Commissioner of Internal Revenue v. Rivera's Estate

• Decision Date: 10 June 1954
• Docket Number: Docket 22896.,No. 202,202
• Parties: COMMISSIONER OF INTERNAL REVENUE v. RIVERA'S ESTATE et al.
• Court: U.S. Court of Appeals — Second Circuit

214 F.2d 60 (1954)

COMMISSIONER OF INTERNAL REVENUE v. RIVERA'S ESTATE et al.

No. 202, Docket 22896.

United States Court of Appeals Second Circuit.

Argued May 6, 1954.

Decided June 10, 1954.

H. Brian Holland, Ellis N. Slack, Lee A. Jackson and I. Henry Kutz, Washington, D. C., for petitioner.

Claude A. Hope and Eugene Blanc, Jr., New York City, for respondent; Guillermo E. Gonzalez and Jorge L. Cordova, San Juan, Puerto Rico, of counsel.

Before CLARK, FRANK and MEDINA, Circuit Judges.

MEDINA, Circuit Judge.

This appeal involves a federal estate tax assessed against the estate of Clotilde Santiago Rivera, deceased, and is taken from the decision of the Tax Court entered on March 2, 1953, determining that there is an overpayment in estate tax in the amount of $69,327.87, which was paid after the mailing of the notice of deficiency. The question presented on this appeal is whether or not Congress exempted from the federal estate tax assets situated in the continental United States belonging to the estate of a citizen of the United States and of Puerto Rico domiciled in Puerto Rico at the time of his death.

Decedent was born in Puerto Rico on December 14, 1872, died testate in New York City on January 9, 1949, and was buried in Puerto Rico; he was domiciled in Puerto Rico throughout all of his life up to and including the date of his death. He was made a citizen of the United States by virtue of the provisions of the Second Organic Act,¹ sometimes known as the Jones Act, and remained a citizen of the United States at the date of his death.

Decedent's will, executed on December 10, 1948, was protocolized on January 13, 1949, and was thereafter recorded and registered in accordance with the laws of Puerto Rico in the Registry of Wills in the Supreme Court of Puerto Rico. On that date, letters testamentary under the will were issued by the District Court of San Juan, Puerto Rico, to Jose Hernandez Usera and Guillermo E. Gonzalez, the executors named in the will. No ancillary or other proceedings for the probate of the will or for the appointment of any executors or representatives of the decedent have ever been had.

On March 31, 1949, the executors filed with the appropriate authorities in Puerto Rico an inventory of the assets and liabilities of the estate of the decedent as of the date of death.

On June 27, 1950, the executors filed with the Collector of Internal Revenue for the Second District of New York an estate tax return showing no tax to be due. The certificates representing the stocks and bonds listed under Schedule B of the estate tax return were physically located within the United States on the date of decedent's death, as were also the items of miscellaneous property listed under Schedule F. The value of the stocks and bonds included in Schedule B of the estate tax return was $307,338.23, and the value of the items included in Schedule F was $10,278.85, adding up to a total value of $317,617.08 for all the property of decedent which was reported as having been physically located within the United States at the time of his death.

The Commissioner determined an estate tax deficiency of $69,327.87 against the executors of decedent's estate, and explained the deficiency in his "Report of Examination of Estate Tax Return," dated April 17, 1951, as follows:

"The deficiency here results principally from computing tax liability on the estate of a citizen and resident of Puerto Rico as that of a nonresident not a citizen pursuant to Section 861 of the Internal Revenue Code 26 U.S.C.A.."

The executors paid to Puerto Rico its succession tax in the sum of $53,067.16 on February 8, 1952.

The executors petitioned the Tax Court for a redetermination of the deficiency, and the Tax Court overruled the Commissioner's determination and held that the federal estate tax is not applicable to the estate of a citizen of the United States who was also a citizen of Puerto Rico and who was domiciled in Puerto Rico at the time of his death. Accordingly, the Tax Court decided that no estate tax was due and ordered a refund of the sum of $69,327.87, which taxpayer had paid after the mailing of the notice of deficiency. The opinion of the Tax Court is reported in 19 T.C. 271.

In Estate of Smallwood, 1948, 11 T.C. 740, the Tax Court held that the estate of a citizen of the United States and Puerto Rico domiciled in Puerto Rico at the time of his death, was not taxable under Part II of the estate tax law, Sections 810 to 851, I.R.C., 26 U.S.C.A., relating to the estates of "Citizens or Residents of the United States". The Commissioner acquiesced in that decision. In the case before us, the Commissioner seeks to tax such an estate under Part III of the estate tax law, Sections 860 to 865, I.R.C., 26 U.S.C.A., relating to the estates of "Nonresidents Not Citizens of the United States". No question arises concerning the power of Congress to make the estate tax law applicable to the estates of citizens of Puerto Rico; that Congress has such power is freely conceded by the taxpayer. The sole question is, has Congress exercised that power? We think it has not.

