In Re the Appraisal Under the Transfer Tax Act of a Certain Trust Fund Held by Harbeck

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] Several years before the appearance on the statute books of this state of a Taxable Transfer Law, John H. Harbeck died, leaving a last will and testament, by which he bequeathed the sum of three hundred thousand dollars in trust, the income thereof to be paid to his wife during her life, and after her death the principal to such persons and in such proportions as she should appoint by her last will and testament; and in the event of her failure to exercise the power of appointment, it should go according to the Statute of Descents. The appointor exercised the power thus vested in her, by a will dated October 20th, 1887, and which was admitted to probate shortly after her death and on the third day of February, 1896.

The question for decision is, whether this fund is subject to tax under the Taxable Transfer Act of 1892. It is a question of no special public importance, for, since the death of the appointor, by an act which became a law April 16th, 1897, the legislature has amended § 220 of the Taxable Transfer Act so that it now expressly provides that "whenever any person or corporation shall exercise the power of appointment derived from any disposition of property made either before or after the passage of this act, such appointment when made shall be deemed a transfer taxable under the provisions of this act in the same manner as though the property to which such appointment relates belonged absolutely to the donee of such power and had been bequeathed or devised by such donee by will. * * *"

Apparently this case has no importance other than as to the parties who are interested in the determination which must be made whether this particular trust fund shall be taxed by the state. In such case the rule is said to be that where the question is involved in doubt, the doubt should be resolved in favor of the taxpayer, and against the taxing power (Matter ofFayerweather, 143 N.Y. 114), and the reason for the rule is given in Matter of Enston (113 N.Y. 174) as follows: "The tax imposed by the act is not a common burden upon all the property or upon the people within the state. It is not a general but a special tax, reaching only to special cases and affecting only a special class of persons. * * * It is a well-established rule that a citizen cannot be subjected to special burdens without the clear warrant of law."

The decision of this court in Matter of Miller (110 N.Y. 216) is authority for the proposition that the act of 1897 is entitled to consideration at the hands of the court, as a legislative declaration that the subject-matter of the new provisions did not prior thereto constitute a part of the law. In that case, the question was whether a legacy to an adopted child was taxable, the tax having been imposed in 1886, under the law as it then stood. But the legislature having a year later passed an act expressly exempting adopted children, this court, in determining whether the legacy was taxable under the law as it stood in 1886, said: "Moreover, the fact that such provision was made by the statute of 1887 (Ch. 713), and the act of 1885 amended accordingly, must be regarded as a legislative declaration that the law did not, as originally passed, embrace the provisions which the later act supplies."

The legislative declaration in this case, for it amounts to that at least, seems well founded, and we proceed at once to a consideration of the only point of difference between this court and the learned Appellate Division. That court in its opinion, and rightly, as we think, asserted the following propositions:First, that the tax sought to be imposed is not a tax upon property, but upon a right of succession. Second, that the Transfer Tax Act has no retroactive effect. Third, that the beneficiaries, whose succession is sought to be taxed, take by virtue of the will of John H. Harbeck, which went into effect in 1878, long prior to the enactment of the Transfer Tax Law. These propositions are not only well founded in reason, but they are established by authority, the first two by Matter of Swift (137 N.Y. 77), and the last by Matter of Stewart (131 N.Y. 274). The latter case but restates a rule that long ago became engrafted upon the body of the law. It is, in the language of Chancellor KENT, that "An estate created by the execution of a power takes effect in the same manner as if it had been created by the deed which raised the power. The party who takes under the execution of a power, takes under the authority and under the grantor of the power, whether it applies to real or personal property, in like manner as if the power and the instrument creating the power had been incorporated in one instrument." (4 Kent's Com. 338.) So, while the power of appointment did not take effect until after the death of Mrs. Harbeck in 1896, it was not the authority by which the beneficiaries acquired the fund. The source of their title to the fund was the original will of John H. Harbeck, which went into effect in 1877, and into that instrument must be read the names of the appointees, although designated by a later instrument. For those who take under a power of appointment, take as if their names were in the grant of the power. (Commonwealth v.Williams' Exrs., 13 Pa. St. 29, citing 2 Vesey, 61.)

In Matter of Stewart (supra) the will of the testatrix created a trust for certain purposes, and authorized the trustees, after using so much of the trust fund as should be required for the trust purposes, to appoint any part of the estate among any of the legatees in the will. The will was probated November 13, 1886, and the power was exercised January 16th, 1890, and in determining whether the sum received by one of the appointees was taxable under the law of 1885, the court reached a conclusion which cannot be more briefly stated than in its own words: "We think there can be no reasonable doubt that the appointees under the power of appointment took their interests under and by virtue of the will, and not in a legal sense under the instrument of January 16th, 1890, in execution of the power."

