Opinion
No. 37227
Decided February 28, 1962.
Taxation — Succession tax — Imposition on one-half of succession to spouse — Passing by joint and survivorship contract — Validity of imposition.
The imposition of a tax upon one-half of the amount of a succession which passes to a husband or wife by virtue of a joint and survivorship contract owned by them constitutes a valid exercise of the legislative power.
APPEAL from the Court of Appeals for Allen County.
This cause arose in the Probate Court of Allen County.
Reference in the statement of facts and the opinion herein to the succession tax as being on the property involved shall mean that such tax is on the succession to such property.
In September of 1958, one Ernest Snow Evans, Sr., the husband of the appellant, died. In the application for determination of the succession tax on his estate, there were listed, for the purpose of information only, certain United States government E bonds which were held by appellant and her husband in both their names in joint and survivorship contracts. Upon an affidavit of the appellant that the bonds were purchased solely with her own funds, the Probate Court entered an order omitting such bonds from all succession taxes. Exceptions were filed by the Tax Commissioner, which exceptions were overruled by the Probate Court without written opinion.
The Tax Commissioner appealed to the Court of appeals. The Court of Appeals, reversing the judgment of the Probate Court, determined that Section 5731.02 (E), Revised Code, which provides that one-half of joint and survivorship property held by a husband and wife is taxable as a succession to the survivor, is a valid enactment, and that, under the provisions of this section, the bonds are subject to such taxation.
The cause is before this court on an appeal as of right, a constitutional question being involved.
Mr. Mark McElroy, attorney general, and Mr. Robert J. Kosydar, for appellee.
Mr. John R. Evans, for appellant.
The single question raised by this appeal is the constitutionality of Section 5731.02 (E), Revised Code, which reads as follows:
"A tax is hereby levied upon the succession to any property passing, in trust or otherwise, to or for the use of a person, institution, or corporation, in the following cases:
"* * *
"(E) Whenever property is held by two or more persons jointly, so that upon the death of one of them the survivor has a right to the immediate ownership or possession and enjoyment of the whole property, the accrual of such right by the death of one of them shall be deemed a succession taxable under this section, in the same manner as if the enhanced value of the whole property belonged absolutely to the deceased person, and he had bequeathed the same to the survivor by will, provided when the persons holding said property jointly are a husband and wife, the survivor shall be deemed to have a succession taxable to the extent of one-half the total value of the property without regard to enhancement * * *."
It is appellant's contention that the levying of a tax on property passing by virtue of joint and survivorship contracts, without regard to the amounts contributed by the co-owners, violates the provisions of Section 7, Article XII of the Ohio Constitution, which provides:
"Laws may be passed providing for the taxation of the right to receive, or to succeed to, estates, and such taxation may be uniform or it may be so graduated as to tax at a higher rate the right to receive, or to succeed to, estates of larger value than to estates of smaller value. Such tax may also be levied at different rates upon collateral and direct inheritances, and a portion of each estate not exceeding twenty thousand dollars may be exempt from such taxation."
Basically, it is appellant's argument that this constitutional provision authorizes succession taxes only on the right to receive or to succeed to estates, that one does not succeed to that which one already owns, and that to arbitrarily impose a tax on one-half of joint and survivorship property owned by a husband and wife without regard as to whether the interest of the survivor has been increased over what was previously owned and without regard to the survivor's contribution to the fund violates the constitutional provision.
It should be noted at the outset that, even without the provisions of Section 7, Article XII of the Ohio Constitution, the General Assembly has the power to impose succession taxes. In States, ex rel. Zielonka, City Solr., v. Carrel, Aud., 99 Ohio St. 220, 225, Chief Justice Nichols stated:
"A majority of this court are of the opinion that there is no constitutional limitation resting upon the authority of the General Assembly to levy tax on property of every kind and character, except that it must be uniform and according to its true value in money. Nor is there even this limitation on its power to provide for the levy of taxation on incomes, inheritances and franchises, including the imposition of excise taxes."
Irrespective of this, however, an examination of Section 7, Article XII, shows that this section merely empowers the General Assembly to enact laws imposing taxes on the right to receive or to succeed to estates, and that it leaves completely to the General Assembly the power to define that which is to be considered a succession.
There is no question that the General Assembly may include in its definition of successions property which passes under joint and survivorship contracts. 28 American Jurisprudence, 173, Inheritance Taxes, Section 228.
A great deal of the confusion in these matters arises as a result of a misunderstanding of the nature of the estate tax. The true nature of the estate tax is well set forth in West v. Oklahoma Tax Commission, 334 U.S. 717, at page 727, where it is stated:
"Implicit in this court's refusal to apply the Rickert doctrine to an estate or inheritance tax situation is a recognition that such a tax rests upon a basis different from that underlying a property tax. An inheritance or estate tax is not levied on the property of which an estate is composed. Rather it is imposed upon the shifting of economic benefits and the privilege of transmitting or receiving such benefits." See, also, United States Trust Co., Exr., v. Helvering, Commr., 307 U.S. 57, and Magoun v. Illinois Trust Savings Bank, 170 U.S. 283.
