Heiner v. Donnan

285 U.S. 312, 52 S. Ct. 358, 76 L. Ed. 772, 1932 U.S. LEXIS 438, 1932 C.B. 324, 10 A.F.T.R. (P-H) 1609, 3 U.S. Tax Cas. (CCH) 913

Opinions

Mr. Justice Sutherland

delivered the opinion of the Court.

This case is here on á certificate from the Circuit Court of Appeals for the Third Circuit. On March 1, 1927, John W. Donnan, by complete and irrevocable gift inter vivos, transferred without .consideration certain securities to trustees for his four children, ,and also, without consideration, advanced a sum of money to his son. He died on December 23, 1928, less than two years after the gifts and advancement were made. The Commissioner of Intérnal Revenue included in the gross estate of decedent the value of the property transferred, and imposed a death transfer tax accordingly, on authority of the clause in § 302 (c) of -the Revenue Act of 1926, c. 27, 44 Stat. 9, 70 (U..S. C., Sup. V, Title 26, § 1094), which, without regard .to the fact, provides that such a transfer made within two years prior to the death of the decedent shall “ be deemed and held to have been made in contemplation of death within the meaning of this title.”*

The executors paid the tax, and, after rejection of a claim for refund, brought this action in the federal district court for the western district of Pennsylvania to recover the amount of the tax attributable to the inclusion of the property in question by the commissioner. The trial court found that neither the transfer in trust nor the advancement was made in contemplation of death. Judgment was rendered in favor of the executors on the ground that the foregoing provision of § 302 (c) was unconstitutional as contravening the due process clause of the Fifth Amendment, and void as being repugnant to other sections of the act. 48 F. (2d) 1058. An appeal was taken, and the circuit court of appeals has certified to this court two questions of law upon which instruction is desired:

“ 1. Does the second sentence of section 302 (c) of the revenue act of 1926 violate the due process clause of the fifth amendment to the Constitution of the United States?

“ 2. If the answer to the first question be in the negative, is the second sentence of section 302 (c) of the revenue act of 1926 void because repugnant to sections 1111, 1113 (a), 1117, and .1122 (c) of the same act?”

A negative answer to the first question, if made, must rest either upon the ground that Congress has the constitutional power to deny to the representatives of the estate of a decedent the right to show by competent evidence that a gift made within two years prior to the death of the decedent was in fact not made in contemplation of death; or upon the theory that, although the tax in question is imposed as a death transfer tax, it nevertheless may be sustained as a gift tax.

First Section 301 of the Revenue Act of 1926 imposes-a tax “ upon the transfer of the net estate of every decedent,” etc. There can be no doubt as to the meaning of this language. The thing taxed is the .transmission of property from the dead to the living. It does not include pure gifts inter vivos. The tax rests, in 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 áre more immediately rested. ... it is the power to transmit or the transmission or receipt-of property by death which is the subject levied upon by all death duties.” Knowlton v. Moore, 178 U. S. 41, 56, 57. The value of property transferred without consideration and in contemplation of death is included in the value of the gross estate of the decedent for the purposes of a death tax, because the transfer is considered to be testamentary in effect. Milliken v. United States, 283 U. S. 15, 23. But such a transfer, not so made, embodies a transaction begun and completed wholly by and between the living, taxable- as a gift (Bromley v. McCaughn, 280 U. S. 124), but obviously not subject to any form of death duty, since it bears no-relation" whatever to death. The “ generating source ” of such a gift is to be found in the facts of life and not in the circumstance of death. And the death afterward of the donor in no way changes the situation; that is to say, the death does not result in a shifting, or in the completion of a shifting, to the donfee of any economic benefit of property, which is the subject of a death tax, Chase Nat. Bank v. United States, 278 U. S. 327, 338; Reinecke v. Northern Trust Co., 278 U. S. 339, 346; Saltonstall v. Saltonstall, 276 U. S. 260, 271; nor does the death in such case bring into being, or ripen for the donee or anyone else, so far as the gift is concerned, any property right or interest which can be the subject of any form of death tax. Compare Tyler v. United States, 281 U. S. 497, 503. Complete ownership of the gift, together with all its incidents, has passed during the life of both donor and donee, and no interest of any kind remains to pass to one or cease in the other in consequence of the death which happens' afterward.

