Case Name: Estate of Willis Edward Clack, deceased, Marshall & Ilsley Trust Company, Co-personal Representative, and Richard E. Clack, Co-personal Representative, Petitioner v. Commissioner of Internal Revenue, Respondent
Court: United States Tax Court
Jurisdiction: United States
Decision Date: 1996-02-29
Citations: 106 T.C. 131
Docket Number: Docket No. 12557-91
Parties: Estate of Willis Edward Clack, deceased, Marshall & Ilsley Trust Company, Co-personal Representative, and Richard E. Clack, Co-personal Representative, Petitioner v. Commissioner of Internal Revenue, Respondent
Judges: Hamblen, Swift, Jacobs, Wright, Ruwe, Colvin, Laro, Foley, and Vasquez, JJ., agree with this majority opinion.
Reporter: Reports of the Tax Court of the United States
Volume: 106
Pages: 131–175

Head Matter:
Estate of Willis Edward Clack, deceased, Marshall & Ilsley Trust Company, Co-personal Representative, and Richard E. Clack, Co-personal Representative, Petitioner v. Commissioner of Internal Revenue, Respondent
Docket No. 12557-91.
Filed February 29, 1996.
Robert L. Kamholz, Jr., and John M. Byers, for petitioner.
Michael J. Calabrese, for respondent.

Opinion:
Wells, Judge-
Respondent determined a deficiency of $2,284,008 in the Federal estate tax of the Estate of Willis Edward Clack (estate). Unless otherwise indicated, all section references are to the Internal Revenue Code in effect on the date of death of Willis Edward Clack (decedent), and all Rule references are to the Tax Court Rules of Practice and Procedure. The issue to be decided in this opinion is whether the interest of decedent's surviving spouse in certain marital trust property is "qualified terminable interest property" (qtip) within the meaning of section 2056(b)(7), where the passage to the surviving spouse of the interest in the property is contingent upon the coexecutors' QTIP election as to the property.
FINDINGS OF FACT
Some of the facts were stipulated for trial pursuant to Rule 91. The parties' stipulations are incorporated into this opinion by reference and are found accordingly.
Decedent was born on July 21, 1923, and died testate on July 1, 1987, in Madison, Wisconsin. At the time of his death, decedent was a resident of Benton County, Arkansas. On August 4, 1987, the Benton County Probate Court admitted to probate decedent's last will, dated August 27, 1986 (the will), and issued letters testamentary to Richard E. Clack and the Marshall & Ilsley Trust Co., authorizing them to act as coexecutors of decedent's estate. At that time and at the time of filing the petition in the instant case, the Marshall & Ilsley Trust Co. maintained its principal place of business in the State of Wisconsin, and Richard E. Clack was a resident of the State of Wisconsin.
Decedent was survived by his wife, Alice Clack, his sons, Richard E. Clack and Robert A. Clack, and his daughter, Ann Clack Klimnowicz. During his lifetime, decedent was the owner and operator of a successful plastic extrusion company, Clack Corp., located in Winsor, Wisconsin. At the time decedent executed his will, his sons were active in the company. Richard E. Clack was "the number two person in the company". Robert A. Clack had just started working in the business.
Decedent consulted an attorney in Wisconsin about preparing a will. Decedent was concerned about keeping the control of Clack Corp. in the family. Although decedent wanted his son Robert A. Clack to remain with the company, he wanted his other son Richard E. Clack to have control of the company. Decedent also wanted to minimize his estate taxes and to provide for his wife.
Decedent executed his will on August 27, 1986. The will names decedent's son Richard E. Clack and the Marshall & Ilsley Trust Co. of Milwaukee, Wisconsin, as co-personal representatives of his estate and cotrustees of the trusts created by the will.
Article I of the will provides for the payment of expenses (paragraph A) and taxes (paragraph B) from the residuary estate. Article II of the will bequeaths to decedent's wife all of decedent's personal effects and his interest in his personal residence. Article III of the will bequeaths to decedent's son Richard E. Clack 12,689 shares of the common stock of Clack Corp. Such bequest was made to recognize Richard E. Clack's activities in the management and success of Clack Corp. and was intended to ensure that Richard E. Clack retained control of Clack Corp.
