Gillette v. Commissioner of Internal Revenue

• Decision Date: 04 March 1935
• Docket Number: No. 33.,33.
• Parties: GILLETTE v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

76 F.2d 6 (1935)

GILLETTE v. COMMISSIONER OF INTERNAL REVENUE.

No. 33.

Circuit Court of Appeals, Second Circuit.

March 4, 1935.

Robert H. Montgomery, of Washington, D. C. (Thomas G. Haight, of Jersey City, N. J., and James O. Wynn, Roswell Magill, and George G. Blattmachr, all of New York City, of counsel), for petitioner.

Frank J. Wideman, Asst. Atty. Gen., and Sewall Key and John G. Remey, Sp. Assts. to Atty. Gen., for respondent.

Before MANTON, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

This is a proceeding to review a determination of a deficiency in income taxes by the Board of Tax Appeals.

On May 26, 1923, Lina Gillette, the aunt of the taxpayer, transferred certain shares of stock of the Gillette Safety Razor Company to trustees who were to hold the stock in trust, paying the net income to the settlor, Lina Gillette, and her mother, Fanny Gillette, during their joint lives and during the life of the survivor, and, upon the death of the survivor, were to pay over the corpus of the trust to the taxpayer and his brother in equal shares. Lina Gillette died August 4, 1926, and Fanny Gillette on December 25, 1926.

The superior court of California held that the transfer by Lina Gillette was made in contemplation of death, and adjudged that the taxpayer Elmon C. Gillette was liable to pay an inheritance tax on the remainder interest transferred to him under the trust deed. He paid $64,918.98 on account of this tax liability in 1928, and deducted that amount from his income when making his tax return for that year. Under authority of section 23 (c) of the Revenue Act of 1928 (26 USCA § 2023 (c), the Commissioner disallowed the deduction and determined a deficiency of $15,001 because of the disallowance. The Board of Tax Appeals affirmed the Commissioner.

None of the property of the trust ever came into the hands of the executors of Lina Gillette, and they paid no inheritance taxes thereon, but it remained in the possession of the trustees until actually distributed to the remaindermen.

The right of the taxpayer to deduct the inheritance taxes, which he paid in 1928, from his income for that year, is the subject of the controversy on the present appeal.

Section 23 (c) of the Revenue Act of 1928, which became a law on May 29th of that year, in computing net income for purposes of taxation, allowed the deduction from gross income of taxes paid or accrued during the taxable year, but in subdivision (3) thereof (26 USCA § 2023 (c) (3) contained the following limitation:

"For the purpose of this subsection, estate, inheritance, legacy, and succession taxes accrue on the due date thereof, except as otherwise provided by the law of the jurisdiction imposing such taxes, and shall be allowed as a deduction only to the estate."

The foregoing subdivision under section 65 (26 USCA § 2065) following was to "take effect as of January 1, 1928."

It is argued that section 23 (c) (3) does not apply to the present case because, under section 703 (a) (2) of the same Revenue Act of 1928 (26 USCA § 2703 (a) (2), inheritance taxes were to be allowed as a deduction to the beneficiary, if claimed by the latter, and not by the estate. Here they were paid and claimed as a deduction by the beneficiary, made a liability of the latter by judgment of the superior court of California, and neither paid nor claimed as a deduction by the executor of Lina Gillette or by the trustees under her trust deed. Section 703 (a) (2) by its terms only affected determination of the net income of a beneficiary or distributee "under the Revenue Act of 1926 or any prior revenue Act," and consequently bore no relation to the present case where section 23 (c) of the Act of 1928 had become controlling.

The Senate Committee on Finance, Seventieth Congress, First Session, states in Report No. 960, when dealing with proposed section 23 (c) afterwards embodied in the Revenue Act of 1928:

"Section 23 (c) of the House bill provides that estate, inheritance, legacy, and succession taxes shall be allowed as deductions only to the decedent's estate and not to the beneficiary. This is a change in existing law and is a substantial simplification. Furthermore, there is no sound policy which requires the deduction to be allowed to the beneficiary. The distributions of corpus which he receives are not treated as income and the tax which he is required to pay in effect is merely a decrease in the corpus transmitted to him."

The foregoing reasoning is in accord with the statement of the Supreme Court in Keith v. Johnson, 271 U. S. 1, 46 S. Ct. 415, 416, 70 L. Ed. 795, that the New York state transfer tax "is deductible from the legacy and does not pass to the legatee."

Under the California Inheritance Tax Act (St. Cal. 1921, p. 1500, § 1, amended by St. Cal. 1925, p. 472, § 1), the word "estate" means the interest of a "testator * * * or donor passing or transferred to individual legatees," and section 9 (St. Cal. 1921, p. 1510, § 9) requires any executor or trustee having in charge or trust any legacy or property for distribution subject to an inheritance tax to deduct the tax therefrom and not to deliver any property subject to a tax until he shall have collected the tax thereon. Moreover, it is provided in section 3 (St. Cal. 1921, p. 1503, § 3) that inheritance taxes shall be a lien upon property transferred until such taxes are paid.

The California statute relating to the imposition and collection of inheritance taxes does not differ essentially from that of New...