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WikiLeaks Document Release http://wikileaks.org/wiki/CRS-95-444 February 2, 2009 Congressional Research Service Report 95-444 A History of Federal Estate, Gift, and Generation-Skipping Taxes John R. Luckey, American Law Division January 3, 2008 Abstract. Three primary categories of legislation pertaining to transfer taxes have been introduced in the 110th Congress. As noted above, the repeal of the estate and generation-skipping taxes is not permanent. One category would make the repeal permanent. (See, H.R. 411 and H.R. 2380). Another category would accelerate therepealofthesetransfertaxes. (See,H.R.25,H.R.1040,H.R.1586,H.R.4042,S.1025,S.1040,andS.1081). The third would reinstate these taxes at lower rates and/or in a manner more considerate of family-owned business. (See, H.R. 1928, H.R. 3170, H.R. 3475, H.R. 4172, H.R. 4235, H.R. 4242, and S. 1994). In this report, the history of the federal transfer taxes has been divided into four parts: (1) the federal death and gift taxes usedbetween1789and1915;(2)thedevelopment,from1916through1975,ofthemodernestateandgifttaxes; (3) the creation and refinement of a unified estate and gift tax system, supplemented by a generation-skipping transfertax;and(4)thephaseoutandrepealoftheestateandgeneration-skippingtaxes,withthegifttaxbeing retained as a device to protect the integrity of the income tax. (cid:0) (cid:2)(cid:3)(cid:4)(cid:5)(cid:6)(cid:7)(cid:8)(cid:9)(cid:10)(cid:3)(cid:8)(cid:11)(cid:3)(cid:12)(cid:13)(cid:14)(cid:13)(cid:9)(cid:15)(cid:16)(cid:3)(cid:17)(cid:6)(cid:7)(cid:15)(cid:7)(cid:13)(cid:18)(cid:3)(cid:19)(cid:5)(cid:11)(cid:7)(cid:18)(cid:3)(cid:15)(cid:20)(cid:14)(cid:3) (cid:19)(cid:13)(cid:20)(cid:13)(cid:9)(cid:15)(cid:7)(cid:5)(cid:8)(cid:20)(cid:21)(cid:22)(cid:23)(cid:5)(cid:24)(cid:24)(cid:5)(cid:20)(cid:25)(cid:3)(cid:26)(cid:15)(cid:27)(cid:13)(cid:6)(cid:3) (cid:2)(cid:3)(cid:4)(cid:5)(cid:6)(cid:7)(cid:8)(cid:6)(cid:9)(cid:10)(cid:11)(cid:12)(cid:13)(cid:14)(cid:6) (cid:2)(cid:3)(cid:4)(cid:5)(cid:6)(cid:7)(cid:8)(cid:9)(cid:5)(cid:10)(cid:3)(cid:11)(cid:12)(cid:9)(cid:9)(cid:13)(cid:14)(cid:15)(cid:3)(cid:16)(cid:11) 4 4 -4 (cid:17)(cid:8)(cid:15)(cid:18)(cid:8)(cid:14)(cid:16)(cid:11)(cid:19)(cid:20)(cid:21)(cid:11)(cid:22)(cid:23)(cid:23)(cid:24)(cid:11) 5 9 - S R C / ki wi / g r o s. k a e kil wi / / p: t t h (cid:0)(cid:2)(cid:3)(cid:4)(cid:5)(cid:6)(cid:7)(cid:7)(cid:8)(cid:2)(cid:3)(cid:9)(cid:10)(cid:11)(cid:12)(cid:6)(cid:7)(cid:6)(cid:9)(cid:5)(cid:13)(cid:14)(cid:11)(cid:15)(cid:6)(cid:5)(cid:16)(cid:8)(cid:13)(cid:6)(cid:11) (cid:0)(cid:2)(cid:3)(cid:0)(cid:4)(cid:4)(cid:5) (cid:6)(cid:6)(cid:6)(cid:7)(cid:8)(cid:9)(cid:10)(cid:7)(cid:11)(cid:12)(cid:13)(cid:5) (cid:14)(cid:3)(cid:2)(cid:15)(cid:15)(cid:15)(cid:5) (cid:2)(cid:3)(cid:4)(cid:5)(cid:3)(cid:6)(cid:7)(cid:8)(cid:9)(cid:10)(cid:5)(cid:11)(cid:8)(cid:9)(cid:5)(cid:2)(cid:8)(cid:12)(cid:13)(cid:9)(cid:6)(cid:14)(cid:14) Prepared for Members and Committees of Congress (cid:0)(cid:2)(cid:3)(cid:4)(cid:5)(cid:6)(cid:7)(cid:8)(cid:9)(cid:2)(cid:7)(cid:10)(cid:2)(cid:11)(cid:12)(cid:13)(cid:12)(cid:8)(cid:14)(cid:15)(cid:2)(cid:16)(cid:5)(cid:6)(cid:14)(cid:6)(cid:12)(cid:17)(cid:2)(cid:18)(cid:4)(cid:10)(cid:6)(cid:17)(cid:2)(cid:14)(cid:19)(cid:13)(cid:2)(cid:18)(cid:12)(cid:19)(cid:12)(cid:8)(cid:14)(cid:6)(cid:4)(cid:7)(cid:19)(cid:20)(cid:21)(cid:22)(cid:4)(cid:23)(cid:23)(cid:4)(cid:19)(cid:24)(cid:2)(cid:25)(cid:14)(cid:26)(cid:12)(cid:5)(cid:2) (cid:2) (cid:2)(cid:3)(cid:4)(cid:4)(cid:5)(cid:6)(cid:7)(cid:8) Since 1976, the federal transfer tax system has included an estate tax, gift tax, and generation- skipping tax. The estate and gift transfer taxes have been part of the federal revenue system, off and on, since the earliest days of the United States. The Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16) provided for a phaseout of the estate and generation- skipping taxes over a 10-year period, leaving the gift tax as the only federal transfer tax. It is important to note that, as structured in this act, the repeal of the estate and generation-skipping taxes is not