Cottrell v. C. I. R., 79-1842

• Decision Date: 03 September 1980
• Docket Number: No. 79-1842,79-1842
• Citation: 628 F.2d 1127
• Parties: 80-2 USTC P 13,369 Lois P. COTTRELL, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1127

628 F.2d 1127

80-2 USTC P 13,369

Lois P. COTTRELL, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

No. 79-1842.

United States Court of Appeals,

Eighth Circuit.

Submitted June 11, 1980.

Decided Sept. 3, 1980.

Phillip H. Martin, Dorsey, Windhorst, Hannaford, Whitney & Halladay, Minneapolis, Minn., argued for appellant; Kenneth L. Cutler, Minneapolis, Minn., on brief.

Helen A. Buckley, Atty., Tax Div., Dept. of Justice, Washington, D.C., argued, for appellee; M. Carr Ferguson, Asst. Atty. Gen., Gilbert E. Andrews, Ann Belanger Durney, Washington, D.C., on brief.

Before LAY, Chief Judge, and HEANEY, BRIGHT, ROSS, STEPHENSON, HENLEY, McMILLIAN and ARNOLD, Circuit Judges, en banc.

ARNOLD, Circuit Judge.

This is a gift-tax case. The question is whether Lois P. Cottrell made a taxable transfer of property by gift within the meaning of 26 U.S.C. §§ 2501 and 2511 when she disclaimed her remainder interest created by her father's will. The Tax Court, 72 T.C. 489, found that a taxable transfer was made and determined a deficiency in the amount of $4,639,402.50. Because this case is indistinguishable in any material respect from Keinath v. Commissioner, 480 F.2d 57 (8th Cir. 1973), we reverse.

I.

Parker Webster Page died testate on January 22, 1937, a resident of Essex County, New Jersey. He was survived by his wife, Nellie A. Page, and two daughters, Helen Page Wodell (later Halbach) and Lois P. Cottrell, the taxpayer in this case. The third paragraph of Mr. Page's will, which was admitted to probate in a New Jersey court shortly after his death, reads as follows:

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 principal and to apply the net income to her use. Upon her death I give, devise, bequeath and appoint the principal 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.

Thus, all of the trust's net income was designated for the sole use of Nellie A. Page, the life beneficiary. In addition, the fourth paragraph of the will granted to the trustees the power to take from the principal up to $10,000 a year for the life beneficiary.

The taxpayer and her sister were appointed executors of the will on February 10, 1937. On February 23, 1944, the taxpayer irrevocably released the testamentary power of appointment granted to her under the third paragraph of the will, but reserved a partial power to appoint only to her spouse and descendents. The trust assets were distributed by the executors to the trustees on January 27, 1945, and from that date the taxpayer and her sister acted as trustees. ¹

Nellie A. Page died on April 14, 1970, at the age of 100. She was survived by her two children, the taxpayer and her sister. On April 30, 1970, the taxpayer executed a written disclaimer, which was filed in the probate court on June 15, 1970. It reads in full:

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 had the taxpayer received any income or principal from the trust.

The trustees filed suit for a determination of the validity of the disclaimer. The Superior Court of New Jersey held the disclaimer valid 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, 585, 274 A.2d 614, 616 (Ch.Div. 1970). The taxpayer's disclaimed remainder interest, then worth over ten million dollars, was distributed to her children under the third paragraph of the Page will.

The Commissioner of Internal Revenue determined that the taxpayer made a taxable transfer, and a deficiency of $4,639,402.50 was assessed. The taxpayer filed with the Tax Court a petition for a redetermination, and the case was submitted on the pleadings and stipulated facts. The Tax Court agreed with the Commissioner, ruling that the taxpayer's disclaimer was not made within a reasonable time under Treas. Reg. § 25.2511-1(c), and thus constituted a taxable transfer. The taxpayer appealed to this Court. ²

II.

