Helvering v. Hallock, 309 U.S. 106 (1940)

MR. JUSTICE FRANKFURTER delivered the opinion of the Court.

These cases raise the same question -- namely, whether transfers of property inter vivos made in trust, the particulars of which will later appear, are within the provisions of § 302(c) of the Revenue Act of 1926.{1} They were heard in succession, and may be decided together. In each case, the Commissioner of Internal Revenue included the trust property in the decedent’s gross estate. In Nos. 110, 111, and 112, his determination was reversed by the Board of Tax Appeals (34 B.T.A. 575), and the Board was affirmed by the Circuit Court of Appeals for the Sixth Circuit. 102 F.2d 1. In No. 183, the taxpayer paid under protest, successfully sued for recovery in the District Court for the Eastern District of Pennsylvania, and his judgment was sustained by the Circuit Court of Appeals for the Third Circuit. 103 F.2d 834. In No. 399, the Commissioner was in part successful before the Board of Tax Appeals (36 B.T.A. 669), and the Circuit Court of Appeals for the Second Circuit affirmed the Board. 104 F.2d 1011.

Neither here nor below does the issue turn on the unglossed text of § 302(c). In its enforcement, Treasury and courts alike encounter three recent decisions of this Court, Klein v. United States, 283 U.S. 231, Helvering v. St. Louis Trust Co., 296 U.S. 39, and Becker v. St. Louis Trust Co., 296 U.S. 48. Because of the difficulties which lower courts have found in applying the distinctions made by these cases and the seeming disharmony of their results, when judged by the controlling purposes of the estate tax law, we brought the cases here. All involve dispositions of property by way of trust in which the settlement provides for return or reversion of the corpus to the donor upon a contingency terminable at his death. Whether the transfer made by the decedent in his lifetime is "intended to take effect in possession or enjoyment at or after his death" by reason of that which he retained is the crux of the problem. We must put to one side questions that arise under sections of the estate tax law other than § 302(c) -- sections, that is, relating to transfers taking place at death. Section 302(c) deals with property not technically passing at death, but with interests theretofore created. The taxable event is a transfer inter vivos. B ut the measure of the tax is the value of the transferred property at the time when death brings it into enjoyment.

We turn to the cases which beget the difficulties. In Klein v. United States, supra, decided in 1931, the decedent, during his lifetime, had conveyed land to his wife for her lifetime,

and if she shall die prior to the decease of said grantor, then and in that event she shall by virtue hereof take no greater or other estate in said lands and the reversion in fee in and to the same shall in that event remain vested in said grantor. . . .

The instrument further provided,

Upon condition and in the event that said grantee shall survive the said grantor, then and in that case only the said grantee shall by virtue of this conveyance take, have, and hold the said lands in fee simple. . . .

The taxpayer contended that the decedent had reserved a mere "possibility of reverter," and that such a "remote interest,"{2} extinguishable upon the grantor’s death, was not sufficient to bring the conveyance within the reckoning of the taxable estate. This Court held otherwise. It rejected formal distinctions pertaining to the law of real property as irrelevant criteria in this field of taxation. "Nothing is to be gained," it was said,

by multiplying words in respect of the various niceties of the art of conveyancing or the law of contingent and vested remainders. It is perfectly plain that the death of the grantor was the indispensable and intended event which brought the larger estate into being for the grantee and effected its transmission from the dead to the living, thus satisfying the terms of the taxing act and justifying the tax imposed.

Klein v. United States, supra, at 234.

