Sanford Estate v. Commissioner of Internal Revenue

• Decision Date: 06 November 1939
• Docket Number: No. 34,34
• Citation: 60 S.Ct. 51,84 L.Ed. 20,308 U.S. 39
• Parties: SANFORD'S ESTATE et al. v. COMMISSIONER OF INTERNAL REVENUE
• Court: U.S. Supreme Court

308 U.S. 39

60 S.Ct. 51

84 L.Ed. 20

SANFORD'S ESTATE et al.

v COMMISSIONER OF INTERNAL REVENUE.

No. 34.

Argued Oct. 8, 9, 1939.

Decided Nov. 6, 1939.

Rehearing Denied Dec. 4, 1939.

See 308 U.S. 637, 60 S.Ct. 258, 84 L.Ed. —-.

Messrs. Montgomery B. Angell and John W. Davis, both of New York City, for petitioners.

Mr. Frank Murphy, Atty. Gen., and Miss Helen R. Carloss, Sp. Asst. Atty. Gen., for respondent.

Mr. Justice STONE delivered the opinion of the Court.

This and its companion case, Rasquin v. Humphreys, 308 U.S. 54, 60 S.Ct. 60, 84 L.Ed. 77, present the single question of statutory construction whether in the case of an inter vivos transfer of property in trust, by a donor reserving to himself the power to designate new beneficiaries other than himself, the gift becomes complete and subject to the gift tax imposed by the federal revenue laws at the time of the relinquishment of the power. Co-relative questions, important only if a negative answer is given to the first one, are whether the gift becomes complete and taxable when the trust is created or in the case where the donor has reserved a power of revocation for his own benefit and has relinquished it before relinquishing the power to change beneficiaries, whether the gift first becomes complete and taxable at the time of relinquishing the power of revocation.

In 1913, before the enactment of the first gift tax statute of 1924, decedent created a trust of personal property for the benefit of named beneficiaries, reserving to himself the power to terminate the trust in whole or in part, or to modify it. In 1919 he surrendered the power to revoke the trust by an appropriate writing in which he reserved 'the right to modify any or all of the trusts' but provided that this right 'shall in no way be deemed or construed to include any right or privilege' in the donor 'to withdraw principal or income from any trust.' In August, 1924, after the effective date of the gift tax statute, 43 Stat. 313, § 319 et seq., 26 U.S.C.A. Int.Rev.Acts, page 79 et seq., decedent renounced his remaining power to modify the trust. After his death in 1928, the Commissioner following the decision in Hesslein v. Hoey, 2 Cir., 91 F.2d 954, in 1937, ruled that the gift became complete and taxable only upon decedent's final renunciation of his power to modify the trusts and gave notice of a tax deficiency accordingly.

The order of the Board of Tax Appeals sustaining the tax was affirmed by the Court of Appeals for the Third Circuit, 103 F.2d 81, which followed the decision of the Court of Appeals for the second circuit in Hesslein v. Hoey, supra, in which we had denied certiorari, 302 U.S. 756, 58 S.Ct. 284, 82 L.Ed. 585. In the Hesslein case, as in the Humphreys case now before us, a gift in trust with the reservation of a power in the donor to alter the disposition of the property in any way not beneficial to himself, was held to be incomplete and not subject to the gift tax under the 1932 Act so long as the donor retained that power.

We granted certiorari in this case May 15, 1939, 307 U.S. 618, 59 S.Ct. 836, 83 L.Ed. 1498, and in the Humphreys case May 22, 1939, 307 U.S. 619, 59 S.Ct. 1034, 83 L.Ed. 1499, upon the representation of the Government that it has taken inconsistent positions with respect to the question involved in the two cases and that because of this fact and of the doubt of the correctness of the decision in the Hesslein case decision of the question by this Court is desirable in order to remove the resultant confusion in the administration of the revenue laws.

It has continued to take these inconsistent positions here, stating that it is unable to determine which construction of the statute will be most advantageous to the Government in point of revenue collected. It argues in this case that the gift did not become complete and taxable until surrender by the donor of his reserved power to designate new beneficiaries of the trusts. In the Humphreys case it argues that the gift upon trust with power reserved to the donor, not afterward relinquished, to change the beneficiaries was complete and taxable when the trust was created. It concedes by its brief that 'a decision favorable to the government in either case will necessarily preclude a favorable decision in the other.'

