Betty R. BROWN; Michael J. Brown; Philip A. Melrose; Beryl Rae, as Co-Trustee of the Marital Trust Created under the will of Willet H. Brown; Raymond C. Sandler, as Co-Trustees of the Marital Trust Created Under the Will of Willet H. Brown, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
No. 02-55254
United States Court of Appeals, Ninth Circuit
Argued and Submitted February 4, 2003. Filed May 1, 2003.
329 F.3d 664
Judith A. Hagley, Tax Division, Department of Justice, Washington, DC, for the defendant-appellee.
Appeal from the United States District Court for the Central District of California; Gary A. Feess, District Judge, Presiding. D.C. No. CV-99-05437-GAF.
Before MESKILL,s FERGUSON, and BERZON, Circuit Judges.
OPINION
BERZON, Circuit Judge:
The estate tax combines into one sad transaction the only two certainties in life. Upon death, a decedent‘s estate must pay a tax on property owned immediately prior to death, subject to certain adjustments.
This appeal involves three of those adjustments. First, we must determine whether the Internal Revenue Service (“IRS“) properly increased the estate tax owed by the estate of Willet Brown (“the Estate“) under
The second, more complex issue involves the interaction of two estate tax deductions: the marital deduction (
BACKGROUND
Willet Brown (“Willet“) died in 1993, leaving behind a sizeable estate, worth approximately $180,000,000. Pursuant to a pre-nuptial agreement between Willett and wife Betty Brown (“Betty“), the entire estate was Willet‘s separate property, California community property laws notwithstanding.
Prior to his death, Willet sought thе advice of an estate tax attorney. Together, the two developed a plan pursuant to which Willet‘s entire net estate would be placed in a marital trust upon his death. During her life, Betty would be the income beneficiary of this marital trust. Through the operation of the marital deduction rules of
As part of this plan Willet also created an insurance trust to hold life insurance on Betty‘s life, presumably so that the heirs receiving the estate property upon her death could use the life insurance proceeds to pay estate taxes. To fund the life insurance trust Willet gave Betty a gift of $3,100,000. Betty promptly wrote a check from her separate checking account for that amount in favor of the life insurance trust.
Whether the $3,100,000 was paid by Betty or Willet is immaterial to the current appeal. The parties agree that the $3,100,000 payment into the life insurance trust was a taxable event, incurring gift tax liability of $1,415,732. They further agree that Willet and Betty properly elected to be jointly and severally liable for the gift taxes under
At issue is whether Willet or Betty paid the gift taxes. If the spouse who paid the gift taxes died within three years of doing so,
We here pause to explain why the IRS would require a decedent to pay estate taxes on gift taxes, a concept that, on its face, gives new meaning to the phrase “double taxation.” Section 2035(c)(1993) is designed to recoup any advantage gained by so-called “death-bed” transfers in which a taxpayer, cognizant of impending mortality, transfers property out of her estate in order to reduce estate tax liability. See Block v. United States, 507 F.2d 603, 605 (5th Cir.1975) (discussing predecessor of the current
So Willet, on the advice of his estate tax attorney, gave Betty two checks totaling $1,415,732, which she deposited in her own account. The next day she drew two checks from hеr personal account payable to the IRS for the identical amount, in satisfaction of the gift tax liability. (Because gifts between spouses are tax free, the gifts from Willet to Betty enabling this actuarial wager did not otherwise risk any gift or estate tax liability.) As the Brown estate admits, this money was given to Betty on the “understanding” that Betty would use it to satisfy the gift tax liability.5 Betty was, however, under no legally enforceable obligation to use the funds in that fashion.
(B) The Estate Tax Return & Litigation
Willet won the actuarial bet he might have preferred to lose. He died in 1993, within three years of the gift tax payment.
In 1995, the Estate prepared an estate tax return indicating zero tax liability. The zero balance reflected: (1) the absence of any tax payment on the abovedescribed gift tax, based on the assumption that Betty made the payment; and (2) a marital trust comprising the remaining estate (after expected administration expenses), which passed to Betty and was therefore eligible for the marital deduction.
The IRS — predictably — disagreed with the Estate‘s tax return. The IRS claimed that, in substance if not in form, Willet paid the gift taxes so the $1,415,732 should be included in thе Estate. In addition, as those funds did not pass to the marital trust but rather were used to benefit the beneficiaries of the life insurance trust, those funds, maintained the IRS, were not eligible for the marital deduction. The IRS consequently assessed a tax deficiency on the $1,415,732 and interest thereon.
