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COMMISSIONER OF INTERNAL REVENUE v. ESTATE OF HUBERT, DECEASED, C & S SOVRAN TRUST CO. (GEORGIA) N. A., CO-EXECUTOR (1997)
OCTOBER TERM, 1996
COMMISSIONER OF INTERNAL REVENUE v.
ESTATE OF HUBERT, DECEASED, C & S SOVRAN TRUST CO. (GEORGIA) N. A., CO-EXECUTOR
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT
No. 95-1402. Argued November 12, 1996-Decided March 18, 1997
The executors of decedent Hubert's substantial estate filed a federal estate tax return about a year after his death. Subsequently, petitioner Commissioner of Internal Revenue issued a notice of deficiency, claiming underreporting of federal estate tax liability caused by the estate's asserted entitlement to marital and charitable deductions. While the estate's redetermination petition was pending in the Tax Court, interested parties settled much of the litigation surrounding the estate that had begun after Hubert's death. The agreement divided the estate's residue principal, assumed to be worth $26 million on the date of death, about equally between marital trusts and a charitable trust. It also provided that the estate would pay its administration expenses either from the principal or the income of the assets that would comprise the residue and the corpus of the trusts, preserving the executors' discretion to apportion such expenses. The estate paid about $500,000 of its nearly $2 million of administration expenses from principal and the rest from income. It then recalculated its tax liability, reducing the marital and charitable deductions by the amount of principal, but not the amount of income, used to pay the expenses. The Commissioner concluded that using income for expenses required a dollar-for-dollar reduction of the deductions. The Tax Court disagreed, finding that no reduction was required by reason of the executors' power, or the exercise of their power, to pay administration expenses from income. The Court of Appeals affirmed.
Held: The judgment is affirmed. 63 F.3d 1083, affirmed.
JUSTICE KENNEDY, joined by THE CHIEF JUSTICE, JUSTICE STEVENS, and JUSTICE GINSBURG, concluded that a taxpayer does not have to reduce the estate tax deduction for marital or charitable bequests by the amount of the administration expenses that were paid from income generated during administration by assets allocated to those bequests. Pp.99-111.
(a) Hubert's executors used the standard date-of-death valuation to determine the value of property included in the gross estate for estate tax purposes. The parties agree that, for purposes of the question presented, the charitable, 26 U. S. C. § 2055, and marital, § 2056, deduction statutes should be read to require the same answer, notwithstanding differences in their language. Since the marital deduction statute and regulation speak in more specific terms on this question than the charitable deduction statute, this plurality concentrates on the marital provisions, but the holding here applies to both deductions. pp. 99-100.
(b) The marital deduction statute allows deduction for qualifying property only to the extent of the property's "value." So when the executors use date-of-death valuation for gross estate purposes, the deduction's value will be limited by that value. Marital deduction "value" is "net value," determined by the same principles as if the bequest were a gift to the spouse, 26 CFR § 20.2056(b)-4(a), i. e., present value as of the controlling valuation date, § 25.2523(a)-I(e); see also §§ 20.2056(b)-4(d), 20.2055-2(f)(1). Although the question presented is not controlled by these provisions' exact terms, it is natural to apply the present-value principle here. Thus, assuming it were necessary for valuation purposes to take into account that income, this would be done by subtracting from the value of the bequest, computed as if the income were not subject to administration expense charges, the present value (as of the controlling valuation date) of the income expected to be used to pay administration expenses. Cf. Ithaca Trust Co. v. United States, 279 U. S. 151. There is no dispute the entire interests transferred in trust here qualify for the marital and charitable deductions; the question before the Court is one of valuation. Pp. 100-104.
(c) Only material limitations on the right to receive income are taken into account when valuing the property interest passing to the surviving spouse. 26 CFR § 20.2056(b)-4(a). A provision requiring or allowing administration expenses to be paid from income "may" be deemed a "material limitation" on the spouse's right to income. For example, where the amount of the corpus, and the expected income from it, are small, the amount of the estate's anticipated administration expenses chargeable to income may be material as compared with the anticipated income used to determine the assets' date-of-death value. Whether a limitation is material will also depend in part on the nature of the spouse's interest in the assets generating income. An obligation to pay administration expenses from income is more likely to be material where the value of the trust to the spouse is derived solely from income, but is less likely to be material where, as here, the marital property is valued as being equivalent to a transfer of the fee. Pp. 104-107.
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