Smith v. Shaughnessy
318 U.S. 176, 63 S. Ct. 545 (1943)

  • Smith formed a $571k trust for his wife. It was an irrevocable transfer. The trust income was to be paid to his wife, and when she died, the money came back to Mr. Smith if he was still alive (aka reversion), else it went to whoever she put in her will (aka a general testamentary power of appointment).
  • The IRS stepped in and demanded $71k in gift tax.
    • Based on the total value of trust principle.
  • Mr. Smith paid the tax, and then sued to get a refund.
  • The Trial Court found that only $322k was taxable. The IRS appealed.
    • The Trial Court found that the only thing that was transferred was the life interest, and that was the only part that was taxable.
  • The Appellate Court reversed. Smith appealed.
    • The Appellate Court taxed the life income and the remainder.
  • The US Supreme Court affirmed.
    • The Supreme Court found that there are three property interests at stake:
      • The life estate, which was the part of the gift that the wife received while she was alive. This was taxable.
      • The reversion, which was the money Mr. Smith would get back if he outlived his wife. This could be calculated from actuarial tables. This part was not taxable, since it was never given.
      • The remainder, which is the amount that Mrs. Smith would leave in her will to currently unnamed parties.
    • The Supreme Court found that the remainder was taxable.
      • The IRS argued that Mr. Smith had abandoned control of the remainder and it was therefore taxable.
      • Mr. Smith argued that no realistic value could be placed on the remainder and so it could not be classified as a gift.
      • The Supreme Court agreed with the IRS's argument and also found that just because something couldn't be accurately calculated wasn't an excuse for not taxing it.
  • In a dissent it was argued that the remainder hadn't technically been given to Mrs. Smith since she would have to be dead to receive it. So how could there be a gift without a beneficiary?