State Board of Equalization v. Fall

MR. JUSTICE ANGSTMAN delivered the opinion of the court. Plaintiff has appealed from an order determining that no *282 inheritance tax is due to the state of Montana from the estate of David Perry, deceased. David Perry died on February 6,1946, a resident of California. At the time of his death he was a member of a partnership composed of himself, Owen H. Perry, William M. Perry and John W. Schroeder. The partnership was engaged in dredging operations in Lewis and Clark county, Montana. The case turns upon the question whether certain real and personal property in Montana constituted property of the partnership or whether it was owned by the individuals named above as tenants in common, and if partnership property, whether it was tangible or intangible property. The record before us shows that in December 1938 Perry-Schroeder Mining Company, Inc., conveyed by deed to David Perry an undivided 3750/10,000 interest in and to all of the property and assets of the first party, real, personal and mixed, and wheresoever situated, including “certain specifically described lands, mining claims, leases on land for placer mining purposes, rights of way and power line,” certain water rights, and “all dredges, mining machinery, tools, equipment and supplies now owned or used by said corporation.” All of the above described property has at all times been situated in Montana. The same deed conveyed to Owen H. Perry an undivided 2500/10,000 interest; to William M. Perry an undivided 1250/10,000 interest and to John W. Schroeder an undivided 2500/10,000 interest. The deed made no mention of a partnership. However, on October 30, 1939, the partners entered into an amended partnership agreement as follows: “Amended Articles of Partnership of Perry-Schroeder Mining Company “We, David Perry of Seattle, Washington, John W. Schroeder, Owen H. Perry and William M. Perry of Helena, Montana, do hereby associate ourselves as co-partners, and do hereby mutually covenant and agree, each with the others, to articles of partnership as follows, to-wit: *283 “1. The copartnership firm name shall be ‘Perry-Schroeder Mining Company.’ “2. The business of the copartnership shall be, and be confined to taking over the property and assets of Perry-Schroeder Mining Company, Inc., (a Montana corporation), placer mining on the so-called Eldorado Bar in Lewis and Clark County, Montana, including the owning, leasing and working of placer mining grounds in and in that locality, the acquiring of placer mining machinery and equipment, and the borrowing of money for such purposes, including the assumption of the debts of said corporation; also including such business as may be incident to the conduct of such placer mining industry, and the-pledging, mortgaging, exchange or sale of the partnership property. “3. The respective interests of the several partners in the partnership property and business shall be as follows: David Perry, 18% per cent; John W. Schroeder, 43% per cent; Owen H. Perry, 25 per cent; Wiliam M. Perry, 12% per cent. “4. Upon any disputed question in the management of the partnership business or property, the majority in partnership interest (as distinguished from number of partners) shall control the action of the partnership, and the partnership shall exist and continue so long as it has any indebtedness to Beeonstruction Finance Corporation and as much longer as all the partners may desire. “5. These amended articles of partnership differ from the original only in the respective interests of David Perry and John W. Schroeder.” David Perry left a will which was filed for probate in California where he also left some property. Ancillary proceedings followed in this state. The inventory and appraisement filed in the ancillary proceedings listed decedent’s property in Montana as follows: “Property of Perry-Schroeder Mining Co., a partnership. Beal Property, in Lewis & Clark County, Montana: Parcel #1: SW%SE%, SW% of Section 3; Pt S% Section 4; Pt N%SE% and Lot 9 of *284 Section 5; and NE^, NE^NW^, and Pt lots 6 and 9 in Section- 9; all in Township 11 North, Range 2 West, M. P. M. $ 3,875.00 Parcel ^2; All North of Missouri River, Section 10, NW%, Pt NW14SW1/4, N%SE%, Lots 1, 2, 3, and 4 less 10 acres, Section 11, All in Township 11 North, Range 2 West, M. P. M. 2.670.00 Improvements on above Realty 5.880.00 Personal Property: Portable Houses 18,200.00 Cash 5,965.36 Petty Cash 25.00 U. S. Bonds 25,068.75 Accounts Receivable 847.70 Prepaid Insurance 620.34 Ditcher made by Company 250.00 RD-7 Caterpillar 1940 4.900.00 Carryall Scraper 750.00 3 only 40 H. P. Ingersoll-Rand Motor pumps 500 G. P. M. at 225 T. D. H. 1.032.00 1 only 15 K V A Transformer 101.00 2 only 7% El V A Transformers 132.00 2 