Keinath v. CIR

• Citation: 480 F.2d 57
• Decision Date: 08 May 1973
• Docket Number: No. 72-1647 to 72-1651.,72-1647 to 72-1651.
• Parties: Pauline KEINATH, Transferee of Assets of Cargill MacMillan, Transferor, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. Cargill MacMILLAN, Jr., Transferee of Assets of Cargill MacMillan, Transferor, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. Whitney MacMILLAN, Transferee of Assets of Cargill MacMillan, Transferor, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. Pauline W. MacMILLAN, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. Cargill MacMILLAN 1967 TRUST et al., Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

480 F.2d 57 (1973)

Pauline KEINATH, Transferee of Assets of Cargill MacMillan, Transferor, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

Cargill MacMILLAN, Jr., Transferee of Assets of Cargill MacMillan, Transferor, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

Whitney MacMILLAN, Transferee of Assets of Cargill MacMillan, Transferor, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

Pauline W. MacMILLAN, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

Cargill MacMILLAN 1967 TRUST et al., Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

Nos. 72-1647 to 72-1651.

United States Court of Appeals, Eighth Circuit.

Submitted April 10, 1973.

Decided May 8, 1973.

Rehearing Denied June 1, 1973.

John W. Windhorst, Minneapolis, Minn., for appellants.

Donald H. Olson, Atty., Dept. of Justice, Washington, D. C., for appellee.

Before GIBSON, LAY and BRIGHT, Circuit Judges.

GIBSON, Circuit Judge.

These consolidated appeals¹ question the validity of a gift tax of $147,572 plus interest assessed by the Commissioner and sustained by the Tax Court on a disclaimer made by a remainderman within six months after the death of the life beneficiary. The Tax Court opinion, reported in 58 T.C. 352 (1972), held the disclaimer was not timely filed. We reverse for the reasons set forth in this opinion.

John H. MacMillan, Sr., the grandfather of appellants Pauline Keinath, Cargill MacMillan, Jr., and Whitney MacMillan died testate in 1944, devising and bequeathing most of his estate to a trust, the income of which was to be paid to the testator's widow Edna MacMillan for life and upon her death the principal was to be divided between the testator's two sons, John, Jr. and Cargill MacMillan. In the event either son predeceased the widow, the deceased son's share was to be distributed to his children per stirpes. John, Jr. and Cargill were named in the will and subsequently served as co-trustees of the trust. John, Jr. died in 1960 survived by three children. Cargill then served as sole trustee.

Cargill at no time accepted any income or principal from the trust and the parties agree that Cargill by virtue of his father's will² had a vested remainder in one-half of the trust subject to divestiture only if he should predecease the life beneficiary.

The life beneficiary Edna MacMillan died March 28, 1963. On May 20, 1963, Cargill signed a document titled "Disclaimer," which was filed in the District Court of Hennepin County, Minnesota on September 6, 1963. That document reads in part:

"WHEREAS, under the terms of Article III of said trust instrument, the undersigned would, after his mother\'s death, except for this Disclaimer, have succeeded to a one-half (½) beneficial interest in the remainder of said trust, but in the event of his death prior to that of his mother, said one-half (½) beneficial interest in the trust or trust property would have passed to the issue of the undersigned who survive said Edna C. MacMillan, per stirpes, free and clear of trust, and

* * * * * *

"NOW, THEREFORE, in consideration of the premises, the undersigned does hereby finally and irrevocably disclaim, renounce, remise and refuse to accept any beneficial interest in said trust or trust assets of any nature, real, personal or otherwise, including both principal and accrued or accruing income thereof, which now or hereafter would be effectively vested in him under the provisions of Article III of said last will and testament of John H. MacMillan, were it not for the execution of this Disclaimer, with the understanding that all right, title and interest in said one-half (½) interest in the trust or trust property will pass to his issue who survive said Edna C. MacMillan, per stirpes, this Disclaimer to become effective immediately upon, but not before, its filing with the District Court for the Fourth Judicial District, Hennepin County, Minnesota, in the proceeding entitled: `In the Matter of the Trusteeship under the Last Will and Testament of John H. MacMillan, Deceased,\' therein and maintained under District Court File No. T-2078."

Prior to the filing of the executed Disclaimer, Cargill MacMillan, as Trustee, on August 16, 1963, petitioned the District Court of Hennepin County, Minnesota, for an order construing the provisions of the trust and the effect of such a Disclaimer upon the devolution of his share of the trust. The petition was heard on September 6, 1963, the same date the Disclaimer was filed with the court. The Minnesota District Court found that the Disclaimer was valid and timely, that Cargill had never accepted any beneficial interest in the trust estate or dominion over the property of the trust, and that the beneficial interest in the trust estate effective as of the date of Edna C. MacMillan's death passed to the six grandchildren by virtue of the terms of the trust instrument.

