Heiner v. Donnan, No. 514

• Court: United States Supreme Court
• Writing for the Court: SUTHERLAND
• Citation: 76 L.Ed. 772,52 S.Ct. 358,285 U.S. 312
• Parties: HEINER, Collector of Internal Revenue, v. DONNAN et al
• Docket Number: No. 514
• Decision Date: 21 March 1932

285 U.S. 312 52 S.Ct. 358 76 L.Ed. 772 HEINER, Collector of Internal Revenue,

v.

DONNAN et al.

No. 514. Argued Feb. 26, 1932. Decided March 21, 1932.

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

[Argument of Counsel from pages 313-317 intentionally omitted]

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Mr. William G. Heiner, of Pittsburgh, Pa., for Donnan and others.

[Argument of Counsel from pages 317-319 intentionally omitted]

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Mr. Justice SUTHERLAND delivered the opinion of the Court.

This case is here on a certificate from the Circuit Court of Appeals for the Third Circuit. On March 1, 1927, John W. Donnan, by complete and irrevocable gift inter vivos, transferred without consideration certain securities to trustees for his four children, and also, without consideration, advanced a sum of money to his son. He died on December 23, 1928, less than two years after the gifts and advancement were made. The Commissioner of Internal Revenue included in the gross estate of decedent the value of the property transferred, and imposed a death transfer tax accordingly, on authority of the clause in section 302(c) of the Revenue Act of 1926, c. 27, 44 Stat. 9, 70 (U. S. C., Supp. V, Title 26, § 1094 (26 USCA § 1094(c))), which, without regard to the fact, provides that such a transfer made within two years prior to the death of the decedent shall 'be deemed and held to have been made in contemplation of death within the meaning of this title.'¹

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'1. Does the second sentence of section 302(c) of the revenue act of 1926 violate the due process clause of the fifth amendment to the Constitution of the United States?

'2. If the answer to the first question be in the negative, is the second sentence of section 302(c) of the revenue act of 1926 void because repugnant to sections 1111, 1113(a), 1117, and 1122(c) of the same act?'

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A negative answer to the first question, if made, must rest either upon the ground that Congress has the constitutional power to deny to the representatives of the estate of a decedent the right to show by competent evidence that a gift made within two years prior to the death of the decedent was in fact not made in contemplation of death, or upon the theory that, although the tax in question is imposed as a death transfer tax, it nevertheless may be sustained as a gift tax.

First. Section 301(a) of the Revenue Act of 1926 (26 USCA § 1092) imposes a tax 'upon the transfer of the net estate of every decedent,' etc. There can be no doubt as to the meaning of this language. The thing taxed is the transmission of property from the dead to the living. It does not include pure gifts inter vivos. The tax rests, in essence, 'upon the principle that death is the generating source from which the particular taxing power takes its being, and that it is the power to transmit, or the transmission from the dead to the living, on which such taxes are more immediately rested. * * * It is the power to transmit or the transmission or receipt of property by death which is the subject levied upon by all death duties.' Knowlton v. Moore, 178 U. S. 41, 56, 57, 20 S. Ct. 747, 753, 44 L. Ed. 969. The value of property transferred without consideration and in contemplation of death is included in the value of the gross estate of the decedent for the purposes of a death tax, because the transfer is considered to be testamentary in effect. Milliken v. United States, 283 U. S. 15, 23, 51 S. Ct. 324, 75 L. Ed. 809. But such a transfer, not so made, embodies a transaction begun and completed wholly by and between the living, taxable as a gift (Bromley v. McCaughn, 280 U. S. 124, 50 S. Ct. 46, 74 L. Ed. 226), but obviously not subject to any form of death duty, since it bears no relation whatever to death. The 'generating source' of such a gift is to be found in the facts of life and not in the circumstance of death. And the death afterward of the donor in no way changes the situation; that is to say, the

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death does not result in a shifting, or in the completion of a shifting, to the donee of any economic benefit of property, which is the subject of a death tax, Chase Nat. Bank v. United States, 278 U. S. 327, 338, 49 S. Ct. 126, 73 L. Ed. 405, 63 A. L. R. 388; Reinecke v. Trust Co., 278 U. S. 339, 346, 49 S. Ct. 123, 73 L. Ed. 410, 66 A. L. R. 397; Saltonstall v. Saltonstall, 276 U. S. 260, 271, 48 S. Ct. 225, 72 L. Ed. 565; nor does the death in such case bring into being, or ripen for the donee or any one else, so far as the gift is concerned, any property right or interest which can be the subject of any form of death tax. Compare Tyler v. United States, 281 U. S. 497, 503, 50 S. Ct. 356, 74 L. Ed. 991, 69 A. L. R. 758. Complete ownership of the gift, together with all its incidents, has passed during the life of both donor and donee, and no interest of any kind remains to pass to one or cease in the other in consequence of the death which happens afterward.