The phrase “ in contemplation of or intended to take effect ... at or after his death,” found in the provisions of § 302 (c) of the act of 1926 and prior acts, as applied to fully executed gifts inter vivos, puts them in the same category for purposes of taxation with gifts causa mortis. In this light, the meaning and purpose of the provision were considered, in a recent decision of this court dealing with the Revenue Act of 1918. United States v. Wells, 283 U. S. 102, 116-117, 118:

“The dominant purpose is to reach substitutes for-testamentary dispositions and thus to prevent the evasion of the estate tax. Nichols v. Coolidge, 274 U. S. 531, 542; Milliken v. United States, ante, p. 15. As the transfer may otherwise have all the indicia of a valid gift inter vivos, the differentiating factor must be found in the transferor’s motive. Death must be ‘ contemplated,’ that is, the motive which induces the transfer must be of the sort which leads to testamentary disposition. As a condition of body or mind that naturally gives rise to the. feeling that death is near, that the donor is about to. reach the moment of inevitable surrender of ownership, is most likely to prompt such a disposition to those who are deemed to be the proper objects of his bounty, the evidence of the existence or non-existence of such a condition at the time of the gift- is obviously of great importance in determining whether it is made in contemplation of death. The natural and reasonable inference which may.be drawn from the fact that but a short period intervenes between the transfer and death, is recognized by the statutory provision creating a presumption in the case of gifts within two years prior to death. But this presumption, by the statute before us, [Act of 1918] is expressly stated to be' a rebuttable one, and the mere fact that death ensues even shortly after the gift does not determine absolutely that it is in contemplation of death. The question, necessarily, is as to the state of mind of the donor.

“ If it is the thought of death, as a controlling motive prompting the disposition of. property, that affords the test, it follows that the statute does not embrace gifts inter vivos which spring from a different motive. Such transfers were made the subject of a distinct gift tax, since repealed.”

There is no doubt of the power of Congress to provide for including in the gross estate of a decedent, for purposes of the death tax, the value of gifts made in contemplation -of death; and likewise no doubt of the power of that body to create a rebuttable presumption that gifts made within a period of two years prior to death are made in contemplation thereof. But the presumption here created is not of that kind. It is made definitely conclusive — incapable of being overcome by proof of the most positive character. Thus stated, the first question submitted -is answered in the affirmative by Schlesinger v. Wisconsin, 270 U. S. 230, and Hoeper v. Tax Commission, 284 U. S. 206. The only difference between the present case and the Schlesinger case is that there the statute fixed a period of six -years as limiting the application of the presumption, while here it is fixed at two; and there the Fourteenth Amendment was involved, while here it is the Fifth Amendment. The length of time was not a factor in the case. The presumption was held invalid upon the ground that the statute made it conclusive without regard to actualitiés, while like gifts, at other times were not thus treated; and that there was no adequate basis for such a distinction. “ The presumption and consequent taxation,” the court said (p. 240), “are defended upon the theory that, exercising judgment and discretion, the. legislature found them necessary in order to prevent evasion of inheritance taxes. That is to say, ‘A’ may be required to submit to an exactment forbidden by the Constitution if this seems necessary in order to enable- the State readily to collect lawful charges against ‘ B.’ Rights guaranteed by the federal Constitution are not to be so lightly treated; they are superior to this supposed necessity. The State is forbidden to deny due process of law or the equal protection of the laws for any purpose whatsoever.”

The Schlesinger case has since been applied many times by the lower federal courts, by the Board of Tax Appeals, and by state courts; * and none of them seem to have-been at any loss to understand the basis, of the decision, namely, that a statute which imposes a tax upon an assumption of fact which the taxpayer is‘forbidden to controvert, is so arbitrary and unreasonable that it cannot stand under the Fourteenth Amendment.

