Estate of Willis Edward Clack, Marshall & Ilsley Trust Company, Co-Personal Representative, and Richard E. Clack, Co-Personal Representative v. Commissioner

106 T.C. No. 6UNITED STATES TAX COURT
ESTATE OF WILLIS EDWARD CLACK, DECEASED, MARSHALL &
ILSLEY TRUST COMPANY, CO-PERSONAL REPRESENTATIVE, AND
RICHARD E. CLACK, CO-PERSONAL REPRESENTATIVE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12557-91. Filed February 29, 1996.
Decedent’s will gave his surviving spouse an
income interest in certain marital trust property but
provided that if decedent’s coexecutors did not elect
to treat the property as "qualified terminable interest
property" (QTIP) within the meaning of sec. 2056(b)(7),
I.R.C., such property would instead be administered
under the terms of a nonmarital family trust.
Held: The marital trust property is QTIP within
the meaning of sec. 2056(b)(7), I.R.C. This Court's
opinions in Estate of Robertson v. Commissioner, 98
T.C. 678 (1992), revd. 15 F.3d 779 (8th Cir. 1994);
Estate of Clayton v. Commissioner, 97 T.C. 327 (1991),
revd. 976 F.2d 1486 (5th Cir. 1992); and Estate of
Spencer v. Commissioner, T.C. Memo. 1992-579, revd. 43
F.3d 226 (6th Cir. 1995), are no longer followed.
Robert L. Kamholz, Jr., and John M. Byers, for petitioner.
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Michael J. Calabrese, for respondent.
WELLS, Judge:* Respondent determined a deficiency of
$2,284,008 in the Federal estate tax of the Estate of Willis
Edward Clack (estate). Unless otherwise indicated, all section
references are to the Internal Revenue Code in effect on the date
of death of Willis Edward Clack (decedent), and all Rule
references are to the Tax Court Rules of Practice and Procedure.
The issue to be decided in this Opinion is whether the interest
of decedent’s surviving spouse in certain marital trust property
is "qualified terminable interest property" (QTIP) within the
meaning of section 2056(b)(7), where the passage to the surviving
spouse of the interest in the property is contingent upon the
coexecutors’ QTIP election as to the property.1
FINDINGS OF FACT
Some of the facts were stipulated for trial pursuant to Rule
91. The parties’ stipulations are incorporated into this Opinion
by reference and are found accordingly.
*
This case was reassigned to Judge Thomas B. Wells by Order
of the Chief Judge.
1
If the interest in such property is QTIP, then an additional
issue must be decided, to wit, whether the estate, inheritance,
and any other succession taxes are to be paid from the assets
passing into the marital trust or from the stock bequeathed to
decedent's son. This additional issue will be decided by a
separate opinion subsequently to be released.
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Decedent was born on July 21, 1923, and died testate on July
1, 1987, in Madison, Wisconsin. At the time of his death,
decedent was a resident of Benton County, Arkansas. On August 4,
1987, the Benton County Probate Court admitted to probate
decedent's last will, dated August 27, 1986 (the will), and
issued letters testamentary to Richard E. Clack and the Marshall
& Ilsley Trust Co., authorizing them to act as coexecutors of
decedent's estate.2 At that time and at the time of filing the
petition in the instant case, the Marshall & Ilsley Trust Co.
maintained its principal place of business in the State of
Wisconsin, and Richard E. Clack was a resident of the State of
Wisconsin.
Decedent was survived by his wife, Alice Clack, his sons,
Richard E. Clack and Robert A. Clack, and his daughter, Ann Clack
Klimnowicz. During his lifetime, decedent was the owner and
operator of a successful plastic extrusion company, Clack Corp.
located in Winsor, Wisconsin. At the time decedent executed his
will, his sons were active in the company. Richard E. Clack was
"the number two person in the company". Robert A. Clack had just
started working in the business.
Decedent consulted an attorney in Wisconsin about preparing
a will. Decedent was concerned about keeping the control of
2
The terms "coexecutors" and "co-personal representatives"
are used interchangeably in this case.
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Clack Corp. in the family. Although decedent wanted his son
Robert A. Clack to remain with the company, he wanted his other
son Richard E. Clack to have control of the company. Decedent
also wanted to minimize his estate taxes and to provide for his
wife.
Decedent executed his will on August 27, 1986. The will
names decedent’s son Richard E. Clack and the Marshall & Ilsley
Trust Co. of Milwaukee, Wisconsin, as co-personal representatives
of his estate and cotrustees of the trusts created by the will.
Article I of the will provides for the payment of expenses
(paragraph A) and taxes (paragraph B) from the residuary estate.
Article II of the will bequeaths to decedent’s wife all of
decedent’s personal effects and his interest in his personal
residence. Article III of the will bequeaths to decedent’s son
Richard E. Clack 12,689 shares of the common stock of Clack Corp.
Such bequest was made to recognize Richard E. Clack’s activities
in the management and success of Clack Corp. and was intended to
ensure that Richard E. Clack retained control of Clack Corp.
Article IV of the will creates a marital trust for the
benefit of decedent’s wife as follows:
Qualified Terminable Interest Property Marital
Trust. If my wife survives me, I give to my Trustee
the minimum pecuniary amount which will qualify for the
federal estate tax marital deduction and which will
result in the smallest federal estate tax being payable
by reason of my death. In computing this amount, my
Personal Representative shall take into account the
unified credit and the credit for state death taxes and
deduction (except the marital deduction) available to
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my estate and all other items included in my gross
estate for federal estate tax purposes, whether or not
passing under this Will, which qualify for said
deduction. My Personal Representative shall assume
that all payments and legacies under the preceding
Articles of this Will have been fully satisfied and
shall take into account the state death tax credit only
to the extent that use of the credit does not require
an increase in state death taxes payable. I recognize
that, depending upon the size of my estate, the year of
my death and other factors, no amount may pass to this
Marital Trust.
Article IV, paragraph C of the will states:
It is my intention that this bequest shall qualify
for the federal estate tax marital deduction to the
extent that my Personal Representative elects that any
part or all of any amount passing under this Article IV
be treated as qualified terminable interest property,
and the terms of this Will shall be construed in
accordance with such intent. My wife may require my
Trustee to convert unproductive property into
productive property within a reasonable time.
The will requires the trustee to pay the net income of the
marital trust to decedent's wife "in convenient installments at
least quarterly". Any undistributed and accrued income at the
time of the death of decedent's wife is to be paid to the wife's
estate. The trustee is empowered to invade the principal of the
marital trust as deemed necessary to provide for decedent’s wife
in order that she may maintain her standard of living. The
marital trust terminates upon the death of decedent's wife. Upon
termination of the marital trust, any assets remaining after
payment of estate, inheritance, and succession taxes arising from
the surviving spouse's death are to be added to the family trust
created under Article V of the will (discussed below).
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Article IV, paragraph D of the will provides for spousal
disclaimer rights as follows:
My wife or her personal representative, by an
instrument in writing delivered to my Trustee after my
death, may disclaim all or any part of the distribution
payable under this Article IV to the Trustee of the
Qualified Terminable Interest Property Marital Trust
under Paragraph B. Any part so disclaimed shall be
held and administered by the Trustee as a separate
trust in accordance with the terms of the Family Trust,
except my wife shall not receive distributions of
principal from this separate trust. If my wife further
disclaims her income interest in this separate trust,
then it shall be held and administered in accordance
with the terms of the Family Trust as if she had
predeceased me. Upon my wife's death, any assets
segregated pursuant to the terms of this Paragraph
shall be merged with other assets being held in the
Family Trust.
Article IV, paragraph F of the will provides for an election
as follows:
My Personal Representative may elect that any part
or all of any amount passing under this Article IV be
treated as qualified terminable interest property for
the purpose of qualifying for the marital deduction
allowable in determining the federal estate tax upon my
estate. While I anticipate that the election will be
made for all of such property, my Personal
Representative shall have the authority not to make the
election should no election or a partial election be
advantageous for some reason I have not foreseen. Any
part of any amount passing under this Article IV with
respect to which my Personal Representative does not so
elect to be treated as qualified terminable interest
property shall continue to be held by my Trustee and
administered and distributed pursuant to the terms of
the Family Trust hereunder.
Article V of the will provides for "Family Trust
Administration", in which the trustee is to receive the residue
of decedent's estate in order to fund the family trust.
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Decedent's wife, children, and the issue of any deceased children
constitute the beneficiaries of the family trust. The trustee
has sole discretion to distribute income and principal to any one
or more of the beneficiaries. Any income not distributed to the
beneficiaries is to be added to the principal of the family
trust.
Article IX, paragraph A of the will provides that the
personal representative "may make such elections under the tax
laws applicable to my estate as it determines should be made."
On April 1, 1988, a U.S. Estate Tax Return, Form 706, was
timely filed for the estate with the Internal Revenue Service
Center in Austin, Texas. On the estate tax return, the
coexecutors made the election under section 2056(b)(7) for the
entire marital trust amount, which they valued at $4,162,439.24.
The marital trust amount was computed as follows:
Probate estate $6,685,474.21
Add: Profit sharing plan benefit1 320,327.89
Total 7,005,802.10
Less: Funeral expenses (3,973.00)
Administration expenses (338,849.06)
Debts (20,811.95)
Mortgages & liens (1,365.85)
Less: Specific bequest to spouse (42,075.00)
Specific bequest to son (2,436,288.00)
Net amount to marital trust 4,162,439.24
1
The trustees of the marital trust were named as the
beneficiaries of the Clack Corp. Profit Sharing Plan.
Thus, the coexecutors treated the payment of expenses under
Article I, paragraph A of the will, the bequests of tangible
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personal property and of the interest in the home to the
surviving spouse under Article II, and the bequest of the Clack
Corp. stock to Richard E. Clack under Article III as having been
fully satisfied before determining the marital trust amount but
did not treat the payment of estate taxes under Article I,
paragraph B as having been fully satisfied.
The coexecutors claimed a total marital deduction in the
amount of $4,460,101.18, composed of what they determined to be
the value of the marital trust property ($4,162,439.24), plus
certain joint property ($194,263.55), the bequest of tangible
personal property and the interest in the home ($42,075), life
insurance proceeds ($46,481.72), and retirement benefits
($14,841.67) passing to the surviving spouse. Other than the
specific bequest of Clack Corp. stock to Richard E. Clack and a
payment of $25,953.51 to Robert A. Clack as the beneficiary of a
single premium annuity policy, all of the assets of decedent's
estate either passed directly to the surviving spouse
($297,661.94 by specific bequest or outside of probate) or were
treated by the coexecutors as part of the marital trust
($4,162,439.24 as QTIP election). The coexecutors did not fund
the family trust.
On the estate tax return, the total gross estate was valued
at $7,287,342.55. The estate tax reported as due on the return
was $684,589.11.
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On November 10, 1988, the Internal Revenue Service (IRS)
selected the estate tax return for audit. In January of 1989,
the coexecutors and the IRS agreed that the value of each share
of the Clack Corp. stock was $10 more than reported on the estate
tax return. At the time of his death, decedent owned 24,675
shares of Clack Corp. stock, of which 12,689 shares were
bequeathed to Richard E. Clack. The remaining 11,986 shares were
treated by the coexecutors as part of the marital trust.
On March 28, 1991, respondent issued a statutory notice of
deficiency to the estate, determining an estate tax deficiency of
$2,284,008. The principal adjustment was the disallowance of
$4,162,439.24 of the marital deduction because of respondent’s
determination that the "spouse's entire interest in the marital
trust was subject to a power in the executors to appoint the
corpus to someone other than the surviving spouse."
OPINION
Section 2001 imposes a tax on the transfer of the taxable
estate of any person who is a citizen or resident of the United
States at the time of death. Section 2056(a) allows a marital
deduction from a decedent's gross estate for the value of
property interests passing from the decedent to the decedent’s
surviving spouse. As a general rule, however, a marital
deduction is denied for a "terminable interest", that is, a
property interest that will terminate or fail "on the lapse of
time, on the occurrence of an event or contingency, or on the
failure of an event or contingency to occur". Sec. 2056(b)(1).
