106 T.C. No. 10
UNITED STATES TAX COURT
ESTATE OF MILADA S. NEUMANN, DECEASED, ERIC W.
SHAW, ANCILLARY ADMINISTRATOR, C.T.A., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11060-94. Filed April 9, 1996.
Decedent, a nonresident alien, died in 1990. She
bequeathed U.S. situs property outright to her
grandchildren. In 1986, bequests of this type, i.e.,
"direct skips", were first subjected to the generation-
skipping transfer (GST) tax provisions of secs. 2601
through 2663, I.R.C. At the time of decedent's death,
regulations dealing with "direct skips" had not been
issued. Held, the bequests are subject to the GST tax.
The issuance of regulations in respect of "direct
skips" by nonresident aliens provided for in sec.
2663(2), I.R.C., is not a condition precedent to the
imposition of the GST tax on such "direct skips" but
merely authorizes the Secretary to prescribe the
allocations and calculations involved in determining
how such tax should be imposed.
Edward L. Peck and Thomas V. Glynn, for petitioner.
Moira L. Sullivan, for respondent.
OPINION
TANNENWALD, Judge: Respondent determined a deficiency in
petitioner's Federal estate tax and generation-skipping transfer
(GST) tax in the amount of $2,002,102.05. After concessions, the
sole issue remaining for decision is whether the GST tax, under
sections 2601 through 2663,1 applies to the transfer of U.S.
situs property to decedent's grandchildren, where, at the time of
death, decedent was a nonresident alien and regulations had not
yet been promulgated under section 2663(2).
All the facts have been stipulated and are so found. The
stipulation of facts and the exhibits attached thereto are
incorporated herein by this reference.
Petitioner is the estate of Milada S. Neumann (decedent) who
died testate on July 14, 1990. Decedent was a resident and
citizen of the Republic of Venezuela at the time of her death.
Eric W. Shaw is the ancillary administrator and resided in
Larchmont, New York, at the time the petition was filed.
Decedent's will was admitted to ancillary probate by the
Surrogate's Court of New York County, New York. As translated
into English, the will provides in part as follows:
1
All statutory references are to the Internal Revenue Code in
effect as of the date of decedent's death, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
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Second: I resolve that all that is legitimate (that is
fifty percent) corresponds to my only legitimate heir,
my son Michal * * *
Third: I instruct that after the legitimate is
subtracted, all the available portion of my estate
(that is fifty percent) is distributed as follows: half
of the available (that is twenty-five percent) to my
legitimate granddaughter Vanesa * * * and the other
half of the available (that is twenty-five percent) to
my legitimate grandson, Ricardo.
Vanesa and Ricardo are the children of decedent's son,
Michal. At the time of decedent's death, Michal and Ricardo were
citizens and residents of Venezuela, and Vanesa was a citizen and
resident of the United States.
Decedent's estate included U.S. situs property consisting of
works of art and other tangible personal property, and a
cooperative apartment, all located in New York, New York. The
estate also included foreign situs property including cash and
securities located in Venezuela and in a Cayman Islands Trust.
At the time of death, the U.S. situs property had a value of
approximately $20 million, and the foreign situs property had a
value of approximately $15 million.
In the notice of deficiency, respondent determined that the
testamentary transfers of property to Vanesa and Ricardo,
decedent's grandchildren, were subject to the GST tax.
The generation-skipping transfer tax was first imposed by
the Tax Reform Act of 1976, Pub. L. 94-455, sec. 2006, 90 Stat.
1520, 1879, but applied only to transfers in trust and not to
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"direct skip" transfers such as are involved herein, e.g.,
outright bequests by a decedent to a grandchild. See Staff of
Joint Comm. on Taxation, General Explanation of the Tax Reform
Act of 1976, at 565 (J. Comm. Print 1976), 1976-3 C.B. (Vol. 2)
577. Section 2614(b), enacted in 1976, made clear that the GST
tax was to apply only to nonresident aliens in respect of
property that would otherwise be taken into account for purposes
of the estate tax to which nonresident aliens were already
subject by virtue of section 2101(a). See General Explanation of
the Tax Reform Act of 1976, supra at 580, 1976-3 C.B. (Vol. 2) at
592.
