CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE SEVENTH CIRCUIT.
Hughes, McReynolds, Brandeis, Butler, Stone, Roberts, Black; Mr. Justice Cardozo and Mr. Justice Reed took no part in the consideration or decision of this case.
MR. JUSTICE ROBERTS delivered the opinion of the Court.
The petitioner challenges a decision holding unconstitutional the provision of § 302 (c) of the Revenue Act of 1926,*fn1 as amended by Joint Resolution of Congress of March 3, 1931,*fn2 which requires the inclusion in a decedent's gross taxable estate of property transferred by irrevocable deed with reservation of a life estate. On account of alleged conflict with our decisions and of the important constitutional question presented we granted the writ of certiorari.
Clara R. Smith, a resident of Illinois, died in 1933. In 1927 she transferred securities, by irrevocable deed, to her son Edward, in trust to pay the income to her for life and, upon her death, to divide the corpus into three equal parts, the income from a part to be paid to each of her three children, Lora, Bessie, and Edward, during their lives, with remainders of the daughters' shares to their respective children; upon Edward's death leaving no issue the income from his share to be paid to his widow for life and, upon her death, the remainder to be added, in equal shares, to the daughters' trust funds. Edward died in 1928 leaving a widow but no issue.
In 1931 dissatisfaction with the administration of the trust impelled the decedent to seek its abrogation. Examination of the instrument disclosed violation of the rule against perpetuities. A bill was accordingly filed in an Illinois state court to have the trust declared void. The son's widow answered denying invalidity. A guardian ad litem representing the interests of infant beneficiaries in remainder also opposed the prayer of the bill. Subsequently, to avoid family discord and amicably to settle the pending litigation, a compromise agreement was made by the decedent and all the adult beneficiaries, consenting to the entry of a decree on condition that the decedent would declare a new trust of approximately one-third of the securities in the existing trust whereby Edward's widow should enjoy a life interest identical to that given her by the 1927 trust and, upon her death, the remainder should be equally divided between the decedent's daughters. The agreement further required the making of testamentary provision for the decedent's daughters and grandchildren, and certain outright gifts to the latter. In pursuance of the agreement, the decedent, on February 17, 1932, executed a new irrevocable deed of trust conveying approximately one-third of the corpus of the former trust and reserving to herself a life interest in the income, and executed a new will. A consent decree was then entered in the equity suit, the guardian ad litem representing to the court that the settlement would be advantageous to the minor beneficiaries.
The Commissioner's inclusion of the corpus of the trust of February 17, 1932, in the gross estate was sustained by the Board of Tax Appeals.*fn3 The Circuit Court of Appeals reversed the Board's decision.*fn4 We are of opinion that the action of the Commissioner and the Board should have been affirmed.
agree. The decree declared the 1927 trust void and revested the trust assets in the decedent. If that trust was, as the Illinois court decreed, void and ineffective because it violated the rule against perpetuities the son's widow took no interest under it and gave nothing to procure the 1932 transfer.
Third. The Commissioner relies not only upon the Joint Resolution of March 3, 1931, but upon § 803 (a) of the Revenue Act of 1932.*fn5 We need not consider the latter since the Joint Resolution, if legally enforcible, in express terms authorized his inclusion of the trust fund in the decedent's gross estate. As the Resolution was adopted nearly a year prior to the creation of the 1932 trust no claim is or can be made that, as to that transaction, it is retroactive. The contention is that the transfer was inter vivos, was presently effective, was irrevocable, was not made in contemplation of, or effective at, death, and that Congress was, therefore, without power to make it the subject of an estate or inheritance tax; that, while the transfer might, by appropriate legislation, have been taxed as a gift, to tax it as in the nature of a testamentary disposition is a denial of due process. The contention is unsound for several reasons. Since Congress may lay an excise upon gifts it is of no significance that the exaction is denominated an estate tax or is found in a statute purporting to levy an estate tax. Moreover, Congress having the right to classify gifts of different sorts might impose an excise at one rate upon a gift without reservation of a life estate and at another rate upon a gift with such reservation. Such a classification would not be arbitrary or unreasonable. A further vindication of the exaction is the authority of Congress to treat as testamentary, transfers with reservation of a
power or an interest in the donor. The legislative history of the Joint Resolution, to which reference is made in Hassett v. Welch, post, p. 303, demonstrates that the purpose of the legislation was to prevent avoidance of estate taxes. As has been said by the Court of Appeals of New York:*fn6 "It is true that an ingenious mind may devise other means of ...