Levitt v. Comm'r of Internal Revenue (In re Estate of Levitt)
| Citation | 95 T.C. 289,95 T.C. No. 22 |
| Decision Date | 13 September 1990 |
| Docket Number | Docket No. 28680-88. |
| Court | U.S. Tax Court |
| Parties | ESTATE OF SAMUEL I. LEVITT, DECEASED, HELEN S. LEVITT, ADMINISTRATOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
OPINION TEXT STARTS HERE
On June 12, 1975, D executed a trust agreement and made an inter vivos transfer of certain property to the trust. On March 6, 1978, D amended the trust agreement in its entirety. The amended trust agreement contains a formula which refers to the maximum marital deduction. D died intestate on May 13, 1985.
HELD, the formula in the trust is not the type of ‘formula‘ contemplated by section 403(e)(3), Economic Recovery Tax Act of 1981, Pub. L. 97-34, 95 Stat. 305 (section 403(e)(3)). HELD FURTHER, section 403(e)(3) does not preclude P from qualifying for an unlimited marital deduction under I.R.C. section 2056. The analysis contained in Estate of Blair v. Commissioner, T.C. Memo. 1988-296, does not properly take into account the effect of a will provision reducing the maximum marital deduction amount so as to utilize the estate tax unified credit to its fullest extent. Kenneth G. Coveney, for the petitioner.
William H. Quealy, Jr., for the respondent.
Respondent determined a deficiency in petitioner's Federal estate tax in the amount of $143,327.
The issue for decision is whether section 403(e)(3) of the Economic Recovery Tax Act of 1981, Pub. L. 97-39, 95 Stat. 305 (ERTA), precludes petitioner from qualifying for an unlimited marital deduction under section 2056. (Unless otherwise indicated, all section references are to the Internal Revenue Code as amended and in effect as of the date of the decedent's death and all Rule references are to the Tax Court Rules of Practice and Procedure.)
The parties submitted this case fully stipulated. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.
Petitioner is the Estate of Samuel I. Levitt. Helen S. Levitt (Mrs. Levitt) is the widow of Samuel I. Levitt (decedent or Mr. Levitt). At the time of his death, decedent was domiciled in California. By order of the Superior Court of California for the County of San Diego, dated February 16, 1989, Mrs. Levitt was appointed to act as administrator (executor) for the Estate of Samuel I. Levitt.
By trust agreement executed June 12, 1975, decedent, as trustor, made an inter vivos transfer of certain property to a revocable trust (the Trust). In general, the Trust was for the benefit of Mr. and Mrs. Levitt during their joint lifetimes and thereafter for Mrs. Levitt if she survived her husband, which she did.
By First Amendment to Trust Agreement, executed March 6, 1978, decedent amended the Trust in its entirety, but the dispository scheme was basically unchanged, although somewhat liberalized for the benefit of Mrs. Levitt after her husband's death.
On May 13, 1985, decedent, without having made any further amendments to the Trust, died intestate.
The formula clause in question reads as follows:
B. If the Trustor's Spouse survives the Trustor, the Trustee shall divide the Trust Estate, without being required to make physical segregation thereof except to the extent necessary to make distribution, into shares as follows:
1. One share, to be known as Trust A, shall consist of the following:
(i) The one-half interest of the Spouse in the community property of our marriage to the extent included in the Trust Estate; and
(ii) The Marital Deduction Amount consisting of that amount of the balance of the Trust Estate which will equal the maximum marital deduction allowable for federal estate tax purposes on my death, reduced by the final federal estate tax values of all other property interests includible in my gross estate for federal tax purposes which pass or have passed to Spouse under other provisions of this Trust or otherwise and qualify for the marital deduction; provided that such amount shall be reduced by an amount, if any, needed to increase my taxable estate to the largest amount that will not result in a federal estate tax being imposed by reason of my death, after allowing for the unified credit which has not been claimed for transfers made by me during my life and all other available credits taken against the federal estate tax.
(For convenience, Article II of the amended trust agreement containing the dispositive provisions is reproduced in its entirety in the appendix.)
On its estate tax return, petitioner reported a gross estate in the amount of $1,909,880, including assets of the Trust in the amount of $858,851. Petitioner also claimed marital, funeral expense and debt expense deductions in the amounts of $1,424,214, $20,000 and $9,621, respectively.
