Estate of Eleanor R. Gerson, Allan D. Kleinman v. Commissioner

127 T.C. No. 11UNITED STATES TAX COURT
ESTATE OF ELEANOR R. GERSON, DECEASED,
ALLAN D. KLEINMAN, EXECUTOR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13534-04. Filed October 24, 2006.
G created the Benjamin Gerson Trust which became
irrevocable when G died in 1973. The trust provided
for the creation of a marital trust (the trust) for the
benefit of G’s wife, D. The trust conferred upon D a
general power of appointment over the trust property.
D died in October 2000 and left a will under which she
exercised the power of appointment in favor of her
grandchildren. R determined that the transfer to D’s
grandchildren was subject to generation-skipping
transfer (GST) tax. P contends (1) sec. 26.2601-
1(b)(1)(i), GST Tax Regs., is invalid, and (2) the
transfer is excepted from GST tax under sec.
1433(b)(2)(A) of the Tax Reform Act of 1986, Pub. L.
99-514, 100 Stat. 2731.
Held: Sec. 26.2601-1(b)(1)(i), GST Tax Regs., is
a reasonable and valid interpretation of sec.
1433(b)(2)(A) of the Tax Reform Act of 1986 because it
harmonizes with the plain language of the statute, its
origin, and its purpose.
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Held, further: R’s determination that the
disputed transfer is subject to GST tax is sustained.
Mark A. Phillips and Jeffry L. Weiler, for petitioner.
Stephen J. Neubeck, for respondent.
OPINION
HAINES, Judge: Respondent issued a notice of deficiency to
the Estate of Eleanor R. Gerson (the estate) determining a
deficiency of $1,144,465 in Federal generation-skipping transfer
(GST) tax. The sole issue before the Court concerns the validity
of section 26.2601-1(b)(1)(i), GST Tax Regs., which provides that
the “grandfather” exception to the GST tax set forth in section
1433(b)(2)(A) of the Tax Reform Act of 1986 (TRA 1986), Pub. L.
99-514, 100 Stat. 2085, 2731 (hereinafter TRA 1986 section
1433(b)(2)(A)), does not except from GST tax a transfer of
property pursuant to the exercise, release, or lapse of a general
power of appointment that is treated as a taxable transfer for
purposes of Federal estate or gift tax.1 We hold the regulation
is valid, and we sustain respondent’s determination that the
disputed transfer is subject to GST tax.
1
Unless otherwise indicated, section references are to
sections of the Internal Revenue Code, as amended, and Rule
references are to the Tax Court Rules of Practice and Procedure.
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Background
This case was submitted to the Court fully stipulated
pursuant to Rule 122. The parties’ stipulation of facts, with
attached exhibits, is incorporated herein by this reference.
Eleanor R. Gerson (decedent) died testate on October 20,
2000. At the time of her death, decedent was domiciled in
Cleveland Heights, Ohio. Allan D. Kleinman was duly appointed
executor of decedent’s estate by the Probate Court for Cuyahoga
City, Ohio. At the time the petition was filed, Mr. Kleinman was
a resident of Cuyahoga County, Ohio, and in his capacity as
executor had a mailing address of 200 Public Square, Suite 2300,
Cleveland, Ohio 44114.
Decedent married Benjamin S. Gerson (Mr. Gerson) on November
6, 1938, and remained married to him until his death on July 22,
1973. Decedent and Mr. Gerson had four children and five
grandchildren.
On December 9, 1968, Mr. Gerson, as grantor, executed a
revocable trust agreement (the Benjamin Gerson Trust). On July
19, 1973, shortly before his death, Mr. Gerson amended the
Benjamin Gerson Trust for the last time (the Third amendment).
Upon Mr. Gerson’s death on July 22, 1973, the Benjamin Gerson
Trust, as amended, became irrevocable.
Article III, paragraph A of the Benjamin Gerson Trust, as
amended, provided for the division of the trust corpus into three
trusts. One of those trusts, Trust A, was a marital trust for
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the benefit of decedent. Article III, paragraph B of the
Benjamin Gerson Trust, as amended, provided for the distribution
of the income and principal of Trust A. Specifically, paragraph
B.3 of article III provided:
Upon the death of my said wife, the balance remaining
in Trust A, including any income therein received by the
Trustee from the time of the last income payment and the
date of death of my said wife, shall be distributed by the
Trustee to such person or persons, and in such share or
shares, in trust or otherwise, as my said wife shall, by her
Last Will and Testament, or Codicil thereto, appoint by
specific reference thereto. It is my intention that
my said wife shall have an unlimited testamentary power
of appointment in respect of the whole of Trust A,
including the power to appoint the same in favor of her
own estate.
The parties agree that this provision of the Benjamin Gerson
Trust, as amended, conferred upon decedent a general power of
appointment, as that term is defined in section 2041(b).
The accounting records maintained by National City Bank as
trustee of the Benjamin Gerson Trust reflect that no additions
were made to the corpus of Trust A after September 25, 1985.
On September 24, 1999, decedent executed her will and, as
grantor, a revocable trust agreement (the Eleanor Gerson Trust).
On September 13, 2000, shortly before her death, decedent amended
and restated the Eleanor Gerson Trust.
As of her death on October 20, 2000, decedent was survived
by her four children and her five grandchildren.
Item I, paragraph C of the decedent’s will provided:
Under the terms of a certain Trust Agreement dated
December 9, 1968, entered into between my spouse, BENJAMIN
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S. GERSON, AND NATIONAL CITY BANK, Trustee (as modified
by my spouse’s Third amendment to said Trust Agreement,
dated July 19, 1973), specifically at paragraph B.3 of
Article III thereof, I am granted a general power to
appoint at the time of my death the property held in Trust
A of my said spouse’s Trust Agreement. I hereby exercise
said power of appointment and direct that all property
subject thereto shall be allocated to NATIONAL CITY BANK,
Trustee, or any successor thereto, under my said 1999
Amended and Restated Revocable Trust Agreement, to be
administered pursuant to the terms of ARTICLE III thereof
(the Grandchildren’s Trust) for the benefit of my
grandchildren and more remote descendants.
ARTICLE III of the Eleanor Gerson Trust established the
Grandchildren’s Trust. Under the terms of the Grandchildren’s
Trust, the corpus of the trust was divided into five equal shares
for the benefit of each of her grandchildren. Two of decedent’s
grandchildren received their shares outright. The shares
allocated to the other three grandchildren were held in trust for
their respective benefit, to be transferred outright to such
grandchild upon the earlier of the grandchild’s reaching the age
of 40 or the twenty-first anniversary of decedent’s death less
one day.
Decedent’s estate filed a Form 706, United States Estate
(and Generation-Skipping Transfer) Tax Return, on July 20, 2001,
along with a Form 8275-R, Regulation Disclosure Statement,
indicating it was taking a position contrary to section 26.2601-
1(b)(1)(i), GST Tax Regs. The corpus of Trust A as of the date
of decedent’s death is listed as Item 1 on Schedule H of the
estate’s return and is valued at $6,244,627.16. The estate’s
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return reported a gross estate in the amount of $22,054,002.79,
and Federal estate tax in the amount of $7,168,531.02.
As indicated, respondent issued a statutory notice of
deficiency to decedent’s estate. A timely petition for
redetermination was filed with the Court challenging respondent’s
determination.
Discussion
The parties do not dispute that a transfer from decedent
directly to her grandchildren, skipping over decedent’s children,
normally would be subject to GST. As discussed in detail below,
the dispute in this case centers on the transitional relief
provided by the “grandfather” exception to the GST tax set forth
in TRA 1986 section 1433(b)(2)(A), and the validity of section
26.2601-1(b)(1)(i), GST Tax Regs. The regulation provides that a
transfer of property pursuant to the exercise, release, or lapse
of a general power of appointment that is treated as a taxable
transfer under Federal estate and/or gift tax provisions, is not
a “transfer under a trust” that is eligible for transitional
relief from GST tax under TRA 1986 section 1433(b)(2)(A).
To frame the issue properly, we briefly outline the GST tax
provisions, review pertinent caselaw that preceded the
promulgation of section 26.2601-1(b)(1)(i), GST Tax Regs.,
examine the regulation and the circumstances surrounding its
promulgation, and summarize the parties’ positions.
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I. The Generation-Skipping Transfer Tax
The current version of the GST tax, set forth in sections
2601-2664, was enacted under TRA 1986, in which Congress
substantively modified and retroactively repealed an earlier GST
tax regime enacted in 1976.2 The GST tax generally is imposed on
transfers, whether outright or in trust, to transferees who are
at least two generations below the generation of the transferor.
Secs. 2611, 2613(a). The public policy underlying the GST tax is
to bring uniformity and consistency to Federal transfer taxes
(estate, gift, and generation-skipping) by imposing a transfer
tax upon all transfers whether directly to an immediate
succeeding generation or to generations further removed from the
transferor. See Peterson Marital Trust v. Commissioner, 78 F.3d
795, 798 (2d Cir. 1996), affg. 102 T.C. 790 (1994); H. Rept. 99-
426, at 824, 1986-3 C.B. (Vol. 2) 1, 824.
A generation-skipping transfer is defined to include a
taxable distribution, a taxable termination, and a direct skip.
Sec. 2611(a). A direct skip means a transfer, subject to Federal
estate or gift tax, of an interest in property to a skip person.
Sec. 2612(c)(1). A skip person means a natural person assigned
to a generation which is two or more generations below the
generation of the transferor, or a trust if all interests in such
2
The first generation-skipping transfer tax was enacted as
part of the Tax Reform Act of 1976, Pub. L. 94-455, sec. 2006, 90
Stat. 1879-1890.
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trust are held by skip persons. Secs. 2613(a)(1) and (2), 2651.
In the case of a direct skip (other than a direct skip from
a trust), liability for GST tax falls on the transferor. Sec.
2603(a)(3). The term “transferor” means the decedent in the case
of any property subject to Federal estate tax. Sec. 2652(a)(1).
The flush language of section 2652(a)(1) provides that “An
individual shall be treated as transferring any property with
respect to which such individual is the transferor.”
As a general rule, if a decedent holds a general power of
appointment over property at death, the value of such property is
included in the decedent’s gross estate for Federal estate tax
purposes under section 2041. With exceptions not pertinent to
our discussion, a general power of appointment means “a power
which is exercisable in favor of the decedent, his estate, his
creditors, or the creditors of his estate”. Sec. 2041(b)(1).3
GST tax generally applies to any generation-skipping
transfer made after October 22, 1986. TRA 1986 sec. 1431(a).
However, TRA 1986 section 1433(b)(2)(A) provides special
transitional rules or “grandfather” provisions excepting certain
transfers from the reach of the GST tax. TRA 1986 section
1433(b)(2)(A) provides:
3
It follows that a decedent who dies holding a general
power of appointment over property is treated as the transferor
of that property for purposes of GST tax. See 5 Bittker &
Lokken, Federal Taxation of Income, Estates & Gifts, par. 133.2.2
at 133-6 to 133-7 (2d ed. 1993).
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(b) Special Rules.--
* * * * *
(2) Exceptions.--The amendments made by this subtitle
shall not apply to--
(A) any generation-skipping transfer under a trust
which was irrevocable on September 25, 1985, but only
to the extent that such transfer is not made out of
corpus added to the trust after September 25, 1985 (or
out of income attributable to corpus so added),
September 25, 1985, apparently was selected as the effective date
for irrevocable trusts because the House Committee on Ways and
Means held a markup session on these matters on September 26,
1985. See Staff of the Joint Comm. on Taxation, 99th Cong., Tax
Reform Proposals in Connection with Committee on Ways and Means
Markup (JCS-44-85) (Sept. 26, 1985).
