                       106 T.C. No. 10



                UNITED STATES TAX COURT



    ESTATE OF MILADA S. NEUMANN, DECEASED, ERIC W.
 SHAW, ANCILLARY ADMINISTRATOR, C.T.A., Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 11060-94.                      Filed April 9, 1996.



     Decedent, a nonresident alien, died in 1990. She
bequeathed U.S. situs property outright to her
grandchildren. In 1986, bequests of this type, i.e.,
"direct skips", were first subjected to the generation-
skipping transfer (GST) tax provisions of secs. 2601
through 2663, I.R.C. At the time of decedent's death,
regulations dealing with "direct skips" had not been
issued. Held, the bequests are subject to the GST tax.
The issuance of regulations in respect of "direct
skips" by nonresident aliens provided for in sec.
2663(2), I.R.C., is not a condition precedent to the
imposition of the GST tax on such "direct skips" but
merely authorizes the Secretary to prescribe the
allocations and calculations involved in determining
how such tax should be imposed.
     Edward L. Peck and Thomas V. Glynn, for petitioner.

     Moira L. Sullivan, for respondent.



                              OPINION


     TANNENWALD, Judge:   Respondent determined a deficiency in

petitioner's Federal estate tax and generation-skipping transfer

(GST) tax in the amount of $2,002,102.05.   After concessions, the

sole issue remaining for decision is whether the GST tax, under

sections 2601 through 2663,1 applies to the transfer of U.S.

situs property to decedent's grandchildren, where, at the time of

death, decedent was a nonresident alien and regulations had not

yet been promulgated under section 2663(2).

     All the facts have been stipulated and are so found.    The

stipulation of facts and the exhibits attached thereto are

incorporated herein by this reference.

     Petitioner is the estate of Milada S. Neumann (decedent) who

died testate on July 14, 1990.   Decedent was a resident and

citizen of the Republic of Venezuela at the time of her death.

Eric W. Shaw is the ancillary administrator and resided in

Larchmont, New York, at the time the petition was filed.

     Decedent's will was admitted to ancillary probate by the

Surrogate's Court of New York County, New York.   As translated

into English, the will provides in part as follows:

1
  All statutory references are to the Internal Revenue Code in
effect as of the date of decedent's death, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
                                 - 3 -



     Second: I resolve that all that is legitimate (that is
     fifty percent) corresponds to my only legitimate heir,
     my son Michal * * *

     Third: I instruct that after the legitimate is
     subtracted, all the available portion of my estate
     (that is fifty percent) is distributed as follows: half
     of the available (that is twenty-five percent) to my
     legitimate granddaughter Vanesa * * * and the other
     half of the available (that is twenty-five percent) to
     my legitimate grandson, Ricardo.

     Vanesa and Ricardo are the children of decedent's son,

Michal.   At the time of decedent's death, Michal and Ricardo were

citizens and residents of Venezuela, and Vanesa was a citizen and

resident of the United States.

     Decedent's estate included U.S. situs property consisting of

works of art and other tangible personal property, and a

cooperative apartment, all located in New York, New York.   The

estate also included foreign situs property including cash and

securities located in Venezuela and in a Cayman Islands Trust.

At the time of death, the U.S. situs property had a value of

approximately $20 million, and the foreign situs property had a

value of approximately $15 million.

     In the notice of deficiency, respondent determined that the

testamentary transfers of property to Vanesa and Ricardo,

decedent's grandchildren, were subject to the GST tax.

     The generation-skipping transfer tax was first imposed by

the Tax Reform Act of 1976, Pub. L. 94-455, sec. 2006, 90 Stat.

1520, 1879, but applied only to transfers in trust and not to
                                  - 4 -



"direct skip" transfers such as are involved herein, e.g.,

outright bequests by a decedent to a grandchild.        See Staff of

Joint Comm. on Taxation, General Explanation of the Tax Reform

Act of 1976, at 565 (J. Comm. Print 1976), 1976-3 C.B. (Vol. 2)

577.    Section 2614(b), enacted in 1976, made clear that the GST

tax was to apply only to nonresident aliens in respect of

property that would otherwise be taken into account for purposes

of the estate tax to which nonresident aliens were already

subject by virtue of section 2101(a).         See General Explanation of

the Tax Reform Act of 1976, supra at 580, 1976-3 C.B. (Vol. 2) at

592.

