359 F.2d 817 | 7th Cir. | 1966
Lead Opinion
Plaintiff-Bank sued under 28 U.S.C. § 1346(a)(1) for refund of estate taxes paid after the District Director of Internal Revenue disallowed part of a marital deduction claimed in the estate tax return filed by the Bank by virtue of the Int. Rev. Code of 1954, § 2056. The district court held in favor of the Bank under § 2056(b)(5).
The deduction was claimed by the Bank as executor of decedent’s will and trustee under a residuary trust in which the settlor-husband provided, so far as relevant here:
(a) In the event I die prior to October 1, 1961,1 direct my Trustee to pay to my wife the sum of Two Hundred Dollars ($200.00) per month up to and through December 1, 1964, and then to pay to my wife the sum of Three Hundred Dollars ($300.00) per month after December 1, 1964, each and every month for the duration of her life.
The widow was the sole trust beneficiary, the only person entitled to any income, and was given the general power to appoint the remainder of the trust by her last will and testament. Since the settlor died September 25, 1959, we are concerned only with the payments of $200.00 per month and whether these payments provide the widow with an interest in “all the income from a specific portion” of the entire interest, § 2056(b)(5), thus
The district court determined, by use of the annuity tables and directions promulgated by the Treasury Department,
A marital deduction equal in value to a maximum 50% of the adjusted gross estate is allowed for the value of any interest in property which passes from the decedent to the surviving spouse.
The parties agree that the “sole issue * * * is whether the surviving spouse was entitled for life to all the income from a specific portion of the corpus of the trust,” so as to come within the provisions of § 2056(b) (5). We hold that the surviving spouse was entitled for life to all the income “from a specific portion” of the corpus of the trust, and that the Bank was entitled to include that amount in the return filed as part of the claimed marital deduction.
The purpose of the marital deduction provision was to extend to spouses in common law states the advantages of married taxpayers in community property states, by permitting the surviving spouse to acquire free of estate tax up to one-half of the decedent’s adjusted gross es-state, Dougherty v. United States, 292 F.2d 331, 337 (6th Cir. 1961), and to bring about a two-stage payment of estate taxes, United States v. Stapf, 375 U.S. 118, 128, 84 S.Ct. 248, 11 L.Ed.2d 195 (1963). The “terminable interest” limitation was intended to prevent an escape from tax liability of the second step, i. e., the passing of the surviving spouse’s interest to “any other person” upon termination of her life estate or other terminable interest without estate
The qualification of the widow’s interest for deduction must be determined as of the time of her husband’s death. Jackson v. United States, 376 U.S. 503, 508, 84 S.Ct. 869, 11 L.Ed.2d 871 (1964). The Government argues that since the widow's estate is not a “fractional or percentile” part, required by Treasury Regulation § 20.2056(b)-5(c), it cannot be a “specific portion”; that the capitalized sum reached by the district court cannot be “specific” because the value of the entire trust corpus is subject to fluctuation due to economic conditions,
These theories, with the exception of the latter argument,
A district court in Northeastern Pennsylvania Nat. B. & T. Co. v. United States, 235 F.Supp. 941 (M.D.Pa.1964),
The court considered the Government argument that both the widow and Government should share equally in the risk of the fluctuation in value of the corpus resulting in decrease or increase in taxes, and that the “fractional or percentile share” requirement of the regulation must be met. The court, however, following Gelb, rejected the Government’s arguments and computed actuarially the portion of the corpus which was needed to yield the widow’s income and allowed the deduction accordingly. The court, 235 F. Supp. at 946, agreed with the reasoning in Gelb, 298 F.2d at 551, that the Congressional “ * * * example of a ‘specific portion’ [as a fractional interest] does not warrant a construction that Congress did not mean to include other instances fairly within the language and the underlying policy.”
