Wecker, Theodore S.

English

St. John's University School of Law

St. John's Law Review Volume 7 Number 1 Volume 7, December 1932, Number 1 Article 28 June 2014 Inheritance Taxation--Transfers in Contemplation of Death--Constitutional Law Theodore S. Wecker Follow this and additional works at: https://scholarship.law.stjohns.edu/lawreview Recommended Citation Wecker, Theodore S. (1932) "Inheritance Taxation--Transfers in Contemplation of Death--Constitutional Law," St. John's Law Review: Vol. 7 : No. 1 , Article 28. Available at: https://scholarship.law.stjohns.edu/lawreview/vol7/iss1/28 This Comment is brought to you for free and open access by the Journals at St. John's Law Scholarship Repository. It has been accepted for inclusion in St. John's Law Review by an authorized editor of St. John's Law Scholarship Repository. For more information, please contact selbyc@stjohns.edu. TAX COMMENTEditor-THEODORE S. WECKER.INHERITANCE TAXATION-TRANSFERS IN CONTEMPLATION OFDEATH-CONSTITUTIONAL LA.-"In matters of taxation, the prob-lem of the government has always been to compel the gracious yield-ing of the unwilling taxpayer to its sovereign power." 1 It is notstartling, therefore, that inheritance and death transfer tax statuteshave met with much circumvention and interposition in the form ofthe practice of disposing of property by gifts inter vivos. The Rev-enue Acts of 1916,2a 1918,2b 1921,2c and 1924 2d included sections thedominant purpose of which was to reach substitutes for testamentarydispositions and thus to prevent the evasion of the estate tax.3 Themethod adopted by these sections proved ineffective in its practicaladministration with a great loss to the government in consequence, 4and section 302 (c), 5 accordingly, was adopted. The most recentexpression of the Supreme Court, in Heiner v. Donnan,6 however,declared the second sentence of this section unconstitutional.7In this case, the facts were as follows: One Donnan died withintwo years after transferring by complete and irrevocable gift intervivos certain securities to trustees for his four children, and afteradvancing a sum of money to his son. Both transactions were with-out consideration. The Commissioner of Internal Revenue included'Harrow, Summary Procedure Against Transferees Uifder the RevenueActs of 1926 and 1928 (1930) 5 ST. JOHN's L. REv. 11, 11.2a REV. ACT OF 1916 §202 (b), c. 463, 39 STAT. 756, 778."b REv. AcT OF 1918 §402 (c), c. 18, 40 STAT. 1057, 1097.2c REV. Ac OF 1921 §402 (c), c. 136, 42 STAT. 227, 278.d REv. AcT op 1924 §302 (c), c. 234, 43 STAT. 353, 304 (26 U. S. C. A.§1094, note).'See U. S. v. Wells, 283 U. S. 102, 116, 117, 51 Sup. Ct. 446, 451 (1930),citing Nichols v. Coolidge, 274 U. S. 531, 47 Sup. Ct. 710 (1926) and Millikenv. U. S., 283 U. S. 15, 51 Sup. Ct. 324 (1930).'Justice Stone, in his dissenting opinion in Heiner v. Donnan, - U. S. -,52 Sup. Ct. 358, 363, at 367, 368 (1932), compiled the following statistics: "102cases, decision of which was determined by the answer to the question of fact,whether a gift had been made in contemplation of death have arisen; in 20cases involving gifts of approximately $4,500,000 the government was success-ful; in 78 involving gifts largely in excess of $120,000,000, it was unsuccessful;in another the jury disagreed." See also Housa REP. No. 1, 69th Cong. 1stSess. at 15.' REv. AcT OF 1926 §302 (c), c. 27, 44 STAT. 9, 70 (26 U. S. C. A. §1094[c]). This section provides in part as follows: "Sec. 302. The value of thegross estate of the decedent shall be determined by including the value at thetime of his death of all property * * *"(c) * * * [2d sentence] Where within two years after his death *** andwithout such a consideration, the decedent has made a transfer, * * * suchtransfer shall be deemed and held to have been made in contemplation ofdeath * * *"'IHeiner v. Donnan, - U. S. -, 52 Sup. Ct. 358 (1932).Supra note 5.TAX COMMENTin the gross estate of decedent the value of the property transferred,imposing a death transfer tax on authority of section 302 (c). De-spite the declaration of the second sentence of this section that "suchtransfers shall be deemed and held to have been made in contempla-tion of death," the trial Court found as a fact that neither the transferin trust nor the advancement was made in contemplation of death.Judgment was rendered against the commissioner on the ground thesecond