Estate of Anne W. Morgens, James H. Morgens v. Commissioner , 133 T.C. No. 17 ( 2009 )

133 T.C. No. 17UNITED STATES TAX COURT
ESTATE OF ANNE W. MORGENS, DECEASED, JAMES H. MORGENS, EXECUTOR,
Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 26212-06. Filed December 21, 2009.
Husband (H) and wife (D) established a revocable
inter vivos trust. After H’s death the portion of the
trust representing H’s one-half of the community
property was allocated to a residual trust in which D
received an income interest for life. A qualified
terminable interest property (QTIP) election under sec.
2056(b)(7), I.R.C., was made on H’s estate tax return
for the property passing to the residual trust, thereby
allowing H’s estate to claim a marital deduction for
the full value of the QTIP.
During D’s lifetime the trust was divided into two
trusts. D made gifts of her qualifying income
interests in both trusts, which in turn triggered
deemed transfers of the QTIP remainder under sec. 2519,
I.R.C. Recipients of the QTIP paid gift taxes. D died
within 3 years of the transfers. R determined that the
amounts of gift tax paid by the recipients of the QTIP
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remainder are includable in D’s gross estate under sec.
2035(b), I.R.C.
Held: The amounts of gift tax paid by the
recipients of the QTIP remainder are includable in D’s
gross estate under sec. 2035(b), I.R.C.
John W. Porter, J. Graham Kenney, and Keri D. Brown, for
petitioner.
James A. Whitten, for respondent.
OPINION
MARVEL, Judge: Respondent determined a $4,684,430
deficiency in the Federal estate tax of the Estate of Anne W.
Morgens (Mrs. Morgens). The sole issue1 for decision is whether
the amounts of gift tax paid with respect to Mrs. Morgens’ deemed
1
Respondent listed several adjustments in the explanation of
adjustments section of the estate tax notice of deficiency. Of
those adjustments, the estate concedes: (1) Adjustments related
to the decrease in the gift tax refund on Schedule F, Other
Miscellaneous Property Not Reportable Under Any Other Schedule;
(2) the increase in funeral and administrative expenses on
Schedule J, Funeral Expenses and Expenses Incurred in
Administering Property Subject to Claims; and (3) charges arising
from a recomputation of the adjusted gift tax payable. The
petition challenges respondent’s determinations concerning
inclusion in the gross estate of the amounts of gift tax paid for
2000 and 2001 and generation-skipping tax and an adjustment
related to the State death tax credit. The briefs address only
the issue of inclusion in the gross estate of the gift tax paid
with respect to 2000 and 2001 gifts. Accordingly, we deem the
remaining issues raised in the petition that were not already
conceded or resolved by agreement or opinion conceded. See Rule
151(e)(4) and (5), Tax Court Rules of Practice & Procedure;
Petzoldt v. Commissioner, 92 T.C. 661, 683 (1989).
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gifts of remainder interests in qualified terminable interest
property (QTIP) are includable in her gross estate under section
2035(b).2
Background
The parties submitted this case fully stipulated under Rule
122. We incorporate the stipulated facts into our findings by
this reference. Mrs. Morgens was a resident of California when
she died on August 25, 2002, and her estate is administered
there. The estate’s executor, James H. Morgens (James Morgens),
Mrs. Morgens’ son, lived in Georgia when he petitioned the Court
on behalf of the estate.
I. Family History and the Establishment of the Residual Trust
Mrs. Morgens was born on August 11, 1909. On September 16,
1935, she married Howard J. Morgens (Mr. Morgens) and remained
married to him until his death on January 27, 2000. The couple
had two sons, Edwin H. Morgens (Edwin Morgens) and James Morgens,
and a daughter, Joanne Morgens Bretz (Joanne Bretz). Joanne
Bretz predeceased Mr. Morgens. The couple also had several
grandchildren, including Matthew H. Bretz (Matthew Bretz) and
Anne Bretz Carpenter (Anne Carpenter); Matthew Bretz and Anne
Carpenter were children of Joanne Bretz.
2
Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the date of
decedent’s death, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
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On February 14, 1991, Mr. and Mrs. Morgens, as settlors,
executed the Morgens Family Living Trust Agreement establishing a
revocable trust (trust) to administer assets they contributed to
the trust.3 Mr. Morgens was the original trustee of the trust.
Mr. Morgens and Mrs. Morgens later executed several amendments.
When Mr. Morgens died, the disposition and management of the
trust assets were governed by the second, third, fourth, and
fifth amendments to the Morgens Family Living Trust Agreement
(amended trust agreement).
Under the amended trust agreement, after the death of the
first spouse, the corpus of the trust was to be distributed into
two separate trusts: The survivor’s trust and the residual
trust. The portion of the trust representing the surviving
spouse’s one-half of the community property would be allocated to
the survivor’s trust, and the portion representing one-half of
the community property of the first spouse to die would be
allocated to the residual trust.
With respect to the residual trust,4 the amended trust
agreement provided in pertinent part that after certain gifts,5
3
Exhibit A described the property the settlors delivered to
the trustee, but Exhibit A was not attached to the copy of the
Morgens Family Living Trust Agreement in the record.
4
This case concerns only issues and facts related to the
residual trust.
5
The amended trust agreement required the trustees to
(continued...)
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the balance of the residual trust would remain in trust for the
benefit of the surviving spouse6 for that spouse’s lifetime. The
surviving spouse had an income interest in the trust that
entitled her to receive the net income of the trust in quarter-
annual or more frequent installments during her life (income
interest). The trustee had the power to “pay to or apply for the
benefit of the Surviving Spouse as much of the principal of the
trust as the Trustee, in the Trustee’s discretion shall consider
necessary for the Surviving Spouse’s proper support, health,
maintenance, and execution”7 (principal invasion interest).
After the surviving spouse’s death, the remainder of the residual
trust was to be divided into 10 equal shares, with Edwin Morgens
receiving 3 shares, James Morgens receiving 5 shares, and the
trusts for the benefit of Anne Carpenter and Matthew Bretz each
receiving 1 share.
In accordance with the amended trust agreement, when Mr.
Morgens died, the trust was divided into the survivor’s trust and
the residual trust. Mrs. Morgens, James Morgens, and Edwin
5
(...continued)
establish separate subtrusts for the settlors’ then-living
grandchildren and to distribute certain assets to Edwin and James
Morgens.
6
The phrase “the surviving spouse” refers to the second
spouse to die.
