Indiana Law Review


Disclaimer of Joint Tenancy Interest—When Does the
Nine-Month Time Limit in I.R.C. Section 2518 Begin to

Run?

I. Introduction

In Kennedy v. Commissioner,^ Frank Kennedy acquired 160 acres

of Illinois farmland in 1953 and titled the property as joint tenants with

right of survivorship between his wife and himself. Frank died in 1978.

Within nine months of his death, his wife disclaimed the interest she

had acquired in the farm by surviving Frank.^ Not only in this case,

but in all cases dealing with the disclaimer of joint tenancy interests

under section 2518^ of the Internal Revenue Code, the key issue is at

what point did the transfer that created Mrs. Kennedy's interest occur

—

at the creation of the tenancy or at the death of her husband. In Kennedy

the Seventh Circuit Court of Appeals held that, because of her husband's

right to partition, the transfer of the survivorship interest took place at

his death and Mrs. Kennedy's disclaimer was a qualified disclaimer (one

that avoids the imposition of tax)."^ This holding is in direct conflict

with the interpretative Treasury Regulation Section 25.25 18-2(c)(4)(i) that

was enacted in August of 1986 just shortly before the Kennedy decision.^

The regulation states, "an interest or any portion of an interest in a

joint tenancy . . . must be made no later than 9 months after the transfer
creating the tenancy."^ The Kennedy court held the regulation was

inconsistent with the other regulations appHcable to section 2518 dis-

claimers and chose not to apply it.^

'804 F.2d 1332 (7th Cir. 1986).

^Id. at 1333.

^All section numbers used in this Note refer to the Internal Revenue Code of 1986

as amended unless otherwise noted; see infra note 31 for language of I.R.C. § 2518

(1987).

•^Kennedy, 804 F.2d at 1336. The court compared the survivorship right to that of

a general power of appointment and found the regulations treatment of joint tenancy

inconsistent with that of general power of appointment in Treasury Regulation Section

25.2518-2(c)(3). See infra text accompanying notes 162-81.

Treas. Reg. § 25.2518-2(c)(4)(i) (1986); see infra text accompanying note 52 for

language of regulation. A difference exists between interpretative regulations and legislative
regulations, interpretative regulations having less weight. For full discussion see infra text

accompanying notes 183-87.

*Treas. Reg. § 25.25 18-2(c)(4)(i) (1986); see infra text accompanying note 52 for

language of regulation.

'Kennedy, 804 F.2d at 1335-36.



670 INDIANA LAW REVIEW [Vol. 21:669

This Note will show that the Kennedy decision recognizes the reality

of modern joint tenancy property and is more in line with the Con-
gressional intent behind section 2518 than the Treasury Regulation Section

25.25 18-2(c)(4)(i).^ The Congressional intent behind section 2518 is that
the time period in the statute should run from the taxable transfer of

the interest,^ and that section 2518 was to provide a uniform federal

disclaimer law which was not dependent on state or local law.'^ The

Kennedy decision is also more in line with the broader Congressional
intent of fairness behind the tax law that similarly situated taxpayers

be treated the same,^' and with other recent tax legislation that has

eased the estate tax burden on farm families when passing their estates
on to the next generation. '^

The Kennedy court is the first court of appeals to address the issue
of from which transfer the nine-month time period in Section 2518

begins to runJ^ The Eighth Circuit Court of Appeals, however, will be
facing this issue in the spring of 1988 in McDonald v. Commissioner^'^
McDonald will give the Eighth Circuit a chance to side with the Seventh
Circuit in holding against the Internal Revenue Service's (Service or IRS)

interpretation of the Treasury regulation. However, if the Eighth Circuit

chooses to accept the Service's interpretation, there will be a split between

two circuits, and the United States Supreme Court may take the op-
portunity to decide the conflict.

Resolution of this conflict is important to the taxpayer because it

can have a large impact on the amount of estate tax couples holding

property as joint tenants will incur in passing their estates to the next

generation. This impact will be demonstrated by example below.

II. The Relevancy of Allowing Disclaimer of the Survivorship
Interest in Joint Tenancy Property Under Present Tax Law

The Economic Recovery Tax Act of 1981'^ dramatically changed the
gift and estate tax consequences between spouses. The Act provided for
an unlimited marital deduction, thus preventing any tax on any inter

^Treas. Reg. § 25.2518-2(c)(4)(i) (1986); see infra text accompanying note 52 for

language of regulation.

"^See infra text accompanying notes 80-93.

^°See infra text accompanying notes 94-107.

"5ee infra text accompanying notes 108-14.

^^See infra text accompanying notes 115-16.

'^Kennedy v. Commissioner, 804 F.2d 1332, 1333 (7th Cir. 1986).
'^89 T.C. 293 (1987). See infra notes 192-98 and accompanying text.

'Pub. L. No. 97-34, 95 Stat. 172 (codified as amended in scattered sections of 26

U.S.C.).



1988] DISCLAIMER OF JOINT TENANCY 671

vivos gift or bequest at death to one's spouse. '^ By increasing the unified
gift and estate tax credit to $192,800, it also increased to $600,000 the

amount that any one taxpayer can give during his life and pass at death

without being subject to a tax.^^ Because of these changes, in estates

where the combined assets in a husband and wife's estate are less than

$600,000, the disclaimers of joint tenancy property would not affect the

gift or estate tax paid by the couple.

In estates larger than $600,000, however, the right to disclaim the

survivorship interest in jointly held property can have a major impact

on the amount of estate tax a couple holding property as joint tenants

will incur in passing their estates to the next generation. This can best

be explained by illustration. Disclaimer of joint tenancy interests will

be relevant in most states involving spousal property because of assets

such as stocks, bonds, and personal homes which many times are owned
as joint tenants with right of survivorship. However, the issue may be
particularly important to agricultural estates, such as in Kennedy, where

land held as joint tenants make up the major portion of the assets.
Therefore, the following examples deal with land held by farm couples.

In both examples the couple's only property is assumed to be farm-

land worth 1.2 million dollars.'^ It is further assumed, for the sake of

simplicity, that the deductions for debts, estate administration expenses,

state death taxes and other expenses are zero. The annual rate of
appreciation in land value is also assumed to be zero.

The first example shows the tax consequences when the couple own
the land as joint tenants with right of survivorship and the Service's

position on disclaiming of joint tenancy property is followed. The second

example shows the tax consequences under similar ownership when the
disclaimer of the survivorship interest is allowed as it was in Kennedy.

Both examples illustrate the total federal estate taxes paid by husband

and wife before the property is finally distributed to the next generation,

assuming one spouse survives the other by at least ten years.

EXAMPLE 1. Disclaimer of Survivorship Interest Disallowed
Husband dies in 1987 and wife is not allowed to disclaim the survivorship
interest in the farm, so husband's undivided one-half interest of $600,000

passes to her. Wife dies ten years later and the farmland, worth $1,200,000,

'^I.R.C. §§ 2056(a), 2523(a) (1987). Section 2056 allows all qualified property that

will pass to the decedent's spouse to be deducted from the decedent's gross estate, thereby

escaping federal estate taxes. Section 2523 provides that a donor may deduct all qualified
gifts made to a spouse when computing taxable gifts, thereby escaping federal gift tax.

'l.R.C. § 2010(a), (b) (1987). The unified credit was phased-in. For decedents dying
in 1987 and thereafter, the credit will be $192,800 (sheltering $600,000).

'^The example is not unrealistic even with today's depressed land prices; it could

represent a 1000 acre Illinois or Indiana farm worth $1200 per acre.



672 INDIANA LAW REVIEW [Vol. 21:669

less the amount sold to pay husband's estate taxes, passes to heirs. The
tax impacts are as follows:

Estate Tax Paid by Husband's Estate $ -0-^^

Estate Tax Paid by Wife's Estate $ 235,000^^

Combined Estate Tax Paid by Husband and Wife $ 235,000

EXAMPLE 2. Disclaimer of Survivorship Interest Allowed
Husband dies in 1987 and wife is allowed to disclaim the survivorship

interest in the farm. The husband's one-half undivided interest, worth

$600,000 less the amount sold to pay death taxes, passes to heirs. Wife

dies ten years later and her one-half undivided interest, worth $600,000

less the amount sold to pay her estate tax, passes to heirs. The tax

impacts are as follows:

Estate Tax Paid by Husband's Estate $ -0-^^

Estate Tax Paid by Wife's Estate $ -0^^^

Combined Estate Tax Paid by Husband and Wife -0-

With a combined estate of $1,200,000, disallowing the disclaimer of

the survivorship interest results in a $235,000 higher tax Uability. A

"Husband's gross estate under I.R.C. § 2040(b) (1987) will be one-half the value

of the joint tenancy property or, $600,000. Without disclaimer, husband's entire interest

of $600,000 will be treated for tax purposes as if it passes to the surviving spouse.

However, under the marital deduction of I.R.C. § 2040(b) (1987) the entire $600,000

interest will qualify for the marital deduction and escape federal estate tax.

Gross Estate of Husband $600,000

Marital Deduction $600,000

Taxable Estate $ -0-

Tax Payable upon Death of Husband $ -0-

^°Upon the death of the wife ten years later, her gross estate will total $1,200,000,

the original value of the farmland. There is no allowable marital deduction, making the

taxable estate worth $1,200,000.

The tentative tax of I.R.C. § 2001(c)(1) (1987) for a $1,200,000 estate equals $427,800.

The unified credit for decedents dying in 1987 will be $192,800. I.R.C. § 2010 (1987).
The tax payable upon her death will then be $235,000.

Gross Estate of Wife $1,200,000

Marital Deduction -0-

Taxable Estate $1,200,000

Tentative Tax $ 427,800

Unified Credit $ (192,800)

Tax Payable upon Death of Wife $ 235,000

^'The tentative tax on a $600,000 gross estate is $192,800. I.R.C. § 2001(c)(1) (1987).

The amount is then reduced by the $192,800 unified credit applicable for decedents dying

in 1987. I.R.C. § 2010 (1987). The result is a net tax of $-0-.

2^The tentative tax on wife's $600,000 gross estate is $192,800. I.R.C. § 2001(c)(1)

(1987). The amount is then reduced by the $192,800 unified credit applicable for decedents

dying after 1987. I.R.C. § 2010 (1987). The result is a net tax of $-0-.



1988] DISCLAIMER OF JOINT TENANCY 673

couple loses the benefit of the first spouse's unified credit^^ and incurs

a higher effective tax rate because the value of the entire tenancy is

taxed in the surviving joint tenant's gross estate. ^"^ Because the agricultural

sector has been preoccupied with the current economic problems,^^ farm-

couples may find, at the death of one spouse, that they have not done
sufficient estate planning to ensure that their land and businesses can

be passed on to the next generation with a minimum of estate tax. The
ability to make a qualified disclaimer of a joint tenancy survivorship
interest at the death of the first spouse, as in Kennedy, could be used

as an effective post-mortem estate planning tool to help alleviate the

tax burden of passing the estate on to the next generation and to avoid

a possible forced sale of family property to pay estate taxes. To better
understand the disclaimer issues raised by Kennedy, at this point a

consideration of the development of federal disclaimer law is in order.

III. Background

A. Brief Background on Federal Disclaimer Law

Prior to the Tax Reform Act of 1976 (TRA 1976), the tax conse-
quences of disclaimers were governed by section 2511, particularly Treas-

ury Regulation Section 25.25 ll-l(c).^^ This regulation still governs

disclaimers for interests created prior to 1977.^^ To be an effective

"See supra note 19-22 and accompanying text.

