Estate of Posner v. Commissioner

• Court: U.S. Tax Court
• Writing for the Court: Thornton
• Citation: Estate of Posner v. Commissioner, 87 T.C.M. 1288 (T.C. 2004)
• Decision Date: 10 May 2004
• Docket Number: Dkt. No. 12780-01.
• Parties: Estate of Rose B. Posner, Deceased, David B. Posner, Personal Representative v. Commissioner.

87 T.C.M. 1288

T.C. Memo. 2004-112 Estate of Rose B. Posner, Deceased, David B. Posner, Personal Representative v. Commissioner.

Dkt. No. 12780-01.

United States Tax Court.

May 10, 2004.

Mark T. Willen and Peter E. Keith, for petitioner.

C. Teddy Li, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

THORNTON, Judge:

Respondent determined a $1,114,795 Federal estate tax deficiency with respect to the Estate of Rose B. Posner (the estate). The parties have resolved all issues raised in the notice of deficiency. The estate contends, however, that it is entitled to a $2,909,000 estate tax refund because certain marital trust property was erroneously included in the gross estate. Resolution of this issue turns upon these two subissues: (1) Whether Rose B. Posner (decedent) possessed a general power of appointment over the marital trust property in question under section 2041; and (2) whether the duty of consistency requires the estate to treat decedent as possessing a general power of appointment under section 2041.¹ Finally, if we determine that the estate is entitled to a refund of an estate tax overpayment, we must decide whether this Court has jurisdiction at this juncture to award interest on the overpayment.

FINDINGS OF FACT

The parties have stipulated most of the facts, which we incorporate along with the associated exhibits into our findings of fact. On October 28, 1996, decedent died in Baltimore County, Maryland. When the petition was filed, David B. Posner (David), the personal representative of the estate, resided in Reisterstown, Maryland.

Mr. Posner's Will

Decedent was formerly married to Nathan Posner (Mr. Posner). On April 21, 1975, Mr. Posner died. He was survived by decedent and their three children, David, Judith Geduldig, and Carol Jean Posner Gordon.

Mr. Posner's will devised half of his estate to a marital trust (the marital trust) for decedent's benefit. Item II of Mr. Posner's will created the marital trust, and item XIV set forth provisions for its administration. Specifically, item II of Mr. Posner's will provided:

If my wife, Rose B. Posner, shall survive me, I give, devise and bequeath to my Trustees, hereinafter named, in trust and confidence, nevertheless, for the uses and purposes hereinafter set forth, an amount equal to one-half) of the value of my adjusted gross estate as finally determined for federal estate tax purposes, less an amount equal to the value of all property which passes or has passed to my said wife either under other provisions of this Will, or outside of this Will and which qualifies for the marital deduction allowable for federal estate tax purposes; provided, however, no assets shall be made a part of this trust estate which do not qualify for said marital deduction. This trust estate shall be administered by my Trustees as a separate trust. * * *

Item XIV of Mr. Posner's will provided:

Anything in this Will to the contrary notwithstanding, and whether or not any reference is made in any other provision of this Will to the limitations imposed by this Section XIV, my Trustee shall not have or exercise any authority, power or discretion over the Marital Trust or the income thereof, or the property constituting the same, nor shall any payment or distribution by my Trustee be limited or restricted by any provision of this Will, which would in any way (a) adversely affect the qualification of the Marital Trust, (b) prevent my estate from receiving the benefit of the maximum marital deduction, or (c) affect the right of my said wife to all income therefrom or her right to dispose of the principal and income thereof in the amount and to the extent necessary to qualify the Marital Trust for the marital deduction for Federal estate tax purposes under the provisions of the law applicable to my estate.

The parties have stipulated that Mr. Posner's will included none of the substantive dispositions, such as for income beneficiaries, remaindermen, and powers of appointment, normally found in a document establishing a testamentary trust.

In 1976, Mr. Posner's estate filed a Federal estate tax return, attaching thereto a copy of Mr. Posner's will. On that return, Mr. Posner's estate claimed a marital deduction with respect to the marital trust property. Respondent audited this estate tax return and allowed the claimed marital deduction.

