United States v. Hemme
Headline: Estate tax rule upheld: Court allows a 20% reduction to the new unified credit when a donor used the old gift exemption during the 1976 transition, affecting certain late-1976 givers and their estates.
Holding: The Court held that applying the 20% reduction to the unified credit for a gift where the donor had claimed the old lifetime gift exemption during the 1976 transition did not violate the statute or due process.
- Allows IRS to cut unified credit when donor used the old gift exemption in late 1976.
- Affects estates of people who made gifts between Sept 9 and Dec 31, 1976 and died within three years.
- Limits due-process challenges to similar transitional tax adjustments.
Summary
Background
The case involves the trustee of a revocable living trust and heirs who sought a $6,000 refund after the IRS reduced their estate’s new unified credit. In September 1976 the decedent made gifts totaling $45,000 and claimed the old $30,000 lifetime gift exemption. He died a little over two years later, and under the law at the time gifts made within three years of death had to be included in the estate. The estate claimed the 1978 unified credit of $34,000; the IRS reduced that credit by 20% of the $30,000 gift exemption, a $6,000 reduction, which the estate paid and then challenged in court.
Reasoning
The Court asked whether the transitional rule that cuts the unified credit by 20% of any specific gift exemption used in the brief transition period fits the statute and the Constitution. The Justices read the word "allowed" to mean a claimed exemption that the tax system did not formally disallow, and relied on longstanding tax practice saying IRS inaction can indicate allowance. The Court also noted that the three-year lookback rule for gifts already attached and that, when compared with the old law, the estate actually paid slightly less tax overall. The Court rejected the estate’s argument that the rule was an unconstitutional retroactive penalty or improper double taxation.
Real world impact
The ruling lets the IRS apply the transitional 20% reduction to unified credits when the decedent used the old gift exemption in the specified late-1976 window and died within three years. The Supreme Court reversed the lower court and upheld the statute as written and applied in this situation.
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