Internal Revenue Service
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 Rev. Rul. 79-14

1979-1 C.B. 309

Section 2056 -- Marital Deduction

IRS Headnote

Marital deduction; trust; fiduciary's discretion to pay death taxes. A decedent bequeathed one-half of the adjusted gross estate in trust for the surviving spouse. The will directed that all death taxes be paid out of the nonmarital portion of the estate, but granted the fiduciary discretion, unrestricted under local law, to pay the taxes from the marital trust interest, which otherwise qualified for the marital deduction. The fiduciary did not exercise the discretion. The marital deduction allowed the estate for the marital trust interest is reduced by the amount of the taxes that could be paid from the marital share.

Full Text

Rev. Rul. 79-14

ISSUE

Where decedent left a portion of the estate in a trust for the decedent's spouse otherwise qualifying for the marital deduction, does the discretion granted to the fiduciary to pay estate taxes out of the corpus of the marital trust reduce the amount of the marital deduction otherwise allowable if the fiduciary did not exercise this discretion?

FACTS

The decedent, D, died in 1976. D's will provided for one-half of D's adjusted gross estate to be held by the fiduciary with the net income to be paid monthly to D's surviving spouse, A, for life. At A's death, the corpus is to be distributed as A appoints by will. D's will directed that all inheritance, estate, and transfer taxes were to be paid out of the portion of D's estate that was not included in the marital trust. D's will also granted the fiduciary a discretion to pay these taxes out of the marital trust interest if the fiduciary, in the fiduciary's sole discretion, considered it prudent from a "business standpoint" to do so. D's will empowered the fiduciary to allocate the tax expense in advance against assets that would otherwise be distributed to the marital trust, but the taxes could not be paid out of trust income. The fiduciary allocated all taxes to property other than the marital trust interest and distributed assets to the trust equal in value to one-half of the adjusted gross estate. Therefore, one-half of D's adjusted gross estate will be subject to A's power of appointment.

Under applicable local law, a testator may provide that certain property shall be used for the payment of taxes. Such a will provision is recognized as a direction to the fiduciary. As of the date of the decedent's death, the local law, as interpreted by the highest state court, did not impose any restriction on the discretionary power of the fiduciary to pay taxes from the amount set aside as trust corpus.

The estate tax return filed for D's estate reflects a marital deduction equal to one-half of D's adjusted gross estate.

LAW AND ANALYSIS

Section 2056(a) of the Code provides for a deduction from the gross estate equal to the value of property interests passing from decedent to the surviving spouse.

Section 2056(b)(4)(A) of the Code provides that the value of the property interests passing to the surviving spouse for purposes of the marital deduction shall be determined by taking into account the effect of any death taxes.

Section 2056(b)(1) of the Code disallows the marital deduction for certain interests passing to the surviving spouse that will terminate or fail on the occurrence or nonoccurrence of an event or contingency. An exception to section 2056(b)(1) is section 2056(b)(5), which allows a deduction for the surviving spouse's interest if it consists of a right to all the income for life from the entire property, or a specific portion thereof, payable at least annually, with a power to appoint the entire property, or such specific portion; provided there is no power in any other person to appoint any part of the property, or such specific portion, to any person other than the surviving spouse. The power of appointment in the surviving spouse, whether exercisable by will or during life, must be exercisable by the surviving spouse alone and in all events.

On facts substantially similar to those in the present case, Estate of Wycoff v. Commissioner, 506 F.2d 1144 (10th Cir. 1974), cert. den., 421 U.S. 1000 (1975), held that the marital deduction had to be reduced by the amount of death taxes that could have been paid, by virtue of the fiduciary's discretionary authority, out of the marital trust assets, even though the death taxes were in fact paid from the nonmarital trust portion of the estate.

Citing Jackson v. United States, 376 U.S. 503 (1964), Ct. D. 1889, 1964-2 C.B. 522, for the principle that eligibility for the marital deduction is determined at the time of the decedent's death, the court, in Estate of Wyckoff, gave alternative grounds for its holding, as follows: (1) The reduction was mandated by section 2056(b)(4)(A) of the Code because, at the date of death, all death taxes could have been paid from the marital trust assets. (2) The fiduciary's discretion existing at the date of decedent's death was, to the extent of the death taxes payable, a power to appoint a portion of the marital trust assets to a person (the United States or the state owed the death taxes) other than the surviving spouse, so that under sections 2056(b)(1) and (5) only the specific portion not chargeable with death taxes qualified for the marital deduction.

With respect to the court's first alternative ground, see also Boston Safe Deposit & Trust Co. v. Commissioner, 345 F.2d 625, 628-29 (1st Cir. 1965); Ballantine v. Tomlinson, 293 F.2d 311, 313 (5th Cir. 1961); Estate of Short v. Commissioner, 68 T.C. 184, 190 (1977), acq., 1977-2 C.B. 2; Estate of Roney v. Commissioner, 33 T.C. 801, 804 (1960), aff'd per curiam, 294 F.2d 774 (5th Cir. 1961), all to the effect that the marital deduction must be reduced by death taxes or other expenses chargeable to the marital bequest even though such taxes or expenses are paid from other sources. With respect to the court's second alternative ground, see also Estate of McCabe v. United States, 475 F.2d 1142, 1148-52 (Ct. Cl. 1973); Estate of Spero v. Commissioner, 34 T.C. 1116, 1120-21 (1960); Rev. Rul. 72-154, 1972-1 C.B. 310, all to the effect that a life estate coupled with a power of appointment in the surviving spouse will not qualify for the marital deduction if, during the spouse's lifetime, the entire property is subject to diversion from the spouse to another individual at the discretion of someone other than the spouse.

In the present case, D's will indicates a preference that assets not included in the marital trust be used to pay death taxes; however, the fiduciary was granted discretionary authority, unrestricted under state law, to use marital trust assets for the payment of such taxes. Consequently, under either section 2056(b)(4)(A), or sections 2056(b)(1) and (b)(5) of the Code the marital deduction is limited to the value of property that could not have been allocated for the payment of death taxes.

HOLDING

The marital deduction allowable with respect to D's estate is an amount equal to one-half of the adjusted gross estate reduced by inheritance, estate, and transfer taxes incurred as a result of D's death. In addition, if the encumbered bequest had been outright rather than in trust, the value of the property passing to the surviving spouse would be similarly reduced by taxes in computing the marital deduction.