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

• Decision Date: 17 May 1993
• Docket Number: No. 28208–90.,28208–90.
• Citation: 100 T.C. No. 28,100 T.C. 427
• Parties: ESTATE OF Hazard E. REEVES, Deceased, Alexander G. Reeves, Harry Miller, and the Bank of New York, Co–Executors, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

100 T.C. 427

100 T.C. No. 28

ESTATE OF Hazard E. REEVES, Deceased, Alexander G. Reeves, Harry Miller, and the Bank of New York, Co–Executors, Petitioner,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 28208–90.

United States Tax Court

May 17, 1993.

Alfred Wheeler, New York City, for petitioner.

Michael Goldbas, Albany, NY, for respondent.

HAMBLEN, Chief Judge:

Respondent determined a deficiency in the Federal estate tax of the Estate of Hazard E. Reeves (petitioner) in the amount of $1,100,700.69. This case is before the Court pursuant to Rule 122 on the parties' fully stipulated facts. The issue for our decision is whether the marital deduction must be adjusted to reflect the deduction allowed for the sale of employer shares to an Employee Stock Ownership Plan (ESOP) under section 2057.

Unless otherwise noted, all section references are to the Internal Revenue Code in effect at decedent's date of death, and all Rule references are to the Tax Court Rules of Practice and Procedure.

FINDINGS OF FACT

All of the facts have been stipulated pursuant to Rule 91. The stipulation of facts and exhibits are incorporated as our findings by this reference.

At the time of the filing of the petition in this case, two of the executors of decedent's estate were residents of the State of New York, and one was a resident of the State of New Hampshire. The estate's mailing address was in New York, New York.

On October 30, 1985, Hazard E. Reeves (decedent) executed his Last Will and Testament (will). On November 20, 1985, and February 25, 1986, respectively, decedent executed a first and a second codicil to his will. Under the terms of the will and the codicils thereto, decedent appointed Alexander G. Reeves, Harry Miller, and Bank of New York as executors of his estate. In addition, decedent made specific bequests of personal property to named individuals and his surviving spouse. Further, he made general cash bequests to individuals other than his surviving spouse. Decedent did not, however, specifically bequeath his interest in 511,116 shares of Realtron Corporation class A common stock. Realtron is a domestic corporation whose shares are not publicly traded.

Article twelve, subpart(c) of the will grants to the executors the power “[to] sell at public or private sale and to exchange or otherwise dispose of any stocks, bonds, securities, or other personal property constituting assets of my estate not specifically bequeathed.”

Decedent bequeathed the residue of his estate to a trust. The trust's terms direct the trustees to pay the net income from the trust at least quarterly to, or for the benefit of, decedent's surviving spouse. The principal of the trust could be used by the trustees for the support, maintenance, and welfare of decedent's surviving spouse. Decedent directed that the remainder interest of the trust be used to pay estate taxes owed by his surviving spouse's estate and then distributed to her grandchildren.

Decedent died on December 23, 1986. In September 1987, the executors sold the 511,116 shares of Realtron stock to Realtron's Employee Stock Ownership Plan for the amount of $2,555,580.

On March 23, 1988, pursuant to an extension, the executors timely filed a Federal estate tax return. They valued the gross estate as of decedent's date of death at $20,410,045.55, which included the 511,116 shares of Realtron Corporation class A common stock, valued at $5,111,160.¹ On the return, the executors claimed a marital deduction of $11,583,568, made up of the following items:

(1) One-half of the value of the property held jointly, prior to decedent's death, which passed to decedent's surviving spouse by operation of law;

(2) The value of the tangible personal property bequeathed to decedent's surviving spouse; and

(3) The net fair market value of the residuary bequest which was treated as Qualified Terminable Interest Property (QTIP) pursuant to section 2056(b)(7). In determining the value of the residuary, the executors included the $5,111,160 “date of death” value of the Realtron shares.²

The executors also claimed a deduction from the gross estate of $1,277,790, pursuant to section 2057. The deduction so reported equals 50 percent of the proceeds from the sale of the Realtron stock to the Realtron Employee Stock Ownership Plan.

OPINION

1. The Marital Deduction

Section 2056 permits an estate to claim a marital deduction for the value of property interests passing outright from a decedent to the decedent's surviving spouse “except as limited by subsection (b)”. One of the limitations in subsection (b) is the denial of deductibility for a “terminable interest”. Sec. 2056(b)(1). That, generally, is a property interest that will terminate or fail “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).

