United States v. Manufacturers National Bank of Detroit

PETITIONER:United States
RESPONDENT:Manufacturers National Bank of Detroit
LOCATION:Dry Docks at Reed, WV

DOCKET NO.: 350
DECIDED BY: Warren Court (1958-1962)
LOWER COURT:

CITATION: 363 US 194 (1960)
ARGUED: Mar 31, 1960
DECIDED: Jun 13, 1960

Facts of the case

Question

Audio Transcription for Oral Argument – March 31, 1960 in United States v. Manufacturers National Bank of Detroit

Earl Warren:

Number 350, United States, Appellant, versus Manufacturers National Bank of Detroit.

Mr. Kramer, you may proceed.

Kramer:

Mr. Chief Justice, may it please the Court.

This case is here as a direct appeal under 28 U.S.C. Sections 1252 and 2101, from a judgment of the Eastern District Court of the District Court of Michigan, in a suit brought for recovery of certain federal estate taxes under 28 U.S.C. Section 1346 (a) (1).

The District Court held the provisions in question of the federal estate tax under which the tax was levied, was unconstitutional as applied in this particular case.

The sections of the statute involved are found in the — the appendix to our brief on pages 27 and 29.

It’s Section 811 (g) (2) (A) of the 1939 Internal Revenue Code as amended by Section 404 of the Revenue Act of 1942.

William O. Douglas:

Before you start on your argument —

Kramer:

Yes.

William O. Douglas:

— could I ask you one question, supposed this man has died after the date specified in the 1954 Act —

Kramer:

Yes.

William O. Douglas:

— what would be the result?

Kramer:

The result would be that there — there would be no estate — the insurance proceeds, in question, would not have been included in his gross estate.

William O. Douglas:

That wouldn’t be in his — his gross estate?

Kramer:

That is correct.

Yes.

William O. Douglas:

No — none of them.

Kramer:

None of them would be.

William O. Douglas:

Even though he had paid —

Kramer:

Premiums (Voice Overlap) —

William O. Douglas:

— all the premiums?

Kramer:

That is right.

The reason is —

William O. Douglas:

And the reason is that it turns on — on his relinquishment of —

Kramer:

What are known as incidents of ownership?

William O. Douglas:

— all incidents of ownership, including the — the labor of relinquishment of the right to change the beneficiary?

Kramer:

That is correct.

If he had died after sometime in August 1954, the effective date of the 1954 Act, however, he died before then and under the 1939 Code as amendment by the 1942 Act, it is the Government’s contention that the proceeds in question aren’t — in fact, it is conceding that if the 1942 Act is constitutional, the insurance proceeds are included in his gross estate.

That is conceding.

The facts or may — may contained in the — in a stipulation which is printed in the record on pages 15 and 18.

Kramer:

He died — the decedent here died testate, July 15th, 1954, just before the effective date of the 1954 Act, at age 66.

The taxpayer here is his executor.

In his estate tax return, the executor included the total proceeds amounting to about $126,000, of four insurance policies on his life, the — the proceeds being payable to his wife.

He, as the decedent, had taken out all of these policies between the years 1953 and 1932.

On December 18th, 1936, he made an absolute outright assignment of the ownership of this policy.

He transferred all the incidents of ownership in the policy to his wife who was named beneficiary.

He gave up all of his rights in the policy to obtain cash surrender value to obtain loans or to change the beneficiary.

His —

Charles E. Whittaker:

All loans and properties, the old ones —

Kramer:

That is correct.

That was done in December 18th, 1936.

The assignment is printed on pages 18 and 19 of the record.

However, that is —

Hugo L. Black:

(Inaudible) the last policy.

Kramer:

I beg your pardon?

Hugo L. Black:

(Inaudible) indeed the last policy.

Kramer:

Well, the last policy was taken out in 1932.

The first policy in 1923 and two policies were taken out in 1927.

Two — three of the policies are for — were for a face amount of $25,000 each, one was for $50,000.

The decedent paid all the premiums on the policy from the time they were first taken out until he died.

Even after the assignment in 1936, he continued to pay the premiums on the policy.

Every premium that was paid on any of these policies was paid by the decedent.

Like the present time, the proceeds are held by the insurer under an option chosen by the widow for her benefit and the benefit of the children.

When the Internal Revenue Service made their audit of this estate tax return, they determined that a refund should be made of approximately $7800 for this reason, they determined that since he had assigned these policies in December 1936, prior to January 10th, 1941, then it followed that under the 1942 Act, since he had retained no incidents of ownership in the policies after January 10th, 1941, there was to be excluded from his gross estate that proportion of the proceeds of the policies, a little less than one-half which represented the premiums he had paid prior to January 10th, 1941.

This is 350.

Charles E. Whittaker:

(Inaudible)

Kramer:

He paid before that date.

Charles E. Whittaker:

Unfortunately, the accident —

Kramer:

Excluded, yes.

Charles E. Whittaker:

(Voice Overlap) —

Kramer:

That was the basis of the refund which amounted to about $7800.

There was excluded, I think, roughly about $60,000 of the proceeds.

Thereafter, the taxpayer filed a refund claim with the service asking for a refund based upon the exclusion of the remainder of the proceeds.

In other words, the taxpayer claimed that not simply part of the proceeds, but all the proceeds should’ve been excluded from the gross estate.

And the taxpayer therefore, claimed an additional refund of a little less than $9000.

The claim was rejected and the taxpayer then brought this suit in the District Court in the Eastern District of Michigan, asking for this refund on the ground that the sections of the statute here involved were unconstitutional for two reasons.

First, the taxpayer argued that since the decedent had no incident of ownership in the policy at the time he died, therefore, the estate tax was a direct tax on the policy proceeds.

As a direct tax, it was not apportioned and therefore, it violated Article I, Sections 2 and 9 of the Constitution, which are found in the appendix to our brief, page 26.

By a subsequent amendment to the complaint, the taxpayer raised in the additional argument, namely, that the statute in question here is applied in his case, violated the due process clause of the Fifth Amendment, first, because it was discriminatory in operation and second, because it was retroact.

