Court Opinion

ID: 4486510
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:34:29.214882+00
Date Added: 2024-06-11T14:53:54.665355
License: Public Domain

NlMS, C.J., dissenting: In concluding that the statute would allow petitioner to supply any necessary signatures omitted from the original recapture agreement, the majority first sidesteps an important issue unrelated' to section 2032A(d)(3) and then disregards both legislative history and relevant precedent when applying that section. The issue the majority expressly avoids is whether, without regard to the statutory relief provisions, the trust beneficiaries were justified in not executing the original recapture agreement. This issue is important because a proper application of section 2032A(d)(3) does not support a holding for petitioner. Signature Requirement for Trust Beneficiaries Section 2032A(d)(2) describes the recapture agreement in part as “a written agreement signed by each person in being who has an interest (whether or not in possession) in any property designated in such agreement.” Petitioner argues at length on brief that only the trustee, Mrs. Greeman, had an interest in the property under State law, and thus only she was required to sign the recapture agreement. Petitioner’s primary contention is that the beneficiaries’ interests do not satisfy section 20.2032A-8(c)(2), Estate Tax Regs., particularly the first sentence: “An interest in property is an interest which, as of the date of the decedent’s death, can be asserted under applicable local law so as to affect the disposition of the specially valued property by the estate.” Assuming that the beneficiaries here are qualified heirs, a proposition discussed in detail below, petitioner’s reliance on section 20.2032A-8(c)(2), Estate Tax Regs., appears to be misplaced. There can be little doubt that qualified heirs with present interests are considered to have interests in the property under section 2032A(d)(2). See Estate of Thompson v. Commissioner, 864 F.2d 1128, 1136 n. 10 (4th Cir. 1989), revg. 89 T.C. 619 (1987); H. Rept. 94-1380 (1976), 1976-3 C.B. (Vol. 3) 735, 761. The legislative history does not suggest otherwise, and the statute itself, in section 2032A(e)(l), defines “qualified heir” in a way that presumes an interest in the property. I do not believe that section 20.2032A-8(c)(2), Estate Tax Regs., was meant to, or can be reasonably read to, override the principle that qualified heirs have interests in the property. See Estate of Pullin v. Commissioner, 84 T.C.. 789, 802 (1985) (Dawson, C.J., dissenting). Indeed, this regulation in context appears to be broadening rather than limiting. See sec. 20.2032A-8(c)(l), Estate Tax Regs.; Rev. Proc. 81-14, secs. 2.04 and 3, 1981-1 C.B. 669. Still to be confirmed is the assumption that the beneficiaries are qualified heirs. A qualified heir, as defined in section 2032A(e)(l), must be a member of the decedent’s family specified in section 2032A(e)(2). Respondent does not dispute that the three beneficiaries, decedent’s grandchildren, fall within the permissible family relationships of section 2032A(e)(2). The relevant inquiry, however, is whether the beneficiaries are qualified heirs for purposes of section 2032A(b)(l), which restricts the special use valuation provisions to real property that is “acquired from or passed from the decedent to a qualified heir of the decedent.” See sec. 2032A(e)(l). The way in which the treatment of trusts evolved under section 2032A serves to answer this question. Interests held through a trust have been eligible for special use valuation since the enactment of section 2032A in 1976: The conferees intend to make it clear that the rules for special valuation apply to property which passes in trust. Trust property shall be deemed to have passed from the decedent to a qualified heir to the extent that the qualified heir has a present interest in that trust property. [S. Rept. 94-1236 (Conf.) (1976), 1976-3 C.B. (Vol. 3) 807, 960.] See Estate of Clinard v. Commissioner, 86 T.C. 1180 (1986). “Present interest” was subsequently defined in the regulations with reference to section 2503. T.D. 7710, 45 Fed. Reg. 50,736 (July 31, 1980), 1980-2 C.B. 254, 259, 264 (secs. 20.2032A-3(b)(l) and 20.2032A-8(a)(2), Estate Tax Regs.). This section 2503 definition, in the view of Congress, unjustifiably precluded special use valuation for property passing from the decedent to a trust in which the interests of all the beneficiaries were subject to the trustee’s discretion. H. Rept. 97-215 (Conf.) (1981), 1981-2 C.B. 481, 510; H. Rept. 97-201 (1981), 1981-2 C.B. 352, 380 n.8. Accordingly, Congress in 1981 amended section 2032A(g) to permit special use valuation for discretionary trusts in which all the beneficiaries are family members under section 2032A(e)(2), by deeming such beneficiaries to have present interests. Economic Recovery Tax Act of 1981, Pub. L. 97-34, sec. 421(j)(l), 95 Stat. 312; see H. Rept. 97-215 (Conf.) (1981), 1981-2 C.B. at 510. (References to section 2503 were deleted from the regulations in 1981 because “It has been concluded that the present interest requirement should not apply if all the potential beneficiaries and remaindermen of a discretionary trust are members of the decedent’s family and, therefore, would have been qualified heirs if the property passed to them directly.” T.D. 7786, 46 Fed. Reg. 43,036 (Aug. 26, 1981), 1981-2 C.B. 174.) The