Appellant urges, however, that she has no more now than she had prior to the death of the co-owner.
This brings us to a consideration of the practical legal effect of the joint and survivorship contract. It must be remembered that the creation of such relationship is purely a voluntary act, and that there is no compulsion on an absolute owner of property to enter into such a relationship; however, when he does, he automatically places himself in a legal position different from that which he previously occupied.
The creation of a joint and survivorship contract as to property of which one is the absolute owner effectuates a complete and practical legal metamorphosis of such property. In such case, the joint and survivorship contract changes the nature of the ownership from one that is absolute with complete dominion over the property to an ownership which is defeasible, with a joint dominion over the property with another. By his own voluntary act, the absolute owner creates such rights in another that the prior absolute owner's rights may be completely divested by such other person.
In other words, co-owners of joint and survivorship property have titles which are defeasible, and the death of one co-owner operates to invest the survivor with an absolute title in place of the prior defeasible title. Clearly, the death of a co-owner of a joint and survivorship property creates new rights in the survivor. There has been a definite shift of economic benefits to the survivor, and such shift constitutes a taxable succession. In Tax Commission v. Hutchison, 120 Ohio St. 361, where a similar problem was before this court, Judge Day, in his opinion, stated:
"The chief argument of the defendant in error is that the right of Mrs. Hutchison to consume the whole estate before the death of her husband existed to the same extent after his death, and therefore no additional right accrued to her; that the extinction of her husband's rights by his death brought nothing to her that she did not have theretofore; that the tax is upon succession, and not upon extinction.
"* * *
"We are of opinion that by the death of James Hutchison there was an accrual to Letitia Hutchison of an exclusive right to the entire fund which she did not theretofore possess. The state claims that this amounted to one-half of the fund in question and was donative in character, and our conclusion is that the same is subject to the succession tax, as provided in Section 5332, General Code."
The appellant urges, however, that the arbitrary designation of one-half of joint and survivorship property as a taxable succession, without regard to the actual enhancement of the surviving co-owner's rights or, stated differently, without a consideration of the contribution to the fund by the co-owners, invalidates this section. The right of succession is created solely by statute. The Legislature can and has made distinctions therein, both as to the source or kind of property involved. The classic example is that of ancestral and nonancestral property. The distinction might well have been bottomed upon whether it was glaciated or unglaciated property, as the power of the Legislature is limited only by uniformity of application and reasonableness. The Legislature also has the power to change the portion or fraction that members of any given class may inherit. It has done so many times in the past and will doubtless do so again. Certainly there is no less power in the Legislature to tax in any manner or proportion the right of succession it has created. See State, ex rel. Taylor, Pros. Atty., v. Guilbert, Aud., 70 Ohio St. 229, at page 249 et seq. The Guilbert case was followed in Ostrander, Admr., v. Preece, Admr., 129 Ohio St. 625, and cited as compelling authority by Judge Taft in Bauman v. Hogue, Admr., 160 Ohio St. 296, at page 300.
The power to determine the taxability of various interests and the method of valuation thereof is invested in the General Assembly. So long as the classifications incorporated in taxing statutes are reasonable and the act has a uniform operation, barring a direct constitutional prohibition as to the matter contained therein, the act is valid.
Within the limits set by the Constitution, the General Assembly may provide for the methods of taxation and of valuation and exemption of property from taxation. Bennett v. Evatt, Tax Commr., 145 Ohio St. 587, and Reed v. County Board of Revision, 152 Ohio St. 207.
There is no constitutional limitation in the present instance which affects the power of the General Assembly to determine the taxability of successions. As we have already determined, the transfer of ownership occurring as a result of the death of a co-owner constitutes a succession, and it is clearly within the legislative power to determine whether all or a part of such succession shall be subject to taxation.
The appellant urges the invalidity of this section on the ground that it creates a special classification as to joint and survivorship funds owned by a husband and wife.
It is a basic rule of law that reasonable classifications having a uniform operation may be made a part of any tax law. 38 Ohio Jurisprudence, 881, Taxation, Section 132.
A classification based on the relationship of husband and wife in no way is unreasonable. In law, such classification is common. For example, in succession taxes one of the classifications for exemptions is based on the marital relationship, in the federal income tax the rates are based on such relationship, in the law of garnishment the exemption is based on the marital relationship, and in the law of evidence one of the bases of privilege is that of husband and wife. The basic purpose of the classification in the present case is to provide uniformity in the administration of the succession tax laws in relation to joint and survivorship property. Prior to the amendment of the statute, there was no uniformity among the various Probate Courts as to the taxation of joint and survivorship estates, each court applying the law in its own discretion. Certainly an act which provides uniformity in the application of the law does not create an unreasonable classification. Neither can it be said that such law is not of uniform application, since it operates precisely alike on all members of the same class, that of husband and wife.
