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

• Citation: 97 T.C. No. 22,97 T.C. 327
• Decision Date: 16 September 1991
• Docket Number: Docket No. 24320-90.
• Parties: ESTATE OF ARTHUR M. CLAYTON, JR., DECEASED, MARY MAGDALENE CLAYTON AND THE FIRST NATIONAL BANK OF LAMESA, INDEPENDENT CO-EXECUTORS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: United States Tax Court

97 T.C. 327

97 T.C. No. 22

ESTATE OF ARTHUR M. CLAYTON, JR., DECEASED, MARY MAGDALENE CLAYTON AND THE FIRST NATIONAL BANK OF LAMESA, INDEPENDENT CO-EXECUTORS, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 24320-90.

United States Tax Court

Filed September 16, 1991.

The will of decedent (D) gave his wife (W) an income interest in trust B and provided that, if D's executor did not elect to treat the property in trust B as “qualified terminable interest property” within the meaning of I.R.C. sec. 2056(b)(7), that property would pass to trust A. W's interest in trust A did not satisfy the requirements of sec. 2056(b)(7). HELD: D's estate is not entitled to an estate tax marital deduction for W's interest in the trust B property with respect to which an election was made. Wm. Monroe Kerr and A. M. Nunley III, for the petitioner.

James W. Lessis, for the respondent.

COHEN, JUDGE:

Respondent determined a deficiency of $531,534.97 in petitioner's Federal estate tax. The sole issue for decision is whether the surviving spouse's income interest in property constitutes “qualified terminable interest property” within the meaning of section 2056(b)(7) where the income interest is subject to the executor's election. Unless otherwise indicated, all section references are to the Internal Revenue Code as amended and in effect as of the date of decedent's death.

FINDINGS OF FACT

Some of the facts have been stipulated, and the facts set forth in the stipulation are incorporated in our findings by this reference. Arthur M. Clayton, Jr. (decedent), died on December 22, 1987. Decedent was survived by his second wife, Mary Magdalene Clayton (Mrs. Clayton), and by his four children from his first marriage. At the time the petition in this case was filed, Mrs. Clayton was a resident of the State of Texas, and the First National Bank of Lamesa, Texas (First National), was located in the State of Texas.

THE WILL

Decedent executed a Last Will and Testament (the will) on April 8, 1982, and a First Codicil (the codicil) to the will on June 23, 1982. In the will, decedent made a specific bequest of certain property to Mrs. Clayton. In addition, decedent created trusts for the benefit of Mrs. Clayton during her life.

The corpus of the first trust (trust A) consisted of “an interest in * * * [decedent's] estate equal in value to the amount in effect exempted from federal estate tax by application of the federal estate and gift tax unified credit available” to decedent's estate. The corpus was given to the trustees for the benefit of Mrs. Clayton during her life, and the remainder of trust A was for the benefit of decedent's children who were living at the date of death of Mrs. Clayton.

The corpus of the second trust (trust B) consisted of the residue of decedent's estate, that is, decedent gave “all of the rest of my estate to the trustees of Trust •B,”' for the benefit of Mrs. Clayton, “for and during the rest of her life,” and, upon her death, the remainder of trust B was to “be added to and become a part of the corpus of Trust •A', for the use and benefit of my then living children.”

With respect to trust B, Article THIRD, paragraph D of the will provided:

In the event my executors fail or refuse to make the election under Section 2056(b)(7)(B)(II)(v) of the Internal Revenue Code of 1954, as amended, with respect to my Trust “B” property on the return of tax imposed by Section 2001 of the Internal Revenue Code of 1954, as amended, then the property with respect to which such election was not made shall pass to and become a part of the corpus of Trust “A” for the benefit of my Trust “A” beneficiaries.

Finally, the will provided that, if Mrs. Clayton made a qualified disclaimer of interest in any part of the trust B assets within the meaning of section 2518, any assets disclaimed would pass to a third trust for the benefit of decedent's surviving children.

The will required that distributions of the current income of the trusts were to be made at the discretion of the trustees in such amounts as the trustees deemed necessary for the maintenance, health, education, and medical care of the beneficiary. With regard to distributions of the current income of trust B, however, Article SIXTH, paragraph A of the will provided:

in no event shall the amount distributable by my trustees from Trust “B” to Mary Magdalene Clayton during any year be less than the current net income, to include all taxable net income under the Internal Revenue Code as then existing, of Trust “B” during that year. * * *

Article SEVENTH, paragraph A gave Mrs. Clayton the power to appoint the assets of the trusts, in favor of decedent's children, during her life (by deed) or upon her death (by will); the power of appointment by deed, however, could not be exercised with respect to the trust B assets. The surviving spouse's powers of appointment were not to be exercised in favor of Mrs. Clayton, her estate, her creditors, or the creditors of her estate.

