CHAPTER 65

TAXATION OF LEGACIES AND SUCCESSIONS

History of the Inheritance Tax

THE inheritance or succession tax, though first introduced into Massachusetts legislation in comparatively recent times, is by no means a modern discovery as a device for raising revenue for public use. An inheritance tax in much its present form was an established feature of the Roman system of taxation and exists to-day in almost all the countries whose jurisprudence is based on the Roman law. Many incidents of the feudal system furnished in substance the equivalent of a succession tax. In England the probate duty was introduced in 1694 and the tax on legacies in 1780. The system has been steadily developed since that time, and the "death duties" as they are called furnish a substantial portion of the revenues of the British government. Inheritance taxes were imposed by the United States during the period between 17971 and 1802 and again during and after the civil war and the wars with Spain and with Germany." The first state to adopt the inheritance tax was Pennsylvania in 1826. The expansion of this system of taxation was slow until 1885 when it was established in New York and since that time it has rapidly extended to almost every state in the Union. The inheritance tax first appeared in Massachusetts in 1891,* but it was then confined to inheritance by will or intestate U. S. St. July 6, 1797, c. 11.

1

U. S. St. July 1, 1862, c. 119, §§ 111, 112. This act was amended two years later, and repealed in 1870. The revenue act of 1894 contained a provision for the taxation of inheritances, but the entire act was held unconstitutional on account of its income tax provisions. Pollock v. Farmers' Loan & Trust Co., 157 U. S. 429 (1895); 158 U. S. 601 (1895).

The Spanish War inheritance tax was imposed by U. S. St. June 13, 1898, c. 448, §§29, 30. An inheritance tax was included in the Revenue Act of 1909 as it passed the House of Representatives; but a tax on the income of corporations was substituted in the Senate. Flint v. Stone Tracy Co., 220 U. S. 107 (1911). An inheritance tax was imposed in 1916, before the United States entered the World War, U. S. St. 1916, c. 463, §261, as amended by U. S. St. 1917, c. 63, §900; c. 159, §300. See also War Revenue Act of 1918, c. 400.

St. 1891, c. 425.

[G. L. c. 65 succession to strangers or collateral relatives. In 1907 the direct inheritance law was enacted imposing a tax on all inheritances above a certain value, which value is larger in the case of direct inheritance; but a bequest or inheritance of sufficient size even to the testator's own children is reached by the tax. In 1916 the rate of taxation was modified, and, in general, increased.

The inheritance tax is favored both by economists and by those charged with the duty of raising revenue for the public needs. It is considered the least burdensome of all taxes, and, until the enactment of the income tax act in 1916, furnished the only practicable means of reaching the great mass of personal property consisting of stocks, bonds, notes and other easily concealed objects which readily escaped the annual assessment but which when the owner died passed through the probate court and were then exposed to official examination. While the amount raised by the inheritance tax varies from year to year, according to the number of wealthy residents who have died during the year, in a state of substantial size a considerable revenue can be counted on every year, and taken as a whole, the tax has given general satisfaction when it has been imposed with fairness.

Constitutionality of Inheritance Taxes

Inheritance taxes are of two classes, namely, estate taxes and legacy or succession taxes.1 An estate tax is imposed upon the net estate of the decedent passing at his death, and does not concern itself with the legacies or distributive shares into which the estate is divided or the relationship to the decedent of those who receive the property. It is a tax on the transmission and not on the receipt of property. The present federal tax is an estate tax.2

A legacy or succession tax is a tax upon the privilege of taking property by will or by inheritance or by succession in any other form upon the death of the owner, and is imposed upon each legacy or distributive share of the estate as it is received. It is a tax on the receipt and not on the transmission of property. The present Massachusetts tax is a legacy and succession tax.

5 St. 1907, c. 563.

St. 1916, c. 268.

1 Knowlton v. Moore, 178 U. S. 41, 49 (1900); Minot v. Winthrop, 162 Mass. 113, 124 (1894).

'Plunkett v. Old Colony Trust Co., 233 Mass. 471 (1919).

G. L. c. 65]

The inheritance tax was not established in Massachusetts or elsewhere in the United States without a contest over its constitutionality. It has been sustained here and elsewhere, not as a direct tax but as an excise on the privilege of taking or transmitting property by will or inheritance or by succession in any other form upon the death of the owner-a privilege which if not wholly dependent for its existence upon the will of the legislature is at least so far subject to regulation as to be unquestionably a proper subject of excise.3

The power of the state is not limited to the taxation of the privilege of receiving or transmitting property by will or by the laws regulating intestate succession but extends to all forms of conveyances made gratuitously and intended to take effect in possession or enjoyment after the death of the grantor or donor. The passing into possession and enjoyment of property may be made subject to taxation, even though the instrument under which the property passes was executed and effective before the statute imposing the excise was enacted. A succession tax may even be constitutionally made applicable to the personal estate of a person who has died before it was enacted, although the right to receive the distributive shares has already vested, provided the estate has not passed out of the control of the probate court into the hands of the distributees."

