Bulletin No. 1997–32

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August 11, 1997

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HIGHLIGHTS

OF THIS ISSUE

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

INCOME TAX

EXEMPT ORGANIZATIONS

Rev. Rul. 97–31, page 4.

Announcement 97–76, page 28.

International operation of ships and aircraft; income

exempt from tax. Those countries that currently provide

exemptions from tax to U.S. persons for income from the

international operation of ships and aircraft through income

tax conventions, diplomatic notes, or the country’s domestic

law are listed. Rev. Rul. 89–42 supplemented.

A list is given of organizations now classified as private foundations.

ESTATE TAX

Ct.D. 2062, page 8.

EMPLOYEE PLANS

REG–107644–97, page 24.

Proposed regulations under section 411 of the Code permit

an amendment to a qualified plan that eliminates certain preretirement optional forms of benefit.

Marital or charitable bequests. 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. Commissioner v.

Estate of Hubert.

ADMINISTRATIVE

Announcement 97–75, page 28.

The version of Rev. Rul. 97–31 released for advance publication on July 22, 1997, has been corrected. The corrected

version of is on page 4 of this Bulletin.

Finding Lists begin on page 31.

Department of the Treasury

Internal Revenue Service

Mission of the Service

ucts and services; and perform in a manner warranting

the highest degree of public confidence in our integrity, efficiency, and fairness.

The purpose of the Internal Revenue Service is to collect

the proper amount of tax revenue at the least cost; serve

the public by continually improving the quality of our prod-

Statement of Principles

of Internal Revenue

Tax Administration

The Service also has the responsibility of applying and

administering the law in a reasonable, practical manner.

Issues should only be raised by examining officers when

they have merit, never arbitrarily or for trading purposes.

At the same time, the examining officer should never hesitate to raise a meritorious issue. It is also important that

care be exercised not to raise an issue or to ask a court to

adopt a position inconsistent with an established Service

position.

The function of the Internal Revenue Service is to administer the Internal Revenue Code. Tax policy for raising revenue

is determined by Congress.

With this in mind, it is the duty of the Service to carry out that

policy by correctly applying the laws enacted by Congress;

to determine the reasonable meaning of various Code provisions in light of the Congressional purpose in enacting them;

and to perform this work in a fair and impartial manner, with

neither a government nor a taxpayer point of view.

Administration should be both reasonable and vigorous. It

should be conducted with as little delay as possible and

with great courtesy and considerateness. It should never

try to overreach, and should be reasonable within the

bounds of law and sound administration. It should, however, be vigorous in requiring compliance with law and it

should be relentless in its attack on unreal tax devices and

fraud.

At the heart of administration is interpretation of the Code. It

is the responsibility of each person in the Service, charged

with the duty of interpreting the law, to try to find the true

meaning of the statutory provision and not to adopt a

strained construction in the belief that he or she is “protecting the revenue.” The revenue is properly protected only

when we ascertain and apply the true meaning of the statute.

Introduction

The Internal Revenue Bulletin is the authoritative instrument

of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly and may be obtained

from the Superintendent of Documents on a subscription

basis. Bulletin contents of a permanent nature are consolidated semiannually into Cumulative Bulletins, which are sold

on a single-copy basis.

dures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances

are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application

of the tax laws, including all rulings that supersede, revoke,

modify, or amend any of those previously published in the

Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements

of internal practices and procedures that affect the rights

and duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions, and Subpart B, Legislation and Related

Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to

these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings

are issued by the Department of the Treasury’s Office of the

Assistant Secretary (Enforcement).

Revenue rulings represent the conclusions of the Service on

the application of the law to the pivotal facts stated in the

revenue ruling. In those based on positions taken in rulings

to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature

are deleted to prevent unwarranted invasions of privacy and

to comply with statutory requirements.

Part IV.—Items of General Interest.

With the exception of the Notice of Proposed Rulemaking

and the disbarment and suspension list included in this part,

none of these announcements are consolidated in the Cumulative Bulletins.

Rulings and procedures reported in the Bulletin do not have

the force and effect of Treasury Department Regulations,

but they may be used as precedents. Unpublished rulings

will not be relied on, used, or cited as precedents by Service

personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and proce-

The first Bulletin for each month includes a cumulative index

for the matters published during the preceding months.

These monthly indexes are cumulated on a quarterly and

semiannual basis, and are published in the first Bulletin of the

succeeding quarterly and semiannual period, respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 872. — Gross Income

(Also Section 883; 1.883–1; 894.)

International operation of ships

and aircraft; income exempt from

tax. Those countries that currently provide exemptions from tax to U.S. persons

for income from the internaitonal operation of ships and aircraft through income

tax conventions, diplomatic notes, or the

country’s domestic law are listed. Rev.

Rul. 89–42 supplemented.

Rev. Rul. 97–31

PURPOSE

The purpose of this revenue ruling is to

supplement Rev. Rul. 89–42, 1989–1

C.B. 234, by providing a current list of

countries that grant United States persons

equivalent exemptions from tax for income from the international operation of

ships and aircraft for purposes of section

872(b) of the Internal Revenue Code, section 883 of the Code, and the shipping

and air transport articles in United States

income tax conventins.

A foreign country may grant an equivalent exemption from tax through an income tax convention or exchange of

diplomatic notes, by not imposing a tax,

or by a decree or specific statutory exemption if a tax is generally imposed. The

following Table includes a current list of

such countries and summarizes the types

of income that qualify for examption.

Part I of the Table summarizes equivalent exemptions under shipping and aircraft articles and capital gains articles of

income tax conventions to which the

United States is a party. Part I includes a

summary of the requirements for the exemption, such as whether the exemption is

based solely on residence or has an additional requirement of documentation or

registration. Part I generally does not set

forth other benefities that may be provided

under articles covering business profits,

rentals and royalties, and other income.

Part II of the Table summarizes exemptions available in countries that have exchanged diplomatic notes with the United

States that cover shipping and aircraft income.

Finally, Part III of the Table provides a

list of the countries for which the Service

has determined, upon examination of

August 11, 1997

their laws, that an equivalent exemption is

granted by statute or decree, or by not imposing a tax on such income.

This determination is made on a country by country basis and relies upon information submitted to the Internal Revenue

Service by the foreign country regarding

the foreign law in effect at the time of the

submission. The date of the Service’s review is reflected in the first column of

Part III of the Table. Since its initial review, the Service has not attempted to determine whether any of the foreign laws of

the countreis listed in Part III have been

amended or repealed. Therefore, taxpayers should independently verify the accuracy of the information in Part III of the

Table at such time that a determination is

relevant.

In addition, this list does not represent

an exclusive list of countries whose domestic law provides an equivalent exemption. Other countries that have not submitted the information necessary for the

Service to make a determination also may

grant an exemption. In those cases, a corporation organized in, or an individual

resident of, such a soreign country may

qualify for an exemption even though the

Internal Revenue Service has not yet

made a determination to include the country in Part III of the Table.

The Table is intended only as a summary. The full text of any relevant income

tax convention, diplomatic note, or foreign law should be consulted. It may be

necessary to consult the technical explanation of an income tax convention, a protocol, or a diplomatic note accompanying

a convention to determine the items of income exempted. Income tax conventions

and diplomatic notes are published in the

Cumulative Bulletin. The Table will be

updated periodically.

