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In re Accounting of Abraham D. Levy


decided: April 10, 1978.


Appeal from judgment in the Southern District, Cannella, J., that New York cannot impose estate tax on veteran's estate passing by escheat to the United States under 38 U.S.C. § 5220(a).

Lumbard and Mulligan, Circuit Judges, and Bryan, District Judge.*fn*

Author: Lumbard

LUMBARD, Circuit Judge:

This appeal confronts us with the question whether a veteran's estate which escheats to the United States under 38 U.S.C. § 5220(a) is subject to New York estate taxation. New York appeals from a judgment in the Southern District, Cannella, J., that such property cannot constitutionally be taxed by the state. We affirm this ruling because we find that the federal statute precludes state taxation of property passing to the United States under § 5220.

According to the facts stipulated to by the parties, Charles W. Brown, a physical education teacher retired from the New York City schools, served in the United States Navy from October 3, 1918 to January 12, 1919. On October 11, 1972, Brown entered the Veteran's Administration Hospital in the Bronx for treatment of a heart ailment. At the time of his admission, Brown completed an Application for Medical Benefits which included a notice, set forth in the margin,*fn1 that under 38 U.S.C. § 5220 Brown's estate would become the property of the United States if, while receiving care from the Veteran's Administration, he were to die intestate with no next of kin or heir to inherit his estate. Brown was discharged from the VA Hospital on November 17, 1972, but was readmitted on March 1, 1973, for further treatment of his heart condition. Shortly thereafter, on March 5, 1973, Brown died of an acute myocardial infarction at the age of seventy-five. Brown had never married, left no next of kin entitled to inherit under New York law,*fn2 and died intestate. Thus, upon Brown's death, as much of his estate as had not been appointed to another person passed to the United States under 38 U.S.C. § 5220.

Abraham Levy, Bronx County Public Administrator, was appointed administrator of Brown's estate on March 16, 1973. In April of 1974 Levy filed with the Surrogate's Court of Bronx County an accounting showing that Brown's entire estate, including four bank accounts held jointly with Gertrude Farrington, a friend of Brown's, was worth $68,690.00 after deductions had been made for funeral and administration expenses. Levy's accounting recognized that the $7,066.76 of the estate not held jointly with Farrington was subject to 38 U.S.C. § 5220(a), which provides that the property of any veteran who dies intestate and without next of kin while a patient in a VA hospital, vests in the United States immediately upon the veteran's death. The administrator's accounting also showed that he had paid out of Brown's estate federal and state estate taxes on the entire $68,690.00.*fn3

On April 26, 1974, the United States Attorney for the Southern District was cited by the Surrogate Court to show cause why Levy's account of Brown's estate should not be judicially settled and allowed. In response the United States filed an objection in the Surrogate's Court to the payment of estate taxes on that portion of Brown's estate that passed to the United States under 38 U.S.C. § 5220(a). Following this, on May 22, 1974, the United States removed the proceedings from the Surrogate's Court to the District Court for the Southern District of New York under 28 U.S.C. § 1441, asking that the federal court determine whether under federal law New York could tax property which, upon the death of the decedent, immediately vested in the United States under 38 U.S.C. § 5220.

On April 27, 1976, the parties stipulated the facts and thereafter each side moved for summary judgment. On July 20, 1977, the District Court issued its written opinion, finding that it had jurisdiction to decide the case, and that it should not abstain from doing so. On the merits, Judge Cannella ruled that Brown's property became property of the United States immediately upon his death and, therefore, that New York could not constitutionally tax the estate under McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 4 L. Ed. 579 (1819). It is from this judgment that New York appeals.

Appellant's argument that this section is barred from the federal courts by the Tax Injunction Act of 1937, 28 U.S.C. § 1341, is devoid of merit. The Tax Injunction Act, which forbids an injunction by federal courts against the "assessment, levy or collection of any tax under State law . . . . [provided] . . . . a plain, speedy and efficient remedy" may be had in state court, does not preclude actions by the United States when suing "to protect itself and its instrumentalities from unconstitutional state exactions." See Department of Employment v. United States, 385 U.S. 355, 358, 17 L. Ed. 2d 414, 87 S. Ct. 464 (1966).*fn4

Furthermore, we find this case singularly inappropriate for the invocation of the equitable doctrine of abstention. See Colorado River Water Conservation District v. United States, 424 U.S. 800, 813-17, 47 L. Ed. 2d 483, 96 S. Ct. 1236 (1976). Here there is no unsettled question of state law whose resolution could materially alter the nature of the federal claims in issue. In In re Estate of O'Brine, 37 N.Y.2d 81, 371 N.Y.S.2d 453, 332 N.E.2d 326 (1975), the New York Court of Appeals emphatically held that property passing to the United States under 38 U.S.C. § 3202(e) (which is substantially the same as 38 U.S.C. § 5220) is subject to New York taxation.*fn5 The entertaining of federal jurisdiction in this case does not interfere with state proceedings or functions; the state tax here was paid more than three years ago and, after deciding the issue of federal law, the district court remanded to the Surrogate's Court for completion of probate proceedings. Moreover, the most important issues in the case --the constitutionality of the New York statute and the effect of 38 U.S.C. § 5220 --are matters of federal rather than state law. Accordingly, the district court properly refused to abstain.

Congress, by enacting 38 U.S.C. § 5220(a), preempted the state estate tax provisions insofar as they would apply to veteran's property escheating to the United States. By its terms, § 5220 provides that "all . . . . property, including money and choses in action, owned by [the deceased veteran who dies intestate and without next of kin] . . . . shall immediately vest in and become the property of the United States as trustee for the sole use and benefit of the General Post Fund" (emphasis supplied). Congress included no exception whatsoever for state estate taxes to be paid from such property. Indeed, in § 5220(b) Congress underscored the importance of this scheme by conditioning the receipt of care in a VA hospital on § 5220(a). Thus, the plain wording of § 5220 evinces Congress' intention to preclude any state estate taxation of veterans' estates passing to the United States.

Congress' purpose in passing § 5220 was to supply greatly needed funds for the General Post Fund, which provides recreation and other forms of enjoyment to ex-service men and women confined to veterans' homes and hospitals. See United States v. Oregon, 366 U.S. 643, 647, 6 L. Ed. 2d 575, 81 S. Ct. 1278 (1961). Although the scant legislative history of § 5220 does not explicitly address the question of estate taxes, discussion on the floor of the House when the bill was being considered demonstrated Congress' intention to benefit veterans by taking from the state what would otherwise be its by escheat. See 87 Cong.Rec. 5203 (1941). Cf. United States v. Board of Commissioners of Public Schools of Baltimore City, 432 F. Supp. 629, 632 (D.Md. 1977). It would undermine Congress' purpose in enacting § 5220 were the statute construed to permit states to tax away from the Post Fund substantial portions of the estates given it by § 5220. In light of the statute's express wording and the purpose of the statute, we hold that § 5220 precludes state taxation of property passing to the United States under § 5220.*fn6




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