Court Opinion

ID: 4472271
Source: CourtListenerOpinion
Date Created: 2020-01-13 23:21:34.995936+00
Date Added: 2024-06-11T14:50:15.612951
License: Public Domain

Halpern, J., concurring in part and dissenting in part: I. Limitations on Deductions Based on the 1982 Will A. Settlement Agreement: Marital Deduction Mrs. Hubert challenged the will of her late husband on the ground that it was executed under undue influence in favor of certain charitable beneficiaries. Pursuant to the second and final settlement agreement (the settlement agreement), to which respondent was not a party, Mrs. Hubert received from the estate of Mr. Hubert (the estate) an amount in excess of what she would have received under her late husband’s last will. The majority holds that the marital deduction is determined based on the amount received by Mrs. Hubert under the settlement agreement. Majority op. p. 321. Necessarily, the majority has found that Mr. Hubert’s last will (the 1982 will), or at least the second codicil thereto (which reduced the amount Mrs. Hubert was to receive), is invalid, as having been procured by undue influence. See Ga. Code Ann. sec. 53-2-6 (Michie 1982) (undue influence invalidates a will). I cannot agree with that finding because I believe that it is unsupported by the evidence. 1. Property Must Pass From the Decedent Section 2056 permits a marital deduction only with respect to property that “passes or has passed from the decedent to his surviving spouse” (emphasis added). Accordingly, if property passes from the decedent to other than his surviving spouse, no marital deduction is allowable, even if the property is promptly relinquished to the surviving spouse. E.g., Estate of Suzuki v. Commissioner, T.C. Memo. 1991-624. Of course, a dispute may arise as to whether, or to what extent, property does pass from the decedent to a surviving spouse. An agreement may be reached whereby such claims are settled other than by decision of a court. As a rule, the Commissioner is not a party to such agreements. In such case, the Commissioner may or may not accept the agreed allocation to the surviving spouse as reflective of what actually passed to her from the decedent. At one time, this Court took the position that, so long as the settlement agreement was “made in good faith as a result of arm’s-length bargaining”, property received by the surviving spouse necessarily had “passed from the decedent” and thus might qualify for the marital deduction. Estate of Barrett v. Commissioner, 22 T.C. 606, 611 (1954). That view, however, has been repudiated by the Supreme Court, see Commissioner v. Estate of Bosch, 387 U.S. 456 (1967), and, indeed, today, this Court appears to abandon it. Majority op. p. 319. 2. The Inquiry at Hand Correctly, I believe, the majority characterizes the nature of our inquiry as follows: “In deciding whether the surviving spouse has enforceable rights in a decedent’s estate, courts must look behind any settlement agreement to ensure that the claim on which it is based is valid.” Majority op. p. 319. Also, like the majority, I would not ignore the settlement agreement. Indeed, the regulations contemplate that a settlement agreement may provide a bona fide evaluation of the rights of the spouse in the decedent’s estate. See sec. 20.2056(e)-2(d)(2), Estate Tax Regs. Based on the majority’s analysis, however, it is difficult for me to see how the majority has not simply accepted the bona fides of the settlement agreement as determinative of (1) the invalidity of Mr. Hubert’s will (or, at least, the second codicil thereto) and, consequently (2) the validity of Mrs. Hubert’s claim. If the majority has done that, then it has merely repackaged old (and bad) wine into new bottles, see Estate of Barrett v. Commissioner, supra, and not undertaken the full investigation it has promised. 3. Burden of Proof Petitioner has the burden of proving that Mrs. Hubert was entitled, under decedent’s last valid will, to the entire amount received under the settlement agreement. Rule 142(a); cf. Estate of Rowan v. Commissioner, 54 T.C. 633, 639 (1970) (if, pursuant to Commissioner v. Estate of Bosch, supra, we must determine property rights under State law, under normal rule assigning burden of proof, petitioner has burden of proving facts that support his assignment of error). To carry that burden, petitioner must prove its assertion that the second codicil to the 1982 will (or perhaps the 1982 will itself) is the product of undue influence and therefore invalid. 