Court Opinion

ID: 3023022
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:28:10.690028+00
Date Added: 2024-06-11T12:05:32.460440
License: Public Domain

United States Court of Appeals
                               FOR THE EIGHTH CIRCUIT
                                    ______________

                                    No. 98-3598WM
                                    ______________

John M. Simpson and Sarah S. Dean,         *
Trustees of the Grover M. Simpson          *
Testamentary Trust A,                      *
                                           *
                 Appellants,               *   On Appeal from the United
                                           *   States District Court
        v.                                 *   for the Western District
                                           *   of Missouri.
                                           *
United States of America,                  *
                                           *
                 Appellee.                 *

                                     ___________

                                Submitted: April 22, 1999
                                    Filed: July 23, 1999
                                     ___________

Before RICHARD S. ARNOLD and WOLLMAN,1 Circuit Judges, and WOLLE,2
      District Judge.
                           ___________

RICHARD S. ARNOLD, Circuit Judge.

        1
            The Hon. Roger L. Wollman became Chief Judge of this Court on April 24,
1999.
        2
        The Hon. Charles R. Wolle, United States District Judge for the Southern
District of Iowa, sitting by designation.
      Grover M. Simpson died in 1966. His will created the Grover M. Simpson
Testamentary Trust A. The primary beneficiary of the trust was Mr. Simpson's wife,
Mary Irene Simpson, who later became Mary Irene Bryan. The trust gave Mrs. Bryan
a general power of appointment by will. When she died in 1993, she exercised this
power in favor of her grandchildren. This transfer is subject to a special enactment
known as the Generation-Skipping Transfer tax (GST), unless it is entitled to the
benefit of an effective-date provision under which transfers under a trust which was
irrevocable on September 25, 1985, are not subject to the GST tax.

       The District Court held that the effective-date provision does not apply to the
transfer at issue in this case. Simpson v. United States, 17 F. Supp. 2d 972 (W.D. Mo.
1998). We reverse. In our opinion, the plain language of the effective-date provision
referred to above covers the transfer made by Mrs. Bryan's exercise of her power of
appointment, and there is no sufficient reason not to apply the plain language of the
statute.

                                            I.

        Article IV., ¶ A of the will of Grover M. Simpson created the trust at issue. The
trust became irrevocable on Mr. Simpson's death in 1966. Under its provisions, Mr.
Simpson's widow, then known as Mary Irene Simpson, had a right to receive all of the
income of the trust, and such amounts of the corpus as the trustees in their discretion
might choose. In addition, Mrs. Simpson, who later remarried and became Mrs. Bryan,
had a general testamentary power of appointment. That is, she had the authority, in her
will, to direct that the entire corpus of the trust remaining at the time of her death, or
any part thereof, be given to anyone she named, including her own estate. She thus had
a general power of appointment by will, and upon her death the remaining corpus of the
trust was included in her estate for purposes of the federal estate tax, see 26 U.S.C.
§ 2041.

                                           -2-
       Mrs. Bryan made her will in 1982. Under Section 4.01 of this instrument, she
exercised her power of appointment in favor of her eight living grandchildren, share and
share alike. The will became effective upon Mrs. Bryan's death in 1993. The transfer
from Mrs. Bryan to her grandchildren skipped a generation – the generation of
Mrs. Bryan's children. It would therefore be subject to the Generation-Skipping
Transfer tax, 26 U.S.C. §§ 2601 et seq., but for the possible applicability of a special
"grandfather clause," on which the taxpayers in this case rely. It is unnecessary to
describe the details of the GST tax. It is sufficient for present purposes to know that
the transfer was a "direct skip" within the meaning of 26 U.S.C. § 2612(c)(1), because
Mrs. Simpson's grandchildren were "skip persons" within the meaning of the statute.
The purpose of the statute is to ensure that generation-skipping transfers do not escape
estate tax, that is, that such transfers are taxed as if they were made from one
generation to the next, and then to the next after that, instead of skipping a generation.
In this way, each generation would in effect bear the burden of estate taxation.

