Estate of Shelfer v. Commissioner

103 T.C. No. 2, 103 T.C. 10, 1994 U.S. Tax Ct. LEXIS 50

• Court: United States Tax Court
• Decided: July 19, 1994
• Docket: Docket No. 25389-92
• Status: Published

Opinions

Laro, Judge:

This case is before the Court pursuant to a petition filed by the Estate of Lucille P. Shelfer, Deceased (petitioner), the Quincy State Bank, personal representative for a redetermination of respondent’s determination of a $1,321,638.30 deficiency in Federal estate tax. Pursuant to Rule 122(a),¹ the parties submitted this case to the Court without trial; the record consists of the pleadings and stipulated facts with accompanying exhibits.

After a concession by petitioner,² the issue for decision is whether a trust for which an election had been made under section 2056(b)(7) to obtain a marital deduction for qualified terminable interest property (QTIP) under section 2056 was a QTIP trust so as to be includable in the gross estate of Lucille P. Shelfer (decedent). We hold that the trust was not a QTIP trust, and accordingly is not includable in decedent’s gross estate.

FINDINGS OF FACT

The facts in the joint stipulation and accompanying exhibits are incorporated herein by this reference. At the time the petition was filed in this case, the personal representative’s principal place of business was Quincy, Florida. Decedent was a resident of Florida at the time of her death.

Elbert B. Shelfer, Jr. (Mr. Shelfer), and decedent were husband and wife until Mr. Shelter’s death on September 13, 1986. Prior to his death, Mr. Shelfer executed his last will and testament (the will). Under the terms of the will, the residue of Mr. Shelter’s estate (the estate) was divided into two shares. The first share, designated “share number one”, consisted of an amount equal to one-third of the residue; the second, designated “share number two”, consisted of the remaining two-thirds of the residue. Pursuant to the will, share number one and share number two were held in separate trusts. The Quincy State Bank served as trustee for each trust. Hereinafter, the trusts shall be referred to separately as the Share Number One Trust and the Share Number Two Trust.

Under the will, decedent received the net income from the Share Number Two Trust, payable in quarterly installments during her lifetime. Decedent had no power to require distribution of income from the Share Number Two Trust more frequently. Decedent had no power of appointment over the income of the Share Number Two Trust that accumulated from the date of the last distribution to the date of her death. The will did not require that all income earned after the last distribution date and before decedent’s death be distributed to her or her estate. Pursuant to the will, upon decedent’s death, the Share Number Two Trust terminated, with the principal and any undistributed income therefrom payable to Mr. Shelfer’s niece. The value of the Share Number Two Trust was $2,829,610 at the date of decedent’s death.

On June 16, 1987, the personal representative of the Estate of Mr. Shelfer filed a Form 706, U.S. Estate Tax Return, for the estate. The personal representative elected to treat 54.273 percent of the assets of the Share Number Two Trust as QTIP, and claimed a marital deduction under section 2056 for that percentage of the assets. The Form 706 for the estate was later selected for an estate tax examination. On April 26, 1989, an estate tax examination report was issued that allowed the marital deduction for the claimed partial QTIP election, and increased to 55.945 percent the percentage of the assets of the Share Number Two Trust subject to the election. On May 10, 1989, an estate tax closing letter was issued to the personal representative of the estate. The estate did not file an amended Form 706. The period of limitations on assessment of the estate expired on June 16, 1990.

Decedent died on January 18, 1989. On October 18, 1989, the Quincy State Bank filed a Form 706 on behalf of decedent’s estate. The trust property for which a QTIP election had been made was not included in the gross estate on the Form 706 for decedent’s estate.³ In order to qualify as a QTIP trust, the Share Number Two Trust must meet the requirements of section 2056(b)(7)(B).⁴ On July 12, 1990, respondent commenced an estate tax audit of the Form 706 for decedent’s estate. On December 12, 1990, an estate tax examination report was issued to decedent’s estate in which the same percentage of the Share Number Two Trust treated as QTIP was included in the gross estate of decedent’s estate. A notice of deficiency in estate tax was mailed to petitioner on August 17, 1992.

