United States v. Hemme, 84-1944

• Decision Date: 03 June 1986
• Docket Number: No. 84-1944,84-1944
• Citation: 476 U.S. 558,106 S.Ct. 2071,90 L.Ed.2d 538
• Parties: UNITED STATES, et al., Appellants, v. Alvin HEMME et al
• Court: U.S. Supreme Court

476 U.S. 558

106 S.Ct. 2071

90 L.Ed.2d 538

UNITED STATES, et al., Appellants,

v Alvin HEMME et al.

No. 84-1944.

Argued March 5, 1986.

Decided June 3, 1986.

Syllabus

Prior to 1977, the Internal Revenue Code's gift tax permitted the taxpayer a lifetime exemption of $30,000 to be deducted from amounts otherwise taxable, which exemption could be claimed, in whole or in part, at any time during the taxpayer's lifetime. 26 U.S.C. § 2521 (1970 ed.). The estate tax afforded the estate a specific exemption of $60,000 in determining the amount subject to tax. § 2052 (1970 ed.). The Tax Reform Act of 1976 (new Act), which was enacted on October 4, 1976, and which became effective on January 1, 1977, created the so-called "unified credit" (deductible directly from the amount of the tax) that a taxpayer could apply either toward gift tax during life or toward estate tax after death. §§ 2010(a), 2505(a). The $30,000 exemption for gifts and the $60,000 exemption for estates were eliminated, beginning with estates of taxpayers dying after December 31, 1976, and gifts given after that date, and a phase-in schedule was established for the amount of the new unified credit. The new Act also contained a transitional rule (applicable to taxpayers who, before 1977, had used up some or all of their $30,000 gift tax exemption) providing that the amount of the unified credit "shall be reduced by an amount equal to 20% of the aggregate amount allowed as a specific exemption under section 2521 [prior to its repeal] with respect to gifts made by the decedent after September 8, 1976." § 2010(c). On September 28, 1976, a taxpayer made certain gifts, and he later filed a federal gift tax return which declared that no tax was due and in which he claimed his entire $30,000 lifetime exemption under § 2521 (1970 ed.). However, the taxpayer died just over two years later, and his estate was required by law to include in the estate all gifts made "in contemplation of death," which presumptively included all gifts made within three years of the decedent's death. § 2035 (1970 ed.). After including the 1976 gifts in the estate, the estate then claimed the unified credit of $34,000 under the new Act. However, the Internal Revenue Service (IRS) ruled that under the new Act's transitional rule in § 2010(c) the credit must be reduced by 20% of the specific gift-tax exemption claimed during the decedent's lifetime, or $6,000. The estate paid the assessed deficiency of $6,000 and ultimately a refund suit was filed by appellees (the trustee of the decedent's "revocable living trust" and the trans- ferees of his property). The District Court held that the application of § 2010(c) to the decedent's gifts, which were made before the new Act's enactment, was so arbitrary and capricious as to violate the Due Process Clause of the Fifth Amendment.

Held:

1. There is no merit to appellees' argument, focused on the word "allowed" in § 2010(c), that Congress did not intend the transitional rule to be applied as the IRS applied it here, because when the 1976 gifts were required to be included in the estate as having been made in contemplation of death the $30,000 specific gift-tax exemption decedent had claimed became "disallowed"—a claim to a specific exemption not being "allowed" unless the taxpayer ultimately benefited from that exemption by paying less tax than he otherwise would have paid. Longstanding interpretation of the tax laws does not support such argument. Nor was the mere inclusion of the gifts in the gross estate tantamount to disallowance of the $30,000 exemption. Moreover, decedent did receive a benefit for his specific exemption, since he avoided any gift taxes. The application of § 2010(c) here is consistent with the statute's language and purpose. Pp. 564-567.

2. The District Court erred in finding that § 2010(c), as applied here, transgressed the Due Process Clause of the Fifth Amendment as being arbitrary and capricious because it retroactively affected the final disposition of a gift made before the statute's enactment. Untermyer v. Anderson, 276 U.S. 440, 48 S.Ct. 353, 72 L.Ed. 645 (1928), distinguished. The nature of a tax and the circumstances in which it is laid must be considered before it can be said that its retroactive application is so oppressive as to transgress the constitutional limitation. Here, in view of the applicable statutory provisions prior to the new Act, particularly the requirement of § 2035 (1970 ed.) as to inclusion in an estate of gifts made in contemplation of death, appellees were no worse off than they would have been without the enactment of the new Act. Moreover, even assuming that, as appellees asserted, the confluence of §§ 2010(c) and 2035 required them to pay tax on the same transaction twice, the Constitution was not offended since Congress clearly expressed its intention to occasion that result. Pp. 567-572.

