United States Court of Appeals,
Fifth Circuit.
No. 95-60576.
ESTATE of Louise S. MONROE, Deceased, Robert J. Monroe,
Provisional Administrator and Estate of J. Edgar Monroe, Executor,
Petitioners-Appellants,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
Oct. 9, 1997.
Appeal from the Decision of the United States Tax Court.
Before KING, JONES and DUHÉ, Circuit Judges.
EDITH H. JONES, Circuit Judge:
I. BACKGROUND
This case requires interpretation of § 2518(b) of the Internal
Revenue Code and its accompanying regulations, which describe
"qualified disclaimer" of benefits, a device commonly used for
"post-mortem" estate and other tax planning. The disclaimants here
were 29 legatees of the wife's will, all of whom were asked by her
husband and did irrevocably disclaim the proffered bequests.
Shortly afterward, the husband gave them gifts equaling or
exceeding the bequests, and not long after that he died at age 93.
The Tax Court concluded that the disclaimers were induced or
coerced by "the implied promise that [the disclaimants] would be
better off it they did what Monroe wanted them to do ...," even
though he made no explicit promises. Finding that the
"coerced/induced" standard is inconsistent with the regulations and
a fair reading of the statute, we reverse on nearly all of the
1
disclaimers.
On April 28, 1989, Louise S. Monroe died at the age of 91,
leaving a multimillion dollar estate. J. Edgar Monroe (Monroe),
her husband, became executor of the estate. Monroe, who was then
92 years old, sought help from Robert Monroe, his nephew, in
administering the estate. An estate tax return was timely filed in
March 1990. Edgar Monroe died in May 1990.
The Monroes had no children, but Louise Monroe's will made 31
specific cash bequests to extended family members, long-time
employees, and friends, as well as 4 bequests to corporate
entities. Louise Monroe also made bequests in trust to two
grandnieces and a grandnephew, giving each a treasury bond with a
$500,000 face value. Monroe was the residual beneficiary of his
wife's estate.
The will called for each bequest to bear its portion of the
death taxes. Touche Ross, the accounting firm retained by the
estate, also determined that generation-skipping transfer taxes
would have to be borne by some of the individual legatees. The tax
impact on the legatees under these circumstances would be
substantial, amounting in some cases to 75%-80% of the individual
bequests. However, projections showed that tax liability was
significantly reduced if legatees disclaimed their legacies.
Deeply concerned about the high tax burden on the individual
bequests, Monroe and Robert Monroe decided to pursue disclaimers as
a means of reducing the overall federal tax liability. Before
requesting the disclaimers, Monroe received assurance from Touche
2
Ross that he could independently make gifts to the legatees and
include bequests to them in his own will. The accountants also
advised Robert Monroe that a disclaimer was only valid if it was
done without the promise of anything in return.
With assistance from the accountants, Monroe and Robert Monroe
identified 29 legatees to approach about renouncing. Robert Monroe
rehearsed with one of the accountants his presentation to the
legatees. In substance, Robert Monroe made the following points:
his uncle was upset about the amount of taxes that would have to be
paid by the estate and the legatees; each bequest would be
significantly reduced by taxes; his uncle would like each legatee
to disclaim his or her bequest; each legatee who disclaimed would
be giving up a right; and any disclaimer had to be voluntary and
without consideration.
Monroe personally asked Kathleen Gooden Hayward, Monroe's
grandniece and one of the legatees of a $500,000 treasury bond, as
well as four household employees to give up their bequests. Robert
Monroe made some version of his presentation to the remaining 24
legatees on the list. In December 1989, each of the 29 legatees
signed a disclaimer, conceded by the Commissioner to be valid and
effective under Louisiana law. The total amount disclaimed was
$892,781, and this amount was included in the marital deduction on
the estate tax return as money which passed to Monroe.
In late December 1989 and January 1990, Monroe wrote each of
the disclaimants a personal check in an amount approximately equal
to the gross amount of the bequest renounced. Each check bore the
3
notation "gift." Inadvertently, Monroe failed to file a 1989 gift
tax return for the December 1989 gifts. However, in 1991, a timely
gift tax return was filed covering all the gifts made in January
1990, and an amended gift tax return was filed for the 1989 taxable
year.
After an audit, the Commissioner disallowed the marital
deduction claimed in the estate tax return, reducing it by the
amount of the 29 disclaimers and by the generation-skipping
transfer taxes associated with the three in-trust bequests. The
Commissioner determined that the disclaimers were invalid and that
the generation-skipping transfer taxes should be charged to the
estate residual and not to the particular bequests. The
Commissioner also applied a fraud penalty.
On the estate's petition for redetermination, the Tax Court,
although noting that each disclaimer was motivated by different
factors, analyzed the disclaimers as a group, citing only a few
examples. The Tax Court summarized the motivation for the
disclaimants' actions as follows:
Some of the disclaimants were told by the nephew that Monroe
had always taken care of them and had never cheated them or
that Monroe was a generous man. Many of the disclaimants
anticipated that Monroe would continue to care for them
financially or was likely to make a bequest to them in his
will. Some disclaimants believed that executing the
disclaimer would be in their best long-term interest, because
they did not wish to upset Monroe by refusing to renounce.
The Tax Court agreed with the Commissioner on 28 of 29
disclaimers and, although it denied a fraud penalty, on the
imposition of a negligence penalty. The Tax Court concluded that
the disclaimers were not "qualified disclaimers" under I.R.C. §
4
2518(b). The resulting deficiency was $625,552.73, plus a
negligence penalty of $125,104.55. The taxpayer appealed.
II. THE TAX COURT DECISION
When a legatee, other than a surviving spouse, makes a
qualified disclaimer that causes the surviving spouse to be
entitled to the property, the disclaimed interest is treated as if
it passed directly to the surviving spouse. See Estate Tax Regs.
§ 20.2056(d)-1(b). An estate may take a marital deduction for
property passing directly from the decedent to a surviving spouse.
See I.R.C. § 2056(a). Thus, the estate's marital deduction depends
on whether the 29 disclaimers at issue are qualified disclaimers;
the generation-skipping tax imposed on three of the bequests does
not apply if qualified disclaimers were made.
Section 2518(b) provides that "the term "qualified disclaimer'
means an irrevocable and unqualified refusal by a person to accept
an interest in property but only if ... (3) such person has not
accepted the interest or any of its benefits...."1
In concluding that all but one of the disclaimers were not
qualified within the meaning of § 2518, the Tax Court reasoned that
the disclaimants
1
A "qualified disclaimer" must also be in writing, must be
received by the transferor within 9 months of the transfer or when
the disclaimant reaches age 21, and must result in the interest
passing to a person other than the disclaimant without any
direction by the disclaimant. See I.R.C. § 2518(b). None of these
requirements is contested by the Commissioner.
In addition, although § 2518 is a gift tax section, §
2046 makes it apply to disclaimers of legacies and
inheritances as well.
5
expected, for one reason or another, that they would receive
their renounced bequests in the form of a gift or legacy from
Monroe. Furthermore, the testimony of many of the
disclaimants suggests that they feared what would happen if
they refused to renounce their bequests.
...
The disclaimants may not have explicitly negotiated with or
bargained with Monroe or the nephew for consideration in
return for executing their disclaimers. Each of the
disclaimants other than Helene Tebo, however, was induced or,
in some instances, coerced, into executing a disclaimer.
