E. Norman Peterson Marital Trust v. Comm'r of Internal Revenue

• Decision Date: 28 June 1994
• Docket Number: No. 26044–91.,26044–91.
• Citation: 102 T.C. No. 38,102 T.C. 790
• Parties: E. NORMAN PETERSON MARITAL TRUST, Chemical Bank, Trustee, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

102 T.C. 790

102 T.C. No. 38

E. NORMAN PETERSON MARITAL TRUST, Chemical Bank, Trustee, Petitioner,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 26044–91.

United States Tax Court.

June 28, 1994.

Richard B. Covey and Michael I. Frankel, New York City, for petitioner.

Michael A. Menillo, New York City, for respondent.

Upon his death in 1974, Mr. P established a testamentary Marital Trust for the benefit of his wife. Mrs. P was given a lifetime interest in the income of the Marital Trust, and a testamentary general power of appointment over the Marital Trust assets. To the extent Mrs. P did not exercise her power of appointment, Mr. P's will provided that the assets of the Marital Trust would pass to Mr. P's grandchildren. These grandchildren were the grandchildren of Mr. P by a prior marriage, and were not the grandchildren of Mrs. P.

Upon her death in 1987, Mrs. P did not exercise her testamentary general power of appointment over the Marital Trust assets (other than with respect to the payment of certain Federal estate taxes). As a result, the Marital Trust assets passed to Mr. P's grandchildren pursuant to the terms of Mr. P's will. Petitioner concedes that these transfers constituted “direct skips” as that term is defined in sec. 2612(c)(1), I.R.C.

1. Held: The effective date rules of the Tax Reform Act of 1986 (TRA 1986), Pub.L. 99–514, sec. 1433(b), 100 Stat. 2731, do not prevent the application of the generation-skipping transfer (GST) tax to the transfers. Held, further, sec. 26.2601–1(b)(1)(v)(A), Temporary GST Tax Regs., 53 Fed.Reg. 8445 (Mar. 15, 1988), corrected by 53 Fed.Reg. 18839 (May 25, 1988), is valid.

2. Held, further, the GST tax exception provided by TRA 1986 sec. 1433(b)(3), relating to certain transfers to grandchildren, does not apply to the transfers.

3. Held, further, the application of the GST tax to the transfers does not violate the Due Process Clause or equal protection principles of the Fifth Amendment to the Constitution.

4. Held, further, in calculating petitioner's GST tax liability, the amount of interest payable on the GST tax deficiency must be excluded from the GST tax base.

OPINION

HAMBLEN, Chief Judge:

Respondent determined a deficiency in petitioner's Federal generation-skipping transfer (GST) tax in the amount of $810,925. Unless otherwise indicated, section references are to the Internal Revenue Code in effect as of the date of the transfers at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

After concessions by petitioner,¹ the issues for decision are:

(1) Whether the transfers of assets from the E. Norman Peterson Marital Trust (Marital Trust) upon the death of Eleanor C. Peterson (Mrs. Peterson) are excepted from the Federal GST tax by reason of the effective date rules of the Tax Reform Act of 1986 (TRA 1986), Pub.L. 99–514, section 1433(b)(2)(A), 100 Stat. 2731. We hold that they are not;

(2) whether the exclusion provided by TRA 1986 section 1433(b)(3), 100 Stat. 2731, relating to certain transfers to grandchildren, applies to such transfers. We hold that it does not;

(3) whether the imposition of the GST tax on the transfers at issue violates the Due Process Clause or equal protection principles of the Fifth Amendment to the Constitution. We hold that it does not; and

(4) whether, in calculating the GST tax deficiency, the amount of interest due with respect to the GST tax deficiency is excluded from the GST tax base. We hold that it is excluded.

Background

This case was submitted fully stipulated under Rule 122. The stipulation and attached exhibits are incorporated by this reference. At the time the petition was filed, the principal place of business of the trustee of petitioner was New York, New York.

Petitioner is a testamentary trust created pursuant to the will of E. Norman Peterson (Mr. Peterson). Mr. Peterson died on October 20, 1974. According to the terms of Mr. Peterson's will, Mrs. Peterson was to receive all the income of the Marital Trust during her lifetime, and she had the right to withdraw one-half of the principal of the trust during her lifetime. She did not exercise that right of withdrawal. In addition, Mr. Peterson's will gave Mrs. Peterson a testamentary general power of appointment over the corpus of the Marital Trust, as follows:

I direct my Trustees to pay over and distribute the principal of * * * [the Marital Trust], as then constituted, to such person or persons (including her own estate), in such amounts and upon such estates as my wife by specific provision in her Last Will and Testament shall have appointed * * *.