7
The parties stipulated that the amended trust agreement
allowed the trustees to invade the principal for the purpose of
“education” instead of “execution”.
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Morgens became the cotrustees of the residual trust, but on
January 29, 2000, Mrs. Morgens resigned as a cotrustee. On
October 25, 2000, Mr. Morgens’ estate filed a Form 706, United
States Estate (and Generation-Skipping Transfer) Tax Return. On
Mr. Morgens’ estate’s Form 706, the executor of his estate made
an election under section 2056(b)(7) for the property passing to
the residual trust, thereby qualifying all such property for the
marital deduction.
II. Disclaimers of Interests and the Division of the Residual
Trust
On September 22, 2000, Mrs. Morgens disclaimed her right to
the principal invasion interest in the residual trust. On the
same day, Edwin Morgens, his wife Linda Morgens (Linda Morgens),
their only child Lauren Morgens (Lauren Morgens), individually,
and Lauren Morgens, as guardian ad litem for the unborn and
unascertained children of Edwin Morgens, Linda Morgens, and
Lauren Morgens, disclaimed their interests in and powers over the
portion of the residual trust that Edwin Morgens had been
entitled to receive under the amended trust agreement. As a
result of the disclaimers, Edwin Morgens’ interest in the three
shares of the residual trust remainder (Edwin Morgens’ former
interest) passed to Mrs. Morgens.8 However, Mrs. Morgens
8
The disclaimer by Edwin Morgens resulted in Edwin Morgens’
former interest’s passing in the same manner as by intestacy
under State law. Linda Morgens, as Edwin Morgens’ spouse, and
(continued...)
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executed a partial disclaimer of that interest, retaining only a
special power of appointment to appoint the interest to Mr.
Morgens’ issue. She exercised that power of appointment to
appoint Edwin Morgens’ former interest five-sevenths to James,
one-seventh retained in trust for Anne Carpenter, and one-seventh
retained in trust for Matthew Bretz.9
In November 2000 Mrs. Morgens and James Morgens, Anne
Carpenter, and Matthew Bretz, as the remainder beneficiaries of
the residual trust, entered into an indemnification agreement.
In consideration of any gifts by Mrs. Morgens of her income
interest in the residual trust, the remainder beneficiaries
agreed to indemnify Mrs. Morgens and her estate against certain
gift or estate taxes.
On a date that does not appear in the record, Edwin and
James Morgens, as cotrustees of the residual trust, petitioned
8
(...continued)
Lauren Morgens, as his only child, became entitled to Edwin
Morgens’ former interest. The disclaimers by Linda Morgens and
Lauren Morgens individually allowed Edwin Morgens’ former
interest to pass to the unborn and unascertained issue of Edwin
Morgens, Linda Morgens, or Lauren Morgens. Because of the
disclaimer by Lauren Morgens as guardian ad litem for the unborn
and unascertained issue of Edwin Morgens, Linda Morgens, or
Lauren Morgens, Edwin Morgens’ former interest passed to Mrs.
Morgens.
9
On Sept. 14, 2000, the Superior Court of the State of
California for the County of Monterey (superior court) entered an
order confirming the effect of all disclaimers of Edwin Morgens’
former interest and of Mrs. Morgens’ partial disclaimer and
exercise of her special power of appointment to appoint Edwin
Morgens’ former interest.
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the superior court on behalf of the residual trust to sever the
residual trust into two separate trusts.10 On December 8, 2000,
the superior court held a hearing, and on December 11, 2000, it
granted the petition and ordered that the residual trust be split
into residual trust A and residual trust B. Residual trust A was
funded with assets of the residual trust consisting of 115,000
shares of Proctor & Gamble common stock, and residual trust B was
funded with the remaining assets of the residual trust.
The original terms of the residual trust, except the
spendthrift provision that applied to Mrs. Morgens, became
applicable to residual trusts A and B. Accordingly, Mrs. Morgens
maintained a right to the income from residual trusts A and B for
life. Pursuant to Mrs. Morgens’ exercise of the special power of
appointment over Edwin Morgens’ former interest and the terms of
the residual trust pertaining to the remaining seven shares of
the residual trust, the remainder beneficiaries of residual trust
A were James Morgens, Anne Carpenter, and Matthew Bretz, and the
remainder beneficiaries of residual trust B were James Morgens,
Anne Carpenter, Matthew Bretz, and trusts for the benefit of Anne
Carpenter and Matthew Bretz.
10
The superior court order indicates that James and Edwin
Morgens sought a division of the residual trust to allow Mrs.
Morgens to make two gifts of income interests in separate years.
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III. Section 2519 Deemed Transfers
On December 8, 2000, Mrs. Morgens transferred her income
interest in residual trust A as gifts to the remainder
beneficiaries in the same proportions as their respective
remainder interests,11 thereby triggering a transfer of the QTIP
remainder (2000 deemed transfer) under section 2519.12 On the
date of the gifts, the corpus of residual trust A consisted of
115,000 shares of Proctor & Gamble common stock with a fair
market value of $8,305,300.13 The gross deemed transfer under
section 2519 resulting from Mrs. Morgens’ gift of the residual
trust A income interest was $6,398,901, calculated by multiplying
the fair market value of the corpus ($8,305,300) by the remainder
interest factor of 0.77046.14 On October 13, 2001, Mrs. Morgens
timely filed a Form 709, United States Gift (and Generation-
11
Mrs. Morgens’ gifts were made on the date of the superior
court hearing, and the gifts predate the superior court order
granting the petition to split the residual trust into residual
trust A and residual trust B.
12
Because Mrs. Morgens disposed of her qualifying income
interest for life in the QTIP, she was treated as transferring
all interests in property, other than the qualifying income
interest. See sec. 2519(a); sec. 25.2519-1(a), Gift Tax Regs.
13
The parties stipulated the fair market value of the shares
on the basis of the $72.22 average between the highest and lowest
selling prices of Proctor & Gamble common stock on Dec. 8, 2000.
14
The parties stipulated that on the date of the transfer
the sec. 7520 interest rate was 7 percent, Mrs. Morgens was 91
years old, and under the actuarial tables under sec. 7520, the
applicable remainder interest factor was 0.77046. See sec.
20.2031-7(d)(7), table S, Estate Tax Regs.
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Skipping Transfer) Tax Return, for 2000, reporting a 2000 deemed
transfer of $4,111,592 computed as the gross amount of the 2000
deemed transfer ($6,398,901) minus the agreed gift tax liability
($2,287,309). The trustees of residual trust A paid the
$2,287,309 gift tax associated with the 2000 deemed transfer.
