COURTS DECISIONS ON THE CONSTITUTIONALITY
OF INHERITANCE TAX LAWS.

Federal Decisions on Federal Tax.

The act of Congress of June 13th, 1898, contained provisions for the taxation of legacies and distributive shares of personal property, graduated both according to relationship and also as to amount. This law was attacked with respect to its progressive feature, not as being repugnant to the express limitation in the federal constitution, but as being arbitrary and confiscatory and therefore repugnant to fundamental principles of equity and justice. The supreme court of the United States in 1900 in passing upon this federal statute said in the case of Knowlton vs. Moore, 178 U. S. 41:

"The review which we have made exhibits the fact that taxes imposed with reference to the ability of the person upon whom theb urden is placed to bear the same have been levied from the foundation of the Government.. So, also, some authoritative. thinkers and a number of economic writers contend that a progressive tax is more just and equal than a proportional one. In the absence of constitutional limitation, the question whether it is or is not is legislative and not judicial. The grave consequences which it is asserted must arise in the future, if the right to levy a progressive tax be recognized, involves in its ultimate aspect the mere assertion that free and representative government is a failure, and that the grossest abuses of power are foreshadowed unless the courts usurp legislative function. If a case should ever arise where an arbitrary and confiscatory exaction is imposed bearing the guise of a progressive or any other form of tax, it will be time enough to consider whether the judicial power can afford a remedy by applying inherent and fundamental principles for the protection of the individual, even though there be no express authority in the Constitution to do so. That the law which we have construed affords no ground for the contention that the tax imposed is arbitrary and confiscatory is obvious."

Federal Decisions on State Tax.

A decision of the supreme federal court reported as U. S. vs. Perkins, 163 U. S., 625, is very interesting owing to the fact that the federal government was a beneficiary under the terms of a will, and such bequest came under the provisions of the New York inheritance tax law which imposed a tax on the property devised to the United States. Could a state tax federal property? The court held the tax valid, stating that it was not a tax upon property, but upon its transmission. We could not do better than to quote the language of the court:

"While the laws of all civilized states recognize in every citizen the absolute right to his own earnings, and to the enjoyment of his own property, and the increase thereof, during his life, except so far as the State may require him to contribute his share for public expenses, the right to dispose of his property by will has always been considered purely a creature of statute and within legislative control. * * * * * * Though the general consent of the most enlightened nations has, from the earliest historical period, recognized a natural right in children to inherit the property of their parents, we know of no legal principle to prevent the legislature from taking away or limiting the right of testamentary disposition or imposing such conditions upon its exercise as it may deem conducive to public good. In this view, the socalled inheritance tax of the State of New York is in reality a limitation 'upon the power of a testator to bequeath his property to whom he pleases; a declaration that, in the exercise of that power, he shall contribute a certain percentage to the public use; in other words, that the right to dispose of his property by will shall remain, but subject to a condition that the state has a right to impose. Certainly, if it be true that the right of testamentary disposition is purely statutory, the state has a right to require a contribution to the public treasury before the bequest shall take effect. Thus the tax is not upon the property, in the ordinary sense of the term, but upon the right to dispose of it, and it is not until it has yielded its contribution to the State that it becomes the property of the legatee. ****** That the tax is not a tax upon the property itself, but upon its transmission by will or by descent, is also held both in New York and in several other states."

Thus we see that the federal courts rule that a state inheritance tax is based upon two principles. First, that such a tax is not one on property, but one on the succession. Second, that the right to take property by descent is the creature of the law, and not a natural right. It is a privilege and the authority which confers it, may impose conditions upon it. From these princiciples it is deduced that the states may tax the privilege, discriminate between relatives, and between these and strangers, and grant exemptions and are not precluded from this power by the provisions of the respective state constitutions requiring uniformity of taxation. Magoun vs. Illinois Bank, 170 U. S., 283.

The state of Illinois passed an inheritance tax law exempting small estates giving preference based upon relationship and provided progressive rates. This law was attacked on the ground. that the constitution of the United States prohibits a state denying to any citizen equal protection of the laws. Such a question arising, the supreme court of the United States naturally was called upon to finally settle the questions. We quote from the decision of the court to give its reasoning:

"The clause of the fourteenth amendment especially invoked in that which prohibits a state denying to any citizen the equal protection of the laws. What satisfies this equality has not been and probably never can be precisely defined. * * * * * * It may be safely said that the rule prescribes no rigid equality and permits to the discretion and wisdom of the State a wide latitude as far as interference by this court is concerned. * * * The rule, therefore, is not a substitute for municipal law: it only prescribes that that law have the attribute of equality of operation, and equality of operation does not mean indiscriminate operation on persons merely as such, but on persons according to their relations. In some circumstances it may not tax A more than B, but if A be of a different trade or profession than B, it may. And in matters not of taxation, if A be a different kind of corporation than B, it may subject A to a different rule of responsibility to servants than B. * * * * * In other words the State may distinguish, select, and classify objects of legislation, and necessarily this power must have a wide range of discretion. It is not without limitation, of course. **** Two principles, therefore, must be reconciled in the Illinois Inheritance law if it is to be sustained the equality of protection of the laws guaranteed by the fourteenth amendment, and the power of the State to classify persons and property. The latter principle needs further consideration. What test is there of the reasonableness of a classification of one based upon "some difference which bears a just and proper relation to the attempted classification-and is not a mere arbitrary selection?" Legislation special in character is not forbidden by it, as we have seen. ***** There is therefore no precise application of the rule of reasonableness of classification, and the rule of equality permits many practical inequalities. And necessarily so. In a classification for governmental purposes there cannot be an exact exclusion or inclusion of persons and things. Bearing these considerations in mind we can solve the questions in controversy. There are three main classes in the Illinois statute, the first and second being based respectively, on lineal and collateral relationship to the testator or intestate, and the third being composed of strangers to his blood and distant relatives. The latter is again divided into four subclasses dependent upon the amount of the estate received. The first two classes, therefore, depend on substantial differences which may distinguish them from each other and them or either of them from the other class differences, therefore, which "bear a just and proper relation to the attempted classification." **** And if the constituents of each class are affected alike, the rule of equality prescribed by the cases is satisfied. In other words, the law operates "equally and uniformly upon all persons in similar circumstances." **** ** Nor do the exemptions of the