The inescapable rationale of this decision, rendered by a unanimous Court, was that the statute taxes not merely those interests which are deemed to pass at death according to refined technicalities of the law of property. It also taxes inter vivos transfers that are too much akin to testamentary dispositions not to be subjected to the same excise. By bringing into the gross estate at his death that which the settlor gave contingently upon it, this Court fastened on the vital factor. It refused to subordinate the plain purposes of a modern fiscal measure to the wholly unrelated origins of the recondite learning of ancient property law. Surely the Klein decision was not intended to encourage the belief that a change merely in the phrasing of a grant would serve to create a judicially cognizable difference in the scope of § 302(c), although the grantor retained in himself the possibility of regaining the transferred property upon precisely the same contingency. The teaching of the Klein case is exactly the opposite.{3}

In 1935, the St. Louis Trust cases came here. A rational application of the principles of the Klein case to the situations now before us calls for scrutiny of the particulars in the St. Louis cases in order to extract their relation to the doctrine of the earlier decision.

In Helvering v. St. Louis Trust Co., supra, the decedent had conveyed property in trust, the income of which was to be paid to his daughter during her life, but at her death, "[i]f the grantor still be living, the Trustee shall forthwith . . . transfer, pay, and deliver the entire estate to the grantor, to be his absolutely." But, "[i]f the grantor be then not living," then the income was to be devoted to the settlor’s wife if she were living, and upon the death of both daughter and wife, if he were not living, the trust property was to go to the daughter’s children, or if she left none, to the grantor’s next of kin.

In Becker v. St. Louis Trust Co., supra, the decedent had declared himself trustee of property with the income to be accumulated or at his discretion, to be paid over to his daughter during her life. The instrument further provided that,

If the said beneficiary should die before my death, then this trust estate shall thereupon revert to me and become mine immediately and absolutely, or . . . if I should die before her death, then this property shall thereupon become hers immediately and absolutely. . . .

On the authority of the Klein case, the Commissioner had included in the taxable estates the gifts to which, in the St. Louis Trust cases, the grantor’s death had given definitive measure. If the wife had predeceased the settlor in the Klein case, he would have been repossessed of his property. His wife’s interests were freed from this contingency by the husband’s prior death, and, because of the effect of his death, this Court swept the gift into the gross estate. So, in Helvering v. St. Louis Trust Co., supra, the grantor would have become repossessed of the granted corpus had his daughter predeceased him. But he predeceased her, and, by that event, her interest ripened to full dominion. The same analysis applies to the Becker case. In all three situations, the result and effect were the same. The event which gave to the beneficiaries a dominion over property which they did not have prior to the donor’s death was an act of nature outside the grantor’s "control, design, or volition." Helvering v. St. Louis Trust Co., 296 U.S. 39, 43. But it was no more and no less "fortuitous," so far as the grantor’s "control, design, or volition" was concerned, in the St.Louis Trust cases than it was in the Klein case. In none of the three cases did the dominion over property which finally came to the beneficiary fall by virtue of the grantor’s will, except by his provision that his own death should establish such final and complete dominion. And yet a mere difference in phrasing the circumstance by which identic interests in property were brought into being -- varying forms of words in the creation of the same worldly interests -- was found sufficient to exclude the St. Louis Trust settlements from the application of the Klein doctrine.

Four members of the Court saw no difference. They relied on the governing principle of § 302(c) that Congress meant to include in the gross estate inter vivos gifts "which may be resorted to, as a substitute for a will, in making dispositions of property operative at death." Helvering v. St. Louis Trust Co., 296 U.S. at 46. To effectuate this purpose, practical considerations applicable to taxation, and not the "niceties of the art of conveyancing," were their touchstone. "Having in mind," said the dissenters,

the purpose of the statute and the breadth of its language, it would seem to be of no consequence what particular conveyancers’ device, what particular string, the decedent selected to hold in suspense the ultimate disposition of his property until the moment of his death. In determining whether a taxable transfer becomes complete only at death, we look to substance, not to form. . . . However we label the device, it is but a means by which the gift is rendered incomplete until the donor’s death.

296 U.S. at 47. For the majority in the St. Louis Trust Company cases, these practicalities had less significance than the formal categories of property law. The grantor’s death, the majority said, in Helvering v. St. Louis Trust Co., supra,

simply put an end to what, at best, was a mere possibility of a reverter by extinguishing it -- that is to say, by converting what was merely possible into an utter impossibility.

