U.S. Supreme Court HEINER v. DONNAN, 285 U.S. 312 (1932)

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Mr. Justice SUTHERLAND delivered the opinion of the Court.

This case is here on a 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 Internal 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 section 302(c) of the Revenue Act of 1926, c. 27, 44 Stat. 9, 70 (U. S. C., Supp. V, Title 26, 1094 ( 26 USCA 1094(c))), 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.' [Footnote 1]

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The existence of facts underlying constitutionality is always to be presumed, and the burden is always on him who assails the selection of a class for taxation to establish that there could be no reasonable basis for the legislative judgment in making it. [Footnote 5]

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whether it is so combined with other motives as to preclude its taxation, even though in making it the donor cannot be unaware that he, like others, must die and that his donation will, in the natural course of events, escape the tax which will be imposed on his other property passing at death. See United States v. Wells, supra. The difficulty of searching the motives and purposes of one who is dead, the proofs of which, so far as they survive, are in the control of his personal representatives, need not be elaborated. As the event has proved, the difficulties of establishing the requisite mental state of the deceased donor has rendered the tax on gifts in contemplation of death a weak and ineffective means of compensating for the drain on the revenue by the withdrawal of vest amounts of property from the operation of the estate tax.

The government has been involved in 102 cases arising under 202(b) of the 1916 Revenue Act and its successors. [Footnote 6] This number does not include any of the cases arising under section 302(c) of the Revenue Act of 1926, 26 USCA 1094(c), the statute under present consideration. And it includes only those cases, decision of which was determined by the answer made to the question of fact, whether a gift had been made in contemplation of death.

In 20 cases involving gifts of approximately $4,250,000, the government was successful. [Footnote 7] In 3 it was partially

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successful;8 and in 78 involving gifts largely in excess of $120,000,000, it was unsuccessful. In another the jury disagreed. [Footnote 9]

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ling less than $100,000.21 In the remaining 22 cases the gifts were made more than two years before the death of the donor. [Footnote 22]

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teenth Amendment has not been deemed to impose any such inflexible rule of taxation.

The very power to classify involves the power to recognize and distinguish differences in degree between those things which are near and those which are remote from the object aimed at. Citizens' Telephone Co. v. Fuller, 229 U.S. 322, 33 S. Ct. 833; see Miller v. Wilson, 236 U.S. 373, 384, 35 S. Ct. 342, L. R. A. 1915F, 829. It has never occurred to any one to suggest that a state could not, by statute, fix the age of consent, or the age of competence to make a will or conveyance, although some included within the class selected as competent might be less competent than some who are excluded. In the exercise of the police power, classification may be based on mere numbers or amounts where the distinction between the class appropriately subject to classification and that not chosen for regulation is one of degree. [Footnote 23]

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Stebbins v. Riley, , 45 S. Ct. 424, 44 A. L. R. 1454.24 It may impose a tax that falls more heavily on ownership of chain stores than on ownership of a smaller number. State Board of Tax Commissioners v. Jackson, 283 U.S. 527, 51 S. Ct. 540, 73 A. L. R. 1464; Great Atlantic & Pacific Tea Co. v. Maxwell, 284 U.S. 575, 52 S. Ct. 26, 76 L. Ed.-, decided October 26, 1931. And generally it may create classes for taxation wherever there is basis for the legislative judgment that differences in degree produce differences in kind. [Footnote 25]

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v. Coolidge, supra. The application of the estate tax to the other types of gift inter vivos mentioned in the Act has uniformly been upheld, even though the gift was made more than two years before death. Milliken v. United States, supra; Phillips v. Dime Trust & Safe Deposit Co.; Tyler v. United States, supra; Reinecke v. Northern Trust Co., supra; Chase National Bank v. United States, supra.

I cannot say that the tax on all gifts made in contemplation of death, supplemented by that imposed on all others made within two years of death, is not adapted to a legitimate legislative object. The history of the litigation over gifts made in contemplation of death, to which reference has been made, and the reports of Congressional Committees prepared after extensive investigation and with expert aid, plainly indicate that it is. I can find no adequate reason for saying that the tax is invalid. The denial of its validity seems to me to rest on no substantial ground and to be itself an arbitrary and unreasonable restriction of the sovereign power of the federal government to tax, for which neither the words of the Fifth Amendment nor any judicial interpretation of it affords justification.

The questions should be answered in the negative.

Mr. Justice BRANDEIS joins in this opinion. Footnotes

Footnote 1 'Sec. 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-...'(c) 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.' appeal was taken, and the Circuit Court of Appeals has certified to this court two questions of law upon which instruction is desired:

Footnote 2 See, for example, Hall v. White (D. C.) 48 F.(2d) 1060; Donnan v. Heiner (D. C.) 48 F.(2d) 1058 (the present case); Guinzburg v. Anderson (D. C.) F. (2d) 592; American Security & Trust Co. et al., Executors, 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).

