Shwab v. Doyle

• Decision Date: 10 December 1920
• Docket Number: 3364.
• Citation: 269 F. 321
• Parties: SHWAB v. DOYLE, Collector of Internal Revenue.
• Court: U.S. Court of Appeals — Sixth Circuit

269 F. 321

SHWAB v. DOYLE, Collector of Internal Revenue.

No. 3364.

United States Court of Appeals, Sixth Circuit.

December 10, 1920

[Copyrighted Material Omitted]

W. F Keeney, of Grand Rapids, Mich., and John J. Vertrees, of Nashville, Tenn. (Willard F. Keeney and Julius H. Amberg both of Grand Rapids, Mich., and John J. Vertrees and William O. Vertrees, both of Nashville, Tenn., on the brief), for plaintiff in error.

D. M. Kelleher, of Ft. Dodge, Iowa, and Myron H. Walker, U.S. Atty., of Grand Rapids, Mich. (Wayne Johnson, Solicitor, Internal Revenue, Raymond Thurber, of New York City, and D. M. Kelleher. of Ft. Dodge, Iowa, Sp. Attys. Bureau of Internal Revenue, and Myron H. Walker, U.S. Atty., of Grand Rapids, Mich., on the brief), for defendant in error.

E. S. Heller, Isaac Frohman, Edward F. Treadwell, John W. Preston, and Garret W. McEnerney, all of San Francisco, Cal., amici curiae.

Before KNAPPEN, DENISON, and DONAHUE, Circuit Judges.

KNAPPEN Circuit Judge.

Suit by plaintiff in error to recover an estate tax paid under protest.

On April 22, 1915, decedent made to the Detroit Trust Company a deed absolute in form, conveying personal property worth about $1,000,000 in trust, for the payment of both interest and principal to certain beneficiaries, with no reservation in favor of the grantor. The conveyance took immediate effect, and was accompanied by delivery of the property conveyed. It was purely voluntary and without monetary consideration. Decedent died September 16, 1916, possessed of a remaining estate of about $800,000, upon which a tax was assessed and paid upon return by the executor under title 2 of the Revenue Act of September 8, 1916 (39 Stat.c. 463, U.S. Comp. Stat. Sec. 6336 1/2a), which took effect seven days before decedent's death, viz. September 9, 1916. That tax is not involved here, nor is its validity questioned. The tax here in question was assessed under section 202 of the same act (Comp. St. Sec. 6336 1/2c), as upon a transfer made in contemplation of death.

Plaintiff contended below, and contends here: (1) That the act was not intended to reach absolute conveyances in contemplation of death made before the passage of the act; (2) that, if so intended, it is unconstitutional; (3) that there was no substantial evidence that the transfer was 'in contemplation of death,' within the meaning of the statute. The trial court denied plaintiff's motion for a directed verdict, held the statute valid and applicable to the trust deed, if made in contemplation of death, and submitted to the jury the question whether it was so made. There were verdict and judgment for defendant.

1. Was the act intended to apply to transfers made before its passage? Section 202 includes in the taxable value of a decedent's estate (a) property held by the decedent at the time of his death and subject thereafter to the payment of debts and expenses of administration, and to distribution as part of his estate; (b) property 'of which decedent has at any time made a transfer, or with respect to which he has created a trust, in contemplation of, or intended to take effect in possession or enjoyment at or after, his death, except in case of a bona fide sale for a fair consideration in money or money's worth'; (c) property held jointly or as tenants in the entirety by decedent and any other person.

It will be observed that the transfers mentioned in subdivision (b) are of two classes-- those made 'in contemplation of death,' and those 'intended to take effect in possession or enjoyment at or after' death. We are concerned with the first only of these classifications.

In our opinion the statute evidences an intent on the part of Congress that the tax should apply to all transfers in contemplation of death, whether made before or after the passage of the act, provided the transferor's death occur after the act took effect. This intent is, we think, evidenced by a variety of considerations.

(a) Section 201 (Comp. St. Sec. 6336 1/2b) imposes a tax upon the transfer of the net estate of 'every ^[1] person dying after the passage of this act. ' In section 202 the taxable estate of the decedent embraces all transfers of the two classes already mentioned which the decedent has 'at any time made.' The remaining paragraph of section 202b not already set out declares that--

'Any transfer of a material part of his property in the nature of a final disposition or distribution thereof made by the decedent within two years prior to his death without such a consideration (a fair consideration in money or money's worth) shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title.'