permanent. Unless revised, these taxes are to be reinstated at 2001 levels in 2011. Two primary categories of legislation pertaining to transfer taxes may be expected to be introduced in the 111th Congress. As noted above, the repeal of the estate and generation-skipping taxes is not permanent. One category would make the repeal permanent. The second would reinstate these taxes at lower rates and/or in a manner more considerate of family-owned business. In this report, the history of the federal transfer taxes has been divided into four parts: (1) the 4 4 federal death and gift taxes used between 1789 and 1915; (2) the development, from 1916 4 5- through 1975, of the modern estate and gift taxes; (3) the creation and refinement of a unified 9 S- estate and gift tax system, supplemented by a generation-skipping transfer tax; and (4) the R C phaseout and repeal of the estate and generation-skipping taxes, with the gift tax being retained as / ki a device to protect the integrity of the income tax. wi / g r o s. k a e kil wi / / p: t t h (cid:27)(cid:7)(cid:19)(cid:24)(cid:8)(cid:12)(cid:5)(cid:5)(cid:4)(cid:7)(cid:19)(cid:14)(cid:15)(cid:2)(cid:28)(cid:12)(cid:5)(cid:12)(cid:14)(cid:8)(cid:29)(cid:30)(cid:2)(cid:21)(cid:12)(cid:8)(cid:31)(cid:4)(cid:29)(cid:12)(cid:2) (cid:0)(cid:2)(cid:3)(cid:4)(cid:5)(cid:6)(cid:7)(cid:8)(cid:9)(cid:2)(cid:7)(cid:10)(cid:2)(cid:11)(cid:12)(cid:13)(cid:12)(cid:8)(cid:14)(cid:15)(cid:2)(cid:16)(cid:5)(cid:6)(cid:14)(cid:6)(cid:12)(cid:17)(cid:2)(cid:18)(cid:4)(cid:10)(cid:6)(cid:17)(cid:2)(cid:14)(cid:19)(cid:13)(cid:2)(cid:18)(cid:12)(cid:19)(cid:12)(cid:8)(cid:14)(cid:6)(cid:4)(cid:7)(cid:19)(cid:20)(cid:21)(cid:22)(cid:4)(cid:23)(cid:23)(cid:4)(cid:19)(cid:24)(cid:2)(cid:25)(cid:14)(cid:26)(cid:12)(cid:5)(cid:2) (cid:2) (cid:9)(cid:10)(cid:11)(cid:12)(cid:13)(cid:11)(cid:12)(cid:14)(cid:8) Introduction.....................................................................................................................................1 Death and Gift Taxes in the United States: 1789-1915...................................................................2 The Death Stamp Tax: 1789-1802.............................................................................................2 The Civil War Inheritance Taxes: 1862-1870............................................................................2 An Income Tax on Gifts and Inheritance: 1894........................................................................4 Modified Estate Tax: 1898-1902...............................................................................................4 Reasons for Federal Death Taxes: 1789-1915...........................................................................5 Development of the Modern Federal Estate and Gift Taxes: 1916-1975........................................5 The Revenue Act of 1916..........................................................................................................5 Rate Increases: 1917.................................................................................................................6 Estate Tax Fluctuations and a Brief Gift Tax: 1918-1926.........................................................7 Estate Tax Rate Increases and a Permanent Gift Tax: 1932-1941.............................................8 Further Rate Adjustments and the Marital Deduction: 1942-1948...........................................9 Changes in the Estate Taxation of Life Insurance: 1954.........................................................10 4 4 Restructuring of the Federal Transfer Tax System: 1976-1998.....................................................10 4 - 95 The Tax Reform Act of 1976...................................................................................................10 - RS The Revenue Act of 1978........................................................................................................12 C / The Crude Oil Windfall Profits Tax Act of 1980....................................................................13 wiki The Economic Recovery Tax Act of 1981..............................................................................13 / The Deficit Reduction Act of 1984.........................................................................................15 g r o The Tax Reform Act of 1986...................................................................................................16 s. ak The Omnibus Budget Reconciliation Act of 1987..................................................................16 e kil The Technical and Miscellaneous Revenue Act of 1988.........................................................17 wi The Revenue Reconciliation Act of 1989...............................................................................18 / p:/ The Omnibus Reconciliation Act of 1990...............................................................................19 tt The Omnibus Reconciliation Act of 1993...............................................................................20 h The Taxpayer Relief Act of 1997............................................................................................20 The Internal Revenue Service Restructuring and Reform Act of 1998...................................21 Phaseout and Repeal of the Federal Estate and Generation-Skipping Taxes................................22 Repeal of the Estate and Generation-Skipping Transfer Taxes...............................................22 Phaseout of the Estate and Generation-Skipping Transfer Taxes............................................22 Modification of The Gift Tax..................................................................................................23 Basis Rules for Property Received from a Decedent..............................................................24 Other Amendments..................................................................................................................24 The 111th Congress Legislation...............................................................................................25 Conclusion.....................................................................................................................................25 (cid:15)(cid:16)(cid:17)(cid:18)(cid:13)(cid:19)(cid:6) Table 1. Applicable Exclusion amount and Family-Owned Business Exclusion..........................20 Table 2. Schedule of Changes........................................................................................................23 (cid:27)(cid:7)(cid:19)(cid:24)(cid:8)(cid:12)(cid:5)(cid:5)(cid:4)(cid:7)(cid:19)(cid:14)(cid:15)(cid:2)(cid:28)(cid:12)(cid:5)(cid:12)(cid:14)(cid:8)(cid:29)(cid:30)(cid:2)(cid:21)(cid:12)(cid:8)(cid:31)(cid:4)(cid:29)(cid:12)(cid:2) (cid:0)(cid:2)(cid:3)(cid:4)(cid:5)(cid:6)(cid:7)(cid:8)(cid:9)(cid:2)(cid:7)(cid:10)(cid:2)(cid:11)(cid:12)(cid:13)(cid:12)(cid:8)(cid:14)(cid:15)(cid:2)(cid:16)(cid:5)(cid:6)(cid:14)(cid:6)(cid:12)(cid:17)(cid:2)(cid:18)(cid:4)(cid:10)(cid:6)(cid:17)(cid:2)(cid:14)(cid:19)(cid:13)(cid:2)(cid:18)(cid:12)(cid:19)(cid:12)(cid:8)(cid:14)(cid:6)(cid:4)(cid:7)(cid:19)(cid:20)(cid:21)(cid:22)(cid:4)(cid:23)(cid:23)(cid:4)(cid:19)(cid:24)(cid:2)(cid:25)(cid:14)(cid:26)(cid:12)(cid:5)(cid:2) (cid:2) (cid:20)(cid:3)(cid:5)(cid:21)(cid:16)(cid:11)(cid:21)(cid:19)(cid:6) Author Contact Information..........................................................................................................25 4 4 4 - 5 9 - S R C / ki wi / g r o s. k a e kil wi / / p: t t h (cid:27)(cid:7)(cid:19)(cid:24)(cid:8)(cid:12)(cid:5)(cid:5)(cid:4)(cid:7)(cid:19)(cid:14)(cid:15)(cid:2)(cid:28)(cid:12)(cid:5)(cid:12)(cid:14)(cid:8)(cid:29)(cid:30)(cid:2)(cid:21)(cid:12)(cid:8)(cid:31)(cid:4)(cid:29)(cid:12)(cid:2) (cid:0)(cid:2)(cid:3)(cid:4)(cid:5)(cid:6)(cid:7)(cid:8)(cid:9)(cid:2)(cid:7)(cid:10)(cid:2)(cid:11)(cid:12)(cid:13)(cid:12)(cid:8)(cid:14)(cid:15)(cid:2)(cid:16)(cid:5)(cid:6)(cid:14)(cid:6)(cid:12)(cid:17)(cid:2)(cid:18)(cid:4)(cid:10)(cid:6)(cid:17)(cid:2)(cid:14)(cid:19)(cid:13)(cid:2)(cid:18)(cid:12)(cid:19)(cid:12)(cid:8)(cid:14)(cid:6)(cid:4)(cid:7)(cid:19)(cid:20)(cid:21)(cid:22)(cid:4)(cid:23)(cid:23)(cid:4)(cid:19)(cid:24)(cid:2)(cid:25)(cid:14)(cid:26)(cid:12)(cid:5)(cid:2) (cid:2) (cid:15)(cid:11)(cid:12)(cid:6)(cid:10)(cid:16)(cid:3)(cid:17)(cid:12)(cid:18)(cid:10)(cid:11)(cid:8) The