Estate of Clyde W. Turner, Sr., W. Barclay Rushton v. Commissioner

ESTATE OF CLYDE W. TURNER, SR., DECEASED, W. BARCLAY
RUSHTON, EXECUTOR, PETITIONER v. COMMISSIONER OF
INTERNAL REVENUE, RESPONDENT *
Docket No. 18911–08. Filed March 29, 2012.
P filed a motion for reconsideration of our Memorandum
Opinion Estate of Turner v. Commissioner, T.C. Memo. 2011–
209 (Estate of Turner I). In Estate of Turner I decedent (D)
transferred property to a family limited partnership (FLP) in
exchange for limited and general partnership interests. D
transferred portions of the limited FLP interest as gifts
during his lifetime. In Estate of Turner I we held that the
inter vivos transfer of property to the FLP was subject to
I.R.C. sec. 2036. Among other arguments, the estate contends
that under D’s will, the surviving spouse’s right to the pecu-
niary marital bequest allows the surviving spouse to receive
assets equal to the amount necessary to reduce the estate
taxes to zero, and, because of the application of the marital
deduction under I.R.C. sec. 2056, the estate has no estate tax
deficiency. Held: D’s estate is not entitled to claim the marital
deduction with respect to the FLP interest or the assets
* This Opinion supplements our previously filed opinion Estate of Turner v. Commissioner,
T.C. Memo. 2011–209.
306
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(306) ESTATE OF TURNER v. COMMISSIONER 307
attributable to the FLP interest that D gave as gifts during
his lifetime.
Charles E. Hodges II, for petitioner.
Caroline R. Krivacka and Beth A. Nunnink, for respondent.
SUPPLEMENTAL OPINION
MARVEL, Judge: In a timely filed motion for reconsider-
ation (motion) pursuant to Rule 161, 1 the Estate of Clyde W.
Turner, Sr. (Clyde Sr.), requests the Court to reconsider its
Memorandum Opinion Estate of Turner v. Commissioner,
T.C. Memo. 2011–209 (Estate of Turner I).
In Estate of Turner I we held, among other things, that
Clyde Sr.’s inter vivos transfer of property to Turner & Co.
was subject to section 2036 and that the values of those
transferred assets are included in the value of his gross
estate. The estate requests that we reconsider and/or supple-
ment our findings and opinion in connection with the
application of section 2036. The estate also contends that the
Court did not consider, and should decide, its alternative
position—that even if section 2036 applies, the estate has no
estate tax deficiency because it is entitled to an increased
marital deduction equal to the increased value of the gross
estate. 2 Respondent has filed an objection to the estate’s
motion.
Generally, reconsideration under Rule 161 is intended to
correct substantial errors of fact or law and allow the
introduction of newly discovered evidence that the moving
party could not have introduced, by the exercise of due dili-
gence, in the prior proceeding. Estate of Quick v. Commis-
sioner, 110 T.C. 440, 441 (1998). This Court has discretion to
grant a motion for reconsideration but will not do so unless
the moving party shows unusual circumstances or substan-
tial error. Id.; see also Vaughn v. Commissioner, 87 T.C. 164,
166–167 (1986). ‘‘Reconsideration is not the appropriate
forum for rehashing previously rejected legal arguments or
tendering new legal theories to reach the end result desired
1 Unless otherwise indicated, Rule references are to the Tax Court Rules of Practice and Pro-
cedure, and section references are to the Internal Revenue Code (Code) in effect at relevant
times.
2 The estate originally raised this argument in posttrial briefs but we did not decide it, on
the assumption that it was more appropriately resolved in the Rule 155 computation process.
Because the parties do not agree regarding the issue and the issue must be resolved, we decide
it in this Supplemental Opinion.
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308 138 UNITED STATES TAX COURT REPORTS (306)
by the moving party.’’ Estate of Quick v. Commissioner, 110
T.C. at 441–442.
I. Application of Section 2036
We adopt the findings of fact in Estate of Turner I. For con-
venience and clarity, we repeat the necessary facts below.