On January 10, 2001, Mrs. Morgens transferred her residual
trust B income interest as gifts to the remainder beneficiaries
in the same proportions as their respective remainder interests,
thereby triggering a transfer of the QTIP remainder (2001 deemed
transfer). On the date of the gifts the corpus of residual trust
B consisted of (1) a 21.66-percent interest in Phoenix Partners,
L.P.,15 a New York limited partnership, (2) unspecified assets in
a Merrill Lynch account, and (3) a receivable and related accrued
interest from the survivor’s trust. On the date of the gifts the
fair market value of the residual trust B assets was $28,319,472.
Mrs. Morgens’ estate timely filed a Form 709 on her behalf. The
trustees of residual trust B paid the $7,692,502 gift tax
associated with the 2001 deemed transfer.
On November 24, 2003, Mrs. Morgens’ estate amended the 2001
Form 709. On the amended Form 709 the estate used a different
15
On the date of the gift the assets of Phoenix Partners,
L.P., consisted of cash, equity securities, debt instruments, and
foreign currencies. The record establishes that the survivor’s
trust held a 22.79-percent interest in Phoenix Partners, L.P.
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remainder interest factor16 and reported lower values for the
Phoenix Partners, L.P. interests held by the survivor’s trust and
residual trust B as of January 10, 2001. Respondent audited the
2001 Form 709, and the executor of Mrs. Morgens’ estate and
respondent agreed that the gross value of the 2001 deemed
transfer was $21,623,964 and that the gift tax liability related
to the 2001 deemed transfer was $7,686,208.17 Accordingly, the
agreed value of the 2001 deemed transfer was $13,937,756,
computed as the gross amount of the 2001 deemed transfer
($21,623,964) minus the agreed gift tax liability ($7,686,208).
IV. Estate Tax Return of Mrs. Morgens’ Estate
The executor of Mrs. Morgens’ estate timely filed a Form 706
on November 24, 2003, pursuant to an extension. On the Form 706
the executor did not include the amounts of gift tax paid by the
trustees with respect to the 2000 and 2001 deemed transfers in
Mrs. Morgens’ gross estate, on the ground that those amounts were
not gift tax paid by Mrs. Morgens or her spouse within 3 years of
16
The original 2001 Form 709 used an incorrect remainder
interest factor of 0.76542 to calculate the remainder value. The
parties stipulated that on the date of the transfer the
applicable sec. 7520 interest rate was 6.8 percent, Mrs. Morgens
was 91 years old, and the remainder interest factor was 0.77577.
The stipulated remainder interest factor appears incorrect. See
sec. 20.2031-7(d)(7), table S, Estate Tax Regs. (showing the
remainder interest factor of 0.77557).
17
The executor of the estate and respondent agreed that Mrs.
Morgens’ total gift tax liability for 2001 was $11,440,712.
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Mrs. Morgens’ death. Respondent audited the Form 706 and issued
a notice of deficiency. The estate’s executor timely petitioned
this Court.
Discussion
Generally, the Commissioner’s determination is presumed
correct, and the taxpayer bears the burden of proving it
incorrect. Rule 142(a)(1); INDOPCO, Inc. v. Commissioner, 503
U.S. 79, 84 (1992); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Although the estate asserts in the petition that the requirements
of section 7491(a)(2) are met, we do not need to decide whether
the burden of proof shifts to respondent under section 7491(a)(1)
because the relevant facts are stipulated and only legal issues
remain for us to decide.
I. Applicable Law
Section 2001(a) imposes a tax on the transfer of the taxable
estate of every decedent who is a citizen or resident of the
United States at the time of death. Generally, section 2031(a)
provides that the value of the decedent’s gross estate includes
the value of interests described in sections 2033 through 2044.
Under section 2035(b), the amount of the decedent’s gross estate
shall be increased by the amount of any tax paid by the decedent
or his estate on any gift made by the decedent or his spouse
during the 3-year period preceding the decedent’s death. The
purpose of this provision is to prevent individuals from reducing
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their estate tax liability by making inter vivos transfers
shortly before death. See infra pp. 24-25.
The issue in this case arises at the junction of section
2035(b) and sections 2519 and 2207A(b), which were added to the
Code as part of the QTIP regime by the Economic Recovery Tax Act
of 1981, Pub. L. 97-34, sec. 403, 95 Stat. 301. As discussed
below, see infra pp. 14-16, the Economic Recovery Tax Act of 1981
substantially expanded the availability of the marital deduction,
see H. Rept. 97-201, at 159 (1981), 1981-2 C.B. 352, 377.
Generally, an estate may deduct from the value of the gross
estate the value of property passing from the decedent to his or
her surviving spouse (marital deduction). See sec. 2056(a) and
(b)(7); sec. 20.2056(a)-1(a), Estate Tax Regs. The policy behind
the marital deduction rule is that property passes untaxed from
the first spouse to die to his or her surviving spouse but is
then included in the estate of the surviving spouse. Estate of
Letts v. Commissioner, 109 T.C. 290, 295 (1997), affd. without
published opinion 212 F.3d 600 (11th Cir. 2000). The marital
deduction does not eliminate or reduce the tax on the transfer of
marital assets out of the marital unit but permits deferral until
the death of or gift by the surviving spouse.
Ordinarily, a marital deduction is not allowed for
terminable interest property passing from a decedent to his or
her surviving spouse (terminable interest rule). Sec. 2056(b).
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A terminable interest is an interest passing from a decedent to
his or her surviving spouse that will end on the lapse of time,
on the occurrence of an event or contingency, or on the failure
of an event or contingency to occur. Sec. 2056(b)(1). The
terminable interest rule denies a marital deduction if: (1) An
interest passing to the surviving spouse is a terminable
interest, (2) an interest in such property passes from the
decedent to someone other than his or her surviving spouse for
less than full and adequate consideration in money or money’s
worth, and (3) the third person will possess or enjoy the
property after the termination or failure of the interest passing
to the surviving spouse. Sec. 2056(b)(1). The purpose of the
terminable interest rule is to deny the marital deduction for
transfers between spouses if the transfer has been structured to
avoid estate tax when the surviving spouse dies. Estate of
Novotny v. Commissioner, 93 T.C. 12, 16 (1989).
