Court Opinion

ID: 4472272
Source: CourtListenerOpinion
Date Created: 2020-01-13 23:21:35.004992+00
Date Added: 2024-06-11T14:50:15.643522
License: Public Domain

Beghe, J., concurring in part and dissenting in part: Having joined Judge Halpern’s concurring and dissenting opinion, I also write separately to emphasize my dissent from various aspects of the Court’s holding that the payments of estate administration expenses from income do not reduce the marital and charitable deductions allowable for Federal estate tax purposes. In the case at hand, as in other recent estate tax cases in which administration expenses were claimed as income tax deductions, the Court’s opinion has the effect of abetting a post mortem estate planning blunder or maneuver. See Estate of Street u. Commissioner, T.C. Memo. 1988-553, affd. in part, revd. in part and remanded 974 F.2d 723 (6th Cir. 1992); see also Estate of Mclnnes v. Commissioner, T.C. Memo. 1992-558; Estate of Young v. Commissioner, T.C. Memo. 1992-551. The majority interpret section 20.2056(b)-4(a), Estate Tax Regs., as not requiring a setoff against the marital deduction for administration expenses paid from income, but as being “merely a valuation provision which requires material limitations on the right to receive income to be taken into account when valuing the property interest passing to the surviving spouse.” Majority op. pp. 324-325. The majority opinion goes on to say: The fact that income from property is to be used to pay expenses during the administration of the estate is not necessarily a material limitation [within the meaning of section 20.2056(b)-4(a), Estate Tax Regs.] on the right to receive income that would have a significant effect on the date-of-death value of the property of the estate. [Majority op. p. 325.] and that Moreover, the income used to pay administration expenses is insubstantial compared to the lifetime of income Mrs. Hubert will receive from the property. * * * [Majority op. p. 325.] In so saying, the majority opinion falls short in a variety of ways: (1) It creates the impression that charging estate administration expenses against income can never have a significant effect on the values of the income interests of the surviving spouse and charitable beneficiaries of the estate; (2) it strengthens that impression by providing no sense of the substantial amounts that have already been charged against and paid from the income rights of the marital and charitable residuary interests;1 (3) it opens the barn door to substantial but unknown additional amounts being so charged and paid in the future, without regard to the fact that these additional charges would further reduce the values of the residuary interests of the surviving spouse and the charities;2 and (4) it does not separately address the effect on the estate tax charitable deduction of charging the administration expenses to the income of the residuary estate; in this last respect the majority have decided not to apply the decisions of the Court of Appeals for the Federal Circuit in Burke v. United States, 994 F.2d 1576 (Fed. Cir. 1993) and the Court of Appeals for the Fifth Circuit in Alston v. United States, 349 F.2d 87 (5th Cir. 1965), and to depart from the approach we took in Estate of Warren v. Commissioner, 93 T.C. 694 (1989), revd. on other grounds and remanded 981 F.2d 776 (5th Cir. 1993), and Estate of Horne v. Commissioner, 91 T.C. 100 (1988). The majority’s argument with respect to the marital deduction, that Mrs. Hubert must be considered to have received the entire value of both marital trusts, because she has a general power of appointment over one, and the other is a QTIP trust, see majority op. p. 327, is also misplaced. This argument glides over the requirement that the surviving spouse, irrespective of whether she has a general power of appointment or the QTIP provisions are otherwise satisfied, must have the unqualified right to receive the entire income of the property interest with respect to which the marital deduction is being claimed, if the full marital deduction for the value of that property interest is to be allowed. Northeastern Pa. Natl. Bank & Trust Co. v. United States, 387 U.S. 213 (1967); H. Rept. 1337, 83d Cong., 2d Sess. 92 (1954); S. Rept. 1622, 83d Cong., 2d Sess. 125 (1954). If and to the extent that right to income is reduced, the allowable marital deduction is cut back, cf. Estate of Alexander v. Commissioner, 82 T.C. 34 (1984), affd. without published opinion 760 F.2d 264 (4th Cir. 1985), if not completely disallowed, see sec. 20.2056(b)-5(b), Estate Tax Regs.; cf. Energy Policy Act of 1992, Pub. L. 102-486, sec. 1941, 106 Stat. 3036; H. Conf. Rept. 102-1018, at 432 (1992). See generally Kasner, “Recent Legislation and Pecuniary Marital Deduction Bequests”, Tax Notes 1094 (May 24, 1993). Although the stipulated record in this case is not as clear as it should be, the actual amounts in issue belie the majority’s conclusion that the residuary interests have not already been subjected to a “material limitation” within the meaning of section 20.2056(b)-4(a), Estate Tax Regs.: Gross estate . $30,254,219 Marital share 13,353,572 Charitable share . 