MATTER OF MCKELWAY, N.Y., Judgment, Law, casemine.com

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Attorney(S)

Marcus B. Campbell for appellant. Edgar M. Cullen and Francis L. Archer for respondent.

Judges

Cuthbert W. Pound

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Smart Summary

Factual and Procedural Background

St. Clair McKelway and his wife, Virginia B. McKelway, owned certain corporate bonds jointly and deposited them with the Brooklyn Trust Company as custodian under an agreement that provided for income to be paid in equal shares and for the securities and income to be delivered to the survivor upon the death of either party. At the time the agreement was made, the right of survivorship property interest was not expressly subject to taxation. Subsequently, the Tax Law was amended in 1915 to impose a transfer tax on such joint property transfers upon death.

Mr. McKelway died in 1915 leaving a will that bequeathed all his property to his wife, who was also named executrix. The transfer tax appraiser determined that the joint property was taxable as if it passed by will. The Surrogate's Court relieved the joint property from taxation, reasoning that the transfer occurred during the testator's lifetime and was not affected by the amendment. The Appellate Division affirmed this decision by a divided court. The Court of Appeals was tasked with determining whether the state could impose a transfer tax on the joint property interest passing by survivorship after the amendment or whether the entire right of succession vested prior to the amendment.

Legal Issues Presented

Whether the state may impose a transfer tax on the right of survivorship in joint property upon the death of one joint tenant under the amended Tax Law.
Whether the entire right of succession to the joint property vested prior to the amendment, thus exempting the transfer from taxation.
Whether the tax applies to the whole joint property or only to the beneficial interest arising by survivorship.

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Matter of Klatzl, 216 N.Y. 83	Survivorship interest passes under the instrument creating the tenancy, not intestate succession.	Used to clarify that the survivor’s interest arises from the joint tenancy agreement, not intestate laws.
Atty.-Gen. v. Clark, 222 Mass. 291	Similar principle regarding survivorship and taxation of joint property.	Supported the notion that survivorship interests are distinct from intestate succession for taxation.
Matter of Lansing, 182 N.Y. 238	Transfer tax applies only to transfers occurring after enactment; no tax on vested interests prior to amendment.	Referenced by the Surrogate and Appellate Division to support non-taxation of joint property transfer.
Overheiser v. Lackey, 207 N.Y. 229	Characterization of joint ownership and survivorship; disfavor of tenancy by entirety ownership.	Used to distinguish joint tenancy from tenancy by entirety and to explain survivorship principles.
Matter of Albrecht, 136 N.Y. 91	Husband and wife do not hold personal property as tenants by entirety.	Clarified the nature of joint ownership between spouses in this case.
Hiles v. Fisher, 144 N.Y. 306	Distinction between joint tenants and tenants by entirety regarding conveyance and survivorship.	Supported the court’s analysis of the survivorship and severability of joint tenancy.
Matter of Pell, 171 N.Y. 48	Limitations on taxation of vested estates and remainders.	Distinguished the transfer tax on vested interests versus survivorship interests.
Matter of Vanderbilt, 50 App. Div. 246; 163 N.Y. 597	Taxation of interests analogous to powers of appointment under wills executed prior to tax laws.	Supported the court’s holding that survivorship interests acquired at death may be taxed.
U.S. v. Perkins, 163 U.S. 625	State’s broad sovereign authority to impose taxes on property transfers at death.	Affirmed the state's jurisdiction to regulate transmission of property by taxation.

Court's Reasoning and Analysis

The court analyzed the nature of joint tenancy ownership between Mr. and Mrs. McKelway, emphasizing that the property was held as joint tenants and not tenants by entirety, which has different legal consequences. The court noted that the right of survivorship interest is not vested in the survivor until the death of the other joint tenant, making the survivor’s acquisition of the deceased's interest a transfer occurring at death. The 1915 amendment to the Tax Law explicitly taxed such transfers of intangible joint property interests upon death.

The court distinguished this transfer tax from those on vested estates or contingent remainders, which are not subject to such taxation. It reasoned that the survivor’s beneficial interest arising by survivorship is a new property right acquired at death, and thus taxable under the amended statute. The court rejected the argument that the entire right of succession vested before the amendment, holding instead that only the survivor’s interest arising at death is taxable. Furthermore, the imposition of the tax did not violate any contract between the spouses, as the joint tenancy was ambulatory and terminable at any moment by either party.

Accordingly, the court concluded that the transfer tax applies to the beneficial interest acquired by survivorship and that the prior rulings exempting the joint property from taxation were incorrect.

Holding and Implications

The order of the Appellate Division is reversed.

The case is remitted to the Surrogate’s Court to impose the transfer tax on the joint property in accordance with the court’s opinion. This decision directly affects the parties by requiring taxation of the survivorship interest in joint property acquired at death. The court did not establish a new precedent beyond the application of the existing statutory amendment and recognized principles governing joint tenancy and transfer taxes.

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In the Matter of the Transfer Tax upon the Estate of ST. CLAIR McKELWAY, Deceased. THE COMPTROLLER OF THE STATE OF NEW YORK, Appellant; VIRGINIA B. McKELWAY, Respondent.

POUND, J.

On November 24, 1913, St. Clair McKelway and Virginia B. McKelway, his wife, owned jointly certain securities consisting of corporate bonds, which they delivered to the Brooklyn Trust Company to hold as custodian, pay them the income in equal shares, and, should the agreement be in force at the death of either, to deliver and pay over the securities and any income thereon then on hand to the survivor.

