Estate of Wycoff v. C.I.R.
| Decision Date | 19 November 1974 |
| Docket Number | No. 73-1901,73-1901 |
| Citation | 506 F.2d 1144 |
| Parties | 74-2 USTC P 13,037 ESTATE of Milton S. WYCOFF, Deceased, Zions First National Bank, Executor, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. |
| Court | U.S. Court of Appeals — Tenth Circuit |
J. Jay Bullock, Salt Lake City, Utah, for appellant.
Louis A. Bradbury, Atty., Tax Div., Dept. of Justice (Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks and Loring W. Post, Attys., Tax Div., Dept. of Justice, on the brief), for appellee.
Before LEWIS, Chief Judge, and MOORE * and DOYLE, Circuit Judges.
This is a federal estate tax case, and the issue is whether the United States Tax Court ruled correctly in determining that the value of the marital deduction available to the estate must be reduced to the extent of inheritance, estate and transfer taxes that the executor was authorized by the will to pay out of the marital trust even though he was not required in the will to pay it from the marital share.
The will of decedent, Milton S. Wycoff, created two trusts. One was in favor of his wife amounting to 50% Of his adjusted gross estate; the other trust dealt with the residue of the estate for the benefit of his son. While he directed that inheritance, estate and transfer taxes were to be paid out of the portion of his estate which was not in the marital trust, he, at the same time, granted the executor a discretion to pay these taxes out of this trust estate if the executor considered it prudent from a business standpoint to do so. Based on this authorization, both the Commissioner and the Tax Court ruled that the amount of the marital deduction had to be reduced by the amount of the death taxes. The executor now seeks reversal of the Tax Court ruling.
Decedent died on March 3, 1966 and his will was admitted to probate on March 30, 1966, Zions First National Bank of Salt Lake City being named as the executor. A large part of the estate was composed of shares in the family corporations. The trust in favor of the wife gave her income for life and the power to appoint the corpus together with accrued and undistributed income. The language of the will was such as to seek to maximize the estate tax deduction available under 2056 of the Internal Revenue Code. A further provision in the will 1 directed that the liquid assets were so far as possible to be given to the wife's trust; this was so as to avoid her having to participate in the family businesses. The residuary trust in favor of the son was created in ARTICLE VII of the will. 2
Death taxes were directed to be paid out of the nonmarital trust portion of the estate but, as explained above, the executor was empowered to pay these taxes out of the widow's trust should he consider it prudent to do so. ARTICLE XII provided:
I direct prompt payment of the expenses incident to my funeral, burial and last illness, and all my just debts. I further direct that all inheritance, estate and transfer taxes due by reason of my death shall be paid out of that portion of my estate which is not included in the Marital Trust to be administered by my Trustee, unless, in the best business judgment and sole discretion of my executor, such taxes could be more prudently paid from any assets in my estate without respect to what is or is not included in the Marital Trust created by this my Last Will.
Though he was given discretion to pay the death taxes out of the wife's trust, the executor has not elected to do so. The Probate Court decreed the distribution of the corpus of the estate to the Zions First National Bank as trustee of the two trusts on December 31, 1968.
Some time later, May 25, 1970, the District Director of Internal Revenue gave the bank notice that there was a deficiency in the amount of $57,458.30. Shortly thereafter, the appellant sought a redetermination of the deficiency by the Tax Court. However, that tribunal ruled that in computing the marital deduction, the value of the interest of the surviving spouse had to be reduced by the amount of the death taxes which could have been paid from the widow's share. The deficiency was ruled to be in the amount of $54,888.31.
The cause was then appealed to this court pursuant to 26 U.S.C. 7482.
The appellant raises two points on appeal:
The first is that 2056(b)(4) of the Internal Revenue Code of 1954 does not require that thehmarital deduction be reduced where, as here, the death taxes have not in fact been paid by the estate or are not chargeable to it.
The second contention is that the interest transferred to the surviving spouse qualifies for the marital deduction on the basis of being a 2056(b)(5) exception to the terminable interest prohibition of 2056(b).