It necessarily follows, therefore, that the imposition of a tax upon one-half of the amount of a succession which passes to a husband or wife by virtue of a joint and survivorship contract owned by them constitutes a valid exercise of the legislative power.
It appearing that none of the errors urged are well taken, the judgment of the Court of Appeals is affirmed.
Judgment affirmed.
WEYGANDT, C.J., ZIMMERMAN, MATTHIAS, BELL and O'NEILL, JJ., concur.
TAFT, J., dissents.
RADCLIFF, J., of the Fourth Appellate District, sitting by designation in the place and stead of HERBERT, J.
Were we dealing here with the question of property rights a different conclusion might well be reached. We are, however, concerned solely with a statute that imposes a tax on successions. The authority of the General Assembly to impose such a tax is unquestioned provided the tests of reasonableness of classification and uniformity of application are met. I concur that those tests are met in this statute.
The question to be determined by this court is whether the Court of Appeals erred in reversing the judgment of the Probate Court which reads so far as pertinent:
"* * * this cause came on to be heard upon the exceptions to determination of inheritance tax filed herein by * * * Bowers, Tax Commissioner.
"Upon consideration the court finds that the executrix of this estate has filed an inheritance tax application herein; that attached to said application and made a part thereof is a schedule which discloses United States government E bonds in the total amount of $9215.65; that said United States government E bonds are in the name of Ruth M. Evans or E.S. Evans, now deceased; that said bonds are listed on the application to determine inheritance tax as property not subject to tax; that there is an affidavit attached to the application for the determination of inheritance tax which states that these said United States government E bonds were purchased out of the funds of Ruth M. Evans only; that the statements contained in said affidavit are true and that there is no property in said United States government E bonds passing to the said Ruth M. Evans upon the death of the said E.S. Evans.
"The court further finds that the exception filed by * * * Bowers, Tax Commissioner, * * * is not well taken."
The bonds involved in the instant case are payable to Mr. Evans "or" Mrs. Evans. It is only by reason of federal regulations relating to payments on and reissues of this kind of a bond that it can be held that these bonds could be described by the words of Section 5731.02 (E), Revised Code, as "property * * * held by two or more persons jointly, so that upon the death of one of them the survivor has a right to the immediate ownership or possession and enjoyment of the whole property." See 31 Code of Federal Regulations, Section 315.60 (providing in effect that such bond payable, for example, to "John A. Jones or Mrs. Mary C. Jones" may be paid to either upon his or her separate request or, if both request payment jointly, will be paid "by check drawn to their order jointly, for example, `John A. Jones AND Mrs. Mary C. Jones'"), and Section 315.61 (providing that "if either co-owner dies * * * the survivor will be recognized as the sole and absolute owner").
However, this court has consistently held that the similar statutory provisions of Section 1105.09, Revised Code (formerly Section 710-120, General Code), with respect to so-called joint and survivorship bank accounts were "enacted solely for the benefit and protection of banks" and that those provisions are "not helpful in determining the rights in the deposits of the obligees as between themselves." Bauman v. Walter (1953), 160 Ohio St. 273, 116 N.E.2d 435; Fecteau v. Cleveland Trust Co. (1960), 171 Ohio St. 121, 126, 167 N.E.2d 890; Union Properties, Inc., v. Cleveland Trust Co. (1949), 152 Ohio St. 430, 89 N.E.2d 638; and Nichols v. Metropolitan Life Ins. Co. (1941), 137 Ohio St. 542, 31 N.E.2d 224. If those provisions could have been helpful in such a determination, they would certainly have been referred to by this court when it decided the leading case of Cleveland Trust Co. v. Scobie, Admr. (1926), 114 Ohio St. 241, 151 N.E. 373, 48 A.L.R., 182.
The foregoing federal regulations were obviously designed to protect the government in making payments on or in reissuing such bonds. Nothing therein indicates any intention to affect the rights in or to the bonds of any alternative payees named therein as between themselves.
In Union Properties, Inc., v. Cleveland Trust Co., supra ( 152 Ohio St. 430), the syllabus, concurred in by all the members of the court, reads:
"1. Where money is deposited in a bank in an account carried in the joint names of a husband and wife, with the balance at the death of either payable to the survivor, and a judgment creditor of the husband during the lives of the husband and wife attempts by a proceeding in aid of execution to appropriate the money in such account in the right of the husband, the form of the deposit is not conclusive on the subject of joint ownership and evidence may be introduced that the deposit was in truth made and maintained on a different basis.