4. The Settlement Agreement The only direct evidence relied on by the majority in reaching its conclusion that petitioner has carried its burden is the settlement agreement itself. The settlement agreement, however, does not even assert that any of decedent’s wills or codicils is invalid on account of undue influence, and, thus, by its language alone, cannot constitute evidence in support of that proposition.1 Nevertheless, accepting for the sake of argument that Mrs. Hubert’s claim of undue influence is not without some merit, the settlement agreement might constitute persuasive evidence of the validity of that claim (i.e., that the will or codicil was obtained by undue influence) if the amount received pursuant to the settlement agreement approximated what Mrs. Hubert would have received had she prevailed on her claim in the absence of a compromise. In other words, we might equate the strength of her claim with the degree of her financial success. 5. Mrs. Hubert’s Financial Success On the whole, the majority gives us scant information to judge the degree of Mrs. Hubert’s financial success. We know only that, pursuant to the settlement agreement, she received in value (1) more than half of what she would have received if she had succeeded in having the second codicil declared invalid and (2) substantially all of what she would have received if she had succeeded in having the 1982 will itself declared invalid. Majority op. p. 320. We are provided with no numbers or any finding as to whether the will itself or only a codicil is invalid. The majority does state that the settlement agreement amended the 1982 will and codicils by deleting that provision in the will that disposed of the residuary estate, and all related codicil provisions. Majority op. p. 317. Such evidence would thus suggest that an assumption of the parties to the settlement agreement was that the 1982 will otherwise remained intact.2 From the record, we also learn (although the majority does not tell us) that Mrs. Hubert’s interest in the residue of the estate under the 1982 will and codicils had a value equal to only 48 percent of the value of the residue and that the value of what she received under the settlement agreement had a value equal to approximately 50 percent of that residue. Had she succeeded in having the second codicil declared invalid, she would have restored her power of appointment over the residue and thus would have enjoyed 100 percent of its value. It is thus true, as the majority claims, that, under the settlement agreement, by obtaining approximately 50 percent of the residue, she received in value more than half of what she would have received on her primary claim (that the second codicil was invalid). Nevertheless, that is not the important comparison. The important comparison is between what she received and what she would have received had she not made any claim in the first place. That comparison is between 48 percent of the residue (what she would have received under the second codicil) and approximately 50 percent (what she did receive). Thus, as a measure of her success, she received approximately 4 percent of what she claimed. That is not persuasive evidence that her claim was strong. 6. Other Evidence Putting aside Mrs. Hubert’s apparent lack of financial success, we are left with a finding by the majority based on the bona fides of the transaction: this was a settlement among adverse parties with significant interests to protect in the litigation, including the Georgia attorney general and the Georgia revenue commissioner, whose right to participate in the litigation was litigated all the way to the Supreme Court of Georgia. The settlement agreement also was approved by the Superior Court of Cobb County. Under Georgia law a settlement agreement sustaining a will challenge can be approved by the superior court only “after a hearing * * * at which the judge finds * * * that the caveat is meritorious.” * * * [Majority op. pp. 320-321.] The regulations establish a presumption that a transfer to a surviving spouse is in recognition of enforceable rights in the decedent’s estate if it is pursuant to a decision by a local court upon the merits in an adversary proceeding following a genuine and active contest. Sec. 20.2056(e)-2(d), Estate Tax Regs. There is no indication that such a proceeding occurred here, and the majority fails to explain what weight (or meaning) it gives to the superior court’s finding that the settlement agreement was “meritorious”. It is unclear whether the majority takes the superior court’s finding to mean anything more than that, if proven, Mrs. Hubert’s claim would entitle her to the relief prayed for. If so, then that does not constitute any evaluation of the strength of her claim, or convincing evidence that the 1982 will (or second codicil) was invalid. Likewise, what are we to make of the majority’s reliance on the “adverse”, “significant” interests of the parties to the settlement agreement, without the majority, at the same time, taking into account the degree of Mrs. Hubert’s success? In Estate of Barrett v. Commissioner, 22 T.C. 606, 611 (1954), we dealt with the settlement of a surviving spouse’s claim against the estate and said: Our finding as a fact that * * * [the surviving spouse’s] claim was a valid one made in good faith and settled as the result of arm’s-length negotiations is enough to qualify it as a bona fide claim within the purview of the regulations [the predecessor to sec. 20.2056(e)-2(d)(2), Estate Tax Regs.]