Clyde Sr. resided in Georgia when he died testate on Feb-
ruary 4, 2004. Estate of Turner I, slip op. at 2. W. Barclay
Rushton is the executor of the estate. Id. Mr. Rushton
resided in Georgia when the petition on behalf of the estate
was filed. Id.In early 2002 Clyde Sr., his wife Jewell H. Turner (Jewell),
and their two grandsons Marc and Travis Turner met with
attorneys from the law firm of Stewart, Melvin & Frost. Id.at 7–8. On April 15, 2002, Clyde Sr. and Jewell established
Turner & Co., a Georgia limited liability partnership. Id. at
8. The assets they contributed to the partnership consisted of
cash, shares of common stock of Regions Bank, shares of
other banks, certificates of deposit, and assets held in securi-
ties accounts, such as preferred stock and bonds. Id. at 9–10.
The partnership agreement listed several purposes for cre-
ating Turner & Co., but the agreement was modeled on a
standard form that Stewart, Melvin & Frost used when
drafting partnership agreements. Id. at 11–12.
In 2002–04 Turner & Co. maintained investment accounts
at the GMS Group, Morgan Keegan, and Wachovia Securities
and a checking account at United Community Bank. The GMS
and Wachovia account statements reflect no change in the
securities held between December 2002 and Clyde Sr.’s death
in February 2004. Id. at 19–20. The Morgan Keegan account
statements reflect a handful of asset purchases and sales. Id.
Turner & Co. made no trades in any of its investment
accounts between October 2003, when Clyde Sr. became seri-
ously ill, and his death. Id. at 20.
The estate contended that the Turners created Turner &
Co. for at least one of the following legitimate and significant
nontax reasons: (1) to consolidate their assets for manage-
ment purposes and allow someone other than themselves or
their children to maintain and manage the family’s assets for
future growth pursuant to a more active and formal invest-
ment management strategy, (2) to facilitate resolution of
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family disputes through equal sharing of information, and (3)
to protect the family assets and Jewell from Rory Crumley
(Rory), the Turners’ grandson with addiction problems, and
Rory from himself. We concluded that the objective facts in
the record failed to establish that there was a legitimate and
significant nontax reason for formation of Turner & Co., that
Clyde Sr. retained an interest in the transferred assets, and
that the purpose of Turner & Co. was primarily testa-
mentary. See Estate of Turner I, slip op. at 47–51. We also
concluded that none of the assets contributed to Turner &
Co. required active management or special protection, nor
did Clyde Sr. have a distinct investment philosophy that he
hoped to perpetuate. Id. at 38–39. We held that section 2036
includes the values of the transferred property in Clyde Sr.’s
gross estate. Id. at 53.
The estate requests that we reconsider several findings of
fact and our conclusion with respect to the application of sec-
tion 2036. In the estate’s view, once we do so, it becomes
clear that the estate provided credible evidence to shift the
burden of proof to respondent under section 7491(a) on the
issue of whether Clyde Sr. had a legitimate and significant
nontax purpose for the formation of Turner & Co. However,
as we stated in Estate of Turner I, slip op. at 30, and as we
observed in Knudsen v. Commissioner, 131 T.C. 185, 189
(2008), in a case where the standard of proof is the prepon-
derance of the evidence and the preponderance of the evi-
dence favors one party, we may decide the case on the weight
of the evidence and not on an allocation of the burden of
proof. We shall not reconsider our conclusion regarding the
application of section 7491(a).
We now turn to the estate’s contentions regarding the
application of section 2036. First, the estate contends that
our statement that ‘‘[w]e are particularly struck by the
implausibility of petitioner’s assertion that tax savings
resulting from the family limited partnership were never dis-
cussed during a meeting’’ is an erroneous and unfair
characterization of the estate’s position and is contrary to
stipulated facts. The estate relies on the testimony of Mr.
