Court Opinion

ID: 8991458
Source: CourtListenerOpinion
Date Created: 2022-11-27 12:14:44.575801+00
Date Added: 2024-06-11T17:10:55.843764
License: Public Domain

BOWMAN, Circuit Judge,
dissenting.
I respectfully dissent. The question on which this case turns is whether Sally Irvine’s 1979 partial disclaimer of her contingent remainder interest in an irrevocable trust created in 1917 (when there was no federal gift tax) is a transfer subject to the federal gift tax. The opinion of the Court holds that it is, based on the application of Treasury Regulation § 25.2511-l(c)(2), which provides:
[i]n the case of taxable transfers creating an interest in the person disclaiming made before January 1, 1977 ... 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. The refusal must be unequivocal and effective under the local law. There can be no refusal of ownership of property after its acceptance.
Treas.Reg. § 25.2511 — 1(c)(2) (as amended in 1986) (emphasis added). This regulation reflects the unassailable premise that a disclaimer is not subject to the federal gift tax unless the transfer creating the interest disclaimed was a “taxable transfer” for purposes of the Gift Tax Act. I note without surprise that the Treasury Department has not promulgated any regulation dealing with the refusal to accept ownership of interests created by “nontaxable transfers.”
The transfer that created Mrs. Irvine’s contingent remainder interest is the irrevocable inter vivos trust created by Lucius P. Ordway in 1917. If the establishment of this trust is indeed a “taxable transfer,” even though in 1917 the federal gift tax had not yet been enacted, then Mrs. Irvine’s disclaimer of her contingent remainder interest created by the trust would be subject to the federal gift tax unless her disclaimer was timely.1 But if the creation of her interest by the 1917 Ordway trust is not a “taxable transfer,” then the interest validly disclaimed by Mrs. Irvine under Minnesota law passes to her five children unencumbered by the federal gift tax.
It seems fundamental to me that for a transfer to be taxable there must be an applicable tax in existence when the transfer is made. No such federal tax existed on January 16, 1917 when Lucius P. Ord-way irrevocably transferred assets to the trustees of the Ordway trust and Mrs. Irvine’s interest was created. Moreover, fifteen years later when the Gift Tax Act of 1932 was enacted, Congress expressed its intention not to apply the tax retroactively. Section 501(b) of the Act states: “The tax shall not apply to a transfer made on or before the date of enactment of this Act [June 6, 1932].” Revenue Act of 1932 § 501(b), 47 Stat. 169, 245. This prohibition against retroactive application of the tax to pre-Act gifts has been continued throughout revisions of the Gift Tax Act and is reflected in the current Code in the section governing computation of the tax. 26 U.S.C. § 2502 (1988) (the tax is comput*351ed upon the aggregate sum of taxable gifts made throughout the donor’s life during periods following June 6,1932). “Congress has been careful to avoid any taint of re-troactivity in connection with the 1932 [gift] tax and the subsequent amendments to the tax.” C. Lowndes, R. Kramer, J. McCord, Federal Estate and Gift Taxes 643 (3d ed.1974).
However, where Congress has feared to tread the Eleventh Circuit has rushed in with its stunning determination that “the 1917 gift [of Lucius P. Ordway] was a taxable transfer.” Ordway v. United States, 908 F.2d 890, 895 (11th Cir.1990), petition for cert. filed, No. 90-1503 (Mar. 27, 1991). The Ordway decision gives a new definition to the term “taxable transfer” by referring to section 25.2518-2(c)(3) of the regulations, which provides that “[w]ith 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.” Treas. Reg. § 25.2518-2(c)(3). Based on that language, the Ordway decision concludes that “a taxable transfer occurs whenever 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) [sic], even if that transaction was not subject to the gift tax.” 908 F.2d at 895.