three trusts involved here are discretionary trusts covered by section 2032A(g), as petitioner concedes and as is apparent from section V(b) of decedent’s will: (b) Distributions. The Trustee shall pay to or for the benefit of each beneficiary as much as [sic] the net income of such beneficiary’s share or trust as the Trustee, in its sole discretion, shall deem necessary or advisable for the health, maintenance, support and education of such beneficiary. The Trustee may, in its sole discretion, at any time and from time to time expend so much of the corpus of each trust estate created herein as it may deem advisable to provide adequately and properly for any emergency or extraordinary expense of the beneficiary thereof, including but not limited to expenses incurred by reason of illness, disability and education. Distribution of the entire principal of a share or trust is authorized if the Trustee shall determine such distribution shall be to the best interest of the beneficiary thereof in accordance with the foregoing standard. The Trustee, in the exercise of its discretion hereunder, shall take into consideration other means of support or maintenance available to each beneficiary hereunder prior to making distributions of income or corpus to said beneficiary or on his or her behalf. The three beneficiaries, deemed to have present interests under section 2032A(g), are qualified heirs within the meaning of section 2032A(b)(l) and (e)(1). See S. Rept. 94-1236 (Conf.) (1976), 1976-3 C.B. (Vol. 3) at 960. As qualified heirs, the beneficiaries have interests in the property within the meaning of section 2032A(d)(2), a status that seemingly requires their signatures on the recapture agreement. The wording of section 2032A(d)(2), however, suggests another possible justification for the omitted beneficiary signatures, apart from petitioner’s no-interest-in-the-property argument. Section 2032A(d)(2) states that a recapture agreement is signed by each person in being with an interest in the property “consenting to the application of subsection (c) with respect to such property,” implying that binding consent (rather than signatures per se) may determine compliance with that section. In this case, the question is whether the recapture agreement as executed by the trustee served to bind the beneficiaries, thus rendering their signatures unnecessary. Because the statute calls for consent to the application of section 2032A(c), the provisions thereof are the appropriate focus. One such provision, section 2032A(c)(5), describes a consequence of a recapture-triggering event as follows: “The qualified heir shall be personally liable for the additional tax imposed by this subsection with respect to his interest.” In a typical situation not involving a trust, the signatures of the qualified heirs are important because without those signatures it is doubtful that the qualified heirs bear personal liability for the subsequent additional tax. McDonald v. Commissioner, 89 T.C. 293, 305 (1987), affd. on sec. 2032A issue 853 F.2d 1494 (8th Cir. 1988); Estate of Gunland v. Commissioner, 88 T.C. 1453, 1457 (1987); sec. 20.2032A-8(c)(l), Estate Tax Regs. (“The agreement is to be in a form that is binding on all parties having an interest in the property.”). In this case, whether Mrs. Greeman succeeded in binding the beneficiaries under section 2032A(d)(2) appears to depend specifically on whether she managed to bind them personally for potential recapture liability. In the first sentence of the original recapture agreement, Mrs. Greeman introduced herself as trustee for the “trusts of the qualified heirs” and as an “other party having interest in the property.” She signed the agreement once as trustee under the heading “Qualified Heirs” and once in her individual capacity under the heading “Other Interested Parties.” The body of the agreement includes this statement concerning personal liability: More specifically, the undersigned, trustee for the qualified heirs expressly agrees and consents to personal liability under subsection (c) of 2032A for the additional tax imposed by that subsection with respect to their respective interests in the above-described property in the event of certain early dispositions of the property or early cessation of the qualified use of the property. * * * Because of the reference to “their respective interests,” Mrs. Greeman in executing the agreement may have intended to bind the beneficiaries personally for recapture liability. If this was her intention, however, the intention does not comport with the apparent effect. (In considering the effect of the original recapture agreement, I initially take a general approach, without reference to specific local law, because of the unclear conflict-of-laws situation in this case. The decedent resided and died in Texas, the trustee and beneficiaries reside in New Mexico, the trustee executed the original recapture agreement in an unspecified location, and the trust property is located in Colorado.) The well-settled general rule is that trust beneficiaries are not personally subject to liabilities to third persons incurred in the administration of the trust. See 2 Restatement, Trusts 2d, sec. 274 (1959). The recapture agreement is in the nature of a contract. A specific corollary to the general rule is that trust beneficiaries are not personally hable upon contracts made by a trustee in the administration of the