OCTOBER TERM, 1996
Syllabus
COMMISSIONER OF INTERNAL REVENUE
v.
ESTATE OF HUBERT, DECEASED, C & S SOVRAN TRUST CO. (GEORGIA)
N. A., CO-EXECUTOR
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE
ELEVENTH CIRCUIT
No. 95-1402. Argued November 12, 1996-Decided March 18, 1997
The executors of decedent Hubert's substantial estate filed a
federal estate tax return about a year after his death.
Subsequently, petitioner Commissioner of Internal Revenue issued a
notice of deficiency, claiming underreporting of federal estate tax
liability caused by the estate's asserted entitlement to marital
and charitable deductions. While the estate's redetermination
petition was pending in the Tax Court, interested parties settled
much of the litigation surrounding the estate that had begun after
Hubert's death. The agreement divided the estate's residue
principal, assumed to be worth $26 million on the date of death,
about equally between marital trusts and a charitable trust. It
also provided that the estate would pay its administration expenses
either from the principal or the income of the assets that would
comprise the residue and the corpus of the trusts, preserving the
executors' discretion to apportion such expenses. The estate paid
about $500,000 of its nearly $2 million of administration expenses
from principal and the rest from income. It then recalculated its
tax liability, reducing the marital and charitable deductions by
the amount of principal, but not the amount of income, used to pay
the expenses. The Commissioner concluded that using income for
expenses required a dollar-for-dollar reduction of the deductions.
The Tax Court disagreed, finding that no reduction was required by
reason of the executors' power, or the exercise of their power, to
pay administration expenses from income. The Court of Appeals
affirmed.
Held: The judgment is affirmed.
63
F.3d 1083, affirmed.
JUSTICE KENNEDY, joined by THE CHIEF JUSTICE, JUSTICE STEVENS,
and JUSTICE GINSBURG, concluded that a taxpayer does not have to
reduce the estate tax deduction for marital or charitable bequests
by the amount of the administration expenses that were paid from
income generated during administration by assets allocated to those
bequests. Pp.99-111.
94
Syllabus
(a) Hubert's executors used the standard date-of-death valuation
to determine the value of property included in the gross estate for
estate tax purposes. The parties agree that, for purposes of the
question presented, the charitable, 26 U. S. C. § 2055, and
marital, § 2056, deduction statutes should be read to require the
same answer, notwithstanding differences in their language. Since
the marital deduction statute and regulation speak in more specific
terms on this question than the charitable deduction statute, this
plurality concentrates on the marital provisions, but the holding
here applies to both deductions. pp. 99-100.
(b) The marital deduction statute allows deduction for
qualifying property only to the extent of the property's "value."
So when the executors use date-of-death valuation for gross estate
purposes, the deduction's value will be limited by that value.
Marital deduction "value" is "net value," determined by the same
principles as if the bequest were a gift to the spouse, 26 CFR §
20.2056(b)-4(a), i.
e., present value as of the controlling
valuation date, § 25.2523(a)-I(e); see also §§ 20.2056(b)-4(d),
20.2055-2(f)(1). Although the question presented is not controlled
by these provisions' exact terms, it is natural to apply the
present-value principle here. Thus, assuming it were necessary for
valuation purposes to take into account that income, this would be
done by subtracting from the value of the bequest, computed as if
the income were not subject to administration expense charges, the
present value (as of the controlling valuation date) of the income
expected to be used to pay administration expenses. Cf.
Ithaca
Trust Co. v.
United States, 279 U. S. 151. There is
no dispute the entire interests transferred in trust here qualify
for the marital and charitable deductions; the question before the
Court is one of valuation. Pp. 100-104.
(c) Only material limitations on the right to receive income are
taken into account when valuing the property interest passing to
the surviving spouse. 26 CFR § 20.2056(b)-4(a). A provision
requiring or allowing administration expenses to be paid from
income "may" be deemed a "material limitation" on the spouse's
right to income. For example, where the amount of the corpus, and
the expected income from it, are small, the amount of the estate's
anticipated administration expenses chargeable to income may be
material as compared with the anticipated income used to determine
the assets' date-of-death value. Whether a limitation is material
will also depend in part on the nature of the spouse's interest in
the assets generating income. An obligation to pay administration
expenses from income is more likely to be material where the value
of the trust to the spouse is derived solely from income, but is
less likely to be material where, as here, the marital property is
valued as being equivalent to a transfer of the fee. Pp.
104-107.
95
(d) The Tax Court found that, on the facts presented, the
trustee's discretion to pay administration expenses out of income
was not a material limitation on the right to receive income. There
is no reason to reverse for the Tax Court's failure to specify the
facts it considered relevant to the materiality inquiry. The
anticipated expenses could have been thought immaterial in light of
the income the trust corpus could have been expected to generate.
P. 107.
(e) This approach to the valuation question is consistent with
the language of 26 U. S. C. § 2056(b), as interpreted in
United
States v.
Stapf, 375 U. S. 118, 126, in
which the Court held that the marital deduction should not exceed
the "net economic interest received by the surviving spouse." There
is no basis here for the Commissioner's argument that the reduction
she seeks is necessary to avoid a "double deduction" for
administration expenses in violation of 26 U. S. C. § 642(g).
Moreover, assuming that the marital deduction statute's legislative
history would have relevance here, it does not support the
Commissioner's position. Pp. 109-111.
JUSTICE O'CONNOR, joined by JUSTICE SOUTER and JUSTICE THOMAS,
concluded that the relevant sources point to a test of quantitative
materiality to determine whether allocation of administrative
expenses to postmortem income reduces marital and charitable
deductions, and that test is not met by the unusual factual record
in this case. Pp. 111-122.
(a) Neither the Tax Code itself nor its legislative history
supplies guidance on the question whether allocation of
administrative expenses to postmortem income reduces the marital
deduction always, sometimes, or not at all. However, the
Commissioner's regulations and revenue rulings can be relied on to
decide this issue. Title 26 CFR § 20.2056(b)-4(a) directs the
reader to ask whether the executor's right to allocate
administrative expenses to the marital bequest's postmortem income
is a "material limitation" upon the spouse's "right to income from
the property," such that "account must be taken of its effect."
Because the executor's power is undeniably a "limitation" on the
spouse's right to income, the case hinges on whether that
limitation is "material." In Revenue Ruling 93-48, the Commissioner
ruled that § 20.2056(b)-4(a)'s marital deduction is not
"ordinarily" reduced when an executor allocates interest payments
on deferred federal estate taxes to the spousal bequest's
postmortem income. Such interest and the administrative expenses at
issue here are so similar that they should be treated the same
under § 20.2056(b)-4(a). The Commissioner's treatment of interest
in the Revenue Ruling also indicates that some, but not all,
financial obligations will reduce the marital deduction. Thus, by
virtue of the Rul-
96
Syllabus
ing, the Commissioner has created a quantitative materiality
rule for § 20.2056(b)-4(a). This rule is consistent with the
example set forth in § 20.2056(b)-4(a), and the Commissioner's
expressed preference for such a construction is entitled to
deference. pp. 112-120.
(b) The proper measure of materiality has yet to be decided by
the Commissioner. In the absence of guidance from the Commissioner,
the Tax Court's approach is as consistent with the Code as any
other test, and provides no basis for reversal. Here, the
Commissioner's litigation strategy effectively pre-empted the Tax
Court from finding the $1.5 million diminution in postmortem income
material under a quantitative materiality test, for she argued that
any diversion of postmortem income was material and never
presented any evidence or argued that this diminution was
quantitatively material. Her failure to offer proof of materiality
left the Tax Court with little choice but to reach its carefully
crafted conclusion that the amount was not quantitatively material
on the facts before it. Pp. 120-122.
KENNEDY, J., announced the judgment of the Court and delivered
an opinion, in which REHNQUIST, C. J., and STEVENS and GINSBURG,
JJ., joined. O'CONNOR, J., filed an opinion concurring in the
judgment, in which SOUTER and THOMAS, JJ., joined,
post, p.
111. SCALIA, J., filed a dissenting opinion, in which BREYER, J.,
joined,
post, p. 122. BREYER, J., filed a dissenting
opinion,
post, p. 138.
Kent L. Jones argued the cause for petitioner. With him on the
briefs were Solicitor General Days, Acting Solicitor General
Dellinger, Assistant Attorney General Argrett, Deputy Solicitor
General Wallace, Jonathan S. Cohen, and Joan 1. Oppenheimer.
David D. Aughtry argued the cause for respondent. With
him on the brief was
Shelley Cashion. *
*Briefs of
amici curiae urging affirmance were filed for
the American College of Trust and Estate Counsel by
Edward
F.
Koren and
Alvin J. Golden; for the
American Council on Education et al. by
Matthew J.
Zinn and
Carol A. Rhees; for the Baptist Foundation
of Texas et al. by
Terry L. Simmons, pro se; and for the Tax
Section of The Florida Bar by
Jerald David August and
James J. Freeland.
97
JUSTICE KENNEDY announced the judgment of the Court and
delivered an opinion, in which THE CHIEF JUSTICE, JUSTICE STEVENS,
and JUSTICE GINSBURG join.
In consequence of life's two certainties a decedent's estate
faced federal estate tax deficiencies, giving rise to this case.
The issue is whether the amount of the estate tax deduction for
marital or charitable bequests must be reduced to the extent
administration expenses were paid from income generated during
administration by assets allocated to those bequests.
I
The estate of Otis C. Hubert was substantial, valued at more
than $30 million when he died. Considerable probate and civil
litigation ensued soon after his death. The parties to the various
proceedings included his wife and children; his nephew; one of the
estate's coexecutors, Citizens and Southern Trust Company
(Georgia), N. A., the predecessor of respondent C & S Sovran
Trust Company (Georgia), N. A.; the district attorney for Cobb
County, Georgia, on behalf of certain charitable beneficiaries; and
the Georgia State Revenue Commission. Hubert had made various wills
and codicils, and the legal disputes for the most part concerned
the distribution of estate assets; but they were not confined to
this. In addition to will contests alleging fraud and undue
influence, there were satellite civil suits including claims of
slander and abuse of process. The principal proceedings were in the
Probate and the Superior Courts of Cobb County, Georgia.
The estate attracted the attention of petitioner, the
Commissioner of Internal Revenue. The executors filed the federal
estate tax return in 1987, about a year after Hubert died. In 1990,
the Commissioner issued a notice of deficiency, claiming
underreporting of federal estate tax liability by some $14 million.
