Nelson, G. N. Income Tax Law and Accounting. Published by Author, 1920. Travis, E. M. Federal Income Tax Law and Regulations versus New York State Law and Regulations. The Journal of Accountancy, Ronald Press Company, February, 1920. Seligman, E. R. A. The Income Tax. Macmillan Company, 1914. REVIEW QUESTIONS I. What income tax must be imposed on an estate in settlement? Under what circumstances must a trustee pay an income tax? 2. In what cases must the beneficiaries make a report and pay taxes? If the income tax had been paid before distribution, would any further tax be required? If real estate is sold at a profit, who pays the income tax? 3. Under what circumstances is it impossible to reckon income taxes on the income as a whole? 4. If a trust is revocable, who pays the income tax? 5. If the beneficiaries are to pay the tax, what two things must the fiduciary's return show? 6. To what extent may beneficiaries avail themselves of exempt bonds or notes purchased by the fiduciary? 7. What is the gross income of an estate? What is said of life insurance in this connection? What of stock dividends? When is there any increase in value of the trust property income? 8. For normal tax purposes, what credits are allowed trustees? What exemption may an executor secure twice? 9. What deductions are allowed executors? Why are initial expenses not allowed? Are inheritance taxes deductible? Are deductions allowed for depreciation? What contributions may be deducted? 10. What losses may be deducted? Can beneficiaries take advantage of losses to the estate in making up their own income returns? II. How is the income of an estate in trust computed? What income taxes may be deducted? 12. What exemption from penalty applies to estates? What exemption is allowed the surviving husband or wife? 13. What information must trustees give? When must a trustee act as a withholding agent? What distinction is made between distributing income and corpus? 14. What must be done in regard to state income taxes? 15. In consulting books on tax matters, why is it necessary to secure late editions? CHAPTER XXIX PECULIAR FEATURES OF INHERITANCE TAXATION § 236. Inheritance Taxation in the United States The form of taxation known generally as "inheritance taxes," "transfer taxes," "succession taxes," and in Connecticut as "death duties," is not new. During the Revolution, the Civil War and the Spanish War, the federal government resorted to forms of this tax, but repealed the acts as soon as the stress was over. During the Great War the federal government resorted to this tax again, and this last impost is likely to remain with us unless the courts pronounce the law in its present form unconstitutional. The policy of taxing collateral inheritances was adopted in Pennsylvania in 1826, and has been adhered to in that state ever since. In Virginia such taxes have been imposed since 1844. In 1885 New York passed its state law imposing an inheritance tax, and since that time the state legislature has made over ninety changes and amendments, some of them radical. This evolution by experimentation is still in process. The plan has generally appealed to state authorities, and the New York statutes have been copied in nearly every state in the Union. At the time of this writing the only states having no inheritance taxes are Alabama, Florida, South Carolina, and the territory of Alaska. It will undoubtedly be a permanent source of revenue for the states. § 237. The Theory of Inheritance Taxes All of these taxes are based on the theory that, as the right of inheritance and the right of directing the ownership of property by will are given by the law, the law may properly tax the exercise of these rights. In other words, there is no natural right to inherit or to leave property by a will. The law gives and defines these rights. It now says that a part shall go to the state for the privilege granted. Fundamentally the tax rests upon the proposition that a man cannot take with him into the world beyond the possessions he has acquired here. When he dies those possessions become the property of the State or of such persons as the laws of the State may direct.1 Inheritance taxation is not a tax on property, but it is either a tax on the right or privilege of transferring property by will or a tax on the right or privilege of receiving property from the dead. As the privilege or right to take property by inheritance. or devise is not a natural or inherent right of persons, but is a creation of the law, it is subject to regulation by statute, and the imposition of the tax as incident to the right is authorized under our governmental system when not expressly forbidden by the constitution." In England these taxes are called "death duties," and they attach on death at the same time that the rights of the legatee or the heir attach. The Supreme Court of California said: It is only by virtue of the statute that an heir is entitled to receive any of his ancestor's estate, and the Legislature can provide that the whole or only a portion shall go to the heirs or other beneficiaries upon the death of the ancestor. This being so, and the Legislature in this case having determined that 95 per cent of the decedent's estate may go to his heirs, and that 5 per cent be retained by the State, it is too clear for argument that this 5 per cent vested in the State at the same time that the other 95 per cent vested in the heirs.* 1 Gleason and Otis, Inheritance Taxation (2nd ed.), 1919, P. 4.. Booth v Commonwealth, 130 Ky. 38. Standford's Estate, 126 Cal. 112. These taxes yield large returns, especially in the older and wealthier states. Because of this fact and because they are paid when the parties concerned are receiving wealth without giving an equivalent, and so cause the least inconvenience, it is likely that as time goes by they will be changed only by a gradual increase of the present rates. § 238. Inheritance Taxes Are Constitutional At different times it has been urged that inheritance taxes were unconstitutional in that they violated the rule of uniformity, that the exemptions were unconstitutional, that they deprived heirs of their property without due process of law, that they impaired the obligation of contracts, that they did not respect the privileges and immunities of citizens in the different states, and that they violated the Fourteenth Amendment. On final appeal the Supreme Court of the United States has in each case sustained the law and held that the objections were not applicable. Some features of the inheritance laws of Minnesota, Wisconsin, and Pennsylvania have been pronounced unconstitutional by the supreme courts of these states, but the laws as a whole have been upheld and they are undoubtedly to be a permanent part of our tax laws. These taxes as imposed by the states have been sustained by the courts against all constitutional objections on the broad doctrine that they are not laid on the property itself, but on the right to transmit property at death, or, what is more intelligible, on the right to succeed to property from the dead. Because of this doctrine, it is held that an inheritance tax may be laid on the right to inherit government bonds, which cannot in any other way be taxed. The courts hold to this and it is practically a part of our general law. The tax is not upon the property in the ordinary sense of the word but upon the right to dispose of it, and it is not |