Lois P. Cottrell v. Commissioner of Internal Revenue

with this in accordance tiary hearing 13, 1979. July

Court’s COTTRELL, Appellant, OF INTERNAL

COMMISSIONER

REVENUE, Appellee. 79-1842. of Appeals,

United States

Eighth Circuit. 1980.

Submitted Sept.

Decided Windhorst, Upon give, devise, use. her death I Martin, her Dorsey, H. Phillip Hannaford, Halladay, Minneap- bequeath appoint principal and the Whitney & Minn., equal Page Kenneth Helen olis, argued appellant; my daughters for shares to Minn., Cutler, Page on brief. Lois and if ei- Minneapolis, Wodell and Cottrell L. then be my daughters ther of dead Div., Dept, Buckley, Atty., Tax Helen A. persons proportions to such and in such D.C., Justice, argued, for Washington, daughter may by duly will admitted such Ferguson, Atty. Asst. appellee; M. Carr probate legally appoint to and default Gen., Andrews, Belanger E. Ann Gilbert daughter’s of such to such D.C., brief. Washington, on Durney, surviving equal per then shares issue HEANEY, LAY, Judge, stirpes. and Before Chief STEPHENSON, BRIGHT, ROSS, HEN- Thus, of the trust’s net income was all ARNOLD, LEY, and Circuit McMILLIAN designated for the sole use of Nellie A. Judges, en banc. addition, Page, beneficiary. the paragraph granted fourth of the ARNOLD, Judge. princi- trustees the to take from the gift-tax case. The This is a $10,000 pal up year to life benefi- made a taxable whether Lois P. Cottrell ciary. by gift within the transfer of taxpayer ap- The and her sister were meaning of 26 U.S.C. 2501 and §§ February the will on pointed executors of her when she disclaimed 23, 1944, the tax- February 1937. On her father’s will. The Tax created testamentary payer irrevocably released Court, taxable 72 T.C. found that a her appointment granted to under transfer was made and determined a defi- will, paragraph the third but re- $4,639,402.50. Be- ciency in the amount of partial power appoint only served indistinguishable any cause this case spouse her and The as- descendents. trust material from Keinath v. Commis- respect were sets distributed the executors to sioner, (8th 1973), we re- 480 F.2d 57 Cir. 27, 1945, January the trustees on and from verse. taxpayer that date the and her sister acted as trustees.1 I. 14, 1970, April Page A. died on at Nellie Page Parker Webster testate on Jan- died by her age of 100. was survived She 22, 1937, uary County, a resident of Essex children, taxpayer her sister. two and wife, Jersey. New He was survived his taxpayer executed a April On Nellie Page, daughters, A. and two Helen disclaimer, which was filed in the written Page (later Halbach) Wodell and 1970. It reads probate court on Cottrell, in this case. The full: third Mr. which paragraph Page’s I, Stonington, Con- probate Jersey Page was admitted to in a New Lois necticut, hereby irrevocably court disclaim shortly after his reads as fol- do lows: title and inter- my renounce all of the trust estab- est as a remainderman wife, me, my If A. survives I Page, Nellie father, Parker Webster by my lished devise, give, appoint all of bequeath and Third of his last will Paragraph Trustees, Page, said my my residue of estate to January dated named, TRUST, and testament hold hereinafter IN by the Essex probate and admitted during my the same the life of wife Nel- February County Surrogate’s Court lie A. and to invest and reinvest the 10, 1937. principal apply and to the net income to capacity continued in that three co-trustees 1. On and her December appointed the trust. until the termination of sister and Elizabeth Trust Summit trustees, Company to act with them as property by disclaiming party At no time had the received before Here, undisputed income or from the trust. the disclaimer. New Jersey disclaimer was valid under The trustees filed suit for a determina- jt law, unequivocal, and that validity tion of the disclaimer. accepted before no she Superior Court of New held the dis- disclaimed her interest in the trust. The claimer valid under New law: only question before us is whether the dis- Mrs. and Mrs. having Halbach timely. claimer was If the event which their very promptly acted after mother’s triggered running the of the “reasonable death, effectively disclaimed and re- testator, period time” was the death of the the in provided nounced remainders trust disclaimer, years thereafter, the filed 33 them will of their father. untimely was and ineffective. On the other 582, N.J.Super. In re Estate Page, 113 hand, if the critical event was the death of 585, 614, (Ch.Div. 1970). 274 A.2d 616 The beneficiary, the life the disclaimer was un- taxpayer’s disclaimed remainder questionably timely, having been executed dollars, then worth over ten million was months, 16 and filed days, two thereafter. distributed to her children under the third paragraph will. Commissioner, Keinath 480 F.2d 57