Puerto Rico was ceded to the United States in 1899 by the Treaty of Paris,² which terminated the Spanish American War. Beginning with the enactment on April 12, 1900, of the First Organic Act,³ known as the Foraker Act, Congress established the basic policy of fiscal independence for Puerto Rico, i.e., that in general the Puerto Ricans should have the duty of supporting their own government and the correlative right of having all of their sources of revenue available for insular expenses. Accordingly, Sections 12 and 36 of the First Organic Act provided that all governmental expenses and salaries of officials should be paid out of Puerto Rican revenues, and Section 14 thereof expressly provided that the internal revenue laws of the United States "shall not have force and effect in Porto Rico."⁴ In 1917, Congress conferred full United States citizenship collectively upon all Puerto Rican citizens as of and from April 11, 1899, by the enactment of the Second Organic Act, supra, which was "the practical equivalent of a state Constitution" for Puerto Rico. Camunas v. Porto Rico Railway, Light & Power Co., 1 Cir., 1921, 272 F. 924, 928. It continued and extended the policy of the First Organic Act of imposing upon Puerto Ricans full responsibility for their own local government, and giving them the right to have all sources of revenue tapped for insular expenses. The Second Organic Act further expressly excepted all internal revenue laws of the United States from operation in Puerto Rico.⁵

Courts do not favor repeals of statutes by implication. Where a general policy of government has been well established by statutes and recognized in court decisions, "a clear expression of the intention of Congress" is required to justify a reversal. Ex parte Crow Dog, 1883, 109 U.S. 556, 572, 3 S.Ct. 396, 27 L.Ed. 1030. "It is a canon of statutory construction that a later statute, general in its terms and not expressly repealing a prior special statute, will ordinarily not affect the special provisions of such earlier statute. In other words, where there are two statutes, the earlier special and the later general, — the terms of the general broad enough to include the matter provided for in the special, — * * * the general will not be understood as repealing the special, unless a repeal is expressly named, or unless the provisions of the general are manifestly inconsistent with those of the special." Rodgers v. United States, 1902, 185 U.S. 83, 87, 22 S.Ct. 582, 583, 46 L.Ed. 816. And in the case of United States v. Sixty-seven Packages of Dry Goods, 1854, 17 How. 85, 93, 58 U.S. 85, 93, 15 L.Ed. 54, the Supreme Court stated that "In the interpretation of our system of revenue laws, which is very complicated, * * * this court has not been disposed to apply with strictness the rule which repeals a prior statute by implication, where a subsequent one has made provision upon the same subject, and differing in some respect from the former, but have been inclined to uphold both, unless the repugnancy is clear and positive, so as to leave no doubt as to the intent of Congress." See also United States v. Jackson, 1938, 302 U.S. 628, 58 S.Ct. 390, 82 L.Ed. 488; Saxonville Mills v. Russell, 1885, 116 U.S. 13, 6 S.Ct. 237, 29 L.Ed. 554.

Since the enactment of the Second Organic Act on March 2, 1917, Congress has twice amended the exception relating to the internal revenue laws,⁶ without making the estate tax applicable. In addition, Congress has since that time made many general laws, including certain internal revenue laws (in addition to the direct amendments to the basic exception), applicable to Puerto Rico either by naming Puerto Rico specifically or using the term "possessions," or defining the term "state" so as to include Puerto Rico. When Congress in 1918 made the income tax law applicable to citizens of Puerto Rico, to the extent that their income was derived from sources within the United States, it did so in express terms, and, in contrast, there is a conspicuous lack of any corresponding legislation in relation to the estate tax. Furthermore, there is evidence that Congress itself regarded Part III of the estate tax law as being inapplicable to Puerto Rico. Section 210(e) of the bill H. R. 6712, 80th Congress, Second Session (known as the "Revenue Revision Act of 1948"), proposed the addition of a new Section 852⁷ which related directly to the taxation of the estates of Puerto Ricans. The House passed the bill on June 19, 1948, but the Senate adjourned without acting upon it, and the section was never enacted.

The first modern estate tax was imposed by the Revenue Act of 1916.⁸ This Act, while imposing the tax upon the transfer of the "net estate" of every decedent, "whether a resident or nonresident of the United States", distinguished in defining "net estate" between the...