^'Unlike the 1970's when the agricultural community was experiencing tremendous

land value increases along with high commodity prices and estate planning was a major

concern, the 1980's have brought decreases in land value of almost fifty percent as well

as lower commodity prices. Farmers have become much more concerned with holding on
to what they have and less concerned with proper estate planning.

^^Treas. Reg. § 25.2511-l(c) (as amended in 1986) provides in pertinent part:

[W]here the law governing the administration of the decedent's estate gives a

beneficiary ... a right to completely and unqualifiedly refuse to accept ownership

of property transferred from a decedent, ... a refusal to accept ownership does

not constitute the making of a gift if the refusal is made within a reasonable

time after knowledge of the existence of the transfer .... Where the local law

does not permit such a refusal, any disposition . . . constitutes the making of

a gift.

For further explanation of prior TRA of 1976 disclaimer law and the changes made by
the TRA of 1986, see Morris, Disclaiming Joint Interests: One New Trick and No Longer
a Dog?, 1983 Ariz. St. L.J. 45, 58-62 (1983); Schain, The Effective Disclaimer, 34 Cath.

U.L. Rev. 19, 20-25 (1984).

^^Since I.R.C. § 2518 was enacted prospectively, § 2511 still appHes to all interests

created prior to January 1, 1977. Section 2518 of the Code applies to all interests created
after December 31, 1976, while the ERTA amendment to the section can only be applied
to disclaimers of interests created after December 31, 1981.



674 INDIANA LAW REVIEW [Vol. 21:669

disclaimer under Treasury Regulation Section 25.2511 -1(c), the refusal

to accept must (1) be unequivocal, (2) be effective under local law, (3)
occur before there is an acceptance, and (4) occur within a reasonable

time.^^

Due to its reliance on local law. Treasury Regulation Section 25.2511-

1(c) raised several problems with the disparate treatment of federal

disclaimers among the states. ^^ What constituted a "reasonable time"
under the regulation also created some confusion among the courts. ^°

In an effort to resolve these issues. Congress enacted section 2518^' to

^*Treas. Reg. § 25.251 l-l(c) (as amended in 1986). See supra note 26 for language

of regulation.

^^See Hardenbergh v. Commissioner, 198 F.2d 63 (8th Cir.), cert, denied, 344 U.S.

836 (1952); but see Brown v. Routzahn, 63 F.2d 914 (6th Cir. 1933). For a discussion

of these cases and their disparate treatment of disclaimers under their respective state law,

see Morris, supra note 26, at 59; see also Schain, supra note 26, at 21-22.

^°See Morris, supra note 26, at 59-60; Schain, supra note 26, at 23-25.

^'I.R.C. § 2518 (1987) provides as follows:

(a) GENERAL RULE.—For purposes of this subtitle, if a person makes a
qualified disclaimer with respect to any interest in property, this subtitle shall

apply with respect to such interest as if the interest had never been transferred

to such person.

(b) QUALIFIED DISCLAIMER DEFINED.—For purposes of subsection (a),
the term "qualified disclaimer" means an irrevocable and unqualified refusal

by a person to accept an interest in property but only if

—

(1) such refusal is in writing,

(2) such writing is received by the transferor of the interest, his legal

representative, or the holder of the legal title to the property to

which the interest relates not later than the date which is 9 months

after the later of

—

(A) the date on which the transfer creating the interest in such

person is made, or

(B) the day on which such person attains age 21,

(3) such person has not accepted the interest or any of its benefits,

and

(4) as a result of such refusal, the interest passes without any direction

on the part of the person making the disclaimer and passes either

—

(A) to the spouse of the decedent, or

(B) to a person other than the person making the disclaimer.

(c) OTHER RULES.—For purposes of subsection (a)

—

(1) DISCLAIMER OF UNDIVIDED PORTION OF INTEREST.—
A disclaimer with respect to an undivided portion of an interest
which meets the requirements of the preceding sentence shall be

treated as a qualified disclaimer of such portion of the interest.

(2) POWERS.—A power with respect to property shall be treated as
an interest in such property.

(3) CERTAIN TRANSFERS TREATED AS DISCLAIMERS.—

A

written transfer of the transferor's entire interest in the property

—

(A) which meets requirements similar to the requirements of par-



1988] DISCLAIMER OF JOINT TENANCY 675

create uniformity with respect to the taxation of disclaimers for transfers

after 1977.32

To be a qualified disclaimer under section 2518, similar to section
2511, the disclaimer must be an "irrevocable and unqualified refusal

. . . to accept an interest in property. "3'' Section 2518 also retains the

requirement that the disclaiming party must not have accepted any

benefits of the interest. ^^^ However, distinctions can be made between
the two in that section 2518 added a requirement that the disclaimer

be in writing, ^^ and instituted a fixed nine-month time period to replace

the ''reasonable time" requirement of section 251 1.^^ Also, unUke under

section 2511, the nine-month time period under section 2518 runs from

the creation of the interest regardless of whether the prospective dis-

claimant had knowledge of its existence. ^^

One of the most significant distinctions was Congress' intent not to
have section 2518 depend on local law. This was demonstrated by the

Congressional reports concerning the enactment of section 2518,^^ the

absence of the language requiring compliance with local law in section

2518,3^ and Congress' amendment to section 2518 in the ERTA of 1981
by the addition of subsection c(3) to further alleviate dependency on

local law.'^o

agraphs (2) and (3) of subsection (b), and

(B) which is to a person or persons who would have received the
property had the transferor made a qualified disclaimer (within
the meaning of subsection (b)), shall be treated as a quahfied

disclaimer.

'^See H.R. Rep. No. 1380, 94th Cong., 2d Sess. 66-67, reprinted in 1976 U.S. Code
Cong. & Admin. News 3356, 3420-21 [hereinafter H.R. Rep. No. 1380].

"I.R.C. § 2518(b) (1987). See supra note 31 for text of the statute.

^^Id. § 2518(b)(3). See supra note 31 for text of the statute.

^'Id. § 2518(b)(1). See supra note 31 for text of the statute.

^^Id. § 2518(b)(2). See supra note 31 for text of the statute. Moreover, if the

disclaimant is a minor at the time the interest was created, he or she can defer the

disclaimer decision until nine months after reaching 21 years of age. Id. § 2518(b)(2)(B).

"This result is mandated by the statute itself, which does not make a reference to
the prospective disclaimant 's actual knowledge of the existence of the instrument creating

the disclaimed interest. See I.R.C. § 2518(b)(2)(A) (1987).

'^See H.R. Rep. No. 1380, supra note 32, at 66-67.

^^See supra note 31 and accompanying text.

^°I.R.C. § 2518(c)(3) (1987). See supra note 31 for text of the statute. This amendment
is effective only for disclaimers of interests transferred after 1981. Congress' intent was

to finally devise a uniform standard for federal disclaimers totally independent from state

law. S. Rep. No. 144, 97th Cong., 1st Sess. 142, reprinted in 1981 U.S. Code Cong. &
Admin. News 108, 241-42 [hereinafter S. Rep. No. 144]. The Senate report provides that:

Prior to the enactment of section 2518, the effect of a disclaimer, for Federal

estate and gift tax purposes, depended on its validity under the applicable local

law. When Congress enacted section 2518, it intended to create a uniform Federal



676 INDIANA LAW REVIEW [Vol. 21:669

B. IRS*s Application of Section 2518 to Joint Tenancy Property

1. Proposed Regulation Section 25.2518-2(d)(3).—Prior to enacting
Treasury regulations for section 2518 in 1986/' the Service's position

in applying section 2518 to joint tenancy property was reflected in its

proposed regulation section 25.25 18-2(d)(3). The regulation provided:

To have a quahfied disclaimer under section 2518 in the case
of an interest in a joint tenancy (other than a revocable joint

tenancy, such as a revocable joint bank account) or a tenancy

by the entirety, the disclaimer

—

(i) Must be made with respect to the entire interest in property
which is the subject of the tenancy,

(ii) Must be made within 9 months of the creation of the
tenancy, and

(iii) Must meet each of the remaining requirements enumerated

in section 2518(b)/2

The premise upon which the proposed regulation is based is ex-

pounded upon in a private letter ruling concerning a surviving spouse's
disclaimer of her deceased husband's interest in the couple's personal

residence within nine months of his death in 1979/^ The residence had

been acquired in 1963 with title in the name of both as joint tenants
with right of survivorship. The Service's position was that the disclaimer
was invalid."^ The Service adopted the view of the Oklahoma Supreme
Court"^^ in stating that, under Oklahoma law, the transfer took place at
the creation of the tenancy because the husband had not transferred

any interest in the jointly held property at his death. "^^

standard so that a disclaimer would be effective for Federal . . . purposes whether

or not valid under local law.

Under section 2518, however, because the disclaimer must be effective to divest

the disclaimant of ownership, and pass the interest without direction on the

part of the [disclaimant], the disclaimer must still satisfy local law. Because

appHcable law varies from State to State, there is still no uniformity.

The committee believes that a disclaimant should be able to perfect an otherwise

vaUd disclaimer by directing that the interest pass to the person who would
have received the property had the refusal been effective under local law.

See infra notes 99-100 and accompanying text for a discussion of the ERTA amendment
in 1981. See also infra notes 104-07 and accompanying text for a general discussion of

nonuniform treatment of Federal disclaimers.
^'51 Fed. Reg. 28,366 (1986).

^^Prop. Treas. Reg. § 25.2518-2(d)(3), 45 Fed. Reg. 48,922, 48,927 (1980).

'•^Priv. Ltr. Rul. 81-400-11 (June 29, 1981).

'•'Clovis V. Clovis, 460 P.2d 878 (Ok. 1969).

-^Priv. Ltr. Rul. 81-400-11 (June 29, 1981).



1988] DISCLAIMER OF JOINT TENANCY 611

The Service explained its position by using the language of the

Oklahoma court that creation of a joint tenancy in property estabhshes

a present estate in which both joint tenants are seised of the whole.

Unity of time, title, interest, and possession are requisites for creation,

with the principle characteristic of the estate created being the right of

survivorship. Under this position, the right of survivorship does not pass

anything from a deceased joint tenant to the survivor because, "by the

very nature of joint tenancy[,] [tjitle of the joint tenant who dies first
terminates at death and vests eo instanti in the survivor. Both cotenants

being seised of the whole, the survivor's estate simply is a continuation,

or extension, of the surviving tenant's existing estate.'"*^ The Service

adopted the Oklahoma court's opinion that absent severance of the
tenancy during the life of both tenants, a joint tenancy simply creates

a present estate which assures the survivor joint tenant absolute ownership

of the whole subject matter of the joint tenancy. "^^

The Service's premise raises issues with regard to the application of

the nine-month time requirement and the acceptance of prior benefit

provision under the statute. Under the Service's position the nine-month

time period will begin to run at the creation of the tenancy, because

under the Service's premise no transfer takes place at death; rather,

transfer of all interest in the property, including the survivorship interest,

takes place at creation.

As to acceptance of prior benefits, under its original premise, "if

one joint tenant accepts any benefits from any part or portion of the

property subject to the joint tenancy, that joint tenant has accepted

benefits from the whole of the jointly owned property. ""^^ Because benefits
have been accepted from the entire jointly owned property, an attempted
disclaimer of any part of the jointly owned property will not be a
qualified disclaimer.^^

^Triv. Ltr. Rul. 81-400-11 (June 29, 1981), quoting Clovis v. Clovis, 460 P.2d 878,

881 (Ok. 1969). See generally Morris, supra note 26, at 62-65; Uchtmann, Disclaimers of
Joint Tenancy Interests Revisited, 18 Creighton L. Rev. 333, 337-44 (1985), for a further

discussion of the IRS's position on disclaimers of joint tenancy property.