The Estate — predictably — did not accept the IRS analysis. The executor remitted the requested sums but filed for a claim of abatement. After the IRS took no action on the abatement request, the executor filed for a rebate in 1999, raising several claims.
The Estate claims, first, that the gift taxes paid by Betty should not be included in the Estate. On cross-motions for summary judgment the district court denied that contention. Applying the “step transaction” doctrine, the district court determined that the transactions leading up to Betty‘s satisfaction of the gift tax liability should be treated, for tax purposes, as one integrated transaction. Using that approach, Willet becomes the taxpayer, as the gift tax payment traces back to Willet‘s gift to Betty of the precise amount of the tax. We agree with the district court that the gift tax pаyment is properly attributed to Willet.
The Estate also advances an alternative approach which, it argues, entitles it to a refund. The Estate notes that it actually incurred $3,592,024 in administration expenses, deductible from the gross estate under
The IRS agrees that the Estate may deduct the additional administration expense and interest. It maintains, however, that some of the increased deductions require a corresponding decrease in the marital deduction. In essence, the IRS argues that some of the increased expenses were paid out of funds otherwise earmarked for the marital trust, so that any increase in those expenses decreased those funds and therefore the marital deduction.
In this appeal, the Estate challenges this final conclusion, that any administration expenses paid from the trust corpus decreased the marital deduction. The IRS does not cross-appeal the district court‘s finding in favor of the Estate on the interest issuе, or the issue of expenses paid out of income earned by the marital trust.
STANDARDS OF REVIEW
With respect to the step transaction issue, the district court granted summary judgment in favor of the government. We ordinarily review grants of summary judgement de novo, to determine whether there are genuine issues of material fact and whether the district court correctly applied the substantive law. Oliver v. Keller, 289 F.3d 623, 626 (9th Cir.2002).
The Estate does not contend, however, that there is any genuine issue of material fact requiring trial. Rather, the Estate contends that the application of the step transaction to undisputed facts is a matter of law requiring our de novo review.
The IRS, in contrast, argues that the application of the step transaction doctrine to undisputed facts is itself a question of fact. It further contends that because the underlying facts are undisputed, we should review the district court‘s summary judgement ruling as we would review that court‘s judgment after a bench trial, applying the clearly erroneous standard to the step transaction determination.
Whether a lower court‘s application of the step transaction and related doctrines to undisputed historical facts is an issue of fact or law is a question over which we have struggled.6 See, e.g., Sacks v. Commissioner, 69 F.3d 982, 986 (9th Cir.1995) (noting conflicting authorities). We recently stated, however, that a lower court‘s “determination that several steps of a complex transaction are, under the step transaction doctrine, a single taxable transaction is a finding of fact subject to the clearly erroneous standard of review.” Custom Chrome v. Commissioner, 217 F.3d 1117, 1121 (9th Cir.2000).
The second link in the IRS’ argument in favor of applying the clearly erroneous standard — that we treat the district court‘s summary judgment ruling as if it were the result of a bench trial rather than asking whether material fact issues require such a trial — is more problematic.7 We need not, however, resolve the question regarding the proper standard of review at this juncture unless the answer would matter. As it turns out, it would not matter, as we would on this record affirm the district court‘s summary judgment determination applying a de novo standard.
ANALYSIS
(A) The Step Transaction
The “step-transaction” dоctrine collapses “formally distinct steps in an integrated transaction” in order to assess federal tax liability on the basis of a “realistic view of the entire transaction.” Commissioner v. Clark, 489 U.S. 726, 738, 109 S.Ct. 1455, 103 L.Ed.2d 753 (1989); accord Custom Chrome, 217 F.3d at 1127. As such, the doctrine is part of the “broader tax concept that substance should prevail over form.” Associated Wholesale Grocers, Inc. v. United States, 927 F.2d 1517, 1521 (10th Cir.1991). Under these principles, the IRS argues, the two transactions which resulted in the payment of gift taxes (gift from Willet to Betty, payment by Betty) should be collapsed into one (payment by Willet).
The substance-over-form doctrines are, however, bound by, and in some tension with, the principle, equally lauded in tax law, that “anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose the pattern which will best pay the Treasury.” Grove v. Commissioner, 490 F.2d 241, 242 (2d Cir.1973). We look to two principles to reconcile these competing concerns.