The three propositions to which we have adverted, standing alone, necessarily lead to the conclusion that the right of succession to the property in question is not taxable, for it passed to the beneficiaries under and by virtue of a will that went into effect long before the enactment of a Transfer Tax Law, and as that law is not retroactive, it necessarily follows that the property is not subject to the tax.

In the past, however, there have been a few cases in which the courts have been called upon to decide that while the instrument by which the power is said to be executed becomes incorporated into and forms a part of the original instrument creating the power, yet it takes effect as of the date of the execution of the power, and these cases have been laid hold of to make the final step in the transfer of the property from the testator Harbeck to these beneficiaries operate as the dominating one; the act of the appointor, instead of that of the testator, being treated as the one by which the fund is transmitted to them. In other words, notwithstanding the general rule by which a paper constituting an execution of the power of appointment becomes incorporated into the original instrument creating the power (so that the latter is given the same effect as if the names of the appointees were originally written into the instrument creating the power), it is said that the date of the original instrument is to be ignored, and that upon which the power of appointment is exercised substituted fully in its stead. If the position taken be correct, it follows that the conclusion reached, that the right of succession vested at that time, has support.

But long after the decisions in the cases relied upon by the learned judge who wrote for the Appellate Division to establish the proposition that while title is derived from the act creating the power, it takes effect as of the time of the execution of the power (Jackson v. Davenport, 20 John. 537; 2 Vesey, 61;Commonwealth v. Williams' Exrs., supra), this court had that question before it in Genet v. Hunt (113 N.Y. 158). In that case by a trust deed property was given to trustees to pay the income to a woman during her coverture, and in case of her death during coverture, to convey the property to such persons as she might direct by will. She made a will giving the property upon a trust that suspended the power of alienation during two lives in being. The question was whether this constituted a valid disposition of the property under the law against perpetuities. It was valid if the property could be regarded as her property and as transferred by her will, because then the suspension of the power of alienation was only during two lives in being, but if it was held to be the property of the grantor in the trust deed and as passing under that deed, then it was invalid, for the deed and the will taken together suspended the power of alienation during three lives, two of which were not in being when the trust deed went into effect. The court held that the trusts under the will should be regarded as having been created at the date of the trust deed, and that they were, therefore, invalid. In the course of the argument leading to the conclusion reached, the court called attention to the distinction recognized in the common law between appointments under special powers and appointments under general or absolute powers. The latter is said to exist where the owner may dispose of property in any of the forms known to the law, as where an unrestricted power to appoint a fee in lands by deed or will is given, in which case the donee of the power may at any time acquire an absolute estate by exercising the power. "And for this reason" (said the court) "the question of perpetuity arising upon limitations made by the donee of such a power is determined with reference to the date of the execution of the power and not of the instrument creating it." That constitutes an exception to the general rule which relates to special powers, as in this case, where the authority of the donee of the power is restricted to disposition by will. In such cases the rule is that "An estate created by the execution of a power takes effect in the same manner as if it had been created by the deed which raised the power."

The court further said: "We think the validity of the suspension under the will of Mrs. Riggs is to be determined by the test whether it would be valid if it had been part of a limitation under the trust deed and had been inserted therein atthe time the deed was executed," and, therefore, the court held that the trusts under the will of Mrs. Riggs, in whom was vested the power of appointment, should be construed as if created atthe date of the trust deed, and, as thus construed, that they were invalid, because they provided for a possible suspension of the power of alienation for three lives.

The Genet case and this one are not readily distinguishable upon the point we have been considering, and the former should control this decision.

Matter of Langdon (153 N.Y. 9) is not directly in point, for in that case it was held that the appointer having failed to appoint the persons to whom the fund should go, it passed under the original will, and the court expressly declined to consider what would have been the effect had the power of appointment been exercised. This case would have been like that one had this appointor omitted to exercise the power. In that event the fund would have been distributed according to the Statute of Descents, and, under Matter of Langdon, the transmission would have been by the original will and not taxable. But the testator provided that his wife might appoint, or if she did not the statute should, and as we have attempted to show, the law is, that in the first contingency, as well as the last, the property passed by the will of the owner of it and necessarily as of the date of that instrument.

The order should be reversed, with costs.

All concur.

Order reversed.