II. Caselaw
Before section 26.2601-1(b)(1)(i), GST Tax Regs. (discussed
below) was promulgated, this Court and others opined on the
applicability of the transitional or effective date provisions of
TRA 1986 section 1433(b)(2)(A).
A. Peterson Marital Trust v. Commissioner
In Peterson Marital Trust v. Commissioner, 102 T.C. 790(1994), affd. 78 F.3d 795 (2d Cir. 1996), we were asked to decide
the validity of a regulation which provided that the lapse of a
general power of appointment resulted in a “constructive”
addition to the trust after the effective date of the GST tax.
In that case, E. Norman Peterson died in 1974 and left a will
providing for the creation of a marital trust under which his
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wife (Mrs. Peterson) was entitled to receive all of the income
and to withdraw one-half of the trust principal during her
lifetime. Mrs. Peterson also was given a testamentary general
power of appointment over the corpus of the marital trust. Under
Mr. Peterson’s will, if Mrs. Peterson did not exercise her power
of appointment, the trust principal would be set aside in equal
shares for Mr. Peterson’s grandchildren.
Mrs. Peterson did not exercise her right to withdraw from
the principal of the trust, and she did not exercise her general
power of appointment over the trust corpus (except as to an
amount necessary to pay estate tax attributable to the trust).
As a result, at the time of Mrs. Peterson’s death, most of the
trust property passed to Mr. Peterson’s grandchildren.
The Commissioner determined the transfers to Mr. Peterson’s
grandchildren were subject to GST tax. The Peterson Marital
Trust (the taxpayer) challenged the Commissioner’s determination
and asserted the transfers qualified for transitional relief from
GST under TRA 1986 section 1433(b)(2)(A). The taxpayer argued
“Because the Marital Trust was irrevocable on September 25, 1985
* * * the subsequent transfers from that trust upon Mrs.
Peterson’s death are exempt from the GST tax.” Peterson Marital
Trust v. Commissioner, 102 T.C. at 796. The Commissioner
maintained the taxpayer was not eligible for transitional relief
under TRA 1986 section 1433(b)(2)(A) because the lapse of Mrs.
Peterson’s general power of appointment resulted in a
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“constructive” addition of corpus to the trust after September
25, 1985, within the meaning of the statute. The Commissioner
relied upon section 26.2601-1(b)(1)(v)(A), Temporary GST Tax
Regs., 53 Fed. Reg. 8445 (Mar. 15, 1988), amended by 53 Fed.
18839 (May 25, 1988).4 The taxpayer in turn asserted the
temporary regulation was invalid on the ground it was contrary to
the plain meaning of TRA 1986 section 1433(b)(2)(A).
Upon review of the matter, we initially observed TRA 1986
section 1433(b)(2)(A) did not define the term “added to the
trust” and neither the provision nor its legislative history
contained any specific guidance whether a lapse of a general
power of appointment constituted a constructive addition to the
corpus of a trust. Peterson Marital Trust v. Commissioner, 102
T.C. 798-799. Nevertheless, we gleaned from the effective date
provisions a congressional intention to “grandfather” certain
irrevocable trusts to protect the “reliance interests” of trust
settlors who established trusts before the new GST tax regime was
introduced. Id. at 799. We elaborated on this point as follows:
The effective date rules of TRA 1986 section
1433(b)(2)(A) were apparently intended to “grandfather”
4
Sec. 26.2601-1(b)(1)(v)(A), Temporary GST Tax Regs., 53
Fed. Reg. 8445 (Mar. 15, 1988), provided in pertinent part:
where any portion of a trust remains in the trust after
the release, exercise, or lapse of a power of
appointment over that portion of the trust, * * * the
value of the entire portion of the trust subject to the
power that was released, exercised, or lapsed will be
treated as an addition to the trust.
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trusts that were irrevocable prior to the date the
House Ways and Means Committee began consideration of
the bill containing the GST tax provisions. The most
logical explanation for this grandfather clause is to
protect the reliance interests of trust settlors who
established irrevocable trusts prior to the legislative
introduction of the GST tax regime eventually enacted
by TRA 1986. See Tataranowicz v. Sullivan, 959 F.2d
268, 277 (D.C. Cir. 1992); Sercl v. United States, 684
F.2d 597, 599 (8th Cir. 1982).
As a corollary to its protection of reliance
interests, the grandfather clause does not apply to
transfers “made out of corpus added to the
[grandfathered] trust after September 25, 1985”. TRA
1986 sec. 1433(b)(2)(A). Unlike a person who has
irrevocably transferred money to a trust prior to the
grandfathering date, a person who effects a transfer of
corpus to a grandfathered trust after that date is
aware of (or should be aware of) the effects of the GST
tax. Absent a restriction on post-grandfather-date
transfers, an individual could utilize an existing
grandfathered trust as a vehicle for passing additional
amounts to skip persons free of GST tax, even though
these additional amounts had not been irrevocably
committed to such a transfer as of September 25, 1985.
Such a result would be contrary to the reliance purpose
underlying the grandfather clause. * * *
Section 26.2601-1(b)(1)(v)(A), Temporary GST Tax
Regs., supra, is consistent with the reliance purpose
underlying TRA 1986 section 1433(b)(2)(A), and is
therefore valid. A person who holds a general power of
appointment over trust property maintains control over
the ultimate disposition of that property and is, in
practical effect, in a position similar to the actual
owner of the property. Estate of Kurz v. Commissioner,
101 T.C. 44, 50-51, 59-60 (1993), supplemented by T.C.
Memo. 1994-221. This is the rationale underlying the
inclusion of such property in the gross estate of the
holder of the power for purposes of the Federal estate
tax. Id.Mrs. Peterson, as the holder of a testamentary
general power of appointment, maintained effective
control over the disposition of the property in the
Marital Trust until her death in 1987. Had she chosen
to do so, Mrs. Peterson could have exercised the
general power of appointment to cause the trust
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property to be distributed to persons other than the
Grandchildren's Trusts, thereby avoiding a generation-
skipping transfer. Accordingly, as of the September
25, 1985, grandfather date, the corpus of the trust was
not irrevocably required to be distributed to the
Grandchildren’s Trusts.
Id. at 799-801 (emphasis added; fn. ref. omitted). Consistent
with the foregoing, we held the temporary regulation, which
established that a lapse of a general power of appointment would
result in a constructive addition to a trust, was a reasonable
and valid interpretation of TRA 1986 section 1433(b)(2)(A), and
the transfers to Mr. Peterson’s grandchildren were subject to GST
tax.
The taxpayer appealed this Court’s decision to the Court of
Appeals for the Second Circuit. In affirming our decision, the
Court of Appeals emphasized TRA 1986 section 1433(b)(2)(A) must
be interpreted in proper context. Peterson Marital Trust v.
Commissioner, 78 F.3d at 796, 799. The Court of Appeals observed
the exercise, release, or lapse of a general power of appointment
is viewed as “essentially identical to outright ownership” of the
underlying property by the power holder for purposes of Federal
estate and gift taxes. Id. at 799-800. Applying this
“ownership” principle consistently in the context of the GST tax,
the Court of Appeals held that a transfer of property as the
result of the lapse of a general power of appointment should be
treated as if the power holder received and then added property
to the trust within the meaning of TRA 1986 section
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1433(b)(2)(A). Holding that the constructive addition principle
embodied in section 26.2601-1(b)(1)(v)(A), Temporary GST Tax
Regs., supra, was a reasonable construction of the statute, the
Court of Appeals rejected the taxpayer’s argument the word
“added” in TRA 1986 section 1433(b)(2)(A) should be interpreted
according to its ordinary, literal meaning (thus requiring an
actual increase in the size of the trust as opposed to a
constructive addition to the trust). Peterson Marital Trust v.
Commissioner, 78 F.3d at 800.
The Court of Appeals also rejected the taxpayer’s argument
the regulation in question was invalid because it did not comport
with the purpose of the effective date provisions. The taxpayer
argued Mrs. Peterson allowed her power of appointment to lapse in
an innocent effort to honor her husband’s wishes and no elaborate
legal maneuvers were employed in carrying out the transfers. The
Court of Appeals responded as follows:
The [effective date] rule was not enacted to allow
taxpayers who, in good faith and without intent to
evade taxes, seek to continue benefitting from a tax
advantage that Congress has eliminated. It was
designed, instead, to protect those taxpayers who, on
the basis of pre-existing rules, made arrangements from
which they could not reasonably escape and which, in
retrospect had become singularly undesirable.6 By
giving Mrs. Peterson a general power of appointment
over the trust, Mr. Peterson created an arrangement
which was desirable under then-existing tax laws and
which could be reworked completely should the laws
change, as they in fact did. There is no reason to
“grandfather” such a mutable arrangement, and Congress
has given no indication that it wished to do so.
* * * * *
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Mr. Peterson did not tie himself or his heirs up
at all. He gave Mrs. Peterson a power over the trust
that was great enough to undo any harm that stemmed
from reliance on the absence of a GST at the time the
trust was created. It is this fact that, in the end,
not only gives additional support to the view that the
Treasury Regulation on constructive additions is a
reasonable one, but also negates all of the taxpayer’s
arguments that on “policy grounds” the exemption should
apply in this case.
6
This understanding of the purpose behind the
effective date rule is underscored by the other
provisions of the rule. First, the rule provided that
the GST would not apply to transfers made by wills that
had been executed before the date of enactment of the
GST (October 22, 1986) if the decedent died before
January 1, 1987. Pub. L. 99-514, §1433(b)(2)(B). This
exception ensured that an individual who did not have a
reasonable time between the enactment of the law and
his death to alter his will would not be penalized by
the new provision. Second, the effective date rule
allowed an exception for any individual who was ‘under
a mental disability to change the disposition of his
property and did not regain his competence to dispose
of such property before the date of his death.’ Pub.
L. 99-514, §1433(b)(2)(C).
Id. at 801-802 (emphasis added).
B. Simpson v. United States
In Simpson v. United States, 183 F.3d 812 (8th Cir. 1999),
revg. and remanding 17 F. Supp. 2d 972 (W.D. Mo. 1998), the Court
of Appeals for the Eighth Circuit addressed a factual scenario
nearly identical to the instant case and held a transfer to
grandchildren pursuant to the exercise of a general power of
appointment was eligible for transitional relief from GST tax
under TRA 1986 section 1433(b)(2)(A).
The facts in Simpson are as follows. Mr. Simpson died in
1966 and left a will creating a testamentary trust primarily for
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the benefit of his wife, Mrs. Bryan. The trust gave Mrs. Bryan a
general power of appointment by will. Mrs. Bryan died in 1993
and left a will in which she exercised her power of appointment
in favor of her grandchildren. The Commissioner determined the
transfer to the grandchildren was subject to GST tax, and the
District Court granted the Commissioner’s motion for summary
judgment, holding TRA 1986 section 1433(b)(2)(A) did not apply to
relieve the taxpayer of liability.
On appeal, the Court of Appeals for the Eighth Circuit
reversed, holding the transfer to the grandchildren constituted a
“transfer under a trust which was irrevocable on September 25,
1985” within the plain meaning of the language of TRA 1986
section 1433(b)(2)(A). The Court of Appeals stated:
Trust A, having been created by Mr. Simpson’s will in
1966, was of course irrevocable on September 25, 1985.