Under these circumstances, the consideration for their
disclaimers was the implied promise that they would be better
off if they did what Monroe wanted them to do than if they
refused to do so. Their disclaimers thus were not
"unqualified" as required by section 2518.
The Tax Court analyzed the 29 disclaimers as a group, citing
excerpts of trial testimony from three disclaimants as
"representative of that of a majority of the disclaimants." First,
the Tax Court cited the testimony of Lawrence Lee, who had served
as a butler and chauffeur to the Monroes since 1949. Lee renounced
a specific bequest of $50,000 as well as a bequest in the amount of
his annual salary, or $10,000. Approximately three weeks later, he
received a check from Monroe for $60,000 bearing the notation
"gift." Lee testified in part:
Q. What did he [J. Edgar Monroe] ask you?
A. He asked us to renounce, give it—turn it over to him.
Q. Did he say why?
A. No, I don't think. I can't remember exactly for what reason,
other than to turn it over to him, and he would take care of
it.
Q. He would take care of you if you turned it over to him.
A. Yes.
The Tax Court also relied on the testimony of Betsy
6
Richardson, a niece of the Monroes. Before Louise Monroe's death,
Richardson's daughter, Lisa, had been sick with cancer, and Monroe
had paid $10,000 toward Lisa's treatment as well as $10,000 upon
her high school graduation. At trial, Richardson testified why she
renounced a $5,000 bequest from Louise Monroe:
Q. Why did you ultimately decide to sign the act of renunciation?
A. Because, like I said, I didn't know if I would need help for her
[Lisa] later, and you just—you don't go against Edgar if you
ever want anything from him.
The Tax Court also cited testimony from Kathleen Hayward,
Monroe's grand niece. Hayward disclaimed her right to income from
the $500,000 bond bequeathed to her in trust. Hayward's children
also executed disclaimers of their rights to the principal upon her
death. With a market value of $535,781, this legacy represented
more than half of the total amount disclaimed. Testifying that she
thought of the Monroes as her parents, Hayward described a long,
consistent pattern of the Monroes' generosity toward her. After
Hayward's first marriage ended, Louise Monroe bought a house for
Hayward and provided an allowance that allowed Hayward to stay at
home with her three children. The Monroes also provided a trust
fund that paid for the education of Hayward's children.
After Louise Monroe died, Robert Monroe approached Hayward
about the renunciation. She also talked with Monroe about
renouncing. By the time of her aunt's death, Hayward was better
off than her sister and brother, who were also beneficiaries of
bequests in trust of $500,000 bonds. Hayward was, accordingly,
better able to handle the loss of her legacy. Hayward talked over
7
the idea with her husband and with an attorney, who cautioned her
that she was giving up a right. After stating that she received
nothing in exchange for her disclaimer, was not promised anything
by Robert or Edgar Monroe, and had no agreement that Edgar Monroe
would do anything for her later, Hayward gave the testimony seized
upon by the Tax Court:
Q. Isn't it true that you told the agents that you knew from the
conversation with J. Edgar Monroe that you would get the
inheritance money, if not shortly after renouncing the
bequest, then in his will?
A. He didn't state that. I sort of certainly assumed that.2
2
Although the Tax Court's excerpt stopped there, Hayward went
on to testify on redirect:
Q. I would just want to make it clear, Kathy. Did your uncle say
anything to you when he was asking you to renounce that led
you to believe that he was going to make a gift to you within
two weeks after this event?
A. No. No, certainly not.
* * *
Q. What did you—do you recall what you told Ms. West [attorney for
the Commissioner] then regarding whether you would get
something from Edgar in the future, your Uncle Edgar?
A. My assumption was that he would probably leave it to me in his
will.
Q. But nothing was said to—
A. No.
Q. Why did you assume that?
A. Because he knew that Auntie—that was a request from Auntie, that
she wanted me to have that money, and I felt that he would
honor that request in his will; that at this point he needed
the cash, but he didn't have it, and he would at some point in
his will—that was my thought, that in his will I would be
remembered.
8
The Tax Court next highlighted testimony from Robert Monroe.
He stated that he had not bargained with the disclaimants and had
not made any promises that Edgar Monroe would make payments to the
legatees in return for the disclaimers. On cross-examination, he
was asked why he mentioned his uncle's generosity as a part of his
presentation to the legatees:
Q. What has generosity got to do with disclaiming on the part of a
person being disclaimed in favor of it?
A. It puts into perspective the fact that someone is asking you to
do something and he's not promising you anything. He's not
giving you anything, but at least you're identifying what type
of person he is or was, anyway.
Focusing upon this testimony, the Tax Court concluded that Robert
Monroe
intended to buttress the legatees' confidence in Monroe's
continued generosity....
The nephew's testimony demonstrates that he intended to inform
the disclaimants that the probability that they would receive
something from Monroe in the future was good. Conversely, if
the legatees refused to disclaim, they were unlikely to
receive anything from Monroe subsequently, because their
refusal would be against Monroe's wishes.
Thus, the Tax court concluded that the disclaimers were not
"unqualified" within the meaning of § 2518, and that the subsequent
payments by Monroe were not "merely part of a pattern of
generosity" but were in return for the execution of the
disclaimers.
Q. Would it have made any difference to you if you would have not
received the money?
A. No. I am in a position now that I really don't need it. I may
have—well, I can't say totally no. I may have not been real
happy. I probably would have been hurt. My feelings would
have been very hurt, but I am lucky. I am very lucky.
9
III. THE PARTIES' CONTENTIONS
On appeal, the estate contends that the Tax Court confused the
two tests for acceptance of a disclaimed interest within the
meaning of § 2518(b)(3). The estate relies on the Treasury
Regulations interpreting § 2518(b)(3):
A qualified disclaimer cannot be made with respect to an
interest in property if the disclaimant has accepted the
interest or any of its benefits, expressly or impliedly, prior
to the disclaimer. Acceptance is manifested by an affirmative
act which is consistent with ownership of the interest in
property.... In addition, the acceptance of any consideration
in return for making the disclaimer is an acceptance of the
benefits of the entire interest disclaimed.
Gift Tax Regs. § 25.2518-2(d)(1). The estate argues that this
regulation sets up two distinct ways that the disclaimer can be
"unqualified": by a legatee's explicitly or implicitly accepting
the interest or its benefits before making the disclaimer, or by
his receiving consideration in return for making the disclaimer.
Accordingly, since the Commissioner has not argued that the
disclaimants accepted the benefits of their legacies prior to
executing the disclaimers, the only issue is whether the
disclaimants received consideration for making the disclaimers.
The Estate further argues that the Tax Court invalidated the
disclaimers based on evidence of the disclaimants' motive or
expectation and not based upon evidence that the disclaimants
received valid consideration for executing the disclaimers. Belief
that one will be the beneficiary of future gifts by Monroe or be
remembered in Monroe's will is insufficient to establish
consideration in the absence of some actual promise or agreement to
provide such future benefits. In support, the estate cites Philpot
10
v. Gruninger, 81 U.S. (14 Wall.) 570, 577, 20 L.Ed. 743 (1872),
where the Supreme Court observed:
There is a clear distinction sometimes between the motive that
may induce to enter into a contract and the consideration of
a contract. Nothing is consideration that is not regarded as
such by both parties ... an expectation of results often leads
to the formation of a contract, but neither the expectation
nor the result is the [consideration].