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Accordingly, an interest in the nature of a life estate,
generally, is ineligible for the marital deduction. See Estate
of Nicholson v. Commissioner, 94 T.C. 666, 671 (1990); Estate of
Higgins v. Commissioner, 91 T.C. 61, 66 (1988), affd. 897 F.2d
856 (6th Cir. 1990). However, section 2056(b)(7),3 added by the
3
Sec. 2056(b)(7) provides:
(A) IN GENERAL.--In the case of qualified terminable
interest property--
(i) for purposes of subsection (a), such property
shall be treated as passing to the surviving spouse, and
(ii) for purposes of paragraph (1)(A), no part of such
property shall be treated as passing to any person other
than the surviving spouse.
(B) Qualified terminable interest property defined.--For
purposes of this paragraph--
(i) IN GENERAL.--The term "qualified terminable interest
property" means property--
(I) which passes from the decedent,
(II) in which the surviving spouse has a qualifying
income interest for life, and
(III) to which an election under this paragraph
applies.
(ii) Qualifying income interest for life.--
The surviving spouse has a qualifying income interest for
life if--
(I) the surviving spouse is entitled to all the
income from the property, payable annually or at more
frequent intervals, or has a usufruct interest for life
in the property, and
(II) no person has a power to appoint any part of
the property to any person other than the surviving
spouse.
Subclause (II) shall not apply to a power exercisable only
at or after the death of the surviving spouse. To the
extent provided in regulations, an annuity shall be treated
in a manner similar to an income interest in property
(regardless of whether the property from which the annuity
is payable can be separately identified).
(iii) Property includes interest therein.--The term
"property" includes an interest in property.
(iv) Specific portion treated as separate property.--A
specific portion of property shall be treated as separate
property.
(continued...)
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Economic Recovery Tax Act of 1981, Pub. L. 97-34, sec. 403(d), 95
Stat. 172, 302, allows a marital deduction for "qualified
terminable interest property". Section 2056(b)(7) allows a
decedent to pass to the decedent’s surviving spouse an interest
in property for the
surviving spouse's lifetime without the decedent’s losing the
ability to control the disposition of such property upon the
death of the surviving spouse.
The facts in the instant case fall within this Court's
holding in Estate of Clayton v. Commissioner, 97 T.C. 327 (1991),
revd. 976 F.2d 1486 (5th Cir. 1992). After our opinion in Estate
of Clayton was issued, but before it was reversed by the Fifth
Circuit, we decided Estate of Robertson v. Commissioner, 98 T.C.
678 (1992), revd. 15 F.3d 779 (8th Cir. 1994), and Estate of
Spencer v. Commissioner, T.C. Memo. 1992-579, revd. 43 F.3d 226(6th Cir. 1995), in both of which we followed our holding in
Estate of Clayton. Subsequently, those decisions were reversed,
first by the Fifth Circuit, which reversed our decision in Estate
of Clayton v. Commissioner, supra, then by the Eighth Circuit,
which, following the Fifth Circuit, reversed our decision in
Estate of Robertson v. Commissioner, supra, and finally by the
(...continued)
(v) Election.--An election under this paragraph with
respect to any property shall be made by the executor on the
return of tax imposed by section 2001. Such an election,
once made, shall be irrevocable.
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Sixth Circuit, which reversed our decision in Estate of Spencer
v. Commissioner, supra. The Sixth Circuit, however, applied a
rationale somewhat different from that applied by the Fifth
Circuit.
The Tax Court, in those opinions, held that the surviving
spouse did not have a qualifying income interest for life because
the passage of an income interest in the property to the
surviving spouse was contingent upon the executor’s QTIP election
as to such property and was therefore subject to the executor's
power to appoint the property to someone other than the surviving
spouse. Accordingly, the Tax Court concluded that the property
did not meet the requirements of section 2056(b)(7)(B)(ii)(II),
that the surviving spouse did not have a "qualifying income
interest for life", and that the property therefore was not QTIP.
Estate of Robertson v. Commissioner, supra; Estate of Clayton v.
Commissioner, supra; Estate of Spencer v. Commissioner, supra.
In Estate of Clayton v. Commissioner, supra, the taxpayer
argued that, by definition, an interest in property is QTIP only
if the election is made, and that, once the election is made, the
surviving spouse has a qualifying income interest for life,
effective as of the date of the decedent's death. In response,
we stated:
An election, by definition, is necessary to insure
that the property is qualified terminable interest
property. The essence of section 2056(b)(7)(B)(i),
however, is that a terminable interest is deductible
only if it is an interest in property "in which the
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surviving spouse has a qualifying income interest for
life"; if so, then an applicable election may be made
with respect to such property. Compare Estate of
Tompkins v. Commissioner, 68 T.C. 912 (1977). Whether
the surviving spouse has an income interest for life in
the property is independent of, and not dependent upon,
the requirement that an election be made with respect
to that property. If the surviving spouse does not
have an income interest for life in the trust, then the
election to treat the trust as a QTIP trust is
ineffective. [Id. at 337.]
In Estate of Robertson v. Commissioner, supra at 689, the
taxpayer attempted to distinguish the facts of that case from
those of Estate of Clayton. In Estate of Robertson, the taxpayer
argued that the executor was required to make the QTIP election
and, thus, did not have the power to appoint the property to
anyone other than the surviving spouse. We held to the contrary,
concluding that the executor had the power to appoint the
property to someone other than the surviving spouse and that
Estate of Clayton was controlling.
Preliminarily, this Court stated:
Section 2056(b)(7)(B)(i) defines "qualified
terminable interest property" as property (1) which
passes from the decedent, (2) in which the surviving
spouse has a "qualifying income interest for life", and
(3) for which an election has been made. [Estate of
Robertson v. Commissioner, supra at 684; emphasis
added; fn. ref. omitted.4]
4
Item (3) in the above quotation, however, is an imprecise
paraphrase of and not the actual statutory language used in sec.
2056(b)(7)(B)(i)(III). In Estate of Robertson v. Commissioner,
98 T.C. 678 (1992), revd. 15 F.3d 779 (8th Cir. 1994), this Court
addressed sec. 2056(b)(7)(B)(i)(II), the "qualifying income
interest for life" requirement, and did not undertake to construe
(continued...)
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In reversing this Court, the appellate courts focused upon that
language and held that one of the three essential elements in the
definition of QTIP is that it be property for which an election
has been made. Estate of Spencer v. Commissioner, 43 F.3d at
231; Estate of Robertson v. Commissioner, 15 F.3d at 783; Estate
of Clayton v. Commissioner, 976 F.2d at 1499.
The opinions of the Courts of Appeals, however, diverge in
one respect. The Court of Appeals for the Fifth Circuit held
that the effect of the QTIP election is retroactive to the
instant of the decedent's death. Estate of Clayton v.
Commissioner, 976 F.2d at 1495, 1500. The Court of Appeals for
the Sixth Circuit rejected what it characterized as the legal
fiction of retroactivity created by the Fifth Circuit. Estate of
Spencer v. Commissioner, 43 F.3d at 234. Instead, the Sixth
Circuit held that the date for determining whether property
qualifies for the QTIP election is the date the QTIP election is
made. Id. at 232. In holding that the relevant date for the
determination is the date the QTIP election is made, the Sixth
Circuit rejected the Commissioner’s argument that Jackson v.
United States, 376 U.S. 503 (1964), requires a contrary holding.
The Sixth Circuit stated:
Jackson is readily distinguishable from this case
and not in point. In Jackson, after her husband’s
death, a widow received a court-ordered temporary
(...continued)
sec. 2056(b)(7)(B)(i)(III), the election requirement.
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allowance for her support and maintenance payable from
his estate. The Supreme Court held that because the
widow’s allowance arose from a right under state law
which had not vested in her as of her husband’s date of
death, it could not be included as part of the marital
deduction because it did not meet the definition of any
counter-exception to the rule that terminable interests
are to be included in the taxable estate. Jackson at
507, 84 S.Ct. at 871-72. In the instant case, the
decedent used an estate planning device unknown when
Jackson was decided--the QTIP counter-exception to the
terminable interest rule. Because the Jackson court
ruled on the proper determination date for an interest
which is not an exception to the terminal interest
rule, and not subject to a later election, we do not
think it is dispositive of this issue. [Estate of
Spencer v. Commissioner, 43 F.3d at 231.]
Petitioner argues that, because at the time of his death
decedent was a resident of the State of Arkansas, the Eighth
Circuit would have venue for an appeal of the instant case
(absent stipulation to the contrary). Accordingly, petitioner
contends that, pursuant to Golsen v. Commissioner, 54 T.C. 742(1970), affd. 445 F.2d 985 (10th Cir. 1971), the Eighth Circuit’s
decision in Estate of Robertson v. Commissioner, supra, is
controlling and that we should therefore hold for petitioner.
Respondent argues that, because at the time of filing the
petition in the instant case the individual co-executor of
decedent's estate was a resident of the State of Wisconsin and
the corporate co-executor had its principal place of business in
that State, venue for an appeal of the instant case would lie to
the Court of Appeals for the Seventh Circuit, which has not
addressed the QTIP issue presented in the instant case, and,
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consequently, that the Tax Court is not bound under the Golsen
rule.
The Golsen rule requires a conflict between this Court and
the court having venue over an appeal of the case sub judice.
Because we decide in the instant case to accede to the decisions
of the Courts of Appeals that have reversed our decisions on the
issue before us, no such conflict exists, and therefore it is
unnecessary to address the parties’ arguments concerning the
proper venue for an appeal of the instant case.
We also find it unnecessary, at this point, to winnow out
the differences in our analyses in our prior cases and those of
the Courts of Appeals that have reversed us. Finally, we see no
reason in the instant case to adopt either the rationale of the
Fifth and Eighth Circuits, on the one hand, or of the Sixth
Circuit, on the other, as in either case the result is the same:
the marital deduction is allowed. Suffice it to say that, in
light of the reversals of this Court’s decisions by three
different circuits, we now decide that we will accede to the
result in those appellate decisions and will no longer disallow
the marital deduction for interests that are contingent upon the
executor’s election under section 2056(b)(7)(B)(v), where the
election is actually made under facts similar to those in the
instant case. Accordingly, we hold that the marital trust
property in the instant case qualifies as QTIP under section
2056(b)(7).
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One caveat to our holding is in order. Section 20.2056(b)-
7(d)(3), Estate Tax Regs.,5 provides that the marital deduction
is not available under the circumstances of the instant case.
Because the regulation is effective for estates of decedents
dying after March 1, 1994 (see section 20.2056(b)-10, Estate Tax
Regs.), it is not applicable to the instant case. Consequently,
we leave for another day the issue of the validity of that
regulation. Obviously, if the regulation were held to be valid,
there might be a different result for estates of decedents dying
after March 1, 1994.
To reflect the foregoing,
An appropriate order
will be issued.
Reviewed by the Court.
HAMBLEN, SWIFT, JACOBS, WRIGHT, RUWE, COLVIN, LARO, FOLEY,
and VASQUEZ, JJ., agree with this majority opinion.
5
Sec. 20.2056(b)-7(d)(3), Estate Tax Regs., provides as
follows:
(3) Contingent income interests. An income
interest granted for a term of years, or a life
estate subject to termination upon the occurrence of a
specified event (e.g., remarriage), is not a qualifying
income interest for life. In addition, an income
interest (or life estate) that is contingent upon the
executor’s election under section 2056(b)(7)(B)(v) is
not a qualifying income interest for life, regardless
of whether the election is actually made.
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CHABOT, J., concurring in the result: I do not agree with
the majority's determination to overrule this Court's opinions in
Estate of Robertson v. Commissioner, 98 T.C. 678 (1992), revd. 15
F.3d 779 (8th Cir. 1994); Estate of Clayton v. Commissioner, 97
T.C. 327 (1991), revd. 976 F.2d 1486 (5th Cir. 1992); and Estate
of Spencer v. Commissioner, T.C. Memo. 1992-579, revd. 43 F.3d
226 (6th Cir. 1995). See generally Part I (QTIP Issue) of Judge
Parker's dissent, and Judge Halpern's dissent.
However, for the reasons set forth in Judge Gerber's
concurrence, I would hold that venue for an appeal would be in
the Court of Appeals for the Eighth Circuit. Under the Golsen
rule, we would be bound to follow the interpretation of that
Court of Appeals. See Golsen v. Commissioner, 54 T.C. 742(1970), affd. 445 F.2d 985 (10th Cir. 1971). Because the Golsen
rule leads to the same result that the majority reach in the
instant case, I concur in the result.
