Quincy State Bank v. Comm'r of Internal Revenue (In re Estate of Shelfer)

• Decision Date: 19 July 1994
• Docket Number: No. 25389–92.,25389–92.
• Citation: 103 T.C. No. 2,103 T.C. 10
• Parties: ESTATE OF Lucille P. SHELFER, Deceased, the Quincy State Bank, Personal Representative, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

103 T.C. 10

103 T.C. No. 2

ESTATE OF Lucille P. SHELFER, Deceased, the Quincy State Bank, Personal Representative, Petitioner,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 25389–92.

United States Tax Court.

July 19, 1994.

Thornton M. Henry, West Palm Beach, FL, for petitioner.

Eli J. Dicker, Miami, FL, for respondent.

A surviving spouse, S, received an income interest in a trust. The income was payable to S in quarterly installments. Under the terms of the trust, the income accumulating between the last distribution date and the date of S's death passed to the remainder beneficiary of the trust.

Held: The trust is not qualified terminable interest property under sec.2056(b)(7), I.R.C. Estate of Howard v. Commissioner, 91 T.C. 329 (1988), revd. 910 F.2d 633 (9th Cir.1990), followed.

LARO, Judge:

This case is before the Court pursuant to a petition filed by Estate of Lucille P. Shelfer, Deceased (petitioner), The Quincy State Bank, personal representative for a redetermination of respondent's determination of a $1,321,638.30 deficiency in Federal estate tax. Pursuant to Rule 122(a), ¹ the parties submitted this case to the Court without trial; the record consists of the pleadings and stipulated facts with accompanying exhibits.

After a concession by petitioner,² the issue for decision is whether a trust for which an election had been made under section 2056(b)(7) to obtain a marital deduction for qualified terminable interest property (QTIP) under section 2056, was a QTIP trust so as to be includable in the gross estate of Lucille P. Shelfer (decedent). We hold that the trust was not a QTIP trust, and accordingly is not includable in decedent's gross estate.

FINDINGS OF FACT

The facts in the joint stipulation and accompanying exhibits are incorporated herein by this reference. At the time the petition was filed in this case, the personal representative's principal place of business was Quincy, Florida. Decedent was a resident of Florida at the time of her death.

Elbert B. Shelfer, Jr. (Mr. Shelfer), and decedent were husband and wife until Mr. Shelfer's death on September 13, 1986. Prior to his death, Mr. Shelfer executed his Last Will and Testament (the Will). Under the terms of the Will, the residue of Mr. Shelfer's estate (the Estate) was divided into two shares. The first share, designated “share number one”, consisted of an amount equal to one-third of the residue; the second, designated “share number two”, consisted of the remaining two-thirds of the residue. Pursuant to the Will, share number one and share number two were held in separate trusts. The Quincy State Bank served as trustee for each trust. Hereinafter, the trusts shall be referred to separately as the Share Number One Trust and the Share Number Two Trust.

Under the Will, decedent received the net income from the Share Number Two Trust, payable in quarterly installments during her lifetime. Decedent had no power to require distribution of income from the Share Number Two Trust more frequently. Decedent had no power of appointment over the income of the Share Number Two Trust that accumulated from the date of the last distribution to the date of her death. The Will did not require that all income earned after the last distribution date and before decedent's death be distributed to her or her estate. Pursuant to the Will, upon decedent's death, the Share Number Two Trust terminated, with the principal and any undistributed income therefrom payable to Mr. Shelfer's niece. The value of the Share Number Two Trust was $2,829,610 at the date of decedent's death.

On June 16, 1987, the personal representative of the Estate of Mr. Shelfer filed a Form 706, U.S. Estate Tax Return, for the Estate. The personal representative elected to treat 54.273 percent of the assets of the Share Number Two Trust as QTIP, and claimed a marital deduction under section 2056 for that percentage of the assets. The Form 706 for the Estate was later selected for an estate tax examination. On April 26, 1989, an estate tax examination report was issued that allowed the marital deduction for the claimed partial QTIP election, and increased to 55.945 percent the percentage of the assets of the Share Number Two Trust subject to the election. On May 10, 1989, an estate tax closing letter was issued to the personal representative of the Estate. The Estate did not file an amended Form 706. The statute of limitations on assessment of the Estate expired on June 16, 1990.