In addition, the estate points to several private letter
rulings that have approved disclaimers under § 2518 where the
disclaimants clearly expected that executing disclaimers would
benefit them in the long run. See LTR 9427030 (July 8, 1994). In
LTR 9427030, children and grandchildren of the decedent proposed to
disclaim their interest in an inter vivos trust, their residuary
interest in the decedent's will, and their rights to take under
Oklahoma's intestate succession laws. The decedent's surviving
spouse also proposed to disclaim her right to take under the
decedent's will and the inter vivos trust, but not her right to
take by intestate succession. After the disclaimers were made, the
surviving spouse would take the entire estate through intestate
succession. The surviving spouse also proposed to execute an inter
vivos trust providing for essentially the same dispositions at her
death as were provided in the trust established by the decedent.
The I.R.S. concluded that the disclaimers met the requirements of
§ 2518(b):
You represent that there is no agreement, express or implied,
between the spouse and the children or grandchildren (or their
guardians) with respect to the creation of the trust or will
to be executed by the spouse and the proposed disclaimers to
be made by the children and grandchildren. You also represent
that the disclaimers are being made with the intent on the
part of the various parties to save Oklahoma estate tax.
11
Accordingly ... we conclude that neither the potential
increase in the family wealth arising from the savings in
Oklahoma estate tax through use of the disclaimers described
above, nor the surviving spouse's execution of the proposed
inter vivos trust, pour-over will, or durable general power of
attorney over property, will constitute an acceptance of
consideration under s 2518(b)(3) by the children or
grandchildren in return for their making the proposed
disclaimers.
In another private letter ruling, LTR 9509003 (March 3, 1995),
a son, daughter, and three grandchildren executed disclaimers of
their respective legacies under decedent's will. As a result of
these disclaimers, the estate claimed an additional $3.2 million as
a marital deduction because the property disclaimed passed directly
to the decedent's spouse. The I.R.S. approved the disclaimers:
[I]t is represented that there is no express or implied
agreement between the Spouse, Son, Daughter, and three
grandchildren regarding the ultimate disposition of the
disclaimed property. In the absence of an underlying
agreement, any expectancy Son, Daughter, and the three
grandchildren may have in ultimately inheriting an enhanced
estate from either a parent or a grandparent is purely
speculative. Accordingly, we conclude that although the five
disclaimants have acted in concert in making the disclaimers
in order to reduce the estate tax liability of the Decedent's
estate, such action does not constitute the acceptance of any
consideration in return for the making of a disclaimer within
the meaning of s 25.2518-2(d)(1).3
The estate also cites cases evaluating the meaning of gifts
under I.R.C. § 170. In Estate of Wardwell v. Commissioner, 301
F.2d 632 (8th Cir.1962), the appeals court reversed a Tax Court
decision denying a charitable gift deduction to an invalid who made
a substantial contribution to a nursing home the day before she was
3
See also LTR 8701001 (Aug. 29, 1986) (substantial estate tax
savings resulting from disclaimers by minor grandchildren,
increasing the amount likely to be inherited by disclaimants, did
not amount to receipt of consideration in return for disclaimers;
expectancy of inheritance is purely speculative).
12
granted admission. The Tax Court concluded that the timing of the
payment the day before her admission led to an inference that her
donation was made with an expectation of benefit that disqualified
it as a charitable deduction. Id. at 637. The court noted that
Motivation and expectation do not destroy the reality and
genuineness of a bona fide transaction. Nor is a contribution
or gift, absolute in form when made, invalidated by reason of
conditions arising subsequent to the making thereof.
Id. at 636 (citations omitted). The Court relied on the
unambiguous written subscription agreement to conclude that her
donation did not give her a "legally enforceable right to room
occupancy." Id. at 637-38. See also Dowell v. U.S., 553 F.2d
1233, 1238-39 (10th Cir.1977) (affirming Tax Court conclusion that
donation to nursing home qualified as tax-deductible gift despite
the Commissioner's argument that the donation entitled the donor to
"substantial residency benefits").
Finally, the estate faults the Tax Court for generalizing
about the existence of implicit agreements between Monroe and the
legatees rather than determining if each individual had executed an
"irrevocable and unqualified" disclaimer without accepting any
consideration in return. By its terms, the estate contends, §
2518(b) requires a reviewing court to evaluate each disclaimer
individually.
In response, the Commissioner rejects the estate's view of the
applicable regulations, arguing that the statute is broader than
the regulations. Even if the disclaimants did not receive what
amounted to legal consideration in return for disclaiming, under
the plain meaning of the statute, the disclaimers were not
13
"irrevocable and unqualified": they were not irrevocable because
the legatees received the substance of the bequests through
Monroe's "gifts" and they were not unqualified because the legatees
were induced or coerced into executing the disclaimers.
The Commissioner accuses the estate of reading out the
"irrevocable and unqualified" requirement of the statute by
focusing on the regulations which interpret § 2518(b)(3). The
Commissioner does not attempt to define an "irrevocable and
unqualified" disclaimer. However, the Commissioner contends that
a disclaimant's expectation that falls short of actual
consideration may nonetheless invalidate a disclaimer as not being
"unqualified" within the meaning of § 2518(b).
The Commissioner also urges that, although not relied on by
the Tax Court, the step-transaction and substance-over-form
doctrines support the Tax Court's interpretation of the events.
See Minnesota Tea Co. v. Helvering, 302 U.S. 609, 613, 58 S.Ct.
393, 394-95, 82 L.Ed. 474 (1938); Kanawha Gas & Utilities Co. v.
Commissioner, 214 F.2d 685, 691 (5th Cir.1954). The Commissioner
views this as one grand scheme to avoid paying taxes that were owed
under Louise Monroe's will.
Furthermore, the Commissioner counsels against reliance on its
private letter rulings as precedent. See Transco Exploration Co.
v. Commissioner, 949 F.2d 837, 840 (5th Cir.1992). The
Commissioner also argues that the rulings relied on by the estate
can be distinguished. First, each ruling presumed there was no
express or implied agreement that anything would be given to the
14
legatees in return for executing the disclaimer, whereas the Tax
Court found an implicit agreement between Monroe and 28 of the 29
legatees. Second, the legatees' receipt of essentially the same
amount as their bequest within a few weeks of the disclaimers
further distinguishes this case from the favorable letter rulings.
The Commissioner also distinguishes the gift cases under
I.R.C. § 170, arguing that the section itself embodies a
consideration requirement.
Finally, the Commissioner defends the Tax Court's global
treatment of the disclaimers, because the decision to invalidate
the disclaimers rested less on the legatee's motivations than on
the alleged representation that Monroe would "take care of" the
legatees if they disclaimed and on Monroe's making gifts so soon
after the disclaimers were executed.
IV. DISCUSSION
The Tax Court's findings of fact are reviewed under the
clearly erroneous standard and its conclusions of law are reviewed
de novo. See Houston Oil & Minerals Corp. v. Commissioner of
Internal Revenue, 922 F.2d 283, 285 (5th Cir.1991). The clearly
erroneous standard does not apply, however, when the Tax Court's
fact findings are predicated on an incorrect legal standard. See
Houston Oil & Minerals Corp. v. Commissioner of Internal Revenue,
922 F.2d 283, 285 (5th Cir.1991).
If the disclaimers in this case fail to meet the requirements
of § 2518, it is either because they were not "irrevocable and
unqualified," or because the disclaimants had "accepted the
15
interest or any of its benefits." The Treasury regulations further
explain that acceptance of the interest within the meaning of §
2518(b)(3) includes not only explicit or implied acceptance of the
interest or any of its benefits, but also the receipt of
consideration in return for executing the disclaimer. See Treas.
