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Commissioner of Internal Revenue v. Marshall.

February 3, 1942

COMMISSIONER OF INTERNAL REVENUE
v.
MARSHALL.



Petition to Review an Order of the Board of Tax Appeals.

Author: Frank

Before SWAN, AUGUSTUS N. HAND, and FRANK, Circuit Judges.

FRANK, Circuit Judge.

This is an appeal, by petition for review filed by the Commissioner of Internal Revenue, from a decision of the Board of Tax Appeals, holding that the value of certain remainders created by trusts executed byu the respondent was not subject to gift tax for the year 1937. The facts found by the Board may be summarized as follows:

The taxpayer (respondent) established two irrevocable trusts on June 3, 1937, and transferred $10,000 to each. The income of one was to be paid to Kathleen Bowen for life, and the income of the other was to be paid to Mary Eells for life. The principal of each trust fund was to be distributed to the taxpayer upon the death of the life beneficiary, if taxpayer were then living, but if she were not then living, the principal was to be distributed among her children and their issue per stirpes.

The parties stipulated as follows as to the values of the several interests if computed on an actuarial basis: The value of Kathleen Bowen's life interest at the date of the creation of the trust was $4,753.63. The value of the taxpayer's reversionary interest in the trust for Kathleen Bowen was $2,951.90, and the value of the gift over in the event taxpayer did not survive the life beneficiary was $2,294.47. The value of Mary Eells' life interest at the date of the creation of the trust was $5,542.85. The value of taxpayer's reversionary interest in the trust for Mary Eells was $2,112.60, and the value of the gift over in the event taxpayer did not survive the life beneficiary was $2,344.55.

At the hearing before the Board the parties were in agreement that there was a gift of the value of the life estate in each trust and that the value of the taxpayer's reversionary interest in each trust is excludible in computing the taxable gift.

The parties were in disagreement only as to whether the value of the contingent remainders to the grantor's children and their issue was properly includible in determining the taxpayer's taxable gifts for 1937. The Board of Tax Appeals held that the value of scuh contingent remainders was not so includible.*fn1 We do not agree with the Board's conclusion.

As on original proposition, the taxability of the contingent remainders would seem beyond question. No one would dispute - least of all, we assume, the taxpayer or the children - that there was generosity here; the taxpayer lost, and the children gained, property interests of substantial value. Section 501 of the Revenue Act of 1932, 47 Stat. 169, imposes a tax "upon the transfer ** * of property by gift," "whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the oproperty is real or personal, tangible or intangible." If these words are not enough, we are told by the Senate and House Reports on the Act that:

"The terms 'property,' 'transfer,' 'gift,' and 'indirectly' [in ยง 501] are used in the broadest and most comprehensive sence; the term 'property' reaching every species of right or interest protected by law and having an exchangeable value." Senate Report 665, 72d Cong., 1st sess., p. 39; House Report 708, 72d Cong., 1st sess., p. 27.

How, then, does the taxpayer hope to escape the tax?

1. It is argued, in effect, that the differentiation made in "property law" between "vested" and "contingent" remainders is a sort of sacred cow which, in all circumstances and in particular when applying the gift tax statute, must be respected. The argument runs that once a contingent remainder always a contingent remainder: that if a gift is "contingent," it is not a "completed" gift and is, therefore, not taxable as such. But surely Helvering v. Hallock, 309 U.S. 106, 60 S. Ct. 444, 450, 84 L. Ed. 604, 125 A.L.R. 1368, once and for all destroyed such a word-judggling contention. The Supreme Court there remarked that "the law of contingent and vested remainders is full of casuistries"; said that those "elusive and subtle casuistries" may "have their historic justification but possess no relevance for tax purposes"; noticed that those "niceties of * * * conveyancing" derive "from medieval concepts" relating to ancient forms of land ownership; and flatly announced: "Distinctions which originated under a feudal economy when land domianated social relations are peculiarly irrelevant in the application of tax measures now so largely directed toward intangible wealth."*fn2 Mr. Randolph Paul, recognized as our leading commentator on federal taxation, has observed*fn3 that "Coke's ghost haunted the estate tax until it was retired" by the Hallock case. We agree that the language of the Court in that case leaves no doubt that that ghost need trouble us no further anywhere in the field of federal taxes. And that is all ot the good: Unscrupulous and unreliable in his life,*fn4 Coke should not govern us from the grave. We should be grateful that, at least in a limited area, Mansfield's modern and more congenial spirit*fn5 has finally conquered coke's and that of his disciple Fearne.*fn6

2. It is also argued that Congress could not have intended to be so unjust as to impose a tax based upon an estimate of value, taken from the mortality tables, which may turn out to be not in accordance with reality. Thus the Board refers to the fact that, under Section 510, the donee of a gift may be personally liable for a gift tax not otherwise paid "to the extent of the value of such gift"; suppose, then, argues the Board, that the children, under that section, were required to pay a tax on the value of their remainders at the date of the gift, computed actuarially, and that the life tenants die while the donor still lives; in such circumstances, says the Board, 43 B.T.A. 99, "the children would thus have paid a gift tax on something which they never received."

That argument proves too much. It would preclude a tax on any "value" which is not almost certain to correspond with actual enjoyment. But "value" seldom does so correspond. The fallacy in that argument stems largely from lack of recognition of the eely character of the word "value." It is a bewitching word which, for years, has disturbed mental peace and caused numerous useless debates. Perhaps it would be better for the peace of men's minds if the word were abolished.*fn7 Reams of good paper and gallons of good ink have been wasted by those who have tried to give it a constant and precise meaning. The truth is that it has different meanings in different contexts,*fn8 even in the restricted field of "tax law."*fn9 And there, as almost always, "value" involves a conjecture, a guess, a prediction, a prophecy. With reference to the taxation of life estates, the supreme Court has relied on educated guesses, as of a given date, based on the mortality tables, disregarding the fact that actually, in the particular case before it, the prophecy has turned out to be wrong because the life tenant did not live up to her life expectancy. "Like all values, as the word is used by the law, it depends largely on more or less certain prophecies of the future; and the value is no less real * * * if later the ...


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