## Facts

- E. Norman Peterson died in 1974, and his will created a marital trust for his second wife, Eleanor Peterson.
- The trust provided Eleanor lifetime income, a right to withdraw up to one-half of principal during life, and a general testamentary power of appointment over the corpus.
- If Eleanor did not exercise the power, the trust principal would pass in equal shares to Peterson’s grandchildren.
- After enactment of the generation-skipping transfer tax (GST) in 1986, Eleanor died holding the general power; the trust property was included in her gross estate under I.R.C. § 2041.
- Eleanor’s will directed only that estate tax attributable to inclusion of the trust assets be paid from the trust; otherwise the default distribution to the grandchildren occurred.
- The IRS assessed GST tax on the transfer to the grandchildren, applying Treasury Regulation § 26.2601-1(b)(1)(v)(A), which treats certain post-September 25, 1985 events as “additions” to a grandfathered trust.
- The Tax Court sustained the GST deficiency and upheld the regulation’s validity; the trust appealed.

## Issues

1. Whether Treasury Regulation § 26.2601-1(b)(1)(v)(A) is a valid interpretation of I.R.C. § 2601’s grandfather clause, including the phrase “except to the extent that such trust is added to” after September 25, 1985.
2. Whether inclusion of marital trust assets in a donee-spouse’s gross estate under I.R.C. § 2041, followed by distribution to grandchildren, constitutes a post-1985 “addition” that subjects the transfer to GST despite the trust’s pre-1985 irrevocability.

## Decision

- The Second Circuit affirmed the Tax Court.
- The court upheld Treasury Regulation § 26.2601-1(b)(1)(v)(A) as a reasonable construction of I.R.C. § 2601.
- The court held that the § 2041 estate inclusion and subsequent transfer to grandchildren constituted an “addition” to the trust for GST grandfathering purposes.
- As applied, the transfer from the marital trust to the grandchildren was subject to GST.

## Legal Principles

- Statutory terms used in transfer-tax provisions may carry specialized meanings informed by the structure and history of estate and gift taxation, rather than ordinary usage.
- When I.R.C. § 2601 does not clearly foreclose the Treasury’s construction of “added to,” courts defer to a reasonable Treasury regulation implementing the GST grandfather rule.
- For GST grandfathering, an irrevocable pre-September 25, 1985 trust can lose exemption “to the extent” post-1985 events treated by regulation as “additions” alter transfer-tax consequences, including events tied to general powers of appointment and § 2041 estate inclusion.
- The GST grandfather rule is directed to transfers effectively fixed before the effective date and does not protect post-effective-date mechanisms that can produce generation-skipping transfers without GST.

## Conclusion

The Second Circuit sustained a Treasury regulation interpreting § 2601’s grandfather clause to treat § 2041 estate inclusion and the resulting transfer to grandchildren as a post-1985 “addition,” making the transfer subject to the generation-skipping transfer tax despite the trust’s pre-1985 irrevocability.


E. Norman Peterson Marital Trust v. Commissioner, 78 F.3d 795 (2d Cir. 1996)