       There is no dispute that the transfer in question here would be subject to the GST
tax, were it not for the special effective-date rule contained in the statute, passed in
1986, that enacted the version of the GST tax effective at the time of Mrs. Bryan's
death. This statute, the Tax Reform Act of 1986, Pub. L. No. 99-514, 100 Stat. 2717-
2732, contained, in Section 1433, the general rule that the GST tax would apply to any
transfer taking place after the enactment of the statute on October 22, 1986. There
were exceptions to this general rule, however, and, under Section 1433(b)(2)(A), the
GST tax would not apply to:

             any generation-skipping transfer under a trust which was
             irrevocable on September 25, 1985, but only to the extent
             that such transfer is not made out of corpus added to the
             trust after September 25, 1985 . . ..

                                           -3-
        Thus, the corpus of trust A remaining at the time of Mrs. Bryan's death would
be subject not only to the ordinary estate tax payable by her estate, but also to the
additional GST tax, payable by the trustees of trust A, unless the transfer accomplished
by her exercise of her power of appointment was a "transfer under a trust which was
irrevocable on September 25, 1985." Trust A, having been created by Mr. Simpson's
will in 1966, was of course irrevocable on September 25, 1985. Was the transfer made
by Mrs. Simpson a transfer "under" this trust? We do not see how an affirmative
answer can be avoided. The power of appointment that made the transfer possible was
created by the trust. Language has to mean something, and the argument that this
particular transfer was not "under" trust A is simply untenable.

        The parties discuss at some length what the purpose of the special effective-date
provision could have been. The effective date of September 25, 1985, is the date on
which the staff of the Joint Committee on Internal Revenue Taxation issued a summary
of proposals for a revision of the then-existing GST tax. (The tax had first been
enacted, in a different form, in 1976.) The premise of such provisions, in general, is
that taxpayers, at least those with a lot at stake, follow closely proposals pending in
Congress to amend the tax laws. Once the taxpayer has notice of a proposal, it is fair
to subject him or her to the tax, even when the tax may be enacted some months or
even years later. (Congress has power, within broad limits, to make taxing statutes
retroactive, but it frequently chooses not to exercise this power.) So the provision was
obviously intended to protect taxpayers who had, before September 25, 1985, taken
certain irrevocable action in reliance upon the state of the tax law existing at the time
of the action. What is the relevant action in the present case? The government argues
that the relevant action was the exercise of the power of appointment by Mrs. Bryan,
an exercise which became effective only upon her death, approximately eight years
after September 25, 1985. The taxpayer argues, to the contrary, that the relevant action
is the date of the creation of the trust, which occurred when Mr. Simpson died in 1966.
When Mr. Simpson created the trust, there was no GST tax, and he thus had no reason
to anticipate that his wife's exercise of her general testamentary power of appointment

                                          -4-
would trigger any kind of a tax over and above the ordinary estate tax consequent upon
her possession of a general power, see 26 U.S.C. § 2041.

       Which side is right about the purpose of the statute? The issue is easily resolved,
we think, by consulting the most important evidence of a statute's purpose – that is, its
words. Recall the relevant clause: "any generation-skipping transfer under a trust
which was irrevocable on September 25, 1985." The government wants us to read the
words, in effect, as though "which" modified "transfer." This is not a meaning that the
words will bear. The antecedent of "which" is "trust," not "transfer." The relevant
action which has to take place before September 25, 1985, is the creation of the trust,
or rather its becoming irrevocable, not the occurrence of the generation-skipping
transfer. We see no escape from the logic of this reasoning. In the present case, the
trust became irrevocable before September 25, 1985. The transfer was made possible
by the trust. The transfer was "under" the trust. The fact that the transfer occurred
after September 25, 1985, and, indeed, that Mrs. Bryan, the transferor, could have
avoided the GST tax by giving the property to someone other than her grandchildren,
is not relevant. The point is that when the trust was created and became irrevocable
Mrs. Bryan was given the authority, under the law as it then existed, to exercise her
general power of appointment in favor of anyone at all, and to do so without subjecting
the transfer to a GST tax, such a tax then being far in the future. This is the sort of
reliance that the effective-date provision protects.

                                           II.

       The government points out, and rightly so, that words do not always mean what
they seem, and that they receive their meaning only from the context in which they are
used. The government relies principally on Judge Calabresi's opinion in E. Norman
Peterson Marital Trust v. Commissioner, 78 F.3d 795 (2d Cir. 1996). The facts of
Peterson are similar in many respects, but, as we shall see, different in at least one
crucial respect. In that case, the original settlor, E. Norman Peterson, died in 1974.

