Estate of Rensenhouse v. Commissioner

Pierce, J., concurring in part and dissenting in part.

Because of the importance of this case in the administration of the Federal estate tax, I believe it appropriate to set forth my views, not only with respect to the final result reached by the Court in this particular case, but also with respect to the answers made by the Court to the specific questions presented in the mandate of the Court of Appeals for the Sixth Circuit. Since this is the first case involving the qualification of widows’ awards for the estate tax marital deduction, which has received consideration by any of the Courts of Appeals, and since in the proceedings above the Treasury Department and its counsel made important concessions which caused the case to be remanded for decision on two crucial questions, I believe that the conclusions and reasoning employed by this Court in arriving at its answers to said questions have a bearing on the estate tax treatment of widows’ awards, generally, that goes far beyond their application in the instant case.

I concur in the Court’s holding that the particular widow’s award here involved does not constitute a “terminable interest” within the meaning of section 812(e) (1) (B) of the 1939 Code; and I join in the holding that the decision herein should be for the petitioner. I respectfully dissent, however, from the Court’s answer to the second question presented by the Court of Appeals — that “the terminable interest rule [contained in subparagraph (B) of section 812(e) (1)] is applicable to a widow’s allowance.” And I also am impelled to disagree with the conclusions expressed and applied by the Court in arriving at its answer to the first question of the Court of Appeals. These conclusions are, in substance: That the controlling test for determining whether a particular widow’s award qualifies for the estate tax marital deduction, is whether the widow’s right to the particular amounts actually received by her had vested in her at the time of her husband’s death, under the local lam as interpreted by the local courts — so as to preclude any possibility that payment of such amounts might have been stopped or discontinued by the local court, in the event she had died or remarried immediately after her husband’s death.

Such interpretation and application of section 812 (e) is, in my view, erroneous and out of harmony with the overall scheme of the marital deduction provisions of the Code, as indicated by their own terms. Also, the so-called vesting test which the Court adopted and applied in determining whether the widow’s award qualified, is neither mentioned in the Code nor specifically authorized by the terms thereof; and I find no warrant for inferring that Congress intended the operation of the Federal statute to be dependent on State law. Such test, because of the paucity or indefiniteness of local court decisions in many State jurisdictions (see statement in the Court’s opinion, as to the difficulty of formulating any general rule as to vesting), would complicate the administration of the estate tax law, by making it difficult or even impossible in many instances for taxpayers, their counsel, and the administrative officials, to determine with reasonable certainty whether a particular widow’s award qualifies — thus stimulating litigation and hindering the prompt settlement of estates. And further, such test, because of the differing views expressed by local courts in their consideration of similar facts and similar State statutes, would produce diametrically opposite results in cases arising in different States (compare, for example, the result reached in the instant case involving a Michigan estate, with that reached by this Court in a case involving a California estate, Estate of Edward A. Cunha, 30 T.C. 812 , pending on appeal to C.A. 9) ; and thus it would tend to defeat the objective of attaining a uniform application of the estate tax statutes to a nationwide scheme of taxation.

In answering the questions presented by the Court of Appeals, I would have given effect to the following considerations:

(1) The meaning and application of Federal tax statutes is a Federal question, which should be resolved by application of settled principles relating to the construction of Federal tax statutes.

In Burnet v. Harmel, 287 U.S. 103, 110 , the Supreme Court, in dealing with the meaning and application of a Federal income tax statute, said:

Here we are concerned only with, the meaning and application of a statute enacted by Congress, in the exercise of its plenary power under the Constitution, to tax income. The exertion of that power is not subject to state control. It is the will of Congress which controls, and the expression of its will in legislation, in the absence of language evidencing a different purpose, is to be interpreted so as to give a uniform application to a nation-wide scheme of taxation. * * * State law may control only when the operation of the federal taxing act, by express language or necessary implication, makes its own operation dependent upon state law. * * *

See also Lyeth v. Hoey, 305 U.S. 188, 193-194 , in which the Supreme Court said:

The question as to the construction of the exemption in the federal statute is not determined by local law. We are not concerned with the peculiarities and special incidences of state taxes or with the policies they reflect [relative to the administration of decedents’estates]. * * *

I think that such principles are applicable here.