The Commissioner's major challenge then was to the estate's claimed
entitlement to two deduc-
98
tions. One was the marital deduction, under 68A Stat. 392, as
amended, 26 U. S. C. § 2056, for qualifying property passing from a
decedent to the surviving spouse. The other was the charitable
deduction, under § 2055, for qualifying property passing from a
decedent to a charity. The Commissioner's notice of deficiency
asserted, for reasons not relevant here, that the property passing
to Hubert's surviving wife and to charity did not qualify for the
marital and charitable deductions. The estate petitioned the United
States Tax Court for a redetermination of the deficiency.
Within days of the estate's petition in the Tax Court, much of
the other litigation surrounding the estate settled. The settlement
agreement divided the estate's residue principal between a marital
and a charitable share, which we can assume for purposes of our
discussion were worth a total of $26 million on the day Hubert
died. The settlement agreement divided the $26 million principal
about half to trusts for the surviving spouse and half to a trust
for the charities. The Commissioner stipulated that the nature of
the trusts did not prevent them from qualifying for the marital and
charitable deductions. The stipulation streamlined the Tax Court
litigation but did not resolve it.
The settlement agreement provided that the estate would pay its
administration expenses either from the principal or from the
income of the assets that would comprise the residue and the corpus
of the trusts, preserving the discretion Hubert's most recent will
had given his executors to apportion administration expenses. The
apportionment provisions of the agreement and the will were
consistent for all relevant purposes with the law of Georgia, the
State where the decedent resided. The estate's administration
expenses, including attorney's fees, were on the order of $2
million. The estate paid about $500,000 in expenses from principal
and the rest from income.
The estate recalculated its estate tax liability based on the
settlement agreement and the payments from principal.
99
The estate did not include in its marital and charitable
deductions the amount of residue principal used to pay
administration expenses. The parties here have agreed throughout
that the marital or charitable deductions could not include those
amounts. The estate, however, did not reduce its marital or
charitable deductions by the amount of the income used to pay the
balance of the administration expenses. The Commissioner disagreed
and contended that use of income for this purpose required a
dollar-for-dollar reduction of the amounts of the marital and
charitable deductions.
In a reviewed opinion, the Tax Court, with two judges concurring
in part and dissenting in part, rejected the Commissioner's
position. 101 T. C. 314 (1993). The court noted it had resolved the
same issue against the Commissioner in
Estate of Street v.
Commissioner, 56 TCM 774, 57 TCM 2851 (1988), , 88,553 P-H
Memo TC. The Court of Appeals for the Sixth Circuit had reversed
this aspect of
Estate of Street, see
974
F.2d 723, 727-729 (1992), but in the instant case the Tax Court
adhered to its view and said, given all the circumstances here, no
reduction was required by reason of the executors' power, or the
exercise of their power, to pay administration expenses from
income. The Court of Appeals for the Eleventh Circuit affirmed the
Tax Court, adopting the latter's opinion and noting the resulting
conflict with the Sixth Circuit's decision in
Street and
with the Court of Appeals for the Federal Circuit's decision in
Burke v.
United States, 994 F.2d
1576, cert. denied, 510 U. S. 990 (1993). See
63 F.3d
1083, 1084-1085 (CAll 1995). We granted certiorari, 517 U. S.
1166 (1996), and, in agreement with the Tax Court and the Court of
Appeals for the Eleventh Circuit, we now affirm the judgment.
II
A necessary first step in calculating the taxable estate for
federal estate tax purposes is to determine the property in-
100
cluded in the gross estate, and its value. Though an alternative
valuation date is authorized, the executors of the Hubert estate
used the standard date-of-death valuation. See 26 U. S. C. §§
2031(a), 2051. A later step is to compute any claimed charitable or
marital deductions. See §§ 2055 (charitable), 2056 (marital). Our
inquiry here involves the relationship between valuation principles
and those computations. The language of the charitable and marital
deduction sections differs. For instance, § 2056 requires
consideration, in valuing a marital bequest, of obligations or
encumbrances the decedent imposes on the bequest, "in the same
manner as if the amount of a gift to such spouse of such interest
were being determined." § 2056(b)(4). Section 2055 has no similar
language. Treasury Reg. § 20.2056(b)-4(a), 26 CFR § 20.2056(b)-4(a)
(1996), moreover, has amplified aspects of the marital deduction
statute, as we discuss. There is no similar regulation for the
charitable deduction statute. These differences notwithstanding,
the Commissioner and respondent agree that, for purposes of the
question presented, the two deduction statutes should be read to
require the same answer. We adopt this approach. For the issue we
decide, the marital deduction statute and regulation speak in more
specific terms than the charitable deduction statute, so we
concentrate on the marital provisions. Our holding in the case
applies to both deductions.
We begin with the language of the marital deduction statute. It
allows an estate to deduct for federal estate tax purposes "an
amount equal to the value of any interest in property which passes
or has passed from the decedent to his surviving spouse, but only
to the extent that such interest is included in determining the
value of the gross estate." 26 U. S. C. § 2056(a).
The statute allows deduction for qualifying property only to the
extent of the property's "value." So when the executors value the
property for gross estate purposes as of the date of death, the
value of the marital deduction will be lim-
101
ited by its date-of-death value. This is directed by the
statutory language capping the deduction at "the value of any
interest ... included in determining the value of the gross
estate." It is made explicit by Treas. Reg. § 20.2056(b)-4(a),
which says "value, for the purpose of the marital deduction ... is
to be determined as of the date of the decedent's death [unless the
estate uses the alternative valuation date]."
Section 20.2056(b)-4(a) provides that "value" for marital
deduction purposes is "net value," determined by applying "the same
principles ... as if the amount of a gift to the spouse were being
determined." Section 25.2523(a)-1, entitled "Gift to spouse; in
general," includes a subsection (e), entitled "Valuation," which
parallels § 20.2056(b)-4(d); see also § 20.2055-2(f)(1). Section
25.2523(a)-1(e) provides:
"If the income from property is made payable to the donor or
another individual for life or for a term of years, with remainder
to the donor's spouse ... the marital deduction is computed ...
with respect to the present value of the remainder, determined
under [26 U. S. C. § ]7520. The present value of the remainder
(that is, its value as of the date of gift) is to be determined in
accordance with the rules stated in § 25.2512-5 or, for certain
prior periods, § 25.2512-5A."
Section 7520, in turn, refers to present-value tables located in
regulation § 20.2031-7. The question presented here, involving
date-of-death valuation of property or a principal amount, some of
the income from which may be used to pay administration expenses,
is not controlled by the exact terms of these provisions. For that
reason, we do not attempt to force it into their detailed mold. It
is natural, however, to apply the present-value principle to the
question at hand, as we are directed to do by § 20.2056(b)-4(a). In
other words, assuming it were necessary for valuation purposes to
take into account that income, see
infra, at 106-107
(discussing materiality), this would be done by subtracting from
the
102
value of the bequest, computed as if the income were not subject
to administration expense charges, the present value (as of the
controlling valuation date) of the income expected to be used to
pay administration expenses.
Our application of the present-value principle to the issue here
is further supported by Justice Holmes' explanation of valuation
theory in his opinion for the Court in
Ithaca Trust Co. v.
United States, 279 U. S. 151 (1929). The
decedent there bequeathed the residue of his estate in trust to
charity, subject to a particular life interest in his wife. After
holding that the charitable bequest qualified for the charitable
deduction under the law as it stood in 1929, the Court considered
how to value the bequest. The Government argued the value should be
reduced to reflect the wife's probable life expectancy as of the
date the decedent died. The estate argued for a smaller reduction
than the Government, because by the time of the litigation it was
known that the wife had, in fact, lived for only six months after
the decedent died. Justice Holmes wrote:
"The first impression is that it is absurd to resort to
statistical probabilities when you know the fact. But this is due
to inaccurate thinking .... [Value] depends largely on more or less
certain prophecies of the future; and the value is no less real at
that time if later the prophecy turns out false than when it comes
out true .... Tempting as it is to correct uncertain probabilities
by the now certain fact, we are of opinion that it cannot be done
.... Our opinion is not changed by the necessary exceptions to the
general rule specifically made by the Act." Id., at 155.
So the charitable deduction had to be valued based on the wife's
probable life expectancy as of the date of death rather than the
known fact that she died only six months after her husband.
103
It is suggested that § 20.2056(b)-4(a)'s direction to value the
marital deduction as a spousal gift refers to a gift tax
qualification regulation, § 25.2523(e)-1(f), and a Revenue Ruling
interpreting it, Rev. Rul. 69-56, 1969-1 Cum. Bull. 224.
Post, at 116 (O'CONNOR, J., concurring in judgment). The
suggestion misunderstands the regulations and the Revenue Ruling.
Section 20.2056(b)-4(a) concerns how to determine the "value, for
the purpose of the marital deduction, of any deductible interest."
Before determining an interest's value under § 20.2056(b)-4(a), one
must decide the extent to which the interest qualifies as
deductible.
There is a structural problem with interpreting §
20.2056(b)-4(a) as directing reference to § 25.2523(e)-1(f) for
valuation purposes. Qualification and valuation are different
steps. Section 25.2523(e)-1(f) prescribes conditions under which an
interest transferred in trust qualifies for a marital deduction
under the gift tax. It tracks the language of § 20.2056(b)-5(f),
which prescribes the same conditions for determining whether an
interest transferred in trust qualifies for a marital deduction
under the estate tax. Any interest to which § 25.2523(e)-1(f) would
apply, were its principles understood to be incorporated into §
20.2056(b)-4(a), would, of necessity, already have been analyzed
under the same principles at the earlier, qualification stage of
the estate-tax marital-deduction inquiry under § 20.2056(b)-5(f).
So under the suggested interpretation, whether or not an interest
passed the qualification test, there would never be a need to value
it. If it failed, there would be nothing to value; if it passed,
its value would never be reduced at the valuation stage. The
qualification step of the estate-tax marital-deduction inquiry
would render the valuation step superfluous.
We do not think the Commissioner adopted this view of the
regulations in Revenue Ruling 69-56. The Revenue Ruling held that a
trustee's power to:
104
"charge to income or principal, executor's or trustee's
commissions, legal and accounting fees, custodian fees, and similar
administration expenses ... [does] not result
"[does] in the disallowance or diminution of the marital
deduction for estate and gift tax purposes unless the execution of
such directions would or the exercise of such powers could, cause
the spouse to have less than substantially full beneficial
enjoyment of the particular interest transferred." Rev. Rul. 69-56,
1969-1 Cum. Bull. 224.
The Revenue Ruling cites for this proposition §§
20.2056(b)5(f)(1) and 25.2523(e)-1(f)(1), parts of the estate and
gift tax qualification regulations discussed above. The
qualification regulations provide that an interest may qualify as
deductible only in part. Where that happens, the deduction need not
be disallowed but it must be diminished. See,
e. g.,
§ 20.2056(b)-5(b); § 25.2523(e)-1(b); see also 26 U. S. C. §§
2056(b)(5), 2523(e). It is in this qualification context that the
Revenue Ruling speaks of "diminution" of the marital deduction.