By enacting section 2056(b)(7), Congress provided an
exception to the terminable interest rule for QTIP. Section
2056(b)(7) allows a marital deduction for QTIP even though the
surviving spouse receives only an income interest and has no
control over the ultimate disposition of the property. Under
section 2056(b)(7) a decedent may pass to his or her surviving
spouse an income interest in property for the spouse’s lifetime.
After the death of the surviving spouse the property passes to
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beneficiaries designated by the first spouse to die. Three
requirements must be met for terminable interest property to
qualify as QTIP: (1) The property passes from the decedent, (2)
the surviving spouse has a qualifying income interest for life18
in the property, and (3) the executor of the estate of the first
spouse to die makes an affirmative election to designate the
property as QTIP. Sec. 2056(b)(7)(B).
After the death of the surviving spouse, the value of his
or her gross estate includes the value of QTIP. See sec. 2044.
The estate of the surviving spouse may recover from QTIP
recipients the amount by which the surviving spouse’s estate tax
is increased by the inclusion of the QTIP in the estate. Sec.
2207A(a).
As a corollary to section 2044, section 2519 addresses
dispositions of QTIP during the surviving spouse’s lifetime and
treats any disposition of all or part of a qualifying income
interest for life as a transfer of all interests in QTIP other
than the qualifying income interest.19 If gift tax is due upon
18
Sec. 2056(b)(7)(B)(ii) provides that the surviving spouse
has a qualifying income interest for life if the surviving spouse
is entitled to all income from the property, payable annually or
more frequently, or has a usufruct interest for life in the
property, and no person has the power to appoint any part of the
property to any person other than the surviving spouse.
19
The surviving spouse determines the gift tax consequences
of the disposition of the qualifying income interest for life
(continued...)
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the deemed transfer of the QTIP by a surviving spouse, section
2207A(b) permits the surviving spouse to recover the gift tax
attributable to the deemed transfer from recipients of the QTIP.
Section 25.2207A-1(e), Gift Tax Regs., provides that if the
property is in a trust at the time of the transfer, the person
receiving the property is the trustee. The right of recovery
arises when the surviving spouse subject to section 2519 pays
the Federal gift tax. Sec. 25.2207A-1(a), Gift Tax Regs.
Failure of the surviving spouse to exercise the right to recover
the gift tax under section 2207A(b) is a taxable gift to the
persons from whom the surviving spouse could have obtained
recovery. See sec. 25.2207A-1(b), Gift Tax Regs.
II. The Parties’ Arguments
Respondent argues that Mrs. Morgens was personally liable
for the gift tax attributable to the 2000 and 2001 deemed
transfers and that section 2207A(b) does not shift her liability
to the trustees. Respondent interprets section 2035(b) to
require that the amounts of gift tax paid on the 2000 and 2001
deemed transfers be included in Mrs. Morgens’ gross estate as
gift tax paid within 3 years of her death.
The estate contends that applying section 2035(b) to gift
tax paid by the trustees with respect to the 2000 and 2001
19
(...continued)
separately under sec. 2511(a). See sec. 25.2519-1(a), (c), Gift
Tax Regs.
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deemed transfers results in an increased estate tax burden on
Mrs. Morgens’ estate which is contrary to section 2207A and the
legislative intent of the QTIP regime. The estate suggests that
because the ultimate responsibility for paying the gift tax on
the section 2519 deemed transfers lies with the trustees of
residual trusts A and B, section 2035(b) does not apply. We
disagree and hold that the amounts of gift tax paid with respect
to the 2000 and 2001 deemed transfers of the QTIP is includable
in Mrs. Morgens’ gross estate.
III. Analysis
A. Mrs. Morgens as the Deemed Donor of the QTIP
Because the executor of Mr. Morgens’ estate made a QTIP
election under section 2056(b)(7), Mrs. Morgens’ transfers of
her income interests in residual trusts A and B are treated as
her transfers of the QTIP, other than her qualifying income
interest, under section 2519. Although Mrs. Morgens received no
economic interest in the QTIP besides income for life, the QTIP
regime employs a fiction that treats QTIP as passing entirely
from the first spouse to die to the surviving spouse. Section
2056(b)(7) provides in pertinent part:
(A) In general.--In the case of qualified
terminable interest property–-
(i) for purposes of subsection (a), such
property shall be treated as passing to the
surviving spouse, and
(ii) for purposes of paragraph (1)(A), no
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part of such property shall be treated as passing
to any person other than the surviving spouse.
Although only a life interest actually passes from the first
spouse to die to his or her surviving spouse, the entire QTIP
obtains the deferral benefit of the marital deduction and escapes
inclusion in the gross estate of the first spouse to die. Estate
of Higgins v. Commissioner, 91 T.C. 61, 68 (1988), affd. 897 F.2d
856 (6th Cir. 1990).
Inclusion in the transfer tax base of the surviving spouse
is the quid pro quo for allowing a marital deduction to the
estate of the first spouse to die. Cf. Estate of Mellinger v.
Commissioner, 112 T.C. 26, 35 (1999). In the case of QTIP, such
inclusion occurs either at the death of the surviving spouse, see
sec. 2044(a), or upon a lifetime disposition of his or her
qualifying income interest, see sec. 2519. In sections 2044 and
2519 the Code in essence continues the deemed transfer premise of
section 2056(b)(7) and treats the surviving spouse as if he or
she owned the QTIP outright. For example, section 2044 provides
that for purposes of the estate and generation-skipping tax
chapters of the Code, the QTIP includable in the gross estate of
the surviving spouse shall be treated as property passing from
the surviving spouse. Although section 2519 does not explicitly
state that QTIP is deemed to pass from the surviving spouse,
section 25.2519-1(a), Gift Tax Regs., states that for purposes of
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the estate and gift taxes chapters of the Code the surviving
spouse is treated as transferring the QTIP.
Although the surviving spouse is deemed to first receive and
then transfer QTIP either at his or her death or inter vivos
under the QTIP provisions, the legislative history accompanying
the enactment of the QTIP provisions reiterates that the QTIP
regime employs a fiction of transfers to and from the surviving
spouse. For example, the House Ways and Means Committee report
(report) states that under section 2044(c), property subject to a
section 2056(b)(7) election shall be treated as property passing
to the surviving spouse, although she does not receive the right
to control the ultimate disposition of QTIP. H. Rept. 97-201,
supra at 161, 1981-2 C.B. at 378. The report also states that if
the property is subject to gift tax as a result of the surviving
spouse’s lifetime transfer of the qualifying income interest, the
entire value of the property, less amounts received by the
surviving spouse upon disposition, will be treated as a taxable
gift by the surviving spouse. Id. Because the Code treats the
surviving spouse as transferring QTIP, Mrs. Morgens is the deemed
donor of the QTIP.20
20
In Estate of Mellinger v. Commissioner, 112 T.C. 26(1999), we refused to equate deemed ownership of QTIP with
outright ownership in an estate valuation context. In Estate of
Mellinger v. Commissioner, supra at 26, we considered whether for
valuation purposes the stock held in a QTIP trust established by
the first spouse to die should be aggregated with stock held in
(continued...)
