T.C. Memo. 1997-362

UNITED STATES TAX COURT

ESTATE OF ANNA SOBERDASH, DECEASED, WILMA PORADA AND

MARY ANN LACEK, CO-EXECUTRICES, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 23849-95. Filed August 6, 1997.

Wilma Porada and Mary Ann Lacek (coexecutrices), for

petitioner.

Jeffrey L. Bassin, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

RUWE, Judge: Respondent determined a deficiency of

$616,768.49 in petitioner's Federal estate tax. After

concessions, the issues for decision are: (1) Whether the value

of property in which Anna Soberdash (hereinafter decedent) held a 
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1Unless otherwise indicated, all section 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.

qualified income interest for life and for which a deduction was

allowed under section 2056(b)(7)1 to the estate of Andrew J.

Soberdash must be included in decedent's gross estate pursuant to

section 2044; (2) whether the gross estate should be increased by

$91,010.91 to include cash equivalents which are not reported on

petitioner's Federal estate tax return; and (3) whether the gross

estate should be increased by $15,927.26 to include income

accrued at decedent's death.

FINDINGS OF FACT

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

The stipulation of facts is incorporated herein by this

reference. Decedent died on March 10, 1992, while domiciled in

Fayette County, Pennsylvania. Her estate is being administered

in the Court of Common Pleas of Fayette County. The

coexecutrices of the estate are Wilma Porada and Mary Ann Lacek. 

At the time of filing the petition, Wilma Porada resided in

Parma, Ohio, and Mary Ann Lacek resided in North Royalton, Ohio.

Decedent's husband, Andrew J. Soberdash (hereinafter

Andrew), died on November 27, 1982. At the time of his death,

they had been married for 48 years. 
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Article Five of Andrew's will created a trust referred to as

the Marital Trust. Article Five (A)(1) of Andrew's will directed

the trustees of the Marital Trust to pay the income of the

Marital Trust quarterly to decedent or for her benefit during her

lifetime. Article Five (A)(1) also authorized the corporate

trustee of the Marital Trust in its discretion to pay to decedent

or for her benefit such portions of the principal as it deemed

advisable, for any purpose or reason whatsoever. Under Andrew's

will, no person had a power to appoint any part of the principal

of the Marital Trust to any person other than decedent. 

Article Five (A)(3) of Andrew's will expressed Andrew's intent

that decedent's income interest be a qualified income interest

for life within the meaning of section 2056 and authorized his

executors in their discretion to elect to qualify the principal

of the Marital Trust as qualified terminable interest property

(QTIP). Article Five (A)(2) of Andrew's will directed the

trustees of the Marital Trust to pay to decedent's personal

representative the amount necessary to discharge all death taxes

resulting from the inclusion of the principal of the Marital

Trust in her estate. On the Form 706 estate tax return filed by

Andrew's estate, the executors elected to claim a marital

deduction for an otherwise nondeductible interest under section

2056(b)(7).

The Federal estate tax liability of Andrew's estate was at

issue before this Court in docket No. 45668-86. In the decision
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in docket No. 45668-86, entered on June 9, 1988, the parties

stipulated that $1,507,881.39 of the assets distributable under

Article Five of Andrew's will represented QTIP for which a

deduction was allowed under section 2056(b)(7). In docket No.

45668-86, the parties further stipulated that the assets of the

Marital Trust which constituted QTIP would be segregated from

those assets of the Marital Trust which did not and that the

assets which did not constitute QTIP would not be includable in

the estate of the surviving spouse. 

The $1,507,881.39 which qualified for a QTIP deduction under

section 2056(b)(7) represented 75.13637 percent of the principal

of the Marital Trust, which had a total value of $2,006,859.56. 

On or about September 27, 1989, the executors of Andrew's estate,

who were also the trustees of the Marital Trust, filed a Petition

to Divide Trust with the Fayette County, Pennsylvania Orphan's

Court in order to segregate the QTIP portion of the Marital Trust

from the remaining assets, to comply with the Tax Court

stipulation. The Petition to Divide Trust was not granted, and

the QTIP in the Marital Trust has not been segregated from the

remaining assets. 

On petitioner's Federal estate tax return, petitioner did

not include in the gross estate the value of any QTIP which had

been deducted by Andrew's estate under section 2056(b)(7). 

The assets of the Marital Trust were held at the Fayette

Bank and Trust Co., now known as BT Management Trust Co., which
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is the corporate trustee of the Marital Trust. As of March 31,

1992, the property held in the Marital Trust had a current market

value of $1,982,120.40, 75.13637 percent of which equals

$1,489,293.31. This is the amount of respondent's adjustment for

QTIP in the notice of deficiency. 

On August 15, 1995, a payment of $441,214.40 was made by the

trustees of the Marital Trust to respondent in partial payment of

the deficiency at issue in this case. 

