T.C. Memo. 1997-348

UNITED STATES TAX COURT

ESTATE OF LEON AMIEL, DECEASED, LEON L. AMIEL,

ADMINISTRATOR, C.T.A., Petitioner v

. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5602-93. Filed July 29, 1997.

John R. Morken and Joshua A. Hazelwood , for petitioner.

Kevin J. Kilduff and Dante D. Lucas , for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

JACOBS, Judge : Respondent determined a $2,504,100 deficiency

in petitioner's Federal estate tax.

All of the 28 adjustments set forth in respondent's notice of

deficiency have been resolved save one, that being the amount of

the marital deduction to which the Estate of Leon Amiel, Deceased,-2-

(petitioner) is entitled. Petitioner contends that property that

funded a residuary trust established under the will of Leon Amiel

( the Part B trust) is qualified terminable interest pr operty

(QTIP), and as a consequence, petitioner is entitled to an

unlimited marital deduction (amounting to $7,305,191) pursuant to

section 2056 (a) as amended by section 403(a) of the Economic

Recovery Tax Act of 1981 (ERTA), Pub . L. 97-34, 95 Stat. 301.

Respondent, on the other hand, claims that the transitional rule

set forth in ERTA section 403(e)(3), 95 Stat. 305, subjects

petitioner to the pre-ERTA marital deduction quantitative limits.

Respondent acknowledges that property funding another residuary

trust that contains a maximum marital deduction formula clause (the

Part A trust) qualifies for the marital deduction. Thus, respondent

concludes that petitioner is limited to a marital deduction in the

amount of $5,603,819. Continuing for the sake of completeness,

respondent argues that the Part B trust property fails to qualify

for QTIP treatment b ecause decedent's surviving spouse did not

possess a qualifying income interest for life in t he trust

property. For the reasons that follow, we agree with all of

respondent's positions and conclude that the amount of the marital

deduction available to petitioner is limited to the amount

available prior to the enactment of ERTA.

Unless otherwise indicated, all section references are to the

Internal Revenue Code as amended and in effect for the date of Leon

Amiel's death, and all Rule references are to the Tax Court Rules-3-

of Practice and Procedure. All dollar amounts are rounded.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The

stipulation of facts and the attached exhibits are i ncorporated

herein by this reference.

Leon Amiel (decedent) was a resident of Island Park, New York,

at the time of his death on Octobe r 1, 1988. He was survived by

his wife, Hilda Amiel (Hilda); two daughters, Katherine and Joanne;

an illegitimate son, David; and four grandchildren.

Decedent executed his Last Will and Testament on July 10,

1980. In addition to specific bequests, decedent's will

established two residuary trusts identified as "Part A" and "Part

B". The will provided that the income from each trust was to be

paid to or applied for the benefit of Hilda. She had a testamentary

general power of appointment over the assets of the Part A trust.

Upon Hilda's death, the income from the Part B trust was to be paid

to her daughters until their death, and then to the daughters'

children until they reached the age of 21, at which time the trust

corpus would be distributed to the grandchildren. On the death of

Hilda, the amount of the Par t A trust that was not effectively

disposed of by Hilda through exercising her po wer of appointment

was to be combined with the then corpus of the Part B trust.

Under decedent's will, the Part A trust was to be funded with

an amount equal to that necessary to obtain the maximum marital

deduction allowable under Federal law. In this regard, article-4-

four, paragraph A, of the will provides as follows:

If my wife, HILDA , survives me, I direct my Executor to

set aside that fractional share of my residuary estate

(computed before the ded uction of or provision for any

estate, inheritance or other death taxes or duties, or

any interest or penalties thereon) which shall be

necessary to obtain the maximum marital deduction

allowable in determining the Federal estate tax upon my

estate, after takin g into account all property passing

(or which shall have passed) to my wife other than under

this Article (whe ther under this my Will or otherwise)

which qualifies for said deduction. In computing the

fraction to be used in determining this share, the final

determination in the Federal estate tax proceeding in my

estate shall control. Only assets which qualify for said

marital deduction shall be allocated to this share. To

the extent possible, no assets with respect to which a

credit for foreign death taxes is allowable in computing

the Federal estate tax on my estate or which are income

in respect to a decedent shall be allocated to this

share. It is my intention that this share shall

participate ratably in any increases or decreases of my

residuary estate.