concept of a death tax and the controversies surrounding such taxes have ancient roots. There is evidence of a 10 percent tax on transfers of property at death in ancient Egypt, as early as 700 B.C.1 Later, the Greeks and Romans adopted death taxes. Critics of such taxes may trace their grievances at least to Pliny the Younger, who charged that a death tax was “an unnatural tax augmenting the grief and sorrow of the bereaved.”2 The gift tax has developed as a necessary concomitant to the death tax because the easiest way to escape a tax on the gratuitous transfer of property at death is to divest oneself of the property during life. The impact of either tax alone would be diminished by the escape offered by the alternate transfer.3 Starting in 1976, Congress almost completely restructured the federal transfer tax system. The estate and gift taxes were unified. The scope of these taxes was changed in terms of size of estates affected. Perceived loopholes of major importance were closed or narrowed. Certain groups, previously thought to have suffered excessive tax burdens, were afforded relief. A new tax, the 4 4 generation-skipping transfer tax, was added to supplement these two other transfer taxes. 4 - 5 9 S- The enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001,4 begins a R C movement away from the use of transfer taxes. This act phases out the estate and generation- / ki skipping taxes over a ten year period, leaving the gift tax as the only federal transfer tax. The wi repeal of the estate tax would leave the United States without a federal estate tax for the first time / g r since 1916. o s. k a e This report details the history of the three federal transfer taxes, tracing their development from wikil their eighteenth century roots to the present.5 / / p: t t h 1 Randolph E. Paul, Federal Estate and Gift Taxation, p. 3 (Boston 1942), William J. Schultz, The Taxation of Inheritance, p. 3 (New York, 1926); and Max West, The Inheritance Tax, p. 11 (New York, 1908). See also, Knowlton v. Moore, 178 U.S. 41, 49 (1900). 2 William J. Schultz, The Taxation of Inheritance, p. 6 (New York 1926). The Roman death taxes were adopted by Emperor Augustus in 6 A.D. See also, Max West, The Inheritance Tax, p. 11 (New York, 1908); and 3 Adam Smith, The Wealth of Nations, p. 311 (London, 1811). For a discussion of the complexities of estate planning in ancient Greece, see, Anton-Herman Chroust, Estate Planning in Hellenic Antiquity: Aristotle’s Last Will and Testament, 45 Notre Dame Lawyer 629 (1969). 3 The history of using inter vivos transfers to evade death taxes may be traced to Egypt in the seventh century, B.C.. As noted by one author: “Another inscription [Egyptian hieroglyphics] records a sale of property by an old man to his sons at a nominal price, apparently for the purpose of avoiding the inheritance tax.” Max West, The Inheritance Tax, pp. 11-12 (New York, 1908). 4 P.L. 107-16, 107th Cong., 1st Sess. (2001). 5 For a summary and description of current law in this area, please see, CRS Report 95-416, Federal Estate, Gift, and Generation-Skipping Taxes: A Description of Current Law, by John R. Luckey. (cid:27)(cid:7)(cid:19)(cid:24)(cid:8)(cid:12)(cid:5)(cid:5)(cid:4)(cid:7)(cid:19)(cid:14)(cid:15)(cid:2)(cid:28)(cid:12)(cid:5)(cid:12)(cid:14)(cid:8)(cid:29)(cid:30)(cid:2)(cid:21)(cid:12)(cid:8)(cid:31)(cid:4)(cid:29)(cid:12)(cid:2) (cid:2) (cid:0)(cid:2)(cid:3)(cid:4)(cid:5)(cid:6)(cid:7)(cid:8)(cid:9)(cid:2)(cid:7)(cid:10)(cid:2)(cid:11)(cid:12)(cid:13)(cid:12)(cid:8)(cid:14)(cid:15)(cid:2)(cid:16)(cid:5)(cid:6)(cid:14)(cid:6)(cid:12)(cid:17)(cid:2)(cid:18)(cid:4)(cid:10)(cid:6)(cid:17)(cid:2)(cid:14)(cid:19)(cid:13)(cid:2)(cid:18)(cid:12)(cid:19)(cid:12)(cid:8)(cid:14)(cid:6)(cid:4)(cid:7)(cid:19)(cid:20)(cid:21)(cid:22)(cid:4)(cid:23)(cid:23)(cid:4)(cid:19)(cid:24)(cid:2)(cid:25)(cid:14)(cid:26)(cid:12)(cid:5)(cid:2) (cid:2) (cid:19)(cid:13)(cid:5)(cid:12)(cid:20)(cid:8)(cid:5)(cid:11)(cid:16)(cid:8)(cid:21)(cid:18)(cid:22)(cid:12)(cid:8)(cid:23)(cid:5)(cid:24)(cid:13)(cid:14)(cid:8)(cid:18)(cid:11)(cid:8)(cid:12)(cid:20)(cid:13)(cid:8)(cid:25)(cid:11)(cid:18)(cid:12)(cid:13)(cid:16)(cid:8)(cid:2)(cid:12)(cid:5)(cid:12)(cid:13)(cid:14)(cid:26)(cid:8)(cid:27)(cid:28)(cid:29)(cid:30)(cid:31)(cid:27)(cid:30)(cid:27) (cid:8) Prior