First, we attempt to distinguish between legitimate “tax avoidance” — actions which, although motivated in part by tax considerations, also have an independent purpose or effect — and illegitimate “tax evasion” — actions which have no, or minimal, purpose or effect beyond tax liabilities. See Stewart v. Commissioner, 714 F.2d 977, 987-988 (9th Cir.1983)(citing Bittker, Pervasive Judicial Doctrines in the Construction of the Internal Revenue Code, 21 How. L.J. 693, 695 (1978)).8
Second, we scrutinize whether the facts presented “fall within the intended scope of the Internal Revenue provision at issue.” Stewart, 714 F.2d at 988. This second step is crucial in areas, such as estate planning, in which it is common for Congress to create, and taxpayers to exploit, various tax planning incentives. See Jay A. Soled, Use of Judicial Doctrines in Resolving Transfer Tax Controversies, 42 B.C. L.Rev. 587, 599, 603-04, 615-16 (2001). For example,
Applying these two principles with appropriate caution, we conclude that the two-step transaction between Willet, Betty, and the IRS was properly treаted as if Willet had paid the gift taxes directly.
1. Betty As A Mere Conduit of Funds
Navigating the murky distinction between “tax avoidance” and “tax evasion” requires careful stewardship. In the context of the step transaction doctrine, however, we have identified a class of cases in which the form of the transaction is particularly suspect. Where a party acts as a “mere conduit” of funds — a fleeting stop in a predetermined voyage toward a particular result — we have readily ignored the role of the intermediary in order appropriately to characterize the transaction. Robino Inc. Pension Trust v. Commissioner, 894 F.2d 342, 344 (9th Cir.1990) (where taxpayers sold options on land to two trusts but the trusts acted as mere “conduits” for the ultimate sale to a third party, role of trust disregarded under step transaction doctrine); Stewart, 714 F.2d at 991 (where corporation acted as “merely a conduit” for the sale of appreciated securities by the taxpayer, several steps collapsed into one under the substance-over-form principle). See also Estate of Sachs v. Commissioner, 856 F.2d 1158, 1163 (8th Cir.1988) (because donor of net gift used donee as a “conduit” to pay taxes, donor deemed to have paid the gift tax).
True, Betty was under no binding commitment to complete the prearranged plan. “Despite intimations to the contrary in the early cases,” however, “there is ample authority for linking several prearranged or contemplated steps, even in the absence of a contractual obligation or financial compulsion to follow through.” Boris I. Bittker & Martin J. McMahon, Jr., Fed. Inc. Tax‘n of Indiv. § 1.03[5] (2d. ed.). See, e.g., Kornfeld v. Commissioner, 137 F.3d 1231, 1235-1236 (10th Cir.1998); McDonald‘s Restaurants v. Commissioner, 688 F.2d 520, 525 (7th Cir.1982); Blake v. Commissioner, 697 F.2d 473, 481 (2d Cir.1982). Where the two parties to the transaction were sufficiently related or commonly controlled, we have twice applied the step transaction analysis without any finding that the intermediary was legally bound to complete the prearranged plan. See Robino, 894 F.2d at 345 (transactions between two taxpayers and trust controlled by tax-payers and spouse of one taxpayer); Stewart, 714 F.2d at 984 (transaction between taxpayer and corporation he controlled).
Particularly apt is the Tenth Circuit‘s analysis in Kornfeld, applying the step transaction doctrine where, as here, family members colluded to accomplish a prearranged plan. In Kornfeld, the taxpayer, an experienced tax attorney, gave cash payments to his daughters and secretary. 137 F.3d at 1232-33.
The gift recipients then immediately used those funds to purchase remainder interests in bonds. Id. The Tenth Circuit determined that the series of transactions should be treated as if the taxpayer had purchased the bonds in fee simple and given the remainder interests to his daughters and secretary (a determination which had negative tax consequences for the taxpayer). Id. In so determining, the Tenth Circuit applied a heightened level of skepticism to transactions between related parties. Id. at 1235. In addition, the court was swayed by the facts that the “taxpayer [had] stipulated that his intention in making gifts was to enable the donees to make the purchases,” аnd that the donees would be unlikely to flout the taxpayer‘s intention. Id. at 1236. As the court noted, “one does not look a gift horse in the mouth.” Id.