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SWIFT, J., concurring: I do not disagree with the decision
of the majority to accede to the rulings of the three Courts of
Appeals that have considered this issue. In light, however, of
respondent’s self-serving, interpretative, prospective-only
regulation on this issue at section 20.2056(b)-7(d)(3), Estate
Tax Regs. (promulgated in the midst of the rejection of
respondent’s position by the Courts of Appeals for the Fifth,
Sixth, and Eighth Circuits1), and in light of the many refund
courts that are not bound by our ruling herein, nor by the
rulings of the above three Courts of Appeals, further litigation
of this issue would appear inevitable.
As an alternative, therefore, to acceding to the extant
rulings of the Courts of Appeals, I would go further, and I would
reconsider our interpretation of the relevant QTIP provisions of
section 2056(b)(7)(B), as follows.
Having the benefit of the analyses set forth in the above
three Courts of Appeals rulings and the benefit of further
reflection that continuing litigation provides, I believe that we
erred in our prior opinions in Estate of Clayton v. Commissioner,
97 T.C. 327 (1991), revd. 976 F.2d 1486 (5th Cir. 1992); Estate
of Robertson v. Commissioner, 98 T.C. 678 (1992), revd. 15 F.3d
779 (8th Cir. 1994); and Estate of Spencer v. Commissioner, T.C.
1
See T.D. 8522, 1994-1 C.B. 236, 238, promulgated on Feb. 28,
1994, effective with respect to estates of decedents dying after
Mar. 1, 1994.
- 20 -
Memo. 1992-579, revd. 43 F.3d 226 (6th Cir. 1995), and I would so
hold.
Section 2056(b)(7)(B)(i) provides three general definitional
requirements that must be satisfied in order to qualify property
as QTIP property. Arguably, the first two (namely, whether
property passed “from” the decedent and whether the surviving
spouse “has” a qualifying income interest for life) could be
determined on the date of decedent’s death.
However, the third requirement (namely, whether the QTIP
election has been made) obviously cannot be determined until the
estate tax return is filed. On that date, one can also determine
whether the first two requirements have been satisfied. It
therefore seems logical to me to determine whether all three
requirements of section 2056(b)(7)(B)(i) have been satisfied on
the date the estate tax return is filed. That is the earliest
date on which one could possibly determine whether all three
requirements have been satisfied. Accordingly, that date ought
to be used to determine whether each of the three requirements
has been satisfied.
In contrast to the technical arguments and hypothetical
situations that are being made and raised on this issue, I agree
with the refreshingly straightforward and commonsense approach of
the Court of Appeals for the Sixth Circuit in Estate of Spencer
v. Commissioner, supra. Therein, the Court of Appeals explained
as follows:
- 21 -
Congress deliberately crafted the broad language of
section 2056(b)(7)(B)(v): “An election under [section
2056(b)(7)] with respect to any property shall be made
by the executor on the return of tax imposed by section
2001.” * * * [Emphasis supplied by the Court of
Appeals.] Congress did not use the words “any existing
qualified terminable interest property” or “any
property meeting the above definition as of the date of
decedent’s death” or any similar limiting language, and
we are not prepared to read such a limitation into this
statute. The language “any property” should be given
its ordinary meaning. Nowhere in the legislative
history of section 2056(b)(7) do we find an indication
that Congress intended a different reading of the
statute. * * *
* * * * * * *
The words of the statute are plain: no property meets
the definition of QTIP until the proper election is
made, and no QTIP election can be made until the estate
tax form is filed. Section 2056(b)(7)(B)(v). Since no
property can be QTIP until the election is made, the
proper date to determine if property satisfies the
requirement of section 2056(b)(7) is on the date of the
election.
* * * * * * *
Section 2056(b)(7) creates a new and different
legislative scheme. Under the election provision, no
property anywhere can be considered QTIP until an
election is made by the executor on Form 706, which can
only be done after the date of death. When the
Commissioner’s interpretation is carried to its logical
extent, no property could ever satisfy the statutory
definition of QTIP because the election for the
surviving spouse cannot be made until after the date of
decedent’s death. This simple fact highlights the
major problem with the Commissioner’s interpretation of
section 2056(b)(7).
* * * * * * *
The IRS would have us adopt an interpretation that
would force property to satisfy every requirement for
the QTIP counter-exception on the date of decedent’s
- 22 -
death except the requirement of election. This would
effectively reduce the election requirement to a mere
formality, defeat its apparent purpose and its most
reasonable interpretation. * * *
* * * * * * *
This decision is in keeping with the overarching
purpose of Congress to liberalize the requirements
surrounding the marital deduction. The 1981 amendments
to section 2056 made a number of changes, each of which
expanded the scope of the marital deduction. In this
spirit, we think an interpretation favoring the
allowance of the deduction is in keeping with
Congressional intent. It recognizes that wills are
often drafted long in advance of death and that family
situations and the value of assets may change
dramatically. There is no reason to interpret section
2056(b)(7) to require that the will identify QTIP
property long in advance of death and thereby deny
taxpayers the full advantage of the marital deduction
for QTIP property. The election provision is plain
enough and seems purposely worded to avoid this estate
planning problem. [43 F.3d at 230-233.]
In the QTIP definitional requirements of section
2056(b)(7)(B), because it is the first date on which the claimed
QTIP property could possibly qualify under section 2056(b)(7)(B),
the date on which the estate tax return is filed is the only
directly relevant date. If, on that date, all of the
requirements have been satisfied (namely, the property passed
from the decedent, the surviving spouse then has a qualifying
income interest for life, and the election has been made on the
return), the property should “be treated”, see sec.
2056(b)(7)(A)(i), as fully meeting the definitional requirements
of section 2056(b)(7)(B).
- 23 -
Based on the above analysis, I would overrule our prior
opinions in Estate of Clayton v. Commissioner, supra, Estate of
Robertson v. Commissioner, supra, and Estate of Spencer v.
Commissioner, supra, and I would adopt the analysis set forth in
the Court of Appeals for the Sixth Circuit's opinion in Estate of
Spencer v. Commissioner, supra.
HAMBLEN and WHALEN, JJ., agree with this concurring opinion.
- 24 -
GERBER, J., concurring: I agree with the majority’s
holding. I am compelled, however, to write separately to address
Judge Parker’s dissenting view that appellate venue depends on
the estate’s representative’s residence, rather than the domicile
of the decedent. The identity of the petitioner1 in a case
involving an estate is a question of some moment and one that
this Court has not yet addressed with any particularity.
The dissenting opinion contains the view that an appeal in
this case lies in the estate’s representative’s appellate venue
(the Court of Appeals for the Seventh Circuit), and, therefore,
we are not bound to follow the holding of the estate’s appellate
venue (the Court of Appeals for the Eighth Circuit). Were it
necessary to reach this question of first impression,2 I believe
the better view is that the estate is the petitioner, and, hence,
under section 7482(b)(1)(A) venue for an appeal in this case
would be in the place of the estate’s probate and/or the
1
Sec. 7482(b) prescribes that appellate venue will be in the
Court of Appeals for the circuit in which the legal residence of
the petitioner is located.
2
The dissent’s disagreement with the majority’s rationale could
have been expressed without discussing or relying on the effect
of venue on any possible appeal. Due to the majority’s decision
to no longer follow our prior position regarding the QTIP issue,
this Court would be in agreement with all Courts of Appeals that
have addressed this issue, and it would be unnecessary for us to
consider whether it would be appropriate to follow the rule of a
particular circuit. See Golsen v. Commissioner, 54 T.C. 742(1970), affd. 445 F.2d 985 (10th Cir. 1971).
- 25 -
decedent’s domicile at the time of death (the Court of Appeals
for the Eighth Circuit).
The dissent expresses the belief that the estate’s
representative should be considered the petitioner. As a matter
of habit and practice, however, this Court most often refers to
and treats a decedent’s estate as the petitioner in an estate tax
case. See, e.g., Estate of Bond v. Commissioner, 104 T.C. 652(1995); Estate of Robertson v. Commissioner, 98 T.C. 678, 679
(1992), revd. on another issue 15 F.3d 779 (8th Cir. 1994);
Belcher v. Commissioner, 83 T.C. 227, 228 (1984); Estate of
McElroy v. Commissioner, 82 T.C. 509, 510 (1984). Consequently,
the fiduciary is commonly referred to as the person by or through
whom an estate acts. See Rule 24(b). Any claim that may be
pursued is not personal to a fiduciary and is intrinsically part
of the rights and assets that compose the estate, which exists
for the benefit of its beneficiaries and creditors.
In addition, by choosing an estate’s representative as the
petitioner, the dissent would open the way for a profound and
deleterious side effect--forum shopping.3 If the estate is
treated as the petitioner, forum shopping is minimized because a
decedent’s domicile is fixed at death. It is also significant
that the law of the decedent’s domicile governs an estate’s
3
The forum-shopping problem would be further exacerbated where
an estate is represented by more than one fiduciary whose
residences would offer the possibility of an appeal to different
Courts of Appeals.
- 26 -
probate and provides for the representative’s legal authority and
requirements to serve the estate. Similarly, it is the law of
the State of the decedent’s domicile that is determinative of
whether a fiduciary has capacity to represent the estate in this
Court. Rule 60(c); Patz Trust v. Commissioner, 69 T.C. 497, 500
(1977); Fehrs v. Commissioner, 65 T.C. 346, 349 (1975). It
follows that a case dismissed for lack of jurisdiction because of
the representative’s incapacity under the domiciliary State law
would logically proceed to the Court of Appeals serving the
domiciliary State.
Systemically, it is more logical to treat the estate as the
petitioner. Notices of deficiency regarding an estate are
concerned only with the estate’s tax liability.4 See Estate of
Tarver v. Commissioner, 26 T.C. 490, 498 (1956), affd. in part
and revd. in part on another issue 255 F.2d 913 (4th Cir. 1958).
Appellate venue should, accordingly, be determined with reference
to the estate and not its fiduciary.
The dissent compares the circumstances in this Court with
those in Federal tort claims, Federal diversity jurisdiction, and
4
Sec. 2203 defines the term “executor” for purposes of the
Internal Revenue Code, and sec. 2204 provides for discharge of
the fiduciary (executor) from personal liability if certain
prescribed procedures are followed. In that connection, sec.
301.6903-1(a), Proced. & Admin. Regs., requires that a fiduciary
provide notice of the fiduciary’s relationship to a district
director. The referenced procedural regulation also indicates
that “the tax or liability is ordinarily not collectible from the
personal estate of the fiduciary but is collectible from the
estate of the taxpayer”.
- 27 -
Federal tax refund cases.5 The dissent expresses the belief that
the U.S. Courts of Appeals for the Seventh and Eighth Circuits
would look to these cases and ascertain appellate venue based on
the residence of the estate’s representative.6
I respectfully disagree because for venue purposes: (1) We
are not dealing with refund, diversity jurisdiction, or tort
claims; (2) we are not compelled to follow the rationale of
refund, diversity, or Federal tort claims cases; and,
significantly, (3) the dissent relies on the diversity cases
despite Congress’ having enacted legislation that effectively
“overrules” them.
Concerning the weight to be afforded to diversity
jurisdiction precedent, 28 U.S.C. sec. 1332 was amended in 1988
to ensure that the citizenship of represented parties will be
determined according to the citizenship of the represented
party--not the fiduciary. 134 Cong. Rec. 31051 (1988). Congress
was concerned with attorneys using out-of-State fiduciaries
5
The Federal tax refund case Kruskal v. United States, 178 F.2d
738 (2d Cir. 1950), which is heavily relied on in the dissenting
opinion, places central focus and substantial reliance on Mecom
v. Fitzsimmons Drilling Co., 284 U.S. 183 (1931), a case
involving Federal diversity jurisdiction. It is also noted that
these cases are about 45 and 65 years old, respectively, and
predate contemporary legislation and thinking on the subject of
venue.
6
The dissent, however, does not explain why following those
principles would cause a better or more feasible result.
- 28 -
solely to create diversity of citizenship for access to the
Federal courts. Id. at 31055.
Furthermore, there are important differences in a court’s
focus with respect to questions of appellate venue versus
questions of diversity of citizenship in order to qualify for
Federal jurisdiction. For diversity jurisdiction purposes, a
representative’s citizenship may be determinative of the
threshold question of whether a party can have access to Federal
courts. Prior to the 1988 legislation, by acknowledging the
representative’s citizenship, courts could ensure that a Federal
forum was available to an estate if the representative’s
citizenship was different from that of any other litigant.
