Estate of Shelfer v. C.I.R., 94-5211

• Decision Date: 01 July 1996
• Docket Number: No. 94-5211,94-5211
• Citation: 86 F.3d 1045
• Parties: -5177, 65 USLW 2040 ESTATE OF Lucille P. SHELFER, Deceased, the Quincy State Bank, Personal Representative, Respondent, v. COMMISSIONER OF INTERNAL REVENUE, Petitioner.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1045

86 F.3d 1045

78 A.F.T.R.2d 96-5177, 65 USLW 2040

ESTATE OF Lucille P. SHELFER, Deceased, the Quincy State Bank, Personal Representative, Respondent, v. COMMISSIONER OF INTERNAL REVENUE, Petitioner.

No. 94-5211.

United States Court of Appeals Eleventh Circuit.

July 1, 1996.

Gary R. Allen, Joan I. Oppenheimer, Loretta C. Argrett, Gilbert S. Rothenberg, Tax

Division, Dept. of Justice, Washington, DC, for petitioner.

Thornton M. Henry, D. Culver Smith III, Jones, Foster, Johnston & Stubbs, P.A., West Palm Beach, FL, for respondent.

Appeal from a Decision of the United States Tax Court.

Before KRAVITCH, DUBINA and CARNES, Circuit Judges.

KRAVITCH, Circuit Judge:

The Commissioner of the Internal Revenue Service ("Commissioner") appeals the Tax Court's decision in favor of the estate of Lucille Shelfer. The court held that Lucille's estate was not liable for a tax deficiency assessed on the value of a trust from which she had received income during her lifetime. The estate of Lucille Shelfer's husband, Elbert, previously had taken a marital deduction for these trust assets, claiming that the trust met the definition of a qualified terminable interest property trust ("QTIP") pursuant to 26 U.S.C. § 2056(b)(7).

This case presents an issue of first impression for this circuit: whether a QTIP trust is established when, under the terms of the trust, the surviving spouse is neither entitled to, nor given the power of appointment over, the trust income accumulating between the date of the last distribution and her death, otherwise known as the "stub income." The Commissioner interprets the QTIP statutory provisions to allow such trusts to qualify for the marital deduction in the decedent's estate; accordingly, the value of the trust assets must be included in the surviving spouse's estate. We agree with the Commissioner and REVERSE the Tax Court.

I.

Elbert Shelfer died on September 13, 1986 and was survived by his wife, Lucille. Elbert's will provided that his estate was to be divided into two shares, that were to be held in separate trusts. The income from each trust was to be paid to Lucille in quarterly installments during her lifetime. The first trust was a standard marital deduction trust consisting of one-third of the estate. It is not at issue in this case. The second trust, comprising the remaining two-thirds of the estate, terminated upon Lucille's death. The principal and all undistributed income was payable to Elbert's niece, Betty Ann Shelfer.

Elbert's will designated Quincy State Bank as the personal representative for his estate, and on June 16, 1987, the bank filed a tax return on behalf of the estate. The bank elected to claim a deduction for approximately half of the assets of the second trust under the QTIP trust provisions of 26 U.S.C. § 2056(b)(7). The IRS examined the return, allowed the QTIP deduction, and issued Quincy Bank a closing letter on May 10, 1989. The statute of limitations for an assessment of deficiency with respect to Elbert's return expired on June 16, 1990.

On January 18, 1989, Lucille died; Quincy State Bank served as personal representative for her estate. The bank filed an estate tax return on October 18, 1989 and did not include the value of the assets in the trust, even though the assets previously had been deducted on her husband's estate tax return. The IRS audited the return and assessed a tax deficiency for the trust assets on the ground that the trust was a QTIP trust subject to taxation. Quincy State Bank commenced a proceeding in tax court on behalf of Lucille's estate, claiming that the trust did not meet the definition of a QTIP trust because Lucille did not control the stub income; therefore, the Bank argued, the estate was not liable for tax on the trust assets under 26 U.S.C. § 2044. The Tax Court agreed. The Commissioner appeals this decision.

II.

The proper construction of a statutory provision is a purely legal issue; thus, we apply a de novo standard of review to the Tax Court's decision. Kirchman v. Commissioner, 862 F.2d 1486, 1490 (11th Cir.1989). As in any case involving the meaning of a statute, we begin our analysis with the language at issue.

