Court Opinion

ID: 4472350
Source: CourtListenerOpinion
Date Created: 2020-01-13 23:23:38.816238+00
Date Added: 2024-06-11T15:03:23.488939
License: Public Domain

Beghe, J., dissenting: The majority’s decision in this case, if allowed to stand, means that, for Quincy State Bank and its clients, “The game is done! I’ve won, I’ve won!”1 They took advantage of respondent’s lack of vigilance in a way that contrasts strongly with what the similarly related estates did in Estate of Howard v. Commissioner, 91 T.C. 329 (1988), revd. 910 F.2d 633 (9th Cir. 1990). Although the executors of the predeceasing husband’s estate in Estate of Howard originally filed an estate tax return making the QTIP election, they then filed a timely amended return disclaiming the trust’s eligibility for the QTIP marital deduction — because of the trust instrument’s treatment of undistributed income — and paid the additional estate tax. Acting consistently with that approach, the estate of the surviving spouse did not include the value of the trust in her gross estate and claimed a previously taxed property credit under section 2013 for the actuarial value of her interest in the trust, a credit that would not have been allowable if the trust had qualified for the marital deduction. Post mortem planning considerations no doubt dictated the coordinated positions taken by the two related estates in Estate of Howard, but at least those positions were consistent. In this case, Quincy State Bank, as the fiduciary of the related estates of Mr. Shelfer and decedent, has taken inconsistent positions: Mr. Shelter’s estate elected and was allowed the QTIP marital deduction for the property in the Share Number Two Trust; decedent’s estate now argues that none of the Share Number Two Trust property is included in her gross estate under section 2044.2 The period of limitations on assessment of an estate tax deficiency against Mr. Shelter’s estate has expired, and the majority opinion allows the whipsaw. Quincy State Bank preferred to let the statute run against Mr. Shelter’s estate, rather than avail itself of the closing agreement procedure3 that respondent promptly put in place in an effort to quell the uncertainty about allow-ability of the marital deduction created by our decision in Estate of Howard v. Commissioner, supra. See Notice 89-4, 1989-1 C.B. 624, as extended by Notice 90-46, 1990-2 C.B. 337.4  Our opinion in Estate of Howard v. Commissioner, supra, was criticized by private practitioners,5 and, of course, was reversed on appeal, Estate of Howard v. Commissioner, 910 F.2d 633 (9th Cir. 1990), revg. 91 T.C. 329 (1988). Although it’s too soon to say the tide of appellate review is running against us, it’s not too soon to subject our position to critical reexamination. This the majority opinion does not do. History of Marital Deduction and QTIP The marital deduction, as enacted in 1948, was intended to codify the long-standing notion that marital property belongs to the unitary estate of both spouses, and in so doing, postpone the payment of estate tax during the lifetime of the surviving spouse. Estate of Cavenaugh v. Commissioner, 100 T.C. 407, 415 (1993); see also Estate of Clayton v. Commissioner, 976 F.2d 1486, 1491, 1492 n.26 (5th Cir. 1992), revg. and remanding 97 T.C. 327 (1991). However, section 2056(b)(1) provided for an exception — as it continues to do— that denies the marital deduction if the property passing to the surviving spouse is terminable interest property. With the passage of time, Congress became aware that the marital deduction, as originally enacted, was posing a dilemma for many testators that was unacceptable, both as social policy and as tax policy: provide the maximum marital deduction to the surviving spouse at the risk that he or she would consume or otherwise dissipate the marital property to the detriment of their children; or instead ensure that, on the death of the surviving spouse, the property would pass to the children at the cost of losing the marital deduction in the estate of the predeceasing spouse. Estate of Cavenaugh v. Commissioner, supra at 415; see also Estate of Clayton v. Commissioner, supra at 1492. In 1981, Congress eliminated the dilemma by enacting the QTIP provision. The QTIP provision allows the predeceasing spouse to leave the surviving spouse a life interest in property that qualifies for the marital deduction without creating the risk that the property will not pass to their children on the death of the surviving spouse. H. Rept. 97-201 (1981), 1981-2 C.B. 352, 377-378; see also Estate of Clayton v. Commissioner, supra at 1492; Estate of Howard v. Commissioner, 910 F.2d at 636. The price to be paid for this privilege, consistent with “‘An essential feature of the Marital Deduction from its very beginning, * * * [is] that any property of the first spouse to die that passed untaxed to the surviving spouse should be taxed in the estate of the surviving spouse.’” Estate of Cavenaugh v. Commissioner, supra at 416 (quoting Estate of Clayton v. Commissioner, supra at 1491) (emphasis added). As enacted, the QTIP provision is a counterexception to the general exception of section 2056(b)(1), which denies a marital deduction to the