Boger, John R., Jr.

English

Duke Law Scholarship Repository

TAXATION OF RENUNCIATIONS OF INTERESTS INDECEDENTS' ESTATES UNDER THE FEDERALESTATE AND GIFT TAXESJOHN R. BOGER, JR.*The recent case of Hardenbergh v. Commissioner1 raisesthe question of whether a renunciation of a share in a deced-ent's estate is a taxable transfer under the federal estateand gift taxes. In Brown v. Routzhan,2 a decedent renounc-ed part of the property which had been devised to him byhis wife's will. Although this renunciation took place eightyears after the probate of the will, it was valid under statelaw, since it was made before final distribution. In holdingthat the decedent, by renouncing, had not made a gift incontemplation of death, the court pointed out that the gov-ernment was attempting to collect a tax upon the exerciseof a right to refuse a gift of property, not a tax on the trans-fer of an interest in property. The court said :3"The decedent never owned nor had any controlof the property as donee. All that he had was aright to accept. Coupled with this right was anequal right to reject. Eeither could be exercisedso long as the estate was in administration. Hedid reject."In the Hardenbergh case the two petitioners, wife anddaughter of a decedent who died intestate, formally renounc-ed their interest in the estate, with the result that the de-cedent's son received the entire estate. The issue beforethe Tax Court was whether the petitioners had made a tax-able gift of their share of the estate to the son. The courtsaid that under the intestate laws of Minnesota, the statein which decedent died, the petitioners had no power toprevent, by renunciation, the vesting of title of the propertyin themselves. It was further held that the instrumentexecuted by the petitioners renouncing their shares evidenc-ed "the passage of title from petitioners of the property they* 3rd year law student, Duke University; A.B. Duke, 1950.1 17 T.C. #20 (1951).63 F.2d 914 (6th Cir. 1933).3 Ibid., p. 917.DUKE BAR JOURNALhad inherited under the laws of Minnesota," and that thisaction constituted a transfer which was subject to the gifttax. The court distinguished Brown v. Routzhan on thebasis that a will was involved there, while in Hardenberghthe decedent died intestate and under state law a devisee orlegatee could renounce, but there was no such provision fora person taking by intestacy.In Hardenbergh v. Commissioner, the Tax Court made noattempt to distinguish the case from Brown v. Routzhan onthe ground that "transfer" should be defined differentlyunder the gift and estate taxes. Nor does it appear thatthere is any distinction between the two cases on this basis.The term "transfer" is used in both taxes without anyattempt to define it.4 However the cases indicate that it isused in the same sense in connection with both the estateand gift tax. Thus in Burnet v. Guggenheimrs the SupremeCourt said that Congress, in enacting the gift tax statute,had adopted the concept of "transfer" as interpreted underthe estate tax.6 In other cases the courts have repeated thatthe two taxes are closely related and the "transfer" underthe gift tax means the same thing as transfer under theestate tax.7Since the term transfer is used in the same sense underboth taxes it would appear that the Hardenbergh case iseither inconsistent with Brown v. Routzahn, or that it muststand on the basis of a distinction between the renunciationof property passing under a will and by intestacy.26 U.S.O.A. § 811 Gross Estate. This section includes in the grossestate of decedent the value at his death of all property (c) (1) "tothe extent of any interest therein of which the decedent has at any timemade a transfer (except in case of a bona fide sale for an adequate andfull consideration in money or money's worth), by trust or other wise--(A) in contemplation of his death:"26 U.S.AC.A. § 1000 (a) imposes a tax on the transfer of property bygift and states in (b) "The tax shall apply whether the transfer is intrust or otherwise, whether the gift is direct or indirect, and whetherthe property is real or personal, tangible or intangible:"288 U.S. 280 (1933).0 Ibid. The court stated that the gift and estate taxes were in parimateria.7 Harris v. Commissioner, 178 F.2d 861 (2nd Cir. 1949); Higgins v.Commissioner, 129 F.2d 237 (1st Cir. 1942).TAXATION OF RENUNCIATIONS OF INTERESTSThe distinction drawn by the Hardenbergh case finds sup-port in the state laws of testacy and intestacy. It is usuallyheld that title to property does not pass to a legatee or de-visee under a will until he accepts it, or if it does that thetitle vests subject to the right to renounce and if this rightis exercised, the renunciation relates back to the testator'sdeath and renders the gift void from the beginning.s Onthe other hand, there appears to be substantial supportamong the text writers, at least, for the