The residence of a fiduciary for purposes of an appeal from
this Court is not a threshold question that would otherwise be a
prerequisite to Federal court access. The focus of our inquiry
involves which Court of Appeals is the most appropriate one to
address an estate’s appeal from this Court.7 In making this
choice we must consider that circuit’s nexus to the subject
matter, the court’s familiarity with local law of the decedent’s
domicile, and the general convenience to all parties.
7
We are not in a position to dictate which Court of Appeals
should review our opinions. However, in the process of
establishing a rule concerning the identity of the petitioner in
our Court and interpreting the appellate venue statute, we should
consider the potential procedural effect on the litigation
process.
- 29 -
Concerning refund jurisdiction, 28 U.S.C. sections 1346 and
1402 (1994) fix trial court venue where the plaintiff resides.
That also would fix venue for purposes of an appeal in a refund
proceeding. In this Court, section 7482 provides that it is the
petitioner’s residence which governs appellate venue. The term
“plaintiff” has been defined in refund case law to equate to the
executor in a case involving an estate. Except for litigation
cost recovery cases, the term “petitioner” has not been defined
by this Court in the context of a case involving an estate unless
only by way of analogy. See discussion infra.
The cases cited in the dissent to support the executor’s
designation as plaintiff in a refund proceeding treat the
executor as the party in interest or, in one case, the
responsible party. Although there are limited circumstances
where the estate’s representative may be held personally liable,
the assets of an estate are the primary source for satisfaction
of the estate’s tax liability. Admittedly, an executor must
represent the interests of the estate, but that alone, or in
conjunction with the possibility that the executor may become
personally liable, does not provide a persuasive reason to
designate the executor as the “petitioner” in this Court.
Even if the rationale of the refund cases cited by the dissent
was soundly based, I find it no more persuasive than the reasons
already expressed herein for the estate, rather than the
executor, to be recognized as the petitioner.
- 30 -
Finally, the dissent’s approach conflicts with our cases
involving litigation costs. In Estate of Hubberd v.
Commissioner, 99 T.C. 335, 338 (1992), we held that an estate is
a party eligible to be awarded litigation costs. In doing so, we
expressly recognized that
“Common sense compels a finding that an estate is
a 'party.' It is an entity which can be taxed, which
can earn income (which is taxed), which can sue, and
which can be sued. * * * In any event, the real party
in interest here is the estate which, by way of its
personal representative, is challenging the tax levied
against it.” [Id. (quoting Boatmen’s First Natl. Bank
v. United States, 723 F. Supp. 163, 169 (W.D. Mo.
1989)); emphasis added.]
The U.S. Court of Appeals for the Seventh Circuit recently
adhered to this concept in Estate of Woll by Woll v. United
States, 44 F.3d 464, 467-468 (7th Cir. 1994). In holding that an
estate is a party eligible to recover attorney's fees, the court
stated:
Notably, the * * * [Equal Access to Justice Act]
does not list estates among the parties eligible to
recover litigation costs. However, seeing no reason to
treat estates differently from individuals, the Tax
Court, the Court of Claims, and at least two district
courts have concluded that estates should be permitted
to recover their costs despite statutory omission.
* * * [Id. at 467 (citing Estate of Hubberd v.
Commissioner, supra at 338-339); emphasis added.]
In the setting of a case in the U.S. Tax Court, the estate
and the decedent are the focus of the proceeding. In that
regard, it is likely that Courts of Appeals would treat the Court
- 31 -
of Appeals for the Eighth Circuit as the proper appellate venue
under section 7482(b).
JACOBS, PARR, COLVIN, FOLEY, and VASQUEZ, JJ., agree with
this concurring opinion.
- 32 -
BEGHE, J., concurring: My first reaction to the case at
hand was that this Court's prior views, as expressed in our
opinions in Estate of Robertson v. Commissioner, 98 T.C. 678(1992), revd. 15 F.3d 779 (8th Cir. 1994), Estate of Clayton v.
Commissioner, 97 T.C. 327 (1991), revd. 976 F.2d 1486 (5th Cir.
1992), and Estate of Spencer v. Commissioner, T.C. Memo. 1992-
579, revd. 43 F.3d 226 (6th Cir. 1995), have the better of the
arguments on the literal interpretation of the statutory
language. I also had (and continue to have) reservations about
the views, expressed by three Courts of Appeals, whose adoption
would require us to invalidate section 20.2056(b)-7(d)(3), Estate
Tax Regs., effective for estates of decedents dying after
March 1, 1994. Cf. Estate of Shelfer v. Commissioner, 103 T.C.
10, 28 n.6 (1994) (Beghe, J., dissenting).
On reflection, I think I see a principled justification for
changing my position on the merits. As explained in my dissent
in Estate of Shelfer, QTIP is an exception to an exception that
deserves a liberal construction. 103 T.C. at 26. This is
particularly so in the Clayton, Robertson, and Spencer situation,
as in the case at hand, because there is no loophole. Although I
agree with Judge Parker that executors don't need the post mortem
planning flexibility to choose who actually gets the property,
dissenting op. p. 45, I don't think that should be our concern;
- 33 -
the QTIP election mechanism assures that the property will be
included in the estate of one spouse or the other.1
Another question raised by the case at hand is whether, in
the light of Central Pa. Sav. Association & Subs. v.
Commissioner, 104 T.C. 384 (1995), we should have stuck to our
guns in the face of reversal by three Courts of Appeals. One
difference between the case at hand and Central is that in
Central the Courts of Appeals upheld a regulation that we had
held invalid. Here, the final regulation, which Judge Parker
would uphold, dissenting op. p. 48--a question properly left open
by the majority opinion--was published just before Estate of
Robertson was reversed. Thus, the reversals in Estate of
Robertson and Estate of Spencer were in the face of Chevron,
U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S.
837, 842-844 (1984). The Court of Appeals for the Sixth Circuit
in Estate of Spencer v. Commissioner, 43 F.3d at 234, tried to
defuse the Chevron argument by citing INS v. Cardoza-Fonseca, 480
U.S. 421 (1987), for the proposition that the Commissioner's
1
See Covey, Estate, Gift and Income Taxation--1993 Developments,
U. Miami 28th Inst. on Est. Plan. par. 117.1 (1994); id.--1994
Developments par. 116.1 (1995). Covey has warned will drafters
of the danger of relying on the Court of Appeals for the Fifth
Circuit's approach in Estate of Clayton v. Commissioner, 976 F.2d
1486 (5th Cir. 1992), revg. 97 T.C. 327 (1991). The warning
still seems to be sound, particularly in view of the position
taken in sec. 20.2056(b)-7(d)(3), Estate Tax Regs.
- 34 -
position is entitled to less deference because she has changed
her position.2 See Priv. Ltr. Rul. 86-31-005 (Apr. 23, 1986).
The courts have been inconsistent on this point. See, e.g., Bell
Fed. Sav. & Loan Association v. Commissioner, 40 F.3d 224, 229
(7th Cir. 1994) (citing National Muffler Dealers Association v.
United States, 440 U.S. 472 (1979)), for an expression of the
contrary view.3
Where I come out on all this is that the policy underlying
the QTIP rules supports petitioner's position in the case at
hand, there are reasonable interpretations of section
2056(b)(7)(B)(i) and (ii) that support petitioner's position, and
the QTIP rules deserve a liberal interpretation that will uphold
that position. We properly leave to another day whether to
uphold the Commissioner's regulation to the contrary, section
20.2056(b)-7(d)(3), Estate Tax Regs. When we face that
question, we should find it a much closer question under Chevron
2
The use of private letter rulings in this fashion erodes the
statutory prohibition of sec. 6110(j)(3) on the use or citation
of private rulings as precedent. I'm concerned that such use
will have a stultifying effect on the private rulings process.
3
The infrequency with which the Supreme Court has cited INS v.
Cardoza-Fonseca, 480 U.S. 421 (1987), in recent years, especially
for the changed-position doctrine, where the Court seems more
likely to disregard it, see Stutson v. United States, U.S.
, 116 S. Ct. 600 (1996); Lawrence v. Chater, U.S. , 116
S. Ct. 604 (1996); cf. Thomas Jefferson Univ. v. Shalala, 512
U.S. , , 114 S. Ct. 2381, 2388 (1994); Good Samaritan Hosp.
v. Shalala, 508 U.S. 402, (1993), 113 S. Ct. 2151, 2161
(1993), would seem to indicate that Cardoza-Fonseca is moribund,
except, perhaps, in the immigration area that gave birth to it,
see Franklin v. INS, 72 F.3d 571 (8th Cir. 1995); Zhang v.
Slattery, 55 F.3d 732 (2d Cir. 1995).
- 35 -
than the Court of Appeals for the Fifth Circuit's opinion in
Clayton might lead one to believe.4
4
The Courts of Appeals--for the Fifth Circuit in Estate of
Clayton, supra (before the release of the final regulation) and
the Eighth Circuit in Estate of Robertson, 15 F.3d 779 (8th Cir.
1994), revg. 98 T.C. 678 (1992) (after its release)--found the
Commissioner's position to be in violation of the plain language
of the statute. Acceptance of this view would derail the inquiry
in Chevron, U.S.A., Inc. v. Natural Resources Defense Council,
Inc., 467 U.S. 837 (1984), from getting to the second step that
requires deference to the Commissioner's view. It's at this
point that I part company from the position stated so
categorically by the Court of Appeals for the Fifth Circuit. The
contrariety of judicial views on this subject shows that
reasonable people can disagree over what the appropriate result
should be and whether it turns on the interpretation to be given
to one or the other prong of sec. 2056(b)(7)(i) and (ii) or on
the policy argument.
- 36 -
PARKER, J., dissenting: I think this Court was correct in
its interpretation of section 2056(b)(7) and correctly held that
the surviving spouse does not have a "qualifying income interest
for life" where passage of such income interest in the property
to the surviving spouse is contingent upon the executor's making
the QTIP election as to such property and therefore subject to
the executor's power to appoint the property to someone other
than the surviving spouse. Thus such property is not "qualified
terminable interest property" even though the executor ultimately
makes the QTIP election. Accordingly, I think this Court should
continue to follow its opinions in Estate of Clayton v.
Commissioner, 97 T.C. 327 (1991), revd. 976 F.2d 1486 (5th Cir.
1992); Estate of Robertson v. Commissioner, 98 T.C. 678 (1992),
revd. 15 F.3d 779 (8th Cir. 1994); and Estate of Spencer v.
Commissioner, T.C. Memo. 1992-579, revd. 43 F.3d 226 (6th Cir.
1995).
However, I agree with petitioner that if an appeal in this
case would lie to the U.S. Court of Appeals for the Eighth
Circuit, this Court would be bound under the Golsen rule to
follow the opinion of the Eighth Circuit in Estate of Robertson
v. Commissioner, supra. Golsen v. Commissioner, 54 T.C. 742(1970), affd. 445 F.2d 985 (10th Cir. 1971). For that reason, I
think this Court must address the venue issue, and under this
Court's special venue statute I would conclude that any appeal in
- 37 -
this case would lie to the U.S. Court of Appeals for the Seventh
Circuit, which has not yet spoken on this particular QTIP issue.
I
QTIP Issue
Section 2056(b)(7)(A) provides that for purposes of the
marital deduction, in the case of "qualified terminable interest
property", the entire property is treated as passing to the
surviving spouse and no part of the property is treated as
passing to any person other than the surviving spouse. Thus, for
qualified terminable interest property, the decedent's estate may
deduct as a marital deduction the value of the entire property,
not just the surviving spouse's "qualifying income interest for
life" in that property.
Section 2056(b)(7)(B) defines "qualified terminable interest
property". Section 2056(b)(7)(B)(i) sets out the three general
requirements--that it be property (1) which passes from the
decedent, (2) in which the surviving spouse has a qualifying
income interest for life, and (3) to which an election under this
paragraph applies. Section 2056(b)(7)(B)(ii) then defines
"qualifying income interest for life". Section
2056(b)(7)(B)(iii), (iv), and (v) sets out other definitions or
requirements of qualified terminable interest property. I agree
that all of section 2056(b)(7)(B) defines qualified terminable
interest property and must be read as a whole. This Court in its
Clayton-Robertson-Spencer opinions concluded, and I continue to
think properly so, that the election provision of section
- 38 -
2056(b)(7)(B)(v), while a critical part of the definition of
"qualified terminable interest property", is not part of the
definition of "qualifying income interest for life" in section
2056(b)(7)(B)(ii). If Congress had intended the election by the
executor to cure all other defects, I think it would have said
so. While an election is necessary for QTIP, I think the
election can only be made as to property in which the surviving
spouse otherwise possesses a "qualifying income interest for
life". The executor can elect whether or not the property in
which the surviving spouse has a qualifying income interest for
life is going to be taxable in the decedent's estate (no QTIP
election) or deducted from his estate and later taxed in the
surviving spouse's estate (QTIP election). An election under
this paragraph cannot apply unless the property is otherwise
qualifying; namely property passing from the decedent and
property in which the surviving spouse has a qualifying income
interest for life.
