Milliken v. United States

Background

A man gave shares of stock to his children in December 1916 while the 1916 revenue law was in force. He died on March 5, 1920, after the 1918 revenue law took effect. The tax commissioner treated the earlier gift as one “in contemplation of death” and taxed it under the 1918 law at the higher rates and by valuing the stock at the donor’s death. The heirs sued to recover the tax; the Court of Claims denied recovery and the Supreme Court reviewed that ruling.

Reasoning

The central question was whether it violated due process to apply the 1918 law’s higher rates and death-date valuation to a gift made before that law. The Court said the classification of gifts made in contemplation of death with testamentary transfers is permissible to prevent evasion of estate taxes. Because the 1916 law already treated such gifts as substitutes for wills, the donor was on notice that he might be taxed under the established system and could face later changes in rates. The Court concluded the retroactive effect here was not arbitrary and upheld the tax as part of the system for taxing transfers at death.

Real world impact

The ruling means people who made gifts as substitutes for wills before a later tax change can be taxed under the later law’s rates and by valuing property at the donor’s death. Estates and heirs therefore may owe the increased tax when the donor dies, and the decision supports collecting such taxes under the federal estate-transfer scheme.