trust. See 3A A. Scott & W. Fratcher, The Law of Trusts, sec. 275, p. 522 (4th ed. 1988); 2 Restatement, Trusts 2d, sec. 275 (1959). A trustee has no power to subject beneficiaries to personal liability because a trustee is not an agent. Taylor v. Davis, 110 U.S. 330, 334-335 (1884); Abraham Zion Corp. v. Lebow, 761 F.2d 93, 103 (2d Cir. 1985). See G. Bogert, The Law of Trusts and Trustees, sec. 712, p. 265 (rev. 2d ed. 1982); 1 Restatement, Agency 2d, sec. 14B (1958). Nonetheless, if someone is not merely a trustee but is also an agent for the beneficiaries, she can bind the beneficiaries personally upon contracts properly made in the performance of her duties. See 3A A. Scott & W. Fratcher, The Law of Trusts, sec. 275, p. 523 (4th ed. 1988); 2 Restatement, Trusts 2d, sec. 275, comment e (1959); 1 Restatement, Agency 2d, sec. 14B, comment g (1958). Control of the trustee by the beneficiaries, however, is necessary for such a relationship. Western Electric Co. v. New Mexico Bureau of Revenue, 90 N.M. 164, 561 P. 2d 26, 29 (1976). See 2 Restatement, Trusts 2d, sec. 274, comment b (1959); 1 Restatement, Agency 2d, sec. 14 & comment a, sec. 14B & comments a-f (1958). (Because both the trustee and the beneficiaries here are New Mexico residents, presumably the law of that State determines the existence of an agency.) The presence of an agency relationship must be determined from all the facts and circumstances, including the conduct and communications of the parties. Trans Union Leasing Corp. v. Hamilton, 93 N.M. 310, 600 P. 2d 256, 258 (1979). Given the discretion accorded Mrs. Greeman as trustee under the terms of decedent’s will, this record does not suggest an ongoing principal/agent relationship between her and the beneficiaries. Moreover, the record does not include “conduct and communications” facts that would support the presence of a more limited agency at the time Mrs. Greeman executed the original recapture agreement. See 1 Restatement, Agency 2d, sec. 26 & comments a-c (1958). Granted, the agency doctrine of ratification permits the later adoption or confirmation of an unauthorized act, which amounts to a substitute for prior authority. Grandi v. LeSage, 74 N.M. 799, 399 P. 2d 285, 292 (1965). Further, liabilities associated with ratification normally relate back to the time of the original act. See 1 Restatement, Agency 2d, secs. 82 & 100A (1958). Although in this case the beneficiaries arguably ratified the trustee’s original unauthorized act, any purported ratification should be irrelevant. At the time petitioner filed the recapture agreement, the beneficiaries were not clearly subject to the personal liability demanded by section 2032A(c)(5). The relation-back feature of ratification does not compensate for the Commissioner’s state of limbo as to personal liability during the period before a purported ratification. The foregoing analysis establishes that decedent’s grandchildren, the trust beneficiaries, had interests in the property within the meaning of section 2032A(d)(2) and that they were not personally bound by the original recapture agreement. That recapture agreement, therefore, did not satisfy section 2032A(d)(2). Section 2032A(d)(3) Section 2032A(d)(3) provides for less than strict compliance with the applicable regulations: (3) Modification of election and AGREEMENT to be PERMITTED.— The Secretary shall prescribe procedures which provide that in any case in which— (A) the executor makes an election under paragraph (1) within the time prescribed for filing such election, and (B) substantially complies with the regulations prescribed by the Secretary with respect to such election, but— (i) the notice of election, as filed, does not contain all required information, or (ii) signatures of 1 or more persons required to enter into the [recapture] agreement * * * are not included on the agreement as filed, or the agreement does not contain all required information, the executor will have a reasonable period of time (not exceeding 90 days) after notification of such failures to provide such information or agreements. The majority states that “subparagraph (B)(ii) of section 2032A(d)(3) does mention signatures and would appear to specifically give relief under circumstances such as here present.” Admittedly, at first glance this provision appears to benefit petitioner. What the majority disregards, however, is that the recapture agreement must demonstrate substantial compliance with the applicable regulations in order for petitioner to qualify for relief under section 2032A(d)(3). H. Rept. 98-861 (Conf.) (1984), 1984-3 C.B. (Vol. 2) 495; Prussner v. United States, 896 F.2d 218, 223 (7th Cir. 1990); McDonald v. Commissioner, 853 F.2d 1494, 1498 n. 7 (8th Cir. 1988), affg. on this issue 89 T.C. 293 (1987). Although the existence of the substantial compliance standard is apparent from the face of the statute, the statute does not define the standard. Consequently, resort to the legislative history is appropriate. McDonald v. Commissioner, 853 F.2d at 1498; Estate of Doherty v. Commissioner, 95 T.C. 446, 455-456 (1990). The legislative history emphasizes that not all signature omissions are insignificant enough to be curable under section 2032A(d)(3): an agreement to the current use valuation election may be perfected under this provision provided the agreement, as filed with the estate tax return, evidences substantial compliance with the requirements