Blodgett v. Holden

• Decision Date: 17 February 1926
• Citation: 11 F.2d 180
• Parties: BLODGETT v. HOLDEN, Collector of Internal Revenue.
• Court: U.S. District Court — Western District of Michigan

11 F.2d 180 (1926)

BLODGETT v. HOLDEN, Collector of Internal Revenue.

District Court, W. D. Michigan, S. D.

February 17, 1926.

Norris, McPherson, Harrington & Waer, of Grand Rapids, Mich., for plaintiff.

E. J. Bowman, U. S. Dist. Atty., of Grand Rapids, Mich., for defendant.

RAYMOND, District Judge.

This suit is brought to recover "gift taxes," amounting to $52,023.52, levied and collected from plaintiff under the provisions of part 2 of title 3 of the Revenue Act of 1924 (43 Stat. 253-313 Comp. St. Supp. 1925, §§ 6336 4/5s-6336 4/5x). The matter is now before the court on motion to dismiss, made by defendant on the ground that the amended declaration does not state facts sufficient to constitute a cause of action. The facts alleged by the amended declaration and admitted by the motion are in substance these:

That on or about March 11, 1925, pursuant to the provisions of the Revenue Act of 1924, plaintiff duly reported the total amount of gifts made by him during the calendar year of 1924 as $872,095.66. Exclusive of gifts for charitable, public, and similar purposes, which were exempt, the total gifts were $850,196.02. A specific exemption of $50,000 was deducted, leaving the net amount of taxable gifts reported $800,196.02. Of the gifts not exempt as charities, etc., $843,696 represented gifts made prior to June 2, 1924, the date the gift tax law became effective, and $6,500.02 represented gifts after that date. Of the $843,696 given before June 2, 1924, $818,086.02 consisted of state and municipal bonds. On March 14, 1925, plaintiff, under protest that there was no valid law authorizing the exaction of the tax, paid to defendant the sum of $52,023.52, the amount of the tax indicated by the return. On the same day he made claim for refund, which was denied, and this suit has been brought to recover the amount so paid.

It is the claim of plaintiff that sections 319 to 324, inclusive, of the Revenue Act of 1924 (Comp. St. Supp. 1925, §§ 6336 4/5s-6336 4/5x), are unconstitutional, and the sole question presented to the court is whether those sections are in conflict with the Constitution. Plaintiff alleges that said provisions are repugnant to the Constitution for the following reasons:

(1) That the gift tax is a direct tax, and a violation of clause 3 of section 2, and clause 4 of section 9, of article 1 of the Constitution, in that it is not apportioned as therein required.

(2) Because the exaction of a gift tax deprives plaintiff of his property without due process of law, and is a taking of plaintiff's property for public use without just compensation, in violation of the Fifth Amendment to the Constitution.

(3) Because the taxes imposed by said sections (and particularly as to gifts made prior to the date the gift tax law became effective) are in effect taxes upon the borrowing power of the states, and upon the governmental agencies of the states.

(4) Because (particularly as to gifts made prior to June 2, 1924) the tax is a direct tax, and in violation of the constitutional provisions to which reference has been made.

(5) Because said tax is an encroachment upon the powers reserved to the states or to the people, contrary to the Tenth Amendment to the Constitution.

The substance of the pertinent sections of the statute relating to the gift tax is as follows:

Section 319 provides that, for the calendar year 1924 and each calendar year thereafter, a tax based upon a certain graduated scale therein set forth is imposed upon the transfer by gift of any property, wherever situated, whether made directly or indirectly. The table of percentages provides for various rates, beginning at 1 per cent. on an amount of taxable gifts not in excess of $50,000, 2 per cent. of the amount by which the taxable gifts exceed $50,000 and do not exceed $100,000, and so on; the rates gradually increasing to a maximum of 40 per cent. on the amount of taxable gifts in excess of $10,000,000.

Section 320 provides in substance that, if the gift is made in property, the fair market value shall be considered the amount of the gift, and, where property is sold or exchanged for less than a fair consideration, the difference between the actual consideration and fair market value shall be deemed a gift.

