Introduction**

Today, for a taxpayer to challenge the validity of a fed­eral tax imposed on him on constitutional grounds is at best a highly impractical quest. The major constitutional hurdles resulting from the requirements of apportionment,[1] uniform­ity,[2] and the doctrine of intergovernmental tax immunities[3] were cleared by the existing federal tax laws early in their history. As to the remaining constitutional limitation on the congressional powers of taxation resulting from the due process clause of the Fifth Amendment,[4] many attempts have been made to challenge a federal tax measure on this ground, but only in a few cases has the Supreme Court found this limitation trans­gressed.[5] The established ample powers of taxation that Con­gress has, the vagueness of the due process concept itself and the congressional care in drafting tax measures to conform with the general notions of fairness, explain the Supreme Court’s reluctance in overturning a federal tax measure on this ground. Rightly so, it has been said that “one of the significant char­acteristics of federal taxation today is the general absence of constitutional problems.”[6]

Thus, to find a federal tax measure whose constitutional validity can be reasonably challenged as violative of the due process clause of the Fifth Amendment is indeed an exceptional case. Yet such a case does arise with the provisions of the federal estate and gift tax law relating to the imposition of the tax on the residents of the so-called possessions of the United States, namely Puerto Rico, the U.S. Virgin Islands and Guam, which in effect classifies them in two groups depending on how they acquired their United States citizenship.[7]

Those residents of a possession that acquired their United States citizenship independently of their connections to the possession (hereinafter referred to as “mainland citizens”) are taxed under the category of “resident or citizen.” In other words, they are taxed on all transfers, either by death or by gift, of property regardless of where this property is situated. Hence this includes property situated within the possession.

The other group, those residents of the possession that acquired their United States citizenship because of their connections to the possession wherein they reside (hereinafter referred to as “possession citizens”), and which obviously comprise a majority of the residents of the possession, are taxed as nonresident aliens. In other words, the federal estate and gift tax is imposed on them only if the property transferred, either by death or by gift, is situated within the United States. Hence, transfers of property situated within the possession are exempt from the tax.

The apparent justification for this differing tax treatment of the residents of a possession is the well-established con­gressional policy of exempting the possessions from federal taxation.[8] Underlying this classification then is the notion that the beneficiaries of this congressional policy are only the native residents of the possession, that is, the possession citizen (the Puerto Rican or Virgin Islander), and not the main­land citizen (the native “American”) residing in the possession. Apparently an unfounded fear, as will subsequently be demonstrated, that the possessions would become an estate and gift tax haven prompted this legislation.

It is submitted that any tax classification based on how United States citizenship is acquired cannot but be arbitrary and hence unconstitutional. It is the purpose of this paper to present various arguments suggesting that the discriminatory result of these estate and gift tax classifications on the main­land citizen resident of a possession makes them violative of the Fifth Amendment due process.[9]

Before entering into a discussion of the constitutional infirmities of the present law, an analysis of the preceding and existing law, and of the corresponding interpreting cases, is necessary to shed some light on the problem. The question of whether a taxpayer has standing to bring this suit and if he is adversely affected economically will also be considered; and since the classification turns on how United States citizenship is acquired, the method of acquisition of United States citizen­ship by the natives of the possessions will be briefly examined. The federal income tax law treatment of the residents of the possessions is also considered.

I. Federal Estate Tax prior to 1958

Since the enactment of the first modern estate tax by the Revenue Act of 1916,[10] and throughout the succeeding Revenue Acts,[11] until the enactment of the Revenue Act of 1934,[12] the estate tax was imposed upon the transfer of the “net estate” of every decedent “whether a resident or nonresident of the United States”[13] regardless of his citizenship. In the case of nonresidents, “net estate” was defined as “the value of that part of his gross estate which at the time of his death is situated in the United States.”[14] The residents of the posses­sions, being nonresidents of the United States,[15] were accord­ingly taxed only on that part of their gross estate which was situated in the United States at the time of their death. Thus, the property of a decedent resident of a possession situated within the possession was not taxed under the law, and this was perfectly compatible with the congressional policy of exempting the possessions from federal taxes.

Under the then existing law, the estates of nonresident United States citizens, to the extent that they contained assets abroad, except real property,[16] escaped taxation. To correct this, the Revenue Act of 1934 added the word “citizen” and “alien”, respectively, to each of the prior classifications so that the resulting classifications were on the one hand “resident or citizen” and on the other hand “nonresident not a citizen of the United States”, in other words, an alien.[17] Thus, the citizens residing abroad were taxed in the same manner as residents. But inadvertently the United States citizens residents of a possession fell under the new category of “resident or citizen”, and the question that arose was if they were to be accordingly taxed on transfers of property situated within the possession, or if the congressional policy of exempting the possessions from federal taxes would prevail. The cases that arose held that the latter policy was to prevail.

The first case was Estate of Smallwood v. Com­missioner, decided in 1948 by the Tax Court of the United States.[18] The decedent here was a United States citizen at the time of his death and had acquired his citizen­ship by birth in St. Louis, Missouri. “[A]t the time of his death and for many years prior thereto,”[19] he was domiciled in Puerto Rico and was thus a citizen of Puerto Rico.[20] “The Commissioner determined a deficiency of $133,038.26 in estate tax”[21] due by decedent’s estate alleging that section 802 of the Internal Revenue Code of 1939[22] “applies to the estates of all [residents or] citizens of the United States,”[23] and that decedent, although a nonresident of the United States, “was a citizen of the United States [at the time of his death and was] therefore subject to the tax.”[24] The petitioner on the other hand argued that the word “citizen” as used in section 802 excludes citizens of the United States who are also citizens of Puerto Rico because:

[The] general internal revenue laws are expressly excepted from those applicable to Puerto Rico and . . . Congress has consistently maintained a benevolent policy in regard to Puerto Rico which it would not change by a general provision of an internal revenue law containing no specific reference to Puerto Rico.[25]

The Court agreed with the petitioner. In reviewing the congressional policy towards Puerto Rico it stated:

Congress has obviously endeavored to advance the political, social, and economic status of Puerto Rico for some ultimate status not yet determined. It has never used Puerto Rico as a source of revenue for Federal uses elsewhere. The causes of the American Revolution would explain that attitude. The form of self-government and the general policy of Congress towards Puerto Rico is shown by the Foraker Act . . . and the Jones Act . . . . It was provided in those acts, and also in a subsequent act, that statutory laws of the United States not locally inapplicable shall apply to Puerto Rico except “the internal revenue laws.”[26]

Therefore, the Court concluded that to reverse an established congressional policy a clear expression of congressional intention is required, and that:

The Revenue Act of 1934, which merely added the word “citizen” alongside of the word “resident,” is not sufficient under the authorities cited . . . to indicate a change in policy of Congress toward Puerto Rico and citizens thereof, an implied repeal or annulment of the special provisions of the Jones Act by a later general provision, or an exercise of its sovereign authority over a possession.[27]

Hence United States citizens who were also citizens of Puerto Rico were excluded from the application of the estate tax.

In 1952, in the subsequent case of Estate of Santiago Rivera v. Commissioner, decedent as in the Smallwood case was also a United States citizen dom­iciled in Puerto Rico.[28] Unlike the Smallwood case, where decedent acquired his citizenship by birth in the United States, decedent here acquired his United States citizenship by virtue of the provisions of the Jones Act, which collectively granted United States citizenship to the citizens of Puerto Rico.[29] Contrary also to the Smallwood case, where the Commissioner attempted to assess the tax on the basis that the decedent fell under the resident or citizen classification, the Commissioner here attempted to assess the tax as if decedent were a nonresident alien, thus taxing only that part of decedent’s estate situated in the United States. The Tax Court in a short opinion which was affirmed by the Circuit Court of Appeals,[30] followed Smallwood and held that decedent was in fact an American citizen and therefore could not be taxed as a nonresident alien.[31]

The facts in Estate of Fairchild v. Commissioner were very similar to those in the Smallwood case, except that here the decedent was at the time of his death domiciled in St. Thomas, the Virgin Islands of the United States.[32] As in the Smallwood case, the Commissioner alleged that since the decedent was a United States citizen at the time of his death he fell under the category of resident or citizen and his estate was therefore subject to the tax. But the Tax Court, following the Smallwood case and finding that the same congressional policy of exempting Puerto Rico from federal taxation existed towards the Virgin Islands, held that the decedent’s estate was not subject to the federal estate tax.[33]

II. Federal Gift Tax prior to 1958

The short-lived first federal gift tax law of 1924 estab­lished the familiar classifications of resident and nonresident.[34] The resident taxpayer was liable for the gift tax on all trans­fers of property by gift regardless of where the property was situated, whereas the nonresident taxpayer was taxed only on gifts of property, which was situated within the United States. The amount of the deductions granted also depended on whether the taxpayer was a resident or not.[35] Here again, since the residents of the possessions were considered nonresidents of the United States, no conflict arose with the congressional policy of exempting the possessions from federal taxation.

The congressional enactment of the present gift tax law in the Revenue Act of 1932 varied these classifications.[36] As did the later amendment to the estate tax law,[37] the category of citizen was introduced so as to tax the gifts made by non­resident United States citizens of property situated abroad in the same way that similar gifts made by residents were taxed.[38] Although not intended, if literally applied, the law would re­quire that the United States citizens residing in the posses­sions be taxed on transfers by gift of property situated within the possessions and this would have collided with the con­gressional policy of exempting the possessions from federal taxation.

This general statutory scheme, of classifying taxpayers as “residents or citizens” on the one hand, and as nonresident aliens on the other hand, for purposes the estate and gift tax law, has remained unchanged.[39] Prior to 1958, no litigation arose over the applicability of the gift tax to United States citizens residing in the possessions on transfers by gifts of properties situated within a possession. This lack of litigation and the Commissioner’s unsuccessful attempt to impose the estate tax on those citizens who are residents of a posses­sion makes it doubtful that an attempt to impose a gift tax on them was made.[40]

A. Estate and gift taxes as amended by the Technical Amendments Act of 1958

The purpose of the Technical Amendments Act of 1958, introduced as H.R. 8381, was “[t]o amend the Internal Revenue Code of 1954 to correct unintended benefits and hardships and to make technical amendments, and for other purposes.”[41] It was evident from the Smallwood, Rivera, and Fairchild cases that the United States citizens residents of a possession were re­ceiving an unintended benefit since they were totally excluded from the applicability of the federal estate tax law even as to that part of their estates situated in the United States. The same was also true as to the federal gift tax law since as stated by the Treasury Department “the legal conclu­sions upon which [these cases] are based are equally applicable to the gift tax.”[42]

To correct these unintended benefits, Senate Amendment 227 to H.R. 8381, as “recommended by the Treasury Department, was introduced on the Senate floor[43] by Senator John J. Williams of Delaware, a member of the Senate Finance Committee.[44] This amendment, as subsequently enacted, established the classifica­tion the constitutional validity of which is being questioned here. It defined a citizen of the United States, for purpose of the federal estate and gift tax law, as excluding those residents of a possession who acquired their United States citizenship because of their con­nections to the possession wherein they reside. Hence, by definition, these residents of the possession that were considered “citizens” (the “mainland citizens”) fell under the category of resident or citizen and were there­fore to be taxed accordingly. With respect to the remaining residents of the possession (the “possession citizens”), the Senate amendment purported to tax them as nonresident aliens.