Reg. § 25.2518-1(d)(1).
3 Unqualified means "not modified by reservations or
restrictions." Id. Under the plain meaning of the statute, an
"irrevocable and unqualified" disclaimer is a relinquishment of a
legal right that is incapable of being retracted or revoked by the
disclaimant and is not modified by reservations or restrictions
that limit its enforceability. None of the written disclaimers
challenged by the Commissioner can be attacked as being subject to
revocation or subject to some condition: the documents executed by
the disclaimants are irrevocable and unqualified on their face.
Monroe's gifts, given after the disclaimants renounced their
bequests, do not change the irrevocability of the disclaimers:
once executed, the disclaimers were effective to give up the
legatees' rights to their respective bequests from Louise Monroe's
estate. The Commissioner, unlike the Tax Court, seems to be
implying that the legatees actually revoked their disclaimers by
accepting the gifts from Monroe. But even if the disclaimants
subsequently received and accepted a payment from Monroe, the
Commissioner has not demonstrated how such acceptance affects the
enforceability of the previously executed disclaimer. The
disclaimants still had no right to such a payment from the estate
16
or from Monroe. Thus, the disclaimers were not revoked.
But irrevocability is a side issue. The real bone of
contention is whether the disclaimers were "unqualified", and
whether unqualified has some meaning beyond the possibilities
carefully delineated in the applicable Treasury Regulations. None
of the written disclaimers articulates any kind of disabling
qualification, of course. Nevertheless, the Tax Court and the
Commissioner assert that because all but one of the disclaimants
"expected," because they were "induced" or "coerced" by Monroe,
that they would eventually receive their bequests in the form of a
gift or legacy, their renunciations were "qualified" to the extent
of the expectation. As the Tax Court later put it, a disclaimer is
not "unqualified" if it rests on an "implied promise" that the
disclaimant will be better off executing the disclaimer than not
doing so. Further, according to the Tax Court, the "implied
promise" may exist even though the disclaimants did not negotiate
or bargain with Monroe for later recompense.
We disagree with this interpretation of "unqualified." It is
inconsistent with a holistic reading of section 2518(b), contrary
to the governing Treasury Regulations and the Service's letter
rulings, and intolerably, unnecessarily vague.
Section 2518(b) describes a covered disclaimer as one which is
"unqualified ... but only if [the disclaimant] ... has not accepted
the interest or any of its benefits." A "qualification,"
therefore, would seem to depend on the tangible receipt of
property, i.e., the "interest or any of its benefits." That is
17
also the most sensible understanding of an unqualified disclaimer.
One who disclaims an interest in property must do so without
getting something in exchange; and since property has been given
up, it follows that a "qualified disclaimer" would be one in which
the renunciation is not complete because property has been kept or
received in return.
The Commissioner and Tax Court would eliminate this statutory
symmetry by holding that a disclaimer of property is "qualified"
even though something less than property, e.g. an "expectation" or
"implied promise", is received in return. While their reading
would enhance the government's ability to disqualify disclaimers,
it also rests on an incomprehensible subjective standard. How
likely is it, in tax terms, that people would disclaim "a bird in
the hand" purely altruistically? Yet the clear inference to be
drawn from the Tax Court's approach to this case is that a
"qualified disclaimer" demands no less than disinterest in the
"property or its benefits." The court voided all of the
disclaimers here except that of Ms. Tebo, who acted solely for
personal reasons in executing a disclaimer. On the contrary, as
the Service's letter rulings indicate, a primary purpose of the law
authorizing qualified disclaimers is to facilitate post-mortem
estate tax planning and to increase family wealth on the
"expectation" that there will thus remain more wealth to pass on to
disclaimants in the future. Consequently, if the Tax Court's
subjective interpretation of "unqualified" disclaimer is accepted,
it undermines the very purpose for which the provision was enacted.
18
It also ensures litigation in virtually every disclaimer situation,
because it can be assumed that heirs and legatees rarely execute
disclaimers for tax purposes without having had some "expectations"
or "inducements" based on conversations with advisers on the
prospective benefits of such a course of action.
Not only does the statutory language conflict with the Tax
Court's interpretation of an "unqualified disclaimer," but the
Treasury Regulations are also incompatible with the "expectation"
or "implied promise" theory. This is not to say that we are
required to enforce Treasury Regulations instead of the statute,
but rather, that the regulations mirror the correct understanding
of the statute better than the Commissioner's and Tax Court's
present positions. The regulations set forth two situations in
which a disclaimer expresses a mere qualified refusal to accept an
interest in property: when the disclaimant accepts, expressly or
impliedly, the interest or any of its benefits; and when the
disclaimant receives "consideration" in return for executing the
disclaimer. Treas. Reg. § 25.2518-2(d)(1). Consistent with our
interpretation, a disclaimant cannot purport to disclaim, while
taking actual advantage of the property "or any of its benefits."
Further, the disclaimant cannot accept "benefits" from the property
by receiving consideration in exchange for the disclaimer. The
juxtaposition in the regulation between the "implied" acceptance of
the interest or any of its benefits and the "consideration" that
must be received in exchange for a disclaimer is not accidental.
One may impliedly accept the benefits of property, for instance by
19
pledging it as security for a loan, and therefore act
inconsistently when making an alleged disclaimer. On the other
hand, only by receiving "consideration" in the classic sense does
one receive "property" or any of its benefits in exchange for
executing the disclaimer. We thus agree with the estate that to
have accepted the benefits of a disclaimed interest, the
disclaimant must have received actual consideration in return for
renouncing his legacy.
A disclaimant's mere expectation of a future benefit in
return for executing a disclaimer will not render it "unqualified."
"Consideration", used deliberately in the regulations, is a term of
art. See Philpot v. Gruninger, 81 U.S. (14 Wall.) 570, 577, 20
L.Ed. 743 (1872); Fire Ins. Ass'n v. Wickham, 141 U.S. 564, 579,
12 S.Ct. 84, 88, 35 L.Ed. 860 (1891) (to constitute consideration,
promise "must have been offered by one party, and accepted by the
other, as one element of the contract"). This is the way the
regulations are written, and it is consistent with the
Commissioner's letter rulings, which are properly cited as evidence
of how the Commissioner has interpreted the law in the past. See
Transco Exploration Co., 949 F.2d at 840. In each of the three
rulings cited above, the obvious expectation that the disclaimant
would be better off in the long-run by renouncing his interest in
favor of the decedent's spouse did not violate the bar against
acceptance of the disclaimed interest or its benefits. See LTR
8701001, LTR 9427030, and LTR 9509003, supra. In one letter
ruling, the surviving spouse proposed to set up an inter vivos
20
trust calling for the same distributions at her death as were
provided in the trust established by the decedent. See LTR
9427030. In each case, the Commissioner cited the lack of an
agreement between the parties as to what the disclaimants were to
receive in the future. The Commissioner implicitly recognized the
distinction between the expectation that renouncing is in the
disclaimant's best interest and an expectation that rises to the
level of consideration. The charitable contribution cases also
recognize this distinction. See, e.g., Wardwell, 301 F.2d at 638
("Motivation and personal expectation do not destroy the reality
and genuineness of a given transaction, even in tax cases"). Thus,
the question for each disclaimer is whether the decision to
disclaim was part of mutually-bargained-for consideration or a mere
unenforceable hope of future benefit, whether that unenforceable
hope springs from family ties, long-term friendship or employment,
or a generalized fear that benefits will be withheld in the future
absent execution of the disclaimer.