Section 321 provides in substance for the following exemptions: (1) Gifts aggregating in value $50,000 in any calendar year; (2) gifts for public purposes, or to corporations organized exclusively for religious, charitable, scientific, literary, educational, or similar purposes; (3) gifts to any one person aggregating $500 in any calendar year; (4) property transferred by gift, identified as having been received by the donor within five years prior to the gift, and upon which a gift tax has been paid.

Section 322 contains appropriate provisions to prevent the duplication of the estate tax and gift tax upon the same property.

Sections 323 and 324 provide for filing of returns and the payment of the tax assessed thereon.

This is the first instance of the taxation of gifts inter vivos in the history of American or English taxation. So far as known, no other country, except France, has imposed a similar tax. Apparently no court heretofore has passed upon the questions which are here involved. The nearest approach to the gift tax are those taxes imposed by the inheritance tax laws of the various states and by the federal estate tax law upon transfers made in contemplation of death, which provide generally that transfers made by a decedent within a specified period of time (usually two to six years prior to death) shall be deemed to have been made in contemplation of death. But transfers by gift unconnected with death never before have been taxed.

There is no longer any question that the judicial department of the government has the power, and in proper cases the duty, to declare an act of Congress unconstitutional. The duty and responsibility resting upon the court was stated by Chief Justice Marshall as follows:

"The question, whether a law be void for its repugnancy to the Constitution, is, at all times, a question of much delicacy, which ought seldom, if ever, to be decided in the affirmative, in a doubtful case. The court, when impelled by duty to render such a judgment, would be unworthy of its station, could it be unmindful of the solemn obligations which that station imposes. But it is not on slight implication and vague conjecture that the Legislature is to be pronounced to have transcended its powers, and its acts to be considered as void. The opposition between the Constitution and the law should be such that the judge feels a clear and strong conviction of their incompatibility with each other." Fletcher v. Peck, 6 Cranch, 87, 128, 3 L. Ed. 162.

See, also, Pollock v. Farmers' Loan & Trust Co., 15 S. Ct. 912, 158 U. S. 601, 617, 39 L. Ed. 1108, and Ogden v. Saunders, 12 Wheat. 213, 270, 6 L. Ed. 606.

When the question involves the exercise by Congress of its taxing powers, the limitations upon the power of the court are well stated in the opinion of Justice Peckham in the case of Nicol v. Ames, 19 S. Ct. 522, 525, 173 U. S. 509, 514 (43 L. Ed. 786), where it is said:

"It is always an exceedingly grave and delicate duty to decide upon the constitutionality of an act of the Congress of the United States. 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. The power to tax is the one great power upon which the whole national fabric is based. It is as necessary to the existence and prosperity of a nation as is the air he breathes to the natural man. It is not only the power to destroy, but it is also the power to keep alive."

On the other hand, it has been frequently declared that, since judges are sworn to support the provisions of the Constitution, they cannot disregard its commands, and a statute which clearly and unmistakably transgresses must be declared unconstitutional.

Courts must not concern themselves with the expediency, wisdom, or essential justice of revenue legislation. See Flint v. Stone Tracy Co., 31 S. Ct. 342, 220 U. S. 107, 167, 55 L. Ed. 389, Ann. Cas. 1912B, 1312. These considerations are, under our form of government, solely for the legislative branch of the government. The exclusive remedy for the seeming failure of Congress in such matters to give due consideration to these subjects is with the electors in their choice of representatives. For the courts to assume supremacy on these matters would be to confuse the powers conferred upon the three great departments of government, and to increase the evils which it may be said already are attendant upon the indiscriminate vesting of legislative, executive, and judicial functions in sundry state and federal boards and commissions. To permit the slightest interference by one department with the functions of another, or the confusion of these distinct departments of government, is to inject chaos into a delicately adjusted system of checks and balances. In the case of McCray v. United States, 24 S. Ct. 769, 195 U. S. 27, 49 L. Ed. 78, 1 Ann. Cas. 561, it was said:

"* * * No instance is afforded from the foundation of the government where an act, which was within a power conferred, was declared to be repugnant to the Constitution, because it appeared to the judicial mind that the particular exertion of constitutional power was either unwise or unjust."

The fact that only three revenue acts of Congress were declared unconstitutional during...