Foreigners are fond of calling us the land of paradoxes. Our public finances certainly justify that characterization. The richest country in the world has been the most dilatory in balancing its budget and appears the most distracted and embarrassed in attaining that end. The fundamental explanation, of course, is the systematically inculcated hostility to the taxation of wealth. For ten years the press has sedulously repeated the Mellon ‘doctrine that the immunity of the rich from taxation is a blessing for the poor. In times of prosperity appropriate taxes upon bloated incomes would discourage enterprise; in days of adversity, there are no bloated incomes. That the Democratic party also should have succumbed so largely to this Mellon philosophy is bound to amuse the future historian of post-war America. But he will be more amazed than amused when he discovers that in the third year of the depression the official “patriotic,”’ “nonpartisan” effort to balance the budget was largely directed toward the imposition of consumption taxes.
Therefore, it ought not to be too surprising that this deep-seated sentiment against the taxation of wealth should be shared by members of our Supreme Court. And how easily private notions of economic or social policy are transmuted into constitutional dogma is too amply proved by the reports of the Supreme Court, particularly since the War. Enormous wealth has been withdrawn from the taxing power of nation and states on the gossamer claim that otherwise governmental instrumentalities would be defeated. The history of taxation is to no small extent a battle of wits between skill in devising taxes and astuteness in evading their incidence. By creating constitutional obstructions to effective safeguards against highly profitable evasion, the Supreme Court has put the Constitution at the disposal of evaders. A few years ago the Supreme Court sheltered great wealth by interposing he benevolent due-process clause on behalf of rich donors who made gifts in anticipation of revenue measures especially designed for them. It did so by inventing a new doctrine of retroactivity which ran counter to the fiscal history of western countries, including our own. And “due process”’ as made to forbid such retroactivity. One would suppose that the Supreme Court would at least be friendly to the effective enforcement of the estate tax. The social justification of that tax has become an accepted postulate even of our individualistic society. Not yet does it meet sympathetic consideration from the Supreme Court. And so the other day, the Court, again under the blessed versatility of “due process,” nullified the attempt of Congress, in response to the compelling experience of the Treasury Department, to prevent gross evasions of the estate tax.
From the original enactment of the estate-tax law in 1916, it was realized that a single tax on estates could be too easily avoided by well timed and astute disposition of property before death. To check such practices, the act of 1916 contained two safeguards. Gifts made “in contemplation of death,” and those in which the donor retained a joint interest during his lifetime, were taxed as part of his estate at death. But other means remained by which property might be withdrawn from the operation of the tax and yet remain within the effective control of the donor; he might, for example place it in trust with a power of revocation or control reserved in himself. The possibility of escape by this device was materially reduced by the act or 1918, which taxed gifts, by way of trust, taking effect “in possession or enjoyment” at the time of the donor’s death. The courts threatened the effectiveness of much of this legislation by technical and sterile definitions of “possession or enjoyment,” and only last year Congress was forced to close a broad avenue of escape from the estate tax by making specific provision for the inclusion of property which is transferred on trust for another but from which the income is reserved for the donor during his life.
Meanwhile, the tax authorities were beset by difficulties growing out of the vague phrase “in contemplation of death.” To what degree the donor must have apprehended his end, and how to prove that apprehension, were questions which made the collection of a tax precarious at best. The devil himself, the lawyers are fond of quoting, knoweth not the mind of man; and even if he did, the devil’s advocate might experience considerable difficulty in proving it to a court of law. Realizing that the limited omniscience of the taxing authorities finding it impossible to isolate successfully those gifts that were made “in contemplation of death”, Congress in 1924 imposed a tax on all gifts, irrespective of date or motive, at rates equal to those Under the estate tax. This general gift tax was upheld by the Supreme Court. In addition, the tax on gifts made in contemplation of death was retained, giving the government a second string to its bow, although of course credit was allowed where a gift tax had already been paid on the transfer.
