Estate of Gerson v. Comm'r

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 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 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 133-2 (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 trans-feror.

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 another person, that person is substituted for the “trans-feror”. 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 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.

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 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 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. 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.

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. 142: “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.”

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).

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 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).

I agree with the conclusion, see majority op. p. 152, 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.