CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE SECOND CIRCUIT.
Taft, Holmes, Van Devanter, McReynolds, Brandeis, Sutherland, Butler, Sanford, Stone
MR. JUSTICE BUTLER delivered the opinion of the Court.
In 1917, John B. Johnson, a resident of New York, died intestate. Respondent was appointed administratrix, and in that year paid to the State $233,044.20, the transfer tax imposed pursuant to Art. X, Tax Law, c. 60, Consolidated Laws. When respondent made the income tax return for the estate for 1917 (Revenue Act of 1916, c. 463, 39 Stat. 756, 757), she claimed that the state transfer tax paid in that year was deductible; but, yielding to the regulations of the Treasury Department, she did not make the deduction, and under protest paid to the United States an income tax calculated on $164,958.00, amounting to $30,985.53. If the deduction had been made there would have been no taxable income. This action was brought to recover the amount paid. The District Court gave respondent judgment which was affirmed by the Circuit Court of Appeals.
Under the Revenue Act of 1916, the income of the estate for 1917 during administration was subject to a tax to be assessed against the administratrix. She was required to pay the tax and was indemnified against claims of beneficiaries for the amount paid. § 2(b). It is provided that, in computing net income, in the case of a citizen or resident of the United States, for the purpose of the tax, there shall be allowed as deductions the taxes imposed by the authority of the United States or of any State and paid within the year. § 5(a) Third. Administrators and other fiduciaries are subject to all the provisions which apply to individuals. § 8(c).
In United States v. Woodward, 256 U.S. 632, it was held that the federal estate taxes imposed by the Revenue Act of 1916 are deductible in ascertaining net taxable income received by estates of deceased persons during the period of administration or settlement. Revenue Act of 1918, Title II. The court said (p. 635): "It [the estate tax] is made a charge on the estate and is to be paid out of it by the administrator or executor substantially as other taxes and charges are paid. . . . It does not segregate any part of the estate from the rest and keep it from passing to the administrator or executor for purposes of administration, . . . but is made a general charge on the gross estate and is to be paid in money out of any available funds or, if there be none, by converting other property into money for the purpose."
The government contends that the state transfer tax is not imposed on the estate and is not deductible in calculating the federal tax on the income of the estate.
The transfer tax law imposes a tax "upon the transfer of property" from the deceased (§ 220) at rates graduated, according to the amount transferred to each beneficiary and the relationship, or absence of any, between the deceased and beneficiaries. §§ 221, 221(a). Until paid the tax is a lien upon the property of the deceased. The person to whom the property is transferred is made personally liable for the tax. The personal representatives of the deceased are personally liable for the tax until its payment; they are authorized to sell the property of the estate to obtain money to pay the tax in the same manner as they may to pay debts of the deceased. § 224.*fn*
They are not entitled to discharge until the tax is paid. § 236. The law plainly makes it their duty to pay the tax out of the estate. The property remaining passes to the beneficiaries. When property is transferred without the deduction of the tax the beneficiary is required to pay. But, by whomsoever the amount may be handed over to the State, the tax is in effect an appropriation by the State of a part of the property of the deceased at the time of death. And the State's portion is deductible from the legacy and does not pass to the legatee. If money is transferred the tax is withheld; property other than money passes subject to the transfer tax. Cf. Matter of Estate of Swift, 137 N. Y. 77, 83. In Matter of Merriam, 141 N. Y. 479, a bequest to the United States was
held subject to the tax. The court said (p. 484), "This tax, in effect, limits the power of testamentary disposition, and legatees and devisees take their bequests and devises subject to this tax imposed upon the succession of property. This view eliminates from the case the point urged by the appellant that to collect this tax would be in violation of the well-established rule that the state cannot tax the property of the United States. Assuming this legacy vested in the United States at the moment of testator's death, yet in contemplation of law the tax was fixed on the succession at the same instant of time. This is not a tax imposed by the state on the property of the United States. The property that vests in the United States under this will is the net amount of its legacy after the succession tax is paid." That case was brought to this court on writ of error. United States v. Perkins, 163 U.S. 625. Following the decisions of the New York court it was held that the transfer tax is not imposed on property but on the transfer, and that the ...