CHANGES TO REV. RUL. 89–42

The changes to the Table published in

Rev. Rul. 89–42 are summarized as follows. In Part I, the following countries

have been added to the list of countries

that provide an exemption under an income tax convention: Czech Republic,

India, Indonesia, Israel, Mexico, Portugal,

the Russian Federation, the Slovak Republic, Spain, Sweden, and Tunisia. The

following countries have entered into new

income tax conventions with the United

States that supersede prior income tax

conventions reported in Rev. Rul. 89–42;

Finland, France, Germany, Kazakhstan,

and the Netherlands. The Income tax conventions between the United States and

the Netherlands, as extended to the

Netherlands Antilles and Aruba, and between the United States and Malta have

been terminated, in relevant part, effective January 1, 1988, and January 1,

1997, respectively, and have been deleted

from the list.

In Part II, new diplomatic notes have

been exchanged with Chile, Hong Kong,

India, Isle of Man, Japan, Luxembourg,

Malaysia, Malta, Marshall Islands, Norway, Pakistan, Peru, and St. Vincent and

the Grenadines. After the publication of

Rev. Rul. 89–42, Mexico entered into a

diplomatic note with the United States

effective retroactively to January 1,

1987. This note, however, terminated on

January 1, 1994, the general effective

date of the new U.S. — Mexico Income

Tax Convention. In addition, the Russian

Federation entered into a diplomatic note

effective retroactivity to January 1,

1991.2 This note also terminated on January 1, 1994, the general effective date of

the New U.S. — Russian Federation Income Tax Convention. Although a diplomatic not was signed with Boliva, that

note has never entered into force. Therefore Boliva has been removed from the

list.

In Part III, Antigua and Barbuda, Barbados, Ecuador (shipping only), Israel,

Qata (aircraft only), Turks and Caicos,

and the U.S. Virgin Islands have been

added to the list of countries whose domestic law has been determined to provide an equivalent exemption.

Consistent with past practice, the Service will entertain a request from a foreign government to make a determination

that the domestic law of the country provides an equivalent exemption. However,

the Service will not accept requests from

individual taxpayers; instead, taxpayers

should seek to have the relevant foreign

government request a determination that

the particular country qualifies as an

equivalent exemption jurisdiction.

This note is published at 1990–2 C.B. 322.

This note is published at 1996–36 I.R.B. 6.

1997–32 I.R.B.

Taxpayers claiming an exemption

under the terms of an income tax convention, or under section 872(b) or section

883 of the Code, must file a return on

Form 1040NR (U.S. Nonresident Alien

Income Tax Return) or Form 1120F (U.S.

Income Tax Return of a Foreign Corpora-

tion) and comply with the provisions of

section 8 of Rev. Proc. 91–12, 1991–1

C.B. 473.

EFFECT ON OTHER REVENUE

RULINGS

Rev. Rul. 89–42 is supplemented.

DRAFTING INFORMATION

The principal author of this revneue

ruling is Patricia C. Bray of the Office of

Associate Chief Counsel (International).

For information regarding this revneuw

ruling contact Ms. Bray on (202)

622–3880 (not a toll-free call).

TABLE

Countries Currently Granting Equivalent Exemptions for Income From the International Operation of Ships and Aircraft

TYPES OF SHIPPING AND AIRCRAFT INCOME EXEMPTED2

Basis for Exemption

Countries

and

Territories

PART I TREATIES1

Australia

Austria

Barbados

Belgium

Canada

China29

(Peoples Republic)

Cyprus

Czech Republic

Denmark

Egypt

Finland22

France

Germany22/24

Greece

Hungary

Iceland

India22

Indonesia22

Ireland

Israel

Italy11

Jamaica

Japan11

Kazakhstan

Korea

Luxembourg

Mexico22

Morocco

Netherlands22

New Zealand

Norway11

Pakistan14

1997–32 I.R.B.

Residence

Based

Flag

Residence

& Flag

Reciprocal

Residence

& Flag

Unilateral

X12

Operating

Income

Full

Rental

(Time or

voyage

charter)

BareBoat

Rental

Container

Rental

Capital

Gains

—

X15

X27

—

X15

X27

—

X5/6

—

X15

—

X21

X15

X13

—

X13

—

X15

—

X15

—

X10

—

X15

—

X28

—

X28

—

X5/9

—

August 11, 1997

TABLE—CONTINUED

TYPES OF SHIPPING AND AIRCRAFT INCOME EXEMPTED2

Basis for Exemption

Countries

and

Territories

PART I TREATIES1

Philippines16

Poland

Portugal22

Romania

Russian22

Federation

Slovak Republic22

Spain22

Sweden22

Switzerland

Trinidad & Tobago

Tunisia22

USSR25

U.K.

Residence

Based

Flag

Residence

& Flag

Reciprocal

Residence

& Flag

Unilateral

BareBoat

Rental

Container

Rental

Capital

Gains

—

X15

—

X15

—

X15

—

TYPES OF SHIPPING AND AIRCRAFT INCOME EXEMPTED2

Cumulative Bulletin Citation

Countries

and

Territories

PART II EXCHANGE OF NOTES23

Argentina

1988–1 C.B. 456

Bahamas

1988–1 C.B. 458

Belgium

1988–1 C.B. 459

Chile14

1991–1 C.B. 304

Colombia

1988–1 C.B. 461

Cyprus

1989–2 C.B. 332

Denmark

1988–1 C.B. 462

El Salvador14

1988–1 C.B. 463

Fiji

1996–40 I.R.B. 8

Finland

1989–2 C.B. 334

Greece

1988–2 C.B. 366

Hong Hong16/31

1995–1 C.B. 228

India

1990–2 C.B. 316

Isle of Man16

1990–2 C.B. 317

Japan

1990–2 C.B. 318

Jordan

1996–50 I.R.B. 8

Liberia

1988–1 C.B. 463

Luxembourg

1996–28 I.R.B. 36

Malaysia

1990–2 C.B. 319

Malta

1997–17 I.R.B. 5

Marshall Islands

1990–2 C.B. 321

Norway

1991–1 C.B. 304

Pakistan16

1991–1 C.B. 305

August 11, 1997

Operating

Income

Full

Rental

(Time or

voyage

charter)

Operating

Income

Full

Rental

(Time or

voyage

charter)

BareBoat

Rental

Incidental

Container

Rental

Incidental

Capital

Gains

—

1997–32 I.R.B.

TABLE—CONTINUED

TYPES OF SHIPPING AND AIRCRAFT INCOME EXEMPTED2

Cumulative Bulletin Citation

Countries

and

Territories

PART II EXCHANGE OF NOTES23

Panama

1988–2 C.B. 366

Peru16

1989–2 C.B. 335

St. Vincent &

Grenadines

1989–2 C.B. 336

Singapore

1990–2 C.B. 323

Sweden

1988–1 C.B. 466

Taiwan

1989–2 C.B. 337

Venezuela

1988–1 C.B. 467

Operating

Income

Full

Rental

(Time or

voyage

charter)

BareBoat

Rental

Incidental

Container

Rental

Incidental

Capital

Gains

—

—30

—

TYPES OF SHIPPING AND AIRCRAFT INCOME EXEMPTED2

Countries

and

Territories

Date

Foreign

Law

Reviewed

PART III DOMESTIC LAW

Antigua & Barbuda16 NOV 1991

Barbados

OCT 1989

Bermuda

NOV 1988

Brazil18

DEC 1988

Bulgaria

— 1989

Cayman Islands26

JAN 1987

Chile16

OCT 1988

Ecuador16/17

DEC 1989

Israel

FEB 1991

Netherlands

OCT 1988

Netherlands Antilles

MAY 1988

Portugal14

ships JUNE 1989

aircraft FEB 1989

Qatar14

AUG 1994

Spain19

DEC 1988

Turkey20

JAN 1987

Turks & Caicos26

FEB 1990

U.S. Virgin Islands

OCT 1988

Vanuatu

MAY 1987

Operating

Income

Full

Rental

(Time or

voyage

charter)

BareBoat

Rental

Incidental

Container

Rental

Incidental

Capital

Gains

—

A reciprocal exemption based on treaty relief is limited to the circumstances in which the treaty itself would be available. In such cases the exemption is based on

section 894 and the treaty itself, rather than on section 872(b) or section 883.

