Court Opinion

ID: 9006654
Source: CourtListenerOpinion
Date Created: 2022-11-27 13:31:46.162383+00
Date Added: 2024-06-11T17:11:17.548662
License: Public Domain

McMILLIAN, Circuit Judge,
with whom LAY and BRIGHT, Senior Circuit Judges, and JOHN R. GIBSON, Circuit Judge, join, dissenting.
I do not agree with the analysis of the majority opinion and accordingly dissent. I think the majority opinion’s interpretation of “taxable transfer” as a transfer made after the enactment of the federal gift tax is too narrow.
“TAXABLE TRANSFER”
The majority opinion holds that Treasury Regulation § 25.2511 — 1(c)(2) is inapplicable because the trust which created Mrs. Irvine’s contingent remainder interest predated the enactment of the federal gift tax in 1932 and thus was not a “taxable trans*999fer,” that is, a transfer to which the federal gift tax is, or would have been, applicable. I would instead follow the analysis in Ordway v. United States, 908 F.2d 890, 895 (11th Cir.1990) (Ordway), cert. denied, — U.S. —, 111 S.Ct. 2916, 115 L.Ed.2d 1080 (1991). As noted by the majority opinion, the facts in Ordway and in the present case are virtually identical. In Ordway the Eleventh Circuit acknowledged that the original trust was not taxable, that is, in the sense it was not subject to federal gift tax, but concluded that it was a “taxable transfer” because, “[f]or the purposes of measuring time, ... a taxable transfer occurs whenever there happens ‘any transaction in which an interest in property is gratuitously passed or conferred upon another,’ even if that transaction was not subject to the gift tax.” Id., citing 26 C.F.R. § 25.2511(c)(1), .2815-2(c)(3). Thus, I would hold in the present case that the original trust can be considered a “taxable transfer” for purposes of determining whether Mrs. Irvine’s partial disclaimer was made within a reasonable time for purposes of Treasury Regulation § 25.-2511-l(c)(2).
In my view, the meaning of the term “taxable transfer” has less to do with liability for federal gift tax than with determining whether a completed gift has been made for federal gift tax purposes, regardless of whether a federal gift tax is actually imposed on that transaction. For this reason, I do not think the citation to the annual gift tax exclusion regulation, 26 C.F.R. § 25.2815-2(c)(3), is inapposite. What is critical in the present case is whether there was a completed gift, not the reason why no federal gift tax is incurred with respect to that particular transfer. In other words, as long as the transfer effected a completed gift of property, then the transfer is a “taxable transfer,” even though the transfer may not be subject to federal gift tax.
Interpreting “taxable transfer” to refer to whether the transfer effected a completed gift subject to federal gift tax, regardless of whether there was a federal gift tax at the time of the transfer, is supported by a close examination of the structure of the two Treasury regulations in question. Treasury Regulation § 25.2511-1, and § 25.2518 by cross-reference, defines transfers to which the federal gift tax applies and does not apply. For example, gifts of some kinds of property by nonresidents who are not citizens of the United States are not subject to federal gift tax. Id. § 25.2511-l(b). If a husband and wife file a joint income tax return for a tax year, the payment by one spouse of all or part of the income tax liability for that year is not a transfer subject to federal gift tax. Id. § 25.2511-l(d). The regulations describe other types of transfers that are not subject to federal gift tax: transfer of bare legal title to a trustee, transfer for a full and adequate consideration in money or money’s worth, or to ordinary business transactions. Id. § 25.2511-l(g)(l).
Of special interest in the present case, indirect transfers, effected by means of disclaimers or refusals to accept ownership of property, are transfers subject to federal gift tax: “any transaction in which an interest in property is gratuitously passed or conferred upon another, regardless of the means or device employed, constitutes a gift subject to tax.” Id. § 25.2511-l(c); Jewett v. Commissioner, 455 U.S. 305, 310, 102 S.Ct. 1082, 1086, 71 L.Ed.2d 170 (1982) (indirect transfer, by means of disclaimer, of contingent future interest in trust could be treated as taxable gift); McDonald v. Commissioner, 853 F.2d 1494, 1499 (8th Cir.1988), cert. denied, 490 U.S. 1005, 109 S.Ct. 1639,104 L.Ed.2d 155 (1989). However, certain disclaimers are not transfers subject to federal gift tax. Section 25.-2511-l(c) differentiates between disclaimers of interests created by “taxable transfers” before January 1, 1977, or after December 31, 1976, because the Tax Reform Act of 1976, Pub.L. No. 94-455, 90 Stat. 1520, established specific uniform standards for determining whether a disclaimer constitutes a taxable gift and the effective date for the disclaimer provisions was December 31, 1976. Id. § 2009(e)(2).
