Mfr. Nat'l Bank of Detroit v. Comm'r of Internal Revenue (In re Estate of Higgins)
| Decision Date | 19 July 1988 |
| Docket Number | Docket No. 11431-86. |
| Citation | 91 T.C. No. 7,91 T.C. 61 |
| Parties | ESTATE OF JOHN T. HIGGINS, DECEASED, MANUFACTURERS NATIONAL BANK OF DETROIT, PERSONAL REPRESENTATIVE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Decedent's will left a life interest in the residue of his estate to his surviving spouse and the remainder interest therein (subject to the payment of taxes, administration expenses, and certain needs of the surviving spouse) to designated charities.
HELD: The personal representative of the estate did not make an election to have the interest treated as ‘qualified terminable interest property‘ (QTIP) under sec. 2056(b)(7), I.R.C. 1954. Leonard J. Prekel, for the petitioner.
Roberta M. Hamm, for the respondent.
Respondent determined a deficiency in the Federal estate tax of the estate of John T. Higgins in the amount of $185,813.46. The issue for determination is whether the personal representative of the estate made a valid qualified terminable interest property election under section 2056(b)(7).1
Manufacturers National Bank of Detroit (the bank), is the personal representative of the estate of John T. Higgins. Its principal office at the time of the filing of the petition was in Detroit, Michigan.
John T. Higgins (hereinafter Higgins or decedent), a retired attorney, died on April 29, 1982, survived by his wife, Margaretta Higgins. Higgins had been a partner in the Detroit, Michigan, law firm of Higgins, Starrs, and MacDonell.
Twenty-seven days prior to his death, Higgins executed a will naming his former law partner, John R. Starrs (Starrs), as personal representative. Relevant to this case, article Seven of decedent's will read as follows:
SEVENTH: Should my beloved wife, MARGARETTA C. HIGGINS, survive me by thirty days, I give and bequeath all the rest and residue of my estate unto my Trustee, hereafter named, to invest and reinvest the assets thereof, to collect the income therefrom, to pay the taxes and expenses of maintenance and administration thereof and to pay the net income therefrom to or for the account of my beloved wife, MARGARETTA C. HIGGINS, in monthly or other convenient installments (but not less often than annually) during her lifetime. If, in the opinion of my Trustee, considering income available to my beloved wife from all other sources, my said beloved wife, MARGARETTA C. HIGGINS, shall, by reason of illness, accident or misfortune, stand in need of funds for medical, surgical, dental, hospital or nursing expenses, or expenses of invalidism or convalescence, my Trustee is authorized to invade principal to the extent necessary to meet such need or needs. This power of invasion shall be continuous and shall not be exhausted by use.
Paragraph 8 specified that, upon the death of Higgins' spouse, the remaining trust assets be paid to three qualified educational institutions as follows: 10 percent to Manhattanville College, 10 percent to the Academy of the Sacred Heart, and 80 percent to the University of Notre Dame Du Lac.
The will was admitted to probate and Starrs was appointed personal representative of the estate by order of the Oakland County Probate Court, Pontiac, Michigan, dated June 22, 1982. Starrs died on October 20, 1984, and the bank succeeded him as personal representative of the estate by order of the Oakland County Probate Court, dated January 2, 1985.
The law firm of Higgins, Starrs, and MacDonell prepared a June 1982 version of a Form 706, U.S. Federal Estate Tax Return, for the estate. Both Starrs, as personal representative of the estate, and Robert MacDonell, as preparer of the Form 706, signed the return.
Starrs filed the return with the Internal Revenue Service (IRS) on January 28, 1983. On page 2 of the return the following question was answered negatively: ‘Do you elect to claim a marital deduction for an otherwise nondeductible interest under section 2056(b)(7)?‘ Attached to the return was a letter written by Starrs explaining the computations for determining the value of the marital and charitable deductions taken on the return. The letter stated in pertinent part:
Sirs:
A computation indicating how we determined the value of the marital deduction and the charitable deduction (the trust remainder to the charities being liable for the taxes) in the above matter follows.