In 1986, dissatisfied with the GST tax, Congress
retroactively repealed the 1976 provisions and enacted new
provisions extending the GST tax to "direct skip" transfers such
as are involved herein. See Tax Reform Act of 1986, Pub. L. 99-
514, sec. 1431, 100 Stat. 2085, 2717.2 Section 2663, enacted in
1986, provided:
The Secretary shall prescribe such regulations as
may be necessary or appropriate to carry out the
purposes of this chapter, including--
* * * * * * *
(2) regulations (consistent with the
principles of chapters 11 and 12) providing for
2
Sec. 2614(b) disappeared in the 1986 amendments presumably
because Congress intended the limitation to be reflected in the
definitions in sec. 2612.
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the application of this chapter in the case of
transferors who are nonresidents not citizens of
the United States, * * *
No regulation in respect of generation-skipping transfers by
nonresident aliens had been issued at the time of decedent's
death. Notice of proposed regulations dealing with the GST tax
as applied to nonresident aliens was first published in the
Federal Register on December 24, 1992. See PS-73-88, 1993-1 C.B.
867, 883. Final regulations were published on December 27, 1995.
T.D. 8644, 1996-7 I.R.B. 16, 44 (Feb. 12, 1996). Both the
proposed and final regulations had effective dates subsequent to
the date of decedent's death.
Petitioner argues the GST tax should not apply to "direct
skips" by nonresident aliens which occurred prior to the adoption
of implementing regulations on the ground that section 2663(2)
manifests the intent of Congress to require such regulations as a
condition to the imposition of such tax. Respondent counters
that the statute itself imposes the tax and that section 2663(2)
represents simply a recognition by Congress that regulations
might be needed to fill in some of the details affecting the
application of the GST tax to transfers by nonresident aliens.
In this connection, we note that respondent apparently determined
the manner in which the GST tax should be applied herein
consistently with the methodology set forth in the proposed
regulations and that petitioner does not question that
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methodology except in the context of the contention that such
regulations were necessary to the imposition of the GST tax and
that therefore the use of that methodology constituted an
unjustified retroactive application of the regulations.
Thus, we are called upon to resolve the following question:
Are the regulations a necessary condition to determining
"whether" the GST tax applies, as petitioner contends, or do they
constitute only a means of arriving at "how" that tax, otherwise
imposed by the statute, should be determined, as respondent
contends.
In support of its position, petitioner relies heavily on
Alexander v. Commissioner, 95 T.C. 467 (1990), affd. without
published opinion sub nom. Stell v. Commissioner, 999 F.2d 544
(9th Cir. 1993). In that case, section 465(c)(1), as then in
effect, set forth specific types of transactions to which the at-
risk provisions applied (see 95 T.C. at 469 n.4) and then
provided in section 465(c)(3):
(3) Extension to other activities.--
(A) In general.--In the case of taxable
years beginning after December 31, 1978, this
section also applies to each activity--
(i) engaged in by the taxpayer in
carrying on a trade or business or for the
production of income, and
(ii) which is not described in
paragraph (1),
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* * * * * * *
(D) Application of subsection (b)(3).--In
the case of an activity described in subparagraph
(A), subsection (b)(3) shall apply only to the
extent provided in regulations prescribed by the
Secretary. [Emphasis added.]
The activity of the taxpayer was not one of the specified
types of transactions that fell within the scope of an activity
described in section 465(c)(1). No regulations had been issued
under section 465(c)(3)(D). We held that the issuance of the
regulations was a precondition to a determination whether the at-
risk rules applied to the taxpayer's activity. In so doing, we
specifically characterized the "only to the extent" language of
the statute as unambiguous and therefore controlling. Alexander
v. Commissioner, supra at 473; see H. Enters. Intl., Inc. v.
Commissioner, 105 T.C. 71, 82 (1995).
Respondent contends that this foundation of our opinion
distinguishes Alexander from the instant case and relies on
Occidental Petroleum Corp. v. Commissioner, 82 T.C. 819 (1984),
which dealt with the effect on the alternative minimum tax of the
absence of regulations under section 58(h) which provided:
SEC. 58(h) Regulations To Include Tax Benefit
Rule.--The Secretary shall prescribe regulations under
which items of tax preference shall be properly
adjusted where the tax treatment giving rise to such
items will not result in the reduction of the
taxpayer's tax under this subtitle for any taxable
years.
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We held that the absence of regulations did not preclude proper
adjustments in respect of the tax benefit rule and went on to
determine those adjustments in that case. The rationale of our
opinion was that section 58(h) was intended by Congress to
provide a basis for "how" the alternative minimum tax should be
applied in order to take into account the tax benefit rule.
