Rev. Rul. 88-12,

1988-1 C.B. 330, 1988-6 I.R.B. 11.

                       Internal Revenue Service

                                 Revenue Ruling

   MARITAL DEDUCTION; SOUTH CAROLINA; LIABILITY OF RESIDUARY SHARE FOR DEBTS

                                  AND EXPENSES

                          Published: February 8, 1988

SECTION 2056. - BEQUESTS, ETC., TO SURVIVING SPOUSE, 26 CFR 20.2056(b)-4: Marital deduction; valuation of interest passing to surviving spouse.

  Marital deduction; South Carolina; liability of residuary share for debts and expenses. For purposes of computing the marital deduction for residents of South Carolina dying after 1978, the surviving spouse's share of the residuary interest is reduced by the expenses and debts allocated by South Carolina law to such shares but is not reduced by state and federal death taxes. Rev. Rul. 78-419 obsolete for estates of decedents dying after 1978.

ISSUE

  If a resident of South Carolina dies after 1978 and the decedent's will contains no provision for the apportionment of debts, expenses, or death taxes, is the value of property interest bequeathed to the surviving spouse under the residuary clause of the will reduced by a portion of those debts, expenses and taxes for purposes of determining the amount of the deduction allowed under section 2056 of the Internal Revenue Code?

FACTS

  The decedent, D, a resident of South Carolina, died testate in 1982, survived by S, D's spouse, and A and B, D's children. The decedent's will contained specific and general bequests and a residuary clause. Under the residuary clause, D gave one-half of the residue to § and divided the remaining one-half evenly between A and B. Although D's will directed that the debts and administration expenses be paid promptly, it did not contain any provision for the apportionment among the beneficiaries of payment of debts, expenses, and any death taxes. Both federal and state death taxes were imposed on D's estate. The residuary bequest to § qualifies for the estate tax marital deduction under section 2056 of the Code.

  In 1978, South Carolina amended its statute concerning the method of determining the value of the taxable estate for state estate tax purposes. The amended statute is effective for estates of decedents dying after December 31, 1978. With respect to the apportionment of debts and expenses, the statute provides that, in the absence of a provision in a decedent's will to the contrary, in determining the net marital deduction allowable for South Carolina estate tax purposes in either an intestate situation or a testate situation involving a residuary share, the intestate or testate share passing to a surviving spouse shall be liable for, and charged with, a pro rata share of debts, funeral expenses, and expenses of administration. The amount charged against the spouse's share is the proportion that the value of the intestate share or the testate share of the residuary estate passing to a surviving spouse bears to the value of the total intestate estate or total residuary estate before reduction for debts and expenses. See S.C. Code Ann. sec. 12-15- 60(1) (Law. Co-op. Supp. 1986).

  Regarding the apportionment of state and federal death taxes, the statute was also amended to provide that, in the absence of a provision in the decedent's will to the contrary, the intestate share or testate share of the residuary estate passing to a surviving spouse will not be charged with any death taxes, state or federal, to the extent that the share qualifies for the statutory marital deduction. See S.C. Code Ann. supra, sec. 12-15-60(2).

  The South Carolina estate tax law adopts by reference the deductions allowed for purposes of the federal estate tax including the marital deduction allowed under section 2056 of the Code. See S.C. Code Ann. supra, sec. 12-15-60.

  In this situation, D's will made no provision for the apportionment of debts, expenses, and taxes. Therefore, pursuant to S.C. Code Ann. sec. 12-15-60, D's executor charged S's one-half share of the residue with one-half of the estate debts and expenses. Also pursuant to state law, S's share of the residue was not charged with any state or federal estate taxes. Accordingly, D's executor distributed to S, in satisfaction of S's residuary bequest, an amount equal to one-half of the residue less one-half of the estate debts and expenses. The executor deducted this amount as the marital deduction under state and federal law.

LAW AND ANALYSIS

  Section 2001(a) of the Code imposes a tax on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States.

  Section 2056(a) of the Code provides that the value of the taxable estate shall be determined by deducting from the value of the gross estate an amount equal to the value of any interest in property which passes from the decedent to the decedent's surviving spouse. Section 2056(b)(4)(A) provides that in determining the value of any interest in property passing to the surviving spouse for the purpose of the deduction granted by section 2056(a), there shall be taken into account the effect that the federal estate tax imposed by section 2001 of the Code, or any other estate, succession, legacy or inheritance tax, has on the net value of such interest. Section 2056(b)(4)(B) provides that where the interest in property passing to the surviving spouse is encumbered in any manner or where the surviving spouse incurs any obligation imposed by the decedent with respect to the passing of such interest, the encumbrance or obligation must be taken into account in valuing the spouse's interest.

  In ascertaining the net value of the interest passing to the surviving spouse for purposes of determining the allowable marital deduction, applicable state law is determinative of the extent to which federal and state death taxes and debts and expenses are chargeable against the spouse's interest. See Estate of Milliken v. Commissioner, 70 T.C. 883 (1978), acq., 1979-1 C.B. 1.

  Since D was a resident of South Carolina and D's estate is administered in South Carolina, it is necessary to look to South Carolina law to determine whether the interests in property passing to § under the residuary clause are charged with a portion of the debts, expenses, and taxes of D's estate.

  Rev. Rul. 78-419, 1978-2 C.B. 244, considers the application of South Carolina law, as in effect prior to the amendments discussed above, to a situation similar to that presented here. In Rev. Rul. 78-419, the surviving spouse was bequeathed a portion of the residuary estate and the will was silent regarding the apportionment of debts and expenses. The revenue ruling concludes that, under South Carolina law applicable prior to 1979, the surviving spouse's share of the residue was not chargeable with any estate debts and expenses, to the extent the spouse's interest qualified for the marital deduction under state and federal law. Accordingly, the amount passing to the surviving spouse, and consequently the allowable marital deduction, was based on the spouse's share of the residue without reduction for any debts and expenses.

  However, under S.C. Code Ann. sec. 12-15-60, as currently in effect, the spouse's share of the residue is, under the circumstances presented here, chargeable with a pro rata share of estate debts and expenses but is not chargeable with any portion of the federal or state estate tax liability. Accordingly, since § was bequeathed one-half of the residue, D's executor properly determined the amount passing to § under state law by charging S's one-half share with one-half of the estate debts and expenses. Further, since S's residuary bequest qualified for the marital deduction under state and federal law, S's share was not reduced by any state or federal estate taxes. The amount of the allowable marital deduction under section 2056 was correctly determined based on the amount to § under applicable South Carolina law.

HOLDING

  If a resident of South Carolina dies after 1978, and the decedent's will contains no provision for the apportionment of debts, expenses, or death taxes, then the value of the property interests passing to the surviving spouse under the residuary clause of the will is reduced by a pro rata portion of the estate debts and expenses, but not by any death taxes, for purposes of determining the amount of the marital deduction allowed under section 2056 of the Code.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 78-419 is obsoleted for estates of decedents dying after December 31, 1978.

DRAFTING INFORMATION

  The principal author of this revenue ruling is William Blodgett of the Individual Tax Division. For further information regarding this revenue ruling contact Mr. Blodgett on (202) 566-3466 (not a toll-free call).

Rev. Rul. 88-12, 1988-1 C.B. 330, 1988-6 I.R.B. 11.