There is no dispute the entire interests transferred in trust here
qualify for the estate tax marital and charitable deductions,
respectively. The question before us is one of valuation. Sections
25.2523(e)-1(f) and 20.2056(b)5(f) and Revenue Ruling 69-56 do not
bear on our inquiry.
The parties here agree that the marital and charitable
deductions had to be reduced by the amount of marital and
charitable residue principal used to pay administration expenses.
The Commissioner contends that the estate must reduce its marital
and charitable deductions by the amount of administration expenses
paid not only from principal but also, and in all events, from
income and by a dollar-for-dollar amount. The Commissioner cites
the controlling regulation in support of her position. The
regulation says:
105
"The value, for the purpose of the marital deduction, of any
deductible interest which passed from the decedent to his surviving
spouse is to be determined as of the date of the decedent's death
[unless the estate uses the alternative valuation date]. The
marital deduction may be taken only with respect to the net value
of any deductible interest which passed from the decedent to his
surviving spouse, the same principles being applicable as if the
amount of a gift to the spouse were being determined. In
determining the value of the interest in property passing to the
spouse account must be taken of the effect of any material
limitations upon her right to income from the property. An example
of a case in which this rule may be applied is a bequest of
property in trust for the benefit of the decedent's spouse but the
income from the property from the date of the decedent's death
until distribution of the property to the trustee is to be used to
pay expenses incurred in the administration of the estate." 26 CFR
§ 20.2056(b)4(a) (1996).
The regulation does not help the Commissioner. It says a
limitation providing that income "is to be used" throughout the
administration period to pay administration expenses "may" be
material in a given case and, if it is, account must be taken of it
for valuation purposes as if it were a gift to the spouse, as we
have discussed, see
supra, at 101-102. The Tax Court was
quite accurate in its description of the regulation when it
said:
"That section is merely a valuation provision which requires
material limitations on the right to receive income to be taken
into account when valuing the property interest passing to the
surviving spouse. The fact that income from property is to be used
to pay expenses during the administration of the estate is not
necessarily
106
a material limitation on the right to receive income that would
have a significant effect on the date-of-death value of the
property of the estate." 101 T. C., at 324-325.
There is no indication in the case before us that the executor's
power to charge administration expenses to income is equivalent to
an express postponement of the spouse's right to income beyond a
reasonable period of administration. Cf. 26 CFR §
20.2056(b)-5(f)(9) (1996) (requiring valuation of express
postponements of the spouse's right to income beyond a reasonable
period of administration). By contrast, we have no difficulty
conceiving of situations where a provision requiring or allowing
administration expenses to be paid from income could be deemed a
"material limitation" on the spouse's right to income. Suppose the
decedent's other bequests account for most of the estate's property
or that most of its assets are nonincome producing, so that the
corpus of the surviving spouse's bequest, and the income she could
expect to receive from it, would be quite small. In these
circumstances, the amount of the estate's anticipated
administration expenses chargeable to income may be material as
compared with the anticipated income used to determine the assets'
date-of-death value. If so, a provision requiring or allowing
administration expenses to be charged to income would be a material
limitation on the spouse's right to income, reducing the marital
bequest's date-of-death value and the allowable marital
deduction.
Whether a limitation is "material" will also depend in part on
the nature of the spouse's interest in the assets generating
income. This analysis finds strong support in the text of §
20.2056(b)-4(a). The regulation gives an example of where a
limitation on the right to income "may" be material-bequests "in
trust" for the benefit of a decedent's spouse. The example suggests
a significant difference between a bequest of income and an
outright gift of the fee interest in the income-producing property.
A fee in the
107
same interest will almost always be worth much more. Where the
value of the trust to the beneficiaries is derived solely from
income, an obligation to pay administration expenses from that
income is more likely to be "material." In the case of a specific
bequest of income, for example, valued only for its future income
stream, a diversion of that income would be more significant. The
marital property in this case, however, comprising trusts involving
either a general power of appointment (the GPA trust) or an
irrevocable election (the QTIP trust), was valued as being
equivalent to a transfer of the fee. See Brief for Petitioner 8-9,
n. 1 ("[T]he corpus of both trusts is includable in the estate of
the surviving spouse"). As a result, the limitation on the right to
income here is less likely to be material. The inquiry into the
value of the estate's anticipated administration expenses should be
just as administrable, if not more so, than valuing property
interests like going-concern businesses, see,
e. g.,
§ 20.2031-3, involving much greater complexity and uncertainty.
The Tax Court concluded here: "On the facts before us, we find
that the trustee's discretion to pay administration expenses out of
income is not a material limitation on the right to receive
income." 101 T. C., at 325. The Tax Court did not specify the facts
it considered relevant to the materiality inquiry. As we have
explained, however, the Commissioner does not contend the estate
failed to give adequate consideration to expected future
administration expenses as of the date of death in determining the
amount of the marital deduction. We have no basis to reverse for
the Tax Court's failure to elaborate. Here, given the size and
complexity of the estate, one might have expected it to incur
substantial litigation costs. But the anticipated expenses could
nonetheless have been thought immaterial in light of the income the
trust corpus could have been expected to generate.
The major disagreement in principle between the Tax Court
majority and dissenters involved the distinction be-
108
tween expected and actual income and expenses. Judge Halpern's
opinion, joined by Judge Beghe, explained:
"I believe the majority is undone by its view that income earned
on estate property is not included in the gross estate. Once it is
accepted that income earned on estate property (as anticipated at
the appropriate valuation date) is included in the gross
estate, the next question is whether, but for the use of such
income to pay administration expenses, it would be received by the
surviving spouse or charitable beneficiary. If the answer is yes,
then it follows easily that, when such income is used for
administration expenses, rather than received by the surviving
spouse or charitable beneficiary, the value of the interest passing
from the decedent to the surviving spouse or charitable beneficiary
is decreased." Id., at 342-343 (opinion concurring in part
and dissenting in part).
The Tax Court dissenters recognized that only anticipated, not
actual, income is included in the gross estate, as the gross estate
is based on date-of-death value. See also
id., at 342, n. 5
(opinion of Halpern, J.) ("It is true, of course, that income
actually earned on ... property [included in valuing the gross
estate] during the period of estate administration is not included
in the gross estate. The gross estate, however, does include the
discounted value of post mortem income expected to be earned during
estate administration" (emphasis deleted)). The dissenters failed
to recognize that following their own logic, as a general rule,
assuming compliance with § 20.2056(b)-4(a)'s limitation to relevant
facts on the controlling valuation date, only anticipated
administration expenses payable from income, not the actual ones,
affect the date-ofdeath value of the marital or charitable
bequests. The dissenters were, in a sense, a step closer to
§25.2523(a)-1(e)'s present-value approach than the Commissioner,
for they would have required the estate to reduce the marital or
char-
109
it able deduction by only the discounted value of the actual
administration expenses, whereas the Commissioner insists on a
dollar-for-dollar reduction. The dissenters' wait-andsee approach
to the valuation inquiry, however, is still at odds with the
valuation inquiry required by the regulations:
What is the net value of the marital or charitable bequest on
the controlling valuation date, determined as if it were a gift to
the spouse?
The Commissioner directs us to the language of § 2056(b)(4),
which says:
"In determining ... the value of any interest in property
passing to the surviving spouse for which a deduction is allowed by
this section-
"(B) where such interest or property is encumbered in any
manner, or where the surviving spouse incurs any obligation imposed
by the decedent with respect to the passing of such interest, such
encumbrance or obligation shall be taken into account in the same
manner as if the amount of a gift to such spouse of such interest
were being determined."
We interpreted this language in
United States v.
Stapf, 375 U. S. 118 (1963). The husband's will there gave
property to his wife, conditioned on her relinquishing other
property she owned to the couple's children. We held that the
husband's estate was entitled to a marital deduction only to the
extent the value of the property the husband gave his wife exceeded
the value of the property she relinquished to receive it. The
marital deduction, we explained, should not exceed the "net
economic interest received by the surviving spouse."
Id., at
126. The statutory language, as we interpreted it in
Stapf,
is consistent with our analysis here. Where the will requires or
allows the estate to pay administration expenses from income that
would otherwise go to the surviving spouse, our analysis requires
that the marital
110
deduction reflect the date-of-death value of the expected future
administration expenses chargeable to income if they are material
as compared with the date-of-death value of the expected future
income. U sing this approach to valuation, the estate will arrive
at the "net economic interest received by the surviving spouse."
Ibid.
For the first time at oral argument, the Commissioner suggested
that the reduction she seeks is necessary to avoid a "double
deduction" in violation of 26 U. S. C. § 642(g). Under § 642(g), an
estate may take an estate tax deduction for administration expenses
under § 2053(a)(2), or it may take them, if deductible, off its
taxable income, but it may not do both. The so-called double
deduction argument is rhetorical, not statutory. As our colleagues
in dissent recognize, "nothing in § 642(g)
compels the
conclusion that the marital (or charitable) deduction must be
reduced whenever an estate elects to deduct expenses from income."
Post, at 137 (SCALIA, J., dissenting) (emphasis in
original). The Commissioner nevertheless suggests that, unless we
reduce the estate's marital deduction by the amount of
administration expenses paid from income and deducted on its income
tax, the estate will receive a deduction for them on its income tax
as well as a deduction for them on its estate tax in the form of
inflated marital and charitable deductions. See Tr. of Oral Arg.
12, 15. The marital and charitable estate tax deductions do not
include income, however. When income is used, consistent with state
law and the will, to pay administration expenses, this does not
require that the estate tax deductions be diminished. The
deductions include asset values determined with reference to
expected income, but under our analysis the values must also be
reduced to reflect material expected administration expense charges
to which that income may be subjected. As noted above, the
Commissioner has not contended the estate's marital and charitable
deductions fail to reflect such expected payments. So
111
there is no basis for the double deduction argument. Our
analysis is consistent with the design of the statute.
The Commissioner also invites our attention to the legislative
history of the marital deduction statute. Assuming for the sake of
argument it would have relevance here, it does not support her
position. The Senate Report accompanying the statute says:
"The interest passing to the surviving spouse from the decedent
is only such interest as the decedent can give. If the decedent by
his will leaves the residue of his estate to the surviving spouse
and she pays, or if the estate income is used to pay, claims
against the estate so as to increase the residue, such increase in
the residue is acquired by purchase and not by bequest.
Accordingly, the value of any additional part of the residue
passing to the surviving spouse cannot be included in the amount of
the marital deduction." S. Rep. No. 1013, 80th Cong., 2d Sess., pt.
2, p. 6 (1948).
The Report supports our analysis. It underscores that valuation
for marital deduction purposes occurs on the date of death.
