Wisely v. U.S.

• Decision Date: 11 January 1990
• Docket Number: No. 89-2606,89-2606
• Citation: 893 F.2d 660
• Parties: -1183, 90-1 USTC P 60,017 Hazel S. WISELY, Executor of the Estate of William H. Wisely, Deceased, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 660

893 F.2d 660

65 A.F.T.R.2d 90-1183, 90-1 USTC P 60,017

Hazel S. WISELY, Executor of the Estate of William H Wisely, Deceased, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 89-2606.

United States Court of Appeals Fourth Circuit.

Argued Oct. 31, 1989.

Decided Jan. 11, 1990.

D. French Slaughter, III (Jay T. Swett, McGuire, Woods, Battle & Boothe, on brief), for plaintiff-appellant.

Ann Belaner Durney (Shirley D. Peterson, Asst. Atty. Gen., Gary R. Allen, Nancy G. Morgan, Tax Div., Dept. of Justice, John Perry Alderman, U.S. Atty., on brief), for defendant-appellee.

Before RUSSELL and WIDENER, Circuit Judges, and FOX, United States District Judge for the Eastern District of North Carolina, sitting by designation.

JAMES C. FOX, District Judge:

This is a suit for the refund of $124,311 in estate taxes, penalties, and interest, assessed and collected by the Internal Revenue Service from the Estate of William H. Wisely. In the district court, judgment was for the United States and the taxpayer estate has appealed. The principal question for our determination is whether the district court properly granted summary judgment for the government in holding that the deceased's will, as drafted, failed to qualify the marital trust for the marital estate tax deduction under Title 26 U.S.C. Sec. 2056(b)(5). Having concluded that the district court's disposition was proper, we affirm.

I.

The relevant, undisputed facts are as follows:

The decedent, William H. Wisely, died testate on November 9, 1982, leaving his Last Will and Testament which he had executed on April 22, 1982. The will named the decedent's wife, Hazel S. Wisely, as the executor of the Estate.

The will contained provisions for the creation of two trusts, the William H. Wisely Family Trust created under Article V, ¹ and the marital trust created under Article VI. The portion of the will which is pertinent to this appeal concerns the payment of income from the marital trust and is found in paragraph 2 of Article VI, which states:

My trustees shall pay to my said wife so much, or all, of the net income of the said trust as my Trustees shall, in their sole discretion, deem necessary to provide for her care and support in the style and manner of living to which she has been accustomed, and to provide for her medical or other emergency needs. Any income not so used shall be accumulated and added to the corpus. Such payments may also be made from the corpus at any time or times in the event of any illness of my said wife or any other emergency, physical or financial.

The will also granted Mrs. Wisely a general testamentary power of appointment over the marital trust corpus. Finally, the will appointed Mrs. Wisely, her son-in-law, Donald G. Dickason, and a family friend, H. Gordon Larew, to serve as trustees of both the Family and Marital Trusts.

On its federal estate tax return, the Estate claimed a marital deduction in the amount of $281,575, representing the full value of the property transferred to the marital trust pursuant to Article VI of the will. The Internal Revenue Service disallowed the marital deduction on the ground that the marital trust did not fully comply with the requirements of Section 2056(b)(5) of the Internal Revenue Code of 1954. ² The Estate paid the resulting tax deficiency together with all accrued penalties and interest thereon, and filed a claim for a refund. The Estate instituted the civil action in federal district court upon disallowance of its refund claim.

At the district court level, the district court granted the government's motion for summary judgment in an order entered on December 19, 1988. In the accompanying memorandum opinion, reported at 703 F.Supp. 474 (W.D.Va.1988), the district court held that the Estate was not entitled to a marital deduction for the value of the marital trust. The district court found that the will as drafted did not include in the marital trust two of the five requirements, set forth in Code Section 2056(b)(5) and Section 20.2056(b)-5(a) of the Treasury Regulations on Estate Tax (1954 Code) (26 C.F.R.), for qualifying a terminable interest for the marital deduction. These two requirements were the "right to income" and "payable annually" provisions of Treasury Regulations Sec. 20.2056(b)-5(a). The district court rejected the Estate's argument that the will was ambiguous as to these two elements and that extrinsic evidence was needed to determine the decedent's intent. Instead, the district court found the will to be unambiguous and relied upon the wording of the will itself in reaching its conclusions. The district court thus rejected the use of extrinsic evidence.

