United States v. Irvine and 1st Trust Nat'l Assoc.
| Citation | 511 U.S. 224,114 S.Ct. 1473,128 L.Ed.2d 168 |
| Decision Date | 20 April 1994 |
| Docket Number | 921546 |
| Parties | UNITED STATES, Petitioner v. John O. IRVINE and First Trust National Association |
| Court | United States Supreme Court |
As a result of Sally Ordway Irvine's 1979 disclaimer of five-sixteenths of her interest in the corpus of a recently terminated trust that had been created by her grandfather in 1917, each of her five children received one-sixteenth of her share of the distributed trust principal. Her disclaimer was effective under Minnesota law even though she had learned of her contingent interest in the trust at least as early as 1931 when she became 21, but the Internal Revenue Service determined that the disclaimer brought about a gratuitous transfer that was subject to federal gift tax under Internal Revenue Code §§ 2501(a)(1) and 2511(a). Mrs. Irvine died after she paid the tax and accrued interest, and respondents, representing her estate, filed this refund action. Arguing that the transaction was not excepted from gift tax under Treasury Regulation § 25.2511-1(c)(2) (Regulation), the Government relied on Jewett v. Commissioner, 455 U.S. 305, 102 S.Ct. 1082, 71 L.Ed.2d 170, in which this Court construed the 1958 version of the Regulation to provide that the disclaimer of a remainder interest in a trust effects a taxable gift to the beneficiary of the disclaimer unless the disclaimant acts within a reasonable time after learning of the transfer that created the interest being disclaimed. Respondents attempted to distinguish Jewett as having dealt with a trust established in 1939, after the creation of the gift tax by the Revenue Act of 1932 (Act). The District Court ruled for respondents on cross-motions for summary judgment. The Court of Appeals affirmed, holding that the Regulation's express terms rendered it inapplicable to the trust in question; that state law therefore governed, and the federal gift tax did not apply because Mrs. Irvine's disclaimer was indisputably valid under state law; and that taxation of the transfer effected by the disclaimer would violate the Act's prohibition of retroactive gift taxation.
Held: The disclaimer of a remainder interest in a trust is subject to federal gift taxation when the creation of the interest (but not the disclaimer) occurred before enactment of the gift tax. Pp. ____.
(a) Although the Internal Revenue Code's gift tax provisions embrace all gratuitous transfers of property having significant value, the Regulation affords an exception by providing that a disclaimer of property transferred from a decedent's estate does not result in a gift if it is unequivocal and effective under local law, and made "within a reasonable time after knowledge of the existence of the transfer." The Jewett Court held that "the transfer" in the 1958 version of the Regulation refers to the creation of the interest being disclaimed, with the "reasonable time" therefore beginning to run upon knowledge of the creation of the trust. Pp. ____.
(b) If the Regulation applies to Mrs. Irvine's disclaimer, her act resulted in taxable gifts. The knowledge and capacity to act, which are presupposed by the requirement that a tax-free disclaimer be made within a reasonable time of the disclaimant's knowledge of the transfer of the interest to her, were present in this instance at least as early as Mrs. Irvine's 21st birthday in 1931. Although there is no bright line rule for timeliness in the absence of a statute or regulation providing one, Mrs. Irvine's delay for at least 47 years in making her disclaimer could not possibly be thought reasonable. Pp. ____.
(c) Respondents' arguments that the Regulation is inapposite by its own terms to the facts of this case need not be resolved here, for the result of the Regulation's inapplicability would not be, as respondents claim, a freedom from gift taxation on a theory of borrowed state law. State property transfer rules do not translate into federal taxation rules because the principles underlying the two look to different objects. In order to defeat the claims of a disclaimant's creditors in the disclaimed property, the state rules apply the legal fiction that an effective disclaimer of a testamentary gift cancels the transfer to the disclaimant ab initio and substitutes a single transfer from the original donor to the disclaimant's beneficiary. In contrast, Congress enacted the gift tax as a supplement to the federal estate tax and a means of curbing estate tax avoidance. Since the reasons for defeating a disclaimant's creditors would furnish no reasons for defeating the gift tax, the Court in Jewett, supra, at 317, 102 S.Ct., at 1090, was undoubtedly correct to hold that Congress had not meant to incorporate state-law fictions as touchstones of taxability when it enacted the Act. Absent such a legal fiction, the federal gift tax is not struck blind by a disclaimer. Pp. ____.
