The Needle's Eye


‘IT is easier for a camel to go through the eye of a needle, than for a rich man to enter into the kingdom of God.’

Without irreverence or disrespect for the Scriptures let us change this colorful statement so that it shall read: ‘It is easier for a camel to go through the eye of a needle, than for a rich man to avoid death taxes.’

Let us picture the needle’s eye as the inheritance-tax situation through which estates must pass before they can be distributed to expectant heirs. How much of the estate will be torn or rubbed off in passing through the needle’s eye?

The Revenue Act of 1926, with its welcome and material reduction in the Federal Estate Tax, received widespread publicity and the impression is almost universally prevalent that the needle’s eye has been enlarged to so comfortable a degree that the subject of death taxes should now be considered of trifling weight, not worthy of serious study. The increase in the Federal exemption from $50,000 to $100,000 automatically removed a vast number of estates from Federal taxation, while the reduction in rates by the Government still further lulled the public into believing that death taxes were slowly but certainly passing out of style.

So far as estates of $100,000 or less are concerned, the situation was vastly improved by the passage of the Revenue Act. But, directly this act became a law, there crept quietly and inevitably into the scene a joker. First one state, then another and another, without the blowing of trumpets and with a minimum of publicity, inserted this joker on its statutes until now its application is so frequent and its extension so evident to those conversant with death taxes that the man of affairs should be brought face to face with the needle’s eye. What has happened to it? It appears to be larger. Is it ?

One of the most potent arguments brought to bear upon the former Federal Estate Tax was the fact that it originated as a war measure and was an invasion into the field of States’ rights. Uncle Sam was said to be poaching upon private domains. He should get out and stay out. Death taxes should be imposed by the states and by the states alone.

In increasing the exemption and in reducing the rates the Federal Government made great strides toward quitting this field of taxation. The ink was hardly dry on the Revenue Act of 1926, however, before New Jersey enacted legislation taking advantage of the new 80 per cent credit allowed by the Government. Quick on the trigger as was New Jersey, she was closely followed by similar legislation on the part of Georgia, Virginia, New York, and Massachusetts. From then on, several other states have eyed these green pastures so recently left by the Government and enacted legislation which has legalized the grazing of these fertile fields.

The trend is unmistakable. Whereas for a brief time the needle’s eye was enlarged, the states are now fully alive to the situation and the opportunity. Many of them have already, by one method or another, availed themselves of an unusual situation. To themselves they said, ‘We need the money. Our new law will not increase the tax burden on the estate; it will merely bring in to us what would have formerly gone to the Government. We will take what the Government leaves.’ Thus in many states the needle’s eye has resumed much its former size. It still scrapes off most effectively material portions of the estate which passes through.

Prior to the passage of the Revenue Act of 1926 the needle’s eye was in twilight. Many of the shadows that served to make mysterious this field of taxation have been dispelled. There has been no sadness of farewell as certain of the more vexatious phases passed.

Wisconsin gives us a good picture of the passing of the shadows. From the inheritance-tax standpoint she has long been known as an ‘unfavorable’ state. In the rapaciousness of her death taxes there was a mediæval flavor. She went so far as to hold that a gift made within six years of death should be considered to have been made in contemplation of death and was therefore taxable. Having pushed the pendulum of taxation beyond the limits of justice, the reaction was inevitable. In the case of Schlesinger v. The State of Wisconsin, Wisconsin courts sustained the validity of the Wisconsin inheritance-tax law. Carried to the Supreme Court of the United States, the decision of the Supreme Court of Wisconsin was reversed, making this section of Wisconsin’s inheritance-tax laws invalid. Thus an unreasonable and unjust law was wiped from the slate in a state where vision has been sadly lacking in the framing of inheritance-tax legislation.

For a number of years there was a small group of states which had gone to the extreme in their endeavor to extend the scope of their inheritance taxes. In this group was North Carolina, mentioned not because her laws were worse than others in this group, but because in her courts a legal battle began which ended in the Supreme Court of the United States on March 1, 1926.

The case of Rhode Island Hospital Trust Company v. Doughton has had such far-reaching effects upon the deathtax situation in other states that a brief sketch may picture the passing of this shadow. Among others, North Carolina held taxable in the estate of a nonresident decedent the shares of a foreign corporation owning property or doing business in the state. Consider the breadth of this law. Many corporations do a national business, owning property in many states and entering every state so far as the transaction of business is concerned. Under this law, shares of such corporations became taxable in the estate of a nonresident.

George Briggs lived and died in Rhode Island, leaving a large estate. He never lived in North Carolina. The Rhode Island Hospital Trust Company, as executor under Briggs’s will, found among his personal property a block of Tobacco stock amounting to over $100,000. The Tobacco Company is incorporated under the laws of New Jersey. Two-thirds in value of the entire property of the Tobacco Company is in North Carolina. On this basis North Carolina taxed the estate a little over $2000, assessing the tax upon twothirds the value of the Tobacco stock.

