Opinion ID: 592206
Heading Depth: 3
Heading Rank: 3

Heading: Definition as Substance

Text: 48 The position of the Commissioner and the judgment of the Tax Court rises or falls on the definition of QTIP. The same is true for the opposite position of the Co-Executors and for the holding we make today. 49 The Code contains a three-pronged functional definition of QTIP, which is followed immediately by specific definitions of terms used in that tripartite definition. As the definition of QTIP begins with the statement that  'qualified terminable interest property' means property, the first step is to identify the property to be tested under the elements of the definition. Relying on two specifically defined terms--that property includes an interest in property; and that a specific portion of property is to be treated as separate property--the Co-Executors argue that the property under examination here is the separate, undivided .563731 interest in the securities that was identified on the Form 706 as the property to which the QTIP election applies. Relying on nothing that has either been cited to us or that our independent research has produced, the Commissioner and the Tax Court insist that the property here under examination is the entire residue of testator's estate, being the maximum amount of property and interests in property with which Trust B could be funded were a total QTIP election to be made. For reasons explained in more detail below, we agree with the position of the Co-Executors and reject the position of the Commissioner and the Tax Court. 50 The second step is to see if the identified separate interest in property (the undivided interest in the securities for which the QTIP election was made) meets the Code's definition of QTIP. That is done by testing it for compliance with each of the three prongs of that statutory definition. 51 All agree that one of those prongs, i.e., that the separate interest in property passes from the decedent, is met. We conclude that a second prong is met, i.e., that the property be an interest to which an election under this paragraph applies. We reach that conclusion by observing that election is a defined term: An election under this paragraph in respect to any property shall be made by the executor on the return ... [and] ... shall be irrevocable. 41 Here, Surviving Spouse as Independent Executrix duly and timely completed the Form 706, checked the appropriate box on Schedule M, and identified the property in respect to which that election is made, i.e., the undivided .563731 interest in the securities listed on Schedules B and C. Thus, the property being tested for eligibility is the same property to which the election made by the Independent Executrix applies. 52 The third prong requires that the separate interest in property be one in which the surviving spouse has a qualifying income interest for life. 42 This phrase too is a defined term of art: Such an interest is one in which the surviving spouse is entitled to all the income ... payable annually or at more frequent intervals ... [and of which] no person has a power to appoint any part of the property to any person other than surviving spouse. 43 53 Under the terms of the Will, Surviving Spouse is expressly given the right for life to receive all income from Trust B, the corpus of which is the separate property interest in question. The executors and trustees are directed to pay such income to her no less frequently than annually. Even so, [t]he statute does not require that each day income accumulates that the income be paid immediately to the spouse. 44 In fact, [n]o provision need be made for paying income before the executor distributes the property to the trustee,. 45 Clearly, the annual-income-for-life element is met even if the income is not disbursed until a year after the trust is funded--an event that can only occur during or at the end of the orderly administration of the estate. Obviously funding of every testamentary trust occurs after the death of the testator; the executor cannot possibly ascertain on day one the amount of the income. Just as obviously, then, the beneficiary must wait a reasonable time before the income is actually received. But receipt and entitlement are not congruent. The requirement of life income interest is met as long as the eventual disbursements include all income accruing from and after the moment of the testator's death. 54 The other definitional element of qualifying income interest for life is that no one may have a power to appoint any of the property to anyone other than the surviving spouse. We have already determined that the property being considered is the undivided interest in the securities for which the executor made a timely QTIP election. No reasonable reading or construction of the Will or the statute can validate the position of the Commissioner, as endorsed by the Tax Court, that the Independent Executrix's QTIP election itself is tantamount to a power of appointment to the testator's children. Clearly, the estate's entitlement to a QTIP deduction is not meant to be abrogated simply because making a partial election for a separate interest in the property, i.e., not making a full election as to all interest in the property, results in a portion of the estate's residue--one that would have passed to Trust B under a full election--passing to Trust A. To embrace the Commissioner's flawed logic and deliberate disregard of the plain wording of the pertinent part of Code § 2056 would be to engage in pure sophistry. 55 Besides being unable to direct our attention to anything that might support their interpretation, the Commissioner and the Tax Court cannot escape the effects of their own interpretative pronouncements on the election prong of the QTIP definition. As shall be seen, such pronouncements implicitly acknowledge that the election element of the definition is viewed in the past tense, i.e., that although the effect of the election is tested as of the instant of the testator's death, the definitional eligibility of the separate terminable interest under examination is tested as though QTIP election had already been made. 56 In the Treasury's own proposed regulation interpreting the definition of QTIP, cited to us by the Commissioner in the appendix to her brief, the Department identifies the property as that which the executor elected to treat as qualified terminable interest property. 46 Likewise, the Tax Court, in citing its decision in the instant case to support its judgment in Estate of Willard E. Robertson v. Commissioner, refers to the election element of the definition pertaining to property for which an election has been made. 47 57