THE LOGICAL BASIS FOR INHERITANCE TAXATION

National Tax Association

THE LOGICAL BASIS FOR INHERITANCE TAXATIONAuthor(s): JOHN HARRINGTONSource: Proceedings of the Annual Conference on Taxation under the Auspices of the NationalTax Association, Vol. 15 (SEPTEMBER 18-22, 1922), pp. 412-419Published by: National Tax AssociationStable URL: http://www.jstor.org/stable/23399754 .

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412 NATIONAL TAX ASSOCIATION

Secretary Holcomb: May I interrupt the meeting just a mo

ment? The committee on the apportionment of interstate business

has done a who!e lot of work, and it is only fair to permit them to

introduce this short resolution, which some member of the com

mittee has submitted.

(Secretary Holcomb reads resolution in regard to the rule of ap

portionment of income of mercantile and manufacturing concerns)

Chairman McKenzie: Under the rules of the association, the

resolution will be referred to the resolutions committee. Before

throwing this topic open for general discussion, I am going to ask

Mr. John Harrington, a member of the committee, and a member

of the staff of the Wisconsin Tax Commission, to speak to us for i\

few minutes and present his views.

I should just like to suggest to the speaker and the conference

that as you all know we put over until tonight number three of the

second session. If we are going to get through in any reasonable

time this evening, the speakers will have to be bound strictly by the

rules which we have adopted; otherwise you will be here until

midnight.

John Harrington of Wisconsin: I think fifteen or twenty min

utes will cover what I have to say. Mr. Chairman and gentlemen of the conference : My name has

been connected with this subject in the remarks of the chairman of

this committee in such a way that it seems to me I should at least

have an opportunity of defending a position which we take in our

state. I might say further that we have not found any difficulty in

applying the principles that will be found in this paper, in our state, and that the objections which have been offered will, I think, largely

disappear when the question comes to real consideration.

You see, here is a system that has gone on for years, and we

have become accustomed to it, and because of that custom, we

naturally think that there is nothing else. I will take no more time

to make introductory remarks and the paper will probably explain itself sufficiently.

THE LOGICAL BASIS FOR INHERITANCE TAXATION

JOHN HARRINGTON

Inheritance Tax Counsel, Wisconsin Tax Commission

It is not intended in this paper to assume the attitude of dissent

ing from the very capable and complete report of the majority of

the committee on inheritance taxation. This paper should be con

sidered rather a supplemental than a dissenting report. If it should

be assumed that the more prevalent fundamental theory upon which

the present inheritance tax laws of the states are founded is the



INHERITANCE TAXATION 413

sound and correct theory, we can all join in the report as a whole,

although we may still differ as to a few less important details.

But because there seem to be certain irreconcilable differences

that persist, in spite of every effort to get together; and because

these differences seem to extend to tax officials, legislatures, and

even the courts, it seems highly desirable at this time, if it can be

done, to go back and re-examine these fundamentals and to re

state definitely what appear to be the basic principles which should

govern in inheritance taxation, as viewed by the minority. As sustaining our views of the need of such re-examination, I

take the liberty of quoting from the preamble of resolutions adopted at the 1921 conference, as follows :

"Whereas this conference, although opposed to the levy of

state inheritance taxes upon property passing at death under

the laws of a state other than that in which the decedent was

domiciled at time of death, recognizes the fact that such taxes

are now imposed and are likely to continue in force for some

time to come."

Is not this a rather despairing attitude, and an acknowledgment ■of weakness ? This does not correspond with the facts, for real

•estate is now assessed for inheritance tax purposes in the state ot

its situs, and not at domicile, and is universally acknowledged to

be properly so assessed; and real estate constitutes more than half

of the property transferred at death. Why shou'd it be assumed

that double taxation will continue? It is clearly unjust—aggra

vatingly unjust—that in one estate the transfer should be taxed but

once, while in another estate, perhaps no larger, the transfer should

be subject to the inheritance tax two, three, or four times. If you will examine the majority report, you will observe that very much

of it is devoted to devices intended to minimize the evils of double

and treble taxation. This should be unnecessary. It will probably be agreed to unanimously that the first prin

ciple of inheritance taxation should be that the transfer of property at death should be subject to only one transfer or inheritance tax

(excluding consideration of the federal estate tax). This principle should be fundamental, and should require no further argument nor elaboration.

