In 1936, respondent's decedent divested himself of his rights in
certain insurance policies on his own life by assigning them to his
wife, but he continued to pay the premiums on them until he died in
1954. The Internal Revenue Service determined that, under §
811(g)(2)(A) of the Internal Revenue Code of 1939, the portion of
the proceeds attributable to premiums paid by the insured after
January 10, 1941, should be included in his estate for the purposes
of the federal estate tax.
Held: as thus applied, § 811 (g)(2)(A) is
constitutional. Pp.
363 U. S.
194-201.
(a) The tax is not a direct tax on property which Congress
cannot exact without apportionment among the States. Pp.
363 U. S.
197-200.
(b) The tax is not retroactive, and does not violate the Due
Process Clause of the Fifth Amendment. Pp.
363 U. S.
200-201.
175 F. Supp. 291 reversed.
MR. CHIEF JUSTICE WARREN delivered the opinion of the Court.
The question here is whether Section 811(g)(2)(A) of the
Internal Revenue Code of 1939 is constitutional as applied in this
case. That section, the "payment of premiums" provision in the 1939
Code, requires inclusion
Page 363 U. S. 195
of insurance proceeds in the gross estate of an insured where
the proceeds are receivable by beneficiaries other than the
executor, but are attributable to premiums paid by the insured.
[
Footnote 1] Inclusion is
required regardless of whether the insured retained any policy
rights. However, if the insured possessed no "incident of
ownership" after January 10, 1941, the premiums paid by him before
that date are excluded in determining the portion of the proceeds
for which he paid the premiums. [
Footnote 2]
Page 363 U. S. 196
The facts in the case are stipulated. The insured died testate
on July 15, 1954. The taxpayer is his executor. On the estate tax
return, the taxpayer included, as part of the gross estate, the
proceeds of four insurance policies payable to the wife of the
insured. These policies were originally issued to the insured, but
he divested himself of the policy rights by assigning them to his
wife on December 18, 1936. However, he continued to pay the
premiums on the policies until he died. After his death, the
proceeds were retained by the insurer for the benefit of the
family, pursuant to the provisions of a settlement option selected
by the wife.
In auditing the return, the Revenue Service determined that only
the portion of the proceeds attributable to premiums paid by the
insured after January 10, 1941, should be included in his estate.
[
Footnote 3] Accordingly, the
tax was adjusted, and a refund was made. The executor then filed a
claim for refund of the rest of the tax attributable to the
inclusion of the proceeds. The executor claimed that, because the
decedent had divested himself of all interest in the policies in
1936, the tax constituted an unapportioned direct tax on property,
invalid under
Page 363 U. S. 197
Article I, Sections 2 and 9, of the Constitution. [
Footnote 4] However, the Commissioner refused
to allow the claim, and the present suit for refund followed. In
the District Court, the executor added a claim that the tax is also
invalid under the Due Process Clause of the Fifth Amendment
"because it is retroactive, and discriminatory in its
operation."
The District Court sustained the taxpayer's contention that, as
applied in this case, Section 811(g)(2)(A) is unconstitutional. It
held that, because the decedent retained no incidents of ownership
in the policies after 1936, "no transfer of the property herein
sought to be included in the estate of this decedent occurred at
the time of his death." The court concluded that the tax was
therefore a direct tax on the proceeds themselves, and could not be
levied without apportionment. [
Footnote 5] 175 F. Supp. 291. The Government appealed
directly to this Court under Sections 1252 and 2101 of Title 28,
and we noted jurisdiction. 361 U.S. 880.
The first objection to the tax is that it is a direct tax --
that is, that it is not a tax upon a transfer or other taxable
Page 363 U. S. 198
event but is, instead, a tax upon property -- which Congress
cannot exact without apportionment.
This argument does not do justice to the evident intent of
Congress to tax events, "as distinguished from [their] tangible
fruits."
Tyler v. United States, 281 U.
S. 497,
281 U. S. 502.
From its inception, the estate tax has been a tax on a class of
events which Congress has chosen to label, in the provision which
actually imposes the tax, "the
transfer of the net estate
of every decedent." [
Footnote
6] (Emphasis added.)
See New York Trust Co. v.Eisner,
256 U. S. 345. If
there is any taxable event here which can fairly be said to be a
"transfer" under this language in Section 810 of the 1939 Code, the
tax is clearly constitutional without apportionment. For such a tax
has always "been treated as a duty or excise, because of the
particular occasion which gives rise to its levy."
Knowlton v.