296 U.S.39, 43. This was precisely the mode of argument which had been rejected in Klein v. United States, supra.

We are now asked to accept all three decisions as constituting a coherent body of law, and to apply their distinctions to the trusts before us.

In Nos. 110, 111 and 112 (Helvering v. Hallock), the decedent in 1919 created a trust under a separation agreement, giving the income to his wife for life, with this further provision:

If and when Anne Lamson Hallock shall die and in such event . . . , the within trust shall terminate and said Trustee shall . . . pay Party of the First Part if he then be living any accrued income, then remaining in said trust fund and shall . . . deliver forthwith to Party of the First Part, the principal of the said trust fund. If and in the event said Party of the First Part shall not be living, then and in such event payment and delivery over shall be made to Levitt Hallock and Helen Hallock, respectively son and daughter of the Party of the First Part, share and share alike. . . .

When the settlor died in 1932, his divorced wife, the life beneficiary, survived him. The Circuit Court of Appeals held that the trust instrument had conveyed the "whole interest" of the decedent, subject only to a "condition subsequent," which left him nothing "except a mere possibility of reverter." Commissioner v. Hallock, 102 F.2d 1, 3, 4.

In No. 183 (Rothensies v. Huston) the decedent, by an antenuptial agreement, in 1925 conveyed property in trust, the income to be paid to his prospective wife during her life, subject to the following disposition of the principal:

In trust if the said Rae Spektor shall die during the lifetime of said George F. Uber to pay over the principal and all accumulated income thereof unto the said George F. Uber in fee, free and clear of any trust.

In trust if the said Rae Spektor after the marriage shall survive the said George F. Uber to pay over the principal and all accumulated income unto the said Rae Spektor -- then Rae Uber -- in fee, free and clear of any trust.

Mrs. Uber outlived her husband, who died in 1934. The Circuit Court of Appeals deemed Becker v. St. Louis Trust Co., supra, controlling against the inclusion of the trust corpus in the gross estate.

Finally, in No. 399 (Bryant v. Helvering), the testator provided for the payment of trust income to his wife during her life, and, upon her death, to the settlor himself if he should survive her. The instrument, which was executed in 1917, continued:

Upon the death of the survivor of said Ida Bryant and the party of the first part, unless this trust shall have been modified or revoked as hereinafter provided, to convey, transfer, and pay over the principal of the trust fund to the executors or administrators of the estate of the party hereto of the first part.

There was a further provision giving to the decedent and his wife jointly during their lives, and to either of them after the death of the other, power to modify, alter, or revoke the instrument. The wife survived the husband, who died in 1930. The Board of Tax Appeals allowed the Commissioner to include in the decedent’s gross estate only the value of a "vested reversionary interest" which the Board held the grantor had reserved to himself. On appeal by the taxpayer, the Circuit Court of Appeals sustained this determination.