Prior to her death, decedent was determined to be

incompetent, and a guardianship was established, with Integra

National Bank (Integra) as the guardian of her assets. Integra

prepared an estate valuation schedule listing the assets held by

the Anna Soberdash Guardianship and their values as of the date

of decedent's death. According to the estate valuation schedule

prepared by Integra, decedent owned as of the date of her death

two parcels of real estate, 1,026 shares of BT Financial Corp.

common stock, and household goods, all of which were reported on

the Federal estate tax return. The remaining assets listed on

the estate valuation schedule prepared by Integra were cash

equivalents. These were not reported separately on decedent's

Federal estate tax return. Rather, an aggregated amount of

$368,050.76 was reported as "cash". 

As of the date of decedent's death, she owned the following

cash equivalents listed on the estate valuation schedule prepared

by Integra, which had the following values as of that date:
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 3,539 shares short intermediate govt. $36,451.70

12,023 shares income trust 127,203.34

18,198 shares intermediate govt. trust 181,434.04

Federated trust short-term govt. securities 18,500.00

Accrued net income 739.83

Principal cash 66.80

Undistributable income cash on hand 95,229.85

 Subtotal 459,625.56

Less: Costs (563.88)

 Total $459,061.68

During the period from January 1 to March 10, 1992, the

Marital Trust established under Andrew's will accrued income of

$15,927.26, which was payable to decedent under Article Five

(A)(1) of Andrew's will and which was paid to the Anna Soberdash

Guardianship on April 29, 1992. The $15,927.26 in income accrued

by the Marital Trust was not reported as an asset on petitioner's

Federal estate tax return. 

OPINION

The primary issue is whether the value of property in which

decedent held a qualified income interest for life and for which

a deduction was allowed under section 2056(b)(7) to the estate of

Andrew J. Soberdash must be included in decedent's gross estate

pursuant to section 2044.

Section 2056(a) grants a deduction for the value of any

interest in property passing to a surviving spouse which is

included in determining the value of the gross estate. Pursuant

to section 2056(b)(1), a marital deduction cannot ordinarily be
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claimed for property passing to a surviving spouse where the

interest of a surviving spouse may eventually terminate or fail. 

However, section 2056(b)(7) allows a marital deduction for QTIP. 

QTIP is defined in section 2056(b)(7)(B)(i)(I)-(III) as property

which passes from the decedent, in which the surviving spouse has

a qualifying income interest for life, and to which an election

applies.

Section 2056(b)(7)(B)(ii)(I) and (II) provides that the

surviving spouse has a qualifying income interest for life if the

surviving spouse is entitled to all the income from the property,

payable annually or at more frequent intervals, and no person has

a power to appoint any part of the property to any person other

than the surviving spouse. Under section 2056(b)(7)(A)(i) and

(ii), QTIP is treated for purposes of section 2056(a) as passing

to the surviving spouse, and for purposes of section

2056(b)(1)(A) as not passing to any person other than the

surviving spouse. Pursuant to section 2056(b)(7)(B)(v), a QTIP

election with respect to any property shall be made by the

executor on the Federal estate tax return, and once made, is

irrevocable.

Section 2044 sets forth the tax treatment of the QTIP in the

estate of the surviving spouse. Under section 2044(a), the value

of the gross estate includes the value of any property to which

this section applies in which the decedent had a qualifying

income interest for life. Section 2044(b)(1)(A) applies section
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2Petitioner has not established that such mismanagement

occurred.

2044(a) to any property if a deduction was allowed with respect

to the transfer of such property to the decedent under section

2056(b)(7). See Estate of Cavenaugh v. Commissioner, 100 T.C.

407, 417 (1993), affd. in part on this issue and revd. in part 51

F.3d 597, 599-601 (5th Cir. 1995).

Under Andrew's will, decedent was entitled to all the income

from the Marital Trust, payable quarterly, and no person had any

power to appoint any part of the principal of the Marital Trust

to any other person. Thus, decedent had a qualifying income

interest for life under sections 2056(b)(7)(B)(ii)(I) and (II)

and 2044(a). Andrew's estate was allowed a deduction under

section 2056(b)(7) for $1,507,881.39 of the assets distributed to

the Marital Trust under Article Five of Andrew's will. This

satisfies section 2044(b)(1)(A). It follows that the value as of

decedent's death of the QTIP deducted by Andrew's estate must be

included in decedent's gross estate.

Petitioner does not argue that the terms of Andrew's will

and the Marital Trust are inconsistent with the foregoing

analysis. Rather, petitioner appears to object to inclusion in

the gross estate because the Marital Trust was allegedly

mismanaged by its trustees.2 Petitioner contends that as a

result of such mismanagement, not all the income was paid to

decedent or for her benefit and that principal was appointed
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during decedent's lifetime to others. Under section

2056(b)(7)(B)(ii)(I) and (II), the relevant questions are whether

decedent was entitled to all the income from the property,

payable at least annually, and whether any person had a power to

appoint any part of the property to any other person. Under the

statutory provisions, the possibility of mismanagement in the

operation of the trust has no bearing on the eligibility for a

deduction under section 2056(b)(7) or the subsequent inclusion in

the surviving spouse's estate under section 2044.