Nor is it material that the Fourteenth Amendment was involved in the Schlesinger case, instead of the Fifth Amendment, as here. The restraint imposed upon legislation by the due process clauses of the two amendments is the same. Coolidge v. Long, 282 U. S. 582, 596. That a federal statute passed under the taxing power may be so arbitrary and capricious as to cause it to fall before the due process of law clause of the Fifth Amendment is settled. Nichols v. Coolidge, 274 U. S. 531, 542; Brushaber v. Union Pac. R. Co., 240 U. S. 1, 24-25; Tyler v. United States, supra, p. 504.

In Hoeper v. Tax Commission, supra, this court had before it for consideration a statute of Wisconsin which provided that in computing the amount of income taxes payable by persons residing together as members of a family, the income of the wife should be added to that of the husband and assessed to . and payable by him. We held that, since in law and in fact the wife’s income was her separate property, the state was without power to measure his tax in part by the income of his wife. At page 215 we said:

“ We have no doubt that, because of the fundamental conceptions which underlie our system, any attempt by a state to measure the tax on one person’s property or income by reference .to' the property or income of another is contrary to due process of law as guaranteed by the Fourteenth Amendment. That which is not in fact the taxpayer’s income cannot be made such by calling it income. Compare Nichols v. Coolidge, 274 U. S. 531, 540.”

The suggestion of the state court that the provision was valid as necessary to prevent frauds and evasions of the tax by married persons was definitely rejected on the ground that such claimed' necessity could not justify an otherwise unconstitutional exaction.

In substance and effect, the situation presented in the Hoeper case is the same as that presented here. In the first place, the tax, in part, is laid in respect of property shown not to have been transferred in contemplation of death and the complete title to which had passed to the. donee during the lifetime of the donor; and secondly, the tax is not laid upon the transfer of the gift or in respect of its value. It is laid upon the transfer, and calculated upon the value, of the estate of the decedent, such value being enhanced by the fictitious inclusion of the gift, and the estate made liable for a tax computed. upon that value. Moreover, under the statute the value of the gift when made is to be ignored, and its value arbitrarily fixed as of the date of the donor’s death. The result is that upon those who succeed to the decedent’s estate there is imposed the burden of a tax, measured in part by property which comprises no portion of the estate, to which the estate is in no way related, and from which the estate derives no benefit of any description. Plainly, this is to measure the tax on A’s property by imputing to it in part the value of the property of B, a result which both the Schlesinger and Hoeper cases condemn as arbitrary and a denial of due process of law. Such an exaction is not taxation but spoliation. “ It is not taxation that government should take from one the profits and gains of another. That is ■taxation which compels one to pay for the support of the government from his own gains and of his own property..” United States v. Railroad Co., 17 Wall. 322, 326.

The presumption here excludes consideration of every fact and circumstance tending to show the real motive of the donor. The young man in abounding health, bereft of life by a stroke of lightning within two years after making a gift, is conclusively presumed to have acted under the inducement of the thought of death, equally with the old and ailing who already stands in the shadow of the inevitable end. And although the tax explicitly is based upon the circumstance that the thought of death must be the impelling cause of the transfer (United States v. Wells, supra, p. 118), the presumption, nevertheless, precludes the ascertainment of the truth in respect of that requisite upon which the liability is made to rest, with the result, in the present case and in many others, of putting upon an estate the burden of a tax measured in part by the value of property never owned by the estate or in the remotest degree connected with the death which brought it into existence. Such a statute is more arbitrary and less defensible against attack than one imposing arbitrarily retroactive taxes, which this court has decided to be in clear violation of the Fifth' Amendment. As said by Judge Learned Hand in Frew v. Bowers, 12 F. (2d) 625, 630, “ Such a law is far more capricious than merely retroactive taxes. Those do indeed impose unexpected burdens, but at least they distribute them in accordance with the taxpayer’s wealth. But this section distributes them in accordance with another’s wealth; that is .a far more grievous injustice.”

