UNITED STATES v. IRVINE ET AL.
No. 92-1546
Supreme Court of the United States
Argued December 6, 1993—Decided April 20, 1994
511 U.S. 224
Kent L. Jones argued the cause for the United States. With him on the briefs were Solicitor General Days, Acting Assistant Attorney General Paup, Deputy Solicitor General Wallace, Jonathan S. Cohen, and Teresa E. McLaughlin.
Phillip H. Martin argued the cause for respondents. With him on the briefs were Mary J. Streitz, Carol A. Peterson, and Cole Oehler.*
JUSTICE SOUTER delivered the opinion of the Court.
In Jewett v. Commissioner, 455 U. S. 305 (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.
I
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
*Burton G. Ross, Cynthia S. Rosenblatt, and Robert P. Reznick filed a brief for John G. Ordway, Jr., et al. as amici curiae urging affirmance. Geoffrey J. O‘Connor filed a brief for the estate of Helen W. Halbach et al. as amici curiae.
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
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 (Act), whereas the Ordway trust had been created before the Act, in 1917. Respondents also argued that the “reasonable time” limitation did not apply because the pre-Act, 1917 transfer creating the trust was not a “taxable transfer” of an interest, absent which the Regulation was inapplicable.6 On cross-motions
A divided panel of the Court of Appeals for the Eighth Circuit reversed. 936 F. 2d 343 (1991). It rejected the view that the Regulation is inapplicable to a trust created before enactment of the gift tax statute simply because the Regulation reaches only ”‘taxable transfers creating an interest in the person disclaiming made before January 1, 1977.‘” Id., at 347 (emphasis in original). The Court of Appeals held that the transfer creating the trust was “tax-
Respondents’ suggestion for rehearing en banc was granted, however, and the panel opinion was vacated. Unlike the panel, the en banc court affirmed the District Court, holding the Regulation inapplicable because its terms expressly limit its scope to “taxable transfers . . . made before January 1, 1977.” 981 F. 2d 991 (CA8 1992). The creation of the Ordway trust in 1917 was not a “taxable transfer,” the court reasoned, because the federal gift tax provisions had yet to be enacted: “It is fundamental that for a transfer to be taxable there must be an applicable tax in existence when the transfer is made. No such federal tax existed on January 16, 1917, when . . . Mrs. Irvine‘s interest was created.” Id., at 994. Given the inapplicability of the Regulation and its “reasonable time” requirement for tax-free disclaimer, the majority held that state law governed the effect of a dis-
In a concurring opinion, id., at 996-998, Judge Loken also concluded the Regulation was inapplicable, not because of its limitation to “taxable transfers,” but because it is limited to interests in “property transferred from a decedent . . . by the decedent‘s will or by the law of descent and distribution,” whereas the Ordway trust came from an inter vivos transfer. Judge Loken shared the majority view, however, that because the Regulation was inapplicable, the federal gift tax consequences of the disclaimer were a function of state law. The dissent took the position of the majority in the panel opinion, and of the Eleventh Circuit in Ordway v. United States, supra. See 981 F. 2d, at 998-1002.
The conflict prompted us to grant certiorari to determine whether a disclaimer made after enactment of the gift tax statute, of an interest created before enactment, is necessarily free of any consequent federal gift taxation. 508 U. S. 971 (1993). We hold that it is not, and reverse.
II
The Internal Revenue Code of 1986 taxes “the transfer of property by gift,”
Treasury Reg. § 25.2511-1(c)(1)9 restates the gift tax‘s broad scope by providing that the tax is payable on “any transaction in which an interest in property is gratuitously passed or conferred upon another, regardless of the means or device employed . . . .” The Regulation (subsection 1(c)(2)), on the other hand, affords an exception to the general rule of taxability, by providing that a disclaimer of property transferred by a decedent‘s will or the law of descent and distribution 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.” As
III
A
On one point there cannot be any serious dispute, for it is clear that 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 1931.10 We need not decide whether a disclaimer good for gift tax purposes could be required to have been made before enactment of the gift tax, for Mrs. Irvine did not disclaim shortly after enactment of the Act, and the timeliness determination in this case would be the same whether the reasonable time was calculated from Mrs. Irvine‘s first knowledge of the interest (1931) or from the enactment of the federal gift tax statute (1932). Moreover, we understand the Government to have conceded that it would not have contested the timeliness of a disclaimer made within a reasonable time after the enactment of the Act. See Tr. of Oral Arg. 12.
