Opinion ID: 106702
Heading Depth: 1
Heading Rank: 1

Heading: the marital deduction.

Text: By electing to take under the will, Mrs. Stapf, in effect, agreed to accept the property devised to her and, in turn, to surrender property of greater value to the trust for the benefit of the children. This raises the question of whether a decedent's estate is allowed a marital deduction under § 812 (e) (1) (E) (ii) of the 1939 Code where the bequest to the surviving spouse is on the condition that she convey property of equivalent or greater value to her children. The Government contends that, for purposes of a marital deduction, the value of the interest passing to the wife is the value of the property given her less the value of the property she is required to give another as a condition to receiving it. On this view, since the widow had no net benefit from the exercise of her election, the estate would be entitled to no marital deduction. Respondents reject this net benefit approach and argue that the plain meaning of the statute makes detriment to the surviving spouse immaterial. Section 812 (e) (1) (A) provides that in general the marital deduction is for the value of any interest in property which passes . . . from the decedent to his surviving spouse. Subparagraph (E) then deals specifically with the question of valuation: (E) Valuation Of Interest Passing To Surviving Spouse.In determining for the purposes of subparagraph (A) the value of any interest in property passing to the surviving spouse for which a deduction is allowed by this subsection ..... (ii) where such interest or property is incumbered in any manner, or where the surviving spouse incurs any obligation imposed by the decedent with respect to the passing of such interest, such incumbrance or obligation shall be taken into account in the same manner as if the amount of a gift to such spouse of such interest were being determined. The disputed deduction turns upon the interpretation of (1) the introductory phrase any obligation imposed by the decedent with respect to the passing of such interest, and (2) the concluding provision that such . . . obligation shall be taken into account in the same manner as if the amount of a gift to such spouse of such interest were being determined. The Court of Appeals, in allowing the claimed marital deduction, reasoned that since the valuation is to be as if a gift were being taxed, the legal analysis should be the same as if a husband had made an inter vivos gift to his wife on the condition that she give something to the children. In such a case, it was stated, the husband is taxable in the full amount for his gift. The detriment incurred by the wife would not ordinarily reduce the amount of the gift taxable to the husband, the original donor. [8] The court concluded: Within gift tax confines the community property of the widow passing under the will of the husband to others may not be `netted' against the devise to the widow, and thus testator, were the transfer inter vivos, would be liable for gift taxes on the full value of the devise. 309 F. 2d 592, 598. This conclusion, based on the alleged plain meaning of the final gift-amount clause of § 812 (e) (1) (E) (ii), [9] is not supported by a reading of the entire statutory provision. First, § 812 (e) allows a marital deduction only for the decedent's gifts or bequests which pass to his surviving spouse. In the present case the effect of the devise was not to distribute wealth to the surviving spouse, but instead to transmit, through the widow, a gift to the couple's children. The gift-to-the-surviving-spouse terminology reflects concern with the status of the actual recipient or donee of the gift. What the statute provides is a marital deductiona deduction for gifts to the surviving spouse not a deduction for gifts to the children or a deduction for gifts to privately selected beneficiaries. The appropriate reference, therefore, is not to the value of the gift moving from the deceased spouse but to the net value of the gift received by the surviving spouse. Second, the introductory phrases of § 812 (e) (1) (E) (ii) provide that the gift-amount determination is to be made where such interest or property is incumbered in any manner, or where the surviving spouse incurs any obligation imposed by the decedent with respect to the passing of such interest . . . . The Government, drawing upon the broad import of this language, argues: An undertaking by the wife to convey property to a third person, upon which her receipt of property under the decedent's will is conditioned, is plainly an `obligation imposed by the decedent with respect to the passing of such interest.'  Respondents contend that incumbrance or obligation refers only to a payment to be made out of property passing to the surviving spouse. Respondents' narrow construction certainly is not compelled by a literal interpretation of the statutory language. Their construction would embrace only, for example, an obligation on the property passing whereas the statute speaks of an obligation  with respect to the passing gift. Finally, to arrive at the real value of the gift such . . . obligation shall be taken into account . . . . In context we think this relates the gift-amount determination to the net economic interest received by the surviving spouse. This interpretation is supported by authoritative declarations of congressional intent. The Senate Committee on Finance, in explaining the operation of the marital deduction, stated its understanding as follows: If the decedent bequeaths certain property to his surviving spouse subject, however, to her agreement, or a charge on the property, for payment of $1,000 to X, the value of the bequest (and, accordingly, the value of the interest passing to the surviving spouse) is the value, reduced by $1,000, of such property. S. Rep. No. 1013, 80th Cong., 2d Sess., Pt. 2, p. 6. (Emphasis added.) The relevant Treasury Regulation is directly based upon, if not literally taken from, such expressions of legislative intent. Treas. Reg. 105, § 81.47c (b) (1949). The Regulation specifically includes an example of the kind of testamentary disposition involved in this case: A decedent bequeathed certain securities to his wife in lieu of her interest in property held by them as community property under the law of the State of their residence. The wife elected to relinquish her community property interest and to take the bequest. For the purpose of the marital deduction, the value of the bequest is to be reduced by the value of the community property interest relinquished by the wife. [10] We conclude, therefore, that the governing principle, approved by Congress and embodied in the Treasury Regulation, [11] must be that a marital deduction is allowable only to the extent that the property bequeathed to the surviving spouse exceeds in value the property such spouse is required to relinquish. Our conclusion concerning the congressionally intended result under § 812 (e) (1) accords with the general purpose of Congress in creating the marital deduction. The 1948 tax amendments were intended to equalize the effect of the estate taxes in community property and common-law jurisdictions. [12] Under a community property system, such as that in Texas, the spouse receives outright ownership of one-half of the community property and only the other one-half is included in the decedent's estate. To equalize the incidence of progressively scaled estate taxes and to adhere to the patterns of state law, the marital deduction permits a deceased spouse, subject to certain requirements, to transfer free of taxes one-half of the non-community property to the surviving spouse. Although applicable to separately held property in a community property state, the primary thrust of this is to extend to taxpayers in common-law States the advantages of estate splitting otherwise available only in community property States. The purpose, however, is only to permit a married couple's property to be taxed in two stages and not to allow a tax-exempt transfer of wealth into succeeding generations. Thus the marital deduction is generally restricted to the transfer of property interests that will be includible in the surviving spouse's gross estate. [13] Respondents' construction of § 812 (e) (1) would, nevertheless, permit one-half of a spouse's wealth to pass from one generation to another without being subject either to gift or estate taxes. [14] We do not believe that this result, squarely contrary to the concept of the marital deduction, can be justified by the language of § 812 (e) (1). Furthermore, since in a community property jurisdiction one-half of the community normally vests in the wife, approval of the claimed deduction would create an opportunity for tax reduction that, as a practical matter, would be more readily available to couples in community property jurisdictions than to couples in common-law jurisdictions. [15] Such a result, again, would be unnecessarily inconsistent with a basic purpose of the statute. Since in our opinion the plain meaning of § 812 (e) (1) does not require the interpretation advanced by respondents, the statute must be construed to accord with the clearly expressed congressional purposes and the relevant Treasury Regulation. We conclude that, for estate tax purposes, the value of a conditional bequest to a widow should be the value of the property given to her less the value of the property she is required to give to another. In this case the value of the property transferred to Mrs. Stapf ($106,268) must be reduced by the value of the community property she was required to relinquish ($111,443). Since she received no net benefit, the estate is entitled to no marital deduction.