The District Court subsequently entered judgment for the taxpayer finding his statute unconstitutional reasoning — reasoning that there was no transfer of the property involved at the time of the decedent’s death.

The District Court, as a matter of fact, did not elaborate its reasoning to any extent because it said, it simply adopted as its own.

The opinion of the Court of Appeals for the Seventh Circuit in a somewhat similar case Kohl against the United States 226 F.2d 381, which is cited in the first footnote of our brief on page 4.

The facts in the Kohl case were somewhat similar though not entirely similar, particularly in connection with the retroactive feature of the tax.

And the Court of Appeals in the Kohl case had there found, these particular provisions of the Internal Revenue Code of 1939 in the 1942 Act, unconstitutional on two grounds.

First, it was a direct unapportioned tax and second, it violated due process because it was a retroactive tax.

Hugo L. Black:

Was any challenge to the — any contention that the statute itself did not allow and did not cover this transaction which they say is not a transfer?

Kramer:

At no time has there been any dispute, but that if the statute is constitutional, it does cover the proceeds of the policy.

It has never been in dispute between the Government and the taxpayer.

Hugo L. Black:

Are — are they arguing that it was not a transfer and is therefore unconstitutional?

Kramer:

It is their argument, as I understand it, first, that there is no transfer here to be the subject of the tax, at least, no transfer at the time of death.

And that since there is no transfer to be the subject of the tax, the tax must be a direct tax upon the proceeds themselves, a direct tax upon the property.

And since it is a direct tax, it must be apportioned and it has not been apportioned.

Hugo L. Black:

What is the direct word on with — of the statute?

What does it tax?

Kramer:

Well, the direct word of the statute is found here in our brief on page 27.

It says, “The value of the gross estate of the decedent shall be in — determined by including the value at the time of his death, of all property, real, personal, tangible or intangible.”

Then dropping down to (g) (2), “To the extent of the amount of receivable by all — all other beneficiaries as insurance under policies upon the life of the decedent, purchased with premiums or other consideration, paid directly or indirectly by the decedent in proportion that the amount shall pay theirs to the total premiums paid for the insurance.”

Felix Frankfurter:

Mr. Kramer, what gave rise — what’s the date of this provision?

It’s a new one, isn’t it?

Kramer:

Yes.

Kramer:

Well, the date of this provision is the —

Felix Frankfurter:

(Inaudible)

Kramer:

In the 1942 Act which was adopted October 21st, 1942.

Felix Frankfurter:

What was the — any enlightenment, if you have, how this came to be a reasoning for the statute in the (Voice Overlap) —

Kramer:

Yes.

Felix Frankfurter:

(Inaudible) I’m telling at the outset.

Kramer:

The first federal state tax that is the original federal state tax, the modern one, was adopted in 1960.

That contained no specific provision of all dealing with insurance proceeds.

Then the 1918 Act, for the first time, had a specific provision dealing with insurance proceeds.

It followed a — it made a fundamental distinction which is still followed today.

It was followed in 1942 Act.

Between policies, the proceeds of which were payable to the executor, of the decedent, we’re not concerned with that.

Then it contained this language applying to the proceeds of — payable to other beneficiaries.

It provided simply that in such a case, they should be taxed to the extent that the policies were taken out by the decedent upon his own right.

Now, that language remained unchanged through subsequent revenue acts until the 1942 Act.

But between 1918 and 1942, it was a matter of much doubt as to the meaning of that phrase, “taken out by the decedent upon his own right.”

There were at least four interpretations which were suggested and at one time or another, adopted by the Treasury or by the lower courts.

One interpretation was that that meant that there should be included in the gross estate, proceeds of policies only — only when the decedent had retained incidence of ownership until death.

A second interpretation was that the proceeds were included only when and — only and to the extent that the decedent had paid the premium, so-called premium payment tax.

A third interpretation was that the proceeds were included only if both factors were present, namely that the decedent paid premiums and retained incidents of ownership.

A fourth interpretation was the — an alternative tax, proceeds included, if the decedent either retained incidents of ownership or had paid premiums.

The 1942 Act, Congress adopted the alternative tax, then under the 1954 Act, Congress adopted solely the incidents of ownership tax and that is the present act.

And that, roughly speaking, is the situation as far as the statutory history is concerned.

Now, turning first of all to the direct tax argument, the contention of the Government is simply is, this is not a direct tax, for two reasons.

First, it is a tax upon a testamentary transfer.

There is a sufficient testamentary transfer here, at death to warrant, constitutionally, the imposition of a federal death tax.

Or second, in the alternative, if this Court should feel that there is not a sufficient testamentary transfer, it is the position of the Government that the tax is one upon the inter vivos transfer, which are here involved, with payment of the tax simply being postponed until the date of death.

Charles E. Whittaker:

Suppose the — wouldn’t that subject be covered by gift taxes, if it were an inter vivos taxation.

Kramer:

Not necessarily.

Under the federal estate tax, as I shall point out in a moment, there are numerous inter vivos transfers which are covered by the federal estate tax.

Charles E. Whittaker:

Those made in contemplation of death?

Kramer:

That is correct.

Those, where a life estate as reserved by the transferor.

Those where the transferor has powers of revocation or amendment, in general, those were the transferor as — is sometimes said, keeps a strength on the transfer, those where he has certain rights of reversion.

Also, those involving jointly owned property under certain circumstances.

Turning — and by the way, I might also point out, of course, we are dealing here with the — solely with a problem of constitutionality.

There is, of course, the usual presumption in favor of the constitutionality of the statute.

More than that, because of that presumption as this Court has pointed out, if there are several possible interpretation of the statute, this Court generally will not deliberately adopt an interpretation which will hold the statute unconstitutional, instead this Court will ordinarily adopt such an interpretation of the statute, if it all possible, which will result at voting it constitutional.

Well, is it — position of the Government that this statute maybe properly interpreted as a tax either upon the transfer here at death, or a tax upon the inter vivos transfer or if you will really, a tax upon the combination of the two transfers involved.

Charles E. Whittaker:

May I ask you please, sir?

Kramer:

Yes.

Charles E. Whittaker:

Has this Court not held and hasn’t defend the policy of the Commission to predicate estate taxes upon viewing of the taxation of the privilege of transferring property of death?

