Walshire v. U.S.

• Decision Date: 01 May 2002
• Docket Number: No. 01-2465.,01-2465.
• Citation: 288 F.3d 342
• Parties: Thomas J. WALSHIRE, Executor of the Estate of Edward M. Walshire; Everette R. Walshire, Executor of the Estate of Edward M. Walshire, Appellants, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

288 F.3d 342

Thomas J. WALSHIRE, Executor of the Estate of Edward M. Walshire; Everette R. Walshire, Executor of the Estate of Edward M. Walshire, Appellants, v. UNITED STATES of America, Appellee.

No. 01-2465.

United States Court of Appeals, Eighth Circuit.

Submitted: December 12, 2001.

Filed May 1, 2002.

COPYRIGHT MATERIAL OMITTED

Robert N. Downer, Iowa City, IA, argued, for appellant.

Regina S. Moriarty, U.S. Dept. of justice, Washington, DC, argued, for appellee.

Before WOLLMAN,¹ Chief Judge, HANSEN, Circuit Judge, and BATTEY,² District Judge.

HANSEN, Circuit Judge.

This case requires us to determine the validity of Treasury Regulation § 25.2518-3(b), which prevents the disclaimer of a remainder interest, while retaining a life estate, from being considered a qualified disclaimer under Internal Revenue Code § 2518, 26 U.S.C. § 2518. We hold that the regulation is valid and affirm the district court's³ judgment upholding the estate tax assessment based on the regulation.

I.

Edward M. Walshire received a one-fourth interest in the residue of his brother's estate when his brother died testate. Walshire executed a disclaimer of the remainder interest in his share of the residue but reserved to himself the income and use of the property during his life. Walshire's children were the contingent beneficiaries under Walshire's brother's will, and they would have received any property that Walshire disclaimed from his brother's estate. The estate consisted of real estate, stocks, bonds, bank accounts, farm machinery, and personal items. (Plaintiffs' App. at 75-77.) Walshire's share of his brother's estate was distributed to him by checks made jointly payable to him and each of his children. The checks were used to purchase certificates of deposit (CDs), which were originally held solely in Walshire's name with his children named as "pay on death" beneficiaries of the various CDs. During Walshire's life, the CDs were changed and titled in the name of "Walshire or [one of his children]." Walshire received the income from the CDs during his life but did not otherwise use or invade the principal balance of the CDs.

When Edward Walshire died, his executors, Thomas J. Walshire and Everette R. Walshire (hereinafter collectively "the executors"), did not include the value of the CDs on Walshire's federal estate tax return because he had disclaimed the remainder interest in the property from which the CDs originated. The IRS determined that the disclaimer was not a qualified disclaimer for estate tax purposes and assessed estate taxes and penalties of approximately $64,000 against the estate based on the value of the CDs excluded from the return. The district court affirmed the assessment on cross-motions for summary judgment. The executors concede that the regulations preclude the disclaimer attempted by Walshire, but argue that the regulation at issue, § 25.2518-3(b), is invalid because it is contrary to the clear and unambiguous language of § 2518 of the Internal Revenue Code.

II.

As this appeal involves only the legal issue of whether the treasury regulation is valid, we review the district court's judgment de novo. See Nichols v. United States, 260 F.3d 637, 642 (6th Cir.2001). Treasury "regulations command our respect, for Congress has delegated to the Secretary of the Treasury, not to th[e][c]ourt[s], the task of administering the tax laws of the Nation." Comm'r v. Portland Cement Co. of Utah, 450 U.S. 156, 169, 101 S.Ct. 1037, 67 L.Ed.2d 140 (1981) (internal quotations omitted). See also I.R.C. § 7805(a) (authorizing the Secretary to prescribe all needed rules and regulations to enforce the Internal Revenue Code). "Treasury Regulations [are] valid if they `implement the congressional mandate in some reasonable manner.'" Rowan Cos., Inc. v. United States, 452 U.S. 247, 252, 101 S.Ct. 2288, 68 L.Ed.2d 814 (1981) (quoting United States v. Correll, 389 U.S. 299, 307, 88 S.Ct. 445, 19 L.Ed.2d 537 (1967)). A regulation reasonably implements the Congressional mandate if it "harmonizes with the plain language of the statute, its origin, and its purpose." Id. at 253, 101 S.Ct. 2288 (internal quotations omitted). We may not invalidate a regulation merely because we would have implemented the statute differently; "`the choice among reasonable interpretations is for the [Secretary], not the courts.'" Miller v. United States, 65 F.3d 687, 689 (8th Cir.1995) (quoting Nat'l Muffler Dealers Ass'n v. United States, 440 U.S. 472, 488, 99 S.Ct. 1304, 59 L.Ed.2d 519 (1979)). We are mindful that the Secretary is bound by the plain language of the Internal Revenue Code, but where the Code "`is silent or ambiguous with respect to the specific issue, the question for the court is whether the [regulation] is based on a permissible construction of the statute." Id. at 689-90 (quoting Chevron U.S.A., Inc. v. Natural Res. Def. Council Inc., 467 U.S. 837, 843, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984)).

