Estate of Tessmer v. Commissioner
| Decision Date | 18 August 1994 |
| Docket Number | Docket No. 14714-92. |
| Citation | 68 T.C.M. 440 |
| Parties | Estate of Henry L. Tessmer, Deceased, Minnie Tessmer, Executrix v. Commissioner. |
| Court | U.S. Tax Court |
James W. Childs, 863 N. Cleveland-Massillon Rd., Akron, Ohio, for the petitioner. Susan T. Mosley, for the respondent.
Respondent determined a deficiency in petitioner's estate tax in the amount of $683,248.
The sole issue for decision is whether the amount petitioner claimed as a marital deduction pursuant to section 2056(a)1 should be reduced by a proportionate share of the debts of the estate.
The parties submitted this case fully stipulated. The stipulation of facts and attached exhibits are incorporated herein by this reference. At the time the petition was filed, Minnie Tessmer, decedent's surviving spouse and executrix of petitioner, resided in Congress Lake, Hartville, Ohio.
Henry L. Tessmer (Decedent) died testate on April 18, 1989. The pertinent portions of decedent's "Last Will and Testament" are as follows:
On Form 706, "United States Estate (and Generation-Skipping Transfer) Tax Return", received by respondent on January 18, 1990, petitioner reported, inter alia: (1) Total gross estate of $9,198,347;2 (2) total allowable deductions of $8,605,292, which included a $3,085,834 marital deduction;3 (3) taxable estate of $593,055; and (4) after applying the "allowable unified credit" of $192,800, no estate taxes due. Petitioner did not reduce the gift to Ms. Tessmer by a proportionate share of the debts and expenses of the estate. The property distributed under "ITEM III" was sufficient to pay the debts and expenses of the estate.
Respondent reduced the marital deduction reported by petitioner by a proportionate share of the debts and expenses of the estate and determined a deficiency in petitioner's estate taxes.4 Petitioner concedes that the marital deduction should be reduced by administration expenses of $119,115.5 In the notice of deficiency, respondent reduced the marital deduction by this proportionate share of the funeral and administration expenses of the estate. See supra note 4. Therefore, based on petitioner's concession, we sustain this portion of respondent's determination. The issue left to be resolved is whether the gift to Ms. Tessmer must also be proportionately reduced by the remaining debts of the estate of $5,400,343.
Section 2056(a) allows a deduction from the gross estate for any interest in property which passes or has passed from the decedent to his surviving spouse. Section 2056(b)(4) provides:
(4) Valuation of interest passing to surviving spouse.—In determining for purposes of subsection (a) the value of any interest in property passing to the surviving spouse for which a deduction is allowed by this section
(A) there shall be taken into account the effect which the tax imposed by section 2001, or any estate, succession, legacy, or inheritance tax, has on the net value to the surviving spouse of such interest; and
(B) where such interest or property is encumbered in any manner, or where the surviving spouse incurs any obligation imposed by the decedent with respect to the passing of such interest, such encumbrance or obligation shall be taken into account in the same manner as if the amount of a gift to such spouse of such interest were being determined.
Section 20.2056(b)-4(a), Estate Tax Regs., provides that "the marital deduction may be taken only with respect to the net value of any deductible interest which passed from the decedent to his surviving spouse". Therefore, the net value of the gift received by the surviving spouse controls the amount of the marital deduction. United States v. Stapf [63-2 USTC ¶ 12,192], 375 U.S. 118, 125 (1963); Estate of Reid v. Commissioner [Dec. 44,583], 90 T.C. 304, 307 (1988); Estate of Swallen v. Commissioner [Dec. 48,968(M)], T.C. Memo. 1993-149.