Kramer:

Well, I don’t know of any.

If I would perhaps take the word, “privilege”, but the general scheme of the federal estate tax and this Court has pointed that out, is that it is a tax upon transfers at death.

But as you and I had just discussed, there are many inter vivos transfers which are included within that.

Furthermore, I suppose, this Court has pointed out in its opinion, is that the name you give the tax really doesn’t matter.

In a sense I suppose, Congress could simply enact a “transfer tax” without saying whether the transfer had to be a death or inter vivos.

The only constitutional issue, I suppose, arises here.

If you had a death tax, which tax is certain inter vivos transfers, there must be some rational basis for taxing some inter vivos transfers, but not all inter vivos transfers under the death tax.

If Congress, for example, rather say, should enact the statute and saying, “Only inter vivos transfers made by redheaded men, shall be taxed under the federal estate tax.

Or only inter vivos transfers made by Republicans or by Democrats, that might well be.

In fact, I think it would be, so I refer indiscriminatory as to the — a violation of due process, though not necessarily a direct tax.

But turning the moment to the direct tax argument, it is the vision of the Government that practically speaking, there is a testamentary transfer here, in two aspects.

First of all, the death of the insured here marks the point of time when the beneficiary gets actual enjoyment, actual control, actual possession of the moneys in question.

It’s the point of time, so to speak, when the property, if you will, shifts from the insurance company to the beneficiary, from A to B.

But more than that, it not simply marks the point of time when that shift comes and this is far more important.

It marks the moment when ordinarily, the barrier of the policy as far as the beneficiary is concerned increases tremendously.

Take this case for example, the moment before death, what was the value of policy ownership to the wife?

Well, at most, it was the approximate price surrender value.

Rough — a rough calculation shows that that would amount to about $60,000.

Kramer:

The moment after death or the moment of death, the value of the policy was the face amount, namely $125,000.

It doubled in value.

William J. Brennan, Jr.:

I suppose the only question is (Voice Overlap) —

Kramer:

Putting it, I suppose, somewhat monthly.

One might call this death insurance, rather than life insurance.

Or to put it in other way, the policy is worth far, far more in the usual case and in this case, when the insured is dead and when he’s alive.

That is the position of the Government that that type of increase in death, that realization, so to speak, in actual case of the beneficiary’s right is a sufficient testamentary event to warrant the imposition here of an estate tax.

The tax impinges where there’s been an assignment as there has been here, under your theory, impinges on the entire proceeds of the policy to the extent they were presented premiums paid by the decedent, during his lifetime.

Kramer:

That is correct.

And not merely between the difference between the surrender value, what the wife had in consequence of the assignment and the proceeds you achieved, or received on death.

Kramer:

That is correct.

Now, in that connection though, I should like to point out that this Court, in quite analogous situation, has upheld the constitutionality of a tax.

Take the case of Tyler against the United States, cited on pages 10 and 14 of our brief.

That case sustained the constitutionally of a tax which said, “That when one of two tenants by the entirety dies, there shall be included in the estate of the decedent tenant, if he was the original source for the property, the entire property of the tenant.”

Now, a very strong argument was made in that case, in the Tyler case, that it was unconstitutional to do that on the very same ground as here.

First, that it was a direct tax, because there was no testamentary transfer.

Second, that it violate the due process.

And this Court, of course, pointed out, well, in the first place, as to approximately one-half of the property, you might well say that one-half was owned by the tenant who died, but then the argument was made.

Well, if that’s true, what about the other half of the policy?

You see that perhaps is roughly similar to the cash surrender value here of the policies you were talking about.

Felix Frankfurter:

Mr. Kramer?

Kramer:

Yes.

Felix Frankfurter:

Am I to infer that if it isn’t a testamentary disposition, therefore, it must be a direct tax?

Kramer:

No, sir.

Definitely not.

Felix Frankfurter:

Well, I (Voice Overlap) —

Kramer:

That would bring me the second phase of my argument.

I think that you’ll put your finger there on a logical felon, in the argument in the opinion of the courts below and in the argument of the taxpayer.

It does not follow, conceding for the sake of argument, that there is no testament — the — if there is no testamentary transfer here that there — then is a direct tax.

The only conclusion you can logically draw from the fact there is no testamentary transfer, is there is no tax on a testamentary transfer.

Kramer:

But there still maybe and indeed it is the contention of the Government that there is a tax on the inter vivos transfers involved here.

Because there are, of course, inter vivos transfers, that the inter vivos transfer of the assignment of the policy and there is the inter vivos transfer that occurs each time that the decedent paid premiums between 1936 when he assigned the policy until he died in 1954.

Charles E. Whittaker:

Isn’t that the basis really of your defendants here, the continued payment of premiums by Mr. Langley.

Kramer:

That is perfectly correct.

Charles E. Whittaker:

If this — for our information now, I’m trying to understand.

Kramer:

Yes.

Charles E. Whittaker:

If this had been a paid up policy which Mr. Langley gave out right to his wife, then the fact that it was worth much less at that time than death benefits would be immaterial, would it not?

Kramer:

Well, it would be immaterial because I — I — under the facts of this case, the statute itself, was not taxed.

Charles E. Whittaker:

But each time he made payments, after January 10, 1941, he purchased new rights, did he not?

Kramer:

That is correct.

Charles E. Whittaker:

And they increased the — the amount receivable at death and therefore, you say that the amounts of insurance proceeds purchased by those premiums constituted a transfer effective at death.

Kramer:

That is correct.

Or another way one might put it is that, you have here a tax on the inter vivos transfer with payments simply being postponed until death.

And there’s a good sensible reason for postponing the payment until death.

It isn’t until death that the beneficiary actually gets the full benefits, the face value of the policy and it isn’t until death he — that you can really determine, with fairness, the value what the beneficiary gets.

And suppose you —

Kramer:

But the important thing as you say is the payment of premiums, if this were a direct tax, Congress then might simply have said the proceed shall be included in the gross estate, even if he didn’t pay any premiums and even if he didn’t have any incidents of ownership, but that isn’t what Congress said.

Congress said the proceeds shall be included only in the — only proportionately to the amount of premiums he paid.