^«Priv. Ltr. Rul. 81-400-11 (June 29, 1981).

'"Uchtmann, supra note 47, at 339.

^°Id. at 339 n.27, reads in part:

I.R.S. Letter Ruls. 79-400-62, July 10, 1979 (acceptance based upon entering

into a contract for sale); 79-120-49, Nov. 30, 1978 (accepting dividends from

jointly-held corporate stock subsequent to its purchase and prior to disclaimer);

79-110-05, Nov. 29, 1978 (mere acquiescence in the establishment of joint tenancies

of certificates of deposit and bank account); 78-290-08, April 14, 1978 (proceeds

of jointly-owned maturities and securities deposited into joint checking account

from which household and normal Hving expenses were paid).

The IRS later changed its position on the acceptance of benefits when it enacted Treasury

regulations for section 2518. See infra text accompanying notes 57-58.



678 INDIANA LAW REVIEW [Vol. 21:669

2. Enactment of Treasury Regulations for Section 2518.—The lan-
guage of the enacted Regulation Section 25.25 18-2(c)(4)(i) specifically

concerning jointly held property differs in several respects from that of

its predecessor, the proposed regulation 25.2518-2(d)(3).^^ The enacted
regulation reads as follows:

In general. Except as otherwise provided in paragraph (c)(4)(ii)

of this section, a quahfied disclaimer under section 2518(a) of

an interest or any portion of an interest in a joint tenancy or

a tenancy by the entirety must be made no later than 9 months
after the transfer creating the tenancy. Thus, a surviving joint

tenant cannot disclaim any part of the interest, including the

survivorship interest, if more than 9 months have passed since
the transfer creating the joint tenancy. In addition, a joint tenant

cannot make a qualified disclaimer of any portion of the joint
interest attributable to consideration furnished by that tenant."

The enacted regulation quoted above did not contain the language
of the proposed regulation which required that the entire interest subject

to the joint tenancy had to be disclaimed for the disclaimer to quaUfy.^^

As one authority highUghted, the emphasis, under the premise that joint
tenants own the whole and no transfer takes place at death, is arguably
consistent with a requirement that a joint tenant must disclaim the whole

interest^'* as was required by the proposed regulation. ^^ By leaving out
this requirement when enacting the proposed regulations, the IRS has
begun to shift its premise and recognize that the survivorship interest

is a separate interest. ^^

'Prop. Treas. Reg. § 25.2518-2(d)(3), 45 Fed. Reg. 48,922 (1980). See supra text

accompanying note 42 for language of regulation.

"Treas. Reg. § 25.2518-2(c)(4)(i). Subsection (c)(4)(ii) is the special provision for

joint tenancy created between spouses between the years of 1976-82 and reads as follows:

(ii) Tenancies in real property between spouses created before 1982. In the case

of joint tenancies between spouses or a tenancy by the entirety in real property

created after 1976 and before 1982 where no election was made under section
2515, the surviving spouse must make a qualified disclaimer no later than 9
months after the date of death of the first spouse to die. Such a quahfied

disclaimer will be effective for

—

(A) The entire joint interest (except any portion attributable to consideration

furnished by the surviving spouse) if the date of death of the deceased

spouse is before 1982; or

(B) One-half the value of the joint interest if the date of death of the deceased

spouse is after 1981.

^^See supra text accompanying note 42.

'"Uchtmann, supra note 47, at 338.

"Prop. Treas. Reg. § 25.25 18-2(d)(3), 45 Fed. Reg. 48,926 (1980). See supra text

accompanying note 42 for language of regulation.

'^In the Brief for Petitioner at 16-17, Kennedy v. Commissioner, 804 F.2d 1332 (7th



1988] DISCLAIMER OF JOINT TENANCY 679

The Service's recognition that separate interests do exist can also be

seen in Treasury regulation section 25.2518-2(d)(i). In this regulation,

the IRS changed its earlier position that by accepting benefits from any

part of the joint tenancy property, a person has accepted benefits from

the whole of the jointly owned property. ^^ The section reads in part:

The acceptance of one interest in property will not, by itself,

constitute an acceptance of any other separate interests created

by the transferor and held by the disclaimant in the same prop-

erty. In the case of residential property, held in joint tenancy

by some or all of the residents, a joint tenant will not be

considered to have accepted the joint interest merely because the

tenant resided on the property prior to disclaiming his interest

in the property. ^^

Although the Service did make minor revisions in the regulations
regarding joint property, it retained its earher position that a qualified

disclaimer must be made within nine months of the creation of the
tenancy. ^^ This position is not consistent with the other changes made
in the proposed regulations discussed above which neglected the IRS's

recognition of the separateness of the survivorship interest. When enacting
the regulations, the IRS noted that some authorities disagreed with its

position that a qualified disclaimer must be made within nine months
of the creation of the tenancy. ^° The IRS still retained its position,

however, because of the holding in the Tax Court Memorandum Opinion
oi Kennedy v. Commissioner,^^ that *'each joint tenant receives an interest

in the entire property subject to the tenancy, as well as the rights of

survivorship, at the time of the transfer creating the joint interest. "^^

Three months after the regulations were enacted, the Seventh Circuit,

in Kennedy v. Commissioner,^^ found the regulation concerning joint

tenancy property to be inconsistent with the other regulations under

Cir. 1986) (No. 33349-83), Petitioner's counsel argued the language in the proposed

regulation requiring the entire interest to be disclaimed was inconsistent with § 2518(c)(1)

which provided for the disclaimers of undivided interest in property. This argument

highlighted one of the reasons why the language was left out of the enacted regulation.

^''See supra notes 49-50 and accompanying text.

^«Treas. Reg. § 25.25 18-2(d)(l) (1986).

^^Id. § 25,2518-2(c)(4)(i). See supra text accompanying note 52 for language of

regulation.

«'51 Fed. Reg. 28,365, 28,366 (1986).

^'Kennedy v. Commissioner, 51 T.C.M. (CCH) 232, rev'd, 804 F.2d 1332 (7th Cir.
1986).

^^51 Fed. Reg. 28,365, 28,366 (1986).

"804 F.2d 1332 (7th Cir. 1986).



680 INDIANA LAW REVIEW [Vol. 21:669

section 2518 and overruled the Kennedy memorandum opinion^'* upon
which the Service had rehed.^^

3. Criticism of the Service's Current Position.—The Service's position
has been criticized as being fundamentally flawed: "based on shadowy

and intricate common law property concepts and ancient fictions that
bear little relationship to contemporary property law and reality. "^^ It

is not too difficult to conceptualize that a surviving joint tenant acquires

greater property interest at the death of the other joint tenant.^^ In 1932

the United States Supreme Court recognized this in Gwinn v. Com-
missioner,^^ where it held,

Although the property here involved was held under a joint

tenancy with the right of survivorship created by the . . . transfer,

the rights of the possible survivor were not then irrevocably

fixed, since under the state laws the joint estate might have been

terminated through voluntary conveyance by either party, through

proceedings for partition, [or] by an involuntary alienation under

an execution .... The right to effect these changes in the estate

was not terminated until the co-tenant's death .... The death

became the generating source of definite accessions to the sur-

vivor's property rights. ^^

A joint tenant: must account to his co-tenants for any rent and
profits exceeding his proportion;^^ can only lease his aliquot portion of

^Id. at 1335-36.

^'51 Fed. Reg. 28,365, 28,366 (1986).

^Uchtmann, supra note 47, at 339-40.

''Id. at 340-41.

^«287 U.S. 224 (1932).

'^Id. at 228-29 (citations omitted). In Gwinn, property was acquired as joint tenants

in 1915. At that time there were no provisions for federal transfer tax on property passing

at death. In 1916 such transfer taxes were enacted and later amended in 1924. One of
the co-tenants died in 1924, four months after the enactment of 26 U.S.C. § 1094. The

Commissioner of the Internal Revenue interpreted this statute to include the one-half

interest the deceased co-tenant passed at her death to the surviving joint tenant in arriving

at the value of the estate subject to transfer tax. The petitioner maintained that no interest

passed at death, because all interest in the property had passed at creation, which was

prior to the enactment of the 1924 or 1916 statutes—thus the statutes should not apply.
The court rejected the petitioner's argument, recognizing that an interest did pass at the

death of one joint tenant to the surviving joint tenant.

™Uchtmann, supra note 47, at 340 n.32, reads:

See, e.g., Graham v. Allen, 11 Ariz. App. 207, 463 P.2d 102 (1970); Swartzbaugh
V. Sampson, 11 Cal. App. 2d 451, 54 P.2d 73 (1936); People v. Varel, 351 111.

96, 184 N.E. 209 (1932); Pistole v. Lanier, 214 Ky. 290, 283 S.W. 88 (1926);

Kahnovsky v. Kahnovsky, 67 R.I. 208, 21 A.2d 569 (1941). But see Black v.

Black, 91 Cal. App. 2d 328, , 204 P.2d 950, 953 (1949) ("[T]here is no



1988] DISCLAIMER OF JOINT TENANCY 681

property subject to the rights of co-tenants to enjoy the property;^' and

can technically encumber by mortgage only his proportional interest;

and realistically may not be able to find a lender willing to accept such
a mortgage. ^^ To the extent that the surviving joint tenant's rights are
greater as sole owner than as joint tenant, the survivor has acquired

something upon the death of the other joint tenant. This reality is

inconsistent with the position of the IRS that the joint tenant is seized

of the whole at creation and nothing passes at death.^^ As shown by
the Gwinn decision quoted above, ^'^ the recognition that there is an
interest that passes at death is neither new nor novel. Justice Black also
recognized this in the 1939 case of United States v. Jacobs^^ where he

wrote:

equity in the claim that the mere fact of being named as joint tenant entitles

one to share in the revenues produced on the land as the result of the labor,

management and money of him who is in sole possession when the claiming
co-tenant has neither demanded possession, contributed to the expense of pro-

duction nor previously made himself Hable for possible losses").

^'Uchtmann, supra note 47, at 341 n.33 reads:

The majority view is that a joint tenant may not bind more than that tenant's
aliquot portion of the joint estate: See, e.g., Graham v. Allen, 11 Ariz. App.

207, 209, 463 P.2d 102, 104 (1970); Swartzbaugh v. Sampson, 11 Cal. App.

2d 451, 458, 54 P.2d 73, 77 (1936). In Reiger v. Bruce, 322 111. App. 689, 54

N.E.2d 770 (1944), a non-signing joint tenant was allowed to bring an action

of forcible entry and detainer to recover the property from the lessee. The lessee

does not, however, lose its rights against the signing joint tenant. See also

National Gas & Co. v. Rizer, 20 111. App. 2d 332, 335, 155 N.E.2d 848, 849
(1959).

^^Uchtmann, supra note 47, at 341 n.34 reads:

There is conflicting authority as to whether a creditor's lien or mortgage actually

severs a joint tenancy. The matter of severance and thus the outcome upon the

death of the debtor-joint tenant depends upon whether the state follows a title,

hybrid, or lien theory of mortgages. In a title jurisdiction, conveyance of a

mortgage by the joint tenant will sever the tenancy and destroy the right of

survivorship. In a lien jurisdiction, there is no severance of the joint interest,

and the mortgagee holds only a lien which may "evaporate" if the mortgaging
joint tenant is the first to die. Because of the disappearing lien problem in hen

jurisdictions, a lender will be less Ukely to accept a mortgage or other security

interest in joint tenancy property, and the ability to use the joint tenancy property

as collateral essentially becomes unavailable to a joint tenant who does not
desire to sever the joint tenancy and destroy the right of survivorship. For a

discussion of creditors' and mortgagees' rights regarding joint tenancy property,

see Uchtmann & Hartnell, Qualified Disclaimer of Joint Tenancies: A Policy
and Property Law Analysis, 22 Ariz. L. Rev. 987, 1003-05 (1980) and Mattis,
Severance of Joint Tenancies by Mortgages: A Contextual Approach, 1977 S.
III. U.L.J. 27, 45-61.