sentence of Section 302 (c) was unconstitutional, and viola-tive of the due process clause of the Fifth Amendment. The SupremeCourt affirmed this decision, Justices Stone and Brandeis dissenting.This ultimate fate of section 302 (c) was presaged by severalantecedent cases. In the lower courts, five decisions declared, insimilar situations, the unconstitutionality of this provision.8  TheKentucky Court of Appeals declared invalid a provision of the Ken-tucky Statutes, which was parallel in form and purpose with theprovision under discussion.9 The Supreme Court foretold its deci-sion in two of its own opinions, Schlesinger v. Wisconsin 10 andUnited States v. Wells.1A Wisconsin statute 12 which provided that all gifts made withinsix years shall be conclusively presumed to have been made in con-templation of death was the subject of the Scdesinger case. Thefacts in this case were found to be that Schlesinger died testate,leaving a large estate; that within six years he had made four sepa-rate gifts aggregating more than five million dollars to his wife andthree children; that none of these was really made in view, anticipa-tion, or contemplation of death. The Supreme Court of Wisconsindefended the presumption and consequent taxation on the theory that,exercising judgment and discretion, the legislature found them neces-sary in order to prevent evasion of inheritance taxes.' 3 In an opin-ion, written by Justice McReynolds, the Supreme Court answeredthis argument by stating that it was equivalent to declaring that "Amay be required to submit to an exactment forbidden by the Consti-tution if this seems necessary in order to enable the state readily tocollect lawful charges against B." 14 As to this, the Court therecontinued:'Donnan v. Heiner, 48 F. (2d) 1058 (D. C. W. D. Pa. 1931); Hall v.White, 48 F. (2d) 1060 (D. C. D. Mass. 1931); Guinzburg v. Anderson, 51 F.(2d) 582 (D. C. S. D. N. Y. 1931); Delaware Trust Co. v. Handy, 51 F. (2d)867 (D. C. D. Del. 1931); Guinzburg v. Anderson, 54 F. (2d) 629 (C. C. A.2d, 1931).'State Tax Comm. v. Robinson's Executor, 234 Ky. 405, 28 S. W.(2d) 491 (1930). An inheritance tax statute (Ky. STATS. §4281 a-I, subsec.2), providing that a gift, if made within three years of donor's death, shall bedeemed taxable as made in contemplation of death, was declared unconstitu-tional, the Court stating that to justify an inheritance tax, it must be provedthat the gift, whenever made, was actually in contemplation of death."0 Schlesinger v. Wisconsin, 270 U. S. 230, 46 Sup. Ct. 260 (1925)." U. S. v. Wells, 283 U. S. 102, 51 Sup. Ct. 446 (1930).§1087-1, c. 64ff, Wis. STATs. (1919).11 184 Wis. 1, 199 N. W. 951 (1924)."Supra note 10, 270 U. S. at 240, 46 Sup. Ct. at 261.ST. JOHN'S LAW REVIEW"Rights guaranteed by the Federal Constitution are notto be so lightly treated; they are superior to this supposednecessity. The state is forbidden to deny due process of thelaws for any purpose whatsoever." 15"A forbidden tax cannot be enforced in order to facili-tate the collection of one properly laid." 16The power of Congress or of a state to provide for including in thegross estate of a decedent, for purposes of a death tax, the value ofgifts made in contemplation of death, and their power to create arebuttable presumption in this respect, was not denied in this case.The Court decided against that part of the statute that made thepresumption conclusive "without regard to actualities"; that classify-ing gifts made during a specified period as made in contemplation ofdeath was an arbitrary exertion of a power.It remained, however, for the Wells case 17 to disperse the doubtsconcerning the true definition of the phrase "in contemplation ofdeath." The Government there agreed that the early decisions 18 con-strued the words "in contemplation of death" as referring only togifts causa mortis, but claimed that this definition had been aban-doned in favor of more liberal constructions, pointing toward a ten-dency on the part of the legislatures and the Courts to broaden themeaning in order that the tax might be made effective. The Courtsaid, however, that "while the interpretation of the phrase had notbeen uniform, therie has been agreement upon certain fundamentalconsiderations": 191. "It is recognized that the reference is not to the gen-eral expectation of death which all entertain. It must be aparticular concern giving rise to a definite motive." 