Source: http://www.law.cornell.edu/supremecourt/text/455/305
Timestamp: 2013-05-21 14:50:28
Document Index: 578498070

Matched Legal Cases: ['§ 2501', '§ 25', '§ 2501', '§ 25', '§ 25', '§ 25', '§ 25', '§ 25', '§ 2501', '§ 2009', '§ 2009', '§ 2009', '§ 2513']

George F. JEWETT, Jr., et ux., Petitioners v. COMMISSIONER OF INTERNAL REVENUE. | Supreme Court | LII / Legal Information Institute
Supreme Court aboutsearch liibulletin subscribe previews George F. JEWETT, Jr., et ux., Petitioners v. COMMISSIONER OF INTERNAL REVENUE.
455 U.S. 305 (102 S.Ct. 1082, 71 L.Ed.2d 170)
George F. JEWETT, Jr., et ux., Petitioners v. COMMISSIONER OF INTERNAL REVENUE.
[HTML] dissent, BLACKMUN, REHNQUIST, O'CONNOR
[HTML] Syllabus Held: The "transfer" referred to in the Treasury Regulation excepting from the federal gift tax a refusal to accept ownership of an interest in property transferred by will if such refusal is effective under local law and made "within a reasonable time after knowledge of the existence of the transfer," occurs, as indicated by both the text and history of the Regulation, when the interest is created and not at a later time when the interest either vests or becomes possessory. Hence, in this case where disclaimers of a contingent interest in a testamentary trust, though effective under local law, were not made until 33 years, and thus not "within a reasonable time," after the interest was created, the disclaimers were subject to a gift tax under §§ 2501(a)(1) and 2511(a) of the Internal Revenue Code, as indirect gifts to a successor in interest. Pp. 309-319.
A trust beneficiary's refusal to accept ownership of property may constitute an indirect gift to a successor in interest subject to federal gift tax liability. 26 U.S.C. 2501, 2511. Under Treasury Regulation § 25.2511-1(c), however, such a refusal is not subject to tax if it is effective under local law and made "within a reasonable time after knowledge of the existence of the transfer." The petitioner husband (hereafter petitioner) in this case executed disclaimers of a contingent interest in a testamentary trust 33 years after that interest was created, but while it was still contingent. The narrow question presented is whether the "transfer" referred to in the Regulation occurs when the interest is created, as the Government contends, or at a later time when the interest either vests or becomes possessory, as argued by petitioner.
Petitioner's grandmother, Margaret Weyerhaeuser Jewett, died in 1939 leaving the bulk of her substantial estate in a testamentary trust. Her will, executed in Massachusetts, provided that the trust income should be paid to petitioner's grandfather during his life, and thereafter to petitioner's parents. Upon the death of the surviving parent, the principal was to be divided "into equal shares or trusts so that there shall be one share for each child of my said son petitioner's father then living and one share for the issue then living representing each child of my said son then dead." App. 9. Petitioner's mother is the sole surviving life tenant. Thus, under the testamentary plan, if petitioner survived his mother, he would receive one share of the corpus of the trust; if he predeceased his mother, that share would be distributed to his issue. Since petitioner's parents had two children, his share of the trust amounted to one-half of the principal.
The Commissioner assessed a deficiency of approximately $750,000. He concluded that the disclaimers were indirect transfers of property by gift within the meaning of §§ 2501(a)(1)
of the Internal Revenue Code, and that they were not excepted from tax under Treas.Reg. § 25.2511-1(c)
because they were not made "within a reasonable time after knowledge" of his grandmother's transfer to him of an interest in the trust estate. Petitioner then filed this action in the Tax Court seeking a redetermination of the deficiency.
Although a comparable argument had been accepted by the Court of Appeals for the Eighth Circuit in Keinath v. Commissioner, 480 F.2d 57 (1973),
in this case. We granted certiorari to resolve the conflict. 452 U.S. 904, 101 S.Ct. 3029, 69 L.Ed.2d 404.
* Section 2501(a)(1) of the Internal Revenue Code imposes a tax "on the transfer of property by gift." Section 2511(a) provides that the tax shall apply "whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible." As the Senate
In Smith v. Shaughnessy, 318 U.S. 176, 180, 63 S.Ct. 545, 547, 87 L.Ed. 690, the Court noted that "the language of the gift tax statute, 'property . . . real or personal, tangible or intangible,' is broad enough to include property, however conceptual or contingent."