Thus, in order to determine the validity of disclaimers for federal gift tax purposes, the relevant date is December 31, 1976. In *1000my view, § 25.2511-l(c)(2) and § 25.2518 are complementary regulations: interests created by “taxable transfers” made after December 31, 1976, are subject to the “new” uniform standards established by the 1976 Act and § 25.2518, while interests created by "taxable transfers” before January 1, 1977, are subject to the “old” standards set forth in § 25.251l-l(c)(2). In the present case the 1976 standards and § 25.-2518 do not apply because the contingent remainder interest which Mrs. Irvine disclaimed was created when the original trust was established in 1917, before January 1, 1977.
In my view, whether or not the interest created was established before the enactment of the federal gift tax is irrelevant; the key is whether the interest was created by a “taxable transfer,” that is, a completed gift. The original trust effected a completed gift for federal gift tax purposes, even though it necessarily pre-dated the enactment of the federal gift tax, and thus was “taxable,” even though it was not subject to federal gift tax. It was not a transfer to which the federal gift tax was not otherwise applicable, for example, a transfer for a full and adequate consideration in money or money’s worth. Such a transfer would not have been a “taxable transfer” for federal gift tax purposes, regardless of whether it occurred before or after the enactment of the federal gift tax, because it was not a completed gift. Mrs. Irvine did not buy her contingent remainder interest; her grandfather gave it to her. For this reason, I would hold that the 1917 trust was a “taxable transfer” for purposes of determining the validity of the disclaimer of an interest created by it, even though it was not subject to federal gift tax.
The thrust of the majority opinion in disregarding the Eleventh Circuit’s analysis in Ordway relates to, in my judgment, a misunderstanding of the Ordway opinion and the government’s contention in the present case. The majority opinion’s reasoning is that the government seeks to apply the gift tax retroactively to transfers made prior to June 6, 1932. In attempting to distinguish Treasury Regulation § 25.-2511-l(c)(2) and Judge Frank Johnson’s reasoned analysis in the Ordway case, the majority opinion relies upon Commissioner v. Copley’s Estate, 194 F.2d 364, 367 (7th Cir.1952). I respectfully submit such reliance is misplaced.
Treasury Regulation § 25.2518-2(c)(3) reads: “With respect to inter vivos transfers, a taxable transfer occurs when there is a completed gift for Federal gift tax purposes regardless of whether a gift tax is imposed on the completed gift.” The majority opinion urges that the Eleventh Circuit misapplies this regulation, because it is concerned “with the $10,000 annual exclusion on gifts and has absolutely nothing to do with pre-Act transfers.” This completely distorts the meaning and purpose of the regulation. The Commissioner has simply declared that a donor can create a “taxable transfer,” even if it is not subject to a tax, existing or not existing at the time of the transfer, if there happens “any transaction in which an interest in property is gratuitously passed or conferred upon another,” 26 C.F.R. § 25.2511(c)(1).1 Thus, even though the creation of the trust in 1917 was not taxable, it can still be viewed, in applying the Gift Tax Act to transfers of property interests after 1932, as a “taxable transfer.”
The majority opinion suggests that the Ordway opinion of the Eleventh Circuit has taken Treasury Regulation § 25.2518-2(c)(3) out of context. This is not true. The reference to the $10,000 annual exclusion on gifts in § 25.2518-2(c)(3) is merely an illustration of how a taxable transfer may occur when there is a completed gift regardless of whether the gift tax is imposed on the completed gift. Treasury Regulation § 25.2518-2 is directed to § 2518(a) of the Internal Revenue Code which deals with the question of how a qualified disclaimer may take place. Subsection 3 of § 25.2518-2 relates to the new *1001nine-month period for making a disclaimer which is now described in § 25.2518-2(c)(l). The flow of the entire language relates to inter vivos transfers and provides the Commissioner’s declaration that as to inter vi-vos transfers a taxable transfer can take place regardless of whether a gift tax is imposed upon the completed gift.
