Cottrell v. Comm'r of Internal Revenue , Docket No. 1816-77.

• Decision Date: 13 June 1979
• Docket Number: Docket No. 1816-77.
• Parties: LOIS P. COTTRELL, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

72 T.C. 489

LOIS P. COTTRELL, PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 1816-77.

United States Tax Court

Filed June 13, 1979.

Petitioner held a 50-percent remainder interest in a testamentary trust created in 1937 by the will of her father. In 1970, when the life tenant of the trust expired, petitioner executed a disclaimer of her remainder interest which was unequivocal and effective under New Jersey law. Held, the disclaimer was not made within a reasonable time as required by sec. 25.2511-1(c), Gift Tax Regs. Keinath v. Commissioner, 480 F.2d 57 (8th Cir. 1973), distinguished. Held, further, petitioner is not liable for any additions to tax under sec. 6653(a), I.R.C. 1954. John W. Windhorst, Phillip H. Martin, and Kenneth L. Cutler, for the petitioners.

Robert F. Cunningham, for the respondent.

WILES, Judge:

Respondent determined a $4,639,402.50 deficiency and a $231,970.13 addition to tax under section 6653(a)¹ in petitioner's 1970 Federal gift tax. The two issues are whether petitioner made a taxable gift under section 2511 when she executed a disclaimer of her remainder interest in her father's testamentary trust and whether she is subject to an addition to tax under section 6653(a) for failing to disclose the disclaimer on her 1970 gift tax return.

FINDINGS OF FACT

All the facts have been stipulated and are so found.

Lois P. Cottrell (hereinafter petitioner) resided in Stonington, Conn., when she filed her Federal gift tax return for the calendar year 1970 with the Office of the Internal Revenue Service in Hartford, Conn., and in Excelsior, Minn., at the time of filing her petition herein.

Parker Webster Page, petitioner's father, died testate on January 22, 1937, a resident of Essex County, N. J. His will, dated January 12, 1935, was admitted to probate there on February 10, 1937.

Testator's will provided in relevant part:

If my wife, Nellie A. Page, survives me, I give, devise, bequeath and appoint all of said residue of my estate to my Trustees, hereinafter named, in trust, to hold the same during the life of my wife Nellie A. Page and to invest and reinvest the prinicipal and to apply the net income to her use. Upon her death I give, devise, bequeath and appoint the prinicipal in equal shares to my daughters Helen Page Wodell and Lois Page Cottrell and if either of my daughters should then be dead to such persons and in such proportions as such daughter may by will duly admitted to probate legally appoint and in default of such appointment to such daughter's issue then surviving in equal shares per stirpes.

The trust was subject to, governed by, and interpreted under the laws of New Jersey.

On February 23, 1944, petitioner irrevocably released her testamentary power of appointment created under the above will provision; however, she reserved and retained a partial power to appoint to her spouse and her descendents. From and after January 27, 1945, petitioner and her sister performed their functions as trustees over the testamentary trust. In 1965, they appointed a corporation to serve as cotrustee.

Nellie Page died on April 14, 1970, at the age of 100. She was survived by her two daughters, Helen Page Halbach, age 79, and petitioner, age 74. Petitioner had three surviving children at her mother's death.

On April 30, 1970, petitioner executed an instrument entitled “Disclaimer and Renunciation” which provided:

I, Lois Page Cottrell, of Stonington, Connecticut, do hereby irrevocably disclaim and renounce all my right, title and interest as a remainderman of the trust established by my father, Parker Webster Page, in Paragraph Third of his last will and testament dated January 12, 1935 and admitted to probate by the Essex County Surrogate's Court on February 10, 1937.

At no time did petitioner ever receive or accept any income or principal from the trust. Petitioner did not receive any fees or other compensation for acting as trustee of the trust.