^^Uchtmann, supra note 47, at 341.

^'^See supra note 69 and accompanying text.

"306 U.S. 363 (1939).



682 INDIANA LAW REVIEW [Vol. 21:669

Upon the death of her co-tenant [the wife] for the first time
became possessed of the sole right to sell the entire property

without risk of loss which might have resulted from partition

or separate sale of her interest while decedent lived. There was

—

at his death—a distinct shifting of economic interest, a decided
change for the survivor's benefit.^^

The Service's position does not recognize the reality that the surviving
joint tenant receives a substantial economic benefit at the death of the

other joint tenant. This position creates several areas of conflict with

the Congressional intent behind section 2518.

C. IRS\s Position in Conflict with Congressional Intent Behind

§2518

There are three areas of conflict that arise between the Service's

position and the Congressional intent behind section 2518. The first and
most significant conflict is in the definition of what constitutes the

transfer which activates the nine-month time limitation in the statute. ^^

The second conflict exists between the Congressional intent behind the
enactment of section 2518, to provide a more uniform federal disclaimer
law by alleviating reliance on state disclaimer laws, and the Service's

interpretation of section 2518, which results in rehance on state law.^^

The third conflict arises between the Service's position, which discrim-
inates against owners of joint tenancy property, and the broader goals

of the tax law to treat taxpayers fairly. "^^

1. Definition of Transfer.—When commenting on the statutory re-
quirement that '*the written refusal must be received by the transferor

of the interest . . . not later than nine months after the day on which
the transfer creating the interest is made,"^ the House Ways and Means
Committee stated: "For purposes of this requirement, a transfer is

considered to be made when it is treated as a completed transfer for
gift tax purposes with respect to inter vivos transfers or upon the date

of the decedent's death with respect to testamentary transfers."^' The
Conference Committee report reflected the same intent by stating: "The
Conferees intend to make it clear that the 9-month period for making

'*M at 371.

"I.R.C. § 2518(b)(2) (1987). The exact language is reproduced in note 31 supra. See

infra text accompanying notes 80-93 for further discussion.

''^See H.R. Rep. No. 1380, supra note 32, at 66-67. See infra text accompanying

notes 94-107 for further discussion.

^'See infra text accompanying notes 108-16 for further discussion.

^"See H.R. Rep. No. 1380, supra note 32, at 67 (emphasis added).

''Id.



1988] DISCLAIMER OF JOINT TENANCY 683

a disclaimer is to be determined in reference to each taxable transfer. ''^^

At the time of creation of a joint tenancy by a donor of property,

the only tax that may occur is a gift tax on the value of the one-half
interest conveyed to the donee to the extent the value of the one-half

interest exceeds the donee's contribution.^^ The portion retained by the

donor which would pass at his death to the donee, if the donee survives

him, is never taxed at creation and only becomes a "taxable transfer"

at the death of the donor.^^ If both parties contributed equally to the

purchase of the joint tenancy property, there is no gift tax at creation.

Also, in this case the only "taxable transfer" occurs at the death of

one of the tenants when the surviving tenant receives the decedent's one-
half interest. ^^

If the intent of Congress is that the transfer creating the interest

means a taxable transfer, then the donee above would have nine months

from creation of the tenancy to disclaim his one-half proportional interest

in the property. But with respect to the accretive interest, ^^ which would

only pass at the death of the donor, he would have nine months from

the donor's death to disclaim. Similarly in the case of equal contributions,

the survivor would have nine months from the decedent's death to

disclaim the accretive interest which would pass to him at the decedent's

death.

This application of Congressional intent to joint tenancy disclaimer

is supported by the fact that House Report 1380 defining "transfer"

^^Joint Explanatory Statement of the Committee of Conference, S. Rep. No. 1236,

94th Cong., 2d Sess. 607,623.24, reprinted in 1976 U.S. Code Cong. & Admin. News
4262, 4266 (emphasis added).

"I.R.C. §§ 2511, 2512 (1987).

^'*The value of the donor's interest in the joint tenancy property is included in the

donor's estate at his death. I.R.C. § 2040 (1987). The transfer of the estate, which is

defined to include the donor's interest in the joint property, occurs upon the donor's

death and is a taxable transfer. I.R.C. at § 2001(a). Thus, the donee should have nine

months from the time of this taxable transfer to disclaim the accretive portion (the donor's

interest), which is nine months from the date of the donor's death.

I.R.C. § 2040(b)(1) (1987) provides in the case of a "qualified joint interest," only

one-half of the value of the joint tenancy property is includible in the gross estate of

the deceased joint tenant, without regard to which joint tenant paid for the property. In

order to be a "qualified joint interest," the property must be held in joint tenancy by

the decedent and his or her spouse at the time of the decedent's death; no other person

may have an interest in the property. Further, the joint tenancy must have been created
by the decedent, by the decedent's spouse, or by both. I.R.C. § 2040(b)(2) (1987).

^^See supra note 80 and accompanying text,

*^Uchtmann defined the proportional interest as that one-half interest which passes

at the creation of the joint tenancy and the accretive interest as that interest which contains

the survivorship one-half interest and passes at the death of the first tenant to die.

Uchtmann, supra note 47, at 343.



684 INDIANA LAW REVIEW [Vol. 21:669

also noted that "many professional study groups had recommended that
definite rules be provided with respect to the treatment of disclaimers

for estate and gift tax purposes. "^^ It cited the American Bar Association

Recommendation Number 1974-2, which states:

Joint interests vesting as a result of survivorship may be dis-
claimed within nine months after the death of the deceased joint

tenant to the extent that the interest is includible in the estate

of the deceased joint tenant. To the extent that the property is
not includible in the estate of the deceased joint tenant, the

disclaimer must be made no later than nine months after creation
of the joint tenancy. ^^

One of the Treasury Regulations enacted in 1986 is in line with
Congressional intent on this issue and states, ''[t]he rules described in

§§ 25.2518-1 through 25.2518-3 apply to the quaUfied disclaimer of an

interest in property which is created in the person disclaiming by a

taxable transfer made after December 31, 1976."^^ The enacted regulations
also have a specific section on "transfers" which includes almost verbatim
the language of the House Ways and Means Committee concerning
taxable transfers.^^ However, the regulation concerning jointly held prop-

erty, which states that the time period begins to run at the creation of

the tenancy,^' ignores the taxable transfer as being the time at which

the nine-month limitation begins to run. Therefore, it is inconsistent

with the transfer section of the regulations^^ and Congressional intent.

''See H.R. Rep. No. 1380, supra note 32, at 66 n.5.

'^American Bar Association Tax Section Recommendation No. 1974-2, 27 Tax Law.
818, 820 (1973).

^^Treas. Reg. § 25.2518-l(a)(l) (1986) (emphasis added). The Service's original position
was contrary to this. It recognized this Congressional intent as to transfer in a private

letter ruling, Priv. Ltr. Rul. 81-400-11 (June 29, 1981), but stated, "[w]hile this language

is useful in determining Congressional intent as to when the 9-month period begins to
toll under section 2518, it is not relevant for purposes of the effective date provisions."

Id. The IRS determined that the transfer creating the decedent's interest was the creation
of the tenancy in 1963 and held section 2511, rather than section 2518, governed the

validity of the decedent's disclaimer. Id.

The House Ways and Means Committee defined the "transfer that created the interest"
as being the taxable transfer at one point in their report. See H.R. Rep. No. 1380, supra

note 32, at 67. Later in the same report, the Committee used the previously defined

language in stating "[t]he amendments apply with respect to 'transfers creating an interest'
in the person disclaiming made after December 31, 1976." Id. It appears odd that the
Committee would have in mind a definition other than that of the taxable transfer.

^Treas. Reg. § 25.25 18-2(c)(3) (1986). See infra note 166 for language of regulation.

''Treas. Reg. § 25.2518-2(c)(4)(i) (1986). See infra text accompanying note 52 for

language of regulation.

^^Treas. Reg. § 25.25 18-2(c)(3) (1986). See infra note 166 for language of regulation.



1988] DISCLAIMER OF JOINT TENANCY 685

The Seventh Circuit highhghted this discrepancy when it reversed the

Tax Court in Kennedy. ^^

2. Uniform Federal Disclaimer Law That Was Not Dependent on
Local Law.—Prior to the enactment of section 2518, a disclaimer had
to be valid under local law to be effective for purposes of the federal

estate and gift tax.^"^ The legislative history behind the enactment of

section 2518 states that "[w]hen Congress enacted section 2518, it intended

to create a uniform Federal standard so that a disclaimer would be

effective for Federal estate and gift tax purposes whether or not valid

under local law."^^ In spite of this Congressional intent, the proposed

regulation section 25.25 18- 1(c)(1) required that the disclaimer be effective

under local law.^^ The proposed regulation reflected the fact that, by

stating in section 2518(b)(4) that the interest must pass "without any

direction"^^ on the part of the disclaimant, and by not providing a way

to complete the transfer, Congress had made section 2518 dependent

upon local law.^^ In the ERTA of 1981, in an effort to alleviate this
dependency on local law, Congress amended section 2518 by adding

subsection (c)(3). ^^ The amendment permitted a direct transfer to quaUfy

as a disclaimer for federal tax purposes if the grantee is the person who
would have received the property had the grantor simply disclaimed the

interest. The transfer must also meet the other requirements set down
in section 251 8(b). ^^^

The conflicting proposed regulation was revised before being enacted

in 1986 to reflect the Congressional intent stated above. '°' For transfers

prior to 1982, the enacted form provided that one could make a qualified

^^Kennedy v. Commissioner, 804 F.2d 1332, 1335 (7th Cir. 1986).

^''Treas. Reg. § 25.251 l-l(c) (as amended in 1986). See supra note 26 for text of

regulation.

'^S. Rep. No. 144, supra note 40, at 142; H.R. Rep. No. 201, 97th Cong., 1st Sess.

190 (1981).

'^Prop. Treas. Reg. § 25.2518-l(c)(l), 45 Fed. Reg. 48,922 (1980).

^n.R.C. § 2518(b)(4) (1987). See supra note 31 for text of statute.

^^See Martin, Perspectives on Federal Disclaimer Legislation, 46 U. Chi. L. Rev.

316, 323-35 (1979).

^n.R.C. § 2518(c)(3) (1987), added by ERTA § 426(a). See supra note 31 for text
of statute.

"^I.R.C. § 2518(c)(3) (1987). See supra note 31 for text of statute. According to one

authority the wording of § 2518(c)(3) seemingly limits its application to transfers for the

transferor's "entire interest in the property." Curiously, however, § 2518(c)(1) creates an

apparent discrepancy by making the qualification rules of subsection (b) applicable to an

undivided portion of the interest, as well as to an entire interest. Irrespective of any

minor ambiguities, one thing seems clear: Congress intended to create uniform tax treatment

of disclaimer, and it is willing to take the necessary steps to achieve that goal. Morris,

supra note 26, at 62 n.ll7.

'O'Treas. Reg. § 25.2518-l(c)(l)(i) (1986). See also 51 Fed. Reg. 28,366 (1986).



