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

• Decision Date: 30 June 1975
• Docket Number: Docket No. 4226-73.
• Citation: 64 T.C. 499
• Parties: ESTATE OF YALE C. HOLLAND, DECEASED, GERTRUDE CAPSER HOLLAND, EXECUTRIX, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

64 T.C. 499

ESTATE OF YALE C. HOLLAND, DECEASED, GERTRUDE CAPSER HOLLAND, EXECUTRIX, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 4226-73.

United States Tax Court

Filed June 30, 1975.

C. E. Heaney, Jr., and Jeffrey D. Toberer, for the petitioner.

Ronald M. Frykberg, for the respondent.

Decedent's will left the residue of his estate to his surviving spouse with full power in her to dispose of such property in her discretion. In his will he also expressed a wish that any property thus passing which remained at her death should go to his brother and sister or their heirs. Held, the estate property which passed to decedent's surviving spouse qualifies for the marital deduction under sec. 2056, I.R.C. 1954.

DAWSON, Chief Judge:

Respondent determined a deficiency in petitioner's Federal estate tax in the amount of $92,224.46. We must decide whether certain property interests passing to the widow of Yale C. Holland qualify for the marital deduction under section 2056, I.R.C. 1954.¹ In addition, we must determine the admissibility of certain evidence submitted by petitioner and objected to by the respondent.

The facts of this case have been fully stipulated. The stipulation of facts and attached exhibits are incorporated herein by this reference, although the admissibility of certain exhibits is discussed more fully later in this opinion.

Yale C. Holland (decedent) died on May 24, 1969, a citizen of the United States and a resident of Omaha, Douglas County, Nebr. He left a last will and testament executed on July 8, 1967, which was duly admitted to probate in the County Court of Douglas County, Nebr., on June 30, 1969.

The petitioner, Gertrude Capser Holland, is the duly appointed and qualified executrix of the decedent's estate. Her legal residence at the time the petition was filed herein was in Omaha, Nebr.

The Federal estate tax return for the decedent's estate was filed with the District Director of Internal Revenue at Omaha, Nebr., on July 27, 1970. The decedent was survived by his wife, Gertrude Capser Holland, a brother, Lyle C. Holland, and a sister, Vivian Holland O'Brien. No children survived the decedent.

The decedent was a practicing attorney in Omaha, Nebr., for over 50 years. Lyle C. Holland, decedent's brother, was a practicing attorney in Lincoln, Nebr., for over 40 years.

A decree on final account in the Estate of Yale C. Holland was entered by the County Judge of the County Court of Douglas County, Nebr., on September 28, 1970. No application for construction of decedent's will was filed in the County Court, and no issue was raised in the probate proceeding regarding the construction of the will.

The Decree of Final Account shows that in the last will and testament of decedent, he made specific bequests of $2,000 each to his brother and sister, while ‘all the rest, residue, and remainder of his Estate was devised and bequeathed to his surviving spouse, Gertrude Capser Holland.’

In the Federal estate tax return a marital deduction in the amount of $328,931.61 was claimed. In the statutory notice of deficiency the respondent determined that $262,821.84 of the amount claimed was with respect to property in which the surviving spouse received a nonqualifying terminable interest. The balance of the deduction claimed, or $66,109.77, consisting of insurance payable to the surviving spouse and jointly held property, was allowed by the respondent. A separate adjustment in the notice of deficiency relating to valuation of a partnership interest by respondent has been conceded by the petitioner.

In paragraph V of the decedent's last will and testament it is provided, in relevant part, that:

V

I give, devise and bequeath to my beloved wife, Gertrude Capser Holland, all the rest, residue and remainder of my Estate, real, personal and mixed, wherever situated. * * * with full power to sell, mortgage, or dispose of, in her discretion and as she may see fit, all or any part of said property, and likewise to use, in any way that she may see fit, the proceeds of any such sale, mortgage or other disposition. It is my will and my intention that she shall not be restricted in any manner from using or disposing of all or any part of said property, and that if she conveys or otherwise disposes of the same or any part thereof the grantor from her shall obtain a full and complete fee simple title, free from any claims on the part of any of my heirs or devisees.

