until it has yielded its contribution to the State that it be- § 239. The Federal Estate Tax The federal estate tax at present in force is based on Title IV of the Revenue Act of 1918. It differs from most state laws in that: ... the subject of tax is the transfer of the entire net estate, The federal tax differs from other systems of taxation in the following particulars: 1. Since this tax is laid on the entire estate, not on a particular legacy or share, it diminishes only the residuary estate and not any specific legacies. 2. The value of the separate legacies or interests devised is ignored and does not affect the tax imposed. 3. The relationship of the legatee or devisee has no bearing on the liability to tax or on the amount of the tax that is imposed. The federal inheritance tax is discussed more fully in Chapters XXXVII-XXXIX. § 240. What Transfers Are Subject to the Inheritance Tax While inheritance taxes are levied on the transfer and not on the property itself, nevertheless they are measured and assessed by the value of the property as shown by the appraisal. They are broad in their application, for the inheritance of government, state, and municipal bonds that are tax-exempt is nevertheless subject to this impost or excise duty. • United States v. Perkins, 163 U. S. 625. Article of Regulations 37. The state inheritance laws tax transfers of: 1. All the property of a decedent in the state of his residence. This includes all real property in the state, and all personal property both in and out of the state. 2. All real estate of non-residents. 3. All personal property of non-residents actually or constructively in the state. This subject is treated at greater length in Chapter XXX. $ 241. Double Taxation A peculiar feature of the inheritance taxes is the fact that the same property is often taxed in two states. If a citizen of Illinois having a bank account in New York should die, his heirs would be taxed by the state of Illinois on all his property, which would include the New York bank deposits. These would be taxed also in the state of New York. There is no law or constitutional prohibition of double taxation. It is not just, but it is legal. The supreme court has said and repeated: No doubt it would be a great advantage to the country and to the individual states if principles of taxation would be agreed upon which did not conflict with each other, and a common scheme could be adopted by which taxation of substantially the same property in two jurisdictions could be avoided. But the Constitution of the United States does not go so far. § 242. Rates of State Taxation The New York tax on which most of the later inheritance tax laws of other states are based is laid as follows: If property goes to father, mother, husband, wife, child, or adopted child, and the amount in each case does not exceed $5,000, there is no tax. Above $5,000 and up to $25,000 Hawley v. Malden, 232 U. S. 134. the rate is I per cent. Above $25,000 and up to $100,000 the rate is 2 per cent. Above $100,000 and up to $200,000 the rate is 3 per cent. All excess is at 4 per cent. To grandchildren the rates are the same, but there are no taxes if the amount is less than $500. To brother, sister, son-in-law, or daughter-in-law, if the value of the property inherited is over $500 the rates in each block are I per cent higher than those stated above. To more remote kindred and strangers, legacies above $500 are taxed at rates higher by 4 per cent in each block than those for mother, father, husband, wife, child, or adopted child. In other states the exemptions and the rates are varied, and as changes are being made continually, in each case the latest law must be consulted. In California, for instance, the exemptions for immediate relatives are much higher, being $24,000 for widow or minor child. The rates too are much higher, going up to 15 per cent on legacies of over $1,000,000 to the immediate family, and to 30 per cent on legacies of over $1,000,000 to more distant kin. Generally, the far western states have larger exemptions and higher rates. There does not seem to be any limit to the amount that a legislature may impose. In Georgia, the rate above the exemption is I per cent, and no more. This shows that the state is only starting in this direction, that conservatism is strong, and that only the thin edge of the wedge has been inserted. In Iowa, Maryland, and some other states, there is no tax on property going to immediate kin. In Kansas, the wife is allowed an exemption of $75,000. In some states no tax is levied on property going to husband or wife, or to lineal heirs. Other minor variations are to be found, but the general character of the laws is the same in all the states. It is to be noted that the state transfer taxes generally increase: (1) as the amount transferred increases, and (2) as the degree of relationship diminishes. In the present somewhat confused condition of the law relating to inheritance taxes, it has been held that executors could, in some cases where part of the assets were in another state, arrange to pay legacies to collateral relatives from the foreign assets at a lower rate of tax than prevails in the state of domicile. This can be done to advantage only in a few instances, and it is not likely that it will be possible when inheritance taxes attain a more harmonious development. REVIEW QUESTIONS 1. When has inheritance taxation been used by the federal government in this country? What states first adopted inheritance taxation? 2. What is the theory of inheritance taxation? Is it a tax on property? Explain. Why are the rates likely to increase? What are the arguments in favor of the system? 3. What constitutional objections have been urged against inheritance taxes? What attitude has the supreme court assumed? On what broad ground have inheritance tax laws been upheld? 4. In what three particulars does the federal transfer tax differ from any state laws? 5. How are inheritance taxes calculated? Would the inheritance of Liberty bonds be taxed? What property in a state comes under this tax? 6. How does double taxation arise? Is there any remedy for double taxation? 7. In your state, is there any exemption? In your state, what are the rates? Usually what two causes operate to increase the rate of taxation? CHAPTER XXX PROPERTY AFFECTED BY TRANSFER TAXES § 243. Comprehensiveness of Transfer Taxes Because inheritance and transfer taxes are not taxes on property, but are excise or impost taxes on the succession to or inheritance of property, they attach to the inheritance of all kinds of property or rights that have value or that are transferred at death. They extend to all the assets of a man's estate, and include every valuable right or claim that can be transferred to another. The state may lay an inheritance tax on any resident's property or business wherever situated.1 The New York Statute expresses it broadly as follows: The words "estate" and "property," as used in this article, shall be taken to mean the property or interest therein passing or transferred to individuals or corporate legatees, devisees, heirs, next of kin, grantees, donees or vendees, and not as the property or interest therein of the decedent, grantor, donor or vendor and shall include all property or interest therein, whether situated within or without the state.' All property passing by will or inheritance is subject to these taxes. As the law is usually phrased, it is rarely practicable to evade payment. A testator's order directing that no inventory be made will not hold when there is an inheritance tax. He may direct that the amount of the taxes be paid as an expense of administration, so that the legacies shall be paid at their face value, but this will not affect the total amount to be paid. He could also make the legacies many and small, 'State Tax on Foreign Bondholders, 15 Wall. 300. 'Laws of 1910, Chapter 706, Art. X, § 243. |