of the regulations. To be eligible for perfection, the agreement as originally filed must at a minimum be valid under State law and must include the signatures of all parties having a present interest or a remainder interest other than an interest having a relatively small value. [Emphasis added.] The right to perfect agreements is intended to be limited to cases where, for example, a parent of a minor remainderman, rather than a guardian ad litem as required under State law, signs the agreement. * * * [H. Rept. 98-861 (Conf.) (1984), 1984-3 C.B. (Vol. 2) 495. Fn. ref. omitted.] In light of this legislative intent, I fail to see how the majority can reach the result it does under section 2032A(d)(3). All three beneficiaries have present interests in the property according to section 2032A(g), and none of those interests is of “relatively small value.” The majority does not explain why it ignores the legislative history of section 2032A(d)(3), which has been cited with approval by this Court several times. E.g., Estate of Strickland v. Commissioner, 92 T.C. 16, 29 (1989); McDonald v. Commissioner, 89 T.C. 293, 306-307 (1987), affd. on this issue 853 F.2d 1494 (8th Cir. 1988); Estate of Johnson v. Commissioner, 89 T.C. 127, 132-133 (1987); Estate of Grimes v. Commissioner, T.C. Memo. 1988-576; Estate of Killion v. Commissioner, T.C. Memo. 1988-244. Most recently, in Estate of Doherty v. Commissioner, supra at 456-457, this Court relied on the legislative history in deciding that section 2032A(d)(3) was not available to cure an attempted election lacking a written appraisal of the specially valued property. The majority distinguishes McDonald v. Commissioner, supra, based on the Eighth Circuit’s statement that “it is difficult to conclude that the original election was in substantial compliance * * * when it contained neither the name nor the signature of anyone with an interest in the property.” 853 F.2d at 1497. The majority reasons that the original documents here contain the names of all interested parties and only lack certain signatures. This is not a meaningful distinction. The purpose of the section 2032A(d)(2) signature requirement is to ensure that interested parties consent to the recapture provisions, not to place respondent on notice as to the interested parties. See sec. 20.2032A-8(c)(l), Estate Tax Regs. Notice as to the interested parties is provided for elsewhere, namely in Schedule N to the Form 706 and in the notice of election. See sec. 20.2032A-8(a)(3)(xii), Estate Tax Regs. The quoted passage from the Eighth Circuit opinion is also taken out of context. It arises in a brief discussion of the statutory language, which is merely the starting point in the Eighth Circuit’s systematic analysis. The court discusses the legislative history approvingly, and in more detail than it discusses the statute, beginning in the next paragraph. 853 F.2d at 1497-1498. Section 1421 of the Tax Reform Act of 1986 The majority does not make clear the extent to which its holding for petitioner draws support from section 1421 of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2716 (as amended, hereinafter referred to as section 1421). Because I believe that both section 2032A(d)(2) and section 2032A(d)(3) favor respondent in this case, section 1421 warrants at least some discussion as a possible independent ground for the majority’s result: SEC. 1421(a). IN GENERAL. — In the case of any decedent dying before January 1, 1986, if the executor— (1) made an election under section 2032A of the Internal Revenue Code of 1954 on the return of tax imposed by section 2001 of such Code, and (2) provided substantially all the information with respect to such election required on such return of tax, such election shall be a valid election for purposes of section 2032A of such Code. (b) ExecutoR Must PROVIDE Information — An election described in subsection (a) shall not be valid if the Secretary of the Treasury or his delegate after the date of enactment of this Act requests information from the executor with respect to such election and the executor does not provide such information within 90 days of receipt of such request. This Court has considered section 1421 twice recently, in Estate of Merwin v. Commissioner, 95 T.C. 168 (1990), and in Estate of Doherty v. Commissioner, 95 T.C. 446 (1990). In both cases, which involved estates that failed to qualify for relief under section 2032A(d)(3), we declined to grant section 1421 relief because the cause of the deficient election was not a Form 706 misleading on its face. See Estate of Doherty v. Commissioner, supra at 458-459. Clearly, whatever the reason for the omitted signatures in the instant case, that reason was not a misleading Form 706. Petitioner should not be allowed to perfect its election under the authority of section 1421. Based on the foregoing, I cannot join with the majority in holding for petitioner. Although the majority declines to address whether the original recapture agreement fully satisfied the election requirements, I conclude that, because of the omitted beneficiary signatures, it did not. I also conclude that petitioner fails to qualify for relief under either section 2032A(d)(3) or section 1421. The majority, in my judgment, strays unjustifiably from both relevant precedent and applicable legislative history. Parker, Hamblen, Cohen, Gerber, and Halpern, JJ., agree with the dissenting opinion.