In Estate of Sanford v. Commissioner, 308 U.S. 39, 44, 60 S.Ct. 51, 56, 84 L.Ed. 20, the Court explained that "an important, if not the main, purpose of the gift tax was to prevent or compensate for avoidance of death taxes by taxing the gifts of property inter vivos which, but for the gifts, would be subject in its original or converted form to the tax laid upon transfers at death." Since the practical effect of petitioner's disclaimers was to reduce the expected size of his taxable estate and to confer a gratuitous benefit upon the natural objects of his bounty, the treatment of the disclaimers as taxable gifts is fully consistent with the basic purpose of the statutory scheme.
The Regulation describes a transfer that "is effected by the decedent's will" (or by the law of descent and distribution of intestate property), not by a subsequent vesting event or distribution of property. The property must be transferred "from a decedent," not from an estate executor or trust administrator. The lack of any reference in the Regulation to future interests or contingent remainders, and the consistent focus on transfers effected by the decedent by will or through the laws of intestate distribution, undermine the suggestion that the relevant transfer occurs other than at the time of the testator's death. The Regulation also requires "knowledge of the existence of the transfer"; since a person to whom assets have actually been distributed would seldom, if ever, lack knowledge of the existence of such a transfer, it seems more likely that this provision was drafted to protect persons who had no knowledge of the creation of an interest.
Treasury Regulation § 25.2511-1(c) has not been changed since it was promulgated on November 15, 1958. The form of the Regulation, however, is somewhat different from a draft that was first proposed on January 3, 1957. That draft required a renunciation to be made "within a reasonable time after knowledge of the existence of the interest," rather than after knowledge of the existence of the "transfer."
In both of these cases the transferee had renounced a fee interest before the administration of the decedent's estate had been completed. In the earlier case, Brown v. Routzahn, 63 F.2d 914 (CA6 1933), cert. denied, 290 U.S. 641, 54 S.Ct. 60, 78 L.Ed. 557, a husband refused to accept a bequest under his wife's will. Under Ohio law the disclaimer was effective because it preceded the distribution of his wife's estate. Since the husband had never acquired ownership of the property, his disclaimer was held not to constitute the transfer of an interest; rather, it was deemed an exercise of a right to refuse a gift of property. Accordingly, the renunciation was held not be a gift in contemplation of death for purposes of determining the husband's estate tax. In the second case, Hardenbergh v. Commissioner, 198 F.2d 63 (CA8 1952), cert. denied, 344 U.S. 836, 73 S.Ct. 45, 97 L.Ed. 650, the decedent died intestate leaving a wife, a daughter, and a son by a prior marriage. To effectuate the decedent's intent to equalize the wealth of the three, the wife and daughter relinquished their rights to their intestate shares. Under Minnesota law, however, "title to an interest in decedent's estate vested in the taxpayers by operation of law which neither had the power to prevent." 198 F.2d, at 66. Since local law denied them the power to renounce the interest, the taxpayers' disclaimers were not effective and constituted gifts subject to the federal gift tax.
As indicated in the Commissioner's Memorandum, Treas.Reg. § 25.2511-1(c) sought to preserve the distinction between these two cases. Originally, the Regulation tracked language in the Hardenbergh opinion and provided that a disclaimer was taxable only if title to the property had "vested" under state law. On consideration, however, the Commissioner recognized that this language did not capture "the proper distinction between these two court cases"; indeed, in Brown v. Routzahn, the property interest had fully "vested" at the time of the taxpayer's renunciation.
Petitioner argues that the legislative decision not to apply those standards retroactively is evidence that a different rule was previously effective. It is clear, however, that Congress expressed no opinion on the proper interpretation of the Regulation at issue in this case; it merely established an unambiguous rule that should apply in the future.
Petitioner also argues that it is unfair to apply the 1958 Regulation "retroactively" to an interest that had been created previously; petitioner asserts that, by the time the Regulation was adopted, it was already too lateaccording to the Commissioner's viewto disclaim the interest.
Finally, petitioner argues that the disclaimer of a contingent remainder is not a taxable event by analogizing it to an exercise of a special power of appointment, which generally is not considered a taxable transfer. 26 U.S.C. 2514. As the Commissioner notes in response, however, a disclaimant's control over property more closely resembles a general power of appointment, the exercise of which is a taxable transfer. Ibid. Unlike the holder of a special powerbut like the holder of a general powera disclaimant may decide to retain the interest himself. It is this characteristic of the control exercised by a disclaimant that makes a disclaimer a "transfer" within the scope of the gift tax provisions.