As an inheritance tax is an excise it follows as a necessary consequence that in determining the value of the privilege taxed and consequently the amount of the excise it is proper to take

* Knowlton v. Moore, 178 U. S. 41 (1900); Minot v. Winthrop, 162 Mass. 113 (1894).

The state may tax the succession of a husband or wife to community property. Moffit v. Kelly, 218 U. S. 400 (1910). The state may tax the transfer of property by deed intended to take effect in possession or enjoyment after the death of the grantor. Keeney v. New York, 222 U. S. 525 (1912). The United States may levy a tax on the succession of property within the several states. Knowlton v. Moore, 178 U. S. 41 (1900).

5

The state may tax the execution of a power though the power was created prior to the enactment of the tax. Crocker v. Shaw, 174 Mass. 266 (1899); Attorney General v. Stone, 209 Mass. 186 (1911); Burnham v. Treasurer & Receiver General, 212 Mass. 165 (1912); Chanler v. Kelsey, 205 U. S. 466 (1907). The state may tax the vesting in possession of trust property by failure to exercise a power of appointment created prior to the establishment of the tax, Minot v. Treasurer & Receiver General, 207 Mass. 588 (1911); and a legacy in compliance with a contract may be taxed, although the contract was made before the enactment of the tax. Clarke v. Treasurer & Receiver General, 226 Mass. 301 (1917).

Cahen v. Brewster, 203 U. S. 543 (1906).

[G. L. c. 65, §1 into consideration property which could not be constitutionally subjected to direct taxation; and that the tax need not be proportional but may be graduated in any manner which the court cannot clearly see to be arbitrary and unreasonable.

Subjects and Rates of Taxation

SECTION 1. All property within the jurisdiction of the commonwealth, corporeal or incorporeal, and any interest therein, whether belonging to inhabitants of the commonwealth or not, which shall pass by will, or by laws regulating intestate succession, or by deed, grant or gift, except in cases of a bona fide purchase for full consideration in money or money's worth, made in contemplation of the death. of the grantor or donor or made or intended to take effect in possession or enjoyment after his death, and any beneficial interest therein. which shall arise or accrue by survivorship in any form of joint ownership in which the decedent joint owner contributed during his life any part of the property held in such joint ownership or of the purchase price thereof, to any person, absolutely or in trust, except to or for the use of charitable, educational or religious societies or institutions, the property of which is by the laws of the commonwealth exempt from taxation, or for or upon trust for any charitable purposes to be carried out within the commonwealth, or to or for the use of the commonwealth or any town therein for public purposes, shall be subject to a tax at the percentage rates fixed by the following table:

Provided, however, that no property or interest therein, which shall pass or accrue to or for the use of a person in Class A, except a grandchild of the deceased, unless its value exceeds ten thousand dollars, and no other property or interest therein, unless its value exceeds one thousand dollars, shall be subject to the tax imposed by this chapter, and no tax shall be exacted upon any property or interest

7 Thus a state may tax a bequest to the United States. United States v. Perkins, 163 U. S. 625 (1896). A state may tax a bequest of United States bonds. Plummer v. Coler, 178 U. S. 115 (1900); Callahan v. Woodbridge, 171 Mass. 595 (1898). A state may tax a bequest of property which it has agreed should be exempt from taxation without thereby impairing the obligation of contracts. Orr v. Gilman, 183 U. S. 278 (1901). The United States may tax a bequest to a city incorporated by a state. Snyder v. Bettman, 190 U. S. 249 (1903).

Minot v. Winthrop, 162 Mass. 113 (1894); Magoun v. Illinois Trust & Savings Bank, 170 U. S. 283 (1898); Billings v. Illinois, 188 U. S. 97 (1903); Campbell v. California, 200 U. S. 87 (1906); Keeney v. New York, 222 U. S. 525 (1912); Watson v. New York, 254 U. S. 122 (1920).

G. L. c. 65, § 1]

so passing or accruing which shall reduce the value of such property or interest below said amounts.

The original inheritance tax statute of 1891 imposed a tax of five per cent for the use of the commonwealth upon all property passing by will or descent or conveyance taking effect after the death of the grantor "except to or for the use of the father, mother, husband, wife, lineal descendant, brother, sister, adopted child, the lineal descendant of any adopted child, the wife or widow of a son or the husband of a daughter of a decedent" and except certain charitable bequests to be considered later. It was further provided that no estate should be liable to this tax unless it exceeded ten thousand dollars in value. In 1895 it was provided that no bequest should be subject to the tax unless it exceeded five hundred dollars; but it was held that this exemption did not apply to the estates of persons dying before its enactment.1 In 1896 the same exemption was extended to

'Howe v. Howe, 179 Mass. 546 (1901). This provision with others was reenacted by St. 1906, c. 436, §1, and section 2 of the latter statute provided that section 1 should apply to all cases in which the tax remained unpaid at its passage. In 1909 and 1910 the commonwealth collected a number of inheritance taxes which had fallen due during the early years of the law and had been then overlooked. It would seem that so far as these legacies were less than $500 they