Carol Patterson etc. v. United States ( 1999 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 98-3648
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Carol S. Patterson; Commerce Bank, *
N.A., as Co-Executors for the Estate of *
Robert M. Patterson, *
*
Appellants, *
*
v. * Appeal from the United States District
* Court for the Western District of Missouri.
United States of America, *
*
Appellee. *
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Submitted: April 22, 1999
Filed: May 18, 1999
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Before BOWMAN, Chief Judge, ROSS and FAGG , Circuit Judges.
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ROSS, Circuit Judge.
Carol S. Patterson and Commerce Bank, N.A., co-executors for the estate of Robert
M. Patterson, appeal from a judgment of the district court upholding a decision of the
Internal Revenue Service (IRS) disallowing a portion of a marital deduction. We reverse
and remand.
On November 16, 1989, the decedent executed a will and a trust agreement.
Article I of the will “direct[ed][the] Executor to pay out of the residue of [the] estate
any and all . . . death taxes.” However, the article also provided that in the event there
was a trust in existence at the time of death, "any part or all . . . of such . . . taxes may,
in the discretion of the Trustee . . ., be paid from the assets thereof.” Article IV of the
will provided that the residue of the estate was to be added to the trust.
Article VII of the trust agreement created a marital trust, directing the trustee to
“set aside a ten percent fractional share of [the] remainder of the Trust Estate,
computed before any reduction for . . . death taxes.” Article X of the trust agreement
provided that the trustee, “in its sole discretion, if it deems it expedient and in the best
interest of Donor’s beneficiaries,” pay death taxes from the trust estate.
The estate paid $4,666,567.61 in federal death taxes from the trust estate. The
estate tax return reflected the value of the assets passing to the marital trust was
$629,504.31, which was ten percent of the value of the remainder of the trust estate as
augmented by the residue of the probate estate computed before reduction for death
taxes. The co-executors elected to treat the full value of the marital trust as a qualified
terminable interest property (QTIP) deduction under 26 U.S.C. § 2056(b)(7). The IRS
disallowed $74,242.87 of the marital deduction, contending taxes had to be paid from
the probate estate. Under its calculations, because the death taxes exceeded the value
of the probate estate, there was no probate residue to be added to the trust estate.
After paying the additional taxes and after the IRS denied a claim for a refund,
the co-executors filed an action in the district court. The court granted the IRS’ motion
for summary judgment, holding that Article I of the will unambiguously directed that
taxes be paid from the probate estate.
On appeal, the co-executors argue the district court erred in holding that the will
unambiguously directed that taxes be paid from the probate estate. It is undisputed that
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interpretation of the will and apportionment of death taxes is governed by Kansas state
law. See Riggs v. Del Drago, 317 U.S. 95, 97-98 (1942). Our task "is to ascertain the
testator's intent from the four corners of the will." In re Estate of Cline, 898 P.2d 643,
646 (Kan. 1995). We must give "every single provision thereof a practicable operative
effect." Drach v. Ely, 703 P.2d 746, 749 (Kan. 1985) (internal quotation omitted).
Moreover, under Kansas law, "[t]he will and the trust [agreement] must be considered
and construed together to determine which document shall govern the apportionment
of death taxes." In re Estate of Pickrell, 806 P.2d 1007, 1011 (Kan. 1991).
Although Article I of the will directed that the co-executors pay taxes from the
probate estate, the district court erred by disregarding that the article also provided that
if a trust was in existence at the time of death, the trustee had discretion to pay death
taxes from the trust estate. Considering the will and the trust agreement together, we
agree with the co-executors that the documents unambiguously express the decedent's
intent to give the trustee discretion to pay taxes from the trust estate. Indeed, in its
brief the IRS concedes that "[c]learly, the language of the will and the trust agreement
gave the . . . trustees . . . the discretion to pay the taxes out of the trust estate."1 In
addition, Article VII of the trust agreement is a clear and unambiguous direction that
the marital share be unburdened by death taxes.
Because of its concession, on appeal the IRS presents an alternative ground for
affirmance. It argues even if the trustee had discretion to pay taxes from the trust
1
Despite its concession in its brief, at oral argument the IRS asserted that the will
was ambiguous as to the trustee's discretion. Even if it were ambiguous, under Kansas
law, "it is presumed that [the decedent] intended his estate and surviving spouse to have
the fullest benefit of the marital deduction." Jackson v. Jackson, 536 P.2d 1400, 1406
(Kan. 1975). Contrary to the IRS' suggestion at argument, "[i]t would, indeed, be
difficult in the usual case . . . to attribute to the testator an intention that his estate
should pay an increased estate tax and that his widow's distributable share should be
reduced." Id. (internal quotation omitted).
