Court Opinion

ID: 4483121
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:15:54.281625+00
Date Added: 2024-06-11T14:54:02.745148
License: Public Domain

Irwin, J., I respectfully dissent. Under section 2056(b)(1) an interest in property passing to the surviving spouse is a nondeductible interest if: (1) On the occurrence of an event or contingency the interest will terminate or fail; (2) an interest in the same property passes from the decedent to any person other than the surviving spouse; and (3) by reason of such passing such person may possess or enjoy any part of such property after termination or failure of the interest passing to the surviving spouse. In this case I believe the interest in property which passed to the surviving spouse was subject to termination after which the beneficiaries of the residual portion of the trust would “possess and enjoy” the property. I would conclude that, under the terms of the statute, the interest in property which passed to the surviving spouse was a nondeductible interest. The interest in property which passed to the surviving spouse was the right to the income from and a testamentary general power of appointment over the marital portion of the trust.1 Regardless of whether we call this a “vested right,” it was an interest in property which was subject to termination or failure on the occurrence of an event or contingency.2 Under the terms of the trust nothing was to be allocated to the marital portion if, on the valuation date chosen by the trustee, the value of the assets in the surviving spouse’s “estate” equaled or exceeded the value of the assets in decedent’s estate. In that event, the majority (as I understand it) believes the surviving spouse’s interest in property would not have terminated but would merely have become worthless. Worthlessness, the majority notes, is a question of value and not indicative of termination. Under the circumstances of this case, I cannot agree. Admittedly an interest in property which passes to the surviving spouse is eligible for the marital deduction notwithstanding the possibility that the underlying property may decline in value or, indeed, become worthless. In that case, however, the surviving spouse still has an interest in “something” (the underlying property), even though the property is worthless. However, in the instant case if the marital portion of the trust had not been funded, the surviving spouse’s interest (the right to income for life and a testamentary power of appointment) would have become an interest in “nothing.” An interest in “nothing” is not an “interest in property.” I see the potential nonfunding of the marital portion of the trust as an event or contingency upon which the surviving spouse’s “interest in property” would have failed. The majority points out that formula bequests which are designed to achieve the maximum marital deduction have not been challenged by the Internal Revenue Service. While the typical formula fractional share bequest3 may result in a deductible interest (an issue we are not called on to decide and as to which I have some doubt), it does not follow that this “equalization formula” results in a deductible interest. An interest in property which passes to a surviving spouse under a formula fractional share bequest will terminate if, between the date of death and the alternate valuation date, there is a fluctuation in the value of the assets passing to the surviving spouse such that the value of assets passing outside the will (and qualifying for the marital deduction) equals the maximum marital deduction.4 Although in such instance the surviving spouse’s interest in the probate assets clearly terminates, respondent apparently concedes that this is not the type of contingency which renders the interest nondeductible within the meaning of section 2056(b)(1). The contingency causing termination of the surviving spouse’s interest is a function of the fluctuation in value of assets comprising decedent’s estate and the availability of the section 2032 election. In his original brief (p. 14) respondent states: Normally, the valuation required in determining the amount of a marital deduction does not render a fractional interest nondeductible. But in the instant case the valuation of the property is dependent on factors outside of the decedent’s estate, which factors will occur at a date subsequent to the date of decedent’s death.[5]  I believe the distinction drawn by respondent is significant. Section 2032 is a relief provision; construing an election under section 2032 as a “contingency” within the meaning of section 2056(b)(1) would effectively eliminate such relief for many taxpayers. However, the interest passing to the surviving spouse in the case before us can be distinguished from the interest passing under a formula fractional share bequest in that here the contingency involves the fluctuation in the value of assets outside the decedent’s estate. This is not the type of situation for which section 2032 was designed to provide relief. Consequently, I cannot find any reason to construe this contingency as falling outside the proscriptions of section 2056(b)(1). I conclude, therefore, that the surviving spouse’s interest in the present case is a nondeductible terminable interest. I have reached this conclusion reluctantly. As respondent concedes, the purposes of neither the marital deduction nor the terminable interest rule would be frustrated by allowing petitioner’s claimed deduction inasmuch as the value of the marital portion of the trust, as finally determined, will be taxable in the surviving spouse’s estate. However, we must reach a result which is consonant with the statute. As the Supreme Court said in Jackson v. United States, 376 U.S. 503, 509-510 (1964): there is no provision in the Code for deducting all terminable interests which become nonterminable at a later date and therefore taxable in the estate of the surviving spouse if not consumed or transferred. The examples cited in the legislative history make it clear that the determinative factor is not taxability to the surviving spouse but terminability as defined by the statute. * * *   The surviving spouse also had a “special power of appointment” (not here relevant) over the marital portion which was exercisable during her life.    It is possible to have a vested right in a terminable interest, i.e., a life estate.    An example of a formula fractional share bequest is as follows: “If my said wife survives me, I give to * * * [her] the following described fractional share of my residuary estate: “The numerator of the fraction shall be the maximum estate tax marital deduction (allowable in determining the federal estate tax payable by reason of my death) minus the value for federal estate tax purposes of all items in my gross estate which qualify for said deduction and which pass or have passed from me to my said wife (the words “pass or- have passed” shall have the same meaning as such words shall have under the provisions of the Internal Revenue Code in effect at the time of my death) under other provisions of this will, by right of survivorship with respect to jointly owned property, under settlement arrangements relating to life insurance proceeds, or otherwise than under this fractional share gift of my residuary estate (in computing the numerator, the values as finally determined for federal estate tax purposes shall control); and the denominator of the fraction shall be the value of my residuary estate, and to the extent that the items initially in my residuary estate are included in my gross estate, the value at which they are included in my gross estate shall control, and to the extent they are not so included, their value at the time they would have been valued if they had been so included shall control in determining the denominator. When distribution is made, there shall be distributed the above-described fractional share of my residuary estate without regard to whether the total value of what is distributed is more or less than the numerator of the above-described fraction.” (Casner, Estate Planning 795 (3d ed.).)    For example, assume that D’s will contained a formula fractional share bequest (as described in n. 3) to W, his surviving spouse, and a bequest of the remainder of his estate to his son, X. Assume that on the date of D’s death the value of his adjusted gross estate was $1 million, including probate assets valued at $750,000 and Black Acre, held by D and W as joint tenants, valued at $250,000 (the entire value of which is includable in D’s gross estate under sec. 2040). Assume also that on the alternate valuation date the value of Black Acre remained unchanged, but that the value of the probate assets dropped to $250,000 (reducing the value of the adjusted gross estate to $500,000). The interest in property which passed to W, by virtue of D’s will, was an undefined portion of the assets in D’s probate estate. If the executor elects the alternate valuation date, none of the probate assets pass to W under D’s will. W’s interest in the probate assets has failed and upon that failure X takes all of the probate assets by virtue of the interest which passed to him under D’s will.   5 With regard to another potential “contingency,” respondent cites, with approval, the following: “The power in the executor to affect the amount passing to the wife under a formula gift by taking certain tax deductions as income tax deductions and thereby increasing the adjusted gross estate might at first be thought to be a power to divert from the wife part of what finally passes to her; that is, the part which would not have passed to her if the deductions had been taken as estate tax deductions with a resultant decrease in the adjusted gross estate. This power in the executor is given by the terms of the Revenue Code itself and, like other powers created by operation of law, should not disqualify for the marital deduction any part of the gift to the wife. * * *” (Casner, supra at 788 n. 13. Emphasis supplied by respondent.)