In ascertaining the correct construction of the statutes taxing gifts, it is necessary to read them in the light of the closely related provisions of the revenue laws taxing transfers at death, as they have been interpreted by our decisions. Section 319 et seq. of the Revenue Act of 1924, 43 Stat. 253, 313, reenacted as Sec. 501 et seq. of the 1932 Act, 47 Stat. 169, 26 U.S.C.A. Int.Rev. Acts, page 580 et seq., imposed a graduated tax upon gifts. It supplemented that laid on transfers at death, which had long been a feature of the revenue laws. When the gift tax was enacted Congress was aware that the essence of a transfer is the passage of control over the economic benefits of property rather than any technical changes in its title. See Burnet v. Guggenheim, 288 U.S. 280, 287, 53 S.Ct. 369, 371, 77 L.Ed. 748. Following the enactment of the gift tax statute this Court in Reinecke v. Northern Trust Company, 1929, 278 U.S. 339, 49 S.Ct. 123, 73 L.Ed. 410, 66 A.L.R. 397, held that the relinquishment at death of a power of revocation of a trust for the benefit of its donor was a taxable transfer. Cf. Saltonstall v. Saltonstall, 276 U.S. 260, 48 S.Ct. 225, 72 L.Ed. 565; Chase National Bank v. United States, 278 U.S. 327, 49 S.Ct. 126, 73 L.Ed. 405, 63 A.L.R. 388, and similarly in Porter v. Commissioner, 1933, 288 U.S. 436, 53 S.Ct. 451, 77 L.Ed. 880, that the relinquishment by a donor at death of a reserved power to modify the trust except in his own favor is likewise a transfer of the property which could constitutionally be taxed under the provisions of § 302(d) of the 1926 Revenue Act, 26 U.S.C.A. Int.Rev.Acts, page 228, reenacting in substance 302(d) of the 1924 Act, 26 U.S.C.A. Int.Rev.Acts, page 67, although enacted after the creation of the trust. Cf. Bullen v. Wisconsin, 240 U.S. 625, 36 S.Ct. 473, 60 L.Ed. 830; Curry v. McCanless, 307 U.S. 357, 59 S.Ct. 900, 83 L.Ed. 1339; Graves v. Elliott, 307 U.S. 383, 59 S.Ct. 913, 83 L.Ed. 1356. Since it was the relinquishment of the power which was taxed as a transfer and not the transfer in trust, the statute was not retroactively applied. Cf. Nichols v. Coolidge, 274 U.S. 531, 47 S.Ct. 710, 71 L.Ed. 1184, 52 A.L.R. 1081; Helvering v. Helmholz, 296 U.S. 93, 98, 56 S.Ct. 68, 70, 80 L.Ed. 76.

The rationale of decision in both cases is that 'taxation is not so much concerned with the refinements of title as it is with the actual command over the property taxed.' See Corliss v. Bowers, 281 U.S. 376, 378, 50 S.Ct. 336, 74 L.Ed. 916; Saltonstall v. Saltonstall, supra, 276 U.S. page 261, 48 S.Ct. page 225, 72 L.Ed. 565; Burnet v. Guggenheim, supra, 288 U.S. page 287, 53 S.Ct. page 371, 77 L.Ed. 748, and that a retention of control over the disposition of the trust property, whether for the benefit of the donor or others, renders the gift incomplete until the power is relinquished whether in life or at death. The rule was thus established, and has ever since been consistently followed by the Court, that a transfer of property upon trust, with power reserved to the donor either to revoke it and recapture the trust property or to modify its terms so as to designate new beneficiaries other than himself is incomplete, and becomes complete so as to subject the transfer to death taxes only on relinquishment of the power at death.

There is nothing in the language of the statute, and our attention has not been directed to anything in its legislative history to suggest that Congress had any purpose to tax gifts before the donor had fully parted with his interest in the property given, or that the test of the completeness of the taxed gift was to be any different from that to be applied in determining whether the donor has retained an interest such that it becomes subject to the estate tax upon its extinguishment at death. The gift tax was supplementary to the estate tax. The two are in pari materia and must be construed together. Burnet v. Guggenheim, supra, 288 U.S. page 286, 53 S.Ct. page 371, 77 L.Ed. 748. An important, if not the main purpose of the gift tax was to prevent or compensate for avoidance of death taxes by taxing the gifts of property inter vivos which, but for the gifts, would be subject in its original or converted form to the tax laid upon transfers at death.¹

Section 322 of the 1924 Act, 26 U.S.C.A. Int.Rev.Acts, page 82, provides that when a tax has been imposed by § 319 upon a gift, the value of which is required by any provision of the statute taxing the estate to be included in the gross estate, the gift tax is to be credited on the estate tax. The two taxes are thus not always mutually exclusive as in the case of gifts made in contemplation of death which are complete and taxable when made, and are also required to be included in the gross estate for purposes of the death tax. But § 322 is without application unless there is a gift inter vivos which is taxable independently of any requirement that it shall be included in the grossestate. Property transferred in trust subject to a power of control over its disposition reserved to the donor is likewise required by § 302(d) to be included in the gross estate. But it does not follow that the transfer in trust is also taxable as a gift. The point was decided in the Guggenheim case where it was held that a gift upon trust, with power in the donor to revoke it is not taxable as a gift because the transfer is incomplete, and that the transfer whether inter vivos or at death becomes complete and taxable only when the power of control is relinquished. We think, as was pointed out in the Guggenheim case, supra, 288 U.S. page 285, 53 S.Ct. page 370, 77 L.Ed. 748, that the gift tax sta...