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B. Gift Tax as the Donor’s Liability
As the deemed donor of QTIP, the surviving spouse bears the
gift tax liability associated with the transfer of QTIP. See
sec. 2502(c). The estate, however, points to section 2207A(b) as
evidence that Congress intended that recipients of QTIP bear the
ultimate gift tax liability on the transfers of QTIP. Section
2207A(b) provides:
SEC. 2207A(b). Recovery With Respect to Gift
Tax.--If for any calendar year tax is paid under
chapter 12 with respect to any person by reason of
property treated as transferred by such person under
section 2519, such person shall be entitled to recover
20
(...continued)
the surviving spouse’s revocable trust and with stock the
surviving spouse held outright. The Commissioner argued, inter
alia, that the surviving spouse should have been treated as the
owner of the QTIP under sec. 2044 and, accordingly, all shares
should have been aggregated and valued at a premium and not at a
discount for lack of marketability. Id. at 35. We reasoned that
nothing in sec. 2044 or the accompanying legislative history
indicated that Congress intended that QTIP included in the estate
of the surviving spouse upon her death under sec. 2044 should be
treated as if she actually owned QTIP for purposes of
aggregation. Id. at 36, 38. We also acknowledged the limited
economic nature of the surviving spouse’s ownership. Id. at 36
(“at no time did decedent possess, control, or have any power of
disposition over * * * shares in the QTIP trust”).
Our reasoning in Estate of Mellinger does not apply in this
case. As we noted in Estate of Mellinger v. Commissioner, supra
at 36, 38, the legislative history of the QTIP regime is silent
on the issue of valuation. In the case of transfer taxes
applicable to QTIP transfers, however, Congress considered that
the surviving spouse would incur gift tax liability upon a deemed
transfer of QTIP during his or her lifetime. See sec. 2207A(b).
In fact, imposing a transfer tax upon the surviving spouse’s
disposition of QTIP either at death or during lifetime is the
main premise of the QTIP regime.
- 21 -
from the person receiving the property the amount by
which–-
(1) the total tax for such year under chapter
12, exceeds
(2) the total tax which would have been
payable under such chapter for such year if
the value of such property had not been
taken into account for purposes of chapter
12.
See also sec. 25.2207A-1(a), Gift Tax Regs.
The estate also relies on the General Explanation of the
Economic Recovery Tax Act of 1981, see Staff of Joint Comm. on
Taxation, General Explanation of the Economic Recovery Tax Act of
1981 (General Explanation), at 234 (J. Comm. Print 1981), to
support its argument. The General Explanation states that
Congress recognized that the burden of tax resulting from a
deemed transfer under section 2519 should be “borne by the
persons receiving that property and not by the spouse or the
spouse’s heirs.” Id.
We agree that Congress intended that as between QTIP
recipients and the surviving spouse, it is the QTIP recipients
who should bear the ultimate financial burden for transfer taxes.
See H. Rept. 97-201, supra at 160, 1981-2 C.B. at 378. However,
we do not believe that by allocating the financial burden for
gift tax to recipients of QTIP, Congress shifted to them
liability for the gift tax. Section 2207A(b) does not provide
that the donees of QTIP should be liable for the applicable gift
- 22 -
tax. Rather, section 2207A(b) refers to the right to recover the
gift tax. The estate’s argument would read section 2207A(b) out
of the gift tax architecture. Section 2502(c) clearly provides
that gift tax is the liability of the donor: “The [gift] tax
imposed by section 2501 shall be paid by the donor.” Section
25.2511-2(a), Gift Tax Regs., also provides that “the tax is a
primary and personal liability of the donor, is an excise upon
his act of making the transfer, is measured by the value of the
property passing from the donor”. The donee is liable only if
the gift tax is not paid by the donor when due.21 Sec. 6324(b).
It is the donor who must file a gift tax return and pay the tax
on or before April 15 of the year following the year in which a
gift was made. Secs. 6019, 6075(b), 6151(a). Any gift tax, if
not paid, can be assessed against the donor within 3 years after
the gift tax return is filed. Sec. 6501.
More fundamentally, the question of how private parties
allocate the burden of the tax is different from the issue of who
is liable under the Code for gift tax; the donor and the donee
21
If the donor fails to pay the gift tax due, sec. 6324(b)
imposes a lien upon any gift made by the donor during the
relevant tax year. The lien extends for 10 years from the date
the donor made the gift. Id. The donee is personally liable for
the gift tax to the extent of the value of such gift. Id. The
liability of the donee under sec. 6324(b) arises when the donor
fails to pay the gift tax by the due date, even if the
Commissioner made no deficiency determination against the donor.
Mississippi Valley Trust Co. v. Commissioner, 147 F.2d 186, 187-
188 (8th Cir. 1945), affg. a Memorandum Opinion of this Court.
- 23 -
may shift the ultimate financial burden by agreement, for example
in a net gift context, discussed below. However, such an
allocation does not define or determine who has the initial
responsibility for reporting and paying the tax. See Diedrich v.
Commissioner, 457 U.S. 191, 196-197 (1982); see also Lucas v.
Earl, 281 U.S. 111, 115 (1930).
We disagree that section 2207A(b) shifts the gift tax
liability to QTIP recipients. Rather, the liability remains with
the donor; and because the QTIP regime treats the surviving
spouse as the deemed donor of QTIP, the liability for the gift
tax attributable to a section 2519 deemed transfer remains with
the surviving spouse.
C. Section 2035(b) and the Gift Tax on QTIP Transfers
1. Section 2035(b)
Section 2035(b) provides:
SEC. 2035(b). Inclusion of Gift Tax on Gifts Made
During 3 Years Before Decedent’s Death.--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 during the
3-year period ending on the date of the decedent’s
death.