The Commissioner Internal (8th 1973) Revenue presented strikingly Cir. a determined that the made a taxpayer taxa- controlling. fact situation and is The testa- transfer, $4,639,- ble and a deficiency of in devising tor died most of his estate 402.50 was assessed. The filed to a trust. His wife was life benefi- petition with the Tax Court a for a redeter- ciary, upon principal and her death the was mination, and the case was submitted on to be divided between the testator’s two the pleadings stipulated and facts. The sons, Cargill. John Jr. and The sons served Tax agreed Commissioner, Court with the until co-trustees John Jr. died ruling that the taxpayer’s disclaimer was Cargill and after that served as the sole not made within a reasonable time under parties agreed trustee. The that the will Reg. 25.2511-l(c), and thus consti- § gave Cargill a vested remainder in one-half tuted a taxable transfer. The ap- subject if of the trust to divestment he pealed to this Court.2 mother, predecease his the life bene- ficiary. Cargill accepted any at no time

II. income or from the trust. The life “The transfer of by gift” is beneficiary March May died 1963. On taxed under the Internal Revenue Code of Cargill signed unequivocal an dis- regardless of whether trust, is “di- claimer of and rect or indirect.” 26 U.S.C. §§ disclaimer was filed in a Minnesota state circumstances, however, In some a transfer court on court September 1963. That by way unequivocal of an disclaimer of a timely. held the disclaimer valid and devised interest is not taxable. deficiency, Commissioner assessed a how- Reg. 25.2511-l(c), Under Treas. ever, a dis- upheld and the Tax Court Com- claimer is not a assessment, taxable transfer if four holding missioner’s (1) conditions are met: The disclaimer must period “reasonable time” within which a law; permitted (2) be under local the dis- began disclaimer must be filed to run at the reversed, claimer must be made within reasonable death of the This testator. Court time after knowledge reasoning of the existence of the time within which the disclaiming party; (3) transfer begins disclaimer must be to run when filed (4) the disclaimer unequivocal; must be the remainder interest becomes “indefeasi- there acceptance must have been no of bly quality quantity.” fixed both in Excelsior, February Thus, appeal 2. On the date the Minnesota. to this petition proper filed a in the Tax for a Court redetermi- under 26 U.S.C. liability, 7482(b)(1)(A). nation of tax she was a resident of First, power given nature of the her. 480 F.2d at 63. We said “by duly to divestment become interests not was exercisable at the death of the testa- probate.” fixed admitted to Even if tor, within a reason- power by making and must disclaimed exercised the We held that able time thereafter. Car- effective. might exercise not ever become interest did not become gill’s remainder whol- present rights. A will creates no It is beneficiary, the death of fixed until the testa- ly ambulatory until the death of the testator’s and we years revoked, after by destruc- trix. It can be either filing of the disclaimer with- found that the making a later will. Even if tion or the thereafter was reasonable six months revoked, may never admitted to and effective. aside, may and set probate. It be contested testamentary capac- formality for lack of disagreement The area of case, present ity. And case is rather narrow. one actually No not even exercisable unless the remainder, con argues taxpayer’s that the mother, hap- which did not predeceased her itself, indefeasibly in and of sidered circumstances, In these we do not pen. “When a indefeasibly vested.3 remainder is it can be believe said that conditional vested, subject it is not to condition taxpayer’s testamentary power converted remainder, precedent, any contingent to ex- “indefeasibly remainder an interest into limitation, ecutory power of or quality.” fixed in Smith, subsequent.” condition & Fu Simes 