OPINION

Section 2001 imposes a tax on the transfer of the taxable estate of every citizen and resident decedent. The taxable estate of a decedent is the decedent’s gross estate less allowable deductions. Sec. 2051. Section 2056(b)(7)(A) allows the value of property that is QTIP to be deducted from the gross estate. The value of the QTIP is then included in the surviving spouse’s gross estate. Sec. 2044.

Respondent determined that a portion of the Share Number Two Trust is QTIP that must be included in decedent’s gross estate under section 2044. Petitioner argues that the Share Number Two Trust is not QTIP, and therefore no part of it is includable in decedent’s gross estate. We must decide whether a portion of the Share Number Two Trust is QTIP. If it is not, then its value is not includable in decedent’s estate. See sec. 2044. Among other requirements, the Share Number Two Trust must be property in which the decedent had a “qualifying income interest for life”. Sec. 2056(b)(7)(B)(i)(II). Under section 2056(b)(7)(B)(ii), a surviving spouse has a “qualifying income interest for life” if, in addition to meeting other requirements, he or she “is entitled to all the income from the property, payable annually or at more frequent intervals”. Respondent argues that decedent had a qualifying income interest for life because she was entitled to all of the income from the Share Number Two Trust, payable at least annually. Petitioner argues that decedent did not have a qualifying income interest for life because she was not entitled to the income accruing between the distribution date just prior to her death and the date of her death. Instead, under the terms of the Share Number Two Trust, that “stub period” income passed to Mr. Shelter’s niece. We agree with petitioner.

By making a QTIP election, the executor of the estate treated a portion of the Share Number Two Trust as a QTIP trust. However, if this election was erroneous, and the trust was never a QTIP trust, the election to treat it as such was not valid. Estate of Howard v. Commissioner, 91 T.C. 329, 333 (1988), revd. 910 F.2d 633 (9th Cir. 1990); see also Estate of Cavenaugh v. Commissioner, 100 T.C. 407, 417 (1993). An erroneous election by the executor certainly cannot override the terms of the statute and make a trust that otherwise would not qualify as QTIP into a QTIP trust.

In Estate of Howard v. Commissioner, supra at 338, this Court held that for a trust to be a QTIP trust under section 2056(b)(7), “the income accumulated by the trust between the last date of distribution and the surviving spouse’s death must be disposed of as the surviving spouse directs either by virtue of being payable to the surviving spouse’s estate or through a power of appointment which includes a power to appoint to her estate”. (Fn. ref. omitted.) A trust that provides that such income be distributed to the remainder beneficiary or beneficiaries simply does not do. Id. In so holding, this Court applied the test advanced by the taxpayer, which requires that two components be present in order to comply with section 2056(b)(7)(B)(ii)(I): (1) The surviving spouse must be entitled to all the income, and (2) distributions of income must be made at least annually. Id. at 334. We reinforce our prior holding today; the plain language of 2056(b)(7)(B)(ii)(I) provides: “The surviving spouse is entitled to all the income from the property, payable annually or at more frequent intervals”.⁵

We are not unmindful that Estate of Howard v. Commissioner, supra, was reversed by a divided panel of the Court of Appeals for the Ninth Circuit. See Estate of Howard v. Commissioner, 910 F.2d 633 (9th Cir. 1990). In so doing, the Court of Appeals adopted a reading of section 2056(b)(7)(B) “consistent with the realities of trust administration.” Id. at 635. The court determined that the statute did not require that the income that accumulates each day must be paid to the surviving spouse each day. We agree that section 2056(b)(7) does not impose as a condition of being a QTIP trust an unrealistic requirement that income must be paid to the surviving spouse on a daily basis. In fact, the statute does not require distributions more frequently than annually.⁶ However, the statute also requires that the surviving spouse receive “all the income”. The Court of Appeals stated that it suffices that “the spouse be entitled to all the income at the time of its annual or more frequent distribution.” Id. (emphasis added). The statute itself imposes no such limitation. In effect, the court interpreted the statute to include the words, “at the time of its annual or more frequent distribution.” This interpretation deemphasizes the fact that the surviving spouse was actually not entitled to receive a portion of the trust income, the stub period income. As noted in the dissent:

Despite the fact that the majority reaches a felicitous result, the tax court’s analysis appears literally correct. * * * While this may not comport with “the realities of trust administration,” I would leave it to the Congress to correct unintended consequences of ambiguous language by technical amendment * * *. [Id. at 637 (Rymer, J., dissenting).]