191 (Ital-ics ours.)2. "The motive must be of the sort which leads to testa-mentary disposition." 19b3. "It is sufficient if contemplation of death be the induc-ing cause of the transfer, whether or not death is believed tobe near." 19c4. "The statute does not embrace gifts inter vivos whichspring from different motives. Such transfers were made thesubject of a distinct gift tax, since repealed." 19dl Ibid.' Supra note 11.See cases collected in 7 A. L. R. 1028, 21 A. L. R. 1335.' Supra note 11, 283 U. S. at 115, 51 Sup. Ct. at 451."a Ibid. 283 U. S. at 115, 51 Sup. Ct. at 451."lb Ibid. 283 U. S. at 117, 51 Sup. Ct. at 451.1c Ibid. 283 U. S. at 119, 51 Sup. Ct. at 452.I'd Ibid. 283 U. S. at 118, 51 Sup. Ct. at 452.TAX COMMENT5. "The provision is not confined to gifts cauiamortis."19e6. Whether the motive is present should be determinedfrom the surrounding circumstances, the "bodily and mentalcondition" of the donor at the time of the transfer, the periodbetween the transfer and death, etc. 19fThe Wells case dealt with a rebuttable presumption, 20 but Heinerv. Donnan involved a conclusive presumption. One of the issueswhich split the Supreme Court in Heiner v. Donnan 21 was whetherthe tax was intended as a death transfer tax or a tax in pure giftsinter vivos, for if it were the latter, the tax laid might not be uncon-stitutional. Speaking through Justice Sutherland, the majority said:"The statute requires that this value shall be determinedas of the time of the decedent's death, without regard to thevalue of the gift when received. The event upon which thetax is made to depend is not the transfer of the gift, but thetransfer of the estate of the decedent. The tax falls upon theestate and not upon the gift, and is computed not upon thevalue of the gift, but by progressively graduated percentages,upon the value of the entire estate. It is * * * apparent * * *that Congress could not have had, even remotely, in mind theimposition of a gift tax." 22This the minority, in an opinion delivered by Justice Stone, stoutlydenied:"At the outset it is to be borne in mind that gifts intervivos are not immune from federal taxation." 23" * * the obvious and permissible purpose of the presentand related sections" is to tax gifts inter vivos.2 4" * * * It is not imperative that the motive of the donorbe made the exclusive basis of the selection of these gifts fortaxation." 25"The gifts taxed may, in some instances, * * * bear norelation whatever to death, except that all are near death." 26It is submitted, however, that the evolution of the present statute, thetransformation of a prina facie presumption into a conclusive pre-1'e Ibid. 283 U. S. at 115, 51 Sup. Ct. at 451.'OfIbid. 283 U. S. at 117, 51 Sup. Ct. at 451."' Supra note 2 (d).2'Supra note 6.2-Ibid. 52 Sup. Ct. at 362, 363.Ibid. 52 Sup. Ct. at 364.' Ibid. 52 Sup. Ct. at 365.Ibid. 52 Sup. Ct. at 366.- Ibid. 52 Sup. Ct. at 366.ST. JOHN'S LAW REVIEWsumption, tends to indicate that the taxing intention has retained itsidentity, and since pure gifts inter vivos were not included in the earlyhistory of the statute 27 it is more logical to argue that they are notnow included in section 302 (c).The majority opinion goes even further, asserting that even "ifconstrued as imposing a gift tax, it is in that respect still so arbitraryas to cause it to fall within the ban of the due process clause * * *," 28citing as the basis of its conclusion Schlesinger v. Wisconsin.29 Thelatter case adopted the view of the Supreme Court of Wisconsin,30stating:"The court below declared that a tax on gifts inter vivosonly could not be so laid as to hit those made within six yearsof the donor's death and exempt all others-this would be'wholly arbitrary.' We agree with this view * * **" 31The minority, however, points out the question involved in Heiner v.Do-nnan 32 was not involved in. the Schlesinger case, distinguishingbetween the two cases:"There, all gifts made within six years of death weretaxed. Here, only those within the statute. There, the taxwas a successive tax, and so was a burden on-right to receive,Leach, v. Nichols, 286 U. S. -, 52 Sup. Ct. 338 (1932), andnecessarily payable by the donee, but at rates and valuationsprevailing at the time of the donor's death. Here the tax wasupon the transfer effected by the donor's gift after the enact-ment of the statute, and is payable from the donor's estate atthe same rates and values as though it had passed at hisdeath." 