Smith v. Commissioner

• Decision Date: 10 May 1978
• Docket Number: Docket No. 829-76.
• Citation: 1978 TC Memo 175,37 TCM (CCH) 745
• Parties: Estate of Doyle J. Smith, Deceased, Christine C. Smith and Doyle J. Smith, Jr., Co-Executors v. Commissioner.
• Court: U.S. Tax Court

37 TCM (CCH) 745

1978 TC Memo 175

T.C. Memo. 1978-175. Estate of Doyle J. Smith, Deceased, Christine C. Smith and Doyle J. Smith, Jr., Co-Executors v. Commissioner.

Docket No. 829-76.

United States Tax Court.

Filed May 10, 1978.

Donald W. Pemberton, 2750 One Commerce Square, Memphis, Tenn., for petitioner. Wm. Robert Pope, Jr., for respondent.

Memorandum Opinion

TANNENWALD, Judge:

Respondent determined a deficiency of $26,868.00 in petitioner's Federal estate tax. The sole issue for decision is whether property passing to a testamentary trust qualifies for the marital deduction under section 2056.¹

All of the facts have been stipulated. The stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference.

Doyle J. Smith (decedent) died testate on January 30, 1972, a resident of Shelby County, Tennessee. On February 4, 1972, decedent's last will and testament was admitted to probate in the Probate Court of Shelby County, Tennessee, and Christine C. Smith and Doyle J. Smith, Jr., were appointed executors of the decedent's estate. The Federal estate tax return for the decedent's estate was filed on October 30, 1972, with the Internal Revenue Service Center at Memphis, Tennessee.

Part IV of decedent's will, which was signed January 4, 1963, created a trust for the benefit of his wife (hereinafter sometimes referred to as the "marital deduction trust"), as follows:

IV

I give, devise and bequeath to The First National Bank of Memphis, Tennessee, the following-described property, to hold and use the same as Trustee, upon the terms and conditions set forth hereinafter:

Property in an amount equal to the maximum estate tax marital deduction (allowable in determining the Federal estate tax on my gross estate), diminished by the value for Federal estate tax purposes of all other items in my said gross estate which qualify for said deduction and which pass or have passed to my wife under other provisions of this Will, or otherwise. In making the computations necessary to determine the amount of this gift, the final determinations in the Federal estate tax proceedings shall control.

Said trust estate shall belong to my wife, Christine Cain Smith, and the same shall be held and distributed by said Trustee for the use and benefit of my said wife in the proportions and in the manner and under the terms and conditions herein set out:

1. The Trustee shall pay to Christine Cain Smith the net income from said trust for the remainder of her natural life. Said payments shall be made at least annually, but may be made more frequently at the discretion of the Trustee.

2. Said Chrintine sic Cain Smith shall have the absolute power of appointment over the corpus of said trust, provided, however, the said power may not be exercised in her own favor.

3. Said power of appointment may be exercised only by a valid Will of my wife, which specifically states that she is exercising this particular power.

4. If my wife should die without exercising said power of appointment, then, in such event, the property remaining in trust shall be added to the trust established herein for my children and shall become subject to all the terms and conditions of such trust.

The residue of the estate was bequeathed to a trust, the income of which was to be either accumulated or distributed, in the trustee's discretion, to a class composed of decedent's wife and children (hereinafter sometimes referred to as the "residuary trust").

The will granted the trustee certain powers and protection from liability in the exercise of its discretion. The pertinent provisions are:

VII

The Trustee named in both trusts shall have complete and absolute power to determine what property shall constitute the corpus of each of the two trusts established herein, and also, their decision in connection with valuation of said property shall be conclusive.

VIII

It is my intention that my Executors and Trustee shall have all the powers and immunities necessary to handle my estate and both trusts herein created according to its best judgment and for the best interest of the beneficiaries, and without imposing any restrictions upon said powers and immunities, but in amplification of the same, I hereb sic expressly authorize and empower the Executors, with respect to my estate, and the Trustee, with respect to the trusts created herein, in its sole and absolute discretion:

1. To purchase or otherwise acquire, and to retain, whether originally a part of my estate or subsequently acquired, any and all stocks, bonds, notes or other securities, and/or any variety of real or personal property, including stocks or interests in investment trusts and common trust funds, as it may deem advisable, whether or not such investments be of the character permissible for investments by fiduciaries, or be unsecured or unproductive. Investments need not be diversified and may be made or retained with a view to a possible increase in value. The Executors or the Trustee may, at any time, render liquid my estate or the trust estates, in whole or in part, and hold cash or redily sic marketable securities of little or no yield for such period as it may deem advisable.

