Commissioner v. Wemyss
324 U.S. 303, 65 S. Ct. 652, 1945 U.S. LEXIS 2755 (1945)
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Rule of Law:
For federal gift tax purposes, a transfer of property is not made for 'adequate and full consideration in money or money's worth' unless the consideration provides a direct, measurable economic benefit to the donor; a detriment to the donee is insufficient.
Facts:
- A taxpayer proposed marriage to Mrs. More, a widow with one child.
- Mrs. More was the income beneficiary of two trusts established by her deceased husband.
- The terms of the trusts stipulated that upon her remarriage, her share of the income would cease and be redirected to her child.
- This trust income averaged approximately $5,484 per year.
- Mrs. More expressed unwillingness to remarry due to the impending loss of this income.
- To induce her to marry him, the taxpayer entered into an agreement on May 24, 1939, to transfer a block of stock to her.
- The value of the transferred stock was $149,456.13.
- Within a month of the stock transfer, the taxpayer and Mrs. More were married.
Procedural Posture:
- The Commissioner of Internal Revenue assessed a gift tax deficiency against the taxpayer for the stock transfer.
- The taxpayer challenged the assessment in the U.S. Tax Court (a court of first instance for tax disputes).
- The Tax Court sustained the Commissioner's deficiency assessment.
- The taxpayer, as appellant, appealed the Tax Court's decision to the U.S. Circuit Court of Appeals.
- The Circuit Court of Appeals reversed the Tax Court, finding in favor of the taxpayer.
- The Commissioner, as petitioner, was granted a writ of certiorari by the U.S. Supreme Court to review the judgment of the Circuit Court of Appeals.
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Issue:
Does a taxpayer's transfer of stock to his fiancée to compensate her for the loss of trust income she would forfeit upon their marriage constitute a transfer for 'adequate and full consideration in money or money's worth,' thereby exempting it from the federal gift tax?
Opinions:
Majority - Mr. Justice Frankfurter
No. The transfer does not constitute a transfer for 'adequate and full consideration in money or money's worth' and is therefore subject to the gift tax. The gift tax statute dispenses with the common law test of 'donative intent' and instead applies a workable external test: a transfer is a gift to the extent its value exceeds the value of consideration received in 'money or money's worth.' Consideration that is not reducible to a monetary value, such as a promise of marriage, is disregarded. Furthermore, the statute's purpose is to tax transfers that deplete the donor's estate. Therefore, any consideration must benefit the donor to offset this depletion; a mere detriment to the donee, such as Mrs. More's loss of trust income, does not constitute adequate consideration for the donor. The transaction was not a bona fide business transaction at arm's length, but rather a family arrangement subject to the gift tax.
Dissenting - Mr. Justice Roberts
Yes. The dissent would affirm the judgment of the Circuit Court of Appeals, which found the transfer was part of an arm's length bargain and lacked the donative intent necessary to constitute a gift.
Analysis:
This decision significantly broadened the scope of the federal gift tax by establishing an objective, estate-depletion standard over a subjective, intent-based one. By decoupling the gift tax's definition of 'consideration' from contract law, the Court made it clear that family and marital arrangements are not exempt simply because they involve a bargained-for exchange. The ruling's key principle—that consideration must be measurable in money and benefit the donor—created a strong anti-abuse rule, preventing taxpayers from disguising gratuitous transfers of wealth as contractual payments to avoid taxation.
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