3The minority opinion, further, points toward many decisions in whichsimilar taxation of gifts made inter vivos was sustained.3 4 Further,-*Supra note 2.28 SJpra note 6, 52 Sup. Ct. at 362.-l"9 S;a note 10.Estate of Schlesinger, 184 Wis. 1, 199 N. W. 951 (1924)."Supra note 10, 270 U. S. at 239, 46 Sup. Ct. at 261.Supra note 6.Ibid. 52 Sup. Ct. 365.'Bromley v. McCaughn, 280 U. S. 124, 50 Sup. Ct. 46 (1029) (a statutetaxing all gifts inter vivos at the same rates and with the same exemptions asin the case of testamentary transfers was upheld) ; Tyler v. U. S., 281 U. S.497, 50 Sup. Ct. 356 (1929) (the Supreme Court upheld taxation, as a part ofthe donor's estate, of another selected class of gifts inter vivos estates by theentirety donated by one spouse for the benefit of both, although the gift wasnot testamentary, and neither title, possession, nor enjoyment passed at death) ;Milliken v. U. S., 283 U. S. 15, 51 Sup. Ct. 324 (1930) (a selected class of giftsinter zivos, which were not testamentary, although made in contemplation ofdeath, were so taxed as a part of the donor's estate). Similar taxation of giftsmade inter vivos, but finally effective only at death, was sustained in ReineckeTAX COMMENTin the Schlesinger case, "the classification of gifts was deemed to bearbitrary under the Fourteenth Amendment ** * Here we are con-cerned only with the Fifth Amendment." 35The true basis for the minority opinion, however, was "thedifficulty of searching the motives and purposes of one who is dead,the proofs of which, so far as they survive, are in the control of hispersonal representative * * *," " and the tremendous loss in revenuebecause of this difficulty, for which Justice Stone elaborately andprofusely gives statistics.3 7It is respectfully submitted that the majority opinion is correctin its position that a death transfer tax was intended by section302 (c) and it was therefore unconstitutional, but that the minorityis on entirely sound ground in its declaration that a tax on pure giftsinter vivos, if enacted to remedy a serious situation, would be entirelyvalid. The true solution to the problem is more likely to be in, arevision of section 302 (c), clearly expressing that a tax on puregifts inter vivos is intended, rather than in a return to its forerunners,in view of the proven inutility of the latter.38THEODORE S. WECKER.STATE TAXATION OF FEDERAL INSTRUMENTALITIES-FEDERALTAXATION OF STATE INSTRUMENTALITIES.-In McCulloch v. Mary-land, the Supreme Court declared that the constitutionally grantedpowers of the federal government were not subject to regulation orcontrol by the states through the exercise of their taxing powers.1v. Northern Trust Co., 278 U. S. 339, 49 Sup. Ct. 123 (1928) ; Chase NationalBank v. U. S., 278 U. S. 327, 49 Sup. Ct. 126 (1928) ; see Taft v. Bowers, 278U. S. 470, 49 Sup. Ct. 199 (1928).It is submitted that a ruling of the Supreme Court in the future to theeffect that a tax is invalid if intended to embrace gifts inter vivos would involveoverruling the above cases.' Supra note 6, 52 Sup. Ct. at 365.' Ibid. 52 Sup. Ct. at 367.' Ibid. 52 Sup. Ct. at 367, 368."Supra note 4. Section 302 (c) has been amended by the REv. ACT OF1932, tit. VI, §803. In part, this section reads as follows:"Sec. 803 (a) (Section 302 (c) * * * is amended to read as follows:-"I(c) * * * any transfer of a material part of his property in thenature of a final disposition or distribution thereof, made by the decedentwithin two years prior to his death without such consideration, shall,unless shown to the contrary, be deemed to have been made in contem-plation of death * * *.' " (Italics ours.)'17 U. S. 316 (1819). See also Osborn v. Bank of U. S., 22 U. S. 738(1824); Weston v. Charleston, 27 U. S. 449 (1829); Dennis v. First NationalBank of Great Falls, 55 Mont. 448, 178 Pac. 580 (1919); Chase National Bankof New York v. Spokane County, 125 Wash. 1, 215 Pac. 374 (1923). See alsoPowell, Indirect Encroachmnent on Federal Authority by the Taxing Power ofthe States (1919) 31 CoL. L. Rv. 321.

Inheritance Taxation--Transfers in Contemplation of Death--Constitutional Law

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Inheritance Taxation--Transfers in Contemplation of Death--Constitutional Law

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