
    In re Estate of Packard: Lewis, Admr., Appellant, v. Bowers, Tax Commr., Appellee.
    (No. 37529
    Decided March 27, 1963.)
    
      
      Mr. George D. Lewis, for appellant.
    
      Mr. Mark McElroy and Mr. William B. Saxbe, attorneys general, Mr. Joseph L. White and Mr. Daronne B. Tate, for appellee.
   Gibson, J.

There is no dispute over whether the succession to the Ohio asset, i. e., a business block called the “Packard Block” in the city of Warren, Ohio, is subject to the Ohio succession tax nor is there any issue regarding the appraised valuation at $87,500 of the asset. The only question is whether debts, costs of administration and taxes, including the federal estate tax, are to be deducted from the appraised value of the Ohio asset in determining the amount of the succession tax.

Appellant, the ancillary administrator, contends that a portion of the debts, including the federal estate tax and costs of administration, must be deducted from the valuation of the Ohio realty asset in computing the Ohio nonresident succession tax. In other words, appellant says he should pay an Ohio succession tax based on approximately $59,000 rather than $87,500, thus allowing a deduction for a portion of the federal estate tax and the cost of administration. For this proposition, appellant relies heavily upon Section 5731.10, Revised Code, which provides in pertinent part:

“When assessing the tax upon a succession passing from a nonresident decedent, the court shall determine the value of the aggregate succession, which shall be the fair market value of all the property, real or personal, whether within or without the state, passing to the successor from the estate of the decedent, after making the deductions computed as though the decedent had been a resident of this state and all of his property were located in this state. It shall further determine the value of the Ohio succession, which shall be the fair market value of that part of the aggregate succession which passes to the successor in property subject to inheritance tax under sections 5731.01 to 5731.56, inclusive, of the Revised Code, after allowing the deductions. Out of the Ohio succession so determined the successor shall he allowed such proportion of the exemption to which he would be entitled under section 5731.09 of the Revised Code as is represented by the ratio of the value of his Ohio succession to the value of his aggregate succession. Tax shall then be assessed on the balance of the Ohio succession at the rates and in the method provided for by section 5731.12 of the Revised Code * # *.” (Emphasis supplied.)

We believe the appellant reads too much into Section 5731.10, which is special legislation addressed to the assessment of the tax on the succession from a nonresident decedent. It seems clear that the first two sentences of the section, as quoted above, provide for the computation of a ratio between the value of the aggregate succession and the value of the Ohio succession. However, the third sentence of the section plainly states that the ratio is to be used in determining the proportion of the exemption to which the successor is entitled under Section 5731.09. There is no provision in Section 5731.10 calling for the apportionment of debts or the federal estate tax, which tax this court in Tax Commission, ex rel. Price, Atty. Genl., v. Lamprecht, Admr. (1923), 107 Ohio St., 535, assumed to be included in debts at least as far as a resident decedent’s estate was concerned. A careful search of the Revised Code fails to disclose any statutory provision requiring the apportionment of debts or the federal estate tax. In view of the express provision in this section for apportioning exemptions, it would seem that if the General Assembly had intended to grant apportionment of debts, federal estate taxes and other deductions, it would have said so.

In the absence of a clear legislative mandate that debts be apportioned, this court is faced with determining whether equity and public policy require a finding that the special statute by implication calls for apportionment of debts and federal estate taxes.

Appellant contends that the tenth article of the will requires that all death taxes be paid from the assets of the residuary estate, and, since the Ohio real estate is part of the residuary estate, there should be an apportionment of the tax between the Ohio succession and the non-Ohio succession. It is evident to us that this article has no bearing upon the question as to whether Ohio should apportion the federal estate tax between Ohio property and property outside Ohio in assessing a tax upon the succession from a nonresident decedent. Rather the article expresses an intention that residuary or general legatees should bear death taxes ahead of specific or special legatees. This intention of the testatrix might well be considered in subsequent litigation, if any, between the various classes of beneficiaries for contribution, but is immaterial to the issue now before this court.