The Commissioner's position is inconsistent with the controlling
regulations. The Tax Court and the Court of Appeals were correct in
finding for the taxpayer on these facts, and we affirm the
judgment.
It is so ordered.
JUSTICE O'CONNOR, with whom JUSTICE SOUTER and JUSTICE THOMAS
join, concurring in the judgment.
"Logic and taxation are not always the best of friends."
Sonneborn Brothers v.
Cureton, 262 U. S. 506, 522 (1923)
(McReynolds, J., concurring). In cases like the one before us
today, they can be complete strangers. That our tax laws can at
times be in such disarray is a discomforting thought. I can
understand why the plurality attempts to extrapolate
112
a generalized estate tax valuation theory from one regulation
and then to apply that theory to resolve this case, perhaps with
the hope of making sense out of the applicable law. But where the
applicability-not to mention the validity-of that theory is far
from clear, the temptation to make order out of chaos at any cost
should be resisted, especially when the question presented can be
resolved-albeit imperfectlyby reference to more directly applicable
sources. While JUSTICE SCALIA, JUSTICE BREYER, and I agree on this
point, we disagree on the result ultimately dictated by these
sources. I therefore write separately to explain why in my view the
plurality's result, though not its reasoning, is correct.
I
When a citizen or resident of the United States dies, the
Federal Government imposes a tax on "all [of his] property, real or
personal, tangible or intangible, wherever situated." 26 U. S. C.
§§ 2001(a), 2031(a). Specifically excluded from taxation, however,
is certain property devised to the decedent's spouse or to charity.
Such testamentary gifts may qualify for the marital deduction, §
2056(a), or the charitable deduction, § 2055(a). If they do, they
are removed from the decedent's "gross estate" and exempted from
the estate tax. § 2051. Calculating the estate tax, however, takes
time, as does marshaling the decedent's property and distributing
it to the ultimate beneficiaries. During this process, the assets
in the estate often earn income and the estate itself incurs
administrative expenses. To deal with this eventuality, the Tax
Code permits an estate administrator to choose between allocating
these expenses to the assets in the estate at the time of death
(the estate principal), or to the postmortem income earned by those
assets. § 642(g). Everyone agrees that when these expenses are
charged against a portion of the estate's principal devised to the
spouse or charity, that portion of the principal is diverted from
the spouse or charity and the marital and charitable deductions are
accord-
113
ingly "reduced" by the actual amount of expenses incurred. See
ante, at 104 (plurality opinion);
post, at 123
(SCALIA, J., dissenting); Brief for Petitioner 19; Brief for
Respondent 6. The question presented here is what becomes of these
deductions when the estate chooses the second option under § 642(g)
and allocates administrative expenses to the postmortem income
generated by the property in the spousal or charitable devise.
The Tax Code itself supplies no guidance. Accord,
post,
at 127 (SCALIA, J., dissenting). The statute most relevant to this
case, 26 U. S. C. § 2056(b)(4)(B), provides:
"[W]here [any interest in property otherwise qualifying for the
marital deduction] is encumbered in any manner, or where the
surviving spouse incurs any obligation imposed by the decedent with
respect to the passing of such interest, such encumbrance or
obligation shall be taken into account in the same manner as if the
amount of a gift to such spouse of such interest were being
determined. "
Although an executor's power to burden the postmortem income of
the marital bequest with the estate's administrative expenses is
arguably an "encumbrance" or an "obligation imposed by the decedent
with respect to the passing of such interest," the statute itself
says only that the "encumbrance or obligation shall be taken into
account." It does not explain how this should be done, however. In
my view, it is not possible to tell from § 2056(b)(4)(B) whether
allocation of administrative expenses to postmortem income reduces
the marital deduction always, sometimes, or not at all.
Nor does the Code's legislative history give shape to its
otherwise ambiguous language. The discussion in the Senate Report
of § 2056(b)(4)(B)'s predecessor statute reads:
"The interest passing to the surviving spouse from the decedent
is only such interest as the decedent can give. If the decedent by
his will leaves the residue of his es-
114
tate to the surviving spouse and she pays, or if the estate
income is used to pay, claims against the estate so as to increase
the residue, such increase in the residue is acquired by purchase
and not by bequest. Accordingly, the value of any such additional
part of the residue passing to the surviving spouse cannot be
included in the amount of the marital deduction." S. Rep. No. 1013,
80th Cong., 2d Sess., pt. 2, p. 6 (1948) (emphasis added).
This italicized passage might be helpful if it explicitly
referred to "administrative expenses" instead of "claims against
the estate." But it is not at all clear from the Senate Report
whether the latter term includes the former: The Report nowhere
defines the term "claims against the estate," and the immediately
preceding paragraph discusses § 2056(b)(4)(B)'s language with
reference to mortgages.
Ibid. Because mortgages differ from
administrative expenses in many ways
(e. g., mortgages
pre-exist the decedent's death and are fixed in amount at that
time), there is a reasonable argument that administrative expenses
are not "claims against the estate." In sum, the Code's legislative
history is not illuminating.
II
All that remains in this statutory vacuum are the Commissioner's
regulations and Revenue Rulings, and it is on these sources that I
would decide this issue. The key regulation is 26 CFR §
20.2056(b)-4(a) (1996):
"The value, for the purpose of the marital deduction, of any
deductible interest which passed from the decedent to his surviving
spouse is to be determined as of the date of the decedent's death
.... The marital deduction may be taken only with respect to the
net value of any deductible interest which passed from the decedent
to his surviving spouse, the same principles being applica-
115
ble as if the amount of a gift to the spouse were being
determined. In determining the value of the interest in property
passing to the spouse account must be taken of the effect of any
material limitations upon her right to income from the
property."
The text of the regulation leaves no doubt that only the "net
value" of the spousal gift may be deducted. Moreover, there is
little doubt that, in assessing this "net value," one should
examine how the spousal devise would have been treated if it were
instead an
inter vivos gift. See 26 U. S. C. § 2056(b)(4)(A)
(also referring to treatment of gifts).
The plurality latches onto 26 CFR § 25.2523(a)-1(e) (1996), and
to the statutes and regulations to which it refers.
Ante, at
101-102 (referring to 26 U. S. C. § 7520; 26 CFR § 20.2031-7
(1996)). In the plurality's view, these regulations define how to
"tak[e] [account] of the effect of any material limitations upon [a
spouse's] right to income from the property." 26 CFR §
20.2056(b)-4(a) (1996). The plurality frankly admits that these
regulations do not speak directly to the antecedent inquiry-when an
executor's right to allocate administrative expenses to income
constitutes a "material limitation."
Ante, at 106. The
plurality nevertheless believes that these regulations bear
indirectly on this inquiry by implying an underlying estate
tax valuation theory that, in the plurality's view, dovetails
nicely with our decision in
Ithaca Trust Co. v.
United
States, 279 U. S.
151 (1929).
Ante, at 102. It is on the basis of this
valuation theory that the plurality is able to conclude that the
Tax Court's analysis was wrong because that analysis did not,
consistent with the plurality's theory, focus solely on
anticipated administrative expenses and
anticipated
income.
Ante, at 107-109. But, as JUSTICE SCALIA points out,
the plurality's valuation theory is not universally applicable and,
in fact, conflicts with the Commissioner's treatment of some other
expenses. See 26 CFR § 20.2056(b)-4(c) (1996);
post, at
133-136. Because § 25.2523(a)-1(e) and its accompanying provisions
do no more
116
than suggest an estate tax valuation theory that itself has
questionable value in this context, these provisions do not in my
view provide any meaningful guidance in this case.
The Tax Court, on the other hand, zeroed in on 26 CFR §§
25.2523(e)-1(f)(3) and (4) (1996), the gift tax regulations which,
read together, provide that a trustee's power to allocate the
"trustees' commissions ... and other charges" to the trust's income
will not disqualify the trust from the gift tax spousal deduction
as long as the donee spouse receives "substantial beneficial
enjoyment" of the trust property. 101 T. C. 314, 325 (1993); see
also 26 CFR § 20.2056(b)-5(f) (1996) (tracking language of §
25.2523(e)-1(f)). The Commissioner interpreted this language in
Revenue Ruling 69-56, and held that a trustee's power to
"charge to income or principal, executor's or trustee's
commissions, legal and accounting fees, custodian fees, and similar
administration expenses ...
"[does] not result in the disallowance or diminution of the
marital deduction for estate and gift tax purposes
unless the execution of such directions would or the exercise of
such powers could, cause the spouse to have less than substantially
full beneficial enjoyment of the particular interest transferred."
Rev. Rul. 69-56, 1969-1 Cum. Bull. 224 (emphasis added).
Both the plurality and JUSTICE SCALIA argue that these gift
regulations and rulings are inapposite because they address how the
power to allocate expenses affects a trust's
qualification
for the marital deduction, and not how it affects the trust's
value. Ante, at 103-104;
post, at 125-126, 131-132.
They further contend that the "material limitation" language in 26
CFR § 20.2056(b)-4(a) (1996) would be rendered superfluous if a
"material limitation" on the spouse's right to receive income
existed only when that spouse lacked "substantial beneficial
enjoyment" of the income. 101 T. C.,
117
at 325-326 (adopting this argument). Under this reading, there
could be no such thing as a trust that qualified for the marital
deduction but imposed a material limitation on the right to income
because any trust failing the "substantial beneficial enjoyment"
test would not qualify for the deduction at all.
Ante, at
103;
post, at 132. These are potent criticisms. But no
matter how poorly drafted or ill conceived the Revenue Ruling might
be, the fact remains that the Commissioner issued it and its plain
language is hard to ignore. In the end, the conclusion one draws
regarding how the marital and charitable trusts would be treated if
they were
inter vivos gifts depends on whether one takes the
Commissioner at her word: If one does, the gift tax provisions,
Revenue Ruling 69-56 in particular, favor respondent's position; if
one does not, one is left with no guidance at all. Neither result
is wholly satisfying.
Fortunately, § 20.2056(b)-4(a) further directs the reader to
consider a second method of determining the amount of the marital
deduction:
"In determining the value of the interest in property passing to
the spouse account must be taken of the effect of any material
limitations upon her right to income from the property."
From this we ask whether the executor's right to allocate
administrative expenses to the postmortem income of the marital
bequest is a material limitation upon the spouse's "right to income
from the property," such that "account must be taken of the
effect." Because the executor's power is undeniably a "limitation"
on the spouse's right to income, the case hinges on whether that
limitation is "material." Accord,
post, at 128 (SCALIA, J.,
dissenting) ("The beginning of analysis ... is to determine what,
in the context of § 20.2056(b)-4(a), the word 'material'
means").