gross estate for terminable interest property that passed from the deceased spouse to the surviving spouse. Estate of Clayton v. Commissioner, supra at 1494; Estate of Cavenaugh v. Commissioner, supra at 417 n.5. Accordingly, the QTIP provision is to be read liberally and interpreted broadly, consistently with its remedial objective. See Estate of Clayton v. Commissioner, supra; Estate of Howard v. Commissioner, 910 F.2d at 633. Reconsidering the Arguments The majority choose to continue to interpret section 2056(b)(7) narrowly. While the majority acknowledge that the statute “does not define the requirement that the surviving spouse * * * [be] entitled to all the income from the property,5” majority op. p. 16, they nevertheless conclude that the Share Number Two Trust does not qualify as a QTIP trust because the “stub” income was not payable to decedent’s estate or disposed of by her power of appointment. In so doing, the majority fail to confront the arguments of the Court of Appeals for the Ninth Circuit that we erroneously construed the QTIP provision, section 2056(b)(7), by treating it as being identical with section 2056(b)(5), and that we ignored the reasonable realities of trust administration. In Estate of Howard v. Commissioner, 91 T.C. at 334, we looked to the legislative history of section 2056(b)(5) for guidance in interpreting the “nearly identical” language found in the QTIP provision. While the general rule is that the same words in different parts of a statute are accorded the same meaning, id. (citing Sorenson v. Secretary of the Treasury, 475 U.S. 851, 860 (1986)), the legislative history of the two statutory provisions establishes that the intent of QTIP differs from that of section 2056(b)(5). The reason for the requirement, under section 2056(b)(5) and the regulations thereunder, that the surviving spouse have a power of appointment over any undistributed income in the trust was to assure that the undistributed income would be subject to estate tax in the surviving spouse’s estate. See Covey, “Recent Developments Concerning Estate, Gift and Income Taxation — 1988”, in The Twenty-Third Annual Philip E. Heckerling Institute on Estate Planning, par. 124.3(2), at 1— 172 (Gaubatz ed. 1989). However, section 2044 includes QTIP property in the surviving spouse’s estate, thereby producing the correct tax result and making such a power unnecessary. Id.; see also Evans, “Round Two: The IRS Responds to Howard”, 3 Probate & Property No. 4, at 14 (1989). Accordingly, our decision in this case is not constrained by the legislative history of section 2056(b)(5). See majority op. p. 16. The majority argue that section 2056(b)(7) is unambiguous (majority op. pp. 14, 16) when it provides that “The surviving spouse is entitled to all the income from the property’.6 However, in Estate of Howard v. Commissioner, 91 T.C. at 333, we implicitly acknowledged that the statutory language was ambiguous when we had recourse to the legislative history and concluded that “[the taxpayer’s] is the more reasonable reading of the statute.” Moreover, the Court of Appeals for the Ninth Circuit also found the phrase to be ambiguous, as evidenced by its conclusion that “the statute recognizes a QTIP in a trust where the spouse is entitled to all of the income that is at least payable annually.” Estate of Howard v. Commissioner, 910 F.2d at 635. Thus, we are free to accept the interpretation of the statute by the Court of Appeals for the Ninth Circuit if we find it more persuasive than petitioner’s. Contrary to the majority opinion, the Court of Appeals for the Ninth Circuit, in Estate of Howard v. Commissioner, 910 F.2d at 635, did not err when it concluded that the surviving spouse need be entitled to no more than all the income at the times of its annual or more frequent distribution. Although the statute does not explicitly impose such a limitation, majority op. p. 15, neither does the statute disavow it, see Estate of Howard v. Commissioner, 910 F.2d at 635. The Court of Appeals for the Ninth Circuit, by reading such a limitation into the statute, properly adopts the approach that the QTIP provision is to be interpreted broadly. The approach of the Court of Appeals for the Ninth Circuit also does not, as the majority incorrectly assume, glide over the fact that the decedent or her estate did not receive a portion of the Shared Number Two Trust income accumulated during her lifetime. This is because, for estate tax purposes, any income from QTIP property accumulated from the date of last distribution to the date of the surviving spouse’s death is included in the surviving spouse’s gross estate. Sec. 20.2044-1(d)(2), Estate Tax Regs.7 Thus, while “stub” income was not paid to the decedent, the regulations under section 2044 treat the decedent as having been entitled to such income, and cause it to be included in the surviving spouse’s gross estate for estate tax purposes.8  Section 2056(b)(7) merely requires that the surviving spouse be entitled to all the income payable during her lifetime, not that she be paid all the income during her lifetime. Inasmuch as the decedent is properly treated by section 2044 as having been entitled to the “stub” income for estate tax purposes, the interpretation by the Court of Appeals for the Ninth Circuit of section 2056(b)(7) is reasonable and proper. Because that interpretation better comports with the realities of trust administration and is more consistent with a view that the qtip provision should be read liberally and interpreted broadly, consistently with its remedial objective, I respectfully dissent from the majority opinion. I also join and applaüd Judge Wells’ analysis of the first sentence of the flush language of section 2056(b)(7)(B). Parker, Jacobs, Parr, and Wells, JJ., agree with this dissent.   