Decedent's will gave the trustees the power to invade the

principal of both trusts for the benef it of Hilda, decedent's

daughters, and other descendants. In this regard, article four,

paragraph C, of the will provides as follows:

In addition, my Trustees may, at any time or from time to

time, pay or apply for the benefit of my wife or for the

benefit of any beneficiary of any trust crea ted under

this Will so much or all of the principal of such trust

as my Trustees in their sole discretion, deem necessary

or desirable for the support, maintenance, health,

education, comfort or general welfare of my wife or any

such beneficiary provided, however, that the principal of

the Part A trust shall be paid or applied for the benefit

of my wife before the principal of [the] Part B trust is

so paid or applied for her benefit.

The will further provides in article five:

Without in any way limiting by implica tion or

otherwise the powers and discretion of my Executors and-5-

Trustees, it is my desire that to the extent possible, my

wife, HILDA

, and then my daughters, KATHERINE and JOANNE

and then m y descendants shall have adequate funds to

maintain the standard of comfort and general welfare that

they enjoyed at the time of my death.

In this regard, it is my desire that adequate funds

be provided to enable my descendants to attend suitable

schools, colleges and professional schools, taking into

account the cost of tuition, board at school, books and

the many other expenses incident to such education.

I also request my Trustees to consider favorably the

requirements of my wife, my daughter and my descendants

to provide for special family situations which may arise

from time to time, including (without limita tion) the

need for additional funds to furnish a home at the time

of marriage, the need for funds to acquire an interest in

or establish a business, taking into account the

probabilities of the success of the business, experience,

and the aggregate amount required to be invested in any

such business.

Decedent executed one codicil to his will on August 5, 1988,

and another on August 18, 1988. The August 5 codicil created a

$500,000 trust for the benefit of decedent's mistress, Sondra

Barnett. The August 18 codicil revoked a trust for the benefit of

David Amiel and created a $250,000 trust for the benefit of Ms.

Barnett. The trustee of the trust created for the benefit of Ms.

Barnett was prohibited from invading the corpus of the trust for

Ms. Barnett's benefit.

Decedent was in the hospital suffering from terminal cancer in

August 1988 when he executed the codicils to his will. The maximum

ma rital deduction formula contained in decedent's will was never

amended to refer to an unlimited marital deduction.

In March 1991, Hilda and Ms. Barnett entered into an agreement-6-

1 The $1 mathematical difference is due to rounding. pursuant to which: (1) Ms. Barnett agreed not to seek probate of

the August 5 codicil; (2) Ms. Barnett would be paid $175,000; (3)

Ms. Barnett surrendered entitlement to any legacy in trust or

otherwise contained in the will or codicil; and (4) Ms. Barnett and

Hilda agreed to the division of certain personal property owned by

decedent which was in the possession of Ms. Barnett at the time of

decedent's death.

Decedent's will and the August 18 codicil were admitted to

probate by the Surrogate's Court of Nassau County, New York.

The estate tax return was filed on January 2, 1990. It

reported a total gross estate of $8,495,460. The estate claimed a

marital deduction of $7,305,191, which consisted of $3,965,959 in

property interests not subject to a QTIP election and $3,339,231 in

property interests subject to a QTIP election. 1 Respondent, after

making numerous adjustments that increased decedent's gross estate,

disallowed $1,701,372 of the claimed marital deduction.-7-

OPINION

In general, a marital deduction is available in computing the

taxable estate of a decedent for the value of all property

interests passing from the decedent to the surviving spouse. Sec.

2056(a). Here, petitioner asserts that it is ent itled to a

$7,305,191 marital deduction, whereas respondent claims petitioner

is entitled to a $5,603,819 marital deduction.

At the time decedent executed his will on July 10, 1980, the

maximum marital deduction permitted was limited to the greater of

$250,000 or 50 percent of the value of a decedent's adjusted gross

estate. ERTA eliminated this limitation for persons dying after

December 31, 1981. The intent of Congress in repealing the marital

deduction quantitative limits was to treat a husband and wife as

one economic unit and to allow unlimited tax-free transfers within

that unit. S. Rept. 97-144, at 127 (1981), 1981-2 C.B. 412, 461.