The italicized words in each of the above quotations indicate, on their face, an all-embracing intent, and are thus prima facie opposed to a limitation to transfers made after the passage of the act.

(b) The evident theory of the statute is that transfers intended to take effect after the death of the grantor, as well as those made in contemplation of death, are equally testamentary in character. Rosenthal v. People, 211 Ill. 306, 309, 71 N.E. 1121; Keeney v. New York, 222 U.S. 525, 536, 32 Sup.Ct. 105, 56 L.Ed. 299, 38 L.R.A.(N.S.) 1139. Such classification is within the power of Congress. The theory of taxation on account of transfers testamentary in character is that death is the generating source of the tax. Knowlton v. Moore, 178 U.S. 41, 56, 20 Sup.Ct. 747, 44 L.Ed. 969; Cahen v. Brewster, 203 U.S. 543, 550, 27 Sup.Ct. 174, 51 L.Ed. 310, 8 Ann.Cas. 215. A transfer is accordingly taxed only at the death of the transferor, no matter how long the transfer may precede death. Congress has accordingly included the two classes of transfers in one and the same section and subjected them, so far as terms go, to precisely the same treatment. In our opinion a transfer intended to take effect in possession or enjoyment after the grantor's death would under this statute be taxable, although made before the passage of the act. Wright v. Blakeslee, 101 U.S. 174, 176, 25 L.Ed. 1048. The natural inference would be, in the absence of substantial evidence to the contrary, that the same result was intended as to transfers made in contemplation of death.

(c) While the interests derived by a grantee under an absolute and immediately effective conveyance in contemplation of death are vested, the same is true of any irrevocable conveyance which takes effect in possession or enjoyment only upon the death of the grantor, although in the latter case such vesting is merely in expectancy. If Congress had power, as we think it had, to tax both classes of conveyances, even if made before the passage of the act, no good reason suggests itself why it should desire to discriminate between the two classes of transfers.

It is not to our minds unnatural, nor is it necessarily unjust, that Congress should intend that one taking a conveyance of a testamentary character, entirely without consideration, should do so at the risk of having the transfer taxed, directly or indirectly, as would be the case were the transfer by will or by conveyance taking effect at or after the grantor's death. Under this statute, however, the remaining estate of the decedent, both in case of a transfer intended to take effect at the grantor's death and in the case of a transfer made in contemplation of death (as well as in the case of transfers by will), is made primarily liable for the tax, and it is only when the estate proves insufficient for the purpose that resort may be had, under section 209 (Comp. St. Sec. 6336 1/2j), to the personal responsibility of the transferee or to the property transferred, and even then a right of action over is given to the transferee. We find in the language of section 209 ('if a decedent makes a transfer of or creates a trust with respect to, etc.') nothing which we think inconsistent with the construction of the act which we find disclosed by section 202 and by the other considerations to which we have called attention. Section 209 pertains merely to the remedy for the collection of the tax.

(d) Congress has not been averse to imposing taxation for a period preceding the passage of the taxing act. This has been ordinary practice with respect to income taxes. Indeed, the revenue act of September 8, 1916, here in question, provided for taxation of income accruing during the entire year beginning January 1, 1916. While in that case less than a year had elapsed, the distinction from the case presented here is one of degree and not of principle. The present income tax act, however, passed February 24, 1919 (40 Stat.c. 18 (Comp. St. Ann. Supp. 1919, Sec. 6336 1/8a et seq.)), imposed taxation for the year 1918, then wholly passed.

It is true that if the tax before us is retroactive it might, at least theoretically, affect conveyances made many years before a grantor's death, but this consideration is hardly practical. Congress would, we think, scarcely be impressed with a practical likelihood that a transfer made many years before a grantor's death (say 25 years, to use plaintiff's suggestion) would be judicially found to be made in contemplation of death under the legal definition applicable thereto, and without the aid of the two years prima facie provision. The considerations which we have enumerated, not only outweigh in our opinion those opposed thereto, but we think clearly, positively, and imperatively demand that the act be construed as intended to apply to transfers of the class here in question, although made before the act was passed, provided the death of the transferor occurs thereafter.

2. Is the statute unconstitutional as applied to the trust deed? In our opinion the act, if so...