Section 2518 of the Internal Revenue Code allows the recipient of an interest in property to disclaim that interest such that the interest is treated as having never been transferred to the disclaimant for gift or estate tax purposes. I.R.C. § 2518(a).⁴ The purpose of the disclaimer statute is to avoid a second level of tax where the disclaimant effectively steps back and permits transfer of the property to the next person in line. For example, suppose A bequeaths his entire estate to B if B survives A, and to C if B does not survive A, and that B is alive when A dies. The property in A's estate is subject to estate tax when A dies. For whatever reason, B decides that he does not want the property and that C should receive the property from A's estate. Without the disclaimer statute, even if B allows the property to be transferred to C, the property in A's estate would again be taxed as a taxable gift from B to C. See I.R.C. § 2511(a) (including indirect transfers within the purview of the gift tax). Section 2518 treats the property as having never been transferred to B so that the property reaches C, as directed by A's will, with only one level of transfer tax.

To enjoy the benefits of § 2518, the disclaimant must make a "qualified disclaimer" under the statute. A qualified disclaimer is defined as "an irrevocable and unqualified refusal ... to accept an interest in property," which must meet the following requirements: 1) the disclaimer must be in writing, 2) the disclaimer must be received by the transferor or his legal representative within 9 months of the transfer that created the interest, 3) the disclaimant cannot have accepted the interest or any of its benefits, and 4) the interest must pass without any direction on the part of the disclaimant. I.R.C. § 2518(b). A transferee may disclaim an undivided portion of a transferred interest and avoid the second level of transfer tax for that portion of the interest as long as the disclaimer satisfies the requirements enumerated above. See I.R.C. § 2518(c)(1).

The disclaimer statute is included within subchapter B of the gift tax chapter of the Internal Revenue Code. See I.R.C. §§ 2501 et seq. Congress enacted the gift tax as broadly as possible "to embrace all gratuitous transfers, by whatever means, of property and property rights of significant value." United States v. Irvine, 511 U.S. 224, 233, 114 S.Ct. 1473, 128 L.Ed.2d 168 (1994). "On several ... occasions, [the Supreme] Court has acknowledged the expansive sweep of the gift tax provisions... [and] reinforce[d] the view that the gift tax should be applied broadly to effectuate the clear intent of Congress." Dickman v. Comm'r, 465 U.S. 330, 335, 104 S.Ct. 1086, 79 L.Ed.2d 343 (1984). "[A]n important, if not the main, purpose of the gift tax was to prevent or compensate for avoidance of death taxes by taxing the gifts of property inter vivos which, but for the gifts, would be subject in its original or converted form to the tax laid upon transfers at death." Irvine, 511 U.S. at 235, 114 S.Ct. 1473 (internal quotations omitted). By allowing a disclaimant to avoid the transfer tax for qualified disclaimers, Congress created an exception to this comprehensive transfer tax scheme. Because § 2518 provides "an exception from the normal tax requirements of the Internal Revenue Code," we construe its application narrowly to give effect to Congress's clear intent to tax all gratuitous transfers and to prevent taxpayers' attempts to avoid estate taxes. Ark. Best Corp. v. Comm'r, 485 U.S. 212, 220, 108 S.Ct. 971, 99 L.Ed.2d 183 (1988) (internal quotations omitted). We assess the validity of the regulation at issue in light of this background, the purpose of the statute, and its fit within the transfer tax regime. Rowan, 452 U.S. at 253, 101 S.Ct. 2288.

Walshire attempted to disclaim a portion of the property he was entitled to receive from his brother by dividing it horizontally, that is, by disclaiming the remainder interest but retaining the right to the income and use of the property during his lifetime, or the life estate. The regulation at issue in this case requires that the undivided portion "consist of a fraction or percentage of each and every substantial interest or right owned by the disclaimant in such property and must extend over the entire term of the disclaimant's interest in such property and in other property into which such property is converted." Treas. Reg. § 25.2518-3(b). In other words, the regulation requires a vertical division of the property. The regulation specifically excludes the disclaimer attempted by Walshire. See id. ("Thus, for example, a disclaimer made by the devisee of a fee simple interest in Blackacre is not a qualified disclaimer if the disclaimant disclaims a remainder interest in Blackacre but retains a life estate.")

The executors argue that the regulation is contrary to the plain language of § 2518(a), which allows the disclaimer of "any interest in property." The executors argue that a...