Milliken v. United States

GREEN, Judge;

This is a suit to recover $812,165.42 alleged to have been wrongfully collected as additional estate taxes. Plaintiffs filed a claim for refund thereof which was denied by the Commissioner.

The facts in the ease are not in dispute.

The plaintiffs are executors of the estate of Seth M. Milliken, who died on March 5, 1920. In December, 1916, the testator transferred by way of gift 2,713 shares of capital stock of Minot Mills (Inc.). After the death of the decedent the plaintiffs filed a return for the purposes of the tax upon his estate. In so doing, they failed to include the 2,713 shares of stock above referred to. The commissioner held that this stock had been transferred in contemplation of death, and that the value thereof should have been included as a part of the gross estate. For the purpose of the federal estate tax he fixed the value thereof at the time of the decedent’s death in the sum of $3,308,720.54. By reason of this action, an additional tax of $812,-165.42 was assessed against the estate of the decedent. The plaintiffs paid this additional tax and their application for refund thereof having been denied, now bring this suit, but do not contend that the stock involved was not transferred in contemplation of death.

The issue in the ease is whether the Commissioner correetly included the shares of stock above referred to in the gross estate.

The decedent died in March, 1920, and the Commissioner applied the provisions of the Revenue Act of 1918 in determining the tax against his estate, the 1916 act being then repealed. The transfer was by way of gift, and section 402 of the Revenue Act of 1918 (40 Stat. 1097), directs that the gross estate of the decedent shall be ascertained by including (among other things) the value at his death of all property:

“To the extent of any interest therein of which the decedent has at any time made a transfer, or with respect to which he has at any time created a trust, in contemplation of or intended to take effect in possession or enjoyment at or after his .death (whether such transfer or trust is made or created before or.after the passage of this Act), except in ease of a bona fide sale for a fair consideration in money or money’s worth.”

This language is so plain and definite that it is clear that this section applies to the transfer under consideration in this case, although it was made prior to' the passage of the 1918 act. Plaintiffs do not question this construction of the statute, but contend that when applied to gifts made prior to the time when the Revenue Act of 1918 went into force, the statute is unconstitutional. This constitutes the question to be determined in the case.

Nichols v. Coolidge, 274 U. S. 531, 47 S. Ct. 710, 714, 71 L. Ed. 1184, 52 A. L. R. 1081, is cited as supporting the contention of the plaintiffs. In that ease it appeared that the decedent and her husband had, in July, 1907, transferred certain property without consideration to trustees who agreed to hold it and pay the income to the settlors, then to the survivor, and thereafter to dispose of it in a manner not necessary here to repeat. On April 6, 1917, the settlors assigned to their children their entire interest in the property. In May, 1917, the decedent and her husband conveyed absolutely certain other property to their children, but we are here concerned only with the application of the law made by the Supreme Court to the transfer first above set forth. The death of the decedent occurred in January, 1921. Her executors made a return under the Revenue Act of 1918 (approved February 24, 1919), which did not include the property first transferred. The Commissioner held that under the provisions of section 402(e) of said act (40 Stat. 1097), which are above set forth, the value of all this property at her death must be included in the gross estate.

The Supreme Court found that the transfer was not made in contemplation- of death, and held that section 402(c):

“ * * * in so far as it requires that there shall be included in the gross estate the value of property transferred by a decedent prior to its passage merely because the conveyance was intended to take effect in possession or enjoyment at or after his death, is arbitrary, capricious and amounts to confiscation;” and in giving its reasons for holding the statute arbitrary said:

“An excise is prescribed, but the amount of it is made to depend upon past lawful transactions, not testamentary in character and beyond recall. Property of small value transferred before death may have become immensely valuable, and the estate tax, swollen by this, may leave nothing for distribution. Real estate transferred years ago, when of small value, may be worth an enormous sum at the death. If the deceased leaves no estate there can be no- tax; if, on the other hand, he leaves ten dollars both that and the real estate become liable. Different estates must bear disproportionate burdens determined by what the deceased did one or twenty years before he died. See Frew v. Bowers, Collector (C. C. A.) 12 F.(2d) 625.”

One faet which is reeited above is not found in the case at bar. In the .Coolidge Case, supra, the transactions are. said to be “not testamentary in character,” by -whieh we understand the court to mean that they were not made in contemplation of death as a part of a plan of distributing the estate of the grantor by conveyance instead of by will. In fact the court in another part of the opinion, states expressly that the transfers were not made in contemplation of death. It is true that the court said in this connection that “undoubtedly, Congress may require that property subsequently transferred in contemplation of death be treated as part of the estate for purposes of taxation.” Counsel for plaintiffs argue that it is a fair inference from this language that conveyances made prior to the taxing statute under such circumstances would not be subject to taxation, but we think that what the court intended to have understood was that there was no doubt about such transfers being subject to the tax when made after the enactment of the statute, but as to those made prior thereto it was an open question when they were made in contemplation of death.

As the transfer under consideration in the case at bar was made in contemplation of death, it becomes necessary to determine this question.

If we consider only cases where the statute is not retroactive, we find in the language hereinabove quoted from the Coolidge Case that “undoubtedly, Congress may require that property subsequently transferred in contemplation of death be treated as part of the estate for purposes of taxation.” If this be true, it is quite clear that such a statute is not arbitrary and capricious and cannot be held unconstitutional on that ground, although on first consideration it might appear that some of the language used in the Coolidge Case, and in other eases, might apply thereto as a reason for holding it invalid. But when we apply the statute to transfers made in contemplation of death, the whole aspect of the case is changed, and the reasons which the court gave for holding the conveyances in the Coolidge Case not subject to tax do not apply in the ease at bar.