The arm of the government was strengthened, moreover, by requiring the representatives of the estate to prove, where the gift was within two years of death, that it was not in contemplation thereof. But this shift of the burden of proof was of little Value to the government in a contest against an elderly man of wealth contemplating death with one eye and the tax law Avith the other. The gift tax itself promised better results, but in 1926 it was repealed. Congress, however, was alive to the need of conserving the gain which the gift tax had made in the enforcement of the estate tax. Ten years’ experience in administering the revenue acts had taught its lesson. Congress provided that gifts made within two years of death should be “deemed to have been made in contemplation of death,” and so might be assessed under the estate tax. The inclusion of this provision,” reported the Ways and Means Committee of the House, “will prevent most of the evasion and is the only way in which it can be prevented.” This is the provision which the Supreme Court now declares unconstitutional. Again “due process” worked its charm on behalf of Wealth.
In thus setting at naught the considered effort of Congress to obtain a really effective tax on decedents’ estates, a majority of the Court found the provision arbitrary and unreasonable because it might apply to gifts made with no thought of death or taxes. “The young man in abounding health,” Writes Mr. Justice Sutherland, “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.” The pity aroused by this affecting apparition of the benevolent young plutocrat is somewhat mollified by the fact that if the property had not been given to kith or kin—for gifts to charity are exempted—so shortly before the donor’s untimely end, it would in all likelihood have passed by will and been taxed accordingly. The apparition fades completely before the picture drawn by Mr. Justice Stone in a dissenting opinion, in which he was joined by Mr. Justice
Brandeis. (Mr. Justice Cardozo did not sit in the case.) This opinion reveals graphically by whom these gifts are made, and with what effect on the operation of the taxing system. Mr. Justice Stone analyzes one hundred and two cases in which the government and the decedent’s estate engaged in litigation over the question whether a gift had been made “in contemplation of death,” under the law as it existed before the 1926 provision.
In twenty cases involving gifts of approximately $4,250,000, the government was successful. In three it was partially successful; and in seventy-eight involving gifts largely in excess of $120,000,000, it was unsuccessful. In another the jury disagreed. In fifty-six of the total of seventy-eight cases decided against the government, the gifts were made within two years of death. In this group of fifty-six donors, two were more than ninety years of age at the time of death; ten were between eighty and ninety; twenty-seven were between seventy and eighty; six were between sixty and seventy; six were between fifty and sixty; and only one was younger than fifty. There was one gift of $46,000,000 made within two months of death by a donor seventy-one years of age at death; one of $36,790,000 made by a donor over eighty, who consulted a tax expert before making the gift; one of over $10,400,000 made by a donor aged seventy-six, six months before death; and one by a donor aged seventy-five at death, in which the tax assessed was over $1,000,000. There was one other in excess of $2,000,000; five others largely in excess of $1,000,000; four others in excess of $500,000; thirteen in excess of $250,000; and fourteen in excess of $100,000. The value of the gifts was not shown definitely in three cases; twelve involved gifts totaling less than $100,000. In the remaining twenty-two cases the gifts were made more than two years before the death of the donor.
This decision does not touch technical issues that are in the special province of learned judges. How taxes are evaded and how fine a net must be woven to prevent big fish from escaping, what the experience of a decade of federal-estates administration indicated and what means are adopted in the end that there be not wholesale evasion—these are matters which tax administrators, members of the Ways and Means Committee, students of public finance, are as competent to understand as are Mr. Justice Sutherland and his brethren. Is it not the plain truth that Mr. Justice Stone’s powerful opinion deals with actualities and demolishes the hollow fabric of unreality erected by the majority? And if it be the truth, the Supreme Court has its duty toward a balanced budget—it ought not to sanctify gross tax evasion by the rich nor call the wordspinning by which it does so the Constitution.
Felix Frankfurter was an associate justice of the United States Supreme Court.