The same factors which applied in Kornfeld apply here: The parties are related, so heightened scrutiny is appropriate. Willet‘s admitted intention in giving the funds to Betty was to enable her to make the gift tax payments. Finally, Betty was unlikely to flout the desires of her husband because it was she, as the initial beneficiary of the Estate, who stood to gain if the gift tax wager was successful. The two transactions culminating in gift tax payments should therefore be treated as one integrated whole despite the lack of a legally binding commitment.
2. The End Run Around § 2035
Our conclusion is reinforced by a consideration of the statute here at issue,
The instant case differs from Sachs, however, in that Betty was jointly liable under
The question then is whether the Willet-Betty-IRS transaction, though on its face an end-run around
First,
The amount of the gift tax subject to this rule would include tax paid by the decedent or his estate on any gift made by the donor ... It would not, however, include any gift tax paid by the spouse on a gift made by the decedent within three years of death which is treated as made one-half by the spouse [e.g., under
§ 2513 ], sinсe the spouse‘s payment of such tax would not reduce the decedent‘s estate at the time of death.
H. Rep. No. 94-1380, *14, 94th Cong., 2d. Sess. (1976) (emphasis added).
The reason the source of funds matters is that
By channeling Willet‘s funds through Betty‘s estate, the Browns created a transaction sequence in which the tax risk diverged from the economics of the payment. Where one spouse has significantly fewer assets than the other spouse, shifting the risk of
In Magneson v. Commissioner, 753 F.2d 1490, 1497 (9th Cir.1985), we distinguished between a taxpayer‘s right to choose “[b]etween two equally direct ways of achieving the same result” the method “which entailed the most tax advantages” and the inability to “secure by a series of contrived steps, different tax treatment than if he had carried out the transaction directly.” That distinction is illuminating: Had Betty and Willet both had adequate funds with which to рay the gift tax, they would be entitled to choose the most advantageous method from among two equally direct ways of paying the tax (check from Willet to IRS vs. check from Betty to IRS). Here however, Willet actually supplied the funds, and Betty‘s involvement was merely a “contrived step” to secure tax treatment different from that which would have resulted if Willet had paid the IRS directly. The contrived step did not alter the economic reality that Willet paid the tax, and Betty‘s transient ownership over the funds for one day had no independent purpose or effect beyond the attempt to alter tax liabilities.
3. Impact of Lack of Certainty of Tax Benefit
In a variant of its assertion that the actuarial bet was entirely proper, the Estate, noting that the end result of the machinations did not create a certain tax advantage, contends that the transaction sequence is therefore immune from the step transaction doctrine. That the tax advantages flowing from Willet‘s plan were uncertain does not, as the Estate contends, distinguish this case from other instances in which the step transaction or substance over form doctrine has been applied.
Similarly, in Robino, we looked through the form of a transaction even though the choice of form did not create a certain tax advantage. In Robino, individuals devised a complicated cross-option scheme, using two trusts as conduits to hold, and ultimately sell, real property. This arrangement “let the taxpayers keep the parcel if it did not appreciate in value but shift the gain on the parcel to the trusts if it did increase in value.” 894 F.2d at 345. The real estate market was “volatile” during the relevant time period, id. at 343, so a gain on the real property, and therefore the tax advantage of the scheme, was by no means assured. As both Robino and Sachs therefore demonstrate, a certain tax advantage is not a prerequisite to application of the step transaction doctrine.
Tax consequences aside, the nature of the Browns’ transaction sequence (ultimately, a transfer of funds from Willet to the IRS) was fixed the moment Betty wrote out the check to the IRS. Focusing only on Betty‘s role within that predetermined result, it is clear that her participation had no significance beyond the attempt to alter tax liabilities. Unlike a situation in which Betty paid the gift taxes by reducing her own net worth, a decision with independent economic effect on Betty‘s estate, Betty‘s role as a conduit altered the economics of the transaction only by shifting the risk of
The final component of the Estate‘s uncertainty argument relates to its complaint that the step transaction doctrine can be, and often is, applied asymmetrically: Had Betty died within three years of the gift tax payments, it is quite unlikely that the IRS would adamantly advocate in favor of treating the funds as if paid by Willet, so as to relieve Betty of the estate tax liability. The IRS‘s lawyer so indicated at oral argument.