only 50 K V A Transformers 682.00 47520 feet if: 8 Bare Copper Wire 2376 lbs. 238.00 1 only International Model C-60 Dump truck 156" wheel base 1935 1.363.00 1 only Ford % ton Pickup 1941 445.00 1 only 300 Amp Lincoln Welder 250.00 1 only Kirk Hillman 6" Drill 1.300.00 Shop Equipment including all major equipment, small tools and gold melting equipment 2,850.00 1 only 6 Cu. ft. Yuba Dredge 112,000.00 189,445.15 *285 Less Taxes due and owing at time of death of decedent 1,126.65 188,318.50 Value of the interest of David Perry, above named decedent, and a partner in the Perry-Schroeder Mining Company— 18% ..................................................................................35,309.72.” The final report and petition of defendant administrator filed with the state board of equalization to have determined the inheritance tax due alleges in substance: That testator was a resident of the state of California; that the appraised .value of his real estate is $2,329.69; that his personal property consists of $1,118.50 in cash and other personal property of the appraised value of $32,072.78; that his gross estate outside of Montana amounts to $99,184.47; that his gross estate in Montana amounts to $2,329.69 (being the appraised value of his real estate in Montana); that his gross estate wherever situate amounts to $101,514.17; that the undivided 18.75 % owned by decedent at the time of his death in the Perry-Schroeder Mining Company, Inc., a partnership, appraised at $33,191.28 exclusive of the value placed on the real property, is intangible personal property within the meaning of Chapter 3, Montana Session Laws 1945, and therefore exempt from the payment of inheritance tax; that the widow of decedent is entitled to an exemption of $17,000 under the laws of Montana and that no inheritance tax is due the state of Montana from the estate or from the beneficiary thereof. The state board of equalization on behalf of the state of Montana served and filed verified objections to the administrator’s final report and petition, alleging among other things: That the report and petition are incorrect and at variance with the inventory and appraisement in variously specified and enumerated respects; that the inventory shows that the property therein listed and evaluated is the property of the Perry-Schroeder Mining Company, Inc., a mining partnership; that the testator, David Perry, owned an undivided 18.75% of all *286 such property, appraised at $35,509.72; that testator together with Owen H. Perry, William M. Perry and John W. Sehroeder comprise the mining partnership; that they own certain mining claims and leased other mining claims and other property, all situate in Lewis and Clark county, Montana, which they worked and mined for a period of more than five years next preceding decedent’s demise, and from which they extracted minerals and derived great profit; that the decedent, his two brothers and Sehroeder were jointly engaged in working the mines; that they owned all the property listed and described in the inventory and appraisement as tenants in common; that they owned a certain Yuba dredge listed and appraised at $112,000 located upon the mining claims and property so owned, occupied, mined and worked by them and which they used up to the date of decedent’s death in extracting gold and minerals from the mining claims and property in which decedent at the time of his death possessed and owned an undivided interest as tenant in common ; that at the time of decedent’s death the dredge was mining property placed on the described mining ground and actually used by its owners in mining and extracting minerals and for working and developing the mines; that the dredge is real property and at the time of decedent’s death was affixed to the mining claims and real property; that the mining partnership was solvent and all debts were paid; that all the property listed in the inventory and appraisement remained on hand at the time of decedent’s death and that he then owned an interest in the whole of the property as such tenant in common; that upon the death of David Perry, the mining operations were discontinued by the owners without any agreement to resume and that there is due the state of Montana inheritance tax upon each item of property so listed in the inventory and appraisement. There was no denial of the allegations of the state’s objections. On March 25, 1947, a hearing was had on the administrator’s final report and petition and the state’s objections thereto. At the hearing the state, without objection, introduced documentary *287 evidence in support of the allegations of its formal objections, but no proof either oral or documentary was introduced by the administrator in support of the disputed