Court Opinion

ID: 9423443
Source: CourtListenerOpinion
Date Created: 2023-08-02 23:07:48.360978+00
Date Added: 2024-06-11T17:22:44.325344
License: Public Domain

Mr. Justice Douglas,
dissenting.
As the Court says, the issue in these cases is not whether the Commissioner is “bound" by the state court . decrees. He was not a party to the state court proceedings and therefore cannot be bound in the sense of res judicata. The question simply is whether, absent fraud or collusion, a federal court can ignore a state court judgment when federal taxation depends upon property rights and when property rights rest on state law, as they do here.
Since our 1938 decision in Erie R. Co. v. Tompkins, 304 U. S. 64, an unbroken line of cases has held that the federal courts must look to state legislation, state decisions, state administrative practice, for the state law that is to be applied. See, e. g., Cities Service Oil Co. v. Dunlap, 308 U. S. 208; Bernhardt v. Polygraphic Co., 350 U. S. 198. Those were diversity cases; and in them we have never suggested that the federal court may ignore a relevant state court decision because it was not entered by the highest state court. Indeed, we have held that the federal court is obligated to follow the decision of a lower state court in the absence of decisions of the State Supreme Court showing that the state law is other than announced by the lower court. See, e. g., Fidelity Union Trust Co. v. Field, 311 U. S. 169; West v. A. T. & T. Co., 311 U. S. 223; Six Companies of California v. Joint Highway District, 311 U. S. 180; Stoner v. New York Life Ins. Co., 311 U. S. 464.
It is true that in King v. Order of Travelers, 333 U. S. 153, we held that a federal court of appeals did not have *467to accept the decision of a state court of common pleas on a matter of state law. But that case was unique. The state court had relied upon the decision of a federal district court; the “Court of Common Pleas [did] not appear to have such importance and competence within [the State’s] own judicial system that its decisions should be taken as authoritative expositions of that State’s ‘law’ ” (id., at 161); “the difficulty of locating Common Pleas decisions [was] a matter of great practical significance” (ibid.); another state court had handed down an opinion rejecting the reasoning of the court of common pleas and espousing the reasoning of the Court of Appeals, illustrating “the perils of interpreting a Common Pleas decision as a definitive expression of [state law]” (333 U. S., at 162); and the interpretation of the Court of Appeals, which rejected the decision of the court of common pleas, was strongly supported by the decisions of the State Supreme Court. We stressed that our decision was not “to be taken as promulgating a general rule that federal courts need never abide by determinations of state law by state trial courts.” Ibid.
Even before it was held that federal courts must apply state law in diversity cases, it was incumbent upon federal courts to take state law from state court decisions when federal tax consequences turned on state law. In Freuler v. Helvering, 291 U. S. 35, the trustee under a decedent’s will had included in income distributed to the life beneficiaries amounts representing depreciation of the corpus. The life beneficiaries did not include the amounts constituting depreciation and the Commissioner asserted a deficiency. While the case was on appeal to the Board of Tax Appeals, the trustee filed an accounting in the state probate court, requesting its approval. The state court held that the life beneficiaries were not entitled to the distribution of depreciation of the corpus, and *468ordered that the life beneficiaries repay the trustee for the amount improperly distributed to them. In the tax litigation, the Court of Appeals ignored the state court determination on the ground that “no orders of the probate court, the effect of which would relate to what are deductions to be allowed under the national income taxing law, are conclusive and binding on the federal courts . . . 62 F. 2d 733, 735. The Court reversed, holding that the probate court order was an order governing distribution within § 219 of the Revenue Act of 1921. It went on to say:
“Moreover, the decision of [the probate] court, until reversed or overruled, establishes the law of California respecting distribution of the trust estate. It is none the less a declaration of the law of the State because not based on a statute, or earlier decisions. The rights of the beneficiaries are property rights and the court has adjudicated them. What the law as announced by that court adjudges distributable is, we think, to be so considered in applying § 219 of the Act of 1921.” 291 U. S., at 45.
