Irwin v. Gavit
Encyclopedia
Irwin v. Gavit, , was a case before the U.S. Supreme Court
regarding the taxability, under United States tax law
, of a divided interest in a bequest. It is notable (and thus appears frequently in law school casebooks) for the following holding:
's will, a sixth of his estate
would be held in trust for his granddaughter until she turned 21. During this period, her father would receive some of the income on this principal—in other words, he held an income interest in a testamentary trust for 15 years, with the remainder to his daughter.
The Collector viewed these payments as income, because they constituted the income on principal. Plaintiff argued they were exempt under §102(a) as property acquired by bequest.
He sued the Commissioner of Internal Revenue
(Irwin) in the N.D.N.Y.
, which found for the plaintiff. The Second Circuit
affirmed. The Commissioner appealed to the Supreme Court.
The Internal Revenue Code
at the time provided that while the gains, profits and income "derived from any source whatsoever" was taxable, the value of property acquired by gift
or bequest
was not to be included in taxable income
, and that trustee
s could be required to account for and withhold
certain amounts for the payment of tax.
Justice Holmes
, writing for the majority, reasoned that the statute
as then written required that the income received by trustees and paid to the remainderman
be considered taxable income. Holmes held that although the receipt of the estate funds would be considered a non-taxable bequest, the receipt of income from those funds in installments is taxable.
dissented, rejecting Holmes' distinction between the income from the trust and the trust itself, and suggesting that the majority stretched the meaning of the statute
too far. He wrote that money
is itself property, and therefore the money paid to Marcia Ann Gavit should also be considered part of the bequest:
268 U.S. 161 at 169.
Supreme Court of the United States
The Supreme Court of the United States is the highest court in the United States. It has ultimate appellate jurisdiction over all state and federal courts, and original jurisdiction over a small range of cases...
regarding the taxability, under United States tax law
Taxation in the United States
The United States is a federal republic with autonomous state and local governments. Taxes are imposed in the United States at each of these levels. These include taxes on income, property, sales, imports, payroll, estates and gifts, as well as various fees.Taxes are imposed on net income of...
, of a divided interest in a bequest. It is notable (and thus appears frequently in law school casebooks) for the following holding:
- A bequest of incomeIncomeIncome is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...
from propertyPropertyProperty is any physical or intangible entity that is owned by a person or jointly by a group of people or a legal entity like a corporation...
held in trustTrust lawIn common law legal systems, a trust is a relationship whereby property is held by one party for the benefit of another...
is taxable, even where the bequest of the entire corpus of the trust would be excluded as a gift.
Facts and procedural history
Under Anthony N. BradyAnthony N. Brady
Anthony Nicholas Brady was an American businessman born in Lille, France who emigrated to Troy, New York in 1857. Settling in Albany, New York he was first employed by a local barber and at age 19 went into business for himself, opening a tea store that he soon expanded with other outlets...
's will, a sixth of his estate
Estate (law)
An estate is the net worth of a person at any point in time. It is the sum of a person's assets - legal rights, interests and entitlements to property of any kind - less all liabilities at that time. The issue is of special legal significance on a question of bankruptcy and death of the person...
would be held in trust for his granddaughter until she turned 21. During this period, her father would receive some of the income on this principal—in other words, he held an income interest in a testamentary trust for 15 years, with the remainder to his daughter.
The Collector viewed these payments as income, because they constituted the income on principal. Plaintiff argued they were exempt under §102(a) as property acquired by bequest.
He sued the Commissioner of Internal Revenue
Commissioner of Internal Revenue
The Commissioner of Internal Revenue is the head of the Internal Revenue Service , a bureau within the United States Department of the Treasury.The office of Commissioner was created by Congress by the Revenue Act of 1862...
(Irwin) in the N.D.N.Y.
United States District Court for the Northern District of New York
The United States District Court for the Northern District of New York serves one of the 94 judicial districts in the United States and one of four in the state of New York. The U.S. Attorney for the district is Richard S. Hartunian...
, which found for the plaintiff. The Second Circuit
United States Court of Appeals for the Second Circuit
The United States Court of Appeals for the Second Circuit is one of the thirteen United States Courts of Appeals...
affirmed. The Commissioner appealed to the Supreme Court.
Issue
Is a gift of future income on an estate includable as income (because the bequest is made of the income of the estate and not the estate itself)?Majority opinion
"[W]e can perceive no distinction relevant to the question before us between a gift of the fund for life and a gift of the income from it." The Code provision excluding gifts and bequests "assumes the gift of a corpus and contrasts it with the income arising from it, but was not intended to exempt income properly so-called...."The Internal Revenue Code
Internal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
at the time provided that while the gains, profits and income "derived from any source whatsoever" was taxable, the value of property acquired by gift
Gift
A gift or a present is the transfer of something without the expectation of receiving something in return. Although gift-giving might involve an expectation of reciprocity, a gift is meant to be free. In many human societies, the act of mutually exchanging money, goods, etc. may contribute to...
or bequest
Bequest
A bequest is the act of giving property by will. Strictly, "bequest" is used of personal property, and "devise" of real property. In legal terminology, "bequeath" is a verb form meaning "to make a bequest."...
was not to be included in taxable income
Taxable income
Taxable income refers to the base upon which an income tax system imposes tax. Generally, it includes some or all items of income and is reduced by expenses and other deductions. The amounts included as income, expenses, and other deductions vary by country or system. Many systems provide that...