Unless otherwise footnoted, an X indicates full exemption whether or not there is a permanent establishment.

Operating income is not defined.

Lessor must either regularly lease ships or aircraft on a full basis or operate them in international traffic.

The U.S. tax exemption is available only if the income is incidental to operating income.

Except to the extent depreciation has been allowed in the other country.

In the case of aircraft only, the registration may be in the country of residence or in any country with a treaty providing for such exemption between such country

and the country of residence.

Documentation or registration required for ships or aircraft of United States residents only.

This treaty exempts gains derived by an enterprise of a Contracting State if the ships, aircraft or containers are owned and operated by the enterprise and the income

from them is taxable only in that State.

1997–32 I.R.B.

August 11, 1997

Income from the bareboat rental of aircraft used in international traffic is exempt. Income from the bareboat rental of ships is also exempt if the ship is operated in

international traffic and if the lessee is not a resident of, or does not have a permanent establishment in, the other Contracting State.

See also the diplomatic notes or protocol accompanying this treaty.

With regard to residents of Japan, the ships or aircraft need not be registered in Japan if the ships or aircraft are leased by such a resident.

As a result of correspondence, it was clarified that income from the international operation of ships or aircraft includes this category of income.

This exemption applies to aircraft only.

This exemption applies if the ships or aircraft are operated in international traffic by the lessee, or the rental income is incidental to the operation of ships or aircraft

in international traffic by the lessor.

This exemption applies to shipping only.

This exemption is generally effective for all open years beginning on or after January 1, 1987.

Brazilian and Portuguese laws exempt only companies.

The Spanish statute exempts only corporations.

See Rev. Rul. 87–18, 1987–1 C.B. 178.

This exemption applies if the ship or aircraft is operated in international traffic or if the rental income is incidential to income from such international operation.

The following income tax treaties were ratified after the publication of Rev. Rul. 89–42 and were generally effective on the following dates:

Czech Republic . . . . . . . . . . . . .January 1, 1993

Finland . . . . . . . . . . . . . . . . . . .January 1, 1991

France . . . . . . . . . . . . . . . . . . . .January 1, 1996

Germany . . . . . . . . . . . . . . . . . .January 1, 1990

India . . . . . . . . . . . . . . . . . . . . .January 1, 1991

Indonesia . . . . . . . . . . . . . . . . . .January 1, 1990

Israel . . . . . . . . . . . . . . . . . . . . .January 1, 1995

Kazakhstan . . . . . . . . . . . . . . . .January 1, 1996

Mexico . . . . . . . . . . . . . . . . . . .January 1, 1994

Netherlands . . . . . . . . . . . . . . . .January 1, 1994

Portugal . . . . . . . . . . . . . . . . . . .January 1, 1996

Russian Federation . . . . . . . . . . .January 1, 1994

Slovak Republic . . . . . . . . . . . . .January 1, 1993

Spain . . . . . . . . . . . . . . . . . . . . .January 1, 1991

Sweden . . . . . . . . . . . . . . . . . . .January 1, 1996

Tunisia . . . . . . . . . . . . . . . . . . . .January 1, 1990

Notes signed prior to the Technical and Miscellaneous Revenue Act of 1988, will be interpreted in accordance with Technical Corrections.

This treaty is effective for the eastern States of Germany (the former East Germany) from January 1, 1991.

The U.S. — U.S.S.R. income tax treaty signed June 20, 1973, continues to apply to the countries of Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova,

Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.

The country generally imposes no income tax.

This exemption applies if the ships or aircraft are operated in international traffic by the lessee, and the rental income is incidental to the operation of ships or aircraft in international traffic by the lessor.

The exemption applies except where the containers are used solely between places within the other Contracting State.

Pursuant to Notice 97–40, 1997–28 I.R.B. 6 dated July 14, 1997, the treaty between the United States and the People’s Republic of China (China) will continue to

apply only to China and will not apply to the Hong Kong Special Administrative Region of the People’s Republic of China.

A dialogue is currently taking place between the Government of the United States and Singapore concerning the scope of the reciprocal exemption.

This diplomatic note applies to Hong Kong before July 1, 1997, and pursuant to Notice 97–40, 1997–28 I.R.B. 6 dated July 14, 1997, to the Hong Kong Special

Administrative Region of the People’s Republic of China on or after July 1, 1997. The note does not apply with respect to the People’s Republic of China, which will

continue to be treated as a separate country for purposes of the Internal Revenue Code.

Section 2056.—Bequests, Etc.,

to Surviving Spouse

Ct.D. 2062

SUPREME COURT

OF THE UNITED STATES

No. 95-1402

COMMISSIONER OF INTERNAL

REVENUE v. ESTATE OF HUBERT,

DECEASED, C & S SOVRAN TRUST

CO. (GEORGIA) N.A., CO-EXECUTOR

520 U.S

CERTIORARI TO THE UNITED

STATES COURT OF APPEALS FOR

THE ELEVENTH CIRCUIT

March 18, 1997

August 11, 1997

Syllabus

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.

1997–32 I.R.B.

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. 4–16.

(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. 4–5.

(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)–1(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.

5–9.

1997–32 I.R.B.

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

“marterial 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. 10–12.

(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. 12.

(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. 13–16.

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. 1–12.

(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

Ruling, 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.

2–10.

(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 preempted 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 post-

August 11, 1997

mortem 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. 10-12.

KENNEDY, J., announced the judgment

of the Court and delivered an opinion, in

which REHNQUIST, C.J., and STEVENS and

G INSBURG , J.J., joined. O’C ONNOR , J.,

filed an opinion concurring in the judgment, in which SOUTER and THOMAS, JJ.,

joined. SCALIA, J., filed a dissenting opinion, in which BREYER, J., joined. BREYER,

J., filed a dissenting opinion.

SUPREME COURT OF THE

UNITED STATES

No. 95–1402

COMMISSIONER OF INTERNAL

REVENUE, PETITIONER v. ESTATE OF

OTIS C. HUBERT, DECEASED, C & S

SOVRAN TRUST COMPANY

(GEORGIA) N.A., CO-EXECUTOR

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF

APPEALS FOR THE ELEVENTH

CIRCUIT

[March 18, 1997]

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.

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,

August 11, 1997

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 deductions. 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 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. 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, T. C. Mem.

1988–553, 1988 WL 128662 (T. C. 1988).

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

1997–32 I.R.B.

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

(CA11 1995). We granted certiorari, 517

U. S.—(1996), and, in agreement with the

Tax Court and the Court of Appeals for

the Eleventh Circuit, we now affirm the

judgment.

A necessary first step in calculating the

taxable estate for federal estate tax purposes is to determine the property included 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 Regulation §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 respondents 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 in-

1997–32 I.R.B.

terest 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 limited 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), 26 CFR §20.2056(b)–

4(a) (1996), 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].”

Regulation §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.” Regulation §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). It 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 10–12

(discussing materiality), 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.

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.