* * *

X

The Trustee hereunder shall not be liable for any action taken by it in good faith in the exercise of the powers and discretions herein granted. The Trustee named herein, and the Sucessor sic Trustee, or Trustees, shall not be required to give any bond or furnish any manner of security nor make any accounting in any court, and any Successor Trustee, or Trustees, shall succeed to all powers, discretions and immunities granted to the original Trustee.

The trustee of the marital deduction trust has not executed any agreements modifying its powers as set forth in the decedent's will.

On the estate tax return, petitioner claimed a marital deduction of $312,469.26.² Respondent disallowed $162,289.07 of this deduction, which was the amount claimed for property passing to the marital deduction trust.

Section 2056(a) allows an estate a deduction for certain property interests passing to the decedent's surviving spouse. A deduction is allowed in the case of a life estate with a power of appointment in the surviving spouse if all the requirements of section 2056(b)(5) are met. That subsection requires, inter alia. that the surviving spouse be entitled for life to all the income and have a power of appointment exercisable in favor of the surviving spouse or his or her estate.³

The parties agree that the property passing to the wife's trust qualifies for the deduction, if at all, under section 2056(b) (5) but disagree as to whether the wife is considered entitled to all the income and whether her power of appointment meets the specifications of that subsection. Respondent also contends that the deduction is not allowable because, under Rev. Proc. 64-19, 1964-1 C.B. (Part I) 682, the value of the interest is considered unascertainable at the date of death since the trust may be funded at estate tax values with assets chosen in the discretion of the trustee. We hold that the interest qualifies for the marital deduction under section 2056(b)(5).

Respondent contends that the wife's power of appointment over the marital deduction trust is exercisable neither in favor of herself nor her estate. Decedent's will states that the wife's power of appointment "may not be exercised in her own favor" and then in the next sentence states that it may only be exercised by her will. Respondent reasons that it is impossible for the wife to exercise the power of appointment in her own favor because it can only be exercised by will and that, therefore, the clause prohibiting her from exercising the power in her own favor must be construed as preventing her from exercising it in favor of her estate.

In resolving this issue, we must determine the extent of the wife's interest according to Tennessee law. Commissioner v. Estate of Bosch 67-2 USTC ¶ 12,472, 387 U.S. 456 (1967). Tennessee courts follow the usual rule that the testator's intent is to be ascertained by looking to the entire will. Martin v. Taylor, 521 S.W. 2d 581 (1975); First American National Bank v. Cole, 211 Tenn. 213, 364 S.W. 2d 875 (1963). The Supreme Court of Tennessee has summarized the rule in the following manner:

The cardinal rule in construction of all wills is that the court shall seek to discover the intention of the testator and give effect to it, unless it contravenes some rule of law or public policy. That intention is to be ascertained from the particular words used, from the context, and from the general scope and purpose of the will, read in the light of the surrounding and attending circumstances. Moore v. Neely, 212 Tenn. 496, 370 S.W. 2d 537, 540 (1963).

With this rule as our guide, we conclude that decedent intended that his wife have the power to appoint the marital trust in favor of her estate. Although respondent's interpretation has a certain logic to it, he has failed to take into account the fact that the draftsman of decedent's will was obviously cognizant of the provisions of section 2056, as evidenced by the specific reference in Paragraph 4 to "the maximum estate tax marital deduction allowable in determining the Federal estate on my gross estate." Moreover, although the evidence of decedent's intent from the use of the words that "the trust estate shall belong to her" and that the power of appointment was to be "absolute" is tempered by the subsequent negation of the exercise of the power in her favor and the restriction of her power to appoint to that of a testamentary power,⁴ the words "belong" and "absolute" should be given some consideration. Finally, we note that the general rule is that "the general testamentary power is the equivalent of ownership with this considerable limitation; the donor has provided that no appointment shall be effective until the donee's death and, therefore, the donee cannot appoint to...