Winton v. Reynolds, 883.

• Decision Date: 24 October 1944
• Docket Number: No. 883.,883.
• Citation: 57 F. Supp. 565
• Parties: WINTON v. REYNOLDS, Collector of Internal Revenue.
• Court: U.S. District Court — District of Minnesota

57 F. Supp. 565

WINTON v. REYNOLDS, Collector of Internal Revenue.

No. 883.

District Court, D. Minnesota, Fourth Division.

October 24, 1944.

Fowler, Youngquist, Furber, Taney & Johnson, G. A. Youngquist, and Frederick W. Thomas, all of Minneapolis, Minn., for plaintiff.

Victor E. Anderson, U. S. Atty., and Linus J. Hammond, Asst. U. S. Atty., both of St. Paul, Minn., for defendant.

JOYCE, District Judge.

This is an action to recover overpayment of gift taxes. The facts are stipulated. In 1937 David J. Winton, hereafter referred to as donor, made a gift of $5,110 to plaintiff, his wife. In the same year he created and made gifts to three trusts for the benefit of his minor children. In his gift tax return he claimed and was allowed an exclusion of $5,000 for each of the four gifts under section 504(b) of the Revenue Act of 1932, 26 U.S.C.A. Int.Rev.Acts, page 585, which provided: "In the case of gifts (other than of future interests in property) made to any person by the donor during the calendar year, the first $5,000 of such gifts to such person shall not * * * be included in the total amount of gifts made during such year."

Following the decision of the Supreme Court in United States v. Pelzer, 312 U.S. 399, 61 S.Ct. 659, 85 L.Ed. 913, the Commissioner of Internal Revenue reaudited donor's 1937 return and disallowed the exclusions for the three trusts on the ground they were future interests in property.

In 1935 and 1936 donor had also made substantial gifts to each of three trusts created in 1935 for the benefit of the minor children and was allowed a $5,000 exclusion for each gift. Upon re-audit of the 1937 return, the Commissioner disallowed these exclusions, taking the position they were likewise gifts of future interests in property. Section 505 of the Revenue Act of 1932, 26 U.S.C.A. Int.Rev.Acts, page 586, allows as a deduction in computing the net gifts for any calendar year, a specific exemption less the aggregate of amounts claimed and allowed as exemptions in previous years. Donor had exhausted this specific exemption, so the disallowance of these exemptions in computing the net gifts for the purposes of the 1937 return increased the taxable "net gifts" for that year and had the effect of further increasing the deficiency by $1,529.79. The Commissioner determined the total deficiency to be $3,536.28. As the period within which assessment could be made against the donor had expired, he notified the trustee and plaintiff, as donee and transferee, that he proposed to assess each for the deficiency. It is stipulated that donor was solvent and able to pay the tax during the period which assessment could have been made against him.

Plaintiff paid the deficiency and interest under protest. She filed a claim for refund which was rejected, and now seeks to recover $4,340.78, the amount paid. Her contentions are: (1) That continued solvency of the donor precludes liability on her part as transferee; (2) that she is not liable as donee under section 1009 of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 1009 (Section 510 of the Revenue Act of 1932); (3) that the gifts to the 1937 trusts were not gifts of future interests in property; (4) that even if the gifts to the 1935 trusts were such gifts of future interests, the Commissioner cannot by disallowing exclusions previously granted increase the amount of net gifts in his computation of the tax for 1937 and thereby increase the deficiency for that year.

The Commissioner's position is that as the gift tax was not paid by the donor when due, plaintiff, as donee-transferee, is personally liable for the tax to the extent of the gift received by her irrespective of the solvency of the donor.

1. The question must be resolved in the light of the following statutes (all subsequent references by section number refer to the Revenue Act of 1932 unless otherwise specified):

Sec. 510. "The tax imposed by this title shall be a lien upon all gifts made during the calendar year, for ten years from the time the gifts are made. If the tax is not paid when due, the donee of any gift shall be personally liable for such tax to the extent of the value of such gift."