It is suggested that regulation

§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)– l(f), and a revenue ruling interpreting it, Rev. Rul. 69–56, 1969–1

Cum. Bul. 224. Post, at 5–6 (O’CONNOR,

J., concurring in judgment). The sugges-

August 11, 1997

tion misunderstands the regulations and

the revenue ruling. Regulation

§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. Regulation

§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 regulation §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:

“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. Bul. 224.

The revenue ruling cites for this proposition §20.2056(b)–5(f)(1) and §25.2523(e)–

August 11, 1997

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. Regulations

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 dollarfor-dollar amount. The Commissioner cites

the controlling regulation in support of her

position. The regulation says:

“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 5–6. 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 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

1997–32 I.R.B.

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 regulation 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 incomeproducing property. A fee in the 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

1997–32 I.R.B.

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 between

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 administration is not included in the

gross estate. The gross estate, however,

does include the discounted value of postmortem 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

regulation §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-of-death value

of the marital or charitable bequests. The

dissenters were, in a sense, a step closer to

§25.2523(a)–l(e)’s present-value approach than the Commissioner, for they

would have required the estate to reduce

the marital or charitable 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 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. Using this approach to valuation,

the estate will arrive at the “net economic

August 11, 1997

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

12–13 (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 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

August 11, 1997

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 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 imperfectly—by 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.

ment 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 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 accordingly “reduced” by the actual amount of expenses

incurred. See ante, at 9 (plurality opinion); post, at 2 (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 6 (SCALIA, J., dissenting). The statute most relevant to this

case, 26 U. S. C. §2056(b)(4)(B), provides:

“where [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.”

When a citizen or resident of the

United States dies, the Federal Govern-

Although an executor’s power to burden

the postmortem income of the marital be-

1997–32 I.R.B.

quest 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 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 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.

All that remains in this statutory vacuum are the Commissioner’s regulations

and revenue rulings, and it is on these

1997–32 I.R.B.

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 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.”

The text of the regulation leaves no doubt

that, only the “net value” of the spousal

gift may be deducted. There is also 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 also 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 5–6 (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 6. 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 6–7, 13. 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 12–13. 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 13–15.

Because §25.2523(a)–1(e) and its accompanying provisions do no more 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 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)–l(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. Bul. 224

(emphasis added).

Both the plurality and J USTICE S CALIA

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 7–9; post, at 4–5,

11–12. 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., at 325–326

August 11, 1997

(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 8; post, at 11. 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 respondents’ 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 7 (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, see ibid.; The 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

August 11, 1997

payments on deferred federal estate taxes

to the postmortem income of the spousal

bequest. Rev. Rul. 93–48, 1993–2 Cum.

Bul. 270 (“[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 9. 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 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 limi-

tation 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

2, does not undercut the relevance of the

Ruling’s implications as to income. Post,

at 10 (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 7–8, since interest on deferred estate taxes surely reduces, and is therefore

relevant to, “the value of what passes.”

Ibid. (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.

See, e.g., Rev. Rul. 75–298, 1975–2 Cum.

Bul. 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. Bul. 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 lowincome 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 distribu-

1997–32 I.R.B.

tion of the property to the trustee is to

be used to pay expenses incurred in the

administration of the estate.”

Even assuming that J USTICE S CALIA is

correct that the word “may” connotes

“possibility rather than permissibility,”

post, at 10, 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 bequest when the actual administrative expenses are allocated to income

with the projected income stream when

the expenses are allocated to principal.

App. to Brief American College of Trust

and Estate Counsel as Amicus Curiae

1–2. The plurality, drawing upon its valuation theory, supra, at 5, 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 14. 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 8. Were this Court considering the question of quantitative materiality in the first instance, I would be

hard pressed not to find this amount “ma-

1997–32 I.R.B.

terial” given the size of Mr. Hubert’s estate. But the Tax Court in this case was effectively preempted 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 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.

J USTICE S CALIA with whom J USTICE

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 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 IRS 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 comprising the residuary bequest to the spouse (or charity) is

used to satisfy administration expenses. I

therefore respectfully dissent.

Section 2056 of the Internal Revenue

Code provides for a deduction from gross

estate for marital bequests. 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.

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 4–5, and,

like the plurality, I focus my attention on the marital

deduction.

August 11, 1997

As the plurality implicitly recognizes,

Mrs. Hubert’s interest in the estate was

burdened with the obligation of paying

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., 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 Treasury Regulation §25.2523(a)–1(e), see

ante, at 5–6, 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 6. 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 administration expenses. As I discuss below, infra,

at 13–14, the estate tax provisions provide

for a deduction from the gross estate for

August 11, 1997

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.

Bul. 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 life-estate trust to qualify for

the gift and estate tax marital deductions,

that 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 “powe[r]”

to allocate expenses between income and

principal “does not result in the disallowance or diminution of the marital deduction” (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 9 (plurality opinion);

ante, at 2 (O’CONNOR, J., concurring in

the judgment), supra, at 2, 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 in-

come 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.

The Commissioner contends that Treasury Regulation §20.2056(b)–4(a), 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 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

1997–32 I.R.B.

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 477,

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 the respondents come 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 anticipated income. Ante, at 10–11. 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 12.

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 respondents: “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

1997–32 I.R.B.

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 “material

limitation” 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 particular 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 two

million dollars 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 income—because of a

recent Revenue Ruling in which the Commissioner acquiesced in lower court hold-

ings that the marital deduction is not reduced by the payment from the marital

bequest of interest on deferred estate

taxes. Ante, at 8–9 (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 8–9. 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 (CA7

1993); Estate of Richardson v. Commissioner, 89 T. C. 1193 (1987). Rather than

continuing to expend resources in litigation that seemed likely to bring little or no

income to the Treasury, the Commissioner chose, in Revenue Ruling 93–48,

to “adopt the result” of thenrecent court

decisions regarding interest on taxes. It 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 Treasury Regulation

§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

August 11, 1997

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 substantial 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

4–5) the concurrence’s view, ante, at 2.

Respondents assert that some inquiry

into “substantiality” is necessarily implied by the fact that the last sentence of

the regulation describes an income-topay-administration-expenses 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

10–11) took yet a third approach to “material limitation,” which I must pause to

consider. The Tax Court relied on Treas.

Reg. §25.2523(e)–1(f)(3), 26 CFR

§25.2523(e)–1(f)(3) (1996), which, it

August 11, 1997

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 that: “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)–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

C.F.R. §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)–

4.” Ibid. (emphasis added).

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 in-

come. See, e.g., Maass v. Higgins, 312

U. S. 443, 448 (1941); 26 CFR §20.2031–

l(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 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 9 (plurality opinion); ante, at

2 (O’CONNOR, J., concurring in the 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, 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.

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 provi-

1997–32 I.R.B.

sions prohibit examination of any events

following the 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 6–7, 11–13. 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,” §20.2053–3(a)

(emphasis added), and expressly prohibit

taking a deduction “upon the basis of a

vague or uncertain estimate,” 26 CFR

§20.2053–1(b)(3) (1996). 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)(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)

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.

1997–32 I.R.B.

(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.

It requires the Internal Revenue Service

and courts to engage in a peculiar, nunc

pro tunc, three-stage 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, 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 dateof-death value of the marital or charitable

bequests,” ante, at 13, the marital deduction will be limited to approximately $25

million, and, despite generating almost no

income and having very few administration expenses, the estate will be required

to pay an estate tax on some five million

dollars 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 thirty million dollars 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 com-

August 11, 1997

puting 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 Secretary 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 the 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.

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

August 11, 1997

interest which 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 dollar-fordollar 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. Commissioner of Internal Revenue, 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 United

States 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 & J. Pennell, 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 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.” §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

1997–32 I.R.B.

or from the estate’s income tax. 26 U. S.