With all due respect for the Court of Appeals for the Ninth Circuit, we do not agree with the majority opinion in Estate of Howard v. Commissioner, supra, that the plain language of section 2056(b)(7)(B) supports a reading that the surviving spouse is entitled to “all the income” accruing during her lifetime where he or she is not entitled to income accrued after the final distribution date. The statute states that the spouse must be entitled to “all the income”. Sec. 2056(b)(7)(B)(ii)(I) (emphasis added); cf. Estate of Doherty v. Commissioner, 95 T.C. 446, 460-462 (1990), revd. and remanded on other grounds 982 F.2d 450 (10th Cir. 1992) (surviving spouse’s interest was not “qualifying income interest for life” where surviving spouse was not entitled to all the income because trustee had discretion to retain and accumulate income for remainder beneficiaries); Wells v. United States, 746 F. Supp. 1024, 1027-1028 (D. Haw. 1990) (residuary trust created by testator’s will did not constitute “qualifying income interest for life” where trustee had discretion to pay part of the income to testator’s children; surviving spouse was not entitled to all the income). The statute does not qualify the phrase “all the income” with any limitation such as “except income accruing after the last distribution date before his or her death”. To the extent that the remainder beneficiary receives income earned on the corpus during the spouse’s lifetime, as well as the corpus itself, the lifetime beneficiary has not received “all the income”.

Although section 2056(b)(7) does not define the requirement that “the surviving spouse * * * [be] entitled to all the income from the property, payable annually or at more frequent intervals”, we think the plain meaning of the statute is clear; all the income from a QTIP trust must be paid to the surviving spouse. The statutory language ordinarily is conclusive, absent a clear legislative intent to the contrary. Consumer Prod. Safety Commn. v. GTE Sylvania, Inc., 447 U.S. 102, 108 (1980). We find no such legislative intent here.

The legislative history referenced by the Court of Appeals, which consists of portions of the House report, does not elucidate the statute. See Estate of Howard v. Commissioner, 910 F.2d at 636. The legislative history does not define “all the income”. See H. Rept. 97-201, at 161 (1981), 1981-2 C.B. 352, 378.⁷ The House report only states, in relevant part:

A qualifying income interest must meet several conditions. First, the spouse must be entitled for a period measured solely by the spouse’s life to all the income from the entire interest, or all the income from a specific portion thereof, payable annually or at more frequent intervals * * *.

H. Rept. 97-201, supra at 161, 1981-2 C.B. at 378. If this statement is at all helpful, it is because it indicates that the surviving spouse must be entitled to all the income from the trust “for a period measured solely by the spouse’s life”. Id. The period therefore would not be measured by the annual or more frequent distribution dates, and would include the period between the last distribution date and the date of the spouse’s death. In Estate of Howard v. Commissioner, 91 T.C. at 334-337, Judge Tannenwald provides an excellent discussion of the legislative history of section 2056(b)(5) and (7), and we need not discuss it any further herein.

The fact that respondent’s position is consistent with proposed regulations does not persuade us to adopt her view. The proposed regulations state: “an income interest will not fail to constitute a qualifying income interest for life solely because income between the last distribution date and the date of the surviving spouse’s death is not required to be distributed to the surviving spouse or the surviving spouse’s estate.” Sec. 20.2056(b)-7(c)(l), Proposed Estate Tax Regs., 49 Fed. Reg. 21357 (May 17, 1984). Proposed regulations are not entitled to our deference, and in fact carry no more weight than an argument advanced by respondent on brief. Estate of Howard v. Commissioner, 91 T.C. at 337; Laglia v. Commissioner, 88 T.C. 894, 897 (1987); Scott v. Commissioner, 84 T.C. 683, 690 (1985). Respondent argues that the regulations, which have since been finalized, see sec. 20.2056(b)-7(d)(4), Estate Tax Regs., are now entitled to our deference. Respondent neglects to point out that the final regulations are effective with respect to decedents dying after March 1, 1994. Sec. 20.2056(b)-10, Estate Tax Regs. With respect to decedents dying on or before March 1, 1994, the executor may rely on any reasonable interpretation of the statutory provisions. Id. Accordingly, the final regulations are inapplicable to the instant case; we need not determine how we would decide the case if the final regulations were applicable.⁸

Respondent also determined that if she prevailed on her argument that a portion of the Share Number Two Trust was a QTIP trust, petitioner would be entitled to a credit for tax on prior transfers. See sec. 2013. Because we decided that issue in favor of petitioner, no credit is allowable.

