City Bank Farmers Trust Co. v. Schnader

Background

A New York resident, Thomas B. Clarke, loaned 79 portraits to a Pennsylvania museum for exhibition. Clarke kept no definite plan to bring them back, and they remained at the museum for nearly three years. After Clarke died while the pictures were on display, Pennsylvania officials appraised the paintings and assessed an inheritance tax. The trustee of Clarke’s estate sued to block Pennsylvania’s tax, arguing the pictures had no real location in Pennsylvania and that New York should tax the transfer instead.

Reasoning

The central question was which State had the right to tax the transfer: Pennsylvania or New York. The Court looked at how long the paintings stayed in Pennsylvania, the owner’s actions, and the nature of the loan. Because Clarke had surrendered his storage, allowed the paintings to remain for years, permitted the museum to exhibit them, and never insisted on their return, the Court found their location in Pennsylvania was not merely temporary. The Court held that the paintings had an actual situs in Pennsylvania when Clarke died, so Pennsylvania had the authority to tax the transfer despite Clarke’s New York residency and New York probate of his will.

Real world impact

The decision means tangible items physically located in a State at the time of an owner’s death can be taxed by that State. Owners who lend or place valuable property outside their home State risk creating a taxable situs where the items sit. Trustees and museums handling long-term loans should expect possible tax claims by the State where the items are kept.