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(Supreme Court, Appellate Division, Second Department. December 21, 1917.)



Under a will devising rents and profits from certain city lots to testator's son for life, with authority to appoint such realty to his issue or to his sisters or their issue by deed or will, and, on failure to appoint, devising the realty to his issue and in default of issue to his sisters and their heirs in fee, the sisters had a vested interest, subject to the birth of issue to their brother and to his exercise of such power of appointment. 2. TAXATION 885-TRANSFER TAX-VESTED INTEREST.

Such vested interest was not subject to a transfer tax.


Under Transfer Tax Law (Consol. Laws, c. 60) § 220, subd. 6, providing that, when any person shall exercise a power of appointment derived from any disposition of property made before or after the law, such appointment when made shall be deemed a taxable transfer as though the property to which the appointment related belonged absolutely to the donee of such power and had been bequeathed or devised by his will, transfers by deed in execution of a power of appointment contained in a will of a testator dying before any inheritance tax law, not being dependent on or connected with death, were not subject to a transfer tax. 4. TAXATION 860-INHERITANCE TAX-PRINCIPLE.

The legislative purpose must be gathered from the entire system or method of levying duties on property changing hands at death, the principle being to tax the state's grant of a privilege to succeed to the property passing on death.

Appeals from Orders of Surrogate, Westchester County.

In the matter of the transfer tax upon the estate of John G. Wendel, deceased. Appeal by the personal representatives from order of the Surrogate entered upon the appraiser's supplemental report and appeal by them from order dismissing their appeal from the appraisal as made by such supplemental record. Orders modified.

See, also, 95 Misc. Rep. 406, 160 N. Y. Supp. 822.

Argued before JENKŠ, P. J., and THOMAS, MILLS, PUTNAM, and BLACKMAŘ, JJ.

Lewis L. Delafield, of New York City (George Flint Warren, Jr., and Alfred Gregory, both of New York City, on the brief), for appellants.

Francis A. Winslow, of New York City, for State Comptroller respondent.

PUTNAM, J. These appeals question the power to tax transfers by deed in execution of a power of appointment in the will, made in 1875, of the deceased's father, John D. Wendel, who died in 1876 before any statute in this state imposed an inheritance or transfer tax. [1, 2] John D. Wendel, by paragraph 21 of his will, devised to his son John G. Wendel certain lots in New York, "to have and to hold * for and during his life, the rents issues and profits I devote expressly to his own use and benefit, and I authorize him to appoint the said real estate to and amongst his lawful issue or to his sisters or their issue in such share and for such estates and on such condi

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tions as he may think fit by deed or by will, and in case he shall leave no such valid appointment I devise the said lots of land to his lawful issue and if he shall leave no such issue then to his sisters their heirs and assigns in fee simple forever."

On January 23, 1911, said John G. Wendel conveyed these lands to his sisters in pursuance of this power of appointment, by separate deeds which included also his own life interest therein. They were all dated December 27, 1910, and were together recorded on January 23, 1911. The interests are differently and diversely described in these instruments. The grantees under these deeds entered into possession and thereafter received the income arising therefrom and also paid the taxes thereon. John G. Wendel, the grantor, died on November 30, 1914, intestate, and without issue.

The appraiser first treated these properties as not taxable. The surrogate, however, overruled this view, resulting in a supplemental report. The lands involved were then valued at $1,525,000. The calculated value of the life estate of John G. Wendel in the six properties was $350,149, leaving, as subject to tax, a capital value of $1,174,851.

The sisters of John G. Wendel had a vested interest under the will of 1876, subject to two possibilities, the birth of issue to their brother, and the exercise of this power of appointment by which the lands might be distributed among them differently. As their interest was thus vested, it was not subject to a transfer tax. Matter of Pell, 171 N. Y. 48, 63 N. E. 789, 57 L. R. A. 540, 89 Am. St. Rep. 791; Matter of Chapman, 133 App. Div. 337, 117 N. Y. Supp. 679, affirmed 196 N. Y. 561, 90 N. E. 1157.

[3] The Transfer Tax Law, § 220, subd. 6, provided:

"Whenever any person or corporation shall exercise a power of appoint'ment derived from any disposition of property made either before or after the passage of this chapter, such appointment when made shall be deemed a transfer taxable under the provisions of this chapter in the same manner as though the property to which such appointment relates belonged absolutely to the donee of such power and had been bequeathed or devised by such donee by will."

