Burnet v. Guggenheim

• Decision Date: 06 February 1933
• Docket Number: No. 283,283
• Citation: 77 L.Ed. 748,53 S.Ct. 369,288 U.S. 280
• Parties: BURNET, Commissioner of Internal Revenue, v. GUGGENHEIM
• Court: U.S. Supreme Court

288 U.S. 280

53 S.Ct. 369

77 L.Ed. 748

BURNET, Commissioner of Internal Revenue,

v GUGGENHEIM.

No. 283.

Argued Jan. 11, 1933.

Decided Feb. 6, 1933.

The Attorney General and Mr. G. A. Youngquist, Asst. Atty. Gen., for petitioner.

Mr. Elihu Root, Jr., of New York City, for respondent.

Mr. Justice CARDOZO delivered the opinion of the Court.

The question to be decided is whether deeds of trust made in 1917, with a reservation to the grantor of a power of revocation, became taxable as gifts under the Revenue Act of 1924 when in 1925 there was a change of the deeds by the cancellation of the power.

On June 28, 1917, the respondent, a resident of New York, executed in New Jersey two deeds of trust, one for the benefit of his son, and one for the benefit of his daughter. The trusts were to continue for ten years, during which period part of the income was to be paid to the beneficiary and part accumulated. At the end of the ten-year period, the principal and the accumulated income were to go to the beneficiary, if living; if not living, then to his or her children; and, if no children survived, then to the settlor in the case of the son's trust, and in the case of the daughter's trust to the trustees of the son's trust as an increment to the fund. The settlor reserved to himself broad powers of control in respect of the trust property and its investment and administration. In particular, there was an unrestricted power to modify, alter, or revoke the trusts except as to income, received or accrued. The power of investment and administration was transferred by the settlor from himself to others in May, 1921. The power to modify, alter, or revoke was eliminated from the deeds, and thereby canceled and surrendered, in July, 1925.

In the meanwhile Congress had passed the Revenue Act of 1924 which included among its provisions of tax upon gifts. 'For the calendar year 1924 and each calendar year thereafter * * * a tax * * * is hereby imposed upon the transfer by a resident by gift during such calendar year of any property wherever situated, whether made directly or indirectly,' the tax to be assessed in accordance with a schedule of percentages upon the value of the property. 43 Stat. 253, 313, c. 234, §§ 319, 320, 26 U.S. Code, §§ 1131, 1132 (26 USCA §§ 1131 note, 1132 note).

At the date of the cancellation of the power of revocation, the value of the securities constituting the corpus of the two trusts was nearly $13,000,000. Upon this value the Commissioner assessed against the donor a tax of $2,465,681, which the Board of Tax Appeals confirmed with a slight modification due to a mistake in computation. The taxpayer appealed to the Court of Appeals for the Second Circuit, which reversed the decision of the Board and held the gift exempt. 58 F.(2d) 188. The case is here on certiorari, 287 U.S. 587, 53 S.Ct. 85, 77 L.Ed. —-.

On November 8, 1924, more than eight months before the cancellation of the power of revocation, the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, adopted and promulgated the following regulation: 'The creation of a trust where the grantor retains the power to revest in himself title to the corpus of the trust, does not constitute a gift subject to tax, but the annual income of the trust which is paid over to the beneficiaries shall be treated as a taxable gift for the year in which so paid. Where the power retained by the grantor to revest in himself title to the corpus is not exercised, a taxable transfer will be treated as taking place in the year in which such power is terminated.' Regulations 67, article I.

The substance of this regulation has now been carried forward into the Revenue Act of 1932, which will give the rule for later transfers. Revenue Act of 1932, c. 209, 47 Stat. 169, 245, § 501(c), 26 USCA § 1136a(c).¹

We think the regulation, and the later statute continuing it, are declaratory of the law which Congress meant to establish in 1924.

'Taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed—the actual benefit for which the tax is paid.' Corliss v. Bowers, 281 U.S. 376, 378, 50 S.Ct. 336, 75 L.Ed. 916; Cf. Chase National Bank v. United States, 278 U.S. 327, 49 S.Ct. 126, 73 L.Ed. 405, 63 A.L.R. 388; Saltonstall v. Saltonstall, 276 U.S. 260, 48 S.Ct. 225, 72 L.Ed. 565; Tyler v. United States 281 U.S. 497, 503, 50 S.Ct. 356, 74 L.Ed. 991, 69 A.L.R. 758; Burnet v. Harmel, 287 U.S. 103, 53 S.Ct. 74, 77 L.Ed. 199; Palmer v. Bender, 287 U.S. 551, 53 S.Ct. 225, 77 L.Ed. 489. While the powers of revocation stood uncanceled in the deeds, the gifts, from the point of view of substance, were inchoate and imperfect. By concession there would have been no gift in any aspect if the donor had attempted to attain the same result by the mere delivery of the securities into the hands of the donees. A power of revocation accompanying delivery would have made the gift a nullity. Basket v. Hassell, 107 U.S. 602, 2 S.Ct. 415, 27 L.Ed. 500. By the execution of deeds and the creation of trusts, the settlor did indeed succeed in divesting himself of title and transferring it to others (Stone v. Hackett, 12 Gray (Mass.) 227; Van Cott v. Prentice, 104 N.Y. 45, 10 N.E. 257; National Newark & Essex Banking Co. v. Rosahl, 97 N.J. Eq. 74, 128 A. 586; Jones v. Clifton, 101 U.S. 225, 25 L.Ed. 908), but the substance of his dominion was the same as if these forms had been omitted (Corliss v. Bowers, supra). He was free at any moment, with reason or without, to revest title in himself, except as to any income then collected or accrued. As to the principal of the trusts and as to income to accrue thereafter, the gifts were formal and unreal. They acquired substance and reality for the first time in July, 1925, when the deeds became absolute through the cancellation of the power.

The argument for the respondent is that Congress in laying a tax upon transfers by gift made in 1924 or in any year thereafter had in mind the passing of title, not the extinguishment of dominion. In that view the transfer had been made in 1917 when the deeds of trust were executed. The argument for the government is that what was done in 1917 was preliminary and tentative, and that not till 1925 was there a transfer in the sense that must have been present in the mind of Congress when laying a burden upon gifts. Petitioner and respondent are at one in the view that from the extinguishment of the power there came about a change of legal rights and a shifting of economic benefits which Congress was at liberty, under the Constitution, to tax as a transfer effected at that time. Chase National Bank v. United States, supra; Saltonstall v. Saltonstall, supra; Tyler v. United States, supra; Corliss v. Bowers, supra. The question is not one of legislative power. It is one of legislative intention.

With the controversy thus narrowed, doubt is narrowed too. Congress did not mean that the tax should be paid twice, or partly at one time and partly at another. If a revocable deed of trust is a present transfer by gift, there is not another transfer when the power is extinguished. If there is not a present transfer upon the delivery of the revocable deed, then there is such a transfer upon the extinguishment of the power. There must be a choice, and a consistent choice, between the one date and the other. To arrive at a decision, we have therefore to put to ourselves the question, Which choice is it the more likely that Congress would have made? Let us suppose a revocable transfer made on June 3, 1924, the day after the adoption of the Revenue Act of that year. Let us suppose a power of revocation still uncanceled, or extinguished years afterwards, say in 1931. Did Congress have in view the present payment of a tax upon the full value of the subject-matter of this imperfect and inchoate gift? The statute provides that, upon a transfer by gift, the tax upon the value shall be paid by the donor, 43 Stat. 316, c. 234, § 324, and shall constitute a lien upon the property transferred, 43 Stat. c. 234, §§ 324, 315 (26 USCA § 1136 note, and § 1115 and note). By the act now in force, the personal liability for payment extends to the donee. Act of June 6, 1932, c. 209, § 510, 47 Stat. 249 (26 USCA § 1136j). A statute will be construed in such a way as to avoid unnecessary hardship when its meaning is uncertain. Hawaii v. Mankichi, 190 U.S. 197, 214, 23 S.Ct. 787, 47 L.Ed. 1016; Sorrells v. United States, 287 U.S. 435, 53 S.Ct. 210, 77 L.Ed. 413. Hardship there plainly is in exacting the immediate payment of a tax upon the value of the principal when nothing has been done to give assurance that any part of the principal will ever go to the donee. The statute is not aimed at every transfer of the legal title without consideration. Such a transfer there would be if the trustees were to hold for the use of the grantor. It is aimed at transfers of the title that have the quality of a gift, and a gift is not consummate until put beyond recall.

The respondent invokes the rule that in the construction of a taxing act doubt is to be resolved in favor of the taxpayer. United States v. Merriam, 263 U.S. 179, 44 S.Ct. 69, 68 L.Ed. 240, 29 A.L.R. 1547; Gould v. Gould, 245 U.S. 151, 38 S.Ct. 53, 62 L.Ed. 211. There are many facets to such a maxim. One must view them all, if one would apply it wisely. The construction that is liberal to one taxpayer may be illiberal to others. One must strike a balance of advantage. It happens that the taxpayer before us made his deeds in 1917, before a transfer by gift was subject to a tax. We shall alleviate his burden if we say that the gift was then complete. On the other hand, we shall be heightening the burdens of taxpayers who made deeds of gift after the act of 1924. In making them, they had the assurance of a treasury regulation that the tax would not be laid, while the power of revocation was uncanceled, except upon...