Coyle, the Turners’ attorney, who testified that the law firm
presented the Turners with a tax planning option with alleg-
edly superior tax benefits. However, the Turners’ rejection of
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310 138 UNITED STATES TAX COURT REPORTS (306)
another tax planning vehicle does not establish a nontax rea-
son for the creation of Turner & Co.
The estate also mistakenly contends that respondent’s lack
of objection to certain of its proposed findings of fact creates
binding stipulations that the Court must find as relevant
facts. Although we have on occasion deemed the lack of objec-
tion to a proposed finding of fact to be a concession that it
is correct except to the extent that it is clearly inconsistent
with the opposing party’s brief, see Fankhanel v. Commis-
sioner, T.C. Memo. 1998–403, aff ’d without published
opinion, 205 F.3d 1333 (4th Cir. 2000); Estate of Freeman v.
Commissioner, T.C. Memo. 1996–372, we find facts on the
basis of the record as a whole, and we are not obligated to
find facts that we do not consider relevant or necessary to
our holdings. The estate has pointed to no instance where we
found or failed to find facts inappropriately or erroneously.
Second, the estate asks us to take into account various
other facts regarding the nontax purposes for the formation
of Turner & Co., including the facts regarding Marc’s role in
handling his grandparents’ finances and bookkeeping, the
Turners’ concern regarding management of their assets, dis-
putes among family members, and the timing of the transfer
of assets to Turner & Co. The estate has failed to dem-
onstrate any unusual circumstances or substantial errors of
fact or law that would justify reconsideration of our opinion
and the findings of fact contained therein.
Third, the estate asks us to reconsider the holding that
consolidated asset management generally is not a significant
nontax purpose for forming a limited partnership except for
assets requiring active management or special protection. As
we discussed in Estate of Turner I, we previously have held
that consolidated asset management may be a legitimate and
significant nontax purpose. Estate of Schutt v. Commissioner,
T.C. Memo. 2005–126; see also Estate of Black v. Commis-
sioner, 133 T.C. 340, 371 (2009). However, consolidated asset
management generally is not a significant nontax purpose
where a family limited partnership is ‘‘ ‘just a vehicle for
changing the form of the investment in the assets, a mere
asset container.’ ’’ Estate of Turner I, slip op. at 36 (quoting
Estate of Erickson v. Commissioner, T.C. Memo. 2007–107).
As we concluded in Estate of Turner I, there was no signifi-
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cant nontax reason for the formation of Turner & Co. on the
facts of this case, and we shall not reconsider our conclusion.
Fourth, the estate asks us to reconsider our statement that
the Turners’ concern regarding asset management ‘‘could
have been readily addressed without transferring the assets
to a family limited partnership.’’ Estate of Turner I, slip op.
at 41. The estate points out that ‘‘[t]o the extent some other
potential alternative exists, taxpayers are free to choose
between alternative structures as they see fit and not in a
way that maximizes tax revenue.’’ However, a taxpayer’s
freedom of choice is subject to various statutory and judicial
limitations. For example, in the context of the bona fide sale
exception to section 2036, one limitation is the existence of
a legitimate and significant nontax reason for the creation of
the partnership. As we held in Estate of Turner I, we are not
persuaded on the basis of the record as a whole that such a
purpose existed when Turner & Co. was formed.
We also reject the estate’s invitation to reconsider our
conclusion regarding the role that Turner & Co. allegedly
had in protecting Rory from himself and Jewell from Rory.
We fail to see how transferring assets to a limited partner-
ship and then granting a portion of the limited partnership
interest to a trust for the benefit of Rory provided any mean-
ingful additional protection of family assets because Rory had
no ownership interest in any of the assets before the creation
of the partnership structure.
In Estate of Turner I we considered and addressed the
estate’s arguments, witnesses’ testimony, and documentary
evidence. The estate has not demonstrated any manifest
error of fact. We will therefore deny the motion regarding the
application of section 2036.
II. The Marital Deduction Issue
The estate contends that even if section 2036 applies, the
estate has no estate tax deficiency because Clyde Sr.’s will
allows the estate to claim an increased marital deduction. We
disagree.