Was the transfer made by Mrs. Simpson a transfer
‘under’ this trust? We do not see how an affirmative
answer can be avoided. The power of appointment that
made the transfer possible was created by the trust.
Language has to mean something, and the argument that
this particular transfer was not ‘under’ trust A is
simply untenable. [Simpson v. United States, supra at
814-815.]
In so holding, the Court of Appeals rejected the Commissioner’s
argument that the relevant action for purposes of TRA 1986
section 1433(b)(2)(A) was Mrs. Bryan’s exercise of her power of
appointment (after October 22, 1986). In particular, the Court
of Appeals concluded the relevant action under the express
language of TRA 1986 section 1433(b)(2)(A) was whether the trust
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became irrevocable on or before September 25, 1985. The Court of
Appeals reasoned as follows:
The point is that when the trust was created and became
irrevocable Mrs. Bryan was given the authority, under
the law as it then existed, to exercise her general
power of appointment in favor of anyone at all, and to
do so without subjecting the transfer to a GST tax,
such a tax then being far in the future. This is the
sort of reliance that the effective-date provision
protects. [Simpson v. United States, supra at 814-
815.]
As a final matter, the Court of Appeals rejected the
Commissioner’s reliance on Peterson Marital Trust, distinguishing
that case on the grounds (1) it concerned the lapse of a power of
appointment (as opposed to the exercise of a power of
appointment), and (2) the Commissioner had relied upon a
temporary Treasury regulation in Peterson Marital Trust, whereas
there was no regulation applicable to the transfer in dispute in
the Simpson case. Simpson v. United States, 183 F.3d at 815-816.
C. Bachler v. United States
In Bachler v. United States, 281 F.3d 1078 (9th Cir. 2002),
revg. and remanding 126 F. Supp. 2d 1279 (N.D. Cal. 2000),
another case presenting a scenario nearly identical to the
instant case, the Court of Appeals for the Ninth Circuit followed
the holding of the Eighth Circuit in Simpson and held the
disputed transfer to the Bachler grandchildren was eligible for
relief from the GST tax under TRA 1986 section 1433(b)(2)(A).
The disputed transfer in Bachler occurred in 1997, and,
therefore, the Court of Appeals declined to address the validity
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of section 26.2601-1(b)(1)(i), GST Tax Regs. (discussed below),
which was not in effect until a later date.
III. Section 26.2601-1(b)(1)(i), GST Tax Regs.
We now turn to the regulation at issue in this case--a
regulation that was amended in response to the Eighth Circuit’s
decision in the Simpson case. Section 26.2601-1(b)(1)(i), GST
Tax Regs., originally was promulgated in 1995 and closely tracked
the language of TRA 1986 section 1433(b)(2)(A). The regulation
stated in pertinent part:
(b) Exceptions-(1) Irrevocable trusts-(i) In
general. The provisions of chapter 13 do not apply to
any generation-skipping transfer under a trust (as
defined in section 2652(b)) that was irrevocable on
September 25, 1985. The rule of the preceding sentence
does not apply to a pro rata portion of any generation-
skipping transfer under an irrevocable trust if
additions are made to the trust after September 25,
1985. * * *
See T.D. 8644, 1996-1 C.B. 200, 207.
In November 1999, several months after the Eighth Circuit
issued Simpson, the Secretary proposed to amend section 26.2601-
1(b)(1)(i), GST Tax Regs. See 64 Fed. Reg. 62997 (Nov. 18,
1999). The Treasury Department’s notice of proposed rulemaking
included a discussion and comparison of Peterson Marital Trust
and Simpson, and articulated the view that (1) there was no
substantive difference in the cases, and (2) Simpson was wrongly
decided. See id. at 62999. The proposed amendment was adopted
and promulgated in final form on December 20, 2000. See T.D.
8912, 2001-1 C.B. 452.
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Section 26.2601-1(b)(1)(i), GST Tax Regs., now states in
pertinent part:
(b) Exceptions. (1) Irrevocable trusts. (i) In
general. The provisions of chapter 13 do not apply to
any generation-skipping transfer under a trust (as
defined in section 2652(b)) that was irrevocable on
September 25, 1985. * * * Further, the rule in the
first sentence of this paragraph (b)(1)(i) does not
apply to a transfer of property pursuant to the
exercise, release, or lapse of a general power of
appointment that is treated as a taxable transfer under
chapter 11 or chapter 12. The transfer is made by the
person holding the power at the time the exercise,
release, or lapse of the power becomes effective, and
is not considered a transfer under a trust that was
irrevocable on September 25, 1985. * * *
In sum, section 26.2601-1(b)(1)(i), GST Tax Regs., recites the
general transitional rule set forth in TRA 1986 section
1433(b)(2)(A) and excepts from the rule a transfer of property
pursuant to the exercise, release, or lapse of a general power of
appointment if that transfer is treated as a taxable transfer by
the power holder for purposes of Federal estate or gift taxes.
Section 26.2601-1(c), GST Tax Regs., provides that the amended
portion of the regulation is applicable on and after November 18,
1999.5
IV. The Parties’ Positions
Petitioner relies on the Eighth and Ninth Circuit cases,
Simpson and Bachler, for the proposition that the plain and
unambiguous language of TRA 1986 section 1433(b)(2)(A) excepts
5
We note that decedent last amended and restated the
Eleanor Gerson Trust on Sept. 13, 2000, some 10 months after the
Secretary first proposed to amend the regulation in dispute.
- 20 -
the transfer in dispute from GST tax, inasmuch as decedent’s
exercise of her general power of appointment under the Benjamin
Gerson Trust in favor of her grandchildren constituted a
“generation-skipping transfer under a trust that was irrevocable
on September 25, 1985”. Petitioner maintains section 26.2601-
1(b)(1)(i), GST Tax Regs., is an invalid attempt by the Secretary
to “re-write the statute and to override the judicial
construction of the statute’s plain language”.6 As petitioner
sees it, TRA 1986 section 1433(b)(2)(A) was intended to protect
the reliance interest of a grantor of a trust that was
irrevocable on September 25, 1985--that is, Congress intended
such grantors could be assured any transfer from an irrevocable
trust would not be subjected to GST tax.
Respondent maintains section 26.2601-1(b)(1)(i), GST Tax
Regs., is a reasonable and valid interpretation of TRA 1986
section 1433(b)(2)(A). Respondent avers TRA 1986 section
1433(b)(2)(A) is silent regarding the proper treatment of
transfers from irrevocable trusts pursuant to the exercise of a
general power of appointment, and section 26.2601-1(b)(1)(i), GST
Tax Regs., reasonably fills the statutory gap. Relying on the
Second Circuit opinion in Peterson Marital Trust for the general
6
In connection with this point, petitioner contends TRA
1986 sec. 1433(b)(2)(A) was carefully drafted to except from the
GST tax any transfer under a trust that was irrevocable on Sept.
25, 1985, with one narrow exclusion for transfers made out of
corpus added to the trust after Sept. 25, 1985.
- 21 -
proposition the transitional relief provided in section
1433(b)(2) was intended to protect taxpayers who “relying on pre-
existing rules, made arrangements from which they could not
reasonably escape”, respondent asserts section 26.2601-
1(b)(1)(i), GST Tax Regs., is a reasonable interpretation of TRA
1986 section 1433(b)(2)(A). In respondent’s view, the regulation
correctly focuses on whether a generation-skipping transfer was
mandated under a trust that was irrevocable on September 25,
1985, not (as petitioner contends) on whether the trust was
irrevocable on September 25, 1985. Respondent reasons that,
because the disputed generation-skipping transfers in this case
were not required or mandated under the trust, but were made at
the decedent’s election and pursuant to the exercise of a general
power of appointment under which decedent was deemed to be the
owner of the property for purposes of the Federal estate tax, the
transfers are not eligible for exemption from the GST tax under
TRA 1986 section 1433(b)(2)(A).
V. Analysis
This case presents a question of first impression concerning
the validity of section 26.2601-1(b)(1)(i), GST Tax Regs. We
evaluate the validity of the regulation against the plain
language of TRA 1986 section 1433(b)(2)(A), its origin, and its
purpose. Our analysis is informed in part by caselaw
interpreting the statute. This case is appealable to the Court
of Appeals for the Sixth Circuit, which to our knowledge has not
- 22 -
had occasion to address TRA 1986 section 1433(b)(2)(A) or
regulations related thereto.
We note at the outset that the Secretary promulgated section
26.2601-1(b)(1)(i), GST Tax Regs., after the Commissioner
received an adverse decision from the Eighth Circuit in Simpson.
In Natl. Cable & Telecomm. Association v. Brand X Internet
Servs., 545 U.S. 967, ___, 125 S. Ct. 2688, 2700 (2005), the
Supreme Court stated:
A court’s prior judicial construction of a statute
trumps an agency construction otherwise entitled to
Chevron deference only if the prior court decision
holds that its construction follows from the
unambiguous terms of the statute and thus leaves no
room for agency discretion.
As previously discussed, the Eighth Circuit based its holding in
Simpson on the plain meaning of the phrase “transfer under a
trust” contained in TRA 1986 section 1433(b)(2)(A), whereas this
Court and the Second Circuit in Peterson Marital Trust held that
the same statute must be read in proper context. Where, as here,
the Secretary was confronted with what we consider conflicting
judicial constructions of TRA 1986 section 1433(b)(2)(A), we do
not believe the Supreme Court’s statement in Natl. Cable &
Telecomm. Association curtailed the Secretary’s discretion to
promulgate the regulation in dispute or mandates a holding in
this case that Simpson trumps the regulation in dispute.
Section 26.2601-1(b)(1)(i), GST Tax Regs., is a Federal
interpretative tax regulation promulgated under the general
- 23 -
authority vested in the Secretary by section 7805(a). Although
entitled to considerable weight, interpretative tax regulations
are accorded less deference than legislative regulations issued
under a specific grant of authority. See Chevron U.S.A., Inc. v.
Natural Res. Def. Council, Inc., 467 U.S. 837, 843-844 (1984);
United States v. Vogel Fertilizer Co., 455 U.S. 16, 24 (1982).
When this Court reviews an interpretative tax regulation, we
generally apply the analysis set forth by the Supreme Court in
Natl. Muffler Dealers Association v. United States, 440 U.S. 472(1979). Under Natl. Muffler Dealers Association, an
interpretative regulation is valid if it implements a
congressional mandate in a reasonable manner. Id. at 476-477;
see United States v. Vogel Fertilizer Co., supra at 24 (quoting
United States v. Correll, 389 U.S. 299, 307 (1967)). In Natl.
Muffler Dealers Association v. United States, supra at 477, the
Supreme Court stated:
In determining whether a particular regulation
carries out the congressional mandate in a proper
manner, we look to see whether the regulation
harmonizes with the plain language of the statute, its
origin, and its purpose. A regulation may have
particular force if it is a substantially
contemporaneous construction of the statute by those
presumed to have been aware of congressional intent.
If the regulation dates from a later period, the manner
in which it evolved merits inquiry. Other relevant
considerations are the length of time the regulation
has been in effect, the reliance placed on it, the
consistency of the Commissioner’s interpretation, and
the degree of scrutiny Congress has devoted to the
regulation during subsequent re-enactments of the
statute.