Wills drafted before 1982 typically included maximum marital

deduction formula clauses (similar to that c ontained in article

four, paragraph A, of decedent's will) under which the amount of

property transferred to the surviving spouse w as determined by

reference to the maximum allowable marital deduction. The purpose

of the marital deduction formula clause was to reduce or eliminate

Federal estate taxes imposed on the estate of the first spouse to

die while passing no more to the surviving spouse than necessary to

produce such a reduction or elimination. Because these wills were

drafted wh en there was a quantitative limitation on the maximum-8-

marital deduction, Congress was concerned that many testators who

used the formula clause may not have intended to pass more than the

greater of $250,000 or 50 percent of the adjusted gross estate to

their surviving spouses, which might occur if the ne w unlimited

marital deduction were used in the computation of the marital

deduction under a formula clause. I d. at 128, 1981-2 C.B. at 462.

To prevent a distortion of the testator's in tent, Congress

provided a t ransitional rule applicable to wills executed before

September 12, 1981, that conta in a formula marital deduction

clause. The transitional rule provides that if:

(A) the decedent dies after December 31,

1981,

(B) by reason of the death of the decedent

property passes from the decedent or is

acquired from the decedent under a will

executed * * * [before September 12, 1981] or

a trust created before such date, which

contains a formula expressly providing that

the spouse is to receive the maximum amount of

property qualifying for the marital deduction

allowable by Federal law,

(C) the formula referred to in subparagraph

(B) was not amended to refer specifically to

an unlimited marital deduction at any time * *

* [after September 12, 198 1] and before the

death of the decedent, and

(D) the State does not enact a statute

applicable to such estate which construes this

type of formula as referring to t he marital

deduction allowable by Federal law as amended

by * * * [ERTA section 403(a)],

then the amendment made by * * * [ERTA section 403(a)]

shall not apply to the estate of such decedent.

ERTA sec. 403(e)(3).-9-

Decedent's will established two residuary trusts. The Part A

trust contained a maximum mar ital deduction formula clause; the

Part B trust did not. Respondent acknowledges that the property

funding the Part A trus t qualifies for the marital deduction.

Respondent asserts that the effect of the transitional rule is to

limit overall the amount of the marital deduction available to

petitioner to that of the pre-ERTA quantitative limits. Hence,

respondent posits that the amount of the marital deduction

available to petitioner is the amount of the property funding the

Part A trust.

Petitioner asserts in its posttrial brief:

The "Transitional Rule" was not intended

to limit the marital deduction for property

"passing to the surviving spouse", but rather

was intended to prevent the unintended

legislative amendment of a testator's

testamentary scheme. In the present matter,

the formula is used to divide property into a

"Part A" trust and a "Part B" trust both of

which "pass" to the survivin g spouse. The

"Part A" trust provides an income interest to

the surviving spouse for life and grants her a

general power of appointment and qualifies for

the marital deduction and this is not

contested by respondent.

The "Part B" trust also qualifies for the

marital deduction as it is Qualified

Terminable Interest Property ("Q-TIP") and,

therefore, pursuant to I.R.C. Sec.

2056(b)(7)(B) "passes" to the surviving

spouse. As required, petitioner properly

elected on Schedule M, Part 2 of the estate

tax return Q-TIP tre atment for the "Part B"

trust.

We find petitioner's position unpersuasive. The language of-10-

the transitional rule is explicit. The transitional rule precludes

the unlimited marital deduction provided with the enactment of ERTA

to an estate where: (1) The will containing a maximum marital

deduction formula clause was executed prior to the e nactment of

ERTA; (2) the formula clause was not amended at an y time after

September 12, 1981, to refer specifically to an unlimited marital

deduction; and (3) there is not enacted a State law applicable to

the estate which would construe the formula clause as referring to

the unlimited marital deduction. Here, each of the aforementioned

situations is applicable. The maximum marital deduction formula

clause contained in article four, paragraph A, of decedent's will

is precisely the type of formula clause addressed by the

transitional rule. See E state of Christmas v. Commissioner

, 91

T.C. 769 (1988); Estate of Bauersfeld v. Commissioner , T.C. Memo.

1988-224; cf. Estate of Levitt v. Commissioner

, 95 T.C. 289 (1990).

