McDonald v. C.I.R.
| Decision Date | 15 September 1988 |
| Docket Number | No. 87-2389,87-2389 |
| Citation | 853 F.2d 1494 |
| Parties | -5995, 88-2 USTC P 13,778 Gladys L. McDONALD, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. ESTATE OF John McDONALD, Deceased, C.F. Cornelius, Personal Representative, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Garry A. Pearson, Grand Forks, N.D., for appellant.
Teresa E. McLaughlin, Washington, D.C., for appellee.
Before FAGG and WOLLMAN, Circuit Judges, and RE *, Chief Judge.
The Estate of John McDonald (Estate) appeals from a tax court order upholding the Commissioner's determination that certain estate property did not qualify for special use valuation under section 2032A of the Internal Revenue Code. 1 In a consolidated appeal, Gladys L. McDonald (Gladys) appeals from a tax court order upholding a determination by the Commissioner that her disclaimer of the survivorship interest in jointly-held property was a taxable transfer because such disclaimer was not made within the time period prescribed by 26 C.F.R. Sec. 25.2511-1(c). McDonald v. Comm'r, 89 T.C. 293 (1987). We affirm in part, reverse in part, and remand for further proceedings consistent with this opinion.
John McDonald (Decedent), a resident of North Dakota, died testate on January 16, 1981, survived by his widow, Gladys, four children and three grandchildren. Except for some small specific bequests, the will provided that Gladys was to inherit all of Decedent's property. In addition, Decedent and Gladys had owned certain property, including several parcels of farmland, as joint tenants with right of survivorship.
On September 23, 1981, Gladys disclaimed her interest in the farmland she stood to inherit under the terms of Decedent's will, as well as the survivorship interest in most of the farmland the couple had owned in joint tenancy. As a result of the disclaimer, this property passed to three of Decedent's children, Virlyn McDonald, Dorothy Spicer, and Gladys Jean Cox, in equal shares.
The federal estate tax return for Decedent's estate was timely filed with the Internal Revenue Service on October 7, 1981. Included in this return was a "Notice Of Election Of Special Use Valuation As Authorized By Section 2032A" and an "Agreement Relating To Special Use Valuation Under Section 2032A Of The 1976 Tax Reform Act." Both were signed by Gladys and C.F. Cornelius, the personal representative of the Estate, and listed Gladys as the only person with an interest in the farmland on which special use valuation was elected.
On February 26, 1982, an amended federal estate tax return was filed for Decedent's estate. This return contained an amended "Agreement Relating To Special Use Valuation Under Section 2032A Of The 1976 Tax Reform Act," signed by Virlyn McDonald, Dorothy Spicer, Gladys Jean Cox, and three of Decedent's grandchildren.
Based on the stipulated facts, the tax court upheld the Commissioner's refusal to permit special use valuation of the farmland, holding that by omitting the children's names and signatures on the original notice of election and agreement, the Estate had not complied with the election requirements under 26 C.F.R. Sec. 20.2032A-8. The tax court also upheld the Commissioner's determination that Gladys's disclaimer of the survivorship interest was a taxable gift, holding that she had not made the disclaimer within the time period prescribed by 26 C.F.R. Sec. 25.2511-1(c). The parties having stipulated to the facts below, we review the tax court's application of the law to the facts de novo. Mangels v. United States, 828 F.2d 1324, 1326 (8th Cir.1987).
An election for a special use valuation is made by attaching a notice of election and a recapture agreement to a timely filed federal estate tax return. 26 U.S.C. Sec. 2032A(d)(1); 2 26 C.F.R Sec. 20.2032A-8(a)(3). 3 The notice of election must contain fourteen specific items, including "(xii) The name, address, taxpayer identification number, and relationship to the decedent of each person taking an interest in each item of specially valued property * * *." 26 C.F.R. Sec. 20.2032A-8(a)(3). An interest in the property is one "which, as of the date of decedent's death, can be asserted under applicable local law so as to affect the disposition of the specially valued property of the estate." 26 C.F.R. Sec. 20.2032A-8(c)(2).