C. 642(g); cf. ante, at 2 (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 that

value minus a set of permitted deductions.

26 U. S. C. §2053(a) (specifying deductions).

Although respondents argue 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

1997–32 I.R.B.

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 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 of death 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 Commnissioner’s practice of reducing the marital deduction dollar-for-dollar might re-

flect 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 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 dollarfor-dollar 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 1, 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 issue—

almost $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.

August 11, 1997

Part III. Administrative, Procedural, and Miscellaneous

Notice of Proposed Rulemaking

and Notice of Public Hearing

Permitted Elimination of

Preretirement Optional

Forms of Benefit

REG–107644–97

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Notice of proposed rulemaking

and notice of public hearing.

SUMMARY: This document contains

proposed regulations that would permit an

amendment to a qualified plan that eliminates certain preretirement optional forms

of benefit. These regulations affect employers that maintain qualified plans, plan

administrators of qualified plans and participants in qualified plans. This document provides notice of a public hearing

on these proposed regulations.

DATES: Written comments and outlines

of the topics to be discussed at the public

hearing must be received by September

30, 1997. A public hearing is scheduled

for October 28, 1997.

ADDRESSES: Send submissions to

CC:DOM:CORP:R (REG–107644–97),

Room 5228, Internal Revenue Service,

POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be

hand delivered between the hours of 8

a.m. and 5 p.m. to CC:DOM:CORP:R

(REG–107644–97), Courier’s Desk, Internal Revenue Service, 1111 Constitution

Avenue, NW, Washington, DC. Alternatively, taxpayers may submit comments

electronically via the Internet by selecting

the “Tax Regs” option on the IRS Home

Page, or by submitting comments directly

to the IRS Internet site at http://www.irs.

ustreas.gov/prod/tax–regs/comments.html.

A public hearing is scheduled to be held in

the Auditorium, Internal Revenue Building,

111 Constitution Avenue, NW, Washington,

DC.

FOR FURTHER INFORMATION CONTACT: Thomas Foley, (202) 622-6050 (not

a toll-free number).

August 11, 1997

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of

Management and Budget for review in accordance with the Paperwork Reduction

Act of 1995 (44 U.S.C. 3507(d)). Comments on the collection of information

should be sent to the Office of Management and Budget, Attn: Desk Officer for

the Department of the Treasury, Office of

Information and Regulatory Affairs,

Washington, DC 20503, with copies to

the Internal Revenue Service, Attn: IRS

Reports Clearance Officer, T:FP, Washington, DC 20224. Comments on the collection of information should be received

by September 2, 1997. Comments are

specifically requested concerning:

Whether the proposed collection of information is necessary for the proper performance of the functions of the Internal

Revenue Service, including whether the

information will have practical utility;

The accuracy of the estimated burden

associated with the proposed collection of

information (see below);

How the quality, utility, and clarity of

the information to be collected may be enhanced;

How the burden of complying with the

proposed collectin of information may be

minimized, including through the application of automated collection techniques or

other forms of information technology;

and

Estimates of capital or start-up costs

and costs of operation, maintenance, and

purchase of service to provide information.

The collection of information in this

proposed regulation is in §1.411(d)–4.

This information is required for a taxpayer who wants to amend a qualified

plan to eliminate certain preretirement optional forms of benefit. This information

will be used to determine whether taxpayers have amended a qualified plan. The

collection of information is voluntary to

obtain a benefit. The likely recordkeepers

are businesses or other for-profit organizations and non-profit institutions.

Estimated total recordkeeping burden:

48,800 hours.

Estimated average burden per recordkeeper: For Master and Prototype Plan

Employers: 10 minutes. For Master and

Prototype Plan Sponsors: 30 minutes. For

Employers with Individually Designed

Plans: 30 minutes.

Estimated number of recordkeepers:

135,000.

An agency may not conduct or sponsor,

and a person is not required to respond to,

a collection of information unless it displays a valid control number assigned by

the Office of Management and Budget.

Books or records relating to a collection of information must be retained as

long as their contents may become material in the administration of any internal

revenue law. Generally, tax returns and

tax return information are confidential, as

required by 26 U.S.C. 6103.

Background

This notice contains proposed amendments to the income tax regulations (26

CFR Part 1) under section 411(d) of the

Internal Revenue Code of 1986.

Section 411(d)(6) generally provides

that a plan will not be treated as satisfying

the requirements of section 411 if the accrued benefit of a participant is decreased

by a plan amendment. Under section

411(d)(6)(B), a plan amendment that

eliminates an optional form of benefit will

be treated as reducing accrued benefits to

the extent that the amendment applies to

benefits accrued as of the later of the

adoption date or the effective date of the

amendment. However, section 411(d)(6)(B) also permits the Secretary to provide

in regulations that this rule will not apply

to an amendment that eliminates an optional form of benefit.

Section 401(a)(9) provides that, in

order for a plan to be qualified under section 401(a), distributions from the plan

must commence no later than the “required beginning date.” Prior to 1997,

section 401(a)(9)(C) generally provided

that the required beginning date is April 1

following the calendar year in which the

employee attains age 701⁄2. Consequently,

in order to satisfy section 401(a)(9), qualified plans, other than certain church and

governmental plans, have provided for

distributions to commence no later than

April 1 following the calendar year that

1997–32 I.R.B.

an employee attains age 701⁄2. These distributions commence without regard to

whether the employee has retired from

employment with the employer maintaining the plan.

Section 1404 of the Small Business Job

Protection Act of 1996, Public Law

104–188 (SBJPA), amended the definition of required beginning date that applies to an employee who is not a 5-percent owner. Section 401(a)(9)(C)(i), as

amended, provides that, in the case of

such an employee, the required beginning

date is April 1 of the calendar year following the later of the calendar year in which

the employee attains age 701⁄2 or the calendar year in which the employee retires.

Accordingly, except for 5-percent owners,

a plan is no longer required to provide for

distributions that commence prior to retirement in order to satisfy section

401(a)(9).

The right to commence benefit distributions in any form at a particular time is

an optional form of benefit within the

meaning of section 411(d)(6)(B) and

§1.411(d)–4 Q&A–1(b). In enacting section 1404 of the SBJPA, Congress did not

alter the application of section 411(d)(6).

Thus, except to the extent authorized by

regulations, a plan amendment that eliminates the right to commence preretirement

benefit distributions in a plan after age

701⁄2 (or restricts the right by adding an

additional condition) violates section

411(d)(6) if the amendment applies to

benefits accrued as of the later of the

adoption or effective date of the amendment.

Notice 96–67 (1996–53 I.R.B. 12) provided questions and answers addressing

certain issues relating to the amendment

of section 401(a)(9)(C) by the SBJPA and

requested comments concerning the extent to which relief from section 411(d)(6)

would be appropriate for plan amendments that eliminate preretirement distributions after age 701⁄2 (e.g., by limiting section 411(d)(6) protection to employees

above a certain age).

Overview

1. Permitted Elimination of

Preretirement Distributions

After Age 701⁄2

The legislative history to section 1404

of the SBJPA indicates that the reason for

1997–32 I.R.B.

amending the definition of required beginning date was that it is inappropriate to

require all participants to commence distributions by age 701⁄2 without regard to

whether the participant is still employed

by the employer. Because section 1404

did not alter the application of section

411(d)(6) to plan provisions allowing or

requiring preretirement distributions after

age 70 1⁄2 , an employer ’s choices for

amending its plan to implement the

SBJPA change to the definition of required beginning date are limited unless

the IRS and Treasury grant relief from

section 411(d)(6).

