Commissioner v. Estate of Hubert, 520 U.S. 93 (1997)
Commissioner v. Estate of Hubert
No. 95-1402
Argued November 12, 1996
Decided March 18, 1997
520 U.S. 93
CERTIORARI TO THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
Syllabus
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)-1(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.
(d) The Tax Court found that, on the facts presented, the trustee’s discretion to pay administration expenses out of income was not a material limitation on the right to receive income. There is no reason to reverse for the Tax Court’s failure to specify the facts it considered relevant to the materiality inquiry. The anticipated expenses could have been thought immaterial in light of the income the trust corpus could have been expected to generate. P. 107.
(e) This approach to the valuation question is consistent with the language of 26 U.S.C. § 2056(b), as interpreted in United States v. Stapf, 375 U.S. 118, 126, in which the Court held that the marital deduction should not exceed the "net economic interest received by the surviving spouse." There is no basis here for the Commissioner’s argument that the reduction she seeks is necessary to avoid a "double deduction" for administration expenses in violation of 26 U.S.C. § 642(g). Moreover, assuming that the marital deduction statute’s legislative history would have relevance here, it does not support the Commissioner’s position. Pp. 109-111.
JUSTICE O’CONNOR, joined by JUSTICE SOUTER and JUSTICE THOMAS, concluded that the relevant sources point to a test of quantitative materiality to determine whether allocation of administrative expenses to postmortem income reduces marital and charitable deductions, and that test is not met by the unusual factual record in this case. Pp. 111-122.
(a) Neither the Tax Code itself nor its legislative history supplies guidance on the question whether allocation of administrative expenses to postmortem income reduces the marital deduction always, sometimes, or not at all. However, the Commissioner’s regulations and revenue rulings can be relied on to decide this issue. Title 26 CFR § 20.2056(b)-4(a) directs the reader to ask whether the executor’s right to allocate administrative expenses to the marital bequest’s postmortem income is a "material limitation" upon the spouse’s "right to income from the property," such that "account must be taken of its effect." Because the executor’s power is undeniably a "limitation" on the spouse’s right to income, the case hinges on whether that limitation is "material." In Revenue Ruling 93-48, the Commissioner ruled that § 20.2056(b)-4(a)’s marital deduction is not "ordinarily" reduced when an executor allocates interest payments on deferred federal estate taxes to the spousal bequest’s postmortem income. Such interest and the administrative expenses at issue here are so similar that they should be treated the same under § 20.2056(b)-4(a). The Commissioner’s treatment of interest in the Revenue Ruling also indicates that some, but not all, financial obligations will reduce the marital deduction. Thus, by virtue of the Ruling, the Commissioner has created a quantitative materiality rule for § 20.2056(b)-4(a). This rule is consistent with the example set forth in § 20.2056(b)-4(a), and the Commissioner’s expressed preference for such a construction is entitled to deference. Pp. 112-120.
(b) The proper measure of materiality has yet to be decided by the Commissioner. In the absence of guidance from the Commissioner, the Tax Court’s approach is as consistent with the Code as any other test, and provides no basis for reversal. Here, the Commissioner’s litigation strategy effectively preempted the Tax Court from finding the $1.5 million diminution in postmortem income material under a quantitative materiality test, for she argued that any diversion of postmortem income was material and never presented any evidence or argued that this diminution was quantitatively material. Her failure to offer proof of materiality left the Tax Court with little choice but to reach its carefully crafted conclusion that the amount was not quantitatively material on the facts before it. Pp. 120-122.
KENNEDY, J., announced the judgment of the Court and delivered an opinion, in which REHNQUIST, C.J., and STEVENS and GINSBURG, JJ., joined. O’CONNOR, J., filed an opinion concurring in the judgment, in which SOUTER and THOMAS, JJ., joined, post, p. 111. SCALIA, J., filed a dissenting opinion, in which BREYER, J., joined, post, p. 122. BREYER, J., filed a dissenting opinion, post, p. 138.