to 1916, the United States did not make regular use of death and gift taxes. The federal government turned to them only in time of extraordinary revenue demands, such as wartime, although individual states used them extensively. (cid:15)(cid:4)(cid:13)(cid:6)(cid:22)(cid:13)(cid:16)(cid:21)(cid:4)(cid:6)(cid:23)(cid:21)(cid:16)(cid:24)(cid:25)(cid:6)(cid:15)(cid:16)(cid:26)(cid:27)(cid:6)(cid:28)(cid:29)(cid:30)(cid:31) (cid:28)(cid:30)!"(cid:6) The federal experience with death taxes began in the eighteenth century, when strained trade relations with France necessitated development of a strong naval force. In 1794, a special revenue committee of the House of Representatives recommended that a system of stamp duties be adopted to meet the resultant revenue needs. The recommended duties included a tax: On inventories of the effects of deceased persons, ten cents. On receipts for legacies, or shares of personal estate, where the sum is above $50 and not exceeding $100, twenty-five cents; more than $100 and not exceeding $500, fifty cents; for 4 4 4 every further sum above $500, a dollar. Not to extend to wives, children or grandchildren. - 5 9 - S On probates of wills, and letters of administration, fifty cents.6 R C / ki In 1796, the House Committee on Ways and means reported to Congress a bill to adopt such a /wi tax7 and the tax was enacted in 1797. g r o ks. The Stamp Act of July 6, 1797,8 required the use of federal stamps on receipts and discharges a kile from legacies and intestate shares, and levied a charge for the purchase of the required stamps. wi The rate structure recommended by the special revenue committee in 1794 was adopted, along // with exemptions for distributions to a wife (but not a husband), or a child or grandchild.9 The tp: stamp tax continued in force until 1802, when it was repealed.10 For the next 60 years, the federal t h tax structure endured without any form of death tax. (cid:15)(cid:4)(cid:13)(cid:6)(cid:20)#$#(cid:18)(cid:6)%(cid:16)&(cid:6)’(cid:5)(cid:4)(cid:13)&#(cid:21)(cid:16)(cid:5)(cid:11)(cid:13)(cid:6)(cid:15)(cid:16)(cid:26)(cid:13)(cid:19)(cid:27)(cid:6)(cid:28)(cid:30)(" (cid:28)(cid:30)(cid:29)!(cid:6) The Civil War period was important in the development of the federal estate and gift tax system. The Revenue Act of 1862 introduced the first federal gift tax and included a number of features which have become important parts of the present federal estate, gift, and generation-skipping tax laws, including taxation of certain lifetime transfers of a testamentary character and exemption of 6 1 American State Papers in Finance 277. 7 Annals of Congress, 4th Cong., 1st Sess. 993 (1796). The tax proposed by the Ways and means Committee, however, was not graduated, unlike the 1794 recommendation. The Ways and Means proposal called for a flat 2 percent levy and exempted property passing to parents, husbands, and lineal descendants. 8 Act of July 6, 1797, 1 Stat. 527. 9 The policy of favorable tax treatment of transfers to a spouse has continued into present law, which affords special estate and gift tax deductions for certain interspousal transfers. 26 U.S.C. §§ 2056, and 2523. 10 Act of April 6, 1802, 2 Stat. 148. (cid:27)(cid:7)(cid:19)(cid:24)(cid:8)(cid:12)(cid:5)(cid:5)(cid:4)(cid:7)(cid:19)(cid:14)(cid:15)(cid:2)(cid:28)(cid:12)(cid:5)(cid:12)(cid:14)(cid:8)(cid:29)(cid:30)(cid:2)(cid:21)(cid:12)(cid:8)(cid:31)(cid:4)(cid:29)(cid:12)(cid:2) (cid:2) (cid:0)(cid:2)(cid:3)(cid:4)(cid:5)(cid:6)(cid:7)(cid:8)(cid:9)(cid:2)(cid:7)(cid:10)(cid:2)(cid:11)(cid:12)(cid:13)(cid:12)(cid:8)(cid:14)(cid:15)(cid:2)(cid:16)(cid:5)(cid:6)(cid:14)(cid:6)(cid:12)(cid:17)(cid:2)(cid:18)(cid:4)(cid:10)(cid:6)(cid:17)(cid:2)(cid:14)(cid:19)(cid:13)(cid:2)(cid:18)(cid:12)(cid:19)(cid:12)(cid:8)(cid:14)(cid:6)(cid:4)(cid:7)(cid:19)(cid:20)(cid:21)(cid:22)(cid:4)(cid:23)(cid:23)(cid:4)(cid:19)(cid:24)(cid:2)(cid:25)(cid:14)(cid:26)(cid:12)(cid:5)(cid:2) (cid:2) small