Article IV of the will creates a marital trust for the benefit of decedent's wife as follows:
Qualified Terminable Interest Property Marital Trust. If my wife survives me, I give to my Trustee the minimum pecuniary amount which will qualify for the federal estate tax marital deduction and which will result in the smallest federal estate tax being payable by reason of my death. In computing this amount, my Personal Representative shall take into account the unified credit and the credit for state death taxes and deduction (except the marital deduction) available to my estate and all other items included in my gross estate for federal estate tax purposes, whether or not passing under this Will, which qualify for said deduction. My Per sonal Representative shall assume that all payments and legacies under the preceding Articles of this Will have been fully satisfied and shall take into account the state death tax credit only to the extent that use of the credit does not require an increase in state death taxes payable. I recognize that, depending upon the size of my estate, the year of my death and other factors, no amount may pass to this Marital Trust.
Article IV, paragraph C of the will states:
It is my intention that this bequest shall qualify for the federal estate tax marital deduction to the extent that my Personal Representative elects that any part or all of any amount passing under this Article IV be treated as qualified terminable interest property, and the terms of this Will shall bé construed in áccordance with such intent. My wife may require my Trustee to convert unproductive pi'operty into productive property within a reasonable time.
The will requires the trustee to pay the net income of the marital trust to decedent's wife "in convenient installments at least quarterly". Any undistributed and accrued income at the time of the death of decedent's wife is to be paid to the wife's estate. The trustee is empowered to invade the principal of the marital trust as deemed necessary to provide for decedent's wife in order that she may maintain her standard of living. The marital trust terminates upon the death of decedent's wife. Upon termination of the marital trust, any assets remaining after payment of estate, inheritance, and succession taxes arising from the surviving spouse's death are to be added to the family trust created under Article V of the will (discussed below).
Article IV, paragraph D of the will provides for spousal disclaimer rights as follows:
'My wife or her personal representative, by an instrument in writing delivered to my Trustee after my death, may disclaim all or any part of the distribution payable under this Article IV to the Trustee of the Qualified Terminable Interest Property Marital Trust under Paragraph B. Any part so disclaimed shall be held and administered by the Trustee as a separate trust in accordance with the terms of the Family Trust,, except my wife shall. not receive distributions of principal from this separate trust. If my wife further disclaims her income interest in this separate trust, then it shall be held and administered in accordance with the terms of the Family -Trust as if she had predeceased me. Upon my wife's death, any assets segregated pursuant to the terms of this Paragraph shall be merged with other assets being held in the Family Trust.
Article IV, paragraph F of the will provides for an election as follows:
My Personal Representative may elect that any part or all of any amount passing under this Article IV be treated as qualified terminable interest property for the purpose of qualifying for the marital deduction allowable in determining the federal estate tax upon my estate. While I anticipate that the election will be made for all of such property, my Personal Representative shall have the authority not to make the election should no election or a partial election be advantageous for some reason I have not foreseen. Any part of any amount passing under this Article IV with respect to which my Personal Representative does not so elect to be treated as qualified terminable interest property shall continue to be held by my Trustee and administered and distributed pursuant to the terms of the Family Trust hereunder.
Article V of the will provides for "Family Trust Administration", in which the trustee is to receive the residue of decedent's estate in order to fund the family trust. Decedent's wife, children, and the issue of any deceased children constitute the beneficiaries of the family trust. The trustee has sole discretion to distribute income and principal to any one or more of the beneficiaries. Any income not distributed to the beneficiaries is to be added to the principal of the family-triist.
Article IX, paragraph A of the will provides that the personal representative "may make such elections under the tax laws applicable to my estate as it determines should be made."
On April 1, 1988, a U.S. Estate Tax Return, Form 706, was timely filed for the estate with the Internal Revenue Service Center in Austin, Texas. On the estate tax return, the coexecutors made the election under section 2056(b)(7) for the entire marital trust amount, which they valued at $4,162,439.24. The marital trust amount wás computed as follows:
Probate estate $6,685,474.21
Add:
Profit sharing plan benefit 320,327.89
Total 7,005,802.10
Less:
Funeral expenses (3,973.00)
Administration expenses (338,849.06)
Debts (20,811.95).
Mortgages and liens (1,365.85)
Less:
Specific bequest to spouse (42,075.00)
Specific bequest to son (2,436,288.00)
Net amount to marital trust 4,162,439.24
Thus, the coexecutors treated the payment of expenses under Article I, paragraph A of the will, the bequests of tangible personal property and of the interest in the home to the surviving spouse under Article II, and the bequest of the Clack Corp. stock to Richard E. Clack under Article III as having been fully satisfied before determining the marital trust amount but did not treat the payment of estate taxes under Article I, paragraph B as having been fully satisfied.