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estate, the discretion is irrelevant as a matter of federal law. The IRS contends the
value of the probate estate must be fixed as of the date of the decedent's death, and not
when the trustee exercises his discretion, which is necessarily post-mortem. The IRS
relies on Jackson v. United States, 376 U.S. 503, 507-11 (1964), in which the Supreme
Court held that a widow's allowance arising under state law which had not yet vested
as of her husband's date of death could not be included as part of the marital deduction
because it was a terminable interest.
"Jackson is readily distinguishable from this case and not in point." Estate of
Spencer v. Comm'r, 43 F.3d 226, 231 (6th Cir. 1995). "In the instant case, the
decedent used an estate planning device unknown when Jackson was decided -- the
QTIP . . .." Id.2 Before the QTIP was enacted in 1981, "if the property passe[d] to the
surviving spouse in the estate of the first to die and also escaped taxation in the estate
of the surviving spouse because the property constituted a 'terminable interest' -- such
as a simple life estate -- . . . there [wa]s no marital deduction." Estate of Robertson v.
Comm'r, 15 F.3d 779, 782 (8th Cir. 1994). Congress " 'invented [QTIP] to produce
the desired qualitative expansion of the classes of property eligible for the Marital
Deduction, i.e., to extend, for the first time ever, the availability of the Marital
Deduction to those types of terminable interests in property that Congress deigned to
"qualify." ' " Id. at 783 (quoting Estate of Clayton v. Comm'r, 976 F.2d 1486, 1493 (5th
Cir. 1992)). In order to qualify for QTIP deductibility, property must pass from the
decedent to the spouse, the spouse must have a qualifying income interest for life, and
2
Estate of Wycoff v. Comm'r, 506 F.2d 1144 (10th Cir. 1974), cert. denied, 421
U.S. 1000 (1975), also is not helpful to the IRS. Not only was Wycoff a pre-QTIP
case that relied on Jackson, the court believed that "[i]n the absence of a clear and
unambiguous direction [by the decedent], property transferred to the surviving spouse
must bear part of the estate tax burden." Id. at 1149-50. In contrast here, there was
a "clear and unambiguous direction" that the marital share be unburdened by taxes. We
note that the tax court has "confine[d] Estate of Wycoff to its facts." Estate of Hubert
v. Comm'r, 63 F.3d 1083, 1089 (11th Cir. 1995) (adopting tax court opinion), aff'd, 520
U.S. 593 (1997).
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an election must be made on the tax return. 26 U.S.C. § 2056(b)(7)(B)(i). A qualifying
income for life is one in which "no person has a power to appoint any part of the
property to any person other than the surviving spouse." Id. at § 2056(b)(7)(B)(ii).
In the district court the IRS stipulated that the marital trust was a QTIP trust. On
appeal the IRS claims it is not challenging the trust's QTIP status, but is challenging
whether the trustee's discretion prevented property from passing to the trust and
whether the discretion is an impermissible power of appointment. Although a party is
bound by a stipulation, Gaworski v. ITT Commercial Fin. Corp., 17 F.3d 1104, 1112
(8th Cir.), cert. denied, 513 U.S. 946 (1994), we will assume the issues are not within
the scope of the stipulation, but find they are without merit. In Robertson, this court
rejected similar arguments by the IRS concerning a trustee's discretion to make a QTIP
election. Following the Fifth Circuit's decision in Clayton, 976 F.2d at 1486, we held
that QTIP eligibility for property is determined at the time of an election, not at the time
of a testator's death, and that the discretion did not prevent property from passing from
the decedent to the spouse. Robertson, 15 F.3d at 782-84 & n.1. As was stated in
Clayton, and we think applicable here, the IRS' argument "that if anything occurs after
the death of the testator . . . to prevent even a modicum of property which under the
testament would have passed from the decedent to the surviving spouse, the [marital]
deduction is unavailable . . . ignore[s] the overarching truism that many acts must be
done and many facts must be determined after the death of the testator in order to
determine the taxable estate." 976 F.2d at 1498. See also Spencer, 43 F.3d at 228
(rejecting IRS' arguments that executor's discretion concerning amount of property to
be placed into QTIP trust was prohibited power of appointment or prevented property
from passing as "counter-intuitive and against common sense").
Accordingly, the case is reversed and remanded for further proceedings not
inconsistent with this opinion.
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A true copy.
Attest:
CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT
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