The issue of the effect of a state court determination came up again in Blair v. Commissioner, 300 U. S. 5. The issue in that case was whether a beneficiary had effectively assigned income from a trust. In prior tax litigation, a federal court held that the trust was a spendthrift trust and that, therefore, the assignments were invalid and the income taxable to the beneficiary. The trustees then brought an action in the state court; the state courts determined that the trust was not a spendthrift trust and that the assignments were valid. The Board of Tax Appeals accepted the decision of the state court and rejected the Commissioner’s claim that petitioner was liable for tax on the income. The Court *469rejected the Commissioner’s argument that the trust was a spendthrift trust, noting that:
“The question of the validity of the assignments is a question of local law. ... By that law the character of the trust, the nature and extent of the interest of the beneficiary, and the power of the beneficiary to assign that interest in whole or in part, are to be determined. The decision of the state court upon these questions is final. ... It matters not that the decision was by an intermediate appellate court. ... In this instance, it is not necessary to go beyond the obvious point that the decision was in a suit between the trustees and the beneficiary and his assignees, and the decree which was entered in pursuance of the decision determined as between these parties the validity of the particular assignments. Nor is there any basis for a charge that the suit was collusive and the decree inoperative. . . . The trustees were entitled to seek the instructions of the court having supervision of the trust. That court entertained the suit and the appellate court, with the first decision of the Circuit Court of Appeals before it, reviewed the decisions of the Supreme Court of the State and reached a deliberate conclusion. To derogate from the authority of that conclusion and of the decree it commanded, so far as the question is one of state law, would be wholly unwarranted in the exercise of federal jurisdiction.
“In the face of this ruling of the state court it is not open to the Government to argue that the trust ‘was, under the [state] law, a spendthrift trust.’ The point of the argument is that, the trust being of that character, the state law barred the *470voluntary alienation by the beneficiary of his interest. The state court held precisely the contrary.” Id., 9-10.
I would adhere to Freuler v. Helvering, supra, and Blair v. Commissioner, supra. There was no indication in those cases that the state court decision would not be followed if it was not from the highest state court.
The idea that these state proceedings are not to be respected reflects the premise that such proceedings are brought solely to avoid federal taxes. But there are some instances in which an adversary proceeding is impossible (see, e. g., Estate of Darlington v. Commissioner, 302 F. 2d 693; Braverman & Gerson, The Conclusiveness of State Court Decrees in Federal Tax Litigation, 17 Tax L. Rev. 545, 570-572 (1962)), and many instances in which the parties desire a determination of their rights for other than tax reasons.
Not giving effect to a state court determination may be unfair to the taxpayer and is contrary to the congressional purpose of making federal tax consequences depend upon rights under state law. The result will be to tax the taxpayer or his estate for benefits which he does not have under state law. This aspect is emphasized in Blair v. Commissioner, supra, where the Government attempted to tax the taxpayer for income to which he had no right under state law. In Second National Bank v. United States, the grandchildren’s trusts will be assessed for the estate taxes, since the state court held that the proration statute applied; but the estate tax will be computed as if the proration statute did not apply — the marital deduction will be decreased and the tax increased. Or take the case where a state court determines that X does not own a house. After X dies, a federal court determines that the state court was wrong and that X owned the house, and it *471must be included in his gross estate even though it does not pass to his heirs. I cannot believe that Congress intended such unjust results.
This is not to say that a federal court is bound by all state court decrees. A federal court might not be bound by a consent decree, for it does not purport to be a declaration of state law; it may be merely a judicial stamp placed upon the parties’ contractual settlement. Nor need the federal court defer to a state court decree which has been obtained by fraud or collusion. But where, absent those considerations, a state court has reached a deliberate conclusion, where it has construed state law, the federal court should consider the decision to be an exposition of the controlling state law and give it effect as such.