Petitioner further contends that any additional taxes should

be paid by the Marital Trust. The question of ultimate liability

for payment of the tax is not relevant to the issue of

includability in the gross estate under section 2044. We note,

however, that the Code provides a mechanism for the recovery of

any additional liability resulting from inclusion of QTIP under

section 2044 by the executor of the estate of the surviving

spouse. 

Section 2207A(a)(1) provides that if any part of the gross

estate is includable by reason of section 2044, the decedent's

estate is entitled to recover from the person receiving the

property the additional tax resulting from such inclusion.

Moreover, Andrew, in Article Five (A)(2) of his will, directed

the trustees of the Marital Trust to pay to decedent's personal

representative the amount necessary to discharge all death taxes

resulting from the inclusion of the principal of the Marital
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Trust in her estate. On August 15, 1995, a payment of

$441,214.40 was made by the trustees of the Marital Trust

directly to respondent in partial payment of the deficiency at

issue in this case. This represents a substantial portion, if

not all, of the deficiency plus interest that will be due as a

result of the inclusion of Marital Trust assets in the gross

estate under section 2044.

A QTIP deduction under section 2056(b)(7) was allowed in

Andrew's estate for 75.13637 percent of the value of the assets

of the Marital Trust. In Andrew's case, the parties stipulated

that the assets of the Marital Trust which constituted QTIP would

be segregated from those assets of the Marital Trust which did

not and that decedent's estate would not include any Marital

Trust property that was not QTIP. No such division has occurred,

and the QTIP in the Marital Trust has not been segregated from

the remaining assets. Respondent therefore determined that

75.13637 percent of the value of the assets of the Marital Trust

as of the time of decedent's death is includable in decedent's

gross estate. At the time of decedent's death, the property held

in the Marital Trust had a value of $1,982,120.40. Applying

75.13637 percent to the value of the Marital Trust results in a

value of $1,489,293.31 for the QTIP for which a deduction was
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3Sec. 22.2056-1(b), Temporary Estate Tax Regs., 47 Fed. Reg.

41736 (Sept. 22, 1982), which was applicable to the QTIP

deduction for Andrew's estate, provides that a QTIP election may

be made for all or any part of a property that meets the

requirements of sec. 2056(b)(7)(B)(i)(I) and (II). A partial

election must relate to a fractional or percentile share of the

property so that the elective part will reflect its proportionate

share of the increment or decline in the whole of the property

for purposes of applying sec. 2044. Sec. 22.2056-1(b), Temporary

Estate Tax Regs., supra. This temporary regulation was

incorporated into the final regulations contained in T.D. 8522,

1994-1 C.B. 236, 239, effective Mar. 1, 1994. 

allowed under section 2056(b)(7) for Andrew's estate. We hold

that respondent's determination is correct.3

The next issue is whether the gross estate should include

$91,010.91 in cash equivalents that was not reported by

petitioner on its Federal estate tax return. Under section 2033,

the value of the gross estate shall include the value of all

property to the extent of the interest therein of the decedent at

the time of her death.

On its estate tax return, petitioner reported that as of the

date of decedent's death, she held cash of $368,050.76. 

According to Integra, the guardian of the Anna Soberdash

Guardianship, the cash equivalents held by the guardianship as of

the date of death had a value of $459,061.68. 

In support of its position that the amount of cash

reportable on the Federal estate tax return is $368,050.76,

petitioner presented a copy of a decree from the Court of Common

Pleas of Fayette County, Pennsylvania, Orphan's Court Division,

dated April 16, 1993, showing that the amount of cash available
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for distribution at that time was $368,050.76. This document

does not reflect the amount of cash or the fair market value of

cash equivalents as of March 10, 1992, the day of decedent's

death. We hold that the gross estate should be increased by

$91,010.91 to include cash equivalents not reported by petitioner

on its Federal estate tax return. 

The final issue is whether the gross estate should include

$15,927.26 of accrued income payable to decedent at her death. 

Section 20.2033-1(b), Estate Tax Regs., explicitly provides that

interest and dividends which have accrued as of the date of death

constitute a part of the gross estate.

During the period from January 1 to March 10, 1992, the

Marital Trust established under Andrew's will accrued income of

$15,927.26, which was payable to decedent and which was paid to

the Anna Soberdash Guardianship on April 29, 1992. 

Petitioner appears to argue that the $15,927.26 should not

be included in the gross estate because it was also subject to

income taxation. Upon receipt of the $15,927.26, it was properly

subject to income taxation as income in respect of a decedent

under section 691(a). However, decedent's right to this income

at her death is an asset which must be included in the gross

estate under section 2033. See Estate of Earle v. Commissioner,

5 T.C. 991 (1945), affd. 157 F.2d 501 (6th Cir. 1946). We hold

that the accrued trust income of $15,927.26 should be included in

the gross estate.
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Decision will be entered

under Rule 155.