Section 2056(b)(7)(B)(ii) defines the term "qualifying
income interest for life" as follows:
(ii) Qualifying income interest for life.--The
surviving spouse has a qualifying income interest for life
if--
(I) the surviving spouse is entitled to all the
income from the property, payable annually or at more
frequent intervals, * * * and
(II) no person has a power to appoint any part of
the property to any person other than the surviving
spouse.
- 39 -
Subclause (II) shall not apply to a power exercisable
only at or after the death of the surviving spouse. To
the extent provided in regulations, an annuity shall be
treated in a manner similar to an income interest in
property (regardless of whether the property from which
the annuity is payable can be separately identified).
We concluded in Estate of Clayton v. Commissioner, supra, that,
when the surviving spouse's income interest in the property is
contingent upon the executor's making a QTIP election, the
executor possesses the ability to control and to direct the
assets to someone other than the surviving spouse. We held that
the executor's ability to control and direct the assets was
tantamount to a power to appoint the property to someone other
than the surviving spouse. The statute expressly provides that
no person can have the power to appoint the property to anyone
other than the surviving spouse. Sec. 2056(b)(7)(B)(ii)(II).
The only exception to that prohibition is that it "shall not
apply to a power exercisable only at or after the death of the
surviving spouse." Sec. 2056(b)(7)(B)(ii)(II) (flush language).
Congress did not include within that exception a power
exercisable by the executor or a power exercisable prior to the
executor's making the election on the estate tax return.
I see no distinction between the situation in which the
executor is given such power during the period prior to the
filing of the estate tax return and the situation in which an
individual who is not the executor is given such power during
that period. The testator's coupling the power with the
- 40 -
executor's making of the QTIP election does not diminish the
power.
The Court of Appeals for the Fifth Circuit attempts to
circumvent the prohibition against the executor's having such a
power during the period prior to making the election by applying
a relation-back legal fiction. The Fifth Circuit stated:
although the effect of the election is tested as of the
instant of the testator's death, the definitional
eligibility of the separate terminable interest under
examination is tested as though QTIP election had
already been made.
Estate of Clayton v. Commissioner, 976 F.2d at 1497. "The
question is not when those determinations are made or when those
acts are performed but whether their effects relate back, ab
initio, to the moment of death." Id. at 1498. "[L]ike other
estate tax elections (and other exceptions to the terminable
interest rules), the effect of the QTIP election is retroactive
to the instant of death, irrespective of when it is actually
made." Id. at 1495. Thus, the Fifth Circuit ignores the power
of appointment vested in the executor during the period from the
date of the decedent's death to the date of making of the
election by creating a "relation-back" legal fiction.
The Court of Appeals for the Fifth Circuit likened the QTIP
election to a qualified disclaimer by the surviving spouse and
stated:
For example, a qualified disclaimer by the Surviving
Spouse has precisely the effect of the QTIP election
here: Both are volitional acts; both can be made only
after the death of the testator; both relate back, ab
- 41 -
initio, to the date of death of the testator; and both
have the effect of causing estate property which would
otherwise pass to the Surviving Spouse to pass instead
directly to or for the benefit of other parties. * * *
Id. at 1498. However, the point there, and in the present case,
is that, absent the executor's election, the property is not
"estate property which would otherwise pass to the Surviving
Spouse".
In the case of qualified disclaimers, moreover, section 2518
specifically provides that
if a person makes a qualified disclaimer with respect
to any interest in property, this subtitle shall apply
with respect to such interest as if the interest had
never been transferred to such person.
Thus, the statute specifically mandates the relation-back effect
of a qualified disclaimer. There is no such statutory provision
applicable to an executor's power to appoint property away from
the surviving spouse coupled with the power to make a QTIP
election. Furthermore, section 2056(b)(7)(B)(ii)(II) (and flush
language) specifically precludes applying this relation-back
fiction to the power to appoint the property to someone other
than the surviving spouse by specifically prohibiting anyone from
having such a power at any time prior to the death of the
surviving spouse. I think the Court of Appeals for the Fifth
Circuit's judicially created exception is contrary to the express
language of the statute.
The only means of ignoring an executor's power to appoint
the property to someone other than the surviving spouse
- 42 -
(exercisable by the executor's not making the QTIP election)
would be to adopt the test applied by the Court of Appeals for
the Sixth Circuit in Estate of Spencer v. Commissioner, 43 F.3d
226 (6th Cir. 1995), revg. T.C. Memo. 1992-579, that the date for
determining whether property qualifies is the date the QTIP
election is made.
However, the holding of the Court of Appeals for the Sixth
Circuit, if pursued to its logical conclusion, would prohibit
QTIP treatment for any qualifying income interest granted to a
surviving spouse if the surviving spouse dies prior to the
executor's making the QTIP election. In such a situation, if the
date for determining whether property qualifies as QTIP is the
date the election is made, then the executor of the first spouse
to die cannot make the election to treat any property interest as
QTIP. This is because, at the time the executor makes the
election, the surviving spouse has died and no longer has any
interest in the property; the property has passed to the
remainder interest. In that situation, at the time the executor
makes the election, the surviving spouse does not have a
qualifying income interest for life, and the second essential
element for QTIP treatment cannot be met. In such situation, the
spouses could lose the benefit of the surviving spouse's unified
credit.1 I do not think that the date of making the election is
1
For example, assume husband is the first to die and leaves
wife a qualifying income interest in his entire estate, which
estate is valued at $1.2 million. Assume further that wife dies
(continued...)
- 43 -
the proper date for determining whether the surviving spouse has
a qualifying income interest for life in the property.
I agree that the election under section 2056(b)(7)(B)(v),
like any other election that an executor makes under the estate
tax provisions, must be made after the date of death of the
decedent. However, I think the election can be made only as to
an otherwise qualifying income interest in the property and that
the election itself cannot qualify otherwise nonqualifying
property. The definition of an interest in property in section
2056(b)(7)(B)(iii), the definition of a specific portion of
property in section 2056(b)(7)(B)(iv), and the phrase "any
property" in the definition of an election in section
2056(b)(7)(B)(v) do not change that result. Whatever the nature
of the property, whatever the interest in the property, or
whatever the specific portion of the property, the statute
requires the surviving spouse to have a "qualifying income
interest for life" in that "property".
(...continued)
8 months after husband and her income interest in husband's
estate is the only property in which she has any interest. If
the executor of husband's estate files the estate tax return
before wife dies and elects on the return to treat one-half of
the property as QTIP, husband's estate will get a marital
deduction for $600,000 leaving $600,000 in his estate. Wife's
estate will include the $600,000 QTIP property. Neither estate
will be subject to tax (sheltered by husband's and wife's
respective unified credit). If, on the other hand, husband's
executor does not file the estate tax return until after wife's
death, no QTIP election may be made, $600,000 of husband's estate
is taxable, and wife's unified credit is wasted.
- 44 -
The term "property * * * to which an election under this
paragraph applies" under section 2056(b)(7)(B)(i)(III) means
something different from property for which an election "has been
made". I think the term refers to property that meets the two
preceding requirements; namely, property "which passes from the
decedent" (sec. 2056(b)(7)(B)(i)(I)) and property "in which the
surviving spouse has a qualifying income interest for life" (sec.
2056(b)(7)(B)(i)(II)). I think the surviving spouse must first
have a qualifying income interest for life in the property before
the executor can make the QTIP election as to all or any part of
that property.
The Court of Appeals for the Fifth Circuit held that the
requirement that the property be an interest to which an election
under this paragraph applies is satisfied if "the property being
tested for eligibility is the same property to which the election
made by the * * * [executor] applies." Estate of Clayton v.
Commissioner, 976 F.2d at 1496. In reversing this Court,
however, the Fifth Circuit stated:
the Tax Court insist[s] that the "property" here under
examination is the entire residue of testator's estate,
being the maximum amount of property and interests in
property with which * * * [the marital trust] could be
funded were a total QTIP election to be made. * * *
- 45 -
Id.2 With all due respect to the Court of Appeals for the Fifth
Circuit, I think that statement mischaracterizes the focus of
this Court. Contrary to such characterization, this Court
applies the standard espoused by the Fifth Circuit; the property
being tested for QTIP eligibility is the same property to which
the election made by the executor applies.
During the period from the testator's death to the time of
making the election, the executor possessed the power to appoint
the property for which the election was made to someone other
than the surviving spouse. The fact that the executor made the
election and, thus, did not in fact appoint the property to
someone other than the surviving spouse does not negate the fact
that, prior to making the election, the executor had the power to
appoint the property to someone other than the surviving spouse.
2
The Court of Appeals for the Fifth Circuit also focused on
this Court's language that the executor has the power to direct
the assets of Trust B (marital trust) to Trust A (children's
trust). The Fifth Circuit stated:
First, the QTIP election cannot vest the executor with
control over "trust assets" before they become trust
assets! The undivided interests in the * * *
[property] for which the election is made are estate
assets but they do not become trust assets until the
trust is funded, even though the economic effect of
funding is retroactive to the instant of death. Assets
used to fund each testamentary trust get there by
virtue of the provisions of the Will and the
administration of the estate. * * *
Estate of Clayton v. Commissioner, 976 F.2d 1486, 1499 (5th Cir.
1992), revg. 97 T.C. 327 (1991). I agree that the assets of the
estate are the proper focus of the determination. It is those
assets, however, over which the executor had the prohibited
power.
- 46 -
With all due respect to the Court of Appeals for the Fifth
Circuit, I do not think that this Court's Estate of Clayton
opinion turned on the fact that the executor made a partial
election as opposed to a full election. This Court's opinions in
Estate of Robertson and Estate of Spencer and indeed the present
case involve a full election. Nor can policy concerns about
eliminating the need for testators to risk predicting the future
and providing flexibility and opportunity for post mortem estate
planning provide a principled basis for disregarding the language
actually used by Congress in section 2056(b)(7).
I do not think that, by requiring the executor to make the
election for QTIP treatment, Congress intended to permit such
expansive post mortem estate planning. Congress intended that
the executor have the ability to determine whether property in
which the testator grants the surviving spouse a qualifying
income interest for life should be taxed in the estate of the
first to die or, to the extent not consumed or earlier disposed
of by the surviving spouse, in the estate of the surviving
spouse. Additionally, Congress provided for a partial election
in order to permit the executor to elect to have a portion of
such otherwise qualifying property taxed in the estate of each
spouse. In the Economic Recovery Tax Act of 1981, Pub. L. 97-34,
95 Stat. 172, Congress had already liberalized the marital
deduction provisions, allowing an unlimited estate tax marital
deduction and an unlimited gift tax marital deduction. The QTIP
- 47 -
provisions for estate tax (section 2056(b)(7)) and the QTIP
provisions for gift tax (section 2523(f)) were designed to permit
a decedent (or donor spouse) to make a lifetime gift or a
testamentary bequest to his spouse of an income interest for life
in property but still control the disposition of that property at
the death of the surviving spouse or donee spouse. Congress did
not intend to vest the executor with the power to determine the
disposition of the decedent's property; i.e., whether the
surviving spouse would ultimately receive a qualifying income
interest for life in the property or whether some other heir or
heirs would receive that interest. To the contrary, the
legislative history makes clear that "tax consequences should not
control an individual's disposition of property." H. Rept. 97-
201, at 160 (1981), 1981-2 C.B. 352, 378.