The facts pertinent to our consideration of this issue are as
follows. In 2002, upon the formation of Turner & Co., Clyde
Sr. and Jewell each contributed assets with a fair market
value of $4,333,671 (total value of $8,667,342) to Turner &
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312 138 UNITED STATES TAX COURT REPORTS (306)
Co. In exchange, they each received a 0.5% general partner-
ship interest and a 49.5% limited partnership interest. By
January 1, 2003, Clyde Sr. transferred 21.7446% of his lim-
ited partnership interest in Turner & Co. as gifts to family
members. On the date of his death, he owned a 0.5% general
partnership interest and a 27.7554% limited partnership
interest in Turner & Co. As we stated in Estate of Turner I,
the parties appear to agree that Turner & Co.’s net asset
value as of the date of Clyde Sr.’s death was $9,580,520. 3
Because of the discounts for lack of marketability and lack
of control, the estate reported that the 0.5% general partner-
ship interest had a value of $30,744 and that the 27.7554%
limited partnership interest had a value of $1,578,240.
The estate reported that an 18.8525% limited partnership
interest was allocated to the surviving spouse and an
8.9029% interest was allocated to a bypass trust. 4 Clyde Sr.’s
estate claimed a marital deduction of $1,820,435, of which
$1,072,000 pertained to the 18.8525% interest in Turner &
Co. that passed to Jewell.
In Estate of Turner I we held that under section 2036 the
assets that Clyde Sr. transferred to Turner & Co. must be
included in his gross estate. Estate of Turner I, slip op. at
52–53. The estate contends that under Clyde Sr.’s will, the
surviving spouse’s right to the pecuniary marital bequest
requires that the surviving spouse receive assets equal to the
amount necessary to reduce estate taxes to zero. The marital
deduction formula provision of Clyde Sr.’s will reads as fol-
lows:
If Jewell survives me and if there is a federal estate tax in effect at the
time of my death, I give, devise and bequeath to her cash, securities or
other property of my estate (undiminished by any estate, inheritance,
succession, death or similar taxes) having a value equal to the maximum
marital deduction as finally determined in my federal estate tax pro-
ceedings, less the aggregate amount of marital deductions, if any, allowed
for such tax purposes by reason of property or interests in property passing
or which have passed to my said wife otherwise than pursuant to the
provisions of this Item; provided, however, the amount of this bequest
shall be reduced by the amount, if any, needed to increase my taxable
3 In his computation for entry of decision submitted to the Court after we filed Estate of Turn-
er I, respondent calculated the deficiency using Turner & Co.’s net asset value of $9,488,714.
Respondent states that for the Rule 155 computation he used the lower amount set forth in the
notice of deficiency because that amount is to the estate’s benefit.
4 These findings of fact supplement our findings of fact in Estate of Turner I.
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estate (for federal estate tax purposes) to the largest amount that, after
allowing for the unified credit against the federal estate tax, and the state
death tax credit against such tax * * *, will result in the smallest, if any,
federal estate tax being imposed on my estate. The term ‘‘maximum mar-
ital deduction’’ shall not be construed as a direction by me to exercise any
election respecting the deduction of estate administration expenses, the
determination of the estate tax valuation date, or any other tax election
which may be available under any tax laws, only in such manner as will
result in a larger allowable estate tax marital deduction than if the con-
trary election had been made. My Executor shall have the sole discretion
to select the assets which shall constitute this bequest. In no event, how-
ever, shall there be included in this bequest any asset or the proceeds of
any asset which will not qualify for the federal estate tax marital deduc-
tion, and this bequest shall be reduced to the extent that it cannot be cre-
ated with such qualifying assets. My Executor shall value any asset
selected by my Executor for distribution in kind as a part of this bequest
at the value of such asset at the date of distribution of such asset.
Respondent disagrees that the will provision allows the
estate to claim an increased marital deduction.