(2) Section 812(e) provides a comprehensive plan for dealing with interests which commonly would be considered as passing from a decedent to his surviving spouse; and it provides its own definition of an interest passing, which is broad enough to cover all the interests included in determining the value of the decedent’s gross estate under the various subsections of section 811 of the Code.

When Congress first established the estate tax marital deduction in 1948, the basic scheme was to permit the spouse who died first, to pass to his surviving spouse free from the burden of estate tax, up to one-half of his adjusted gross estate; provided that the interest so passed was of such character that it would qualify for taxation in the estate of the surviving spouse. See Estate of Edward F. Pipe, 23 T.C. 99, 104 , affd. 241 F. 2d 210 , certiorari denied 355 U.S. 814 . This scheme was made effective by adding to section 812 of the 1939 Code, a new subsection (e) which included the following basic provision, and the following overall limitation:

(e) Bequests, Etc., to Surviving Spouse.—

(1) Allowance oe marital deduction.—

(A) In General. — 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. [Emphasis supplied.]

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(H) Limitation On Aggregate Of Deductions. — The aggregate amount of the deductions allowed under this paragraph (computed without regard to this subparagraph) shall not exceed 50 per centum of the value of the adjusted gross estate, as defined in paragraph (2).

Included also in section 812(e) are several other paragraphs and subparagraphs (including subparagraph (B) here involved) which provide special limitations, exceptions and definitions, that serve to make effective the scheme of the subsection, and also provide for such latitude in its application as will make its operation both practical and certain. Such latitude is provided, not only by the terms “passes or has passed” contained in subparagraph (A), but also by the definition contained in paragraph (3) of section 812(e), which states that, “For the purposes of this subsection * * * [certain specified interests] in property shall be considered as passing from the decedent.” (Emphasis supplied). Among the interests that shall be so considered as passing is an interest “inherited” (sec. 812(e)(3)(B)); and, by reason of the above-mentioned concessions made by the Treasury Department in the instant case when it was before the Court of Appeals, the widow’s award here involved which was actually paid out of the decedent’s gross estate to the widow, is to be regarded as an interest “inherited.” Still other interests considered as passing from the decedent include: Statutory interests assigned, in certain States, in lieu of dower or curtesy (sec. 812(e)(3)(C)); a cash amount received in settlement of a will contest (Estate of Gertrude P. Barrett, 22 T.C. 606 ); and the limited statutory interest in an estate, which a widow may have elected to take against her husband’s will (S. Rept. No. 1013, 80th Cong., 2d Sess., 1948- 1 C.B. 285 , 334).

In a statute of such fine mesh, I find no room for the inclusion of tests based on the peculiarities and policies of differing State laws, which are not specifically authorized.

(3) The Court’s holdings and conclusions as to the application and effect of subparagraph (B) fail, in my view, to give recognition to the limited scope of said subparagraph, as indicated by its terms. The opening sentence of this subparagraph reads as follows:

(B) Life Estate or Other Terminable Interest. — Where, upon the lapse of time, upon the occurrence of an event or contingency, or upon the failure of an event or contingency to occur, such interest passing to the surviving spouse will terminate or fail, no deduction shall be allowed with respect to such interest—

(i) if * * * ; and

(ii) if * * *;

and no deduction shall be allowed * * *

(iii) if » * *. [Emphasis supplied.]

It will be observed that, in order for the marital deduction to be disallowed under this subparagraph, the conditions of clauses (i) and (ii), or of clause (iii), must be met. Hone of these clauses has the remotest relation to a widow’s award; and hence, the condition precedent to the application of said subparagraph to such an award, is not met.