[Footnote 1] See, also, House Report No. 179, 68th Congress, 1st Sess., p. 75; Congressional Record, vol. 65, part 3, pp. 3119, 3120, 3122; part 4, pp. 3371, 3372, 3373; part 8, pp. 8094, 8095, 8096.

[Footnote 2] See Senate Report No. 52, 69th Congress, ,1st Sess., p. 9.

Footnote 3 This consideration seems also to have motivated the corresponding English legislation. In 1881 England adopted a statute, 44 Vict. c. 12, 38(2)(a), which included gifts inter vivos, made within three months of the death, in the donor's estate, subject to death duties. The three months was increased to one year, in 1889, 52 Vict. c. 7, 11(1), and to three years in 1910, 10 Edw. VII, c. 8, 59(1), the last provision remaining in force, except in some particular circumstances not now necessary to mention, until the present time.

The brief for the government in No. 514, Appendix B, lists fourteen states which, prior to the enactment of the present statute in 1926, had found it necessary or expedient to adopt similar legislation; the state statutes subjected to inheritance taxation gifts made within periods ranging from one to six years of the donor's death. See, also, Sabine, 'Transfers in Contemplation of Death,' 5 Internal Revenue News, September, 1931, p. 8.

Footnote 4 House Report, Ways and Means Committee, No. 1, 69th Congress, 1st Sess., p. 15. See Tyler v. United States, 281 U.S. 497, 505, 50 S. Ct. 356, 69 A. L. R. 758; Milliken v. United States, 283 U.S. 15, 20, 51 S. Ct. 324.

Footnote 5 Sinking Fund Cases, , 718; Nicol v. Ames, 173 U.S. 509, 514-515, 19 S. Ct. 522; Buttfield v. Stranahan, 192 U.S. 470, 492, 24 S. Ct. 349; Graves v. Minnesota, 272 U.S. 425, 428, 47 S. Ct. 122; Zahn v. Board of Public Works, 274 U.S. 325, 328, 47 S. Ct. 594; Euclid v. Ambler Realty Co., 272 U.S. 365, 395, 47 S. Ct. 114, 54 A. L. R. 1016; Hardware Dealers Mutual Fire Insurance Co. v. Glidden Co., 284 U.S. 151, 158, 52 S. Ct. 69; O'Gorman & Young, Inc., v. Hartford Fire Ins. Co., , 257-258, 51 S. Ct. 130.

Footnote 6 Revenue Act of 1916, 202(b), c. 463, 39 Stat. 756, 778; Revenue Act of 1918, 402(c), c. 18, 40 Stat. 1057, 1097; Revenue Act of 1921, 402(c), c. 136, 42 Stat. 227, 278; Revenue Act of 1924, 302(c), c. 234, 43 Stat. 353, 304 (26 USCA 1094 note).

Footnote 7 In 18 of these cases the gifts were made within two years of death. The value of the gifts so made was approximately $3,000,000, exclusive of certain realty and personalty, the value of which was not definitely indicated in the reports. Among this group of cases was one in which the gift was $880,100, made when the donor was advised by his physician that he was about to die, Phillips v. Gnichtel (C. C. A.) 27 F.(2d) 662, cert. den. 278 U.S. 636, 49 S. Ct. 33; another of $421,200 made within four months of death by a donor seventy-two years of age, Luscomb v. Commissioner (C. C. A.) 30 F.(2d) 818; one of over $1,000,000, Brown v. Routzahn (D. C. N. D. Ohio) 58 F.(2d) 329; and one of $312,000, Kunhardt v. Bowers (S. D. N. Y.) 57 F.(2d) 1064. Two of the gifts were of more than $ 200,000, Rengstorff v. McLaughlin (D. C.) 21 F. (2d) 177; Green v. Commissioner, 6 B. T. A. 278. Six were of more than $100,000, Farmers' Bank & Trust Co. v. Commissioner, 10 B. T. A. 43; Burling v. Commissioner, 13 B. T. A. 264; Hale v. Commissioner, 18 B. T. A. 342; Sugerman v. Commissioner, 20 B. T. A. 960; McClure v. Commissioner (C. C. A. 5th) 56 F . (2d) 598; Neal v. Commissioner (C. C. A.) 53 F.(2d) 806. Two were of more than $50,000, Second National Bank v. Commissioner, 12 B. T. A. 1066; Latham v. Commissioner, 16 B. T. A. 48. The others were either less than that amount, Kahn v. Commissioner, 4 B. T. A. 1289; Wheelock v. Commissioner, 13 B. T. A. 828; Rolfe v. Commissioner, 16 B. T. A. 519; or the appraised value of the gifts is not shown, Schoenheit v. Lucas (C. C. A.) 44 F.(2d) 476; Lehman v. Commissioner, 6 B. T. A. 791; Appeal of Ward, 3 B. T. A. 879.