- 24 -
In Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc.,
supra, the Supreme Court enunciated the following two-part
analysis applicable to judicial review of an agency’s
construction of a statute:
When a court reviews an agency's construction of the
statute which it administers, it is confronted with two
questions. First, always, is the question whether
Congress has directly spoken to the precise question at
issue. If the intent of Congress is clear, that is the
end of the matter; for the court, as well as the
agency, must give effect to the unambiguously expressed
intent of Congress. If, however, the court determines
Congress has not directly addressed the precise
question at issue, the court does not simply impose its
own construction on the statute, as would be necessary
in the absence of an administrative interpretation.
Rather, if the statute is silent or ambiguous with
respect to the specific issue, the question for the
court is whether the agency's answer is based on a
permissible construction of the statute. [Chevron
U.S.A., Inc. v. Natural Resources Defense Council,
Inc., supra at 842-843; fn. refs. and citations
omitted.]
In the case before us, we conclude it is unnecessary to
attempt to discern any substantive difference between Natl.
Muffler Dealers Association and Chevron U.S.A., Inc. because we
conclude the result here would be the same under either standard.
See Swallows Holding, Ltd. v. Commissioner, 126 T.C. 96, 131
(2006).
In evaluating the validity of section 26.2601-1(b)(1)(i),
GST Tax Regs., we first consider whether Congress has directly
spoken to the precise question at issue. Inasmuch as TRA 1986
section 1433(b)(2)(A) does not define the phrase “transfer under
a trust”, we do not believe that Congress has directly spoken to
- 25 -
the precise question at issue here; i.e., the proper treatment
under the GST tax effective-date provisions of transfers effected
pursuant to the exercise, release, or lapse of a general power of
appointment. As previously discussed, the Eighth and Ninth
Circuits in Simpson and Bachler, respectively, have held the
plain language of TRA 1986 section 1433(b)(2)(A) excepts from GST
tax a generation-skipping transfer effected pursuant to the
exercise of a general power of appointment under a trust that was
irrevocable on September 25, 1985. We respectfully disagree with
the holdings in these two cases. Instead, we adhere to the view,
articulated by the Second Circuit in Peterson Marital Trust, that
the words of TRA 1986 section 1433(b)(2)(A) “can only be given
meaning in a particular context”. Peterson Marital Trust v.
Commissioner, 78 F.3d at 799.7 Consistent with Natl. Muffler
Dealers Association and Chevron U.S.A., Inc., we do not evaluate
the validity of section 26.2601-1(b)(1)(i), GST Tax Regs., by
examining the plain language of TRA 1986 section 1433(b)(2)(A) in
a vacuum--we also are obliged to consider the origin and purpose
of the statute.
Our review of the legislative history of TRA 1986 as it
pertains to the question presented reveals two matters that
warrant discussion. First, as we comprehend statements by the
Committee on Ways and Means (the Committee) in H. Rept. 99-426,
7
Cf. Greenpeace, Inc. v. Waste Techs. Indus., 9 F.3d 1174,
1179-1181 (6th Cir. 1993).
- 26 -
at 820, 1986-3 C.B. (Vol. 2) at 820, describing then-present law,
under the heading “Overview”, the Committee understood the GST
tax was imposed on a transfer from a trust which specifically
provided for distributions to a generation at least two
generations removed from the grantor. This viewpoint is
reiterated in H. Rept. 99-426, at 821, 1986-3 C.B. (Vol. 2) at
821, under the heading “Generation assignment”, which states in
pertinent part: “A generation-skipping trust is a trust having
two or more generations of ‘beneficiaries’ who belong to
generations which are ‘younger’ than the generation of the
grantor of the trust.” Significantly, nothing in the committee
reports suggests that, when Congress referred to “transfers under
a trust”, it ever contemplated or considered a volitional
generation-skipping transfer arising from the exercise of a
general power of appointment as opposed to a specific transfer by
the settlor to identified persons.
Second, in H. Rept. 99-426, supra at 824, 1986-3 C.B. (Vol.
2) at 824, the Committee stated, under the heading “Reasons for
Change”:
The committee believes, as it stated when the
generation-skipping transfer tax originally was enacted
in 1976, that the purpose of the three transfer taxes
(gift, estate, and generation-skipping) is not only to
raise revenue, but also to do so in a manner that has
as nearly as possible a uniform effect. This policy is
best served when transfer tax consequences do not vary
widely depending on whether property is transferred
outright to immediately succeeding generations or is
transferred in ways that skip generations. * * * The
bill accomplishes the committee’s goal of simplified
- 27 -
administration while ensuring that transfers having a
similar substantial effect will be subject to tax in a
similar manner. [Emphasis added.]
To paraphrase, the Committee expressed its intention that (1)
Federal transfer taxes generally should be applied as uniformly
as possible, and (2) generation-skipping transfers having a
similar substantial effect should be taxed in a similar manner.
In Peterson Marital Trust v. Commissioner, 98 F.3d at 800,
the Second Circuit concluded the regulation in dispute therein
was a reasonable interpretation of TRA 1986 section 1433(b)(2)(A)
because the regulation ensured that general powers of appointment
would be treated consistently; i.e., treated as outright
ownership of the property for purposes of all Federal transfer
taxes, which harmonized with the origin and purpose of the
statute.
Section 26.2601-1(b)(1)(i), GST Tax Regs., harmonizes with
the origin and purpose of TRA 1986 section 1433(b)(2)(A) and
achieves the consistency and uniformity Congress sought. By
excluding transfers arising from the exercise of a general power
of appointment from the transitional relief provided in TRA 1986
section 1433(b)(2)(A) for “transfers under a trust”, the
regulation ensures that general powers of appointment are
uniformly treated as the equivalent of outright ownership by the
power holder. In other words, the regulation is consistent with
the general proposition under the GST tax regime that a decedent
who dies holding a general power of appointment over property is
- 28 -
treated as the “transferor” of that property for purposes of GST
tax. Secs. 2603(a)(3), 2652(a)(1); 5 Bittker & Lokken, Federal
Taxation of Income, Estates & Gifts, par. 133.2.2 at 133-6 to
133-7 (2d ed. 1993). The regulation also promotes uniformity by
ensuring that generation-skipping transfers arising from the
lapse of a power of appointment on the one hand, and generation-
skipping transfers arising from the exercise of a power of
appointment on the other, are taxed in a similar manner.8
We also must not lose sight of the particular purpose of the
statute. As the Second Circuit discussed in Peterson Marital
Trust v. Commissioner, 78 F.3d at 801-802 n.6, the transitional
rules set forth in section 1433(b)(2) are so-called grandfather
provisions designed to protect taxpayers who, on the basis of
pre-existing rules, made estate-planning arrangements from which
they could not reasonably escape and which would otherwise
generate GST tax liability. The generation-skipping transfers in
the present case are not transfers the transitional rules were
8
In Simpson v. United States, 183 F.3d 812, 815-816 (8th
Cir. 1999), the Court of Appeals for the Eighth Circuit
distinguished Peterson Marital Trust v. Commissioner, 78 F.3d 795(2d Cir. 1996), in part because the latter case concerned a lapse
of a power of appointment, which was treated as resulting in a
constructive addition to the trust. Considering that the holder
of general power of appointment is treated as having the same
outright “ownership” interest for purposes of Federal transfer
taxes, see secs. 2041 (estate tax), 2514(b) (gift tax), we fail
to see any meaningful difference for present purposes whether in
the end there is a lapse, exercise, or release of the power. See
Harrington et al., Generation Skipping Transfer Tax, par.
7.03[5][b][i] (2d ed. 2001) (questioning the Eighth Circuit’s
attempt at distinguishing Peterson Marital Trust).
- 29 -
intended to protect. Mr. Gerson did not structure his
irrevocable trust in a manner that tied the hands of his heirs,
nor was decedent required to make the disputed generation-
skipping transfers. To the contrary, Mr. Gerson gave the
decedent the flexibility to transfer trust property to anyone of
her choosing. Decedent, who was aware or should have been aware
of the regulation in dispute, nevertheless exercised her general
power of appointment to effect a generation-skipping transfer.
Considering all the factors discussed above, we hold section
26.2601-1(b)(1)(i), GST Tax Regs., is a reasonable and valid
interpretation of the plain language of TRA 1986 section
1433(b)(2)(A). The regulation harmonizes with the plain language
of the statute, its origin, and its purpose. Natl. Muffler
Dealers Association v. United States, 440 U.S. at 477.
Accordingly, we sustain respondent’s determination that
decedent’s transfer to her grandchildren was subject to GST tax.
To reflect the foregoing,
Decision will be
entered for respondent.
Reviewed by the Court.
COHEN, SWIFT, HALPERN, THORNTON, GOEKE, and KROUPA,
JJ., agree with this majority opinion.
CHIECHI, J., concurs in result only.
FOLEY, J., did not participate in the consideration of this
opinion.
- 30 -
SWIFT, J., concurring: The majority opinion is too
circumspect in discussing the erroneous interpretations of
section 1433(b)(2)(A) of the Tax Reform Act of 1986 (TRA 1986),
Pub. L. 99-514, 100 Stat. 2731, by the Courts of Appeals in
Simpson v. United States, 183 F.3d 812 (8th Cir. 1999), and in
Bachler v. United States, 281 F.3d 1078 (9th Cir. 2002).
In the above opinions, the Courts of Appeals for the Eighth
and Ninth Circuits make at least two serious mistakes: (1) They
merge and confuse the relevant transfers that are to be
considered under the grandfather exception of section
1433(b)(2)(A); and (2) they improperly distinguish and limit
Peterson Marital Trust v. Commissioner, 78 F.3d 795 (2d Cir.
1996), affg. 102 T.C. 790 (1994).
(1) The Relevant Transfers
The Court of Appeals for the Eighth Circuit in Simpson v.
United States, supra at 813, begins its analysis by correctly
stating that --
the general rule [of section 1433] * * * would apply
[the GST tax] to any transfer taking place after the
enactment of the statute * * * .
In the very next paragraph of its opinion, however, the
Court of Appeals merges the transfer that took place in that case
after September 25, 1985, with the earlier transfer that took
place therein in 1966 when the trust was created and the corpus
was transferred to the trust. The opinion states –-
- 31 -
The power of appointment that made the [post-September
25, 1985] transfer possible was created by the trust.
Language has to mean something, and the argument that
[the post-September 25,1985, transfer] * * * was not
“under” [the trust] * * * is simply untenable. [Id. at
814.]
Certainly, in Simpson the creation of the trust in 1966 made
“possible” the later, actual transfer that occurred in 1993. But
the “possibility” in 1966 of a later transfer and the “fact” of
the transfer in 1993 are two different things. In their
analyses, the Courts of Appeals for the Eighth and Ninth Circuits
seem erroneously to merge the creation of the possibility of a
transfer to grandchildren (via a transfer to a surviving spouse
of a general power of appointment) with the fact of a later,
actual transfer to grandchildren, as if they constituted the same
transfer.
In both Simpson and in Bachler the surviving spouse’s
testamentary exercise of a general power of appointment, and
thereby the post-September 25, 1985, skip transfers to
grandchildren, were “made possible under” the trusts, but the
skip transfers did not “occur under” the trusts. They occurred
under the general power of appointment given to the surviving
spouse by the trust creator, the predeceased husband. Under that
general power of appointment, the surviving spouse need not have
made skip transfers and could have transferred the property to
anyone she wished.