Accordingly, we also agree with the estate that the Tax Court
was required to evaluate each disclaimer under the requirements of
§ 2518. The statutory requirements are applicable to each interest
disclaimed. The estate submitted documentary evidence supporting
all 29 disclaimers and testimony regarding all but two. Although
the Tax Court singled out Helene Tebo, finding that she disclaimed
her bequest for personal reasons, its opinion lumps the remaining
28 disclaimers together. As the Commissioner argues, the Tax Court
may have focused on alleged inducement and/or coercion of the
21
disclaimants by Robert and Edgar Monroe, rather than on each
legatee's motivation for disclaiming. But the correct standard
requires a finding whether there was actual bargained-for
consideration for the disclaimers.
The rehearsed presentation by Robert Monroe does not in
itself support a finding that there was consideration. He
explained the estate tax problems created by the decedent's will
and how executing the disclaimers would affect the distribution of
property. He informed the legatees that they were giving up a
right and that he could not promise them anything in return for
that. The only potentially questionable part of the presentation
was the reference to his uncle's generosity. The Tax Court found
that the intent of this statement was
to inform the disclaimants that the probability that they
would receive something from Monroe in the future was good.
Conversely, if the legatees refused to disclaim, they were
unlikely to receive anything from Monroe subsequently, because
their refusal would be against Monroe's wishes.
Even assuming that the Tax Court correctly ascertained Robert
Monroe's intention, his statements merely reminding the
disclaimants of Monroe's history of generosity, without
demonstrating that the individual legatee did or could reasonably
be expected to interpret such a reminder as a promise, do not
invalidate the disclaimers. It is only where the evidence
indicates that Robert or Edgar Monroe went further than this
rehearsed presentation, or that a particular legatee interpreted
22
this as a promise,4 that the Tax Court's findings might be
supported. Furthermore, even if the record shows that Robert or
Edgar Monroe went too far in their representations to a specific
legatee, that does not support a generalization applicable to other
disclaimants.
Turning to an evaluation of the record relevant to each
disclaimer, we conclude that for the majority of the disclaimants,
the evidence as a matter of law does not support a finding of any
agreement that would amount to consideration for the execution of
the disclaimers. The duty to defer to the Tax Court's findings of
fact applies only insofar as the Tax Court correctly applied the
law, which it did not do here. And in any event, with regard to
most of the disclaimers, there is no specific evidence other than
that which only supports a finding that the disclaimers were made
without consideration.
In addition to testimony indicating that they were made no
promises and that they understood that they were giving up any
right to claim something from Louise Monroe's estate, many legatees
testified to some personal reason inconsistent with improper
inducement or coercion by Monroe. These are the disclaimers
executed by Clarence Landry,5 groundskeeper for 14 years ($14,350);
4
The Tax Court repeatedly implies that "threats" could create
"consideration" for a renunciation of a legacy. We leave that
question for another day, although the idea appears incompatible
with a focus on consideration for a disclaimer. There is no
evidence that any legatee was coerced into executing a disclaimer.
5
He testified that "[Edgar Monroe] didn't make any promises.
I didn't know whether I was going to get anything or not. Can't
23
John McDonald,6 butler/chauffeur for 12 years ($8,975); Marie
Louise Conway,7 household employee for 19 years ($9,430); Carol
Monroe,8 ex-wife of Robert Monroe ($5,000); Edward Jameson,9
chauffeur for 27 summers in Newport, Rhode Island ($5,000);
say, you particularly what I was going to get. I could end up with
nothing, because I signed for nothing."
6
Although McDonald, who was 84 at the time he testified at
trial, said that he did not really understand what the renunciation
said, he also testified that he discussed it with his niece, he
understood that he was giving up the money given to him by Louise
Monroe, he did so voluntarily, he had no recollection of anyone
telling him he would get something for disclaiming his interest,
and he could not remember specifically why he signed the
renunciation.
7
Conway showed the disclaimer to her son, who explained to her
that she would be giving up her right to inherit under Louise
Monroe's will. She testified that "I have faith in Mr. Monroe if
I was entitled to whatever it was, I am sure I would get it," and
that "when you work for a person as long as I have worked—you know,
I have worked for them, you just have faith in people, and I had
faith in [Edgar Monroe]." Under questioning from the Court, Conway
testified that she did not know what would happen if she did not
sign the disclaimer: "I just didn't give that a thought. I really
didn't."
8
The Monroes were so generous in putting her children through
college that Carol Monroe was "deeply grateful" and renounced her
bequest as "a way of paying back a debt that I felt." After
executing the disclaimer, she put the matter "totally out of my
mind after that, to the point that I didn't remember how much had,
you know, been given to me."
9
When the Monroes sold their Newport residence, they created
a trust fund to take care of Jameson. Jameson had passed away as
of the trial, and Robert Monroe testified that he made no bargains
with Jameson in return for the disclaimer Jameson executed.
24
Dorothy Fujii,10 the Monroes' niece ($5,000); Beryl Fransen,11
Louise Monroe's cousin ($75,000); Anthony Farris,12 a gardener at
the Monroe's Mississippi home ($5,000); Miriam Walmsley,13 daughter
of the Monroes' closest friends in New Orleans ($5,000); Joseph P.
Monroe,14 Robert Monroe's brother ($5,000); Joy Monroe,15 Joseph P.
10
Fujii had died before the trial. Robert Monroe testified
that he telephoned her in Japan to discuss the disclaimer. Fujii
did not commit to making the disclaimer right away, but discussed
the issue with her sister, Marilyn Monroe Wolf, before deciding to
renounce. Robert Monroe testified that he made no promises of any
future benefit in return for her disclaimer.
11
Fransen had died before the trial. Robert Monroe testified
that he made no promises of anything in return to Fransen for
signing the disclaimer. James Burke, the attorney who served as a
notary for Fransen's disclaimer, testified that Fransen signed the
disclaimer voluntarily and that he observed no explicit or implicit
promise on the part of Robert Monroe.
12
Mr. Farris was unavailable to testify at trial. He was one
of the four Mississippi household employees approached by Edgar
Monroe about the disclaimers. Robert Monroe, who was in the house
when Edgar Monroe talked to each of the employees, testified that
he did not observe any promises or threats being made to Farris to
get him to disclaim.
13
Robert Monroe testified that he approached Walmsley about the
disclaimer and that she voluntarily signed it without any promises
of future benefits.
14
Joseph P. Monroe was ill during the trial, but the parties
stipulated that he would testify in part that Robert Monroe "made
it clear to me that I was under no obligation to renounce. I
decided to execute a renunciation because I hoped that doing so
would cause my Uncle Edgar to view me in a favorable light in the
future. I was never promised anything for my renunciation nor was
I given any commitment that any future gifts would be made by J.
Edgar Monroe. As J. Edgar Monroe had been very generous to me and
my family in the past, I simply felt that executing the
renunciation would be in my best long-term interest."
15
The parties stipulated that Joy Monroe would testify that she
executed the renunciation because her husband "advised me that he
was going to renounce his inheritance because he felt that it would
be in our best long-term interest. I chose to renounce the
inheritance because my husband asked me to."
