Cory

The issue before us on this appeal is whether the gift taxes paid by the donor-decedent prior to her death are includable in her gross estate for inheritance tax purpose. Surprising as it may seem, this issue has not been directly determined in this state.

*833 The facts are these: On July 2, 1974, Ethel Bayley Fowler, decedent, established an inter vivos trust in which she retained a life estate. At that time she paid federal gift taxes of $94,185 and California gift taxes of $33,204. Decedent died on April 20, 1976, and the amount of the gift establishing the trust was subject to California Inheritance Tax under Revenue and Taxation Code section 13644 1 and a federal estate tax under Internal Revenue Code section 2036. Gift tax credits were given both for the federal estate tax and the state inheritance tax subsequently paid by the estate.

The State of California, acting through Kenneth Cory as State Controller, appellant, and John P. Belton as tax referee, treated the total gift taxes of $127,389 paid by the decedent as a prepayment of death taxes and hence an asset of the estate. Objections were filed on behalf of decedent’s estate on the ground that the amount of…