The terms of these grants differ in detail from one another, as all three differ from the formulas of conveyance used in the Klein and St. Louis Trust cases. It therefore becomes important to inquire whether the technical forms in which interests contingent upon death are cast should control our decision. If so, it becomes necessary to determine whether the differing terms of conveyance now in issue approximate more closely those used in the Klein case, and are therefore governed by it, or have a greater verbal resemblance to those that saved the tax in the St. Louis Trust cases. Such an essay in linguistic refinement would still further embarrass existing intricacies. It might demonstrate verbal ingenuity, but it could hardly strengthen the rational foundations of law. The law of contingent and vested remainders is full of casuistries. There are great diversities among the several states as to the conveyancing significance of like grants; sometimes, in the same state there are conflicting lines of decision, one series ignoring the other. Attempts by the Board of Tax Appeals and the Circuit Courts of Appeal to administer § 302(c) by reference to these distinctions abundantly illustrate the inevitable confusion.{4} One of the cases at bar, No. 399, reveals vividly the snares which inevitably await an attempt to base estate tax law on the "niceties of the art of conveyancing." In connection with the ascertainment of its own death duties, the Supreme Court of Errors of Connecticut defined the nature of the interest which the decedent in that case retained after his inter vivos transfer. Bryant v. Hackett, 118 Conn. 233, 171 A. 664. And yet the nature of that interest under Connecticut law and the scope of the Connecticut Court’s adjudication of that interest were made the subject of lively controversy before us. The importation of these distinctions and controversies from the law of property into the administration of the estate tax precludes a fair and workable tax system. Essentially the same interests, judged from the point of view of wealth, will be taxable or not depending upon elusive and subtle casuistries which may have their historic justification, but possess no relevance for tax purposes.{5} These unwitty diversities of the law of property derive from medieval concepts as to the necessity of a continuous seisin.{6} Distinctions which originated under a feudal economy when land dominated social relations are peculiarly irrelevant in the application of tax measures now so largely directed toward intangible wealth.

Our real problem, therefore, is to determine whether we are to adhere to a harmonizing principle in the construction of § 302(c) or whether we are to multiply gossamer distinctions between the present cases and the three earlier ones. Freed from the distinctions introduced by the St. Louis Trust cases, the Klein case furnishes such a harmonizing principle. Does, then, the doctrine of stare decisis compel us to accept the distinctions made in the St. Louis Trust cases as starting points for still finer distinctions spun out of the tenuosities of surviving feudal law? We think not. We think the Klein case rejected the presupposition of such distinctions for the fiscal judgments which § 302(c) demands.

We recognize that stare decisis embodies an important social policy. It represents an element of continuity in law, and is rooted in the psychologic need to satisfy reasonable expectations. But stare decisis is a principle of policy, and not a mechanical formula of adherence to the latest decision, however recent and questionable, when such adherence involves collision with a prior doctrine more embracing in its scope, intrinsically sounder, and verified by experience.

Nor have we, in the St. Louis Trust cases, rules of decision around which, by the accretion of time and the response of affairs, substantial interests have established themselves. No such conjunction of circumstances requires perpetuation of what we must regard as the deviations of the St. Louis Trust decisions from the Klein doctrine. We have not before us interests created or maintained in reliance on those cases. We do not mean to imply that the inevitably empiric process of construing tax legislation should give rise to an estoppel against the responsible exercise of the judicial process. But it is a fact that, in all the cases before us, the settlements were made, and the settlors died, before the St. Louis Trust decisions.

Nor does want of specific Congressional repudiations of the St. Louis Trust cases serve as an implied instruction by Congress to us not to reconsider, in the light of new experience, whether those decisions in conjunction with the Klein case, make for dissonance of doctrine. It would require very persuasive circumstances enveloping Congressional silence to debar this Court from reexamining its own doctrines. To explain the cause of nonaction by Congress when Congress itself sheds no light is to venture into speculative unrealities.{7} Congress may not have had its attention directed to an undesirable decision, and there is no indication that, as to the St. Louis Trust cases, it had, even by any bill that found its way into a committee pigeon-hole. Congress may not have had its attention so directed for any number of reasons that may have moved the Treasury to stay its hand. But certainly such inaction by the Treasury can hardly operate as a controlling administrative practice, through acquiescence, tantamount to an estoppel barring reexamination by this Court of distinctions which it had drawn.{8} Various considerations of parliamentary tactics and strategy might be suggested as reasons for the inaction of the Treasury and of Congress, but they would only be sufficient to indicate that we walk on quicksand when we try to find, in the absence of corrective legislation, a controlling legal principle.