The possibility of a one-way rachet does give us pause. We are not alone: Both courts and commentators have struggled with whether the substance over form principle is a one or two-way street, and whether, even if a two-way street, it nonetheless “run[s] downhill for the Commissioner and uphill for the taxpayer.” Bittker & McMahon, Fed. Inc. Tax‘n of Indiv., § 1.03 (quoting Rogers’ Estate v. CIR, 70,192 P-H Memo. TC (1970), aff‘d 445 F.2d 1020 (2d Cir.1971)) but see Clark, 489 U.S. at 737, 109 S.Ct. 1455 (invoking the doctrine in favor of the taxpayer). See generally, William S. Blatt, Lost On A One-Way Street: The Taxpayers‘s Ability to Disavow Form, 70 Or. L.Rev 381 (1991).
Had Betty indeed died first, we would be faced with the difficult question of whether symmetry required application of the step transaction doctrine, or whether the taxpayer, having complete control over the form of the transaction, must bear the consequences of the chosen form without recourse to the step transaction doctrine. Whether the doctrine must be applied symmetrically is not, however, the issue now before us, and we do not reach it.
4. Effect on Estate Planning
The Estate also maintains, somewhat grandiosely, that our holding vitiates the entire estate tax planning profession. For example, notes the Estate, a typiсal estate planning tool, employed by many parents, involves annual gifts of approximately $10,000 per parent in order to take advantage of the annual gift exclusion of
Rather than supporting the result the Estate favors, the inter vivos gift example usefully illustrates the boundaries of the substance-over-form doctrine. When parents elect to make an inter vivos gift to their children rather than bequeathing those assets, that decision does have effects independent of the tax consequences: The children receive the funds earlier, and the parent loses control over the assets. In comparison, Betty‘s ownership over the funds from Willet was transitory. She was simply a conduit, and her role in the transaction was a temporary artifice rather than an event with independent economic significancе.
(B) The Marital Deduction
The Brown estate advances a second theory for relief. The Brown estate spent $3,592,024 on administration expenses (including, inter alia, attorneys fees, accounting fees, and legal fees), and is entitled to deduct those amounts from its estate tax return. See
The IRS agrees but contends that, to the extent those additional expenses were paid out of funds otherwise earmarked for the marital trust, any increase in the administration expense deduction must be offset by a corresponding decrease in the marital deduction claimed by the Estate. To evaluate that contention, we first examine the principles governing the valuation of the gross estate, the marital deduction, and the administration deduction.
1. Calculating Estate Taxes
Section 2001 of the Internal Revenue Code imposes a tax on the value of a decedent‘s property. In calculating the amount owed, the taxpayer first determines the value of the “gross estate.”
From the gross estate, the taxpayer subtracts allowable deductions. Two deductions are relevant for purposes of this appeal: administration expenses,
When administration expenses are paid out of funds otherwise earmarked for the corpus of the marital trust, the interplay bеtween the administration deduction and the marital deduction is clear: the larger the administration deduction, the smaller the marital deduction. This is so because funds diverted from the marital trust to pay administration expenses do not “pass” to the surviving spouse. The result also makes good sense: If the estate elects the administration deduction under
The plain language of
2. Timing and Valuation
The Estate urges us to value the administration expenses at two different times. For purposes of calculating the net estate after expenses and thereby determining the marital deduction, the Estate urges that we use the date-of-death value of the expenses. For purposes of calculating the
Typically, the taxpayer values the gross estate according to its value on the date of the decedent‘s death.
This early valuation assists the executor in completing the estate tax return and in оtherwise moving forward to settle the affairs of the estate. Cf. Ithaca, 279 U.S. at 155, 49 S.Ct. 291 (“The first impression is that it is absurd to resort to statistical probability when you know the fact. But this is due to inaccurate thinking. The estate so far as may be is settled as of the date of the testator‘s death.“) Moreover, that the heirs may ultimately receive, estate-tax free, income earned during estate administration can be considered compensation for the delay in receiving the property. See Hubert, 520 U.S. at 131, 117 S.Ct. 1124 (Scalia, J. dissenting) (citation omitted). And, in any event, the income earned by the estate is subject to the estate‘s income tax. See
Whatever the valuation date, however, it is important to value the gross estate and the various deductions as of the same date. Hubert, 520 U.S. at 100-101, 117 S.Ct. 1124 (Kennedy, J., plurality);
The administration expense deduction is an exception to the date-of-death valuation principle. If the date-of-death principle were employed, the administration expenses would be estimated as soon as practicable after the decedent‘s death, allowing the estate to quickly finalize its estate tax return. The gross estate would then be reduced by the expected value of the deduction and, if the expenses were to be paid out of funds otherwise earmarked for the corpus of the marital trust, the marital deduction would be reduced accordingly. Under this estimation method, an estate choosing to pay administration expenses out of funds otherwise earmarked for the marital trust would have no incentive to either under or overestimate. If, for example, actual expenses turned out to be more than anticipated, the estate, though it would not have benefitted from the full value of the administration deduction, would have over-estimated by a corresponding amount the funds earmarked for the marital trust, resulting in an offsetting benefit.16
But the IRS has adopted a different approach with respect to administration expenses. The estate may only deduct those expenses ”actually and necessarily incurred.”
