Burnet v. Guggenheim
1933 U.S. LEXIS 40, 53 S. Ct. 369, 288 U.S. 280 (1933)
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Rule of Law:
A gift is not legally complete for federal gift tax purposes until the donor surrenders dominion and control over the property. The termination of a donor's power to revoke a trust is the taxable event that completes the gift.
Facts:
- In 1917, Guggenheim created two trusts, one for his son and one for his daughter.
- The terms of the trusts gave Guggenheim the unrestricted power to modify, alter, or revoke them.
- In May 1921, Guggenheim transferred his powers of investment and administration of the trusts to other parties.
- In July 1925, after the passage of the Revenue Act of 1924 which established a gift tax, Guggenheim canceled his power to modify, alter, or revoke the trusts, thereby making them irrevocable.
Procedural Posture:
- The Commissioner of Internal Revenue assessed a gift tax against Guggenheim based on the value of the trust assets at the time he canceled his power of revocation in 1925.
- Guggenheim appealed to the Board of Tax Appeals, which upheld the Commissioner's assessment.
- Guggenheim then appealed to the U.S. Court of Appeals for the Second Circuit.
- The Court of Appeals reversed the Board of Tax Appeals, holding that the transfer was not a taxable gift.
- Burnet, the Commissioner of Internal Revenue, petitioned the U.S. Supreme Court for a writ of certiorari, which was granted.
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Issue:
Does the cancellation of a grantor's power to revoke a trust constitute a taxable transfer by gift under the Revenue Act of 1924, when the trust itself was created prior to the enactment of the tax?
Opinions:
Majority - Justice Cardozo
Yes, the cancellation of the power to revoke constitutes a taxable gift. A gift is not consummate for tax purposes until it is put beyond the donor's recall. While the power of revocation existed, the gifts were inchoate and imperfect from a substantive point of view, as the donor retained dominion and control. The transfers acquired substance and reality, and thus became taxable gifts, only when Guggenheim surrendered his power of revocation in 1925. The court reasoned that taxation is concerned with the actual command over property, not with the technical refinements of legal title. To tax the gift before it becomes irrevocable would impose a hardship by demanding payment on a transfer that may never become final. This interpretation aligns the gift tax with the estate tax, which focuses on the shifting of economic benefits rather than formalities of title.
Dissenting - Justice Sutherland and Justice Butler
No. The dissenters stated their opinion that the termination of the donor’s power of revocation was not a transfer by gift of any property within the meaning of the statute and that the judgment of the lower court should be affirmed, but provided no further reasoning.
Analysis:
This landmark decision established the foundational 'dominion and control' principle in U.S. gift tax law. By focusing on the substance of the transfer rather than its legal form, the Court clarified that a gift is incomplete as long as the donor retains the power to undo it. This ruling harmonized the gift tax with the estate tax, preventing a significant loophole where individuals could make revocable 'gifts' to remove assets from their taxable estate while still controlling them. The principle was so influential that it was later explicitly codified by Congress, providing lasting certainty for estate planning and tax administration.