statements of his report and petition and the cause was submited to the court. On May 8, 1947, on application of the administrator the case was reopened to permit him to introduce further testimony. Upon final submission the court found no inheritance tax due to the state from the estate. To sustain the court’s conclusion the administrator takes the position that the property involved constituted" assets of the partnership of which the deceased was a member and that in consequence the property passing to the heirs constitutes intangible property exempt from inheritance tax because of Chapter 3, Laws of 1945. We agree that the property at the time of decedent’s death and prior thereto was a part of the assets of the partnership. That it was used in carrying on the partnership business is undenied. The individuals owned most of the property involved before the formation of the partnership. They acquired it by deed from the corporation without any mention that it was partnership property as stated in section 6681. It was presumptively an interest in common held by each of the grantees. Sec. 6683, Rev. Codes 1935, and see 47 C. J. 757; Ivins v. Hardy, Mont., 179 Pac. (2d) 745. As far as purchasers and creditors are concerned they had the right to rely on the title to the real estate as shown by the record. 40 Am. Jur., p. 194, sec. 95. But as between the parties themselves the controlling consideration as to whether the property belongs to the partnership is the intention of the parties. Generally speaking there is a presumption that the ownership of. real estate is where the muniment of title places it. But “If, by all the circumstances attending the transaction, it is made to appear that in the intention of the parties it was purchased for and was treated as partnership property, the presumption of ownership arising from the face of the deed will *288 be overcome, and the property will be treated as belonging to the partnership.” And “An agreement that certain real estate should be part of the firm assets may be implied from the acts and conduct of the parties.” 40 Am. Jur., p. 197. The rule is stated in Robinson Bank v. Miller, 153 Ill. 244, 38 N. E. 1078, 1081, 27 L. R. A. 449, 46 Am. St. Rep. 883, as follows: “The weight of authority seems to us to support the position that where persons who afterwards become partners buy land in their individual names and with their individual funds, before the making of a partnership agreement, the land will be regarded as the individual property of the partners, in the absence of a clear and explicit agreement subsequently entered into by them to make it firm property, or in the absence of controlling circumstances which indicate an intention to convert it into firm assets. ’ ’ Section 2 of the partnership agreement above quoted shows the clear intent that the property theretofore held by the corporation was to be thereafter considered as partnership property. In the view that we take of the case it is unnecessary to determine whether the partnership is a general commercial partnership as distinguished from a mining partnership, an issue discussed at length in the briefs of counsel. It is our view that whatever may be the character of the partnership, the property must be included in computing the inheritance tax and is not exempt under Chapter 3, Laws of 1945. Chapter 3, Laws of 1945, in legal effect exempts intangible personal property of a non-resident decedent from inheritance tax when the laws of the state of the residence allow a reciprocal exemption to residents of Montana. California has such a reciprocal law, and it is the contention of defendant that the partnership interest of the decedent is intangible personal property. The eases relied upon as sustaining the contention that the property is intangible and hence exempt under Chapter 3, Laws of 1945, are Blodgett v. Silberman, 277 U. S. 1, 48 S. Ct. 410, 72 L. Ed. 749, and Wootten v. Oklahoma Tax Commission, *289 185 Okl. 259, 91 Pac. (2d) 73. The Wootten case simply followed the Blodgett case. We are not impressed with the reasoning of the court in the Blodgett case and therefore decline to follow it. We have heretofore refused to blindly follow determinations of that court as to rules of property rights in this state. Gas Products Co. v. Rankin, 63 Mont. 372, 207 Pac. 993, 24 A. L. R. 294. The court in the Blodgett case [277 U. S. 1, 48 S. Ct. 414], said: “It is very plain, therefore, that the interest of the decedent in the partnership of William Openhym & Sons was simply a right to' share in what would remain of the partnership assets after its liabilities were satisfied. It was merely an interest in the surplus, a chose in action. It is an intangible, .and carries with it a right to an accounting. ’ Whether property is tangible or intangible depends upon its nature and characteristics and not upon the circumstance that an accounting must be had to determine the surplus. If the court’s conclusion in the Blodgett case be correct then all property of a decedent dying intestate is intangible because the interest of the decedent in his own estate is only that remaining after the payment of the debts, expenses of last illness and of administration. The same is true of a person leaving a will except perhaps as to specific devises or bequests. In the Blodgett ease the court correctly held that an inheritanee tax is not a tax upon property but upon the right or privilege- of succession to the property of a deceased person. This is the holding of this court also. Gelsthorpe v. Furnell, 20 Mont. 299, 51 Pac. 267, 39 L. R. A. 170; In re Touhy’s Estate, 35 Mont. 431, 90 Pac. 170; State v. Jones, 80 Mont. 574, 261 Pac. 356, 60 A. L. R. 551; State v. Walker, 70 Mont. 484, 226 Pac. 894. The court in the Boldgett case was too much concerned with the character of the property of the decedent in his own estate and not enough concerned with the character, of the property passing to the heir. If the tax is one upon the right to receive, then whether the property be tangible or intangible depends upon what the heir receives. It is his right that must be looked to and it is of no *290 moment that the decedent’s right or interest cannot be measured without an accounting. Under the laws of Montana when a partner dies the property passes to the surviving partner who settles the affairs of the partnership and accounts to the administrator. Sec. 10261, Rev. Codes 1935. Until the affairs of the partnership have been settled the partnership property is not property of the estate of the deceased party to be administered as such. White v. Prahl, 94 Mont. 345, 22 Pac. (2d) 315. Here there is no denial of the allegation that all debts of the partnership have been paid and that the property mentioned in the inventory and appraisement remains on hand. The law is well settled that when the partnership is settled and the debts are paid, the real estate of the partnership retains its character as such and is held by the owners as tenants in common. We announced this rule as early as 1887 in the case of Lindley v. Davis, 7 Mont. 206, 210, 14 Pac. 717, 718; wherein this court said: “The conversion of real property into personalty is a devise of equity', in order to effectuate the settlement of partnerships. The rule [ceases] when the partnership is settled and its debts are paid. The partners then hold their real estate as tenants in common, relieved of any trust in behalf of the partnership. The weight of American authorities sustains this doctrine.” This is the view of the courts and textwriters generally. Thus in 40 Am. Jur., page 330, section 291, it is said: “The rule adhered to by the great weight of authority in the United States, as commonly stated, is that although partnership real estate is in equity regarded as personal property so far as is necessary for the purpose of settling and paying the debts of the partnership and adjusting the equities of the partners, the residue, if any, after satisfying such obligations, resumes or retains its former character as real estate, and must, for purposes of descent and distribution, be treated as realty, so as to go to the heir at law, rather than as personalty which would pass to the personal representatives of the deceased partner; or, *291 as the rule is sometimes stated, on the dissolution of a partnership by the death of a partner, the share of the deceased partner in the real estate descends as such to the heirs, subject to equity of the surviving partner or partners to have it appropriated to accomplish the trust to which it was primarily subjected. ’ And see the note in 25 A. L. R. 389. In Darrow v. Calkins, 154 N. Y. 503, 49, N. E. 61, 64, 48 L. R. A. 299, 61 Am. St. Rep. 637, the court said: “The clear current of the American decisions supports the rule that, in the absence of any agreement, express or implied, between the partners to the contrary, partnership real estate retains its character as realty with all the incidents of that species of property between the partners themselves, and also between a surviving partner and the real and personal representatives of a deceased partner, except that each share is impressed with a trust implied by law in favor of the other partner that, so far as is necessary, it shall be first applied to the adjustment of partnership obligations and the payment of any balance found to be due from the one partner-to the other on winding up the partnership affairs. To the extent necessary for these purposes the character of the property is, in