Stockland v. Comm'r of Internal Revenue (In re Estate of Robertson), Docket No. 39144-87.

• Decision Date: 29 June 1992
• Docket Number: Docket No. 39144-87.
• Parties: ESTATE OF WILLARD E. ROBERTSON, DECEASED, TOM STOCKLAND, SUCCESSOR-EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

98 T.C. 678

98 T.C. No. 47

ESTATE OF WILLARD E. ROBERTSON, DECEASED, TOM STOCKLAND, SUCCESSOR-EXECUTOR, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 39144-87.

United States Tax Court

Filed June 29, 1992.

The will of decedent (D) gave his wife (W) an income interest in Trusts M-2 and M-3 and provided that if D's executor did not elect to treat the property in Trusts M-2 and M-3 as “qualified terminable interest property” (QTIP property) within the meaning of sec. 2056(b)(7), I.R.C., that property would instead be added to the nonmarital trust. The executor made the QTIP election as to the property in Trusts M-2 and M-3.

HELD: D's estate is not entitled to an estate tax marital deduction for W's interest in the Trusts M-2 and M-3 property, where W's interest in Trusts M-2 and M-3 was contingent on the executor's making the QTIP election and thus did not satisfy the requirements of sec. 2056(b)(7), I.R.C. Estate of Clayton v. Commissioner, 97 T.C. 327 (1991), followed. E.J. Ball, Kenneth R. Mourton, and Stephen Erwin Adams, for petitioner.

Edsel Ford Holman, Jr., for respondent.

OPINION

PARKER, JUDGE:

This matter is before the Court on respondent's motion for partial summary judgment, filed December 23, 1991.

Unless otherwise indicated, all section references are to the Internal Revenue Code 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.

Respondent determined a deficiency of $14,014,749.30 in petitioner's Federal estate tax. The issue is whether the surviving spouse's income interest in the Marlin Robertson Trust-2 and Trust-3 property constitutes “qualified terminable interest property” within the meaning of section 2056(b)(7) where that income interest is subject to an election to be made by the executor in his discretion. ¹ Specifically, the issue is whether petitioner is entitled to a marital deduction with respect to this property. Secs. 2056(a), (b)(1), and (b)(7).

Willard E. Robertson (the decedent) died on October 29, 1983, and on the date of his death, was a resident of Benton County, Arkansas. On November 2, 1983, the decedent's last will and testament was probated and his son, Willard E. Robertson, Jr. (Robbie), was authorized to act as executor for the decedent's estate.

On April 11, 1984, Marlin Head Robertson (the surviving spouse) filed a petition for removal of executor, which litigation was resolved by an agreement filed with the Probate Court on August 1, 1984. On that same day, the Probate Court issued an order that authorized the surviving spouse to act with Robbie as co-executor of the decedent's estate. ²

On September 28, 1984, the surviving spouse and Robbie, as co- executors, filed a United States Estate Tax Return, Form 706, for the estate, which is petitioner herein. That estate tax return reported a gross estate valued at $31,531,399.11, including a valuation of the decedent's interest in the Willard E. Robertson Corporation of $29,363,860. ³ Certain life insurance payable to the surviving spouse and property passing directly to the surviving spouse totaling $1,249,246.95, plus $8,829,813.56 set aside for a section 2056(b)(5) “power of appointment” marital trust, resulted in a partial marital deduction of $10,079,060.51. The estate tax return also reflected a marital deduction for two residuary marital trusts in which the surviving spouse was allowed only an income interest under the terms of the decedent's will. These two residuary marital trusts (to be more fully discussed below as the Marlin Robertson Trust-2 and the Marlin Robertson Trust-3) were reported with a value of $8,829,813.56 each. On the estate tax return, the co-executors made the election under section 2056(b)(7)(B)(v) in regard to these two trusts. The total marital deduction claimed on that estate tax return was $27,738,687.63, which together with other deductions resulted in estate tax due of zero.

On September 18, 1987, respondent issued a statutory notice of deficiency to petitioner, determining an estate tax deficiency of $14,014,749.30. The principal adjustment was the disallowance of $22,417,820.71 of the marital deduction due to litigation against the estate by the decedent's first wife and his children of that marriage. A timely petition was filed in the Tax Court. Trial of the case was continued because of the pending litigation by the first wife and the children of that marriage. After that litigation was settled, respondent determined that the two residuary marital trusts did not meet the qualifications for “qualified terminable interest property” (QTIP property). Respondent moved for leave to file an amended answer to raise that issue which the Court allowed on May 2, 1990. The trial of the case was subsequently again continued because of these new issues and certain delays in obtaining appraisals of various properties. Pretrial preparations in regard to these valuation issues and other issues are still ongoing. See supra notes 1, 3.