. If we disregard the degree of Mrs. Hubert’s success, are we not right back to our position in Estate of Barrett (looking to the bona tides of the agreement), which today we seem to repudiate? 7. Commissioner v. Estate of Bosch The lesson of Commissioner v. Estate of Bosch, 387 U.S. 456 (1967), is that respondent, having been absent from the State court proceeding that established rights to the decedent’s property, is entitled to her day in Federal court, unless she could not there prevail. Here, we have a question of fact, for which petitioner bears the burden of proof. The evidence in this case, as analyzed by the majority, does not convince me that Mr. Hubert’s 1982 will (or at least the second codicil thereto) was invalid. Indeed, based on the lack of Mrs. Hubert’s financial success, I would find to the contrary. For that reason, I cannot agree with the majority’s holding that the marital deduction is determined based on all of what Mrs. Hubert received under the settlement agreement, and would limit the deduction to what she received under Mr. Hubert’s 1982 will and the codicils thereto. B. Settlement Agreement: Charitable Deduction Apparently, respondent has conceded that, whether or not we find decedent’s last will (or the second codicil thereto) to be invalid, the estate is entitled to a charitable deduction equal to the lesser of the amount the charity would have received under the 1982 will or the amount it actually received under the settlement agreement. Majority op. p. 322. We thus need not determine whether the estate’s charitable deduction is limited to the amount that would have been received under decedent’s last valid will, as properly interpreted under State law.3 Assuming that the majority here has found that the second codicil to decedent’s 1982 will, but not the will itself, is invalid, the amount passing to the charity pursuant to the settlement agreement may well exceed the value of what it was entitled to pursuant to such will (i.e., the amount of the residue not appointed by Mrs. Hubert). Respondent has stipulated that “the Second Settlement Agreement modified the 1982 Will and three Codicils so that the split interest provisions under I.R.C. section 2055(e) [do] not bar a deduction for the charitable gift”. Although I am by no means convinced that a settlement agreement can transform a nonqualifying interest into a qualifying interest, I would simply accept respondent’s concession in this case and leave that question for another day. II. Allocation of Expenses The second issue addressed by the majority is whether the marital and charitable deductions must be reduced by expenses allocated to income of the estate. The majority holds that such deductions need not be so reduced. Majority op. p. 331. With regard to the marital deduction, the majority considers section 2056(b)(4) and section 20.2056(b)-4(a), Estate Tax Regs., and finds that the trustee’s discretion to pay administration expenses out of income is not a material limitation on the right to receive income. Majority op. p. 325. In his separate opinion, Judge Beghe calculates the relevant amounts of income and administration expenses. Like Judge Beghe, I cannot conclude that what the majority characterizes as the “trustee’s discretion” is an immaterial limitation on the surviving spouse’s right to receive income from property passing to her, which is to be disregarded in determining the value of such property. See sec. 20.2056(b)-4(a), Estate Tax Regs. I write separately from Judge Beghe, however, because I believe that the majority’s error runs much deeper than failing to recognize a material limitation on the right to receive income in this case. The majority adopts an approach that (1) appears inconsistent with section 20.2056(b)-4(a), Estate Tax Regs., (2) is premised upon a misconception concerning the consequence of probate accounting allocations to income and principal in valuing the gross estate and interests therein, and (3) is inconsistent with precedent of this Court. A. Inconsistency With Section 20.2056(b)-4(a), Estate Tax Regs. Section 20.2056(b)-4(a), Estate Tax Regs., provides that “In determining the value of the interest in property passing to the spouse account must be taken of the effect of any material limitations upon her right to income from the property.” (Emphasis