- 32 -
The only relevant transfer of property that occurred “under”
the trust was effectively made to the surviving spouse upon
creation of the trust and the grant to her of a general power of
appointment. Thereafter, the surviving spouse made a separate,
independent, discretionary, and subsequent skip transfer of
property to grandchildren, which transfer was made and occurred
under the general power of appointment, not under the trust.
Under a proper understanding of TRA 1986 section
1433(b)(2)(A) of the general power of appointment transferred to
Mrs. Gerson, and of the property transfer that occurred when Mrs.
Gerson exercised her general power of appointment, the result
reached by the majority herein is correct and should be reached
even if the regulations at issue had never been promulgated.
(2) The Second Circuit’s Opinion in Peterson Marital Trust
In Peterson Marital Trust v. Commissioner, supra, the Court
of Appeals for the Second Circuit held that the mere lapse of a
general power of appointment held by a surviving spouse and the
resulting transfer of property to a skip generation triggered a
post-September 25, 1985, taxable generation-skipping transfer.
If the mere lapse of a general power of appointment triggers a
taxable generation-skipping transfer of property, certainly it
should follow that the affirmative exercise of a general power of
- 33 -
appointment in favor of a skip generation triggers a taxable
generation-skipping transfer of property.
Rather than distinguishable, as the Courts of Appeals for
the Eighth and Ninth Circuits concluded, see Simpson v. United
States, 183 F.3d at 815; Bachler v. United States, 281 F.3d at
1080, the post-September 25, 1985, exercise of general powers of
appointment that were involved in Simpson and in Bachler are more
egregious, or rather, are more obvious post-September 25, 1985,
independent and discretionary transfers of property subject to
the GST tax than was the deemed transfer involved in Peterson
Marital Trust v. Commissioner, 78 F.3d 795 (2d Cir. 1996).
Accordingly, the transfer that occurred in this case (and in
Simpson and in Bachler) would appear to be a clearer case for
application of the GST tax than the transfer in Peterson Marital
Trust, since the surviving spouse herein affirmatively made a
generation-skipping transfer, while the spouse in Peterson
Marital Trust did so only by default. See Harrington & Acker,
Estates, Gifts, and Trusts: Generation Skipping Tax, 850 Tax
Mgmt. (BNA), A-73 (2002).
The interpretations of TRA 1986 section 1433(b)(2)(A) that
are reflected in the Peterson Marital Trust opinions of this
Court and of the U.S. Court of Appeals for the Second Circuit,
that are reflected in the various versions of Treasury
regulations that have been promulgated over the years, and also
- 34 -
the interpretation reflected in the majority opinion herein, are
consistent and uniform. Under those interpretations, post-
September 25, 1985, exercises of general powers of appointment in
favor of skip donees do not qualify for the TRA 1986 section
1433(b)(2)(A) grandfather provision, and they trigger the GST
tax.
Peterson Marital Trust is not distinguishable and supports
the majority’s opinion herein.
Respectfully, in the above two respects the United States
Courts of Appeals for the Eighth and the Ninth Circuits in
Simpson and in Bachler erred in their analyses of TRA 1986
section 1433(b)(2)(A).
A few concluding comments are appropriate. It has been
recently suggested that the Secretary and respondent are misusing
their administrative regulatory authority to “bootstrap” (Judge
Laro’s dissent, infra p. 50 note 1) or overcome a “failed
litigating position” (Swallows Holding v. Commissioner, 126 T.C.
96, 148 (2006)). In my opinion, these suggestions are
inappropriate and incorrect.
Under section 7805(a), Congress has given the Secretary and
respondent important authority and responsibility to assist in
the administration of our Federal income tax laws through the
promulgation of regulations. The suggestion that the Secretary
and respondent are somehow misusing this authority and
responsibility undermines their important role in this regard.
- 35 -
Also, the suggestion calling into question the Secretary’s
and respondent’s motive in promulgating the particular regulation
involved herein is inaccurate, as was the similar suggestion in
Swallows Holding v. Commissioner, supra at 136, 138, 147-148.
Section 26.2601-1(b)(1)(i), GST Tax Regs., was promulgated in
2000, T.D. 8912, 2001-1 C.B. 452, after respondent’s
interpretation of the statutory transition rule of section
1433(b)(2)(A) had been accepted by the Court of Appeals for the
Second Circuit in Peterson Marital Trust v. Commissioner, 78 F.3d
795 (1996), by two District Courts in Bachler v. United States,
126 F. Supp. 2d 1279 (N.D. Cal. 2000), and Simpson v. United
States, 17 F. Supp. 2d 972 (W.D. Mo. 1998), and by this Court in
Peterson Marital Trust v. Commissioner, 102 T.C. 790 (1994).
By December of 2000, when the regulation at issue herein was
promulgated, respondent’s interpretation of the statutory
transition rule of TRA 1986 section 1433(b)(2)(A) had been
rejected by the Court of Appeals for the Eighth Circuit in
Simpson v. United States, 183 F.3d 812 (8th Cir. 1999). However,
in light of the above four Federal court opinions that had
adopted respondent’s statutory interpretation, it is an
overstatement and simply not correct to suggest that the
Secretary’s regulation bootstrapped a failed litigating position.
With the responsibility for tax administration and with the
authority and responsibility under section 7805(a) to provide
- 36 -
rules and regulations relating to our Federal tax laws, what are
the Secretary and respondent supposed to do? When the Federal
courts disagree as to the proper interpretation of tax law, is
the regulatory authority placed on hold? Must the public and the
tax administrator await an ultimate resolution of the issue by
the courts? What if the Federal courts remain in conflict,
without an ultimate resolution of an issue? Is the tax law, in
such a situation, to be interpreted differently in different
judicial districts? Are taxpayers to be treated differently?1
The Supreme Court recently addressed these concerns in Natl.
Cable & Telecomm. Association v. Brand X Internet Servs., 545
U.S. 967, 125 S. Ct. 2688 (2005). Therein, the Supreme Court
made it clear that the regulatory authority of Federal agencies
remains viable and in play even in the face of pending litigation
and decided court cases. The Supreme Court explained:
Yet allowing a judicial precedent to foreclose an
agency from interpreting an ambiguous statute * * *
would allow a court’s interpretation to override an
agency’s. Chevron’s premise is that it is for agencies,
not courts, to fill statutory gaps. * * * Only a
judicial precedent holding that the statute
unambiguously forecloses the agency’s interpretation,
and therefore contains no gap for the agency to fill,
displaces a conflicting agency construction.
* * * * * * *
1
Court conflicts over the proper interpretation of
statutory language provide perhaps the best evidence that the
statutory language subject to the conflicting interpretations is
ambiguous.
- 37 -
Yet whether Congress has delegated to an agency the
authority to interpret a statute does not depend on the
order in which the judicial and administrative
constructions occur. The Court of Appeals’ rule
[holding that stare decisis required a court to apply a
judicial construction rather than a previously existing
agency construction], moreover, would “lead to the
ossification of large portions of our statutory law,”
by precluding agencies from revising unwise judicial
constructions of ambiguous statutes. Neither Chevron
nor the doctrine of stare decisis requires these
haphazard results. [Id. at , 125 S. Ct. at 2701-
2702; citation omitted.]
For the reasons stated, I respectfully concur.
WELLS and HOLMES, JJ., agree with this concurring opinion.
- 38 -
THORNTON, J., concurring: Under the subject transitional
rule, a generation-skipping transfer escapes the effects of the
1986 amendments to the generation-skipping transfer (GST) tax if
it is a “generation-skipping transfer under a trust which was
irrevocable on September 25, 1985”. See Tax Reform Act of 1986,
Pub. L. 99-514, sec. 1433(b)(2)(A), 100 Stat. 2731. This
language has been interpreted as referring: (1) Narrowly to a
generation-skipping transfer that is pursuant to the terms of the
trust agreement; and (2) more broadly, to any generation-skipping
transfer that is made possible under the terms of the trust
agreement, for instance, through the exercise of a general power
of appointment pursuant to the trust agreement. The disputed
regulations and the majority opinion endorse the first reading.
Two Courts of Appeals have endorsed the second reading. Bachler
v. United States, 281 F.3d 1078 (9th Cir. 2002); Simpson v.
United States, 183 F.3d 812 (8th Cir. 1999). For the reasons
discussed below, I believe the disputed regulations and the
majority report are correct.
The “cardinal rule” of statutory construction requires us
“to give effect, if possible, to every clause and word of a
statute.” United States v. Menasche, 348 U.S. 528, 538-539
(1955) (internal quotations omitted). In parsing the
transitional rule, Bachler and Simpson went astray by failing to
give effect to the modifying language “generation-skipping” that
- 39 -
immediately precedes “transfer under a trust”. In Simpson, for
instance, the appeals court reasoned that because the exercise of
a general power of appointment was made possible by the trust,
and the transfer was “under” the trust, the generation-skipping
transfer effected by the power’s exercise qualified under the
transitional rule. Simpson v. United States, supra at 814;
accord Bachler v. United States, supra. Under this construction,
however, the modifying language “generation-skipping” has no
significant effect. Inasmuch as neither the GST tax nor the
transitional rule has any application to any type of transfer
other than a generation-skipping transfer, the modifying language
“generation-skipping” is unnecessary and superfluous if it serves
merely to label the type of transfer eligible for transitional
relief. Yet, under the reading adopted by Simpson and Bachler,
the language appears to serve no other function.
To have significant purpose and effect, the modifying
language “generation-skipping” is properly construed, I believe,
as limiting transitional relief to a generation-skipping transfer
that is pursuant to the terms of the trust agreement; i.e., to a
transfer that is, just as the statute says, “a generation-
skipping transfer under a trust”. A generation-skipping transfer
that results from the power holder’s exercise of a general power
of appointment under a trust agreement is not a “generation-
skipping transfer under a trust” within the meaning of the
- 40 -
transitional rule. Because this conclusion, based partly on the
arcana of the GST tax, may not be immediately obvious, some
background is in order.
The GST tax applies to three forms of transfers (direct
skips, taxable terminations, and taxable distributions) for the
benefit of a “skip person”, defined generally as a person at
least two generations younger than the “transferor”. Secs.
2611(a), 2613. See generally Bittker & Lokken, Federal Taxation
of Income, Estates & Gifts, par. 133.2.1, at s133-2 (Supp. 2006).
For purposes of the GST tax, the “transferor” is the individual
“with respect to whom property was most recently subject to
Federal estate or gift tax.” Sec. 26.2652-1(a)(1), GST Tax Regs.
Pursuant to section 2652(a)(1), “An individual shall be treated
as transferring any property with respect to which such
individual is the transferor.” Thus, a generation-skipping
transfer that is effected through a trust arrangement does not
necessarily occur upon the creation of the trust. Rather, the
generation-skipping transfer occurs when the property passing to
the skip person becomes subject to Federal estate or gift tax
with respect to the transferor.
In the case of property subject to the Federal estate tax,
the “transferor” is the decedent. Sec. 2652(a)(1). Regardless
of who the initial “transferor” of property might have been, if
the property is subsequently included in the gross estate of
- 41 -
another person, that person is substituted for the “transferor”.
See Bittker & Lokken, supra par. 133.2.2. Under section 2041, if
a decedent holds a general power of appointment, the property
subject to the power is included in the decedent’s gross estate.
Consequently, for GST tax purposes the holder of such a power is
the transferor of the property.1 See Peterson Marital Trust v.
