United States v. Provident Trust Co. of Pennsylvania
| Decision Date | 03 October 1929 |
| Docket Number | No. 4009.,4009. |
| Parties | UNITED STATES v. PROVIDENT TRUST CO. OF PENNSYLVANIA et al. |
| Court | U.S. Court of Appeals — Third Circuit |
George W. Coles, U. S. Atty., of Philadelphia, Pa. (C. M. Charest, Gen. Counsel, and T. H. Lewis, Jr., Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for the United States.
John S. Sinclair, Cuthbert H. Latta, Jr., and Charles Sinkler, all of Philadelphia, Pa., for appellees.
Before BUFFINGTON, WOOLLEY, and DAVIS, Circuit Judges.
James K. Young and Mary Wilson Young, his wife, acquired as tenants by the entirety several parcels of real estate in Philadelphia. Later, they conveyed some of them for a consideration part paid and the balance secured by a ground rent, reserved to themselves as tenants by the entirety, to yield them a certain annual income, redeemable at a named figure.
James K. Young died in 1923. The Commissioner of Internal Revenue, upon review and audit of the estate tax return made by his administrators, included in the decedent's gross estate the value of the ground rent and other property, so held, and determined a deficiency in the sum of $1,244.43. From this action Young's administrators appealed and the Board of Tax Appeals entered judgment against the Commissioner. 5 B. T. A. 1004. The United States then brought this suit in the District Court against Young's administrators to collect the additional tax so determined. The court, on facts averred in the statement of claim and admitted by the affidavit of defense, raising a question of law as though on demurrer, held that the Congress, by including for taxing purposes, in the gross estate of a decedent, property held by him and his wife as tenants by the entirety, exceeded its constitutional power and entered judgment for the defendants. The case is here on the government's appeal.
The tax was assessed under the Revenue Act of 1921 (42 Stat. 227). That Act, by Section 401, imposes a tax "upon the transfer of the net estate of every decedent dying after" its passage. Section 400 defines "net estate" to mean "the estate as determined under the provisions of Section 403." This section provides that the "net estate shall be determined by deducting from * * * gross estate" certain items with which we are not concerned. To obtain a net estate there must, of course, first be a gross estate. So Section 402 provides that the gross estate of a decedent shall include the value at the time of his death of all property, real and personal, "to the extent of the interest therein held jointly, or as tenants in the entirety, by the decedent and any other person."
In a word, the Congress provided that the value of property held at the time of death by a decedent and his spouse as tenants by the entirety shall be included in the deceased tenant's gross estate, and imposed a tax upon the transfer of the resultant net estate. The single question in this case is whether or not the Congress had power to draw such an estate within its reach and impose an estate tax upon it.
The effective words of the quoted provisions of the Revenue Act are "transfer" and "net estate." The Congress, in these provisions and in like provisions in other revenue acts, has been careful to impose the tax not upon property but upon the "transfer" of an interest in property, and the courts in construing the provisions have said, again and again, that the tax is not upon property but upon the privilege of transferring it. Thus the acts avoid imposing a direct tax, which to be valid must be apportioned. Section 2, Clause 3, and Section 9, Clause 4, of Article 1 of the Constitution. Hylton v. United States, 3 Dall. 174, 1 L. Ed. 556.
But the meaning of the word "transfer" as interpreted by the courts is not so literal as at first it would seem to be. Therefore, in order to determine whether the interest of a deceased tenant by the entirety constitutes an "interest" in his property which from its nature can be included in his gross estate, and whether on his death there is a transfer of such an interest to his co-tenant which is taxable as a part of his net estate, we shall look into the meaning of a "transfer" as the subject of taxation.
The earliest pronouncement upon the matter was made in Knowlton v. Moore, 178 U. S. 41, 20 S. Ct. 747, 753, 44 L. Ed. 969, which was a full recognition that the transmission of some interest in property occasioned by death is the basis for the imposition of an estate tax as distinguished from a direct tax on property.
Reviewing the field of death duties and bringing the act then under review within its boundary, the Supreme Court stated that: "Tax laws of this nature in all countries rest in their 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."