Senate Amendment 227 to the Technical Amendments Act of 1958 was agreed upon by the House and was subsequently enacted into law.[45] It added two new provisions to the Internal Revenue Code of 1954: Section 2208 as to the estate tax and section 2501(b) as to the gift tax, both of which are still in effect today, fifty-eight years after they were enacted. Section 2208 provided that:

A decedent who was a citizen of the United States and a resident of a possession thereof at the time of his death shall, for the purposes of the tax imposed by this chapter, be considered a “citizen” of the United States within the meaning of that term whenever used in this title, unless he acquired his United States citizenship solely by reason of (1) his being a citizen of such possession of the United States, or (2) his birth or residence within such possession of the United States.[46]

Section 2501(b) with respect to the gift tax law is identical except that in­stead of “decedent” it says “donor” and the phrase “at the time of his death” is excluded.

That part of Senate Amendment 227 which pur­ported to tax the possessions citizens as nonresident aliens was not agreed upon by the House. Existing law was to continue to be applicable to them, so in effect they were completely excluded from the federal estate and gift tax laws, even as to transfers of property situated in the United States, which was quite a windfall.[47] Subsequently, in 1960, the Internal Revenue Code of 1954 was amended to correct this windfall by adding section 2209, with respect to the estate tax, and section 2501 (c), with respect to the gift tax, so as to tax the possession citizen as a nonresident alien for purposes of such taxes, both of which are still in effect today. [48]

No litigation, as of yet, has arisen over these provisions. But two things are evident from the literal language of the statute. First, a person may have acquired his citizenship because of his connections to a possession and still not receive the favorable tax treatment if he is a resident of another pos­session, as for example, a Puerto Rican born citizen residing in the Virgin Islands. The statute in effect defines the favored group as “a resident of a possession . . . [who] acquired his United States citizenship solely by reason of (1) his being a citizen of such possession . . . or (2) his birth or residence within such possession.”[49] (Emphasis supplied.) And secondly, it also appears that the statute refers only to those possessions from which United States citizenship can be acquired by reason of (1) being a citizen of such possession or (2) by birth or residence within such possession.[50] These possessions were, in 1958, Puerto Rico,[51] the Virgin Islands[52] and Guam.[53] Under the first category, acquiring United States citizenship by being a citizen of such possession, only Puerto Rico is included since of the possessions it is the only one whose residents are also referred to as citizens of the possession.[54]

B. Acquisition of United States citizenship by the natives of the possessions

Puerto Rico was acquired by the United States in 1898 as a result of the Spanish-American War.[55] All Puerto Ricans born prior to 1941 acquired United States citizenship by collective naturalization under various congressional acts.[56] In 1941, an amendment to the Nationality Act of 1940 provided that all persons born in Puerto Rico after January 13, 1941 were deemed citizens of the United States at birth.[57]

The Virgin Islands were acquired from Denmark by purchase in 1916.[58] In 1927, Congress enacted legislation pertaining to the citizenship of its inhabitants which granted citizenship at birth to all persons born in the Virgin Islands after 1927 and collectively naturalized as United States citizens all those persons born or residing in the Virgin Islands prior to 1927 who had not elected to retain their Danish citizenship.[59]

Guam, as Puerto Rico, was acquired by the United States as a result of the Spanish-American War.[60] Yet Congress did not enact legislation pertaining to the citizenship of its inhab­itants until 1950.[61] Under the Nationality Act of 1940, the inhabitant’s of Guam were considered nationals, not citizens of the United States.[62] The Guam Organic Act of 1950 conferred citizenship to all persons born in Guam after 1899 who had not acquired a foreign nationality.[63] Citizenship was also con­ferred to other residents of Guam born prior to 1899.[64] Although the statute says that all persons born in Guam subject to the jurisdiction of the United States are citizens, it does not specify, as in the case of Puerto Rico and the Virgin Islands, that they are deemed citizens at birth.[65]

C. Standing to Sue

The issue here was not academic in 1968 when this article was first written. A greater tax burden was imposed on the mainland citizen resident of a possession, all other things being equal, than on the possession citizen be­cause of the fact that they happened to acquire their United States citizenship in a different manner. Because the federal estate tax is a progressive tax, the credit provided for estate, inheritance or gift taxes paid to a foreign country,[66] which includes the possessions for estate tax purposes,[67] did not off­set the additional tax burden imposed on the mainland citizen resident of the possession over the possession citizen.[68] The federal gift tax law, on the other hand, did not provide a credit for gift taxes paid elsewhere,[69] and thus an additional tax burden is definitively imposed on the mainland citizen in this case.

The Puerto Rico inheritance and gift tax law in effect in 1968 was repealed by Puerto Rico Act number 157 of June 30, 1968 and a new estate and gift tax was adopted patterned after the federal estate and gift tax law, which was effective as of January 1, 1969.  All transfers of properties situated in Puerto Rico, by death or by gift, that belonged to a resident of Puerto Rico were subject to estate and gift taxes in Puerto Rico. However, the law provided that if the transfer of such properties was subject to federal estate and gift taxes, then the tax payable in Puerto Rico would be an amount equal to the credit granted under federal law for taxes paid to Puerto Rico. In this way, the residents of Puerto Rico who did not acquire their U.S. citizenship by birth or residence in Puerto Rico were not subjected to an additional tax burden by the imposition of the federal tax because they were still subject to a Puerto Rico tax. However, in 1985, the Puerto Rico estate and gift tax law was amended (Act 11 of July 24, 1985) exempting from Puerto Rico estate and gift taxes transfers of properties situated in Puerto Rico belonging to residents of Puerto Rico not subject to federal estate and gift taxes. Thus, after 1985, and up until the present time, an additional tax burden is definitively imposed by the federal estate and gift tax law on the transfers of property situated in Puerto Rico, by death or by gift, by residents of Puerto Rico who happened to have acquired their U.S. citizenship by birth or residence outside of Puerto Rico.[70] Had they not been subject to federal estate and gift taxes on such transfers of property, they would not have been subject to Puerto Rico estate and gift taxes on such transfers of property.

III. Federal Income Tax Law – The citizens of a possession who are not otherwise citizens of the United States

As appears from the legislative history of the Technical Amendments Act of 1958, the possession citizens were referred to as citizens of a possession not otherwise citizens of the United States in the congressional debates. The phrase is misleading since the possession citizens are also United States citizens, but an inquiry as to its origin is helpful in ascertaining later on the legislative purpose of this classification for federal estate and gift tax purposes.

The Revenue Act of 1918 created a new classification of taxpayers under the federal income tax law: a “citizen of [a] possession . . . not otherwise a cit­izen of the United States”.[71] This new classification would apply to the native residents of two of the so-called possessions of the United States then: the Philippine Islands and “Porto Rico” (as Puerto Rico was then referred to in federal laws).[72] The intent of Congress, in accordance with its policy of exempting the so- called possessions from federal taxation, was to exempt the native residents of the possessions from federal income taxes on their income derived from sources within the possession, but to tax them on their income derived from sources within the United States as if they were nonresident aliens. Although Congress had granted Puerto Ricans U. S. citizenship in 1917, the Filipinos were never granted U.S. citizenship; they were U.S nationals.[73] Thus, the new classification, the “resident of a possession not otherwise a citizen of the United States”, clearly described their situation. This was not so with respect to Puerto Rico. Congress somehow forget that the year before, in 1917, it had granted United States citizenship to Puerto Ricans. The Bureau of Internal Revenue, as the Internal Revenue service was then known, cured this discrepancy by issuing a Treasury regulation that would include the native Puerto Rican, who was a U.S. citizen, under this new classification.

The federal income tax law had classified taxpayers in two groups: “citizen[s] or resident[s]” of the United States and nonresident aliens.[74] The former were taxed on all their income regardless of its source; whereas the latter were taxed only on income derived from sources within the United States. Excluded from both categories were the “citizens of a possession not otherwise citizens of the United States” be­cause they were not citizens nor residents of the United States, and could not be considered aliens.   Hence the Rev­enue Act of 1918 created a third category of taxpayers, the “citizens of a possession not otherwise citizens of the United States”. This provision remained unaltered as section 252 of the Internal Revenue Code of 1939, subsequently enacted in 1939, to provide that the native residents of the possessions were to be taxed as non-resident aliens and subject to federal income taxation only on their income from sources within the United States. [75]

Except in the case of Puerto Rico, this provision of the income tax law providing that the citizen of a possessions not otherwise a citizen of the United States be taxed as a nonresident alien has never been applied to a native resident of a possession who was a citizen of the United States. Since 1921 it has not been applic­able to Virgin Islands since the federal income tax laws are in force there as a territorial tax.[76] After the enactment of the 1950 Organic Act of Guam, it has not applied there, either for the same reasons as in the case of the Virgin Islands[77] or because the Organic Act also conferred United States citizenship to the inhabitants of Guam.[78]

Even though Puerto Rico was considered a possession of the United States, this classification, the resident of a possession not otherwise a citizen of the United States, literally read, should not have applied to Puerto Rico since Puerto Ricans were United States citizens at the time of its enactment in 1918 and have been citizens since 1917.[79] However, since it was the intent of Congress that it should apply, the then Bureau of Internal Revenue issued a Treasury Regulations to define the phrase a “citizen of a possession not otherwise a citizen of the United States” to in effect include those residents of Puerto Rico who had acquired their United States citizenship by reason of the Jones Act, referred to as the “organic act”.[80] They were not considered “citizens” for purposes of federal income taxation but were instead considered nonresident aliens. Accordingly, they would only be taxed and their income from U.S. sources.

With respect to the residents of Puerto Rico who did not acquire their United States citizenship by reason of the Jones Act, and as a result were deemed citizens of the United States for federal income tax purposes, section 251 of the Internal Revenue Code of 1939 provided that in their case “gross income” would only include income derived from sources within the United States if they derived more than 80% of their income from sources within the possession in which they resided during the prior three year period, and 50% or more from the active conduct of a trade or business within such possession. Thus, the income from Puerto Rico sources of those U.S. citizens who did not acquire their U.S. citizenship by virtue of the Jones Act and met the 80%-50% test was exempt for federal income taxation. Technically, section 251 did not require that these United States citizens be a resident of Puerto Rico. However, they were more than likely a resident of Puerto Rico if they met the 80%-50 test.