TERMS OF THE WILL

In his last will and testament, the decedent made certain specific bequests. The decedent bequeathed all of his personal effects to his wife and specific amounts of money to his son, Phillip Scott Robertson, to his daughter, Patricia Anne Miller, and to his brother, Leonard Robertson.

Article IX of the decedent's will addressed the disposition of the residue of his estate. In paragraph 1(a), of Article IX, the decedent directed that, if his wife survived him, his residuary estate be divided into four separate parts. The first part, designated as the “Willard Robertson Trust” was to be funded by an amount of property “equal in value to the largest amount which, after allowing for the unified credit which has not been claimed for transfers made during my life, and any other allowable credits, will result in no federal estate taxes being imposed upon my estate.” The Willard Robertson Trust was for the sole benefit of the decedent's sons of his second marriage, Willard E. Robertson, Jr., (Robbie) and James Christopher Robertson (Chris). The surviving spouse was given no interest in the Willard Robertson Trust.

The rest of the residue of the decedent's estate was to be divided into three equal trusts, designated as the Marlin Robertson Trust-I (Trust M-1), the Marlin Robertson Trust-2 (Trust M-2), and the Marlin Robertson Trust-3 (Trust M-3). Trust M-1 qualified for the marital deduction under section 2056(b)(5) because the surviving spouse was given a testamentary power of appointment over the assets of that trust. Paragraphs 3(a) and 3(c) of Article IX of the will provided that:

(a) The Trustee shall pay all of the net income of the MARLIN ROBERTSON TRUSTS to my wife in convenient installments at least as often as quarter-annually during her life.

* * * * *

(c) * * * To the extent that my wife does not effectively exercise her power of appointment, the MARLIN ROBERTSON TRUST-I shall upon the death of my wife be added to and commingled with the WILLARD ROBERTSON TRUST and held, or distributed in whole or in part, as if it had been an original part of the WILLARD ROBERTSON TRUST.

As indicated in paragraph 3(a), the surviving spouse also was to receive all of the net income of Trusts M-2 and M-3. However, if the executor failed or refused to make the QTIP election on the estate tax return, the assets of Trusts M-2 and M-3 were to be transferred to the Willard Robertson Trust. Specifically, paragraphs 3(d), 4, and 5 of Article IX of the will provided as follows:

(d) I hereby authorize my executor, in his sole discretion, to elect that any part or all of any amount of property passing under this Article to the MARLIN ROBERTSON TRUST-2 and/or the MARLIN ROBERTSON TRUST-3 be treated as qualified terminable interest property for the purposes of qualifying for the marital deduction allowable in determining the federal estate tax upon my estate. Without limiting the discretion contained in the foregoing sentence, it is my expectation that my executor will make said election with respect to all of any such amount unless the timing of my wife's death and mine and the computation of the combined death duties in our two (2) estate (sic) render such an election inappropriate. To the extent that my executor does not effectively exercise the power of election granted hereunder, then such portion of the MARLIN ROBERTSON TRUST-2 and/or MARLIN ROBERTSON TRUST-3 shall be added to and commingled with the WILLARD ROBERTSON TRUST and held, or distributed in whole or in part, as if it had been an original part of the WILLARD ROBERTSON TRUST.

4. Upon the death of my wife after my death, the Trustee shall divide the MARLIN ROBERTSON TRUST-2 and the MARLIN ROBERTSON TRUST-3, as then constituted, or if my wife does not survive me, the Trustee shall distribute the MARLIN ROBERTSON TRUST-2 and the MARLIN ROBERTSON TRUST-3 to the WILLARD ROBERTSON TRUST to be added to and commingled with the WILLARD ROBERTSON TRUST and held, or partly held and partly distributed, as if it had been an original part of the WILLARD ROBERTSON TRUST.

5. If there is not sufficient evidence that my wife and I died otherwise than simultaneously or should we die as the result of a common disaster, she shall be considered to have survived me for all purposes of this article.

POSITIONS OF THE PARTIES

Respondent's general position regarding the marital deduction is that, on the date of the decedent's death, the surviving spouse's interest in two of the three residuary marital trusts was subject to a contingency that could have caused such interest to terminate or fail. Respondent argues that the failure of the executor to elect QTIP treatment would defeat the surviving spouse's interest in Trusts M-2 and M-3. Specifically, respondent says that, because the surviving spouse's rights were contingent on the executor's making the QTIP election, her rights did not “pass” from the decedent as required...