Generally, applying section 2036 in the context of a family
limited partnership raises a twofold problem for the marital
deduction calculation. The first problem (which is not at
issue in this case) arises because appraisals of partnership
interests use various discounts, such as discounts for lack of
marketability and lack of control. When section 2036 applies,
it pulls undiscounted assets that the decedent transferred to
the partnership into the gross estate. The estate, however,
claims on the return the marital deduction using a dis-
counted value of the partnership interest pertaining to those
assets, to the extent the partnership interest passes to the
surviving spouse. In some cases the Internal Revenue Service
has taken the position that even when section 2036(a)
applies, the marital deduction is measured by the value of
what actually passes to the surviving spouse, which is a dis-
counted partnership interest, and not by the value of the
underlying assets. Estate of Black v. Commissioner, 133 T.C.
340, 342 (2009); Estate of Shurtz v. Commissioner, T.C.
Memo. 2010–21. This produces a mismatch between values
for the gross estate inclusion and the marital deduction cal-
culation. 5 However, this type of mismatch is not present in
5 We faced a problem of a mismatch between the values of assets for the purpose of inclusion
in the gross estate and for the purpose of calculating the marital deduction in Estate of Black
v. Commissioner, 133 T.C. 340, 342 (2009), and Estate of Shurtz v. Commissioner, T.C. Memo.
Continued
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314 138 UNITED STATES TAX COURT REPORTS (306)
this case: respondent allowed an increased marital deduction
that he calculated on the basis of the value of assets trans-
ferred in exchange for the partnership interests that Clyde
Sr. held at death, rather than on the basis of the discounted
values of the general and limited partnership interests that
Clyde Sr. owned at death, to the extent that they passed to
Jewell. The estate recognizes that, and we leave this mis-
match problem for another day.
The second type of problem caused by the application of
section 2036 arises when a decedent transfers a portion of
the partnership interest during his lifetime as a gift to some-
one other than the spouse. On the estate tax return the
estate claims a marital deduction for the partnership interest
that passes to the surviving spouse, but section 2036 pulls
assets underlying the partnership interest into the gross
estate, including assets pertaining to the transferred partner-
ship interest. Although under section 2036 assets underlying
the partnership interest transferred as a gift are included in
the gross estate, neither those assets nor the corresponding
partnership interest passes to the surviving spouse.
This type of mismatch is at issue in this case. In Estate of
Turner I we concluded that section 2036 applied to the
transfer of assets to the limited partnership, and section
2036 caused the inclusion of the assets transferred to the
partnership in Clyde Sr.’s gross estate. A portion of those
assets includes assets underlying the 21.7446% partnership
interest that Clyde Sr. transferred as a gift. Because Clyde
Sr. no longer owned the 21.7446% limited partnership
interest at his death, our holding that section 2036 requires
the inclusion of the underlying assets in his estate means
that the gross estate includes assets that Clyde Sr. had
2010–21. For example, in Estate of Black v. Commissioner, 133 T.C. at 342, we stated that if
the fair market value of the stock that the decedent contributed to the partnership, rather than
the fair market value of the decedent’s interest in the partnership, was includable in his gross
estate under sec. 2036, we had to decide ‘‘whether the marital deduction to which Mr. Black’s
estate is entitled under section 2056 should be computed according to the value of the partner-
ship interest that actually passed to Mrs. Black or according to the value of the underlying stock
apportionable to that interest’’. See also Estate of Shurtz v. Commissioner, T.C. Memo. 2010–
21. However, in those cases we held that sec. 2036(a) did not apply because the transfers of
assets to the family limited partnerships met the bona fide sale exception. See Estate of Black
v. Commissioner, 133 T.C. at 375; Estate of Shurtz v. Commissioner, T.C. Memo. 2010–21. Ac-
cordingly, the issue became moot, and the estates computed the marital deductions according
to the value of the partnership interests that actually passed to the surviving spouses. See Es-
tate of Black v. Commissioner, 133 T.C. at 375; Estate of Shurtz v. Commissioner, T.C. Memo.
2010–21.