Therefore, the classification of the residents of Puerto Rico based on how they acquired their United States citizenship did not discriminate against either class of residents with respect to income derived from sources within Puerto Rico. Both classes of residents were exempt for federal income taxation on such income. However, with respect to their income derived from sources within the United States (not connected to a trade or business in the United States), such as, for example, interest received from investments made in Untied States, those who acquired their citizenship by reason of the Jones Act were unfairly discriminated upon. Since they were considered aliens for federal income tax purposes, their gross income from U.S. sources, as for example interest on investments made in the United States, was subject to a 30% withholding tax on the gross amount of the interest received. [81] The other United States citizens residing in Puerto Rico, who were considered “citizens” and not “aliens” were not subject to the 30% withholding tax since they were U.S. citizens and U.S. citizens have never been subject to that withholding tax.

The reason for this distinction between United States citizens for tax purposes was unexplainable. In 1950, Congress so concluded and amended the federal income tax law, eliminating such distinctions between United States citizens, and providing that all United States citizens who are bona fide res­idents of Puerto Rico, regardless of how they acquired their U.S. citizenship, are not subject to federal income taxation on income derived from sources within Puerto Rico, but are subject to federal income taxes on income derived from all other sources, just as “residents or citizens”. [82]

The comments found in the Senate Report in relation to this amendment appear inconsistent with the subsequent enactment of a similar classification in the estate and gift tax laws. The Senate Report states:

Under the existing Federal individual income tax law a disparity exists between the treatment accorded [to] two different groups of United States citizens who are residents of Puerto Rico, those who are citizens only by reason of the organic acts establishing the government of Puerto Rico and those who are citizens because they are born or naturalized in the United States. Puerto Rican residents who are United States citizens only as a result of the organic law are taxed by the United States in the same manner as resident aliens. [83] [Explanation of how the other group was taxed follows.]

Such report also states:

In the opinion of your committee the existing Federal tax treatment of United States citizens in Puerto Rico is confusing and the discrimination of those who derive their citizenship from the organic law is unfair. Moreover it is most unfortunate to classify citizens of the United States as nonresident aliens for tax purposes. …The withholding tax of 30% of gross income will no longer apply to residents of Puerto Rico who are citizens of the United States only by reason of organic law nor are they to be deprived of exemptions and the benefits of income splitting as under existing law.[84]

A. Due process considerations

In attacking the constitutionality of this classification the only weapon available in the constitutional arsenal is the due process clause of the Fifth Amendment.[85] Federal tax measures have been attacked on this ground in three major areas: (1) territorial jurisdiction, (2) progressive taxation and other aspects of classification and (3) retrospective taxation.[86] Our concern is with that part of the second area, which refers to other aspects of classification. At the outset, it is interesting to note that only in one case has the Supreme Court found a federal tax measure invalid under the Fifth Amendment based on an unreasonable classification.[87]

Although inequality is inherent in the notion of classifica­tion, laws may classify, and the resulting classification will be valid as long as “those who are similarly situated [are] sim­ilarly treated.”[88] This is in fact the constitutional require­ment embodied in the equal protection clause. But the equal protection clause is only binding upon the states, so if in fact there are any equal protection limitations binding the Federal government, they must be found in the due process clause of the Fifth Amendment.[89]

Although the due process clause limits congressional class­ification this has not always been thought to be the case. In a legal treatise written in 1906 it was said that “[s]o far as unequal, unjust or oppressive taxation is concerned, the due process clause in the Fifth Amendment, if it be a limitation on congressional power at all, is a limitation of so vague and elastic character as to be hardly worth mentioning.”[90] It was also said by Justice White, speaking for the Court in Brushaber v. Union Pacific Railroad Co.[91] in 1916:

[I]t is equally well settled that such clause [Fifth Amendment due process] is not a limitation upon the taxing power conferred upon Congress by the Constitution; in other words, that the Consti­tution does not conflict with itself by conferring upon the one hand, a taxing power, and taking the same power away, on the other, by the limitations of the due process clause.[92]

Nevertheless, Justice White conceded that a congressional act could be so arbitrary or a classification “so wanting in basis” that it was not an exertion of the taxing power but a confisca­tion of property violative of the Fifth Amendment.[93]

Subsequent cases also implied that the Fifth Amendment was not a limitation on congressional classification in tax measures.[94] Attacks on the reasonableness of a classification were quickly dismissed by the Court stating “the Fifth Amendment, unlike the Fourteenth, has no equal protection clause.”[95] But in all these cases the overruled contention that a federal tax law created an arbitrary classification was at best a desperate last-resort allegation.[96]

Other cases while upholding the challenged tax classifi­cation,[97] conceded that although the Fifth Amendment contains no equal protection clause “discrimination, if gross enough, is equivalent to confiscation and subject under the Fifth Amend­ment to challenge and annulment.”[98] In non-tax cases, especially those involving racial classifications, the Supreme Court has strongly implied that equal protection notions are embodied in the Fifth Amendment.[99]

But a consideration of the extent to which equal protection is incorporated in the Fifth Amendment is a futile exercise.[100] What is important is that the Fifth Amendment is a limitation on congressional classification and that the technique or the rationale of the Court in determining the validity of a classification is the same under the Fourteenth as under the Fifth Amendment.[101] In short, in both cases the judicial task is to determine the purpose of the law and judge the reasonable­ness of the classification in the light of that legislative pur­pose.[102]

B. Legislative purpose

In order to judge the constitutional validity of the class­ification here in question, the legislative purpose behind its enactment must be determined. As stated by Senator Williams, the purpose of the law was “to plug up a loophole with regard to inheritance taxes paid in the Virgin Islands and in Puerto Rico.”[103] As seen from the Smallwood, Rivera and Fairchild cases, the law indeed contained a loophole. United States cit­izens residing in a possession were exempt from paying estate and gift taxes, even as to that property situated in the United States. If nonresident aliens were taxed on transfers or property, either by death or by gift, which was situated in the United States, it is manifest that the United States citizen residents of a possession were obtaining an unintended benefit.

Taking into consideration the congressional policy of ex­empting the possessions from the internal revenue laws, an amendment providing that United States citizens who were bona fide residents of a possession were, for purposes of the estate and gift tax laws, not to be taxed on property situated within the possessions, would have corrected this unintended benefit. But apparently from the congressional viewpoint, the un­intended benefit received was more than avoiding an estate or gift tax on transfers of property situated within the United States. It was in fact avoiding the tax on all transfers, by death or by gift, of property, including that property situated within a possession. And it was not all of the United States citizen residents of a possession that were enjoying this unintended benefit. Excluded were the possession citizens, or as they were referred to in the congressional debates, citizens of a possession not otherwise citizens of the United States.

On the one hand, we could assume that this in fact was the legislative purpose: to tax the non-native U.S. citizens res­iding in a possession under the “resident or citizen” classification and to exclude from that classification the native U.S. citizens residing in a possession who acquired their citizenship because of their connections to that possession. On the other hand, this result is not satisfying because it leaves unanswered the question as to why this dis­tinction between residents of a possessions was necessary or justified. In this respect, the legislative history of the law is not helpful; on the contrary, it is, to say the least, rather confusing. The distinction drawn between residents of a possession on the basis of how they acquired their citizenship produces the same adverse consequences that Congress found with the otherwise not citizens of the United States income tax classification as ap­plied to Puerto Rico.[104] No explanation is given as to why a similar classification was thought necessary in the estate and gift tax laws.

Furthermore, in the legislative debates those residents who acquired their United States citizenship because of their rela­tions to the possession were referred to as residents otherwise not citizens of the United States.[105] For example, a Treasury Department letter recommending the resulting classification, and which was introduced in the record by Senator Williams, stated: “It has also been held in Estate of Rivera that the estate of a citizen of Puerto Rico who was not otherwise a citizen of the United States was not subject to estate tax . . . as a nonresident decedent not a citizen of the United States.”[106] The emphasized phrase was not used in the Rivera case, which held that “the federal estate tax is not applicable to citizen of the United States [resident of Puerto Rico] and the decedent was an American citizen who cannot be taxed as a nonresident alien.”[107]

Congress must have been aware that the native residents of the possessions were also United States citizens. It must also have been aware that the citizen of a possession not otherwise a citizen of the United States income tax classification was, after the 1950 amendment, no longer applicable to Puerto Rico because it created a “disparity [for tax purposes] between . . . two different groups of United States citizens who are residents of Puerto Rico” and was discriminatory in result.[108]

Thus, the only plausible reason for the classification was to prevent tax avoidance of federal estate and gift taxes. In other words, Congress did not want to reverse its policy of exempting the possessions from federal taxation, and on the other hand, it wanted to prevent those United States citizens who acquired residence in a possession in order to avoid the estate and gift tax on transfers of property situated within the possession, from avoiding it. That this was the underlying reason for the classification may be inferred from Congressman Mills who stated that: “This is designed to prevent a serious loophole for the evasion of estate and gift taxes under present law.”[109]

We shall analyze the resulting classification in the light of these two alternative legislative purposes. The first is that the purpose of the classification was to tax all United States citizens residing in a possession, excluding those res­idents that acquired their citizenship because of their connec­tions to the possession, under the category of resident or citizen for purposes of federal estate and gift taxes. The second is that the purpose of the classification was to prevent a United States citizen from acquiring residency in a possession in order to avoid federal estate and gift tax.

C. The reasonableness of the classification

Analyzing this classification in the light of the first of the legislative purposes, it appears that it coincides with the legislative purpose. Therefore, unlike the majority of cases involving a determination of the constitutional validity of a legal classification, this one is not defective because it does not include all, or because it excludes others, which in the light of the legislative purpose should have been included or excluded.[110] In other words, the problem of over inclusiveness or under inclusiveness does not arise.[111] Neither is the classification defective because it is dis­criminatory in the sense that it was motivated by prejudice or hostility of a majority group towards a minority group. The classification in effect favors the possession citizens, in other words, the Puerto Ricans or the Virgin Islanders which are minority groups if compared with the universe of United States citizens. If the contrary were true, well-estab­lished precedents[112] indicate that a court would have had no trouble in striking down this classification as discriminatory.