The Estate argues, correctly, that it is therefore entitled to deduct from the gross estate the amount of actual administration expenses. In the same breath, it further contends, incorrectly in our view, that because the marital deduction is frozen at its date-of-death value, the Estate need only reduce the marital deduction to account for marital-trust funds earmarked to pay estimated administration expenses.
For the reasons stated, coupled with the fact, discussed below, that the only authority on which the Estate relies supports our conclusion, we hold that
3. Commissioner v. Estate of Hubert, 520 U.S. 93, 117 S.Ct. 1124 (1997)
Hubert confronted an issue related to but different from the question presented by this appeal. That case concerned whether and how the marital deduction must be reduced when administration expenses were paid out of the income earned by the marital trust during estate administration, rather than from the marital trust corpus, and deducted from the estate‘s income tax, rather than the estate tax, return.18
Although that issue splintered the court, all justices recognized as established and accepted in their reasoning the proposition that when administration expenses are paid from the marital trust corpus, the result is a pro tanto reduction of the marital deduction. The plurality stated:
The estate did not include in its marital and charitable deductions the amount of residue principal used to pay administration expenses. The parties here have agreed throughout that the marital or charitable deductions could not include those amounts. The estate, however, did not reduce the marital or charitable deductions by the amount of the income used to pay the balance of the administration expenses. The Commissioner disagreed and contended that use of income for this purpose required a dollar-for-dollar reduction of the amounts of the marital and charitable deductions.
Hubert, 520 U.S. at 99, 117 S.Ct. 1124 (Kennedy, J, plurality) (emphasis added). The concurring opinion also noted:
Everyone agrees that when these expenses are charged against a portion of the estate‘s principal devised to the spouse or charity, that portion of the principal is diverted from the spouse or charity and the marital and charitable deductions are accordingly reduced by the actual amount of expenses incurred.
Id. at 112, 117 S.Ct. 1124 (O‘Connor, J, concurring) (emphasis added). Justice Scalia‘s dissent, joined by Justice Breyer, likewise stated:
Thus, as the plurality correctly recognizes, and as both parties agree, if any portion of marital bequest principal is used to pay estate administration expenses, then the marital deduction must be reduced commensurately.
Id. at 123, 117 S.Ct. 1124 (Scalia, J., dissenting). See also id. at 136, 117 S.Ct. 1124 (“the key regulation is best read to require that account be taken of actual expenses.“) (emphasis in original).
True, those statements were not directed at the issue before the Court. Instead, each opinion recited a uniform background assumption against which the more difficult issue of administration payments from income was to be evaluated. While these statements may be dicta under some formulations of that concept, see United States v. Johnson, 256 F.3d 895 (9th Cir. 2001) (debating the definition of dicta), several considerations counsel against our treating them as such. The statements were not made “casually and without analysis,” Johnson, 256 F.3d at 915 (Kozinski, J, concurring). Rather, as we will develop, the statements formed part of the “analytical structure of the opinion,” United States v. Crawley, 837 F.2d 291, 293 (7th Cir.1988). Further, even if dicta, the language is still Supreme Court dicta, and dicta uniform among Justices otherwise very much divided by the case before them.
If the Supreme Court‘s remarks regarding the effect of allocating administrative expenses to estate principal were truly aberrational, the Court would have expected Plaintiffs to provide authority for the contrary proposition. Plaintiffs have failed to do so, and the reason has become apparent to the Court. Taken in context, the comments of the Supreme Court reveal a unanimity on a point that, in all likelihood, is obvious in view of the controlling statute. The beneficiary may take a marital deduction to the extent that property is included in valuing the estate. Reductions in estate principal reduce the value of the estate, which in turn requires an equivalent reduction in the marital deduction. Thus, to ignore the uniform comments of the three opinions as dicta is to ignore the command of the very statute that created the marital deduction in the first place.
