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T.C. Memo. 2000-324

UNITED STATES TAX COURT

ESTATE OF HENRY A. LASSITER, DECEASED, PAULA ANN MASTERS

LASSITER, ADMINISTRATOR, C.T.A., Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 17643-98.

Filed October 19, 2000.

D executed a will in 1970 which set forth a

testamentary plan placing the majority of D’s property

into two trusts. The terms of one trust are such that

a marital deduction is available for assets passing

thereto. The other, residuary, trust does not as

written satisfy the requirements for such a deduction,

largely by reason of interests therein granted to

persons other than D’s surviving spouse. Following D’s

death in 1994, beneficiaries of his estate executed a

series of disclaimers in an attempt to enable the

residuary trust to qualify for the marital deduction

under sec. 2056(b)(7), I.R.C. When this deduction was

claimed for Federal estate tax purposes, it was

disallowed by R.

Held: The estate is entitled to a deduction

pursuant to sec. 2056(b)(7), I.R.C., for property

placed in the residuary trust established under D’s

1970 will.

- 2 David D. Aughtry and Charles E. Hodges II, for petitioner.

David Delduco and Clinton M. Fried, for respondent.

MEMORANDUM OPINION

NIMS, Judge:

Respondent determined a Federal estate tax

deficiency in the amount of $14,330,496 for the Estate of Henry

A. Lassiter (the estate).

Pursuant to Rule 122, the parties have

submitted fully stipulated the sole issue of whether, after

giving effect to various disclaimers, the estate is entitled to a

deduction under section 2056(b)(7) with respect to an interest

transferred in trust from Henry A. Lassiter (Mr. Lassiter or

decedent) to his surviving spouse.

If this legal question is

answered in the negative, further proceedings will be required to

establish the value of certain property held by Mr. Lassiter at

the time of his death.

Unless otherwise indicated, all section references are to

sections of the Internal Revenue Code in effect as of the date of

decedent’s death, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

Background

As this case was submitted fully stipulated, the facts are

so found.

The stipulations of the parties, with accompanying

- 3 exhibits, are incorporated herein by this reference.

We set

forth below such factual information as is useful in

understanding our decision.

Mr. Lassiter was a citizen of the United States and a

domiciliary of Clayton County, Georgia, when he was killed in an

automobile accident while in Singapore on May 9, 1994.

years of age.

He was 48

His surviving spouse, Paula Ann Masters Lassiter

(Mrs. Lassiter), is the administrator of the estate.

At the time

the petition in this case was filed, Mrs. Lassiter resided in

Morrow, Georgia.

The estate has at all relevant times been

administered by the Probate Court of Clayton County, Georgia

(Probate Court).

In addition to his wife, Mr. Lassiter was also survived by

their four daughters:

Cathy Lassiter Smith (Cathy), Cindy Elaine

Lassiter (Cindy), Christy Lynn Lassiter (Christy), and Cheryl

Marie Lassiter (Cheryl).

As of the date of their father’s death,

Cathy, Cindy, Christy, and Cheryl were 25, 23, 19, and 15 years

of age, respectively, and Cathy was married to Paul A. Smith.

The Testamentary Disposition

On May 26, 1994, an order and letters of administration were

issued by the Probate Court admitting to probate a will of Mr.

Lassiter dated August 7, 1970.

The 1970 will, in addition to

providing for payment of debts and burial expenses and making

specific bequests of personal effects, set forth a testamentary

- 4 plan establishing two trusts to be funded by the remainder of Mr.

Lassiter’s probate assets.

Item IV of the will specified the

amount to be placed in a trust over which Mrs. Lassiter was given

a general power of appointment by directing the trustee to:

(1) determine the value of my entire estate passing

under this Will, (2) add thereto the value of any and

all insurance and other property passing outside of

this Will but includable in my estate for Federal

Estate Tax purposes, (3) deduct therefrom all debts and

expenses of administration allowed as a deduction for

Federal Estate Tax purposes but not any estate or

inheritance tax, (4) ascertain one-half of the

remainder, (5) deduct from such one-half the value of

any and all insurance and other property passing to my

said wife either outside this Will or under any other

item of this Will in such manner as to qualify as a

part of the marital deduction under the Federal Estate

Tax Law, and (6) the remainder of such one-half shall

be the value of the part of my estate bequeathed in

this Item.

The trustee of this trust was further told to pay all income

therefrom to Mrs. Lassiter, in semiannual or more frequent

installments, and was authorized “to encroach on the corpus of

the property” as necessary to provide for Mrs. Lassiter’s “proper

support and comfort”.

A second, residuary, trust was then created under Item V of

the will for all probate property not otherwise disposed of

through the above-described provisions.

Pursuant to the

governing terms set forth in Item V, the trustee of this trust

was instructed as follows:

(b) Said Trustee shall hold and manage said

property and shall use such part of the income and/or

principal thereof as it may deem necessary to provide

- 5 for the support in reasonable comfort of my wife, and

to provide for the support and education of my children

and the descendants of any deceased child of mine.

After any child has finished his education, or in

normal course should have completed his education, the

Trustee shall not be required to make any payment for

the support of such child or his descendants unless in

the judgment of the Trustee there is ample property to

support my wife and educate my children or such child

is unable to support himself. To the extent

practicable, however, I desire my Trustee in making

encroachment for the benefit of my wife to encroach

first on the trust created for my wife in Item IV

hereof before encroaching on this trust; but this

request shall not apply to the extent it would be

necessary to sell property which in the opinion of the

Trustee should not be sold in order to encroach first

on such trust.

and from time to time by instrument in writing signed

by her and delivered to the Trustee, to direct the

Trustee to turn over any part of the property in this

trust to or among such of my descendants, or spouses of

such descendants, and in such manner, in trust or

otherwise, as my said wife may in such instrument

direct or appoint, provided that she shall have no

power to appoint said property to herself, to her

estate, to her creditors or to the creditors of her

estate.

