Harris v. Commissioner of Internal Revenue

• Decision Date: 22 December 1949
• Docket Number: Docket 21224.,No. 62,62
• Citation: 178 F.2d 861
• Parties: HARRIS v. COMMISSIONER OF INTERNAL REVENUE. COMMISSIONER OF INTERNAL REVENUE v. HARRIS.
• Court: U.S. Court of Appeals — Second Circuit

178 F.2d 861 (1949)

HARRIS v. COMMISSIONER OF INTERNAL REVENUE.

COMMISSIONER OF INTERNAL REVENUE v. HARRIS.

No. 62, Docket 21224.

United States Court of Appeals Second Circuit.

Argued November 2, 1949.

Decided December 22, 1949.

I. N. Wilpon, Brooklyn, N. Y., for petitioner.

C. Oliphant, Theron L. Caudle, Ellis N. Slack, Washington, D. C., I. Henry Kutz, Washington, D. C., argued for respondent.

Before L. HAND, Chief Judge, and SWAN and FRANK, Circuit Judges.

L. HAND, Chief Judge.

This cause comes up upon petitions of the taxpayer and the Commissioner to review an order of the Tax Court in banc, deciding her liability for gift taxes in the years 1940, 1941, 1942 and 1943. The tax for each of the first three years depends upon the same question: i. e. whether bank deposits in United States banks of a nonresident, not a citizen, are excluded from property subject to a gift tax. The Tax Court held that they were not excluded, and taxed the taxpayer accordingly. The tax for the year 1943 was upon payments by the taxpayer to her husband, in performance of an agreement, executed in anticipation of divorce and dependent upon it for its validity, which was later adopted by the decree. The taxpayer argues that these payments were not "founded upon a promise or agreement," but upon the obligation established by the decree. The Tax Court so held, and expunged the deficiency.

The Taxpayer's Appeal.

The estate tax¹ excludes from taxation, (a) any amount receivable as insurance upon the life of a "nonresident not a citizen", and (b) "any moneys deposited * * * by or for a nonresident not a citizen * * * who was not engaged in business in the United States." Section 1000(b) of the gift tax² excludes the property of "a nonresident not a citizen", which was not "situated within the United States"; but, since deposits in United States banks are so "situated," the taxpayer must, and does, maintain that we should read the exclusion of § 863(b) into § 1000 (b). Her chief reliance is Merrill v. Fahs,³ where the Supreme Court, following its decision in Sandford's Estate v. Commissioner,⁴ held that the gift tax, being ancillary to the estate tax, should be read as in parimateria. The question in Merrill v. Fahs,³ was of the meaning of the phrase, "money or money's worth," in the gift tax,⁵ which that act carried over from the estate tax, and which in each act excluded property transferred upon such a consideration. In definition of that phrase the estate tax in 1932 provided⁶ that the relinquishment of marital rights should not be deemed "money or money's worth." The gift tax, passed in the same year, did not incorporate this definition; but the Supreme Court held that it was nevertheless by implication to be read into § 1002. The First Circuit⁷ had already held the same way. We of course accept to the full this canon for the interpretation of the gift tax; but, like every other aid in interpretation, it must yield when the text is clearly enough to the contrary, as it is in the case at bar. We start with the fact that in Merrill v. Fahs, supra,³ the court thought that the definition of "money or money's worth," added to the estate tax in 1932 by what is now § 812(b), was put in only out of abundant caution, which nobody can suppose to be true of the exclusion by § 863 from property situated within the United States of life insurance policies and bank deposits. Moreover, an analysis of the two statutes confirms the conclusion that the gift tax should not be read to imply § 863.