       In 1986, dissatisfied with the GST tax, Congress

retroactively repealed the 1976 provisions and enacted new

provisions extending the GST tax to "direct skip" transfers such

as are involved herein.    See Tax Reform Act of 1986, Pub. L. 99-

514, sec. 1431, 100 Stat. 2085, 2717.2         Section 2663, enacted in

1986, provided:

            The Secretary shall prescribe such regulations as
       may be necessary or appropriate to carry out the
       purposes of this chapter, including--

                      *   *   *    *      *    *   *

                 (2) regulations (consistent with the
            principles of chapters 11 and 12) providing for

2
   Sec. 2614(b) disappeared in the 1986 amendments presumably
because Congress intended the limitation to be reflected in the
definitions in sec. 2612.
                                - 5 -



            the application of this chapter in the case of
            transferors who are nonresidents not citizens of
            the United States, * * *

     No regulation in respect of generation-skipping transfers by

nonresident aliens had been issued at the time of decedent's

death.   Notice of proposed regulations dealing with the GST tax

as applied to nonresident aliens was first published in the

Federal Register on December 24, 1992.    See PS-73-88, 1993-1 C.B.

867, 883.    Final regulations were published on December 27, 1995.

T.D. 8644, 1996-7 I.R.B. 16, 44 (Feb. 12, 1996).    Both the

proposed and final regulations had effective dates subsequent to

the date of decedent's death.

     Petitioner argues the GST tax should not apply to "direct

skips" by nonresident aliens which occurred prior to the adoption

of implementing regulations on the ground that section 2663(2)

manifests the intent of Congress to require such regulations as a

condition to the imposition of such tax.    Respondent counters

that the statute itself imposes the tax and that section 2663(2)

represents simply a recognition by Congress that regulations

might be needed to fill in some of the details affecting the

application of the GST tax to transfers by nonresident aliens.

In this connection, we note that respondent apparently determined

the manner in which the GST tax should be applied herein

consistently with the methodology set forth in the proposed

regulations and that petitioner does not question that
                                 - 6 -



methodology except in the context of the contention that such

regulations were necessary to the imposition of the GST tax and

that therefore the use of that methodology constituted an

unjustified retroactive application of the regulations.

     Thus, we are called upon to resolve the following question:

Are the regulations a necessary condition to determining

"whether" the GST tax applies, as petitioner contends, or do they

constitute only a means of arriving at "how" that tax, otherwise

imposed by the statute, should be determined, as respondent

contends.

     In support of its position, petitioner relies heavily on

Alexander v. Commissioner, 95 T.C. 467 (1990), affd. without

published opinion sub nom. Stell v. Commissioner, 999 F.2d 544

(9th Cir. 1993).     In that case, section 465(c)(1), as then in

effect, set forth specific types of transactions to which the at-

risk provisions applied (see 95 T.C. at 469 n.4) and then

provided in section 465(c)(3):

            (3)   Extension to other activities.--

                 (A) In general.--In the case of taxable
            years beginning after December 31, 1978, this
            section also applies to each activity--

                       (i) engaged in by the taxpayer in
                  carrying on a trade or business or for the
                  production of income, and

                       (ii) which is not described in
                  paragraph (1),
                                  - 7 -



                    *   *     *    *      *   *   *

               (D) Application of subsection (b)(3).--In
          the case of an activity described in subparagraph
          (A), subsection (b)(3) shall apply only to the
          extent provided in regulations prescribed by the
          Secretary. [Emphasis added.]

     The activity of the taxpayer was not one of the specified

types of transactions that fell within the scope of an activity

described in section 465(c)(1).     No regulations had been issued

under section 465(c)(3)(D).   We held that the issuance of the

regulations was a precondition to a determination whether the at-

risk rules applied to the taxpayer's activity.        In so doing, we

specifically characterized the "only to the extent" language of

the statute as unambiguous and therefore controlling.        Alexander

v. Commissioner, supra at 473; see H. Enters. Intl., Inc. v.

Commissioner, 105 T.C. 71, 82 (1995).

     Respondent contends that this foundation of our opinion

distinguishes Alexander from the instant case and relies on

Occidental Petroleum Corp. v. Commissioner, 82 T.C. 819 (1984),

which dealt with the effect on the alternative minimum tax of the

absence of regulations under section 58(h) which provided:

          SEC. 58(h) Regulations To Include Tax Benefit
     Rule.--The Secretary shall prescribe regulations under
     which items of tax preference shall be properly
     adjusted where the tax treatment giving rise to such
     items will not result in the reduction of the
     taxpayer's tax under this subtitle for any taxable
     years.
                              - 8 -



We held that the absence of regulations did not preclude proper

adjustments in respect of the tax benefit rule and went on to

determine those adjustments in that case.   The rationale of our

opinion was that section 58(h) was intended by Congress to

provide a basis for "how" the alternative minimum tax should be

applied in order to take into account the tax benefit rule.