(d) On the death of my said wife, the property

then remaining in this trust shall be distributed to or

among such of my descendants, and in such manner, in

trust or otherwise as my said wife may by her Last Will

and Testament direct or appoint, provided that she

shall have no power to appoint said property to

herself, to her creditors, to her estate or to the

creditors of her estate.

(e) Should my said wife fail to exercise her power

of appointment as to all of the property in this trust,

or should she predecease me, then on my death or on the

death of my said wife, whichever last occurs, the

property of this trust as to which she fails to

- 6 exercise such power of appointment shall be divided

into as many separate and equal shares as I have

children then living and deceased children with

descendants then living.

Mr. Lassiter’s will appointed First National Bank of Atlanta

as the initial trustee of the trusts created therein.

Beneficiaries entitled to more than 50 percent of the income from

his estate and testamentary trusts were authorized at any time to

remove the trustee and to appoint a successor corporate trustee.

In such event Item X directed:

“Any successor Executor or

Trustee appointed as herein provided, or appointed according to

law, shall have and may exercise all of the rights, powers and

duties herein conferred upon the Executor and Trustee as fully

and to the same extent as if such successor had originally been

named as Executor or Trustee.”

The powers and duties conferred upon the trustee for

purposes of administering “every trust” established under the

1970 will were set forth in Item XII.

Among the powers so

enumerated were the following:

(a) To hold in their discretion any part of the

estate to be administered in its form or condition at

the time said fiduciaries qualify as the fiduciaries of

said estate, * * *

(b) To make and change investments, converting

personal property into real property and the reverse

whenever they think it advisable * * * ; to purchase

and hold for investment unproductive and unimproved

real estate * * *

- 7 (h) They may apportion or allocate all ordinary

and extra dividends and gains from sales of

unproductive real estate or from sales of any other

part of the corpus and any other receipt or receipts

and all expenditures and payments and all losses of

income during alterations or improvements of real

estate, between income and principal as to them seems

fair and just, and any such apportionment or

allocation, including the right to amortize or fail to

amortize any part of the premium or discount, made in

good faith shall be final. * * * They may in general

use their discretion in determining the questions as to

what receipts and what payments are income and

principal, which discretion exercised in good faith

shall be final;

The Disclaimers

After Mr. Lassiter’s death and at the request of Mrs.

Lassiter and the Lassiter children, First National Bank of

Atlanta declined and renounced its right to serve as the named

trustee.

Accordingly, on February 6, 1995, in her role as

administrator of her husband’s estate, Mrs. Lassiter filed with

the Probate Court three petitions.

Therein she requested that

she be appointed trustee of the trusts created under Items IV and

V of the 1970 will, that authority be granted to the trustee to

disclaim trust powers, that a guardian ad litem be appointed to

represent the interests of minor daughter Cheryl and all unborn

and unascertained beneficiaries of the Item V trust, and that

such guardian ad litem be authorized to execute disclaimers of

interests in the Item V trust on behalf of the represented

beneficiaries.

By orders dated February 6, 1995, the Probate

- 8 Court granted each of these petitions.

Jack R. Hancock was

designated as the guardian ad litem for the minor, unborn, and

unascertained beneficiaries.

Also on February 6, 1995, eight disclaimers were executed

and filed with the Probate Court.

Six of these instruments,

namely, those executed by the three adult Lassiter children, by

Cathy’s spouse Paul A. Smith, by the guardian ad litem on behalf

of minor child Cheryl, and by the guardian ad litem on behalf of

Mr. Lassiter’s unborn and unascertained descendants, are

substantially identical.

Each by its terms renounces any

interest in the Item V trust during the life of Mrs. Lassiter, as

follows:

RENOUNCEMENT OF SUCCESSION AND DISCLAIMER OF PROPERTY

HENRY A. LASSITER (the “Decedent”), of Clayton

County, Georgia, died on May 8, 1994. The Decedent

left a written will dated August 7, 1970 (the “1970

Will”), which was duly admitted to probate as the

Decedent’s Last Will and Testament by the Probate Court

of Clayton County, Georgia on May 26, 1994.

The Decedent’s wife (Paula Ann Masters Lassiter,

hereinafter referred to as “Mrs. Ann Lassiter”) and

descendants are beneficiaries under the Residuary Trust

established under Item V of the 1970 Will (the

“Residuary Trust”). The 1970 Will is recorded at

Docket Book R, Page 122, in the Probate Court of

Clayton County, Georgia. A subsequent will which

bequeaths and devises substantially all of the

Decedent’s property to Mrs. Ann Lassiter is believed to

exist but cannot be found.

The Decedent’s daughter, CATHY LASSITER SMITH, now

desires to fulfill her understanding of her father’s

intentions [or similar language appropriately

designating the disclaimant] by disclaiming,

- 9 renouncing, and refusing any and all rights, title, and

interest in the principal and income of the Residuary

Trust during the life of Mrs. Ann Lassiter, including

without limitation, all rights as a beneficiary under

the inter vivos power of appointment provided under

Paragraph (c) of the 1970 Will, any right or interest

to have income withheld from the income beneficiary or

accumulated during the lifetime of Mrs. Ann Lassiter,

and any right or interest to cause the Trustee of the

Residuary Trust to so withhold or accumulate income

(all rights, title and interests described in this

paragraph being herein referred to as the “Disclaimed

Property Interest”).

