Fifth Circuit Upholds Qualified Disclaimer

In an unpublished opinion, the Fifth Circuit Court of Appeals held that a disclaimer by a legatee did not result in a lapsed bequest under Mississippi state law that would have resulted in taxable gifts of property passing to the legatee’s heirs.

The circuit court thus reversed and remanded a decision by the federal district court for southern Mississippi that had ruled for the IRS on the issue.

Franklin M. Tatum Sr. (Tatum Sr.) died testate in 1987 in Mississippi. He devised 60% of his residual estate, which included valuable stock, to his son, Franklin M. Tatum Jr. (Tatum Jr.), and 20% shares to each of Tatum Sr.’s two grandsons by his only other son, who had predeceased him. The will also provided that if any of the legatees predeceased Tatum Sr., their shares would pass to their descendants per stirpes.

Later in 1987, Tatum Jr., who was also one of three executors of his father’s will, disclaimed his interest in a letter to himself and the other executors. Accordingly, the probate court entered an order stating that Tatum Jr.’s disclaimed share would pass to his children as if Tatum Jr. had predeceased his father. In 1997, the stock was distributed to the heirs, including Tatum Jr.’s children.

Tatum Jr. died in 2003, and his wife, Doris Tatum, predeceased him in 2001. Both died testate. In 2008, the IRS sent notices of deficiency to the estates of both Tatum Jr. and Doris Tatum, alleging they failed to pay a combined $1.48 million in gift taxes due for 1997. The estates paid the taxes under protest and sued for a refund in district court. The IRS also asserted a negligence penalty, and if the court ruled for the IRS, the estates would have also owed more than $1.7 million in interest.

The district court said that Tatum Jr.’s disclaimer was not qualified under IRC § 2518(a) and therefore not exempt from gift tax because it failed the requirement of section 2518(b) that a qualified disclaimer must be made by an “irrevocable and unqualified refusal” of an interest in property and the requirement of section 2518(b)(4) that, as a result of the disclaimer, the interest must pass to the disclaimant’s spouse or another person without any direction by the disclaimant. The IRS argued that because Tatum Sr. made no clear provision in his will for an alternate disposition of the bequest if it was disclaimed but only provided an alternate disposition if Tatum Jr. predeceased him, the property passed to Tatum Jr. by intestate succession as a lapsed bequest.

While acknowledging the result “seems unfair,” the court said Tatum Jr. never disclaimed whatever intestate interest he might have had in the property and therefore his disclaimer was not a qualified disclaimer under section 2518(a). The court also noted that if Tatum Sr. had died after 1994, when Mississippi adopted the Uniform Disclaimer of Property Interest Act, state law would likely have favored the estates.

On appeal, the Fifth Circuit said that the general proposition that a lapsed bequest becomes intestate property was qualified by Mississippi’s anti-lapse statute (Miss. Code Ann. § 91-5-7), which provides that when the deceased beneficiary is a child of the testator, the bequest does not lapse but passes as if the legatee had survived the testator and then died intestate. In that case, Tatum Jr.’s interest would have passed to his heirs without any direction on his part, thus meeting the Code’s requirement for a qualified disclaimer.

  • Tatum v. U.S., docket no. 10-60852 (5th Cir. 8/8/11), rev’g Estate of Tatum Jr. v. U.S., docket nos. 2:09cv00048-KS-MTP and 2:09cv00049-KS-MTP (S.D. Miss. 10/6/10).

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