Congress enacted section 2035(b) to eliminate the Code’s
incentives for deathbed transfers. H. Rept. 94-1380, at 12
(1976), 1976-3 C.B. (Vol. 3) 735, 746. Incentives for deathbed
transfers existed because in general, gift tax is not taken into
account in either gift tax or estate tax basis. Id. at 11, 1976-
- 24 -
3 C.B. (Vol. 3) at 745. The transfer tax savings occur
because the gift tax base excludes gift tax, but its payment
diminishes the value of the donor’s estate. Id. The estate tax
base, on the other hand, includes the full value of the property,
although a portion of the estate is used to satisfy estate taxes.
Id.
Congress concluded that the preference for lifetime
transfers over transfers at death encouraged deathbed gifts. Id.
at 11-12, 1976-3 C.B. (Vol. 3) at 745-746. It enacted section
2035(b), which effectively treats gifts in contemplation of death
and transfers at death alike and reduces an incentive to make
deathbed gifts. Id. The House Ways and Means Committee report
states: “the gift tax paid on transfers made within 3 years of
death should in all cases be included in the decedent’s gross
estate. This ‘gross-up’ rule would eliminate any incentive to
make deathbed transfers to remove an amount equal to the gift
- 25 -
taxes from the transfer tax base.”22 Id. at 12, 1976-3 C.B.
(Vol. 3) at 746.
2. Payment Effected by the Donee
We have previously considered the phrase “[gift tax] paid by
the decedent or his estate” in the context of net gifts. See
Estate of Sachs v. Commissioner, 88 T.C. 769, 777-778 (1987),
affd. in part and revd. in part on another ground 856 F.2d 1158(8th Cir. 1988); see also Estate of Armstrong v. Commissioner,
119 T.C. 220 (2002). A “net gift” is a gift made by a donor when
a donor makes a gift subject to the condition that the donee pay
the resulting gift tax. See Estate of Armstrong v. United
States, 277 F.3d 490, 495 (4th Cir. 2002) (citing Rev. Rul. 75-
72, 1975-1 C.B. 310). In such cases, for purposes of calculating
22
The “Explanation of provisions” part of the House Ways and
Means Committee report uses slightly different language. It
states:
The amount of gift tax subject to this rule would
include tax paid by the decedent or his estate * * *.
It would not, however, include any gift tax paid by the
spouse on a gift made by the decedent within 3 years of
death which is treated as made one-half by the spouse,
since the spouse’s payment fo such tax would not reduce
the decedent’s estate at the time of death.
H. Rept. 94-1380, at 14 (1976), 1976-3 C.B. (Vol. 3) 735, 748.
As we explained in Estate of Sachs v. Commissioner, 88 T.C. 769,
778 (1987), affd. in part and revd. in part on another ground 856
F.2d 1158 (8th Cir. 1988), payment of tax on gifts does not
always remove funds from the transfer tax base, and the language
of sec. 2035(b) accommodates split gifts. The removal of funds
from the transfer tax base occurs, however, in net gifts. See
id.- 26 -
the gift tax the donor reduces the amount of the gift by the
amount of the gift tax. Id. The reason for the reduction is
that because the donee incurred the obligation to pay the tax as
a condition of the gift, “the donor did not have the intent to
make other than a net gift.” Turner v. Commissioner, 49 T.C.
356, 360-361 (1968), affd. per curiam 410 F.2d 752 (6th Cir.
1969). In other words the donor reduces the value of the gift by
the amount of the tax because the donor has received
consideration for a part of the gift equal to the applicable gift
tax.
In Estate of Sachs v. Commissioner, supra at 770, the
decedent made gifts of stock to trusts established for the
benefit of his grandchildren on condition that the trustees pay
the resulting gift tax. The decedent reported the gifts as net
gifts. Id. Because the decedent died within 3 years of the
gifts, the Commissioner included the gift tax paid by the trusts
in the decedent’s gross estate under section 2035(c) (current
section 2035(b)).
In Estate of Sachs we held that the phrase “[gift tax] paid
by the decedent or his estate” in section 2035(c) included gift
tax attributable to net gifts made by a decedent during the 3-
year period before his or her death, even though the donees are
contractually obligated to pay the gift tax. See id. at 776-778.
We stated that “Application of the literal language of section
- 27 -
2035(c) would dictate a result inconsistent with the architecture
of the transfer tax system.” Id. at 774. We reasoned that the
literal application of section 2035(c) would be “wholly
inconsistent with Congress’ goal of sharply distinguishing
deathbed gifts from other gifts and eliminating the disparity of
treatment between deathbed gifts and transfers at death.” Id. at
777.
The parties strongly disagree whether a deemed transfer of
QTIP is a net gift or is merely reported as a net gift.
Respondent argues that a deemed transfer of QTIP does not differ
in any meaningful way from the net gift considered in Estate of
Sachs. Mrs. Morgens and her estate in fact reported the values
of the 2000 and 2001 deemed transfers, respectively, by
subtracting the gift tax the trustees paid with respect to the
transfers from the fair market value of the transferred
property.23 Accordingly, respondent contends that under Estate
of Sachs section 2035(b) applies to the gift tax paid on the 2000
and 2001 deemed transfers. See id. at 778.
23
Under regulations promulgated after Mrs. Morgens died, the
amount treated as a transfer under sec. 2519 is reduced by the
amount of gift tax that the surviving spouse is entitled to
recover under sec. 2207A(b). Sec. 25.2519-1(c)(4), Gift Tax
Regs. Although it is not clear that the regulations apply to
Mrs. Morgens’ gifts, compare T.D. 9077, 2003-2 C.B. 634, with
sec. 25.2519-2, Gift Tax Regs., the position taken by Mrs.
Morgens appears consistent with sec. 25.2519-1(c)(4), Gift Tax
Regs.
- 28 -
The estate opposes labeling section 2519 deemed transfers as
net gifts and points to a number of differences between net gifts
and section 2519 transfers. For example, the estate contends:
(1) The property taxed in a net gift is the donor’s property
rather than property of the first spouse to die; (2) the donor
provides the funds to pay the gift tax on a net gift, while funds
used to pay the gift tax in a section 2519 transfer come from the
estate of the first spouse to die or the transferee; and (3) the
transferee’s obligation to pay the gift tax on a net gift arises
under other circumstances than a section 2519 transfer.
