US SUPREME COURT DECISIONS

Prior to 1977, the Internal Revenue Code's gift tax permitted the taxpayer a lifetime exemption of $30,000 to be deducted from amounts otherwise taxable, which exemption could be claimed, in whole or in part, at any time during the taxpayer's lifetime. 26 U.S.C. § 2521 (1970 ed.). The estate tax afforded the estate a specific exemption of $60,000 in determining the amount subject to tax. § 2052 (1970 ed.). The Tax Reform Act of 1976 (new Act), which was enacted on October 4, 1976, and which became effective on January 1, 1977, created the so-called "unified credit" (deductible directly from the amount of the tax) that a taxpayer could apply either toward gift tax during life or toward estate tax after death. §§ 2010(a), 2505(a). The $30,000 exemption for gifts and the $60,000 exemption for estates were eliminated, beginning with estates of taxpayers dying after December 31, 1976, and gifts given after that date, and a phase-in schedule was established for the amount of the new unified credit. The new Act also contained a transitional rule (applicable to taxpayers who, before 1977, had used up some or all of their $30,000 gift tax exemption) providing that the amount of the unified credit

"shall be reduced by an amount equal to 20% of the aggregate amount allowed as a specific exemption under section 2521 [prior to its repeal] with respect to gifts made by the decedent after September 8, 1976."

§ 2010(c). On September 28, 1976, a taxpayer made certain gifts, and he later filed a federal gift tax return which declared that no tax was due and in which he claimed his entire $30,000 lifetime exemption under § 2521 (1970 ed.). However, the taxpayer died just over two years later, and his estate was required by law to include in the estate all gifts made "in contemplation of death," which presumptively included all gifts made within three years of the decedent's death. § 2035 (1970 ed.). After including the 1976 gifts in the estate, the estate then claimed the unified credit of $34,000 under the new Act. However, the Internal Revenue Service (IRS) ruled that, under the new Act's transitional rule in § 2010(c), the credit must be reduced by 20% of the specific gift-tax exemption claimed during the decedent's lifetime, or $6,000. The estate paid the assessed deficiency of $6,000 and ultimately a refund suit was filed by appellees (the trustee of the decedent's "revocable living trust" and the transferees chanrobles.com-red

Page 476 U. S. 559

of his property). The District Court held that the application of § 2010(c) to the decedent's gifts, which were made before the new Act's enactment, was so arbitrary and capricious as to violate the Due Process Clause of the Fifth Amendment.

Held:

1. There is no merit to appellees' argument, focused on the word "allowed" in § 2010(c), that Congress did not intend the transitional rule to be applied as the IRS applied it here, because, when the 1976 gifts were required to be included in the estate as having been made in contemplation of death, the $30,000 specific gift tax exemption decedent had claimed became "disallowed" -- a claim to a specific exemption not being "allowed" unless the taxpayer ultimately benefited from that exemption by paying less tax than he otherwise would have payed. Longstanding interpretation of the tax laws does not support such argument. Nor was the mere inclusion of the gifts in the gross estate tantamount to disallowance of the $30,000 exemption. Moreover, decedent did receive a benefit for his specific exemption, since he avoided any gift taxes. The application of § 2010(c) here is consistent with the statute's language and purpose. Pp. 476 U. S. 564-567.

2. The District Court erred in finding that § 2010(c), as applied here, transgressed the Due Process Clause of the Fifth Amendment as being arbitrary and capricious because it retroactively affected the final disposition of a gift made before the statute's enactment. Untermyer v. Anderson, 276 U. S. 440, distinguished. The nature of a tax and the circumstances in which it is laid must be considered before it can be said that its retroactive application is so oppressive as to transgress the constitutional limitation. Here, in view of the applicable statutory provisions prior to the new Act, particularly the requirement of § 2035 (1970 ed.) as to inclusion in an estate of gifts made in contemplation of death, appellees were no worse off than they would have been without the enactment of the new Act. Moreover, even assuming that, as appellees asserted, the confluence of §§ 2010(c) and 2035 required them to pay tax on the same transaction twice, the Constitution was not offended, since Congress clearly expressed its intention to occasion that result. Pp. 476 U. S. 567-572.

Reversed.

MARSHALL, J., delivered the opinion for a unanimous Court. chanrobles.com-red

Page 476 U. S. 560