In other words, the tax is limited to the insurance that the decedent bought, that he purchased.

Charles E. Whittaker:

You mean just exactly that.

You mean paid after the gift or after the transfer, don’t you?

Kramer:

Well, that is the effect under the statute because Congress has put in Section 404 a special provision to avoid any retroactivity here.

And under that provision, the Internal Revenue Service here, refunded a little or less than half of the tax on the policy proceeds, a little less than half.

Now, I should like to point out that as a matter of fact, this Court, so far as I know, has never in any estate tax case despite the fact the point has been raised many times, ever held that there was a direct tax.

This Court has always managed to find in any estate tax case where the point was raised, that there was either a testamentary transfer or an inter vivos transfers or a combination, which might be the subject of the tax.

Felix Frankfurter:

But I congratulate you on beginnings discussed, what is or is not a direct tax without even so much as referring to the income tax cases.

I think that’s quite an achievement, Mr. Kramer.

Kramer:

Thank you.

Felix Frankfurter:

But we had any discussions since then that matters, any extensive discussion of what is a name — or a direct tax can seek on past cases?

Kramer:

Frankly, Mr. Justice, I do not think we have.

Felix Frankfurter:

No.

Hugo L. Black:

Mr. Kramer, since you suggested this was not a direct tax.

I was hoping if you would define what is a direct tax for?

Kramer:

Mr. Justice, I would respectfully decline.

Felix Frankfurter:

Why don’t you refer Justice Black to the income tax case discussion?

They’re only 250 pages.

Could I ask you a question, what is the situation in the Courts of Appeal on this problem, by the Kohl case you cited?

Kramer:

Yes.

Well —

Is there — is there a conflict?

Kramer:

Yes, there is.

The Second Circuit has upheld (Voice Overlap) —

Kramer:

That is correct.

The Second Circuit affirmed per curiae, it’s set out here on page 24 of our brief in the footnote dividing the page.

The Second Circuit affirmed per curiae in adopting as its own, the opinion of the Tax Court in the Loeb case, which sustained in the constitutionality of the tax here.

And there are — are two district courts which have reached the same conclusion.

One, in the Colonial Trust case, which actually involved — not the 1942 Act, but the prior acts and the Schwartz’s case down in Louisiana, the District Court case which also affirmed the constitutionality of death.

Felix Frankfurter:

Mr. Kramer, of what you said — I’m — I infer with some surprise that the Tax Court does bear some constitutionality.

Now, the old Board of Tax Appeals did not, did it?

Kramer:

I believe not.

Felix Frankfurter:

And the Tax Court fairs on —

Kramer:

They certainly did in these cases.

Felix Frankfurter:

They did in these cases?

Kramer:

They met the issue.

In fact, they more than passed on it.

At the time they rendered their decision, the — the Court of Appeals in the Seventh Circuit released a contrary conclusion.

They examined the reasoning of the court and they respectfully declined the power.

And they — incidentally, they reiterated their holding on — in the Loeb case and in a later decision, the Baker case, which is also cited in the footnote on page 24 of our brief.

Hugo L. Black:

On the Second Circuit, without writing in the opinion of his own, adopted this Tax Court of —

Kramer:

That’s right.

Kramer:

They affirmed per curiam saying that the opinion of the Tax Court, they would adopt instead.

Felix Frankfurter:

But what case — in what cases has this Court seems to think (Inaudible) cases nullified and unconstitutional federal tax measure.

Kramer:

Yes.

There has been.

Felix Frankfurter:

Well, your courts doing what about, is that a federal or a state?

Kramer:

I think that was a — a state one.

Felix Frankfurter:

(Inaudible)

Kramer:

Yes.

There — as far as I know now, there are several gift tax cases onto Myers, where the problem of retroactivity was involved, which is not involved here.

And then there are — there are two and to my knowledge only two federal estate tax cases that have upheld an argument based on constitutionality.

One is Heiner against Donnan in 1932.

The other is a rather unusual case, Nichols against Coolidge.

Felix Frankfurter:

Well, both cases have run the (Inaudible) of criticism at the time since, haven’t they?

Kramer:

They certainly have.

And the taxpayer in fact and the courts below, neither — neither the Kohl case, nor the court below here, nor the taxpayer in his brief, has even cited either those two cases.

Felix Frankfurter:

Well, I think the Coolidge case itself, had been questioned in subsequent cases here.

Kramer:

Yes, it had.

In fact, it was narrowly limited in one of the cases not cited in our brief Binney against Long, very narrowly limited.

Felix Frankfurter:

And was it Binney against Long that — on which Justice Roberts (Inaudible)

Kramer:

It may have been.

Felix Frankfurter:

It’s that kind of a problem, wasn’t it?

Kramer:

Yes, it was.

As to the — a vested and contingent remain.

He made that distinction.

The (Inaudible) of this problem has been so long from getting up here.

This assignment of a life insurance is — is common practice — was a common practice, always has been.

Why — why (Inaudible) over the few odd cases?

Kramer:

I simply cannot answer that.

Under the — the 1918 Act, I think one reason for it may have been that everyone, the scholars, commentators, the Treasury itself and the Court, the lower courts, were very confused as to the meaning of the language I referred to under the 1918 Act.

Then Congress passed the 1942 Act specifically saying what it was and I think the Treasury, no doubt then gave up the battle under the prayer.

Kramer:

This is the first case under the 1942 Act to reach this Court.

Felix Frankfurter:

Is there any — was there any disclosure why Congress repealed it?

Kramer:

Well, the disclosure in the reports, as I understand that, the House Ways and Means Committee split somewhat along party lines and the Republican majority took the position that life insurance was being singled out for unusual treatment under the premium payment tax.

The majority took — the minority took the position is that it was property single life insurance out for unusual treatment, because it was a unique kind of property.

Felix Frankfurter:

You say what is life insurance?

(Inaudible)

Kramer:

That is correct.

But as far as I know, there was no suggestion that Congress was repealing it, because of constitutional policy.

It was done as a matter of physical policy, so it is the matter of fiscal policy.

Hugo L. Black:

(Inaudible) under this position.