This Court, unlike the House of Lords,{9} has from the beginning rejected a doctrine of disability at self-correction. Whatever else may be said about want of Congressional action to modify by legislation the result in the St. Louis Trust cases, it will hardly be urged that the reason was Congressional approval of those distinctions between the St. Louis Trust and the Klein cases to which four members of this Court could not give assent. By imputing to Congress a hypothetical recognition of coherence between the Klein and the St. Louis Trust cases, we cannot evade our own responsibility for reconsidering, in the light of further experience, the validity of distinctions which this Court has itself created. Our problem, then, is not that of rejecting a settled statutory construction. The real problem is whether a principle shall prevail over its later misapplications. Surely we are not bound by reason or by the considerations that underlie stare decisis to persevere in distinctions taken in the application of a statute which, on further examination, appear consonant neither with the purposes of the statute nor with this Court’s own conception of it. We therefore reject as untenable the diversities taken in the St. Louis Trust cases in applying the Klein doctrine -- untenable because they drastically eat into the principle which those cases professed to accept and to which we adhere.

In Nos. 110, 111, 112 and 183, the judgments are

Reversed.

In No. 399, the judgment is

Affirmed.

THE CHIEF JUSTICE concurs in the result upon the ground that each of these cases is controlled by our decision in Klein v. United States, 283 U.S. 231.

* Together with No. 111, Helvering, Commissioner of Internal Revenue v. Hallock, Executrix, and No. 112, Helvering, Commissioner of Internal Revenue v. Squire, Superintendent of Banks of Ohio, also on writs of certiorari, 308 U.S. 532, to the Circuit Court of Appeals for the Sixth Circuit, argued December 13, 1939; No. 183, Rothensies, Collector of Internal Revenue v. Huston, Administrator, on writ of certiorari, 308 U.S. 538, to the Circuit Court of Appeals for the Third Circuit, argued December 13, 14, 1939, and No. 399, Bryant et al., Executors v. Helvering, Commissioner of Internal Revenue, on writ of certiorari, 308 U.S. 543, to the Circuit Court of Appeals for the Second Circuit, argued December 14, 1939.

1. . 27, 44 Stat. 9, as amended by § 803 of the Revenue Act of 1932, c. 209, 47 Stat. 169, 279:

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, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. 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 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.

2. Petitioner’s Brief, Klein v. United States, pp. 11-13.

3. Some indication of the influence of Klein v. United States, supra, upon the lower courts may be found in Sargent v. White, 50 F.2d 410, and Union Trust Co. v. United States, 54 F.2d 152, cert. denied, 286 U.S. 547. Cf. Commissioner v. Schwarz, 74 F.2d 712.

4. See, for example, the attempts by the Board of Tax Appeals to deal with the peculiarities of New York law in the field of vested and contingent remainders. Elizabeth B. Wallace v. Comm’r, 27 B.T.A. 902; Louis C. Raegner, Jr. v. Comm’r, 29 B.T.A. 1243. In both of these cases, limitations which would probably have been "contingent" at "common law" were held to be "vested" under the New York statutory rule. Cf. Commissioner v. Schwarz, 74 F.2d 712; Flora M. Bonney v. Comm’r, 29 B.T.A. 45.

5. Cf. Lyeth v. Hoey, 305 U.S. 188, 194. See Paul, The Effect on Federal Taxation of Local Rules of Property in Selected Studies in Federal Taxation (2nd Series), pp. 23-28; Developments in the Law-Taxation, 47 Harv.L.Rev. 1209, 1238-41; Note, 49 Harv.L.Rev. 462.

6. See, for example, Fearne, Contingent Remainders, (4th Am.Ed.), pp. 3-241; Gray, Rule Against Perpetuities (2nd Ed.), pp. 99-118; VII Holdsworth, History of English Law, 81 et seq.; 1 Simes, Future Interests, §§ 64-96. The confusion apt to be engendered by judicial forays into this field is well illustrated by the use of the term "possibility of reverter" by the majority in Helvering v. St. Louis Union Trust Co., supra. "A possibility of reverter" is traditionally defined as the interest remaining in a grantor who has conveyed a determinable fee. The definition has not been thought to have any relation to the reversionary interest of a grantor who has transferred either a vested or contingent remainder in fee. See Gray, Rule Against Perpetuities (2nd Ed.), §§ 13-51.