12,870,864 Residuary estate . 26,224,436 Income distributed to Mrs. Hubert through 5/31/90 . 1,219,603 Income distributed to Mrs. Hubert through 5/31/90 from other interests qualifying for marital deduction . 699,376 1,918,979 Income used to pay administrative expenses through 5/31/90 and deducted for income tax purposes . 1,458,445 Post-settlement agreement income through 9/26/91 . 1,173,171 Post-settlement administrative expenses charged to income and deducted for income tax purposes . 548,414 It thus appears that, for the first 5 years’ administration of the estate, the income interests of the surviving spouse and the charities have been substantially burdened and materially limited by the payment of estate administration expenses, which have been both charged to income and deducted for Federal income tax purposes. These administration expenses have been substantially in excess of the “trustee’s commissions, and other charges”, majority op. p. 325, of administering an estate or trust in the ordinary course that can be paid out of income without depriving the surviving spouse beneficiary of the required substantial beneficial enjoyment within the meaning of section 25.2523(e)-l(f)(3), Gift Tax Regs. See also sec. 20.2056(b)-5(f)(3), Estate Tax Regs. During this 5-year period, the estate generated gross income of no less than $4.5 million, of which approximately $2 million was used to pay administration expenses that were charged to income and deducted for Federal income tax purposes. If it be assumed that these expenses were paid rat-ably over the 5-year period following decedent’s death, the equivalent of a 5-year annuity of approximately $400,000 has been charged against the income interests of the surviving spouse and the charities. Such an annuity would have had a date-of-death present value of $1,511,352 (using the 10-per-cent table B of sec. 20.2031-7(f), Estate Tax Regs., applicable to estates of decedents dying after November 30, 1983, and prior to May 1, 1989), and the marital and charitable deductions should be reduced accordingly. Rather than reducing the widow’s marital share and the charitable share dollar for dollar, or approximately $2 million, as argued by respondent,3 based on the amounts actually charged against income, I would apply the majority’s interpretation of section 20.2056(b)-4(a), Estate Tax Regs., as a valuation provision to reduce the aggregate marital and charitable deductions by the date-of-death present value of the annuity charged against the residuary interests in the estate.4 Assuming that the expenses were charged against both the marital and charitable residuary interests, the marital and charitable deductions should be reduced in the same proportions that they bear to the total residuary estate. The same general approach should be used to determine the estate tax effects of estate administration expenses subsequently incurred and paid that petitioner actually charges to income and claims as income tax deductions. In dealing with this problem, will drafters, estate administrators, and the courts should be under no illusions about the potential benefits and amounts at risk in claiming estate administration expenses as income tax deductions. Under the majority’s approach, there is a substantial tax benefit in claiming income tax deductions for expenses paid from income that would otherwise accrue to the marital and charitable residuary shares. The benefit is that the estate tax deductions for the value of the principal amounts passing to or for the benefit of the surviving spouse and the charitable beneficiaries are not reduced by the expenses. Yet those expenses are also allowed as income tax deductions, in effect creating a double deduction that “would violate the spirit, if not the literal language, of section 642(g).” Gans, “Will Administration Expenses Charged to Income Reduce the Marital Deduction?”, 71 J. Taxn. 90, 91 (1989). However, the benefits of the double deduction will be exceeded, if the maneuver is held to be unsuccessful — as it should be — by the detriment of the “hall of mirrors” effect under which the amount of any death taxes chargeable against a marital bequest is itself subject to the Federal estate tax. As a result, the estate tax deficiency will chew into