Letts v. Comm'r of Internal Revenue (In re Estate of Letts)
| Decision Date | 24 November 1997 |
| Docket Number | No. 8539–95.,8539–95. |
| Citation | 109 T.C. 290,109 T.C. No. 15 |
| Parties | Estate of Mildred Geraldine LETTS, Deceased, James P. Letts III and Joanne L. Magbee, Coexecutors, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Timothy J. Peaden, John C. Sawyer, and Michelle M. Henkel, for petitioner.
David Delduco and Charles P. Hanfman, for respondent.
Respondent determined that petitioner is liable for a $461,601 deficiency in Federal estate tax. The issue for decision is whether, because of the duty of consistency, decedent's estate includes the value of property that decedent's husband left to her. We hold that it does.1
Unless otherwise indicated, section references are to the Internal Revenue Code. Rule references are to the Tax Court Rules of Practice and Procedure.
The facts are fully stipulated, and the case was submitted under Rule 122. Decedent died in Georgia. The executors of her estate live in Georgia.
Decedent was Mildred Geraldine Letts. Her husband was James P. Letts, Jr. Their children are James P. Letts III and JoAnne L. Magbee (formerly JoAnne Geraldine Letts).
James P. Letts, Jr. (James Letts, Jr.), signed his will in 1983 and amended it by codicil in 1984. He named decedent, James P. Letts III, and JoAnne L. Magbee executors.
Item I of his will provided that all of his tangible personal property was to pass to decedent if she survived him by 30 days. In Item II of his will, he devised the residue of his estate, after payment of funeral expenses, debts, and expenses of administration, to decedent and their two children in trust (Item II trust). The amount of the Item II trust was equal to:
the value of such residue minus the largest amount which can be withheld from this marital deduction bequest without increasing the Federal estate tax on my estate otherwise payable by reason of my death.
The Item II trust authorized decedent to receive all of the income from the trust for life at least quarterly, authorized decedent to withdraw up to $40,000 per year, and authorized the trustees to distribute the corpus to decedent for her comfort, maintenance, and support. The corpus of the Item II trust consisted of terminable interest property in which decedent had an income interest for life.
The Item II trust authorized the executors of the Estate of James Letts, Jr., to elect to treat the trust as “qualified terminable interest property” (QTIP) for purposes of the Federal estate tax marital deduction. If the executors made a QTIP election, the trustees were directed to pay the Federal estate tax that resulted from including the marital property in decedent's estate under sections 2044 and 2207A.
Item III of the will of James Letts, Jr., created a trust (Item III trust) for the benefit of decedent and the living descendants of James Letts, Jr. When decedent died, the undistributed income from the Item II trust was to be paid to decedent's estate and the corpus was to be paid to the Item III trust.
James Letts, Jr., died on November 7, 1985. Ralph M. Newberry, a certified public accountant, prepared his Federal estate tax return. The gross estate reported on the return was $1,877,372.
The Estate of James Letts, Jr., claimed a $1,317,969 marital deduction. of that amount, $317,705 was attributable to assets passing to decedent as joint tenant with the right of survivorship. The remaining $1,000,264 was for the Item II trust, which was described on Schedule M as a “qualified marital trust”. The Estate of James Letts, Jr., did not state on its return whether or not the Item II trust property was terminable interest property. The Estate of James Letts, Jr., passed $1,317,969 to decedent and paid no estate taxes.
On page 2 of the return filed by the Estate of James Letts, Jr., under “Elections by the Executor”, the following question appears on line 4: “Do you elect to claim a marital deduction for qualified terminable interest property (QTIP) under section 2056(b)(7)?” The executor of the Estate of James Letts, Jr., placed an “x” in the box for “No”.
The instructions for line 4 say that if the gross estate exceeds $500,000, the property for which the election is being made must be listed on Schedule M and clearly marked as “qualified terminable interest property”. The executor listed no property on Schedule M as QTIP.
The estate tax return for the Estate of James Letts, Jr., did not include a copy of the will of James Letts, Jr.
James P. Letts III signed the Federal estate tax return for the Estate of James Letts, Jr. It was filed on September 8, 1986. Respondent did not examine or make any adjustments to that return. The time to assess tax against the Estate of James Letts, Jr., expired on September 8, 1989, before decedent died.