Commissioner, 102 T.C. 790, 794, 805 (1994), affd. 78 F.3d 795(2d Cir. 1996).
In the instant case, the appointive property under Mrs.
Gerson’s general power of appointment was includable in her gross
estate pursuant to section 2041. Consequently, for GST tax
purposes, she was the “transferor” of this property. Under
section 2652(a), she (and not the grantor of the trust, Mr.
Gerson) is treated as transferring this property.2 Thus,
notwithstanding that Mrs. Gerson’s power of appointment arose
1
By contrast, if a decedent holds a nongeneral power of
appointment (i.e., a limited or special power of appointment),
the appointive property is not taxable under sec. 2041. See
Bittker & Lokken, Federal Taxation of Income, Estates & Gifts,
par. 128.1, at 128-5 (2d ed. 1993). Consequently, in the case of
property passing pursuant to a nongeneral power of appointment,
the power holder would not be the “transferor” for purposes of
the GST tax.
2
Consistent with this view, there appears to be no dispute
that the relevant generation-skipping transfer is the “direct
skip” from Mrs. Gerson to her grandchildren, rather than any
“taxable distribution” from the trust. As the majority opinion
states, majority op. p. 6, “The parties do not dispute that a
transfer from decedent [Mrs. Gerson] directly to her
grandchildren, skipping over decedent’s children, normally would
be subject to GST.”
- 42 -
under the trust or might be said to have been exercised “under”
the trust, the resulting generation-skipping transfer is treated
as being directly from her to her grandchildren. Consequently,
it was not a “generation-skipping transfer under a trust” within
the meaning of the transitional rule.
Sound policy considerations support this result. For
Federal estate tax purposes, a general power of appointment is
tantamount to outright ownership of the property to which the
power relates. See Morgan v. Commissioner, 309 U.S. 78, 81
(1940); Estate of Kurz v. Commissioner, 101 T.C. 44, 50-51
(1993).3 Because the holder of a general power of appointment has
“effective control over the disposition of the property”, the
power holder has the ability to avoid a generation-skipping
transfer. Peterson Marital Trust v. Commissioner, supra at 800.
Consequently, the power holder has no legitimate expectation of
immunity from the 1986 GST tax amendments that might otherwise
apply to generation-skipping transfers resulting from exercise of
the power. The purpose of the transitional rule would not be
served by providing transitional relief in these circumstances.
3
In this regard, the Federal estate tax rules depart from
the traditional common law view, under which the donee was often
likened to an agent or trustee for the donor. Under the common-
law “relation-back theory”, the appointive property was generally
thought of as passing directly from the donor to the appointee or
the takers in default. See Bittker & Lokken, Federal Taxation of
Income, Estates & Gifts, par. 128.1, at 128-3 (2d ed. 1993).
- 43 -
The disputed regulations are consistent with Peterson
Marital Trust v. Commissioner, supra, and provide like results
for generation-skipping transfers arising from the exercise of
general powers of appointment and generation-skipping transfers
arising from lapses of general powers of appointment. This
result properly recognizes that there is no substantive
difference between these types of generation-skipping transfers.
As memorialized by the Staff of the Joint Committee on
Taxation in the General Explanation of the Tax Reform Act of 1986
(J. Comm. Print 1987) (the General Explanation), contemporaneous
Congressional colloquies indicate that the principal architects
of the transitional rule understood it to apply to the exercise
of a limited power of appointment under an otherwise
grandfathered trust, provided that the exercise of the limited
power did not unduly extend the time for the vesting of any
beneficial interest in the trust.4 From these statements, one may
4
The General Explanation states:
The new generation-skipping transfer tax does not
apply to the exercise of a limited power of appointment
under an otherwise grandfathered trust or to trusts to
which the trust property is appointed provided such
exercise cannot postpone vesting of any estate or
interest in the trust property for a period
ascertainable without regard to the date of the
creation of the trust. [Staff of Jt. Comm. on Taxation,
General Explanation of the Tax Reform Act of 1986, at
1267 n.12 (J. Comm. Print 1987).]
As authority for this statement, the General Explanation
cites substantively identical colloquies involving the Chairman
(continued...)
- 44 -
draw two negative inferences: First, that the transitional rule
was not meant to apply to a limited power of appointment that ran
afoul of the vesting requirements; and second, and of more
relevance here, that the transitional rule was not meant to apply
to the exercise of a general power of appointment under an
otherwise grandfathered trust.
In short, giving effect to all its terms and considering its
origin and purpose, the transitional rule has a meaning
sufficiently plain as to erase any doubt as to the validity of
the disputed regulations.5 Insofar as the statute might be
thought to be ambiguous, to that extent it might be said to have
4
(...continued)
and Ranking Member of the Senate Committee on Finance and the
Chairman of the House Committee on Ways and Means. See 132 Cong.
Rec. S13952 (daily ed. Sept. 26, 1986) (colloquy between Senate
Committee on Finance Chairman Packwood and the ranking Member
Sen. Bentsen); 132 Cong. Rec. H8362 (daily ed. Sept. 25, 1986)
(colloquy between House Committee on Ways and Means Chairman
Rostenkowski and House Committee on Ways and Means Member Rep.
Andrews).
5
I agree with the conclusion, see majority op. p. 22, that
the Supreme Court’s statement in Natl. Cable & Telecomm.
Association v. Brand X Internet Servs., 545 U.S. 967 (2005),
regarding the circumstances in which a “prior judicial
construction” might trump an “agency construction otherwise
entitled to Chevron deference”, does not compel us to hold that
the disputed regulations are invalid in the wake of Simpson v.
United States, 183 F.3d 812 (8th Cir. 1999), or Bachler v. United
States, 281 F.3d 1078 (2002). Under the rule of Golsen v.
Commissioner, 54 T.C. 742, 757 (1970), affd. 445 F.2d 985 (10th
Cir. 1971), this Court is not required to follow Simpson and
Bachler in this case, which is not appealable to either of the
circuits in which those cases arose. In any event, Simpson and
Bachler did not address the validity of the disputed regulations.
- 45 -
left room for the Secretary to exercise his discretion in
promulgating the disputed regulations, which for the reasons
discussed above are based on a “permissible construction of the
statute”. Chevron U.S.A., Inc. v. Natural Res. Def. Council, 467
U.S. 837, 843 (1984).
COHEN, SWIFT, WELLS, MARVEL, GOEKE, KROUPA, and HOLMES, JJ.,
agree with this concurring opinion.
- 46 -
HOLMES, J., concurring: The issue before the court is
simply this--is the regulation a reasonable interpretation of the
statute? I concur with the result that the majority reaches and
with their analysis of the disputed regulation’s validity under
National Muffler.1
I write separately because the Sixth Circuit--the circuit to
which any appeal of this case is headed--has expressly adopted
Chevron2 deference for tax regulations, like the one here, that
are issued under section 7805's general authority.3 In Swallows,4
the Court aired its differences on deference under National
Muffler versus deference under Chevron. Swallows is now on
appeal, but I recognize that the majority is constrained to use
National Muffler review unless there would be a practical
certainty of reversal. See Golsen v. Commissioner, 54 T.C. 742,
757 (1970), affd. 445 F.2d 985 (10th Cir. 1971). That practical
certainty isn’t present here because, as is usually the case,
whether a regulation is valid doesn’t depend on the standard:
1
Natl. Muffler Dealers Assn. v. United States, 440 U.S.
472 (1979).
2
Chevron U.S.A., Inc., v. Natural Res. Def. Council, Inc.,
467 U.S. 837 (1984).
3
See Hosp. Corp. of Am. & Subs. v. Commissioner, 107 T.C.
73 (1996), affd. 348 F.3d 136, 140-141 (6th Cir. 2003); Peoples
Fed. Sav. & Loan Assn. v. Commissioner, T.C. Memo. 1990-129,
revd. 948 F.2d 289, 299-300 (6th Cir. 1991).
4
Swallows Holding, Ltd. v. Commissioner, 126 T.C. 96, on
appeal (3d Cir., filed July 5, 2006).
- 47 -
the top-to-bottom review we have found required by National
Muffler and the two-part test of Chevron will usually lead to the
same result.5
Under both these standards, we start by deciding whether the
words of section 1433(b)(2)(A) have a plain meaning. As the
Supreme Court described step one of the analysis in Chevron, “If
the intent of Congress is clear, that is the end of the matter;
for the court, as well as the agency, must give effect to the
unambiguously expressed intent of Congress.” Chevron, 467 U.S.
at 842-43. As I noted in Swallows, 126 T.C. at 164 n.7 (Holmes,
J., dissenting), there is a controversy over whether courts
should only look to the text and structure of the statute in
deciding whether a statute is ambiguous, Natl. R.R. Passenger
Corp. v. Boston & Me. Corp., 503 U.S. 407, 417 (1992) (citations
omitted), or whether they should also investigate the legislative
history in this first step, Chevron, 467 U.S. at 842-843.6
However, that controversy isn’t relevant to this case: The
majority opinion and the carefully drawn concurrences of Judges
Swift and Thornton show the ambiguity of the phrase “generation-
skipping transfer under a trust,” and Judge Thornton’s shows as
5
See Swallows, 126 T.C. at 173-174 (Holmes, J.,
dissenting).
6
The Sixth Circuit does look at legislative history in step
one. See Hospital Corp., 348 F.3d at 143; Peoples Federal S&L,
948 F.2d at 299.
- 48 -
well that the legislative history--such as it is--reveals that
the overall purpose of the transition provision was to ratify
only unavoidable generation-skipping transfers.
There is not, then, an “unambiguously expressed intent” to
the contrary. I readily admit that the dissent’s construction,
following Bachler and Simpson, is reasonable too. But, as the
Sixth Circuit noted in Peoples Federal S&L, “there may be several
permissible constructions. If there are gaps left by silence or
ambiguity of the statutes in question, agencies may fill the gaps
with necessary rules, providing they are reasonable, and courts
should not interfere with this process.” 948 F.2d at 300.
And reasonableness is all that’s required in step two of
Chevron. In gift and estate tax law, the IRS has for years
consistently treated a general power of appointment as equivalent
to ownership. See Estate of Kurz v. Commissioner, 101 T.C. 44(1993), supplemented and reconsideration denied T.C. Memo. 1994-
221, affd. 68 F.3d 1027 (7th Cir. 1995). Because the holder of a
general power controls the ultimate disposition of trust
property, that property is includable in the gross estate for
estate tax purposes, section 2041, and the transfer of property
by the exercise or release of the power is deemed a transfer by
the person in possession of the power, section 2514(b). In
- 49 -
Peterson,7 moreover, the Second Circuit agreed with us (even in
the absence of the regulation at issue today) that it was
reasonable to regard the lapse of a general power as a
constructive addition to the trust that created it. It is just
as reasonable to treat all generation-skipping uses--whether a
lapse or transfer or some other exercise--of a general power
alike. Doing so eliminates the distinctions created in Simpson
and Bachler between the taxability of a general power’s exercise,
and the taxability of its lapse. It also conforms the transition
provision to a commonsense reading of section 1433(b)(2)(A) as
protecting generation-skipping transfers only where the tax could
not have otherwise been avoided.
Is section 26.2601-1(b)(1)(i), GST Tax Regs., the best
interpretation of the statute? That isn’t for us to decide. Our
task is simply to determine if the regulation is a reasonable
interpretation of the exemption’s applicability to the holder of
a general power under an irrevocable generation-skipping trust.