At common law, real estate is not liable for the debts of a decedent. The General Assembly clearly has indicated an intention that an executor or administrator is not to ask authority to sell the decedent’s real estate until after he has ascertained that there is insufficient personal property to pay all of decedent’s debts, widow’s allowance and costs of administration. Section 2127.02, Revised Code. See Foreman, Admx., v. Medina County National Bank (1928), 119 Ohio St., 17; DuVall v. Faulkner (1925), 113 Ohio St., 543; and Wood, Admr., v. Butler (1872), 23 Ohio St., 520. Appellant concedes the validity of this rule but argues that the will requires the executor to sell the real estate and pay the debts including death taxes, and, therefore, under the doctrine of equitable conversion, the Ohio real estate is to be treated as personalty.

There is no question that the fictional doctrine of equitable conversion, under which real estate will be regarded as personalty, or vice versa, is well recognized in Ohio. See 11 Ohio Jurisprudence (2d), 646, Conversion in Equity, Section 1 et seq., and cases cited therein. The doctrine is founded upon the maxim that equity regards and treats that as done which in good conscience ought to be done. But as Summers, J., pointed out in Geiger, Exr., v. Bitzer (1909), 80 Ohio St., 65, 74, equity does not regard and treat as done what might be done, or what could be done, but only what ought to be done.

Whether a direction to sell real estate is to be considered an equitable conversion of realty into personalty depends upon the peculiar language of the will under consideration. 11 Ohio Jurisprudence (2d), 651, Conversion in Equity, Section 7. The will of decedent does not clearly direct the executor to dispose of the “Packard Block” in Warren, Ohio. The first paragraph of the ninth article of decedent’s will directs the trustee and executor “to hold or dispose of” all the residue of the decedent’s estate, real and personal. The first numbered paragraph of the twelfth article provides that the trustee and executors “may” sell or “may lease, mortgage, or otherwise dispose of, any properties, real or personal, other than property specifically devised or bequeathed”. The second numbered paragraph of the same article directs the executor to “sell as promptly as is feasible after my death, in such manner as they deem most practical and advantageous”. Considering the will as a whole, the decedent must have intended that some real estate possibly would become part of the trust estate. However, it is clear that failure to sell the Ohio property will in no way interfere with final settlement of the estate.

The realty in question is income producing and, as we have indicated in discussing the terms of the decedent’s will, the executor or trustee may retain it as an investment if he chooses to do so. Although no evidence was presented as to how the value of the “Packard Block” is being reported for New York inheritance tax purposes, it seems unlikely that the theory of equitable conversion is being advanced there, for to do so would increase the amount of personalty taxable in that state.

Additional practical considerations militate against requiring the deduction of a proportionate part of the federal estate tax from the value of the Ohio succession in determining the Ohio succession tax. It is conceded that for the past 23 years, at least, the Tax Commissioner has followed the method of determining the tax on the succession passing from a nonresident decedent employed in this case. Further, this method of computation is consistent with the allowance by the Tax Commissioner of all debts and expenses of out-of-state administration from personal property when a decedent domiciled in Ohio dies owning realty outside Ohio. Such long standing administration practices are not only persuasive, but should not be set aside unless judicial construction makes it imperative to do so. See In re Estate of Friedman (1950), 154 Ohio St., 1; 50 Ohio Jurisprudence (2d), 253, Statutes, Section 268.

Appellant calls attention to Section 2129.23, Revised Code, which, as he notes, requires the ancillary administrator to pay the expenses of the ancillary adminstration, including attorney fees, public charges and taxes, and all claims of creditors. The same section indicates that such expenses are to be paid from any residue of the personal estate and then the proceeds of real estate sold for the payment of debts. This section neither expressly nor by necessary implication calls for an apportionment of federal estate taxes between the Ohio succession and the aggregate succession.

The absence of a clear legislative intention to apportion debts, federal estate taxes and other deductions between the Ohio succession and the aggregate succession from a nonresident decedent, coupled with the reasons and practices discussed herein, compel the conclusion that such apportionment is not required. Accordingly, the judgment of the Court of Appeals is affirmed.

Judgment affirmed.

Zimmerman, Matthias and O’Neill, JJ., concur.

Taet, C. J., and Herbert, J., dissent in part.

Guernsey, J., dissents from the judgment.

Guernsey, J., of the Third Appellate District, sitting by designation in the place and stead of Griffith, J.

Taft, C. J.,

dissenting in part. The first sentence of Section 5731.10, Revised Code, specifies that “the value of the aggregate succession [i. e., as indicated by Section 5731.01(B), Revised Code, the property passing from the estate to those who receive something therefrom] * * # shall he the fair market value of all the property, real or personal, whether within or without the state, passing to the successor [as indicated by Sections 5731.01(B) and 5731.03, “the successor” includes all of those who receive something as legatees, devisees or other distributees of the estate] from the estate of the decedent, after making the deductions computed as though the decedent had heen a resident of this state and all of his property were located in this state.”