Nevertheless, if the motivation factor is cast aside, the classification is indeed discriminatory, even though admittedly its discriminatory character is elusive. Two factors account for this elusiveness. In the first place, to allege that a law discriminates against a majority group does not shock our sense of justice. But such is not the case here. If the dis­criminated upon group, the mainland citizen, is compared with the remaining residents of the possession, he is in fact a minority group. In the second place, to say that a federal law discriminates against Americans vis-à-vis Puerto Ricans or Virgin Islanders seems as hard to conceive as saying that a Mississippi law discriminates against its white residents. In ascertaining the validity of this classification, we must determine if those that are similarly situated are simil­arly treated. This requires a prior consideration of the rela­tionship that exists between the two classes as defined by the legislature. In other words, an inquiry must be made to determine if there are any plausible reasons that justify treating one group in a different manner than the other.

There appears to be no plausible reason that would justify treating one group of residents of a possession in a different manner for tax purposes than the remaining residents just because of the fact that they happened to have acquired their United States cit­izenship in a different manner. It is clear that there is no congressional policy that exempts from federal taxation those United States citizens who acquired their citizenship because of their relations to a possession. This results from the pro­visions of the estate and gift tax law in question. The minute the possession citizen is no longer a resident of the possession in which he was born or resided, and acquired his U.S. citizenship as a result of such birth or residency, he falls under the category of “resident or citizen” and is taxed accordingly.[113] It is the possession, the geographical unit, and thus its residents who are the beneficiaries of the congressional policy.[114]

Nevertheless, the ample congressional powers of taxation are well established. The fact that there is no congressional policy of exempting a citizen from federal taxes just because of the fact that he happened to acquire his citizenship in a certain way does not make this classification invalid. Neither is the classification defective because it classifies residents of a possession in two groups for tax purposes depending on how they acquired their United States citizenship. According to Tussman and tenBroek:

The issue is not whether, in defining a class, the legislature has carved the universe at a natural joint. If we want to know if such class­ifications are reasonable, it is fruitless to consider whether or not they correspond to some “natural” grouping or separate those who naturally belong together.[115] 

Thus here, although it is submitted that any legal classification which turns on how United States citizenship was acquired should be a suspect classification[116] or one which should bear a presumption of unconstitutionality, the fact that such a distinction was made does not in and of itself make this classification unconstitutional.

An analysis of this classification to determine if it com­plies with the reasonable relation test reveals its unconstitu­tionality. The mainland citizen resident of a possession is not treated for tax purposes in the same way as those that are similarly situated to him, the possession citizen resident of a possession. The fact that all mainland citizens are treated in the same manner does not suffice to determine if the reasonable relation test is complied with. “Judicial inquiry . . . does not end with a showing of equal application among the members of a class defined by the legislature.”[117]

Congress concluded that the effect of the law is that United States citizens residing in a possession but who:

[A]cquired their . . . citizenship . . . independently of their connections with the possessions will have their estates taxed in the same manner as estates of citizens of the United States are taxed. . . . For example, a United States citizen who moves from the United States to one of the possessions will continue to be treated . . . in the same manner in which he would have been treated if he had remained in the United States.[118]

Apparently then, according to congress, the reasonable relation test is complied with: the mainland citizen residing in a possession, being a United States citizen, is taxed “in the same manner as estates of citizens of United States are taxed.”[119]

But this argument is fallacious for two reasons. First, its apparent consistency is based on the erroneous premise that a United States resident is taxed because of his citizenship, and since he is still a citizen despite the fact that he subsequently became a resident of a possession he should be taxed “in the same manner in which he would have been [taxed] if he had remained in the United States.”[120] This premise disregards the legislative history of the law. The category of citizen was introduced in 1934 not to tax United States residents who were already taxed because of their residency, but to tax nonresident citizens.[121] Residents of the United States are taxed in the same manner regardless of their citizenship. Thus, although the effect is the same since the category reads “resident or citizen”, nevertheless the fact is that when the mainland citizen was residing in the United States he was taxed because of his residency there.

Secondly, the argument is fallacious because it disregards the fact that the native inhabitants of the possessions are also United States citizens and unless they are also residents of the possession, they are not entitled to be exempt from federal taxation. It is clear that the mainland citizen resident of a posses­sion is more similarly situated to the other residents of the possession who are also United States citizens than to the res­idents of the United States. To dwell on this point any further would be to belabor the obvious. Due process requires that all residents of a possession be on equal footing for tax purposes.

An argument could be made that the mainland citizen is more similarly situated to those United States citizens residing in a foreign country; and if they are taxed under the “resident or citizen” category because of their citizenship, then the mainland citizen should also be taxed in the same manner. But this argument also disregards the fact that a possession is not deemed a foreign country, that the native residents of the possession are also United States citizens, and that the reason for their exemption from the tax is only dependent on their residency in the possession. If we carry this to its logical extreme, congressional policy of exempting the possessions from taxation would be thwarted if enough mainland citizens moved to the possessions.

If we assume that the legislative purpose behind the enactment of this classification was to prevent the avoidance of federal estate and gift taxes, it is still unreasonable for the same reasons stated before. Moreover, if the legislative purpose was to prevent United States citizens who acquired residency in a possession in order to avoid the federal estate and gift taxes, from avoiding it, then the resulting classification is both under-inclusive and over-inclusive.[122] It is under-inclusive since a possession citizen may subsequently become a resident of the possession again in order to avoid federal estate and gift taxation and he will accomplish his purpose. Yet the probabilities of this occurrence are such that a court will not overturn the classification on this basis. After all, “a statute aimed at what is deemed an evil, and hitting it presumably where experience shows it to be most felt, is not to be upset.”[123] But the defect arising out of the over-inclusive trait of this classification cannot be dismissed as easily. Not all mainland citizens who become residents of possessions have as their purpose the avoidance of taxes. Under this classification, they would still be taxed. In effect, the statute establishes an irrefutable presumption that all those mainland citizens who became residents of a possession were motivated by tax avoidance purposes and this sweeps too broadly.

Heiner v. Donnan involved the validity of an estate tax provision which established that all inter vivos transfers made in the two years preceding the transferor’s death were conclusively presumed to have been made in contemplation of death, thereby constituting in effect a testamentary disposition and thus subject to estate taxes.[124] The court found that “[t]he dominant purpose [of this provision] is to reach substitutes for testamentary dispositions and thus to prevent the evasion of the estate tax [and a]s the transfer may otherwise have all the indicia of a valid gift inter vivos, the differentiating factor must be found in the transferor’s motive.”[125] The court concluded that the conclusive presumption created by the statute, incapable of being overcome by proof, precluded ascertaining if in fact this subjective factor was present, and held that “[s]uch a statute is more arbitrary and less defensible against attack than one imposing arbitrarily retroactive taxes, which this court has decided to be in clear violation of the Fifth Amendment.”[126]

If the purpose of the statute here was to tax those whose change of residence to a possession was motivated by tax avoidance purposes, then here also the differentiating factor on which the imposition of the tax should turn is a subjective one, the taxpayer’s motive in becoming a resident of a possession. The classification here seems even less defensible than the one in Heiner v. Donnan. It establishes an irrefutable presumption that all those residents of a possession who acquired their United States citizenship by birth or residence without the possession became residents of such a possession because they were motivated by tax avoidance purposes.

The resulting effect of a similar classification in two other cases is comparable to the case here in question. In Carrington v. Rash a sergeant in the United States Army challenged the constitutionality of a Texas Constitution provision which prohibited “‘[a]ny member of the Armed Forces of the United States’ who moves his home to Texas during the course of his military duty from ever voting in any election in that state ‘so long as he or she is a member of the Armed Forces’”.[127] The Supreme Court found this provision unconstitutional. It said: “By forbidding a soldier ever to controvert the presumption of non-residence, the Texas Constitution imposes an invidious discrimination in violation of the Fourteenth Amendment. ‘There is no indication in the Constitution that . . . occupation affords a per­missible basis for distinguishing between qualified voters within the State.”[128]

In Thompson v. Shapiro, the constitutionality of a state regulation, which withheld welfare benefits (Aid to Dependent Chil­dren) for one year to newly-arrived residents, otherwise qual­ified to receive the benefits, unless they came to the state with “substantial employment prospects” or a “certain cash stake” was involved.[129] The court found this unconstitutional because it violated “the right to travel and its concomitant right to establish residence” and the equal protection clause of the Fourteenth Amendment.[130] Although the court found that the purpose of this regulation of protecting the state’s “fisc by discouraging entry of those who come needing relief” was invalid, it held that even in the light of this purpose a “classification based on wealth between those who enter with a cash stake and those . . . who do not . . . . is invalid because there is no showing that in the long run the applicant with the cash would be a lesser drain on the state treasury.”[131]

Unlike the problem in consideration, what was involved in these cases was the validity of a state law, and thus it was the equal protection clause of the Fourteenth Amendment that came into play. But these differences are not relevant here. What is relevant and what is clear from both cases is that newly­-arrived or nonnative residents cannot be deprived of rights or benefits enjoyed by the native residents because of that fact.

In conclusion, then, it appears that this classification, regardless of the legislative purpose which motivated it, is unconstitutional. It clearly falls under any of the judicial tests of either unreasonable, grossly discriminatory or arbitrary. Examples that attest to this are obvious and need not be enumerated. Possibly unawareness of the fact that the natives of the possessions were also citizens of the United States or misconstruing con­gressional policy of exempting the possessions from federal taxation as only applicable to the natives of the possessions account for the enactment of this classification. If, as seen be­fore, Congress considered the similar income tax classification as applicable to Puerto Rico as creating a disparity in the tax treatment of residents of Puerto Rico or as being confusing it would follow that this classification in the estate and gift tax law can be characterized in the same manner.

Conclusions and alternatives

Congressional policy with respect to the applicability of the federal estate and gift tax laws to the citizens of the United States residing in a possession (particularly Puerto Rico) in order to comply with the congressional policy of exempting the possession from federal taxation has been confusing and unexplainable.

Inadvertently, the 1934 amendments that expanded the classification of “residents” in the federal estate tax law to include “citizens” did not take into account the fact that the residents of Puerto Rico and the Virgin Islands had been granted U.S. citizenship. Since they were U.S. citizens, the result of imposing an estate tax on them under the new category of “resident or citizen” meant their estates of property situated in the possession would be subject to taxation. Obviously, this was not the purpose of the 1934 amendments. It would have reversed congressional policy of exempting the possessions from federal taxes. The purpose of the amendment was to impose the estate tax on transfers of property situated outside the United States by U.S. citizens residing abroad in the same manner as if they had been residents of the United Sates.[132]

Nor was the purpose of the 1934 amendments to exempt the estates situated in the United States of U.S. citizens residing in Puerto Rico and the Virgin Islands from federal estate taxes. This, however, was the result of the 1934 amendments. U.S. citizens residing in Puerto Rico and the Virgin Islands no longer fell under the new category of nonresident aliens because they were not aliens but U.S. citizens. As a result their estates situated in the United States escaped taxation.