Coleridge, “The Rime of the Ancient Mariner”, pt. Ill, st. 12.    Sec. 2044(a) provides that the gross estate includes any property to which sec. 2044 applies in which the decedent had a qualifying income interest for life. Thus, although sec. 2044 applies to any property for which a QTIP deduction was allowed under sec. 2056(b)(7) with respect to the transfer of such property to the decedent, sec. 2044(b)(1)(A), the property is not included in the decedent’s gross estate where the decedent did not have a qualifying income interest for life in the property, Estate of Cavenaugh v. Commissioner, 100 T.C. 407, 417 (1993); Estate of Howard v. Commissioner, 91 T.C. 329, 333 (1988), revd. on other grounds 910 F.2d 633 (9th Cir. 1990).    Although respondent issued a closing letter to Mr. Shelfer’s estate, this was not a closing agreement within the purview of sec. 7121. Schwager v. Commissioner, 64 T.C. 781, 789 (1975).    Respondent originally published Notice 89-4 in 1989-2 I.R.B. 14 (Jan. 9, 1989). Respondent then missed the boat by issuing the closing letter confirming the allowance of the marital deduction in Mr. Shelter’s estate on May 10, 1989, and failing, prior to expiration of the period of limitations on assessment of an estate tax deficiency against Mr. Shelter’s estate, May 13, 1990, to reopen the estate tax audit of Mr. Shelter’s estate and initiate the settlement procedure under the notices.    See Covey, “Recent Developments Concerning Estate, Gift and Income Taxation — 1988”, in The Twenty-Third Annual Philip E. Heckerling Institute on Estate Planning, par. 124.3(2), at 1 — 168 (Gaubatz ed. 1989); Blattmachr & Blattmachr, “A New Quirk in QTIPS: The Estate of Rose Howard”, 127 Trusts & Estates No. 11, at 43 (1988); Evans, “Round Two: The IRS Responds to Howard”, 3 Probate & Property No. 4, at 12 (1989). For some comments to the contrary from the vale of academe, see Odeku, “Section 2056(b)(7) Qualified Terminable Interest Property Marital Deduction in Estate of Rose D. Howard v. Commissioner”, 44 Tax Law. 907 (1991), and O’Connor, “The Qualified Terminal Property Trust: Should Proposed Regulation Be Followed?”, 54 Mo. L. Rev. 1079 (1989). There is something to be said for the view, to which all the commentators agreed, that professional prudence, in the face of the Tax Court’s decision in Estate of Howard v. Commissioner, 91 T.C. 329 (1988), revd. 910 F.2d 633 (9th Cir. 1990), where wills and trusts had been drafted in reliance on the proposed regulation and could be changed, and where State law did not provide that undistributed income on hand at death would be paid to the deceased beneficiary’s estate, dictates that they should have been amended to provide that undistributed income should be payable to the life beneficiary’s estate or made subject to her general power of appointment. Where this change could not be made because the testator or grantor had died, consideration could have been given to having a construction proceeding to excise the offending language. But the availability of these remedies does not relieve this Court of the responsibility of critically reexamining the position it took in Estate of Howard, in cases such as this in which such remedies were not availed of.    If the statute were unambiguous, the Court and the Commissioner would be required to give effect to clearly expressed Congressional intent, and any final regulation that was inconsistent with that intent would be invalid. See Chevron U.S.A. v. National Resources Defense Council, 467 U.S. 837, 842-843 (1984). The majority opinion unnecessarily casts doubt on the validity of what is now the final regulation, sec. 20.2056(b)-7, Estate Tax Regs. In so doing, the majority opinion raises the specter that the Court is of the view that the final regulation is invalid and that the House bill, referred to by the majority (majority op. note 8), will have to be enacted in order to resolve the problem generally, if only prospectively.    1 do realize that sec. 20.2044-l(d)(2), Estate Tax Regs., is effective with respect to decedents who die after Mar. 1, 1994, and that it was a proposed regulation on the date of decedent’s death and the dates on which petitioner filed its estate tax return and the petition in this case. However, I find it to be a reasonable and persuasive interpretation of an otherwise ambiguous statute.    It would appear that the undistributed income ultimately payable to the remainderman would be “income in respect of a decedent” entitled to the sec. 691(c) deduction for the estate tax attributable to its inclusion in the beneficiary’s estate under sec. 2044.