It is my wish and desire that at the death of my wife what remains of the Estate which she may have inherited from me, together with the increase, income and proceeds thereof and therefrom may pass to my sister Vivian and my brother Lyle and be equally divided between them as to value, the manner of the division to be such as they may mutually agree upon. Should either my sister or my brother, or both of them, die prior to the death of my wife then it would be my wish that the children of the deceased parent should receive the share that the parent would otherwise have received.

Respondent contends that under Nebraska law the interest in property passing to decedent's wife under the language of paragraph V of his will, above, is not a fee simple, but a life estate with limited power to use and dispose of the property. Thus, he argues that the interest passing to decedent's widow does not qualify for the marital deduction as either a fee simple or a life estate with a power of appointment within the scope of section 2056(b)(5).²

Petitioner, on the other hand, contends that the language found at paragraph V of decedent's will, is sufficient under Nebraska law to convey fee simple title to his surviving spouse, and qualifies for the marital deduction under section 2056(a). In the alternative, petitioner contends that paragraph V granted to decedent's surviving spouse a life estate with full power of appointment which qualifies for the marital deduction under section 2056(b)(5).

Under section 2056(a) the value of a taxable estate is 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 a surviving spouse, but only to the extent that such interest is included in determining the value of the gross estate. This deduction is referred to as the ‘marital deduction.’ Sec. 20.2056(a)-1(a), Estate Tax Regs. The allowable aggregate amount of a marital deduction may not exceed 50 percent of the value of the ‘adjusted gross estate’ as defined at section 2056(c)(2). The effect of the marital deduction is that qualifying property interests avoid the double burden of being taxed once in the decedent's estate and again in the estate of the surviving spouse.

In order to obtain the marital deduction, an executor must show that a qualifying property interest passed from the decedent to a surviving spouse. Sec. 20.2056(a)-1(b), Estate Tax Regs. Terminable interests in property may not qualify for the marital deduction. Sec. 2056(b)(1). A ‘terminable interest’ in property is an interest which will terminate or fail on the lapse of time or on the occurrence or the failure to occur of some contingency. Sec. 20.2056(b)-1(b), Estate Tax Regs. Thus, a terminable interest in property will not qualify for the marital deduction if (1) another interest in the same property passed from the decedent to some other person for less than adequate consideration and (2) by reason of its passing such other person (or his or her heirs or assigns) may possess or enjoy any part of the property after the termination of the spouse's interest. Sec. 20.2056(b)-1(c)(1), Estate Tax Regs. The legislative history indicates that the marital deduction is not to be allowed ‘if the only interest given a spouse is in property in which the decedent or donor also gave an interest to someone else who may possess or enjoy the property after the donee spouse dies.’ S. Rept. No. 1013, 80th Cong., 2d Sess., 1948 C.B. 285, 305. The goal of Congress was to allow the marital deduction tax benefits to a decedent's estate in those situations where the qualifying property interest ‘would be includible in the gross estate of the beneficiary or donee spouse unless it has been dissipated in the interval.’ S. Rept. No. 1013, supra. Thus, where a decedent passes by will an interest in property to a donee spouse which consists of a life estate only, with a vested remainder in such property passing by the same will to other persons, the life estate passing to the donee spouse is a terminable interest that does not qualify for the marital deduction. In this situation the entire interest in property has not passed to the surviving spouse. Instead, the will passed various vested interests (life estate and remainder) in the property to separate persons. See sec. 20.2056(b)-1(e)(2), Estate Tax Regs. By contrast, where a decedent passes by will a life estate to a surviving donee spouse with a power in the spouse alone to appoint the entire interest received to either himself or herself or his or her estate, such life estate will qualify for the marital deduction as an exception to the terminable interest rule. See sec. 2056(b)(5); sec. 20.2056(b)-5, Estate Tax Regs. This exception is allowed because the property interest passes completely to the surviving spouse and is includable in his or her gross estate unless disposed of in the interval. S. Rept. No. 1013, supra.

Where a surviving spouse takes under a decedent's will, the interest in property passing to such spouse is to be determined from the will itself. S. Rept. No. 1013, supra, 1948 C.B. 334. In determining whether the property interest so passing is a ‘terminable interest’ within the meaning of section 2056(b)(5) relating to life estates with power of appointment to the surviving spouse, we must also look to applicable provisions of the law of the jurisdiction under which the interest passes. Sec. 20.2056(b)-5(e), Estate Tax Regs. In...