110, (2d 1956).4 ture Interests at 90 ed. In § could some point And even if this words, remainder, other a in order to be surmounted, remains an insu how be there vested, indefeasibly must sooner or later at perable barrier Commissioner’s pass to the remainderman or her estate. tempt escape to Keinath: trustee’s Here, Keinath, just as had to the benefit power to invade for of outlive enjoy her mother in order ever to power of this the life tenant. The existence possession of the assets of the If trust. she for the remaindermen’s impossible made mother, predeceased her her interest failed. fixed in . “indefeasibly interests to be indefeasibly Such an interest is not fixed. Keinath, quantity,” required by as also until sure, the death of the life tenant. To be only suggested distinction $10,000 power invade was limited to here, unlike in the taxpayer year, a a small sum when viewed in relation general power appointment by also had a of appreciation (primarily to the tremendous will.5 We hold that fact insufficient to stock) through enjoyed. IBM this trust has distinguish Keinath for several reasons. If act, taxpayer, by her own But the value of the res in 1945 when had at events, Page’s all to convert her transferred from Mr. estate to defeasible interest one, $239,000,6 $10,- into an indefeasible only Commissioner trust was about so a would have a point. But that was the 000-per-year potential depletion hardly not definitions, Taxpayer’s probably g., Moynihan, 4. For interest would see e. have 3, 118; Restatement, supra Property been classified at common law as a vested note at complete if divestment § comment f. she did not survive the life tenant. The condi- expressed tional element in the in a released, power partially 5. The was later as following actually making clause the words but, above, noted in accordance with the Com- gift, and doubts as to construction of an instru- contention, the nature missioner’s we consider usually vesting. ment are resolved in favor of taxpayer’s property date of of interest as of the Moynihan, See Introduction to the Law of Real her father’s when it was created. Property (1962). arguable 121 & n.8 It is only contingent that the interest was a remain- what the trust was 6. The record does not tell us der, n.2, distinction, see id. at 118 but died. We are worth when the testator though it is of scholastic is not rele- justified believing worth no more that it was present purposes vant and need not be in 1937 than in 1945. pursued. taxpayer’s If remainder was vested all, at it was not vested. er, circumstances, all the light includ- It is no answer negligible. whom accept bequest of the trustees to ing consequences, was herself one given. was bound to She nothing under her father’s will. We see in trust for the sole exercise the improper or in this unfair mother, 1965 the of her and since benefit of the trans- “knowledge of the existence shared with a disinterested power has been Reg. 25.2511-l(c), fer” clause of co-trustee. It is fair —or construed Keinath. so Treasury Congress and the could well have addition, a the Keinath reading enacting issuing concluded in 2511 and opinion leaves us with a firm conviction thereunder —that regulations of that case covers this the rationale know what is involved before be- referred to as one. One of the state cases very ing put to her election whether to supporting the rule announced was Chancery decision of the Division of the disclaim it. What we said in Keinath in a Superior of New in In re slightly different context is relevant here: court, The Keinath Page, supra. Estate of right “Persons have and should con- at cited but 480 F.2d consequences many sider the tax of their among length, noting, discussed it at some acts, increasingly larger take an as taxes things, other that the remaindermen under corpus bite of the income or of individual “powers appoint- Page’s Mr. will had assets.” 480 F.2d at 66. ment.” 480 F.2d at 63. The Commissioner