As one choice, in accordance with the

guidance in Announcement 97–24

(1997–11 I.R.B. 24) March 13, 1997, the

employer may give employees the option

of commencing distributions at age 701⁄2

or deferring commencement until after retirement. As a second alternative, the employer may amend the plan to eliminate

the right to preretirement distributions

solely with respect to future accruals.

However, under this second approach,

each current participant would retain the

right to receive preretirement distributions after age 701⁄2 with respect to a portion of his or her accrued benefit.

The IRS and Treasury recognize the

potential complexity of administering

plans (particularly defined benefit plans)

that adopt either of these choices. In addition, an employer may not have voluntarily chosen to offer preretirement distributions to employees who have attained age

701⁄2 but instead may have included these

provisions in its plan solely to comply

with section 401(a)(9) prior to its amendment by the SBJPA. Therefore, after consideration of the comments received in response to Notice 96–67 and subject to the

conditions described below, the proposed

regulations would provide relief from section 411(d)(6) for certain plan amendments that eliminate preretirement distributions commencing at age 701⁄2.

2. Conditions on the Relief From

Section 411(d)(6)

a. Protection for Employees Who Are

Near Age701⁄2

Under the proposed regulation, an

amendment to eliminate a preretirement

age 701⁄2 distribution option may apply

only to benefits with respect to employees

who attain age 701⁄2 in or after a calendar

year, specified in the amendment, that begins after the later of December 31, 1998,

or the adoption date of the amendment.

The relief from section 411(d)(6) is limited to distributions to employees who attain age 701⁄2 after calendar year 1998 because employees who were near age 701⁄2

at the time of enactment of the SBJPA

may have had an expectation of receiving

preretirement distributions in the near future and may have made plans that took

into account these expected distributions.

b. Optional Forms of Benefit for

Participants Retiring After Age 701⁄2

A plan using this relief generally may

not preclude an employee who retires

after the calendar year in which the employee attains age 701⁄2 from receiving an

optional form of benefit that would have

been available if the employee had retired

in the calendar year in which the employee attained age 701⁄2 .

c. Timing of Plan Amendment

An amendment to eliminate a preretirement age 701⁄2 distribution option may be

adopted no later than the last day of any

remedial amendment period that applies

to the plan for changes under the SBJPA.

However, in no event will the deadline for

adopting such a plan amendment be before December 31, 1998. The relief provided is available only to employers that

adopt the amendment within this specified time period because the relief is

being provided to simplify the implementation of section 401(a)(9), as amended by

the SBJPA, for employers that do not voluntarily provide preretirement distributions for an extended period after the enactment of the SBJPA.

3. Circumstances Under Which No

Relief Is Required

Many employers do not need relief

under section 411(d)(6) in order to implement the SBJPA change in the definition

of required beginning date in their plans.

The regulation includes an example of

such a plan, a profit-sharing plan that permits an employee to elect distribution

after age 59 1⁄2 at any time and in any

amount. The example illustrates that this

plan may be amended to implement the

SBJPA change in the definition of re-

August 11, 1997

quired beginning date without violating

section 411(d)(6). In this example, the

section 411(d)(6) relief proposed in this

regulation is not required because the optional forms of benefit in the plan that reflect the pre-SBJPA mandatory distribution requirements of section 401(a)(9) are

encompassed by the optional forms of

benefit provided under the general elective distribution provisions. The right to

commence distributions at age 701⁄2 continues to be available under the plan even

after the plan is amended to implement

the SBJPA change in the required beginning date.

Effective Date

The guidance in these proposed regulations will only be effective after the date

that final regulations are adopted and will

only apply to amendments adopted and

effective after that date. In order to provide employers with ample time to craft

the appropriate plan amendment to implement the relief from section 411(d)(6) that

would be provided when these regulations

are finalized, the IRS and the Treasury intend to finalize these regulations on an expedited schedule after consideration of

the comments received.

Special Analyses

It has been determined that this notice

of proposed rulemaking is not a significant regulatory action as defined in EO

12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C.

chapter 5) does not apply to these regulations. Further, it is hereby certified, pursuant to sections 603(a) and 605(b) of the

Regulatory Flexibility Act, that the collection of information in these regulations

will not have a significant economic impact on a substantial number of small entities. The burden imposed by the collection of information is the burden of

amending a plan to modify the provisions

reflecting section 401(a)(9). The cost of

the amendment varies depending upon

whether the small entity involved maintains an individually designed plan or

uses a master or prototype plan. For an individually designed plan, the small entity

maintaining the plan will be responsible

for arranging to have the amendment

made. Most small entities with individu-

August 11, 1997

ally designed plans will have the amendment done by a skilled outside service

provider, such as a consulting firm or law

firm. The time required to make such an

amendment is estimated at 30 minutes,

which is not a significant economic impact, even for a very small entity. Moreover, most very small entities that maintain a qualified plan use a master or

prototype plan. For master and prototype

plans, the plan sponsor drafts a single

amendment for all of the employers participating in the plan. The average time

required for the amendment per employer

participating in a master or prototype plan

is estimated to be 10 minutes, which certainly is not a substantial economic impact. Therefore, a regulatory flexibility

analysis under the Regulatory Flexibility

Act (5 U.S.C. chapter 6) is not required.

Pursuant to section 7805(f) of the Internal

Revenue Code, this notice of proposed

rulemaking will be submitted to the Chief

Counsel for Advocacy of the Small Business Administration for comment on its

impact on small business.

Comments and Requests for a

Public Hearing

Before these proposed regulations are

adopted as final regulations, consideration will be given to any written comments (preferably a signed original and

eight (8) copies) that are submitted timely

to the IRS. All comments will be available for public inspection and copying.

A public hearing has been scheduled

for October 28, 1997, at 10 a.m. in the

Auditorium, Internal Revenue Building,

1111 Constitution Avenue, NW., Washington, DC. Because of access restrictions, visitors will not be admitted beyond

the building lobby more than 15 minutes

before the hearing starts.

The rules of 26 CFR 601.601(a)(3)

apply to the hearing.

Persons that wish to present oral arguments at the hearing must submit written

comments and an outline of the topics to

be discussed at the time devoted to each

topic by September 30, 1997.

A period of 10 minutes will be allotted

to each person for making comments.

An agenda showing the scheduling of

speakers will be prepared after deadline

for receiving outlines has passed. Copies

of the agenda will be available free of

charge at the hearing.

Drafting Information

The principal author of these regulations is Cheryl Press, Office of the Associate Chief Counsel (Employee Benefits

and Exempt Organizations), IRS. However, other personnel from the IRS and

Treasury Department participated in their

development.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 is amended by revising the entry for

§1.411(d)–4 to read as folows:

Authority: 26 U.S.C. 7805. * * *

§1.411(d)–4 also issued under 26

U.S.C. 411(d)(6).* * *

Par. 2. Section 1.411(d)–4 is amended

by adding Q&A–10 to read as follows:

§1.411(d)–4 Section 411(d)(6) protected

benefits.

Q–10. If a plan provides for an age 701⁄2

distribution option that commences prior

to retirement from employment with the

employer maintaining the plan, to what

extent may the plan be amended to eliminate this distribution provision?

A–10. (a) In general. The right to commence benefit distributions in a particular

form and at a particular time prior to retirement from employment with the employer maintaining the plan is a separate

optional form of benefit within the meaning of section 411(d)(6)(B) and Q&A–1

of this section, even if the plan provision

creating this right was included in the

plan solely to comply with section

401(a)(9), as in effect for years before

January 1, 1997. Therefore, except as otherwise provided in paragraph (b) of this

A–10, a plan amendment violates section

411(d)(6) if it eliminates an age 701⁄2 distribution option (within the meaning of

paragraph (c) of this A–10) to the extent

that it applies to benefits accrued as of the

later of the adoption date or effective date

of the amendment.

