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Estate of Shelfer v. C.I.R.

July 01, 1996

ESTATE OF LUCILLE P. SHELFER, DECEASED, THE QUINCY STATE BANK, PERSONAL REPRESENTATIVE, RESPONDENT,
v.
COMMISSIONER OF INTERNAL REVENUE, PETITIONER.



Appeal from a Decision of the United States Tax Court. (No. 25389-92).

Before Kravitch, Dubina and Carnes, Circuit Judges.

Author: Kravitch

KRAVITCH, Circuit Judge:

The Commissioner of the Internal Revenue Service ("Commissioner") appeals the Tax Court's decision in favor of the estate of Lucille Shelfer. The court held that Lucille's estate was not liable for a tax deficiency assessed on the value of a trust from which she had received income during her lifetime. The estate of Lucille Shelfer's husband, Elbert, previously had taken a marital deduction for these trust assets, claiming that the trust met the definition of a qualified terminable interest property trust ("QTIP") pursuant to 26 U.S.C. § 2056(b)(7).

This case presents an issue of first impression for this circuit: whether a QTIP trust is established when, under the terms of the trust, the surviving spouse is neither entitled to, nor given the power of appointment over, the trust income accumulating between the date of the last distribution and her death, otherwise known as the "stub income." The Commissioner interprets the QTIP statutory provisions to allow such trusts to qualify for the marital deduction in the decedent's estate; accordingly, the value of the trust assets must be included in the surviving spouse's estate. We agree with the Commissioner and REVERSE the Tax Court.

I.

Elbert Shelfer died on September 13, 1986 and was survived by his wife, Lucille. Elbert's will provided that his estate was to be divided into two shares, that were to be held in separate trusts. The income from each trust was to be paid to Lucille in quarterly installments during her lifetime. The first trust was a standard marital deduction trust consisting of one-third of the estate. It is not at issue in this case. The second trust, comprising the remaining two-thirds of the estate, terminated upon Lucille's death. The principal and all undistributed income was payable to Elbert's niece, Betty Ann Shelfer.

Elbert's will designated Quincy State Bank as the personal representative for his estate, and on June 16, 1987, the bank filed a tax return on behalf of the estate. The bank elected to claim a deduction for approximately half of the assets of the second trust under the QTIP trust provisions of 26 U.S.C. § 2056(b)(7). The IRS examined the return, allowed the QTIP deduction, and issued Quincy Bank a closing letter on May 10, 1989. The statute of limitations for an assessment of deficiency with respect to Elbert's return expired on June 16, 1990.

On January 18, 1989, Lucille died; Quincy State Bank served as personal representative for her estate. The bank filed an estate tax return on October 18, 1989 and did not include the value of the assets in the trust, even though the assets previously had been deducted on her husband's estate tax return. The IRS audited the return and assessed a tax deficiency for the trust assets on the ground that the trust was a QTIP trust subject to taxation. Quincy State Bank commenced a proceeding in tax court on behalf of Lucille's estate, claiming that the trust did not meet the definition of a QTIP trust because Lucille did not control the stub income; therefore, the Bank argued, the estate was not liable for tax on the trust assets under 26 U.S.C. § 2044. The Tax Court agreed. The Commissioner appeals this decision.

II.

The proper construction of a statutory provision is a purely legal issue; thus, we apply a de novo standard of review to the Tax Court's decision. Kirchman v. Commissioner, 862 F.2d 1486, 1490 (11th Cir.1989). As in any case involving the meaning of a statute, we begin our analysis with the language at issue.

26 U.S.C. § 2056(b)(7)(B) provides, in relevant part:

(i) In general.--The term "qualified terminable income interest property" means property--

(I) which passes from the decedent,

(II) in which the surviving spouse has a qualifying income interest for life, and

(III) to which an election under this paragraph applies.

(ii) Qualifying income interest for life.--The surviving spouse has a qualifying income interest for life if--

(I) the surviving spouse is entitled to all the income from the property, payable annually or at more frequent intervals, or has a usufruct ...


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