Following this, we have another alleged principle, one that is

assumed more often than it is expressed, although it is expressed often enough, as in the resolution above quoted. This principle

may be stated as follows: The inheritance tax should be imposed

upon the transfer of decedent's property at his domicile and where

his estate is being administered.

This principle sounds obvious and as a matter of course; and

■consequently, as a general' principle, has been little questioned or




analyzed. It probably grew out of the fact that at an early period, when inheritance taxation was taking form in an experimental

way, most decedents had all of their property at their domicile.

The location of the property and the domicile coincided, and as a

matter of course, the tax was imposed at the domicile; and that

was assumed to be the only proper place of taxation; and that

assumption has come down through the years, and has been more

or less a guiding principle in legislation and court decisions to the

present time.

But a conflicting principle was soon adopted by the courts,

namely, that the transfer of real estate at death was subject to

taxation at the situs of the real estate. Following this, it seemed to

be accepted at once, pursuant to the principle of taxation only once, that real estate should not be held subject to the tax at the domi

cile, when located in a foreign jurisdiction. The rule adopted as to real estate should have been a warning

that the alleged principle of taxation at domicile only, was un

sound and needed re-examination; for real estate constituted much

more than half of all property. If it is sound, as it undoubtedly is,

that the transfer of real estate should be taxable only at its situs,

no reason can be found why the same rule should not apply to

tangible personal property. If a farm or store building, left by decedent in another state, should be taxable there and there only, it is not possible to find a sound reason why the livestock and farm

machinery, or the stock of goods in the store building, should not

also be taxed at the situs.

Since real estate and tangible personal property constitute the

great bulk of our property, we now find that the theory of taxation

at domicile is substantially abrogated, and should be cast into the

discard. If this had been done long ago, this association would

have needed no committee on inheritance taxation—except possibly to discuss uniform rates and exemptions, and the disposition of

that small fraction of our property known as intangibles represent

ing tangible property located in more than one state—and possibly to harry Congress in respect to the repeal of the federal estate tax.

Discarding the principle of taxation at domicile, we find at once

that we must accept in its place the contrary principle of taxation

at the situs of the property. And this, we are convinced, is the

true principle that will bring us out of the mess of confusion and

contradictions now existing, as indicated by the majority report. To state the present necessity briefly, we must back up and start

over. As our foundation for a simple and equitable system of

taxation, we must accept two fundamental principles :

1. The transfer of property of a decedent shall be subject to

only one inheritance tax.




2. The transfer of property at death shall be taxed at the situs

of the property.

As a corollary to the second principle, it is to be understood and

accepted that intangible property—the mere paper representatives of the tangible property or evidences of title or interest therein—

such as bonds, mortgages, land contracts, corporate stocks, bills of

sale, bills of lading, warehouse receipts and similar securities, are

taxable only at the situs of the tangible property which they rep resent.

When we accept and apply the above principles, we shall find

that many of the problems now before us will have disappeared, and many others will have been greatly simplified. Let me indicate

the probable results:

(1) Real estate left by decedent will be taxed as at present. This will take care of half the property of the country.

(2) Physical or tangible personal property will be taxed in the

same manner as real estate—where located or commonly kept only. This will represent, say, twenty-five per cent of the nation's prop

erty.

(3) Intangible property, such as bonds, mortgages, stocks, etc.

representing property located within a single state will be taxed in

the state where the tangible property so represented is located.

This will take care of, let us say, fifteen per cent of the property of the country.

(4) Intangible personal property representing interstate prop

erty will be apportioned for the purpose of tax among the states

where the property is located. Let us assume this to cover ten per cent of all property, and therefore ten per cent of all inheritance

taxes.

Let me remark here by way of parenthesis that the above frac

tions of the total property are purely hypothetical, and are subject to modification by each reader to suit his taste or his knowledge based upon research. There is still left a small fraction, almost

negligible, of so-called property—promissory notes, book accounts,

and personal debts—strictly not property at all—usually mere prom ises to pay money not yet earned. Probably they should be as

signed to domicile.