and reduce the allowable marital deduction in amounts that will disproportionately exceed, with exponentially incremental effect, the initial amount of the disallowed marital deduction. See 5 Bittker & Lokken, Federal Taxation of Income, Estates and Gifts 129-77 (2d ed. 1993). The same is true of the charitable residuary bequest and the estate tax charitable deduction. Id. at 130-30 through 130-33. The Tax Court stands virtually alone on this issue. The preponderance of academic and professional opinion has been that Estate of Street v. Commissioner, T.C. Memo. 1988-553, was incorrectly decided. See Gans, “Will Administration Expenses Charged to Income Reduce the Marital Deduction?”, 71 J. Taxn. 90 (1989); Covey, “Administration Expenses and Interest Charged to Income”, U. of Miami Estate Planning Conference par. 1701.3 (1990); U.S. Trust Co. of New York, “Operation of Credit Shelter Formula Provision”, Practical Drafting 1685-1688 (Apr. 1989); U.S. Trust Co. of New York, “Operation of Credit Shelter-Marital Deduction Formula Provisions”, Practical Drafting 3055-3062 (Jan. 1993). But see Kasner, “Marital Deduction Bequests: The Impact of Estate Debts and Expenses”, Tax Notes 229 (Apr. 12, 1993). Because the result in Estate of Street v. Commissioner, supra, seemed too good to be true, the commentators cautioned practitioners not to rely on the Tax Court’s decision. Practitioners were advised to insulate the marital bequest from the effect of Estate of Street’s reversal or repudiation by allocating the expenses to the unified credit shelter bequest, with the possibility of a renunciation by the surviving spouse if our decision in Estate of Street should be upheld. Such cautionary measures would have been well taken, in view of the reversal of our decision in Estate of Street by the Court of Appeals for the Sixth Circuit, 974 F.2d 723 (6th Cir. 1992), its repudiation by the Court of Federal Claims, Fisher v. United States, 28 Fed. Cl. 88 (1993), and the recent confirmation by the Court of Appeals for the Federal Circuit, Burke v. United States, 994 F.2d 1576 (Fed. Cir. 1993), that there must be a similar reduction of the estate tax deduction for a charitable residuary bequest when estate administration expenses are paid and deducted from income. The expenses paid and to be paid from income in this case are so large that such measures would have been and are unavailing to petitioner. Only our refusal to change course stands between respondent’s proposed adjustments and the marital and charitable residuary shares. We should stop swimming against the tide and go with the flow. Halpern, J., agrees with this opinion.   Although, as the majority observe, majority op. p. 323, the payment of administration expenses from income does not reduce the estate principal received by or set aside for the surviving spouse and the charities, the payment of the expenses from income necessarily reduces the income to which those residuary legatees would otherwise be entitled. As a result, the values of the property interests actually received by the residuary legatees have been reduced.    In this regard, the executors have candidly expressed the intention, if their contentions on this issue should be upheld, to charge all subsequent estate administration expenses, including the legal fees of this proceeding, to the income of the residuary interests, and also to claim these expenses as deductions for Federal income tax purposes. As a result, the values of the residuary interests will be further reduced in some currently unknown but probably substantial amounts.    Under the terms of the settlement agreement, the division of the residuary between the marital and charitable shares was 52 percent and 48 percent, respectively. The record does not indicate the amounts of income distributed or held for distribution to the charitable beneficiaries. In any event, it appears that the income used to pay estate administration expenses during the first 5 years of the estate’s administration was no less than 20 percent of the estate’s income during this period, a not insignificant amount.    I am aware that this approach is arguably contrary to the view, represented by such cases as Estate ofWycoffv. Commissioner, 59 T.C. 617, 621-623 (1973), affd. 506 F.2d 1144 (10th Cir. 1974), that the reduction in value must be determined as of the date of death by reference to what the executors have the power to do under State law. Because application of this view could have draconian results that would even more seriously encroach upon the marital and charitable shares than respondent’s determination in this case, I prefer the approach espoused in the text, which has both “wait and see” and nunc pro tunc aspects.