     We reaffirmed our position as to the effect of the absence

of regulations under section 58(h) in Breakell v. Commissioner,

97 T.C. 282, 285 (1991), affd. in part, revd. in part without

published opinion 996 F.2d 1231 (11th Cir. 1993); see also First

Chicago Corp. v. Commissioner, 88 T.C. 663, 669 (1987), affd. 842

F.2d 180 (7th Cir. 1988); cf. Estate of Hoover v. Commissioner,

102 T.C. 777, 782 (1994), revd. on another issue 69 F.3d 1044

(10th Cir. 1995), where we adopted a similar view in respect of

the absence of regulations directed to be prescribed by the

Secretary under section 2032A(g).

     More recently, in H. Enters. Intl., Inc. v Commissioner,

supra, we dealt with a situation comparable to that herein,

involving the impact of the failure of the Secretary to issue

regulations to prevent tax avoidance under section 7701(f) on the

application of the limitations of sections 246A and 265(a)(2) to

the interest on funds borrowed by one corporation and used by an

affiliated corporation to purchase portfolio stock and tax-exempt

securities.
                                 - 9 -



     Section 7701(f) provides:

          SEC. 7701(f) Use of Related Persons or Pass-Thru
     Entities.--The Secretary shall prescribe such
     regulations as may be necessary or appropriate to
     prevent the avoidance of those provisions of this title
     which deal with--

                  (1) the linking of borrowing to investment, or

                  (2) diminishing risks,

     through the use of related persons, pass-thru entities,
     or other intermediaries. [Emphasis added.]

     Reviewing the analyses and conclusions of Occidental

Petroleum Corp. v. Commissioner, supra, First Chicago Corp. v.

Commissioner, supra, and Alexander v. Commissioner, supra, we

held that the issuance of regulations under section 7701(f) was

not a precondition to applying sections 246A and 265(a)(2) to

transactions involving a parent corporation and its subsidiary.

In so holding, we followed Occidental Petroleum and First Chicago

and distinguished Alexander on the ground that the "only to the

extent" language of section 465(c)(3)(D) was absent from section

7701(f).    See H. Enters. Intl., Inc. v. Commissioner, supra at

81-84.     In short, the teaching of the decided cases is that

issuance of regulations is to be considered a precondition to the

imposition of a tax where the applicable provision directing the

issuance of such regulations reflects a "whether"

characterization, such as existed in Alexander, and not where the
                               - 10 -



provision simply reflects a "how" characterization.    We follow

that path herein.

     Under these circumstances and applying the teaching of the

decided cases, we hold that the regulations contemplated under

section 2663(2) reflect a "how" characterization and their

issuance is not a necessary precondition to the imposition of the

GST tax on the transfers involved herein.    In enacting section

2663(2), Congress simply recognized that there would be problems

of allocation and calculations of tax in respect of nonresident

aliens because, unlike citizens and residents, not all the

property of nonresident aliens is subject to U.S. estate tax.

     We are unimpressed with petitioner's attempt to create a

"whether" patina to section 2663(2) by pointing to alleged gaps

and possible invalid provisions of the proposed regulations

dealing with the definition of "direct skip" transfers and the

calculation of the taxable amount of a "direct skip" and

applicable rate of tax.    Such gaps and provisions clearly go to

the "how" and not to the "whether" in respect of the application

of the GST tax.3    In this connection, we note that petitioner

3
   For a critical analysis of the proposed regulations, see
Schlesinger, "The Generation-Skipping Transfer Tax--A
Reexamination on Its Ninth Anniversary", 74 Taxes 49 (Jan. 1996);
Heller & Sasaki, "Proposed Regulation Section 26.2663-2 and the
Application of the Generation-Skipping Transfer Tax to Transfer
by Nonresident Aliens", 12 Intl. Tax & Bus. Law. 291 (1994); see
also Helt, "Generation-Skipping Transfer Tax Regulations," 74
                                                   (continued...)
                             - 11 -



concedes that the transfers involved herein were "direct skips"

and, as we have previously pointed out, does not question

respondent's calculation of the GST tax on those transfers.

     In light of our holding, we have no need to explore

petitioner's arguments regarding retroactivity or the alleged

failure of the Secretary to comply with the Administrative

Procedure Act, 5 U.S.C. secs. 551-559 (1988), in issuing the

proposed regulations.

     To reflect the foregoing, and in order to take into account

the settlement of certain unrelated issues,

                                         Decision will be entered

                                   under Rule 155.




3
 (...continued)
Taxes 67 (1996), analyzing the extent to which the final
regulations removed some of the gaps, etc. in the proposed
regulations.