686 INDIANA LAW REVIEW [Vol. 21:669

disclaimer under section 2518, regardless of whether the requirements

of local law were met, "if, under local law, the disclaimed interest in

property is transferred, as a result of attempting the disclaimer, to another

person without any direction on the part of the disclaimant."'^^ No
regulation has yet been promulgated for an interest created after 1981,

which would apply to the 1981 amendment by the addition of section

2518(c)(3).
»03

The efforts to make federal disclaimer law more uniform and less
dependent on state and local law have not been successful. ^^^ One area
in particular is the application of federal disclaimer laws to joint tenancy

property. The majority of states now have disclaimer laws allowing the
disclaimer of the accretive interest in joint tenancy property. '°^ Where
state law allows the disclaimer of the accretive interest in joint tenancy

property, some courts have taken the view that the state disclaimer law

changes the nature of the property ownership at death to that of tenants

in common and, therefore, have allowed the disclaimer of the accretive
interest as a qualified federal disclaimer. '^^ Because courts may interpret
differently the way state disclaimer laws affect property interest and the
application of section 2518, the Treasury regulations for section 2518

have not provided for uniform treatment of federal disclaimers of joint

tenancy property. In addition, some states do not have disclaimer laws

for joint tenancy property. '^^ Taxpayers in these states will not have the

'"^Treas. Reg. § 25.251 8- l(c)(l)(i) (1986).

'°'Treas. Reg. § 25.251 8- i(c)(l)(ii) (1986).

^^See generally Schain, supra note 26.

'"'Uchtmann, supra note 47, at 342, n.37, provides:

E.g., Ark. Stat. Ann. § 62-3202(d) (Supp. 1983); Conn. Gen. Stat. Ann. §
45-300 (West Supp. 1984); Hawaii Rev. Stat. § 560:2-801 (1976 & Supp. 1983);
Idaho Code § 15-2-801(a) (1979); Me. Rev. Stat. Ann. tit. 18A, § 2-801(c)

(1981); Mass. Gen. Laws Ann. ch. 191A, § 2 (West 1981); Neb. Rev. Stat.

§ 30-2352(a) (1979); S.D. Codified Laws Ann. § 43-4-30.1 (1983); Utah Code
Ann. § 75-2-802(1 )(a) (1978); Wash. Rev. Code § 11.86.020 (1984). Generally,
all states have statutes allowing the disclaimer of property that would pass to

the disclaimant by virtue of the state's statute of descent and distribution. For

a detailed listing of these statutes, see Primmer, Disclaimers After the Tax

Reform Act of 1976: Chaos Out of Disorder, 31 U.S.C. Tax Inst. 811, 822

n.41 (1979). But see Comment, Federal Taxation: Section 2518 Disclaimers-

Anything But Uniform, 31 U. Fla. L. Rev. 188, app. D, at 209-10 (1978).

'°*Hoffman v. United States, 85-2 U.S. Tax Cas. 90430 (CCH) (D. Neb. 1985);
Ferguson v. United States, 48 A.F.T.R.2d (P-H) \ 148,472 (D. Ariz. 1981). These cases

will be discussed further at text accompanying infra notes 117-32.

'"^As of 1984, Mississippi, New Hampshire and Vermont had no disclaimer statutes
applicable to intestate interests. Uchtmann, supra note 47, at 342, n.37. North CaroHna

has no disclaimer statute applicable to joint tenancy interest. Estate of Dancy v. Com-
missioner, 89 T.C. 550 (1987). See infra note 199 for a discussion of Estate of Dancy

which deals with the disclaimer of joint tenancy property.



1988] DISCLAIMER OF JOINT TENANCY 687

option of using state disclaimer laws to change their joint property

interest so that federal disclaimer law will apply, again creating more

disparity in the application of federal disclaimer law.

3. The Service's Position Conflicts With Broader Goals of Tax

Law.—The Service's position is also in conflict with several broader
goals underlying the tax laws.'°^ By its inconsistent position on disclaimers,
the IRS treats similarly situated taxpayers differently.'^^ It also makes

the form of the transaction, rather than its substance, control the tax

consequences. ^'^ The result is a tax structure that taxpayers will regard

as unfair. ''' This is demonstrated by the Service's disparate treatment

of joint tenants and tenants in common. If a couple owned a farm
worth $1,200,000 as tenants in common, zero tax would accrue in passing
the farm on to the next generation. This is assuming that the decedent

left his one-half undivided interest in the tenancy in common property
to the surviving spouse in his will, and that she disclaimed it under

section 2518 within nine months of decedent's death. ^'^ The same farm

owned as joint tenants, under the Service's position regarding joint
tenancy property, would, in passing it to the next generation, result in

a $235,000 estate tax (as shown by example earHer).''^ One authority
questions the extent to which early common law distinctions between

^^^Federal Estate and Gift Taxation: Recommendations of the American Law Institute
and Reporters' Studies 78 (1969). They articulated seven goals in formulating recommen-

dations for reform of the federal estate and gift tax system:

In relation to any proposals in the gift and estate tax area, a decision must be

made on the goals which tax legislation in this field is designed to accomplish.
The goals which have guided this Study are as follows (not necessarily listed

in the order of their importance):

(1) to produce revenue;

(2) to impose reasonable restrictions on the inheritance of wealth;

(3) to guard against the destruction of incentives to accumulate wealth;

(4) to reduce, if not eliminate, the circumstances under which the form of a

transfer will affect the tax result;

(5) to have a tax system that is readily understandable in the normal and routine

transfer situations;

(6) to treat taxpayers similarly situated in the same manner; and

(7) to produce a tax structure that will be regarded as fair.

It is obvious that in some instances the achievement of some of these goals will call for

solutions directly opposite to the achievement of other goals. In such instances, a decision

has to be made as to which goals should predominate.
^'^See supra note 108 goal 6.

"°See supra note 108 goal 4.

'"See supra note 108 goal 7. For a discussion of these goals, see Uchtmann & Hartnell,
supra note 72, at 989-92.

"^The tax computations for such an estate would be the same as in example 2 given

earlier in the text. See supra notes 21-22 for computations.

^"See supra notes 19-20 for computations.



688 INDIANA LAW REVIEW [Vol. 21:669

tenants in common and joint tenants have disappeared over time, and
in light of this, whether a poHcy which discriminates between a tenant

in common and a joint tenant regarding the right to disclaim an accretive
undivided interest in property can be justified. ^'"^

The special use valuation section 2032A,''^ provides that, for tax

purposes, qualifying farmland transferred in a decedent's estate can be

transferred at its income-generating value rather than its market value.

Congress has thus recognized the large estate tax burden faced by farmers

when passing their family farms and businesses to the next generation.
However, the significant tax saving under this section is not available

for inter vivos transfers' ^^ and thus provides a strong incentive to hold

on to farmland until death. The Service's position increasing the estate

tax burden on farm couples who own their land as joint tenants is not
in line with Congress' actions to help decrease the estate tax burden for

farm couples. Because the special use valuation benefits for agricultural

property of section 2032A are only available for transfers at death, the

Service's position also would not allow farm couples to pass title to

farmland to their children who may have joined the family business at
the death of the first parent, but would force them to wait until the

death of the second.

D. The Courts* Treatment of Disclaimers of Joint Tenancy Prior to

Kennedy

The Service's position that the nine-month time period for disclaiming

joint tenancy property begins to run at the creation of the tenancy and

not at the death of one of the joint tenants, is based on a series of

private letter rulings discussed earlier.''^ These letter rulings cannot be

cited as precedent and are merely opinions of the IRS on specific issues

raised by inquiring taxpayers.''^ Prior to Kennedy only two courts ad-

dressed the issue of disclaiming joint tenancy property interest. The first

was the Federal District Court for the District of Arizona in Ferguson

V. United States. ^^'^ Because the creation of the joint interest, the death

of one of the joint owners, and the attempted disclaimer by the surviving

joint owner all occurred prior to 1977, the court applied pre-section

2518 law (section 2511). The court concluded that in light of the existing

Arizona disclaimer statutes a new statutory basis for the existence of

"'Uchtmann, supra note 47, at 350. For examples of disparate tax treatment, see id.

at 347-50.

"'I.R.C. § 2032A (1987).

'"S^e supra notes 43-50 and accompanying text.

"«I.R.C. § 6110a)(3) (1987).

"M8 A.F.T.R.2d (P-H) 1 148,472 (D. Ariz. 1981).



1988] DISCLAIMER OF JOINT TENANCY 689

joint estates had replaced the common law, and that a joint tenant could
make an effective disclaimer even though the renunciation came long
after the creation of the joint estate. '^^

The court reasoned that the right of survivorship interest, not the

joint interest itself, was the interest being disclaimed. It interpreted the

state statute to mean that upon renunciation of a joint interest at the
death of one co-tenant, the joint estate is destroyed and is replaced by

a tenancy in common which arises at the time of the renunciation. The
surviving tenant could then disclaim ownership in the deceased tenant's

share, provided the survivor had not accepted any benefits of that interest

he could not have accepted as a tenant in common. '^^ The court's result
implies that the statute has altered the common law of joint tenancy.
If other statutory requirements were met, the court saw no difficulty

in recognizing practical realities and permitting the disclaimer. '^^

Although in Ferguson section 2511 controlled because the transfer

was prior to 1977, the same rationale as to the effect of state disclaimer

law on the nature of joint tenancy property could easily be appHed to

post 1977 transfers under section 2518. In fact, prior to Kennedy, the

only other case that addressed the issue of disclaiming joint interest,

Hoffman v. United States, ^^^ applied section 2518 and used a very similar
approach in allowing the disclaimer of the survivorship interest in joint

tenancy property. In Hoffman, a husband and wife bought a quarter

section of land in 1943, each making equal contributions and taking

title as joint tenants with right of survivorship. ^^^^ The husband died in

1979 and the wife made a written disclaimer of an undivided one-half
interest in the jointly held property within seven months of his death.

The Hoffman court decided that Treasury Regulation Section 25.2511-
1(c) did not apply because the creation of the tenancy in 1943 was not

the result of a transfer and the regulation applied only to "property

transferred from a decedent (whether the transfer is effected by the

decedent's will or by the law of descent and distribution of intestate

property). "'^^

^^^Id. See also Morris, supra note 26, at 64. In his article, Morris proposes a new

form of property ownership, "statutory tenancy," similar but yet distinct from joint

tenancy. For a further discussion of this form of ownership as compared to joint tenancy

and the property interest in Ferguson after applying state disclaimer law, see Morris, supra

note 26, at 65-78.

•"85-2 U.S. Tax Cas. (CCH) 1 90,430 (D. Neb. 1985).
'^These facts differ slightly from those in Kennedy and Ferguson where only one

spouse bought the property and then titled it as joint tenants with rights of survivorship,

making a gift of the one-half undivided interest at the time. Id.

^^^Id.; see also Treas. Reg. § 25.251 l-l(c) (as amended in 1986). See supra note 26

for text of regulation.