(b) Permitted elimination of optional

form. An amendment of a plan will not violate the requiremnts of section 411(d)(6)

1997–32 I.R.B.

merely because the amendment eliminates an age 701⁄2 distribution option to the

extent that the option provides for distribution to an employee prior to retirement

from employment with the employer

maintaining the plan, provided that—

(1) The amendment eliminating this

optional form of benefit applies only to

benefits with respect to employees who

attain age 701⁄2 in or after a calendar year,

specified in the amendment, that begins

after the later of—

(i) December 31, 1998; or

(ii) The adoption date of the amendment;

(2) The plan does not, except to the extent required by section 401(a)(9), preclude an employee who retires after the

calendar year in which the employee attains age 701⁄2 from receiving benefits in

any of the same optional forms of benefit

(except for the difference in the timing of

the commencement of payments) that

would have been available had the employee retired in the calendar year in

which the employee attained age 701⁄2;

and

(3) The amendment is adopted no later

than the last day of any remedial amendment period that applies to the plan for

changes under the Small Business Job

Protection Act of 1996 (110 Stat. 1755)

(but in no event will the adoption of the

amendment be required before December

31, 1998).

purposes of this Q&A–10, an age 701⁄2

distribution option is an optional form of

benefit under which benefits payable in a

particular distribution form (including

1997–32 I.R.B.

any modifications that may be elected

after benefit commencement) commence

at a time during the period that begins on

or after January 1 of the calendar year in

which an employee attains age 701⁄2 and

ends April 1 of the immediately following

calendar year.

(d) Examples. The provisions of this

section are illustrated by the following examples:

Example 1. Plan A, a defined benefit plan, provides each participant with a qualified joint and survivor annuity (QJSA) that is available at any time

after the later of age 65 or retirement. However, in

accordance with section 401(a)(9) as in effect prior

to January 1, 1997, Plan A provides that if an employee does not retire by the end of the calendar year

in which the employee attains age 701⁄2, then the

QJSA commences on the following April 1. On October 1, 1998, Plan A is amended to provide that, for

an employee who is not a 5-percent owner and who

attains age 701⁄2 after 1998, benefits may not commence before the employee retires but must commence no later than the April 1 following the later of

the calendar year in which the employee retires or

the calendar year in which the employee attains age

701⁄2. This amendment satisfies this Q&A–10 and

does not violate section 411(d)(6).

Example 2. Plan B, a money purchase pension

plan, provides each participant with a choice of a

QJSA or a single sum distribution commencing at

any time after the later of age 65 or retirement. In

addition, in accordance with section 401(a)(9) as in

effect prior to January 1, 1997, Plan B provides that

benefits will commence in the form of a QJSA on

April 1 following the calendar year in which the employee attains age 701⁄2, except that, with spousal

consent, a participant may elect to receive annual installment payments equal to the minimum amount

necessary to satisfy section 401(a)(9) (calculated in

accordance with a method specified in the plan)

until retirement, at which time a participant may

choose between a QJSA and a single sum distribution (with spousal consent). On June 30, 1998, Plan

B is amended to provide that, for an employee who

is not a 5-percent owner and who attains age 701⁄2

after 1998, benefits may not commence prior to retirement but benefits must commence no later than

April 1 after the later of the calendar year in which

the employee retires or the calendar year in which

the employee attains age 701⁄2. The amendment further provides that the option described above to receive annual installment payments prior to retirement will not be available under the plan to an

employee who is not a 5-percent owner and who attains age 701⁄2 after 1998. This amendment satisfies

this Q&A–10 and does not violate section 411(d)(6).

Example 3. Plan C, a profit-sharing plan, contains two distribution provisions. Under the first provision, in any year after an employee attains age

591⁄2, the employee may elect a distribution of any

specified amount not exceeding the balance of the

employee’s account. In addition, the plan provides a

secion 401(a)(9) override provision under which, if,

during any year following the year that the employee attains age 701⁄2, the employee does not elect

an amount at least equal to the minimum amount

necessary to satisfy section 401(a)(9) (calculated in

accordance with a method specified in the plan),

Plan C will distribute the difference by December 31

of that year (or for the year the employee attains age

701⁄2, by April 1 of the following year). On December 31, 1996, Plan C is amended to provide that, for

an employee other than an employee who is a 5-percent owner in the year that the employee attains age

701⁄2, in applying the section 401(a)(9) override provision, the later of the year of retirement, or year of

attainment of age 701⁄2, is substituted for the year that

the employee attains age 701⁄2. After the amendment,

Plan C still permits each employee to elect to receive the same amount as was available before the

amendment. Because this amendment does not eliminate an optional form of benefit, the amendment

does not violate section 411(d)(6). Accordingly, the

amendment is not required to satisfy the conditions

of paragraph (b) of this A–10.

(e) This Q&A–10 applies to amendments adopted and effective after the publication of final regulations in the Federal

Michael P. Dolan,

Acting Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on July

1, 1997, 8:45 a.m., and published in the issue of

the Federal Register for July 2, 1997, 62 F.R.

35752)

August 11, 1997

Part IV. Items of General Interest

Corrections to Rev. Rul. 97–31:

International Operation of Ships

and Aircraft; Income Exempt

From Tax

Announcement 97–75

Rev. Rul. 97–31, which was “dropped”

on July 22, 1997, omitted Kazakhstan

from Part I of the Table. Part I of the

Table provides a list of countries that have

an income tax convention in effect with

the United States containing an exemption for income of United States persons

that are engaged in the international operation of ships or aircraft.

The corrected version of Rev. Rul.

97–31 includes Kazakhstan in Part I of

the Table and adds Kazakhstan to footnote 22 and removes it from footnote 25.

Rev. Rul. 97–31 as corrected is published

in this Bulletin, I.R.B. 1997–32 dated August 11, 1997.

Contacts

For further information or assistance

regarding this announcement, please contact Patricia Bray, Office of the Associate

Chief Counsel (International) at (202)

622-3880 (not a toll-free call) or FAX

(202) 622-4408.

Foundations Status of Certain

Organizations

Announcement 97–76

The following organizations have

failed to establish or have been unable to

maintain their status as public charities or

as operating foundations. Accordingly,

grantors and contributors may not, after

this date, rely on previous rulings or designations in the Cumulative List of Organizations (Publication 78), or on the presumption arising from the filing of notices

under section 508(b) of the Code. This

listing does not indicate that the organizations have lost their status as organizations described in section 501(c)(3), eligible to receive deductible contributions.