The estate’s comparison, however, ignores the underlying
premise of the QTIP regime that the surviving spouse is deemed to
receive and then give (or pass at death) QTIP property, other
than her life interest. In addition, we believe that for
purposes of section 2035(b) the deemed transfer of QTIP in this
case is similar to a net gift. In the case at hand, as in a net
gift scenario, the trustees had a contractual obligation to
indemnify Mrs. Morgens for any gift tax liability. Mrs. Morgens
also had a statutory right to recover the gift tax under section
2207A(b). In the net gift scenario the donor is liable for the
gift tax under section 2502(c), and in the context of QTIP the
surviving spouse, the deemed donor, is also liable for the gift
tax. Mrs. Morgens reported the deemed transfers by subtracting
the gift tax the trustees paid from the value of the transferred
- 29 -
property. Our reasoning in Estate of Sachs v. Commissioner,
supra, which construed then section 2035(c) in the context of net
gifts, as well as the reasoning of the Court of Appeals for the
Eighth Circuit in Estate of Sachs v. Commissioner, 856 F.2d at
1163-1165, equally apply in the context of deemed transfers of
QTIP. See supra pp. 26-27.
The estate also relies on Brown v. United States, 329 F.3d
664 (9th Cir. 2003). In Brown the husband’s estate was his
separate property, and the wife had no money of her own. Id. at
667. As part of his estate plan, the husband established an
insurance trust to hold life insurance on his wife’s life and
gave his wife money to fund the trust. Id. The transfer to the
trust was a taxable gift, and the couple elected to be jointly
and severally liable for the gift tax. Id. Because the wife had
no money of her own, the husband gave her checks equal to the
total amount of gift tax, and the wife used the money to pay the
gift tax for both of them. Id. at 668-669. The husband died
within 3 years of his wife’s payment of the gift tax, and the
Commissioner contended that all of the gift tax that the wife
paid was includable in the husband’s gross estate under section
2035(c) because in substance the husband paid the gift tax. Id.
at 669. The Court of Appeals for the Ninth Circuit applied the
step-transaction doctrine and held that the gift tax payment was
properly attributable to the husband because the wife was a “mere
- 30 -
conduit” of funds and the husband’s payment to his wife had no
purpose other than facilitating the husband’s payment of the gift
tax. Id. at 672.
The estate suggests that under Brown v. United States,
supra, the substance of the gift controls rather than the form,
and the source of funds is pertinent in a section 2035(b)
analysis. The estate points out that because the wife in Brown
paid the gift tax using her husband’s financial resources, it was
the husband’s estate that was reduced and therefore the payment
should be included in his gross estate under section 2035(b).
The estate analogizes Brown to the QTIP situation and argues that
the key consideration in a section 2035(b) analysis is the source
of funds because the goal of section 2035(b) is to prevent
depletion of the estate through deathbed gifts.
The estate’s reliance on Brown is misplaced. While we
generally agree that the source of funds used to pay the gift tax
is pertinent in a section 2035(b) analysis because the purpose of
section 2035(b) is to prevent depletion of the estate, see Estate
of Sachs v. Commissioner, 856 F.2d at 1165, the essential premise
of the QTIP regime is that the surviving spouse is deemed to pass
the entire QTIP. Accordingly, the estate’s argument ignores the
underlying assumption of the QTIP regime that the entire QTIP is
first deemed to pass to the surviving spouse and the surviving
spouse, in turn, is deemed to transfer the QTIP either at his or
- 31 -
her death or inter vivos. Because of such deemed ownership of
QTIP and inclusion in the transfer tax base of the surviving
spouse, the estate of the first spouse to die is permitted to
exclude the entire QTIP from the estate tax base of the first
spouse to die. Cf. Estate of Mellinger v. Commissioner, 112 T.C.
at 35.
3. Plain Language Comparison With Section 2207A(b)
Nothing in the Code expressly excepts the gift tax liability
of the surviving spouse on transfers of QTIP from the application
of section 2035(b). The estate nevertheless highlights
variations in language in sections 2035(b) and 2207A(b) as
support for the contention that Congress did not intend to apply
section 2035(b) to gift tax paid by recipients of QTIP under
section 2207A(b). The estate argues that section 2035(b)
increases the decedent’s gross estate by the amount of gift tax
“paid by the decedent” whereas the QTIP regime, in section 2207A,
addresses the tax paid “with respect to” a person who has made a
deemed transfer of QTIP. According to the estate, tax paid “with
respect to” a person is not includable under section 2035(b)
because it is different from the tax paid “by the decedent or his
estate”.
Although there are variations in the language of sections
2035(b) and 2207A(b), those variations do not lead to a different
interpretation of section 2035(b). We do not think that when
- 32 -
Congress referred to gift tax “with respect to” a decedent in
section 2207A(b), it intended to somehow distinguish a special
type of gift tax, in contrast to gift tax “paid by the decedent”.
Rather, we believe that Congress used the wording it did in
section 2207A(b) to reflect the reality of the QTIP regime--the
deemed transfer of QTIP by the decedent and the payment of tax
resulting from that deemed transfer. The gift tax structure
simply does not have two categories of gift tax, namely the gift
tax paid by a taxpayer and the gift tax paid with respect to a
taxpayer, as the estate appears to imply. It is the donor’s
liability for gift tax that has always been the cornerstone of
the gift tax provisions of the Code. See sec. 2502(c); see also
Revenue Act of 1932, ch. 209 secs. 509, 510, 47 Stat. 249(providing, similar to the current Code, that the gift tax shall
be paid by the donor and if the tax is not paid when due, the
donee shall be personally liable for such tax to the extent of
the value of the gift). Accordingly, we disagree that the
differences in the language in sections 2035(b) and 2207A(b)
mandate a contrary result.
4. No Legislative Intent To Amend Section 2035(b)
The estate contends that when Congress enacted the QTIP
regime, it silently amended section 2035(b) with respect to gift
tax that arises when a surviving spouse makes a gift of QTIP. It
argues that the General Explanation supports the argument that
- 33 -
Congress did not intend the surviving spouse or her estate to
bear transfer taxes on QTIP but rather intended that the
surviving spouse remain in the same economic position as if the
QTIP never existed:
Though the Congress believed that qualifying terminable
interest property should be aggregated with the
spouse’s cumulative gifts or included in the spouse’s
estate to determine the amount of the transfer tax, it
did not believe that the spouse or the spouse’s heirs
should bear the burden of this tax. Accordingly, the
Congress believed it appropriate to provide an
apportionment rule to insure that any transfer taxes
imposed on qualified terminable interest property are
borne by the persons receiving that property and not by
the spouse or the spouse’s heirs.
General Explanation, supra at 234 (emphasis added); see also H.
Rept. 97-201, supra at 160, 1981-2 C.B. at 378.