statute render its operation unequal within the meaning of the fourteenth amendment. ******›

"The provisions of the statute in regard to the tax on legacies to strangers to the blood of an intestate need further comment. * * * There are four classes created, and manifestly there is equality between the members of each class. Inequality is only found by comparing the members of one class with those of another. It is illustrated by appellant as follows: One who receives a legacy of $10,000 pays 3 per cent, or $300, thus receiving $9,700 net; while one receiving a legacy of $10,001 pays 4 per cent on the whole amount, or $400.04, thus receiving $9,600.96, or $99.04 less than the one whose legacy was actually one dollar less valuable. * * * *.* If there is unsoundness it must be in the classification. The members of each class are treated alike—that is to say, all who inherit $10,000 are treated alike; all who inherit any other sum are treated alike. There is equality, therefore, within the classes. If there is inequality it must be because the members of a class are arbitrarily made such and burdened as such upon no distinctions justifying it. * * * * But neither case can be said to be contrary to the rule of equality of the fourteenth amendment. That rule does not require, as we have seen, exact equality of taxation. It only requires that the law imposing it shall operrate on all alike under the same circumstances. The tax is not on money; it is on the right to inherit; and hence a condition of inheritance, and it may be graded according to the value of inheritance. The condition is not arbitrary because it is determined by that value; it is not unequal in operation because it does not levy the same percentage on every dollar; does not fail to treat "all alike under the circumstances and conditions, both in the privilege conferred and the liabilities imposed." Magoun vs. Illinois Bank, 170 U. S., 283 (1897)."

This same law of Illinois imposes an inheritance tax on a life tenant. Is such a provision valid? Five years after the decision of the Magoun case the same court again passed on the inheritance tax law of Illinois. The classification of persons was attacked as unreasonable and arbitrary and that it denies the life tenant equal protection of the laws of Illinois. On this attack in the case of Billings vs. Illinois, 188 U. S., 97, the supreme court of the United States said:

"The assignment of error is 'that the statute is in contravention of the fourteenth amendment to the constitution of the United States of America, in that the classification of life tenants is arbitrary and unreasonable, and denies to the plaintiffs in error, as life tenants, the equal protection of the laws; because the statute, as interpreted and enforced by the State courts, taxes life estates where the remainder is to lineals, but does not tax, and expressly exempts, similar life estates where the remainder

is to collaterals or to strangers in blood.' ***** *If there had been a proper classification there could not have been the denial of the equal protection of the laws, and we, therefore, expressed (in Magoun vs. Illinois Bank) and illustrated the principle upon which it should be based. We said it was established by cases that classification must be based on some reasonable ground. It could not be a "mere arbitrary selection." But what is the test of an arbitrary selection? It is difficult to exhibit it precisely in a general rule. Classiffication is essentially the same in law as it is in other departments of knowledge or practice. It is the grouping of things in speculation or practice, because they 'agree with one another in certain particulars and differ from other things in those same particulars.' Things may have very diverse qualities and yet be united in a class. They may have very similar qualities and yet be cast in different classes. ***** Other illustrations may be taken from the cases, which tend to the same end. If the purpose is within the legal powers of the legislature, and the classification made has relation to that purpose (excludes no persons or objects that are affected by the purpose, includes all that are), logically speaking, it will be appropriate; legally speaking, a law based upon it will have equality of operation. ***** Undoubtedly, life tenants regarded simply as persons, may be in legal contemplation the same; estates for life regarded simply as estates with their attributes also in legal contemplation may be said to be the same, but that is not all that is to be considered, nor is it determinative. We must regard the power of the State over testate and intestate dispositions of property; its power to create and limit estates, and, as resulting, its power to impose conditions upon their transfer or devolution. It is upon this power that inheritance tax laws are based, and we said, in the Magoun case, that the power could be exercised by distinguishing between the lineal and collateral relatives of a testator. There the amount of tax depended upon him who immediately received: here the existence of the tax depends upon him who ultimately receives. That can make no difference with the power of the state. No discrimination being exercised in the creation of the class, equality is observed. Crossing the lines of the classes there is equality." Billings vs. Illinois, 188 U. S., 97, (1902).

The state of California has a very good inheritance tax iaw based upon an outline drafted by a committee of the International Tax Association in 1910. This law provides for certain exemptions in favor of certain strangers to the blood as the wife of decedent or a widow of the son or the husband of a daughter of decedent. Does the fourteenth amendment to the federal constitution compel-states in levying inheritance taxes to conform to blood relationship? This question was settled in 1905 in the