The phrase 'in contemplation of or intended to take effect * * * at or after his death,' found in the provisions of section 302(c) of the act of 1926 and prior acts, as applied to fully executed gifts inter vivos, puts them in the same category for purpose of taxation with gifts causa mortis. In this light, the meaning and purpose of the provision were considered, in a recent decision of this court dealing with the Revenue Act of 1918 (40 Stat. 1057). United States v. Wells, 283 U. S. 102, 116, 117, 118, 51 S. Ct. 446, 451, 75 L. Ed. 867.

'The dominant purpose is to reach substitutes for testamentary dispositions and thus to prevent the evasion of the estate tax. Nichols v. Coolidge, 274 U. S. 531, 542, 47 S. Ct. 710, 71 L. Ed. 1184, 52 A. L. R. 1081; Milliken v. United States, 28o U. S. 15, 51 S. Ct. 324, 75 L. Ed. 809. As the transfer may otherwise have all the indicia of a valid gift inter vivos, the differentiating factor must be found in the transferor's motive. Death must be 'contemplated,' that is, the motive which induces the transfer must be of the sort which leads to testamentary disposition. As a condition of body and mind that naturally gives rise to the feeling that death is near, that the donor is about to reach the moment of inevitable surrender of ownership,

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is most likely to prompt such a disposition to those who are deemed to be the proper objects of his bounty, the evidence of the existence or nonexistence of such a condition at the time of the gift is obviously of great importance in determining whether it is made in contemplation of death. The natural and reasonable inference which may be drawn from the fact that but a short period intervenes between the transfer and death is recognized by the statutory provision creating a presumption in the case of gifts within two years prior to death. But this presumption, by the statute before us (Act of 1918), is expressly stated to be a rebuttable one, and the mere fact that death ensues even shortly after the gift does not determine absolutely that it is in contemplation of death. The question, necessarily, is as to the state of mind of the donor. * * *

'If it is the thought of death, as a controlling motive prompting the disposition of property, that affords the test, it follows that the statute does not embrace gifts inter vivos which spring from a different motive. Such transfers were made the subject of a distinct gift tax, since repealed.'

There is no doubt of the power of Congress to provide for including in the gross estate of a decedent, for purposes of the death tax, the value of gifts made in contemplation of death; and likewise no doubt of the power of that body to create a rebuttable presumption that gifts made within a period of two years prior to death are made in contemplation thereof. But the presumption here created is not of that kind. It is made definitely conclusive-incapable of being overcome by proof of the most positive character. Thus stated, the first question submitted is answered in the affirmative by Schlesinger v. Wisconsin, 270 U. S. 230, 46 S. Ct. 260, 70 L. Ed. 557, 43 A. L. R. 1224, and Hoeper v. Tax Commission, 284 U. S. 206, 52 S. Ct. 120, 76 L. Ed. 248. The only difference between the present

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case and the Schlesinger Case is that there the statute fixed a period of six years as limiting the application of the presumption, while here it is fixed at two; and there the Fourteenth Amendment was involved, while here it is the Fifth Amendment. The length of time was not a factor in the case. The presumption was held invalid upon the ground that the statute made it conclusive without regard to actualities, while like gifts at other times were not thus treated; and that there was no adequate basis for such a distinction. 'The presumption and consequent taxation,' the court said (page 240 of 270 U. S., 46 S. Ct. 260, 261), 'are defended upon the theory that, exercising judgment and discretion, the Legislature found them necessary in order to prevent evasion of inheritance taxes. That is to say, A. may be required to submit to an exactment forbidden by the Constitution if this seems necessary in order to enable the state readily to collect lawful charges against B. Rights guaranteed by the federal Constitution are not to be so lightly treated; they are superior to this supposed necessity. The state is forbidden to deny due process of law or the equal protection of the laws for any purpose whatsoever.'

The Schlesinger Case has since been applied many times by the lower federal courts, by the Board of Tax Appeals, and by state courts;² and none of them seem to have been at any loss to understand the basis of the decision, namely, that a statute which imposes a tax upon an assumption of fact which the taxpayer is forbidden to controvert is so arbitrary and unreasonable that it cannot stand under the Fourteenth Amendment.

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Nor is it material that the Fourteenth...