Howard v. Comm'r of Internal Revenue (In re Estate of Howard)

Decision Date23 August 1988
Docket NumberDkt. No. 9208-87
Citation91 T.C. 329,91 T.C. No. 26
PartiesESTATE OF ROSE D. HOWARD, DECEASED, ROGER W. A. HOWARD, VOLNEY E. HOWARD, III, ALANSON L. HOWARD, ROBERT L. BRINER, Trustees, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

A surviving spouse received an income interest in a trust. Under the terms of the trust, the income accumulating between the last distribution date and the surviving spouse's death passed to the remainder beneficiaries of the trust. HELD, the trust is not a qualified terminable interest property trust. Sec. 2056(b)(7), I.R.C. William W. Sumner, for the petitioner.

James W. Clark, for the respondent.

OPINION

TANNENWALD, JUDGE:

Respondent determined a deficiency in petitioner's Federal estate tax of $673,884.43. The issue for decision is whether a trust for which an election had been made under section 2056(b)(7) 1 relating to the marital deduction for qualified terminable interest property, was a qualified terminable interest property trust so as to be includable in decedent's estate. 2

The facts have been fully stipulated. The stipulation of facts and attached exhibits are incorporated herein by this reference.

Petitioner is the Estate of Rose D. Howard. Rose D. Howard is hereinafter referred to as ‘decedent.‘ Decedent died testate on February 11, 1984. She was a resident of California at the time of her death. All of the assets of petitioner passed in trust.

Decedent was married to Volney E. Howard, Jr., (Howard) at the time of his death on April 24, 1983. Included in Howard's gross estate for Federal estate tax purposes was the value of a trust which he and decedent had previously established and which is the trust involved herein. 3

Under the terms of the trust, the income was payable to decedent quarter-annually or at more frequent intervals. The trust instrument further provided: ‘Income accrued or held undistributed by the Trustee at the termination of any interest shall go to the next beneficiaries of the trust in proportion to their interests in the trust.‘

Except for a noncumulative right to withdraw a portion of principal of the trust annually, decedent had no power of disposition over the principal or the above-described income.

On January 24, 1984, Howard's estate filed a Federal estate tax return and elected to treat the trust as a qualified terminable interest property trust (QTIP trust), and claimed a marital deduction for the value of the trust property. On July 3, 1984, Howard's estate filed an amended Federal estate tax return, on which it claimed that the trust was not a QTIP trust and therefore not eligible for the marital deduction. The additional tax shown to be due thereon was assessed and paid.

A Federal estate tax return was filed for decedent's estate on November 13, 1984. Except for a figure purporting to be the value of decedent's right of withdrawal, that return did not include the value of the assets of the trust in the gross estate. That return also showed a credit for tax on prior transfers, which included a credit in respect of the value of the trust property which had been included in Howard's estate for Federal estate tax purposes.

Section 2001 imposes a tax on the transfer of the taxable estate of all citizen and resident decedents. Section 2051 defines taxable estate as the gross estate less deductions. ‘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.‘ Sec. 2033. Among the property included in the gross estate is qualified terminable interest property for which a marital deduction was allowed under section 2056(b)(7). Sec. 2044. 4

Under certain conditions, section 2056 allows a deduction from the gross estate for the value of property passing to the surviving spouse. Sec. 2056(a). If the spouse's interest in the property is a terminable interest, that is, it will terminate either on the lapse of time (for example, a life estate) or the occurrence or nonoccurrence of an event, generally no deduction is allowed. Sec. 2056(b)(1). If, however, the property is qualified terminable interest property, a deduction for its value is allowed. See sec. 2056(b)(7)(A).

Section 2056(b)(7)(B), which defines qualified terminable interest property, provides, in pertinent part:

(B) * * * 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, * * * and

(II) no person has a power to appoint any part of the property to any person other than the surviving spouse.

* * *

(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 2011. Such an election, once made, shall be irrevocable.

Resolution of the issue before us depends upon the meaning of ‘qualified income interest for life,‘ specifically, whether an instrument directing that the income of a trust that has been accumulated but not distributed at the date of the surviving spouse's death pass to someone other than the surviving spouse's estate creates such an interest. To have a ‘qualified income interest for life,‘ the surviving spouse must have been ‘entitled to all the income from the property, payable annually or at more frequent intervals * * *.‘ Sec. 2056(b)(7)(B)(ii)(I). Petitioner argues that, under that definition, there are two separate requirements which must be met for an income interest to be a qualified income interest: (1) the surviving spouse must be entitled to all the income and (2) distributions of income must be made at least annually. Accordingly, petitioner concludes that the trust does not meet these requirements because the remainder beneficiaries of the trust and not petitioner were entitled to the income that had accumulated at decedent's death. Respondent argues that it is sufficient to satisfy the requirements of a qualified income interest if all payments of income required under the trust instrument during the surviving spouse's lifetime are made to the surviving spouse — that is, that the words ‘payable annually or at more frequent intervals‘ simply limit the word ‘all‘ and do not constitute a separate requirement.

If petitioner is correct, and decedent's income interest did not qualify, then the trust is not a QTIP trust and is not includable in decedent's gross estate under section 2044. If respondent is correct, the trust is a QTIP trust and is includable in decedent's gross estate. We agree with petitioner.