NOW THEREFORE, CATHY LASSITER SMITH [or other

disclaimant], having neither accepted nor received any

of the benefits of the Disclaimed Property Interest,

and hereby acknowledging that she has not and will not

receive consideration in exchange for executing this

disclaimer, and in accordance with O.C.G.A. Section 532-115, hereby irrevocably and unqualifiedly disclaims,

renounces and refuses to accept any and all rights,

title and interest (including, but not limited to,

rights in intestacy) in the Disclaimed Property

Interest.

Except for this disclaimer and refusal to accept

any interest in the Disclaimed Property Interest, CATHY

LASSITER SMITH [or other disclaimant] does not disclaim

nor does she refuse to accept any rights, title or

interest in any other property interest other than the

Disclaimed Property Interest, including, without

limitation, any remainder interest passing under said

1970 Will which she would receive or otherwise be

entitled to receive as a result of the Decedent’s

death.

Mrs. Lassiter, in her personal capacity, also executed a

disclaimer which contains introductory material akin to that

quoted above and reads in relevant part:

Paragraph (c) of Item V of the 1970 Will bestows

upon Mrs. Ann Lassiter an inter vivos special power of

appointment (“Residuary Trust Inter Vivos Power of

- 10 Appointment”). Additionally, Item V contains no

directive nor authority for the trustee to accumulate

trust income.

The Decedent’s surviving spouse, MRS. ANN

LASSITER, now desires to fulfill her understanding of

her husband’s intentions by disclaiming, renouncing,

and refusing any and all rights, powers, and interest

in the Residuary Trust Inter Vivos Power of

Appointment. Additionally, in order to avoid any

possible confusion, MRS. ANN LASSITER desires to

disclaim, renounce, and refuse any right or interest in

having the income of the Residuary Trust withheld from

the income beneficiary or accumulated and any right or

interest to cause the Trustee of the Residuary Trust to

so withhold or accumulate income which may be said to

exist under the terms of the Residuary Trust or under

applicable Georgia law (hereinafter the “Accumulation

Interest”).

A further disclaimer was executed by Mrs. Lassiter in her

capacity as trustee.

As pertinent to the case at bar, this

instrument states:

Paragraph (b) of Item V of the 1970 Will requires

the Trustee to distribute income and/or principal to

the descendants of the Decedent for their support and

education as the Trustee deems necessary (“Trustee

Power to Distribute to Decedent’s Descendants”).

Paragraph (b) contains no directive or authority to

withhold from the income beneficiary or accumulate

trust income.

NOW THEREFORE, the Trustee, on behalf of herself

and all successors and assigns, in accordance with

O.C.G.A. Section 53-2-115, having neither exercised nor

accepted any of the above-described powers as trustee,

hereby (i) affirms that under both Georgia law and the

terms of the Residuary Trust the Trustee has no

directive, power, or authority to withhold from the

income beneficiary or accumulate income under the

Residuary Trust; (ii) irrevocably and unqualifiedly

disclaims, renounces and refuses such Trustee Power to

Distribute to Decedent’s Descendants; (iii) irrevocably

- 11 and unqualifiedly disclaims, renounces and refuses any

directive, power or authority that may be said to exist

to withhold from the income beneficiary or accumulate

income as Trustee under the Residuary Trust during the

lifetime of the surviving spouse; (iv) irrevocably and

unqualifiedly disclaims, renounces and refuses any

directive, power or authority that may be said to exist

to acquire or retain unproductive property during the

lifetime of the surviving spouse without the surviving

spouse’s consent; and (v) irrevocably and unqualifiedly

disclaims, renounces and refuses any directive, power

or authority that may be said to exist to treat any

receipt or other item as principal which is properly

treated under applicable law as income.

Additionally, attached to the trustee’s disclaimer is a

statement declaring that “The Decedent’s Descendants hereby join

in and consent to the provisions set forth in this RENOUNCEMENT

OF SUCCESSION AND DISCLAIMER OF PROPERTY”.

The consent statement

is signed by Cathy, Cindy, Christy, Jack R. Hancock as guardian

ad litem for Cheryl, and Jack R. Hancock as guardian ad litem for

unborn and unascertained descendants.

The Trust Assets

At the time the 1970 will was executed, the Lassiters were a

young couple with one child and no income-producing assets.

of Mr. Lassiter’s date of death, the assets passing to his estate

and utilized to fund the trusts created under his will consisted

primarily of the following:

(1) 98 percent of the class A common

stock (voting) and 100 percent of the class B common stock

(nonvoting) in Micro Design International Holding, Inc., and

Subsidiaries (MDI); (2) 100 percent of the common stock (voting)

in Lassiter Properties, Inc. (Lassiter Properties); (3) partner

- 12 and shareholder interests in real estate partnerships and S

corporations; and (4) real estate directly owned by decedent.

Since her husband’s death, Mrs. Lassiter has controlled the

day-to-day operations and strategic decisions relating to the

above-described assets.

She has also continuously possessed

signature authority over the approximately 50 bank accounts

relating to these assets.

As administrator and trustee under the 1970 will, Mrs.

Lassiter votes 98 percent and 100 percent of the voting stock in

MDI and Lassiter Properties, respectively, and thereby controls

their boards of directors.

She serves as chairman of the board

of both MDI and Lassiter Properties, and has done so since Mr.

Lassiter’s death.

She was also chief executive officer of both

companies until designating Cathy as CEO of Lassiter Properties

in December of 1998.

Among the business matters controlled by

Mrs. Lassiter in her various roles at MDI and Lassiter Properties

are selection of management; hiring, firing, and compensation of

employees; and declaration of dividends.

Major corporate

transactions likewise fall within her sphere of responsibility,

as evidenced by her decision that MDI would declare bankruptcy on

June 21, 1999, due to a decline in business after 1994.

In addition to her duties above as a corporate director and

officer, Mrs. Lassiter actively manages, reviews, and executes

the real estate leases pertaining to properties owned directly,

- 13 owned by the real estate partnerships and S corporations, and

owned by Lassiter Properties.