Former Public Charities. The following

organizations (which have been treated as

organizations that are not private foundations described in section 509(a) of the

Code) are now classified as private foundations:

August 11, 1997

Aztec Educational Foundation, Shawnee,

Baby Safe Haven Inc., Philadelphia, PA

Barga County Chip, Lanse, MI

Cardiovascular Pharmacotherapy

Symposium, Minneapolis, MN

C & M Development Association, Joliet,

Coalition for a National Memorial to

Mahatma Gandhi, Potomac, MD

Community Valley Community Outreach

Corp., Bryn Athon, PA

Comunidad en Accion, Inc., New Britain,

CTC Swan Medical Fund Inc., Columbus,

Dudley Ministries Inc, Milwaukee, WI

Evergreen Living Foundation, Inc.,

Detroit, MI

Evy Lessin Fund for Ovarian Cancer

Research, Gladwynne, PA

Friends of the Homeless Corp., Bayonne,

Hardy County Extension Service

Foundation, Inc., Moorefield, WV

Health Commons Institute, Falmouth, ME

Heyoka Foundation, Inchellium, WA

Hidden Talents Therapeutic Riding Inc.,

Fredonia, WI

Horse Lovers United Inc., Salisbury, MD

Hospice of Wythe Bland Inc., Wytheville,

Houston Trial Lawyers Foundation,

Houston, TX

Jaga Learning Center, Little Rock, AR

Josh Gottheil Memorial Fund for

Lymphoma Research, Urbana, IL

Joshua Richwine Memorial Fund,

Norwood, MA

Karl Pilsl Ministries Inc., Tulsa, OK

Laulima Kokua Okamanawa, Hilo, HI

Levitical Ministries Inc., Brunswick, TN

Licking Valley Family “Y” Association,

Cynthiana, KY

Lily Fields Inc., Knoxville, TN

Little Feet Child Care Center Inc.,

Farmington, NM

Little People Place, Blytheville, AR

Longmeadow Diamond Club, Springfield,

Love Horizons, Inc., Country Club Hills,

Lowndes County Public Schools

Foundation, Hayneville, AL

Macks Loving Day Care Center Inc.,

Baltimore, MD

Maryland Foundation for Research and

Economic Education Inc., Baltimore,

Melody Foundation A New Jersey

Non-Profit Corporation, Princeton, NJ

Metaphysical Alternative Group Inc.,

Royal Oak, MI

Metropolitan Police Education

Foundation, Inc., Nashville, TN

Michelle McLean Children Trust, Inc.,

Washington, DC

Midwest Funding Corporation, Overland

Park, KS

Midwest Missouri Youth Sports

Association Inc., Raytown, MO

Ministry of El Shaddai, Enterprise, AL

Minnesota Agri-Growth Foundation, Inc.,

Bloomington, MN

Minnesota Blades Hockey Club, Wayzata,

Mt. Olive Development Corporation,

Buffalo, NY

A Museum in the Hudson Valley at

Newburgh, Newburgh, NY

Mutual Housing Group of Yonkers,

Yonkers, NY

NDI Management Corporation, Bronx,

NEDP, Inc., Tupper Lake, NY

New Choreographers Forum, Inc.,

Arlington, MA

New Ebony Community Association, Inc.,

New York, NY

New England Council for Middle East

Studies, Inc., Providence, RI

New Era Alternative Treatment Center

Inc., Highland Park, MI

Neworks Theatre, Inc., Haverhill, MA

New York Charities, New York, NY

Ninas Gymnastics Foundation, Inc.,

Queens, NY

Nine Lives Productions, Inc., Flushing,

North Country Christian Radio Inc.,

Bemidiji, MN

Northeastern Native American

Association, Inc., Jamaica, NY

Northeast Resources, Inc., Minneapolis,

Novak-Cullen Athletic Club, Omaha, NE

NY Gulf War Fund, New York, NY

Odyssey Dance Co., Inc., Astoria, NY

Oekos A Foundation for Education, Inc.,

Harvard, MA

Operation Eagle, Inc., Shrewsbury, MA

Parents for a Better Playground, Derby,

1997–32 I.R.B.

Partners in Prevention, Inc., Weston, MA

Pastoral Counseling Center of the

Dover-Rochester Area, Rochester, NH

Pen Club Vietnamese Writers of the

Southern States of United States,

Houston, TX

Picture Project, Inc., New York, NY

Playground Planners of Milton, Inc.,

Milton, MA

Polish Childrens Relief Fund, Inc., New

York, NY

Princeton Task Force on Ethics in

Business Government and the

Professions, Princeton, NJ

1997–32 I.R.B.

Project Yad, Inc., Brookline, MA

Renaissance Development Enterprises

Incorporated, Chicago, IL

Rancho Santa Fe Youth Soccer, Rancho

Santa Fe, CA

Seniors Helping Seniors, Inc., Milford,

Webster City Community Foundation,

Inc., Webster City, IA

Working Institute of Service Enfranchisement WISE, Harvey, LA

classification as a public charity or as a private operating foundation, the Internal

Revenue Service will issue a ruling or determination letter with the revised classification as to foundation status. Grantors and

contributors may thereafter rely upon such

ruling or determination letter as provided

in section 1.509(a)–7 of the Income Tax

Regulations. It is not the practice of the

Service to announce such revised classification of foundation status in the Internal

Revenue Bulletin.

If an organization listed above submits

information that warrants the renewal of its

August 11, 1997

Definition of Terms

Revenue rulings and revenue procedures

(hereinafter referred to as “rulings”) that

have an effect on previous rulings use the

following defined terms to describe the

effect:

Amplified describes a situation where

no change is being made in a prior published position, but the prior position is

being extended to apply to a variation of

the fact situation set forth therein. Thus,

if an earlier ruling held that a principle

applied to A, and the new ruling holds

that the same principle also applies to B,

the earlier ruling is amplified. (Compare

with modified, below).

Clarified is used in those instances

where the language in a prior ruling is

being made clear because the language

has caused, or may cause, some confusion. It is not used where a position in a

prior ruling is being changed.

Distinguished describes a situation

where a ruling mentions a previously

published ruling and points out an essential difference between them.

Modified is used where the substance

of a previously published position is

being changed. Thus, if a prior ruling

held that a principle applied to A but not

to B, and the new ruling holds that it ap-

plies to both A and B, the prior ruling is

modified because it corrects a published

position. (Compare with amplified and

clarified, above).

Obsoleted describes a previously published ruling that is not considered determinative with respect to future transactions. This term is most commonly used

in a ruling that lists previously published

rulings that are obsoleted because of

changes in law or regulations. A ruling

may also be obsoleted because the substance has been included in regulations

subsequently adopted.

Revoked describes situations where the

position in the previously published ruling is not correct and the correct position

is being stated in the new ruling.

Superseded describes a situation where

the new ruling does nothing more than

restate the substance and situation of a

previously published ruling (or rulings).

Thus, the term is used to republish under

the 1986 Code and regulations the same

position published under the 1939 Code

and regulations. The term is also used

when it is desired to republish in a single

ruling a series of situations, names, etc.,

that were previously published over a period of time in separate rulings. If the

new ruling does more than restate the

substance of a prior ruling, a combination

of terms is used. For example, modified

and superseded describes a situation

where the substance of a previously published ruling is being changed in part and

is continued without change in part and it

is desired to restate the valid portion of

the previously published ruling in a new

ruling that is self contained. In this case

the previously published ruling is first

modified and then, as modified, is superseded.

Supplemented is used in situations in

which a list, such as a list of the names of

countries, is published in a ruling and

that list is expanded by adding further

names in subsequent rulings. After the

original ruling has been supplemented

several times, a new ruling may be published that includes the list in the original

ruling and the additions, and supersedes

all prior rulings in the series.

Suspended is used in rare situations to

show that the previous published rulings

will not be applied pending some future

action such as the issuance of new or

amended regulations, the outcome of

cases in litigation, or the outcome of a

Service study.

Abbreviations

E.O.—Executive Order.

ER—Employer.

ERISA—Employee Retirement Income Security Act.

EX—Executor.

F—Fiduciary.

FC—Foreign Country.

FICA—Federal Insurance Contribution Act.

FISC—Foreign International Sales Company.

FPH—Foreign Personal Holding Company.

F.R.—Federal Register.

FUTA—Federal Unemployment Tax Act.

FX—Foreign

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