Estate of Shelfer v. Commissioner of Internal Revenue
78 A.F.T.R.2d (RIA) 5177, 86 F.3d 1045, 1996 U.S. App. LEXIS 15684 (1996)
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Rule of Law:
A trust qualifies for the Qualified Terminable Interest Property (QTIP) marital deduction under 26 U.S.C. § 2056(b)(7) even if the surviving spouse is not entitled to the income that accrues between the last distribution date and the date of their death (i.e., the 'stub income'). The statutory requirement that the spouse be 'entitled to all the income...payable annually or at more frequent intervals' is satisfied so long as they receive all distributed income during their lifetime.
Facts:
- Elbert Shelfer died on September 13, 1986, and was survived by his wife, Lucille Shelfer.
- Elbert's will established a trust that provided income to Lucille in quarterly installments for the duration of her life.
- The terms of the trust specified that upon Lucille's death, the trust's principal and any undistributed income would be paid to Elbert's niece, Betty Ann Shelfer.
- This provision meant that Lucille had no right to or power of appointment over the 'stub income'—the income that accumulated in the trust between the last quarterly payment and the date of her death.
- Lucille died on January 18, 1989.
- Quincy State Bank served as the personal representative for both Elbert's and Lucille's estates.
Procedural Posture:
- Quincy State Bank, as representative for Elbert Shelfer's estate, filed a tax return electing to take a marital deduction for the trust assets under the QTIP provisions.
- The Internal Revenue Service (IRS) allowed the QTIP deduction for Elbert's estate.
- After Lucille Shelfer's death, Quincy State Bank, as representative for her estate, filed an estate tax return that did not include the value of the QTIP trust assets.
- The IRS audited Lucille's return and assessed a tax deficiency, asserting that the trust assets must be included in her estate under 26 U.S.C. § 2044.
- Quincy State Bank, on behalf of Lucille's estate, petitioned the U.S. Tax Court to contest the deficiency.
- The Tax Court ruled in favor of Lucille's estate, holding that the trust was not a valid QTIP trust because Lucille did not control the stub income.
- The Commissioner of the IRS (appellant) appealed the Tax Court's decision to the U.S. Court of Appeals for the Eleventh Circuit, with the Estate of Lucille Shelfer as the appellee.
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Issue:
Does a trust fail to qualify as Qualified Terminable Interest Property (QTIP) under 26 U.S.C. § 2056(b)(7) if the trust instrument provides that the income accrued between the last distribution date and the surviving spouse's death is payable to a party other than the surviving spouse's estate?
Opinions:
Majority - Kravitch, Circuit Judge
No. A trust does not fail to qualify as QTIP property merely because the surviving spouse is not entitled to the stub income. The statutory language is ambiguous, so the court must look to legislative history and purpose. Congress created the QTIP exception to the terminable property rule with two main goals: 1) to liberalize the marital deduction by allowing a decedent to provide for a surviving spouse while retaining control over the ultimate disposition of the property, and 2) to treat a married couple as a single economic unit for tax purposes, ensuring that property for which a deduction is taken in the first estate is subject to tax in the second. The Commissioner's interpretation, which allows the QTIP election, serves these goals by honoring the decedent's control over the stub income while ensuring the trust assets are taxed in the surviving spouse's estate as required by § 2044. The Tax Court's contrary position would frustrate Congressional intent by conditioning a significant tax benefit on the disposition of a relatively minor amount of income not needed for the spouse's support, and would create impractical results for standard trust administration.
Analysis:
This decision resolves a key ambiguity in the requirements for QTIP trusts, aligning the Eleventh Circuit with the Ninth Circuit and creating a more uniform, liberal interpretation of the statute. By prioritizing the broad legislative purpose of the marital deduction over a hyper-technical reading of the statute, the court provides much-needed certainty for estate planners. The ruling validates common trust drafting practices where stub income is directed to the remainder beneficiaries, preventing the invalidation of countless existing estate plans and avoiding potential windfalls for estates seeking to escape taxation through a subsequent, inconsistent interpretation of their own prior QTIP election.