estates. During the debate on the act, Congress considered for the first time special treatment of charitable transfers.11 The use of a federal death tax was revived in 1862 to meet the revenue demands of the Civil War.12 The 1862 levy, like its predecessor, taxed legacies and distributive shares of personal property but, unlike its predecessor, it was not a documentary stamp tax but an inheritance tax (a tax imposed upon individuals who receive property from a decedent upon the privilege of inheriting the property).13 The amount of the 1862 tax was, as is typical of inheritance taxes, graduated according to the closeness of the familial relationship between the decedent and the beneficiary. The rates ranged from 0.75 percent, for distributions to ancestors, lineal descendants, and siblings, to 5 percent, for distributions to distant relations and unrelated persons. The tax was imposed only on personal estates in excess of $1,000. Bequests to surviving spouses were entirely exempt from tax. Gifts intended to take effect at the donor’s death or thereafter were included in the donor’s estate for tax purposes. War revenue needs prompted Congress to increase the rates of tax on inheritances in 1864 and to 4 4 impose a succession tax on the receipt of real property by devise. The succession tax applied both 4 - 5 to devises of real property and to transfers for inadequate consideration, though transfers in 9 - S consideration of marriage were regarded as transfers for adequate consideration. Widows (though R C not widowers) were exempt from the succession tax, and charitable transfers of real estate were / ki expressly taxed at the highest rate.14 wi / g r In 1866, Congress responded to pleas of the Special Commissioner of the Revenue and tightened o ks. enforcement of the legacy and succession taxes. A penalty of up to $1,000 was imposed on a wikile estxaetecmuteonrsts a.1n5d administrators who failed to furnish the required statements or filed false / / tp: The legacy and succession taxes were repealed in 1870, when the need for their additional t h revenues had ceased.16 Four years later, the United States Supreme Court held, in Scholey v. Rew,17 that the legacy and succession taxes had been constitutionally imposed. 11 During consideration of the 1862 tax, Representative William Payne Sheffield of Rhode Island argued unsuccessfully for special treatment of charitable bequests. In debates on the floor of the House of Representatives, Congressman Sheffield stated: It seems to me proper for the national Legislature to give encouragement to making of this class of devises for charitable and literary purposes. There are a great many of them made—made to poor churches and made for the purpose of building schools and colleges. The Government has frequently aided such institutions by grants of land; and it seems to me to be in harmony with the previous policy of our legislature to adopt a provision of this character. Cong. Globe, 37th Cong., 2nd Sess. 1534 (1862). 12 Act of July 1, 1862, 12 Stat. 432, 483. 13 An inheritance tax may be distinguished from an estate tax, such as the tax presently imposed by the federal government. An estate tax is imposed upon a decedent’s estate for the privilege of passing the property to designated beneficiaries, whereas an inheritance tax is imposed upon the beneficiaries themselves for the privilege of receiving legacies, bequests and devises from the deceased. 14 Act of July 30, 1864, 13 Stat. 285, 480. 15 Act of July 13, 1866, 14 Stat. 140. 