In the present case the government has not attempted to impose a gift tax on the original transfer in trust made in 1917. The taxable transfer in the present case relates solely to Mrs. Irvine’s indirect transfer resulting from the disclaimer in 1979. There is no attempt to tax the 1917 bequest and the tax upon the indirect transfer resulting from the disclaimer is not in any way dependent upon the original transfer in trust made by Mrs. Irvine’s grandfather in 1917. See Jewett ¶. Commissioner, 455 U.S. 305, 102 S.Ct. 1082.2
The majority opinion attempts to analogize the creation of the Ordway trust in 1917 to the transfers pursuant to the 1931 antenuptial agreement at issue in Commissioner v. Copley’s Estate. This is a complete non sequitur. The facts of Commissioner v. Copley’s Estate are clearly distinguishable. In that case an antenuptial agreement was executed in 1931 between a man and a woman who were married later that year. The husband agreed to pay a sum of one million dollars to his wife payable upon demand at any time after they were married. In 1936 and in 1944, pursuant to the 1931 agreement, the husband transferred $500,000 in securities on each occasion. The Internal Revenue Service attempted to tax these transfers under the Gift Tax Act of 1932. However, the court held that this would require a retroactive application of the gift tax because the transfers made in 1936 and 1944 were simply discharging a contractual debt or obligation which the husband owed to his wife pursuant to the 1931 agreement. On this basis, the Seventh Circuit held that application of the 1932 gift tax act was impermissible because it would apply the gift tax act on a retroactive basis. Contrary to the majority opinion’s reasoning, “the creation” of the Ordway trust in 1917 does not fall into the “same category.” In Commissioner v. Copley’s Estate, the transfers made in 1936 and 1944 were not subject to the gift tax because they constituted payments of an obligation under the 1931 agreement. In the present case, the disclaimer made by the taxpayer in 1979 is the transaction which is taxable. Because Lucius Ordway made the original gift before January 1, 1977, 26 C.F.R. § 25.2511-l(c)2 applies. Under this regulation the disclaimer of interest made in 1979 is subject to the federal gift tax unless the disclaimer was valid under state law and was made within a reasonable time of the knowledge of the existence of the transfer.
As I now discuss, I would follow the original panel majority opinion as to the merits of the validity of the disclaimer. DISCLAIMER WITHIN A REASONABLE TIME
As noted above, because the interest disclaimed by Mrs. Irvine was created by a taxable transfer before January 1, 1977, her disclaimer is subject to federal gift tax unless it was valid under .state law and was “made within a reasonable time after knowledge of the existence of the transfer.” 26 C.F.R. § 25.2511-l(c)(2). It is undisputed that the disclaimer was valid under Minnesota law. What is disputed it whether the disclaimer was made within a reasonable time. This issue is a familiar one. See Cottrell v. Commissioner, 628 F.2d 1127 (8th Cir.1980) (banc); Keinath v. Commissioner, 480 F.2d 57 (8th Cir.1973), overruled by Jewett v. Commissioner, 455 U.S. 305, 102 S.Ct. 1082. I agree with the government’s argument that Mrs. Irvine’s disclaimer was not “made within a reasonable time after knowledge of the existence of the transfer.” The “reasonable time” during which Mrs. Irvine could have made a disclaimer began to run in 1931, when she first learned of her interest, and not in 1979, when her interest vested upon the death of the last life beneficiary. Because *1002Mrs. Irvine did not disclaim her contingent remainder interest until 1979, some 48 years after she learned of its existence, her disclaimer was not effective.
In Jewett v. Commissioner the taxpayer’s grandmother died in 1939, leaving the bulk of her estate in a testamentary trust. Under the terms of the trust, the trust income was payable to her husband for life and thereafter to the taxpayer’s parents. Upon the death of the surviving parent, the trust was to be divided equally among her grandchildren then living or, if any grandchild had died, to that grandchild’s child or children. In 1972, some 33 years after the creation of the trust and when the taxpayer’s mother, who was one of the life beneficiaries, was still alive, the taxpayer disclaimed his interest in the trust. The taxpayer argued that the word “transfer” in the Treasury regulation referred to the vesting or distribution of property and that the “reasonable time” during which he could make a disclaimer did not begin to run until that interest vested upon the death of the last surviving life tenant. See Keinath v. Commissioner, 480 F.2d at 63-64 (holding that time within which disclaimer of vested remainder interest subject to divestiture must be filed begins to run when interest becomes indefeasibly fixed both in quality and quantity, that is, after death of life beneficiary, not testator). The Supreme Court rejected the taxpayer’s interpretation and held that the relevant “transfer” referred to in the regulation occurred when the disclaimed interest was created and not later when that interest vested. 455 U.S. at 312, 318-19, 102 S.Ct. at 1087, 1090-91. The Court held that the taxpayer’s disclaimer in 1972 was not made within a reasonable time of either the creation of the interest, some 33 years before, or when he reached the age of majority, some 24 years before. Id. at 318, 102 S.Ct. at 1090.