This regulation is.
SWIFT, J., agrees with this concurring opinion.
7
Peterson Marital Trust v. Commissioner, 102 T.C. 790(1994), affd. 78 F.3d 795 (2d Cir. 1996).
- 50 -
LARO, J., dissenting: The Court’s opinion concludes supra
p. 29 that respondent’s interpretation of section 1433(b)(2)(A)
of the Tax Reform Act of 1986 (TRA 1986), Pub. L. 99-514, 100
Stat. 2731, “is a reasonable and valid interpretation of the
plain language of TRA 1986 section 1433(b)(2)(A)”. Because I
disagree, I dissent.1 As the Courts of Appeals for the Eighth and
Ninth Circuits held in Simpson v. United States, 183 F.3d 812(8th Cir. 1999), and Bachler v. United States, 281 F.3d 1078 (9th
Cir. 2002), factual settings that the Court’s opinion supra pp.
15 and 17 acknowledges are “nearly identical” to the factual
setting at hand, the plain reading of TRA 1986 section
1433(b)(2)(A) leads to a conclusion contrary to that expressed in
the Court’s opinion. The conclusion in the Court’s opinion is
1
Following a prior judicial decision rejecting respondent’s
interpretation of TRA 1986 sec. 1433(b)(2)(A) as inconsistent
with the plain reading of that section, respondent caused his
interpretation to be prescribed in sec. 26.2601-1(b)(1)(i), GST
Tax Regs. The Court’s opinion supra p. 21 frames this case as “a
question of first impression concerning the validity of section
26.2601-1(b)(1)(i), GST Tax Regs.” I view this case differently.
In a case such as this, where the question involves an
“interpretation of the plain language” of a statute, respondent’s
interpretation of that language is not entitled to any greater
respect simply because respondent has bootstrapped his
interpretation by causing it to be prescribed in a regulation.
The judiciary, and not respondent (or the Secretary), is the
final authority on the plain meaning of a statute. See Rubin v.
United States, 449 U.S. 424, 430 (1981); Volkswagenwerk v. FMC,
390 U.S. 261, 272 (1968); FTC v. Colgate-Palmolive Co., 380 U.S.
374, 385 (1965). While Natl. Cable & Telecomm. Association v.
Brand X Internet Servs., 545 U.S. 967 (2005), allows an agency in
certain cases to overrule an adverse judicial interpretation
through the issuance of regulations, that case is inapplicable
where, as here, the judicial interpretation follows from the
unambiguous terms of the statute.
- 51 -
predicated on its finding that respondent’s interpretation is “a
reasonable * * * interpretation of the plain language” of TRA
1986 section 1433(b)(2)(A), as opposed to a finding, which the
Court’s opinion does not make, that respondent’s interpretation
represents the plain reading of TRA 1986 section 1433(b)(2)(A).
To my mind, an unambiguous statute has only a single plain
reading, see Chickasaw Nation v. United States, 534 U.S. 84, 94
(2001), and any other reading is ultra vires even if it is
“reasonable”.2 Such is especially so where, as here, respondent’s
2
I disagree with the Court’s opinion’s conclusion supra pp.
24-25 that “Congress has [not] directly spoken to the precise
question at issue” “Inasmuch as TRA 1986 section 1433(b)(2)(A)
does not define the phrase ‘transfer under a trust’”. Congress
has spoken directly on this issue in the best way that it can;
i.e., by providing in unambiguous terms that the generation-
skipping tax (GST) “shall not apply to * * * any generation-
skipping transfer under a trust which was irrevocable on
September 25, 1985”. TRA 1986 sec. 1433(b)(2)(A) (emphasis
added); see HUD v. Rucker, 535 U.S. 125, 131 (2002) (“As we have
explained, ‘the word “any” has an expansive meaning, that is,
“one or some indiscriminately of whatever kind’” (quoting United
States v. Gonzales, 520 U.S. 1, 5 (1997))); United States v. Am.
Trucking Associations, Inc., 310 U.S. 534, 543 (1940) (“There is,
of course, no more persuasive evidence of the purpose of a
statute than the words by which the legislature undertook to give
expression to its wishes.”); see also United States v. Monsanto,
491 U.S. 600, 606-609 (1989); D.J. Lee, M.D., Inc. v.
Commissioner, 931 F.2d 418, 420 (6th Cir. 1991), affg. 92 T.C.
291 (1989); Cornett-Lewis Coal Co. v. Commissioner, 141 F.2d
1000, 1004 (6th Cir. 1944), revg. and remanding 47 B.T.A. 571(1942). I know no rule of law, nor has the Court’s opinion
referenced any such rule, that states that a term is ambiguous
simply because it is not defined by Congress. The Supreme Court
has “stated time and again that courts must presume that a
legislature says in a statute what it means and means in a
statute what it says there. * * * When the statutory language
is plain, the sole function of the courts--at least where the
(continued...)
- 52 -
interpretation was previously rejected by a judicial tribunal in
favor of the plain reading application of that section.
TRA 1986 section 1433(b)(2)(A) provides in relevant part
that the GST does not apply to “any generation-skipping transfer
under a trust which was irrevocable on September 25, 1985, but
only to the extent that such transfer is not made out of corpus
added to the trust after September 25, 1985”.3 As noted in the
Court’s opinion supra pp. 7 and 17-18, the Secretary proposed
section 26.2601-1(b)(1)(i), GST Tax Regs., in 1999, 13 years
after the enactment of TRA 1986 section 1433(b)(2)(A), to
supplant the literal interpretation that the Secretary had given
TRA 1986 section 1433(b)(2)(A) in a predecessor regulation and,
more particularly, to overrule the judiciary’s rejection in
Simpson v. United States, supra, of respondent’s more restrictive
interpretation of TRA 1986 section 1433(b)(2)(A). As finalized,
2
(...continued)
disposition required by the text is not absurd--is to enforce it
according to its terms.” Arlington Cent. Sch. Dist. Bd. of Educ.
v. Murphy, 548 U.S. , 126 S.Ct. 2455, 2459 (2006) (citations
and internal quotation marks omitted).
3
As I read TRA 1986 sec. 1433(b)(2)(A), Congress included
within that section both a general rule and an exception thereto.
The general rule provides that the GST does not apply to “any
generation-skipping transfer under a trust which was irrevocable
on September 25, 1985”. The exception provides that the general
rule applies “only to the extent that such transfer is not made
out of corpus added to the trust after September 25, 1985”.
- 53 -
section 26.2601-1(b)(1)(i), GST Tax Regs., states in relevant
part:
The provisions of chapter 13 do not apply to any
generation-skipping transfer under a trust (as defined
in section 2652(b)) that was irrevocable on September
25, 1985. * * * Further, the rule in the first
sentence of this paragraph (b)(1)(i) does not apply to
a transfer of property pursuant to the exercise,
release, or lapse of a general power of appointment
that is treated as a taxable transfer under chapter 11
or chapter 12. The transfer is made by the person
holding the power at the time the exercise, release, or
lapse of the power becomes effective, and is not
considered a transfer under a trust that was
irrevocable on September 25, 1985. * * *
Petitioner’s appeal of the Court’s opinion’s acceptance of
respondent’s nonliteral interpretation of TRA 1986 section
1433(b)(2)(A) will most certainly be to the Court of Appeals for
the Sixth Circuit. That court has advised lower courts that
“Where the statute is clear, the agency has nothing to interpret
and the court has no agency interpretation to which it may be
required to defer.” Dixie Fuel Co. v. Commr. of Soc. Sec.,
171 F.3d 1052, 1064 (6th Cir. 1999), abrogated on other grounds
by Barnhart v. Peabody Coal Co., 537 U.S. 149 (2003); accord
Bradley v. Austin, 841 F.2d 1288, 1293 (6th Cir. 1988) (“In
determining the meaning of legislation, we must first look to the
plain language of the statute itself. * * * If we find that the
statutory language is unambiguous, then that language is regarded
as conclusive unless there is a clearly expressed legislative
intent to the contrary”); Ohio Power Co. v. NLRB, 176 F.2d 385,
- 54 -
387 (6th Cir. 1949) (holding that plain and unambiguous text must
be applied as written without resort to construction); see also
Chevron U.S.A., Inc. v. Natural Res. Def. Council, 467 U.S. 837,
842-843 (1984) (“If the intent of Congress is clear, that is the
end of the matter; for the court, as well as the agency, must
give effect to the unambiguously expressed intent of Congress”).
The Courts of Appeals for the Eighth and Ninth Circuits have held
in Simpson v. United States, 183 F.3d 812 (8th Cir. 1999), and
Bachler v. United States, 281 F.3d 1078 (2002), that the general
rule in TRA 1986 section 1433(b)(2)(A) may be applied plainly as
written, and the Court’s opinion sets forth no persuasive reason
as to why the Court of Appeals for the Sixth Circuit, or any
other Court of Appeals for that matter, should (or will) disagree
with the holdings of those cases.4
The Court’s opinion strains to find an ambiguity in the
clear reading of TRA 1986 section 1433(b)(2)(A) by referencing
4
The Court’s opinion suggests supra p. 25 that the Courts
of Appeals for the Eighth and Ninth Circuits did not consider the
general rule in its “particular context”. I disagree. Those
courts applied the general rule according to the plain reading of
its terms and, consistent with settled law, see, e.g., Bower v.
Fed. Express Corp., 96 F.3d 200, 208 (6th Cir. 1996) (holding
that an ambiguity in one part of a statute is not cause to narrow
or expand the plain meaning of a term found elsewhere in the
statute), declined respondent’s invitation to narrow the plain
reading of those terms on account of a proffered ambiguity in the
terms of the statute. When a clear term may be construed plainly
as written, a court should not strain to find ambiguity in that
term so as apply it differently. See Sphinx Intl., Inc. v. Natl.
Union Fire Ins. Co., 412 F.3d 1224, 1228 (11th Cir. 2005).
- 55 -
Peterson Marital Trust v. Commissioner, 102 T.C. 790 (1994),
affd. 78 F.3d 795 (2d Cir. 1996). That case is both factually
and legally distinguishable from Simpson v. United States, supra,
and Bachler v. United States, supra. First, as a matter of law,
Peterson Marital Trust did not deal with the part of the statute
at issue in Simpson and Bachler (as well as at issue here). The
case of Peterson Marital Trust concerned the part of TRA 1986
section 1433(b)(2)(A) that follows the comma; i.e., the exception
that provides “only to the extent that such transfer is not made
out of corpus added to the trust after September 25, 1985”. The
Courts of Appeals for the Eighth and Ninth Circuits construed the
part of TRA 1986 section 1433(b)(2)(A) preceding the comma; i.e.,
the general rule that provides “any generation-skipping transfer
under a trust which was irrevocable on September 25, 1985”. The
Courts of Appeals for the Eighth and Ninth Circuits held
specifically that the exercise of a general testamentary power of
appointment by a beneficiary of a decedent’s trust is within the
“clear” or “straightforward” plain reading of the general rule
because the exercise is a transfer under a trust which was
irrevocable on September 25, 1985. Bachler v. United States,
supra at 1079, 1080 (the court reached its decision by applying a
“straightforward reading” of the general rule); Simpson v. United
States, supra at 813, 814, 816 (the court held that the reading
of the general rule is “clear”); accord Bartlik v. U.S. Dept. of
- 56 -
Labor, 62 F.3d 163, 165-166 (6th Cir. 1995) (courts must endeavor
to apply the plain meaning of a statute as ascertained through a
“straightforward” and “commonsense” approach). The Courts of
Appeals for the Eighth and Ninth Circuits rejected respondent’s
reading of the general rule to require that the transfer be
irrevocable on September 25, 1986, a reading also espoused by
respondent here and accepted by the Court’s opinion supra pp. 21
and 27-29, concluding instead that the general rule in TRA 1986
section 1433(b)(2)(A) plainly required that the trust be
irrevocable on that date. See Bachler v. United States, supra at
1080; Simpson v. United States, supra at 814. That conclusion is
supported by the “rule of the last antecedent”, under which the
clause “which was irrevocable on September 25, 1985” should be
construed to relate to the word “trust” and not to the word
“transfer”. See 2A Singer, Sutherland Statutory Construction,
sec. 47:33 (6th ed. 2000); see also Barnhart v. Thomas, 540 U.S.