25
Monroe's wife ($5,000); Beatrice de la Vergne,16 distant cousin
($5,000); Robert Monroe ($5,000); Marjorie Monroe Colomb
($10,000),17 and Teche Bennett ($5,000).18
There was no evidence about the disclaimer in the amount of
$5,000 executed by Airline Animal Hospital other than the
renunciation document itself. From the four corners of the
document, there is no reason to doubt that it was executed
voluntarily and without consideration.
The remaining disclaimers involve at least some evidence that
Robert or Edgar Monroe may have gone further in their
representations than Robert Monroe testified was his rehearsed
presentation. Beginning with the largest disclaimer, that of the
Hayward family, including Kathleen Hayward's renunciation of her
16
De la Vergne testified that "[Robert Monroe] said that there
was some problems with the income tax, and it would be better for
the estate if that was renounced. And since I certainly didn't
want to do anything to hurt people who had been kind and nice to
me, I said I would be glad to." Robert Monroe did remind her that
Monroe was a generous man.
17
Marjorie Monroe Colomb, Monroe's niece, testified that she
renounced because Monroe "has been good to me too many years, and
he has given me just so many things over the years. He has been
very kind, so what was this one thing?" She also testified that
Monroe had previously given her gifts of $10,000 "almost every
year; not quite." Monroe had also bankrolled her husband's failed
business. Colomb testified that she had not been promised anything
in return for her disclaimer.
18
Bennett testified: "My uncle Edgar has given so much to us
that if he would have asked me to give anything up, I would have.
I just had that kind of respect for him." She talked it over with
a friend who was a lawyer: "And he had asked me if I understood
that I was not going—you know, that I am giving this money up, was
I crazy. And I told him, no, I was asked to do it, and I would.
And he says, Well, did they promise you, and I told him, no, they
couldn't promise me, and that I was doing this because I wanted
to."
26
interest in the income from a $500,000 bond and her three
children's renunciation19 of their interest in the trust principal,
the Tax Court cited her testimony on cross-examination that
although Monroe "didn't state that" she would get her disclaimed
inheritance either during Monroe's lifetime or in his will, she
"sort of certainly assumed that" she would. Viewed in context,
however, this testimony furnishes no support for a finding of
actual consideration for executing disclaimers. First, each of her
adult children executed disclaimers of their interests in the trust
principal after being asked to do so by their mother. At a
minimum, their disclaimers, which represented the bulk of the
$535,781 present value of the bequest, warrants analysis separate
from that of Kathleen Hayward. It is apparent that an adult's
decision to renounce a bequest at the simple request of his mother,
without any indication that he was promised anything in return for
the disclaimer, does not take a disclaimer outside the strictures
of § 2518(b).
Second, turning to Hayward's statements, we are convinced that
it would be error to conclude that her assumption that Monroe would
honor her aunt's request in his will made her disclaimer in return
for an implicit promise from Monroe. Hayward did not testify that
Monroe explicitly or implicitly created this expectation. In fact
she testified that Monroe did not say that he would give her
19
Hayward's daughters, Cherie, Shannon, and Susanne Champagne,
also were the beneficiaries of cash bequests of $5,000 each. It is
undisputed that they disclaimed these bequests for the same reasons
that they disclaimed their interests in the trust.
27
anything, that she renounced "[b]ecause my uncle was upset, and he
is very important to me, and I didn't like to see him like that,"
that she understood, upon the advice of an attorney, that Monroe
was under no obligation to give her anything, and that although she
"probably would have been hurt" had Monroe not remembered her in
his will, it would not have made a difference to her if she had not
received the money because "[she didn't] really need it."
Elizabeth Monroe Richardson, Monroe's niece with the daughter
who was ill with cancer, renounced her $5,000 bequest because "you
don't go against Edgar if you ever want anything from him." This
fear that she and her daughter might not be the beneficiaries of
future support from Edgar if the bequest was not disclaimed
apparently arose from Richardson's prior dealings with Monroe,
because she did not testify that anything said to her in the
discussions about the disclaimer indicated that Robert or Edgar
Monroe explicitly or implicitly threatened her with a loss of
future support. Although Richardson may have felt that irritating
Edgar Monroe might jeopardize his future support, this does not
invalidate the disclaimer any more than a generalized expectation
that Monroe would be generous in the future if the bequest was
renounced. Absent some promise or agreement specifically related
to renouncing the bequest, an otherwise valid disclaimer should not
be invalidated.
Marilyn Monroe Wolf, a niece of the Monroes, testified that
Robert Monroe told her that because of estate taxes, she would only
receive $1,800 of the $5,000 left to her. However "it would go to
28
my uncle tax-free if I did renounce, and that I would not be
promised anything in return for the renunciation; it was up to me
if I wanted to do that or not." She decided to renounce because
the amount she would receive "was not a significant amount to me,
and since [Edgar Monroe] was upset about it, I wanted to keep him
happy, so I agreed to do it." Wolf wanted to keep Monroe happy
because "I had an expectation that I or my sons would be in his
will, and I didn't want to do anything to interfere with that."
However, she testified that she was not promised anything or "led
to believe she would get anything" in return for renouncing the
bequest. Wolf may have believed that she had a greater likelihood
of keeping her family in Monroe's will by executing the disclaimer,
but her expectation was not created by any promise or agreement
made by Robert Monroe. Accordingly, her disclaimer, like that of
Betsy Richardson, does not fall outside the scope of § 2518(b).
Finally, six of the disclaimers present fact issues which
must be reconsidered by the Tax Court in light of the correct
standard.
Lawrence Lee's testimony, excerpted earlier, indicates that
although he felt that Monroe made no promises or guarantees, Monroe
did say that "he would take care of it" or "take care of us [the
household employees]." Lee had worked for the Monroes for 40 years
as of Louise Monroe's death and renounced a bequest of $50,000 plus
his annual salary of $10,806. Lee was highly likely to trust and
rely on any implicit representation by Monroe. This is a close
case. Although Monroe made no specific reference to a gift or
29
subsequent bequest, the circumstances of the representation require
further analysis based on the proper legal standard.
Judith Bazer, Monroe's great, great niece, who renounced a
$5,000 bequest, executed an affidavit at the request of I.R.S.
agents. In the affidavit, she states that Robert Monroe told her
that "if we would give the money back by executing the disclaimer,
we would save on the taxes and my uncle (J. Edgar Monroe) would see
to it that we get the full amount of our inheritance." Judith
Bazer also stated in the affidavit that when Monroe later wrote her
the $5,000 check, "it was accepted as a gift, although I knew the
true purpose of the check." Judith Bazer also testified at trial
that Robert Monroe only told her that "[y]our uncle has taken care
of you, and he always will."
Rachel Bazer, who disclaimed a $5,000 bequest, was present
when Robert Monroe spoke to her sister, Judith Bazer, about
renouncing.
Shane Bazer, great, great nephew of the Monroes, testified
that he was not promised anything in return for his disclaimer of
a $5,000 bequest. However, the Commissioner presented testimony
from I.R.S. agent Raymond Gregson that Shane Bazer had told Gregson
in a prior interview that Robert Monroe said that Shane had a
better chance of receiving the full amount of the bequest if he
renounced.
Vivian Simmons, the Monroes' maid for four years, signed an
affidavit stating that Robert Monroe told her that "if I would sign
the disclaimer, J. Edgar Monroe would see to it that I would get
30
the full amount of money willed to me from the estate."
