Sixth Circuit Notes Split Re Interpretation of Tax Reform Act of 1986

Per Estate of Gerson v. C.I.R.,--- F.3d ----, 2007 WL 3307024 (6th Cir. Nov. 09, 2007):

The Code defines “generation-skipping transfer” to include “(1) a taxable distribution, (2) a taxable termination, and (3) a direct skip.” I.R.C. § 2611(a). In this case the facts evidence a direct skip, “a transfer subject to a tax imposed by chapter 11 or 12 of an interest in property to a skip person.” Id. § 2612(c)(1). The Estate thus meets the criteria under the provision's first clause.

The next step in the analysis, then, is to decide whether the “transfer is not made out of corpus added to the trust after September 25, 1985.” Tax Reform Act of 1986 § 1433(b)(2)(A).

The parties' dispute on this second clause brings to this court a question that divides three of our sister circuits and the Tax Court below. Compare Bachler v. United States, 281 F.3d 1078 (9th Cir.2002), and Simpson v. United States, 183 F.3d 812 (8th Cir.1999) (grandfathering transfer), with E. Norman Peterson Marital Trust v. Comm'r, 78 F.3d 795 (2d Cir.1996) (finding grandfather clause inapplicable). See also Gerson, 127 T.C. at 152.