We hold that the amount of the marital deduction available to

pe titioner is limited to the amount available prior to the

enactment of ERTA. Because in the instant case (1) the

transitional rule does apply, (2) respondent a cknowledges that

petitioner is entitled to a marital deduction for the property

funding the Part A trust, and (3) the value of the property funding

the Part A trust is such as to entitle petitioner to the maximum

pre-ERTA marital deduction, we need not decide whether the Part B

trust property qualifies for QTIP treatment. Nonetheless, for the

sake of completeness we shall address this matter.-11-

Section 2056(b)(7) permits an unlimited marital deduction for

QTIP, which is defined as property passing from the decedent to the

surviving spouse in which the surviving spouse has a "qual ifying

income interest for life" and as to which an election has been

made. To have a qualifying income interest for life, the surviving

spouse must be entitled to all o f the income from the QTIP for

life, payable annually or at more frequent intervals, and no

person, including the surviving spouse, can appoint any part of the

property to any person other than the surviving spouse. Sec.

2056(b)(7)(B)(ii)(I) and (II). In the instant case, respondent

admits that the property in the Part B trust passed from decedent

to his surviving spouse and that an election was properly made.

Respondent argues that decedent's surviving spouse, Hilda, did

not have a qualifying income interest in the Part B trust property

for life because decedent's will permits the trustee of the Part B

trust to invade the corpus not only for the benefit of decedent's

wife, but also for h is daughters and grandchildren. Petitioner

contends that the language of the will does not permit invasion of

the corpus of the Part B t rust during the lifetime of decedent's

surviving spouse. We agree with respondent.

Article four, paragraph C, of decedent's will provides that

the trustees may invade the trust corpus "at any time * * * for the

benefit of my wife or for the benefit of any beneficiary of any

trust". Petitioner contends that the trustees' power to invade on

behalf of "any beneficiary" should be construed as limited to an-12-

invasion for the current income beneficiary only. That is,

according to petitioner, during Hilda's lifetime the trustees could

invade the corpus of the Part B trust only for Hilda's benefit. We

disagree. In our opinion, the trustees' invasion power is not as

limited as petitioner asserts. We believe decedent wanted to

permit the trustees to invade the trust corpus "at any time",

including the lifetime of Hilda, should it be necessary to benefit

Hilda, Katherine, Joanne, or Katherine's and Joanne's children. In

this regard, article four, paragraph C, permits such invasion for

the support, maintenance, health , education, comfort, or general

welfare of "my [decedent's] wife or any such beneficiary".

Article five of decedent's will directs that the trustees

provide decedent's descendants wit h adequate funds to attend

suitable schools, colleges, and professional schools. This

provision demonstrates that decedent's desire under article four,

paragraph C, to permit invasion of corpus for educational purposes

was primarily for th e benefit of decedent's grandchildren, who

could be attending school during the lifetime of Hilda. Article

five also provides that the trustees are not to be limited "in any

way" in providing decedent's wife, daughters, a nd grandchildren

with adequate funds to maintain the standard of living they enjoyed

"at the time of my death".

Article five permits the trustees to invade corpus to provide

for "special family situations which may arise from time to time".

These are defined to include furnishing a home at the time of-13-

marriage and acquiring or establishing a business. The

beneficiaries of any such invasion of corpus are decedent's wife,

d aughters, and grandchildren. The will does not prohibit an

invasion of corpus for the benefit of decedent's daughters and

grandchildren during the lifetime of the surviving spouse.

Decedent did not intend that only his descendants who married after

the death of his wife could receive funds for furnishing a home.

A similar provision was interpreted in E state of Bowling v.

Commissioner , 93 T.C. 286 (1989). The will provided:

"(g) The Trustee named herein shall be authorized to

encroach upon the corpus of said Trust for any emergency

needs which effect [sic] the support, mainte nance and

health needs of any beneficiary of said Trust, with said

encroachment to be at the discretion of said Trustee."

Id. at 289. We therein held that the trust property did not

qualify for QTIP treatment because the trustee could invade corpus

for emergency needs of other beneficiaries during the lifetime of

the surviving spouse. Id. at 294.

Petitioner cites s everal cases where references to "any

benefi ciary" were held to refer only to current income

beneficiar ies. We find those cases distinguishable from the

instant one. Each case is decided on the specific language

involved. Here, as previously stated, we believe decedent's clear

intent was to permit the trustees of the Part B trust to provide

for emergency and other needs of decedent's daughters and

grandchildren during the lifetime of his surviving spouse.

We have considered all the arguments advanced by petitioner.-14-

We find each of them unpersuasive.

To reflect the settlement of the parties and the foregoing,

Decision will be entered

under Rule 155

.