equity, deemed to be changed into personalty. On the death of either partner, where the title is vested in both, the share of the land standing in the name of the deceased partner descends as real estate to his heirs, subject to the equity of the surviving partner to have it appropriated to accomplish the trust to which it was primarily subjected. The working out of the. mutual rights which grew out of the partnership relation does not seem to require that the character of the property should be changed until the occasion arises for a conversion, and then only to the extent required. The American rule commends itself for its simplicity. It makes the legal title subservient in equity to the original trust. It disturbs it no further than is necessary for this purpose. The portion of the land not required for partnership equities retains its character as realty, and it leaves the laws of inheritance and descent to their ordinary operation.” (Emphasis supplied.) *292 To the same effect is Mechem on Partnerships, 2nd Ed., section 402. As above noted the partnership real estate will be treated as personal property in the settlement of the partnership affairs “but the principle of equitable conversion has no further application.” Riddle v. Whitehill, 135 U. S. 621, 10 S. Ct. 924, 928, 34 L. Ed. 282. And see to the same effect 47 C. J. 765. And as to personal property it is only so much thereof as.is necessary to discharge the duties imposed upon the survivor that passes to him (Silver v. Eakins, 55 Mont. 210, 175 Pac. 876) and the balance of the partnership property should be divided between the surviving partners and the heirs of the deceased partner. It still retains its character as tangible property if such it was at the date of the death of the partner. The correct rule was announced in the case of In re Small’s Estate, 151 Pa. 1, 25 A. 23, 24. There a testator bequeathed to his two brothers “all my interest in the partnership association of P. A. & S. Small, Limited, and in all the property, real and personal, notes, stocks, bonds, and accounts of said partnership association ” The court held this bequest was of tangible, not intangible, property, saying: ‘ ‘ The partnership property was largely made up of lands, merchandise, flour, grain, and other personal property, which had a visible and tangible existence, and an actual situs, in this state. As was said by Comstock, C. J., in Hoyt v. Commissioners of Taxes, 23 N. Y. 224, 228; ‘The fiction or maxim m'obilia personam sequuntur is by no means of universal application. Like other fictions, it has its special uses. It may be resorted to when convenience and justice so require. In other circumstances, the truth, and not the fiction, affords, as it plainly ought to afford, the rule of action. * * * I can think of no more just and appropriate exercise of the sovereignty of a state or nation over property situated within it, and protected by its laws, than to compel it to contribute towards the maintenance of government and law.’ * * * As a general rule, intangible personal property of a nonresident, such as bonds, *293 mortgages, and other ehoses in action, is governed, as to its situs, by the fiction of law above noticed; and hence such property is not subject to collateral inheritance taxation under our laws, because it is not ‘situated within this state.’ * * * The facts of this case, however, are different, and bring it within the exceptions to the fictitious rule. In the formation, location, etc., of their partnership association the testator and his brothers evi-. dently established the situs of the personal property which constituted its capital. They organized the association under the laws of this state, located its principal office and conducted its business therein, and thus enjoyed the benefit of the law and protection of the state and local government. In such circumstances, as remarked in Hoyt v. Commisisoners of Taxes, supra, the truth and not the fiction plainly affords the rule of action. Neither convenience nor justice requires us to resort to the fictitious rule.” The court then concluded by saying: ‘‘For these and othér reasons that might be suggested we think the learned judge was right in concluding that the interest bequeathed to appellants was tangible personal property, having an actual situs within the state, receiving the benefit and protection of its laws, during testator’s lifetime and since, and therefore subject to payment of collateral inheritance tax.” The court erred in finding and ordering that no inheritance tax is due the state of Montana from the above estate. The order‘is accordingly reversed and the cause remanded for further proceedings in conformity with this opinion. Associate Justices Choate and Metcalf concur.