Ordway v. U.S., 89-5753

• Decision Date: 10 August 1990
• Docket Number: No. 89-5753,89-5753
• Citation: 908 F.2d 890
• Parties: -5998, 90-2 USTC P 60,036 John G. ORDWAY and Margaret M. Ordway, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 890

908 F.2d 890

66 A.F.T.R.2d 90-5998, 90-2 USTC P 60,036

John G. ORDWAY and Margaret M. Ordway, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.

No. 89-5753.

United States Court of Appeals Eleventh Circuit.

Aug. 10, 1990.

Gary R. Allen, Chief, Appellate Section, Tax Div., Dept. of Justice, Barbara I. Hodges, Brian Griffin, Jonathan S. Cohen, and Calvin C. Curtis, Washington, D.C., for defendant-appellant.

Cynthia S. Rosenblatt, Burton G. Ross, and Craig D. Norman, Ross, Rosenblatt & Wilson, Minneapolis, Minn., for plaintiffs-appellees.

Appeal from the United States District Court for the Southern District of Florida.

Before FAY and JOHNSON, Circuit Judges, and GIBSON ^*, Senior Circuit Judge.

JOHNSON, Circuit Judge:

The United States ("the government") appeals from the district court's grant of summary judgment in favor of plaintiffs/appellees John G. Ordway, Jr. and Margaret M. Ordway ("taxpayers") and its order directing a refund of federal gift taxes paid by the taxpayers for the calendar quarters ending September 30, 1979 and March 31, 1980.

I. STATEMENT OF THE CASE

On January 16, 1917, Lucius P. Ordway established an irrevocable inter vivos trust, administered under Minnesota law. He funded the trust with some 38,200 shares of Minnesota Mining and Manufacturing Company ("3M") stock and other assets. The trust provided that the trust income was to be paid to Lucius' wife and five children for their lives. On the death of the last surviving life beneficiary, the trust corpus was to be distributed to Lucius' grandchildren per capita. If any of the grandchildren died prior to termination of the trust, their share of the corpus would be distributed to their surviving issue per stirpes.

John G. Ordway, Jr., born on November 29, 1922, is one of Lucius Ordway's grandsons. At birth, he acquired a contingent remainder interest in the trust. John Ordway became aware of this interest in 1941 at age nineteen. On June 27, 1979, Katherine G. Ordway, taxpayer's aunt and last survivor of Lucius Ordway's wife and five children, died unmarried and without issue. At this point the trust terminated and the grandchildrens' contingent remainder interests vested. On August 23, 1979, John Ordway (then fifty-six years old) filed a partial disclaimer of his interest in the trust corpus. ¹ He filed the disclaimer in the Ramsey County District Court of Minnesota, and the disclaimer was valid and effective under Minnesota law. As a result of the disclaimer, John Ordway's three children received the disclaimed portion of his interest per stirpes.

On or about November 15, 1979, John Ordway filed a third quarter gift tax return with the Internal Revenue Service ("IRS"). He disclosed the 1979 disclaimer, but stated that the disclaimer was not a transfer subject to gift tax. ² On March 19, 1982, following an audit of that return, John Ordway filed an amended 1979 third quarter gift tax return, and his wife Margaret Ordway filed an original third quarter gift tax return. Both of the returns treated the 1979 disclaimer as a taxable transfer under the gift tax provisions. They treated the gift as having been made one-half by each of them under Internal Revenue Code ("the Code") section 2513. The taxpayers each paid the taxes assessed against these returns. The IRS later assessed interest on the deficiencies, which the taxpayers also paid.

On March 10, 1980, John Ordway made a gift of 3M shares which was unrelated to the 1979 disclaimer. The taxpayers filed timely gift tax returns for the first quarter of 1980, treating the 1980 gift as having been made one-half by each of them. They paid the gift tax as reported. As a result of a subsequent audit, the IRS Commissioner asserted a deficiency in the 1980 first quarter tax for two reasons. First, because the disclaimer was deemed taxable in the third quarter of 1979, the taxpayers' respective cumulative gift tax brackets for the first quarter of 1980 were increased. Second, the Commissioner disallowed a $240,068 blockage discount which the taxpayers had claimed on their 1980 returns.

The taxpayers paid the asserted deficiencies, then filed timely claims for refunds of those taxes and interest. The government disallowed the refund claims in full, finding that the disclaimer was a transfer subject to gift tax. On March 16, 1987, the taxpayers sued the government for recovery of the taxes and interest pursuant to 26 U.S.C.A. Sec. 7422 and 28 U.S.C.A. Sec. 1346(a)(1).