To sustain the validity of this irrebuttable presumption it is argued, with apparent conviction, that under the prima jade presumption originally in force there had been a loss of revenue, and decisions holding that particular gifts were not made in contemplation of death are cited. This is very near to saying that the individual, innocent of evasion, may be stripped of his constitutional rights in order to further a more thorough enforcement of the tax against the guilty — a new and startling doctrine, condemned by its mere statement and distinctly .repudiated by this court in the Schlednger (p. 240) and Hoeper (p. 217) cases involving similar situations. Both emphatically declared that such rights were superior to this supposed necessity.

The government makes the point that the conclusive presumption created by the statute is a rule of substantive law, and, regarded as such, should be upheld; and decisions tending to support that view are cited. The earlier revenue acts created a prima fade presumption, which was made irrebuttable by the later act of 1926. A rebuttable presumption clearly is a rule of evidence which has the effect of shifting the burden of proof, Mobile, J. & K. C. R. Co. v. Turnipseed, 219 U. S. 35, 43; and it is hard to see how a statutory rebuttable presumption is turned from a rule of evidence into a rule of substantive law as the result of a later statute making it conclusive. In both cases it is a substitute for proof; in the one open to challenge and disproof, and in the other conclusive. However, whether the latter presumption be treated as a rule of evidence or of substantive law, it constitutes an attempt, by legislative fiat, to enact into existence a fact which here does not, and cannot be made to, exist in actuality, and the result is the same, unless we are ready to overrule the Schlesinger case, as we are not; for that case dealt with a conclusive presumption and the court held it invalid without regard to the question of its technical characterization. This court has held' more than once that a statute creating a presumption which operates to deny a fair opportunity to rebut it violates the due process clause of the Fourteenth Amendment. For example, Bailey v. Alabama, 219 U. S. 219, 238, et seq.; Manley v. Georgia, 279 U. S. 1, 5-6. “ It is apparent,” this court said in the Bailey case (p. 239) “ that a constitutional prohibition cannot be transgressed indirectly .by the creation of a statutory presumption any more than it can be violated by direct enactment. The power to create presumptions is not a means of' escape from constitutional restrictions.”

If a legislative body is without power to enact as a rule of evidence a statute denying a litigant the right to prove the facts of his case, certainly the power cannot be made to emerge by putting the enactment in the guise of a rule of substantive law.

Second.. The provision in question cannot be sustained as imposing a gift tax, (1) because the intent of Congress to enact the provision as an incident of the death tax and not as a gift tax is unmistakable; and (2) because, if construed as imposing a gift tax, it is in that aspect still so arbitrary and capricious as to.cause it to fall within, the ban of the due process clause of the Fifth Amendment.

1. The intent of Congress to include gifts made in contemplation of death as integral parts of the decedent’s estate for the purposes of the death tax only is so clear as, reasonably, to preclude argument to the contrary. In United States v. Wells, supra, this court held, as already shown, that since it is the thought of death, as a controlling motive prompting the gift, that affords the test whether it is made in contemplation of death, “ it follows that the statute does not embrace gifts inter vivos which spring from a different motive. Such transfers were made the subject of a distinct gift tax, since repealed.” And see Reinecke v. Trust Co., supra, at p. 347. It is significant that the repeal of the gift tax referred to was made by the same act (c. 27, § 1200 (a), 44 Stat. 9, 125), which contains the provision here in question. The tax is imposed upon the transfer of the net estate, but it is first necessary to ascertain the value of the gross estate, and the statute provides that this is to be determined by including, among other things, the value of auy interest in property of which the decedent has at any time made a transfer in contemplation of his death. The statute requires that this value shall be determined as of the time of the decedent’s death, without regard to the value of the gift when received. The event upon which the tax is made to depend is not the transfer of the gift, but the transfer of the estate of the decedent. The tax falls upon the estate and not upon the gift, and is computed not upon the value of the gift, but, by progressively graduated percentages, upon the value of the entire estate. It is so apparent from a consideration of these features of the statute that Congress could not have had, even remotely, in mind the imposition of a gift tax, that to construe the provision in question as imposing such a tax is to disregard the plain language and the plain intent of the act. For this court to do so would be to enact a law under the pretense of construing one and thus pronounce itself guilty of a flagrant perversion of the judicial power.