"The transfer of property by gift" is taxed under the Internal Revenue Code of 1954 regardless of whether the gift is "direct or indirect." 26 U.S.C. §§ 2501, 2511. In some circumstances, however, a transfer by way of an unequivocal disclaimer of a devised interest in property is not taxable. Under Treas. Reg. § 25.2511-1(c), a disclaimer is not a taxable transfer if four conditions are met: (1) The disclaimer must be permitted under local law; (2) the disclaimer must be made within a reasonable time after knowledge of the existence of the transfer to the disclaiming party; (3) the disclaimer must be unequivocal; and (4) there must have been no acceptance of property by the disclaiming party before the disclaimer. Here, it is undisputed that the disclaimer was valid under New Jersey law, that it was unequivocal, and that the taxpayer accepted no property before she disclaimed her interest in the trust. The only question before us is whether the disclaimer was timely. If the event which triggered the running of the "reasonable time" period was the death of the testator, the disclaimer, filed 33 years thereafter, was untimely and ineffective. On the other hand, if the critical event was the death of the life beneficiary, the disclaimer was unquestionably timely, having been executed 16 days, and filed two months, thereafter.

Keinath v. Commissioner, 480 F.2d 57 (8th Cir. 1973) presented a strikingly similar fact situation and is controlling. The testator died in 1944 devising most of his estate to a trust. His wife was the life beneficiary, and upon her death the principal was to be divided between the testator's two sons, John Jr. and Cargill. The sons served as co-trustees until John Jr. died in 1960, and after that Cargill served as the sole trustee. The parties agreed that the will gave Cargill a vested remainder in one-half of the trust subject to divestment only if he should predecease his mother, the life beneficiary. Cargill at no time accepted any income or principal from the trust. The life beneficiary died March 28, 1963. On May 20, 1963, Cargill signed an unequivocal disclaimer of any interest in the trust, and the disclaimer was filed in a Minnesota state court on September 6, 1963. That court held the disclaimer valid and timely. The Commissioner assessed a deficiency, however, and the Tax Court upheld the Commissioner's assessment, holding that the "reasonable time" period within which a disclaimer must be filed began to run at the death of the testator. This Court reversed, reasoning that the time within which the disclaimer must be filed begins to run when the remainder interest becomes "indefeasibly fixed both in quality and quantity." 480 F.2d at 63. We said that remainder interests not subject to divestment become indefeasibly fixed at the death of the testator, and must be disclaimed within a reasonable time thereafter. We held that Cargill's remainder interest did not become fixed until the death of the life beneficiary, 19 years after the testator's death, and we found that the filing of the disclaimer within six months thereafter was reasonable and effective.

The area of disagreement in this case actually is rather narrow. No one argues that the taxpayer's remainder, considered in and of itself, was indefeasibly vested. ³ "When a remainder is indefeasibly vested, it is not subject to any condition precedent, to any contingent remainder, executory limitation, power of appointment or condition subsequent." Simes & Smith, Future Interests § 110, at 90 (2d ed. 1956). ⁴ In other words, a remainder, in order to be indefeasibly vested, must sooner or later pass to the remainderman or her estate. Here, just as in Keinath, taxpayer had to outlive her mother in order ever to enjoy possession of the assets of the trust. If she predeceased her mother, her interest failed. Such an interest is not indefeasibly fixed.

The only distinction suggested is that here, unlike in Keinath, the taxpayer also had a general power of appointment by will. ⁵ We hold that fact insufficient to distinguish Keinath for several reasons. If taxpayer, by her own act, had the right, at all events, to convert her defeasible interest into an indefeasible one, the Commissioner would have a point. But that was not the nature of the power given her. First, the power was exercisable only "by will duly admitted to probate." Even if taxpayer exercised the power by making a will, the exercise might not ever become effective. A will creates no present rights. It is wholly ambulatory until the death of the testatrix. It can be revoked, either by destruction or the making of a later will. Even if not revoked, it may never by admitted to probate. It may be contested and set aside, for lack of formality or testamentary capacity. And in the present case, the power was not even exercisable unless the taxpayer predeceased her mother, which did not happen. In these circumstances, we do not believe it can be said that the conditional testamentary power converted taxpayer's remainder into an interest "indefeasibly fixed in quality."

And even if this point could somehow be...