In the recent case of Allen v. United States,
No reason advanced has persuaded us that we can substantially distinguish the facts and underlying principles involved before us from those in Gelb, and none that we should not do substantially here what the Second Circuit did in Gelb. In this court the Government cites no decision in its favor on the issue here, adding only that “we respectfully submit, however, the Gelb decision is erroneous. * * •» ”
We are unable to agree with the Government’s appraisal of Gelb, and the judgment is affirmed.
. This sub-section provides an exception to the “terminable interest” rule of § 2056 (b) (1), for it provides in pertinent part that the decedent’s estate is entitled to the marital deduction to the extent that the surviving spouse “ * * * is entitled for life to all the income from the entire interest, or all the income from a specific portion thereof, * * * ■with power in the surviving spouse to appoint the entire interest, or such specific portion * * (Emphasis added.) This sub-section succeeded Int.Rev. Oode of 1939, § 812(e), added by Revenue Act of 1948, § 361, but § 812(e) (1) (E) allowed the deduction only if the surviving spouse was entitled to “all” the income from the trust corpus.
. Treas. Reg. on Estate Tax § 20.2031-7, 8; 26 C.F.R. § 20.2031-7, 8 (1961).
. This section of the regulations provides in pertinent part:
(c) Definition of specific portion. A partial interest in property is not treated as a specific portion of the entire interest unless the rights of the surviving spouse in income and as to the power constitute a fractional or percentile share of a property interest so that such interest or share in the surviving spouse reflects its proportionate share of the increment or decline in the whole of the property interest to which the income rights and the power relate. Thus, if the right of the spouse to income and the power extend to one-half or a specified percentage of the property, or the equivalent, the interest is considered as a specific portion. On the other hand, if the annual income of the spouse is limited to a specific sum, or if she has a power to appoint only a specific sum out of a larger fund, the interest is not a deductible interest. (Emphasis added.) 26 O.F.R. § 20.-2056(b)-5(e) (1961).
. Int.Rev.Oode of 1954, § 2056(a), (c).
. Int.Rev.Oode of 1954, § 2056(b) (1). See generally Cunha’s Estate v. C.I.R., 279 F.2d 292, 296 (9th Cir.), cert. denied, 364 U.S. 942, 81 S.Ct. 460, 5 L.Ed.2d 373 (1960) (“terminable interest,” § 812(e) of 1939 Code).
. Int.Rev.Oode of 1954, § 2056(b) (5); see note 1 supra.
. Northeastern Pennsylvania Nat. B. & T. Co. v. United States, 235 F.Supp. 941, 943 (M.D.Pa.1964). See also note 1 supra.
. I.e., a restricted amount, the $68,572.00, can never be a “specific portion” of a larger, variable amount, the trust corpus. Brief for the Appellant, pp. 17-18. The substance of this contention appears to have been made, and rejected, in the Gélb, Northeastern Pennsylvania Nat. Bank and Allen decisions discussed infra. Counsel for the Government, on oral argument here, conceded that if the surviving spouse were given a life interest in all the income from a restricted amount, i.e., $68,572.00, plus the requisite power of appointment, this would qualify. While this may not concede the case, it does concede that a limited dollar amount (the capitalized sum here) may be a “specific portion,” and within the “fractional or percentile share” terminology of the regulation.
. Appellee in its claim for refund alleged the trust had a value of $123,541.10.
. The trustee was also directed to pay “all costs, expenses, taxes and charges out of the income or corpus” before making distribution to the widow. Thus her payments might come from corpus.
. This argument was specifically made and rejected in Northeastern Pennsylvania Nat. Bank, see text accompanying note 12; the Gelb court inferentially rejects it by approving actuarially-eomputed “specific” portions.
. Appeal pending, No. 15249, 3rd Cir., Oct., 1965.
. 250 F.Supp. 155 (E.D.Mo.1965).
. Brief for the Appellant, p. 20.
Dissenting Opinion
(dissenting).
The statutory language here involved (26 U.S.C.A. § 2056(b) (5)) “* * *