Moreover, it is obvious from the context of subparagraph (B), that the “terminable interests” intended to be controlled thereby, are interests passing to a surviving spouse, which are not of such character that they would qualify for taxation in the surviving spouse’s estate —as for example, a life estate, or an estate for a term of years, or a contingent interest that is subject to curtailment or extinguishment, and to which clauses (i) and (ii) or (iii) would pertain. The sub-paragraph has, in my view, no application whatever to interests which pass to the widow, absolutely for her sole use and consumption.

Widows’ awards simply do not fit into the pattern of subparagraph (B). They are allowances which an appropriate local court, acting under an empowering statute, may authorize the executor or administrator to expend and pay out of the decedent’s gross estate for the temporary support of the surviving widow. Except in some States where a minimum allowance is provided, the local court usually has discretionary power to fix the amount or amounts to be paid, either in a single lump sum or in a series of monthly lump sums; and in addition, it has discretionary power to determine how long the payments shall run — as for example, until the widow’s interest in the estate is assigned to her; or for 1 year; or until further order of the court. Because such allowances are for the relief of the widow only, and because on the other hand they may operate against the interests of other persons, the local court usually has discretionary power also to stop the payments, or to increase or decrease their amounts, so as to give effect to their purpose. Neither the empowering local statute nor the discretionary orders of the local court can, in any realistic sense, be regarded as creating interests in property which pass to the widow prior to the time or times when the particular support payments are actually or constructively received by her. There is no corpus represented by the award, in which the widow has only a limited or contingent use; there are no remainders; and there is no reverter.

I would have held that subparagraph (B) is in no way applicable to widows’ awards.

(4) There is legislative history which indicates clearly an intention of Congress that support allowances actually paid to a widow out of her husband’s gross estate, should qualify for the estate tax marital deduction.

Prior to the creation of the marital deduction in 1948, and continuing until 1950, amounts paid to a surviving spouse as a widow’s award, were, to the extent “reasonably required and actually expended for the support during the settlement of the estate,” expressly deductible for estate tax purposes, under section 812(b)(5) of the 1939 Code. In 1950, however, such deduction was eliminated from the Code; and in explanation of such action, the Senate Finance Committee made the following statements (S. Eept. No. 2375, 81st Cong., 2d Sess., 1950- 2 C.B. 483 ,525,576):

This deduction [allowed by section 812(b) (5)] is inconsistent with the concept of the estate tax as a tax on all properties transferred at death. In practice it has discriminated in favor of estates located in States which authorize liberal allowances for the support of dependents, and it has probably also tended to delay the settlement of estates.

Section 502 of your committee’s bill repeals this particular feature of the estate tax law. * * *

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Under existing law amounts expended in accordance with the local law for support of the surviving spouse of the decedent are, by reason of their deducti-bility under section 812(b), not allowable as a marital deduction under section 812 (e) of the Code. However, as a result of the amendment made by this section [section 502 of the Revenue Act of 1950] such amounts heretofore deductible under section 812(b) will be allowable as a marital deduction subject to the conditions and limitations of section 812 (e). [Emphasis supplied.]

The last of the above-quoted statements appears also, in identical words, in the report of the Ways and Means Committee of the House (H. Eept. No. 2319, 81st Cong., 2d Sess., 1950- 2 C.B. 380 , 478).

Thus it will be seen, that the intended effect of the repeal of said section 812(b)(5) was merely to shift the deduction for widows’ awards from one subsection of section 812 to another; and thereby place the allowances under the 50 per cent limitation on aggregate marital deductions, which is provided by section 812(e) (1) (H) of the 1939 Code.

In view of the above statements contained in the report of the Senate Finance Committee, to the effect that such action was motivated, at least in part, by a desire to eliminate discrimination among the States and to prevent delay in the settlement of estates, it cannot reasonably be inferred that Congress intended that the qualification of widows’ awards for the marital deduction, should be subjected to the uncertainties and variations of local law.

I believe that the intention of Congress, as disclosed by the above quotations from the committee reports, should be given effect in respect of widows’ support allowances, generally.