Thus, the Smallwood, Fairchild and Rivera cases, discussed above, held that the estate of U.S. citizens residing in a possession situated in the possession were not subject to federal estate taxes at all, regardless of whether such property was located in the possession or in the United States.[133] With respect to estates situated in Puerto Rico and the Virgin islands, the law was not applied literally. The U.S. citizens residing in Puerto Rico or the Virgin Islands were not subject to estate taxes under the new classification of “resident or citizen”, even though they were U.S. citizens. In this manner, congressional policy of exempting Puerto Rico and the Virgin Islands from federal taxation was not affected. With respect to estates situated in the United States, the law was applied literally. The U.S. citizens residing in Puerto Rico or the Virgin Islands were not subject to estate taxes under the new classification of nonresident aliens, with respect to their estates situated in the United Sates, because they were not aliens but U.S. citizens. Their estates were exempt from federal estate taxes even if situated within the United States. This is the unintended benefit that led to the 1958 amendments.

Why Congress in 1934 overlooked this loophole created by the 1934 amendments to the law, that the U.S. citizens residing in the possessions would not be subject to estate and gift taxation even if the property transferred was situated in the United States, is unexplainable. This is more so if we take into consideration that already in 1921, for federal income tax purposes, Congress had provided that income derived by a citizen of the United States from sources within a possession was exempt from federal income taxes if he met the 80%-50% test,[134] and that the res­idents of the possession not otherwise citizens of the United States were also exempt from federal taxes on income derived from sources within the possession, and would only be taxed on income derived from sources within the United States as non­resident aliens were.[135] Obviously, what prompted this legislation was the congressional policy of exempting the possessions from federal taxes. That the residents of the possessions were liable for federal income taxes on income derived from sources within the United States was perfectly compatible with this policy. Moreover, had it not been for the enactment of these provisions specifically applicable to the U.S. citizens residing in a possession, the same loophole that arose under the estate and gift tax laws prior to 1958, as made evident by the Smallwood and Rivera cases, would have arisen in the income tax law, since the latter, as the former, classified taxpayers as either as “citizens or residents” or as “nonresidents aliens”. [136]

Also unexplainable are the 1958 amendments to the estate and gift tax laws.[137] Congress again classified the residents of Puerto Rico in two groups for federal estate and gift tax purposes, depending on how they acquired their U.S. citizenship, just as it had done in 1918 for federal income tax purposes. As discussed before, under the federal income tax law it was the possession citizen that was unfairly discriminated upon then. He was subject to a 30% withholding tax on his gross income from U.S. sources because he was not considered a U.S. citizen, and was taxed as a nonresident alien, even though he was a citizen. The mainland citizen residing in the possession, however, was not subject to the withholding tax on his U.S. source gross income because he was considered a “citizen”. In 1950, Congress eliminated this classification for federal income tax purposes and taxed all residents of Puerto Rico in the same manner, regardless of how they had acquired their U.S. citizenship. It did so because it concluded that the classification was “confusing” and the discriminatory result “unfair” and because “it was unfortunate to classify citizens of the United States as nonresident aliens for tax purposes”.[138]

As a result of the amendments made in 1958 to the federal estate and gift tax laws, it is the mainland citizen that is discriminated upon. The transfer of his property, by death or by gift, situated in Puerto Rico is subject to federal estate and gift taxes because he is considered a “citizen”. That same transfer would not have been subject to such tax had the property belonged to a possession citizen because he is not considered a “citizen”.

Regardless of whether it is the possession citizen or the mainland citizen who is discriminated upon, the classification is still unfair and arbitrary. There is no rational basis to justify a classification for tax purposes based on how U.S. citizenship was acquired. It is unexplainable why Congress established that classification for purposes of the federal estate and gift tax laws in 1958 if eight years it had repealed that same classification for income tax purposes because it was discriminatory.

Aside from the fact that the constitutional validity of the resulting classification is highly doubtful, Congressional ambivalence in deciding to postpone taxing the possessions citizens as nonresident aliens, and waiting until 1960 to do so, is also unexplainable. In 1958, in deciding not to tax the possessions citizens as nonresident aliens, Congress said this “area require[d] further study.” [139] No further explanations were given although subsequently in 1960 they were so taxed.[140] The only plausible answer is that Congress may have thought that taxing the native residents as nonresident aliens would somehow conflict with congressional policy of exempting the possessions from federal taxes. On the other hand, this would hardly seem to be the case, if Congress had in fact provided before that they were to be taxed as nonresident aliens for federal income tax purposes.

Also unexplainable is why Congress decided to tax the mainland citizen on transfers by death or by gift of properties situated within the possessions. The obvious answer is that Congress may have believed that the possessions would become estate and gift tax havens prompting non natives to move their residence to a possession in order to avoid federal estate and gift taxes. There is, however, no basis in the congressional record to support such belief. In the case of Puerto Rico, the local inheritance and gift tax rates in 1958 were higher than the federal es­tate and gift tax rates, so obtaining residence in the Puerto Rico then was no inducement to avoid federal estate or gift taxes.[141] Nevertheless, congressional concern that undue advantage may be taken of the possessions federal tax exemption is justi­fiable. What is unjustifiable and unexplainable are the result­ing classifications in the law.

It is submitted that the federal estate and gift tax laws should be amended so that transfers of property by death or by gift of all United States citizens residing in Puerto Rico are taxed in the same manner. Compliance with the congressional policy of exempting Puerto Rico from federal taxes would be complied with by exempting the residents of Puerto Rico, regardless of how they acquired their U.S. citizenship, from federal estate and gift taxes with respect to property situated in Puerto Rico, just as the income of such residents from sources derived within Puerto Rico is exempt from federal income taxes.[142] As to the federal estate tax law, this would mean that in the case of a decedent who at the time of his death was a United States citizen and a bona fide resident of Puerto Rico, there would be excluded from his gross estate all property transferred by death situated in Puerto Rico. A similar provision could be adopted in the federal gift tax law. In this manner all U.S. citizens residing in Puerto Rico, regardless of how they acquired their U.S. citizenship, would be treated the same for federal estate and gift tax purposes, just as they are treated for federal income tax purposes.

Especially in the case of new residents, this proposed amendment would require a rigid scrutiny of their residency claims to assure that undue advantage of the tax exemption is not taken. The estate tax law could provide that a U.S. citizen who acquired residence in Puerto Rico in contemplation of death would not be deemed a resident of Puerto Rico for federal estate tax purposes. It could establish a presumption that a decedent who became a resident of Puerto Rico within three years prior to his death acquired his residence in Puerto Rico in contemplation of death unless proven otherwise. A similar provision had existed in the federal estate tax law to prevent the avoidance of estate tax through the use of gifts as a substitute for testamentary dispositions of what would otherwise be included in the gross estate.[143] The estate tax was then 25% higher than the gift tax.[144] Therefore, gifts made in contemplation of death would be subject to the higher estate tax.

It is also evident today, more so than in 1968 when this article was first written, that the unfair discriminatory effect of this classification adversely affects, not only the estates situated in Puerto Rico of the U.S. citizens residing in Puerto Rico who acquired their citizenship by birth or residence outside of Puerto Rico, as discussed in this article, but also the estates situated in the United States of the residents of Puerto Rico who acquired their U.S. citizenship by birth or residence in Puerto Rico (hereinafter the “native Puerto Rican”). Treating the native Puerto Rican as nonresident aliens for federal estate tax purposes unfairly discriminates against them as compared to other U.S. citizens, including those who are also residents of Puerto Rico, and also, in certain instances, as compared to nonresident aliens.

Because they are treated as nonresident aliens, the estates of native Puerto Ricans consisting of property situated within the United States have a substantial federal estate tax liability that the estates of other U.S. citizens, including those residing in Puerto Rico, do not have. This is so because the federal estate tax exemption is now $5,430,000[145] for the estates of citizens or residents and, at most, only up to $175,000[146] for the estates of the U.S. citizens residing in Puerto Rico who are taxed as nonresident aliens. Thus, the estate of native Puerto Ricans, taxed as a nonresident alien, consisting of property situated in the United States, having a value of $5,430,000, is subject to a federal estate tax of $2,471,000, simply because the decedent happened to have acquired his U.S. citizenship by birth or residence in of Puerto Rico.[147] However, if that estate had belonged to any other U.S. citizen, including a non-native Puerto Rican who is a resident of Puerto Rico, it would have been covered by the exemption and no estate taxes would have been payable.

In addition, the fact that a native Puerto Rican is treated as a nonresident alien for federal estate tax purposes, but not for federal income tax purposes, produces an absurd result in connection with the estate tax on the so-called “portfolio debt investments” made in the United States (for example, U.S. treasury bonds and treasury bills). Portfolio debt investments are not subject to federal estate taxes if made by a nonresident alien but they are subject to estate taxes if made by a native Puerto Rican. This is clearly an unfair discrimination against the native Puerto Rican, even if it could plausibly be argued that the native Puerto Rican is more similarly situated to a nonresident alien than to other U.S. citizens, and that taxing the native Puerto Rican as a nonresident alien for federal estate tax purposes is justified. Congress again was not aware of the situation of the native Puerto Rican when it made the amendments that produced this result in 1984.

To stimulate foreign investment in the United States, the Deficit Reduction Act of 1984 amended the internal revenue code to repeal the 30% withholding tax on so-called “portfolio interest” received by a nonresident alien.[148] “Portfolio interest” is defined as interest from certain obligations specifically described (“portfolio debt investments”), including U.S. treasury bonds and treasury bills, which would otherwise be subject to the 30% withholding tax if received by a nonresident alien.[149] The internal revenue code was also amended to repeal the estate tax on portfolio debt investments of a nonresident alien decedent.[150] This was done by providing that such portfolio debt investments shall not be deemed property situated within the United States if “any interest thereon would be eligible for the exemption from tax under section 871(h)(1) [which repeals the 30% withholding tax on portfolio interest] were such interest received by the decedent at the time of his death”.[151] Therefore, since portfolio debt investments belonging to the estate of a nonresident alien decedent are not deemed property situated within the United States, the same are not subject to federal estate taxes.

