Court Opinion

ID: 4474885
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:11:11.146595+00
Date Added: 2024-06-11T14:53:52.818877
License: Public Domain

Kroupa, J., concurring in part and dissenting in part: I do not dispute any of the findings of fact used by the majority in its analysis. As the trial Judge who was able to weigh the credibility of the witnesses, however, I found Christiansen and her daughter’s charitable intent compelling. They both intended to use their wealth to benefit the people of South Dakota and improve the economic and social conditions there. Unfortunately, the majority gives lip service to these important charitable objectives in part I to deny the estate the benefit of a charitable contribution deduction because of the majority’s flawed interpretation of the regulation. I would hold that the estate is entitled to deduct the amounts passing to the Trust to the extent of the annuity portion. I do agree with the majority, however, that we should allow a deduction for the amounts passing directly to the Foundation and therefore concur with part II of the majority opinion. I. Analysis of the Regulation on Partial Disclaimers Now to the several reasons I disagree with the majority’s holding that the estate is not entitled to deduct the value of the disclaimed property that passed, at Christiansen’s direction, to the Trust. We are dealing with the annuity portion of the Trust as the parties do not dispute, nor has the estate claimed, a deduction for the amount attributable to the contingent remainder. A. Overly Broad Interpretation The majority disallows the disclaimer on the grounds that Christiansen’s daughter retained a contingent remainder in the Trust. The majority interprets the example in section 25.2518 — 2(e)(3), Gift Tax Regs., to mean that retaining any remainder in a trust that receives disclaimed property will always disqualify the disclaimer. The majority relies upon the italicized sentence in the example in section 25.2518-2(e)(3), Gift Tax Regs., to conclude that this italicized sentence “seems to resolve this issue.”1 See majority op. p. 10. It seems to me that the majority ignores the other sentences in this section including the immediately preceding sentence that focuses on whether the property is severable. The majority disregards any severable/nonseverable analysis to disqualify the disclaimer. This interpretation is inconsistent with several other important provisions of the regulation. First, had the drafters of this regulation intended to establish such a broad rule, the drafters would not have included the severable/nonseverable language immediately before the italicized sentence. The sentence upon which the majority relies is simply an illustration to distinguish the consequences of severable property from those of nonseverable property. The remainder in the example must be viewed as nonseverable property to give effect to the rest of the regulation.2 Indeed, the sentence in the regulation immediately before the italicized sentence provides: If the portion of the disclaimed interest in property which the disclaimant has a right to receive is not severable property or an undivided portion of the property, then the disclaimer is not a qualified disclaimer with respect to any portion of the property * * * [Sec. 25.2518-2(e)(3), Gift Tax Regs, (emphasis added).] The majority’s interpretation simply disqualifies the entire disclaimer if the disclaimant has a right to receive any disclaimed property, severable or hot, in the form of a trust remainder. The majority’s interpretation is difficult to reconcile with some of the examples in section 25.2518-3(d), Gift Tax Regs. The examples turn on whether the property is severable or nonseverable. Sometimes the disclaimer is qualified (i.e., if the property is severable).3 See sec. 25.2518-3(d), Examples (8), (11), Gift Tax Regs. Sometimes the disclaimer is not qualified (i.e., if the property is nonseverable). See sec. 25.2518-3(d), Example (10), Gift Tax Regs. The majority interpretation does not account for the different results in these examples. The majority relies on a decedent’s creation of the interest in a will, not a trust, to differentiate Examples (8) and (11) of section 25.2518-3(d), Gift Tax Regs., from the italicized sentence. The distinction of whether the separate interest is created in a will or in a trust is irrelevant. We should not interpret the regulation to require the interest to be created in a will. The transferor, not the disclaimant, must create the separate interests, but it is of no moment how they were created. Sec. 25.2518-3(a)(1), Gift Tax Regs. Consistent with the regulation, Christiansen, the transferor, not her daughter, created the annuity and contingent remainder interests when Christiansen created the Trust. These interests are thus separate interests. Id. I would find that Christiansen, not her daughter, was the transferor. There is no requirement in the regulation that the interest be created in a will. All Christiansen’s daughter did was to disclaim a fractional portion of the property passing to her in the will. She did not create or carve out a particular interest for herself and disclaim the rest. The majority’s implication otherwise is wrong. B. Contingent Nature of Remainder I am also not convinced that section 25.2518-2(e)(3), Gift Tax Regs., controls. That section turns on whether the disclaimant has the “right to receive” the disclaimed property. A remainder is merely one example of a right to receive the property. The contingent remainder that Christiansen’s daughter retained, however, does not give her the unequivocal right to receive the property. She will receive the property only if she is alive at the end of the Trust’s 20-year term. Under South Dakota law, a contingent remainder does not provide a fixed or certain right to future enjoyment of property and does not vest until a condition precedent has occurred. S.D. Codified Laws sec. 43-3-11 (2004); Rowett v. McFarland, 394 N.W.2d 298, 306 (S.D. 1986). Where the disclaimant has an