Thanks to the fighting blood of the executor, this case was carried to the Supreme Court of the United States, where Chief Justice Taft, in a refreshingly clear opinion, declared the North Carolina law invalid. In effect, North Carolina held that the owner of shares of stock in a corporation was for that reason part owner of the property of that corporation. Our Supreme Court held this line of reasoning unsound and declared that the owner of stock in a corporation is not to that extent the owner of the property of that company.

This decision in favor of the Briggs estate has been a milestone marking the progress of more favorable legislation in death taxes, because it affected not alone North Carolina, but each of the states which had similar statutes, which with the handing down of this decision became at once invalid.

A glimpse of the wide influence of this decisive ruling of the Supreme Court is had when we note that it affected, directly or indirectly, such states as Arizona, Arkansas, Louisiana, Texas, Utah, West Virginia, California, Colorado, Iowa, Minnesota, Montana, New Mexico, Oklahoma, Mississippi, and Tennessee, among others.


But these are the lesser shadows.

Always the worst pinch in passing through the eye of the needle was the paying of the multiple tax. The double tax is still inevitable in estates of over $100,000 in the great majority of our states. A little over a year ago triple taxation in the larger estates was a matter to be expected under the then laws. It was the overlapping tax, by the state of residence, the Federal Government, and then by one or more foreign states, which lined the eye of the needle with thorns. In this, the most vicious phase of the old laws, there has been a marked change for the better.

By far the most popular method of killing the multiple tax has been the enactment of reciprocal exemption legislation. To illustrate: Massachusetts says to New York, ‘I will agree not to tax the heirs of New Yorkers on the stock of Massachusetts corporations which they are to inherit if you will agree to extend the same courtesy to residents of Massachusetts.’ New York and Massachusetts both agree. Before New York and Massachusetts became ‘reciprocal’ the following situation was not only possible but common. Jones, a New Yorker, died leaving an estate of several hundred thousand. In the estate was a block of about $25,000 in stock of the Edison Electric Illuminating Company of Boston, a Massachusetts corporation. Under the old laws this stock felt the pinch of the eye of the needle, for it was taxed, first by the Federal Government, then by New York and by Massachusetts. Under the present situation the triple tax has passed in this specific example, as Massachusetts has exempted this stock in favor of the New York estate.1

New York, Massachusetts, Pennsylvania, and Connecticut were among the leaders in enacting reciprocal exemptions. The change that took place in New Jersey is especially interesting because of the fact that formerly she was known as an ‘unfavorable’ state as regards death taxes, while at the same time she was the state of incorporation of many companies most attractive from the standpoint of the investor. In fact, if an investor was discriminating in his selection of choice investments, he was certain to have in his list of holdings the stocks of more than one New Jersey company, thereby aggravating the position of his family on the inheritance-tax situation.

New Jersey solved the problem without reciprocal exemptions. Her solution was simple, direct, effective. She said in substance: ‘We will not tax the transfer of stock of domestic corporations in nonresident estates.’ She takes no recognition of any reciprocal legislation, in that she does not confine her exemption to a group of reciprocal states. From an ‘unfavorable’ state she has turned to the right-about and is now demurely seated in the front row of the ‘favorable.’

Without regard to the order of their happening, let us see how other thorns in the multiple-tax group have been removed from the needle’s eye. In February of this year we learn that the following states had legislation pending, which if passed would bring them into the reciprocal group: California, Indiana, Maryland, Missouri, New Hampshire, Oregon, South Carolina, Illinois, and Maine. In April Colorado passed a new inheritance-tax law taking much the same broad position as did New Jersey, in that she does not now tax the intangible personal property of a nonresident.

At about the same time Ohio became reciprocal as of June 30, 1927. Maine’s gesture toward reciprocity is futuristic, in that her law making her reciprocal does not become effective until July 1, 1928. Translating this into terms that the investor may understand, it means just this. If you live in New York and happen to own stock in a Maine corporation, such as the United States Smelting Company, and die before July 1, 1928, it is quite possible that your family would have to pay a double tax, perhaps a triple tax, on the Maine stock. The triple tax would occur if your estate was much over $100,000, as the Federal Estate Tax would then appear. The double tax would come from Maine and New York, the state of residence. Thus until July 1, 1928, Maine cannot be regarded as a favorable state, and stocks in Maine corporations should be handled with care by elderly investors.

New Hampshire, a sister state, passed reciprocal exemption legislation, whereas Massachusetts, one of the pioneers in the reciprocal group, went a step beyond reciprocity by exempting nonresident decedents on all property within the state excepting only real estate and interests therein and tangible personal property. Here rises an interesting legal question yet to be decided. Have Massachusetts and New Jersey, in going a step beyond reciprocity, disqualified themselves with the group of states which are strictly reciprocal? From a technical standpoint they are no longer reciprocal, yet it would be a penny-pinching practice to exclude them from the reciprocal exemption privilege solely because they had taken a step in advance of the majority of states.