In summary, I think this Court was right in its analysis of
the QTIP provisions in its Clayton-Robertson-Spencer opinions;
the Court of Appeals opinions are inconsistent as to when the
surviving spouse's "qualifying income interest for life" in
property is to be determined and whether the surviving spouse
must have a qualifying income interest for life in property
separate and apart from and independent of the fact that the
executor ultimately makes a QTIP election. For these reasons, I
think this Court should not, in the majority's words, "accede to
the decisions of the Courts of Appeals that have reversed our
decisions on the issue before us". Majority op. p. 16. This
- 48 -
Court should not so accede, particularly without any analysis of
those circuit decisions and without some explanation as to why we
are departing from our prior decisions. Although this Court is
only a trial court, it is a trial court with national
jurisdiction. The tax bar, the Internal Revenue Service, and the
taxpayers, particularly those residing in the other nine circuits
to which Tax Court decisions can be appealed, are entitled to a
reasoned, principled explanation of our change of position. The
majority not only declines to address the differences in our
analyses in our prior cases and those of the Courts of Appeals
that have reversed us, but throws out a hint that the result
might be different under the recently published regulations,
which are effective for the estates of decedents dying after
March 1, 1994. Sec. 20.2056(b)-7(d)(3), Estate Tax Regs. This
Court's prior decisions are consistent with and support the
validity of those regulations.
II
Venue Issue
This is an appropriate case in which to continue to follow
our prior opinions since, under the Tax Court's special venue
statute, any appeal would lie to the U.S. Court of Appeals for
the Seventh Circuit, which has not yet addressed this particular
QTIP issue.
Although the reviewing court will undoubtedly make its own
determination, I think it is appropriate for this Court to
address the issue of venue. Brewin v. Commissioner, 72 T.C.
- 49 -
1055, 1059 (1979), revd. and remanded on another issue 639 F.2d
805 (D.C. Cir. 1981).3 This venue issue arises under a specific
Internal Revenue Code provision applicable only to the Tax Court
and appears to be an issue of first impression.
Section 7482(b)(1) provides with respect to review of
decisions of the Tax Court:
SEC. 7482(b). Venue.--
(1) In General.--Except as otherwise provided in
paragraphs (2) and (3), such decisions may be reviewed by
the United States court of appeals for the circuit in which
is located--
(A) in the case of a petitioner seeking
redetermination of tax liability other than a
corporation, the legal residence of the petitioner,
(B) in the case of a corporation seeking
redetermination of tax liability, the principal place
of business or principal office or agency of the
corporation, or, if it has no principal place of
business or principal office or agency in any judicial
circuit, then the office to which was made the return
of the tax in respect of which the liability arises,
(C) in the case of a person seeking a declaratory
decision under section 7476, the principal place of
business, or principal office or agency of the
employer,
(D) in the case of an organization seeking a
declaratory decision under section 7428, the principal
office or agency of the organization, or
(E) in the case of a petition under section 6226
or 6228(a), the principal place of business of the
partnership.
If for any reason no subparagraph of the preceding sentence
applies, then such decisions may be reviewed by the Court of
3
See also Peat Oil & Gas Associates v. Commissioner, T.C. Memo.
1993-130, appeal dismissed without published opinion for improper
venue 12 F.3d 214 (6th Cir. 1993).
- 50 -
Appeals for the District of Columbia. For purposes of this
paragraph, the legal residence, principal place of business,
or principal office or agency referred to herein shall be
determined as of the time the petition seeking
redetermination of tax liability was filed with the Tax
Court or as of the time the petition seeking a declaratory
decision under section 7428 or 7476, or the petition under
section 6226 or 6228(a), was filed with the Tax Court.
Section 7482(b)(1)(A) and (B) is the relevant provision for this
venue inquiry.
In estate tax cases in the Tax Court, sometimes the estate
is referred to as the petitioner and sometimes the executor is
referred to as the petitioner.4 However, this Court has never
squarely addressed whether the estate or the executor is the
petitioner or the real party in interest, or, stated another way,
whether the residence (or principal place of business) of the
executor at the time the petition is filed, or the residence of
the decedent at the time of his death, is determinative for
purposes of venue under section 7482(b)(1). That issue does not
turn upon how a case is captioned in this Court.5 Cf. Estate of
4
That sec. 7482(b)(1)(A) uses the term "petitioner" rather than
"taxpayer" is not particularly relevant to our inquiry. Various
provisions of the Internal Revenue Code refer to "the taxpayer"
whether in the context of deficiency cases in the Tax Court (sec.
6212--notice of deficiency; sec. 6213--restrictions applicable to
deficiencies; petition to Tax Court) or in the context of tax
refund cases in the U.S. District Courts (sec. 7422--civil
actions for refund). However, when it comes to venue provisions,
sec. 7482(b)(1)(A) uses the term "petitioner" for the party
filing a deficiency case in the Tax Court, and 28 U.S.C. sec.
1402(a)(1) (1994) uses the term "plaintiff" for the party filing
a tax refund suit.
5
Rule 23(a)(1) provides that "The name of an estate or trust or
other person for whom a fiduciary acts shall precede the
fiduciary's name and title, as for example 'Estate of Mary Doe,
(continued...)
- 51 -
Turner v. Helvering, 68 F.2d 759, 760 (D.C. Cir. 1934). That
issue does not turn upon how the capacity of fiduciaries or other
representatives to litigate in this Court is to be determined.6
No issue has been raised in this Court as to the capacity of
Richard E. Clack and the Marshall & Isley Trust Co. to litigate
in this Court. Their capacity to litigate in this Court is to be
determined, and presumably has been determined, under Arkansas
law.7 In any event, their capacity to litigate in the Tax Court
does not mean that the State that appointed them determines the
proper venue for any appeal from a decision of this Court. See
(...continued)
deceased, Richard Roe, Executor.'"
6
Rule 60(c) provides that "The capacity of a fiduciary or other
representative to litigate in the Court shall be determined in
accordance with the law of the jurisdiction from which such
person's authority is derived."
7
The Probate Court of Benton County, Arkansas, issued letters
testamentary to Richard E. Clack and the Marshall & Isley Trust
Co., authorizing them to act as coexecutors of decedent's estate.
That Mr. Clack is a resident of Wisconsin and that the Trust
Company has its principal place of business in Wisconsin did not
disqualify them to be authorized to act as coexecutors of
dececent's estate and hence authorized to represent decedent's
estate and litigate in this Court.
Under Arkansas law, a nonresident natural person is
authorized to act as executor so long as an in-state agent is
appointed for service of process. Ark. Code Ann. secs. 28-48-
101(a), 28-48-101(b)(6) (Michie 1987). Under Arkansas law, a
foreign corporation is not disqualified to act as a fiduciary so
long as its home jurisdiction (here Wisconsin) grants
authorization to Arkansas companies to act in a similar capacity.
Ark. Code Ann. secs. 28-48-101(a), 28-48-101(b)(4) (Michie 1987);
Ark. Code Ann. sec. 4-27-203 (Michie 1987). Wisconsin law
essentially tracks that of Arkansas in this regard. Wis. Stat.
Ann. secs. 856.21, 856.23 (West 1991); sec. 223.12(1), (4) (West
1957 & Supp. 1981).
- 52 -
Mecom v. Fitzsimmons Drilling Co., 284 U.S. 183, 186, 190 (1931)
(venue in Federal diversity case); Buchheit v. United Air Lines,
Inc., 202 F. Supp. 811 (S.D.N.Y. 1962) (venue under Federal Tort
Claims Act). These venue cases suggest that the personal
residence of an executor or administrator is controlling, and
that the residence of the decedent at the time of his death and
the place of appointment of the executor or administrator are
immaterial.
Petitioner does not dispute that the "legal residences" of
the coexecutors determine the proper venue for an appeal in this
case. Rather, petitioner argues that because decedent was
domiciled in Arkansas at the time of his death, the coexecutors
should be deemed to reside in Arkansas. Petitioner suggests that
the standard applied for establishing diversity jurisdiction of
Federal courts under 28 U.S.C. sec. 1332 (1994) and removal under
28 U.S.C. sec. 1441 (1994) should apply for purposes of
determining venue under section 7482(b)(1). Petitioner argues
that "In the related field of diversity jurisdiction, courts have
demonstrated a willingness to look behind the individual
residence of the executor when determining the citizenship of
parties." The Judicial Improvements and Access to Justice Act
of 1988, Pub. L. 100-702, sec. 202(a), 102 Stat. 4646, added 28
U.S.C. sec. 1332(c), which provides:
(c) For the purposes of this section and section 1441
of this title--
* * * * * * *
- 53 -
(2) the legal representative of the estate of a
decedent shall be deemed to be a citizen only of the
same State as the decedent, and the legal
representative of an infant or incompetent shall be
deemed to be a citizen only of the same State as the
infant or incompetent.
As acknowledged by petitioner, 28 U.S.C. sec. 1332, by its
express terms, applies only to that section and to 28 U.S.C. sec.
1441. This provision does not mention the Tax Court's venue
statute, which had been in the law for 22 years at that time. I
think that this 1988 provision "overrules" neither the cases on
which I rely nor this Court's specific venue statute.
Proper venue in a Federal tax case is a question of Federal
law and is to be determined by examining the Federal venue
provisions, any relevant legislative history, and any case law
construing them. I have not found any case construing section
7482(b)(1). Accordingly, I look to the various predecessor venue
statutes for this Court leading up to the present section
7482(b)(1), the reasons for adoption of section 7482(b)(1), and
any cases construing similar provisions in Federal tax refund
cases.
The Board of Tax Appeals, the predecessor of this Court, was
established in 1924. Revenue Act of 1924, ch. 234, sec. 900, 43
Stat. 253, 336. Two years later the law was expanded to provide
appellate review by a Circuit Court of Appeals or the Court of
Appeals for the District of Columbia. Revenue Act of 1926, ch.
27, sec. 1001, 44 Stat. 9, 109. Venue for such appeals was set
forth in section 1002 of the Revenue Act of 1926. Section
- 54 -
1002(a) of the act provided review for "an individual" by the
circuit "whereof he is an inhabitant". Section 1002(b) of the
act provided review for "a person (other than an individual)" by
the circuit in which is located the office of the collector where
the tax return was filed. The term "person (other than an
individual)" was defined to include an estate. See Ayer v.
Commissioner, 63 F.2d 231 (2d Cir. 1933), dismissing appeal from
26 B.T.A. 9 (1932). Because of the definition of "person (other
than an individual)" to include an estate and confusion as to
where returns were to be filed,8 the cases construing section
1002 of the Revenue Act of 1926 are not on point or particularly
helpful in the present inquiry. See Estate of Turner v.
Helvering, 68 F.2d 759 (D.C. Cir. 1934); Ayer v. Commissioner,
supra; Matheson v. Commissioner, 54 F.2d 537 (2d Cir. 1931),
affg. 18 B.T.A. 674 (1930); Rusk v. Commissioner, 53 F.2d 428(7th Cir. 1931), affg. 20 B.T.A. 138 (1930).
In 1934 the venue provision for the Board of Tax Appeals was
changed to make venue depend entirely upon where the tax return
was filed. Section 519 of the Revenue Act of 1934, ch. 277, 48
Stat. 680, 760, amended section 1002 of the Revenue Act of 1926
to read as follows:
8
The estate income tax return was filed with the office of the
collector for the district where the fiduciary resided; the
estate tax return was filed in the office of the collector for
the district where the decedent resided at the time of his death.
Revenue Act of 1924, ch. 234, secs. 225(b), 300, 304, 43 Stat.
253, 280, 303, 307.
- 55 -
(a) Except as provided in subdivision (b), such
decision may be reviewed by the Circuit Court of Appeals for
the circuit in which is located the collector's office to
which was made the return of the tax in respect of which the
liability arises or, if no return was made, then by the
Court of Appeals of the District of Columbia.
(b) Notwithstanding the provisions of subsection (a),
such decision may be reviewed by any Circuit Court of
Appeals, or the Court of Appeals of the District of
Columbia, which may be designated by the Commissioner and
the taxpayer by stipulation in writing.
That version of the venue statute making venue, absent a
stipulation to the contrary, depend entirely upon where the tax
return was filed became section 1141(b) of the 1939 Internal
Revenue Code and then substantially unchanged became section 7482
of the 1954 Internal Revenue Code. In the meantime the Board of
Tax Appeals became the Tax Court of the United States and then
the United States Tax Court. That 1934 provision remained the
venue statute for appeal from Tax Court decisions until the
current version of section 7482(b)(1) was enacted in 1966.
In connection with the Internal Revenue Service's then
conversion from manual to automatic data processing of tax
returns, the Act of Nov. 2, 1966, provided for tax returns to be
filed with Internal Revenue Service Centers rather than with the
offices of the collectors. The 1966 Act abolished all tax refund
suits against collectors, retaining only tax refund suits against
the United States in U.S. District Courts or in the U.S. Court of
Claims (later Claims Court and now Court of Federal Claims). The
1966 Act made significant changes in the Tax Court's venue
statute. Pub. L. 89-713, sec. 3(c), 80 Stat. 1107, 1109.