These leases consist, during each

annual period, of approximately 54 instruments for hunting,

fishing, and recreation.

Mrs. Lassiter also makes all final sale

and acquisition decisions relating to the land and timber held

directly and by Lassiter Properties.

Similar decisions relating

to properties held by the real estate partnerships and S

corporations are made by both Mrs. Lassiter and the other partner

or shareholder, subject to each other’s approval.

The Estate Tax Return and Notice of Deficiency

On August 8, 1995, a Form 706, United States Estate (and

Generation-Skipping Transfer) Tax Return, was timely filed for

Mr. Lassiter’s estate.

The return indicates that the Item IV

trust was not funded; rather, all assets covered by the trust

provisions of the 1970 will were treated as passing into the Item

V trust.

A marital deduction was then claimed under section

2056(b)(7) with respect to property passing into the Item V

trust.

Respondent issued a notice of deficiency on August 6,

1998, disallowing this deduction on the grounds that “the

decedent’s surviving spouse does not have a qualifying income

interest for life in the residuary trust established pursuant to

Item V of the Last Will and Testament of the decedent.”

Respondent, however, permitted a marital deduction equal to onehalf of the adjusted gross estate, in accordance with the terms

- 14 set forth in Item IV of Mr. Lassiter’s will.

The parties have

further stipulated that the trust created by Item IV qualifies

under section 2056(b)(5) for the marital deduction.

Mrs.

Lassiter, as administrator of her husband’s estate, filed a

petition with this Court on November 4, 1998, seeking

redetermination of respondent’s disallowance.

Discussion

Contentions of the Parties

Respondent contends that the marital deduction claimed by

the estate is properly disallowed on either of two primary bases.

First, accepting as true statements by family members regarding

their belief that Mr. Lassiter executed a more recent will or

codicil which could not be found, respondent asserts that the

1970 will was revoked by operation of Georgia law.

Hence,

according to respondent, Mr. Lassiter died intestate, and trust

provisions contained in the 1970 will cannot serve as grounds for

a marital deduction.

In the alternative, even if the 1970 will is deemed

effective, respondent maintains that the terms of the trust set

forth in Item V preclude Mrs. Lassiter’s interest therein from

constituting qualified terminable interest property (QTIP) as

necessary for the section 2056(b)(7) deduction.

Respondent

further avers that the disclaimers executed by the beneficiaries

and trustee fail to cure, among other things, the fact that

- 15 distributions of income are limited by an ascertainable standard,

which is inconsistent with the QTIP requirement that the

surviving spouse be entitled to all income from the trust

property.

Conversely, the estate argues that respondent’s position

regarding revocation of the 1970 will is both procedurally and

substantively misplaced.

The estate claims that the issue of

revocation was not pleaded and raised for the first time on

brief, such that its consideration would be prejudicial to the

estate at this stage in the litigation.

Moreover, it is the

estate’s position that no evidence exists sufficient to support a

finding of revocation under Georgia law.

Thus treating the 1970 will as valid and controlling, the

estate contends that, after giving effect to the various

disclaimers, a QTIP deduction under section 2056(b)(7) is

appropriate with respect to the property passing to the Item V

trust.

The estate avers that the disclaimers and Georgia law

enable the residuary trust to comport with the statutory

requirement that the surviving spouse be entitled to all income,

distributable at least annually.

Furthermore, the estate

maintains that case law demands a broad and liberal

interpretation of the marital deduction and, at the very least,

that the disclaimers render the disposition here consistent with

- 16 the statute’s underlying policies and with regulations allegedly

implying that substantial compliance is a proper standard for

evaluating deductibility under section 2056(b)(7).

II.

Preliminary Matters

Before turning to the substantive questions raised by the

parties’ contentions, we first address several evidentiary

objections.

Respondent objects to certain of the stipulated

facts and exhibits primarily on grounds of relevancy.

Respondent

additionally argues that consideration of these items would

conflict with the principle of Greenberg’s Express, Inc. v.

Commissioner, 62 T.C. 324, 327 (1974), that this Court will not

look behind a deficiency notice to examine respondent’s motives

or administrative actions in making the determination.

The

estate counters that the materials are relevant and that some

particularly should come in as admissions by respondent under

rules 801(d)(2) and 804(b)(3) of the Federal Rules of Evidence.

Relevance is defined as “evidence having any tendency to

make the existence of any fact that is of consequence to the

determination of the action more probable or less probable than

it would be without the evidence.”

Fed. R. Evid. 401.

Evidence

meeting this standard is admissible, while irrelevant evidence is

not.

See Fed. R. Evid. 402.

We conclude that the evidence in

question falls short of this relevancy threshold.

- 17 With the exception of the affidavit by Rufus A. Chambers,

discussed below, all of the disputed items relate either to the

estate’s attempts to obtain a private letter ruling in this

matter or to respondent’s internal communications in preparing

the statutory notice.

To the extent that these materials contain

pertinent factual information, such facts are otherwise present

in the record by means of uncontested stipulations and exhibits.

To the extent that the documents contain respondent’s legal

conclusions, they are without a place in our analysis.

As we

have previously established, “a trial before the Tax Court is a

proceeding de novo; our determination as to a petitioner’s tax

liability must be based on the merits of the case and not any

previous record developed at the administrative level.”

Greenberg’s Express, Inc. v. Commissioner, supra at 328.

carrying out this mandate here, we cannot substitute selected

conclusions made by respondent in administrative papers for our

own.

We instead must engage in an independent review of the

facts and application of law thereto.

The disputed materials

thus are basically superfluous, and we sustain respondent’s

objections.

With respect to the affidavit of Mr. Chambers, the parties

focus their arguments on the standards for admissibility of parol

evidence to aid in construction of a will.

