Irvine v. U.S.

• Decision Date: 28 December 1992
• Docket Number: No. 89-5616,89-5616
• Citation: 981 F.2d 991
• Parties: -2145, 61 USLW 2418, 93-1 USTC P 60,126 John O. IRVINE and First Trust National Association, a national banking corporation, as co-personal representatives of the Estate of Sally O. Irvine, Appellees, v. UNITED STATES of America, Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 991

981 F.2d 991

71 A.F.T.R.2d 93-2145, 61 USLW 2418,

93-1 USTC P 60,126

John O. IRVINE and First Trust National Association, a

national banking corporation, as co-personal

representatives of the Estate of Sally

O. Irvine, Appellees, v. UNITED STATES of America, Appellant.

No. 89-5616.

United States Court of Appeals,

Eighth Circuit.

Submitted Jan. 6, 1992.

Decided Dec. 28, 1992.

Michael L. Paup, Washington, DC, argued (Shirley D. Peterson, Gary R. Allen, Jonathan S. Cohen and Calvin C. Curtis, Dept. of Justice, on the brief), for appellant.

Phillip H. Martin, Minneapolis, MN, argued (Mary J. Streitz, Minneapolis, MN, and Cole Oehler and Richard H. Kyle, St. Paul, MN, on the brief), for appellees.

Before LAY, ^* Chief Judge, BRIGHT, Senior Circuit Judge, McMILLIAN, ARNOLD, ^** JOHN R. GIBSON, FAGG, BOWMAN, WOLLMAN, BEAM, LOKEN, and HANSEN, Circuit Judges, En Banc.

BOWMAN, Circuit Judge.

The United States appeals from the order of the District Court granting summary judgment in favor of John O. Irvine and First Trust National Association (taxpayers) as the personal representatives of the Estate of Sally Ordway Irvine (Mrs. Irvine) and directing the government to refund federal gift taxes and interest paid by Mrs. Irvine for the third quarter of 1979 and the third quarter of 1980. For reversal, the government argues the District Court erred in holding that Mrs. Irvine's partial disclaimer in 1979 of a remainder interest in a trust created by her grandfather in 1917 was not subject to federal gift tax, I.R.C. §§ 2501-2524 (1988).

A three-judge panel of this Court, with one judge dissenting, ruled in favor of the government. Irvine v. United States, 936 F.2d 343 (8th Cir.1991) (subsequent history omitted). The Court granted taxpayers' suggestion for rehearing en banc, thereby vacating the panel opinion. We now affirm the order of the District Court.

I.

The underlying facts are not disputed. Mrs. Irvine was a granddaughter of Lucius P. Ordway. In January 1917 Lucius P. Ordway established an irrevocable inter vivos In June 1979 Katharine G. Ordway, who was Mrs. Irvine's aunt and the last surviving child of Lucius P. Ordway, died unmarried, and the trust terminated. Twelve Ordway grandchildren, including Mrs. Irvine, were living at the time of Katharine G. Ordway's death. Because one grandchild had died with issue, the trust corpus was to be divided into thirteen shares. In August 1979, about two months after Katharine G. Ordway's death, Mrs. Irvine disclaimed part of her share of the trust corpus. It is undisputed that Mrs. Irvine's partial disclaimer was valid under Minnesota law. Minn.Stat. § 501.211 (1988) (valid disclaimer if filed in Minnesota district court within six months of event which causes disclaimant to be finally ascertained and interest indefeasibly fixed), repealed by 1989 Minn.Laws, ch. 340, art. 1, § 77 (replaced by Minn.Stat. § 501B.86 (1990), which changed the deadline to nine months effective January 1, 1990). As a result of the partial disclaimer, Mrs. Irvine was treated, with respect to the disclaimed interest, as if she had died before the termination of the trust, and her five children thus received, as provided by the trust instrument, the disclaimed portion of her share of the trust corpus.

                trust.   The trust income was to be paid to Ordway's wife, Jessie G. Ordway, and their five children for their lives.   The trust also provided that if any of Ordway's children died before the termination of the trust, that child's issue and the child's surviving spouse, as long as the surviving spouse remained unmarried, would receive the child's share of the trust income.   On the death of the last surviving life beneficiary, the trust would terminate and the trust corpus would be distributed to the grandchildren, per capita.   If any of the grandchildren died with issue before the termination of the trust, that grandchild's share would be distributed in equal portions to his or her surviving issue.   Mrs. Irvine became aware of her contingent remainder interest in the trust when she turned 21 in 1931
                

On audit of Mrs. Irvine's gift tax return for the third quarter of 1979, the Internal Revenue Service (IRS) took the position that the disclaimer effected a taxable gift by Mrs. Irvine to her children. Mrs. Irvine consequently paid, under protest, the gift tax asserted to be due on the disclaimer, as well as the accrued interest on the deficiency, and filed a timely claim with the IRS for a refund. Later the IRS notified Mrs. Irvine that, because the adjustments made to her gift tax return for the third quarter of 1979 on account of the disclaimer had reduced the amount of unified credit available to her, she owed additional gift taxes for the third quarter of 1980. She paid these additional taxes and accrued interest, and made another timely filing with the IRS for a refund. In March 1987 the IRS disallowed both of the refund claims, and in November of that year Mrs. Irvine died.