Thus, under Jewett v. Commissioner, the “reasonable time” during which Mrs. Irvine would have made a disclaimer began to run, at the latest, in 1931, when she became aware of her remainder interest and when she turned 21. Mrs. Irvine’s partial disclaimer in 1979, some 48 years later, was clearly too late. This is twice as long as the period which the Supreme Court rejected in Jewett v. Commissioner. Id. (disclaimer 24 years after majority); Ordway, 908 F.2d at 895 (disclaimer made 38 years after knowledge of transfer and 36 years after age of majority). Moreover, the predecessor to the 1986 regulation was promulgated in 1958, well in advance of the 1979 disclaimer. The substantive requirement in the 1958 regulation that “a refusal to accept ownership does not constitute the making of a gift if the refusal is made within a reasonable time after knowledge of the existence of the transfer” was not changed in 1986. Certainly the adoption of the regulation in 1958 was sufficient to put Mrs. Irvine on notice that an “unreasonable” delay in refusing to accept ownership would not be effective for gift tax purposes. Even assuming the “reasonable time” period did not begin to run until 1958, Mrs. Irvine did not act until 1979, some 21 years later. Cf. Jewett v. Commissioner, 455 U.S. at 316 n. 17, 102 S.Ct. at 1089 n. 17 (citing Brown v. Routzahn, 63 F.2d 914 (6th Cir.) (renunciation 8 years later was effective under state law but was considered unacceptable for federal tax purposes), cert. denied, 290 U.S. 641, 54 S.Ct. 60, 78 L.Ed. 557 (1933)), 317 n. 20 (taxpayer did not renounce interest until 14 years after adoption of 1958 regulation). In addition, it makes no difference for federal gift tax purposes that Mrs. Irvine’s interest remained contingent until the death of her aunt, the last life beneficiary, in 1979. Jewett v. Commissioner, 455 U.S. at 317-18, 102 S.Ct. at 1090-91 (comparing disclaimer of contingent remainder to exercise of general power of appointment, which is a taxable transfer); Ordway, 908 F.2d at 893 n. 4.
FAIRNESS
In 1979 Keinath v. Commissioner, which was decided in 1973 and in which the government did not seek certiorari, was the rule in this circuit. Keinath v. Commissioner held that the time within which the disclaimer must be filed begins to run when the remainder interest becomes “indefeasibly fixed in both quality and quanti*1003ty” and that remainder interests subject to divestment did not become “indefeasibly fixed” until the death of the life beneficiary. 480 F.2d at 63. Thus, under Keinath v. Commissioner a disclaimer could be filed within a reasonable time of the death of the life beneficiary. Id. In the present case, the last life beneficiary died in June 1979 and Mrs. Irvine filed her partial disclaimer only two months later in August 1979, which was clearly “within a reasonable time” under the Keinath v. Commissioner rule. In 1980 this circuit affirmed Keinath v. Commissioner en banc in Cottrell v. Commissioner, 628 F.2d 1127. It was not until Jewett v. Commissioner in 1982, two years later, that the Supreme Court changed the disclaimer rule and overruled Keinath v. Commissioner.
It does seem unfair to apply a rule announced in 1982 to a disclaimer which was valid under the applicable law when it was made in 1979. However, to the extent that the unfairness is due to the fact that at the time the new rule was announced, it was already too late to act, a similar retroactivity argument was rejected by the Supreme Court in Jewett v. Commissioner, 465 U.S. at 817, 102 S.Ct. at 1090 (rejecting taxpayer’s argument that it was unfair to apply a 1958 regulation to an interest created in 1939). Moreover, to the extent that the unfairness is due to the fact that the disclaimer when it was made was valid under this circuit’s case law, one must nevertheless acknowledge that that case law was subsequently overruled by the Supreme Court. This is the unavoidable, albeit in the present case expensive, consequence of our hierarchical court system. This court is an intermediate appellate court, and our decisions can be overruled by the Supreme Court.
In sum, I would hold that the original trust was a “taxable transfer” and that the disclaimer was not made within a reasonable time. Accordingly, I would reverse the order of the district court and would remand the case to the district court for further proceedings on the valuation issue.

. "The IRS’s understanding of the terms of the Code is entitled to considerable deference.” United States v. National Bank of Commerce, 472 U.S. 713, 730, 105 S.Ct. 2919, 2930, 86 L.Ed.2d 565 (1985).

. Congress has expressly stated that the gift tax shall not be given retroactive application. Revenue Act of 1932, ch. 209, § 501(b), 47 Stat. 169, 245 (1932). In support of its holding, the majority opinion seeks to inject the issue of retroactivity into this case where none actually exists.