However, if the law is literally applied, such portfolio debt investments are subject to federal estate taxes if held by a native Puerto Rican decedent. The way the law is written, the estate tax exemption is applicable only if the interest on such investments would have been subject to the 30% withholding tax under section 871(a)(1) of the Internal Revenue Code had such interest not been considered as portfolio interest under section 871(h)(1). Section 871(a)(1) imposes a 30% withholding tax only on nonresident aliens. Native Puerto Ricans are not subject to the 30% withholding tax imposed by section 871(a)(1), and have not been subject to such a withholding tax since 1950, because they are treated as “citizens” for federal income tax purposes, who are not subject to the 30% withholding tax, and not as “nonresident aliens”, subject to that withholding tax.[152] Thus, if the law is literally applied, as it should be, portfolio debt investments of a native Puerto Rican decedent are subject to federal estate taxes.[153] This constitutes an unfair discrimination against native Puerto Ricans who are taxed as nonresident aliens as compared to other nonresident aliens.

In conclusion, classifying the U.S. citizens residing in Puerto Rico based on how they acquired their U.S. citizenship for federal estate and gift tax purposes has no justification at all. First, it unfairly discriminates against the U.S. citizens residing in Puerto Rico, who acquired their U.S. citizenship by birth or residence outside of Puerto Rico, as compared to native Puerto Ricans, because the former are subject to federal estate and gift taxes with respect to transfers of property, by death or by gift, situated within Puerto Rico and the latter are not. Second, it unfairly discriminates against native Puerto Ricans, as compared to other U.S. citizens, including those who are also residents of Puerto Rico, because the federal estate tax exemption is only, at most, $175,000 for the former and $5,430,000 for the latter, thirty times greater. Third, it unfairly discriminates against native Puerto Ricans, who are subject to federal estate taxes on portfolio debt investments made in the United States, as compared to nonresident aliens, who are exempt from federal estate taxes on their portfolio debt investments.

The law has to be amended. Its arbitrariness is evident.

** This article is about the congressional policy of exempting Puerto Rico from federal taxation and the implementation of this policy in the federal estate and gift tax law. To implement this policy, such law classifies the residents of Puerto Rico based on how they acquired their U.S. citizenship. Those who acquired their citizenship by birth or residence in Puerto Rico are entitled to the exemption; those who did not are not entitled to it. It is the author’s contention that the provisions of the federal estate and gift tax law that impose a tax on the transfer, by death or by gift, of properties situated in Puerto Rico, that belonged to a resident of Puerto Rico, merely because of the fact that such person had not acquired his or her U.S. citizenship by birth or residence in Puerto Rico, are unconstitutional.

Although written in 1968, this article is still current and may be more relevant today than it was when written. The provisions in question, sections 2208, and 2501(b) of the federal Internal Revenue Code, remain unaltered today since adopted in 1958. The constitutional jurisprudence established by the U.S. Supreme Court and federal appeals court cases cited by the author remain unchanged and have been updated when necessary. It may be more relevant today than prior to 1985, because in 1985 the Puerto Rico estate and gift tax law was amended to exempt from such taxes properties situated in Puerto Rico transferred by death or by gift by residents of Puerto Rico. Prior to 1985, the federal estate tax was not an additional burden on the taxpayer to the degree it is now because such transfers were anyway subject to Puerto Rico estate taxes, but that is not the case after 1985. The imposition of the federal estate and gift tax now imposes a substantial economic burden on the resident of Puerto Rico who acquired his or her U.S. citizenship by birth or residence outside of Puerto Rico.

[1] E.g., Brushaber v. Union Pac. R.R. Co., 240 U.S. 1 (1916) (sustaining the validity of the first income tax law, Tariff Act of 1913, ch. 16, § 2, 38 Stat. 114, 166, after the adoption of the Sixteenth Amendment to the federal Constitution); Springer v. United States, 102 U.S. 586 (1880); Hylton v. United States, 3 U.S. 171 (1796).

[2] See Brushaber, 240 U.S. 1; Knowlton v. Moore, 178 U.S. 41 (1900).

[3] See Thomas R. Powell, The Waning of Intergovernmental Tax Immunities, 58 Harv. L. Rev. 633 (1945); Thomas R. Powell, The Remnant of Intergovernmental Tax Immunities, 58 Harv. L. Rev. 757 (1945).

[4] “[N]or shall any person . . . be deprived of life, liberty, or property, without due process of law.” U.S. Const. amend. V.

[5] See Heiner v. Donnan, 285 U.S. 312 (1932); Untermyer v. Anderson, 276 U.S. 440 (1928); Blodgett v. Holden, 275 U.S. 142 (1927); Nichols v. Coolidge, 274 U.S. 531 (1927). See also Virginia Wood, Due Process of Law, 1932-1949: The Supreme Court’s Use of a Constitutional Tool 340 (1951); Lucius P. McGehee, Due Process of Law under the Federal Constitution 208 (1906).

[6] Paul W. Bruton & Ramond J. Bradley, Bruton’s Cases and Materials on Federal Taxation 17 (Pamphlet 1) (1954).

[7] I.R.C. §§ 2208-2209, 2501(b)-(c) (2012).

[8] In the case of: (1) Puerto Rico, 48 U.S.C. § 734 (2012); (2) Virgin Islands, 48 U.S.C. §§ 1394-97 (2012) (the federal estate and gift taxes were not specifically made applicable to the Virgin Islands, but they have enacted their own inheritance tax. V.I. Code Ann tit. 33, §§ 1-3 (1957)); and (3) Guam, 48 U.S.C. §§ 1421g-1421i (2012).

[9] In the particular case of the Commonwealth of Puerto Rico it could also be alleged under the compact theory of the Commonwealth status, that these provisions in applying a federal tax on certain residents of Puerto Rico on transfers, either by death or by gift, of property situated within Puerto Rico without the consent of the legislature of Puerto Rico, violates the Puerto Rican Federal Relations Act, ch. 446, 64 Stat. 319 (1950). See Arnold H. Leibowitz, The Applicability of Federal Law to the Commonwealth of Puerto Rico, 54 Geo. L.J. 219, 227 nn.32-33 (1967); Hearings Before the United States-Puerto Rico Commission on the Status of Puerto Rico, S. Doc. No. 89-108, pt. 1, at 395 (1965); Status of Puerto Rico: Report of the United States-Puerto Rico Commission on the Status of Puerto Rico, H.R. Doc. No. 89-464 (1968).

[10] Revenue Act of 1916, ch. 463, §§ 200-212, 39 Stat. 756, 777-80.

[11] Revenue Act of 1918, ch. 18, §§ 402-403, 40 Stat. 1057, 1097-99; Revenue Act of 1921, ch. 136, §§ 402-403, 42 Stat. 227, 278-81; Revenue Act of 1924, ch. 234, §§ 302-303, 43 Stat. 253, 304-07; Revenue Act of 1926, ch. 27, §§ 302-303, 44 Stat. 9, 70-74 (unaffected by the Revenue Act of 1932, ch. 209, 47 Stat. 169).

[12] Revenue Act of 1934, ch. 277, 48 Stat. 680.

[13] Revenue Act of 1916 § 201.

[14] Id. § 203(b).

[15] Section 200 of the Revenue Act of 1916 defines “United States” as excluding the unincorporated territories. Id. § 200.

[16] Real property situated abroad was exempt from estate taxes. The Revenue Bill of 1934, H.R. 7835, 73rd Cong. (1934) (enacted), as originally introduced, purported to tax the real property of a decedent nonresident United States citizen situated abroad. H.R. Rep. No. 73-704, at 36-37 (1934). Since real property which was situated abroad was excluded from the gross estate of decedents who were residents, H.R. 7835 as originally introduced would have put the nonresident United States citizen in a worse position, taxwise, than that of the residents. But a Senate amendment treating the resident and the nonresident United States citizen in the same manner by excluding from the latter’s gross estate his real property situated abroad prevailed. S. Rep. No. 73-558, at 46 (1934). It was not until the Revenue Act of 1962 that real property situated abroad was included in a resident or citizen’s gross estate for estate tax purposes. Revenue Act of 1962, Pub. L. No. 87-834, § 18, 76 Stat. 960, 1052-53.

[17] Revenue Act of 1934 § 403.

[18] Estate of Smallwood v. Comm’r, 11 T.C. 740 (1948).

[19] Id. at 740.

[20] Puerto Rican citizenship, which is somewhat analogous to state citizenship, was created by the Foraker Act of 1900. Foraker Act, ch. 191, § 7, 31 Stat. 77, 79 (1900). The law provided that those Spanish subjects, except those that elected to preserve their allegiance to Spain, who were residents of Puerto Rico in the period of 1899-1900, just after the Spanish-American War, and their sons born subsequent thereto, were deemed to be citizens of Puerto Rico. Under the Jones Act of 1917, United States citizenship was conferred to all citizens of Puerto Rico. Jones Act, ch. 145, § 5, 39 Stat. 951, 953 (1917). A 1927 amendment to the Jones Act redefined Puerto Rican citizenship. Act of Mar. 4, 1927, ch. 503, sec. 2, § 5a, 44 Stat. 1418, 1418-19 (codified at 48 U.S.C. § 733(a) (1952)). The amendment provides that “[a]ll citizens of the United States who have resided or who shall hereafter reside in the island for one year shall be citizens of [Puerto Rico].” Id.

[21] Smallwood, 11 T.C. at 740.

[22] I.R.C. §§§ 802, 811 and 861 (1939). In effect provided that the gross estate of a decedent who is either a resident or citizen of the United States shall include all of his property regardless of where it is situated except real property abroad vis-à-vis estates of nonresident aliens which only include property situated within the United States.

[23] Smallwood, 11 T.C. at 740.

[24] Id. at 740-41.

[25] Id. at 741.

[26] Id. at 741-42 (citations omitted).

[27] Id. at 743.

[28] Estate of Santiago Rivera v. Comm’r, 19 T.C. 271 (1952), affd. 214 F.2d. 60 (2^nd. Cir., 1954).

[29] See sources cited supra note 20 and accompanying text.

[30] Comm’r v. Santiago Rivera’s Estate, 214 F.2d 60 (2d Cir. 1954).

[31] Santiago Rivera, 19 T.C. at 274-75.

[32] Estate of Fairchild v. Comm’r, 24 T.C. 408 (1955). In the Smallwood and Santiago Rivera cases decedents were citizens of Puerto Rico. Legally there is no such thing as citizens of the Virgin Islands. As to this possible distinction between the cases, the Court stated: “[E]ven though this term [citizen] is not employed with respect to an inhabitant of the Virgin Islands, we conclude that the decedent herein occupied the same relationship to the Virgin Islands as did the decedents in the Smallwood and Rivera cases to Puerto Rico.” Id. at 41o.

[33] Id. at 411.

[34] Revenue Act of 1924, ch. 234, §§ 319-324, 43 Stat. 253, 313-16, repealed by Revenue Act of 1926, ch. 27, § 1200, 44 Stat. 9, 125-26.

[35] Revenue Act of 1924 § 321.

[36] Revenue Act of 1932, ch. 209, §§ 501-32, 47 Stat. 169, 245-59.

