In Re the Transfer Tax Upon the Estate of Hazard

We are of the opinion that the income tax payable to the United States government should have been deducted in determining the value of Frederick Rowland Hazard's estate subject to the transfer tax. The Federal Income Tax Law applicable to this estate is title I of the act of September 8th, 1916 (39 Statutes at Large, 1000), as amended by title XII of the act of October 3d 1917. This provides for an annual tax upon the entire net income received in the preceding calendar year from all sources by every individual in the United States.

Regulation No. 33 governing the collection of the income tax imposed by the act of September 8th, 1916, as amended, provides by article IV, paragraph 23, as follows:

"Executors and Administrators: — If the net income of a decedent from January 1 to the date of his death within that year was $1,000 or over, if unmarried, or $2,000 or over, if married, a return for such decedent must be made by the executor or administrator, and such executor or administrator may claim all deductions and exemptions to which the decedent would have been entitled under the law."

The income from January 1st, 1917, to February 27th of the same year was a fixed and determined amount subject to no change. It was in the hands of the executors. By act of Congress it was taxable and the tax was levied directly upon the estate or this amount of income constituting part of the estate. In 1918 the executors would be called upon to pay it. For and in behalf of the deceased whom they represented they were obliged by the provisions of the above law to make a return to the Federal government showing the amount of this net income.

The tax is against the citizen and resident personally. The owner is taxed with reference to the income. As he, by reason of his death, cannot make a return his executors into whose hands his estate has come must do so. (Brady v. Anderson, 240 Fed. Rep. 665.)

The tax due the United States government upon the income received during the two months mentioned and payable in 1918 is not unlike any other debt or claim against the deceased which may not be due at the time of his death. In ascertaining the value of the estate for the purpose of the transfer tax, debts owing by the deceased are to be deducted. (Matter of Westurn, 152 N.Y. 93,100.) The tax is upon that property only passing to the persons mentioned in the statute. Amounts due creditors do not pass by will or intestacy and are not within the provision of the law. (Matter of Gihon, 169 N.Y. 443.)

This tax was a charge upon the income of Frederick Rowland Hazard, payable by him, but which, because of his death, his executors paid for him. It reduced the amount of his property transferred by his will.

This case is distinguishable from those cited by the respondent. In Matter of Sherman (179 App. Div. 497; affirmed,222 N.Y. 540) it was held that the Federal estate tax imposed by the United States Revenue Act of September 8, 1916, should not be deducted in determining the net taxable estate of the decedent subject to transfer tax. To the same effect is Matter ofBierstadt (178 App. Div. 836). The Federal tax, however, was not upon the estate of the deceased and under the Federal Constitution could not be. It was not a tax upon the property transferred, but a tax upon the transfer itself, the amount of the tax being measured by the value of the property affected by the transfers. The transferee took the full amount coming by will or distribution less, however, the tax imposed upon his share or right to take his share. The fact that the amount was payable by the executors before distribution did not and could not change the nature of the tax. It is for this reason that no deduction was made in ascertaining the transfer tax. No Federal charge was made upon decedent's estate. The same reason applies to Matterof Freund (143 App. Div. 335; affirmed, 202 N.Y. 556). The owner of lands died after they had been assessed for the purpose of taxation, but before the tax had been levied. It was held that the assessment created no indebtedness which could be deducted under the Transfer Tax Law; until the tax had been levied no legal charge could rest upon the estate, or become a lien upon the property. The rate even was not ascertained until after the owner's death. This is very different from a charge directly created by act of Congress payable at a fixed rate.

The amount, therefore, of $10,698.68 income tax paid to the United States government for the months of January and February, 1917, must be deducted from the gross estate of the decedent in fixing the transfer tax.

We are likewise of the opinion that the income of $142,742.46 earned and received upon the distributive share of Frederick Rowland Hazard in the estate of his father after February 27, 1917, should not be included in the property subject to the transfer tax.

Taxable transfers are defined by article X of the Tax Law. It is there stated that a tax shall be imposed upon the transfer by will or the intestate laws of any property from a person seized and possessed thereof to the persons mentioned in the statute. The tax is upon the clear market value of the property possessed at the time of death. It is due and payable at the time of the transfer which is also the time of death (§ 222). The amount of the tax is not affected by an increase or decrease in the value of the estate between the date of death and its subsequent distribution. (Matter of Vassar, 127 N.Y. 1; Matter ofPenfold, 216 N.Y. 163.)

When Frederick Rowland Hazard died, February 27th, 1917, he was entitled to a two-sevenths share of his father's estate. There had been no accounting and no distribution. He was entitled to an accounting and to distribution, and this right passed to his executors. It was in the nature of a chose in action. It was property not yet reduced to possession. The transfer tax while due and payable could not be ascertained because it had not yet been determined what Frederick Rowland Hazard was to receive. By December 1st, 1917, the estate of Rowland Hazard was ready to make distribution and paid to the estate of Frederick his two-sevenths share amounting to $2,025,675.87. In this amount, however, was included $142,742.46, received by the Rowland Hazard estate after Frederick's death. Of this amount he certainly was not possessed at the time of his death. Even the estate of Rowland Hazard had not then received it. It was in the process of earning or accumulation and was paid up to December 1st, 1917. If the date of Frederick's death is to be taken as the time for valuing his estate for the purpose of taxation it is difficult to understand how income thereafter received can be included as property possessed by him at the time of his death.

Where the personal estate of a deceased amounted to about $2,000,000 and at the time of appraisement had been increased by interest on investments in the amount of $150,000 it was held that this increase or interest was not property of which the testator was seized or possessed at the time of his death. (Matter of Vassar, supra.)

All must recognize that an appraisement cannot take place immediately after death and that some months may elapse before it can be made, but the value of the estate appraised is, nevertheless, to be taken as of the date of death.

The value of Frederick Hazard's distributive share in his father's estate could not be ascertained or appraised until paid and distributed. The appraisement and payment of the tax were thus postponed, but the amount of it was not to be affected by the delay in making distribution or in settling the father's estate. The value as paid over at the time of distribution may be assumed to be the value of the distributive share to which Frederick was entitled at the time of his death. Where, however, it appears that the amount includes subsequent earnings or interest such assumption is unjustified. From the amount distributed must be deducted the income acquired after death.

Matter of Clinch (99 App. Div. 298; affirmed, 180 N.Y. 300), upon which much reliance is placed by the respondent, merely determines that an interest in another estate not distributed at the time of death is taxable when paid. It fixes the time for ascertaining the amount of the transfer tax, but does not determine what that amount shall be. The question here presented was not raised in that case.

For the reasons here stated the orders must be reversed so far as appealed from, with costs.

HISCOCK, Ch. J., CHASE, COLLIN, CARDOZO, POUND and ANDREWS, JJ., concur.

Orders reversed, etc.