added.) The majority resists that directive, however, and adopts a theory under which it appears that no limitation on a surviving spouse’s right to income would be taken into account, whether material or immaterial. Under the majority’s approach, the allocation, for probate accounting purposes, of estate administration expenses between income and principal is critical. Expenses allocated to principal are in all events taken into account in valuing the marital deduction: If the administration expenses were paid out of principal, they would reduce the amount of such principal received by the beneficiaries and would reduce the marital and charitable deductions. [Majority op. p. 323.] Income earned by the estate, in the majority’s view: has no effect on the estate for Federal estate tax purposes. It is accounted for separately in the estate’s probate account and is taxed separately on the estate’s Forms 1041. [Majority op. p. 323; emphasis added.] Such income (in the majority’s view) having no effect on the estate, it is difficult to see how the materiality of any charge against it for administration expenses matters in the least. Indeed, the majority states: income earned on estate property is not included in the gross estate. * * * As a result, under section 2056(a), such income does not lead to an increase in the amount of the marital deduction requiring a corresponding decrease for payment of administration expenses chargeable against income of the estate. [Majority op. p. 329.] In the majority’s view, apparently, probate income simply is irrelevant to the marital deduction. The majority appears to believe that probate income neither increases nor decreases the surviving spouse’s share of property passing from the deceased. Thus, the majority’s rationale is not dependent on the burden of administration expenses being an immaterial limitation on the surviving spouse’s right to income from the property. See sec. 20.2056(b)-4(a), Estate Tax Regs. It is enough for the majority that the expenses are paid from income rather than principal. See majority op. p. 323. The majority cites two cases in support of its broad dichotomy between principal and income: Estate of Street v. Commissioner, T.C. Memo. 1988-553, affd. in part, revd. in part and remanded 974 F.2d 723 (6th Cir. 1992), and Estate of Richardson v. Commissioner, 89 T.C. 1193 (1987). Neither case, however, explains how we might be justified in declining to take into account material limitations on a surviving spouses’s right to income, as section 20.2056(b)-4(a), Estate Tax Regs., directs. Indeed, neither case contains any meaningful discussion of that regulation, and Estate of Street fails even to mention it. Accordingly, I believe that the theory adopted by the majority is inconsistent with section 20.2056(b)-4(a), Estate Tax Regs., and, therefore, invalid. B. The Majority’s Misconception About Probate Accounting Allocations to Income and Principal In distinguishing between charges to probate-accounting principal and income,4 the majority relies upon the assumption that, although principal is included in the gross estate, income is not. (“[Ijncome earned on estate property is not included in the gross estate.” Majority op. p. 329.) That distinction, however, simply will not hold. The gross estate includes, generally, the decedent’s interest in “all property, real or personal, tangible or intangible, wherever situated.” Secs. 2031, 2033. Such (included) property interests are valued as of a particular time: either the date of decedent’s death or the alternate valuation date (hereinafter the appropriate valuation date). Secs. 2031 and 2032. Nothing in that scheme supports the proposition that either principal or income is includable in the gross estate to the exclusion of the other. Rather, because the value of the gross estate consists of decedent’s interest in both principal and income, both of those components are included in the gross estate.5 Only by considering principal and income as a unit, and only by discounting them together to their present value as of the appropriate valuation date, can the gross estate properly be valued. The allocation between the two is not relevant to that determination. Thus, consider a zero coupon bond included in the gross estate at a value of $1,000. One year after the appropriate valuation date, the bond is sold for $1,100. Proceeds are allocated $1,000 to principal and $100 to income. Implicitly, the rate of return to the estate with regard to the bond is 10 percent. Thus, the appropriate-valuation-date present values of such principal and income are, approximately, $910 and $90, respectively, or $1,000, together. If the bond were sold 2 years after the appropriate valuation date for $1,210, with $1,000 allocated to principal and $210 to