Kramer:

Under the 1954 Act —

Hugo L. Black:

Yes.

Kramer:

— the proceeds of the policy here in the 1954 Act, would not be taxable because the 1954 Act repeal the so-called premium payment test that is in the 1942 Act, which is in question here.

Felix Frankfurter:

If I may ask an irrelevant question or attribute.

What volume of litigation is depending on the outcome of this case?

Kramer:

Well, we pointed out in our jurisdictional statement that there are cases pending in two other circuits involving this, the Fourth and the Eighth Circuit which involves substantial sums of money.

Felix Frankfurter:

I suppose if the District Court — position were to be sustained here, that the claims for refund are even those that are outlaws by times.

Kramer:

I expect they’re undoubtedly, would be.

Felix Frankfurter:

For legislation —

Kramer:

For legislation to allow it, that would be the customary practice that they were outlawed by time.

Yes.

Well, I want to address myself, just for a moment, to the due process argument.

Conceding that this is an indirect tax —

Felix Frankfurter:

Yes.

Kramer:

— the taxpayer argues here that even if the tax is indirect, it is so discriminatory and unfair as to be a violation of due process and of the Fifth Amendment.

Well, as I say, the nature of that argument simply is that what you are in effect doing here is you are taxing some inter vivos transfers, but not all inter vivos transfers under a death tax.

And that discrimination — that drawing the line has been drawn so unfairly, so outrageously as to violate due process.

Well, the decisions of this Court in general have said that you may tax inter vivos transfer under the federal estate tax, provided there is a good reason for doing so.

So it isn’t completely arbitrary.

That, for instance, was the basis in which this Court in the Milliken case sustained the tax on transfers made in contemplation of death.

Kramer:

Those transfers obviously are inter vivos transfers, outright.

But the Court sustained it on the ground that this was a reasonable thing to do.

Why was it reasonable?

Well, it was reasonable because there was a testamentary state of mind in the transferor.

And if you didn’t tax this thing, you would have widespread avoidance and evasion of the estate tax.

As a matter of fact, Congress has built around the tax on transfers at death sort of a — a protective treasurer of taxes, death taxes on inter vivos transfers in order to avoid a widespread evasion of the — of federal estate tax.

Now —

Felix Frankfurter:

I think that argument of yours has happened a little bit, by what Congress didn’t have before.

Kramer:

Well, they didn’t entirely go back though.

They kept the tax on transfers in contemplation of death.

They kept the tax on revocable transfers, transfers of the reserved life estate and transfers of a certain reversionary right.

Felix Frankfurter:

And those are rather conventional of — rather conventional — related testamentary position.

Charles E. Whittaker:

Isn’t it true that the theory of all of those is that they are not consonant, they are not complete?

As against the Government, they are — they are not powered?

Kramer:

Well, the — a gift made in contemplation of death is complete, legally.

Charles E. Whittaker:

Not as against the Government [Laughs] well advised and thus said to be a device isn’t it?

Evasions —

Kramer:

Well, evasion of course that they all — depends on how you look at it whether it is evasion or avoidance perhaps.

Tax lawyers sometimes resent the word evasion, I believe.

But the point I should like to make here is that the nature of life insurance is such that from a constitutional standpoint and we’re considering this just from a constitutional standpoint, not from the standpoint of whether we, as legislators, would think otherwise, but from a constitutional standpoint.

It was perfectly reasonable for Congress in 1942 to enact the premium payment tax because the nature of life insurance is such that you don’t have the usual factors operating which determined from making inter vivos transfers of other kinds of property.

Now, that’s true for these two reasons.

In the first place, when you go to make an inter vivos transfer when insurance policies is involved here, the gift tax you have to pay ordinarily is based only upon a fracture of the death value of the policy.

The — the gift tax is based upon the so-called replacement value of the policy at the time of the gift and that ordinarily will be far, far less than the face amount of the policy payable at death.

Now, of course, it is also true that if you continue to pay premium, each premium payment is a later gift subject to the gift tax.

But again, you are entitled to an annual exclusion under the gift tax of $3000.

You can pay it with many premiums with that.

As a matter of fact in this case, the total annual premiums payable on all four policies amounting to about $3800, so all the $800, the very annual premium payment after the transfer at 1936, would be automatically excluded from the gift tax.

But then, of course, there‘s another — there’s another reason here.

In the case of ordinary property, houses, automobiles, stocks and bonds and so on, there’s a strong deterrent to transferring the property, because a man when he’s alive, wants to own the property, in order to use it and to enjoy it.

Kramer:

For now, ordinarily, you don’t use and enjoy life insurance the same way you do a car or a house.

One of the main reasons you buy life insurance, on — on your life is to provide for your dependence after your death.

Well, as far as providing for your dependence after your death, you don’t have to own the policy.

If the dependents owning the policy, one might even argue that there’s — they’re better provided for.

If you assign the policy to your wife as was done here, you can — you could continue to have the — the enjoyment of the policy, so to speak, in the sense that you know your wife is provided for after you die.

That point is very well brought out in the income tax case this Court decided, Burnet against Wells, which is cited on page 25 of our brief.

That case sustain the constitutionality of provision of the federal income tax, which tax to the grantor, the income of a funded insurance trust, even though he has made an irrevocable transfer to the trust.

Had no ownership in it in any way, no control of it, when the trust was to fund insurance policies on his own life.

And this Court, in writing the opinion, noted that from a standpoint of the grantor, he still was getting all the enjoyment out of this income when it was used to pay the premiums on the insurance on his life, which he’d assigned to his wife, because one of the main element in life insurance is the sense of enjoyment that men obtain from knowing that their dependents are provided for.

Now, of course, it is true that when you make an outright assignment of the policy, you do give up certain rights, cash right to get the cash surrender value, loan value, that type of thing.But even there is a practical matter.

Most life insurance policies are not assigned the total strength.

They’re usually assigned as here, to close family relatives and it’s not, I think, an unfair inference to say that if the decedent here, after you assign these policies and before (Inaudible) had desperately needed to get the case surrender value.

He might have persuaded his wife to make it available to him.

Hugo L. Black:

He might not have?

Kramer:

He might not, that’s true.