Section 2056(b)(7) contains an exception to this “terminable interest rule”. It provides a marital deduction for “qualified terminable interest property”. That, generally, is property which passes to the surviving spouse from the decedent, from which the surviving spouse can claim “all the income from the property, payable annually or at more frequent intervals”, and, while she is alive, no one else can appoint any part of the property to anyone but her. Sec. 2056(b)(7).

Here, the parties agree that the executors properly elected to treat the lifetime interest in the residuary trust bequeathed to decedent's surviving spouse as a terminable interest that qualifies for QTIP treatment. Satisfaction of the conditions of section 2056(b)(7) is not in controversy.

2. Limitation on Double Deductions

Section 2056(b)(9) was added as a technical correction to the marital deduction provisions. Technical Corrections Act of 1982, Pub.L. 97–448, sec. 104(a)(2)(A), 96 Stat. 2365, 2380. Section 2056(b)(9) provides as follows:

DENIAL OF DOUBLE DEDUCTION.—Nothing in this section or any other provision of this chapter shall allow the value of any interest in property to be deducted under this chapter more than once with respect to the same decedent.

Apparently, the only legislative material regarding section 2056(b)(9) is a statement in a staff report prepared for the use of the Committee on Ways and Means. That report states the purpose of section 2056(b)(9) as follows:

In order to insure that there is not a double deduction as a marital deduction and a charitable deduction for charitable remainder interests, the bill would clarify that the value of any interest in property may be deducted only once in computing the estate tax or gift tax liability. [Staff of Joint Comm. on Taxation, Description of H.R. 6056, Technical Corrections Act of 1982 (J.Comm.Print 1982) at 12.]

3. Section 2057

Section 2057, enacted as part of the Tax Reform Act of 1986, provided in pertinent part:

(a) GENERAL RULE.—For purposes of the tax imposed by section 2001, the value of the taxable estate shall be determined by deducting from the value of the gross estate an amount equal to 50 percent of the qualified proceeds of a qualified sale of employer securities. [Pub.L. 99–514, sec. 1172(a), 100 Stat. 2085, 2513–2515.]

In sum, section 2057 provides an estate tax deduction for 50 percent of the proceeds from a sale of employer securities to an Employee Stock Ownership Plan (ESOP). The legislative history indicates that section 2057 was intended to encourage transfers of employer securities to ESOPs. See H.Rept. 100–391, at 1045 (1987), 132 Cong.Rec. S7902 (daily ed. June 19, 1986). Congress repealed section 2057 as of December 19, 1989. Omnibus Budget Reconciliation Act of 1989, Pub.L. 101–239, sec. 7304, 103 Stat. 2301, 2352.

There is no dispute that the estate has satisfied the conditions imposed by section 2057 for deduction of 50 percent of the proceeds from the sale of the Realtron stock to the ESOP. The dispute here, rather, is whether petitioner has taken a double deduction for the interest in the Realtron shares. Respondent argues that petitioner included the date-of-death value of those shares in the QTIP marital deduction and also claimed the ESOP deduction for half the sale proceeds of those shares under section 2057. Respondent contends that section 2056(b)(9) prohibits such a “double deduction”.

4. The Allowable Deductions

We are unaware of any case applying section 2056(b)(9). Nonetheless, we find that the plain language of the statute denies petitioner a double deduction resulting from its claiming the full date-of-death value of the Realtron shares as part of the marital deduction plus the value of half the proceeds as an ESOP deduction. It is well established that statutes are to be construed so as to give effect to their plain and ordinary meaning unless to do so would produce absurd results. United States v. American Trucking Associations, Inc., 310 U.S. 534, 543–544 (1940). Here, our construction of section 2056(b)(9)—that it prevents more than one deduction for the value of any property interest in an estate tax context—gives effect to its plain meaning and produces sensible results.³

Section 2056(b)(9) provides that, for estate tax purposes,⁴ the value of an “interest in property” may be deducted only once with respect to the same decedent.

The “value” of a deductible interest passing to the surviving spouse is determined as of the decedent's date of death, unless the executors elect the alternate valuation method under section 2032. Sec. 20.2056(b)–4(a), Estate Tax Regs. Here, the parties agree that the value of the Realtron stock, determined as of decedent's date of death, entered into the computation of the value of the residuary estate. The value of that residuary, in the form of a QTIP trust, was included in the amount of the marital deduction under section 2056(a).

The term “interest in property” also has a meaning in the provisions of the Internal Revenue Code relating to the marital deduction. The marital deduction provisions first...