This appeal followed.

II.

The federal estate tax is computed by subtracting the deductions enumerated in Sections 2053 through 2056 of the Code from the value of the gross estate, which is defined under Sections 2031, et seq., Internal Revenue Code. These deductions include- : administration expenses and claims against the estate, Section 2053, casualty losses, Section 2054, charitable bequests, Section 2055, and the marital deduction, Section 2056. The taxable estate, thus determined, is subject to tax at rates established under Section 2001(c) of the Code. At issue in this case is the marital deduction, which allows property to pass to a surviving spouse without the imposition of tax. Such property, rather than being taxed upon the death of the first spouse, is taxed at the time of death of the surviving spouse.

Code Section 2056(a) generally permits a deduction from the gross estate for the value of an interest in property passing to the surviving spouse. Section 2056(b), however, limits marital deductions of "terminable interests." A terminable interest is one "where, on the lapse of time, on the occurrence of a contingency, or on the failure of an event or contingency to occur, an interest passing to the surviving spouse will terminate or fail...." Included in such "terminable interests" is property transferred as a life estate to the surviving spouse. 26 U.S.C. Sec. 2056(a), Treas.Reg. Sec. 20.2056(b)-1(b).

An exception to the general rule barring a marital deduction for a terminable interest is contained in Section 2056(b)(5). In order to fall within this exception, the bequest must meet the five separate requirements set forth in Section 20.2056(b)-5(a) of the Regulations:

(1) The surviving spouse must be entitled for life to all of the income from the entire interest or a specific portion of the entire interest, or to a specific portion of all the income from the entire interest;

(2) The income payable to the surviving spouse must be payable annually or at more frequent intervals;

(3) The surviving spouse must have the power to appoint the entire interest or the specific portion to either herself or her estate;

(4) The power in the surviving spouse must be exercisable by her alone and (whether exercisable by will or during life) must be exercisable in all events; and

(5) The entire interest or the specific portion must not be subject to a power in any other person to appoint any part to any person other than the surviving spouse.

Relevant to this appeal are Sections 20.2056(b)-5(a)(1) & (2).

A.

Under Section 20.2056(b)-(5)(a)(1), the value of the life estate passing to the surviving spouse with a general power of appointment qualifies for the marital deduction if the surviving spouse is entitled for life either: (1) to all of the income from the entire interest; (2) to all of the income from a specific portion of the entire interest; or (3) to a specific portion of all of the income from the entire interest.

The district court concluded that the terms of the marital trust, as found in Article VI, paragraph 2 of the will, did not meet any of these three requirements because the will failed to expressly state that Mrs. Wisely was entitled to either all the income outright or to some lesser specific portion expressed as a "fractional or percentile share" of the marital trust income. We agree with the district court's conclusion.

Under Article VI paragraph 2 of the will, the trustees may, in their sole discretion, decide to accumulate any income they do not deem necessary for Mrs. Wisely's support, medical, or emergency expenses. Moreover, Mrs. Wisely is not entitled, under the terms of the trust, to demand that the trustees distribute income to her. On the contrary, the trustees' affirmative action is required in order for the trust to distribute income to Mrs. Wisely. In short, the consent of persons other than Mrs. Wisely is required as a condition precedent to distribution of the marital trust income. Likewise, it is within the discretion of persons other than Mrs. Wisely to accumulate the trust income rather than to pay it to her, if they should determine that the income is not necessary to maintain her standard of living. We agree with the district court's reasoning that the "sole discretion" language in the trust does not entitle Mrs. Wisely to all of the income from the entire interest for life. ³ Furthermore, we affirm the district court's finding that the language of the trust fails to satisfy the second or third conditions of Section 20.2056(b)-5(a)(1). We rely on the district court's reasoning that the language allowing the trustees to pay Mrs. Wisely income in their "sole discretion" fails to designate either a specific portion of the entire interest or a specific portion of all of the income from the entire interest.

Accordingly, we conclude that the district court did not err in finding that the marital trust failed to meet the requirement of Section 20.2056(b)-5(a)(1).

B.

The other section relevant to this appeal is Section 20.2056(b)-5(a)(2). This section requires that for a life estate with a general power of appointment granted to the surviving spouse to qualify for the marital deduction, all of the income must be "payable annually or at more...