Hugo L. Black:

She (Voice Overlap) —

Kramer:

On — on the other hand, this Court in the Bullard case, which is cited on page 50 in our brief, followed a similar line of reasoning here, in the Bullard case, this Court sustained the constitutionality of a vision of the federal estate tax, which said, “If a grantor transfers property and trust and provides that the property shall be to A for life, to B in remain,” but that the grantor should have the power to revoke the trust, but only — but only if one or more of the beneficiaries consented.

Well, now, this Court pointed out there, in answer to the argument that’s made.

That as a rule, the beneficiaries of the trust would be close family relatives of the grantor and that he probably would not have much difficulty in getting their consent to revocation, if they really need it.

Hugo L. Black:

Does an — that does an argument strengthen your case so much when you think about the fact that mostly when people give property away that way, they give it to their close relatives.

Now, not merely insurance, but most other things, money, household goods and all the things.

Kramer:

That is quite true.

Hugo L. Black:

You don’t think we have to agree with a policy here, in order to sustain the constitutionality of the —

Kramer:

Oh no, no indeed.

That all you have to agree is that the policy is not so outrageous, not so arbitrary as to violate the Constitution.

Hugo L. Black:

All that there’s nothing in the Constitution that prohibits you.

Kramer:

That is correct.

Hugo L. Black:

(Voice Overlap) contesting in that way on this general (Inaudible)

Kramer:

That is correct.

Well, turning for just one more moment to a final point here, the retroactivity of the tax.

Kramer:

Of course, there is no provision in the Constitution which flatly says a retroactive tax is unconstitutional.

As a matter of fact, there are many decisions of this Court which have upheld retroactive taxes, particularly retroactive income tax.

This Court has only said that a retroactive tax is unconstitutional if it is really outrageous subject.

I mean, every retroactive tax, in the sense, has a certain amount of unfairness, so it isn’t enough simply that the tax is retroactive and therefore, unfair to be unconstitutional.

It has to be something far more than (Inaudible).

Well now, in this particular case, in the position of the Government, that the tax to the extent, if that all, but it is retroactive, is well within the constitutional limits.

In the first place, Congress, so to speak, deliberately mitigated any unfairness of retroactivity, because — because Congress said that where as here, the ensured retained no incidents of ownership after January 10th, 1941, in the policy, then all premium payments made before 1941 should be excluded in determining the proportion of the premiums he had paid.

Charles E. Whittaker:

Is this argument directed to the theory that the tax is imposed on the inter vivos gift made in 1936?

Kramer:

This argument is directed now, to the argument that I understand is made, that this tax is a retroactive one and the argument direct that the tax is retroactive, I take it as may on this basis.

The insured died, of course, after the 1942 Act.

There is no retroactivity and that sense.

But the insurer had transferred the policy in 1936, before the 1942 Act.

My argument now is that even if he transferred the policy at 1936, Congress, in order to avoid any possible unfairness, has said that all premiums he paid before 1941 are to be excluded in taking into account what amount of the proceeds are to be included in his gross estate.

Congress has gone out of its way to remove so to say, any sting of unfairness.

Beyond that also, of course, when this transfer was made in 1936, the then outstanding Treasury regulations said that there would be a tax.

There was no surprise, so to speak.

This is not a case where a man makes a transfer and there’s no statute taxing and then years later, to his complete surprise, Congress passes a statute and says, “Because you made a transfer years and years ago, we’re now going to tax you.”

Well, it didn’t happen here.

This transfer was made long after the 1918 Act was in effect.

And between 1918 and 1936, when this transfer was made, the Treasury had taken the consistent position that the premium payment test apply.

Some courts have said yes, some courts have said, no.

Whether or not the Treasury was right, it’s beside the point.

The mere fact that Treasury made that claim gave notice, so to speak.

He was unnoticed.

He was not until after the transfer was made, the following year that the Treasury reversed its position and said that the sole test was the other.

But even so, Congress avoided retroactivity.

Hugo L. Black:

What case is relied on the holding that because it’s retroactive, it’s unconstitutional, which one were you (Inaudible)

Kramer:

Well, there — I do not believe there are any actual cases cited in the brief.

The only estate — federal estate tax case I know, is one that has not been cited.

It is the case of Nichols against Coolidge.

Kramer:

Nichols against Coolidge 274 U.S. 531 and one should read with Nichols against Coolidge, two other cases, Coolidge against Long, 282 U.S. 582 which involved a Massachusetts death tax upon the same property and then Binney against Long 299 U.S. 280, which severely restricts and qualify the whole doctrine of the Coolidge case.

On the other hand of course, this case, this Court has upheld a retroactive federal estate tax under circumstances that seemed, in a sense, much more unfair than they’re involved here.

In the Jacobs case, which is cited on — in our brief on pages 21 and 22, many years before there was any federal estate tax, before 1960, a man who owned property transferred it — it to himself and his wife as joint tenants.

Then he died after 1960.

This Court sustained the inclusion in his gross estate of the entire property he transferred to himself and his wife as joint tenants.

Now, the argument was made there, very strongly that this was unfair, because when the man set up this joint tenancy, he had not the slightest warning that any federal estate tax would be enacted years later.

Furthermore, when their federal estate tax was passed in 1960, the man was caught.

He couldn’t back out.

At the very most, he could’ve gotten back one-half of his property, if he’d severed the joint tenancy.

But as far as the other half of the property was concerned, he was stopped.

He was taken by surprise and he couldn’t back out.

But in spite of that fact, this Court sustained that act.

And a somewhat similar case, perhaps even stronger is one not cited in our brief.

It’s per curiam opinion of this Court, Third National Bank against White, 287 U.S. 577.

The same facts as the Jacob case, except it was a tenancy by the entirety and the difference is and the thing that makes it even stronger is in the case of the tenancy by the entirety created before the federal estate tax, there is no way you can back out at all.

You can’t, before death, sever a tenancy by the entirety in most states and that was true in the case herein question.

Earl Warren:

Well, except by divorce.

Kramer:

Yes.

That is correct.

Hugo L. Black:

That was the Jacob’s case you referred to?