The provision which gives rise to the marital deduction is 2056 of the Internal Revenue Code of 1954 which provides as follows:
2056. Bequests, etc., to surviving spouse
(a) Allowance of marital deduction.-- For purposes of the tax imposed by section 2001, the value of the taxable estate shall, except as limited by subsections (b), (c), and (d), be determined by deducting from the value of the gross estate an amount equal to the value of any interest in property which passes or has passed from the decedent to his surviving spouse, but only to the extent that such interest is included in determining the value of the gross estate.
. . . .the
(c) Limitation on aggregate of deductions.--
(1) General rule.-- The aggregate amount of the deductions allowed under this section (computed without regard to this subsection) shall not exceed 50 percent of the value of the adjusted gross estate, as defined in paragraph (2).
The purpose of Congress in creating this deduction was to stem the tide of state law changes in the community property system. The effect of the change was to give non-community property state citizens the tax advantages which were then enjoyed only by the community property state citizens. The deduction allows married couples' property to be taxed in two stages-- upon the death of the decedent and upon the death of the surviving spouse. Thus, the marital deduction is restricted to the property interest includable in the surviving spouse's gross estate. United States v. Stapf, 375 U.S. 118, 84 S.Ct. 248, 11 L.Ed.2d 195 (1963).
Accordingly, if the property transferred to the surviving spouse is terminable and thereby is not includable in the gross estate of the surviving spouse, there is no marital deduction. Also, if any part of the property transferred to the surviving spouse is used to pay inheritance taxes, the value of the marital deduction is reduced by the amount of the taxes so paid.
Section 2056(b) provides in part:
(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;
We are required to determine the value of the deductible non-terminable interest in the property which passed to the surviving spouse. In turn, we must decide whether the executor's authority to use marital trust assets for the payment of the state and federal death taxes served to reduce the marital deduction in this amount. The bank contends that 2056(b)(4) is subject to the interpretation that the marital deduction is to be reduced only to the extent that the federal estate or state inheritance tax was actually paid from or charged to the marital share. Its further claim is that the language of 2056(b)(4) supports this.
It is pointed out that the provision is entitled 'valuation of interest passing to surviving spouse.' It refers to the 'effect' of death taxes upon the 'net value to the surviving spouse.' It is argued that the purpose was to restrict the effect on the surviving spouse's marital deduction to the amount of taxes actually paid. The only relevant consideration in applying 2056(b) (4), so it is argued, is whether the property interest passed to the surviving spouse was in fact utilized to pay the taxes. 3
The regulations relied on by the bank and quoted below are not germane because the thrust of them is to explain the computation of the marital deduction rather than the effect of the taxes payable out of it.
Also, the cases hold that the marital deduction is to be strictly construed. Commissioner of Internal Revenue v. Bosch, 387 U.S. 456, 464, 87 S.Ct. 1776, 1782, 18 L.Ed.2d 886 (1967). Another relevant rule of construction is that the taxpayer has the burden of proof to establish compliance with the specific statutory requisites and the taxpayer must prove the applicability of the deduction or exception claimed. New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440, 54 S.Ct. 788, 790, 78 L.Ed. 1348 (1934).
Furthermore, in determining whether an interest of the surviving spouse is entitled to the marital deduction, the time of death of the decedent governs the tax consequences. Jackson v. United States, 376 U.S. 503, 84 S.Ct. 869, 11 L.Ed.2d 871 (1964); Boston Safe Deposit and Trust Co. v. Commissioner of Internal Revenue, 345 F.2d 625 (1st Cir. 1965). See also26 C.F.R. 20.2056(b)-4(a) (1972) and In Estate of Albert L. Rice, 41 T.C. 344 (1963), wherein this principle was applied in valuing a property interest.
The value of the marital deduction and the effect of death taxes upon the extent of the marital deduction are to be determined as a matter of federal law. Thus, the orders of state probate courts are not applicable. In this instance the Utah Probate Court ordered the executor to distribute to the widow's trust 50% Of the...
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