, and that trustee
Trustee
Trustee is a legal term which, in its broadest sense, can refer to any person who holds property, authority, or a position of trust or responsibility for the benefit of another...
s could be required to account for and withhold
Withholding tax
Withholding tax, also called retention tax, is a government requirement for the payer of an item of income to withhold or deduct tax from the payment, and pay that tax to the government. In most jurisdictions, withholding tax applies to employment income. Many jurisdictions also require...
certain amounts for the payment of tax.
Justice Holmes
Oliver Wendell Holmes, Jr.
Oliver Wendell Holmes, Jr. was an American jurist who served as an Associate Justice of the Supreme Court of the United States from 1902 to 1932...
, writing for the majority, reasoned that the statute
Statute
A statute is a formal written enactment of a legislative authority that governs a state, city, or county. Typically, statutes command or prohibit something, or declare policy. The word is often used to distinguish law made by legislative bodies from case law, decided by courts, and regulations...
as then written required that the income received by trustees and paid to the remainderman
Remainderman
A remainderman is a person who inherits or is entitled to inherit property upon the termination of the estate of the former owner. Usually this occurs due to the death or termination of the former owner's life estate, but this can also occur due to a specific notation in a trust passing ownership...
be considered taxable income. Holmes held that although the receipt of the estate funds would be considered a non-taxable bequest, the receipt of income from those funds in installments is taxable.
Reasoning
Under the statute:- §2(A)(1), provides for a tax upon "the entire net income arising or accruing from all sources." (Holmes: These payments seem to be the type of "income" intended by Congress. Eisner v. MacomberEisner v. MacomberEisner v. Macomber, , was a tax case before the United States Supreme Court. It is notable for the following holdings:*a pro rata stock dividend, where a shareholder received no actual cash or other property, and retained the same proportionate share of ownership of the corporation as was held...
.) - §2(B): net income includes "gains or profits and income derived from any source whatever, including the income from but not the value of property acquired by gift, bequest, devise or descent."
- §2(D): trustees shall make "return of the net income of the person for whom they act, subject to this tax;" and trustees and others, having the control or payment of fixed or determinable gains, etc., of another person who are required to render a return on behalf of another are "authorized to withhold enough to pay the normal tax."
- "The language quoted leaves no doubt in our minds that if a fund were given to trustees for A for life with remainder over, the income received by the trustees and paid over to A would be income of A under the statute. It seems to us hardly less clear that even if there were a specific provision that A should have no interest in the corpus, the payments would be income none the less, within the meaning of the statute and the Constitution, and by popular speech. In the first case it is true that the bequest might be said to be of the corpus for life, in the second it might be said to be of the income. But we think that the provision of the act that exempts bequests assumes the gift of a corpus and contrasts it with the income arising from it, but was not intended to exempt income property socalled simply because of a severance between it and the principal fund. No such conclusion can be drawn from Eisner v. Macomber, 252 U.S. 189, 206 , 207 S., 40 S. Ct. 189, 9 A. L. R. 1570. The money was income in the hands of the trustees and we know of nothing in the law that prevented its being paid and received as income by the donee."
Dissent
Justice SutherlandGeorge Sutherland
Alexander George Sutherland was an English-born U.S. jurist and political figure. One of four appointments to the Supreme Court by President Warren G. Harding, he served as an Associate Justice of the U.S...
dissented, rejecting Holmes' distinction between the income from the trust and the trust itself, and suggesting that the majority stretched the meaning of the statute
Statute
A statute is a formal written enactment of a legislative authority that governs a state, city, or county. Typically, statutes command or prohibit something, or declare policy. The word is often used to distinguish law made by legislative bodies from case law, decided by courts, and regulations...
too far. He wrote that money
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...
is itself property, and therefore the money paid to Marcia Ann Gavit should also be considered part of the bequest:
"The corpus of the estate was not the legacy which respondent received, but merely the source which gave rise to it. The money here sought to be taxed was not the fruits of a legacy; it was the legacy itself."
268 U.S. 161 at 169.
Academic Commentary
Gavit implies that the §102(a) exclusion goes to the remainderman alone, because he is treated as owning the corpus. In holding that trust income cannot be excluded by an income beneficiary (e.g. life-tenant), "the Court in effect decided not merely how much should be taxed, but to whom." But why not divide the realization of the income somehow between the several heirs? For example:- Since the life-tenant's interest is a "wasting asset," tax her life-estate/life-tenancy as an annuity, with a present value (at any given time) equal to the present value of the future payments -- an amount she could "recover ratably" each year.
- The value of the remainder likewise grows from year to year; that could count as annual income, taxed to the remainderman -- but also added to the basis of his remainder interest (as if he had purchased an endowment policy -- but, as we don't tax the income accumulating interest on an endowment policy until it matures, the remainderman should likewise be permitted to defer this "income" until it "matures")