Kramer:

The Jacobs case is that — it is a joint tenancy and then the other case is the tenancy by the entirety and —

Hugo L. Black:

Did they refer to Nichols against Coolidge?

Kramer:

No.

(Inaudible)

Kramer:

Not fairly, no.

It has been severely restricted but —

(Inaudible)

Kramer:

I should think it well might be.

I should think it might be.

Earl Warren:

Mr. Armstrong.

Henry I. Armstrong, Jr.:

May it please the Court.

At the outset, I would like to correct what I think is a — been a misapprehension all the way through, both in my earlier briefs and in the Government.

This tax is not on the proceeds of the insurance in any sense.

It is a tax on the assets of the estate which are in the hands of the executor, to the executor and the executor is required to pay the tax.

True, he has a rather converse right of a — to pursue against the insured — against the beneficiary of the insurance, but that is all.

He is the one who pays the tax and he pays the tax, because the statute orders him to.

Section 810 of the Code of 1939 and that section of the code, orders him to do so because he is in possession of the so called probate estate and there’s a man that can pay it.

That’s the first point.

The next point is that as has been pointed out, this is a new question.

The payer of the premium tests flatly and solely, has never been before this Court before.

Insurance has been held imputable under the State, where the beneficiary retained rights of incidents of ownership, but never before has the question of the effect of the payment of premium test been before the Court.

Potter Stewart:

Was the payment of the premium test in the law only from 1942 until 1954?

Henry I. Armstrong, Jr.:

Yes.

Potter Stewart:

Never been there before?

Henry I. Armstrong, Jr.:

Well, it had been a matter of regulation before that.

Payment of the premium test had been in — Mr. Langley assigned these policies to his wife in, I think, January of 1930 — December of 1935 or 1936.

In March of that same year at that time, the payment of premium test was in.

In March of that year, the payment of premium test was removed, that was 1937.

Then in 1941, by a Treasury decision, it was returned.

Then in 1942, the 19 — the Act of 1942, amended the Code and put the payment of premium test in the 1939 Code.

That remained there until the death of the testator in July of 1954 and the new code went into effect in August of 1954.

Now, I don’t think there’s or even — probably be disputed by the Government, the proceeds of these policies form no portion of the estate of the decedent.

If there should be any doubt on that subject, this Court has so held in the case of United States versus Bess.

That was a case where it was sought to enforce an income — a lien to — for in collectionof an income tax against the decedent, who had died leaving insurance.

The Government sought to argue that under the 1939 Code, Section 3670, there was a lean on the proceeds of the insurance for the — which could be used to enforce collection from the income tax and it did not succeed.

This curtail that was not the case.

To state, it would be anomalous to view his party subject to lien, proceeds never within the insurance reached to enjoy which are reducible possession by another only upon his death.

Now, I don’t want to go into that, but — too far, but I don’t think there is a slightest question anywhere.

But these proceeds are no part of his estate.

And his death now, it’s been pointed out there are a number of cases where it’s perhaps not as strict — the estate tax has applied to situations which were perhaps not strictly transfers.

Henry I. Armstrong, Jr.:

That is joint property, or trust in which the settler reserved the right to income as our point and things like that.

But in every one of these cases, something has been terminated by the death of the owner or something — some right in property has been terminated by death.

And it has been held that that makes it includible in the probate estate.

In this case, nothing was terminated by death.

On the contrary, something was created that is the debt of the insurance company to the insured, I mean to the beneficiary.

Charles E. Whittaker:

Mr. Armstrong, may I ask you please, sir, is not that the case in every situation where a decedent leaves insurance payable to a specific beneficiary?

Henry I. Armstrong, Jr.:

May I — going to that just a moment, Your Honor.

Charles E. Whittaker:

Yes.

Henry I. Armstrong, Jr.:

That I think the leading case on that subject perhaps is the old case of Chase National Bank against the United States.

That was the case where a decedent with insurance on his life in which he retained all of the incidents of ownership.

It was included in his estate for estate tax purposes and I think the assertion was the same as here that that was unconstitutional, as a direct tax.

The Supreme Court in that case held that the proceeds in that case could be included, but it was very careful to explain why it held it.

If I may read just two sentences, this after speaking of the fact that the insured have retained incidents of ownership, the Court said, “The precise question presented is whether the termination at death of that power and the consequent passing to this designated beneficiaries of all rights under the policies freed in the possibility that’s exercised, maybe the legitimate subject of a transfer tax.

As it is true, the termination by death of any of the other legal incidents of property, through which it’s used for economic enjoyment may be controlled.”

What is being taxed is the termination of the right of the insured to control the policy then later on, when it comes to the evaluation of this policy, in the same case on page 339, the Court said, “As it is the termination of the power of disposition of the policies by decedent at death, which operates as an effective transfer and is subject to the tax, there can be no objection to measuring a tax or fixing its right by including in the gross estate the value of the policies at the time of the death, together with the other interest of decedent facts where at his death.”

In other words, in all insurance cases to this death up to this date, what has been taxed is a termination of the rights of the incidents of ownership of the insured in his policies.

The proceeds of the policies have not been included.

They have merely been used to value these rights which were retained by the decedent.

So this is the first time, I believe, that this Court has ever had boldly and nakedly before it, the payment of premium test.

Charles E. Whittaker:

Would that not be the — is that not — does that not then present though the direct tax question you hear, sir?

Henry I. Armstrong, Jr.:

No, sir.

I don’t think so, because it’s been held by this Court in many cases and I have no dispute about it that the termination of the right of a decedent with regard to some property warrants the inclusion of that property or may warrant the inclusion of that property in his estate for tax purposes.

For instance, where there is a trust in which they settler retains the right to income during his life.

His death terminates that right and the entire purpose of the trust is to be valued in his estate and the same thing in the general power of appointment.

That is a little different.

I think a more difficult case is frankly, the fact that the purpose of the gift mortis causa.

That would be included in the estate.

That is the man in contemplation of death, gives his son $100,000 and it is in contemplation of death and he lives a couple of years that will be in his estate.

That is a little bit going near the point, but it still comes within — what I’m going to say about what the Government has done.