Decedent's Will

Before her death, decedent and her two daughters (the daughters) had a falling out. In her will, dated January 3, 1996, decedent effectively disinherited the daughters, leaving most of her estate to her son David, his family, and three charities.² In her will, decedent directed the marital trust property, valued at approximately $5 million, to be paid into a revocable trust (the revocable trust). To one daughter decedent left $100; to the other daughter she left only a photograph. The daughters unsuccessfully challenged the will's validity.³

Power of Appointment Case

While the daughters' challenge to the validity of decedent's will was ongoing, decedent's children disputed ownership of the marital trust property. The daughters contended that decedent had possessed no power of appointment over the marital trust property and that, therefore, the property should revert to Mr. Posner's estate to be distributed equally to the three children pursuant to the residuary clause in Mr. Posner's will. David, as decedent's personal representative and trustee of decedent's revocable trust, contended that decedent possessed and exercised a general power of appointment over the marital trust property and, therefore, the property should be distributed to the various charitable organizations and other beneficiaries named in decedent's revocable trust instrument.

Seeking to resolve this matter, the trustee of Mr. Posner's estate filed a complaint for declaratory judgment in the Circuit Court for Baltimore County, Maryland (Baltimore County circuit court), naming decedent's three children as defendants. On August 11, 1997, the Baltimore County circuit court granted summary judgment for the daughters, ruling that the marital trust property was not part of decedent's estate but instead reverted to Mr. Posner's estate:

The Court finds as a matter of law that, when Mr. Posner's Will is read in its entirety, Item XIV grants Mrs. Posner power over the Marital Trust. However, this power is limited to inter vivos because ambiguous granting language must be construed only as broadly as is necessary to fulfill the testator's intent. See Hutchinson v. Farmer, 190 Md. 411 [58 A.2d 638] (1948). Furthermore, the fact that the IRS approved the marital deduction did not establish that Mrs. Posner's powers were greater than inter vivos because the Trust would have qualified for the deduction if Mrs. Posner had either inter vivos or testamentary power.

As Mrs. Posner's powers over the Marital Trust were limited to inter vivos, her attempt to fund the Revocable Trust with assets from the Marital Trust fails. The Revocable Trust, by its terms, is not an exercise of inter vivos power because it could not vest until Mrs. Posner's death. Accordingly, Mrs. Posner's Revocable Trust was an attempt to exercise a testamentary power that she did not possess.

The Court concludes that the assets from the Marital Trust therefore revert to Mr. Posner's estate to be distributed according to the residuary clause in his Will. [McDonagh v. Geduldig, No. C-97-001002 (Baltimore County Cir. Ct. Aug. 11, 1997).]

The Maryland Court of Special Appeals (court of special appeals) affirmed the Baltimore County circuit court's ruling that Mr. Posner's will granted decedent no testamentary power of appointment. Posner v. McDonagh, No. 3C971002 (Md. Ct. Spec. App. Mar. 11, 1997). The court of special appeals was unpersuaded that references in Mr. Posner's will to the Federal estate tax marital deduction evinced his intention to grant decedent a testamentary power of appointment:

The statements in Item XIV of Nathan Posner's will are very general; they simply demonstrate that he wanted to qualify the marital trust for the marital deduction. In light of the broadness of these pronouncements, and in light of the fact that a marital trust will qualify for the marital deduction if the surviving spouse is given either an inter vivos power of appointment or a testamentary power of appointment, it is not at all clear that the statements in Item XIV of Nathan Posner's will evince an intent to grant Rose Posner a testamentary power of disposition over the marital trust's assets. Given the generality of the statements, it is almost as easy to conclude that Nathan Posner intended to grant Rose Posner a solely inter vivos power of appointment as it is to conclude that he intended to grant her a testamentary power of appointment. Thus, the language in Item XIV of the will does not provide conclusive proof of Nathan Posner's intent with respect to Rose Posner's power of appointment over the marital trust's assets.

Furthermore, the court of special appeals stated that under applicable Maryland caselaw, the language in Mr. Posner's will "is insufficient to grant Rose Posner either an inter vivos or a testamentary power of appointment over the marital trust's assets." Id.⁴ The court of special appeals stated its holding as follows: "Accordingly, we hold that Nathan Posner's will did not grant Rose Posner a testamentary power of appointment over the assets of the marital trust." Id.

By order dated June 30, 1999, the Maryland Court of Appeals, Maryland's highest court, declined to hear the appeal of the court of special appeals' decision.

The Estate's Federal Estate Tax Return

While the above-described litigation was pending, David, as personal representative of decedent's estate, filed a request for an extension of time to file the estate's Federal estate tax return and remitted estate tax of $6.5 million. On July 30, 1998, notwithstanding the uncertainty of the outcome of the ...