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Northeastern Pennsylvania National Bank & Trust Co. v. United States

decided: July 18, 1966.


Staley, Chief Judge, and McLaughlin, Kalodner, Hastie, Forman, Ganey, Smith and Freedman, Circuit Judges. Ganey, Circuit Judge (dissenting).

Author: Forman

FORMAN, Circuit Judge.

This is an appeal by the defendant, United States of America (hereinafter appellant) from a summary judgment entered by the United States District Court for the Middle District of Pennsylvania on the motion of plaintiff, Northeastern Pennsylvania Bank and Trust Company, Executor under the will of Clarence C. Young (hereinafter appellee), in the amount of $17,574.45 with interest, and from the denial of appellant's motion for summary judgment. Appellee's suit alleged an improper rejection of a claimed marital deduction.

Decedent died testate on May 3, 1958 survived by his wife and four children. Paragraph 6 of decedent's will*fn1 provided for the bequest of one-half of the residue of the estate to appellee who was directed to pay out of income, and corpus if necessary, the sum of $300 per month to decedent's wife until his youngest child reached eighteen years of age, after which appellee was directed to pay decedent's wife $350 per month for the rest of her life. Paragraph 6 also provided that if decedent's wife survived him, she would have the power, exercisable by will, to appoint to her estate, or to others, any or all of the principal of the trust remaining at the time of her death. Paragraph 11*fn2 recited that such stipends were in no event to be liable for any debts contracted by the survivor and were not to be liable to attachment or assignment, but were solely for the use, maintenance and support of the survivor.*fn3 Paragraph 11 also indicated that income produced from the corpus of the trust which exceeds the monthly allotment is to be accumulated. Paragraph 12*fn4 of the will granted appellee the power to authorize payments over and above the monthly stipend up to $1500 in the event of a serious illness or financial emergency affecting the surviving spouse. Whether the figure of $1500 is in the aggregate or may be paid in each event is unclear.

Decedent's adjusted gross estate was $199,749.96. Appellee sought to qualify the maximum amount, one-half of that adjusted gross estate, $99,874.98, as a marital deduction in accordance with Sections 2056(c)(1)*fn5 and 2056(b)(5)*fn6 of the 1954 Internal Revenue Code. The value of the property passing outside the will, to the decedent's spouse, $41,751.02, was combined on the estate tax return with the full value of the testamentary residuary trust, $69,245.85, to total $110,996.87. That portion of $110,996.87 which constituted one-half of the adjusted gross estate, $99,874.98, was listed, as noted above, as qualifying for the marital deduction. Appellant eliminated the full value of the testamentary residuary trust from the claimed marital deduction and thus decreased the amount of the allowable marital deduction to $41,751.02. The deficiency in estate tax was paid, a claim for refund was disallowed, appellee filed suit for refund, and after motions for summary judgment were presented by both parties, the District Court ruled in favor of the appellee and granted the refund.*fn7

The District Court did not, as proposed by appellee, conclude that the entire value of the trust corpus, $69,245.85, could be considered for the marital deduction. Instead, it applied a Treasury Department actuarial formula to value the present worth of the surviving spouse's monthly stipend. This formula produced a value of $63,663.43. This was added to $41,751.02, the value of the property passed to the surviving spouse outside the will, to total $105,414.45, an amount in excess of one-half of the decedent's adjusted gross estate, $99,874.98, the maximum allowable statutory marital deduction. The District Court thus concluded that appellee was entitled to the full marital deduction of $99,874.98, and judgment was entered for $17,574.45 plus interest, representing the tax found to have been unlawfully collected by appellant.


As the marital deduction provisions function today, under a trust arrangement such as the one involved herein, the entire corpus of the trust qualifies for inclusion in the estate tax return as part of the marital deduction if each of two prerequisites*fn8 are met: (1) the surviving spouse is entitled to all the income produced from the corpus for the remainder of the survivor's life with (2) power in the survivor to appoint the entire corpus remaining at the time of the power's exercise. If the survivor's requisite relationship to the corpus bars the qualification of the entire corpus for the deduction, a part of the trust corpus will qualify for marital deduction status if the survivor is entitled to the income from a "specific portion" of the whole, whether there be a power to appoint the entire interest remaining at the time of the power's exercise or the power to appoint only a part thereof.*fn9 Appellant's administrative regulation*fn10 has defined "specific portion" as a fractional or percentile part of the entire corpus. The practical effect of the marital deduction is to defer taxation of some part of the decedent's estate passing to the surviving spouse until the death of the surviving spouse.

Reviewing the purpose of the marital deduction, Mr. Justice Goldberg speaking for a unanimous court in United States v. Stapf*fn11 explained:

"The 1948 tax amendments were intended to equalize the effect of the estate taxes in community property and common-law jurisdictions. [Footnote omitted.] Under a community property system, such as that in Texas, the spouse receives outright ownership of one-half of the community property and only the other one-half is included in the decedent's estate. To equalize the incidence of progressively scaled estate taxes and to adhere to the patterns of state law, the marital deduction permits a deceased spouse, subject to certain requirements, to transfer free of taxes one-half of the non-community property to the surviving spouse. Although applicable to separately held property in a community property state, the primary thrust of this is to extend to taxpayers in common-law States the advantages of 'estate splitting' otherwise available only in community property States."

Problems that have arisen in this area have in the main concerned the extent to which the advantages of estate-splitting are to be allowed. Towards clarification of this issue, the above noted interpretive regulation was promulgated. A detailed discussion of the congressional intent behind the passage of the 1948 Revenue Act appears in Senate Report No. 1013, March 16, 1948 [to accompany H.R. 4790]. In that Report, the marital deduction additions to the 1949 Code are characterized as follows:

"These provisions have the effect of allowing a marital deduction with respect to the value of property transferred in trust or at the direction of the decedent where the surviving spouse, by reason of her right to the income and a power of appointment, is the virtual owner of the property."*fn12

And, as above detailed, the virtual ownership interest encompasses that existent in a "specific portion" of the trust corpus.

In sum, the propriety of granting a marital deduction in this case must be measured by the purpose of the marital deduction as expressed in Stapf, the interpretive regulation as promulgated by the Internal Revenue Service, the expression of the congressional intent on the subject, ...

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