- 56 -
As amended in 1966 to its current form, section 7482(b)(1)
was part of a change in venue for both criminal tax and Tax Court
cases. The general purpose of the change was to better disperse
the appeals among the various circuits and to model venue for Tax
Court appeals after the provision of existing law prescribing
venue for tax refund suits in the U.S. District Courts. S. Rept.
1625, 89th Cong. 2d Sess. (1966), 1966-2 C.B. 803, 808.
So what is the proper venue for tax refund suits after which
the Tax Court's venue statute is modeled? Section 1346(a)(1) of
title 28 places original jurisdiction in the U.S. District Courts
or the U.S. Court of Federal Claims for any suit against the
United States for refund of Federal taxes.9 Section 1402(a)(1)
of title 28 provides that proper venue for such a suit is only in
the judicial district in which the individual "plaintiff"
resides.10 Section 1402(a)(2) of title 28 provides that venue
9
28 U.S.C. sec. 1346(a)(1) (1994) provides:
(a) The district courts shall have original
jurisdiction concurrent with the United States Court of
Federal Claims, of:
(1) Any civil action against the United
States for the recovery of any internal-revenue
tax alleged to have been erroneously or illegally assessed or
collected, or any penalty claimed to have been excessive or in
any manner wrongfully collected under the internal-revenue laws;
10
28 U.S.C. sec. 1402(a) (1994) provides:
(a) Any civil action in a district court against
the United States under subsection (a) of section 1346
of this title may be prosecuted only:
(1) Except as provided in paragraph (2), in
(continued...)
- 57 -
for a corporate plaintiff is the judicial district in which is
located its principal place of business or principal office or
agency. In the present case the individual executor resides in
Wisconsin, and the corporate executor has its principal place of
business in Wisconsin.
Suits for refund of Federal taxes may be brought only
against the United States, and if the plaintiff is an individual,
venue is proper only in the judicial district where that
individual resides. Caleshu v. Wangelin, 549 F.2d 93 (8th Cir.
1977); Scott v. United States, 449 F.2d 1291 (8th Cir. 1971);
Noonis v. United States, 539 F. Supp. 404 (S.D. Cal. 1982). And
if the plaintiff is an individual, the venue may not be
transferred to another judicial district, even though the events
(...continued)
the judicial district where the plaintiff resides;
(2) In the case of a civil action by a
corporation under paragraph (1) of subsection (a)
of section 1346, in the judicial district in which
is located the principal place of business or
principal office or agency of the corporation; or
if it has no principal place of business or
principal office or agency in any judicial
district (A) in the judicial district in which is
located the office to which was made the return of
the tax in respect of which the claim is made, or
(B) if no return was made, in the judicial
district in which lies the District of Columbia.
Notwithstanding the foregoing provisions of this
paragraph a district court, for the convenience of
the parties and witnesses, in the interest of
justice, may transfer any such action to any other
district or division.
We note that the transfer provision of the last sentence of 28
U.S.C. sec. 1402(a)(2) applies only to corporations. Caleshu v.
Wangelin, 549 F.2d 93, 95 (8th Cir. 1977).
- 58 -
occurred in another state and even though most of the records are
in the other state. Caleshu v. Wangelin, supra at 95-96 and n.4.
For a refund of Federal estate taxes, the executor is the
proper person to bring the refund suit. Hofheinz v. United
States, 511 F.2d 661 (5th Cir. 1975). The Court of Appeals for
the Fifth Circuit pointed out that the executor actually paid the
estate tax (sec. 2002) and was the proper plaintiff-taxpayer for
purposes of the refund suit. Similarly, the proper venue for a
suit brought by an executor for refund of estate taxes is the
judicial district where the executor resides. Kruskal v. United
States, 178 F.2d 738 (2d Cir. 1950).
In the Kruskal case the executors of the estate were
residents of New York. At the time of the decedent's death, he
was a resident of Connecticut. The letters testamentary were
issued to the executors by the Probate Court for the District of
Roxbury, Connecticut, the district of last residence of the
decedent. Without obtaining ancillary letters in New York, the
executors sued in the U.S. District Court for the Southern
District of New York to recover the Federal estate tax they had
paid. The Government moved to dismiss on the ground that venue
would be only in the District Court for Connecticut and on the
further ground that capacity to sue under rule 17(b) of the
Federal Rule of Civil Procedure depended on New York law, and
that New York law did not permit foreign executors to sue in the
courts of New York in a representative capacity. The District
- 59 -
Court for the Southern District of New York did not address the
first ground but granted the motion on the basis of the
executors' lack of capacity to sue under New York law. The Court
of Appeals for the Second Circuit reversed the lower court,
upholding venue in New York and disagreeing with the argument as
to the lack of ancillary letters.
As to the lack of ancillary letters in New York, the Court
of Appeals for the Second Circuit held that
the claim of the executors is technically in their own
right, for it is to recover monies which they paid and
to right an error which they, under governmental
compulsion, committed. Wherever the transaction giving
rise to a right of recovery occurs after the death of a
testator, suit to enforce the right must be brought by
the executors as individuals, rather than as
representatives. * * *
Kruskal v. United States, 178 F.2d at 740.
The Court of Appeals for the Second Circuit also concluded
that proper venue was in the Southern District of New York where
the executors resided. Citing 28 U.S.C. sec. 1402(a) that refund
suits may be prosecuted only in the judicial district where the
plaintiff resides, the court stated:
Since there is nothing to suggest departure from
the usual rule that residence of the individual
plaintiffs, rather than the situs of their estate,
controls questions of federal jurisdiction, Mecom v.
Fitzsimmons Drilling Co., 284 U.S. 183, * * *;
Greenough v. Tax Assessors of City of Newport, 331 U.S.
486, 495, * * *, we think the plaintiffs have chosen
the correct venue for their action. * * *
Id. at 739.
- 60 -
In summary, I have found few cases addressing venue for tax
refund suits and none addressing venue for appeal of a Tax Court
decision in an estate tax case. However, the above review of the
venue statute, its legislative history, and cases involving tax
refund suits leads me to the conclusion that the residence of the
executor (or the principal place of business in the case of a
corporate executor) is controlling under section 7482(b)(1).
I conclude that an appeal in this case would properly
lie to the Court of Appeals for the Seventh Circuit. Therefore,
I think this Court is not bound by the Golsen rule to follow the
opinion of the Court of Appeals for the Eighth Circuit in Estate
of Robertson v. Commissioner, supra, on the QTIP issue in this
case.
COHEN, J., agrees with this dissent.
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HALPERN, J., dissenting: I cannot join the majority’s
opinion for the following reasons.
I. Our Obligation as a Court of National Jurisdiction Is To
Decide This Case as We Think Is Right
Three strikes and you’re out! Is that the new rule?
According to the majority: “Suffice it to say that, in light of
the reversals of this Court’s decisions by three different
circuits, we now decide that we will accede to the result in
those appellate decisions”. Majority op. p. 16. Finding it
unnecessary “to winnow out the differences in our analyses in our
prior cases and those of the Courts of Appeals that have reversed
us”, id., and seeing “no reason in the instant case to adopt
either the rationale of the Fifth and Eighth Circuits, on the one
hand, or of the Sixth Circuit, on the other”, id., and with no
further analysis than that, the majority overrules a result that
we reached on three separate occasions and which, by virtue of
our role as a trial court of national jurisdiction, governed us
in cases appealable to 9 out of the 12 Courts of Appeals.
A judge is supposed to reach his or her opinion by a process
of “reasoned elaboration”, striving to reach what he (or she)
thinks is the right result.1 Because we are a court of national
jurisdiction, we face unique problems in dealing with the
opinions of the various Courts of Appeals. In Central Pa. Sav.
1
Hart & Sacks, The Legal Process: Basic Problems in the
Making and Application of Law 143-152, in particular 149-150
(1994); Schauer, “Opinions as Rules”, 62 U. Chi. L. Rev. 1455,
1465 (1995).
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Association v. Commissioner, 104 T.C. 384, 406 (1995) (Halpern,
J., dissenting), I described how we have resolved those problems:
We are a Court of national jurisdiction with
expertise in the area of Federal taxes. Since appeals
from this Court lie to each of the 12 Courts of
Appeals, we face unique problems in dealing with the
opinions of Circuit Courts. See, e.g., Lawrence v.
Commissioner, 27 T.C. 713 (1957), revd. 258 F.2d 562(9th Cir. 1958); Golsen v. Commissioner, 54 T.C. 742(1970), affd. 445 F.2d 985 (10th Cir. 1971); Lardas v.
Commissioner, 99 T.C. 490 (1992). We have, since
Lawrence, backed off from the position taken therein,
that, while certainly we should seriously consider the
reasoning of a Court of Appeals that had reversed one
of our decisions, we ought not to follow the Court of
Appeals’ decision if we believe it to be incorrect:
if still of the opinion that its original
result was right, a court of national
jurisdiction to avoid confusion should follow
its own honest beliefs until the Supreme
Court decides the point. The Tax Court early
concluded that it should decide all cases as
it thought right. [Lawrence v. Commissioner,
supra at 716-717; fn. refs. omitted.]
We have backed off to the extent that, in Golsen v.
Commissioner, supra, we created a narrow exception to
the Lawrence doctrine. Where a reversal would appear
inevitable, due to the clearly established position of
the Court of Appeals to which an appeal would lie, our
obligation as a national Court does not require a
futile and wasteful insistence on our view. Golsen v.
Commissioner, 54 T.C. 742, 757. Accordingly, in that
narrow circumstance, although we still think the result
wrong, we will follow that Court of Appeals. Compare
Golsen v. Commissioner, supra (Golsen doctrine
established), with Lardas v. Commissioner, supra
(Golsen doctrine inapplicable). * * *
The majority finds the Golsen doctrine inapplicable.
Majority op. p. 16. Nevertheless, today we overrule three of our
prior decisions with the only apparent justification being that
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three Courts of Appeals disagree with us. Are we persuaded by
the reasoning of one or more of those Courts of Appeals or have
we today adopted a new exception to the Lawrence doctrine, that
when we have been overruled three times we will throw in the
towel? Because we are a trial court of national jurisdiction, we
enjoy an autonomy not enjoyed generally by Federal trial courts.
Because I am jealous of that autonomy, I would be slow to give it
up. As set forth in the next section of this opinion, I think
that we reached the right conclusion in Estate of Clayton v.
Commissioner, 97 T.C. 327 (1991), revd. 976 F.2d 1486 (5th Cir.
1992), Estate of Robertson v. Commissioner, 98 T.C. 678 (1992),
revd. 15 F.3d 779 (8th Cir. 1994), and Estate of Spencer v.
Commissioner, T.C. Memo. 1992-579, revd. 43 F.3d 226 (6th Cir.
1995). I would follow those decisions.
II. Qualified Terminable Interest Property
A. Introduction--Section 2056(b)(7) Is Unambiguous
We must determine whether the property passing from the
decedent to the marital trust is “qualified terminal interest
property”, as that term is used in section 2056(b)(7)(B)(i). If
it is not, then such property does not qualify for the marital
deduction provided for in section 2056(a). The distinguishing
feature of the decedent’s bequest to the marital trust is that it
is conditional on the decedent’s personal representative’s
electing to have section 2056(b)(7)(A) apply. If no election is
made, the marital trust receives nothing. If an election is
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made, but it is with respect to less than all of the property
eligible to pass to the marital trust, then only such lesser
portion passes to the marital trust. Property eligible to pass
to the marital trust, but with respect to which no election is
made, remains in the residue of the estate and funds the family
trust. Because the decedent’s wife has no exclusive right for
life to any portion of the income of the family trust, she does
not have a qualified income interest for life in that trust.
Sec. 2056(b)(7)(B)(ii). Thus, property passing to the family
trust cannot qualify as qualified terminable interest property
under section 2056(b)(7)(B)(i).