unequivocal right to receive the property, a disclaimer would allow the benefit of avoiding a second level of tax without the disclaimant really giving up anything. On the other hand, if the disclaimant has only a contingent remainder, it is uncertain whether the disclaimant will ever receive the property. We should not read the regulation to disqualify a disclaimer because of a vague or distant possibility the disclaimant could receive the property sometime in the future. The regulation speaks in terms of a right to receive property, and the rights Christiansen’s daughter has are uncertain at best. II. Severable Property The majority hedges its bets after concluding that the italicized sentence in section 25.2518—2(e)(3), Gift Tax Regs., “seems to resolve this issue.” The majority goes on to discuss whether the contingent remainder Christiansen’s daughter retained is severable property or an undivided portion of property, reaching the perfunctory conclusion that the remainder is nonseverable. I respectfully disagree with this conclusion. As previously stated, proper application of section 25.2518-2(e)(3), Gift Tax Regs., considers whether the disclaimed property that the disclaimant has the right to receive is severable. Severable property is property that can be divided into separate parts, each of which maintains a complete and independent existence after severance. Sec. 25.2518-3(a)(1)(ii), Gift Tax Regs. The majority mischaracterizes the interests in concluding that they are nonseverable. Christiansen’s daughter did not disclaim an income interest in the Trust. Instead, Christiansen’s daughter effectively disclaimed an annuity interest. An annuity is a commonly purchased financial interest that gives its holder the right to a certain stream of payments over a fixed period, not full present enjoyment of the whole property as might be found in, for example, a life estate. See, e.g., Abeid v. Commissioner, 122 T.C. 404, 408-409 (2004) (describing differences in the definition of annuity between section 7520 and the U.S.-Israel income tax treaty). To adopt the pastry analogy of the majority, an annuity interest is a separate cupcake. The majority implies several times that Christiansen’s daughter disclaimed an income interest, or present enjoyment, in the Trust and kept a remainder. In reality, however, Christiansen’s daughter did no such thing. It was pursuant to Christiansen’s will that any amount her daughter disclaimed would go 75 percent to the Trust and 25 percent to the Foundation. If we accepted the majority’s implication that Christiansen’s daughter disclaimed a portion and retained a remainder, those facts here would fit squarely within Examples (8) and (11) of section 25.2518-3(d), Gift Tax Regs. The disclaimer in each of these examples is qualified, as should be the disclaimer at issue here. The majority’s mischaracterization of the type of interest passing to the Foundation pursuant to the Trust as an income interest or present enjoyment rather than an annuity also leads to the majority’s faulty reliance on Walshire v. United States, 288 F.3d 342 (8th Cir. 2002). The majority says that Walshire is indistinguishable. See majority op. p. 12. Not so. There are many key differences. The disclaimant in Walshire disclaimed a remainder interest in property but retained the right to the income and use of the property during his lifetime. Id. at 347. The disclaimant thus divided the property into parts that did not maintain a complete and independent existence and were therefore not severable property. See sec. 25.2518—3(a)(1)(ii), Gift Tax Regs. For example, if the disclaimant in Walshire had significantly used the property under the retained life estate, the corresponding value of the remainder might have been affected.4  The thoughtful analysis of the U.S. Court of Appeals for the Eighth Circuit in concluding that the disclaimer in Walshire was not qualified is markedly different from the majority’s analysis here. The majority errs to suggest that the distinction between an annuity interest and an income interest “makes no difference.” See majority op. note 12. The annuity and the contingent remainder in this case are truly complete and independent from one another and are therefore severable property. See sec. 25.2518—3(a)(1)(ii), Gift Tax Regs. The Foundation, as the holder of the annuity, can do nothing to affect the contingent remainder. Similarly, Christiansen’s daughter, as the holder of the contingent remainder, cannot do anything to affect the fixed 7 percent of the corpus to be paid annually under the annuity. The two separate parts are in no way dependent on one another, contrary to the majority’s holding. The majority also fails to consider another key distinction between Walshire and this case. The disclaimant in Walshire unilaterally created the interests, and the disclaimant retained the life estate that he had personally created in the property. Walshire v. United States, supra at 344-345. The disclaimant thus retained the life estate because of his decision to carve the property into separate interests, not because the property he disclaimed passed to a trust in which the disclaimant happened to hold an interest. On the other hand, Christiansen, not her daughter, created the separate interests in the Trust. See sec. 25.2518-3(a)(1), Gift Tax Regs. Christiansen’s daughter did not create any property interest whatsoever. She merely disclaimed a fraction of the property passing to her under the will.5  The majority seems to imply that Christiansen’s daughter should be treated as having constructively created and funded the Trust when she made her disclaimer.6 This is not the right approach. To treat Christiansen’s daughter as having created the Trust when she made the disclaimer would involve a series of convoluted steps, each of which either never occurred or violates the main concepts of section 2518.7 I refuse to rely upon her disclaimer to invalidate her disclaimer. III. Differing Treatments in Wills and Disclaimers Finally, there is little dispute that the