(d) Taxation of the transfer following Mrs. Irvine's disclaimer would not violate § 501(b) of the Act, which provided that it would "not apply to a transfer made on or before the date of the enactment of this Act [June 6, 1932]." Section 501 merely prohibited application of the gift tax statute to transfers antedating the enactment of the Act; it did not prohibit taxation where, as here, interests created before the Act were transferred after enactment. Pp. ____.
981 F.2d 991 (CA 8 1992), reversed.
SCALIA, J., filed an opinion concurring in part and concurring in the judgment. BLACKMUN, J., took no part in the decision of the case.
Kent L. Jones, Washington, DC, for petitioner.
Phillip H. Martin, Minneapolis, MN, for respondent.
In Jewett v. Commissioner, 455 U.S. 305, 102 S.Ct. 1082, 71 L.Ed.2d 170 (1982), we construed the 1958 version of Treasury Regulation § 25.2511-1(c) to provide that the disclaimer of a remainder interest in a trust effects a taxable gift unless the disclaimant acts within a reasonable time after learning of the transfer that created the interest. This case presents the question whether the rule is the same, under current Treasury Regulation § 25.2511-1(c)(2) (Regulation), when the creation of the interest (but not the disclaimer) occurred before enactment of the federal gift tax provisions of the Revenue Act of 1932. We hold that it is.
In 1917, Lucius P. Ordway established an irrevocable inter vivos family trust, with his wife and their children as primary concurrent life income beneficiaries, to be succeeded by unmarried surviving spouses of the children and by grandchildren. The trust was to terminate upon the death of the last surviving primary income beneficiary, at which time the corpus would be distributed to Mr. Ordway's surviving grandchildren and the issue of any grandchildren who had died before termination. When the trust terminated on June 27, 1979, the corpus was subject to division into 13 equal shares among 12 grandchildren living and the issue of one who had died. Prior to distribution, on August 23, 1979, one of the grandchildren, Sally Ordway Irvine, filed a disclaimer of five-sixteenths of her interest in the trust principal. Mrs. Irvine had learned of her contingent interest in the trust at least as early as 1931 when she reached the age of 21, and she had begun receiving a share of the annual trust income after her father's death in 1966. Her disclaimer was nonetheless effective under a Minnesota statute on the books at the time, which permitted the disclaimer of a future interest at any time within six months of the event finally identifying the disclaimant and causing her interest to become indefeasibly fixed.1 As a result of her disclaimer, each of Mrs. Irvine's five children received one-sixteenth of her share of the distributed trust principal.
Mrs. Irvine reported the disclaimer in a federal gift tax return, but did not treat it as resulting in a taxable gift. The Commissioner of Internal Revenue determined on audit that the disclaimer indirectly transferred property by gift within the meaning of Internal Revenue Code of 1986 §§ 2501(a)(1) 2 and 2511(a),3 and was not excepted from gift tax under Treas.Reg. § 25.2511-1(c) 4 because it was not made "within a reasonable time after [Mrs. Irvine's] knowledge" of her grandfather's transfer creating her interest in the trust estate. Mrs. Irvine responded with an amended return treating the disclaimer as a taxable gift, on which she paid the resulting tax of $7,468,671.00, plus $2,086,627.51 in accrued interest on the deficiency.5 She then claimed a refund of the tax and interest, which the Internal Revenue Service denied.
After Mrs. Irvine's death in 1987, respondents, representing her estate, filed this action for refund of the tax and interest in the United States District Court for the District of Minnesota. The Government continued to maintain that the partial disclaimer brought about a transfer subject to federal gift tax because Mrs. Irvine had not made it, as the Regulation requires, "within a reasonable time after knowledge of the [earlier] transfer" that created her interest in the trust estate. The Government relied on Jewett v. Commissioner, 455 U.S. 305, 102 S.Ct. 1082, 71 L.Ed.2d 170 (1982), in which this Court held that the "transfer" referred to in Treas.Reg. § 25.2511-1(c), 26 CFR § 25.2511-1(c) (1959) (promulgated in 1958), knowledge of which starts the clock ticking, occurs at the creation of the interest being disclaimed, not when its extent is finally ascertained or it becomes possessory. Jewett, supra, at 311-312, 102 S.Ct., at 1087.
Respondents tried to distinguish Jewett as having dealt with a trust established in 1939, after the creation of the gift tax by the Revenue Act of 1932...
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