Admittedly, in the instant case, this would require deduction from the value of decedent’s gross estate of all the decedent’s debts, all the costs of administration, and the amount of the federal estate tax. Tax Commission, ex rel. Price, Atty. Genl., v. Lamprecht, Admr. (1923), 107 Ohio St., 535, 140 N. E., 333, 31 A. L. R., 985, decided two years before the enactment of Section 5731.10, so holds.

The next sentence of Section 5731.10 specifies that “the value of the Ohio succession * * * shall he the fair market value of that part of the aggregate succession which passes to the successor in property subject to [the Ohio] inheritance tax * * * after allowing the deductions [aforesaid].”

Those “deductions aforesaid” necessarily include all the decedent’s debts, all the costs of administration and the amount of the federal estate tax.

Thus, the General Assembly has in the first two sentences of Section 5731.10, Revised Code, very clearly expressed an intention not to take the gross value of property of a nonresident decedent that is subject to the Ohio inheritance tax as the value of the Ohio succession, but instead to take only “part of the aggregate succession,” which had been specifically defined in the previous sentence as the gross value after deductions therefrom for debts, federal estate tax and costs of administration; and then, in order to make absolutely certain that that intention should not be misunderstood, the General Assembly expressed it again by stating that that “part of the aggregate succession” was to be “after allowing the deductions aforesaid,” i. e., deductions for debts, costs of administration and federal estate tax.

In the instant case, the personal property of the decedent, which was not specifically bequeathed by her will, was more than sufficient to pay all her debts, the federal estate tax and all the costs of administration. In such an instance, in the absence of provisions in the will for payment from other property, such debts and those costs of administration should be paid out of such personal property, although there may be some question as to whether, in the absence of provisions of a will requiring that conclusion, such personal property should bear the entire burden of the federal estate tax. See McDougall, Admr., v. Central National Bank of Cleveland, Trustee (1952), 157 Ohio St., 45,104 N. E. (2d), 441.

There are no provisions of the will requiring payment of the debts of the decedent or the costs of administration, other than the taxes hereinafter referred to, from any other property. However, clause “Tenth” of the will definitely directs payment of “all estate, inheritance, transfer, legacy, succession and other death taxes, state and federal, * * * entirely from and out of the assets available for and which constitute my residuary estate, disposed of by the ninth clause of this will” and that ninth clause disposed of “all the rest, residue and remainder of” decedent’s “estate, both real and personal * * * wheresoever situate.” Thus, those taxes, including the very substantial federal estate tax, were directed to be paid out of a fund that included decedent’s Ohio real estate.

As stated in the syllabus of Bane v. Wick (1863), 14 Ohio St., 505:

“Although ordinarily the undisposed of personal property is primarily liable for the payment of debts, yet where the testator, by the disposition made in his will, clearly designates a particular fund for this purpose, such fund should be first exhausted.”

From the foregoing, it is apparent that, in determining the value of the Ohio succession, at least a portion of the amount paid for the taxes specified in clause tenth of decedent’s will (which taxes included the very substantial federal estate tax) should have been deducted from the gross value of the Ohio real estate in determining the value of the Ohio succession for inheritance tax purposes. In my opinion, that portion should be the proportion thereof which the value of the Ohio real estate bears to the total value of all assets disposed of and to be disposed of by clause ninth of the will before the payment of such taxes therefrom.

Guernsey and Herbert, JJ., concur in the foregoing opinion by Tart, C. J.

Guernsey, J.,

dissenting. I dissent from the judgment, concur in the foregoing opinion by Chief Justice Taft and make additional observations which I deem pertinent to the issues.

The first paragraph of item ninth of the will does, as stated in the majority opinion, direct “my executors or trustees” “to hold or dispose of” the residuary estate. However, this direction is limited by the additional phrases, “my executors or trustees, as the case may he, to hold or dispose of the same as follows.” (Emphasis added.) Then follow instructions as to the disposition of the respective trust shares.