We can quibble over which definition of "material"-"substantial"
or "relevant"-precedes the other in the dictionary,
118
see
ibid.; American Heritage Dictionary 772 (2d ed. 1985)
("substantial" precedes "relevant"), but this debate is beside the
point. The Commissioner has already interpreted the language in §
20.2056(b)-4(a). In Revenue Ruling 93-48, the Commissioner ruled
that the marital deduction is not "ordinarily" reduced when an
executor allocates interest payments on deferred federal estate
taxes to the postmortem income of the spousal bequest. Rev. Rul.
93-48, 1993-2 Cum. Bull. 271 ("[T]he value of a residuary
charitable [or marital] bequest is [not] reduced by the amount of
[interest] expenses payable from the income of the residuary
property"). JUSTICE SCALIA contends that Revenue Ruling 93-48
should be disregarded because it was promulgated by the
Commissioner only after her attempts to prevail on the contrary
position in federal court repeatedly failed.
Post, at
129-130. To be sure, the Commissioner may not have whole-heartedly
embraced Revenue Ruling 93-48, but the Ruling nevertheless issued
and we may not totally ignore the plain language of a regulation or
ruling because the entity promulgating it did not
really
want to have to adopt it. See
Connecticut Nat. Bank v.
Germain, 503
U. S. 249, 253-254 (1992) ("We have stated time and time again
that courts must presume that a legislature says in a statute what
it means and means in a statute what it says there");
West
Virginia Univ. Hospitals, Inc. v.
Casey, 499 U. S. 83, 98 (1991)
(rejecting argument that "the congressional purpose in enacting [a
statute] must prevail over the ordinary meaning of statutory
terms").
It is, as an initial matter, difficult to reconcile the
Commissioner's treatment of interest under Revenue Ruling 93-48
with her position in this case. For all intents and purposes,
interest accruing on estate taxes is functionally indistinguishable
from the administrative expenses at issue here. By definition,
neither of these expenses can exist prior to the decedent's death;
before that time, there is no estate to administer and no estate
tax liability to defer. Yet both
119
types of expenses are inevitable once the estate is open because
it is virtually impossible to close an estate in a day so as to
avoid the deferral of estate tax payments or the incursion of some
administration expenses. Although both can theoretically be avoided
if an executor donates his time or pays up front what he estimates
the estate tax to be, this will not often occur. Both types of
expenses are, moreover, of uncertain amount on the date of death.
Because these two types of expenses are so similar in relevant
ways, in my view they should be treated the same under §
20.2056(b)-4(a) and Ruling 93-48, despite the Commissioner's
limitation on the applicability of Revenue Ruling 93-48 to interest
on deferred estate taxes.
But more important, the Commissioner's treatment of interest on
deferred estate taxes in Revenue Ruling 93-48 indicates her
rejection of the notion that
every financial burden on a
marital bequest's postmortem income is a material limitation
warranting a reduction in the marital deduction. That the Ruling
purports to apply not only to
income but also to
principal, and may therefore deviate from the accepted rule
regarding payment of expenses from principal, see
supra, at
112-113, does not undercut the relevance of the Ruling's
implications as to
income. Post, at 130 (SCALIA, J.,
dissenting). Thus, some financial burdens on the spouse's right to
postmortem income will reduce the marital deduction; others will
not. The line between the two does not, as JUSTICE SCALIA contends,
depend upon the relevance of the limitation on the spouse's right
to income to the value of the marital bequest,
post, at
128-129, since interest on deferred estate taxes surely reduces,
and is therefore relevant to, "the value of what passes,"
post, at 128 (emphasis deleted). By virtue of Revenue Ruling
93-48, the Commissioner has instead created a quantitative rule for
§ 20.2056(b)-4(a). That a limitation affects the marital deduction
only upon reaching a certain quantum of substantiality is not a
concept alien to the law of taxation; such rules are quite
common.
120
See,
e. g., Rev. Rul. 75-298, 1975-2 Cum. Bull.
290 (exempting from income tax the income of qualifying banks owned
by foreign governments, as long as their participation in domestic
commercial activity is
de minimis); Rev. Rul. 90-60, 1990-2
Cum. Bull. 3 (establishing
de minimis rule so that taxpayers
who give up less than 33.3% of their partnership interest need not
post a bond to enable them to defer payment of credit recapture
taxes for low-income housing).
The Commissioner's quantitative materiality rule is consistent
with the example set forth in 26 CFR § 20.2056(b)4(a) (1996):
"An example of a case in which [the material limitation] rule
may be applied is a bequest of property in trust for the benefit of
the decedent's spouse but the income from the property from the
date of the decedent's death until distribution of the property to
the trustee is to be used to pay expenses incurred in the
administration of the estate."
Even assuming that JUSTICE SCALIA is correct that the word "may"
connotes "possibility rather than permissibility,"
post, at
131, the example still does not specify whether it applies when all
the income, some of the income, or any of the income "from the
property ... is to be used to pay expenses incurred in the
administration of the estate." Any of these constructions of the
example's language is plausible, and the Commissioner's expressed
preference for the second one is worthy of deference.
National
Muffler Dealers Assn., Inc. v.
United States, 440 U. S. 472, 476
(1979).
That said, the proper measure of materiality has yet to be
decided by the Commissioner. The Tax Court below compared the
actual amount spent on administration expenses to its estimate of
the income to be generated by the marital bequest during the
spouse's lifetime. 101 T. C., at 325. One
amicus suggests a
comparison of the discounted present value of the projected income
stream from the marital be-
121
quest when the actual administrative expenses are allocated to
income with the projected income stream when the expenses are
allocated to principal. App. to Brief for American College of Trust
and Estate Counsel as
Amicus Curiae 1-2. The plurality,
drawing upon its valuation theory,
supra, at 115, looks to
whether the "date-of-death value of the expected future
administration expenses chargeable to income ... [is] material as
compared with the date-of-death value of the expected future
income."
Ante, at 110. None of these tests specifies with
any particularity when the threshold of materiality is crossed. Cf.
26 U. S. C. § 2503(b) (setting $10,000 annual minimum before gift
tax liability attaches). The proliferation of possible tests only
underscores the need for the Commissioner's guidance. In its
absence, the Tax Court's approach is as consistent with the Code as
any of the others, and provides no basis for reversal.
I share JUSTICE SCALIA'S reluctance to find a $1.5 million
diminution in postmortem income immaterial under any standard.
Post, at 128-129. Were this Court considering the question
of quantitative materiality in the first instance, I would be hard
pressed not to find this amount "material" given the size of Mr.
Hubert's estate. But the Tax Court in this case was effectively
pre-empted from making such a finding by the Commissioner's
litigation strategy. It appears from the record that the
Commissioner elected to marshal all her resources behind the
proposition that
any diversion of postmortem income was
material, and never presented any evidence or argued that $1.5
million was quantitatively material. See App. 58 (Stipulation of
Agreed Issues) (setting forth Commissioner's argument); Brief for
Respondent 47. Because she bore the burden of proving materiality
(since her challenge to administrative expenses was omitted from
the original notice of deficiency), Tax Court Rule 142(a), her
failure of proof left the Tax Court with little choice but to reach
its carefully crafted conclusion that $1.5 million was not
quantitatively material on "the
122
facts before [it]." 101 T. C., at 325. I would resist the
temptation to correct the seemingly counterintuitive result in this
case by protecting the Commissioner from her own litigation
strategy, especially when she continues to adhere to that strategy
and does not, even now, ask us to reconsider the Tax Court's
finding on this issue.
This complex case has spawned four separate opinions from this
Court. The question presented is simple and its answer should have
been equally straightforward. Yet we are confronted with a maze of
regulations and rulings that lead at times in opposite directions.
There is no reason why this labyrinth should exist, especially when
the Commissioner is empowered to promulgate new regulations and
make the answer clear. Indeed, nothing prevents the Commissioner
from announcing by regulation the very position she advances in
this litigation. Until that time, however, the relevant sources
point to a test of quantitative materiality, one that is not met by
the unusual factual record in this case. I would, accordingly,
affirm the judgment of the Tax Court.
JUSTICE SCALIA, with whom JUSTICE BREYER joins, dissenting.
The statute and regulation most applicable to the question
presented in this case are discussed in today's opinion almost as
an afterthought. Instead of relying on the text of 26 U. S. C. §
2056(b)(4)(B) and its interpretive Treasury Regulation, 26 CFR §
20.2056(b)-4(a) (1996), the plurality hinges its analysis on
general principles of valuation which it mistakenly believes to
inhere in the estate tax. It thereby creates a tax boondoggle never
contemplated by Congress, and announces a test of deductibility
virtually impossible for taxpayers and the Internal Revenue Service
to apply. In my view, § 2056(b)(4)(B) and § 20.2056(b)-4(a) provide
a straightforward disposition, namely, that the marital (and
charitable) deductions must be reduced whenever income from
property
123
comprising the residuary bequest to the spouse (or charity) is
used to satisfy administration expenses. I therefore respectfully
dissent.
I
Section 2056 of the Internal Revenue Code provides for a
deduction from gross estate for marital bequests.1 The Code places
two limitations on the marital deduction which are relevant to this
case. First, as would be expected, the marital deduction is limited
to "an amount equal to the value of any interest in property which
passes or has passed from the decedent to his surviving spouse, but
only to the extent that such interest is included in determining
the value of the gross estate." 26 U. S. C. § 2056(a). Thus, as the
plurality correctly recognizes, and as both parties agree, if any
portion of marital bequest principal is used to pay estate
administration expenses, then the marital deduction must be reduced
commensurately. Second, and more to the point, "where such interest
or property [bequeathed to the spouse] is encumbered in any manner,
or where the surviving spouse incurs any obligation imposed by the
decedent with respect to the passing of such interest, such
encumbrance or obligation shall be taken into account in the same
manner as if the amount of a gift to such spouse of such interest
were being determined." § 2056(b)(4)(B). Section 2056(b)(4)(B)
controls this case and leads to the conclusion that the marital
deduction must be reduced when estate income which would otherwise
pass to the spouse is used to pay administration expenses of the
estate.
A
As the plurality implicitly recognizes, Mrs. Hubert's interest
in the estate was burdened with the obligation of paying
1 This case involves both the marital and the charitable
deductions. I agree with the plurality's determination that the
provisions governing the two should be read
in pari materia,
ante, at 100, and, like the plurality, I focus my attention on
the marital deduction.
124
administration expenses. The settlement agreement resolving the
will contest, like Mr. Hubert's most recent will, provided that the
estate's administration expenses would be paid from the residuary
trusts, with the discretion given to the executor to apportion
expenses between the income and principal of the residue. The
marital bequest, which makes up some 52% of the residue, was thus
plainly burdened with the obligation of paying 52% of the
administration expenses of the estate. (The charitable bequest
accounted for the remaining 48% of the residue.)
