completed and distribution of the estate to the heirs made. The "distribution" is not the "transfer." Such cases are not in point.

It was not necessary to discuss the doctrine of equitable conversion that treats real estate owned by a partnership as personalty for the purposes of the partnership. To be sure the real estate is tangible. But so is the personal property, merchandise, and supplies and what not, owned by the partnership tangible. The question here is simply the nature and character of the partner's interest in the partnership. The corporation likewise owns real estate and owns personal property. No doctrine of conversion is necessary in such case. The widow of a stockholder cannot claim dower in any part of the corporation real estate. But the widow of a partner in a firm can claim dower in any real estate of which he is possessed during coverture. So to protect partners, and creditors of the partnership, in this and other matters, equity says the partnership real estate is converted into personalty for the purposes of the firm.

The property of the partnership here involved is of course assessed and taxed in Montana, where it is situated, just as other like property in the state, whether owned by individuals, corporations, or partnerships, is assessed and taxed. It pays Montana for its protection. The tax here involved is not a property tax; it is a tax upon the transfer to the heir. Sec. 10400.1, Rev. Codes 1935; State v. Walker, 70 Mont. 484,226 P. 894. The property inherited is not the land and dredge of the partnership but the interest of the partner in the firm, an intangible. The same rule that applies in the case of a corporation owning property in Montana, applies here. The stockholder owns no specific property of the corporation. His shares therein are classified as "intangible."

Indeed, the appellant board of equalization, admits that if the property operated by the partnership was owned by the partnership, and if it was a general partnership, the deceased partner's interest therein was an intangible. In its brief appellant, referring to the partnership, says: "But if it was a general partnership, decedent's interest constituted intangible property, and Chapter 3, Laws of 1945, provides that a tax thereon ``shall not be payable' where reciprocal statutes of exemption exist, as between Montana and California, the State of decedent's residence." The board, however, says the partnership was a "mining partnership" and asserts that a different rule applies.

The opinion of Mr. Chief Justice Adair, although apparently resting on the holding that the property was owned by the individuals comprising the partnership, upon the ground that it was deeded to them as individuals, also asserts that the partnership was a "mining partnership," and therefore, even if owned by such partnership, is it not an intangible. This too is erroneous. A general partnership may, of course, be formed to engage in mining as well as any other business. That is what the record shows was done here. Further, even if it be assumed that the partnership was a "mining partnership," which it was not, the interest of the partner so long as the partnership continues is an intangible. A canvass of the matter seems required.

The Code section 8050, Revised Codes of 1935, provides that, "A mining partnership exists when two or more persons who own or acquire a mining claim for the purpose of working it and extracting the mineral therefrom actually engage in working the same." In such a partnership an express agreement to become partners or to share the profits or losses at mining is not necessary to the formation and existence of the partnership, "the relation arises from the ownership of shares or interests in the mine and working the same for the purpose of extracting the minerals therefrom." Sec. 8051, Rev. Codes 1935.

Section 8054, Revised Codes of Montana 1935, provides that, "The mining ground owned and worked by partners in mining, whether purchased with partnership funds or not, is partnership property." The statute, section 8058, further provides that no member of a mining partnership can, by a contract in writing bind the partnership except by express authority derived from the members thereof. The principal point of difference between a mining partnership and a general partnership, other than the fact that a general partnership results only from agreement of the parties, and a mining partnership results merely from the owning of a mining claim and working it and extracting the mineral from it by the owners, is that "one of the partners in a mining partnership may convey his interest in the mine and business without dissolving the partnership. The purchaser, from the date of his purchase, becomes a member of the partnership." Sec. 8055, Rev. Codes 1935.

From these provisions of the statute, which declare the rules of the common law arising from the customs of miners in the early days of discovery and development of mines, are to be seen the principal points of difference between the ordinary partnership and the mining partnership. In the former no one may be admitted to the partnership unless all the partners consent thereto, but in the latter a person who buys an interest of another in the mine and business ipso facto becomes a partner in the mining enterprise without the consent, and even against the wishes of the other partners. This absence of delectus personae in mining partnerships, and the fact that the partnership is dissolved when the partners cease to work the mine without an agreement to resume, constitute the essential difference between the two forms of association. When a mining partnership is dissolved the members owning the mine become tenants in common therein. Harris v. Lloyd, 11 Mont. 390,28 P. 736, 28 Am. St. Rep. 475.

With the few exceptions arising out of these two differences, that of the delectus personae, and of the effective cause of the dissolution, the law governing ordinary general partnerships is for the most part applicable to mining partnerships. Dellapiazza v. Foley, 112 Cal. 380, 44 P. 727. The rule that a partner is entitled to an accounting applies alike to each one of the partnerships. Hatten v. Interocean Oil Co., 182 Okla. 465, 78 P.2d 392, 116 A.L.R. 727. The right of a partner to bring suit for an accounting and for dissolution is afforded alike to the partners in both classes of partnerships. Jones v. Clark, 42 Cal. 180.

