Kleinman v. Comm'r of Internal Revenue (In re Estate of Gerson)

Decision Date24 October 2006
Docket NumberNo. 13534–04.,13534–04.
Citation127 T.C. 139,127 T.C. No. 11
PartiesESTATE OF Eleanor R. GERSON, Deceased, Allan D. Kleinman, Executor, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

G created the Benjamin Gerson Trust which became irrevocable when G died in 1973. The trust provided for the creation of a marital trust (the trust) for the benefit of G's wife, D. The trust conferred upon D a general power of appointment over the trust property. D died in October 2000 and left a will under which she exercised the power of appointment in favor of her grandchildren. R determined that the transfer to D's grandchildren was subject to generation-skipping transfer (GST) tax. P contends (1) sec. 26.2601–1(b)(1)(i), GST Tax Regs., is invalid, and (2) the transfer is excepted from GST tax under sec. 1433(b)(2)(A) of the Tax Reform Act of 1986, Pub.L. 99–514, 100 Stat. 2731.

Held: Sec. 26.2601–1(b)(1)(i), GST Tax Regs., is a reasonable and valid interpretation of sec. 1433(b)(2)(A) of the Tax Reform Act of 1986 because it harmonizes with the plain language of the statute, its origin, and its purpose.

Held, further: R's determination that the disputed transfer is subject to GST tax is sustained.

Mark A. Phillips and Jeffry L. Weiler, for petitioner.

Stephen J. Neubeck, for respondent.

OPINION

HAINES, Judge.

Respondent issued a notice of deficiency to the Estate of Eleanor R. Gerson (the estate) determining a deficiency of $1,144,465 in Federal generation-skipping transfer (GST) tax. The sole issue before the Court concerns the validity of section 26.2601–1(b)(1)(i), GST Tax Regs., which provides that the “grandfather” exception to the GST tax set forth in section 1433(b)(2)(A) of the Tax Reform Act of 1986 (TRA 1986), Pub.L. 99–514, 100 Stat.2085, 2731 (hereinafter TRA 1986 section 1433(b)(2)(A)), does not except from GST tax a transfer of property pursuant to the exercise, release, or lapse of a general power of appointment that is treated as a taxable transfer for purposes of Federal estate or gift tax.1 We hold the regulation is valid, and we sustain respondent's determination that the disputed transfer is subject to GST tax.

Background

This case was submitted to the Court fully stipulated pursuant to Rule 122. The parties' stipulation of facts, with attached exhibits, is incorporated herein by this reference.

Eleanor R. Gerson (decedent) died testate on October 20, 2000. At the time of her death, decedent was domiciled in Cleveland Heights, Ohio. Allan D. Kleinman was duly appointed executor of decedent's estate by the Probate Court for Cuyahoga City, Ohio. At the time the petition was filed, Mr. Kleinman was a resident of Cuyahoga County, Ohio, and in his capacity as executor had a mailing address of 200 Public Square, Suite 2300, Cleveland, Ohio 44114.

Decedent married Benjamin S. Gerson (Mr. Gerson) on November 6, 1938, and remained married to him until his death on July 22, 1973. Decedent and Mr. Gerson had four children and five grandchildren.

On December 9, 1968, Mr. Gerson, as grantor, executed a revocable trust agreement (the Benjamin Gerson Trust). On July 19, 1973, shortly before his death, Mr. Gerson amended the Benjamin Gerson Trust for the last time (the Third amendment). Upon Mr. Gerson's death on July 22, 1973, the Benjamin Gerson Trust, as amended, became irrevocable.

Article III, paragraph A of the Benjamin Gerson Trust, as amended, provided for the division of the trust corpus into three trusts. One of those trusts, Trust A, was a marital trust for the benefit of decedent. Article III, paragraph B of the Benjamin Gerson Trust, as amended, provided for the distribution of the income and principal of Trust A. Specifically, paragraph B.3 of article III provided:

Upon the death of my said wife, the balance remaining in Trust A, including any income therein received by the Trustee from the time of the last income payment and the date of death of my said wife, shall be distributed by the Trustee to such person or persons, and in such share or shares, in trust or otherwise, as my said wife shall, by her Last Will and Testament, or Codicil thereto, appoint by specific reference thereto. It is my intention that my said wife shall have an unlimited testamentary power of appointment in respect of the whole of Trust A, including the power to appoint the same in favor of her own estate.

The parties agree that this provision of the Benjamin Gerson Trust, as amended, conferred upon decedent a general power of appointment, as that term is defined in section 2041(b).

The accounting records maintained by National City Bank as trustee of the Benjamin Gerson Trust reflect that no additions were made to the corpus of Trust A after September 25, 1985.

