United States v. Ryerson, 7133

• Decision Date: 12 November 1940
• Docket Number: 7134.,No. 7133,7133
• Parties: UNITED STATES v. RYERSON et al. RYERSON et al. v. UNITED STATES.
• Court: U.S. Court of Appeals — Seventh Circuit

114 F.2d 150 (1940)

UNITED STATES v. RYERSON et al. RYERSON et al. v. UNITED STATES.

Nos. 7133, 7134.

Circuit Court of Appeals, Seventh Circuit.

July 9, 1940.

Writ of Certiorari Granted November 12, 1940.

Laird Bell, William N. Haddad and James P. Johnson, all of Chicago, Ill., for plaintiffs.

Edward First, Asst. Atty., Gen., Wm. J. Campbell, of Chicago, Ill., Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Arthur L. Jacobs, Sp. Assts. to Atty. Gen., for defendant.

Before TREANOR and KERNER, Circuit Judges, and LINDLEY, District Judge.

Writ of Certiorari Granted November 12, 1940. See 61 S.Ct. 142, 85 L.Ed. ___.

TREANOR, Circuit Judge.

This action was brought in the District Court under the Tucker Act.¹ to recover gift taxes for the years 1934 and 1935. The taxes were assessed by the Commissioner of Internal Revenue and have been paid by the taxpayer. Recovery is sought on the ground that the taxes were wrongfully exacted.

Two questions are presented on appeal. One question is whether in case of a gift under a trust agreement only one exclusion of $5,000 is allowed for the trust as the donee or whether an exclusion is allowed for each of the beneficiaries as a donee; and the second question involves the measure of value of four fully paid life insurance policies, the assignments of which constituted the gifts in question.

The facts are not in dispute and will be indicated sufficiently in the course of our discussion.

In respect to the method of determining the value of a gift of a fully paid life insurance policy the District Court stated as a conclusion of law that the value "should be based upon the price that any person of the same age, sex, and condition of health as the insured would have to pay for a similar policy in the same insurance company on the date the gift was made."

The plaintiffs² contend that the District Court was in error in stating such conclusion of law and it is their contention that the proper measure of value of a paid up life insurance policy is the cash surrender value.

The only statutory provision which is relevant reads as follows: "If the gift is made in property, the value thereof at the date of the gift shall be considered the amount of the gift."³ The foregoing provision is so general in its terms as to require some interpretative regulation. The Act was passed in 1932 and in 1933 the following treasury regulation was adopted: "The irrevocable assignment of a life insurance policy * * * constitutes a gift in the amount of the net cash surrender value, if any, plus the prepaid insurance adjusted to the date of the gift."

In 1936 a new regulation was issued which accords with the ruling of the District Court and the contention of the United States.

In Helvering v. Winmill⁴ the Supreme Court stated the generally recognized rule that "Treasury regulations and interpretations long continued without substantial change, applying to unamended or substantially reenacted statutes, are deemed to have received congressional approval and have the effect of law." In Helvering v. Cronin⁵ the Circuit Court of Appeals for the Eighth Circuit discussed the 1933 regulation, and the following pertinent excerpt is from its opinion: "If the gift tax is to be computed by the original regulation of 1933, the taxpayer's return was correct; if by the regulation of 1936, the Commissioner is right. If the regulation of 1933 were invalid because inconsistent with the statute, the 1936 regulation would be applicable. * * * It is not claimed, however, that the 1933 regulation is invalid. It had the approval of Congress by the renactment without material change of section 506 of the Revenue Act of 1932 in the Revenue Acts of 1934 and 1935. That regulation, therefore, had the effect of law. * * * Since it was in effect on the date of the gift it rules the determination of the value of the policies. The 1936 regulation can not be given retroactive effect. * * *"

The Courts of Appeals in the Third, Fourth and Fifth Circuits are in accord with the reasoning and holding of the Eighth Circuit in Helvering v. Cronin.

When the Commissioner, with the approval of the Secretary, promulgates an administrative regulation which the Commissioner is authorized by the Revenue Act to promulgate, such regulation, by force of the Act of Congress, has the effect of law. In the Gift Tax Act Congress does not designate the factors which shall be taken into consideration in determining the amount of a gift. Congress merely provides that if the gift is made in property, the value thereof shall be considered the amount of the gift. There is no fixed, general rule of law which determines value of property. The factors entering into the concept of value vary with types of property and with the purpose for, or use to be made of, the valuation. Likewise, the relative weight to be attached to the different factors may vary. In view of the very general and indefinite standard fixed by Congress for the determination of the amount of the gift of property it became a practical necessity for the Commissioner to designate some factual test of value which could be used to fix the amount of the gift in terms of money. If the test, or measure of value, which was adopted by the Commissioner in 1933 fell within the standard fixed by the Act, and if it afforded a reasonably accurate measure of the monetary value of the gift, the regulation embodying such test or measure was authorized by Congress and had the force of law. The fact that some other test or measure might have been reasonable, or the fact that the regulation embodying the first measure might later be modified and still represent a valid exercise of power by the Commissioner, does not in any way vitiate the validity, and the binding force, of the first regulation during the period that it was officially recognized and enforced.

We are not concerned with a regulation which embodies an erroneous construction of an Act of Congress and which, therefore, would be invalid. In such a case a substituted regulation embodying the correct construction would not represent a change in the law but would constitute a correct expression of the law. Nor do we have an example of an administrative construction by administrative practice, in which case, if the construction is reasonable, courts will give great weight to the practical construction as evidencing the legislative intent.

The United States Government urges that "The cash surrender value of the policies is not their fair market value for gift tax purposes"; and states that the fair market value of the fully paid life insurance policies is not the surrender value but the amount which would have to be paid to duplicate the policies on the date of the gift. But the cost of duplication is not understood generally to measure the "fair market value" of property. The cost of duplication affords some evidence of what a "willing buyer" would pay and may be considered along with other evidence; but it is not the measure of the fair market value of property.

We are of the opinion that, for purposes of evaluating a fully paid life insurance policy, the common test of "the fair market price or value" has no significance. In view of the peculiar type of property involved, the problem for the Commissioner was to devise a fair and appropriate measure of value which reasonably could be considered the amount of the gift. We are of the opinion that the cash surrender value constitutes a fair measure of the value of a fully paid life insurance policy for gift tax purposes. The parties stipulated that "no greater amount could have been obtained or realized upon the said policies by surrendering them or borrowing on them, or otherwise, than these cash values." The District Court found the foregoing to be a fact. If "fair market price" has any significance for the present question it would seem that the cash surrender value more nearly conforms to the fair market value test than does the cost of duplication. Such was the thought expressed by the Board of Tax Appeals in Haines v. Commissioner:⁶ "The fact that insurance companies assume risks and make a charge for doing so which reduces the salable value of the contract from the moment of its issue is of no importance. The true test of value is what such contracts can be sold for, not what it will cost to turn around and buy another one from the insurance company which chooses to make a service charge for issuing another."

The United States urges that even if the regulation of 1933 be applied, consideration has not been given to that part of the regulation which...