The trustees brought an action in the Superior Court of New Jersey, Chancery Division—Essex County for, in part, a determination of the validity and effect of the above disclaimer. On December 23, 1970, the Superior Court entered its judgment in the action brought by the trustees concluding that under New Jersey law: “Mrs. Halbach and Mrs. Cottrell, having acted very promptly after their mother's death, effectively disclaimed and renounced the remainders in trust provided for them by the will of their father.” (In Re Estate of Page, 113 N.J. Super. 582, 274 A.2d 614, 616 (Ch. Div. 1970).) This decision was not appealed, and became final and binding on the parties thereto.

Pursuant to the testator's will, the Superior Court of New Jersey directed distribution of the disclaimed remainder interest to petitioner's issue living at the time of the death of Nellie A. Page, per stirpes. The assets of the trust were distributed in accordance with that judgment.

On April 30, 1970, the date of petitioner's disclaimer, the fair market value of one-half of the trust property, which was subsequently distributed by the trustees to petitioner's children, was approximately $10,132,000.

Petitioner's Federal gift tax return for the calendar year 1970 was prepared by Frank Chapman, an attorney. His law firm issued a written opinion to petitioner on March 10, 1971, which concluded that petitioner's disclaimer of her remainder interest did not constitute a transfer by gift of the trust property by her to her issue and was not subject to Federal gift tax. The opinion also concluded that petitioner had no duty and no reason to disclose the fact of the disclaimer on her gift tax return for the calendar year 1970.

Pursuant to this opinion, petitioner excluded the value of her remainder interest in the trust from her gift tax return for the calendar year 1970. In addition, she did not disclose the disclaimer on her return. Respondent determined that petitioner's execution of the disclaimer of her 50-percent interest in the trust remainder constituted a taxable gift under section 2511. He further determined that petitioner's failure to disclose the disclaimer on her gift tax return was due to negligence or intentional disregard of rules and regulations within the meaning of section 6653(a).

OPINION

We must first determine whether petitioner's execution of her April 30, 1970, disclaimer constituted a taxable gift. This would result if the disclaimer effectuated a taxable transfer of the trust property from petitioner to her children. This in turn depends upon whether the disclaimer was executed within a “reasonable time after knowledge of the existence of the transfer.” Sec. 25.2511-1(c), Gift Tax Regs.

This Court has repeatedly held that the holder of a remainder interest subject to divestiture has a “reasonable time” from the creation of the interest to execute a valid disclaimer not subject to gift tax. Jewett v. Commissioner, 70 T.C. 430 (1978); Keinath v. Commissioner, 58 T.C. 352 (1972), revd. 480 F.2d 57 (8th Cir. 1973). Nevertheless, since this case is appealable only to the Eighth Circuit, petitioner contends that we are required to measure the “reasonable time” for disclaimer from the death of the last surviving life tenant. Petitioner's position is based on the holding of Keinath v. Commissioner, 480 F.2d 57 (8th Cir. 1973), in conjunction with the rule established in Golsen v. Commissioner, 54 T.C. 742, 757 (1970), affd. 445 F.2d 985 (10th Cir. 1971), cert. denied 404 U.S. 940 (1971). Since we find Keinath distinguishable by reason of our recent opinion in Estate of Halbach v. Commissioner, 71 T.C. 141 (1978), we find the rule established in Golsen inapplicable. Accordingly, consistent with the position of this Court, we find that petitioner's disclaimer constituted a taxable gift.

Golsen “requires us to follow a Court of Appeals decision which is squarely in point where appeal from our decision lies to that Court of Appeals and to that Court alone.” Accordingly, we must examine the Eighth Circuit opinion in Keinath to determine if it is “squarely in point.”

Keinath involved a disclaimer filed by a remainderman of a testamentary trust created by the will of his father who died in 1944. The trust granted his mother a life interest with the trust principal to be divided equally between the testator's two sons. In the event either son predeceased his mother, the life tenant, the deceased son's share was to be distributed to the son's child per stirpes. The parties therein agreed that the son had a vested remainder subject to divestiture. The son disclaimed his one-half remainder interest within 6 months following the death of his mother which was approximately 19 years after the trust was created.

This Court upheld the respondent's...