690 INDIANA LAW REVIEW [Vol. 21:669

The question then became whether the change in title effected by

the death of a joint tenant in Nebraska is included in the meaning of

the language in section 2518, "transfer creating an interest," which was

considerably broader than the previous regulation language, because it

was not restricted to transfers from a decedent. ^^^ In examining Nebraska

law on disclaimer of joint tenancy interest, the court found that the

husband's death brought about a transfer that created an interest in the

surviving spouse that she did not possess prior to his death; an interest

which she could disclaim if done within nine months. '^^ Under Nebraska

law

[Tjhe disclaimer, which relates back to the time of death, has

the effect of severing the joint tenancy by destroying the right

of survivorship and converting the estate into a tenancy in

common between the survivor and the successor of the renounced
interest; then, as a tenant in common, the survivor still has the
right to possession of the entire property, subject to the same

right of the other tenant. '^^

The disclaimer raised no questions concerning the acceptance of prior

benefits. "The only benefits that could be accepted from the decedent's
interest before it is renounced that are not merely benefits inherent in

the survivor's own interest by means of the unity of possession common
to both estates are those that could be obtained by assignment, con-

veyance, encumbrance, pledge or transfer of the property, "'^^ none of

which the surviving spouse had done.

In addition to using the Ferguson court's rationale as to the effect

of state disclaimer law, the Hoffman court went on to make a comparison
between disclaiming inheritance by intestate succession and disclaiming

the survivorship right of joint tenancy property. ^^^ From this comparison
the court made a very convincing argument that the two should be
treated the same. The court reasoned that an heir after disclaiming her
inheritance is left in the same position as before the intestate's death,

except that now she no longer has an expectancy of inheritance. The
court continued by pointing out that in either case (that of a joint

tenancy or intestate succession) the prior interest holder could have done

an inter vivos act "by making a will, in the case of inheritance, or by
severing the joint tenancy unilaterally . . .—to defeat the heir's or co-

'^'Hoffman, 85-2 U.S. Tax Cas. at 90,434.

'^'Id.

'^Hd.

''Hd. at 90,435.



1988] DISCLAIMER OF JOINT TENANCY 691

owner's expectancy. And in each case the value of the decedent's interest
is included in the gross estate for death tax purposes. "^^'

In both Ferguson and Hoffman the outcome was very dependent
on state law. Such dependency is in direct conflict with one of Congress'

main goals in passing section 2518—to make a uniform federal disclaimer
law that was not dependent on state or local law.^^^ Neither case addressed

the issue of whether the transfer from which the time limit ran had to

be taxable under section 2518, which was also an intent of Congress

when it enacted the section. Both courts, however, did show a wiUingness
to circumvent the Service's position that an effective disclaimer of a

joint tenancy interest must be done within nine months of the creation

of the tenancy.

IV. The Kennedy Case

A. The Facts

In 1953, Frank Kennedy acquired 160 acres of lUinois farmland.

Frank then created a joint tenancy with the right of survivorship with

his wife, Pearl Kennedy, by transferring a one-half undivided interest

in the farmland to her.'" Frank died in 1978 and within nine months

of his death Pearl disclaimed the interest she had acquired in the farm

by surviving Frank. Under the law of Illinois, this former interest of

Frank's passed to the Kennedy's daughter, Marsha. The IRS believed

that the disclaimer was ineffective under federal law resulting in the

property vesting in Pearl and that by attempting to now disclaim the
property under state law, Pearl was transferring her property to her

daughter which resulted in a taxable gift.'^'* Relying on the 1982 Supreme

Court case of Jewett v. Commissioner, ^^^ the Tax Court agreed, holding

that Pearl's time to make a *'quahfied" disclaimer (one that avoids the

'^'Id. (citing I.R.C. § 2040(a); Treas. Reg. § 20.2040-l(a), -1(b)).

'"5ee supra text accompanying notes 94-107.

'"Kennedy v. Commissioner, 804 F.2d 1332, 1333 (7th Cir. 1986). Frank furnished

all the consideration for the land. Therefore, under current law at that time, although

no taxable gift was reported, one took place for the undivided one-half interest transferred

to Pearl. The Internal Revenue Code was amended effective 1954 to create a special

treatment of marital joint tenancies. See I.R.C. § 2515 (repealed effective 1982). It now
allows a deduction equal to the value of gifts to a spouse. See I.R.C. § 2523(a) and (d)

(1987). However, neither of these changes affect the principal case because the joint tenancy

was created in 1953, prior to these changes.

'''Kennedy, 804 F.2d at 1333.

'"455 U.S. 305 (1982).



692 INDIANA LAW REVIEW [Vol. 21:669

imposition of tax) had been running since 1953 and therefore had expired

long before Frank died.'^^

The case was appealed and the Seventh Circuit became the first

court of appeals to consider the appropriate treatment of disclaimed

interests in real estate held through joint tenancies. '^^ The Seventh Circuit

disagreed with the lower tax court holding and its application of the

Jewett case. Because Illinois state law allowed either joint tenant to

partition the property at will, the Seventh Circuit held that Pearl Kennedy

had acquired the family farm in two steps. '^^ The first step was at the

creation of the tenancy in 1953 when she acquired an undivided one-

half interest in the property. The second step was the transfer of the

survivorship interest which occurred at the death of her husband. "The
time within which Pearl could disclaim the half of the property she

received because of Frank's death started to run in 1978 and is therefore

governed by the 1976 statute. "'^^ Having decided the timing issue and

which statute applied, the court remanded the case for further proceedings

by the Tax Court to determine whether Pearl had accepted any interest

or benefits as the terms are used in section 2518 and the implementing

regulations. ^"^^ On March 9, 1987, the Commissioner filed a Memorandum
on Remand stating that he '*will not pursue the argument that the
petitioner accepted any interest in, or benefit from, the property. "^"^^

B. Analysis of the Court's Decision

In reaching its holding the Seventh Circuit first distinguished Jewett.

It agreed with the Supreme Court's holding in Jewett as it appUed to

contingent remainders, but disagreed with the tax court's application of

the Jewett holding to survivorship interest in jointly held property. ^"^^

Second, the Seventh Circuit compared the survivorship interest in states

where joint tenants have a right to partition to a general power of

appointment. From this the court found an inconsistency in the federal
regulations' treatment of disclaimers of general power in appointments

and disclaimers of joint tenancy interests, and reasoned that the provision

for general power of appointments was the one most appHcable.^'*^

'^^Kennedy v. Commissioner, 51 T.C.M. (CCH) 232, rev'd, 804 F.2d 1332 (7th Cir.

1986).

'''Kennedy, 804 F.2d at 1336.

""Memorandum of Commissioner on Remand (March 9, 1987), Kennedy v. Com-
missioner, 804 F.2d 1322 (7th Cir. 1986).

''^Kennedy, 804 F.2d at 1334.

'''Id. at 1335-36.



1988] DISCLAIMER OF JOINT TENANCY 693

7. The Jewett Decision.—Because the Jewett case involved a trust
and four generations of the Jewett family, its facts are rather complex.

The court in Kennedy used Roman numerals to designate the different
generations and described the trust as follows:

Margaret Weyerhauser Jewett (Jewett I) died [in 1939], creating

a trust in which her spouse and children (Jewett II) had a life

estate. On the death of the last Hfe tenant, the corpus of the
trust would go to surviving members of generation III. If the

last life tenant survived any particular member of generation
III, then that member's share of the corpus would go to gen-

eration IV, the children of the deceased member of generation
III—if necessary, to the descendants of generation IV per stirpes.''*^
In 1972, while one member of generation II was still alive, George

Jewett, a member of generation III, disclaimed any interest in the corpus
of the trust. His interest under state law then passed as if he had

deceased, making his children (Jewett IV) the direct beneficiaries of his

share, worth over $4 million. ^"^^ The IRS proposed to levy a gift tax on

the actuarial value of George's interest in the corpus of the trust. George

argued that because it was not possible to know who would receive the
corpus until the last life tenant died, he should not be charged with

making a gift of such an uncertain amount to his children. ^"^^ The Supreme

Court held to the contrary. It held that George's interest in the corpus

was created in 1939 when Jewett I died. Because he had not disclaimed
within a "reasonable" time from that date, his interest in the corpus

would be considered received by him and given to his children and

therefore subject to a gift tax.^"*^

'^M at 1333.
'''Id. at 1334.

''''Id.

''''Jewett, 455 U.S. at 319-20. Prior to the Supreme Court decision in Jewett, the

Eighth Circuit decision in Keinath v. Commissioner, 480 F.2d 57 (8th Cir. 1973), was

the prevailing view on disclaimers of contingent remainder interest. The court's holding

was that an unequivocable disclaimer of a vested remainder subject to divestiture, filed

within six months of the death of the life tenant, was made within a "reasonable time."
The court said that remainder interests which are not subject to divestiture should be

disclaimed within a reasonable time after the testator's death. Where a remainder interest

is subject to divestiture, however, the reasonable time is measured from the death of the

life tenant. Id. at 64. This position was generally approved by the Eighth Circuit in 1980

by Cottrell v. Commissioner, 628 F.2d 1127 (8th Cir. 1980).

In 1980 the Ninth Circuit held in Jewett v. Commissioner, 638 F.2d 93 (9th Cir.

1980), aff'g 10 T.C. 430 (1978), that the "reasonable time" tolls at the creation of the

interest, not after the interest indefeasibly vests. Id. at 95-96. This decision created a

conflict between the circuits, and the Supreme Court granted certiorari in Jewett on June

1, 1981. 452 U.S. 904 (1981).



694 INDIANA LAW REVIEW [Vol. 21:669

The Seventh Circuit in Kennedy agreed that Jewett *' shows that a

belated disclaimer may be a taxable gift even though the person dis-
claiming has no current access to the money and may never receive
jl^

"148 However, the Seventh Circuit disagreed with the IRS's conclusion

that Jewett should apply to Pearl Kennedy's disclaimer. In Jewett the

interests of the different generations of the Jewett family were fixed in

1939. The future interest of each generation had a present value which

could have been calculated from the actuarial tables in 1939 or in 1972

to determine what the value of each person's share of the trust corpus

was at that time.'"^^ This was not the case with Frank Kennedy's gift

to his wife in 1953 with respect to the survivorship interest. The undivided

one-half interest that Frank retained had no value to Pearl that could

be ascertained in 1953 because Frank retained the right to partition the

property. '^° He retained this right up until his death; therefore, it was
not until his death in 1978 that the survivorship interest value could be

ascertained.'^^ If the survivorship component of a joint tenancy was

treated as a valuable gift in 1953, then that would imply that Frank's

retained interest was worth less than half of the total value of the farm

because Frank's and Pearl's shares, when added together, could not be
more than 100 per cent. However, Frank also had a right of survivorship,

plus the half share that he could retain with certainty by partition. '^^

The court found that the IRS's treatment of the transfer in 1953 implied

both Frank and Pearl's interest was worth more than one-half and this

suggested something was seriously wrong with the IRS's position.'"

The petitioner in Kennedy argued in her brief that the issue in Jewett
revolved around the Supreme Court's interpretation of "transfer. "'^"^ She

argued that the Jewett court's interpretation was that in order to trigger

the time period the transfer had to be a taxable transfer. In Jewett,

when Jewett I died in 1939, there was a taxable transfer at that time
of a future interest to George Jewett (Jewett III); therefore, the reasonable

time period under section 2511 began to run.'^^ When Frank titled the
property jointly with Pearl in 1953 he made a taxable gift of the undivided
one-half interest she acquired at that time. However, the survivorship

'''Kennedy v. Commissioner, 804 F.2d 1332, 1334 (7th Cir. 1986).

'=°M at 1335.

'''See Estate of Lidbury v. Commissioner, 800 F.2d 649, 653-54 (7th Cir. 1986). A
contract to make a gift is not a taxable gift when the value of the interest to be transferred
is subject to diminution at the donor's pleasure.

'''Kennedy, 804 F.2d at 1335.

'"Id.

'^^Brief for Petitioner at 24, Kennedy v. Commissioner, 804 F.2d 1332 (7th Cir. 1986)
(No. 33349-83).

"'Id.