In 1931 § 303(d) of the estate tax was in substance the same as § 862 of the present act. It included shares in domestic corporations — § 862(a) — and property which the decedent had any power to transfer whether it was situated in the United States when he made the transfer or at his death — § 862(b). When the gift tax was drawn in 1932 the first clause of § 303(d) was lifted verbally and made the next to the last section of the act — § 531(b). The exact words were: "Stock in a domestic corporation owned and held by a nonresident shall be deemed property situated within the United States," and they are literally the same as those of the first clause of § 303(d) with the omission of the word, "decedent," after "nonresident," and the insertion of the word, "situated" after "property." There cannot therefore be the least doubt of the provenience of § 531(b), now § 1030(b). The draftsmen omitted the second clause of § 303(d) and the whole of § 303(e), now § 863. It was indeed unnecessary to carry over the first clause of § 303(d) for shares in a domestic corporation were certainly property situated in the United States, but it was necessary to omit the second clause, for that was altogether inapplicable to gift taxes. As to § 303(d) the draftsmen therefore showed unmistakable evidence of deliberate choice, actuated by a distinction between estate taxes and gift taxes. They also omitted all of § 303(e) — now § 863 — and that omission the taxpayer must, we think, put down to a belief that it would by implication be carried over into the gift tax and is to be read as an exclusion from § 501(b), now § 1000(b). Certainly it is inconceivable that when the draftsmen dealt so deliberately with § 303(d), taking over a part and leaving the rest, they exercised no deliberate choice in omitting the whole of the next adjacent — not even section — but subdivision of a section. The taxpayer does not mean to go so far; but her alternative is equally improbable, for it presupposes that faced with the exclusory section — § 303(e) — they did deliberately choose to leave it out, because they assumed that it would be apparent at once that it would be implied. If so, they concerned themselves to repeat what was redundant — the first clause of § 303(d) — and left to inference what was necessary.

The taxpayer answers that, since the definition which excluded the relinquishment of marital rights from "money and money's worth" was put into § 303(d) in 1932, there was as much reason in Merrill v. Fahs, supra,³ to infer that it should not apply to the gift tax, as there is to infer that § 303(e) should not apply to the gift tax, for to leave behind the definition showed that deliberate choice or selection on which we are depending. However, it is not true, strictly speaking, that the first clause of § 303(d) was carried over to the gift tax and the definition was left behind. The definition was added to the section at the same time that the gift tax was passed; and, as a practical matter we should have no warrant for saying that the draftsmen of the gift tax had the addition before them. Be that as it may, even though we do conceive that their failure to transplant the definition into the gift tax was deliberate and presupposed a belief that it was implicit in § 501(b), certainly there is no ground for extending that hypothesis to cover § 303(e) which directly contradicts the general language of § 501(b).

The taxpayer finally argues that we should supply the omission by recourse to the purposes which actuated the exclusion in the estate tax. These were to encourage nonresidents (a) to take out life courage nonresidents (a) to take out life policies with United States underwriters, and (b) to keep their deposits in United States banks. So far as concerns deposits, it is an obvious answer that any alien who knew that his deposits were subject to a gift tax would withdraw them before making a gift, and the tax would at best catch only the unwary. Not so as to bequests, for no one can foretell when he will die. A stronger argument can be made as to insurance policies. In 1932 the estate tax only excluded the first $40,000 of all policies payable to other beneficiaries than the insured's estate, so that without the second clause of § 303(e) the estate of a non-resident decedent would have been taxable upon all policies which he took out in the name of his executor, and upon the excess of all policies over $40,000, of which anyone else was beneficiary. Congress apparently did think that the exclusion of all policies from the estate tax would offer an inducement to nonresidents to take out policies in United States companies; but there is much less reason to suppose that a similar exclusion in the gift tax would have been an equal inducement. The regulation which accompanied the enactment of the gift tax of 1932 provided that only irrevocable transfers of policies should be deemed gifts, and that they should be measured by the surrender value at the time, plus prepaid insurance adjusted to the date of the gift;⁸ and, although the measure of the value of the gift has since then been changed,⁹ that is not important. We may therefore concede that it is theoretically possible that a nonresident might be dissuaded from taking out insurance in a United States company because he learned that if, while he lived, he wished to make an irrevocable gift of it, he would be taxed on its surrender value. It is always a dangerous business to fill in the text of a statute from its purposes, and, although it is a duty often unavoidable, it is utterly unwarranted unless the omission from, or corruption of, the text is plain. We should go clean beyond all permissible extrapolation of any declared purpose, if we were to say in the face of this apparently deliberate omission that Congress must have meant to give United States insurance companies what was possibly, nay probably, a trifling and hypothetical advantage. And this conclusion is immensely fortified, when we consider that we cannot separate policies from bank deposits, and that there could not have been any similar purpose as to them. The order is affirmed as to the years 1940, 1941 and 1942.

The Commissioner's Appeal.

By agreement between the taxpayer and her husband they mutually exchanged certain rights they had against each other, including the surrender by each of any "share in any capacity whatsoever in the estate of the other party...