The net interest in property passing to the surviving spouse for purposes of the marital deduction is determined by State law. Riggs v. Del Drago [42-2 USTC ¶ 10,219], 317 U.S. 95, 101 (1942); Estate of Penney v. Commissioner [74-2 USTC ¶ 13,028], 504 F.2d 37, 40 (6th Cir. 1974), revg. and remanding [Dec. 31,572], 59 T.C. 102 (1972); Estate of Allen v. Commissioner [Dec. 49,346], 101 T.C. 351, 357 (1993). The parties agree Ohio law controls herein.6 Under Ohio law, "The court's sole purpose in an action seeking construction of a will is to ascertain and carry out the intention of the testator." Sandy v. Mouhot, 438 N.E.2d 117, 118 (Ohio 1982); see also Townsend's Executors v. Townsend, 25 Ohio St. 477 (1874). The intent of the testator is determined from the words contained in the will. Stevens v. National City Bank, 544 N.E.2d 612, 615-616 (Ohio 1989); Townsend's Executors v. Townsend, supra ().7
Petitioner argues that the gift to Ms. Tessmer was a general gift and that under Ohio law, a general gift is reduced by debts and expenses of the estate only after the residuary share has been exhausted. Respondent argues (1) that the gift to Ms. Tessmer was a residuary gift and must be reduced proportionately by the debts and expenses of the estate, or (2) alternatively, under Ohio law, the debts and expenses of the estate reduce general and residuary gifts proportionately.
The first matter for decision is whether decedent intended the gift to Ms. Tessmer to be part of the residuary share. A general gift is one that can be satisfied out of the general assets of the estate. In re Mellott's Estate, 121 N.E.2d 7 (Ohio 1954); In re Estate of Kirkwood, 216 N.E.2d 895 (Ohio Ct. App. 1966). We find that decedent intended the gift of "one-third (1/3) of * * * [his] property, real, personal or mixed" to Ms. Tessmer, as described under "ITEM II" of his Last Will and Testament, to be a general gift. See In re Estate of Witteman, 239 N.E.2d 107 (Ohio Ct. App. 1968) (); Berger v. Berger, 304 N.E.2d 265, 272 (Ohio P. Ct. 1973) ().
It is clear that decedent intended "ITEM III" of his Last Will and Testament to be a residuary clause—"All the rest, residue and remainder of my estate". See Berger v. Berger, supra at 269. Moreover, based on the words and structure of decedent's Last Will and Testament, we find that decedent did not intend the gift to Ms. Tessmer as described in "ITEM II" to fall under the residuary clause. For example, the last sentence of "ITEM II" provides that "In the event that my wife, MINNIE TESSMER, shall predecease me, all such property shall become a part of the residue of my estate." Based on the foregoing, we find that the gift to Ms. Tessmer was a general gift, and not part of the residuary.
We must now determine whether under Ohio law petitioner's debts must first be paid from the residuary, or whether the debts must be paid from, and thus reduce, both the general and residuary gifts proportionately. Petitioner contends that under Ohio law, debts of the estate do not reduce a general gift until the residuary share is exhausted. We agree with petitioner. In Y.M.C.A. v. Davis, 140 N.E. 114 (Ohio 1922), affd. 264 U.S. 47 (1924), the Ohio Supreme Court, in the "Syllabus by the Court",8 stated:
A residuary devisee or legatee is presumed in law to be in the position of the last lienholder, after all prior lawful claims and charges have been satisfied out of the estate.
The Ohio Supreme Court explained that:
In the distribution of property agreeably to the will it is elementary, of course, that the testator may, in a large measure, determine the priority in which his several bounties may be distributed, and in so doing it is to be presumed that a legacy, specific as to the person, thing, or amount, shall have priority over a mere general provision, especially, from its very nature, over all residuary devises and legacies.
It would be a strange legal paradox, indeed, to hold residuary devises, legacies, or bounties prior to those that are express and specific. The plaintiff's in error are designated for the first time in item 10, after all specific devises and legacies have been provided for, in the following language:
"All the rest, residue and remainder of my estate and property, real, personal and mixed, of every nature and description, or wheresoever situate * * * I give, devise and bequeath to the Young Men's Christian Association," etc.
This fact affords a clear and conclusive presumption that all charges imposed by the law or by the testator should be paid out of the estate before any rights should ripen in behalf of the residuary...
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