The coexecutors claimed a total marital deduction in the amount of $4,460,101.18, composed of what they determined to be the value of the marital trust property ($4,162,439.24), plus certain joint property ($194,263.55), the bequest of tangible personal property and the interest in the home ($42,075), life insurance proceeds ($46,481.72), and retirement benefits ($14,841.67) passing to the surviving spouse. Other than the specific bequest of Clack Corp. stock to Richard E. Clack and a payment of $25,953.51 to Robert A. Clack as the beneficiary of a single premium annuity policy, all of the assets of decedent's estate either passed directly to the surviving spouse ($297,661.94 by specific bequest or outside of probate) or were treated by the coexecutors as part of the marital trust ($4,162,439.24 as QTIP election). The coexecutors did not fund the family trust.
On the estate tax return, the total gross estate was valued at $7,287,342.55. The estate tax reported as due on the return was $684,589.11.
On November 10, 1988, the Internal Revenue Service (IRS) selected the estate tax return for audit. In January of 1989, the coexecutors and the IRS agreed that the value of each share of the Clack Corp. stock was $10 more than reported on the estate tax return. At the time of his death, decedent owned 24,675 shares of Clack Corp. stock, of which 12,689 shares were bequeathed to Richard E. Clack. The remaining 11,986 shares were treated by the coexecutors as part of the marital trust.
On March 28, 1991, respondent issued a statutory notice of deficiency to the estate, determining an estate tax deficiency of $2,284,008. The principal adjustment was the dis-allowance of $4,162,439.24 of the marital deduction because of respondent's determination that the "spouse's entire interest in the marital trust was subject to a power in the executors to appoint the corpus to someone other than the surviving spouse."
OPINION
Section 2001 imposes a tax on the transfer of the taxable estate of any person who is a citizen or resident of the United States at the time of death. Section 2056(a) allows a marital deduction from a decedent's gross estate for the value of property interests passing from the decedent to the decedent's surviving spouse. As a general rule, however, a marital deduction is denied for a "terminable interest", that is, a property interest that will terminate or fail "on the lapse of time, on the occurrence of an event or contingency, or on the failure of an event or contingency to occur". Sec. 2056(b)(1). Accordingly, an interest in^the nature of a life estate, generally, is ineligible for the marital deduction. See Estate of Nicholson v. Commissioner, 94 T.C. 666, 671 (1990); Estate of Higgins v. Commissioner, 91 T.C. 61, 66 (1988), affd. 897 F.2d 856 (6th Cir. 1990).
However, section 2056(b)(7), added by the Economic Recovery Tax Act of 1981, Pub. L. 97-34, sec. 403(d), 95 Stat. 172, 302, allows a marital deduction for "qualified terminable interest property". Section 2056(b)(7) allows a decedent to pass to the decedent's surviving spouse an interest in property for the surviving spouse's lifetime without the decedent's losing the ability to control the disposition of such property upon the death of the surviving spouse.
The facts in the instant case fall within this Court's holding in Estate of Clayton v. Commissioner, 97 T.C. 327 (1991), revd. 976 F.2d 1486 (5th Cir. 1992). After our opinion in Estate of Clayton was issued, but before it was reversed by the Fifth Circuit, we decided Estate of Robertson v. Commissioner, 98 T.C. 678 (1992), revd. 15 F.3d 779 (8th Cir. 1994), and Estate of Spencer v. Commissioner, T.C. Memo. 1992-579, revd. 43 F.3d 226 (6th Cir. 1995), in both of which we followed our holding in Estate of Clayton. Subsequently, those decisions were reversed, first by the Fifth Circuit, which reversed our decision in Estate of Clayton v. Commissioner,. supra, then by the Eighth Circuit, which, following the Fifth Circuit, reversed our decision in Estate of Robertson v. Commissioner, supra, and finally by the Sixth Circuit, which reverséd our decision in Estate of Spencer v. Commissioner, supra. The Sixth Circuit, however, applied a rationale somewhat different from that applied by the Fifth Circuit.
The Tax Court, in those opinions, held that the surviving spouse did not have a qualifying income interest for life because the passage of an income interest in the property to the surviving spouse was contingent upon the executor's QTIP election as to such property and was therefore subject to the executor's power to appoint the property to someone other than the surviving spouse. Accordingly, the Tax Court concluded that the property did not meet the requirements of section 2056(b)(7)(B)(ii)(II), that the surviving spouse did not have a "qualifying income interest for life", and that the property therefore was not QTIP. Estate of Robertson v. Commissioner, supra; Estate of Clayton v. Commissioner, supra; Estate of Spencer v. Commissioner, supra.