The determination of the amount of “reasonable time” that remained after Mrs. Irvine learned of the interest and reached majority status must be based upon the gift tax‘s purpose to curb avoidance of the estate tax. We have al-
“[T]he passage of time is crucial to the scheme of the gift tax.” Jewett, supra, at 316, n. 17 (internal quotation marks and citation omitted). The opportunity to disclaim, and thereby to avoid gift as well as estate taxation, should not be so long as to provide a virtually unlimited opportunity to consider estate planning consequences. While a decision to disclaim even at the earliest opportunity may be made with appreciation of potential estate tax consequences, the passage of time puts the prospective disclaimant in a correspondingly superior position to determine whether her need to enjoy the property (and incur a tax for a subsequent gift of it or an increased estate tax if she retains it) outweighs the favorable estate and gift tax consequences of a disclaimer. 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 after the clock began running, until she reached age 68, could not possibly be thought reasonable. By the date of her disclaimer, Mrs. Irvine was in a position to make a fairly precise determination of the advantage to be gained by a transfer diminishing her estate
B
Respondents would avoid this result on two alternative grounds. They argue first that by its own terms, the Regulation does not apply on the facts of this case, with the consequence that taxability under the Internal Revenue Code turns on the efficacy of the disclaimer under state law. Second, respondents argue that even if the disclaimer would result in an otherwise taxable transfer in the absence of the governing Regulation, the tax on transfer of an interest created by an instrument antedating the enactment of the gift tax statute would be barred by the statutory prohibition of retroactive application.
1
The question of the Regulation‘s applicability under its own terms need not be resolved here, for the result of its inapplicability would not be freedom from gift taxation on a theory of borrowed state law or on any other rationale. The arguments for inapplicability may therefore be shortly stated, each having been raised at one point or another in the prior litigation of this case.
The first argument turns on the Regulation‘s application to disclaimers of interests created by what it terms “taxable transfers,” a phrase that on its face presupposes some source of taxability for the transfer. There was, however, no gift tax when the trust, including its remainder interests, was created in 1917, and the gift tax provisions of the Act did not render preenactment transfers taxable.11 The language is, to say the least, troublesome to the Government‘s position that the Regulation applies. The Government responds to
The second argument rests on the Regulation‘s provision that “the transfer” to which it applies is subject to a timely, tax-free disclaimer “whether the transfer is effected by the decedent‘s will or by the law of descent and distribution,” but only “where the law governing the administration of the decedent‘s estate” gives the recipient of the transferred interest a right to refuse it.14 As against these descriptions of the transfer‘s testamentary character, the text says nothing indicating that a taxable transfer from anyone other than a decedent may create an interest subject to a disclaimer free of gift tax. If the text is given its strict reading, then, it has no application to the interest in question here, which came into being not from a decedent‘s transfer by will or from application of the law of descent and distribution, but
2
Even assuming the soundness of one or both of these arguments that the Regulation is inapposite, however, the disclaimer would not escape federal gift taxation by reference to state law rules giving effect to the disclaimer as causing a transfer to the beneficiary next in line. Any such reasoning would run counter to our holding in Jewett. In rejecting the argument that the 1958 version of the Regulation was being applied retroactively to the taxpayer‘s disadvantage in that case, the Jewett Court repudiated the “assumption that [the taxpayer] had a ‘right’ to renounce the interest without tax consequences that was ‘taken away’ by the 1958 Regulation. [The taxpayer] never had such a right.” Jewett, 455 U. S., at 317. Only then did the Jewett Court go on to determine that the disclaimer at issue did not fall within the exemption from the gift tax provided by the Regulation, and was consequently taxable. Id., at 312-316. The Court followed the general and longstanding rule in federal tax cases that although state law creates legal interests and rights in property, federal law determines whether and to what extent those interests will be taxed. See, e. g., Burnet v. Harmel, 287 U. S. 103, 110 (1932); Morgan v. Commissioner, 309 U. S. 78, 80-81 (1940); United States v. Mitchell, 403 U. S. 190, 197 (1971). The Court put it this way in United States v. Pelzer, 312 U. S. 399, 402-403 (1941):
“[T]he revenue laws are to be construed in the light of their general purpose to establish a nationwide scheme of taxation uniform in its application. Hence their pro-
visions are not to be taken as subject to state control or limitation unless the language or necessary implication of the section involved makes its application dependent on state law.”