16 Act of July 15, 1870, 16 Stat. 256. (cid:27)(cid:7)(cid:19)(cid:24)(cid:8)(cid:12)(cid:5)(cid:5)(cid:4)(cid:7)(cid:19)(cid:14)(cid:15)(cid:2)(cid:28)(cid:12)(cid:5)(cid:12)(cid:14)(cid:8)(cid:29)(cid:30)(cid:2)(cid:21)(cid:12)(cid:8)(cid:31)(cid:4)(cid:29)(cid:12)(cid:2) (cid:2) (cid:0)(cid:2)(cid:3)(cid:4)(cid:5)(cid:6)(cid:7)(cid:8)(cid:9)(cid:2)(cid:7)(cid:10)(cid:2)(cid:11)(cid:12)(cid:13)(cid:12)(cid:8)(cid:14)(cid:15)(cid:2)(cid:16)(cid:5)(cid:6)(cid:14)(cid:6)(cid:12)(cid:17)(cid:2)(cid:18)(cid:4)(cid:10)(cid:6)(cid:17)(cid:2)(cid:14)(cid:19)(cid:13)(cid:2)(cid:18)(cid:12)(cid:19)(cid:12)(cid:8)(cid:14)(cid:6)(cid:4)(cid:7)(cid:19)(cid:20)(cid:21)(cid:22)(cid:4)(cid:23)(cid:23)(cid:4)(cid:19)(cid:24)(cid:2)(cid:25)(cid:14)(cid:26)(cid:12)(cid:5)(cid:2) (cid:2) In Scholey, the taxpayer contended that the Civil War death taxes were direct taxes which, under the United States Constitution, must be apportioned according to the census.18 The Court disagreed, stating that: Taxes on lands, houses, and other permanent real estate have always been deemed to be direct taxes, and capitation taxes, by the express words of the Constitution, are within the same category, but it never has been decided that any other legal exactions for the support of the federal government fall within the condition that unless laid in proportion to the numbers that the assessment is invalid.... Whether direct taxes in the sense of the Constitution comprehends any other tax than a capitation tax and a tax on land is a question not absolutely decided, nor is it necessary to determine it in the present case, as it is expressly decided that the term does not include the tax on income, which cannot be distinguished in principle from a succession tax such as the one in the present controversy.19 )(cid:5)(cid:6)’(cid:5)(cid:11)(cid:3)(cid:24)(cid:13)(cid:6)(cid:15)(cid:16)(cid:26)(cid:6)(cid:3)(cid:5)(cid:6)*#+(cid:21)(cid:19)(cid:6)(cid:16)(cid:5),(cid:6)’(cid:5)(cid:4)(cid:13)&#(cid:21)(cid:16)(cid:5)(cid:11)(cid:13)(cid:27)(cid:6)(cid:28)(cid:30)(cid:31)-(cid:6) The Income Tax Act of 1894 was not, in a technical sense, a death or gift tax, but it did treat gifts and inheritances as income and tax them as such.20 The tax was short-lived, as the United States 4 4 Supreme Court ruled it unconstitutional in 1895, in Pollock v. Farmers’ Loan and Trust 4 5- Company.21 The Court found that, to the extent the 1894 income tax was imposed on the gains 9 S- from real estate, it so burdened the real estate as to constitute a direct tax, which had to be R C apportioned among the states according to the census. The Court struck down the entire statute / ki because it found that elimination of only the tax on real estate income would unduly burden the wi other classes of income taxpayers, contrary to congressional intent. / g r o s. ak .(cid:3),#+#(cid:13),(cid:6)/(cid:19)(cid:21)(cid:16)(cid:21)(cid:13)(cid:6)(cid:15)(cid:16)(cid:26)(cid:27)(cid:6)(cid:28)(cid:30)(cid:31)(cid:30) (cid:28)(cid:31)!"(cid:6) e kil /wi The War Revenue Act of 189822 imposed another death tax in order to raise revenues to finance / p: the Spanish-American War. The 1898 death tax was a form of estate tax, levied upon the value of t ht all personal property included in a decedent’s gross estate. Property passing to a surviving spouse was excluded from the tax, and a $10,000 specific exemption excluded small estates. The tax rates were graduated from 0.74 percent to 15 percent, taking into consideration both the size of the estate and the degree of kinship of the decedent and the beneficiaries. The United States Supreme Court upheld the 1898 estate tax in Knowlton v. Moore.23 The Court reaffirmed its earlier decision in Scholey v. Rew, supra, and said that the estate tax, like the inheritance tax, was an indirect tax subject to the rule of uniformity and not the rule of (...continued) 17 23 Wall. (90 U.S.) 331 (1874). 18 U.S. Const., Art. I, § 9, cl. 4. 19 23 Wall. (90 U.S.) 331, 347. 20 Act of August 27, 1894, 28 Stat. 509, 553. 21 158 U.S. 429 (1895). This case is often correctly viewed as setting the stage for the passage of the Sixteenth Amendment to the United States Constitution, which expressly authorizes the imposition of an income tax without apportionment by census. 22 Act of June 4, 1898, 30 Stat. 448, 464. 23 178 U.S. 41 (1900). (cid:27)(cid:7)(cid:19)(cid:24)(cid:8)(cid:12)(cid:5)(cid:5)(cid:4)(cid:7)(cid:19)(cid:14)(cid:15)(cid:2)(cid:28)(cid:12)(cid:5)(cid:12)(cid:14)(cid:8)(cid:29)(cid:30)(cid:2)(cid:21)(cid:12)(cid:8)(cid:31)(cid:4)(cid:29)(cid:12)(cid:2) !