In Estate of Clayton v. Commissioner, supra, the taxpayer argued that, by definition, an interest in property is QTIP only if the election is made, and that, once the election is made, the surviving spouse has a qualifying income interest for life, effective as of the date of the decedent's death. In response, we stated:
An election, by definition, is necessary to insure that the property is qualified terminable interest property. The essence of section 2056(b)(7)(B)(i), however, is that a terminable interest is deductible only if it is an interest in property "in which the surviving spouse has a qualifying income interest for life"; if so, then an applicable election may be made with respect to such property. Compare Estate of Tompkins v. Commissioner, 68 T.C. 912 (1977). Whether the surviving spouse has an income interest for life in the property is independent of, and not dependent upon, the requirement that an election be made with respect to that property. If the surviving spouse does not have an income interest for life in the trust, then the election to treat the trust as a QTIP trust is ineffective. [Id. at 337.]
In Estate of Robertson v. Commissioner, supra at 689, the taxpayer attempted to distinguish the facts of that case from those of Estate of Clayton. In Estate of Robertson, the taxpayer argued that the executor was required to make the QTIP election and, thus, did not have the power to appoint the property to anyone other than the surviving spouse. We held to the contrary, concluding that the executor had the power to appoint the property to someone other than the surviving spouse and that Estate of Clayton was controlling.
Preliminarily, this Court stated:
Section 2056(b)(7)(B)(i) defines "qualified terminable interest property" as property (1) which passes from the decedent, (2) in which the surviving spouse has a "qualifying income interest for life", and (3) for which an election has been made. [Estate of Robertson v. Commissioner, supra at 684; emphasis added; fn. ref. omitted. ]
In reversing this Court, the appellate courts focused upon that language and held that one of the three essential elements in the definition of QTIP is that it be property for which an election has been made. Estate of Spencer v. Commissioner, 43 F.3d at 231; Estate of Robertson v. Commissioner, 15 F.3d at 783; Estate of Clayton v. Commissioner, 976 F.2d at 1499.
The opinions of the Courts of Appeals, however, diverge in one respect. The Court of Appeals for the Fifth Circuit held that the effect of the QTIP election is retroactive to the instant of the decedent's death. Estate of Clayton v. Commissioner, 976 F.2d at 1495, 1500. The Court of Appeals for the Sixth Circuit, rejected what it characterized as the legal fiction of retroactivity created by the Fifth Circuit. Estate of Spencer v. Commissioner, 43 F.3d at 234. Instead, the Sixth Circuit held that the date for determining whether property qualifies for the QTIP election is the date the QTIP election is made. Id. at 232. In holding that the relevant date for the determination is the date the QTIP election is made, the Sixth Circuit rejected the Commissioner's argument that Jackson v. United States, 376 U.S. 503 (1964), requires a contrary holding. The Sixth Circuit stated:
Jackson is readily distinguishable from this case and not in point. In Jackson, after her husband's death, a widow received a court-ordered temporary allowance for her support and maintenance payable from his estate. The Supreme Court held that because the widow's allowance arose from a right under state law which had not vested in her as of her husband's date of death, it could not be included as part of the marital deduction because, it did not meet the definition of any counter-exception to the rule that terminable interests are to be included in the taxable estate. Jackson at 507, 84 S.Ct. at 871-72. In the instant case, the decedent used an estate planning device unknown when Jackson was decided — the QTIP counter-exception to the terminable interest rule. Because the Jackson court ruled on the proper determination date for an interest which is not an exception to the terminal interest rule, and not subject to a later election, we do not think it is dispositive of this issue. [Estate of Spencer v. Commissioner, 43 F.3d at 231.]
Petitioner argues that, because at the time of his death decedent was a resident, of the State of Arkansas, the Eighth Circuit would have venue for an appeal of the instant case (absent stipulation to the contrary). Accordingly, petitioner contends that, pursuant to Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir. 1971), the Eighth Circuit's decision in Estate of Robertson v. Commissioner, supra, is controlling and that we should therefore hold for petitioner. Respondent argues that, because at the time of fil ing the petition in the instant case the individual coexecutor of decedent's estate was a resident of the State of Wisconsin and the corporate coexecutor had its principal place of business in that State, venue for an appeal of the instant case would lie to the Court of Appeals for the Seventh Circuit, which has not addressed the QTIP issue presented in the instant case, and, consequently, that the Tax Court is not bound under the Golseh rule.
The Golsen rule requires a conflict between this Court and the court having venue over an appeal of the case sub judice. Because we decide in the instant case to accede to the decisions of the Courts of Appeals that have reversed our decisions on the issue before us, no such conflict exists, and therefore it is unnecessary to address the parties' arguments concerning the proper venue for an appeal of the instant case.