It is still a transfer in contemplation of death, just a transfer mortis causa, just as on the other transfer and that comes within the warding of the statutes and it’s a very different thing to say where a man has transferred something and that transfer has been caused by his death, because that by hypothesis, is what the transfer mortis causa means.

Henry I. Armstrong, Jr.:

When a man has made a transfer mortis causa, and that’s — it’s a very different thing to say that the — it’s the same thing when something has been freshly created by his death over which he had no power, that is the proceeds of the insurance, no interest, no power, or control at all.

Felix Frankfurter:

Isn’t not fair — isn’t not fair to say that all the premiums paid are (Inaudible) in contemplation to (Inaudible)

Henry I. Armstrong, Jr.:

Well —

Felix Frankfurter:

(Inaudible)

Henry I. Armstrong, Jr.:

Every time anybody pays a —

Felix Frankfurter:

(Inaudible)

Henry I. Armstrong, Jr.:

— premium on his policy of insurance, he is making a transfer in contemplation of death —

Felix Frankfurter:

Therefore —

Henry I. Armstrong, Jr.:

— in a sense.

Felix Frankfurter:

From what is (Voice Overlap) —

Henry I. Armstrong, Jr.:

— but does not — excuse me.

Felix Frankfurter:

(Inaudible)

Henry I. Armstrong, Jr.:

I say excuse me.

Felix Frankfurter:

(Inaudible)

Henry I. Armstrong, Jr.:

No, it is not taxed.

I mean the statute doesn’t cover.

That’s all.

Felix Frankfurter:

(Inaudible)

Henry I. Armstrong, Jr.:

It doesn’t.

I didn’t say it couldn’t, I said it doesn’t.

Felix Frankfurter:

(Inaudible)

Henry I. Armstrong, Jr.:

Well, that’s what I would like to come to in just a moment.

Felix Frankfurter:

(Inaudible)

Henry I. Armstrong, Jr.:

[Laughs]

I don’t intend to take too much of the time, but Justice Frankfurter, what you said, that is essentially what this statute does.

I don’t think that that is — I don’t think that’s — that’s the case.

We have been hearing and quoting from Section 811 of the 1939 Code, which makes — tells what is to be taxed.

Section 810 tells what the tax is.

A tax equal to the sum of (Inaudible) on the transfer of another state.

Now, it’s on the transfer and so far as the 1939 Code goes, unless there’s a transfer, there is no tax.

Henry I. Armstrong, Jr.:

Section 811 is not — nothing to do with the transfer.

It has to do with the inclusion and valuation of the various items of the estate and every item of the estate is taken — every item is taken care of.

In the first paragraph, all property of every kind and nature and in the following paragraphs, various items of a sort that have been mentioned, joint property, general powers of appointment, trusts of various sorts.

But in every one of those, some right of the decedent terminates.

When we come to the payment of premiums, nothing terminates, but instead, something is created.

Nothing is transferred whatsoever.

The tax is on the transfer of the various assets of the estate which had been designated otherwise by the statute in the various other sections.

This section stands alone and when there’s a tax because of the proceeds, life insurance, because the tax was paid on.

That is no transfer at all.

Let’s admit it, that’s a lot of transfer.

And the tax on the transfer of the other assets of the estate is taken cared of more other sections of the statute.

So this stands out simply like this, so our thumbs, it’s something different from any other section of the statute.

Now, it’s perfectly possible.

Oh, well, this is simply this — simply fix the rates of tax or something like that.

My position is that it does not simply fix the rate of the tax.

The rate of the tax is fixed by other sections of the statute and if I submit respectfully, sometimes, it’s quite important.

Sometimes, a name of the statute, the way a statute is designated is quite important.

For instance, suppose a tax had been levied in these terms, a direct tax and a certain amount shall be levied on the property of every citizen of the United States dying after this date.

And suppose the cash to be received from that tax was arithmetic to the same that you’d get from an estate tax.

Isn’t it perfectly clear that because of that designation, that tax would be unconstitutional or take the two recent cases of Railway Express Agency versus Virginia, in the first of those cases, if my memory serves, there was a franchise tax on the right to do business based on the business of the insurance company through and to and out of Virginia.

In the second case, I believe, the tax — the subject of the tax are the same, business through and to or out of Virginia, but in that case, it was stated to be a tax in lieu of the tax on other intangible personal property and rolling stock.

That tax was held to be valid.

So I submit that when we get to these fine points or far reaches of definition, the designation of the statute is quite important.

Now, this statute is a tax on transfers and the transfer and valuation of every other asset in the estate has been otherwise defined by the statute and on every other case, there has been something that has been transferred, but in this one instance of the proceeds of insurance on which the deceased has paid the premium, there’s been nothing transferred or even taking stretching transfer as a proper, stretching the word transfer so far as to include determination of a right.

Something has been created, something new.

Now, granted, it would be entirely feasible if —

Felix Frankfurter:

(Inaudible)

Henry I. Armstrong, Jr.:

Well, I — I —

Felix Frankfurter:

You can’t affect anybody to (Inaudible)

Henry I. Armstrong, Jr.:

Yes.

Felix Frankfurter:

And (Inaudible)

Henry I. Armstrong, Jr.:

Well —

Felix Frankfurter:

(Inaudible)

Henry I. Armstrong, Jr.:

Well, I — I see that point, but I don’t — I don’t think I — Justice Frankfurter, that the — there has been a — every other case — a transfer that is taking the termination of the management power of the control as a transfer.

Felix Frankfurter:

So why was the (Inaudible)

Henry I. Armstrong, Jr.:

Well, alright.

She — she did pay the — alright, he did pay the premium and he is subject to gift tax and it is permissible for the Government, if it wants to, to tax a receipt of these policies, but the point I’m making now and why I was insisting on what the tax says is that they haven’t done it.They haven’t done it — and by this Act.

Now, that’s my position.

Felix Frankfurter:

(Inaudible)

Henry I. Armstrong, Jr.:

No.

Felix Frankfurter:

(Inaudible)

Henry I. Armstrong, Jr.:

No, sir.

Felix Frankfurter:

(Inaudible)

Henry I. Armstrong, Jr.:

Yes, sir.

Well, unless the Court has (Inaudible) that’s all I have to say.