The terms of Mr. Peterson's will provided that, to the extent Mrs. Peterson did not exercise her testamentary general power of appointment, the principal of the Marital Trust was to be set aside in equal shares for the grandchildren of Mr. Peterson. These grandchildren were the grandchildren of Mr. Peterson by a prior marriage and were not the grandchildren of Mrs. Peterson.

Any share set aside for a grandchild of Mr. Peterson who had attained age 30 was to be paid to that grandchild. Any share for a grandchild under age 30 was to be retained in trust (individually a Grandchild's Trust, collectively the Grandchildren's Trusts) for the benefit of that grandchild, with the principal to be distributed upon the grandchild's attaining age 30. If the grandchild for whom a share had been set aside died before reaching age 30, the assets of his or her Grandchild's Trust were to be distributed to his or her surviving issue or, if none, to Mr. Peterson's other grandchildren in equal shares.

Mrs. Peterson, a resident of Florida, died on September 5, 1987. Because of her general power of appointment over the Marital Trust property, the entire value of the trust property was included in her gross estate for Federal estate tax purposes in accordance with section 2041. Pursuant to her will, Mrs. Peterson exercised her general power of appointment only to the extent of directing that the Federal estate tax attributable to the inclusion of the Marital Trust property in her gross estate be paid from the Marital Trust property. Her will explicitly provided that she did not otherwise exercise her power of appointment. Accordingly, the balance of the Marital Trust property passed (pursuant to the terms of Mr. Peterson's will) to the Grandchildren's Trusts for the benefit of Mr. Peterson's nine grandchildren, all of whom were under age 30.

On or about August 10, 1988, the personal representatives of Mrs. Peterson's estate filed a Federal Estate Tax Return (Form 706), which included an attached Schedule R–1 GST tax payment voucher. The Schedule R–1 stated that the transfers to the Grandchildren's Trusts were subject to the GST tax, and that there was a GST tax due in the amount of $827,404.

On October 17, 1988, respondent received a “Statement of Trustees” from the trustee of the Marital Trust stating that the GST tax liability should be reduced to $18,910. This significant reduction was based primarily on the trustee's contention that Mr. Peterson, rather than Mrs. Peterson, should be treated as the “transferor” of the property, thereby causing the transfers to qualify for the TRA 1986 section 1433(b)(3) GST tax exception, relating to certain transfers to grandchildren, to the extent the interest of each grandchild could be actuarially valued. On August 12, 1991, respondent issued the statutory notice of deficiency, which disallowed the use of the TRA1986 section 1433(b)(3) exception, and made certain other adjustments to the GST tax calculation.

Discussion

Section 2601 imposes the GST tax on every generation-skipping transfer. Section 2611(a) defines the term “generation- skipping transfer” to mean any of three types of transfers: A taxable termination, a taxable distribution, or a direct skip. Respondent contends that the transfers of property from the Marital Trust to the Grandchildren's Trusts upon Mrs. Peterson's death constitute “direct skips” and are therefore generation-skipping transfers subject to the GST tax.

In general, a transfer of an interest in property constitutes a “direct skip” if: (1) The transfer is subject to either the Federal gift tax or the Federal estate tax; and (2) the transfer is to a “skip person”. Sec. 2612(c)(1). Because Mrs. Peterson's general power of appointment over the Marital Trust property caused the property to be included in her gross estate under section 2041, the first prong of the test is met.

With respect to the second prong of the direct skip test, the term “skip person” includes “a natural person assigned to a generation which is 2 or more generations below the generation assignment of the transferor.” Sec. 2613(a)(1). Because Mr. Peterson's grandchildren are two generations below Mrs. Peterson,² sec. 2651(b)(2), each grandchild is a skip person. Moreover, each Grandchild's Trust constitutes a skip person, since all the interests in each such trust are held by a skip person (i.e., the grandchild for whose benefit the trust was established). Sec. 2613(a)(2). As a result, the transfers of the Marital Trust property to the Grandchildren's Trusts upon Mrs. Peterson's death constitute direct skips.³

Petitioner does not challenge the statutory analysis set forth above. Rather, petitioner presents three alternative arguments for its contention that, notwithstanding the fact that the transfers at issue are direct skips, the transfers are not subject in full to the GST tax, as follows: (1) The effective date rules of TRA1986 section 1433(b) prevent the application of the GST tax to the transfers; (2) the exception provided by TRA1986 section 1433(b)(3), relating to certain transfers to grandchildren, applies to the transfers; and (3) the application of the GST tax to the transfers violates the Due Process Clause and equal protection principles of the Fifth Amendment to the Constitution. For the reasons set forth below, we disagree with each...