Court Opinion

ID: 4472349
Source: CourtListenerOpinion
Date Created: 2020-01-13 23:23:38.808878+00
Date Added: 2024-06-11T08:49:06.919470
License: Public Domain

Wells, J., dissenting: I respectfully dissent from the majority opinion in the instant case. I agree with Judge Beghe that the majority’s holding incorrectly interprets a remedial statute that Congress intended to be interpreted broadly and is contrary to the reasonable interpretation of the Court of Appeals for the Ninth Circuit, the Commissioner’s regulations, and the weight of critical commentary. I, however, wish to set forth an additional reason why I believe the Court, in Estate of Howard v. Commissioner, 91 T.C. 329 (1988), revd. 910 F.2d 633 (9th Cir. 1990), incorrectly interpreted section 2056(b)(7). In Estate of Howard v. Commissioner, supra at 335, the Court stated that “the legislative history of section 2056(b)(7) clearly indicates that ‘qualified terminable interest property’ must meet the requirements of section 20.2056(b)-5(f), Estate Tax Regs.”, citing H. Rept. 97-201, at 161 (1981), 1981-2 C.B. 352, 378, and Staff of Joint Comm, on Taxation, General Explanation of the Economic Recovery Tax Act of 1981, at 435 (J. Comm. Print 1981). Based on its reading of section 20.2056(b)-5(f)(8), Estate Tax Regs., the Court held that to qualify as a “qualified income interest for life,” the “income accumulated by the trust between the last date of distribution and the surviving spouse’s death must be disposed of as the surviving spouse directs either by virtue of being payable to the surviving spouse’s estate or through a power of appointment which includes a power to appoint to her estate or to such other persons as she may direct.” [Estate of Howard v. Commissioner, 91 T.C. at 338 (fn. ref. omitted).] The Court also stated that a disposition of the income that accumulates in the trust between the date of the last distribution and the surviving spouse’s death (hereinafter the stub interest) to the surviving spouse’s estate pursuant to a provision in a trust instrument or through the operation of State law, if the trust instrument is silent or unclear on the issue, satisfies the requirement of section 2056(b)(7). Id. at n.8. Although I agree with the Court’s conclusion in Estate of Howard v. Commissioner, supra, that “qualified terminal interest property” must meet the requirements of section 20.2056(b)-5(f), Estate Tax Regs., as explained below, my reading of the statute and regulations would lead to the opposite result; namely, that section 2056(b)(7) permits the stub interest to be appointed by or paid to someone other than the surviving spouse without failing to satisfy its requirements. An income interest may be a “qualifying income interest for life” under section 2056(b)(7) only if: (1) The surviving spouse is entitled to all of the income from the property, payable annually or at more frequent intervals and (2) no person has a power to appoint any part of the property to any person other than the surviving spouse. Sec. 2056(b)(7)(B)(ii). Section 2056(b)(7) defines “property” as “an interest in property.” Sec. 2056(b)(7)(B)(iii). That definition includes the income interest in the property that the surviving spouse must be entitled to receive for life under section 2056(b)(7)(B)(ii)(I). The stub interest is such an income interest. The first sentence of the flush language of section 2056(b)(7)(B) states, in pertinent part, that the second requirement of section 2056(b)(7)(B), namely, that no person may have a power to appoint any part of the property to any person other than the surviving spouse, does “not apply to a power exercisable only at or after the death of the surviving spouse.” As I read the flush language, any person may appoint any part of the property, including the stub interest, to a person other than the surviving spouse at or after the death of the surviving spouse. Consequently, the flush language of section 2056(b)(7)(B) permits such a power over the stub interest without violating the requirement that the surviving spouse be entitled to all of the income from the property for life. Section 20.2056(b)-5(f)(8), Estate Tax Regs., supports such an interpretation of section 2056(b)(7). To qualify for the marital deduction under section 2056(b)(5) for property passing to the surviving spouse, the surviving spouse must not only be entitled to all of the income from the property for life, but the surviving spouse must also have a power to appoint the property. Section 20.2056(b)-5(f)(8), Estate Tax Regs., provides, in pertinent part: as respects the income for the period between the last distribution date and the date of the spouse’s death, it is sufficient if that income is subject to the spouse’s power to appoint. Thus, if the trust instrument provides that income accrued or undistributed on the date of the spouse’s death is to be disposed of as if it had been received after her death, and if the spouse has a power of appointment over the trust corpus, the power necessarily extends to the undistributed income. [Emphasis added.] Because section 2056(b)(5) requires that the surviving spouse have de facto legal ownership of the underlying property (by having a life estate with a power of appointment over the remainder) in order for the testator’s estate to qualify for a marital deduction, it is not surprising that section 20.2056(b)-5(f)(8), Estate Tax Regs., requires that the surviving spouse must, at a minimum, have a power of appointment over the stub interest as well. Section 2056(b)(7) differs from section 2056(b)(5) in that it specifically permits a person to appoint any part of the property to someone other than the surviving spouse at or after the death of the surviving spouse. Sec. 2056(b)(7)(B). In Estate of Howard v. Commissioner, supra, we held that section 2056(b)(7) is to be interpreted in conjunction with the requirements of section 20.2056(b)-5(f)(8), Estate Tax Regs. It follows that, because section 2056(b)(7) specifically permits a person to appoint any part of the property to someone other than the surviving spouse at or after the death of the surviving spouse, such person is permitted to have the power to appoint the stub interest as well, without violating section 2056(b)(7). In short, the flush language of section 2056(b)(7)(B) permits a person to appoint any interest in the property, including the stub interest, at or after the death of the surviving spouse. Section 20.2056(b)-5(f)(8), Estate Tax Regs., specifically states that, if the surviving spouse is given a power of appointment over the trust corpus, the power of appointment “necessarily extends to the undistributed income”; i.e., the surviving spouse has the power to appoint the stub interest. As section 2056(b)(7) is to be interpreted in accordance with section 20.2056(b)-5(f)(8), Estate Tax Regs., the rationale of that provision (namely, that a power of appointment over a trust corpus includes the power to appoint the stub interest) would also apply to section 2056(b)(7). Consequently, the person who has the power to appoint the corpus of a trust at or after the death of the surviving spouse must necessarily have the power to appoint the stub interest as well. I believe that if the statute allows the stub interest to be appointed to someone other than the surviving spouse at or after her death without disqualifying the property as qualified terminable interest property, then a testamentary gift of the stub interest should not disqualify the property as well. In the instant case, Mr. Shelter’s will required the trustee of the Share Number Two Trust to pay the stub interest at decedent’s death to Mr. Shelter’s niece. Based on the foregoing analysis, I believe that section 2056(b)(7) and section 20.2056(b)-5(f)(8), Estate Tax Regs., allow Mr. Shelter’s will to do so without running afoul of section 2056(b)(7). Consequently, I would hold that the Share Number Two Trust meets the requirements of section 2056(b)(7) and therefore must be included in decedent’s gross estate under section 2044. Parker, Jacobs, Parr, and Beghe, JJ., agree with this dissent.