Moore, 178 U. S. 41,
178 U. S. 81;
New York Trust Co. v. Eisner, supra, at
256 U. S.
349.
Under the statute, the occasion for the tax is the maturing of
the beneficiaries' right to the proceeds upon the death of the
insured. Of course, if the insured possessed no policy rights,
there is no transfer of any interest from him at the moment of
death. But that fact is not material, for the taxable "transfer,"
the maturing of the beneficiaries' right to the proceeds, is the
crucial last step in what Congress can reasonably treat as a
testamentary disposition by the insured in favor of the
beneficiaries. That disposition, which began with the payment of
premiums by the insured, is completed by his death. His death
creates a genuine enlargement of the beneficiaries' rights. It is
the "generating source" of the full value of the proceeds.
See
Schwarz v. United States, 170 F. Supp.
2, 6. The maturing of the right to proceeds is therefore
Page 363 U. S. 199
an appropriate occasion for taxing the transaction to the estate
of the insured.
Cf. Tyler v. United States, 281 U.
S. 497,
281 U. S.
503-504.
There is no inconsistency between such a view of the taxable
event and the basic definition of the subject of the tax in Section
810.
"Obviously, the word 'transfer' in the statute, or the privilege
which may constitutionally be taxed, cannot be taken in such a
restricted sense as to refer only to the passing of particular
items of property directly from the decedent to the transferee. It
must . . . at least include the transfer of property procured
through expenditures by the decedent with the purpose, effected at
his death, of having it pass to another."
Chase National Bank v. United States, 278 U.
S. 327,
278 U. S.
337.
It makes no difference that the payment of premiums occurred
during the lifetime of the insured and indirectly effected an
inter vivos transfer of property to the owner of the
policy rights. Congress can properly impose excise taxes on wholly
inter vivos gifts.
Bromley v. McCaughn,
280 U. S. 124. It
may impose an estate tax on
inter vivos transfers looking
toward death.
Milliken v. United States, 283 U. S.
15. Surely, then, it may impose such a tax on the final
step -- the maturing of the right to proceeds -- in a partly
inter vivos transaction completed by death. The question
is not whether there has been, in the strict sense of the word, a
"transfer" of property owned by the decedent at the time of his
death, but whether
"the death has brought into being or ripened for the survivor,
property rights of such character as to make appropriate the
imposition of a tax upon that result. . . ."
Tyler v. United States, supra, at
281 U. S.
503.
Therefore, this tax, laid on the "ripening," at death, of rights
paid for by the decedent, is not a direct tax within the meaning of
the Constitution.
Cf. Chase National Bank v. United States,
supra; 326 U. S.
Wiener, 326
Page 363 U. S. 200
U.S. 340;
Tyler v. United States, supra; United States v.
Jacobs, 306 U. S. 363.
[
Footnote 7]
Further objections to the statute as applied in this case are
predicated on the Due Process Clause of the Fifth Amendment.
It is said that the statute operates retroactively. But the
taxable event -- the maturing of the policies at death -- occurred
long after the enactment of Section 811(g)(2)(A) in 1942. Moreover,
the payment of all but a few of the premiums in question occurred
after the effective date of the statute, and those few were paid
during the period after January 10, 1941, when regulations gave the
insured fair notice of the likely tax consequences.
See
T.D. 5032, 1941-1 Cum.Bull. 427. [
Footnote 8] Therefore, the statute cannot be said to be
retroactive in its impact. It is not material that the policies
were purchased and the policy rights were assigned before the
statute was enacted. The tax is not laid on the creation or
transfer of the policy rights, and it
"does not operate retroactively merely because some of the facts
or conditions upon which its application depends came into being
prior to the enactment of the tax."
United States v. Jacobs, supra, at
306 U. S.
367.
The taxpayer argues, however, that the enactment of the statute
subjected the insured to a choice between unpleasant
alternatives:
"[H]e could stop paying the
Page 363 U. S. 201
premiums -- in which case, the policies would be destroyed; or,
he could continue paying premiums -- in which case they would be
included in his estate."
But, when he gave away the policy rights, the possibility that
he would eventually be faced with that choice was an obvious risk,
in view of the administrative history of the "payment of premiums"
test.
See 1 Paul, Federal Estate and Gift Taxation, §
10.13. The executor should not complain because his decedent
gambled and lost. And, while it may be true that the insured could
have avoided the tax only at the price of a loss on an investment
already made, that fact alone does not prove that the lawmakers did
"a wholly arbitrary thing," or that they "found equivalence where
there was none," or that they "laid a burden unrelated to privilege
or benefit."