On June 16, 1969, the Commissioner sent notices of deficiencies to the appellants because he claimed that Cargill's attempted renunciation was in fact a gift by him to his children of one-half of the assets of the trust, which were valued at $669,797.63 on September 6, 1963. Each appellant, except Cargill's wife, was assessed a gift tax of $147,572, plus interest, though it was stipulated the amount assessed was a duplicate of the liabilities set forth in all the four cases. Cargill's wife as a spouse who had consented to her husband's "gifts," was assessed one-half of the above amount.

The Tax Court upheld the Commissioner's assessments by relying on 26 U.S.C. § 2511(a),³ Treas.Reg. § 25.2511-1(c) (1958),⁴ and Kathryn S. Fuller, 37 T.C. 147 (1961). The Tax Court⁵ reasoned that the regulation and Fuller establishes a two-pronged test to determine the validity of a disclaimer and said "that the disclaimer must be valid under local law and made within a reasonable time after the disclaimant learns of the transfer."

"Reasonable time" is not defined in the Code or Regulations in this context, and the Tax Court held on the basis of Fuller that "reasonable time" should be defined according to a federally determined standard. The Tax Court then concluded that Cargill failed to disclaim his interest within a reasonable time, because he waited from October 20, 1944 —the time the testamentary trust was created—until September 6, 1963, the date of the filing of the disclaimer in the Minnesota courts.

The appellants contend that Brown v. Routzahn, 63 F.2d 914 (6th Cir. 1933), cert. denied, 290 U.S. 641, 54 S.Ct. 60, 78 L.Ed. 557 established the rule of law that a disclaimer valid and effective under local law is not a taxable transfer for federal tax purposes and that the Commissioner either by his regulation or his interpretation of that regulation is seeking to circumvent that principle of law. Routzahn was an estate tax case recognizing the common law principle on disclaimers. Treas.Reg. § 25.2511-1(c), which implements 26 U.S.C. § 2511 that applies the gift tax imposed by 26 U.S. C. § 2501, also recognizes the common law principle or doctrine of disclaimers. It reiterates the basic common law requirements that the disclaimer must be "made within a reasonable time after knowledge of the existence of the transfer" and that it be unequivocal and effective under local law. These conditions are but a codification of common law principles applicable to the doctrine of disclaimers, and the states, recognizing the doctrine, may well vary in what constitutes a reasonable time or even in imposing a reasonable time condition.

Central to this case is the interpretation or denotation of the word "transfer" in the regulation.⁶ Is the transfer made at the time the trust is established or when the remainderman comes into possession and control? In other words is the reasonable time period calculated from the date the remainderman has the right of possession or control of the property or when the trust is established? The Commissioner contended and the Tax Court held that the reasonable time commenced to run at the time the trust was established.

The appellants would have us look to the local law to define "reasonable time" since this federal taxing act by its express language or necessary implication makes its operation dependent upon state law. Burnet v. Harmel, 287 U.S. 103, 110, 53 S.Ct. 74, 77 L.Ed. 199 (1932). Although the appellants argue for a complete state standard on the validity of a disclaimer, we think the Commissioner has the right in the Treasury Regulations to set forth the conditions under which disclaimers will be recognized. We are concerned here with the exercise of federal taxing power and state law participates only to the extent recognized in the federal statute or Treasury regulation. This is a federal tax act, and in the interest of uniformity implementing regulations should be applied evenly throughout the country. Furthermore as a federal tax act, the Commissioner pursuant to statutory authorization has the right to define the breadth and scope of its operation through regulations. 26 U.S.C. § 7805(a). However, notwithstanding the fact that the gift tax is a national act, there will be many variances in its application because of the very nature of the following imposed conditions: (1) the disclaimer must be recognized and effective under local law; (2) the disclaimer must be made within a reasonable time after knowledge of the existence of the transfer; (3) there can be no disclaimer after there has been acceptance of the transfer of the property; and (4) the disclaimer must be unequivocal. In this case the Commissioner admits that the Disclaimer would have been timely made if the date from which the reasonable period is to be calculated commences at the death of the life beneficiary; also, admittedly otherwise it would not.

In determining "reasonable time" and the related issue of when the reasonable time period commences, we perforce, absent a federal statute or regulation defining reasonable...