On September 24, 1999, decedent executed her will and, as grantor, a revocable trust agreement (the Eleanor Gerson Trust). On September 13, 2000, shortly before her death, decedent amended and restated the Eleanor Gerson Trust.

As of her death on October 20, 2000, decedent was survived by her four children and her five grandchildren.

Item I, paragraph C of the decedent's will provided:

Under the terms of a certain Trust Agreement dated December 9, 1968, entered into between my spouse, BENJAMIN S. GERSON, AND NATIONAL CITY BANK, Trustee (as modified by my spouse's Third amendment to said Trust Agreement, dated July 19, 1973), specifically at paragraph B.3 of Article III thereof, I am granted a general power to appoint at the time of my death the property held in Trust A of my said spouse's Trust Agreement. I hereby exercise said power of appointment and direct that all property subject thereto shall be allocated to NATIONAL CITY BANK, Trustee, or any successor thereto, under my said 1999 Amended and Restated Revocable Trust Agreement, to be administered pursuant to the terms of ARTICLE III thereof (the Grandchildren's Trust) for the benefit of my grandchildren and more remote descendants.

ARTICLE III of the Eleanor Gerson Trust established the Grandchildren's Trust. Under the terms of the Grandchildren's Trust, the corpus of the trust was divided into five equal shares for the benefit of each of her grandchildren. Two of decedent's grandchildren received their shares outright. The shares allocated to the other three grandchildren were held in trust for their respective benefit, to be transferred outright to such grandchild upon the earlier of the grandchild's reaching the age of 40 or the twenty-first anniversary of decedent's death less one day.

Decedent's estate filed a Form 706, United States Estate (and Generation–Skipping Transfer) Tax Return, on July 20, 2001, along with a Form 8275–R, Regulation Disclosure Statement, indicating it was taking a position contrary to section 26.2601–1(b)(1)(i), GST Tax Regs. The corpus of Trust A as of the date of decedent's death is listed as Item 1 on Schedule H of the estate's return and is valued at $6,244,627.16. The estate's return reported a gross estate in the amount of $22,054,002.79, and Federal estate tax in the amount of $7,168,531.02.

As indicated, respondent issued a statutory notice of deficiency to decedent's estate. A timely petition for redetermination was filed with the Court challenging respondent's determination.

Discussion

The parties do not dispute that a transfer from decedent directly to her grandchildren, skipping over decedent's children, normally would be subject to GST. As discussed in detail below, the dispute in this case centers on the transitional relief provided by the “grandfather” exception to the GST tax set forth in TRA 1986 section 1433(b)(2)(A), and the validity of section 26.2601–1(b)(1)(i), GST Tax Regs. The regulation provides that a transfer of property pursuant to the exercise, release, or lapse of a general power of appointment that is treated as a taxable transfer under Federal estate and/or gift tax provisions, is not a “transfer under a trust” that is eligible for transitional relief from GST tax under TRA 1986 section 1433(b)(2)(A).

To frame the issue properly, we briefly outline the GST tax provisions, review pertinent caselaw that preceded the promulgation of section 26.2601–1(b)(1)(i), GST Tax Regs., examine the regulation and the circumstances surrounding its promulgation, and summarize the parties' positions.

I. The Generation–Skipping Transfer Tax

The current version of the GST tax, set forth in sections 2601–2664, was enacted under TRA 1986, in which Congress substantively modified and retroactively repealed an earlier GST tax regime enacted in 1976.2 The GST tax generally is imposed on transfers, whether outright or in trust, to transferees who are at least two generations below the generation of the transferor. Secs. 2611, 2613(a). The public policy underlying the GST tax is to bring uniformity and consistency to Federal transfer taxes (estate, gift, and generation-skipping) by imposing a transfer tax upon all transfers whether directly to an immediate succeeding generation or to generations further removed from the transferor. See Peterson Marital Trust v. Commissioner, 78 F.3d 795, 798 (2d Cir.1996), affg. 102 T.C. 790, 1994 WL 284075 (1994); H. Rept. 99–426, at 824, 1986–3 C.B. (Vol.2) 1, 824.

A generation-skipping transfer is defined to include a taxable distribution, a taxable termination, and a direct skip. Sec. 2611(a). A direct skip means a transfer, subject to Federal estate or gift tax, of an interest in property to a skip person. Sec. 2612(c)(1). A skip person means a natural person assigned to a generation which is two or more generations below the generation of the transferor, or a trust if all interests in such trust are held by skip persons. Secs. 2613(a)(1) and (2), 2651.

In the case of a direct skip (other than a direct skip from a trust), liability for GST tax falls on the transferor. Sec. 2603(a)(3). The term “transferor” means the decedent in the case of any property subject to Federal estate tax. Sec. 2652(a)(1)....

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