We have considered the parties’ other arguments, and find them to be without merit.

To reflect the foregoing and certain computational adjustments,

Decision will be entered under Rule 155.

Reviewed by the Court.

Hamblen, Chabot, Cohen, Gerber, Wright, Whalen, Colvin, Halpern, and Chiechi, JJ., agree with this majority opinion. Ruwe, J., dissents. Swift, J., did not participate in the consideration of this opinion.

1 Unless otherwise indicated, Rule references are to the Tax Court Rules of Practice and Procedure, and section references are to the Internal Revenue Code in effect at the time of the death of Lucille P. Shelfer.

2 Petitioner conceded that the value of the Share Number One Trust, discussed below, was $2,295,719 on the date of the death of Elbert B. Shelfer, Jr.

3 On Aug. 23, 1988, the Tax Court decided Estate of Howard v. Commissioner, 91 T.C. 329 (1988), revd. 910 F.2d 633 (9th Cir. 1990). In Estate of Howard, the Court held that a trust was not includable in the surviving spouse’s estate, despite the QTIP election of her husband’s estate, where income accumulating between the last distribution date and her death was not disposable as directed by her.

4 Sec. 2056(b)(7)(B) provides, in relevant part:

(i) In GENERAL. — The term “qualified terminable interest property” means property—

(I) which passes from the decedent,

(II) in which the surviving spouse has a qualifying income interest for life, and

(III) to which an election under this paragraph applies.

(ii) Qualifying income interest for life. — The surviving spouse has a qualifying income interest for life if—

(I) the surviving spouse is entitled to all the income from the property, payable annually or at more frequent intervals, * * *, and

(II) no person has a power to appoint any part of the property to any person other than the surviving spouse.

Subclause (II) shall not apply to a power exercisable only at or after the death of the surviving spouse. To the extent provided in regulations, an annuity shall be treated in a manner similar to an income interest in property (regardless of whether the property from which the annuity is payable can be separately identified).

(iii) Property includes interest therein. — The term “property” includes an interest in property.

(iv) Specific portion treated as separate property. — A specific portion of property shall be treated as separate property.

(v) Election. — An election under this paragraph with respect to any property shall be made by the executor on the return of tax imposed by section 2001. Such an election, once made, shall be irrevocable.

5 We believe Estate of Howard v. Commissioner, supra, was correctly decided, and reach the same result for substantially the same reasons. Although our opinion in Estate of Howard v. Commissioner, supra, was reversed by the Court of Appeals for the Ninth Circuit, we, as a National Court, are not obligated to follow the ruling of a Court of Appeals where appeal does not lie to that court. Golsen v. Commissioner, 54 T.C. 742 (1970), aff'd. on another issue 445 F.2d 985 (10th Cir. 1971). Appeal in the instant case lies to the Court of Appeals for the Eleventh Circuit. Sec. 7482(b)(1).

6 Sec. 2056(b)(7)(B)(ii)(I) explicitly provides that the income must be distributed “annually or at more frequent intervals”.

7 See also S. Rept. 97-144, at 126-128 (1981), 1981-2 C.B. 412, 461-462; H. Conf. Rept. 97-215, at 247 (1981), 1981-2 C.B. 481, 507.

8 We note that the House of Representatives recently passed a bill that would codify the rule in the final regulations dealing with “stub period” income, see sec. 20.2056(b) — 7(d)(4), Estate Tax Regs., in the case of decedents dying after the date of the bill’s enactment. Tax Simplification and Technical Corrections Bill of 1993, H.R. 3419, 103d Cong., 1st Sess. sec. 603(a)(1), (e) (1994). No inference is intended to be drawn from this provision with respect to the proper rule under existing law. H. Rept. 103-353, at 169 (1993).