The first three subdivisions above, covering ninety per cent of

the property of the country, offer little difficulty. In the very great

majority of estates, the domicile of decedent and the situs of his

property will coincide in any event. In case of real estate located

in another state, the procedure is established, and is relatively

simple and inexpensive. In respect to tangible personal property, there is no reason why it should not be equally simple and inex

pensive. In respect to securities representing property in a single




state, they should be handled by the tax commission or other cen

tralized state department; and I know from experience that the

procedure may be simple, brief, and inexpensive. We have left, then, only the ten per cent of our total property,

being securities representing interstate property. It .is in relation

to this small proportion of our property, transferred once in a

generation, that all the turmoil is about. It is not worth the

amount of heat engendered. It may not be easy to devise a simple and inexpensive procedure for that form of property under the

system which I have outlined; but it has not been done under the

present system. I am of the opinion still that it can be done, and

that it can be done more readily under the general theory of taxa

tion at situs than of taxation at domicile. In any event, when we

adopt the principle of taxation at situs, this question will be ap

proached from a different angle.

Accepting the principle of taxation at situs, we must go back to

our state taxing officials and legislatures, and tell them a few things in plain English. We may remind them that a few years ago the

Supreme Court of the United States said :

" It may be regretted also that one and the same state should

be seen taxing on the one hand according to the fact of power, and on the other, and at the same time, according to the fiction

that in succession after death mobilia sequuntur personam and

domicile governs the whole." Blackstone v. Miller, 188 U.. S.

189.

But it declared that to be the law. This dictum rather encouraged taxation by the strong arm, and

" according to the fact of power

" ;

and with this encouragement, we have arrived at the present sad

state of affairs for which this conference is so desirous of finding a remedy.

We may remind our legislatures and taxing officials that men

have died, and before their widows and children could obtain the

property left to them, they have had to pay inheritance taxes in

several states—at the domicile ; again where the property is located ;

again in the state where the corporation exists that issued their

stocks and bonds; again in the state where the corporation kept a

transfer office; and again in the state where decedent kept his

securities in a safety deposit box. This is taxation "

according to

the fact of power." It well illustrates the maxim that the power to tax is the power to destroy.

We may tell our taxing officials and legislatures of a case now

pending in our courts, where decedent died a resident of Massa

chusetts, leaving stock in a Maryland corporation, all of the cor

porate property, real and personal—some $25,000,000—being located

in Wisconsin. After paying the three taxes in the three states, and




the costs of litigation, there will be some reduction of what Presi

dent Roosevelt used to call a "

swollen fortune You may tell

them of a Wisconsin case where the decedent died a resident of

New York, leaving stock in the Northern Pacific Railroad Com

pany, a Wisconsin corporation having 97^2% of its property located

•outside of the state, and from which the executor paid to the state

•of Wisconsin a tax of $355,000. The decedent did not belong to

Wisconsin, and the property did not belong to Wisconsin, except

2*/2%; yet under our current theory Wisconsin was entitled to the

tax. This was ten years ago. I recall that the state officers

heralded this instance to the people of the state and to the legis lature then in session as a notable victory for the state. This was

taxation "

according to the fact of power ". To me it seems quite like the case of one burglar bragging to another of his successful

exploits. But better ideals prevailed, and in 1913 our laws in this

respect were amended. Very recently the estate of a Wisconsin

decedent was taxed in both Wisconsin and Minnesota upon a stock

of lumber in a yard in Duluth, appraised at $100,000. Do you think the heirs felt that they had received a square deal ? They did not.

We need to tell our legislatures and tax officials that in the field

of inheritance taxation, taxing "

according to the fact of power "

is overdone, inequitable and immoral, when a tax is levied by a

state upon the transfer of securities, merely because the transfer

•office of the corporation is located within the state, or because the

deceased kept his securities in a safety deposit box in the state, or

because the officers of a corporation saw fit to incorporate in a

state other than that in which the property of the corporation was

located. Why should the owner of two or three million dollars'

worth of real estate in Chicago be permitted to move to Florida

and take his real estate with him for inheritance tax purposes by

incorporating in that state, and keeping his stocks there until his

death ? Think of the absurdity of saying that the filing of a docu

ment with an officer of the state of Maryland, by the officers of a

Wisconsin manufacturing corporation, conveys $25,000,000 of Wis

consin property out of the state and removes it to Maryland for

inheritance tax purposes. Can the notions and whims of corpora tion officers be allowed to play hob with our tax laws in this

manner?