20, 26 (2003). That conclusion also is supported by the fact
that Congress apparently drafted the general rule with a broad
and precise brush, providing explicitly that the GST “shall not
apply to * * * any generation-skipping transfer under a trust
which was irrevocable on September 25, 1985.” (Emphasis added.)
Accord Dixie Fuel Co. v. Commr. of Soc. Sec., supra at 1061
(noting that the “Supreme Court has held in any number of
contexts that ‘shall’ is ‘explicitly mandatory’ language”).
- 57 -
The cases of Simpson v. United States, supra, and Bachler v.
United States, supra, also are factually distinguishable from the
case of Peterson Marital Trust v. Commissioner, supra. The cases
of Simpson and Bachler, like the present case, involved the
exercise of a power of appointment and the question of whether
the exercise was a transfer under a trust; the case of Peterson
Marital Trust involved the lapse of a power of appointment and
the question of whether the lapse added corpus to the trust. As
the Courts of Appeals noted in Simpson v. United States, supra at
815-816, and Bachler v. United States, supra at 1080, this
critical point sufficiently distinguished those two cases from
Peterson Marital Trust and the holding thereof. See also Simpson
v. United States, supra at 815 (“The distinction between Peterson
and the present case is obvious.”). The courts also noted that
the lapse in Peterson Marital Trust was governed by a temporary
regulation that stated what constituted “corpus added to the
trust” and that the exercise of the power of appointment was
outside of that regulation in that the exercise depleted, rather
than added, to the trust’s corpus. See Bachler v. United States,
supra at 1080; Simpson v. United States, supra at 815-816.
In closing, I believe that the Court in this case should
apply the plain and unambiguous reading of the general rule,
consistent with the reading of the Courts of Appeals for the
- 58 -
Eighth and Ninth Circuits. Because the Court’s opinion does not
do so, I dissent.
COLVIN, VASQUEZ, GALE, and WHERRY, JJ., agree with this
dissenting opinion.
- 59 -
VASQUEZ, J., dissenting: I write separately to address the
issue of the proper deference the Court should give to
interpretive regulations.1 I respectfully disagree with the
position that when the Court reviews interpretive regulations we
should continue to follow the analysis set forth in Natl. Muffler
Dealers Association v. United States, 440 U.S. 472 (1979). See
Court op. pp. 22-23. I believe that in United States v. Mead
Corp., 533 U.S. 218 (2001), the Supreme Court of the United
States set forth the analysis that courts should use to decide
the deference courts should give to interpretive regulations.
I. Chevron Deference
“If the intent of Congress is clear, that is the end of the
matter; for the court, as well as the agency, must give effect to
the unambiguously expressed intent of Congress.” Chevron U.S.A.
Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-843
(1984). Accordingly, an agency interpretation (e.g., a Treasury
regulation) cannot conflict with the unambiguously expressed
intent of Congress.
If a statute is ambiguous, Chevron provides that a reviewing
court is obliged to accept the agency’s position if Congress has
not previously spoken to the point at issue and the agency’s
interpretation is reasonable. United States v. Mead Corp., supra
at 227, 229. Thus, any regulation entitled to Chevron deference
1
Deference only sets the framework for judicial analysis;
it does not displace it. United States v. Vogel Fertilizer Co.,
455 U.S. 16, 24 (1982); United States v. Cartwright, 411 U.S.
546, 550 (1973).
- 60 -
is binding on the courts unless procedurally defective, arbitrary
or capricious in substance, or manifestly contrary to the
statute. Id. at 227.
II. Mead
It is “plain error for [courts] to rely on” Chevron in
determining what deference to give agency actions without
considering Mead. Am. Fedn. of Govt. Employees, AFL-CIO v.
Veneman, 284 F.3d 125, 129 (D.C. Cir. 2002).
In Mead, the Supreme Court clarified the limits of Chevron
deference owed to an agency’s interpretation of a statute it
administers. The Supreme Court held that an agency’s
interpretation of a particular statutory provision qualifies for
Chevron deference when (1) Congress delegated authority to the
agency to make rules or regulations carrying the force of law,
and (2) the agency interpretation claiming deference was
promulgated in the exercise of that authority. United States v.
Mead Corp., supra at 226-227, 237; Pool Co. v. Cooper, 274 F.3d
173, 177 n.3 (5th Cir. 2001). Furthermore, “mere ambiguity in a
statute is not evidence of congressional delegation of
authority”, agency authority is not to be lightly presumed, and
courts should not presume a delegation of power based solely on
the fact that there was not an express withholding of such power.
Michigan v. EPA, 268 F.3d 1075, 1082 & n.2 (D.C. Cir. 2001).
When an agency’s interpretation of a particular statutory
provision does not qualify for Chevron deference, it is entitled
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to the deference accorded under Skidmore v. Swift & Co., 323 U.S.
134 (1944). United States v. Mead Corp., supra at 234-235, 237.
Pursuant to Skidmore, the agency’s interpretation is accorded
respect proportional to its “power to persuade”. Id. at 235;
Pool Co. v. Cooper, supra at 177 (in the absence of Chevron
deference, pursuant to Mead the agency’s interpretation is
accorded respect under Skidmore according to its “power to
persuade”); Landmark Legal Found. v. IRS, 267 F.3d 1132, 1135-
1136 (D.C. Cir. 2001) (when Chevron deference does not apply, the
Internal Revenue Service’s interpretations are entitled to “no
more than the weight derived from their ‘power to persuade.’”).
III. Interpretive Versus Legislative Regulations
Treasury regulations are either legislative or interpretive
in character. Tutor-Saliba Corp. v. Commissioner, 115 T.C. 1, 7
(2000). Interpretive regulations are promulgated under section
7805; legislative regulations, however, are issued pursuant to a
specific Congressional delegation of authority, to the Secretary
of the Treasury or the Commissioner, to issue rules or
regulations that have the force and effect of law. Id.; Hefti v.
Commissioner, 97 T.C. 180, 189 (1991), affd. 983 F.2d 868 (8th
Cir. 1993). “An interpretive regulation may be contrasted to a
legislative regulation, one which is mandated specifically in the
statute and has the force and effect of law.” Matheson v.
Commissioner, 74 T.C. 836, 840 n.7 (1980).
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The Internal Revenue Code contains numerous specific
delegations of authority from Congress to the Secretary or the
Commissioner to issue rules or regulations that have the force
and effect of law. See, e.g., sec. 1502. These sections--that
provide for issuing legislative regulations--would be superfluous
if section 7805 were a delegation of authority from Congress to
make rules or regulations carrying the force of law. It is a
fundamental rule of statutory construction to give effect to all
of the language of the statute. See Hellmich v. Hellman, 276
U.S. 233 (1928); Stanford v. Commissioner, 297 F.2d 298, 308 (9th
Cir. 1961), affg. 34 T.C. 1150 (1960); Larkin v. United States,
78 F.2d 951 (8th Cir. 1935); Stolk v. Commissioner, 40 T.C. 345(1963), affd. per curiam 326 F.2d 760 (2d Cir. 1964). It is a
well-accepted rule of statutory construction that the various
sections of the Code should be construed so that one section will
explain and support and not defeat or destroy another section.
Crane v. Commissioner, 331 U.S. 1, 13 (1947); Bernier v. Bernier,
147 U.S. 242, 246 (1893); Pleasanton Gravel Co. v. Commissioner,
85 T.C. 839, 851 (1985). Accordingly, I believe that section
7805 is not a delegation of authority by Congress to make rules
or regulations carrying the force of law.
IV. Mead Applied to Interpretive Regulations
Prior to Mead, we questioned whether Chevron applies to
interpretive regulations. Cent. Pa. Sav. Association & Subs. v.
Commissioner, 104 T.C. 384, 391 (1995) (citing E.I. duPont de
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Nemours & Co. v. Commissioner, 41 F.3d 130 (3d Cir. 1994), affg.
102 T.C. 1 (1994)). The Supreme Court, also prior to issuing
Mead, held that interpretive regulations are owed “less deference
than a regulation issued under a specific grant of authority to
define a statutory term or prescribe a method of executing a
statutory provision”. Rowan Cos. v. United States, 452 U.S. 247,
253 (1981); see United States v. Vogel Fertilizer Co., 455 U.S.
16, 24 (1982) (quoting Rowan Cos.); see also Cent. Pa. Sav.
Association v. Commissioner, supra at 391 (citing Vogel
Fertilizer Co.). Accordingly, what level of deference the Court
should give to interpretive regulations needs to be reexamined in
light of Mead.
The first question in the Mead analysis is whether Congress
delegated authority to the agency to make rules or regulations
carrying the force and effect of law. United States v. Mead
Corp., 533 U.S. at 226-227; Pool Co. v. Cooper, supra at 177 n.3.
The second question is whether the agency invoked that authority.
United States v. Mead Corp., supra; Pool Co. v. Cooper, supra.By promulgating a regulation pursuant to section 7805, the
regulation was not issued pursuant to a delegation of authority
by Congress to make rules or regulations carrying the force and
effect of law. See Tutor-Saliba Corp. v. Commissioner, supra at
7; Matheson v. Commissioner, supra at 840 n.7. Accordingly,
pursuant to Mead, interpretive regulations are not entitled to
Chevron deference; instead, they are entitled to Skidmore
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deference. United States v. Mead Corp., supra at 234-235; Rowan
Cos. v. United States, supra at 253; United States v. Vogel
Fertilizer Co., supra at 24; Pool Co. v. Cooper, supra at 177;
Cent. Pa. Sav. Association v. Commissioner, supra at 391; Klamath
Strategic Inv. Fund, LLC v. United States, 440 F. Supp. 2d 608,
621 (E.D. Tex. 2006) (discussing the differences between
legislative and interpretive regulations, concluding that
different standards of review apply to each and that courts must
accord a higher degree of deference to a legislative regulation
than to an interpretive regulation, and holding that “Chevron
deference is only available to the Regulation if it is a
legislative regulation.”); see also Boeing Co. v. United States,
537 U.S. 437, 448 (2003) (noting that an interpretive regulation
promulgated under section 7805 “rather than pursuant to a
specific grant of authority” is entitled to some measure of
deference; however, the Court did not hold or suggest that
interpretive regulations should receive Chevron deference).
V. Conclusion
I believe that Mead changed the landscape regarding the
deference courts should give to interpretive regulations.
Pursuant to the analysis set forth by the Supreme Court in Mead,
I believe interpretive regulations are entitled to Skidmore
deference.
Accordingly, I dissent.