proposition thatwhen a person dies intestate his property passes to his heirswho cannot prevent the passage of title to them by renuncia-tion.9Even though the distinction made in the Hardenberghcase finds support in the local law of decedent estates, it maywell be doubted whether this should be controlling on fed-eral tax questions. The courts have repeatedly emphasizedthat taxation is not so much concerned with the technical-ities of title as it is with changes in economic benefits andthe realities of the particular transaction.10 It appears that,in determining whether a taxable gift has been made, thefederal courts might well ignore technicalities of title underlocal law and consider whether there was such a changein economic benefits and control over the property as tojustify the imposition of a gift or estate tax upon renun-ciation of these rights. Although a devisee or legatee canrefuse to take the title to property, he nevertheless has had,prior to such refusal, as much control over the propertyand has enjoyed as much benefit from it as an heir who hadtitle forced on him and then released his right to the prop-erty. Under this line of reasoning it is hard to perceive4 PAGE, WILLS §§1401 and 1402 (3rd Ed 1941); In re Kalt's Estate,16 Cal.2d 807, 108 P.2d 401 (1940); Albany Hospital v. Hanson, 214 N.Y.435, 108 N.E. 812 (1915); Bouse v. Hull, 168 Md. 1, 176 Atl. 645 (1935);Coomes v. Flnegan, 233 Ia. 448, 7 N.W. 2d 729 (1943); Perkins v. Isley,224 N.C. 793, 32 S.E.2d 588 (1945); Greely v. Houston, 148 Miss. 799, 114So. 740 (1927); Bradford v. Leake, 124 Tenn. 312, 137 S.W. 96 (1911).PAGE, Ibid, § 1401. Also see DART'S LA. Civ. CODE 1945, Art. 977,which illustrates that one state, at least, permits an heir to renounce hisintestate's share in a decedent's estate.10 Estate of Sanford v. Commissioner, 308 U.S. 39 (1939); Burnet v.Guggenheim, 288 U.S. 280 (1932); Commissioner v. Wilder's Estate, 118F.2d 281 (5th Cir. 1941).DuKE BAR JOURNALany sensible distinction between Brown v. Routzahn and theHardenbergh case.In Lyeth v. Hoey" the issue was whether the propertywhich an heir received under compromise of a will contest,by which the will was admitted to probate and the legateepaid the heir part of the estate, was exempt from the in-come tax as property acquired by "gift, bequest, devise, orinheritance." Under the state law the property apparentlywas received by the heir as the result of a contract. TheSupreme Court, however, held that "inheritance" as thatterm was used in the federal tax statute was to be construedaccording to a uniform federal definition rather than accord-ing to the local state law and that the heir took tax-free byinheritance. The court said:"In dealing with the meaning and application of anact of Congress efiacted in the exercise of its plen-ary power under the Constitution to tax incomeand to grant exemptions from that tax, it is the willof Congress which controls, and the expression ofits will in the absence of language evidencing adifferent purpose, should be interpreted 'so as togive a uniform application to a nation-wide schemeof taxation.' Burnet v. Harmel, 287 U.S. 103, 110,53 S.Ct. 74, 77.*** Congress establishes its owncriteria and the state law may control only whenthe federal taxing act by express language or nec-essary implication makes its operation dependentupon the state law.Whether what an heir receives from the estateof his ancestor through the compromise of his con-test of his ancestor's will should be regarded aswithin the exemption from the federal tax should" 305 U.S. 188 (1938). See also Commissioner v. Tower, 327 U.S. 280(1946) where a husband had given his wife property which she trans-ferred to a partnership and became a partner with her husband. Thewife contributed no services to the partnership but received part ofits profits. The Court held that these profits should be taxed as incomeof the husband and the Supreme Court upheld the Tax Court. The tax-payer- contended that the partnership was valid under state law andit should consequently be held valid for tax purposes. In overrulingthis contention the court stated that a state cannot have the final wordand decide issues of federal tax law. The court continued, "But theTax Court in making a final authoritative finding on the questionwhether this was a real partnership Is not governed by how Michiganlaw might treat the same circumstances for purposes of state law."TAXATION OF RENUNCIATIONS OF INTERESTSnot be decided one way in the case of an heir inPennsylvania or Minnesota and in another wayin the case of an heir in Massachusetts or NewYork, according to the differing views of the statecourts."If the term inheritance is to be given a uniform meaningunder the income tax it is difficult to see why "transfer"should not be given a uniform federal definition under theestate and gift taxes.According to Lyeth v. Hoey