Anderson v. McNeir, 139.

• Decision Date: 10 January 1927
• Docket Number: No. 139.,139.
• Citation: 16 F.2d 970
• Parties: ANDERSON, Collector of Internal Revenue, v. McNEIR.
• Court: U.S. Court of Appeals — Second Circuit

16 F.2d 970 (1927)

ANDERSON, Collector of Internal Revenue, v. McNEIR.^*

No. 139.

Circuit Court of Appeals, Second Circuit.

January 10, 1927.

Emory R. Buckner, U. S. Atty., of New York City (Thomas J. Crawford and Edward Feldman, Asst. U. S. Attys., both of New York City, and Charles T. Hendler, Sp. Atty., Bureau of Internal Revenue, of Washington, D. C., of counsel), for plaintiff in error.

Geller, Rolston & Blanc, of New York City (C. Alexander Capron and Russell L. Bradford, both of New York City, of counsel), for defendant in error.

Before MANTON and HAND, Circuit Judges, and CAMPBELL, District Judge.

MANTON, Circuit Judge.

During the calendar year of 1924, and prior to the passage of the Revenue Act of that year, the defendant in error made an irrevocable deed of trust to the Farmers' Loan & Trust Company, giving a large gift of securities for the benefit of his wife, children, and grand-children. The income from the corpus of this trust was to be paid to his wife and two children during the term of their lives. Trusts were created for grandchildren of the donor in the event that the wife and the children of the donor should predecease him without leaving issue. A further provision of the trust was that, in the event of the wife and children so dying and the donor being not then living, one half of the principal should go to Georgetown University and the other half pass under the intestate laws of the state of New York. An additional gift of $4,300 was made by the donor after the passage of the act.

Because of the requirements of sections 319-324 of the Revenue Act of 1924 (Comp. St. §§ 6336 4/5s-6336 4/5x), in January, 1925, the defendant in error filed a gift tax return, reporting these gifts made by him during the year 1924. The plaintiff in error assessed a tax, and collected it, under protest, pursuant to this act. In this action, the defendant in error has succeeded in its recovery.

The act (43 Stat. 253, 313, § 319) requires that, for the calendar year of 1924 and each calendar year thereafter, a tax (referred to in a schedule unnecessary to mention here) is imposed upon the transfer by a resident by gift during such calendar year of any property wherever situate, whether made directly or indirectly, and upon the transfer by a nonresident by gift during such calendar year of any property situated within the United States. Section 320 makes provision for a tax in the event that the gift be made in property, so that the tax be paid on the fair market value. Section 321 provides for deductions, in the case of a resident, an exemption of $50,000; also gifts to charity, all gifts the aggregate amount of which to any one person do not exceed $500, are exempt. A further provision of exemption is made for property transferred by gift, which has been received by the donor within five years prior to the time of his making such gift, either from another person by gift, or by a decedent by gift, devise, or inheritance. Section 322 provides that where a tax is imposed under section 319 upon any gift, and thereafter, upon the death of the donor, the amount thereof is required by any provision of part I of this title to be included in the gross estate of the decedent, then there shall be credited against, and applied in reduction of the estate tax, an amount equal to the tax paid with respect to such gift. Section 323 provides that any person who, within the calendar year of 1924 or any calendar year thereafter, makes any gift or gifts in excess of the deductions allowed by section 321, shall, on or before the 15th day of March, file with the collector a return under oath, listing and setting forth therein all gifts and contributions made by him during such calendar year. Section 324 provides how the tax shall be assessed and collected.

This gift tax is attacked by the defendant in error as repugnant to the Constitution, and he invokes article 1, § 2, cl. 3, which requires that direct taxes shall be apportioned among the several states according to their respective numbers; and article 1, § 9, cl. 4, which provides that no capitation or other direct tax shall be laid, unless in proportion to the census or enumeration hereinbefore directed to be taken; and article 1, § 8, cl. 1, that Congress shall have power to lay and collect taxes, duties, imposts and excises, but all duties, imposts and excises shall be uniform throughout the United States; and article 1, § 9, cl. 5, that no tax or duty shall be laid on articles exported from any state.

The questions presented by this writ are (1) whether the gift tax provided for by this enactment is a direct tax, as contended by the defendant in error, or an excise or indirect tax, as claimed by the government; (2) is it unconstitutional, in so far as it imposes a tax upon transfers by gift made in the calendar year 1924, but consummated before June 2, 1924, when the act became effective? It is also claimed that, if the tax be an excise and not a direct tax, it is repugnant to the Fifth Amendment of the Constitution, as unreasonable and of capricious classification.