2. But if we assume, contrary to what is reasonable, that a gift tax is imposed by providing that the value of property transferred without consideration by a decedent within two years prior to his death shall be included in the value of the gross estate, the case for the government is no better. In the Schlesinger case, the Supreme Court of Wisconsin had expressly held that the tax could not be supported as one on gifts inter vivos only, saying, “ Under such taxation the classification is wholly arbitrary and void. We perceive no more reason •why such gifts inter vivos should be taxed than gifts made within six years of marriage or any other event. It is because only one class of gifts closely connected with and a part of the inheritance tax law is created that the law becomes valid.” Estate of Schlesinger, 184 Wis. 1, 10; 199 N. W. 951. This court accepted that view in these words (p. 239): “ The court below declared that a tax on gifts inter vivos only could not be so laid as to hit those made within six years of the donor’s death and exempt all others — this would be ‘ wholly arbitrary.’ We agree with this view and are of opinion that such a classification would be in plain conflict with the Fourteenth Amendment.” And it follows that the present provision, written in almost identical terms, is in plain conflict with the Fifth Amendment. The provisions 'of the statute referred to in the preceding paragraph of this opinion necessarily condition the tax, however it be char acterized. If it be a gift tax, it, nevertheless, is based, not upon the transfer of the gift, but upon the transfer of the estate; and upon the value of the estate, and not that of the gift. Obviously these are bases having no relation whatever to. the gift. Moreover, the value of ■ the gift is not to. be determined as of the time when made, but, considered as a part of the estate, is to be fixed as of the date of the decedent’s death — a condition so obviously arbitrary and capricious as, by itself, to condemn the tax, viewed as a gift tax, as violative of due process. It is to be paid by the beneficiaries of the decedent, although it is impossible for them to share in the gift which has passed beyond recall. It is, therefore, a contribution to the government exacted of one person, based pro tanto upon the wealth of another.

Considered as a gift tax, these conditions demonstrate the entire lack of relation between the taxpayer and the transfer which is the subject of the tax. They disclose that there is no rational ground for measuring the tax, considered as a gift tax and not as a death tax, by the value of an estate coming into being after the gift has become complete and irrevocable, and of which the gift comprises no part. And they show that to impose liability for the tax, as a gift tax, upon the estate, as they in terms require, is, in effect, to exact tribute from the gains or property of one measured by the gains or property of another.

The first question must be answered in the affirmative and this makes it unnecessary to answer the second.

It is so ordered.

Me. Justice Cardozo took no part in the consideration or decision of this case.

Footnotes

*

“See. 302. The value of the gross estate of the decedent shall be- determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—

“(g) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, 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 an adequate and full consideration in money or money's worth. Where within two years prior to his death but after the enactment of this Act and without such a consideration the decedent has made a transfer or transfers by trust or otherwise, of any of his property, or an interest therein, not admitted or shown to have been made in contemplation of or intended to take effect in possession or enjoyment at or after his death, and the value or aggregate value, at the time of such death, of the property or interest so transferred to any one person is in excess of $5,000, then, to the extent of such excess, such transfer or transfers shall be deemed and held to have been made in contemplation, of death within the meaning of this title. 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 but prior to the enactment of this Act, without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title.”

*

See for example, Hall v. White, 48 F. (2d) 1060; Donnan v. Heiner, 48 F. (2d) 1058 (the present case); Guinzburg v. Anderson, 51 F. (2d) 592; American Security & Trust Co., 24 B. T. A. 334; State Tax Commission v. Robinson’s Executor, 234 Ky. 415; 28 S. W. (2d) 491 (involving a three year period).