in the construction of fed-eral tax acts terms should be interpreted "so as to give auniform application to a nation wide scheme of taxation"unless there is language evidencing a different purpose.It has also been held that a uniform federal definition shouldbe resorted to in gift and estate tax cases.12  The statuteshave no express language requiring that state law be fol-lowed in deciding what constitutes a transfer,13 and thefact that "transfer" is defined in a broad sense indicatesthat local law should not confine the statutory definition.Obviously the line of reasoning adopted by the Hardenberghcase which makes the taxability of a renunciation turn uponnarrow distinctions of the local law of the decedent estatesmay lead to a lack of uniformity in the administration ofthe gift and estate taxes and result in tax distinctions whichare not based on real economic differences.142 Commissioner v. Greene, 119 F.2d 383 (9th Cir. 1941) (a gift taxcase holding that federal law was to be applied in determining whetherthere was consideration in a transaction); Bahr v. Commissioner, 119F.2d 371 (5th Cir. 1941) (which involved deduction provisions of theestate tax); United States v. Pelzer, 312 U.S. 399 (1941) (decidingwhether there was a gift of a future interest).'- Supra, note 6.' It is true that local law almost necessarily determines whether anyrights or interests in property are transferred or created. Rhodes v.Commissioner, 41 B.T.A. 62 (1940). But see Richardson v. Commission-er, 126 F.2d 562 (2nd Cir. 1942). And in some cases it has been heldnot only that the rights created by a particular transaction are to bedetermined by state law but also that the federal tax consequences ofsuch transactions are to be governed by the local law. Poe v. Seaborn,282 U.S. 101 (1930); Lang v. Commissioner, 304 U.S. 264 (1937). How-ever, most of the decisions which have held that the tax consequencesof a transaction were controlled by state law have been cases involvingcommunity property where the results of following the local law arehardly to be commended.DUKE BAR JOURNALIf local law is to be disregarded and a renunciation of aninterest in an intestate estate placed upon the same footingas a renunciation under a will there still remains the prob-lem of whether both transactions are to be treated as a"transfer" resulting in estate and gift tax liability or as amere refusal to accept a benefit which does not result in atax. The courts should determine which of these theoriesshould prevail by considering the policies of the tax lawsand the actual power, control and benefit that the heir ordevisee possesses because of his ability to refuse the prop-erty and in that manner direct who shall receive it." In de-ciding this issue the courts will have to take into account thefact that by renunciation the heir or devisee could only makethe property available to a limited number of persons. An-other factor is that the heir or devisee had this choice forcedupon him. On the other hand, however, the heir or deviseeactually has the power to dispose of the property as hewishes and renunciation is only one means of disposal. Ifa person were allowed to refuse property to which he wasentitled by the death of another and by this refusal enablesomeone else to receive the property renunciation could be-come a widely used means of tax evasion. Whether or not,however, renunciations of interests in decedents' estatesshould or should not be taxed under the estate and gifttaxes, it seems reasonably clear that there is no justificationfor drawing the distinction between renunciations under awill and renunciations in connection with intestacy. Bothshould be treated as a taxable transfer, or neither should.I In this connection It is perhaps worth noting Commissioner v. Mott,85 F.2d 315 (6th Cir. 1936). In that case the court held that a trusteewho renounced all right to his commissions had not constructivelyreceived them and that, consequently, they did not represent taxableincome to him. The Senate Finance Committee in Its report on the1948 Revenue Bill said in part, ". . . if any person disclaims or refusesan attempted gift a transfer by gift Is not considered made." 1948-1Cum.BuLL. 353.§§811 (f) (2) and 1000 (c) (2) I.R.C. as amended by PuB. L. 58, 82CONG., 1ST SESS. (June 28, 1951) provide that the disclaimer or renuncia.tion of a power of appointment shall not be treated a taxable transferunder the federal estate and gift taxes.

Taxation of Renunciations of Interests in Decedents’ Estates Under the Federal Estate and Gift Taxes

bepress Legal Repository

https://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1557&amp;context=dlj

Taxation of Renunciations of Interests in Decedents’ Estates Under the Federal Estate and Gift Taxes

Abstract

Similar works

Full text

Available Versions

Duke Law Scholarship Repository

bepress Legal Repository