Our task under § 2056(b)(4)(B) is to determine how this
obligation would affect the value of the marital bequest were the
bequest an
inter vivos gift. This seemingly rudimentary
question proves difficult to answer. Both parties point to various
provisions of the Internal Revenue Code and the Treasury
Regulations, but these concern the quite different question whether
a gift
qualifies for the gift tax marital deduction; none
discusses how the actual payment of administration expenses from
income will affect the
value of the gift tax marital
deduction. See,
e. g., Treas. Reg.
§§25.2523(e)-1(f)(3) and (4), 26 CFR §§25.2523(e)-1(f)(3) and (4)
(1996) (inclusion of the power to a trustee to allocate expenses of
a trust between income and corpus will not
disqualify the
gift from the marital deduction so long as the spouse maintains
substantial beneficial enjoyment of the income). The plurality
seeks to derive some support from § 25.2523(a)-1(e), see
ante, at 101-102, though it must acknowledge that "[t]he
question presented here ... is not controlled by the exact terms of
[that regulation or the provisions to which it refers],"
ante, at 101. Even going beyond its "exact terms," however,
the regulation has no relevance. Like its counterparts in the
estate tax provisions, see §§ 20.2031-1(b), 20.2031-7, it simply
provides instruction on how to value the
assets comprising
the gift. It says nothing about how to take account of
administration expenses. Indeed, the gross estate does not include
anticipated adminis-
125
tration expenses. As I discuss below,
infra, at 134-135,
the estate tax provisions provide for a deduction from the gross
estate for administration expenses actually incurred. See 26 U. S.
C. § 2053(a)(2) and 26 CFR § 20.2053-3(a) (1996). Were expected
administration expenses taken into account in valuing the assets of
the gross estate, as the plurality incorrectly suggests, then the
estate tax deduction for actual administration expenses would in
effect be a second deduction for the same charge.
Respondent's strongest argument is based on Rev. Rul. 69-56,
1969-1 Cum. Bull. 224, which held that inclusion in a marital trust
of the power to charge administration expenses to either income or
principal does not run afoul of that provision of the regulations
which requires, in order for a lifeestate trust to
qualify
for the gift and estate tax marital deductions, that the settlor
intend the spouse to enjoy "substantially that degree of beneficial
enjoyment of the trust property during her life which the
principles of the law of trust accord to a person who is
unqualifiedly designated as the life beneficiary of a trust." 26
CFR §§ 2523(e)-1(f)(1), 2056(b)-5(f)(1) (1996). Although the
Revenue Ruling was an interpretation of qualification regulations,
it also purported to "h[o]ld" that inclusion of the "power" to
allocate expenses between income and principal "does not result in
the disallowance
or diminution of the marital deduction,"
Rev. Rul. 69-56, 1969-1 Cum. Bull. 224, 225 (emphasis added). I
agree with the Commissioner that this Revenue Ruling is inapposite
because it deals with the effect of the mere
existence of
the power to allocate expenses against income; it speaks not at all
to the question of how the actual
exercise of that power
will affect the valuation of the estate tax marital deduction. If
the Ruling is construed to mean that
exercise of the power
does not reduce the marital deduction, then actually using
principal to pay the expenses should not reduce the marital
deduction, a result which everyone agrees is incorrect, see,
e.
g., ante, at 104 (plurality opinion);
126
ante, at 112-113 (O'CONNOR, J., concurring in judgment);
supra, at 123, and which plainly conflicts with § 2056(a).
It seems to me obvious that the Commissioner was simply not
addressing the issue before us today when she issued Revenue Ruling
69-56, a conclusion confirmed by the fact that the Commissioner's
longstanding view-which antedates Revenue Ruling 69-56-is that use
of marital bequest income to pay administration expenses requires
that the marital deduction be reduced, see,
e. g.,
Brief for Government Appellee in
Ballantine v.
Tomlinson, No. 18,736 (CA5 1961), p. 18; Brief for
Government Appellee in
Alston v.
United States, No.
21,402 (CA5 1965), p. 15.
B
The Commissioner contends that Treas. Reg. § 20.2056 (b)-4(a),
26 CFR § 2056(b)-4(a) (1996), which interprets § 2056(b)-(4)(B),
mandates the conclusion that payment of administration expenses
from marital bequest income reduces the marital deduction. Section
20.2056(b)-4(a) provides:
"The value, for the purpose of the marital deduction, of any
deductible interest which passed from the decedent to his surviving
spouse is to be determined as of the date of the decedent's death,
[unless the executor elects the alternate valuation date]. The
marital deduction may be taken only with respect to the net value
of any deductible interest which passed from the decedent to his
surviving spouse, the same principles being applicable as if the
amount of a gift to the spouse were being determined. In
determining the value of the interest in property passing to the
spouse account must be taken of the effect of any material
limitations upon her right to income from the property. An example
of a case in which this rule may be applied is a bequest of
property in trust for the benefit of the decedent's spouse but the
income from the property from the date of decedent's death until
distribution of the property to the trustee is
127
to be used to pay expenses incurred in the administration of the
estate." (Emphasis added.)
This text was issued pursuant to explicit authority given the
Secretary of the Treasury to promulgate the rules and regulations
necessary to enforce the Internal Revenue Code. See 26 U. S. C. §
7805(a). As this Court has repeatedly acknowledged, judicial
deference to the Secretary's handiwork "helps guarantee that the
rules will be written by 'masters of the subject.'"
National
Muffler Dealers Assn., Inc. v.
United States, 440 U. S. 472, 477
(1979), quoting
United States v.
Moore, 95 U. S. 760, 763 (1878).
Thus, when a provision of the Internal Revenue Code is ambiguous,
as § 2056(b)(4)(B) plainly is, this Court has consistently deferred
to the Treasury Department's interpretive regulations so long as
they '" "implement the congressional mandate in some reasonable
manner."'"
National Muffler Dealers Assn., Inc., supra, at
476, quoting
United States v.
Cartwright, 411 U. S. 546, 550
(1973), in turn quoting
United States v.
Correll,
389 U. S. 299,
307 (1967). See also
Cottage Savings Assn. v.
Commissioner, 499 U. S. 554, 560-561
(1991).
As the courts below recognized, the crucial term of the
regulation for present purposes is "material limitations."
Curiously enough, however, neither the Commissioner nor respondent
comes forward with a definition of this term, the former simply
contending that "it is the burden of paying administration expenses
itself that constitutes the 'material' limitation," Brief
for Petitioner 31, and the latter simply contending that that
burden is for various reasons not substantial enough to qualify.
Today's plurality opinion also takes the latter approach, never
defining the term but displaying by its examples that "material"
must mean "relatively substantial." If, it says, a spouse's bequest
represents a small portion of the overall estate and could be
expected to generate little income, the estate's anticipated
administration expenses" 'may' be material" when compared to the
antici-
128
pated income.
Ante, at 106. But, it says, the mere fact
that an estate incurs (or as I discuss below, under the plurality's
approach, expects to incur) "substantial litigation costs" is
insufficient to make a limitation material.
Ante, at
107.
The beginning of analysis, it seems to me, is to determine what,
in the context of § 20.2056(b)-4(a), the word "material" means. In
common parlance, the word sometimes bears the meaning evidently
assumed by respondent: "substantial," or "serious," or "important."
See 1 The New Shorter Oxford English Dictionary 1714 (1993) (def.
3); Webster's New International Dictionary 1514 (2d ed. 1950) (def.
2a). It would surely bear that meaning in a regulation that
referred to a "material diminution of the value of the spouse's
estate." Relatively small diminutions would not count. But where,
as here, the regulation refers to "material limitations upon [the
spouse's] right to receive income," it seems to me that the more
expansive meaning of "material" is naturally suggested-the meaning
that lawyers use when they move that testimony be excluded as
"immaterial": Not "insubstantial" or "unimportant," but
"irrelevant" or
"inconsequential." See American
Heritage Dictionary 1109 (3d ed. 1992) (def. 4: defining "material"
as "[b]eing both relevant and consequential," and listing
"relevant" as a synonym). In the context of § 20.2056(b)-4(a),
which deals, as its first sentence recites, with "[t]he
value, for the purpose of the marital deduction, of any
deductible interest which passed from the decedent to his surviving
spouse" (emphasis added), a
"materiallimitation" is a
limitation that is relevant or consequential
to the value of
what passes. Many limitations are not-for example, a requirement
that the spouse not spend the income for five years, or that the
spouse be present at the reading of the will, or that the spouse
reconcile with an alienated relative.
That this is the more natural reading of the provision is amply
demonstrated by the consequences of the alternative reading, which
would leave it to the taxpayer, the Commissioner, and ultimately
the courts, to guess whether a particu-
129
lar decrease in value is "material" enough to qualify-without
any hint as to what might be a "ballpark" figure, or indeed any
hint as to whether there is such a thing as "absolute materiality"
(the $2 million at issue here, for instance), or whether it is all
relative to the size of the estate. One should not needlessly
impute such a confusing meaning to a regulation which readily bears
another interpretation that is more precise. Moreover, the
Commissioner's interpretation of her own regulation, so long as it
is consistent with the text, is entitled to considerable deference,
see
National Muffler Dealers Assn., Inc., supra, at 488-489;
Cottage Savings Assn., supra, at 560-561.
The concurrence contends that the other (more unnatural) reading
of "material" must be adopted-and that no deference is to be
accorded the Commissioner's longstanding approach of reducing the
marital deduction for
any payment of administrative expenses
out of marital-bequest incomebecause of a recent Revenue Ruling in
which the Commissioner acquiesced in lower court holdings that the
marital deduction is not reduced by the payment from the marital
bequest of interest on deferred estate taxes.
Ante, at
118120 (discussing Rev. Rul. 93-48). The concurrence asserts that
interest accruing on estate taxes "is functionally
indistinguishable" from administrative expenses, so that Revenue
Ruling 93-48 "created a quantitative rule" shielding some financial
burdens from affecting the calculation of the marital deduction.
Ante, at 118, 119. I think not. The Commissioner issued
Revenue Ruling 93-48 only after her contention, that §
20.2056(b)-4(a) required the marital deduction to be reduced by
payment of estate tax interest from the marital bequest, was
repeatedly rejected by the Tax Court and the Courts of Appeals.
See,
e. g., Estate of Street v.
Commissioner,
974 F.2d
723 (CA6 1992);
Estate of Whittle v.
Commissioner, 994 F.2d
379 (CA 7 1993);
Estate of Richardson v.
