Court Opinion

ID: 4486444
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:34:26.455476+00
Date Added: 2024-06-11T15:03:49.442118
License: Public Domain

WELLS, J., dissenting: I respectfully disagree with the majority’s interpretation of section 2001(b). For even as the majority states the principle of strict construction upon which it rests its holding, the majority has broadened the scope and purpose of section 2001(b) beyond that intended by Congress. In light of the fact that section 2001(b), clearly not a statute of limitations provision, is the provision in issue, reliance on a strict construction leads the majority down the wrong path. While the District Court in Boatmen’s First National Bank of Kansas City v. United States, 705 F. Supp. 1407 (W.D. Mo. 1988), sets forth some of the practical problems and policy concerns arising out of the Commissioner’s interpretation, it is unnecessary to rest upon such considerations to show that Congress did not intend to give the Commissioner license to revalue gifts over 3 years old1 for purposes of computing estate taxes. The majority appears to lose sight of the sole purpose of section 2001(b), namely, to provide a statutorily prescribed method of computing estate taxes. In very general terms, that provision requires that the estate tax be computed by (1) adding post-1976 gifts to the “taxable estate,” (2) figuring a “tentative tax” on that sum, and (3) subtracting the gift tax that would have been payable on the post-1976 gifts, if current rates were in effect at the time of the gifts. The purpose of adding post-1976 gifts to the taxable estate and then subtracting the gift tax payable on those gifts is to “push the taxable estate up to its ‘proper’ place on the unified cumulative rate schedule.” 5 B. Bittker, Federal Taxation of Income, Estates and Gifts, par. 133.3.2 (1972). A House report issued in connection with the enactment of the provision expresses Congress’ concern regarding prior law: life-time transfers are not taken into account for estate tax purposes and the estate remaining at death is subject to tax under a separate rate schedule starting at the lowest rates. Thus, even if the [estate and gift tax] rates were identical, separate rate schedules would provide a preference for making both lifetime and deathtime transfers rather than having the total taken into account for either transfer tax base. * * * [H. Rept. 94-1380 (1976), 1976-3 C.B. (Vol. 3) 735, 745. Emphasis supplied.] A close examination of section 2001(b) and its legislative history confirms that Congress did not contemplate that the provision would be used as a substantive valuation provision, as opposed to a mere computational one. The statute specifically describes the amount subtracted for gift tax payable on post-1976 gifts as follows: the aggregate amount of tax which would have been payable under chapter 12 with respect to gifts made by the decedent after December 31, 1976, if the rate schedule set forth in subsection (c) (as in effect at the decedent’s death) had been applicable at the time of such gifts. The implication of the foregoing language is that the only respect in which computations with respect to post-1976 transfers are to differ from chapter 12 computations is that date of death tax rates are to apply. I believe such a construction is supported by the legislative history cited by the majority (majority op. at 879 and 880). The majority, however, reads into section 2001(b) two additional modifications, i.e., (1) that adjusted taxable gifts may be revalued for estate tax purposes, even when revaluation is prohibited for gift tax purposes and (2) that gift taxes that would have been payable on the increased value are allowed as a credit. There are additional indications of Congress’ intent — the words selected by Congress in drafting section 2001(b) show that the sole purpose of the provision is to set forth the manner of computing estate tax (as opposed to providing license for revaluing post-1976 transfers). Section 2001(b) uses phrases such as “the amount of the adjusted taxable gifts.” By referring to various “amounts,” I believe Congress intended to incorporate those Code provisions which provide the substantive basis for calculating such “amounts.” While section 2001(b) makes express reference to section 2503 without expressly incorporating section 2504, section 2503 does not define the amount of a gift. In order to find that definition, the statute requires reference to section 2512(a), which fixes the amount of a gift as its value when made. Similarly, Congress used the words “amount of the taxable estate” in section 2001(b)(1)(A); in order to find the definition of taxable estate, the statute requires reference to section 2051, where the taxable estate for the purpose of section 2001 is determined after allowing certain deductions from the value of the gross estate. Thus, section 2001(b) must rely on other parts of the Code for the resolution of substantive issues such as valuation, inclusion, exclusion, deduction, etc. Congress’ usage of the specific words contained in section 2001(b) and adoption of a method reliant on other Code provisions indicate that the provision is merely computational and that “adjusted taxable gifts” cannot be determined without referring to chapter 12 in its entirety, including the prohibition against revaluation of