"2. The money in such account is not subject to appropriation by the husband's judgment creditor, where it is found upon evidence of sufficient probative force that notwithstanding the form of the deposit the money is in reality the sole property of the wife."
In Fecteau v. Cleveland Trust Co., supra ( 171 Ohio St. 121), the third paragraph of the syllabus reads:
"The fact that a bank account is carried in the names of two persons jointly with right of survivorship is not always conclusive as to the ownership of the account, and, where a controversy arises as to the ownership of such account, evidence is admissible in a proper case to show the true situation."
See also Bauman v. Walter, supra ( 160 Ohio St. 273), and Nichols v. Metropolitan Life Ins. Co., supra ( 137 Ohio St. 542).
There is nothing in the finding of the Probate Court or in the record in the instant case even tending to suggest that, when Mrs. Evans purchased these bonds with her own money, she "intended to transfer" to her husband any "present * * * interest" in those bonds. See syllabus in Cleveland Trust Co. v. Scobie, supra ( 114 Ohio St. 241). On the contrary, the Probate Court, as the finder of the facts, found in effect that Mr. Evans had "no property in" the bonds.
There was no bill of exceptions before the Court of Appeals and there is nothing in the record even suggesting that the Probate Court should not have so found.
The case of Tax Commission v. Hutchison (1929), 120 Ohio St. 361, 166 N.E. 352, cited in the majority opinion, involved a wholly different factual situation. Thus, the report of that case states that all the balances in the bank accounts there involved "were immediately and directly derived from" sales of real estate which had been held in the joint names of the two depositors and the syllabus deals with "a joint bank account maintained by them to which both contributed."
The case of Cleveland Trust Co. v. Scobie, supra ( 114 Ohio St. 241), also involved a wholly different factual situation. There, as stated in the syllabus, "the record" showed "that the depositor intended to transfer to the person to whom he made the account jointly payable a present joint interest therein equal to his own, and the passbook" had "been left in the possession of the bank for withdrawals by either party." On such facts, it is apparent that, to use the words of the majority opinion in the instant case, "the absolute owner creates such rights in another that the prior absolute owner's rights may be completely divested by such other person." There is not even a suggestion of any such facts in the record in the instant case.
Of course, if Mr. Evans had survived Mrs. Evans, he would, "by virtue of" her "contract" with the federal government, have become the owner of these bonds. In re Estate of Hatch (1950), 154 Ohio St. 149, 93 N.E.2d 585. However, this right to the bonds could not accrue in Mr. Evans (1) until Mrs. Evans died and (2) unless Mr. Evans was then living. It could not accrue until then because Mrs. Evans could at any time have prevented its accrual by cashing the bonds. Obviously, this right never did accrue in Mr. Evans.
Unless and until he secured possession of the bonds, Mr. Evans could not have cashed them or gotten anything for them or even interferred with Mrs. Evans' cashing of them. There is no finding or anything in the record to suggest that Mr. Evans ever had possession of, or even access to, the bonds at any time during his life.
Thus, without possession of or access to the bonds and until he survived Mrs. Evans and in the absence of any intention of Mrs. Evans to transfer any present interest in the bonds to him, Mr. Evans would have no property in the bonds. Unless we ignore our pronouncements of law and decisions in cases such as Union Properties, Inc., v. Cleveland Trust Co., supra ( 152 Ohio St. 430), and Nichols v. Metropolitan Life Ins. Co., supra ( 137 Ohio St. 542), we must conclude, as the Probate Court found, that "there is no property in said * * * bonds passing to" Mrs. Evans "upon the death of" Mr. Evans.
Undoubtedly, the General Assembly could provide for a presumption that would shift the burden of proof from the state with regard to the ownership by the decedent of joint and survivorship property that is held in the names of a husband and wife. However, how can anyone reasonably contend that a statute, which states that a tax shall be levied "upon the succession to * * * property passing," is not arbitrary to the extent that it requires that property wholly owned by a wife at her husband's death be taxed as a succession from her husband?
The majority opinion suggests that the General Assembly may constitutionally provide for "the arbitrary designation of one half of joint and survivorship property as a taxable succession, without regard to the actual enhancement of the surviving co-owner's rights" because "the right of succession is created solely by statute" and the general Assembly may therefore "tax in any manner or proportion the right of succession it has created." The writer of this opinion has considerable doubt as to whether the General Assembly may arbitrarily take away a substantial part of a right of succession that it creates merely because the succession is from a deceased spouse if it would not take any part of such right where the succession was from someone else. See Section 2 of Article I of the Ohio Constitution. However, the right of the wife to take involved in the instant case, if it should involve a right to take anything, would not be a right created by statute. Instead, it would be as this court held in In re Estate of Hatch, supra ( 154 Ohio St. 149), a right created by contract.