+-------------------------------------------------------------------+
¦a.¦Gross estate, line 1 of Recapitulation ¦ ¦1,410,000.36¦
+--+----------------------------------------+----------+------------¦
¦b.¦Deductions to arrive at residue: ¦ ¦ ¦
+--+----------------------------------------+----------+------------¦
¦ ¦1. Schedules J & K ¦129,267.25¦ ¦
+--+----------------------------------------+----------+------------¦
¦ ¦2. Cash gifts from par. 3 of will ¦39,000.00 ¦ ¦
+--+----------------------------------------+----------+------------¦
¦ ¦3. Securities gifts, pars. 4 & 5 of will¦358,725.00¦ ¦
+--+----------------------------------------+----------+------------¦
¦ ¦4. Paintings, gifts by par. 6 of will ¦60,000.00 ¦ ¦
+--+----------------------------------------+----------+------------¦
¦ ¦5. Schedule E gifts to spouse, not ¦130,113.02¦717,105.27 ¦
+--+----------------------------------------+----------+------------¦
¦ ¦probated ¦ ¦ ¦
+--+----------------------------------------+----------+------------¦
¦c.¦Presumed value of probate residue ¦ ¦692,895.09 ¦
+-------------------------------------------------------------------+
Decedent's spouse, Margaretta C. Higgins, was born December 28, 1902. At the time of decedent's death, April 29, 1982, she was 79 years of age. By the Michigan life expectancy tables, she has 6.21 years, which, multiplied by the 5 percent factor, equals 31.05 percent. Hence the value of her interest in the residue of the estate appears to be 31.05 percent of $692,895.09, or $215,143.93. To get this figure we add the figure ($130,113.02) from Schedule E in order to get the total for Schedule M of $345,256.95.
The charitable/educational institutions who are the remaindermen after the death of the life tenant would, as we see it, have their interest in the probate estate figured at 68.95 percent (100 percent minus the spouse's interest of 31.05 percent) of $692,895.09, or $477,751.16, to which would be added the gift of paintings from par. 6 ($60,000.00) for a total charitable gift of $537,751.16, subject to being reduced (on the 706) for the estate and inheritance taxes. The Michigan State Inheritance Tax of $51,340.00 has already been paid and the receipt is attached to the Estate Tax Return. We estimated the Federal Estate Tax at $96,000 for purposes of Schedule 0, thus reducing the available allowable deductions to $390,411.16.
* * * On Schedule M, Bequests, etc., to Surviving Spouse (the marital deduction), attached to petitioner's Form 706, the estate claimed that property passed to Margaretta Higgins in the amount of $345,256.95, $130,113.02 attributable to her interest as a surviving joint tenant of assets listed in Schedule E2 and $215,143.93 attributable to her life income interest in the residual trust established under paragraph 7 of decedent's will. The estate did not designate that any of the property listed on Schedule M was qualified terminable interest property.
On Schedule O, Charitable, Public, and Similar Gifts and Bequests (the charitable deduction), petitioner showed three educational institutions receiving the net amount of $390,411.16, $60,000 in cash and $330,411.16 attributable to the trust remainder established under paragraph 8 of Higgins' will.
In the notice of deficiency, respondent is allowed $215,143.93 of the claimed marital deduction because the life income interest passing to decedent's spouse will terminate or fail upon the death of decedent's spouse, and because it has not been established that an election was made to treat any portion of the property passing to decedent's surviving spouse as qualified terminable interest property (QTIP).
Respondent further disallowed $330,411.16 of the claimed charitable deduction because the remainder interest passing to the educational organizations was in the form of a split-interest trust, not in the form of a charitable remainder annuity trust, a charitable remainder unitrust, or a pooled income fund. See sec. 2055.
The June 1982 version of the Form 706 was the first Form 706 to include the QTIP election. The Q-TIP election question, as stated above, read, ‘Do you elect to claim a marital deduction for an otherwise nondeductible interest under section 2056(b)(7).‘3 The instructions for this question accompanying the June 1982 Form 706 explained the effect of the election and the procedure for making it. The instructions stated that in order to make the election, the election question must be answered by checking the ‘Yes‘ block and, if the total gross estate is more than $500,000, as is the gross estate of Higgins, the property for which this election is made must be included in Schedule M and clearly marked as ‘qualified terminable interest property.‘4
With respect to the election to deduct qualified terminable interests, the instructions for Schedule M5 (Bequests, etc. to Surviving Spouse of the June 1982 Form 706 defined ‘Qualified Terminable Interest Property,‘ explained the effect of the election, and described the procedure for taking the election. The instructions provided that in order to claim this election, which is, once made, irrevocable, you must check ‘Yes‘ to line 12 of ‘General Information‘ on Form 706 and on ‘Schedule M, you should group the property interests for which you made the election separately and mark them 'Qualified Terminable Interest Property.‘’
As stated above, the personal...
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