The affidavit of Mr.

Chambers, the attorney who drafted the 1970 will, was prepared

- 18 nearly 30 years later in anticipation of litigation.

Therein,

Mr. Chambers purports to recall the intentions underlying certain

portions of the testamentary language.

Since this case was

submitted fully stipulated under Rule 122, we have had no

opportunity to view the demeanor of this witness, to obtain any

information regarding the basis for and extent of his memory of

conversations with Mr. Lassiter, or to assess his credibility.

In this context, we are unwilling to rely on or give any weight

to Mr. Chambers’ statements.

Hence, to engage in a parsing of

the complex area of law relating to parol evidence would be a

moot and futile exercise.

objection.

We shall sustain respondent’s

To summarize, we shall exclude stipulated paragraphs

12, 13, 14, 15, 25, and 52, and Exhibits 9-P, 10-P, 11-P, 12-P,

13-P, 26-P, 27-P, 28-J, 29-J, and 30-J.

III.

Revocation of 1970 Will

Since a determination that the 1970 will has been revoked

would obviate any need to scrutinize its terms and the impact

thereon of the 1995 disclaimers, we begin our substantive

discussion with the issue of its effectiveness.

Documents filed

with both this Court and the Probate Court reference a belief on

the part of members of the Lassiter family that a more recent

will or codicil existed but could not be located.

For instance,

each of the eight disclaimers recites that “A subsequent will

which bequeaths and devises substantially all of the Decedent’s

- 19 property to Mrs. Ann Lassiter is believed to exist but cannot be

found.”

Similarly, the petition to this Court contains the

following:

On several occasions in the two year period prior to

his death, Henry told a number of his friends and

business associates that he had executed a new Will

that would make sure that his estate passed to his wife

and children estate tax free (with the effect of

deferring the estate tax liability until the death of

his wife).

Unfortunately, when Henry died, no such Will could be

found. An exhaustive search was made and yet the most

recent Will that could be located was a 1970 instrument

(“1970 Will”) containing an outdated fifty percent

marital deduction formula trust (“Marital Trust”) and a

residuary trust (“Residuary Trust”).

The significance attached by respondent to these averments

appears to have shifted to some degree throughout the litigation

process.

The answer states that respondent “Alleges that the

only will at issue is the Will probated by the court; * * * that

the will probated by the Court is dispositive of the decedent’s

intent for Federal estate tax purposes; and that parol or

extrinsic evidence is inadmissible to alter the terms of the

decedent’s will.”

A like pronouncement is made in the

stipulation of facts signed by the parties on November 1, 1999:

“It is Respondent’s assertion that the 1970 Will is the only will

of the decedent and that it had not been revoked prior to his

death and was the only will admitted to probate; Petitioner

maintains that a more recent will or codicil exists but cannot be

- 20 found.”

However, the supplemental stipulation of facts which the

parties signed on December 13, 1999, includes the language below:

The 1970 Will was drafted by Rufus A. Chambers, a

member of the Georgia Bar. A true and correct copy of

his affidavit is attached hereto as Exhibit 27-P and is

accepted as his testimony subject to the following

objections. Respondent contends that under Georgia law

the 1970 Will has been revoked * * * . * * * Petitioner

does not consent to consideration of Respondent’s

revocation contention and, in addition to substantive

objections, objects to it on the grounds that it would

constitute a new matter.

From a procedural standpoint, it is well settled that the

Commissioner’s determination may be affirmed for reasons other

than those assigned in the statutory notice of deficiency.

See

Estate of Horvath v. Commissioner, 59 T.C. 551, 555 (1973).

the same time, however, it is equally the general rule of this

Court that issues which are not properly pleaded and which are

raised for the first time on brief will not be considered when to

do so would surprise and prejudice the opposing party.

See DiLeo

v. Commissioner, 96 T.C. 858, 891-892 (1991), affd. 959 F.2d 16

(2d Cir. 1992); Markwardt v. Commissioner, 64 T.C. 989, 997

(1975); Estate of Horvath v. Commissioner, supra at 555.

Such

prejudice arises when the opposing party would be prevented from

presenting evidence that might have been offered if the issue had

been timely raised.

See DiLeo v. Commissioner, supra at 891;

Estate of Horvath v. Commissioner, supra at 555.

- 21 In the instant case, we acknowledge that respondent’s

earlier filings contain statements which would seem to negate any

intent to rely on a revocation theory.

Nonetheless, we also note

that it is at least questionable whether there exists the type of

potential for prejudice that should preclude its consideration.

The above-described rule focuses primarily on an inability to

present evidence.

Here, however, both parties are apparently

willing to accept that there is no evidence which could be

produced to establish specifics regarding the creation, content,

and disappearance of the alleged instrument.

They rather are

primarily arguing about the legal consequences of this absence.

Given these rather unusual circumstances and because, as

explained below, we agree with the estate’s interpretation of the

substantive Georgia law, we find it unnecessary, and decline, to

rest our disposition of this issue on procedural grounds alone.

The interpretation of wills, with respect to determining the

legal rights and interests created thereunder, is governed by

State law.

See Helvering v. Stuart, 317 U.S. 154, 161-162

(1942); Morgan v. Commissioner, 309 U.S. 78, 80-81 (1940).

The

parties here do not dispute that the relevant body of law is that

of the State of Georgia, and we so proceed.

Ga. Code Ann. section 53-2-72 (1997) reads as follows:

53-2-72.

Distinction between express and implied

revocation.

(a) A revocation may be either express or implied.

- 22 (b) An express revocation is effected when the

maker by writing or action annuls the instrument. It

takes effect instantly, independently of the validity

or ultimate fate of the will or other instrument

containing the revocation.

execution of a subsequent inconsistent will. It takes

effect only when the subsequent inconsistent will

becomes effectual. If, from any cause, the subsequent

inconsistent will fails, the implied revocation is not

completed.