Maryland joined the reciprocal group of states as of June 1, 1927, while North Carolina dispelled a local shadow by exempting from death taxes gifts to charitable, religious, and educational institutions organized in or disbursing in that state.

Turning aside from the reciprocal exemption, in two states we find an economic awakening that is significant. In Pennsylvania we find the Tax Commission taking a farsighted position as regards inheritance taxes. The Commission argues that death taxes, being a capital levy, should be strictly so regarded. Moneys collected from this source should be added to the capital of the state and not dissipated in current expenses. It is interesting to note that at this time we also find a bill before the legislature of Arkansas calling attention to this same economic principle and stipulating that inheritance-tax funds shall not be used for public expenditures, but shall be paid into the state building fund. Here we have progress. Many other states may well follow suit.

An analysis of the widow’s exemption in the different states since May 1, 1925, shows that this situation has remained almost stationary. At this writing but two states have slightly increased the exemption to a widow. A majority still cling to the $10,000 exemption, which is admittedly niggardly. Seven states allow the widow but $5000 or even less. Sixteen states have seen the light and allow the widow more than $10,000. This latter group should grow. There is small reason or justice in allowing a widow less than $25,000 exempt from all death duties. Better to grant an exemption that will leave a modest competence and then tax more heavily above that figure than to be too grasping in taxing the widow’s mite.


From what has passed we have seen how the needle’s eye has been apparently enlarged and smoothed by the passage of legislation favorable to the nonresident. We said ‘apparently.’ Let us see what the ‘joker’ has done.

In state after state the same bill that included the favorable reciprocal clause also included a provision which has been most effective in narrowing the needle’s eye to virtually its former size. In a vast majority of states the overlapping tax, evil and unjust as it was, did not constitute the real burden of the tax. True, it was the most irritating and annoying phase, but rarely was it the most costly. In but one of the many estates which I have analyzed has the multiple tax been a serious factor. Usually the multiple tax was a small item in each of the states where it occurred. In other words, the bulk of the tax has generally been found to lie between the Federal Government and the home state.

The passing of the Revenue Act of 1926 created a situation unique in the history of our country, because under this act the Government allows a maximum credit of 80 per cent of the gross Federal Estate Tax against the total of all inheritance taxes paid to states. Here was the opportunity of an æon or two, and our state legislators were not slow to grasp it. Here was Uncle Sam deliberately knocking in the head of a pork barrel, and then smilingly turning to the states and saying to them, ‘Come on, boys, help yourselves. Here’s as nice a mess of pork as I ’ve had in a long day. Better step right up and get some.’ They did.

Let us illustrate the working out of this 80 per cent credit. Imagine that Jones, a resident of New York, leaves an estate that is subject to a New York inheritance tax of $5000. Assume arbitrarily that 80 per cent of the Federal Estate Tax on his estate is $10,000. The Federal Government stands ready to allow the full 80 per cent credit if state inheritance taxes total that amount. What is more simple than for New York to say, ‘We will add a new estate tax of our own which will be the difference between our inheritance tax and 80 per cent of the gross Federal Estate Tax, and in this way we will assure ourselves of the full 80 per cent credit, a portion of which would otherwise go to waste upon the innocent and unsuspecting heirs, who do not need the money half as much as we.’ That is what has happened. Therein lies the joker.

State after state has added a new tax which takes advantage of the 80 per cent credit and thereby adds to its coffers handsome and welcome revenues. Let it be remembered that this 80 per cent credit is available only in estates which run over $100,000; in other words, it is possible only in the larger estates. But for this same reason it brings in handsome revenues by a most efficient system. A tax official in a neighboring state told me of a single instance where the new law had brought to the treasury of his state a matter of a million dollars from one estate. This joker is not a thing to be sneezed at.

Let us again be specific. Let us see just where this joker has encamped and note where the needle’s eye has partially closed again.

As of March 19, 1926, Georgia took advantage of the 80 per cent credit. Again we disregard the exact order of events and merely mention the happenings. Delaware took the 80 per cent credit on estates of over $200,000. Maine, Vermont, California, Colorado, Virginia, New Jersey, New York, Rhode Island, Massachusetts, Montana, and Missouri stepped bravely up to the pork barrel and took their slice of the 80 percent credit. Has anyone suggested that our legislators are slow? By the time this article finds itself in print it is likely that other states will have added themselves to this group. Our joker is a popular fellow. Ilis ways are taking.