In March 1988, both parties submitted motions for summary judgment on the question of whether the 1979 disclaimer was taxable. The government contended that the Supreme Court's decision in Jewett v. Commissioner, 455 U.S. 305, 102 S.Ct. 1082, 71 L.Ed.2d 170 (1982), authorized the IRS to collect a gift tax on the disclaimed interest. The taxpayers disagreed. On March 13, 1989, the district court found that Jewett did not apply and that the taxpayers were entitled to refund of the gift taxes, and the court granted the taxpayers' motion for summary judgment. On May 16, 1989, the court ordered the government to refund $2,736,776.90 plus interest to John Ordway and $2,633,559.40 plus interest to Margaret Ordway. The government appeals.

On appeal, we must determine whether the district court erred in holding that John Ordway's partial disclaimer in 1979 of a vested remainder interest in an inter vivos trust created in 1917 was subject to the federal gift tax. ³

II. ANALYSIS

A. Standard of Review

The grant of a motion for summary judgment is subject to de novo review by this Court. Shipes v. Hanover Ins. Co., 884 F.2d 1357, 1359 (11th Cir.1989).

B. Whether Jewett Applies to an Interest Created Before 1932

Section 2501(a)(1) of the Code imposes tax on the transfer of property by gift. That tax applies whether the gift is direct or indirect. Treasury regulation 26 C.F.R. Sec. 25.2511-1(c) provides that an indirect transfer by means of disclaimer is not a taxable gift if (1) the refusal to accept ownership is made within a reasonable time after knowledge of the existence of the transfer, (2) the refusal is unequivocable, and (3) the refusal is effective under local law. In Jewett v. Commissioner, 455 U.S. 305, 310, 102 S.Ct. 1082, 1086-87, 71 L.Ed.2d 170 (1982), the Supreme Court held that a "reasonable time" is measured from the date of the transfer which created the disclaimed interest, not from the date on which that interest vested. Jewett, 455 U.S. at 318-19, 102 S.Ct. at 1090-91.

In the present case, the district court found that Jewett did not apply to John Ordway's transfer by disclaimer of his vested remainder interest because Jewett was an interpretation of the federal gift tax. The court found that the gift tax did not apply to Lucius Ordway's trust because Lucius created the trust in 1917, prior to the existence of a federal gift tax, and the gift tax specifically precludes retroactive application. ⁴ While these facts are true, they are not dispositive of this case.

The Revenue Act of 1924 was Congress' first attempt to pass a federal gift tax. In two different decisions, the Supreme Court held that this statute was unconstitutional because it imposed a gift tax on transfers made before the date of the Act. See Untermyer v. Anderson, 276 U.S. 440, 446, 48 S.Ct. 353, 354, 72 L.Ed. 645 (1928); Blodgett v. Holden, 275 U.S. 142, 147, 48 S.Ct. 105, 106-07, 72 L.Ed. 206 (1927). Congress passed the first valid gift tax in 1932, and that Act specifically stated that "[t]he tax shall not apply to a transfer made on or before the date of the enactment of this Act." Revenue Act of 1932, 47 Stat. 169, section 501(b). ⁵ It is clear, therefore, that Lucius Ordway's transfers to his heirs by means of the trust are not subject to the gift tax. What is questionable is whether John Ordway's indirect transfer of his interest by means of the disclaimer executed in 1979 acted as a separate, taxable transfer. ⁶

Two different Treasury regulations treat disclaimers as separate taxable transfers. Volume 26 C.F.R. Sec. 25.2511-1(c)(2) states:

In the case of taxable transfers creating an interest in the person disclaiming made before January 1, 1977, where the law governing the administration of the decedent's estate gives a beneficiary, heir, or next-of-kin a right completely and unqualifiedly to refuse to accept ownership of property transferred from a decedent.... 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. ⁷

Title 26, U.S.C.A. Sec. 2518(a) states: "For the purposes of this subtitle, if a person makes a qualified disclaimer with respect to any interest in property, this subtitle shall apply with respect to such interest as if the interest had never been transferred to such person." ⁸ Section 2518(a) applies to disclaimers of interests created by taxable transfers made after December 31, 1976. Pub.L. 94-455, Title XX, Sec. 2009(b)(1), Oct. 4, 1976, 90 Stat. 1893. Under section 2518, then, disclaimers do not act as taxable transfers because they function to pass the interest from the donor (in this case, Lucius Ordway) to the disclaimee (in this case, John Ordway's three children), ⁹ while under section 25.2511-1(c), disclaimers do act as taxable transfers unless they meet two specific conditions.

Before deciding which provision applies to John Ordway's disclaimer, however, we first must decide whether Lucius Ordway's original transfer was the kind of transfer which would bring the disclaimer under these provisions. Both provisions assume that disclaimers are created by taxable transfers. As discussed above, Lucius Ordway's original transfer, which created the interest that John Ordway disclaimed in 1979, was not taxable in the sense that it was made before the gift tax existed. In discussing when a disclaimer must be delivered to the transferor under section 25.2518,...