1988] DISCLAIMER OF JOINT TENANCY 695

interest she acquired at that time in the one-half undivided interest he

retained was not taxable under the gift tax laws until Frank died in
1978.'^^ Therefore, because it was this latter interest Pearl was disclaiming,

she argued that, according to Jewett, it was the taxable event of Frank's

death in 1978 that triggered the nine-month time period and section

2518 should apply. '^^

The Congressional intent behind section 2518 supports the interpre-

tation that it is the taxable transfer that triggers the time limit and

determines whether section 2511 for transfers prior to December 1976,

or section 2518 for those after December 1976 will apply. '^^ The IRS

has also enacted Treasury Regulations for section 2518 that reiterate

that it is the taxable transfer that triggers the nine-month time limitation

under section 2518.^^^ The Kennedy court's holding is in line with both

Congressional intent behind section 2518 and the Treasury Regulation's

definition of what constitutes a transfer for purposes of section 2518.^^°

Although the court's holding comports with both of these, it is in direct

conflict with Treasury Regulation Section 25.25 18-2(c)(4), which states

that a disclaimer of a joint tenancy interest must be made within nine
months of the creation of the tenancy. ^^' Because the resolution of this

conflict may affect a significant number of taxpayers, it is necessary to
analyze the conflict and determine which approach should prevail.

2. Kennedy Court Finds the Treasury Regulations Inconsistent.—
The court equated Frank's power of partition to a general power of

appointment over Pearl's survivorship interest, "because by partitioning

the property Frank could direct his half to his creditors and legatees

of his choice rather than Pearl. "'^^ The court also found similarities in
that current tax law pulls the value of the jointly held property into

the estate of a contributing deceased joint tenant, ^^^ just as a general

power of appointment pulls the value of a trust into the estate of the

person who dies while holding the power. '^ With a general power of
appointment the effective transfer occurs when the holder of the general
power exercises it or allows it to lapse, and the time to disclaim then

''''Kennedy, 804 F.2d at 1335. See Gift Tax Regulations 108, §§ 86.2, 86.19(h) (1943);
for treatment under current law, see supra note 84 and accompanying text.

'"Brief for Petitioner at 24, Kennedy v. Commissioner, 804 F.2d 1332 (7th Cir. 1986)

(No. 33349-83).

"^5ee supra notes 80-81 and accompanying text.

'^^See supra notes 89-90 and accompanying text.

'^See infra note 166 for language of regulation.

'*'For the complete language of Treas. Reg. § 25.2518-2(c)(4)(i), see supra text

accompanying note 52.

'"^Kennedy v. Commissioner, 804 F.2d 1332, 1335 (7th Cir. 1986).

'"I.R.C. § 2040(a) (1987).

'^I.R.C. § 2041(a)(2) (1987).



696 INDIANA LAW REVIEW [Vol. 21:669

begins. '^^ The regulations under section 2518 support this treatment of

the situation: "A person to whom any interest in property passes by
reason of the exercise or lapse of a general power may disclaim such
interest within a 9-month period after the exercise or lapse. "'^^ The court

reasoned that Frank's right to partition, which was similar to a general

power of appointment, lapsed at his death and, therefore, Pearl had

nine months from that time to disclaim the survivorship interest in the

farm.'^^

'^'Kennedy, 804 F.2d at 1335.

'^Treas. Reg. § 25.2518-2(c)(3). The full text reads as follows:

Transfer. For purposes of the time limitation described in paragraph (c)(l)(i)

of this section, the 9-month period for making a disclaimer generally is to be

determined with reference to the taxable transfer creating the interest in the

disclaimant. With respect to inter vivos transfers, a taxable transfer occurs when

there is a completed gift for Federal gift tax purposes regardless of whether a

gift tax is imposed on the completed gift. Thus, gifts qualifying for the gift

tax annual exclusion under section 2503(b) are regarded as taxable transfers for

this purpose. With respect to transfers made by a decedent at death or transfers

which become irrevocable at death a taxable transfer occurs upon the date of

the decedent's death. However, where there is a taxable transfer of an interest

for Federal gift tax purposes and such interest is later included in the transferor's

gross estate for Federal estate tax purposes, the 9-month period for making a

qualified disclaimer is determined with reference to the earlier taxable transfer.

In the case of a general power of appointment, the holder of the power has

a 9-month period after the creation of the power in which to disclaim. A person
to whom any interest in property passes by reason of the exercise or lapse of
a general power may disclaim such interest within a 9-month period after the
exercise or lapse. In the case of a nongeneral power of appointment, the holder

of the power, permissible appointees, or takers in default of appointment must

disclaim within a 9-month period after the original taxable transfer that created

or authorized the creation of the power. If the transfer is for the life of an

income beneficiary with succeeding interests to other persons, both the life tenant

and the other remaindermen, whether their interests are vested or contingent,

must disclaim no later than 9 months after the original taxable transfer. In the

case of a remainder interest in property which an executor elects to treat as

qualified terminable interest property under section 2056(b)(7), the remainderman

must disclaim within 9 months of the transfer creating the interest, rather than

9 months of the date such interest is subject to tax under section 2044 or 2519.

A person who receives an interest in property as the result of a qualified
disclaimer of the interest must disclaim the previously disclaimed interest no

later than 9 months after the date of the taxable transfer creating the interest

in the preceding disclaimant. Thus, if A were to make a qualified disclaimer
of a specific bequest and as a result of the qualified disclaimer the property

passed as a part of the residue, the beneficiary of the residue could make a
qualified disclaimer no later than 9 months after the date of the testator's death.

See paragraph (d)(3) of this section for the time limitation rule with reference

to recipients who are under 21 years of age.
'^'Kennedy v. Commissioner, 804 F.2d 1332, 1336 (7th Cir. 1986).



1988] DISCLAIMER OF JOINT TENANCY 697

The Kennedy court noted that the regulations treated other interests,

such as joint bank accounts, similarly. '^^ The Commissioner treats a

joint account between A and B, where A has provided all the funds,
as a transfer to B only when it becomes irrevocable. The transfer becomes
irrevocable when B withdraws the money or A dies. If B does not
withdraw the funds during A's Hfe, B has nine months after A's death
to disclaim any interest in the account. '^^

The court also noted that the new regulation treated a survivorship

interest in land as a completed, irrevocable gift on the date the tenancy

itself was created. '^^ The court found this * 'inconsistent with the Com-
missioner's treatment of general powers of appointment and joint bank

accounts when, as is true in Illinois, either spouse may terminate the
right of survivorship by partitioning the property. "'^^ Because of the

prospect of partition, only the one-half undivided interest had been

transferred irrevocably. The survivorship interest could have been with-

drawn at will, just as funds in a joint account could have been. The

court found that Pearl had no greater interest in Frank's half of the

farm than she had in any funds Frank might have deposited in a joint

checking account. 'Tn either case Pearl would get the interest if she

survived Frank, but only if Frank refrained from exercising his unfettered

power to withdraw (or partition). "'^^

Based on this comparison of Frank's right to partition to that of

a general power of appointment, the court held that Pearl had received

the farm as the result of two separate transfers. The first was the transfer

of the undivided one-half interest in 1953, and the second was the

transfer of the survivorship interest at Frank's death in 1978. Therefore,

the time period in which Pearl could disclaim the half of the property

she received at Frank's death started to run in 1978 and was governed

by section 2518.'^^

The court's holding can be viewed in two ways. First, upon finding

an inconsistency in the Treasury regulations, the court chose to apply

the regulation which discussed general power of appointments^^"* because

the court found it more applicable and in line with the purpose of the
statute than the regulation discussing joint tenancy interest. '^^ The second

'^«M at 1335.

"^Treas. Reg. § 25.25 18-2(c)(5) (1986) Example 9.

'''Kennedy, 804 F.2d at 1335. See also Treas. Reg. § 25.25 18-2(c)(4)(i) (1986). See

supra text accompanying note 52 for language of the regulation.

'''Kennedy, 804 F.2d at 1335.

''^Id.

'''Id. at 1336.

''"Treas. Reg. § 25.25 18-2(c)(3) (1986). See supra note 166 for text of regulation.

'"Treas. Reg. § 25.2518-2(c)(4)(i) (1986). See supra text accompanying note 52 for

language of regulation.



698 INDIANA LAW REVIEW [Vol. 21:669

interpretation is that the court sufficiently distinguished Pearl's survi-

vorship interest, based on Frank's power to partition, to remove it

completely from the joint tenancy regulation *^^ and to place it strictly

under the general power of appointment regulation. '^^ If the second

interpretation is accepted, the holding is not in conflict with Treasury

Regulation Section 25.25 18-2(c)(4)(i);^^^ the regulation simply does not

apply in this case.

Under the second interpretation the regulation applying to joint

tenancy would probably never be used because the right to partition is

one of the common law rights associated with joint tenancy property
and is present in most states where property is held as joint tenants

with right of survivorship.'^^ Courts would almost always be able to

make the comparison, made by the court in Kennedy, that the right to
partition is equivalent to a general power of appointment and, therefore,

would apply the regulation that discusses general power of appointments

rather than the one that addresses joint property interest. Although this

interpretation makes the holding less controversial, the first interpretation

appears to be the practical effect of the court's holding.

If the first interpretation is accepted, the holding is in direct conflict

with Treasury Regulation Section 25.25 18-2(c)(4)(i), which states that a

disclaimer of a joint tenancy interest must be made within nine months
of the creation of the tenancy. '^*^ The Kennedy court questioned the

appropriateness of Treasury Regulation Section 25.25 18-2(c)(4)(i) when
it recognized that the regulation did not discuss the effects of a power

to partition.'^' Because of the effect the right to partition has on the

survivorship interest, the court found this omission suggested something

was seriously wrong with the IRS's position in the regulation discussing

joint property interests. '^^

The Kennedy court did not address directly its power to disregard

a Treasury regulation (which is, implicitly, what the court did if the

first interpretation is accepted). There are two types of Treasury re-

gulations, "interpretative" and "legislative." A regulation promulgated
pursuant to the Secretary's general authority under I.R.C. section 7805(a)

'''Id.

'^Treas. Reg. § 25.25 18-2(c)(3) (1986). See supra note 166 for text of regulation.

'^«Treas. Reg. § 25.2518-2(c)(4)(i) (1986). See supra text accompanying note 52 for

language of regulation.

''^Gwinn v. Commissioner, 287 U.S. 224, 228-29 (1932). See supra text accompanying

note 69.

'«°Treas. Reg. § 25.2518-2(c)(4)(i) (1986). See supra text accompanying note 52 for

language of regulation.

'''Kennedy v. Commissioner, 804 F.2d 1332, 1335 (7th Cir. 1986).



1988] DISCLAIMER OF JOINT TENANCY 699

to ''prescribe all needful rules and regulations for the enforcement of

[the revenue laws],"'^^ is an interpretative regulation. One that is issued
under a specific delegation of authority by Congress in the statute itself

is a legislative regulation and has the same effect as a valid statute. ^^'*

Because Congress did not give such authority to the Commissioner in

section 2518, all regulations concerning the section are interpretative.

When applying an interpretative regulation, the court may substitute its
judgment for the agency's. ^^^ Therefore, the court in Kennedy had the

power to challenge the Treasury regulation.