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already transferred before his death. 6 On the marital deduc-
tion side, however, the estate claimed on the return the dis-
counted value of the partnership interest that passed to the
surviving spouse. Respondent contends that the estate may
not claim a marital deduction for the assets or the partner-
ship interest that Clyde Sr. transferred as gifts during his
lifetime.
The estate, however, contends that under the formula mar-
ital deduction clause of the will quoted above, see supra pp.
312–313, the estate may recalculate the marital deduction
and claim the marital deduction for the assets underlying the
21.7446% partnership interest. The estate argues that even
if section 2036 applies, the will requires the estate to
increase the value of the marital gift. In the estate’s view,
section 2036 applies a legal fiction for purposes of calculating
the gross estate, and, for consistency, the marital deduction
can also be increased to reflect that fiction. The estate argues
that it would be inconsistent to conclude that Clyde Sr.
retained a right to possess or enjoy assets he contributed to
the partnership and at the same time ignore the values of
those assets included in the gross estate under section 2036
in calculating the marital deduction. 7
Respondent disagrees that the Code allows the estate to
increase the marital deduction in that manner. He deter-
mined that ‘‘[t]he taxable items are the portion of Turner &
Co., LP which was gifted, as it does not go to the spouse’’.
Respondent contends that Clyde Sr. no longer owned the
assets underlying the transferred partnership interest or the
partnership interest itself and therefore he could not pass
either to Jewell. Respondent contends that although section
2036 pulls the assets into the estate, the assets do not
qualify for the marital deduction. We must decide whether
the estate may apply the marital deduction formula provision
to increase the amount of the marital deduction for the
6 In the notice of deficiency respondent increased Clyde Sr.’s taxable estate by the net asset
value of the property transferred to Turner & Co. but made a corresponding reduction to the
adjusted taxable gifts.
7 In the opening brief, the estate also claims that the marital deduction would not be reduced
by the amount of the Federal estate tax liability because Clyde Sr.’s will requires that the mar-
ital gift be undiminished by the estate tax. The estate did not raise this aspect of the calcula-
tions in the motion, and we understand the estate either to have abandoned the argument or
to have adopted respondent’s suggestion in the reply brief that any dispute on this point be re-
solved in the context of the Rule 155 computation.
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316 138 UNITED STATES TAX COURT REPORTS (306)
assets that are part of the gross estate yet do not actually
pass to the surviving spouse.
We turn to the relevant Code sections. Generally, an estate
may deduct from the value of the gross estate the value of
property ‘‘which passes or has passed from the decedent to
his surviving spouse’’. See sec. 2056(a); sec. 20.2056(a)–1(a),
Estate Tax Regs. The value of the interest must be includ-
able in the decedent’s gross estate. Sec. 2056(a). Respondent
relies on section 2056(a) and interprets it as limiting the
deduction to the value of the property actually passing to the
surviving spouse.
The statutory definition of the term ‘‘passing’’ is found in
section 2056(c) and is very broad. Section 2056(c) provides
that ‘‘[f]or purposes of this section, an interest in property
shall be considered as passing from the decedent’’ to any per-
son if he or she receives it by will, intestate succession,
dower or elective share, right of survivorship, transfer by the
decedent at any time, the exercise (or in default on nonexer-
cise) of a power of appointment, or pursuant to a life insur-
ance beneficiary designation. See also sec. 20.2056(c)–1,
Estate Tax Regs. Under the regulations, ‘‘[a] property
interest is considered as passing to the surviving spouse only
if it passes to the spouse as beneficial owner’’. 8 Sec.
20.2056(c)–2(a), Estate Tax Regs. (emphasis added). Neither
the partnership interest that Clyde Sr. transferred by gift
nor the underlying assets passed or could pass to Jewell as
a beneficial owner, and under section 20.2056(c)–2(a), Estate
Tax Regs., such property interests are not considered as
passing to the surviving spouse. Accordingly, under section
2056(a) the estate may not deduct from the value of the gross
estate an amount equal to the value of either the transferred
partnership interest or the underlying assets.
The structure of the applicable regulations, see secs.