We also find it unnecessary, at this point, to winnow out the differences in our analyses in our prior cases and those of the Courts of Appeals that have reversed us. Finally, we see no reáson in the instant case to adopt either the rationale of the Fifth and Eighth Circuits, on the one hand, or of the Sixth Circuit, on the other, as in either case the result is the same: the marital deduction is allowed. Suffice it to say that, in light of the reversals of this Court's decisions by three different circuits, we now decide that we will accede to the result in those appellate decisions and will no longer disallow the marital deduction for interests that are contingent upon the executor's election under section 2056(b)(7)(B)(v), where the election is actually made under facts similar to those in the instant case. Accordingly, w'e hold that the marital trust property in the instant case qualifies as QTIP under section 2056(b)(7).
One caveat to our holding is in order. Section 20.2056(b)-7(d)(3), Estate Tax Regs., provides that the marital deduction is not available under the circumstances of the instant case. Because the regulation is effective for estates of decedents dying after March 1, 1994 (see sec. 20.2056(b)-10, Estate Tax Regs.), it is not applicable to the instant case. Consequently, we leave for another day the issue of the validity of that regulation. Obviously, if the regulation were held to be valid, there might be a different result for estates of decedents dying after March 1, 1994.
To reflect the foregoing,
An appropriate order will be. issued.
Reviewed by the Court.
Hamblen, Swift, Jacobs, Wright, Ruwe, Colvin, Laro, Foley, and Vasquez, JJ., agree with this majority opinion.
This case was reassigned to Judge Thomas B. Wells by order of the Chief Judge.
If the interest in such property is QTIP, then an additional issue must be decided, to wit, whether the estate, inheritance, and any other succession taxes are to be paid from the assets passing into the marital trust or from the stock bequeathed to decedent's son. This additional issue will be decided by a separate opinion subsequently to be released.
The terms "coexecutors" and "co-personal representatives" are used interchangeably in this case.
The trustees of the marital trust were named as the beneficiaries of the Clack Corp. Profit Sharing Plan.
Sec. 2056(b)(7) provides:
(A) In general. — In the case of qualified terminable interest property—
(i) for purposes of subsection (a), such property shall be treated as passing to the surviving spouse, and
(ii) for purposes of paragraph (1)(A), no part of such property shall be treated as passing to any person other than the surviving spouse.
(B) Qualified terminable interest property defined. — For purposes of this paragraph—
(i) In general. — The term "qualified terminable interest property" means property—
(I) which passes from the decedent,
(II) in which the surviving spouse has a qualifying income interest for life, and
(III) to which an election under this paragraph applies.
(ii) Qualifying income interest for life. — The surviving spouse has a qualifying income interest for life if—
(I) the surviving spouse is entitled to all the income from the property, payable annually or at more frequent intervals, or has a usufruct interest for life in the property, and
(II) no person has a power to appoint any part of the property to any person other than the surviving spouse.
Subclause (II) shall not apply to a power exercisable only at or after the death of the surviv ing spouse. To the extent provided in regulations, an annuity shall be treated in a manner similar to an income interest in property (regardless of whether the property from which .the annuity is payable can be separately identified).
(iii) Property INCLUDES interest therein. — The term "property" includes an interest in property.
(iv) Specific portion treated as separate property. — A specific portion of property shall be treated as separate property.
(v) Election. — An election under this paragraph with respect to any property shall be made by the executor on the return of tax imposed by section 2001. Such an election, once made, shall be irrevocable.
Item (3) in the above quotation, however, is an imprecise paraphrase of and not the actual statutory language used in sec.-2056(b)(7)(BXi)(III). In Estate of Robertson v. Commissioner, 98 T.C. 678 (1992), revd. 15 F.3d 779 (8th Cir. 1994), this Court addressed sec. 2056(b)(7)(B)(i)(II), the "qualifying income interest for life" requirement, and did not undertake to construe sec. 2056(b)(7)(B)(i)(III), the election requirement.
Sec. 20.2056(b)-7(dX3), Estate Tax Regs., provides as follows:
(3) Contingent income interests. An income interest granted for a term of years, or a life estate subject to termination upon the occurrence of a specified event (e.g., remarriage), is not a qualifying income interest for life. In addition, an income interest (or life estate) that is contingent upon the executor's election under section 2056(b)(7)(B)(v) is not a qualifying income interest for life, regardless of whether the election is actually made.