income, the appropriate-valuation-date present values of principal and income would be, approximately, $826 and $174, respectively, or, again, $1,000, together. Only if the bond is sold immediately on the appropriate valuation date for its value of $1,000 would the allocation to principal of $1,000 have an appropriate-valuation-date present value of the same amount. Comparing principal and interest, on the one hand, to the value of assets included in the gross estate, on the other, presents somewhat of an apples-and-oranges problem. Unless adjustments are made for differences in the times of measurement, the comparison can be misleading. Accordingly, I believe the majority is undone by its view that income earned on estate property is not included in the gross estate. Once it is accepted that income earned on estate property (as anticipated at the appropriate valuation date) is included in the gross estate, the next question is whether, but for the use of such income to pay administration expenses, it would be received by the surviving spouse or charitable beneficiary. If the answer is yes, then it follows easily that, when such income is used for administration expenses, rather than received by the surviving spouse or charitable beneficiary, the value of the interest passing from the decedent to the surviving spouse or charitable beneficiary is decreased. Thus, for example, if the residue of the probate estate is bequeathed to a qualifying charity, and administration expenses properly are paid from such residue, then the value of the interest passing from the decedent to the charitable beneficiary is less than the estate-tax value of the residue, regardless of whether, for probate accounting purposes, such expenses properly are allocable to income or principal with regard to the assets of the residue. Two Courts of Appeals have taken precisely that position. The Court of Appeals for the Federal Circuit recently has concluded that administration expenses charged to the residue of the probate estate reduce the estate-tax value of that residue for purposes of the charitable deduction. Burke v. United States, 994 F.2d 1576, 1581 (Fed. Cir. 1993) (“In sum, when a decedent dies, a finite amount known as the gross estate is legally created. Any deductions for expenses incurred in administering the estate are theoretically derived from this amount and, regardless of the actual source of payment, must be accounted for within the gross estate.”). The Court of Appeals for the Fifth Circuit has expressed similar sentiments: No amount of legalistic legerdemain can produce from * * * [the cited] cases “the principle that where expenses of administration are paid out of post-mortem income, the amount of corpus available for charity is not diminished by such payments * * * ” as argued by the executors. Alston v. United States, 349 F.2d 87, 89 (5th Cir. 1965); cf. Estate of Horne v. Commissioner, 91 T.C. 100, 109 (1988) (amount of residue qualifying for estate-tax charitable deduction must be reduced by executor’s commissions chargeable under State law to principal but actually paid from post mortem income). For the foregoing reasons, I think the majority errs in assuming that the gross estate does not include income earned on estate property during estate administration and therefore errs, on facts such as here existing, in failing to reduce the marital and charitable deductions where the surviving spouse or charitable beneficiary does not receive such income from the estate. C. Inconsistency With Precedent of This Court In my view, the majority gives insufficient attention to Estate of Wycoff v. Commissioner, 59 T.C. 617 (1973), which, until overruled, should be controlling herein. In Estate of Wycoff, the executor had the discretion to pay certain expenses from either the marital trust or the nonmarital trust. We held that the executor’s discretion to invade the marital trust reduced the value of the marital deduction. Our reasoning, though debatable, was quite clear: (1) The interest passing to the surviving spouse is measured at the appropriate valuation date (later events are irrelevant), and (2) the possibility (existing at that time) that the executor would choose to invade the marital, rather than nonmarital, trust reduced the value of the interest passing at such time to the surviving spouse. Id. at 622-623. The Mappes case [318 F.2d 508, 510-511 (10th Cir. 1963)] makes it clear that for purposes of the marital deduction whether an interest passing to the surviving spouse qualifies is a question which must be determined at the time of the decedent’s death. It is not a determination affected by later events which may or may not happen. The case of Estate of Albert L. Rice [41 T.C. 344 (1963), vacated and remanded sub nom. Boston