argues the case was relied on in III. connection with the what is a rea- time, any argument opinion sonable but this cannot sur- As reader of this now, reading opinion. Page vive a of the by largely have seen we view this case discussed after this Court had held six as an exercise in the reasoned a reasonable time. It was months would be precedent. has not Commissioner of when pivotal cited issue asked us to overrule are “[o]n we period reasonable time commences for dis- not inclined to do so on our own motion. ” claiming a remainder interest . . . decisis, weighty any The doctrine of stare 480 F.2d at 62-63. For us now to hold that context, in matters especially is so of statu very we referred tory in such cases construction. For Con disqualifies taxpayer’s to in Keinath this by the gress may any cure error made purposes interest for disclaimer would be to does, the bar courts.7 Until and the part disavow of the rationale of Keinath courts, justified expecting public are and, effect, opin- to amend that practical cases, except egregious in the most neither pro ion nunc tunc. depart previous interpretations from statutes, reached, true, give grudging appli them a nor

The result thus it is has judgment cation. The of the Tax is allowing taxpayer effect to wait until her death and then decide wheth- therefore reversed. mother’s 7. As a matter of as added has done so of the Internal Revenue form Act of disclaimers ath, claimed. The amendment to interests created after December amendment Section months of the creation of the interest dis- ment, changed independent 90 Stat. at 1896. The 2009(e)(2) was to in a Section the law on this adults to be made within fact, way involved here. Section 90 Stat. of state law. See of the Tax Reform Act of impose 2009(b)(1) Congress that does not affect Code, requires 1520, 1893, a uniform tax treat- is effective very question, 26 U.S.C. has, purpose of the Tax Re- since Kein- H.R.Rep. of the nine but printed ment of to interests created before the Act’s effective the rules case of transfers made before date). & law, claimer acknowledge the Committee News & Admin. Admin. 94-1380, including pp. . See id. at 66 ” must be what relating News, id. at 4 News, supra, ^[1976] that Keinath was the law 94th 67-68, made, supra, to disclaimers under Ways period Cong., U.S. n.4, are to continue to reprinted reprinted at 3421-22. Code and Means at 3420 n.4. “In the within which 2d Sess. then -22. The January Cong. (and correct in U.S. U.S. appears 65-68, & Admin. still is as report present a dis- Cong. Cong. state- apply re- of the until he succeed- ROSS, or control Judge, dissenting. beneficiary.” outliving ed in view, during her our which at 64. In Keinath the event F.2d death held lifetime and after her of the remainder- would cause divestiture control over her remainder such extensive control, within his i. man’s interest was not testamentary trust that we interest in the beneficiary. If the outliving the life e. distinguish this case on its facts from would not outlived the life remainderman had partially modify the Keinath case and nothing he took and did not beneficiary Therefore, opinion. of that wording identity have control as to the dissent. beneficiary. ultimate treasury regulation, The relevant 25.- The Keinath states that a dis- 2511-l(c), requires that a disclaimer is ef- following claimer of remainder interest gift purposes fective for “if the refusal termination of a life estate would be found within a reasonable time after made to have been made within a “reasonable knowledge of the existence of the transfer.” time” if than an such interest was less regulation agency’s interpreta- This agree vested We remainder. tion of 26 2511 which states that U.S.C. § general applied with this rule as to the facts gift imposed tax is “whether the transfer is However, of Keinath. the facts of the in- otherwise, in trust or whether the general stant case convince rule us indirect, direct and whether the property or instances. modified in certain personal, tangible intangible is real or * * * Modification should be mandated where the No mention is made in either essentially remainderman controls regulation the statute or of an interest “in- fixed defeasibly quantity quali- both events which would cause divestiture of the or words of ty” meaning. right appoint by i. e. the will if the remainderman should not outlive the The facts show that the taxpayer had life beneficiary. To that extent we feel complete knowledge of the transfer and the en ruling this court banc should its complicated nature thereof from the time in Keinath. of the death of her father in 1937. The taxpayer acted as an executor of her fa- recognize We general that the statement residuary ther’s and as a trustee of the previously in Keinath cited is a convenient Also, trust. 1944the executed uniformity which would lend standard partial general release of her testamenta- disposition type of But of this case.1 ry power appointment. of Keinath recognize, we as did the court that:

More importantly, the remainder The reasonable time does not standard created, of the taxpayer, as lend itself to a mathematical cal- originally purely essen- tially possession assured of either parameters depend culation and its must during her by outliving the varying life benefi- on the factual and cir- situations life— ciary control after her through cumstances of each case. What is a rea- —or death — general exercise of her testamentary sonable time in which to disclaim a testa- appointment. Taxpayer essential- mentary gift has state been considered ly controlled all the events which could courts, but emerged there has no exact cause the disposition ultimate of her re- pattern except general and decisive mainder interest. concept question present- that a factual ed. contrast, presented the facts in Kein- ath led to the suggesting only conclusion that “the remain- 480 F.2d at 62. We are Cargill court, banc, derman really nothing had that this en limit Kein- should by way renounce ownership of beneficial holding ath’s to the facts of that case and 1. We fail to see the relevance of Part III of the court en banc has an absolute frequently which it majority opinion. exercises, Obviously modify scope in a situation this, Supreme prior panel such as where the Court has not of a decision. Keinath, presented ruled on the this unnecessary what we consider to be necessary interest. This modification is be- case, contained therein. cause, dicta as in distinction be- indefeasibly tween an vested remainder and indicates that we Arnold’s Judge remainder subject a vested to divestiture of the dis- uphold the effectiveness may illusory in nature and has no basis Keinath decision relies claimer because the in the federal tax statutes. This modifica- Page, supra, the case of In re Estate accurately us to more tion would allow (Ch.Div. 582, 274 A.2d 614 N.J.Super. what constitutes a “transfer” under define 1970), taxpay- which Lois P. 25.2511-l(c). Reg. As we noted in case, that her in the current established er “ ‘ “taxation is not so much con- was effective under state law. disclaimer with the refinements of title as it is cerned decision in Kein- agree While we with the command over the with the actual facts, we do not believe applied ath as to its ’” Keinath, supra, 480 F.2d at taxed.” up- now binds us to Page that citation to Commissioner, v. citing Estate Sanford gift pur- for federal tax hold disclaimer noted, First, 308 U.S. S.Ct. L.Ed. 20 as the Keinath court poses. omitted). (1939) (citations conclusively bound are “[w]e (footnote state law” 480 F.2d at 61-62 omit- here,

ted). especially BRIGHT, This is true since Judges, HEANEY and interpreting regulations are federal join dissenting opinion. in this government party was not a Page court case. We also state note advisory opinion

was an rendered in a

friendly lawsuit between trustees and Secondly,

remaindermen. a careful reading indicates that the state court would regard-

have found the disclaimer effective whether

less of the remainder was indefeas- Thus,

ibly vested or otherwise. Page does support

not really proposition for which ;

it is cited in Keinath the distinction be-

tween vested remainders and remainders to divestiture. Virgil ALESSI, Petitioner-Appellant, The practical result of the majority opin- ion to permit a remainderman with a America, UNITED STATES of to sit for over 33 Respondent-Appellee.* years before having to determine whether pass inheritance or it on to Docket 79-2270. others of process her own choice. In the United States Court Appeals, deprived United been States has Second Circuit. nearly probably five million dollars which it collected, major would have part, at least Argued 1980. if the remainderman had been forced to Decided Aug. make the election within a reasonable time Rehearing Petition for En Banc after her father’s death. Unanimously Denied summary, the “vest- would October 1980. ed remainder” test in Keinath in situations where the remainderman has the ultimate

control over the of his remainder disposition * Note: published Editor’s of the United States in the advance sheets at this citation County Appeals, Eighth (628 1133), F.2d was withdrawn from Bancorporation National Co. v. Board TGB rehearing granted. bound volume because System, of the Federal Reserve Governors

Case Details

Case Name: Lois P. Cottrell v. Commissioner of Internal Revenue

Court Name: Court of Appeals for the Eighth Circuit

Date Published: Sep 3, 1980

Citation: 628 F.2d 1127

Docket Number: 79-1842

Court Abbreviation: 8th Cir.