In 1892, there had been appended to this statute a declaration (following the policy in other states) that property passing through the failure to execute a power of appointment was nevertheless subjected to transfer tax, the same as if the donee of the power had owned the property, and had devised it by will. This was held in 1905 to have been ineffective, since "where there is no transfer there is no tax." Matter of Lansing, 182 N. Y. at 247, 74 N. E. 885. Accordingly, this provision was repealed. Laws of 1911, c. 732.

The Legislature have validly inverted the former rule regarding the source of a title thus coming through the exercise of a power of appointment. It formerly was related back to the original instrument creating the power (Duke of Marlborough v. Lord Godolphin, 2 Vesey, 61, 67; Doolittle v. Lewis, 7 Johns. Ch. 45, 48, 11 Am. Dec. 389), so that transfer taxes were at first based on the degree of kinship between the original donor of the power and the final appointees (Matter of Stewart, 131 N. Y 274, 30 N. E. 184, 14 L. R. A. 836).

In 1897, we have the enactment now under consideration, that for the purpose of inheritance taxation the transfer from the donee of the power should be deemed a transfer, (a) as if the property under the appointment belonged absolutely to the donee of such power, and (b) had been "bequeathed or devised by such donee by will." This was to lay emphasis on the last step in the devolution of interest. It was natural to have in mind powers exercised by will. The draftsman of this amendment considered an appointment exercised by will. Otherwise how could a devise or bequest furnish any standard of comparison? An appointment by deed inter vivos goes into immediate effect. Could legislative fiat make such grant by a living person a disposition by will?

General legislation on the subject of the transfer tax has been limited to gifts causa mortis, if otherwise the tax would be imposed upon rights of succession which had accrued before the statute came into existence. Matter of Seaman, 147 N. Y. 69, 41 N. E. 401.

Likewise, the language here cannot be taken to place deeds inter vivos on the footing of testamentary dispositions, which are taxed for that very reason that they are by will. On such ground appointments under a power have been taxed because by a will, and not effective until the donee's death. Orr v. Gilman, 183 U. S. 278, 22 Sup. Ct. 213, 46 L. Ed. 196; Matter of Vanderbilt, 50 App. Div. 246, 63 N. Y. Supp. 1079; Id., 163 N. Y. 597, 57 N. E. 1127; Matter of Fearing, 200 N. Y. 340, 93 N. E. 956. If the creation of the power direct that it must be exercised during the donee's life, it cannot be exercised by will. Although a power was given by deed, an appointment by will was subject to tax. Matter of Delano, 176 N. Y. 486, 68 N. E. 871, 64 L. R. A. 279; Chanler v. Kelsey, 205 U. S. 466, 27 Sup. Ct. 550, 51 L. Ed. 882. The state's taxing power rests on transfers and successions effective through death. Had these appointments been by deed, but not to take effect till Mr. Wendel should die, they would have been taxable. But where the transfer was by deed taking full effect in the donee's lifetime, the right had been completely exercised, with no element of inheritance. The policy in other states taxing the failure to appoint, under a power, is based on the view that the failure to act affects the course of the succession, and until such failure is complete the succession is not fully determined. Minot v. Treasurer and Receiver General, 207 Mass. 588, 93 N. E. 973, 33 L. R. A. (N. S.) 236; Montague v. State, 163 Wis. 58, 157 N. W. 508. But here the succession was complete and absolute on delivery of the deeds, and placed beyond the possibility of change at Wendel's death. Such transfers, not being dependent on or connected with death, are clearly without the legislative intention, and beyond the purview of this statute. The question whether the Legislature might lay an excise tax on the creation of a power, as an artificial privilege, and thus subject to the state's control, is not this case, where the only transfers are conveyances in the donee's lifetime. In Matter of Keeney, 194 N. Y. 281, 87 N. E. 428, and Keeney v. New York, 222 U. S. 526, 32 Sup. Ct. 105, 56 L. Ed. 299, 38 L. R. A. (N. S.) 1139, the taxation was on the succession upon Mrs. Keeney's death to a quarter of the income from a trust fund, which

had been paid to her during her life. As this passed upon her death, it came under the state's taxing power.

[4] The legislative purpose, however, must be gathered from the entire system-a method to levy duties, imposed on property changing hands at death. Whether called death duties, or legacy duties, as in England, or droits de mutation par deces1 in France, the principle is to tax the state's grant of a privilege to succeed to property passing on death. Necessarily this appraisal was made as of the date of the deeds in the lifetime of Mr. Wendel. Suppose, however, Mr. Wendel had survived his appointments 20 years, instead of 3 years? Would the Legislature have imposed on such estate a retroactive tax based on what had long since been alienated, and possibly had passed through many successive hands? How could the executors be made personally liable for the tax over property wholly beyond their control until its payment, as section 224 provided?