We reaffirmed our position as to the effect of the absence
of regulations under section 58(h) in Breakell v. Commissioner,
97 T.C. 282, 285 (1991), affd. in part, revd. in part without
published opinion 996 F.2d 1231 (11th Cir. 1993); see also First
Chicago Corp. v. Commissioner, 88 T.C. 663, 669 (1987), affd. 842
F.2d 180 (7th Cir. 1988); cf. Estate of Hoover v. Commissioner,
102 T.C. 777, 782 (1994), revd. on another issue 69 F.3d 1044
(10th Cir. 1995), where we adopted a similar view in respect of
the absence of regulations directed to be prescribed by the
Secretary under section 2032A(g).
More recently, in H. Enters. Intl., Inc. v Commissioner,
supra, we dealt with a situation comparable to that herein,
involving the impact of the failure of the Secretary to issue
regulations to prevent tax avoidance under section 7701(f) on the
application of the limitations of sections 246A and 265(a)(2) to
the interest on funds borrowed by one corporation and used by an
affiliated corporation to purchase portfolio stock and tax-exempt
securities.
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Section 7701(f) provides:
SEC. 7701(f) Use of Related Persons or Pass-Thru
Entities.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to
prevent the avoidance of those provisions of this title
which deal with--
(1) the linking of borrowing to investment, or
(2) diminishing risks,
through the use of related persons, pass-thru entities,
or other intermediaries. [Emphasis added.]
Reviewing the analyses and conclusions of Occidental
Petroleum Corp. v. Commissioner, supra, First Chicago Corp. v.
Commissioner, supra, and Alexander v. Commissioner, supra, we
held that the issuance of regulations under section 7701(f) was
not a precondition to applying sections 246A and 265(a)(2) to
transactions involving a parent corporation and its subsidiary.
In so holding, we followed Occidental Petroleum and First Chicago
and distinguished Alexander on the ground that the "only to the
extent" language of section 465(c)(3)(D) was absent from section
7701(f). See H. Enters. Intl., Inc. v. Commissioner, supra at
81-84. In short, the teaching of the decided cases is that
issuance of regulations is to be considered a precondition to the
imposition of a tax where the applicable provision directing the
issuance of such regulations reflects a "whether"
characterization, such as existed in Alexander, and not where the
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provision simply reflects a "how" characterization. We follow
that path herein.
Under these circumstances and applying the teaching of the
decided cases, we hold that the regulations contemplated under
section 2663(2) reflect a "how" characterization and their
issuance is not a necessary precondition to the imposition of the
GST tax on the transfers involved herein. In enacting section
2663(2), Congress simply recognized that there would be problems
of allocation and calculations of tax in respect of nonresident
aliens because, unlike citizens and residents, not all the
property of nonresident aliens is subject to U.S. estate tax.
We are unimpressed with petitioner's attempt to create a
"whether" patina to section 2663(2) by pointing to alleged gaps
and possible invalid provisions of the proposed regulations
dealing with the definition of "direct skip" transfers and the
calculation of the taxable amount of a "direct skip" and
applicable rate of tax. Such gaps and provisions clearly go to
the "how" and not to the "whether" in respect of the application
of the GST tax.3 In this connection, we note that petitioner
3
For a critical analysis of the proposed regulations, see
Schlesinger, "The Generation-Skipping Transfer Tax--A
Reexamination on Its Ninth Anniversary", 74 Taxes 49 (Jan. 1996);
Heller & Sasaki, "Proposed Regulation Section 26.2663-2 and the
Application of the Generation-Skipping Transfer Tax to Transfer
by Nonresident Aliens", 12 Intl. Tax & Bus. Law. 291 (1994); see
also Helt, "Generation-Skipping Transfer Tax Regulations," 74
(continued...)
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concedes that the transfers involved herein were "direct skips"
and, as we have previously pointed out, does not question
respondent's calculation of the GST tax on those transfers.
In light of our holding, we have no need to explore
petitioner's arguments regarding retroactivity or the alleged
failure of the Secretary to comply with the Administrative
Procedure Act, 5 U.S.C. secs. 551-559 (1988), in issuing the
proposed regulations.
To reflect the foregoing, and in order to take into account
the settlement of certain unrelated issues,
Decision will be entered
under Rule 155.
3
(...continued)
Taxes 67 (1996), analyzing the extent to which the final
regulations removed some of the gaps, etc. in the proposed
regulations.