26 U.S.C. § 2056(b)(7)(B) provides, in relevant part:

(i) In general.--The term "qualified terminable income 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, or has a usufruct interest for life in the property, and

(II) no person has a power to appoint any part of the property to any person other than the surviving spouse. Subclause (II) shall not apply to a power exercisable only at or after the death of the surviving spouse. ¹

(emphasis added).

Lucille's estate contends, and the Tax Court held, that the phrase "all of the income" includes income that has accrued between the last distribution and the date of the spouse's death, or the stub income. They argue that "all" refers to every type of income. Stub income is a kind of income, and thus the surviving spouse must be entitled to stub income in order for the trust to qualify as a QTIP trust. They conclude that because Elbert's will did not grant Lucille control over the stub income, the QTIP election fails.

In contrast, the Commissioner and amicus ² argue that the statute is satisfied if the surviving spouse controls "all of the income" that has been distributed. They contend that the requirement that income be, "payable annually or at more frequent intervals," limits "all of the income" to distributed income, namely those payments that have been made to the surviving spouse during her life. See Estate of Howard v. Commissioner, 910 F.2d 633, 635 (9th Cir.1990) (concluding that "if [the surviving spouse] has been entitled to regular distributions at least annually, she has had an income interest for life").

The estate replies that the phrase "payable annually or at more frequent intervals" is separated from the preceding clause by commas, and thus is a parenthetical clause. Because parenthetical clauses are non-restrictive, it contends that the clause is merely a description of the distribution process and does not in any way limit the preceding requirement that the spouse must be entitled to "all of the income."

Both parties insist that their reading of the statute is "plain." We do not agree. Although the use of commas around the clause "payable annually or at more frequent intervals" does indicate a parenthetical clause, we refuse to place inordinate weight on punctuation and ignore the remainder of the sentence. It is equally plausible that the next clause is designed to provide a context from which to define "all of the income." ³ Cf. Smiley v. Citibank, --- U.S. ----, ----, 116 S.Ct. 1730, 1736, 135 L.Ed.2d 25 (1996) ("A word often takes on a more narrow connotation when it is expressly opposed to another word: 'car,' for example, has a broader meaning by itself than it does in a passage speaking of 'cars and taxis.' "). Nothing in this statutory provision on its face allows us to choose between these interpretations. Accordingly, we must look to other sources for guidance.

The Commissioner contends that the second part of the statute, subclause (ii)(II), mandates her reading of the statute. This clause states that no one can have the power to appoint any of the property to someone other than the surviving spouse. This prohibition is modified by the language beneath this clause, known as the "flush language," which states that subclause II expressly does not apply to a power exercisable only at or after the death of the surviving spouse. See Estate of Shelfer v. Commissioner, 103 T.C. 10, 21-22, 1994 WL 373509 (1994) (Wells, J., dissenting). The flush language allows the decedent to appoint the trust property to another beneficiary after the death of the surviving spouse. The Commissioner argues that the language also refers to disposition of the stub income after the spouse's death.

Although the flush language limiting subclause (ii)(II) is consistent with the Commissioner's argument, it does not directly apply to the independent requirement in subclause (ii)(I) that the spouse be entitled to "all of the income," which remains ambiguous. Thus, the statutory language alone does not resolve the issue before this court.

Our conclusion is further supported by the lack of consensus among jurists as to the clear meaning of this statute. In this case, the Tax Court split on the issue, with ten judges joining the majority and six judges dissenting. Moreover, in a Ninth Circuit case involving this same provision, the majority reversed the Tax Court and concluded that the statute plainly allowed the trust to qualify. Howard, 910 F.2d at 637. The dissent, however, agreed with the Tax Court's reading of the statute. Id. (Rymer, J., dissenting). See Smiley, at ---, 116 S.Ct. at 1733 (In light of the disagreement among the courts and judges who have heard the issue, "it would be difficult indeed to contend that the word ... is unambiguous....").

Accordingly, we must look beyond the "plain language" of the statute for guidance. When faced with a similarly ambiguous tax code provision, the Supreme Court thoroughly examined the history and purpose of the tax provision at issue, past practices, and the practical implications of its ruling. Commissioner v. Engle, 464 U.S. 206, 104 S.Ct. 597, 78 L.Ed.2d 420 (1984). ⁴ We follow suit, beginning with the history and purpose of the marital deduction.

III.

The marital deduction for estate taxes first appeared in § 812(e) of the Internal Revenue Code of 1939, which was enacted by the Revenue Code of 1...