Brown, 2001 WL 1480293, 88 A.F.T.R.2d.2001-6665 at *11.
The Estate primarily relies on the plurality opinion in Hubert. As stated, Hubert grappled only with the question whether administration expenses paid from income earned by the marital trust affected the amount of the marital deduction. In answering that question, the plurality opinion first noted that the marital deduction must be reduced to the extent that the obligation to pay administration expenses reduced the date-of-death value of the marital trust property. Id. at 100, 117 S.Ct. 1124 (citing
Relying on regulations then in force, the plurality concluded that the estate need only account for “material” reductions in the anticipated income stream produced by the corpus of the marital trust. Id. at 105, 117 S.Ct. 1124 (relying on
The Estate argues that this valuation principle applies equally to the present case. Portions of the plurality opinion could be read in isolation to support this approach. Id. at 108, 117 S.Ct. 1124 (marital bequest valuation inquiry limited to “facts on the controlling valuation date.“) A close look, however, reveals that the plurality‘s overall reasoning and adoption of the present value approach in Hubert cannot extend to the result the Estate seeks in this case.
In determining that its valuation approach would not create a “double deduction,” the plurality relied on its observation that income earned by the marital deduction was not separately included in the date-of-death value of the marital property in the first place. Id. at 110-111, 117 S.Ct. 1124 (“The marital ... deduction ... do[es] not include income, however. When income is used ... to pay administration expenses, this does not require that the estate tax deductions be diminished.“)
The plurality‘s conclusion was based on the observation that the marital deduction includes only asset values. Id. Those asset values are “determined with reference to expected income.” Id. Because “only anticipated, not actual, income is included in the gross estate,” the plurality reasoned, “only anticipated administration expenses payable from income, not thе actual ones, affect the date-of-death value of the ... bequest[].” Id. at 108, 117 S.Ct. 1124. In other words, as income is only valued through the lens of expected values in the first instance, the plurality reasoned, limitations on income should be valued through that same lens.
Unlike income earned by the marital trust, the underlying assets which form the corpus of the marital trust property are, of course, directly included in the date-of-death value of the marital trust. So the rationale underpinning the plurality‘s conclusion that its approach created no double deduction cannot extend to the situation in which administration expenses are paid from the trust corpus and the actual amounts paid deducted under
In summary, the concurring and dissenting opinions, representing a majority of the court, expressly disavowed the valuation approach adopted by the plurality, and the plurality‘s reasoning does not extend to the case before us. The only authority relied on by the Estate thus contradicts the result it urges. Further, the clear statutory command of
CONCLUSION
For the reasons stated, we AFFIRM.
Notes
The amount of the gross estate (determined without regard to this subsection) shall be increased by the amount of any tax paid under chapter 12 by the decedent or his estate on any gift made by the decedent or his spouse after December 31, 1976, and during the 3 year period ending on the date of the decedent‘s death.
In 1997, this section was re-codified, with minor changes not relevant here, as
The tax code does not care for such manipulable results. If an inter vivos gift is made within three years of the decedent‘s death, Section 2035(c)(1993) requires that the taxable estate include the $400,000 in previously untaxed gift taxes. This mandate creates an estate tax liability of $160,000 (40% x $400,000), thereby eliminating the advantage of inter vivos gifts. (This example does not take account of the provisions, discussed infra, allowing small annual gifts (
If the consent required by subsection (a)(2) [relating to split-gift treatment] is signified with respect to a gift made in any calendar year, the liability with respect to the entire tax imposed by this chapter of each spouse for such year shall be joint and several.
Although
Revenue-Ruling 93-48 indicates [the Commissioner‘s] rejection of the notion that every financial burden on a marital bequest‘s postmortem income is a material limitation warranting a reduction in the marital deduction. That the Ruling purports to apply not only to income but also to principal, and may therefore deviate from the accepted rule regarding payment of expenses from principal, see supra, at 1134, does not undercut the relevance of the Ruling‘s implications as to income.
Id. at 119, 117 S.Ct. 1124 (O‘Connor, J., concurring) (emphasis added).