Reversed.

MARSHALL, J., delivered the opinion for a unanimous Court.

Albert G. Lauber, Jr., Washington, D.C., for appellants.

Edward F. Sutkowski, Peoria, Ill., for appellees.

Justice MARSHALL delivered the opinion of the Court.

Appellees, identified as the trustee of the "revocable living trust" of Charles W. Hirschi and transferees of Hirschi's property, seek a refund of $6,000 in estate taxes, on the ground that the Government's interpretation of a statutory transitional rule, enacted to bridge the old and new regimes for the federal taxation of gifts and estates, violates both the statute and the Constitution.

I

Prior to 1977, the gift tax and the estate were imposed, calculated, and collected separately. The gift tax, imposed on donors of certain gifts, permitted each taxpayer a lifetime exemption of $30,000 to be deducted from amounts otherwise taxable. 26 U.S.C. § 2521 (1970 ed.). This so-called "specific exemption" could be claimed, in whole or in part, at any time during the taxpayer's lifetime. Ibid. The estate tax, too, provided certain relief for modest estates. In determining the amount subject to estate tax, the estate was entitled to deduct a "specific exemption" of $60,000. § 2052 (1970 ed.).

In considering tax reform in 1976, Congress determined that several changes were necessary to ease the burden of estate and gift taxes on taxpayers of modest means. See H.R.Rep. No. 94-1380, p. 11 (1976), U.S.Code Cong. & Admin.News 1976, p. 2897. One such change was to transform what had been tax deductions into tax credits so that taxpayers in the lower brackets would benefit as much as those in higher brackets.¹ Id., at 15. In addition, Congress decided to merge the two separate specific exemptions for gifts and estates into a single credit, believing that the prior system had favored those who could afford to make substantial lifetime transfers, while disadvantaging those who needed to maintain access to their assets until death. Id., at 16. Accordingly, the Tax Reform Act of 1976 (Act) erased many of the distinctions in treatment between transfers during life and those after death, in effect treating inheritance as the final taxable gift. It created the so-called "unified credit," which a taxpayer could apply either toward gift tax during life or toward estate tax after death. 26 U.S.C. §§ 2010(a), 2505(a). The $30,000 specific exemption for gifts and $60,000 specific exemption for estates were eliminated, beginning with estates of taxpayers dying after December 31, 1976, and gifts given after that date. A phase-in schedule was established for the amount of the new unified credit, providing a credit of $30,000 for taxpayers dying in 1977, $34,000 for those dying in 1978, and culminating in $47,000 for decedents dying in 1981 and thereafter. 26 U.S.C. §§ 2010(b), 2505(b) (1976 ed.).

The transformation from exemptions to credit left unresolved the treatment of taxpayers who, before 1977, had used up some or all of their $30,000 specific exemption to escape taxation of gifts. Without further action by Congress, those taxpayers would have gained that benefit of the old regime and theoretically would still be entitled to the entire unified credit provided by the new scheme, even though the latter credit was intended to be a substitute for the entire $90,000 worth of specific exemptions. Moreover, taxpayers with notice of the new scheme would have a great incentive to make gifts quickly and claim their specific exemptions before the unified credit was to go into effect, deliberately seeking the windfall of double exemption. See Estate of Gawne v. Commissioner, 80 T.C. 478, 483 (1983). Recognizing these possibilities, the House Ways and Means Committee reported out a bill which provided that if any portion of the $30,000 specific exemption for gifts had been claimed by a taxpayer since 1932, the unified credit otherwise available to the taxpayer would be reduced by 20% of the amount of the specific exemption already claimed. H.R. 14844, 94th Cong., 2d Sess., §§ 2010(c), 2505(c) (1976), reprinted in H.R.Rep. No. 94-1380, pp. 94, 131 (1976). While the legislative history does not explain the derivation of the 20% figure, the Committee apparently believed it to represent roughly the proportion of equivalence between the values of the specific exemption and the credit, taking into account average effective tax rates.

This proposed transitional rule was amended by the Conference Committee. The conferees limited the class of covered taxpayers to those who had made gifts after September 8, 1976, the date the Conference Committee approved the measure, but before January 1, 1977, the effective date of the Act. See H.R.Conf.Rep. No. 94-1515, pp. 607-608 (1976). The Conference Committee evidently was less concerned with the possibility of double tax benefits in general than it was with preventing the intentional accretion of such benefits. See R. Stephens, G. Maxfield, & S. Lind, Federal Estate and Gift Taxation ¶ 3.02, p. 3-4, n. 9 (4th ed. 1978); J. McCord, 1976 Estate and Gift Tax Reform:...