The United States Supreme Court has held, however, that deference

is owed to a regulation that '' ' implement [s] the congressional mandate
in some reasonable manner.' "^^^ The Court has also held that, when
challenging an interpretative regulation, a court is required to

look to see whether the regulation harmonizes with the plain

language of the statute, its origin, and its purpose. . . . Other

relevant considerations are the length of time the regulation has

been in effect, the reliance placed on it, the consistency of the

Commissioner's interpretation, and the degree of scrutiny Con-

gress has devoted to the regulation during subsequent re-enact-

ments of the statute. '^^

The Kennedy court found that the regulation in question was not in

harmony with the statute, and that the regulation was inconsistent with
the other regulations under the statute. '^^ The regulation was also not

in line with the Congressional intent that the transfer which triggers the

nine-month time period was to be a taxable transfer. '^^ This is dem-

onstrated by the regulation's requirement that the time period for dis-

claiming the survivorship interest begins to run at the creation of the

tenancy'^^ regardless of the fact that the transfer of the survivorship

interest is not taxable at that time.

The regulation in question had been enacted less than three months

before the Kennedy decision was rendered, and the court was the first

to address disclaimer of joint property interest under the new regulation.

'"I.R.C. § 7805(a) (1987).

'^^Batterton v. Francis, 432 U.S. 416, 425 n.9 (1977).

'''See, e.g., General Electric Co. v. Gilbert, 429 U.S. 125 (1976); Batterton, 432 U.S.

416; see also Davis, Administrative Law Treatise § 7.8, at 36-43 (2d ed. 1979).
'^^United States v. Vogel Fertilizer Co., 455 U.S. 16, 24 (1982), (quoting United

States V. Correll, 389 U.S. 299, 307 (1967)).

'»^National Muffler Dealers Ass'n, Inc. v. United States, 440 U.S. 472, 477 (1979).

'^'Kennedy, 804 F.2d at 1335.

'^^See supra text accompanying notes 80-81.

'^reas. Reg. § 25.25 18-2(c)(4)(i) (1986). See supra text accompanying note 52 for

language of regulation.



700 INDIANA LAW REVIEW [Vol. 21:669

Because the regulation had been enacted so recently there were very few

arguments to support the regulation when looking at the other relevant
considerations suggested by the Supreme Court when challenging a reg-
ulation. Therefore, the court's challenge and disregard of the Treasury

Regulation Section 25.2518-2(c)(4)(i) was proper under the guideUnes set

by the Supreme Court. '^^

The Kennedy case recognized the reality of modern joint tenancy

property and the Congressional intent behind section 2518 that it should

be the taxable transfer that triggers the nine-month time period. However,

it still relied heavily on the state law of Illinois in defining the property

right to be disclaimed. The case brought to the forefront the need for

Congress to take action to clarify the disclaimer of joint property interest

if its intent to have a uniform federal disclaimer law that is not dependent

on state or local law is to become a reality.

V. Post Kennedy Decisions

As of November, 1987, the Seventh Circuit is the only court of
appeals that has addressed this issue. However, the Eighth Circuit will

address the disclaimer of joint tenancy survivorship interest in the spring

of 1988 in a case that is being appealed from the United States Tax

Court. That case, McDonald v. Commissioner, ^^^ held that the disclaimer
of jointly held property received from a decedent was not valid because

transfer of the interest occurred upon the creation of the joint tenancies

and the disclaimer was not made within a reasonable time.'^^ The facts
of the case, for practical purposes, are the same as those in Kennedy.

The majority in McDonald found that Jewett applied and that the court
in Kennedy had not sufficiently distinguished Jewett .^'^'^ Although it

recognized that North Dakota law permitted partition or severance of

joint tenancies, the court did not find this a persuasive basis on which

to distinguish Jewett. Instead, the court stressed the fact that in this

case the joint tenant had not exercised his right to partition, and the

right under North Dakota law only permitted it in limited circumstances

and "certainly not at the whim of a joint tenant. "'^^

'^'iSee supra text accompanying note 187.

'^^McDonald v. Commissioner, 89 T.C. 293 (1987) rev'd, 823 F.2d 1494 (8th Cir.

1988). Immediately preceding publication of this Note, the Eighth Circuit handed down
its opinion reversing the Tax Court in McDonald. The court relied on the reasoning of

the Seventh Circuit in Kennedy in holding that the nine-month time period in section
2518 begins to run at the death of the joint tenant rather than at the creation of the

joint tenancy as held by the Tax Court.

'^'Id. at 301.

'^Vc?. at 299.

'"'M at 300.



1988] DISCLAIMER OF JOINT TENANCY 701

This reasoning is flawed. A joint tenant either does or does not
have a right to partition. Just because he chooses not to exercise the

right during his Ufetime does not mean it did not exist and would not
have affected the property if it had been exercised. Based on this

reasoning, however, the majority held, as did the lower court in Kennedy,

that the survivorship interest was a "contingency that [was] not . . .

materially different than the contingency faced by the disclaiming taxpayer

in Jewettr^^^

A strong dissenting opinion disagreed with the majority's application
of Jewett.^^'^ They agreed with the Seventh Circuit's analysis in Kennedy

and summarized it as follows:

Jewett interests become irrevocable with the creation of the trust

to Mrs. Jewett's death, whereas Frank Kennedy's gift to Pearl,

i.e., the right of Pearl to receive Frank's interest when Frank

died, was revocable until Frank's death, when it became irrev-

ocable. Under section 2518(b)(2)(A), taxpayer then had 9 months

within which to disclaim, which she did.'^^

McDonald will give the Eighth Circuit a chance to join the Seventh
Circuit in recognizing the realities of modern joint tenancy property and

also to continue to set precedent that will further the Congressional

intent behind section 2518. If the Eighth Circuit chooses not to hold

with the Seventh Circuit, then it will be for the Supreme Court to settle

the dispute among the circuits concerning the disclaimer of joint property
interest. '99

'^''Id. (quoting Kennedy v. Commissioner, 51 T.C.M. 232, 233, rev'd, 804 F.2d 1332

(7th Cir. 1986)). "A proper appeal in this case would lie in the Eighth Circuit not the
Seventh Circuit. Accordingly, we are not bound by the Seventh Circuit's opinion in

Kennedy:' McDonald, 89 T.C. at 296 n.ll.

^^^McDonald, 89 T.C. at 308 (Nims, J., dissenting). Six judges joined the dissent

while there were ten siding with the majority. The second dissenting opinion of Judge

Parr discussed briefly the treatment of tenants by the entirety. He wrote that because
"divorce or annulment generally terminates the tenancy by the entirety and transforms it

into a tenancy in common, with each spouse holding an undivided one-half interest," 4A
R. Powell, The Law of Real Property, f 624[3] (1986), he would treat both tenancies
by the entirety and joint tenancies the same. McDonald, 89 T.C. at 310 (Parr, J., dissenting).

This Note did not address disclaimers of tenancy by the entirety interest between spouses,

but since they, too, can be partitioned by divorce or annulment, the same reasoning as

applied in Kennedy would also apply to tenancy by the entirety interest.

'^'McDonald, 89 T.C. at 308-09 (Nims, J., dissenting).

'^For another post Kennedy case addressing disclaimers of joint tenancy interest

under section 2518, see Estate of Dancy v. Commissioner, 89 T.C. 550 (1987). This court

disagreed with the Kennedy court and cited McDonald as authority. The case occurred
in North Carohna, which has no state disclaimer laws for joint tenancy property, therefore

making it distinguishable from Kennedy and limited by its facts. See also Estate of



702 INDIANA LAW REVIEW [Vol. 21:669

VI. Conclusion

The Kennedy case has brought to the forefront the issue of when

the time period begins to run for the disclaimer of the survivorship

interest in joint tenancy property. By allowing such a disclaimer to be

made by the surviving joint tenant within nine months of the deceased
joint tenant's death,^^ rather than nine months from the creation of

the tenancy as required by the Treasury Regulation, ^^^ the holding in

Kennedy has given owners of joint tenency property an effective post

mortem estate planning tool that will allow them to reduce their tax
burden when passing their property to the next generation. Disclaimers
of property at death to avoid taxes is not a new concept. The Kennedy
holding merely dispenses with discrimination between similar property

ownership forms, by allowing joint tenancy property owners the same

rights that tenants in common property owners enjoy under present
disclaimer laws. It is also in line with recent legislation to help alleviate

the large estate tax burden on farm families when passing their farms

on to the next generation. ^^^

Congress made changes in the federal disclaimer law in 1976 and
again in 1981. Three major goals in making these changes were: 1) to

create a uniform federal disclaimer law that was not dependent on local
or state law; 2) to substitute a nine-month period for the "reasonable

time" period in the previous statute; and 3) to define the transfer from

which this time period begins to run as a taxable transfer.^^^ Despite

Congress' efforts, there is still a lack of uniform treatment of federal

disclaimer law among the courts, particularly with respect to joint tenancy
property interest and what constitutes the transfer from which the nine-

month time period begins.
The IRS is partly to blame, because in formulating Treasury Re-

gulations under section 2518, it has failed to recognize the reality of

modern joint tenancy property that an interest does pass at death to
the surviving tenant,^'''^ and the Congressional intent that it is a taxable

transfer from which the nine-month time period begins to run.^^^

Lamoureux v. Iowa Dept. of Rev., 412 N.W.2d 628 (Iowa 1987). This case only addresses
Iowa disclaimer law. However, it cites Kennedy as support for interpreting their statute

as allowing disclaimer of the survivorship interest by the survivor if made within nine
months of the death of the deceased joint tenant.

^'^Kennedy, 804 F.2d at 1336.

^°'Treas. Reg. § 25.2518-2(c)(4)(i) (1986). See supra text accompanying note 52 for

language of regulation.

^°^See supra text accompanying notes 115-16.

^°^See supra text accompanying notes 77-116.

^'^See supra text accompanying notes 66-76.

^°^See supra text accompanying notes 89-90.



1988] DISCLAIMER OF JOINT TENANCY 703

The Kennedy court recognized the inconsistency of the regulation

with respect to Congressional intent and the reahties of modern joint

tenancy property. The court chose not to apply the regulation, allowing

Mrs. Kennedy's disclaimer of the survivorship interest within nine months

of her husband's death.^^^

At this point, three possible forms of action can be taken to resolve

this conflict created by the Kennedy decision. Congress could add amend-

ments to section 2518 that specifically address joint tenancy property

and make clear what its intended treatment of such interests are.^°^

Second, but unUkely because of the present litigation in which the IRS

is involved,2°^ the IRS could issue a new regulation on joint property

more in Une with Congressional intent and the realities of modern joint

tenancy property. Third, the conflict could be resolved by the courts.

If the Eighth Circuit aligns itself with Kennedy in the McDonald case,
although it might not settle the issue in favor of Kennedy in other

circuits, it would certainly bolster the support for the Kennedy application

of section 2518. If the Eighth Circuit holds against Kennedy in the

McDonald case, there would be a split among the circuits. At that point,
if Congress or the IRS has not taken any action, the Supreme Court

would have the opportunity to address and settle the issue of when the

nine-month time period in section 2518 begins to run when disclaiming

the survivorship interest of a joint tenancy—at the creation of the tenancy
or at the death of one of the joint tenants.

If the Supreme Court has the opportunity to decide this conflict,

it should recognize the realities of modern joint tenancy property and

the Congressional intent behind section 2518. In doing so, the Court

should affirm the holding in Kennedy which allows the qualified dis-

claimer of the survivorship interest in jointly held property if made
within nine months of the deceased joint tenant's death.

Gary L. Chapman

^Kennedy v. Commissioner, 804 F.2d 1332, 1336 (7th Cir. 1986).
^Tor a recommended draft of an amendment reflecting the view that the survivorship

interest should be disclaimable within nine months of the deceased joint tenant's death,

see Uchtmann, supra note 47, at 355.

^°^See supra text accompanying notes 192-99.