1985 U.S. Tax Ct. LEXIS 61">*61
W's husband (H) included in his will a formula maximum marital deduction bequest. After the death of H in 1975, W received certain payments which constitute income in respect of a decedent (IRD) as part of her marital share. The IRD is includable in W's income tax return.
85 T.C. 25">*25 OPINION
Respondent determined a deficiency in Nelle W. Kincaid's income tax for 1976 of $ 98,864.18 and a deficiency in her income tax for 1977 of $ 223,080.75. Because of concessions by both parties, the only issue for our determination is the proper method of computing the deduction under
This case was submitted under
Mrs. Kincaid1985 U.S. Tax Ct. LEXIS 61">*64 was the widow of Garvice Kincaid, who died on November 21, 1975. Mrs. Kincaid died during the pendency of these proceedings, and her estate was substituted as party petitioner. Mr. Kincaid's employment contract with Kentucky85 T.C. 25">*26 Finance Co. (KFC) provided that his annual bonus payments were to continue after his death and were to be paid to Mrs. Kincaid. The value of the right to the KFC payments was includable in Mr. Kincaid's gross estate and was eligible for the marital deduction provided by section 2056(a).
Most of Mr. Kincaid's other property was bequeathed to a trust. After payment of taxes, debts, and the expenses of administering his estate, the trust property was divided into a "marital part" and a "nonmarital part." The "marital part" consisted of property equal in value to the maximum deduction allowable to his estate less the value of non-trust property includable in his gross estate which passed to Mrs. Kincaid and qualified for the marital deduction. The KFC payments were such non-trust property. Thus, the value of the right to the KFC payments was subtracted from the maximum marital deduction in determining the "marital part." The "marital part" passed to1985 U.S. Tax Ct. LEXIS 61">*65 Mrs. Kincaid and was eligible for the marital deduction. The "nonmarital part" consisted of the remainder of the trust property. From the notice of deficiency in the estate tax for Mr. Kincaid's estate and from his estate tax return, there can be no dispute that there were other assets in his estate which would have qualified to fund "the marital part" which were not income in respect of a decedent.
Mrs. Kincaid received $ 153,120.41 in 1976 and $ 237,011.63 in 1977 pursuant to the KFC contract. She did not report all of those payments on her income tax returns for those years. The parties now agree that the payments are income in respect of a decedent (IRD) and are includable in Mrs. Kincaid's gross income under
1985 U.S. Tax Ct. LEXIS 61">*66 The
The focus of the controversy here is how to calculate the estate tax attributable to the KFC payments pursuant to
Respondent, relying on
1985 U.S. Tax Ct. LEXIS 61">*69 As the following table shows, these approaches produce substantially different results:
Actual 5 | Petitioner's | Respondent's | |
computation | recomputation | recomputation | |
Gross estate | $ 1,000,000 | $ 900,000 | $ 900,000 |
Adjusted gross estate | 1,000,000 | 900,000 | 900,000 |
Marital deduction | (500,000) | (450,000) | 400,000 |
Exemption | (60,000) | (60,000) | (60,000) |
Taxable estate | 440,000 | 390,000 | 440,000 |
Estate tax | 126,500 | 100,500 | 126,500 |
Sec. 691(c)(1)(A) deduction | 16,000 | 0 |
The1985 U.S. Tax Ct. LEXIS 61">*70 purpose behind
85 T.C. 25">*29 This method fits more logically into the scheme of the statute. The value of KFC payments was1985 U.S. Tax Ct. LEXIS 61">*71 included in Mr. Kincaid's estate and taxed there. Even though the payments went to the marital share, there were other assets which could have funded the marital share to fully fund the formula maximum marital deduction bequest. The other assets which were allocated to the nonmarital share were subject to tax. The important fact is that the existence of the IRD produced additional estate tax on Mr. Kincaid's estate. The allocation of assets as between marital and nonmarital shares should be irrelevant to the discussion. Therefore, logically, it must be concluded that the surviving spouse is entitled to some deduction for the excess estate tax paid because of the inclusion of the IRD in the estate. This conclusion should not be nullified by the happenstance that the IRD passed to the marital share rather than the nonmarital share.
Respondent relies on
In computing the estate tax without including the [income in respect of a decedent] in the gross estate, any estate tax deduction (such as the marital deduction) which may be based upon the gross estate shall be recomputed so as to take into account the exclusion of the [income in respect of a decedent] from the gross estate.
85 T.C. 25">*30 Under our method, the marital deduction does not include IRD and is also limited to 50 percent of the1985 U.S. Tax Ct. LEXIS 61">*73 recomputed gross estate, as required by section 2056.
Respondent also relies on dicta in
It is * * * fallacious to treat the residuary charitable bequest as comparable to the marital deduction. The marital deduction involves merely a
Therefore, we do not believe our holding is inconsistent with the holding in
85 T.C. 25">*31 It is not clear from the record whether an issue1985 U.S. Tax Ct. LEXIS 61">*75 still exists with respect to income in respect of a decedent which may have passed to someone other than petitioner, and its effect on the
1. All references to sections are to the Internal Revenue Code of 1954 as amended and in effect during the years in issue.↩
2. (1) Allowance of deduction. -- (A) General rule. -- A person who includes an amount in gross income under subsection (a) shall be allowed, for the same taxable year, as a deduction an amount which bears the same ratio to the estate tax attributable to the net value for estate tax purposes of all the items described in subsection (a)(1) as the value for estate tax purposes of the items of gross income or portions thereof in respect of which such person included the amount in gross income (or the amount included in gross income, whichever is lower) bears to the value for estate tax purposes of all the items described in subsection (a)(1).↩
3.
* * * * (2) Method of computing deduction. -- For purposes of paragraph (1) -- * * * * (C) The estate tax attributable to such net value shall be an amount equal to the excess of the estate tax over the estate tax computed without including in the gross estate such net value.↩
4. Under sec. 2056(c) as in effect during the year in question, the maximum marital deduction was limited to 50 percent of the value of the adjusted gross estate.
This section was repealed by the Economic Recovery Tax Act of 1981, Pub. L. 97-34, 95 Stat. 301, sec. 403(a)(1)(A), applicable to estates of decedents dying after Dec. 31, 1981, thus allowing an unlimited marital deduction. If the unlimited marital deduction is used, there is no tax on the estate of the first spouse to die (and thus no reduction in tax in the recomputation) and no marital deduction in the estate of the last to die (because there is no surviving spouse). Thus, the dispute presented in this case would not arise.↩
5. The tax on Mr. Kincaid's estate is disputed and is pending before the Court in docket No. 15773-79. Because the estate tax case is unresolved, we use the following assumptions to illustrate the difference between the parties' approach: (1) The actual gross estate was $ 1 million; (2) the actual adjusted gross estate was $ 1 million; (3) the actual marital deduction was $ 500,000; (4) the right to the KFC payments was worth $ 100,000, and was the only item of income in respect of a decedent in the gross estate.↩