Paper by Edward A. Zelinsky
If we are concerned about the fairness, predictability, and rationality of the federal estate tax, we must take a hard look at section 2039 and the provisions of current law pertaining to employer-provided death benefits. At present, the federal estate tax treatment of employer-provided death benefits is not fair, predictable or rational. By analyzing section 2039 and the events leading to and following its adoption, we can understand how our present quandary came about and what can be done to resolve it.
There is, however, a more important reason for exploring the topic of employer-provided death benefits. An analysis of section 2039 yields insights that transcend the subject of employer-provided death benefits and that tell us much about the evolution of federal estate taxation, the emergence of new forms of wealth in twentieth-century America and the respective roles of Congress and the courts in the development of the estate tax.
Since its adoption in 1916, the federal estate levy has evolved in a manner that is both noteworthy and unanticipated. Central to this evolution has been the frequent reluctance of the federal courts to modernize the estate tax in the face of new and unexpected forms of wealth. In the context of the estate tax, many courts have defined transferable wealth as only that property which the decedent actually possesses during his lifetime and subsequently conveys by will, by trust, or by intestacy. However, the forms of wealth that have emerged in the twentieth century cannot be possessed by the decedent while alive and are, thus, not his to convey in a physical sense. By clinging to the notion that transferable wealth is only that which the decedent can possess while alive, the courts have frequently denied themselves the power to subject to federal estate taxation employer-provided death benefits, annuities, insurance death proceeds, beneficial interests in trusts, and other forms of wealth that are significant but that cannot be possessed by the decedent while he is alive.
Because the courts have defined inconsistently and restrictively the transferable property to which the estate tax attaches, Congress has been required to revise the statutory framework of the tax to keep pace with new forms of wealth. Ironically, Congress' repeated modernization of the estate tax has entailed the abandonment of the statutory concept of transfer. Because the courts have failed to give reliable, expansive, and consistent content to the statutory notion of wealth transfer, Congress has been forced to identify on an ad hoc basis certain property arrangements as deserving of estate taxation. Of necessity, this identification has been made without any reference to the notion of transfer.
Congress has recognized that, to effectuate the policy of the federal estate tax, a decedent's estate must often be required to pay tax on property that the decedent never possessed while alive. Since the courts have often defined an estate tax wealth transfer as requiring prior possession by the decedent, Congress has written an estate tax statute which, in large measure, taxes testamentary transfers of wealth by ignoring the concept of transfer. But Congress has merely responded to new forms of wealth piecemeal, never reformulating the estate tax statute in a comprehensive fashion or removing the statutory restrictions that, with some justification, have inhibited the courts from defending and extending the estate tax more aggressively.
In short, a neglected story is embedded in the federal estate tax statute, a story of a changing economy and its new forms of wealth, of the courts' reluctance to respond to these forms of wealth in light of perceived statutory restrictions, and of Congress' consequent efforts to protect federal transfer taxation by eschewing the concept of transfer. Section 2039, its history and its inadequacies, can serve as a vehicle for examining this story.
About the Author
Edward A. Zelinsky. Professor of Law, Benjamin N. Cardozo School of Law of Yeshiva University; B.A. 1972, Yale University; J.D. 1975, Yale University; M.A. 1975, Yale University; M. Phil. 1979, Yale University.
Citation
58 Tul. L. Rev. 1045 (1984)