Knowlton v. Moore has been cited in practically every case in which federal estate tax acts have been involved and we know of no instance in which the court's declaration of the principles upon which such acts are based has been departed from.
The tax has ever been treated as a duty or excise because of the particular occasion which gives rise to its levy. New York Trust Co. v. Eisner, 256 U. S. 345, 41 S. Ct. 506, 65 L. Ed. 963, 16 A. L. R. 660; Y. M. C. A. v. Davis, 264 U. S. 47, 44 S. Ct. 291, 68 L. Ed. 558. The subject of the tax — the event upon which the tax is predicated — is the transmission of some interest in property occasioned by death, hence the classification of estate taxes as death duties. If no interest is transmitted, or if no transfer takes place by the event of death, the subject of the tax is absent and accordingly no estate tax can be validly imposed. While steadfastly adhering to the principle that death is the generating source from which the taxing power takes its being, the Supreme Court has recognized transfers subject to the tax that had been made otherwise than by death yet made finally effective at death, such as transfers made before death yet in contemplation of death, transfers in trust made before death with power reserved by the settler to revoke them, Reinecke v. Trust Co., 278 U. S. 339, 49 S. Ct. 123, 73 L. Ed. 410; transfers of insurance policies with power reserved by the insured to change the beneficiaries, Chase National Bank v. United States, 278 U. S. 327, 49 S. Ct. 126, 73 L. Ed. 405; and transfers of property with a reserved power of appointment, Saltonstall v. Saltonstall, 276 U. S. 260, 48 S. Ct. 225, 227, 72 L. Ed. 565. In all these cases the transfers had not been completely effected or the privilege of succession or the right of possession or enjoyment fully exercised before death. But in all death terminated reserved powers of control and effected final transfers to the advantage of those who had obtained the properties subject to the powers. Thus there was brought about at death, or by death, a "shifting of the economic benefits and burdens of property," which is the real subject of the tax. Saltonstall v. Saltonstall, supra.
A pertinent distinction is that the tax is not upon the interest to which another succeeds on death but is an excise upon the transfer of the estate of the owner upon his death, to be reckoned upon the value of the interest transferred. Y. M. C. A. v. Davis, 264 U. S. 47, 50, 44 S. Ct. 291, 68 L. Ed. 558; Edwards v. Slocomb, 264 U. S. 61, 44 S. Ct. 293, 68 L. Ed. 564. Nor is the tax limited to a transfer of property directly from the decedent to the transferee but extends at least to a transfer of property which, though not the decedent's, was produced by him with the purpose, effected at his death, of having it pass to another.
Thus do the courts regard a "transfer" — the thing taxed — as it appears in the provision of the Revenue Act under review. Of course, if there is no transfer, there is no valid tax. But the Act imposes the tax upon something more than a transfer, namely; "upon the transfer of the net estate" of a decedent. So, also, if there is no net estate of the decedent, there is no valid tax. Thus we come to the question whether on the death of one tenant by the entirety there is any "interest" in his estate which, because of a transfer to the other tenant occasioned by his death, falls into his gross estate and later becomes taxable as a part of his net estate. The answer to this question by a federal court depends primarily on the character of a tenancy by the entirety under the law as declared by the courts of the state in which its exists, for a construction or definition of the estate by the courts of the state constitutes a rule of property which is binding upon federal courts in considering its devolution or transfer. DeVaughn v. Hutchinson, 165 U. S. 566, 570, 17 S. Ct. 461, 41 L. Ed. 827; Clarke v. Clarke, 178 U. S. 186, 20 S. Ct. 873, 44 L. Ed. 1028; Edward Hines Yellow Pine Trustees v. Martin, 268 U. S. 458, 464, 45 S. Ct. 543, 69 L. Ed. 1050.
A tenancy by the entirety in Pennsylvania retains in their purity all the characteristics of its English origin. A quotation from one of many decisions by its courts, always in harmony, will disclose the rule of property which Pennsylvania has laid down in respect to an estate of this character.
In Beihl v. Martin, 236 Pa. 519, 522, 84 A. 953, 954, 42 L. R. A. (N. S.) 555, decided as recently as 19...
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