Ga. Code Ann. section 53-2-73(a) (1997) then further provides:

“An express revocation by written instrument shall be executed

with the same formality and attested by the same number of

witnesses as are requisite for the execution of a will.”

Applying these principles to the matter at bar, we first

conclude that no implied revocation has occurred.

If Mr.

Lassiter in fact executed a will or codicil merely inconsistent

with the disposition in the 1970 will, but not explicitly

revoking the earlier instrument, such revocation has never been

completed because the later document, having been lost or

destroyed without a trace, never became effectual.

We thus turn to whether the estate’s statements are

sufficient to establish an express revocation under Georgia law,

and we again conclude that they are not.

As regards the type of

proof necessary to show express revocation, the Supreme Court of

Georgia explained in Driver v. Sheffield, 85 S.E.2d 766, 767 (Ga.

1955):

- 23 While revocation of a will cannot be established

by proof of parol declarations by the testator, * * * a

clause in a later written instrument, properly executed

by the testator, expressly revoking a former will is

not rendered ineffective merely by the loss or

destruction of the instrument which contains it, and

proof of the revocation clause in a later lost or

destroyed will may be made by parol. Probate of the

former will may be defeated upon proof of the execution

of the later writing by the testator, which contained a

clause revoking the prior will, and the loss or

destruction of the later instrument, without proof of

the rest of the contents of the lost or destroyed

instrument. * * *

The intestate heirs challenging the will in Driver v. Sheffield,

supra at 767, specifically alleged that the later will was

executed in due form and contained a clause revoking any prior

wills.

Hence, based on the rule quoted above, the court reversed

an earlier decision which had dismissed the challenge.

See id.

The Supreme Court of Georgia then further elucidated the meaning

of this holding by subsequently opining in another alleged

revocation case:

“We note that had there been sufficient proof

that the 1981 will was validly executed and had been revoked by

destruction, the 1975 will would not have been revived absent

republication.

OCGA § 53-2-73; Driver v. Sheffield, 221 Ga. 316,

85 S.E.2d 766 (1955).”

Rawlins v. Hulme, 425 S.E.2d 861, 862 n.1

(Ga. 1993).

These judicial pronouncements convince us that where, as

here, a record is devoid of any evidence going to the existence

of an explicit revocation clause or the elements of proper

execution (i.e., witnesses and other formalities), or even any

- 24 allegations thereof by a person in a position to have knowledge

of the decedent’s actions, the Supreme Court of Georgia would not

find an express revocation to have been effected.

Moreover, we

cannot deny the logic of the following remarks by the estate on

brief:

Respondent seeks to inject the mixed contention of fact

and law that the full Marital Deduction Will Henry said

he had was, unbeknownst to the Estate, (i) executed by

Henry, (ii) signed by the required number of witnesses,

(iii) with the requisite formalities, and (iv)

contained a clause revoking the 1970 Will. The great

irony is that Henry’s family and friends searched high

and low for sufficient evidence to prove the existence

and content of the full Marital Deduction Will for

probate purposes. That evidence would have resolved

this entire dispute but it could not be found.

Consequently, both parties are left to cope with the

obsolete 1970 Will.

We therefore proceed on the basis that the 1970 will has not been

revoked under Georgia law.

IV.

Qualification for Marital Deduction

We next address whether the interest received by Mrs.

Lassiter under the 1970 will, as modified by the 1995

disclaimers, qualifies for the marital deduction pursuant to

section 2056(b)(7).

Section 2056(b)(7) was enacted as part of

the Economic Recovery Tax Act of 1981 (ERTA), Pub. L. 97-34, sec.

403(d)(1), 95 Stat. 172, 302.

Prior to 1981, no marital

deduction had been permitted for the type of interest now

sanctioned by this provision.

ERTA also effected another

significant change to the marital deduction statute in that it

- 25 repealed former section 2056(c), thus creating a deduction

unlimited in amount.

See ERTA sec. 403(a)(1)(A), 95 Stat. 301.

At the time of its repeal, section 2056(c) had limited the

aggregate deduction to the greater of $250,000 or 50 percent of

the value of the adjusted gross estate.

At the time the 1970

will was drafted, the limitation contained in section 2056(c) was

simply 50 percent of the adjusted gross estate’s value.

The estate now seeks through the various disclaimers to take

advantage of these changes and to obtain a greater deduction than

would be afforded by placing up to half of Mr. Lassiter’s assets

in the Item IV trust.

As a threshold matter, however, the estate

will be unable to do so if bound by the transitional rule in

section 403(e)(3) of ERTA, 95 Stat. 305.

Section 403(e)(3) of

ERTA retains the former aggregate amount limitation if four

conditions are met:

(A) the decedent dies after December 31, 1981,

(B) by reason of the death of the decedent property

passes from the decedent or is acquired from the

decedent under a will executed before the date which is

30 days after the date of the enactment of this Act, or

a trust created before such date, which contains a

formula expressly providing that the spouse is to

receive the maximum amount of property qualifying for

the marital deduction allowable by Federal law,

amended to refer specifically to an unlimited marital

deduction at any time after the date which is 30 days

after the date of enactment of this Act, and before the

death of the decedent, and

- 26 (D) the State does not enact a statute applicable to

such estate which construes this type of formula as

referring to the marital deduction allowable by Federal

law as amended by [section 403(a) of ERTA] * * *

The transitional rule thus applies only in circumstances

where there exists “a formula expressly providing that the spouse

is to receive the maximum amount of property qualifying for the

marital deduction allowable by Federal law”.

Given this

language, we believe that only a very strained reading of the

term “expressly” could expand its reach to cover a situation

where, as here, the instrument in question does not use the

phrase “maximum marital deduction”.