7. We are not unmindful of amendments to the estate tax law to which other decisions of this Court gave rise. Thus, by § 805 of the Revenue Act of 1936, c. 690, 49 Stat. 1648, Congress undid the construction which this Court gave the estate tax law in another connection by a decision rendered on the same day as were the St. Louis Trust cases. Cf. White v. Poor, 296 U.S. 98. This case arose under § 302(d), and not § 302(c). But, in any event, the fact of Congressional action in dealing with one problem while silent on the different problems created by the St. Louis Trust cases does not imply controlling acceptance by Congress of those cases.

By the Joint Resolution of March 3, 1931, c. 454, 46 Stat. 1516, Congress displaced the construction which this Court put upon § 302(c) in those cases wherein it was held that the reservation by a decedent of a life estate in property conveyed inter vivos, did not constitute a sufficient postponement of the remainder to bring it into the grantor’s gross estate. May v. Heiner, 281 U.S. 238; Burnet v. Northern Trust Co., 283 U.S. 782; Morsman v. Burnet, 283 U.S. 783; McCormick v. Burnet, 283 U.S. 784. The speculative arguments that may be drawn from ad hoc legislation affecting one set of decisions and the want of such legislation to modify another set of decisions dealing with a somewhat different, though cognate, problem are well illustrated by this remedial amendment. For it may be urged with considerable plausibility that, in 1931, Congress had in principle already rejected the general attitude underlying the St. Louis Trust cases, as illustrated by the fact that, in those cases, the majority, in part at least, relied upon the Congressionally discarded May v. Heiner doctrine.

Whatever may be the scope of the doctrine that reenactment of a statute impliedly enacts a settled judicial construction placed upon the reenacted statute, that doctrine has no relevance to the present problem. Since the decisions in the St. Louis Trust cases, Congress has not reenacted § 302(c). The amendments that Congress made to other provisions of § 302 in connection with other situations than those now before the Court were made without reenacting § 302(c). Nor has Congress, under any rational canons of legislative significance, by its compilation of internal revenue laws to form the Internal Revenue Code of 1939, 53 Stat. 1, impliedly enacted into law a particular decision which, in the light of later experience, is seen to create confusion and conflict in the application of a settled principle of internal revenue legislation.

Here, unlike the situation in such cases as National Lead Co. v. United States, 252 U.S. 140, 146-147, and Murphy Oil Co. v. Burnet, 287 U.S. 299, 302-303, we have no conjunction of long, uniform administrative construction and subsequent reenactments of an ambiguous statute to give ground for implying legislative adoption of such construction. See Preface, Internal Revenue Code, 53 Stat. III; compare Smiley v. Holm, 285 U.S. 355, 373, and Warner v. Goltra, 293 U.S. 155, 161.

8. Since the Treasury has amended its regulations in an effort to conform administrative practice to the compulsions of the St. Louis Trust cases, it cannot be deemed to have bound itself by this change. Art. 17, Reg. 80 (1937 Ed.), p. 42. Cf. Estate of Sanford v. Commissioner, 308 U.S. 39.

9. London Street Tramways Co., Ltd. v. London County Council, [1898] A.C. 375. But the rule is otherwise in the Privy Council. Read v. Bishop of Lincoln, [1892] A.C. 644, 655. For the role of precedent in English law, see, inter alia, 2 Yorke, Life of Lord Chancellor Hardwicke, pp. 425, 498; Goodhart, Precedent in English and Continental Law, 50 L.Q.Rev. 40; Holdsworth, Case Law, ibid. 180; Lord Wright in Westminster Council v. Southern Ry. Co., [1936] A.C. 511, 562-63; Allen, Law in the Making, 3rd ed., pp. 224 et seq.