Donatilda Harris, the Monroes' cook for over 50 years,
testified that Robert Monroe asked her to renounce, stating that
"he would take care of us." On cross-examination, Harris admitted
telling I.R.S. agents on a prior occasion that she was told at the
time of her disclaimer that she "would receive the money that you
were disclaiming from J. Edgar Monroe."
Step-transaction/Substance-over-form
Finally, we disagree with the Commissioner's contention that
the Tax Court's decision should be affirmed on substance-over-form
or step-transaction grounds. While the disclaimants, to varying
degrees, may have thought they would eventually receive something
from Monroe, even the actual amount of their legacy, the evidence
shows that most really believed they were, in fact, giving up their
legacy under Louise Monroe's will. Several legatees sought outside
counsel before making their decision. As long as there was no
implicit agreement that they would receive something from Monroe in
return for their disclaimers, the fact that the legatees understood
they were giving up their rights and actually did, in a manner
effective under Louisiana law, give up their rights is sufficient.
There is no evidence that any of the legatees who executed
disclaimers that we have held to be "qualified disclaimers" under
§ 2518(b) believed they were receiving their inheritance under
Louise Monroe's will when they received Edgar Monroe's gifts.
Accordingly, Monroe's subsequent gifts do not change the legitimacy
or legal effect of the legatee's renunciations.
31
V. NEGLIGENCE PENALTY
Although the Commissioner conceded at trial that the fraud
penalty was inapplicable, she nonetheless argued for the imposition
of a 20% negligence penalty under I.R.C. § 6662(a). The Tax Court,
rejecting the estate's arguments, concluded that the estate could
not rely on the accountants' advice because Monroe had failed to
disclose material facts. In particular, the Tax Court felt that
without being told that Monroe intended to make gifts to the
legatees shortly after the disclaimers were executed, the
accountants could not properly advise him. Furthermore, the Tax
Court concluded that Monroe's honest disagreement related entirely
to interpretation of the facts and not of any unclear legal
principles.
The Tax Court erred. First, as we have already determined
that 23 of the 29 disclaimers were "qualified disclaimers" within
§ 2518(b), any addition to tax for negligence would be
proportionally reduced by the amount of understatement that results
when these disclaimers are once again included in the marital
deduction.
However, even with regard to the remaining disclaimers that
continue to pose factual issues, no negligence penalty should have
been or is warranted. Negligence is defined in § 6662(c) as "any
failure to make a reasonable attempt to comply with the provisions
of this title...." Monroe was advised by Touche Ross that gift
giving to the disclaimants was allowed, as long as no promises were
made to induce the legatees to renounce. Based on that advice, it
32
was not unreasonable for Monroe, who was 93 years old at the time
the disclaimers were made, to decide that the better course was to
make any gifts that he wished to make sooner rather than later.20
Furthermore, the only additional advice that Monroe would have
heard had he told his accountants that he decided to make the gifts
was that, although it would not change the substance of the
transaction, it would make the transactions look more suspicious,
and might subject the estate's return to increased I.R.S. scrutiny.
Otherwise, the accountants testified that they would not have
changed the advice they gave. Thus, a prudent man, as defined by
the Tax Court, would have heard from his accountants that although
appearances would suffer from gift giving so soon after the
disclaimers, the actual legal status of the disclaimers would not
change. We doubt that a man in Monroe's position would or should
have been concerned about such appearances.
VI.
For the foregoing reasons, we REVERSE in part and REMAND for
reconsideration of the status of the disclaimers executed by the 6
named individuals.
REVERSED and REMANDED.
KING, Circuit Judge, dissenting:
This is a fact-bound case, hard facts that have now made bad
20
Not only was Monroe significantly advanced in years, but he
had recently experienced significant health problems. In fact, he
was in a coma for a significant period of time while he was in his
80s. Monroe's decision to not delay in making the gifts proved
prescient: he died in May 1990, just five months after the gifts
were made to the legatees.
33
law. In a three-day trial, the Tax Court heard twenty-three
witnesses, including seventeen of the twenty-nine disclaimants.
The court made findings of fact that the majority cannot hold to be
clearly erroneous, although much of the majority opinion amounts to
that. Instead, the majority invokes the rule that we need not
defer to fact-findings infected by an incorrect view of the law and
goes on to set out what it perceives to be the correct view of the
law: in determining whether a disclaimer is unqualified, "the
correct standard requires a finding whether there was actual
bargained-for consideration for the disclaimer[ ]." Majority Op.
at 160-61. Under the rule promulgated by the majority, only
"mutually-bargained-for consideration" will serve to disqualify the
disclaimer. Id. at 160. Neither the statute nor the regulations
impose such a requirement, and it creates ample possibilities for
tax evasion. Only the naive or the uncounseled will engage in
actual bargaining for the consideration to be received in exchange
for a disclaimer or, as is the case with the six disclaimants that
are the subject of the majority's remand, will admit to it. I
respectfully dissent.
It is useful to summarize what happened here. J. Edgar
Monroe, the decedent's husband, and Robert J. Monroe, his nephew,
solicited and obtained disclaimers of specific bequests totaling
$892,781 from twenty-nine legatees under Mrs. Monroe's will.
Within days of the execution of the disclaimers, each disclaimant
received a check from Mr. Monroe for the amount of the disclaimed
legacy. It is apparent, and the Tax Court so found, that the
34
disclaimers and subsequent checks were not isolated events. They
were part of a well-intentioned plan to secure to the legatees the
amount of their bequests without diminution for the substantial
taxes—in many cases, the tax haircut would have been seventy-five
to eighty percent of the amount of the bequest—that would otherwise
have been chargeable to those bequests.1 The legatees from whom
disclaimers were solicited were those who "had witnessed firsthand
and had felt" Mr. Monroe's generosity. In soliciting the
disclaimers, Robert Monroe informed the legatees that taxes would
substantially reduce the amount of their legacies and that Mr.
Monroe was upset by the high taxes. Robert Monroe made a point of
reminding the legatees that Mr. Monroe was a generous man.2 The
1
Provisions in Mrs. Monroe's will, coupled with the applicable
tax law, operated effectively to impose the bulk of the estate and
generation skipping transfer taxes on the legatees. If the
legatees disclaimed, their bequests would fall into the residuary
estate, which, under Mrs. Monroe's will, passed to Mr. Monroe.
Provided the disclaimers were qualified within the meaning of
I.R.C. § 2518(b), Mrs. Monroe's estate could reduce its estate tax
burden by claiming the marital deduction for the amount of the
bequests and could eliminate entirely the generation skipping
transfer tax. Mr. Monroe clearly hoped to spare the legatees the
tremendous tax burden they would bear if they took under the will
by paying them the full amount of the bequests himself, largely out
of the tax savings that inured to the estate, and therefore to Mr.
Monroe as the residuary legatee, as a result of redirecting the
bequests to the residuary estate.