"The petitioner possessed, for 24 years, the effective right to determine who should ultimately receive the benefits of a 50-percent remainder interest of a trust which, in 1972, had a corpus of approximately $8 million. He waited to act in respect of that remainder interest until the surviving life beneficiary was over 70 years of age and until he himself was 45 and, it appears, a man of substantial means. In 1972, by the execution of two disclaimers, he elected to let the property pass according to the alternative provisions of his grandmother's willto the natural objects of his bounty. This, we hold, was an exercise of control over the disposition of property subject to the gift tax imposed by section 2501." 70 T.C. 430, 438 (1978) (footnote omitted).
On audit, the Commissioner determined that the disclaimers were not "made within a reasonable time after knowledge of the existence of the transfer," within the meaning of Treas.Reg. § 25.2511-1(c), 26 CFR § 25.2511-1(c) (1981), and thus were transfers subject to federal gift tax under §§ 2501(a)(1) and 2511(a) of the Internal Revenue Code of 1954, as amended 26 U.S.C. 2501(a)(1) and 2511(a). Deficiencies of approximately $750,000 were determined.
The other side of the controversy, however, is not without substantial support. The federal gift tax does not deal with abstractions. It is concerned with "the transfer of property by gift." 26 U.S.C. 2501(a)(1). With the development of testamentary trustsor, for that matter, of inter vivos trusts legally recognized "interests" of various kinds, possessory and anticipatory, can be created by the trustor. The beneficiary of a contingent remainder or, as the Court seems to suggest here, ante, at 308, n. 5, of "a vested remainder subject to divestiture," however, may never realize anything by way of actual enjoyment of income or corpus. The contingencies upon which enjoyment depends may never ripen. In particular, the contingent beneficiary may die while the life beneficiary still lives.
In the interim, a substantial period as the tax law goes, taxpayers and their advisers have properly assumed that a disclaimer, valid under state law, was valid for federal tax purposes as well as if it were timely made. Judge Harris, dissenting below, observed that "it is particularly important in matters of taxation that established precedent be followed." 638 F.2d, at 96. He went on to say that if the case were one of first impression, he "might well join with the majority" but "numerous tax practitioners have undoubtedly relied on this the Keinath opinion in advising as to the tax consequences of such acts as are involved in the instant case, and justifiably so." Ibid. I agree that stability in tax law is desirable. Except for the Tax Court, the pronounced law appeared to have achieved a level of stability after Keinath.
5. The Court notes, ante, at 316, that by the Tax Reform Act of 1976, Pub.L. 94-455, § 2009(b)(1), 26 U.S.C. 2518, Congress now has imposed a uniform tax treatment of disclaimers, independent of state law. Section 2518, as so added to the Code, however, was specifically made prospective only, that is, it was made applicable only to transfers creating an interest after 1976. Pub.L. 94-455, § 2009(e)(2), 90 Stat. 1896. It thus has no application to the present case.
70 T.C. 430 (1978). There the court, in a reviewed decision, referred to, and relied upon, its own decision in Keinath which had been reversed by the Eighth Circuit. "We think that our decision in Keinath was correct and that it controls the decision in this case." 70 T.C., at 435.
The last Tax Court cases are Estate of Halbach v. Commissioner, 71 T.C. 141 (1978), and Cottrell v. Commissioner, 72 T.C. 489 (1979). The former was a federal estate tax case centering on 26 U.S.C. 2035 (disclaimer within three years of death). The latter, concerning a sister of the Halbach decedent, related to federal gift tax. Neither was a reviewed decision. The judge in Cottrell, recognizing that that case was appealable only to the Eighth Circuit, avoided the Court of Appeals decision in Keinath by distinguishing it on grounds later found unacceptable by the Eighth Circuit majority when the Tax Court decision was reversed.
"A tax, computed as provided in section 2502, is hereby imposed for each calendar quarter on the transfer of property by gift during such calendar quarter by any individual resident or nonresident." 26 U.S.C. 2501(a)(1).
"Subject to the limitations contained in this chapter, the tax imposed by section 2501 shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible; but in the case of a nonresident not a citizen of the United States, shall apply to a transfer only if the property is situated within the United States." 26 U.S.C. 2511(a).
See Tax Reform Act of 1976, Pub.L. 94-455, 90 Stat. 1893, § 2009(b), 26 U.S.C. 2518(b).
Petitioners, as they were entitled to do under § 2513 of the Internal Revenue Code of 1954, 26 U.S.C. 2513, elected to treat any gift made by either as made equally by both.