In February 1988, taxpayers filed the present action seeking a refund of the gift taxes and interest paid. See I.R.C. § 7422 (1988); 28 U.S.C. § 1346(a)(1) (1988). On cross-motions for summary judgment, the District Court ruled in favor of taxpayers, holding they are entitled to a refund of the gift taxes and interest paid for the third quarter of 1979 and the third quarter of 1980, together with the accrued interest on those amounts. A final judgment was entered for taxpayers in the total amount of $22,748,250.43, plus interest from the date of judgment. This appeal followed.

II.

We review de novo the district court's decision to grant summary judgment. Summary judgment is proper when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986); McCuen v. Polk County, 893 F.2d 172, 173 (8th Cir.1990). In the present case, the relevant facts are not disputed.

III.

The question on which this appeal turns is whether Mrs. Irvine's 1979 partial disclaimer of her contingent remainder interest in an irrevocable trust created in In the case of taxable transfers creating an interest in the person disclaiming made before January 1, 1977 ... a refusal to accept ownership does not constitute the making of a gift if the refusal is made within a reasonable time after knowledge of the existence of the transfer. The refusal must be unequivocal and effective under the local law. There can be no refusal of ownership of property after its acceptance.

                1917 (when there was no federal gift tax) effected a gift to her children for federal gift tax purposes.   The government contends that it did, basing its position on the application of Treasury Regulation § 25.2511-1(c)(2), which provides in pertinent part
                

Treas.Reg. § 25.2511-1(c)(2) (as amended in 1986) (emphasis added). ¹ This regulation reflects the fundamental principle that a disclaimer should not be subject to the federal gift tax unless the transfer creating the interest disclaimed was itself a "taxable transfer"; absent this limitation, the gift tax would be imposed on a donee's refusal to accept a gift that never was subject to the tax in the first place, an anomaly that Congress, given its clear intent, as discussed infra, that the gift tax should not have any retroactive application, did not ordain. We note that, consistent with this fundamental principle, the Treasury Department has not promulgated any regulation dealing with the disclaimer of interests created by "nontaxable transfers."

The transfer that created Mrs. Irvine's contingent remainder interest occurred in 1917, when Lucius P. Ordway established his irrevocable inter vivos trust. If the establishment of this trust is indeed a "taxable transfer," even though in 1917 the federal gift tax had not yet been enacted, then Mrs. Irvine's disclaimer of her contingent remainder interest created by the trust would be subject to the federal gift tax unless her disclaimer was timely within the meaning of the regulation. ² But if the creation of her interest by the 1917 Ordway trust is not a "taxable transfer," then the interest validly disclaimed by Mrs. Irvine under Minnesota law passes to her five children unencumbered by the federal gift tax. The government stakes its case on the proposition that the creation of Mrs. Irvine's interest in the Ordway trust is a "taxable transfer" within the meaning of Treasury Regulation § 25.2511-1(c)(2). We find that proposition untenable.

It is fundamental that for a transfer to be taxable there must be an applicable tax in existence when the transfer is made. No such federal tax existed on January 16, 1917, when Lucius P. Ordway irrevocably transferred assets to the trustees of the Ordway trust and Mrs. Irvine's interest was created. Moreover, fifteen years later when the Gift Tax Act of 1932 was enacted, Congress expressed its intention not to apply the tax retroactively. Section 501(b) of the Act states: "The tax shall not apply to a transfer made on or before the date of the enactment of this Act [June 6, 1932]." Revenue Act of 1932, ch. 209, § 501(b), 47 Stat. 169, 245 (1932). This prohibition against retroactive application of the tax to pre-Act gifts has been continued throughout revisions of the Gift Tax Act and is reflected in the current Internal Revenue Code (Code) in the section governing computation of the tax. I.R.C. § 2502 (1988) (the tax is computed upon the aggregate sum of taxable gifts made throughout the donor's life during periods following June 6, 1932). "Congress has been careful to avoid any taint of retroactivity in connection with the 1932 We are mindful that in a case involving Mrs. Irvine's brother John G. Ordway, the Eleventh Circuit has held that "the 1917 gift [of Lucius P. Ordway] was a taxable transfer." Ordway v. United States, 908 F.2d 890, 895 (11th Cir.1990), cert. denied, --- U.S. ----, 111...