20.2056(c)–1, 20.2056(c)–2, and 20.2056(c)–3, Estate Tax
Regs., supports our conclusion. Section 20.2056(c)–1, Estate
Tax Regs., contains general rules for determining the person
to whom any property interest ‘‘passed from the decedent’’.
Section 20.2056(c)–2, Estate Tax Regs., defines the phrase
‘‘passed from the decedent to his surviving spouse’’, as dis-
cussed above. Section 20.2056(c)–3, Estate Tax Regs., defines
8 The regulations contain a number of exceptions not relevant in this case.
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the phrase ‘‘passed from the decedent to a person other than
his surviving spouse’’ as any property interest which, under
the definition of section 20.2056(c)–1, Estate Tax Regs., is
considered as having ‘‘passed from the decedent’’ and which
under the rules of section 20.2056(c)–2, Estate Tax Regs., is
not considered as having ‘‘passed from the decedent to his
surviving spouse’’. Section 20.2056(c)–3, Estate Tax Regs.,
also provides that ‘‘[i]t is immaterial whether the property
interest which passed from the decedent to a person other
than his surviving spouse is included in the decedent’s gross
estate.’’ These regulations read as a whole suggest that
irrespective of whether property is included in the decedent’s
gross estate, property that passed to a person other than a
surviving spouse cannot also be considered as passing to the
surviving spouse. Because Clyde Sr. transferred the under-
lying assets to the partnership and then transferred the por-
tions of the limited partnership interest as gifts during his
lifetime, any property interest in either the partnership
interest transferred to persons other than Jewell or the
assets underlying that interest could not and did not pass to
Jewell for purposes of section 2056. Therefore, the estate
may not recalculate the marital deduction to include the
transferred partnership interest or the underlying assets.
In reaching our conclusion, we also take into account the
place of the marital deduction in the overall structure of the
wealth transfer system. Generally, section 2001(a) imposes a
tax ‘‘on the transfer of the taxable estate of every decedent
who is a citizen or resident of the United States.’’ Section
2051 defines the taxable estate as ‘‘the value of the gross
estate’’ less applicable deductions. The marital deduction
under section 2056 is one such applicable deduction. The
policy behind the marital deduction rule is that property
passes untaxed from the first spouse to die to his or her sur-
viving spouse but then is included in the estate of the sur-
viving spouse. Estate of Letts v. Commissioner, 109 T.C. 290,
295 (1997), aff ’d without published opinion, 212 F.3d 600(11th Cir. 2000). The marital deduction therefore does not
eliminate or reduce the tax on the transfer of marital assets
out of the marital unit but permits deferral until the death
of or gift by the surviving spouse.
As follows from the foregoing, allowing a marital deduction
with respect to an asset to the estate of the first spouse to
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318 138 UNITED STATES TAX COURT REPORTS (306)
die presupposes that the surviving spouse, if she does not
consume the asset, would include it in the transfer tax base
(subject to applicable exemptions), either when she makes a
gift of the property during her lifetime or upon her death. Cf.
secs. 2033, 2511; Estate of Letts v. Commissioner, 109 T.C. at
295. Accordingly, if Clyde Sr.’s estate claims a marital deduc-
tion for the partnership interest Clyde Sr. gave as gifts
during his lifetime or the underlying assets, the marital
deduction presupposes that Jewell would include values of
the transferred partnership interest or the underlying assets
in the gift tax base if she gives them as gifts or her estate
would have to include them in her gross estate upon her
death. 9 Jewell could not consume the assets attributable to
the partnership interest that Clyde Sr. transferred as gifts
because she never owned them. She also could not transfer
it as gifts because the partnership interest Clyde Sr. trans-
ferred as gifts did not pass to her as ‘‘beneficial owner’’. See
sec. 20.2056(c)–2(a), Estate Tax Regs. Lastly, Jewell would
not include the partnership interest that Clyde Sr. had trans-
ferred as gifts during his lifetime or the assets attributable
to it in her gross estate because none of the Code provisions
would require her to do so. The general inclusion section, sec-
tion 2033, provides: ‘‘The value of the gross estate shall
include the value of all property to the extent of the interest
therein of the decedent at the time of his death.’’ Sections
2034 through 2045 require the inclusion of several narrowly
defined classes of assets, none of which would apply to the
assets we are considering. Allowing a marital deduction for
the transferred partnership interest or the assets would
allow them to leave the marital unit without a transfer tax
either at the death of the first spouse or upon the transfer
by gift or at the death of the second spouse.