In her will, decedent named James P. Letts III and JoAnne L. Magbee executors of her estate. Decedent died on April 20, 1991, in Atlanta, Georgia, and was survived by her son, James P. Letts III, and her daughter, JoAnne L. Magbee.
The Item II trust had not been funded before decedent died.
On January 20, 1992, petitioner applied for an extension of time to file decedent's Federal estate tax return.
John C. Sawyer of Alston & Bird in Atlanta prepared decedent's Federal estate tax return. Decedent's Federal estate tax return noted that the executors of James Letts, Jr.'s estate had not elected QTIP treatment for the Item II trust. Decedent's estate did not include the value of the Item II trust in decedent's gross estate. Petitioner attached the following statement to its estate tax return:
Statement Regarding Question 6 of Part 4
Item Two of the Will of James P. Letts, Jr., the late husband of Mildred G. Letts, created a trust for her benefit. Pursuant to the terms of that trust, Mildred G. Letts was to receive all of the income from the trust for life. She also was given the power to withdraw up to $40,000 from the trust each year (see Schedule H), but had no other general power of appointment. On the Form 706 filed on behalf of the estate of James P. Letts, Jr., a copy of which is attached hereto, the executor did not elect to treat the Item Two trust as qualified terminable interest property. Consequently, the assets held in the item two trust are not includible in the gross estate of Mildred G. Letts under section 2044.
James P. Letts III and JoAnne L. Magbee signed decedent's Federal estate tax return. It was filed on April 20, 1992.
Respondent determined that the value of the Item II trust is includable in decedent's gross estate.2 Petitioner concedes that $40,000 of the trust property is includable in decedent's gross estate because it was subject to decedent's power of withdrawal or appointment at her death.
Petitioner points out, and respondent does not dispute, that assessment of tax against the Estate of James Letts, Jr., is barred by the statute of limitations. Petitioner also points out that section 2044 3 does not include in the gross estate of a surviving spouse the value of property for which no QTIP election was made. Thus, petitioner contends that the value of the Item II trust is not includable in decedent's gross estate.
Respondent contends that petitioner must include the value of the Item II trust in decedent's gross estate under the duty of consistency.4 For reasons discussed next, we agree with respondent.
A tax is imposed on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States. Sec.2001(a). In computing the value of the taxable estate, an estate may deduct the value of certain interests which pass from the decedent to the decedent's spouse (marital deduction). Sec.2056(a). Congress enacted the marital deduction in 1948 and expanded it in 1981. H. Rept. 97–201, at 159–161 (1981), 1981–2 C.B. 352, 377–378. As a result, bequests of property from a predeceasing spouse to the surviving spouse are in certain circumstances eligible for an unlimited marital deduction. Sec.2056(a). It is a basic policy of the marital deduction that property that passes untaxed from a predeceasing spouse to a surviving spouse is included in the estate of the surviving spouse. Estate of Shelfer v. Commissioner, 86 F.3d 1045, 1048 (11th Cir.1996), revg. 103 T.C. 10 (1994); Estate of Cavenaugh v. Commissioner, 100 T.C. 407, 416 (1993), affd. in part and revd. in part on other grounds 51 F.3d 597 (5th Cir.1995).
The marital deduction provides special rules for gifts of terminable interest property (e.g., life interests). Sec.2056(b). A terminable interest is an interest passing to a surviving spouse that will end on the lapse of time, on the occurrence of an event or contingency, or on the failure of an event or contingency to occur. Sec.2056(b)(1). The marital deduction is not available for terminable interest property given to the surviving spouse unless the estate of the predeceasing spouse elects to treat the property as QTIP. Sec.2056(b)(1), (7).5 The estate of the predeceasing spouse is denied a marital deduction for terminable interest property if that estate does not make the QTIP election. These rules permit the predeceasing spouse's estate to choose QTIP treatment and thus defer taxation of a terminable interest, at the price of having it included in the gross estate of the surviving spouse under section 2044.
C. Whether the Duty of Consistency Applies1. Background
The duty of consistency 6 prevents a taxpayer from benefiting in a later year from an error or omission in an earlier year which cannot be corrected because the time to assess tax for the earlier year has expired. Herrington v....
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