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

• Decision Date: 30 May 1995
• Docket Number: No. 1250-93.,1250-93.
• Citation: 104 T.C. 652,104 T.C. No. 31
• Parties: ESTATE OF Edwin L. BOND, Deceased, Ruth B. Bond, Personal Representative, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

104 T.C. 652

104 T.C. No. 31

ESTATE OF Edwin L. BOND, Deceased, Ruth B. Bond, Personal Representative, Petitioner,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 1250-93.

United States Tax Court.

May 30, 1995.

Michael A. Patterson, Seattle, WA, and Paul Baummett (specially recognized), for petitioner.

John M. Altman, Michelle K. Loesch, and Robert F. Geraghty, Seattle, WA, for respondent.

D left his residual estate to his wife provided that she “survives distribution” and “survives distribution of her share of the remainder of my estate”, but otherwise left this property in a trust for his and his wife's children. Under Washington law title to real property vests in a devisee immediately upon a decedent's death, but personal property vests through distribution by administration of the estate. Under Washington case law “survive distribution” has no fixed meaning, but must be interpreted in the context of the will. In certain contexts it refers to surviving actual distribution of specific property.

Held: When the provisions of D's will are considered in light of the law of Washington, the value of the personal property left to D's wife is a terminable interest under sec. 2056(b), I.R.C., and not a part of the marital deduction. The real property which, under Wash. Rev. Code Ann. sec. 11.04.250 (West 1987), vests in the devisee immediately upon D's death and without administration or a decree of distribution is not a terminable interest under sec. 2056(b)(1), so the value of the real property devised by D to his wife is a part of the marital deduction.

SCOTT, Judge:

Respondent determined a deficiency in the Federal estate tax of the Estate of Edwin L. Bond in the amount of $440,326.

On April 20, 1994, petitioner, the Estate of Edwin L. Bond, Deceased, Ruth B. Bond, Personal Representative, filed a motion for summary judgment alleging that the Court should conclude, based on the will of Edwin L. Bond, decedent, that all of decedent's residual estate was left unconditionally to his wife and, therefore, was a part of the marital deduction. This motion was taken under advisement by the Court, and the case was heard on the merits.

One of the issues raised by the pleadings has been disposed of by agreement of the parties, leaving for decision whether decedent's bequest of his residual estate to his wife, subject to her surviving distribution or surviving distribution of her share of the remainder of his estate, was a bequest of a terminable interest under section 2056(b)(1)¹ for which no marital deduction is allowable. If we hold that the provisions of the will created to any extent a terminable interest, we must decide whether the value of the real property that passed to decedent's spouse as part of the residual estate is allowable as a marital deduction because of the provisions of the laws of the State of Washington with respect to when title to real property vests in a devisee.

FINDINGS OF FACT

Some of the facts have been stipulated and are found accordingly.

Edwin L. Bond (decedent) died on October 1, 1988. Decedent's wife, Ruth B. Bond (Mrs. Bond), who resided in Seattle, Washington, at the time of the filing of the petition in this case, was appointed personal representative of decedent's estate. Decedent was domiciled in Seattle, Washington, at the time of his death. A Federal estate tax return for decedent's estate was filed with the Internal Revenue Service Center in Seattle on December 29, 1989.

Decedent and Mrs. Bond were married in 1984. Decedent was survived by Mrs. Bond and his and Mrs. Bond's son Jonathan Bond. Decedent had two children by a prior marriage, Gregory M. Bond (Gregory Bond) and Benjamin R. Bond (Benjamin Bond). Jonathan Bond was the only child of the marriage between decedent and Mrs. Bond.

Decedent's sons, Gregory Bond and Benjamin Bond, were killed with decedent in an airplane accident on October 1, 1988. Jonathan Bond was 17 months old at the time of decedent's death.

At the time of his death, decedent was operating a construction business as a sole proprietorship, and over 90 percent of the value of his estate was in real property. Decedent personally managed the real properties he owned. Mrs. Bond was not employed outside the family home at the time of decedent's death and was dependent on decedent for her support.

Sometime in 1987, decedent and Mrs. Bond engaged Dudley Panchot (Mr. Panchot), an attorney licensed to practice law in the State of Washington, to draft wills for them. Decedent and Mrs. Bond together met with Mr. Panchot to discuss the provisions of their wills. After the conclusion of his meeting with decedent and Mrs. Bond, Mr. Panchot dictated a memorandum of instructions addressed to a legal assistant with respect to the provisions to be included in the drafts of the will of decedent and of the will of Mrs. Bond. After the wills were drafted Mr. Panchot made certain changes in the drafts of the wills. One of the changes Mr. Panchot made in the will of decedent was in the wording in Article IV, paragraph 4.2 with respect to the phrase “survive distribution of her share of the remainder of my estate”.