[37] See supra notes 15,16 16 & 17 and accompanying text.

[38] S. Rep. No. 72-665, at 39 (1932) (“Your committee has amended the House Bill to tax gifts made by citizens of the United States of any property wherever situated regardless of whether the donors are residents or nonresidents.”). The gift tax law provided that: “a tax . . . shall be imposed upon the transfer . . . by any individual, resident or nonresident, of property by gift.” Revenue Act of 1932 § 501(a). The category of “nonresident not a citizen of the United States” was an exception to the general rule since they were only taxed if the property transferred by gift was situated within the United States. Gift Tax Act of 1932, ch. 209 § 501(b), 47 Stat. 169, 245. Thus, although the resulting classification was not literally the same as the one under the estate tax law, the result was the same, since by excluding nonresident aliens from the general rule, only “citizens[s] or resident[s]” remained included. Treas. Reg. § 25.2501-1(a) (1954).

[39] I.R.C. §§ 2501, 2507 (1954).

[40] Cf. Comm’r v. Santiago Rivera’s Estate, 214 F.2d 60, 65 n.15 (2d Cir. 1954), and Estate of Smallwood v. Comm’r, 11 T.C. 740, 743 (1948).

[41] Technical Amendments Act of 1958, Pub. L. No. 85-866, 72 Stat. 1606, 1674.

[42] 104 Cong. Rec. 17,106 (1958) (letter of the Treasury Department as introduced in the record by Senator Williams).

[43] “The Senate floor is the one place in the whole tax legislative process where proposals may be presented and adopted that have not been carefully drafted or considered by persons presumed to have expert knowledge of taxation.” Roy Blough, The Federal Taxing Process 91 (1952).

[44] 104 Cong. Rec. 17,105-06.

[45] 104 Cong. Rec. 17, 745 (acceptance of the Conference Report by the Senate); 104 Cong. Rec. 17, 818-19 (acceptance of the Conference Report by the House).

[46] Act of Sept. 2, 1958 § 2208. I.R.C. §§ 2208, 2501(b) (2012). The only residents of a possession who acquired U.S. citizenship by reason of being “a citizen of such possession” were the residents of Puerto Rico, who acquired it by reason of the Jones Act. See supra notes 20 & 32.

[47] “It is recognized that with respect to these other residents of possessions a problem may still remain. However, it was believed that additional time is required for study in this area. For that reason no action is taken at this time with respect to these other residents of possessions.” 104 Cong. Rec. 17,818 (Conference Report, Statement of the Managers on the Part of the House), reprinted in 1958 U.S.C.C.A.N. 5078.

[48] Act of Sept. 14, 1960, Pub. L. No. 86-779, sec. 4(b)(1), § 2209, 74 Stat. 998, 1000; I.R.C. §§ 2209, 2501(c) (2012). See also S. Rep. No. 86-1767, at 6 (1960). Section 2209, with respect to the estate tax, provides: A decedent who was a citizen of the United States and a resident of a possession thereof at the time of his death shall, for the purposes of the tax imposed by this chapter, be considered a “nonresident not a citizen of the United States” within the meaning of that term whenever used in this title, but only if such person acquired his United States citizenship solely by reason of (1) his being a citizen of such possession of the United States, or (2) his birth or residence within such possession of the United States.”

Section 2501(c) reads the same except that it refers to “donor” instead of “decedent” and the phrase “at the time of his death” is eliminated.

[49] Id. (emphasis added).

[50] Thus, American Samoa and the Swain Islands are excluded. See 8 U.S.C. §§ 1101(29), 1408 (2012). The Canal Zone is not in fact a possession and although a person may acquire United States citizenship by his relations to the Canal Zone due to a special legislation, it is not because of his birth or residence there. See 8 U.S.C. § 1403. For the situation before this legislation, see Luella Gettys, The Law of Citizenship in the United States 159 (1934).

[51] In accordance with I.R.C. § 7701(d), we shall assume Puerto Rico is a possession. This section states: “Where not otherwise distinctly expressed or manifestly incompatible with the intent thereof, references in this title to possessions of the United States shall be treated as also referring to the Commonwealth of Puerto Rico.” See 8 U.S.C. § 1402 (acquisition of United States citizenship by birth in Puerto Rico and by collective naturalization because of residence there); Jones Act, ch. 145, § 5, 39 Stat. 951, 953 (1917) (acquisition of United States citizenship by citizens of Puerto Rico); 8 U.S.C. §§ 1101(38), 1427 (residency requirement for individual naturalization is complied with by residency in Puerto Rico, the Virgin Islands and Guam).

[52] See 8 U.S.C. § 1406 (acquisition of United States citizenship by birth or residency in the Virgin Islands). For individual naturalization, see sources cited supra note 51.

[53] See 8 U.S.C. § 1407 (collective naturalization of residents of Guam and conditional citizenship because of birth there). For individual naturalization, see sources cited supra note 51.

[54] Act of April 12, 1900, ch. 191, § 7, 31 Stat. 77, 79. See supra note 20 and accompanying text.

[55] Treaty of Paris of 1898, U.S.-Spain, Dec. 10, 1898, 30 Stat. 1754 (effective April 11, 1898).

[56] Act of March 2, 1917, ch. 145, § 5, 39 Stat. 951, 953, amended by Act of June 27, 1934, ch. 845, 48 Stat. 1245; see also 78 Cong. Rec. 1423 (1934) (for the scope of the various amendments extending United States citizenship to Puerto Ricans).

[57] 8 U.S.C. § 1402.

[58] Convention with Denmark for the cession of the Danish West Indies, U.S.-Den., Aug. 4, 1916, 39 Stat. 1706 (entered into force Jan. 25, 1917).

[59] Act of Feb. 25, 1927, ch. 192, 44 Stat. 1234, pt. 2.

[60] Treaty of Paris of 1898, U.S.-Spain, Dec. 10, 1898, 30 Stat. 1754 (effective force April 11, 1898).

[61] Act of Aug. 1, 1950, ch. 512, § 4, 64 Stat. 384-85.

[62] Nationality Act of 1940, ch. 876, § 204, 54 Stat. 1137, 1139 (1940).

[63] 8 U.S.C. § 1407 (2012).

[64] Id.

[65] Id.

[66] I.R.C. (1954) § 2014.

[67] Id. § 2014(g).

[68] The issue was academic in the case of a mainland citizen resident of Puerto Rico whose gross estate is entirely situated in Puerto Rico. Since the Puerto Rican inheritance tax rates were higher than the federal estate rates, the credit then allowed by the federal estate tax law would offset his federal tax liability. 13 LPRA § 884 (1968) & I.R.C. § 2001 (1968). The issue was not academic in Guam where there were no local estate, inheritance or gift taxes. See 11 Guam Code Ann. (1961). In the majority of cases the issue was not academic in St. Thomas either, since although they had an inheritance tax, the rates were low, the amount depending on the heir’s relation to the decedent (2%, 8% and 14%) on an across the board basis.

[69] I.R.C. of 1954 §§ 2501-2524 (2012).

[70] Section 2030.06 of the Internal Revenue Code of Puerto Rico of 2011, 13 LPRA § 31067 (2012).

[71] Revenue Act of 1918, ch. 18, § 260, 40 Stat. 1057, 1087.

[72] Id. §261.

[73] The only “citizens of a possession who were not otherwise citizens of the United States” in 1918 were the Filipinos. Just as is the case with Puerto Rico and Guam, the Philippines Islands were acquired by the United States by the Treaty of Paris that put an end to the Spanish-American War in 1898. See supra note 55. Just as is also the case with the residents of Puerto Rico, who were made “citizens of Puerto Rico” pursuant to its organic act (the Foraker Act), the residents of the Philippines were made citizens of the Philippines pursuant to Section 4 of the Philippines Organic Act of 1902, 32 Stat. 691 (1902). See supra note 46 (with respect to Puerto Rico). Contrary to the case of the “citizens of Puerto Rico” who were granted United States citizenship in 1917, the citizens of the Philippine Islands, however, were never granted United States citizenship. Gettys, supra note 50, at 49. They together with the inhabitants of other unincorporated territories who were not citizens of the United States could not be considered aliens but “nationals of the United States.” See also González v. Williams, 192 U.S. 1, 12 (1903). Alaska and Hawaii, on the other hand, were incorporated territories and for purposes of the law were considered a “state” rather than a “territory.” See Revenue Act of 1918 § 1.

[74] Id. §§ 210-213(c). See also Treas. Reg. No. 45, under the Revenue Act of 1918, which states: “Art. 3- [e]very citizen of the United States wherever resident is liable to the tax.” See also Cook v. Tait, 265 U.S. 47 (1924).

[75] See supra note 72 and I.R.C. of 1954, § 932; Treas. Reg. § 1-932-1(a) (1967).

[76] I.R.C. of 1939, § 252(a) provided: “(a) Any individual who is a citizen of any possession of the United States (but not otherwise a citizen of the United States) and who is not a resident of the United States, shall be subject to taxation under this chapter only as to income derived from sources within the United States, and in such case the tax shall be computed and paid in the same manner and subject to the same conditions as in the case of other persons who are taxable only as to income derived from such sources.”

[77] 48 U.S.C. 1421i (1952; see Laguana v. Ansell, 102 F. Supp. 919 (1952), aff’d, 212 F.2d. 207 (9th Cir. 1954).

[78] See supra note 53 and accompanying text.

[79] See supra notes 51, 56 and 73 and accompanying text.

[80] The definition then found in the Treasury regulations was indeed confusing. That definition remained in the Treasury regulations after it ceased being applicable to Puerto Rico. See Treas. Reg. 1.932-1(a)(1967), which provided: that “[f]or Federal income tax purposes, a citizen of a possession of the United States who is not otherwise a citizen of the United States is a citizen of a possession of the United States who has not become a citizen of the United States by naturalization.” The definition is also inaccurate since it purported to include those Puerto Ricans who acquired their citizenship by reason of the Jones Act and in effect they acquired their citizenship by naturalization, even if collective naturalization. Be that as it may, it is evident that the Internal Revenue Service promulgated this regulation because it concluded that the intent of Congress was to treat the Puerto Ricans in the same manner as the Filipinos for income tax purposes. After the acquisition of the Philippines and Puerto Rico, the Philippines were the primary concern of the United States, not Puerto Rico, and this may explain why Congress in 1918 ignored the fact that the citizens of Puerto Rico had been granted U.S. citizenship just the year before. See Juan R. Torruella, The Supreme Court and Puerto Rico: The Doctrine of Separate and Unequal 24, 33 & 267 (1985).

⁸¹ Revenue Act of 1921, ch. 136, §260, 42 Stat. 227, 270-71.