Respondent has cited and our

research has revealed no cases holding that a mere percentage

bequest constitutes a formula within the meaning or intent of

section 403(e)(3) of ERTA.

95 T.C. 289 (1990).

See Estate of Levitt v. Commissioner,

We decline to do so now and conclude that

the 1970 will is not subject to the transitional rule.

We apply

section 2056 as in effect at Mr. Lassiter’s date of death.

This statute provides in relevant part:

SEC. 2056.

BEQUESTS, ETC., TO SURVIVING SPOUSE.

(a) Allowance of Marital Deduction.--For purposes

of the tax imposed by section 2001, the value of the

taxable estate shall, except as limited by subsection

(b), be determined by deducting from the value of the

gross estate 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.

- 27 (b) Limitation in the Case of Life Estate or Other

Terminable Interest.-(1) General rule.--Where, on the lapse of

time, on the occurrence of an event or

contingency, or on the failure of an event or

contingency to occur, an interest passing to the

surviving spouse will terminate or fail, no

deduction shall be allowed under this section with

respect to such interest-(A) if an interest in such property

passes or has passed (for less than an

adequate and full consideration in money or

money’s worth) from the decedent to any

person other than such surviving spouse (or

the estate of such spouse); and

(B) if by reason of such passing such

person (or his heirs or assigns) may possess

or enjoy any part of such property after such

termination or failure of the interest so

passing to the surviving spouse;

(7) Election with respect to life estate for

surviving spouse.-(A) In general.--In the case of

qualified terminable interest property-(i) for purposes of subsection (a),

such property shall be treated as

passing to the surviving spouse, and

(ii) for purposes of paragraph

(1)(A), no part of such property shall

be treated as passing to any person

other than the surviving spouse.

(B) Qualified terminable interest

property defined.--For purposes of this

paragraph-(i) In general.--The term

“qualified terminable interest property”

means property--

- 28 (I) which passes from the

decedent,

(II) in which the surviving

spouse has a qualifying income

interest for life, and

(III) to which an election

under this paragraph applies.

(ii) Qualifying income interest for

life.--The surviving spouse has a

qualifying income interest for life if-(I) the surviving spouse is

entitled to all the income from the

property, payable annually or at

more frequent intervals, or has a

usufruct interest for life in the

property, and

(II) no person has a power to

appoint any part of the property to

any person other than the surviving

spouse.

Subclause (II) shall not apply to a

power exercisable only at or after the

death of the surviving spouse. * * *

(iii) Property includes interest

therein.--The term “property” includes

an interest in property.

(iv) Specific portion treated as

separate property.--A specific portion

of property shall be treated as separate

property.

(v) Election.--An election under

this paragraph with respect to any

property shall be made by the executor

on the return of tax imposed by section

2001. Such an election, once made,

shall be irrevocable.

- 29 In other words, section 2056(a) generally allows an unlimited

deduction against estate tax liability for property transferred

to a surviving spouse, but section 2056(b)(1) creates an

exception denying the deduction when the spouse’s interest takes

a form, such as a life estate in trust, which will terminate in

favor of another beneficiary.

Section 2056(b)(7) is among

several exceptions to the exception and allows a deduction for

so-called QTIP, qualified terminable interest property.

In the matter before us, the parties do not dispute that an

interest in the Item V trust passed to Mrs. Lassiter from

decedent or that a timely QTIP election was made on the estate

tax return.

At issue then is whether such interest constitutes a

qualified income interest for life.

Furthermore, since the

estate, appropriately, does not contend that the Item V trust as

originally set forth in the 1970 will qualifies for the marital

deduction, the dispositive issue can be framed more specifically

as whether the 1995 disclaimers render the trust eligible for

QTIP treatment.

Regulations promulgated under section 2056 contemplate that

disclaimed property may be treated as passing to the surviving

spouse within the meaning of the statute.

Section 20.2056(d)-

2(b), Estate Tax Regs., provides in this regard:

If an interest in property passes from a decedent to a

person other than the surviving spouse, and the

interest is created in a transfer made after December

31, 1976, and--

- 30 (1) The person other than the surviving

spouse makes a qualified disclaimer with respect

to such interest; and

(2) The surviving spouse is entitled to such

interest in property as a result of such

disclaimer, the disclaimed interest is treated as

passing directly from the decedent to the

surviving spouse. * * *

This Court has similarly reiterated that “a trust that was not

eligible initially for a marital deduction may become eligible if

the persons with interests in the trust that jeopardize the

marital deduction, other than the surviving spouse, effectively

disclaim their interests.”

Estate of Bennett v. Commissioner,

100 T.C. 42, 58 (1993).

Nonetheless, such a disclaimer can be “qualified” and

effective for purposes of Federal estate tax law only to the

extent that it satisfies the requirements enumerated in section

2518.

See sec. 2046.

SEC. 2518.

Section 2518 reads in part as follows:

DISCLAIMERS.

(a) General Rule.--For purposes of this subtitle,

if a person makes a qualified disclaimer with respect

to any interest in property, this subtitle shall apply

with respect to such interest as if the interest had

never been transferred to such person.

(b) Qualified Disclaimer Defined.--For purposes of

subsection (a), the term “qualified disclaimer” means

an irrevocable and unqualified refusal by a person to

accept an interest in property but only if-(1) such refusal is in writing,

(2) such writing is received by the

transferor of the interest, his legal

representative, or the holder of the legal title

- 31 to the property to which the interest relates not

later than the date which is 9 months after the

later of-(A) the date on which the transfer

creating the interest in such person is made,

(B) the day on which such person attains

age 21,

(3) such person has not accepted the interest

or any of its benefits, and

(4) as a result of such refusal, the interest

passes without any direction on the part of the

person making the disclaimer and passes either-(A) to the spouse of the decedent, or

(B) to a person other than the person

making the disclaimer.

interest.--A disclaimer with respect to an

undivided portion of an interest which meets the

requirements of the preceding sentence shall be

treated as a qualified disclaimer of such portion

of the interest.