The opinion of the Court in the case before us agrees with the Ordway court’s interpretation of Treasury Regulation § 25.2518-2(c)(3) and holds, ante at 347, that “the term ‘taxable transfer’ in Treasury Regulation § 25.2511-l(c)(2) can refer to a transfer made before the enactment of the gift tax.” I cannot accept that startling conclusion. The Court’s reliance on a single sentence from a regulation explicating a section of the Code that is clearly inapplicable to the facts here2 is inappropriate and misplaced. Moreover, the sentence is taken out of context to support an expanded and illogical definition of the term “taxable transfer” to include a pre-Act transfer. This distorted interpretation is evident when the sentence is read in context with the sentence that immediately follows it: “[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. Thus, gifts qualifying for the gift tax annual exclusion under section 2503(b) are regarded as taxable transfers_” Treas. Reg. 25.2518-2(c)(3). Clearly, the sentence upon which the Eleventh Circuit and now our Court mistakenly rely is concerned with the $10,000 annual exclusion on gifts and has absolutely nothing to do with pre-Act transfers. There is a definitive difference between a taxable transfer that qualifies for the annual exclusion and on which a gift tax therefore is not imposed, such as an annual $10,000 check to a favorite nephew, and a transfer as to which the gift tax is not even applicable, such as a transfer pursuant to an obligation created in an antenuptial agreement executed in 1931 between a man and woman married later that year. See Commissioner v. Copley’s Estate, 194 F.2d 364, 367 (7th Cir.1952) (holding that transfers made in 1936 and 1944 pursuant to the 1931 agreement were not taxable because “[t]o hold, as the Commissioner would have us do ... would require a retroactive application of [the gift tax], which we think is not permissible. See Sec. 501(b) of the Revenue Act of 1932.”). The creation of the Ordway trust in 1917 falls into the same category as the transfers pursuant to the 1931 antenuptial agreement in Copley’s Estate; it is a transfer as to which the federal gift tax is inapplicable — and even more cleanly and clearly so than the post-1932 transfers pursuant to the 1931 agreement in Copley’s Estate.
In light of the consistently expressed intent of Congress not to apply the gift tax retroactively to transfers made prior to June 6, 1932, I cannot join in the Court’s holding that “the term ‘taxable transfer’ in Treasury Regulation § 25.2511-l(c)(2) can refer to a transfer made before the enactment of the gift tax.” Ante at 7. Logic, *352history,3 the expressed intent of Congress, and a straightforward reading of the regulations all join here to compel the opposite conclusion. Because the contingent remainder interest that Mrs. Irvine disclaimed in 1979 was created in 1917, it never was subject to the federal gift tax and therefore was never a “taxable transfer” for federal gift tax purposes. Once the pretense that by some mysterious alchemy the treasury regulations have transformed the non-taxable 1917 transfer into a taxable event is stripped away, the government is left without any authority (other than Ordway, which cannot withstand critical analysis) to support its position.
As the federal gift tax simply does not apply here, I forego discussion of the issues concerning the timeliness of the disclaimer and the retroactive application of Jewett. If the gift tax is inapplicable, as I believe it plainly is, then these are non-issues.
For the reasons stated, I would affirm the decision of the District Court in favor of the taxpayers.
ORDER
Sept. 20, 1991
Appellees’ petition for rehearing with suggestion for rehearing en banc is granted. The opinion and judgment of this court filed June 10, 1991, are hereby vacated. The parties may file supplemental briefs not to exceed fifteen pages within thirty days from the date of this order. This case will be set down for en banc rehearing on Monday, January 6, 1992, at 9:00 a.m. in St. Louis, Missouri.

. The issue of timeliness is the subject of Jewett v. Commissioner, 455 U.S. 305, 102 S.Ct. 1082, 71 L.Ed.2d 170 (1982). Jewett deals with the timeliness of the disclaimer of an interest created after the effective date of the federal gift tax and thus does not speak to the precise issue we confront here. It was beyond dispute in Jewett that the transfer creating an interest in the person disclaiming was a taxable transfer.

. Mrs. Irvine’s disclaimer clearly is not governed by section 2518 of the Code. The interest she disclaims was created by a transfer in the year 1917. Section 2518 applies only to the disclaimer of interests created by taxable transfers made after December 31, 1976. Treas.Reg. § 25.2518-l(a)(l).

. The Supreme Court struck down, on Due Process grounds, the original federal gift tax (enacted in 1924) to the extent it attempted to tax transfers made prior to its effective date. See Blodgett v. Holden, 275 U.S. 142, 48 S.Ct. 105, 72 L.Ed. 206 (1927).