In the instant ease, the maker of the transfer, as in practically all eases where a conveyance is made in contemplation of death, was using the conveyance to dispose of or distribute his property instead of a will. His purpose was to make this disposition before death intervened to terminate his control thereof. In its effect it differed but little from disposition by will. If another owner of property disposed of all of his property by will, the law required from his estate a tax based on the value thereof. What reason can be given why the estate of the man who transfers a part of his property in contemplation of death should not pay the same tax as the one who transfers it by will? None, we think, but on the contrary it appears that a provision for taxing property so conveyed in contemplation of death as part of the estate is reasonable and just, and makes for equality between taxpayers rather than inequality, whieh would otherwise exist. If these conclusions are correctly drawn, it is clear that such a tax is not arbitrary or capricious.

Another forcible and distinct reason for holding such a tax valid is, as stated in the Coolidge Case, that it is necessary to prevent evasion. It is-perfectly evident that if the owner of an estate, after he had reason to believe that death was nigh, could, in contemplation thereof, distribute his property by gift instead of by will, the means of avoiding the estate tax would be so apparent and easy, avoidance would become the rule and the payment of the tax the exception. Moreover, in such event, those who were interested in estates conveyed by will could justly complain of the unfair and unjust situation in which they were placed, as compared to those who were purposely avoiding the estate tax. It is well settled that when the general purpose of a legislative act is within the admitted power of the government that the legislative body, as said in Purity Extract Co. v. Lynch, 226 U. S. 192, 201, 33 S. Ct. 44, 46, 57 L. Ed. 184, “may adopt such measures having reasonable relation to that end as it may deem necessary in order to make its action effective”; and further in the same ease: “It does not follow that because a transaction, separately considered, is innocuous, it may not be included in a prohibition the scope of whieh is regarded as essential in the legislative judgment to accomplish a purpose within the admitted power of the government.” This is especially true where the purpose of the act is in part to prevent evasion, and while so far only transactions occurring after the passage of the act have been discussed, it ought also to be said in this connection that the provision in the statute which made it apply to prior transactions was .undoubtedly intended to prevent evasion by making conveyances before the act could go into force. Such provisions have been held valid in tariff acts.

It may be thought, at first, that it is not necessary to elaborate these reasons for holding that the tax on gifts made in contemplation of death, is not arbitrary when the Supreme Court has already held that the tax is constitutional when applied to transactions prior to .the enactment of the law which imposed. it, but these matters are here discussed because they show that the grounds for holding such a tax not to be arbitrary are exactly the same whether the statute is applied to a transfer made after its enactment or before it went into effect, and vice versa no reason can be given for holding the statute to be arbitrary when applied to transactions that took place before its enactment that would not apply equally well to those which' occurred after it went into force.

It is urged, on behalf of plaintiffs, that the retroactive features of the act violate the due process clause of the fifth amendment, and that the act further violates the due process clause of the same amendment by the manner in which the gross estate is computed; also that the act, in so far as it applies to property not owned by the decedent at the time of Ms death, but transferred by way of gift prior thereto, imposes a direct tax wMeh is void for want of apportionment. These statements are general, and the matters wMeh form the principal basis for the attack on the act may be more specifically stated as follows:

First, that the value of property which the decedent has ceased to own — in other words, the property of another — is used to measure the amount of the tax.

Second, that the tax as imposed by the act is not a tax on the transfer of the property of the decedent but a tax on property itself not owned by Mm at the time of Ms death.

Third, that the decedent, when he parted with the title to this property, could not anticipate that the tax now sought to be levied would be imposed.

It is perfectly clear that the first two of these matters might he urged with as much force in a case where the act, after its enactment, was applied to a transfer in contemplation of death as they could to a transfer made prior thereto. In both eases the value of property which the decedent had ceased to own is used to measure the tax; in both eases the matters stated in the second objection,-if applicable at all, would apply equally. When we examine the third objection closely we find that it can be made against all or nearly all acts which have provided for the retroactive application of taxes, and if held to be sufficient by itself and alone to render the act in question invalid, the same rule applied would malm all retroactive taxing statutes unconstitutional. The answer then to the first two of these objections is that the Supreme Court has held that these matters will not invalidate a tax upon a transfer made in contemplation of death. Possibly the third objection in view of what has been stated needs no further answer. It may be contended, however, that some of the language used by the majority opinions in the eases of Blodgett v. Holden, 275 U. S. 142, 48 S. Ct. 105, 72 L. Ed. 206, and Untermyer v. Anderson, 276 U. S. 440, 48 S. Ct. 353, 72 L. Ed. 645, tends to support the claim that no retroactive estate tax is valid, but these statements are general and must be held applicable only to the particular facts in the cases as to which the opimons were rendered. Until the Supreme Court should specifically so state, we cannot believe that it intended by anytMng it has said in these two eases last cited to overrule the general principle that a law of Congress imposing a tax may be retroactive in its operation, which has prevailed so long as to be considered settled doctrine. We think it is not without sighficance that in each ease the court made it clear that it was not ruling on a ease where the transfer was made in contemplation of death, and that the court has in three cases, where the validity of retroactive estate and gift taxes was involved, emphasized the fact that in the case under consideration the transfer in question was not made in contemplation of death. By reason of tMs feature of the ease at bar we conclude that the tax in question is not unconstitutional.

Counsel for defendant contends that the tax in fact was not retroactive but was merely a continuation with a changed rate of the statute that had previously been in force, but the conclusions we .have heretofore reached make it unnecessary to consider tMs proposition.

It follows that plaintiffs’ petition must be dismissed, and it is so ordered.

BOOTH, Chief Justice, and WILLIAMS and LITTLETON, Judges, concur.