                                           -5-
His will created a trust for the benefit of his wife, Eleanor Peterson. Mrs. Peterson was
given a general testamentary power of appointment over the corpus of the trust. If the
power was not exercised, the corpus was to be set aside for the Petersons'
grandchildren. Mrs. Peterson died in 1987. Because she had a general power of
appointment, the remaining value of the trust was then included in her gross estate
under 26 U.S.C. § 2041. But in her will, Mrs. Peterson specifically stated that she was
not exercising the power, except to the extent necessary to pay the estate tax
attributable to the inclusion of the trust property in her estate. The power therefore
lapsed, and the property remaining in the trust after payment of the estate taxes was
transferred to the grandchildren.

      This transfer, like the one at issue in the present case, was clearly subject to the
GST tax, unless it could find shelter in the effective-date provisions of Section 1433 of
Pub. L. No. 99-514. Here we again quote, for the convenience of the reader, the
relevant text of that statute. The GST will not apply to

             any generation-skipping transfer under a trust which was
             irrevocable on September 25, 1985, but only to the extent
             that such transfer is not made out of corpus added to the
             trust after September 25, 1985.

      The question in the Peterson case was not whether the transfer effected by
Mrs. Peterson's choosing not to exercise her power was "under" the trust, but rather
whether the transfer had been made "out of corpus added to the trust after
September 25, 1985."

      There was in effect at the time a temporary regulation issued by the
Commissioner, Temp. Treas. Reg. § 26.2601-1(b)(1)(v)(A), 53 Fed. Reg. 8445 (1988),
corrected by 53 Fed. Reg. 18,839 (1988). This temporary regulation defined what

                                           -6-
constituted "corpus added to the trust" for purposes of the effective-date rule. The
regulation provided, among other things, that

             where any portion of a trust remains in the trust after the
             release, exercise, or lapse of a [general] power of
             appointment over that portion of the trust . . . the value of
             the entire portion of the trust subject to the power that was
             released, exercised, or lapsed will be treated as an addition
             to the trust.

Temp. Treas. Reg. § 26.2601-1(b)(1)(v)(A).

       Under this regulation, therefore, the transfer at issue in the Peterson case was
clearly not entitled to the benefit of the effective-date provisions of Section 1433,
because the transfer came about because of the lapse of a power of appointment, not
its exercise. The portion of the trust transferred was the portion remaining in the trust
after the power had been partly exercised and had otherwise lapsed. The main issue
in Peterson was whether the temporary regulation was valid. The Court held, for
reasons that need not be gone into now, that it was. The effective-date provision
therefore did not apply, and the transfer was subject to the GST tax.

       The distinction between Peterson and the present case is obvious. Here, when
the power was exercised, it was exercised with respect to the entire remaining corpus.
There was no portion of the trust remaining after the exercise. Nor did the power lapse
to any extent. There is therefore no way to argue, and the government in fact does not
argue, that the transfer at issue here is subject to the GST tax because it was made out
of corpus added to the trust after September 25, 1985. Nor is there any regulation,
temporary or permanent, that applies to the particular sort of transfer made here – a
transfer of the entire corpus of the trust remaining at the time of the exercise of the
power. We have no quarrel with the holding of Peterson, but we cannot agree with the

                                          -7-
government that it compels or even supports the result contended for in the present
case.

                                           III.

       The entire concept of written law, indeed of all verbal communication, depends
on the idea that words have some meaning. It is true that the ingenuity of lawyers can
usually scrape up some tag end of ambiguity on which to hang a policy hat. But judges
are obliged, unless there is a substantial uncertainty as to the meaning of the words of
a statute, to apply the statute as written, unless the words are simply nonsense, or self-
contradictory, or something of that kind. This is not such a case. The words of Section
1433(b)(2)(A) are clear, at least to us, and we see no reason not to apply them. The
words make it clear that Congress intended to protect the reliance of creators of trusts
on the law as it existed at the time the trusts became irrevocable. That Congress could,
consistently with the Constitution and with fairness, have selected another effective-
date regime is not relevant. We hold that the transfer at issue in this case took place
under a trust which was irrevocable on September 25, 1985. The GST tax therefore
does not apply.

      The judgment of the District Court is reversed, and the cause remanded to that
Court with directions to enter judgment consistent with this opinion.

      A true copy.

             Attest:

                 CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.

                                           -8-