At the time this agreement was entered into the interest in property which upon the death of one joint tenant passes by right of survivorship to his co-tenant was not in express terms subject to taxation and it has been held that in such cases the survivor takes, not under the laws regulating intestate succession, but under the conveyance or instrument by which the tenancy is created. ( Matter of Klatzl, 216 N.Y. 83; Atty.-Gen. v. Clark, 222 Mass. 291.) Thereafter and before the death of Mr. McKelway additions were made to the joint property and then section 220 of the Tax Law (Cons. Laws, ch. 60) was amended by chapter 664 of the Laws of 1915, by the addition thereto of subdivision 7 which reads as follows:

" Whenever intangible property is held in the joint names of two or more persons, or as tenants by the entirety, or is deposited in banks or other institutions or depositaries in the joint names of two or more persons and payable to either or the survivor, upon the death of one of such persons the right of the surviving tenant by the entirety, joint tenant or joint tenants, person or persons, to the immediate ownership or possession and enjoyment of such property shall be deemed a transfer taxable under the provisions of this chapter in the same manner as though the whole property to which such transfer relates belonged absolutely to the deceased tenant by the entirety, joint tenant or joint depositor and had been bequeathed to the surviving tenant by the entirety, joint tenant or joint tenants, person or persons, by such deceased tenant by the entirety, joint tenant on joint depositor by will."

Mr. McKelway died on July 16, 1915, leaving a last will and testament by which he gave his wife all his property and named her executrix thereof. The will was duly admitted to probate. The transfer tax appraiser found that the joint property was taxable as though it had passed by the will. The surrogate relieved the joint property from taxation, holding that the only transfer thereof was consummated in the lifetime of the testator and that it was not taxable for the reason that where there is no transfer there is no tax, and a transfer made before the passage of the amendment was not affected by it. ( Matter of Lansing, 182 N.Y. 238. ) The Appellate Division affirmed the order of the surrogate by a divided court and the question for us to answer is whether the state may, by the express terms of a statute, impose a tax upon the joint property in which the deceased had an interest ceasing on his death to the extent to which a benefit accrues or arises to the survivor by the cesser of such interest, or whether the entire right of succession accrued prior to the amendment and no interest became vested in the survivor by reason of his death.

It has been said that this kind of ownership is "an object of disfavor" ( Overheiser v. Lackey, 207 N.Y. 229, 233); on the other hand the tax laws are to be construed strictly. But the jurisdiction of the state to regulate and control the transmission of the property of the dead to the living is an attribute of sovereignty, far reaching, if not unlimited, in its possible extent over the privilege taxed. ( U.S. v. Perkins, 163 U.S. 625.)

Mr. and Mrs. McKelway owned this personal property as joint tenants but not by the entirety. There is a joint ownership of personal property analogous to a joint estate in lands ( Overheiser v. Lackey, 207 N.Y. 229, 236), but husband and wife do not take personal property as tenants by the entirety. ( Matter of Albrecht, 136 N Y 91, 94.) Joint tenants, by reason of the combination of entirety of interest with the power of transferring in equal shares, are said to be seized per my et per tout, or by the half and the whole, but tenants by the entirety are seized per tout et non per my, and the conveyance by either husband or wife will have no effect against the other if survivor. ( Hiles v. Fisher, 144 N.Y. 306.) Upon the vesting of an estate by the entirety, both tenants become seized of the whole estate and upon the death of one the survivor acquires no new or additional interest by survivorship. ( Matter of Klatzl, supra.) But joint ownership in personal property may be severed by the act of one in disposing of his interest. If the interest of one joint owner passes to a third party he and the other joint tenant become tenants in common. The doctrine of survivorship applies only if the jointure is not severed. (Williams on Personal Property, pp. 302-306.) The undivided half of this joint property which Mr. McKelway might have effectually disposed of at any time during his life never passed into the absolute ownership of his wife until her husband's death. A transfer tax thereon does not diminish the value of a vested estate and is free from the objections to a tax on vested remainders and reversions as set forth in Matter of Pell ( 171 N.Y. 48) or to a tax on contingent remainders as set forth in Matter of Lansing ( supra).

As to the one-half which Mrs. McKelway herself owned and had the right to dispose of, the rule of the Pell case must govern. She gained nothing in regard thereto by the death of her husband except as the jus accrescendi eliminated his interest. The right of the survivor of two joint tenants of personal property to the exclusive ownership thereof may be deemed a taxable transfer of one-half of the joint property but not to the whole. It is taxable only to the extent of the beneficial interest arising by survivorship, which is, as we have seen, the accruer by survivorship of the whole instead of the half. To this extent it was a property right fully acquired only on survivorship, analogous to an interest created by a power of appointment under a will executed prior to the enactment of the law taxing transfers, and, therefore, one that could be cut down by the imposition of an excise tax after the joint ownership began. ( Matter of Vanderbilt, 50 App. Div. 246; 163 N.Y. 597.) The imposition of such a tax violates no contract for neither joint tenant agrees not to terminate the joint tenancy. Mrs. McKelway had no contract with her husband as to the joint property which was not as ambulatory as a will to the last moment of Mr. McKelway's life and, for the purposes of taxation, she is deemed to have acquired his interest in the joint property by his death.

The order of the Appellate Division should be reversed, with costs in this court and Appellate Division, and the proceeding remitted to the Surrogate's Court for the purpose of imposing a tax in accordance with this opinion.

HISCOCK, Ch. J., CHASE, HOGAN, McLAUGHLIN, CRANE and ANDREWS, JJ., concur.

Order reversed, etc.

MATTER OF MCKELWAY