Commissioner, 89 T. C. 1193 (1987). Rather than continuing
to expend resources in litigation that seemed likely
130
to bring little or no income to the Treasury, the Commissioner
chose, in Revenue Ruling 93-48, to "adopt the result" of
then-recent court decisions regarding interest on taxes. I t is
impossible to think that this suggested her view on the proper
treatment of administrative expenses had changed. Indeed, the
Ruling itself expressly indicates continued adherence to the
Commissioner's longstanding position by reaffirming Revenue Ruling
73-98, which held that the charitable deduction must be reduced by
the amount of charitable bequest income and principal consumed to
pay administrative expenses, modifying it only insofar as it
applies to payment of interest on taxes. Moreover, the Courts of
Appeals whose results the Commissioner adopted
themselves
distinguished administrative expenses. In
Estate of
Street, for example, the court reasoned that while
administrative expenses accrue at death interest on taxes accrues
after death, and noted that the example in Treas. Reg. §
2056(b)-4(a) specifically required a reduction of the marital
deduction for payment of administrative expenses, but was silent as
to interest on taxes. 974 F. 2d, at 727, 729. While the concurrence
may be correct that the distinctions advanced by the Courts of
Appeals are not wholly persuasive (the Commissioner herself argued
that to no avail), I hardly think they are so irrational that it
was arbitrary or capricious for the Commissioner to maintain her
longstanding prior position on administrative expenses once Revenue
Ruling 93-48 was issued; and it is utterly impossible to think that
Revenue Ruling 93-48 was, or was understood to be, an indication
that the Commissioner had
changed her prior position on
administrative expenses. That eliminates the only two grounds on
which Revenue Ruling 93-48 could be relevant.
The concurrence's reading of Revenue Ruling 93-48 suffers from
an additional flaw. Revenue Ruling 93-48 is not limited to payment
from marital bequest
income, but rather extends to payment
from marital bequest
principal as well. Thus, under the
concurrence's view of that Ruling, even sub-
131
stantial administrative expenses paid out of marital bequest
principal may not require a reduction of the marital deduction.
This result is, of course, inconsistent with the statute, see 26 U.
s. C. § 2056(a), and with what appears to be (as I noted earlier,
supra, at 125-126) the concurrence's view,
ante, at
112-113.
Respondent asserts that some inquiry into "substantiality" is
necessarily implied by the fact that the last sentence of the
regulation describes an income-to-pay-administrationexpenses
limitation as "[a]n example of a case in which this rule [of taking
account of material limitations]
may be applied," 26 CFR §
20.2056(b)-4(a) (1996) (emphasis added). The word "may" implies,
the argument goes, that in some circumstances under those same
facts the rule would
not be applied-namely (the argument
posits), when the administration expenses are not "substantial."
But the latter is not the only explanation for the "may." Assuming
it connotes possibility rather than permissibility (as in, "My boss
said that I may go to New York"), the contingency referred to could
simply be the contingency that there be some income which is used
to pay administration expenses.
The Tax Court (in analysis adopted verbatim by the Eleventh
Circuit and seemingly adopted by the concurrence,
ante, at
120-121) took yet a third approach to "material limitation," which
I must pause to consider. The Tax Court relied on 26 CFR §
25.2523(e)-1(f)(3) (1996), which, it stated, provides that so long
as the spouse has substantial beneficial enjoyment of the income of
a trust, the bequest will not be disqualified from the marital gift
deduction by virtue of a provision allowing the trustee to allocate
expenses to income, and the spouse will be deemed to have received
all the income from the trust. The Tax Court concluded: "If Mrs.
Hubert is treated as having received all of the income from the
trust, there can be no material limitation on her right to receive
income." 101 T. C. 314, 325-326 (1993). This reasoning fails for a
number of reasons. First, § 25.2523(e)-
132
1(f)(3) is a
qualification provision; it does not purport
to instruct on how to value the bequest. Second, and more
fundamentally, the Tax Court's approach renders the "material
limitation" phrase in § 20.2056(b)-4(a) superfluous. Under that
view, a limitation is material only if it deprives the spouse of
substantial beneficial enjoyment of the income. However, if the
spouse does not have substantial beneficial enjoyment of the
income, the trust does not qualify for the marital deduction and
whether the limitation is material is irrelevant. That "material
limitation" is not synonymous with "substantial beneficial
enjoyment" is further suggested by the regulations governing the
qualification of trusts for the marital estate tax deduction, which
are virtually identical to the gift tax provisions relied upon by
the Tax Court. See 26 CFR § 20.2056(b)-5(f) (1996). Section
20.2056(b)5(f)(9) provides that a spouse will not be deemed to lack
substantial beneficial enjoyment of the income merely because the
spouse is not entitled to the income from the estate assets for the
period reasonably required for administration of the estate.
However, that section expressly provides: "As to the
valuation of the property interest passing to the spouse in
trust where the right to income is expressly postponed, see §
20.2056(b)-J"." Ibid. (emphasis added).
C
My understanding of § 20.2056(b)-4(a) is the only approach
consistent with the statutory requirement that the marital
deduction be limited to the value of property which passes to the
spouse. See 26 U. S. C. § 2056(a). As the plurality and the
concurrence acknowledge, one component of an asset's value is its
discounted future income. See,
e. g., Maass v.
Higgins, 312
U. S. 443, 448 (1941); 26 CFR § 20.2031-1(b) (1996). (This
explains why postmortem income earned by the estate is not added to
the date-of-death value in computing the gross estate: projected
income was already included in the date-of-death value.) The
plurality
133
and the concurrence also properly acknowledge that if residuary
principal is used to pay administration expenses, then the marital
deduction must be reduced commensurately because the property does
not pass to the spouse. See
ante, at 104 (plurality
opinion);
ante, at 112-113 (O'CONNOR, J., concurring in
judgment); 26 U. S. C. § 2056(a). The plurality and the concurrence
decline, however, to follow this reasoning to its logical
conclusion. Since the future stream of income is one part of the
value of the assets at the date of death, use of the income to pay
administration expenses (which were not included in calculating the
assets' values) in effect reduces the value of the interest that
passes to the spouse. As succinctly explained by a respected tax
commentator:
"Beneficiaries are compensated for the delay in receiving
possession by giving them the right to the income that is earned
during administration .... [I]t is only the combination of the two
rights-that to the income and that to possess the property in the
future-that gives the beneficiary rights at death that are equal to
value of the property at death. If the beneficiary does not get the
income, what the beneficiary gets is less than the deathtime value
of the property." Davenport, A Street Through
Hubert's Fog, 73 Tax Notes 1107, 1110 (1996).
If the beneficiary does not receive the income generated by the
marital bequest principal, she in effect receives at the date of
death less than the value of the property in the estate, in much
the same way as she receives less than the value of the property in
the estate when principal is used to pay expenses.
II
Besides giving the word "material" the erroneous meaning of
something in excess of "substantial," the plurality's opinion
adopts a unique methodology for determining materiality. Consistent
with its apparent view that the estate tax provisions prohibit
examination of any events following the
134
date of death, the plurality concludes that whether a limitation
is material, and the extent of any reduction in the marital
deduction, are determined solely on the basis of the information
available at the date of death-a position espoused by neither
litigant, none of the
amici, and none of the courts to have
considered this issue since it arose some 35 years ago. The
plurality appears to have been misled by its view that the estate
tax demands symmetry: Since only anticipated income is included in
the gross estate, only anticipated administration expenses can
reduce the marital deduction. See
ante, at 102, 106-109. The
provisions of the estate tax clearly reject such a notion of
symmetry and do not sharply discriminate between date-of-death and
postmortem events insofar as the allowance of deductions for claims
against and obligations of the estate are concerned. In this very
case, for example, in calculating the taxable estate the executors
deducted $506,989 of actual administration expenses pursuant to 26
U. S. C. § 2053(a)(2). App. to Pet. for Cert. 3a. The regulations
governing such deductions provide that "[t]he amounts deductible
... as 'administration expenses' ... are limited to such expenses
as are
actually and necessarily, incurred in the
administration of the decedent's estate," 26 CFR § 20.2053-3(a)
(1996) (emphasis added), and expressly prohibit taking a deduction
"upon the basis of a vague or uncertain estimate," §
20.2053-1(b)(3). Since such common administration expenses as
litigation costs will be impossible to ascertain with any
exactitude as of the date of death, the plurality's approach flatly
contradicts the provisions of these regulations.2
The marital deduction itself is calculated on the basis of
actual, rather than anticipated, expenditures from the marital
bequest. The regulations governing 26 U. S. C. § 2056(b)
2 The plurality's reference to
Ithaca Trust Co. v.
United States, 279 U. S. 151 (1929), is
unhelpful. That case holds that date-of-death valuation is
applicable to bequeathed assets, not that it is applicable to
claims and obligations that are to be satisfied out of those
assets.
135
(4)(A), the provision requiring the marital deduction to be
reduced to take account of the effect of estate and inheritance
taxes, make it clear that the
actual amounts of those taxes
control. See 26 CFR § 20.2056(b)-4(c) (1996). (With respect to the
charitable deduction, the requirement that actual amounts be used
is apparent on the face of the statute itself, see 26 U. S. C. §
2055(c).) Moreover, the language of § 2056(b)(4)(A) is quite
similar to the language of the regulation at issue here, §
20.2056(b)-4(a), suggesting that the latter, like the former,
should be interpreted to require consideration of
actual,
rather than merely expected, administration expenses. Compare 26 U.
S. C. § 2056(b)(4)(A) ("[T]here shall be taken into account the
effect which the tax imposed by section 2001, or any estate
[tax], has on the
net value to the surviving spouse of such
interest" (emphasis added)) with 26 CFR § 20.2056(b)-4(a) (1996)
("The marital deduction may be taken only with respect to the
net value of any deductible interest which passed from the
decedent to his surviving spouse .... In determining the value of
the interest in property passing to the spouse account must be
taken of
the effect of any material limitations upon [the
spouse's] right to income" (emphasis added)).
In short, the plurality's general theory concerning valuation is
contradicted by provisions of both the Code and regulations. It is
also plagued by a number of practical problems. Most prominently,
the plurality's rule is simply unadministrable. I t requires the
Internal Revenue Service and courts to engage in a peculiar,
nunc pro tunc, threestage investigation into what would have
been believed on the date of death of the decedent. This highly
speculative inquiry begins, I presume, with an examination of the
various possible administration expenditures multiplied by the
likelihood that they would actually come into being (for example,
estimating the chances that a will contest would develop). Next,
one must calculate the expected future income from the bequest.
Finally, one must determine if,
136
in light of the expected income, the anticipated expenses are
such that a willing buyer would deem them to be a "material [i.
e., substantial] limitation" on the right to receive
income.