If the property subject to special use valuation is disposed of or otherwise ceases to be qualified use property within fifteen years after a decedent's death, an additional estate tax, referred to as recapture tax, is imposed, for which the qualified heir is personally liable. 26 U.S.C. Sec. 2032A(c). To ensure payment, all parties with an interest in the property must expressly consent to personal liability for the recapture tax in a binding agreement attached to a timely filed estate tax return. 26 C.F.R. Sec. 2032A-8(c)(1). 4
The parties have stipulated that Gladys effectively disclaimed her interest in the property for which the special use valuation is sought pursuant to N.D.Cent.Code Secs. 30.1-10-01 and 47-11.1-01. Moreover, the Estate agrees that under North Dakota statute disclaimers relate back to the date of the Decedent's death and that the disclaimed property devolves as though the disclaiming party had predeceased the Decedent. Thus, as of the date of Decedent's death, those taking an interest in the disclaimed property were Virlyn McDonald, Dorothy Spicer, and Gladys Jean Cox.
The Estate argues that the relation-back doctrine is a legal fiction that should be ignored for the purpose of this election. We disagree. Those taking an interest in specially valued property are those whose interests can be asserted under applicable local law to affect an estate's disposition of such property. 26 C.F.R. Sec. 20.2032A-8(c)(2). By virtue of the disclaimer, Gladys had no such interest under North Dakota laws. Accordingly, we conclude that the notice of election and recapture agreement filed with the original estate tax return did not satisfy the requirements of 26 C.F.R. Sec. 20.2032A-8.
In 1984, section 2032A was amended as follows to permit correction of certain imperfections in special use elections and recapture agreements:
(a) IN GENERAL.--Section 2032A(d) () is amended by adding at the end thereof the following new paragraph:
Deficit Reduction Act of 1984, Pub.L. No. 98-369, Sec. 1025(a), 98 Stat. 494, 1030-31 (1984) () (1984 Amendment).
The Estate argues that even if the notice of election and recapture agreement filed with the original estate tax return did not comply with the literal requirements of 26 C.F.R. Sec. 20.2032A-8, they nonetheless substantially complied with those requirements pursuant to the 1984 Amendment. Specifically, the Estate argues that its amended return corrects the agreement as permitted by 26 U.S.C. Sec. 2032A(d)(3)(B)(ii) by adding "signatures of 1 or more persons required to enter into the agreement." We disagree.
Before a recapture agreement may be corrected by the addition of signatures, the agreement as filed with the original return must substantially comply with 26 C.F.R. Sec. 20.2032A-8. As discussed above, this regulation specifically requires the agreement to "be in a form that is binding on all parties having an interest in the property." 26 C.F.R. Sec. 20.2032A-8(c)(1). The Estate does not argue that the original recapture agreement was binding on Decedent's children under North Dakota law. Thus, the issue is whether a recapture agreement that was not executed by any of the parties with an interest in the property can substantially comply with the requirements of 26 C.F.R. Sec. 20.2032A-8.
Neither party has cited a case addressing this specific issue. In construing a case of first impression, we look first to the language of the statute itself; second, to its legislative history; and third, to the interpretation given to it by its administering agency. Brock v. Writers Guild of America, West, Inc., 762 F.2d 1349, 1353 (9th Cir.1985). Having done so, we conclude that the recapture agreement filed with the original return did not substantially comply with 26 C.F.R. Sec. 20.2032A-8. 5
The statutory language, as a precondition to the addition of signatures, requires that the original election substantially comply with 26 C.F.R. Sec. 20.2032A-8, which includes the requirement that the original agreement be binding on all parties taking an interest in the property. Based only on this language, it is difficult to conclude that the original election was in substantial compliance with this requirement when it contained neither the name nor the signature of anyone with an interest in the property as of the date of Decedent's death. See Tipps v. Comm'r, 74 T.C. 458 (1980) ().
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