At the outset, we deal with certain portions of respondent's argument which create what we consider to be smokescreens that simply befog the straightforward issue herein. Woven throughout respondent's brief is his contention that petitioner is merely trying to revoke the original election to treat the trust as a QTIP trust. We note that this election, which was made by Howard's estate, would not be petitioner's to revoke even if it were revocable. See sec. 2056(b)(7)(v). In any event, we do not think that petitioner is seeking to revoke the election. Section 2056(b)(7) sets out three requirements for ‘qualified terminable interest property.‘ The election is only one of them. Petitioner is arguing that another of them has not been met. Respondent's argument misses the essential point that, if the trust was never a QTIP trust, the election to treat it as such was not valid. In a similar vein, we ignore respondent's mathematical analysis in which he endeavors to show that the combined tax savings in respect of the estates of Howard and decedent if the trust is not a QTIP trust, because decedent's death occurred far earlier than anticipated when the estate tax return for Howard's estate was filed, were the primary motivation for petitioner's position. Mathematics — and particularly mathematics based on chance — are irrelevant to the resolution of the issue before us, namely, the proper interpretation of the governing statutory provisions.

Turning to a consideration of that issue, we think that petitioner's is the more reasonable reading of the statute. While ‘payable annually‘ may be seen as limiting the amount of income to which the surviving spouse must be entitled for an income interest to be qualified, a less strained reading of the statute leads to the conclusion that the words create a separate requirement that the income interest must meet. This reading gives ordinary meaning to both ‘all‘ and ‘payable annually,‘ which respondent's interpretation, limiting ‘all‘ to something less than that, would not. Were we to limit the word ‘all‘ as respondent suggests, the meaning of the statute would, in effect, be changed to require ‘at least annual distributions of all income accumulated to the time of the distribution‘ for the income interest to qualify. Had Congress intended that result, this wording would have been a much clearer manner of achieving it.

The legislative history of section 2056(b)(7) does not deal expressly with the meaning of ‘payable annually.‘ See H. Rept. 97- 201, at 161 (1981), 1981-2 C.B. 352, 378. 5 Such being the case, we must look to other sources for guidance. One source is another statutory provision using the same language, since the general rule is that words used in different parts of the same statute should be accorded the same meaning. See Sorensen v. Secretary of the Treasury, 475 U.S. 851, 860 (1986). We think section 2056(b)(5), which contains nearly identical language with that of section 2056(b)(7), constitutes such a source,...

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10 cases
  • Nicholson v. Comm'r of Internal Revenue (In re Estate of Nicholson)
    • United States
    • United States Tax Court
    • April 30, 1990
    ...the requirements of section 20.2056(b)-5(f), Estate Tax Regs. See H. Rept. 97-201 (1981), 1981-2 C.B. 352, 378; Estate of Howard v. Commissioner, 91 T.C. 329, 335 (1988). Under that regulation, a surviving spouse is entitled to ‘all the income from the property‘ if she has the equivalent ‘b......
  • Kerr v. Comm'r of Internal Revenue (In re Estate of Cavenaugh)
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    • United States Tax Court
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    ...see also Estate of Clayton v. Commissioner, supra at 1492; Estate of Howard v. Commissioner, 910 F.2d 633, 636 (9th Cir.1990), revg. 91 T.C. 329 (1988), and also, by discriminating use of the QTIP election and the unified credit, the opportunity to equalize or even zero out their taxable es......
  • Wallace v. Comm'r of Internal Revenue (In re Estate of Wallace)
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    ...are not entitled to judicial deference and generally carry no more weight than a position advanced by respondent. Howard v. Commissioner, 91 T.C. 329, 337 (1988); Estate of Laglia v. Commissioner, 88 T.C. 894,- 897 (1987); F.W. Woolworth Co. v. Commissioner, 54 T.C. 1233, 1265-1266 (1970). ......
  • Doherty v. Comm'r of Internal Revenue (In re Estate of Doherty), Docket No. 5568-88.
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    • United States Tax Court
    • October 18, 1990
    ...determination, whether or not property is in trust), with Estate of Howard v. Commissioner, 901 F.2d 633, 637 (9th Cir. 1990), revg. 91 T.C. 329 (1988) (suggesting that section 20.2056(b)-5(f), Estate Tax Regs., does not apply to QTIP property determination if property is in trust). A recen......
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2 books & journal articles
  • Significant recent developments in estate planning.
    • United States
    • The Tax Adviser Vol. 26 No. 12, December 1995
    • December 1, 1995
    ...Cir. 1994)[73 AFTR2D 94-2329, 94-1 USTC [paragraph] 60,153). (98) Est. of Lucille P. Shelfer, 103 TC 10 (1994). (99)Est. of Rose D. Howard, 91 TC 329 (9881, rev'd, 910 F2d 633 (9th Cir. 1990)(66 AFTR2D 90-5994, 90-2 USTC [paragraph] 60,033). (100) IRS Letter Rulings 9429018 14/25/94), 94300......
  • Significant recent developments in estate planning.
    • United States
    • The Tax Adviser Vol. 27 No. 12, December 1996
    • December 1, 1996
    ...103 TC 10 (1994), rev'd, 86 F3d 1045 (11th Cir. 1996)(78 AFTR2d 96-5177, 96-2 USTC [paragraph]60,238). (51) Est. of Rose D. Howard, 91 TC 329 (1988), rev'd, 910 F2d 633 (9th Cir. 1990)(66 AFTR2d 90-4993, 90-2 USTC [paragraph]60,033). (52) Est. of Willard E. Robertson, 98 TC 678 (1992), rev'......

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