Burnet v. Wells, 289 U.
S. 670,
289 U. S. 679.
Without such a showing, it cannot be held that the tax offends due
process.
Reversed.
MR. JUSTICE DOUGLAS took no part in the consideration or
decision of this case.
[
Footnote 1]
These provisions were enacted, through amendment of § 811(g), by
§ 404(a) of the Revenue Act of 1942, 56 Stat. 798, 944. As amended,
§ 811 provides in pertinent part that:
"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, except real property situated outside of the United
States --"
"
* * * *"
"(g) PROCEEDS OF LIFE INSURANCE --"
"(1) RECEIVABLE BY THE EXECUTOR. -- To the extent of the amount
receivable by the executor as insurance under policies upon the
life of the decedent."
"(2) RECEIVABLE BY OTHER BENEFICIARIES. -- To the extend of the
amount receivable by all other beneficiaries as insurance under
policies upon the life of the decedent (A) purchased with premiums,
or other consideration, paid directly or indirectly by the
decedent, in proportion that the amount so paid by the decedent
bears to the total premiums paid for the insurance, or (B) with
respect to which the decedent possessed at his death any of the
incidents of ownership, exercisable either alone or in conjunction
with any other person. . . ."
[
Footnote 2]
§ 404(c), Revenue Act of 1942, 56 Stat. 798, 945. Section 404(c)
provides that:
"The amendments made by subsection (a) (
see note 1 supra) shall be
applicable only to estates of decedents dying after the date of the
enactment of this Act [October 21, 1942]; but, in determining the
proportion of the premiums or other consideration paid directly or
indirectly by the decedent (but not the total premiums paid), the
amount so paid by the decedent on or before January 10, 1941, shall
be excluded if at no time after such date the decedent possessed an
incident of ownership in the policy."
January 10, 1941, was the effective date of a Treasury
Regulation, T.D. 5032, 1941-1 Cum.Bull. 427, which provided for use
of the "payment of premiums" test under § 811(g) as it existed
prior to the 1942 amendments,
see note 1 supra, regardless of whether the
decedent retained any incidents of ownership. The regulation also
provided, however, that premiums paid by the decedent before its
effective date were to be excluded if the decedent did not
thereafter possess any incidents of ownership.
It should be noted that the "payment of premiums" test was
abandoned in the 1954 Code, which reverted to the exclusive use of
the "incident of ownership" test.
See 26 U.S.C. §
2042.
[
Footnote 3]
See note 2
supra.
[
Footnote 4]
Article I, § 2, provides in pertinent part that:
"Representatives and direct Taxes shall be apportioned among the
several States which may be included within this Union, according
to their respective Numbers. . . ."
Article I, § 9, provides in pertinent part that:
"No Capitation, or other direct, Tax shall be laid, unless in
Proportion to the Census or Enumeration herein before directed to
be taken."
[
Footnote 5]
This result is in accord with
Kohl v. United States,
226 F.2d 381, the reasoning of which the District Court "adopted"
as its own. As the District Court recognized,
Kohl is in
conflict with
Estate of Loeb v. Commissioner, 261 F.2d
232,
affirming 29 T.C. 22;
Schwarz v. United
States, 170 F. Supp.
2;
cf. Colonial Trust Co. v. Kraemer, 63 F. Supp.
866;
Estate of Baker v. Commissioner, 30 T.C. 776.
[
Footnote 6]
Compare § 201 of the Revenue Act of 1916, 39 Stat. 756,
777,
with § 810 of the Internal Revenue Code of 1939, 53
Stat. 120. In the 1954 Code, the word "taxable" was substituted for
the word "net" in this provision. 26 U.S.C. § 2001.
[
Footnote 7]
Our view of the nature of the taxable event here involved makes
it unnecessary to discuss
United States v. Bess,
357 U. S. 51, and
other similar cases relied on by the District Court. Nor do we find
it necessary to consider at length
Lewellyn v. Frick,
268 U. S. 238, or
its progeny. The Court in
Frick did not reach the
constitutional issue.
[
Footnote 8]
We do not agree with the holding in
Kohl v. United
States, 226 F.2d 381, 385, that T.D. 5032 "transcended" §
811(g) as it existed in 1941, and that it was therefore "illegal
and void." T.D. 5032, in effect, construed the controlling language
in the earlier statute -- "taken out by the decedent," 53 Stat. 122
-- as meaning paid for by the insured. Such a construction was
clearly not unreasonable.