Just how a court, presiding over a tax controversy many years
after the decedent's death, is supposed to blind itself to later
developed facts, and gauge the expected administration expenses and
anticipated income just as they would have been gauged on the date
of death, is a mystery to me. In most cases, it is nearly
impossible to estimate administration expenses as of the date of
death; much less is it feasible to reconstruct such an estimation
five or six years later. The plurality's test creates tremendous
uncertainty and will undoubtedly produce extensive litigation. We
should be very reluctant to attribute to the Code or the
Secretary's regulations the intention to require this sort of
inherently difficult inquiry, especially when the key regulation is
best read to require that account be taken of
actual
expenses.
The plurality's test also leads to rather peculiar results.
One example should suffice: Assume a decedent leaves his entire
$30 million estate in trust to his wife and that as of the date of
death a hypothetical buyer estimates that the estate will generate
administration expenses on the order of $5 million because the
decedent's estranged son has publicly stated that he is going to
wage a fight over the will. Further, assume that the will provides
that either income or principal may be used to satisfy the estate's
expenses. Finally, assume that a week after the decedent's death,
mother and son put aside their differences and that the money
passes to the spouse almost immediately with virtually no
administration expenses. Under the plurality's test, since "only
anticipated administration expenses payable from income, not the
actual ones, affect the date-of-death value of the marital or
charitable bequests,"
ante, at 108, the marital deduction
will be limited to approximately $25 million, and, despite
generating almost no income and having very few adminis-
137
tration expenses, the estate will be required to pay an estate
tax on some $5 million even though the entire estate passed to the
spouse. The plurality's test creates taxable estates where none
exist. The proper result under § 2056(b)(4)(B) and §
20.2056(b)-4(a) is that the marital deduction is $30 million and
the estate pays no estate tax.
I have one final concern with the plurality's approach: It
effectively permits an estate to obtain a double deduction from tax
for administration expenses, a tax windfall which Congress could
never have intended. Title 26 U. s. C. § 642(g) provides that
administration expenses, which are allowed as a deduction in
computing the taxable estate of a decedent, see § 2053, may be
deducted from income (provided they fall within an income tax
deduction) if the estate files a statement with the Commissioner
stating that such amounts have not been taken as deductions from
the gross estate. Here, respondent elected to deduct some $1.5
million of its administration expenses on its fiduciary income tax
returns and was prohibited from taking these expenses as a
deduction from the gross estate. Notwithstanding § 642(g), however,
the plurality's holding effectively permits respondent to deduct
the $1.5 million of administration expenses on the estate tax
return under the guise of a marital or charitable deduction. Of
course, the estate could have avoided the estate tax by electing to
deduct its administration expenses on its estate tax return, but
then it would have had no income tax deduction; Congress gave
estates a choice, not a road map to a double deduction. I recognize
that nothing in § 642(g)
compels the conclusion that the
marital (or charitable) deduction must be reduced whenever an
estate elects to deduct expenses from income. However, by enacting
§ 642 to prohibit a double deduction, Congress seemingly
anticipated that if an estate elected to deduct administration
expenses against income, its potential estate tax liability would
increase commensurately. The plurality's holding today defeats this
expectation.
138
III
The plurality today virtually ignores the controlling authority
and instead decides this case based on a novel vision of the estate
tax system. Because 26 CFR § 20.2056(b)-4(a) (1996), which is a
reasonable interpretation of 26 U. S. C. § 2056(b)(4)(B), squarely
controls this case and requires that the marital (and charitable)
deductions be reduced whenever marital (or charitable) bequest
income is used to pay administration expenses, I would reverse the
judgment of the Eleventh Circuit. There is some dispute as to how
exactly to calculate the reduction in the marital and charitable
deductions. The dissenting judges in the Tax Court, on the one
hand, contended that the marital and charitable deductions should
be reduced by the date-of-death value of an annuity charged against
the residuary interest that would be sufficient to pay the actual
administration expenses charged to income. See 101 T. C., at
348-349 (Beghe, J., dissenting). The Commissioner, on the other
hand, contends that the marital and charitable deductions must be
reduced on a dollarfor-dollar basis, reasoning that this is the
same way that all claims and obligations of the estate are treated.
Since this dispute was not adequately briefed by the parties, nor
passed upon by the Eleventh Circuit or the majority of judges in
the Tax Court, I would remand the case to allow the lower courts to
consider this issue in the first instance.
JUSTICE BREYER, dissenting.
I join JUSTICE SCALIA'S dissent. This case turns on whether a
payment of administration expenses out of income generated by
estate assets constitutes a "material limitation" on the right to
receive income from those assets. 26 CFR § 20.2056(b)-4(a) (1996).
The Commissioner has long, and consistently, argued that such a
payment does reduce the value of the marital deduction. See,
e. g., Ballantine v.
Tomlinson,
293 F.2d
311 (CA5 1961);
Alston v.
United States,
349 F.2d
87 (CA5 1965);
Estate of Street v.
Commis-
139
sioner, 974 F.2d
723 (CA6 1992);
Estate of Roney, 33 T. C. 801 (1960),
aff'd
per curiam, 294 F.2d
774 (CA5 1961); Reply Brief for Petitioner 15. JUSTICE SCALIA
explains why the Commissioner's interpretation is consistent with
the regulation's language and the statute it interprets. I add a
brief explanation as to why I believe that it is consistent with
basic statutory and regulatory tax law objectives as well.
The regulation, which speaks of the "net value" of what passes
to the spouse, requires a realistic valuation of the interest left
to the spouse as of the date of the decedent's death. Assume, for
example, that a decedent leaves his entire estate to his wife in
trust, with the proviso that the administrator pay 25% of the
income earned by the estate assets during the period of
administration to the decedent's son. Assume that the period of
administration lasts several years and that the estate generates
several million dollars in income during that time. On these
assumptions, the son will have received an important asset
(included in the estate's date-of-death value) that the surviving
spouse did not receive, namely, the right to a portion of the
estate's income over a period of several years. Were estate tax law
to fail to take account of this fact (that the son, not the wife,
received that asset), it would permit a valuable asset (the right
to that income) to pass to the son without estate tax. But estate
tax law does seem realistically to appraise the "net value" of what
passes to the wife in such circumstances. See 26 CFR §§
20.2056(b)-5(f)(9), 20.2056(b)-4(a) (1996); 4 A. Casner, Estate
Planning § 13.11, pp. 138-139, and § 13.14.6, n. 18 (5th ed. 1988);
cf.
Estate of Friedberg, 63 TCM 3080 (1992), , 92,310 P-H
Memo TC (delay in payment of a specific bequest to a surviving
spouse reduces its marital deduction value). And that being so, why
would it not take account of the similar limitation on the right to
income at issue here? The fact that the administrator uses estate
income to pay administration expenses, rather than to make a
bequest to the son, makes no difference from a marital
deduction
140
perspective, for, as the regulations state, the marital
deduction focuses upon the "net value" of the "interest which
passed from the decedent to his surviving spouse." 26 CFR §
20.2056(b)-4(a) (1996); see
United States v.
Stapf,
375 U. S. 118,
125 (1963).
The Commissioner's position also treats economic equals as
equal. The time when the administrator writes the relevant checks,
and not the account to which he debits them, determines economic
impact. Thus $100,000 in administration expenses incurred by a $1
million estate open for one year, paid by check on the year's last
day will (assuming 10% simple interest and assuming away
here-irrelevant complexities) leave $1 million for the spouse at
year's end, whether the administrator pays the expenses out of
estate principal or from income. On these same assumptions, a
commitment to pay, say, $100,000 in administration expenses out of
income will reduce the value of principal by an amount identical to
the reduction in value that would flow from a commitment to pay a
similar amount out of principal. This economic similarity argues
for similar estate tax treatment.
I recognize that the statute permits estates to deduct
administration and certain other expenses either from the estate
tax or from the estate's income tax. 26 U. s. C. § 642(g); cf.
ante, at 112-113 (O'CONNOR, J., concurring in judgment). But
I do not read that statute as allowing a spouse to escape payment
both of the estate tax (through a greater marital deduction) and
also of income tax (through the deduction of the administration
expenses from income). One can easily read the provision's language
as simply granting the estate the advantage of whichever of the two
tax rates is the more favorable, while continuing to require the
estate to pay at least one of the two potential taxes. To read the
"election" provision in this way makes of it a less dramatic
departure from a Tax Code that otherwise sees what passes to heirs
not as the full value of what the testator left, but, rather,
as
141
that value minus a set of permitted deductions. 26 U. s. C. §
2053(a) (specifying deductions).
Although respondent argues that the Commissioner's
interpretation will sometimes produce an unjustified "shrinking" of
the marital deduction, I do not see how that is so. I concede that
unfairness could occur were the Commissioner to readjust the
marital deduction
every time the administrator deducted from
the estate's income tax
every expense necessary to produce
that income. But regulations guard against her doing so. Those
regulations distinguish between (a) "expenditures ... essential to
the proper settlement of the estate," and (b) expenses "incurred
for the individual benefit of the heirs, legatees, or devisees." 26
CFR § 20.2053-3(a) (1996). The former are "administration
expenses"; the latter are not. Deducting expenses in the latter
category from the estate's income tax should not affect the marital
deduction; and, as long as that is so, the Commissioner's
interpretation will simply permit estates to use their
administration expense deductions to the best tax advantage. It
will not lead to a marital deduction that to the spouse's overall
disadvantage somehow shrinks, or disappears.
The Commissioner's insistence upon reducing the date-ofdeath
value of the trust dollar for dollar poses a more serious problem.
Payment of $100,000 in administration expenses from future income
should reduce the date-of-death value of assets left to a wife in
trust not by $100,000, but by $100,000 discounted to reflect the
fact that the $100,000 will be paid in the future, earning interest
in the meantime. (Assuming a 10% interest rate and payment one year
after death, the reduction in value would be about $91,000, not
$100,000.) Nonetheless, the Commissioner's practice of reducing the
marital deduction dollar for dollar might reflect the simplifying
assumption that discount calculations do not make a sufficiently
large difference sufficiently often to warrant the administrative
burden of authorizing them. Or it might reflect
142
the fact that when administration expenses are taken as a
deduction against the estate tax, their value is not discounted.
Were the Commissioner to defend the dollar-fordollar position in
some such way, her approach might prove reasonable. And this Court
will defer to longstanding interpretations of the Code and Treasury
Regulations, see
supra, at 138-139, that reasonably
"implement the congressional mandate."
United States v.
Correll, 389
U. S. 299, 307 (1967); see
National Muffler Dealers Assn.,
Inc. v.
United States, 440 U. S. 472, 488
(1979). Regardless, I would not decide this matter now, for it has
not been argued to us.
Finally, although I agree with much that JUSTICE O'CONNOR has
written, I cannot agree that the amount at issuealmost $1.5 million
of administration expenses deducted from income-is insignificant
hence immaterial; and I can find no concession to that effect in
the courts below.
For these reasons and those set forth by JUSTICE SCALIA, I would
reverse the Court of Appeals.
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