estate would have been allowed to deduct the present value of the annuity portion of the Trust if Christiansen had made the bequest to the Trust in her will. The Trust would be treated as a charitable lead annuity trust, and the annuity interest would be a guaranteed annuity interest. See sec. 20.2055-2(e)(1) and (2)(vi), Estate Tax Regs. Guaranteed annuity interests are considered to be ascertainable and therefore severable and deductible.8 See sec. 20.2055-2(a), (e)(1) and (2)(vi), Estate Tax Regs. I am not convinced that a different result is warranted merely because the estate plan funded the Trust through a disclaimer rather than directly in the will. I acknowledge the slight textual distinction in the definitions of “severable property” under the Gift Tax Regulations, and “severable interest” under the Estate Tax Regulations,9 but do not find that it dictates a different result. The majority’s conclusion is even more anomalous when considered in light of the general premise of disclaimers: a disclaimant should be able to step back and be treated as never having received the property. See sec. 2518(a). The majority’s conclusion subverts gifts to charity simply because they were made as a result of disclaimers rather than directly in the will. IV. Conclusion Christiansen’s daughter made a qualified disclaimer of the property passing to the Trust. The contingent remainder she retained in the Trust was not a right to receive the property and also was severable from the annuity interest the Foundation held. The estate would have been entitled to deduct the amounts passing to the Trust to the extent of the annuity portion as well as the amounts passing to the Foundation. For the foregoing reasons, I respectfully dissent as to part I of the majority opinion and concur in the result of part II. Swift, J., agrees with this concurring in part, dissenting in part opinion.   The majority italicized this sentence in its reproduction of sec. 25.2518-2(e)(3), Gift Tax Regs. The italics do not appear in the regulation itself.    The example in sec. 25.2518-2(e)(3), Gift Tax Regs., was not in the proposed regulations. 45 Fed. Reg. 48928 (July 22, 1980). The example was added in the final regulations, released 6 years later. There is no discussion of this example in the Treasury Decision accompanying the final regulations. T.D. 8095, 1986-2 C.B. 160.    The Commissioner’s ruling positions also support this premise. See, e.g., Tech. Adv. Mem. 96-10-005 (Nov. 9, 1995); Priv. Ltr. Rul. 98-52-034 (Sept. 29, 1998).    The property in Walshire v. United States, 288 F.3d 342 (8th Cir. 2002), consisted of certificates of deposit (CDs). Had the disclaimant, for example, pledged the CDs as security for a loan and then failed to satisfy his obligations under the loan, the CDs could have been cashed early, and the resulting penalty would have diminished the size of the principal left to the remain-derman.    There is also a theoretical distinction between Walshire v. United States, supra, and this case. A disclaimer permits a beneficiary to step back and allow property to be passed to a third party without incurring another level of tax. The situation in Walshire, where the disclaimant disclaimed a remainder in property left to him but kept a life estate, is akin to a testamentary gift. Such a testamentary gift ordinarily would be subject to estate tax. To treat the disclaimer in Walshire as qualified would enable the avoidance of tax on this transfer. Unlike Walshire, however, the situation here does not afford an opportunity to avoid tax. The estate has never disputed its obligation to pay tax on the amount attributable to the contingent remainder held by Christiansen’s daughter. The estate seeks a deduction only for the fixed-value annuity to be used for charitable purposes. This is not akin to a testamentary gift where tax would be avoided. Moreover, in the event Christiansen’s daughter does not outlive the term of the Trust, the corpus will also pass to the Foundation to be used for charitable purposes. The estate is thus paying tax on the transfer of some property that ultimately may go to charity.    The Trust was unfunded at the time of trial and would only be funded from the disclaimed funds. The estate’s counsel testified, however, that it is common estate planning practice not to distribute funds from the estate until matters have been resolved.    First, we would have to treat Christiansen’s daughter as receiving the disclaimed property from her mother. This in fact had not occurred as of the time of trial. Moreover, under sec. 2518(a), Christiansen’s daughter is treated as if the property had never been transferred to her. Second, despite step 1, we would then have to treat Christiansen’s daughter as having disclaimed the property she never received. Third, we would then have to treat Christiansen’s daughter as having directed this property that she hypothetically disclaimed into a trust in order to fund it. The funding of this trust had not yet occurred as of the time of trial. Further, under sec. 2518(b)(4), a disclaimant cannot direct how the interest passes. Finally, after hypothetical steps 1 through 3 above, that have not yet occurred or never will occur, we would then invalidate the disclaimer because the now-invalidated disclaimer funded the trust.    The majority’s statement in note 12 that the distinction between an annuity interest and an income interest "makes no difference” is especially troubling in light of the different treatments prescribed for these interests. While a guaranteed annuity interest is treated as ascertainable, severable, and deductible, an income interest is not a deductible interest under these rules. See sec. 20.2055-2(e)(2), Estate Tax Regs.    A remainder must be ascertainable to be considered severable under the estate tax regulations. Sec. 20.2055-2(a), Estate Tax Regs. As described supra part II, property must have a complete and independent existence to be severable under the Gift Tax Regulations we are considering. Sec. 25.2518—3(a)(1)(ii), Gift Tax Regs.