Despite the estate’s plea, we will not imply an amendment to
section 2035(b) for the gift tax liability of the surviving
spouse on transfers of QTIP because of the general rule of
statutory construction that “Amendments by implication * * * are
not favored.” United States v. Welden, 377 U.S. 95, 103 n.12
(1964); see also 1A Singer & Singer, Statutes and Statutory
Construction, sec. 22:13, at 292-293 (7th ed. 2009). Moreover,
H. Rept. 97-201, supra at 160, 1981-2 C.B. at 378, which is
similar to the General Explanation, does not indicate
congressional intent to absolve the surviving spouse of all
cascading consequences of the transfer tax liability. Rather,
the House Ways and Means Committee report explains why Congress
- 34 -
enacted section 2207A; namely, to permit the surviving spouse to
recover from QTIP recipients (1) estate taxes due as a result of
inclusion of the remainder interest in the surviving spouse’s
estate under section 2044, see sec. 2207A(a), and (2) gift taxes
due as a result of section 2519 deemed transfers, see sec.
2207A(b).
In this respect we find instructive Congress’ consideration
of another collateral consequence of gift tax triggered by
section 2519 transfers: if, as a result of a lifetime
disposition of the qualifying income interest, the inclusion of
the entire QTIP uses up some or all of the surviving spouse’s
unified credit, the surviving spouse may not recover the credit
amount from the remaindermen. H. Rept. 97-201, supra at 162,
1981-2 C.B. at 379. Congress’ refusal to restore the surviving
spouse’s unified credit undercuts the estate’s argument that
Congress intended to hold the donees liable for the gift tax on
gifts of QTIP under section 2519.
Because Congress contemplated that the surviving spouse may
bear some tax consequences of section 2519 transfers, the House
Ways and Means Committee report, id. at 160, 1981-2 C.B. at 378,
is not evidence of congressional intent to absolve the surviving
spouse of all tax consequences of the QTIP transfers. Without a
clear congressional mandate, we shall not treat gift tax
liability of the surviving spouse, for purposes of section
- 35 -
2035(b), any differently than any other gift tax liability of a
decedent-donor that is paid by the donees with respect to gifts a
decedent-donor makes within 3 years of death.
5. Other Rules of Statutory Construction
The estate argues that the QTIP regime and section 2035(b)
conflict and that the QTIP regime, which is supposed to leave the
surviving spouse in the same economic position as if the QTIP
never existed, applies to the exclusion of section 2035(b). The
estate suggests that under the rules of statutory construction
the later enacted specific provisions of section 2207A(b) control
over the earlier enacted general provisions of section 2035(b).
However, the statutory conflict rule of construction is properly
invoked only when two statutes irreconcilably conflict and the
conflict cannot be resolved by interpretation. See 2B Singer &
Singer, Statutes and Statutory Construction, sec. 51:2, at 216-
218 (7th ed. 2008) (“Where two irreconcilably conflicting
statutes are involved * * * the more recent of the two prevails *
* *. Where a conflict exists the more specific statute controls
over the more general one.”).
We reject the estate’s argument because there is no
irreconcilable conflict between sections 2207A(b) and 2035(b).
Section 2207A(b) gives the surviving spouse a right to recover
gift tax paid with respect to QTIP transfers from recipients of
QTIP. Section 2035(b), on the other hand, as it applies in this
- 36 -
case, increases the estate of the surviving spouse by the amount
of gift tax paid by the surviving spouse or by the estate on
gifts made within 3 years of death, including deemed gifts of
QTIP. Accordingly, the proffered rule of statutory construction
is inapplicable in this case.
In holding as we do, we are mindful of another rule of
statutory construction. We must read the statutes to give effect
to each if we can do so while preserving their sense and purpose.
Watt v. Alaska, 451 U.S. 259, 267 (1981). Creating an exception
from section 2035(b) for gift tax paid with respect to deemed
transfers of QTIP, as the estate invites us to do, would
frustrate the purpose of section 2035(b). The legislative
history of the Tax Reform Act of 1976, Pub. L. 94-455, sec.
2001(a)(5), 90 Stat. 1848, which added section 2035(b) to the
Code, guides us in this case just as it did in Estate of Sachs v.
Commissioner, 88 T.C. 769 (1987).
As discussed above, see supra pp. 23-25, Congress enacted
section 2035(b) to eliminate an incentive for deathbed gifts.
See H. Rept. 94-1380, supra at 12, 1976-3 C.B. (Vol. 3) at 746.
Because of section 2035(b), the donor’s estate must include in
the estate tax base the gift tax paid by the donor with respect
to gifts made within 3 years of death. An exception from section
2035(b) for gift tax paid on QTIP transfers would encourage
transfers of QTIP in contemplation of the surviving spouse’s
- 37 -
death, which is inconsistent with the goal of section 2035(b).
For example, if the surviving spouse held QTIP until death, the
entire QTIP would be included in her estate tax base. Sec. 2044.
However, as in the net gift context, if section 2035(b) did not
apply, by triggering a disposition of QTIP inter vivos, the
surviving spouse could permanently remove the gift tax due on the
transfer of QTIP from her transfer tax base. This is
inconsistent with Congress’ goal of treating alike transfers at
death and transfers in contemplation of death. See H. Rept. 94-
1380, supra at 11-12, 1976-3 C.B. at 745-746. Interpreting
section 2035(b) as inapplicable to gift tax paid by donees of
QTIP in satisfaction of the surviving spouse’s liability would
completely undermine the purpose of section 2035(b) in the
context of QTIP because the literal reading of section 2035(b)
would allow the surviving spouse to easily circumvent the purpose
of section 2035(b).
We recognize the limited economic nature of the interest in
QTIP held by the surviving spouse. Nevertheless, the QTIP
election that the executor of the estate of the first spouse to
die may make carries both benefits and burdens for both spouses
and their estates. See Estate of Higgins v. Commissioner, 91
T.C. at 70. Inclusion of the gift tax paid with respect to a
section 2519 transfer in the surviving spouse’s gross estate is
one such burden if the transfer occurs within 3 years of his or
- 38 -
her death. Without a clear legislative mandate to except gift
tax liability of the surviving spouse on section 2519 transfers
from the application of section 2035(b), we shall not infer such
an exception.
We have considered the remaining arguments made by the
parties, and to the extent not discussed above, we conclude those
arguments are irrelevant, moot, or without merit.
To reflect the foregoing,
Decision will be entered under
Rule 155.