Cases like Jewett and this one illustrate as well as any why it is that state property transfer rules do not translate into federal taxation rules. Under state property rules, an effective disclaimer of a testamentary gift16 is generally treated as relating back to the moment of the original transfer of the interest being disclaimed, having the effect of canceling the transfer to the disclaimant ab initio and substituting a single transfer from the original donor to the beneficiary of the disclaimer. See, e. g., Schoonover v. Osborne, 193 Iowa 474, 478, 187 N. W. 20, 22 (1922); Seifner v. Weller, 171 S. W. 2d 617, 624 (Mo. 1943); Albany Hosp. v. Hanson, 214 N. Y. 435, 445, 108 N. E. 812, 815 (1915); Burritt v. Silliman, 13 N. Y. 93, 97-98 (1855); Perkins v. Isley, 224 N. C. 793, 798, 32 S. E. 2d 588, 591 (1945); see also 3 American Law of Property § 14.15 (A. Casner ed. 1952). Although a state-law right to disclaim with such consequences might be thought to follow from the common-law principle that a gift is a bilateral transaction, requiring not only a donor‘s intent to give, but also a donee‘s acceptance, see, e. g., Wallace v. Moore, 219 Ga. 137, 139, 132 S. E. 2d 37, 39 (1963); Gottstein v. Hedges, 210 Iowa 272, 275, 228 N. W. 93, 94 (1929); Pirie v. Le Saulnier, 161 Wis. 503, 507, 154 N. W. 993, 994 (1915); Blanchard v. Sheldon, 43 Vt. 512, 514 (1871), state-law tolerance for delay in disclaiming reflects a less theoretical concern. An impor-
The principles underlying the federal gift tax treatment of disclaimers look to different objects, however. As we have already stated, Congress enacted the gift tax as a supplement to the estate tax and a means of curbing estate tax avoidance. See supra, at 234-235. Since the reasons for defeating a disclaimant‘s creditors would furnish no reasons for defeating the gift tax as well, the Jewett Court 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. And as we have already stated, supra, at 233, without the exception afforded in the Regulation,17 the gift tax statute provides a general rule of taxability for disclaimers such as Mrs. Irvine‘s.
IV
Presumably to ward off any attack on the federal gift tax resting on the possibility that its retroactive application would violate due process, see Untermyer v. Anderson, 276 U. S. 440 (1928), § 501(b) of the Act provided that it would “not apply to a transfer made on or before the date of the enactment of this Act [June 6, 1932].” Revenue Act of 1932, ch. 209, § 501(b), 47 Stat. 245. The same provision has in substance been carried forward to this day.18 Respondents argue that even if the Regulation applies, or taxation would
The Commissioner‘s assessment of federal gift tax on Mrs. Irvine‘s 1979 disclaimer was authorized by the statute. The judgment of the Court of Appeals is reversed.
It is so ordered.
JUSTICE BLACKMUN took no part in the decision of this case.
JUSTICE SCALIA, concurring in part and concurring in the judgment.
I join the judgment of the Court, and its opinion except for Part III-A. It seems to me that the basis for the “reasonable time” limitation in the Regulation cannot be, as the Court says, ante, at 235, the need to deprive the beneficiary of “a virtually unlimited opportunity to consider estate planning consequences.” Considering estate planning consequences (not a malum in se) is nowhere condemned by the tax laws, and I would see no basis for the Treasury Department‘s arbitrarily declaring a disclaimer to be a gift solely in order to deter such consideration. The Secretary undoubtedly has broad discretion to determine the meaning of the term “transfer” as it is used in the gift tax statute, and undoubtedly may indulge an antagonism to estate planning in choosing among permissible meanings. But “disclaimer after opportunity for estate tax planning” is simply not a permissible meaning.
The justification for the “reasonable time” limitation must, as always, be a textual one. It consists, in my view, of the fact that the failure to make a reasonably prompt disclaimer of a known bequest is an implicit acceptance. Qui tacet, consentire videtur. Thus, a later disclaimer, which causes the property to go to someone else by operation of law, is effectively a transfer to that someone else. (The implication from nondisclaimer is much weaker when the interest is a
Notes
The relevant regulation is now
“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 prop-
erty transferred from a decedent (whether the transfer is effected by the decedent‘s will or by the law of descent and distribution), 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. The refusal must be unequivocal and effective under the local law. There can be no refusal of ownership of property after its acceptance. In the absence of the facts to the contrary, if a person fails to refuse to accept the transfer to him of ownership of a decedent‘s property within a reasonable time after learning of the existence of the transfer, he will be presumed to have accepted the property. Where the local law does not permit such a refusal, any disposition by the beneficiary, heir, or next-of-kin whereby ownership is transferred gratuitously to another constitutes the making of a gift by the beneficiary, heir, or next-of-kin. In any case where a refusal is purported to relate to only a part of the property, the determination of whether or not there has been a complete and unqualified refusal to accept ownership will depend on all the facts and circumstances in each particular case, taking into account the recognition and effectiveness of such a purported refusal under the local law.”