As also stated in the majority opinion, by subparagraph (1) of item twelfth, a general permissive authority is given to the executors and trustees to sell, lease,, mortgage or otherwise dispose of any real property (other than that specifically devised) of which the decedent dies seized, “or in which my estate may from time to time be invested or re-invested.” Nevertheless, this subparagraph is preceded and limited by the preamble to item twelfth giving to the “executors and trustees” “the following powers and authority, all of which, unless othertoise specified below, may be exercised by my executors and by my trustees in either or both such fiduciary capacities at any time and from time to time as such executors and such trustees may in his and its absolute discretion deem advisable.” (Emphasis added.) It is then otherwise specified below in subparagraph (2) of item twelfth that “I direct that my executors shall sell as promptly as is feasible after my death, in such manner as they deem most practical and advantageous, my residence property at Lakewood * * * and also all other real property owned by me. But I authorize my executors or my trustees * * * in their discretion, to retain my property * * * known as ‘Pine Top’ * * * for a period of three years after my death * * (Emphasis added.)

It is obvious from the foregoing (or from a perusal of the entire will, or both) that the testatrix, in each instance, used the terms, “executors,” “trustees,” “executors and trustees,” and “executors or trustees,” advisedly in bestowing upon them and in differentiating their respective powers and duties. Her intent is clear to impose upon the executors, as distinguished from the trustees, a mandatory duty to sell all her real property except “Pine Top” in the course of their administration of her estate. But for “Pine Top” there is to be no distribution by her executors of the residuary estate except in the form of personal property, and then only after they have satisfied all the charges against the estate including debts, costs of administration, and taxes.

The location of the real estate in Ohio provides a tax situs for inheritance tax and creates a tax liability in Ohio which may not be defeated by a mere direction of the testatrix to convert the real property to personal property, which then might acquire an actual or fictional situs at the place of the decedent’s residence. However, the trustees, as residuary legatees, do not receive, or succeed to, a building or real estate valued at $87,500. By virtue of the testamentary mandate to sell and to pay all charges against the estate, including taxes, the property in Ohio has to bear its share of these charges proportionately with all other property in the residuary estate, and the trustees, as residuary legatees, receive, or succeed to, Ohio property only to the extent of the amount remaining after the payment of these charges is made or provided for.

Section 7, Article XII of the Ohio Constitution, provides that “laws may be passed providing for the taxation of the right to receive, or to succeed to, estates.” Of necessity it follows that an inheritance tax may not be levied as to an amount which a successor does not receive or does not succeed to. This constitutional limitation is implicit in all the Ohio inheritance tax statutes and requires that anything which the legatee oxdevisee does not receive be excluded from the “value of the aggregate succession” determined under the provisions of Section 5731.10, Revised Code.

In the event of intestacy, personal property is first consumed to satisfy the charges against an estate, and in the event of testate succession these charges are ordinarily satisfied from property other than that included in specific legacies and devises. Moreover, if a decedent’s assets are sxxfficient, he may by testamentary mandate cause designated assets or successions to be subjected to, or exempted from, one or more of the various classes of charges against his estate, such as debts incurred prior to the time of decease, estate taxes, costs of administration other than estate taxes, and charges against the estate generally made so only by virtue of the direction of the testator (e. g., a direction to pay an inheritance tax ordinarily chargeable only to the successor or against a succession). It follows that charges against an estate may have various impacts on the respective snccesssions in the same estate, or on successions in different estates. It is apparent to me that this is the reason why the Legislature, in its enactment of Section 5731.10, Revised Code, provided specifically that the successor shall be allowed a proportion of the exemption, which rule of law would be applicable to all successions, but could not readily make a single specific and universally applicable rule of law as to debts. The only reasonable alternative was for the Legis-. lature to incorporate the Probate Code therein by reference and to provide generally, as it did, for the allowance of ‘ ‘ deductions computed as though the decedent had been a resident of this state and all of his property were located in this state.”

Finally, although much may be said for following established administrative procedure, as the appellee claims should be done here, nothing may be said for following such procedure if to do so either violates the command of the statute or makes the statute unconstitutional in its application. 
      
       In recodifying Section 5334-1, General Code, as Section 5731.10, Revised Code, the word “aforesaid” was omitted after the word “deductions” but Section 5731.10 must be construed as though “aforesaid” had not been so omitted therefrom. This follows from Section 1.24, Revised Code, which reads in part:
      “* * * in enacting this act it is the intent of the General Assembly not to change the law as heretofore expressed by the section * * * of the General Code * * *.”
     