Footnote 8 Serrien v. Commissioner, 7 B. T. A. 1129; Bloch v. McCaughn (E. D. Pa.) no opinion; Kelly v. Commissioner, 8 B. T. A. 1193.

Footnote 9 Byron v. Tait (D. Md.) no opinion.

Footnote 10 The age of four of the donors is not shown definitely by the reports, but, as to at least three of these, there are indications that the decedents were of advanced years.

Footnote 11 Estate of Astor (S. D. N. Y.) oral opinion.

Footnote 12 Commissioner v. Nevin (C. C. A.) 47 F.(2d) 478, cert. den. Burnet v. Nevin, 283 U.S. 835, 51 S. Ct. 485.

Footnote 13 Rea v. Heiner (D. C.) 6 F.(2d) 389.

Footnote 14 Flannery v. Willcuts (C. C. A.) 25 F.(2d) 951.

Footnote 15 White v. Commissioner, 21 B. T. A. 500.

Footnote 16 Crilly v. Commissioner, 15 B. T. A. 389; W. T. White et al. v. Commissioner, 15 B. T. A. 470; Gimbel v. Commissioner, 11 B. T. A. 214; Stieff v. Tait (D. M. D.) 26 F.(2d) 489; Loughran v. McCaughn (E. D. Pa.) no opinion; American Security & Trust Co. v. Commissioner, 24 B. T. A. 334.

Footnote 17 Esty v. Mitchell (D. Mass.) no opinion; Brehmen v. McCaughn (E. D. Pa.) no opinion; United States v. Wells, 283 U.S. 102, 51 S. Ct. 446; Appeal of Borden, 6 B. T. A. 255.

Footnote 18 Mather v. McLaughlin (E. D. Pa.) 57 F.(2d) 223; Pohlman v. United States (D. Nob.) no opinion; Apperson v. Thurman (D. Ind.) no opinion; Beltzhoover v. Donald (S. D. Miss.) no opinion; Safford v. United States, 66 Ct. Cl. 242; Romberger v. Commissioner, 21 B. T. A. 193; Moore v. Commissioner, 21 B. T. A. 279; Lavelle v. Commissioner, 8 B. T. A. 1150; Boggs v. Commissioner, 11 B. T. A. 824; White v. Commissioner, 15 B. T. A. 470; Jaeger v. Commissioner, 16 B. T. A. 897; Fidelity-Philadelphia Trust Co. v. Commissioner, 17 B. T. A. 910; Vaughan v. Riordan (D. C.) 280 F. 742.

Footnote 19 Wilfley v Helmich (E. D. Mo.) 56 F.(2d) 845; Richardson v. Tait (D. Md.) no opinion; Armstrong v. Rose (S. D. Ga.) no opinion; Off v. United States (D. C.) 35 F.(2d) 222; Loetscher v. Burnet, 60 App. D. C. 38, 46 F.( 2d) 835; Howard v. United States, 65 Ct. Cl. 332; Allen v. Commissioner, 20 B. T. A. 713; Rogers v. Commissioner, 21 B. T. A. 1124; Mississippi Valley Trust Co. v. Commissioner, 22 B. T. A. 136; Gerry v. Commissioner, 22 B. T. A. 748; Estate of Connell, 11 B. T. A. 1254; United States Trust Co. v. Commissioner, 14 B. T. A. 312; Pratt v. Commissioner, 18 B. T. A. 377; Meyer v. United States, 60 Ct. Cl. 474.

Footnote 20 Beeler v. Motter (D. C.) 33 F.(2d) 788; Lozier v. Commissioner, 7 B. T. A. 1050; Heipershausen v. Commissioner, 18 B. T. A. 218.

Footnote 21 Root v. United States (S. D. Fla.) 56 F.(2d) 857; Molton v. Sneed ( N. D. Ala.) no opinion; Owen v. Gardner (E. D. N. Y.) no opinion; Cromwell v. Commissioner, 24 B. T. A. 461; Appeal of Kaufman, 5 B. T. A. 31; Schulz v. Commissioner, 7 B. T. A. 900; Davis v. Commissioner, 9 B. T. A. 1212; Goldman v. Commissioner, 11 B. T. A. 92; Gaither v. Miles (D. C.) 268 F. 692; Appeal of Richardson, 1 B. T. A. 1196; Appeal of McDonald, 2 B. T. A. 1295; Appeal of Hillenmeyer, 2 B. T. A. 1322.