Even the great state of New York is acquiring a glimpse of the

true principles. A few years ago she modified her law so as to re

quire foreign estates to pay a tax upon the stock of New York

corporations. This was only groping for the light. Now her law

of 1922 requires foreign estates to pay a tax upon stocks of foreign

corporations at a proportion of their value equal to the proportion

of New York real estate represented in the assets of the corpora

27




tion. Evidently her vision is clearing. She does not propose to

allow her vast city real estate values to be removed to Florida, for

inheritance tax purposes. But the most drastic thing we must tell our legislators is that

they must release their domestic estates from the tax so far as

these estates consist of securities representing property foreign to

the state. At present, in Wisconsin, we tax twenty per cent of the

value of Chicago, Milwaukee & St. Paul stocks and bonds, left by non-resident decedents. We must treat the estates of our domestic

decedents in the same way. We have domestic land and lumber

companies, having all their property in the south or west. We do.

not tax the stocks and bonds of these companies, when left by non

residents. We must also exempt them to resident decedents, thus

leaving the tax to the southern or western states where the prop

erty has its situs. A little tax may be lost, but we shall have taken

the essential step toward justice and simplicity in inheritance

taxation.

It may be assumed that every state has suitable statutory pro visions prescribing the conditions under which foreign corpora tions may own property and transact business within the state. We

find relatively little difficulty in dealing with corporations and

arranging with them in relation to the proper authority for the

transfer of stocks and bonds of decedents.

At present there are many difficult questions of residence or

domicile, involving lengthy and expensive litigations, as illustrated

by the Harkness case, and Chambers v. Hathaway, in California. In the latter case, decedent was found to be a resident in both

Wisconsin and California, and the estate paid inheritance taxes

accordingly. Under the principles which we advocate, you will

see at once that questions of domicile become of little or no impor tance, and much expensive and troublesome litigation will be

avoided.

We are entirely familiar with the argument and the theory upon which it is based—that the tax is upon the transfer, and not upon the property. This fiction was necessary to sustain progressive rates and to escape the rule of uniformity. But every dealer in

securities, and every economist knows that a heavy inheritance tax,

to which securities may be subject, makes them less desirable as an

investment, and reduces their market value. This is only another

way of saying that as an economic fact the burden of the tax falls

on the property, notwithstanding the legal fiction. The law pro vides that the tax shall remain a lien upon the property until paid, and that the property may be sold to pay the tax. A chief argu ment in support of the inheritance tax is that it is adopted as a

means of reducing the burden of the general property tax. If

there is anything to this argument, it follows that the inheritance




tax should be imposed in the same location as the general prop

erty tax.

As this paper has now been extended beyond my original inten

tion, I am not attempting to outline a procedure for dealing with

securities of corporations having property in many states, such as

the Western Union Telegraph Company. The Wisconsin propor tion in that company is very small, only 2.40%. On a transfer of

less than $50,000 it is not worth attention. These are details touch

ing only a trifling fraction of property passing at death. They can

be taken care of after the big problems are settled.

There is an old stanza with these lines :

" If half the wealth bestowed on camps and courts Were given to redeem the human mind from error,

There were no need for arsenals and forts."

So it is with this problem. If half the mental energy given to

beating some other state out of taxes to which it is equitably en -

titled and to beating estates out of two, three or more taxes, were

given to devising inexpensive ways of reaching only once that very small fraction of the nation's property represented by interstate

stocks and bonds, we should receive great praise from the widows

and orphans, executors and administrators, and the courts.

Chairman McKenzie: The subject is now open for general discussion.

Captain W. P. White: I can see no justice in a tax that is im

posed upon the estate of a husband and wife when the husband

dies, and I can see still less justice when the wife dies. Husband

and wife may own a great deal of property in common. It may be

a joint production of both; it may be the production of one; then

one of these individuals dies, and I don't see anything but the

strong arm of the state stepping in and saying that it has a right to

part of that property, because one of the owners has departed The device of inheritance taxes is perhaps necessary in cases,

where the tax applies at the death of an individual who bore very little tax during life, but it never was reasonable as between hus

band and wife. The rule in regard to the situs of real estate and

tangible personal property is all right, but intangible personal prop

erty ought not to be taxed, except at situs. The expense incident

thereto takes away from the heirs a great part of their property, and it is not fair. It destroys the initiative; the incentive for sav

ing, which men inherently feel in protecting the lives or welfare

of their children. If we are going to have such laws, we are going to devise methods of escaping them. You cannot touch it when

we give it away in such form that the law cannot reach it. We

can sell our property for less than it is worth, and that will be



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THE LOGICAL BASIS FOR INHERITANCE TAXATION