(cid:2) (cid:0)(cid:2)(cid:3)(cid:4)(cid:5)(cid:6)(cid:7)(cid:8)(cid:9)(cid:2)(cid:7)(cid:10)(cid:2)(cid:11)(cid:12)(cid:13)(cid:12)(cid:8)(cid:14)(cid:15)(cid:2)(cid:16)(cid:5)(cid:6)(cid:14)(cid:6)(cid:12)(cid:17)(cid:2)(cid:18)(cid:4)(cid:10)(cid:6)(cid:17)(cid:2)(cid:14)(cid:19)(cid:13)(cid:2)(cid:18)(cid:12)(cid:19)(cid:12)(cid:8)(cid:14)(cid:6)(cid:4)(cid:7)(cid:19)(cid:20)(cid:21)(cid:22)(cid:4)(cid:23)(cid:23)(cid:4)(cid:19)(cid:24)(cid:2)(cid:25)(cid:14)(cid:26)(cid:12)(cid:5)(cid:2) (cid:2) apportionment. The Court rejected the contention that death taxes were the exclusive prerogative of the states and held that, although wills and distribution of estates were matters for state law, taxation of these transfers could rest with the federal government as well as the states. The 1898 estates tax was amended in 1901 to exempt bequests to charitable, religious, literary and educational organizations and to organizations for the encouragement of the arts or the prevention of cruelty to children.24 In 1902, the estate tax was repealed.25 (cid:7)(cid:13)(cid:16)(cid:19)(cid:3)(cid:5)(cid:19)(cid:6)+(cid:3)&(cid:6)0(cid:13),(cid:13)&(cid:16)(cid:18)(cid:6)(cid:22)(cid:13)(cid:16)(cid:21)(cid:4)(cid:6)(cid:15)(cid:16)(cid:26)(cid:13)(cid:19)(cid:27)(cid:6)(cid:28)(cid:29)(cid:30)(cid:31) (cid:28)(cid:31)(cid:28)1(cid:6) Federal death taxes in the United States between 1797 and 1915 appear to have served as supplementary revenue sources adopted only during war times. There is little support for the theory that these taxes were levied in an attempt to prevent the transfer of vast estates or to redistribute wealth. Attitudes began to change with respect to the perpetuation of large estates, however, and in a speech in 1906 President Theodore Roosevelt called for: 4 4 -4 a progressive tax on all fortunes beyond a certain amount, either given in life or devised or 5 -9 bequested upon death to any individual—a tax so framed as to put it out of the power of the S R owner of one of these enormous fortunes to hand on more than a certain amount to any one C / individual.26 ki wi / g (cid:19)(cid:13)!(cid:13)"(cid:10)#(cid:4)(cid:13)(cid:11)(cid:12)(cid:8)(cid:10)(cid:22)(cid:8)(cid:12)(cid:20)(cid:13)(cid:8)$(cid:10)(cid:16)(cid:13)(cid:6)(cid:11)(cid:8)%(cid:13)(cid:16)(cid:13)(cid:6)(cid:5)"(cid:8)&(cid:14)(cid:12)(cid:5)(cid:12)(cid:13)(cid:8)(cid:5)(cid:11)(cid:16)(cid:8)(cid:21)(cid:18)(cid:22)(cid:12)(cid:8) r o s. k a (cid:23)(cid:5)(cid:24)(cid:13)(cid:14)(cid:26)(cid:8)(cid:27)(cid:30)(cid:27)’(cid:31)(cid:27)(cid:30)(cid:28) (cid:8) e kil wi / / p: A history of the modern federal estate and gift taxes must begin in 1916. Though since t ht extensively reexamined and revised numerous times, legislation enacted that year is the direct ancestor of current law. (cid:15)(cid:4)(cid:13)(cid:6)(cid:7)(cid:13)$(cid:13)(cid:5)(cid:10)(cid:13)(cid:6))(cid:11)(cid:21)(cid:6)(cid:3)+(cid:6)(cid:28)(cid:31)(cid:28)((cid:6) In 1916, Congress reacted to a mixture of changing attitudes and revenue shortages, the latter caused by a reduction in United States trade tariff receipts in the early years of World War I. It became apparent that greater reliance would have to be placed on internal taxes and that dependence on tariffs would have to be reduced. One internal tax was a federal estate tax. The estate tax adopted in the Revenue Act of 191627 had many features of the current taxes. It was measured by the value of the property owned by a decedent at the date of death and the value of a decedent’s estate was increased for tax purposes by certain lifetime transfers, including transfers 24 Act of March 2, 1901, 31 Stat. 946. 25 Act of April 12, 1902, 32 Stat. 96. 26 See, quotation in Randolph E. Paul, Taxation in the United States p. 88 (Boston, 1954). 27 Act of September 8, 1916, 39 Stat. 756; on rationale for the tax as a revenue measure, see, H.Rept. 64-922, 64th Cong., 1st Sess. 1-5 (1916). (cid:27)(cid:7)(cid:19)(cid:24)(cid:8)(cid:12)(cid:5)(cid:5)(cid:4)(cid:7)(cid:19)(cid:14)(cid:15)(cid:2)(cid:28)(cid:12)(cid:5)(cid:12)(cid:14)(cid:8)(cid:29)(cid:30)(cid:2)(cid:21)(cid:12)(cid:8)(cid:31)(cid:4)(cid:29)(cid:12)(cid:2) (cid:0)(cid:2)

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