Article II, paragraph 2.1 of decedent's will designated his wife, Ruth B. Bond, as personal representative of his will to serve without bond and with unrestricted nonintervention powers. Article IV, paragraph 4.1 of decedent's will bequeathed to his wife any interest he had in property title to which was in her name alone, any interest he had in automobiles, and any interest he had in the property constituting the family home, together with all of his interest in the household furniture, furnishings and personal effects located therein. Paragraph 4.1 further provided that if decedent's wife was no longer living at the time of decedent's death, all of the foregoing bequests should pass to a contingent trust for their son Jonathan.

Article IV, paragraph 4.2 of decedent's will stated in part as follows--

the residue of my estate shall pass to my wife, RUTH B. BOND, provided that she survives distribution. In the event that RUTH fails to survive distribution of her share of the remainder of my estate, then I direct that RUTH's share shall pass into the trust created primarily for our son JONATHAN * * * as is fully set forth in Article VI below. [Emphasis added.]

Article VI, paragraph 6.1 of decedent's will provided in part as follows--

Contingent Trust for Jonathan and Children of Marriage of Edwin and Ruth. In the event that my wife, RUTH B. BOND, is no longer living at the time of my death, but I am survived by my son JONATHAN and/or any other children born to or adopted by RUTH and me * * * then I leave that portion of my estate specifically set forth in paragraphs 4.1 and 4.2 above, in trust, to my sister-in-law, LORNA BLUM ZWILLENBERG, as trustee * * *.

The pages of decedent's will which contained these clauses were initialed and dated by decedent.

Decedent's estate claimed $1,446,387 as a marital deduction on the estate tax return filed for decedent's estate.

In the notice of deficiency issued to decedent's estate, respondent disallowed $1,139,735 of the claimed marital deduction on the basis that the bequest to Mrs. Bond of decedent's residual estate was a bequest of a terminable interest, and, therefore, the value of the assets of decedent's residual estate was not part of the marital deduction. Respondent allowed a marital deduction of $306,652 to decedent's estate for joint tenancy property which passed to Mrs. Bond on decedent's death by operation of law.

Petitioner's position is that decedent's will was ambiguous as to decedent's intent with respect to the bequest of his residual estate to Mrs. Bond. For this reason, petitioner contends that the Court should consider evidence other than the provisions of the will to determine decedent's intent with respect to the property interest bequest of Mrs. Bond. Petitioner contends that it was decedent's intent that the words “survive distribution” mean “survive my death”. Respondent contends that the will is unambiguous in the provision granting a terminable interest to Mrs. Bond.

OPINION

Section 2056(a) provides, with certain limitations, that in computing the value of the estate subject to estate tax a deduction from the gross estate is allowed of an amount equal to the value of any interest in property which passes or has passed from the decedent to the surviving spouse. Under section 2056(b)(1),² an interest passing to the surviving spouse which will fail or lapse under certain conditions constitutes a terminable interest, the value of which is not deductible by the decedent's estate. Section 2056(b)(1) was enacted to prevent the avoidance of estate tax by a decedent leaving property to his spouse that would not vest in her so as to be included in her estate, but would be part of the marital deduction in his estate, thus escaping tax in either estate. Allen v. United States, 359 F.2d 151, 154 (2d Cir. 1966). In Estate of Heim v. Commissioner, 914 F.2d 1322, 1326-1327 (9th Cir. 1990), affg. T.C. Memo. 1988-433, the court, after discussing the reasons for the terminable interest provision, stated--

As set forth in the statute, a terminable interest exists if three conditions are met. First, the interest must be one that will lapse or terminate upon the occurrence or nonoccurrence of an event, or upon lapse of time; second, upon the failure of the interest of the surviving spouse, the interest in property must be one that will pass from the decedent to someone other than the surviving spouse for less than adequate and full consideration; and third, the person to whom the property passes must be able to enjoy or possess the property after failure of the interest of the surviving spouse. With certain exceptions not relevant here, an interest bequeathed to a surviving spouse will qualify for the marital deduction unless all three of these conditions have been met. Allen, 359 F.2d at 154.

Whether...