The authority vested by the decedent in his personal
representative to elect whether to have section 2056(b)(7)(A)
apply determines more than simply the tax consequences of a
predetermined bequest. As between two classes of possible trust
beneficiaries--one class being the beneficiaries of the marital
trust (principally, the decedent’s wife, with an income interest
and a limited right to principal), and the other class being the
beneficiaries of the family trust (the decedent’s wife, children,
and the children of any deceased children, with rights to both
income and principal)--the personal representative has the
authority to determine which class immediately will enjoy (i.e.,
which trust will receive) the property. The personal
representative’s authority thus amounts to a power to appoint the
property between the two trusts, and the decedent’s wife’s
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interest in the property is contingent on the personal
representative exercising the power in her favor. That is a
clear violation of section 2056(b)(7)(B)(ii)(II) (with an
exception not here relevant, “no person has a power to appoint
any part of the property to any person other than the surviving
spouse.”). The statute is unambiguous. Indeed, section
2056(b)(7)(B)(ii) specifically provides that the prohibition on
powers is inapplicable to a power exercisable only at or after
the death of the surviving spouse. By the terms of his will or
by a power, a decedent can control the disposition of qualified
terminable interest property upon the death of the surviving
spouse. By requiring an election, section 2056(b)(7)(B)(i)(III)
makes it clear that the executor of the estate or other personal
representative of the decedent (hereafter, in either case,
personal representative) can choose whether to take tax advantage
of an otherwise qualifying bequest or devise of terminable
interest property. The decedent cannot, however, empower his
personal representative to deprive the spouse of what would be a
qualified income interest for life by, for example, appointing
the property to a trust in which she does not enjoy all of the
income from the property for life. Simply, such a power is
prohibited by section 2056(b)(7)(B)(ii)(II).
I do not consider section 2056(b)(7) to be ambiguous. Even
if one were to consider the section ambiguous, however, so that a
search for extrinsic evidence of congressional purpose were
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appropriate, I am unpersuaded that, in enacting section
2056(b)(7), Congress’ purpose was to exempt from the terminable
interest rule a bequest or devise that is uncertain (as to
whether the surviving spouse has a qualifying income interest for
life) at the time of the decedent’s death. The relevant
committee reports are silent, and the general rule of section
2056(b) is to the contrary. On that basis, even assuming
ambiguity, I would hold for respondent.
B. Committee Reports Are Silent
Section 2056(b)(7) was added to the Code by the Economic
Recovery Tax Act of 1981 (ERTA), Pub. L. 97-34, sec. 403(d), 95
Stat. 172, 302. H. Rept. 97-201 (H. Rept. 97-201), 1981-2 C.B.
352, is the report of the Committee on Ways and Means that
accompanied H.R. 4242, 97th Cong., 1st Sess. (1981) (which was
enacted as ERTA). In pertinent part, H. Rept. 97-201 details the
reasons for an unlimited marital deduction (simplification and
the view that an individual should be free to pass his entire
estate to a surviving spouse free of tax). It then states:
In addition, the committee believes that the
present limitations on the nature of interests
qualifying for the marital deduction should be
liberalized to permit certain transfers of terminable
interests to qualify for the marital deduction. Under
present law, the marital deduction is available only
with respect to property passing outright to the spouse
or in specified forms which give the spouse control
over the transferred property. Because the surviving
spouse must be given control over the property, the
decedent cannot insure that the spouse will
subsequently pass the property to his children.
Because the maximum marital deduction is limited under
present law to one-half of the decedent’s adjusted
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gross estate, a decedent may at least control
disposition of one-half of his estate and still
maximize current tax benefits. However, unless certain
interests which do not grant the spouse total control
are eligible for the unlimited marital deduction, a
decedent would be forced to choose between surrendering
control of the entire estate to avoid imposition of
estate tax at his death or reducing his tax benefits at
his death to insure inheritance by the children. The
committee believes that the tax laws should be neutral
and that tax consequences should not control an
individual’s disposition of property. Accordingly, the
committee believes that a deduction should be permitted
for certain terminable interests.
H. Rept. 97-201, supra at 159-160, 1981-2 C.B. at 377-378; see
H. Conf. Rept. 97-215, at 247 (1981), 1981-2 C.B. 481, 507
(conference agreement follows the House bill and Senate
amendment).
Thus, Congress enacted section 2056(b)(7) in order to allow
a decedent to enjoy the benefits of the marital deduction while,
at the same time, exercising the type of control over the
disposition of the property upon the termination of the surviving
spouse’s interest that would, under prior law, have violated the
terminable interest rule. Clearly, by providing for an election,
Congress’ purpose also was to allow some post mortem tax
planning. I cannot distill from the committee reports, however,
any clear indication that Congress’ purpose was anymore than to
allow the decedent’s personal representative to determine the tax
consequence of a disposition that had been predetermined by the
decedent. If Congress’ purpose were any more than that, it seems
to me that relevant committees would have stated that purpose.
For me, the committee reports are silent on the issue before us.
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C. Internal Consistency
Section 2056(b) disallows the marital deduction with respect
to certain terminable interests. Section 2056(b) had its origin
in section 361 of the Revenue Act of 1948, ch. 168, 62 Stat. 110,
117. S. Rept. 1013, 80th Cong., 2d Sess. (1948), 1948-1 C.B. 285(S. Rept. 1013), is the report of the Committee on Finance that
accompanied H.R. 4790, 80th Cong. 2d Sess. (1948) (which was
enacted as the Revenue Act of 1948). S. Rept. 1013 has the
following to say about the operation of the terminable interest
rule:
[The terminable interest rule] is intended to be
all-encompassing with respect to various kinds of
contingencies and conditions. Thus, it is immaterial
whether the interest passing to the surviving spouse is
considered as a vested interest subject to divestment
or as a contingent interest. * * * [The terminable
interest rule] applies whether the terms of the
instrument or the theory of their application are
conceived as creating a future interest which may fail
to ripen or vest or as creating a present interest
which may terminate. * * * [1948-1 C.B. at 336.]
The terminable interest rule has been interpreted as
follows:
Thus a terminable interest obviously may be either
a contingent interest (i.e., where vesting is subject
to a condition precedent) or a vested interest subject
to defeasance (i.e., where a vested interest may be
divested by the occurrence of a condition subsequent).
The critical factor which defeats the deduction is the
defeasibility of an interest which will cause it to
pass from the decedent to a third person. * * *
[Emphasis added.]
Robertson v. United States, 199 F. Supp. 78, 80 (N.D. Ala. 1961),
revd. 310 F.2d 199 (5th Cir. 1962). Thus, for example, a
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specific exception to the terminable interest rule is necessary
to allow the decedent to make the interest of the surviving
spouse conditional on surviving the decedent by 6 months or
surviving a common disaster. See sec. 2056(b)(3). Other
conditions of survival violate the terminable interest rule.
See, e.g., sec. 20.2056(b)-3(d), Example (4), Estate Tax Regs.
(condition of survival to date of distribution of property
unacceptable).
In Jackson v. United States, 376 U.S. 503 (1964), the
Supreme Court found that a State-law widow’s allowance was a
prohibited terminable interest. The allowance was subject both
to a condition precedent (award by a court) and defeasance
(abatement upon the widow’s death). The Court stated that the
rule uniformly followed is that qualification for the marital
deduction must be determined at the time of death. Id. at 508.
Thus, consider the following hypothetical situation: The
decedent leaves the residue of his estate to his children, except
to the extent that his personal representative lists any portion
of the residue on the estate tax return as going to the wife. On
the authority of the Jackson case, a deduction under section
2056(a) would fail on account of the terminable interest
exception for the portion of the residue going to the wife.
The general rule of section 2056(b) is that contingent
interests are terminable interests. The determination is made at
the time of death. Here, the decedent’s wife’s interest in the
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marital trust property was contingent at the time of death. Only
if the decedent’s personal representative elected to have section
2056(b)(7)(A) apply to property would it pass to the marital
trust. To be consistent with the general rule of section
2056(b), any ambiguity in section 2056(b)(7) must be resolved to
prevent property in which the surviving spouse has only a
contingent income interest from being qualified terminable
interest property.
I recognize that it might make good policy sense to
disregard the contingency here present: If we did so, the
property in question would, like any qualified terminable
interest property, be deductible in computing the decedent’s
taxable estate but be includable in determining the surviving
spouse’s gross estate. See secs. 2044, 2056. If I were to
consider section 2056(b)(7) in a vacuum (and if I believed that
the provision were ambiguous), then I might reach that result. I
cannot, however, consider section 2056(b)(7) in a vacuum. The
terminable interest rule plays a major role in section 2056.
Without a specific direction from Congress to disregard the
contingent nature of a surviving spouse’s interest, we are not
free to do so. We would be wise to keep in mind what the Supreme
Court said in the Jackson case (involving the widow’s allowance):
We are mindful that the general goal of the
marital deduction provisions was to achieve uniformity
of federal estate tax impact between those States with
community property laws and those without them. But
the device of the marital deduction which Congress
chose to achieve uniformity was knowingly hedged with
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limitations, including the terminable-interest rule.
These provisions may be imperfect devices to achieve
the desired end, but they are the means which Congress
chose. To the extent it was thought desirable to
modify the rigors of the terminable-interest rule,
exceptions to the rule were written into the Code.
Courts should hesitate to provide still another
exception by straying so far from the statutory
language as to allow a marital deduction for the
widow's allowance provided by the California statute.
The achievement of the purposes of the marital
deduction is dependent to a great degree upon the
careful drafting of wills; we have no fear that our
decision today will prevent either the full utilization
of the marital deduction or the proper support of
widows during the pendency of an estate proceeding.
Jackson v. United States, supra at 510 (fn. refs. omitted). We
are not here concerned with the support of widows during the
pendency of an estate tax proceeding. In H. Rept. 97-201, supra
at 160, 1981-2 C.B. at 377-378, the Committee on Ways and Means
expressed the specific concern that, as between the decedent and
the spouse, the decedent be able to control the disposition of
qualified terminable interest property on the conclusion of the
spouse’s life estate. I do not believe that our decisions in
Estate of Clayton v. Commissioner, 97 T.C. 327 (1991), Estate of
Robertson v. Commissioner, 98 T.C. 678 (1992), and Estate of
Spencer v. Commissioner, T.C. Memo. 1992-579, are inconsistent
with Congress’ action to deal with that concern.
D. The Proposed Regulation
Section 20.2056(b)-7(d)(3), Estate Tax Regs., takes a
position consistent with the results we reached in the Estate of
Clayton, Estate of Robertson, and Estate of Spencer cases. In
that respect, section 20.2056(b)-7(d)(3), Estate Tax Regs., is
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effective with respect to decedents dying after March 1, 1994.
Sec. 20.2056(b)-10, Estate Tax Regs. The majority “[leaves] for
another day the issue of the validity of that regulation.”
Majority op. p. 16. What is one to make of that statement? Can
the majority possibly believe that section 2056(b)(7) is
ambiguous and that both the position we take today and the
position we took in the enumerated cases, and that the
Commissioner takes in section 20.2056(b)-7(d)(3), Estate Tax
Regs., are reasonable interpretations of the statute? Only if
the statute is ambiguous is the Commissioner then free to write a
regulation adopting any reasonable interpretation. NationsBank
v. Variable Annuity Life Ins. Co., 513 U.S. ___, ___, 115 S. Ct.
810, 813-814 (1995); Chevron, U.S.A. Inc. v. Natural Resources
Defense Council, Inc., 467 U.S. 837, 842-844 (1984). No court,
neither this Court nor any of the Courts of Appeals that have
reversed us, has suggested any significant ambiguity in the
statute, much less an ambiguity broad enough to tolerate the
diametrically opposed readings found in our prior cases and in
the case we decide today. Certainly, decedents whose estate tax
cases might on appeal go to a Court of Appeals different than the
three that have reversed us bear the risk that such court might
find section 2056(b)(7) ambiguous. Also certainly, the Supreme
Court might find section 2056(b)(7) ambiguous (or unambiguous, as
interpreted by section 20.2056(b)-7(d)(3), Estate Tax Regs.).
Can we seriously say, however, that there is a substantial risk
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that we will find the statute ambiguous and, if so, that both the
position we take today and the position we today abandon are
reasonable interpretations? If there is no such risk, and I
believe that there is not, we should say so. As I have said, we
are a court of national jurisdiction with expertise in the area
of Federal taxes. What we say means something; it makes a
difference. We should explain ourselves, and strive to achieve
the right result.
PARKER, J., agrees with this dissent.
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CHIECHI, Judge dissenting: I join in Judge Parker's dissent
to the extent it addresses the QTIP issue. However, in light of
the majority's interpretation of section 2056(b)(7), I do not
believe it necessary or appropriate to decide the venue issue
that Judge Parker addresses in her dissent. Accordingly, I do
not join Judge Parker's dissent to the extent it considers that
issue.