The power of taxation by the national government was delegated to Congress, but within the restraints of the Constitution. The power to lay and collect taxes, duties, imposts, and excises is exhaustive, and embraces every conceivable power of taxation. Brushaber v. Union Pacific R. R. Co., 240 U. S. 1, 36 S. Ct. 236, 60 L. Ed. 493, L. R. A. 1917D, 414, Ann. Cas. 1917B, 713. It embraces all the attributes which appertain to sovereignty in the fullest sense. United States v. Bennett, 232 U. S. 299, 34 S. Ct. 437, 58 L. Ed. 612. As said in Nicol v. Ames, 173 U. S. 509, 514, 19 S. Ct. 522, 525 (43 L. Ed. 786):

"The presumption, as has frequently been said, is in favor of the validity of the act, and it is only when the question is free from any reasonable doubt that the court should hold an act of the lawmaking power of the nation to be in violation of that fundamental instrument upon which all the powers of the government rest. This is particularly true of a revenue act of Congress. The provisions of such an act should not be lightly or unadvisedly set aside, although if they be plainly antagonistic to the Constitution it is the duty of the court to so declare."

There is not to be found in the cases a clear definition of precisely what is meant by a direct tax, or, indeed, an excise tax. It has become a rule of application to each particular tax. The nature of the tax is to be determined from the standpoint of the Constitution. It may not be answered by the theories of political economists. Pollock v. Farmers' Loan & Trust Co., 157 U. S. 429, 15 S. Ct. 673, 39 L. Ed. 759; Knowlton v. Moore, 178 U. S. 41, 20 S. Ct. 747, 44 L. Ed. 969. Prior to the Pollock Case, it was thought that the direct tax referred to in the Constitution comprised only a capitation or poll tax and a tax on land. The Supreme Court in Hylton v. United States (1796) 3 Dall. 171, 1 L. Ed. 556, overruled a challenge to a tax, as unapportioned, imposed on carriages for the convenience of persons who shall keep them for their own use or to be let out for hire or conveying of passengers. This was held to be an excise tax. In Pacific Insurance Co. v. Soule, 7 Wall. 433, 19 L. Ed. 95, a tax imposed upon premium receipts, dividends, and income of insurance companies was upheld as a proper exercise of constitutional power to levy excise taxes. A tax levied upon the amount of notes of state banks or banking associations, paid out by any national or state banking association, was also held to be an excise tax. Veazie Bank v. Fenno, 8 Wall. 533, 19 L. Ed. 482. The succession tax upon the devolution of title to real estate was held to be an indirect tax and constitutional. Scholey v. Rew, 23 Wall. 331, 23 L. Ed. 99.

In Pollock v. Farmers' Loan & Trust Co., supra, an income tax was held to be unconstitutional, and was said to be the legal equivalent of a direct levy upon the property from which the income was derived, and therefore required apportionment. Later, in 1898, the Supreme Court held a tax levy upon the sale of commodities on boards of trade and exchanges was a valid excise. Nicol v. Ames, supra. A tax on gifts by will was held to be an excise, and not a direct tax. Knowlton v. Moore, 178 U. S. 41, 20 S. Ct. 747, 44 L. Ed. 969. So, also, the stamp tax levied on calls or agreements to sell stock. Treat v. White, 181 U. S. 264, 21 S. Ct. 611, 45 L. Ed. 853. And the tax on manufactured tobacco intended for sale was held to be an excise tax in Patton v. Brady, 184 U. S. 608, 22 S. Ct. 493, 46 L. Ed. 713, as was a stamp tax on a memorandum or contract of sale of stocks in Thomas v. United States, 192 U. S. 363, 24 S. Ct. 305, 48 L. Ed. 481. A corporation excise tax was held valid in Flint v. Stone Tracy Co., 220 U. S. 107, 31 S. Ct. 342, 55 L. Ed. 389, Ann. Cas. 1912B, 1312. This tax was said not to be upon the corporate franchises, irrespective of their use, or upon the property of the corporation, but upon the doing of the corporate business and with respect to the carrying on thereafter.

In Billings v. United States, 232 U. S. 261, 34 S. Ct. 421, 58 L. Ed. 596, the tax was imposed under the Tariff Act upon the use of foreign-built yachts, not used or intended to be used for trade. It was sustained as an excise tax. In that case, the court pointed out that it was to be observed that the provision dealt with ownership, and distinguished between ownership and use, since it based the tax, not upon the former, but upon the use, and stated that it followed that it was not the ownership, but the election, during the taxing period, of the owner to take advantage of one of the elements which were involved in ownership; that is, the right to use was subject under the statute to the excise duty. And the court said:

"In this view the fact of use, not its extent or its frequency, becomes the test, as distinguished from mere ownership, for that...