Opinion ID: 592206
Heading Depth: 3
Heading Rank: 4

Heading: Additional Flaws in the Commissioner's Position

Text: 58 The Commissioner misses the mark by insisting that the QTIP provision should be construed narrowly because it is an exception to the prohibition of deducting terminable interest under the Marital Deduction. As we have noted, however, it is Code § 2056(b)'s general prohibition of deducting terminable interests that is the exception. It is an exception to the broad rule of deductibility of interspousal transfers which in turn implements the clear will of Congress favoring, as a matter of public policy, deferral of estate tax until the death of the second spouse--to the extent such deferral is desired by the parties. It is that general terminable interest exception that must be narrowly construed. As QTIP is an exception to that exception, however, QTIP enjoys the same favored position and liberal construction as is properly afforded to the Marital Deduction itself. 59 More importantly, there is nothing in the plain wording of the entire QTIP subsection which, when viewed in light of the definition of terms therein provided, even remotely supports the position of the Commissioner that if anything occurs after the death of the testator--such as the QTIP election--to prevent even a modicum of property which under the testament would have passed from the decedent to the surviving spouse, the deduction is unavailable for all otherwise eligible property. To reach that strained result, the Commissioner would have us ignore the overarching truism that many acts must be done and many facts must be determined after the death of the testator in order to determine the taxable estate. The question is not when those determinations are made or when those acts are performed but whether their effects relate back, ab initio, to the moment of death. For example, a qualified disclaimer by the Surviving Spouse has precisely the effect of the QTIP election here: Both are volitional acts; both can be made only after the death of the testator; both relate back, ab initio, to the date of death of the testator; and both have the effect of causing estate property which would otherwise pass to the Surviving Spouse to pass instead directly to or for the benefit of other parties. Likewise, while seldom volitional, the death of the Surviving Spouse within six months following the death of the testator who conditions the legacy on survivorship would have the same effect, but again retroactive to the moment of the testator's death. 60 Curiously, the Commissioner and the Tax Court appear to view QTIP legislation as some sort of congressional paternalism aimed at ensuring the financial stability of the surviving spouse. Clearly such protectionism played no part in it. If the intention had been to dangle the carrot of deductibility in front of testators to induce them to ensure the financial well-being of the surviving spouse, Congress would surely have given the power to make the QTIP election to the surviving spouse, not the executor. The point we here emphasize is that for tax purposes Congress was and is interested only in that portion of terminable interest property for which the QTIP election is made; it has no interest whatsoever in the portion of any terminable interest property for which the election is not made. Being ineligible for the Marital Deduction, that property is taxed right where the Commissioner and Congress want it taxed--in the estate of the first spouse to die. Congress could not care less whether the portion of the terminable interest property for which the QTIP election is not made goes to the surviving spouse, to the children, or to a stranger. Obviously, that is why Congress placed the election in the definition of QTIP property. If Congress had intended the result advocated by the Commissioner, it could have 1) defined the property without reference to the election, 2) specified a subsequent election, or 3) provided separately for the election to apply to all property meeting the definition, thereby separating the election from the definition. Facially, the statute eschews any such separation. 61 From whence it came we know not, but the Tax Court here made the pronouncement that the QTIP election gave the executor control over trust assets [that] is tantamount to a power to appoint property that was subject to the qualifying income interest. 48 That unsubstantiated, conclusionary statement can only be the product of a circular argument--one that we reject. First, the QTIP election cannot vest the executor with control over trust assets before they become trust assets! The undivided interests in the securities for which the election is made are estate assets but they do not become trust assets until the trust is funded, even though the economic effect of funding is retroactive to the instant of death. Assets used to fund each testamentary trust get there by virtue of the provisions of the Will and the administration of the estate. The same analysis is applicable to that portion of the quotation from the Tax Court's opinion that refers to property that was subject to the qualifying income interest. No income interest is qualifying until it meets the full definition for QTIP, including the election prong. As we have just noted, one of the three essential elements in the definition of such property interest is that it be property for which--in the Tax Court's own words--an election has been made. 49 62 Additionally, the Commissioner appears to have seized on a gratuitous statement from the Tax Court opinion in the instant case to bootstrap an even more adventuresome government position, i.e., that any QTIP trust that pours nonelected property over is flawed, apparently even if the bypass trust is QTIPable in its own right. 50 Such an arbitrary and unsupported misconstruction of the statute cannot be justified by any reasonable reading. It can only be explained as overzealousness in revenue collection, deliberate disregard for the clear purpose, intent and policy behind the statute, and a historic aversion to the Marital Deduction which is well documented in the Tax Court Reports, the Federal Reporter System, Treasury Regulations, Revenue Rulings, Technical Advice Memoranda, Private Letter Rulings, and the like. 63 Loophole is a term frequently used as a pejorative in the context of taxation. Although it is usually reserved for taxpayers and their professional advisors, in truth the Commissioner and the Service are no less active in probing tax statutes for loopholes. Historically, that has been part of the game, leaving to Congress the damage control of plugging loopholes through technical amendments. The position taken by the IRS and advocated by the Commissioner in the instant case, however, goes beyond mere probing for loopholes overlooked by Congress. Rather, it reflects an effort to batter such a hole in the statutory wall where none exists. We will not approbate such overreaching. From every standpoint--history, expressed intent, logic, reading in pari materiae with other post-mortem provisions, and--above all--the plain language of the statute--the position of the Co-Executors meets muster while the Commissioner's fails.