Safe Deposit & Trust Co. v. Commissioner, 345 F.2d 625 (1st Cir. 1965)], supra, stands for the application of this proposition to the valuation area. In that case a marital deduction was limited to the interest passing to the surviving spouse reduced by its apportioned share of Federal estate and State inheritance taxes. This was so in spite of the fact that the trustee exercised his discretionary power and paid all the taxes from the assets of the nonmarital trust. [Id. at 623.] The majority dismisses Estate of Wycoff because the executor’s choice there was between marital and nonmarital trusts, whereas here the choice was between principal and income. Majority op. p. 330. In so doing, the majority declines “to read Estate of Wycoff more broadly to make the result depend entirely on the discretion of the executor” and confines Estate of Wycoff “to its facts and to the more narrow interpretation which [it believes] was intended by the Court.” Majority op. p. 331. The majority fails, however, to specify any interpretation of Estate of Wycoff that would be consistent with the result reached today and, indeed, I believe there is none. Although I am by no means convinced that Estate of Wycoff reaches the proper result, I think the majority is remiss in failing to follow Estate of Wycoff, which it declines to overrule. III. Discounting of Marital and Charitable Portions The third issue is whether the marital and charitable portions must be discounted by 7 percent per annum to take into account income deemed to be earned by the residuary under Georgia law. See Ga. Code Ann. sec. 53-2-97 (Michie 1982). The majority observes, and the parties agree, that the marital and charitable deductions should be based on the date-of-death value of the residuary. Majority op. p. 332. The majority continues to observe that the actual date-of-death value of the residuary is known (or at least “definitely determinable”). Majority op. p. 332. Accordingly, I agree with the majority that no adjustment is necessary to arrive at that figure. Beghe, J., agrees with this opinion.   I am by no means convinced that, if the settlement agreement did make an assertion in that regard (as it might have if such agreement resolved other disputes as well and the parties thereto agreed as to who purportedly prevailed on each issue), such assertion would be credible evidence. That question, however, need not be resolved today.    That also would seem to be the assumption made by the majority. In a companion case to this case, Estate of Hubert v. Commissioner, T.C. Memo. 1993-482, Judge Clapp, the author of the majority opinion here, addresses a charitable bequest passing pursuant to the 1982 will (and not affected by the settlement agreement). The 1982 will is quoted verbatim as giving rise to the bequest. The 1977 will is not mentioned.    Compare Estate of "Warren v. Commissioner, 93 T.C. 694, 726-727 (1989) (where (1) acknowledging the application of Commissioner v. Estate of Bosch, 387 U.S. 456 (1967), to our evaluation of an “agreed final judgment” settling the rights of a charitable beneficiary to a portion of the residue of the decedent’s estate (2) we rejected the agreed judgment, determining that it incorrectly applied State law), revd. and remanded 981 F.2d 776 (5th Cir. 1993) with Estate of Warren v. Commissioner, 981 F.2d 776, 782 (5th Cir. 1993) (where the Court of Appeals for the Fifth Circuit (1) dismissed Estate of Bosch as inapplicable and (2) declined to apply the so-called enforceable rights doctrine to the charitable deduction: “But where the settlement is a bona fide resolution of a truly adversarial dispute as to rights of the charity under a will of the decedent, then the forgoing requirement [that what is received by the charity must be received from the decedent and not merely from the beneficiaries of the estate] would appear to be satisfied, for in such a case what the charity receives it receives as a result and by virtue of the provisions made for it in the decedent’s will, whether or not it receives precisely what it would be entitled to if no settlement had been made.”), revg. and remanding 93 T.C. 694 (1989).    Principal and income are probate-accounting concepts that sometimes are necessary to determine, for probate accounting purposes, the allocation of post mortem charges or changes in value among temporal interests carved out of probate property (e.g., a life estate and remainder). That distinction is not necessarily significant for a given tax purpose.    It is true, of course, that income actually earned on such property during the period of estate administration is not included in the gross estate. The gross estate, however, does include the discounted value of post mortem income expected to be earned during estate administration.