In a word, there already appears to be a strong trend on the part of the states to avail themselves of the liberal credit allowed by the Federal Government and by this simple method to increase their revenues. By this action the death-tax situation is restored to much Its former status, with the exception that tax by foreign states is passing. The state of domicile is taking what the Federal Government does not take. Instead of paying a large tax to the Government and a large tax to the home state, the situation in states that have acted to secure this credit is changed as follows: the tax to the Federal Government is now the smaller and the tax to the home state is the larger of the two. To illustrate: in an estate which has recently passed through my office for analysis I find the Federal Estate Tax to be about $4000 while the taxes flue to the state of residence will approximate nearly $17,000.

For this reason the present attitude of indifference on the part of our investors is both illogical and dangerous. Death taxes are not a thing of the past. They are very much of the present. The slight shrinkage which they may experience through favorable action on the part of foreign states is beside the real point at issue. The facts are that tax by the state of residence and the Federal Tax have always been the major items. While the latter has been materially reduced, the former is being radically increased. Hence for all practical purposes the tax situation in this field is rapidly approaching its former status so far as tax totals are concerned, and it behooves the investor to determine what these taxes will amount to and what debts his passing will thus incur.


Unknown to investors at large, a curious undercurrent has developed between two groups of states. One group of about twenty states is politely suggesting to Congress that it abolish the Federal Estate Tax and thus leave to the states alone the field of inheritance taxation. The smaller, but more alert group, those who have passed legislation taking advantage of the 80 per cent credit of the new Estate Tax, view with concern this movement on the part of the larger group. This smaller group is well pleased to have the Federal Estate Tax remain as it is, because if the Federal Tax is abolished these states will automatically lose the very welcome revenues which they are now enjoying under their newly enacted taxes.

The adoption of new legislation by this smaller group of states to secure the full 80 per cent credit on the Federal Estate Tax has in several states brought about an unprecedented situation. Take Massachusetts as an illustration. Here we have a state which now has two kinds of death taxes, an inheritance tax and an estate tax, each fundamentally different in principle and application. The inheritance or legacy tax is a tax upon the transfer of the various portions of the estate before they are received by the respective heirs. The number of heirs and their blood relationship has a direct bearing upon the amount of the inheritance tax. The estate tax is a tax upon the entire estate and takes no account of the number of heirs or their relationship to the decedent. Owing to the fact that the Massachusetts estate tax does not apply unless there is first of all a Federal Estate Tax, we have under these circumstances two estate taxes and one inheritance tax payable by the same estate.

These facts should be carefully considered by the investor who happens to live in the group of states which has added an estate tax to its former inheritance tax, because they have an important bearing upon wills. If your will was drawn up some five or ten years ago, have it examined by an attorney who specializes in wills, so that adequate provision may be made for the payment of these estate taxes from the residue of the estate, unless you wish your heirs to receive somewhat smaller portions of your estate than you had planned to give them. Make sure that there will be sufficient residue to care for these two estate taxes, otherwise you may place the residuary legatee in the unpleasant and ridiculous position of assuming a liability rather than receiving a bequest. As a matter of prudence, in view of the state of flux in which our death-tax legislation now finds itself, it would be well for the investor to have such an attorney go over his will at least once in every two years to make certain that his bequests are in conformity with the most recent inheritance taxes.

Will the Federal Estate Tax stand?

With one group of states praying for its abolishment and another group patting itself on the back and praying that it may remain as it is, it is difficult to find an answer. It would not be surprising if it were retained for a few years, at least, at present rates. One of the factors which may quite reasonably act to retard its abolishment is the diminutive group of states which has no death taxes of any description. Abolish the Federal Estate Tax and at once you establish these states as asylums from inheritance taxes. Is this wholly to be desired?

Weighing both favorable and unfavorable factors, we find that, after all, the needle’s eye has changed but little. In the last analysis the total tax is still of such proportions as to exact a considerable toll. There is little excuse for the investor to neglect to have his death taxes estimated by a tax consultant so that he may know definitely whether he has made adequate provision, by life insurance if possible, otherwise by will, for the prompt settlement of these debts. There is small room for doubt that the trend in the states is toward a higher rather than a lower revenue from death taxes. The reduction in the Federal Tax should not befog the investor on this important point.

Death taxes began two thousand years before Christ. Centuries after we are gone they will continue to flourish like the green bay tree. It is the part of the provident investor to recognize them as they are, not as he would like to have them.

  1. Another thorn appears in the eye of the needle as we go to press. New York drops from the reciprocal group of states. A recent decision of the Court of Appeals holds unconstitutional the transfer tax on the property of nonresident decedents. It so happens that the reciprocal exemption clause falls within that portion of the law which has been held unconstitutional. Hence, until this is remedied, New York becomes an unfavorable state to the nonresident, and in estates of over $100,000 a triple tax is possible. This decision also bears directly upon the estates of residents in that they may be liable to taxation in any of the strictly reciprocal states. A multitude of investors will watch this complicated situation with interest.