2
Neither Mr. Monroe nor Robert Monroe told the accounting firm
responsible for the preparation of the estate tax return and for
the related estate tax advice that the gifts had been made. The
required gift tax return was not filed. The revenue agent who
initiated the audit of the estate tax return did not find out about
the gifts until April 1991 when, during the course of the audit, he
interviewed two of the donees, who told him about the gifts they
had received. The agent testified that he scheduled the estate for
audit because he thought it peculiar that employees of the Monroes
who were earning less than $10,000 a year had renounced bequests of
$50,000 each, plus one year's salary. Ironically, three of those
35
Tax Court found that:
The disclaimants may not have explicitly negotiated with or
bargained with Monroe or the nephew for consideration in
return for executing their disclaimers. Each of the
disclaimants other than Tebo, however, was induced or, in some
instances, coerced, into executing a disclaimer. Under these
circumstances, the consideration for their disclaimers was the
implied promise that they would be better off if they did what
Monroe wanted them to do than if they refused to do so. Their
disclaimers thus were not "unqualified" as required by section
2518.
Tebo is an exception because we are persuaded by her
testimony that she voluntarily and without expectation of
anything in return renounced her legacy for personal
reasons....
In addition, petitioner has failed to persuade us that
Monroe's cash gifts to the 29 disclaimants were merely part of
a pattern of generosity that Monroe had engaged in throughout
his life. These "gifts" were all cash payments of specific
and substantial amounts made to the disclaimants shortly after
they executed disclaimers. The inference drawn from this
targeted gift-giving is that Monroe made them "in return" for
the disclaimants' renouncing their bequests and not from a
"detached and disinterested generosity." ... Even if Monroe
had no legal obligation to compensate the disclaimants, they
anticipated, and received, payments from him that left them in
the same economic position as if they had accepted the
legacies in the first place.
The majority tells us that consideration consisting of a
promise, the existence of which is fairly implied or inferred from
what is actually said and done, of a gift or bequest in the full
amount of the bequest disclaimed is not enough to disqualify a
disclaimer. Instead, the majority requires explicitly negotiated
or bargained-for consideration, presumably of the sort required to
support a contract. The consideration requirement that the
employees testified that Mr. Monroe or Robert Monroe had told them
that Mr. Monroe "would take care of it" or "see to it that [they]
would get the full amount of money willed to [them] from the
estate" and are subjects of the majority's remand.
36
majority imposes on disqualification of disclaimers is actually
more rigid than the consideration requirement in contract
formation. It is hornbook law that an implied promise constitutes
sufficient consideration to form a contract. See ARTHUR L. CORBIN,
CORBIN ON CONTRACTS § 144 (1963) ("If a promisor bargains for another
promise in return and gets it, he is bound. It makes no difference
that the return promise is implied from conduct or from language
that is not in the form of express promissory words. That is, it
makes no difference with respect to the question of sufficiency of
consideration."). Yet the majority holds that an implied promise
of remuneration such as the one found by the Tax Court in this case
is insufficient to disqualify a disclaimer. As if that were not
enough, the majority also tells us that, because disclaimer entails
relinquishment of property, a disqualification "would seem to
depend on the tangible receipt of property," whatever that means.
Majority Op. at 159.
To summarize, the majority's conception of a disqualifying
disclaimer possesses three, perhaps four, distinguishing
characteristics. First, disqualification of a disclaimer requires
the existence of explicit negotiations or bargaining. Second, the
disclaimant must receive property, as distinguished from a promise
of property, in exchange for the disclaimer. Third, the property
received must consist of " "consideration' in the classic sense."
Majority Op. at 160. Fourth, because a check from Mr. Monroe in
the full amount of the disclaimed bequest received a few days after
the disclaimer would seem to constitute the kind of tangible
37
property consideration for the disclaimer that would satisfy the
second and third facets of the majority's rule but somehow does
not, the majority's characterization of disqualifying disclaimers
may also require that the disclaimant receive the tangible property
before the disclaimer. The estate argues for this position, and
the majority arguably accepts it. All of these requirements result
from an overly restrictive and unwarranted reading of the statute.
Section 2518 of the Internal Revenue Code defines an
"unqualified disclaimer" as "an irrevocable and unqualified refusal
by a person to accept an interest in property but only if ... such
person has not accepted the interest or any of its benefits."
I.R.C. § 2518(b). The two statutory rationales for the Tax Court's
decision represent a fair reading of the statute. First, giving up
the bequest "in return for" a gift is akin to accepting the
benefits of the bequest.3 Second, a refusal to accept a bequest
from Mrs. Monroe "in return for" a gift from Mr. Monroe is not an
unqualified refusal. Contrary to the reading adopted by the
majority, the statute makes no mention of bargaining, tangible
property, consideration or an enforceable obligation, and there is
no warrant in the statute for compelling the Commissioner to
litigate over these matters when challenging a disqualification.
The majority supports its reading of the statute by misreading
3
Treas. Reg. § 25.2518(d)(1) tells us that "[a]cceptance is
manifested by an affirmative act which is consistent with the
ownership of the interest in property." Exchanging a bequest from
Mrs. Monroe for a gift from Mr. Monroe can fairly be said to
constitute an act that is consistent with ownership of the bequest.
38
Treas. Reg. § 25.2518-1(d)(1) to require that a disclaimant
receive consideration in exchange for the disclaimer. As the
Commissioner points out, the regulation describes several
circumstances in which a disclaimant is deemed to have accepted the
benefits of a legacy, the last among them (or, in the words of the
regulation, "in addition" to the other circumstances listed in the
regulation) being where the disclaimant accepts consideration in
return for the disclaimer. The regulation cannot fairly be read to
require consideration before disqualifying a disclaimer.
The majority likens the promise of gift or bequest implied
from Mr. Monroe's words and actions to a "mere expectation" or
unenforceable hope of future benefit and rejects the implied
promise along with the mere expectation. As the private letter
rulings make clear, in the absence of an express or implied
agreement, the mere expectation or hope that a disclaimant may one
day benefit from the disclaimed property (generally in the form of
an inheritance) is too speculative to form the basis for
disqualifying a disclaimer. But the crux of the inquiry is whether
there is an express or implied agreement. Based on all of the
evidence before it, including evidence of the words and deeds of
Mr. Monroe and Robert Monroe, as well as the legatees' agreement to
disclaim, the Tax Court reasonably deduced that an implied
agreement existed between Mr. Monroe and the legatees. The Tax
Court cannot fairly be read to have based its decision on a "mere
expectation" or hope of future benefit on the part of the legatees.
Finally, the majority opinion contains a great deal of
39
fact-finding, and the majority fails to acknowledge it as such.
This case requires, first and foremost, credibility determinations
about the testimony of Robert Monroe and the disclaimants,
determinations properly relegated to the Tax Court. The Tax Court
was not required to accept that testimony at face value, nor was it
required to go through each piece of testimony and say that the
court did not credit it. The Tax Court's opinion makes very clear
that the court simply did not credit much of what it heard. We
overstep the bounds of our authority as appellate judges when we go
back through an appellate record and make our own credibility
assessments about the witnesses' testimony. The majority opinion
errs in that respect.
As is apparent from the majority opinion, no law addressing
factual scenarios even remotely similar to the facts at issue here
exists at the appellate level. The Commissioner accepts the
concept of post-mortem tax planning, and until now the rules have
been relatively clear. As Robert Monroe testified in the Tax
Court, "the person renouncing ... can't receive a benefit for
signing a renunciation." As for a subsequent gift or bequest, in
Robert's words, "you just couldn't have a promise." The Tax Court
found as facts that the disclaimants received a benefit for signing
a renunciation, and that just such a promise existed. In order to
overturn those fact-findings, the majority has now imported
concepts of explicit bargaining, consideration and tangible receipt
of property into a statute conspicuously devoid of them. I
respectfully dissent.
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Estate of Monroe v. Commissioner
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