The rationality of the estate and gift tax regimes regarding
the marital deduction is also illustrated in sections
2056(b)(7), 2044, and 2519. Section 2056(b)(7) provides an
exception to the general rule that a marital deduction is not
allowed for terminable interest property passing from a
9 After Clyde Sr.’s death, on September 18, 2006, Jewell authorized the establishment of four
separate partnerships: one for each of her surviving children and one for Trey and Rory. Jewell
was a limited partner and a general partner in each partnership. Turner & Co. was dissolved
effective January 8, 2009.
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(306) ESTATE OF TURNER v. COMMISSIONER 319
decedent to his or her surviving spouse. 10 See sec. 2056(b).
Section 2056(b)(7) provides an exception to the terminable
interest rule for qualified terminable interest property (QTIP).
It allows a marital deduction for QTIP to the estate of the
first spouse to die although the surviving spouse receives
only an income interest and not the remainder and has no
control over the disposition of the remainder.
After the death of the surviving spouse, section 2044
requires that the value of his or her gross estate include the
value of QTIP. Section 2519 is similar to section 2044, but it
addresses lifetime transfers of QTIP by the surviving
spouse. 11 But for these sections, the QTIP remainder, never
actually owned by the surviving spouse, would not be
included in a transfer tax base by the surviving spouse or
her estate. Sections 2044 and 2519 therefore ensure that tax-
ation of the transfer of the QTIP remains consistent with the
basic policy of the marital deduction, namely that either gift
tax or estate tax applies (subject to the applicable exemp-
tions) when the property leaves the marital unit.
If we were to accept the estate’s position, Jewell’s estate
would not be required to include in the gross estate the
values of assets that Jewell did not actually own but with
respect to which a marital deduction was allowed to Clyde
Sr.’s estate. There is no Code provision similar to sections
2044 and 2519 that would require adding such assets into
her transfer tax base. The lack of such a provision would
allow the assets to leave Clyde Sr. and Jewell’s marital unit
without being taxed, thereby frustrating the purpose and the
policy underlying the marital deduction. Although the for-
mula of Clyde Sr.’s will directs what assets should pass to
the surviving spouse, the assets attributable to the trans-
ferred partnership interest or the partnership interest itself
are not available to fund the marital bequest; their disposi-
tion to the donees occurred during Clyde Sr.’s lifetime but is
10 A terminable interest is an interest passing from a decedent to his or her surviving spouse
that will end 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). The terminable interest rule denies a mar-
ital deduction if: (1) an interest passing to the surviving spouse is a terminable interest, (2) an
interest in such property passes from the decedent to someone other than his or her surviving
spouse for less than full and adequate consideration, and (3) the third person will possess or
enjoy the property after the termination or failure of the interest passing to the surviving
spouse. Id.11 The estate of the surviving spouse or the surviving spouse, as applicable, may recover the
applicable transfer tax from QTIP recipients. See sec. 2207A(a).
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320 138 UNITED STATES TAX COURT REPORTS (306)
deemed delayed until Clyde Sr.’s death by our holding that
section 2036 applies. Because the property in question did
not pass to Jewell as beneficial owner, we reject the estate’s
position and hold that the estate may not rely on the formula
of Clyde Sr.’s will to increase the marital deduction.
Because we did not address the marital deduction issue in
Estate of Turner I, we supplement Estate of Turner I con-
sistent with the foregoing. We have considered the remaining
arguments of both parties for results contrary to those
expressed herein and, to the extent not discussed above, find
those arguments to be irrelevant, moot, or without merit.
For the above reasons,
An appropriate order will be issued.
f
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