UNITED 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
                               - 2 -

     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, 

, 683 (1989).
                                   - 3 -

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.
                               - 4 -

     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...)
                               - 5 -

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”.
                               - 6 -

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...)
                               - 7 -

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.
                                    - 8 -

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.
                                - 9 -

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.
                               - 10 -

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.
                              - 11 -

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.
                               - 12 -

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, 

, 84 (1992); Welch v. Helvering, 

, 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
                              - 13 -

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, 

, 295 (1997), affd. without

published opinion 

(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).
                              - 14 -

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, 

, 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
                               - 15 -

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...)
                               - 16 -

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.
                                - 17 -

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
                               - 18 -

          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, 

, 68 (1988), affd. 

(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, 

, 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
                                - 19 -

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.    

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, 

(1999), we refused to equate deemed ownership of QTIP with
outright ownership in an estate valuation context. In Estate of
Mellinger v. 

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...)
                              - 20 -

     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. 

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. 

38. We also acknowledged the limited
economic nature of the surviving spouse’s ownership. 

(“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. 

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.”   

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. 

is personally liable for
the gift tax to the extent of the value of such gift. 

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, 

, 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, 

, 196-197 (1982); see also Lucas v.

Earl, 

, 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.       

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.    

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.

that the preference for lifetime

transfers over transfers at death encouraged deathbed gifts.       

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.   

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    

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, 

, 777-778 (1987),

affd. in part and revd. in part on another ground 

(8th Cir. 1988); see also Estate of Armstrong v. Commissioner,

(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, 

, 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, 

,
778 (1987), affd. in part and revd. in part on another ground 

(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

-

the gift tax the donor reduces the amount of the gift by the

amount of the gift tax.     

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, 

, 360-361 (1968), affd. per curiam 

(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. 

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.    

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 

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.”      

  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.”       

       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 

       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. 

, 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. 

, equally apply in the context of deemed transfers of

QTIP.    See supra pp. 26-27.

       The estate also relies on Brown v. United States, 

(9th Cir. 2003).    In Brown the husband’s estate was his

separate property, and the wife had no money of her own.       

   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.      

to the

trust was a taxable gift, and the couple elected to be jointly

and severally liable for the gift tax.      

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.      

  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.          

    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.    

       The estate suggests that under Brown v. United 

, 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. 

, 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. 

.

     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, 

, 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, 

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, 

, 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, 

(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, 

.   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.