Should the IRS be Able to Rewrite Tax Laws that it Doesn't Agree With?
Estate of Gerson is a fascinating case in that it shows how the IRS uses its ability to promulgate Treasury Regulations and how the IRS positions tax litigation in an effort to create anti-taxpayer tax laws.
Gerson is a generation skipping transfer tax case. Mr. Gerson created a revocable trust that became irrevocable upon his demise. The trust gave the surviving Mrs. Gerson a general power to appoint the trust assets to anyone she wanted upon her demise. Pursuant to her estate documents, Mrs. Gerson opted to appoint the trust assets to her grandchildren upon her demise. Thus the trust assets skipped over her children and passed to her grandchildren.
The trust assets were probably not subject to estate taxes upon Mr. Gerson’s demise because the property qualified for the unlimited marital deduction, but the trust assets were probably subject to estate taxes in Mrs. Gerson’s estate upon her demise. According to the IRS and the Tax Court, the trust assets are also subject to the generation skipping transfer tax upon Mrs. Gerson’s demise. Gerson’s estate argued that the transfer to the Gerson grandchildren was not subject to the generation skipping transfer tax because the trust qualified for the trust tax exemption promulgated by Congress in 1985.
As the tax court admits in its court opinion two other federal circuit courts of appeal, the eighth and ninth circuits, have previously decided this exact case and those cases were decided in favor of the taxpayers. Gerson’s estate essentially argued that the IRS enacted Treasury Regulations in an effort to overturn these two prior circuit courts of appeal decisions. The IRS argued that their Treasury Regulation was a gap filler, in that Congress failed to specifically address the exemption as applied to transfers from irrevocable trusts so the IRS has the ability to promulgate a Treasury Regulation to fill that void.
If I were presiding in this case I think I would have sided with the taxpayer. The IRS should not be able to frustrate the clear mandate of Circuit Courts of Appeal by re-writing Treasury Regulations. In addition, taxpayers should be able to rely on Circuit Court precedent to structure their financial affairs. If the US Treasury did not like the court interpretations, its remedy should be to approach Congress and have Congress amend the statute.
I should note that the IRS and the tax court did rely on a Second Circuit Court of Appeal decision in reaching their conclusion; however, that opinion was not 100% on point and the eighth and ninth circuit opinions were.
It appears that this case will be subject to the law of the Sixth Circuit Court of Appeal. If the IRS is successful in this appeal, it will no doubt try to use the sixth circuit opinion to get the case before the Supreme Court. Had this case arisen in the eighth or ninth circuits, the IRS would probably not have pursued the case. That is how the IRS works. It bides its time and waits for the right facts to arise in the right jurisdiction....
Gerson is a generation skipping transfer tax case. Mr. Gerson created a revocable trust that became irrevocable upon his demise. The trust gave the surviving Mrs. Gerson a general power to appoint the trust assets to anyone she wanted upon her demise. Pursuant to her estate documents, Mrs. Gerson opted to appoint the trust assets to her grandchildren upon her demise. Thus the trust assets skipped over her children and passed to her grandchildren.
The trust assets were probably not subject to estate taxes upon Mr. Gerson’s demise because the property qualified for the unlimited marital deduction, but the trust assets were probably subject to estate taxes in Mrs. Gerson’s estate upon her demise. According to the IRS and the Tax Court, the trust assets are also subject to the generation skipping transfer tax upon Mrs. Gerson’s demise. Gerson’s estate argued that the transfer to the Gerson grandchildren was not subject to the generation skipping transfer tax because the trust qualified for the trust tax exemption promulgated by Congress in 1985.
As the tax court admits in its court opinion two other federal circuit courts of appeal, the eighth and ninth circuits, have previously decided this exact case and those cases were decided in favor of the taxpayers. Gerson’s estate essentially argued that the IRS enacted Treasury Regulations in an effort to overturn these two prior circuit courts of appeal decisions. The IRS argued that their Treasury Regulation was a gap filler, in that Congress failed to specifically address the exemption as applied to transfers from irrevocable trusts so the IRS has the ability to promulgate a Treasury Regulation to fill that void.
If I were presiding in this case I think I would have sided with the taxpayer. The IRS should not be able to frustrate the clear mandate of Circuit Courts of Appeal by re-writing Treasury Regulations. In addition, taxpayers should be able to rely on Circuit Court precedent to structure their financial affairs. If the US Treasury did not like the court interpretations, its remedy should be to approach Congress and have Congress amend the statute.
I should note that the IRS and the tax court did rely on a Second Circuit Court of Appeal decision in reaching their conclusion; however, that opinion was not 100% on point and the eighth and ninth circuit opinions were.
It appears that this case will be subject to the law of the Sixth Circuit Court of Appeal. If the IRS is successful in this appeal, it will no doubt try to use the sixth circuit opinion to get the case before the Supreme Court. Had this case arisen in the eighth or ninth circuits, the IRS would probably not have pursued the case. That is how the IRS works. It bides its time and waits for the right facts to arise in the right jurisdiction....
Labels: generation skipping transfer tax, IRS laws, revocable trust, tax laws
 
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2 Comments:
Under Brand X, any administrative agency can generally overturn an appellate court holding with which it disagrees by issuing new regs. I've seen academics write about Brand X, but I haven't seen tax practitioners discuss it much.
I am not familiar with Brand X; however, this type of issue has been addressed in the tax area.
Congress specifically granted the Treasury the right to promulgate regulations in Section 7805. Regulations issued under this section are considered "interpretive," in that they allow the IRS to write technical rules. The IRS can also issue "legislative" regulations, when Congress specifically grants the IRS the ability to write regulations on a particular topic. "Legislative" regulations are much harder to overturn than "administrative" regulations.
With that said, nothing in the IRS grant of authority allows it to overturn a federal court ruling for a court of competent jurisdiction -- especially not a federal court of appeal.
The IRS does have to consider binding precedent in promulgating regulations, or else it may find that the regulation is overturned by one or more courts in the future (that can create a nightmare of litigation and taxpayer requests for refunds, etc.).
When the IRS loses a court case like this it's recourse is to issue an Action on Decision, letting folks know that the IRS will litigate the matter in the future. The IRS is not able to simply rewrite the regulation to overturn the court decision.
That is what makes Gerson so interesting, as the case is not located in the jurisdiction where the circuit cases would be binding precedent and the IRS argued that it was not changing the law it was supplementing it. It is a very good argument, but it is not the reality. The IRS was not supplementing the law, as the other court cases were directly on point. Thus, the IRS was rewriting the law....
Kreig
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