Heiner v. Donnan

Background

John W. Donnan made complete, irrevocable gifts on March 1, 1927, giving securities to trustees for his four children and advancing money to his son. He died on December 23, 1928, less than two years later. The Commissioner of Internal Revenue treated those transfers as part of Donnan’s estate under a 1926 law that declares transfers within two years of death to be "in contemplation of death." The executors paid the tax, sued for a refund, and a lower court found the statute unconstitutional and entered judgment for the executors.

Reasoning

The majority opinion, written by Justice Sutherland, explained that the federal estate tax targets property transferred by death, not fully completed lifetime gifts. The 1926 provision creates an irrebuttable two‑year presumption that any qualifying gift was made because the donor contemplated death, and it prevents beneficiaries from proving the donor’s true motive. The Court held that this conclusive rule is arbitrary and violates the Fifth Amendment’s due process guarantee. The opinion also rejected the government’s alternate argument that the rule should be treated as a gift tax, concluding the statute’s valuation and collection method was irrational when applied as such. The Court answered the certified question that the two‑year irrebuttable rule is unconstitutional.

Real world impact

As a result, estates and heirs may contest the inclusion of recent lifetime gifts in the decedent’s taxable estate instead of being bound by an automatic presumption. The decision removes the government’s ability to rely on this specific automatic two‑year rule, but factual inquiry and other tax provisions remain available to determine tax liability.

Dissents or concurrances

Justice Stone dissented, arguing Congress could lawfully tax gifts made near death to prevent estate‑tax evasion and pointing to administrative experience and statistics supporting the two‑year rule; he would have upheld the provision.