[82] Revenue Act of 1950, ch. 994, § 224, 64 Stat. 906, 944-45; subsequently section 933 of the Internal Revenue Code of 1954 and 1986.

I.R.C. of 1954 § 933.

[83] S. Rep. No. 81-2375, at 48-49 (1950).

[84] Id. at 49. It was not only the resident Puerto Rican who derived income from sources within the United States, but also not connected to a trade or business within the United States, that was discriminated upon. The non-Puerto Rican United States citizen resident of Puerto Rico who did not met the 80%-50% test was also discriminated upon since he was taxed by federal law on income derived from sources within Puerto Rico whereas his counterpart citizen and resident of Puerto Rico was not. Admittedly this is an unlikely case since it is doubtful that a person that does not meet the 80%-50% test is a resident.

[85] U.S. Const. amend. V. Although on first impression this classification strikes as being violative of the uniformity requirement, U.S. Const. art. I, § 8, which must be complied with by both the estate and gift tax laws since they are excise taxes. See New York Trust Co. v. Eisner, 256 U.S. 345 (1921); Bromley v. McCaughn, 280 U.S. 124 (1929); Downes v. Bidwell, 182 U.S. 244 (1901) (holding that the uniformity clause was not applicable to unincorporated territories, at present all of the United States possessions fall under this category). Nevertheless, in any event it would seem doubtful if this classification were violative of the uniformity clause since it has consistently been interpreted as relating to geographical uniformity only. See Brushaber v. Union Pac. R.R. Co., 240 U.S. 1 (1916); Knowlton v. Moore, 178 U.S. 41 (1900); Bruton & Bradley, supra note 6, at 16 (“no federal tax has ever been held to violate it.”).

[86] Bruton & Bradley, supra note 6, at 16.

[87] Heiner v. Donnan, 285 U.S. 312 (1932).

[88] Joseph Tussman & Jacobus tenBroek, The Equal Protection of the Laws, 37 Cal. L. Rev. 341, 344 (1949).

[89] Chester J. Antieau, Equal Protection Outside the Clause, 40 Cal. L. Rev. 362, 362 (1952).

[90] James M. Gray, Limitations of the Taxing Power 377-78 (1906).

[91] Brushaber v. Union Pac. R.R. Co., 240 U.S. 1 (1916). Here the now classical income tax classifications, as appearing in the first income tax law (Tariff Act of 1913), after the Sixteenth Amendment to the Federal Constitution, were challenged as being discriminatory and arbitrary and thus violative of due process.

[92] Id. at 24.

[93] Id. at 25.

[94] Detroit Bank v. United States, 317 U.S. 329, 337 (1943); Helvering v. Lerner Stores Corp., 314 U.S. 463, 468 (1941); Sunshine Anthracite Coal Co. v. Adkins, 310 U.S. 381, 401 (1940); LaBelle Iron Works v. United States, 256 U.S. 377, 392 (1921).

[95] See Sunshine Anthracite Coal Co., 310 U.S. at 401.

[96] See id. (where the contention was that the statutory classification of coal into code and non-code classes applying a tax to the latter infringed due process); Steward Mach. Co. v. Davis, 301 U.S. 548 (1937) (0n the contention on was that the resulting classification in the Social Security Act imposing a tax on employees of eight or more was arbitrary).

[97] Currin v. Wallace, 306 U.S. 1 (1939); Steward Mach. Co., 301 U.S. 548.

[98] Steward Mach. Co., 301 U.S. at 585.

[99] See, e.g., Schneider v. Rusk, 377 U.S. 163 (1964); Bolling v. Sharpe, 347 U.S. 497 (1954); Korematsu v. United States, 323 U.S. 214 (1944).

[100] Since the Fifth Amendment is binding only upon the federal government while the Fourteenth amendment is only binding upon the states, it is impossible to challenge the constitutionality of a classification under both statutes. Only in the case of Puerto Rico would this determination not be academic since the courts as of yet have not decided whether it is the Fifth or the Fourteenth Amendment that applies. See Marquez v. Avilés, 252 F.2d 715, 717 (1st Cir. 1958); Stagg, Mather & Hough v. Descartes, 244 F.2d 578, 583 (1st Cir. 1957). In various cases where a state classification has been found constitutionally invalid under the equal protection clause, its similar counterpart in the Federal sphere has also been found violative of due process for the same reasons. See, e.g., Bolling, 347 U.S. 497; Brown v. Bd. of Educ., 347 U.S. 438 (1954); Heiner v. Donnan, 285 U.S. 312 (1932); Schlesinger v. Wisconsin, 270 U.S. 230 (1925). In other cases, since the limitations imposed on the federal government are not the same as those binding the state governments, a different result arises. Cf. Barclay & Co. v. Edwards, 267 U.S. 442 (1924).

[101] Cf. Antieau, supra note 89; and Tussman & tenBroek, supra note 88.

[102] Our analysis has followed the suggestions offered in Tussman & tenBroek, supra note 88.

[103] 104 Cong. Rec. 17,105 (1958).

[104] See supra notes 81-84 and accompanying text.

[105] See 104 Cong. Rec. 17,106, 17,745 & 17,823 (1958).

[106] Id. at 17,106 (emphasis added) (citations omitted);

[107] Estate of Santiago Rivera v. Comm’r, 19 T.C. 271, 274-75 (1952), aff’d, Comm’r v. Santiago Rivera’s Estate, 214 F.2d 60, 62 (2d Cir. 1954).

[108] S. Rep. No. 81-2375, at 48 (1950); see supra notes 83-84 and accompanying text.

[109] 104 Cong. Rec. 17,823 (1958).

[110] E.g., Hirabayashi v. United States, 320 U.S. 81 (1943). Here, the legislative purpose was to take measures to meet the dangers of sabotage and the legal classification was American citizens of Japanese ancestry. On the other hand, see for example the School Desegregation Cases, Brown v. Bd. of Educ., 347 U.S. 438 (1954), and Schneider v. Rusk, 377 U.S. 163 (1964), where this problem does not arise.

[111] See Tussman & tenBroek, supra note 88, at 365.

[112] E.g., Yick Wo v. Hopkins, 118 U.S. 356 (1886), and cases cited in supra note 110.

[113] See supra notes 49-50 and accompanying text.

[114] United States v. Rexach, 185 F. Supp. 465 (D. P.R. 1960).

[115] Tussman & tenBroek, supra note 88, at 346 (citations omitted).

[116] Cf. Schneider v. Rusk, 377 U.S. 163 (1964), and Afroyim v. Rusk, 387 U.S. 253 (1967).

[117] McLaughlin v. Florida, 379 U.S. 184, 191 (1964).

[118] 104 Cong. Rec. 17,818 (1958).

[119] Id.

[120] Id.

[121] See supra note 12 and accompanying text.

[122] See Tussman & tenBroek, supra note 88, at 365.

[123] Keokee Consol. Coke Co. v. Taylor, 234 U.S. 224, 227 (1914).

[124] Heiner v. Donnan, 285 U.S. 312 (1932).

[125] Id. at 323 (citations omitted).

[126] Id. at 328.

[127] Carrington v. Rash, 380 U.S. 89 (1965) (citations omitted).

[128] Id. at 96 (citing Gray v. Sanders, 372 U.S. 368, 380 (1963)).

[129] Thompson v. Shapiro, 270 F. Supp. 331, 334 (D. Conn. 1967), aff’d, Shapiro v. Thompson, 394 U.S. 618 (1969).

[130] Thompson, 270 F. Supp. at 336.

[131] Id. at 337-38 (citations omitted).

[132] Revenue Act of 1916, ch. 463, §§ 200-212, 39 Stat. 756, 777-80; Revenue Act of 1934, ch. 277, 48 Stat. 680.

[133] See notes 18 and 28, supra, and accompanying text.

[134] Revenue Act of 1921, ch. 136, § 262, 42 Stat. 227, 271. See also note 76 supra and accompanying text.

[135] Id. § 260.

[136] Id.

[137] Technical Amendments Act of 1958, Pub. L. No. 85-866, 72 Stat. 1606, 1606.

[138] See supra notes 82-83 and accompanying text.

[139] 104 Cong. Rec. 17,823 (1958); see also supra notes 47 & 48 and accompanying text.

[140] Act of Sept. 14, 1960, Pub. L. No. 86-779, sec. 4(b)(1), § 2209, 74 Stat. 998, 1000; I.R.C. §§ 2209, 2501(c) (2012). See also S. Rep. No. 86-1767, at 6 (1960).

[141] See supra note 68 and accompanying text.

[142] I.R.C. § 933 (2012).

[143] I.R.C. §2035 (1954). Originally the federal estate tax law established a conclusive presumption that all gifts made by a donor within two years prior to his death were made in contemplation of death. Heiner v. Donnan, discussed above, held that this conclusive presumption violated the due process clause of the Fifth Amendment. See supra notes 124-126 and accompanying text. To correct the constitutional defect, I.R.C. §2035 (1954) amended prior law to provide that the presumption was rebuttable.

[144] I.R.C. §2001 and §2502 (1954).

[145] I.R.C. § 2010(c)(3). Provides for a $5,000,000 basic exclusion to be adjusted for inflation. As adjusted for inflation, the exclusion is $5,430,000 for the estates of decedents who died during 2015. Rev. Proc. 2014-16.

[146] I.R.C. §2102(b(2). Provides that in the case of a “decedent who is considered to be a ‘nonresident not a citizen of the United States’ under section 2209”a maximum credit of $46,800 is allowed against the tax determined under section 2101. A credit of $46,800 shelters $175,000 in U.S. estate tax.

[147] I.R.C. § 2001(c).

[148] Deficit Reduction Act of 1984,§127(a), Pub. L. No. 98-369, 98 Stat. 494, 648 (1984) amended I.R.C. §871 (1983) (Tax on nonresident alien individuals) by adding a new subsection (h) to section 871, which repeals the 30% withholding tax on portfolio interest.

[149] I.R.C. §871(h)(2).

[150] Deficit Reduction Act of 1984,§127(d),

[151] I.R.C. § 2105(b)(3). See also: I.R.C. §871(h)(1), which repeals the 30% withholding tax on portfolio interest.

[152] See supra notes 81-84 and accompanying text,

[153] The Internal Revenue Service, however, issued a private ruling on December 28, 2007 (number 200752016) ruling that portfolio debt investments of a decedent who was a native Puerto Rican and resided in Puerto Rico are not deemed property situated within the United Sates and are, therefore, exempt from federal estate taxes. However, no attempt is made to justify such an interpretation which is contrary to the literal terms of the law. In addition, that ruling cannot be relied upon. It makes a caveat at the end that “it may not be used or cited as precedent”.