Tax Avoidance and the Federal Estate Tax

Abstract

The seemingly unrelated provisions of the federal estate tax fall into a coherent pattern when they are approached from the point of view of purpose. There are a number of ways by which a man may obtain the advantages of a will without making a transfer which is technically testamentary. A death tax limited to the taxation of testate and intestate succession would be little more than an incentive to tax avoidance. Congress, consequently, has surrounded the primary taxes upon testamentary and intestate succession with a protective periphery of taxes upon transactions inter vivos, whose common denominator is that they might otherwise be availed of to avoid the tax. Paradoxically, perhaps, it is the taxation of these living transfers which raises the most perplexing problems under a death tax. The most effective way to prevent avoidance of a death tax is to tax all the transfers which a person makes at the same rates and the same fashion, regardless of whether or not they are testamentary. This rather drastic procedure, which may suggest to some the impatient soul who cut off his head to cure a headache, is that urged by the advocates of integration of the federal estate and gift taxes.1 So far, however, Congress has preferred to proceed along less radical lines by striving to ensnare within the provisions of the estate tax only those transfers which seem directly designed to operate lieu of testamentary disposition. This is, of course, a technique which calls not only for a fine exercise of legislative discrimination, but for close cooperation on the part of the courts. The most skilful draftsman cannot define with precision the transfers which may be used to avoid a death tax. In many instances the legislature is powerless to do more than formulate some general standard and rely upon the courts for its effective realization. Phrases like gifts in contemplation of death, or transfers intended to take effect possession or enjoyment at or after death, are pious expressions of legislative aspiration, rather than definite descriptions of particular types of dispositions. The history of tax avoidance connection with the federal estate tax emphasizes the inadequacy of legislative power to deal unaided with this problem and the vital role of the judiciary. Tax avoidance under the federal estate tax is largely a problem * A.B., 1923, Georgetown University; LL.B., I926, S.J.D., 193I, Harvard University. Member of the New York and District of Columbia Bars. Professor of Law, Duke University. Contributor to legal periodicals. 1 A statement of the case for integration is presented Altman's Integration of the Estate and Gift Taxes, infra p. 331.