Footnote 22 The total value of these gifts, exclusive of realty, was $6,707, 056. Tesdell v. United States (S. D. Iowa) no opinion; Mason v. United States (D. C.) 17 F.(2d) 317; Tips v. Bass (D. C.) 21 F.(2d) 460; Smart v. United States (D. C.) 21 F.(2d) 188; McCaughn v. Carnill (C. C. A.) 43 F.( 2d) 69; Phillips v. Commissioner, 7 B. T. A. 1054; Stein v. Commissioner, 9 B. T. A. 486; Baum v. Commissioner, 21 B. T. A. 176; Appeal of Spofford, 3 B. T. A. 1016; Hausman v. Commissioner, 5 B. T. A. 199; Fleming v. Commissioner, 9 B. T. A. 419; Brehmer v. Commissioner, 9 B. T. A. 423; Hicks v. Commissioner, 9 B. T. A. 1226; Wolferman v. Commissioner, 10 B. T. A. 285; Illinois Merchants Trust Co. v. Commissioner, 12 B. T. A. 818; Bishop v. Commissioner, 14 B. T. A. 130; Fincham v. Commissioner, 16 B. T. A. 1418; Hunt v. Commissioner, 19 B. T. A. 624; Siegel v. Commissioner, 19 B. T. A. 683; Polk v. Miles (D. C.) 268 F. 175; Fidelity & Columbia Trust Co. v. Lucas (D. C.) 7 F.(2d) 146; Appeal of Starck, 3 B. T. A. 514.

Footnote 23 Miller v. Schoene, 276 U.S. 272, 48 S. Ct. 246, 72 L. ed. 568; Reinman v. Little Rock, 237 U.S. 171, 35 S. Ct. 511; Welch v. Swasey, 214 U.S. 91, 29 S. Ct. 567. Consider also Euclid v. Ambler Realty Co., 272 U.S. 365, 47 S. Ct. 114, 54 A. L. R. 1016; Missouri, K. & T. R. Co. v. May, 194 U.S. 267, 24 S. Ct. 638; Murphy v. California, 225 U.S. 623, 32 S. Ct. 697, 41 L. R. A. (N. S.) 153; Keokee Consolidated Coke Co. v. Taylor, 234 U.S. 224, 227, 34 S. Ct. 856. And see particularly the cases collected in footnote 1 of the dissenting opinion of Mr. Justice Brandeis in Louisville Gas & Electric Co. v. Coleman, , 42-44, 48 S. Ct. 423.

Footnote 24 Other types of graduated taxes have been upheld in Clark v. Titusville, 184 U.S. 329, 331, 22 S. Ct. 382; Metropolis Theater Co. v. Chicago, , 69-70, 33 S. Ct. 441. And see Salomon v. State Tax Commission, 278 U.S. 484, 49 S. Ct. 192; Keeney v. Comptroller of State of New York, 222 U.S. 525, 536, 32 S. Ct. 105, 38 L. R. A. (N. S.) 1139; McCray v. United States, , 24 S. Ct. 769, 1 Ann. Cas. 561. See, also, McKenna v. Anderson (C. C. A.) 31 F.(2d) 1016, cert. den. 279 U.S. 869, 49 S. Ct. 482; F. Couthoui, Inc., v. United States ( Ct. Cl.) 54 F.(2d) 158 (December 7, 1931), cert, den. 285 U.S. 548, 52 S. Ct. 396, 76 L. Ed. -, March 21, 1932.

Footnote 25 Instances of classification for taxation dependent on numbers or amounts are Quong Wing v. Kirkendall, 223 U.S. 59, 32 S. Ct. 192; Citizens' Telephone Co. v. Fuller, 229 U.S. 322, 33 S. Ct. 833. See Bell's Gap R. Co. v. Pennsylvania, 134 U.S. 232, 237, 10 S. Ct. 533. Taxing statutes have been upheld, even though the subject of taxation was valued in a manner not necessarily related to real value where administrative necessities have made such classification desirable. Hatch v. Reardon, , 27 S. Ct. 188, 9 Ann. Cas. 736; New York v. Latrobe, 279 U.S. 421, 49 S. Ct. 377; International Shoe Co. v. Shartel, 279 U.S. 429, 49 S. Ct. 380; Paddell v. New York, 211 U.S. 446, 29 S. Ct. 139, 15 Ann. Cas. 187. An annual excise tax on the privilege of selling cigarettes, applicable to retailers and not wholesalers, has been held constitutional, even though set at a flat amount which bore more heavily on small dealers than on large. See Cook v. Marshall County, 196 U.S. 261, 25 S. Ct. 233.

Footnote 26 In this case the Government sought to collect the tax on a trust created before the estate tax was passed, and twelve years before the settlor's death. Judge Learned Hand, concurring, said, page 630 of 12 F.( 2d): 'As to transfers made after the law went into effect I have nothing to say; one may insist that settlors take their chances. But as to those made before the law was passed it appears to me that the result is too whimsical to stand. There are settlements which the settlor outlives for 30 or 40 years.'