In view of these incidents, there was no basis to set up as a standard of comparison a devise or bequest by will, ambulatory and ineffective, before the testator's death.

The execution of this power caused these lands to pass then and there. Death was not the cause nor the occasion of this succession.

Hence I advise that the orders of the Surrogate's Court of Westchester County be modified, so as to exclude from the appraisal the six properties appointed by the deceased under the deeds during his lifetime, with costs of this appeal to appellants. All concur. Settle order on notice.

CAMPBELL v. LONDON & LANCASHIRE INDEMNITY CO. OF AMERICA. (Supreme Court, Trial Term, Erie County. December, 1917.)



In the absence of evidence of bad faith, an insurance company, indemnifying a motor company against loss from liability for injuries to third persons, is liable on its policy, where judgments were recovered against the insured and it borrowed the money with which it paid the judgments, giving its note to the lender, and afterwards took up the note by assigning its cause of action against insurer; and the insurer could not escape liability, although the motor company had no property out of which the judgments against it could have been satisfied.

Action by Lafe B. Campbell against the London & Lancashire Indemnity Company of America. On defendant's motion to set aside directed verdict. Denied.

Clark H. Timerman, of Buffalo, for the motion.

Maurice I. Franklin and Frank Gibbons, both of Buffalo, opposed.

BROWN, J. Defendant indemnified the Hurd-Landsheft Motor Company against loss from the liability imposed by law upon it for damages on account of bodily injuries suffered by any person by rea

1.See In re Scott; Scott v. Scott, L. R. [1915] 1 Chan. 592.

son of the motor company's ownership of any automobile. John Zelekowski, by Maurice I. Franklin, his attorney, recovered judgments aggregating $1,264.47 against the motor company for personal injuries inflicted by its automobiles. The motor company had no known property, except its franchise or charter, and the indemnity policy issued by the defendant, whereby the judgments could be collected. On August 14, 1917, the motor company, by C. De Forest Cummings, of the firm of Kent, Cummings & Smith, its attorneys, delivered its promissory note for $1,264.47, payable to the order of the plaintiff, to Maurice I. Franklin, as attorney for the plaintiff. Concurrently therewith Mr. Franklin delivered to Mr. Cummings the certified check of the plaintiff for $1,264.47, drawn on the German-American Bank, to the order of Kent, Cummings & Smith, attorneys for the motor company, which was deposited by them in the Fidelity Trust Company Bank on August 15, 1917. Concurrently therewith Mr. Cummings delivered to Mr. Franklin, as attorney for the judgment creditor, Zelekowski, the certified check of Kent, Cummings & Smith, as attorneys for the motor company, drawn on the Fidelity Trust Company, for $1,264.47, to the order of Mr. Franklin, in payment of the judgments, which check was deposited by Mr. Franklin in the German-American Bank on that day. On August 15, 1917, Mr. Franklin, as attorney for Zelekowski, delivered to Mr. Cummings, as attorney for the motor company, satisfaction pieces of the judgments. Concurrently therewith Mr. Cummings, as attorney for the motor company, delivered to Mr. Franklin, as attorney for the plaintiff, in payment of the aforesaid promissory notes, an assignment of the motor company's claim against the defendant, based upon the indemnity of the motor company against loss, and concurrently therewith Mr. Franklin, as attorney for the plaintiff, delivered to Mr. Cummings, as attorney for the motor company, the aforesaid promissory note of the motor company for $1,264.47, to the order of plaintiff, canceled and paid. On August 17, 1917, Mr. Franklin settled with his client, Zelekowski, paying him a substantial part of the money received on the 14th, when the judgments were satisfied. Prior to any of these transactions it had been suggested by the parties that they would be carried out for the purpose of maturing the claim against the defendant.

The defendant challenges the good faith of the motor company in thus procuring satisfaction of the judgments, asserting that the loss to the motor company is a mere pretense, and that no liability has been created against it upon the indemnity contract; the argument being that the motor company, having no known property out of which the judgments could have been satisfied, could not have incurred the loss covered by the contract of indemnity by the transactions above set forth. The challenge of the good faith of the foregoing transactions overlooks the fact of actual payment of the amount of the judgments to the judgment creditor. It must be admitted that, if there had been no payment of the judgments to the judgment creditor, but the moneys were to be held by the judgment creditor to await the result of this action, such a pretended payment would be in bad faith, and would defeat plaintiff's right of recovery. When plaintiff proved that the avails

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