Estate of Gerson shows how the IRS uses its ability to promulgate regulations and how the IRS positions cases for litigation in an effort to create pro-IRS tax laws.

Facts & Procedural On Gerson’s Case

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….

Tax problem or dispute?

Call today, (713) 909-4906

  • Former IRS attorneys
  • Deep tax knowledge
  • Reasonable rates
Start the Conversation