From this it is to be seen that insofar as the character of the partners' interest in the mining property is concerned, it appears to be as much an intangible as though the partnership were a general one. True, when a mining partnership is dissolved by cessation of working the mine, the owners of the mine become tenants in common of the property, but this is not in point here as it is admitted that the partnership, if a "mining partnership," was not dissolved at the time of the death of David Perry, and therefore if either a general partnership, or a mining partnership, the right of a partner in either form of association being only for an accounting and dissolution and consequent distribution of the assets after payment of debts, his right would be only a chose in action, classed as an intangible, in either case. It is not necessary, however, to decide here upon the distinction between the two forms of partnership. It is well settled that a partnership may be formed as a general partnership with its usual characteristics for the purpose of mining. There is nothing in the nature of mining to prevent an ordinary partnership from engaging therein. Congdon v. Olds, 18 Mont. 487,46 P. 261; Anaconda Copper Mining Co. v. Butte Boston Mining Co., 17 Mont. 519, 43 P. 924; Decker v. Howell, 42 Cal. 636.

Here the articles of partnership of Perry-Schroeder Mining Company contain provisions that indicate that a general partnership is what the signers of the articles had in mind. The provisions that the business of the partnership shall include "the pledging, mortgaging, exchange or sale of the partnership property" and that "the partnership shall exist so long as it has any indebtedness to Reconstruction Finance Corporation and as much longer as all the parties may desire" are statements of matters not a part of the law-created mining partnership. Especially is this true as to the agreement as to the term of existence. In a mining partnership the term expires when work upon the mine ceases without agreement to resume. Here it continues so long as a certain debt is unpaid, and "all the partners" refers to the persons who signed the articles of agreement. They may continue the partnership as long as all may desire without regard to whether the work continues or not.

But further, the record discloses that two of the partners, and the lawyer who drew the articles of partnership, testified that it was not the intention of the parties to form what is known under the statute as a mining partnership but to form a general partnership with the right of delectus personae, so as to prevent one partner selling his interest in the business and intruding into the partnership as a partner the purchaser thereof, against the wishes of the other partners. This evidence was objected to generally, and upon the ground that it was an attempt to vary, alter and contradict the terms of the written instrument by parol testimony. The objection was overruled and the evidence admitted. This ruling was correct. The evidence did not vary or contradict the terms of the writing. The writing was silent as to delectus personae. But even if it might be said to add to the writing or to vary its terms, it is to be remembered that the rule, that the terms of a written contract cannot be altered or contradicted by parol evidence, cannot be invoked either by or against a stranger to a contract and it is not applicable in a controversy between a party to the contract on the one hand and a stranger to it on the other. Nissen v. Sabin, 202 Iowa 1362, 212 N.W. 125, 50 A.L.R. 1216. And our statute provides that the parol evidence rule is only applicable "between the parties and their representatives, or successors in interest." Sec. 10517, Rev. Codes 1935; Greening v. Gazette Printing Co., 108 Mont. 158, 88 P.2d 862.

The importance of this case is not because of the comparatively small tax sum involved. True, the decision may result in the necessity of paying a double tax upon the transfer. California may hold, as it has the power and right to do, that the United States Supreme Court was right in the Blodgett v. Silberman case, 277 U.S. 1, 48 S. Ct. 410, 72 L. Ed. 749, and tax the transfer occasioned by the death of David Perry, a resident of that state. And Montana may, and by decision in this case will, also tax the transfer because the partnership property is in Montana. But even this double taxation is not so important as the implication arising from what may be considered as a repudiation of an obligation entered into with other states for the benefit of the residents of the agreeing states, by enactment of the reciprocal inheritance tax exemption laws. When we enacted the statute it constituted an agreement with the other states having like statutes. The faith and honor of the state demands that the agreement be scrupulously observed.

For some time it was ruled by the Supreme Court of the United States that taxation by more than one state of that species of property designated as intangibles, such as stocks and bonds of corporations, would constitute a violation of the Fourteenth Amendment, but the present state of the law in that regard, as announced in Curry v. McCanless, 307 U.S. 357, 59 S. Ct. 900,83 L. Ed. 1339, 123 A.L.R. 162, and State Tax Commission v. Aldrich,315 U.S. 789, 62 S. Ct. 490, 86 L. Ed. 1193, is that the state where the owner of the intangible is domiciled at the time of his death may levy an inheritance tax upon the succession thereto, and the state of the corporation issuing the stocks, bonds or securities may tax the succession; and it is also held that such intangibles may secure a business situs by being kept as a part of the owner's business in a state where such business is transacted, and be taxed therein.

It was to escape from such multiple taxation that the states have enacted these reciprocal tax exemption statutes. When Chief Justice Marshall, in McCulloch v. Maryland, 4 Wheat. 316, 431,17 U.S. 316, 431, 4 L. Ed. 579, stated as a proposition not to be denied, "that the power to tax involves the power to destroy," he perceived the potentialities of the taxing power at a time when the manner and purpose of its exercise was simple. He stated the truth as a theory. Today it is seen as a practical possibility. To him the purpose of taxation was to secure funds for the maintenance of the government and for its support in performing the functions imposed upon government by Constitution and law. He had not heard of it as a means of redistributing the wealth of the nation, nor as a weapon to be used in the competitive conflicts of economic rivalry.

The effort of the states to simplify inheritance taxation and avoid its duplicate and triplicate imposition seems to me to be right in principle, and the statute should be construed and applied in accord with the spirit and reason of its enactment.

The judgment of the district court in my opinion is correct and should be affirmed.