gifts under section 2504(c).2  An article written by the American Bar Association Committee on Federal Death Tax Problems of Estates and Trusts, and cited by the majority, supports the foregoing conclusion and provides additional arguments for the proposition that the reference in section 2001(b) to section 2503 incorporates section 2504(c). The Committee Report states: Thus, the definition of adjusted taxable gifts [in section 2001(b)] clearly incorporates section 2503. Moreover, it is abundantly clear that section 2503 incorporates other gift tax sections. Section 2503(a) defines taxable gifts as “the total amount of gifts made during the calendar year, less the deductions provided in subchapter C (section 2522 and following).” Section 2503(b) excludes the first $10,000 in value of gifts to each person, except for the gifts of future interests. Thus, in order to determine a donor’s taxable gifts, sections 2522-2524 are relevant. Moreover, if a donee executes a qualified disclaimer or receives property under certain property settlements, the transfer is not a gift, so these sections are clearly relevant. Most importantly for purposes of this analysis, in determining whether a taxpayer is entitled to the $10,000 exclusion under section 2503(b), the donor must show the value of the interest given to the donee, almost always by use of the valuation tables. Thus, section 2503 incorporates section 2512 and its valuation principles. Section 2504(c) is also a valuation principle and should also be incorporated in section 2503. Alternatively, it could be argued that the definition of taxable gifts under section 2503 is an adjunct to section 2501 (imposing a tax on transfers of property by gift), and to section 2502 (specifying the tax rates). Section 2502 contains the term “preceding calendar periods.” The regulations under section 2504 clearly reveal that the purpose of section 2504 is to provide rules for determining the amount of gifts for preceding calendar periods. Thus, the argument can be made that section 2504(c) should be incorporated into section 2503 because: 1. The purpose of section 2503 is to define the term “taxable gifts” for use in sections 2501 and 2502; 2. As such, section 2503 is a part of the overall definition of gifts subject to tax; and 3. Section 2504 is also part of this process, since it defines gifts for preceding calendar periods, a term used in section 2502. Thus, section 2504(c) is incorporated into the term “adjusted taxable gifts.” [20 Real Property, Probate and Trust Journal 1113, 1118-1120 (Winter 1985). Fn. ref. omitted.] As noted by the majority, section 2504(c) was added in 1954 to cure uncertainty caused by the Commissioner’s ability to revalue gifts made in closed years (majority op. at 875). Thus, it had been a part of the Code for over 20 years when section 2001(b) was enacted. Certainly, by enacting a computational provision designed to push decedents into the proper estate tax rate bracket through unification of the gift and estate tax rates, Congress did not mean to nullify section 2504(c). The majority’s reading of section 2001(b) defeats the purpose of section 2504(c), a harsh result I do not think Congress intended. See Crane v. Commissioner, 331 U.S. 1, 13 (1947) (“one section of the Act must be construed so as not to defeat the intention of another or to frustrate the Act as a whole”). Finally, the majority, in an apparent attempt to ameliorate the harsh result of its holding, reaches out to allow petitioner credit for gift taxes that have not been paid. The statute strains under such a reading. As stated above, the legislative history and language of the statute indicate that Congress only contemplated one deviation from chapter 12 computations for estate tax purposes, i.e., that date of death tax rates should apply. Lest there be any confusion about whether the increased tax due to the revaluation is washed out by the higher credit for gift taxes “payable,” the examples included in Appendix A demonstrate that it is not. For the foregoing reasons, I respectfully dissent. Parker, Shields, Clapp, Swift, Wright, and Parr, JJ., agree with this dissent. Appendix A Example I Assume that the donor made a taxable gift in 1988 in the amount of $300,000 and dies in 1997 with a taxable estate in the amount of $600,000, and the IRS revalues the gift at $600,000 (no change in tax rates between 1988 and 1997). [[Image here]] Example II Assume that the donor made a taxable gift in 1988 in the amount of $1 million and dies in 1997 with a taxable estate in the amount of $2 million, and the IRS revalues the gift at $1,500,000 (no change in tax rates between 1988 and 1997). [[Image here]]   Sec. 2001(d) makes another computational adjustment in split gift situations when the gift (including the spouse’s hypothetical one-half of the gift) is includable in the decedent’s estate, to give credit for gift tax payable on the spouse’s one-half of the gift as a tax payable by the decedent. Where sec. 2001(d) does not apply, i.e., in split gift situations where the gift is not includable in the donor’s gross estate, the majority’s interpretation allows the Commissioner yet another bite at the revaluation apple when the donor’s spouse dies because the one-half that was treated as a gift by the donor’s spouse will then be subject to the sec. 2001(b) computation for the spouse’s estate.