Decedent died on January 18, 1989. On October 18, 1989, The Quincy State Bank filed a Form 706 on behalf of decedent's estate. The trust property for which a QTIP election had been made was not included in the gross estate on the Form 706 for decedent's estate.³ In order to qualify as a QTIP trust, the Share Number Two Trust must meet the requirements of section 2056(b)(7)(B). ⁴ On July 12, 1990, respondent commenced an estate tax audit of the Form 706 for decedent's estate. On December 12, 1990, an estate tax examination report was issued to decedent's estate in which the same percentage of the Share Number Two Trust treated as QTIP was included in the gross estate of decedent's estate. A notice of deficiency in estate tax was mailed to petitioner on August 17, 1992.

OPINION

Section 2001 imposes a tax on the transfer of the taxable estate of every citizen and resident decedent. The taxable estate of a decedent is the decedent's gross estate less allowable deductions. Sec. 2051. Section 2056(b)(7)(A) allows the value of property that is QTIP to be deducted from the gross estate. The value of the QTIP is then included in the surviving spouse's gross estate. Sec. 2044.

Respondent determined that a portion of the Share Number Two Trust is QTIP that must be included in decedent's gross estate under section 2044. Petitioner argues that the Share Number Two trust is not QTIP, and therefore no part of it is includable in decedent's gross estate. We must decide whether a portion of the Share Number Two Trust is QTIP. If it is not, then its value is not includable in decedent's estate. See sec. 2044. Among other requirements, the Share Number Two Trust must be property in which the decedent had a “qualifying income interest for life”. Sec. 2056(b)(7)(B)(i)(II). Under section 2056(b)(7)(B)(ii), a surviving spouse has a “qualifying income interest for life” if, in addition to meeting other requirements, he or she “is entitled to all the income from the property, payable annually or at more frequent intervals”. Respondent argues that decedent had a qualifying income interest for life because she was entitled to all of the income from the Share Number Two Trust, payable at least annually. Petitioner argues that decedent did not have a qualifying income interest for life because she was not entitled to the income accruing between the distribution date just prior to her death, and the date of her death. Instead, under the terms of the Share Number Two Trust, that “stub period” income passed to Mr. Shelfer's niece. We agree with petitioner.

By making a QTIP election, the executor of the Estate treated a portion of the Share Number Two Trust as a QTIP trust. However, if this election was erroneous, and the trust was never a QTIP trust, the election to treat it as such was not valid. Estate of Howard v. Commissioner, 91 T.C. 329, 333 (1988), revd. 910 F.2d 633 (9th Cir.1990); see also Estate of Cavenaugh v. Commissioner, 100 T.C. 407, 417 (1993). An erroneous election by the executor certainly cannot override the terms of the statute and make a trust that otherwise would not qualify as QTIP into a QTIP trust.

In Estate of Howard v. Commissioner, supra at 338, this Court held that for a trust to be a QTIP trust under section 2056(b)(7), “the income accumulated by the trust between the last date of distribution and the surviving spouse's death must be disposed of as the surviving spouse directs either by virtue of being payable to the surviving spouse's estate or through a power of appointment which includes a power to appoint to her estate”. (Fn. ref. omitted.) A trust that provides that such income be distributed to the remainder beneficiary or beneficiaries simply does not do. Id. In so holding, this Court applied the test advanced by the taxpayer, which requires that two components be present in order to comply with section 2056(b)(7)(B)(ii)(I): (1) The surviving spouse must be entitled to all the income, and (2) distributions of income must be made at least annually. Id. at 334. We reinforce our prior holding today; the plain language of 2056(b)(7)(B)(ii)(I) provides: “The surviving spouse is entitled to all the income from the property, payable annually or at more frequent intervals”. ⁵

We are not unmindful that Estate of Howard v. Commissioner, supra was reversed by a divided panel of the Court of Appeals for the Ninth Circuit. See Estate of Howard v. Commissioner, 910 F.2d 633 (9th Cir.1990), revg. 91 T.C. 329, 338 (1988). In so doing, the Court of Appeals adopted a reading of section 2056(b)(7)(B) “consistent with the realities of trust administration.” Id. at 635. The court determined that the statute did not require that the income that accumulates each day must be paid to the surviving spouse each day. We agree that section 2056(b)(7) does not impose as a condition of being a QTIP trust an unrealistic requirement that income must be paid to the surviving spouse on a daily basis. In fact, the statute does not require distributions more frequently than annually.⁶ However, the statute also requires that the surviving spouse receive “all the income”. The Court of Appeals stated that it suffices that “the spouse be entitled to all the income at the time of its annual or more frequent distribution.” Id. (emphasis added). The statute itself imposes no such limitation. In effect, the court interpreted the statute to include the words, “at the time of its annual or more frequent distribution.” This...