The claimed marital deduction in the amount of $1,424,214 consists of the following items, as disclosed on Schedule M of the Federal estate tax return (Form 706) filed by Mrs. Levitt as executor:
+------------------------------------------------------------------+
¦Real estate reported in Schedule A net of $85,722 ¦ ¦
+--------------------------------------------------------+---------¦
¦mortgage report in Schedule K ¦$438,278 ¦
+--------------------------------------------------------+---------¦
¦Stocks reported in Schedule B ¦9,024 ¦
+--------------------------------------------------------+---------¦
¦Cash reported in Schedule C ¦424,017 ¦
+--------------------------------------------------------+---------¦
¦Insurance on decedent's life reported in Schedule D ¦56,080 ¦
+--------------------------------------------------------+---------¦
¦Jointly owned property reported in Schedule E ¦27,408 ¦
+--------------------------------------------------------+---------¦
¦Other miscellaneous property reported in Schedule F ¦10,500 ¦
+--------------------------------------------------------+---------¦
¦Surviving spouse's interest in revocable trust (Trust A)¦458,907 ¦
+--------------------------------------------------------+---------¦
¦Total ¦1,424,214¦
+------------------------------------------------------------------+
Under the formula cause, Trust A, the surviving spouses's trust, shall consist of the surviving spouse's half of the Trust's assets and the marital deduction amount. The marital deduction amount is equal to $458,851. ($858,851, the value of decedent's share of the Trust's assets, reduced by $400,000, the amount needed to fully utilize the $121,800 of unified credit available to the estate, equals a marital deduction amount of $458,851.) Petitioner, however, claimed a marital deduction with respect to Trust A in the amount of $458,907, rather than $458,851. Consequently, an unexplained difference of $56 exists. The tax computation on the face of the return reflects no other available credits.
The assets of the Trust are includable in the decedent's gross estate pursuant to section 2038, and these assets were properly listed on Schedule G of the estate tax return.
At the time of the creation of the Trust on June 12, 1975, Mr. and Mrs. Levitt were residents and domiciliaries of the State of Florida. At the time of the execution of the amendment to the Trust on March 6, 1978, Mr. and Mrs. Levitt were residents and domiciliaries of the State of California.
The Levitts were married in Philadelphia in 1934. At the time of their marriage, they had assets totaling approximately $200. Mr. Levitt was his parents' only so and he supported his family during his lifetime; he received only nominal gifts and inheritances from his family during his lifetime.
On March 6, 1978, the date of the amendment to the Trust, Mr. and Mrs. Levitt had a combined net worth in excess of $975,000, consisting of their residence, a commercial rental building, marketable securities, the outstanding common stock of Levitt International Corporation (all of the stock of which was owned by Mr. and Mrs. Levitt), and cash; on that date all of the assets were the quasi-community property of Mr. Levitt. The combined net worth of the Levitts continued to increase after the amendment of the trust agreement on March 6, 1978.
When the decedent initially executed the revocable trust agreement on June 12, 1975, he named himself as ‘Trustor‘ and Mrs. Levitt and Carl Bruce Levitt and Jay Calman Levitt, the two sons of Mr. and Mrs. Levitt, as the ‘Trustees.‘ When the decedent amended the agreement on March 6, 1978, he named himself and his wife as cotrustees, and provided that upon the death, inability, incapacity, refusal or resignation of both of the trustees, then the two sons would be successor cotrustees.
As previously indicated, the amended revocable trust agreement provided that if Mrs. Levitt survived decedent, she would receive all of the net income from Trust A, at least annually, and would have a general power of appointment over the trust principal. The amended trust agreement further provided that if Mrs. Levitt survived decedent, she would receive all of the income from Trust B, together with as much or all of the principal as the trustee (Mrs. Levitt) deemed advisable, provided only that the principal of Trust A had first to be exhausted before payments of principal could be made from Trust B.
At the death of the survivor of the decedent and his surviving spouse, the principal of Trust B and any unappointed portion of Trust A was to be distributed equally to Mr. and Mrs. Levitt's two sons or their surviving issue, ‘upon the principle of representation.‘
Respondent determined that section 403(e)(3) of ERTA (section 403(e)(3)) limits the amount which petitioner may claim for marital and funeral expense deductions to $945,761 and $9,925, respectively. Under respondent's determination, no trust assets could be allocated to Trust A or will qualify for the marital deduction (because it is respondent's position that the...
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