Sec. 526(a) (1) provides for the enforcement of "the liability, at law or in equity, of a transferee of property of a donor, in respect of the tax * * * imposed by this title."

Sec. 526(b) (1). "The period of limitation for assessment of any such liability of a transferee or fiduciary shall be as follows: (1) within one year after the expiration of the period of limitation for assessment against the donor."

Sec. 526(f). "As used in this section the term `transferee' includes donee, heir, legatee, devisee and distributee."

Nowhere does the statute condition the liability of the donee or transferee upon the solvency of the donor. Plaintiff contends that Section 526(a) (1), Sec. 1025 (a) (1) of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 1025(a) (1), was modeled after similar provisions in the Revenue Act of 1926 pertaining to estate and income taxes and cites congressional committee reports and decisions of the Board of Tax Appeals that such has been the construction of those sections. To me, the language of the statute above quoted is clear and unambiguous. A lien is imposed upon all gifts and, if the tax is not paid, the donee of any gift in that calendar year is personally liable to the extent of the gift received. When the words of a statute are unambiguous there is no room for construction and it must be literally enforced. This rule applies with special force to a statute imposing internal revenue taxes. Minnesota Tea Co. v. Commissioner, 8 Cir., 76 F.2d 797, affirmed 296 U.S. 378, 56 S.Ct. 269, 80 L.Ed. 284.

For the purposes of this case it may be conceded that solvency of the donor precludes liability in equity on the part of the donee, but I cannot escape the conclusion that there is a liability at law within the meaning of Section 526(a) (1). The liability of the donor is primary and that of the donee secondary. Fletcher Trust Co. v. Commissioner, 7 Cir., 141 F.2d 36. But it does not follow that the donee's liability is coterminous with the donor's and expires when the statute of limitations has run against the latter. Section 526(b) (1) expressly provides that the period of assessment against a transferee shall be "within one year after the expiration of the period of limitation for assessment against the donor." To construe the statute as contended for by plaintiff, would seem to render this section meaningless. Fletcher Trust Co. v. Commissioner, supra. This precise question was decided in Evelyn N. Moore v. Commissioner, Nov. 12, 1942, 1 T.C.R. 14, where it was said: "Not only is there no statutory support for the petitioner's contention that her liability ceased when the statute ran against collection from the donor, but the statute clearly indicates that no such exception was intended. It is not for this Court to reason why Congress gave this extra year for assessment and collection against the donee, or to determine whether or not that was done inadvertently. It is enough that the Commissioner has been given this extra year by the clear provisions of the statute."

In that case Mellott, J., dissented principally upon the ground that Section 526(f), which defines transferee to "include" donee, should not be construed to permit collection of the tax against any donee. It is his position that the personal liability of the donee under Section 510 is conditioned upon the insolvency of the donor, and if the latter is solvent the liability of the donee terminates at the same time as the liability of the donor. He thinks it was not the intent of Congress to create a legal liability on the donee-transferee by such a "circuitous method". Plaintiff here advances the same argument. However, I agree with the majority in the Evelyn Moore case that Congress has created such a liability and that the extended period of limitation is applicable to donees as to other kinds of "transferees" defined in Section 526(f). This view is now supported by Baur v. Commissioner, 3 Cir., 145 F.2d 338, where the court said: "In the instant case, the liability which the Commissioner has imposed upon the petitioner is manifestly a legal liability. It arises by virtue of the positive statutory imposition of Sec. 510. * * * Such being the case, it is wholly immaterial to the enforcement of the legal liability whether the transfers rendered the donor insolvent or whether he remained solvent during the period of his enforceable liability for the tax. * * *"

As the tax here was assessed against plaintiff within the one year period prescribed by Section 526(b) (1), the Commissioner is not barred from proceeding against plaintiff as donee-transferee.

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