Article EIGHTH, paragraph V of the will provided as follows with respect to decedent's intent as to the treatment of the trust B property as “qualified terminable interest property”:

It is my intention that the assets of the Trust “B” trust be eligible to be treated, for federal estate tax purposes, as a [sic] “qualified terminable interest property” within the meaning of Section 2056 of the Internal Revenue Code, as amended. In no event shall my Trust “B” trustees be deemed to have any authority or power over Trust “B” assets which would prevent Trust “B” assets from being eligible to be treated as qualified terminable trust properties, if my executors make the timely election to have such properties treated as such.

In the will, decedent nominated, appointed, and constituted Mrs. Clayton and First National as co-trustees of trust A and trust B. In the event that Mrs. Clayton did not or could not serve as a trustee, First National was to serve as the sole trustee.

Decedent also nominated, appointed, and constituted Mrs. Clayton and First National as co-independent executors of the will. In the event that Mrs. Clayton did not or could not serve as executor, First National was to serve as the sole independent executor. The executors were granted the same powers, duties, privileges, authorities, and responsibilities that were conferred upon the trustees under the terms of the will.

PROBATE PROCEEDINGS

On February 4, 1988, an Application for Probate of a Written Will and for Letters Testamentary (the application) was filed in the County Court at Law of Ector County, Texas (the county court). In the application, it was requested:

that the qualification of the First National Bank of Lamesa, Texas, as an Independent Co-Executor be deferred until it makes and files its oath as required by law after the estate's federal estate tax return has been filed, and the time for timely filing of the return has expired. * * * The request is made that Letters Testamentary issue first to Mary Magdalene Clayton as sole Independent Executrix of the estate upon her making and filing her oath, and that when The First National Bank of Lamesa, Texas, as Independent Co-Executor shall qualify by filing its oath, new Letters Testamentary shall issue to Mary Magdalene Clayton and The First National Bank of Lamesa, Texas, as Independent Co-Executors of the estate.

On February 29, 1988, the county court issued an Order Admitting Will to Probate and Authorizing Letters Testamentary (the order). In addition to admitting the will and the codicil to probate, the order provided that Mrs. Clayton and First National were “duly qualified” to act as independent co-executors and to receive letters testamentary. The order also directed:

that * * * Letters Testamentary shall issue to Mary Magdalene Clayton who is appointed as sole Independent Executrix of the Estate of Decedent until the First National Bank of Lamesa, Texas, makes and files its oath as required by law after the estate's federal estate tax return has been filed, when new letters testamentary shall be issued to Mary Magdalene Clayton and the First National Bank of Lamesa, Texas, as Independent Co- Executors of the estate of decedent * * *. On that date, Mrs. Clayton executed her oath, and the county court issued letters testamentary to her as independent executrix.

Mrs. Clayton and First National each executed an oath as independent co-executrix and co-executor, respectively. On October 17, 1988, those oaths were filed and letters testamentary were issued to Mrs. Clayton and to First National as independent co-executors. First National declined to serve as an executor until after the estate tax return was filed because it believed that an election, pursuant to section 2056, should be made by Mrs. Clayton in her sole capacity as executrix.

TAX TREATMENT

The Federal estate tax return, Form 706, was mailed on September 20, 1988. On the return, Mrs. Clayton, as executrix, claimed a marital deduction in the amount of $1,565,585. On Schedule M of the return, “Bequests, etc., to Surviving Spouse,” the executrix checked the appropriate box and elected “to claim a marital deduction for qualified terminable interest property (QTIP) under section 2056(b)(7).” The total value of property interests not subject to a QTIP election was $78,950. The total value of property interests subject to a QTIP election was $1,077,635, which amount represented an undivided .563731 interest in specified bonds, notes, and cash listed on Schedules B and C of the return.

In the notice of deficiency, respondent determined, among other things, “that the marital deduction is $78,950.00 rather than $1,156,585.00 as reported on the estate tax return. Accordingly, the reported taxable estate is increased $1,077,635.00.”

OPINION

BACKGROUND

Section 2001 imposes a tax on the transfer of the taxable estate of all persons who are citizens or residents of the United States at the time of death. The amount of...