(2) Powers.--A power with respect to property

shall be treated as an interest in such property.

Moreover, in order for the requirement of section 2518(b)(4)

to be met, a disclaimer must also be effective under applicable

State law.

See Estate of Bennett v. Commissioner, supra at 67.

Such is demanded by the previously mentioned general rule that

legal rights and interests in property, and transfers thereof,

are created and determined by State law, but the manner in which

these interests are to be taxed is governed by Federal law.

See

- 32 Helvering v. Stuart, 317 U.S. at 161-162; Morgan v. Commissioner,

309 U.S. at 80.

Hence, the interest must have validly passed

without disclaimant direction under State law before it will be

deemed to have done so for Federal tax purposes.

Bennett v. Commissioner, supra at 67.

See Estate of

Relevant portions of the

Georgia disclaimer statute are reproduced below:

53-2-115.

Renouncement of succession.

(a) Any person to whom an interest in property is

transferred, or who succeeds to an interest in property

by contract or by operation of law, or any fiduciary

acting on behalf of such person is authorized to and

may renounce in whole or in part the succession to any

property or interest therein by filing a written

instrument within the time and at the place provided in

subsection (b) of this Code section. For purposes of

this Code section, the term “interest in property”

includes any powers over or rights with respect to such

property. The instrument shall:

(1) Describe the property or part thereof or

interest therein renounced;

(2) Be signed by the person renouncing or by

a fiduciary acting on behalf of such person; and

(3) Declare the renunciation and the extent

thereof.

otherwise indicated by his or her will, the interest

renounced and any future interest which is to take

effect in possession or enjoyment at or after the

termination of the interest renounced shall pass as if

the person renouncing had predeceased the decedent or,

if the person renouncing is one designated to take

pursuant to a power of appointment exercised by a

testamentary instrument, as if the person renouncing

had predeceased the donee of the power. In every case

- 33 the renunciation relates back for all purposes to the date

of death of the decedent or the donee, as the case may be.

(h) Nothing in this Code section shall be deemed

to alter the duties or responsibilities of any

fiduciary to act in the best interests of the person or

persons the fiduciary represents. However, nothing

contained in this Code section shall be deemed to limit

the authority granted by this Code section to the

fiduciary to renounce an interest in property. [Ga.

Code Ann. sec. 53-2-115 (1997).]

All Income Payable Annually

We now evaluate the factual circumstances before us in light

of the above-quoted statutory mandates.

The first requirement

specified for a qualified income interest for life is that the

surviving spouse be entitled to all income from the property,

payable at least annually.

See sec. 2056(b)(7)(B)(ii)(I).

minimum then, no interest can qualify for QTIP treatment if any

person other than the surviving spouse is entitled to income

distributions during the spouse’s lifetime.

The Item V trust,

however, provides a mechanism by which the Lassiter children or

their descendants may receive trust income while Mrs. Lassiter is

living.

The trustee is authorized to make such distributions for

the children’s support and education.

Unless properly

disclaimed, these interests will be fatal to the marital

deduction.

- 34 Each child and potential unborn or unascertained descendant

executed, either personally or through a guardian ad litem, a

disclaimer renouncing “all rights, title, and interest” to income

from the residuary trust during Mrs. Lassiter’s life.

The

parties have stipulated that these disclaimers meet the formal

requirements of section 2518 and Ga. Code Ann. section 53-2-115.

Since both section 2518 and Ga. Code Ann. section 53-2-115

explicitly permit disclaimers of partial interests, we further

conclude that neither statute creates any substantive barrier to

the valid renunciation of an income interest in a trust.

Regulations promulgated under section 2518 buttress this

conclusion by explaining:

For example, if an income interest in securities is

bequeathed to A for life, then to B for life, with the

remainder interest in such securities bequeathed to A’s

estate, and if the remaining requirements of section

2518(b) are met, A could make a qualified disclaimer of

either the income interest or the remainder, or an

undivided portion of either interest. * * * [Sec.

25.2518-3(a)(1)(i), Gift Tax Regs.]

In addition, we decline respondent’s invitation to question

the validity of these disclaimers on the grounds that those

executed by the guardian ad litem failed to protect the best

interests of the beneficiaries.

The renunciations endeavor to

preserve in excess of $14 million in a trust naming Mr.

Lassiter’s descendants as the ultimate remainder beneficiaries.

Given this potential for future benefit, we are unwilling to find

a violation of fiduciary duties.

For similar reasons, we are

- 35 equally unwilling to construe Mrs. Lassiter’s actions in

attempting to obtain the increased deduction as a violation of

her fiduciary duties as administrator and trustee.

On the record

before us, we lack any basis upon which to evaluate or secondguess the Probate Court’s acceptance of the actions by the

fiduciaries.

Hence, we are satisfied that Mr. Lassiter’s descendants

effectively disclaimed their right to receive trust income during

Mrs. Lassiter’s life, and thereby cut off the trustee’s

discretionary power to make such distributions for their support

and education.

Because the Item V trust as written establishes only two

classes of beneficiaries to whom the trustee may distribute

income; i.e., Mr. Lassiter’s wife and his descendants, the

children’s disclaimers leave Mrs. Lassiter as the sole potential

recipient.

That alone, however, does not necessarily mean she is

entitled to all income payable at least annually.

The language of the trust instrument which bears upon this

question states that the trustee “shall use such part of the

income and/or principal thereof as it may deem necessary to

provide for the support in reasonable comfort of my wife”.

The

document also recites Mr. Lassiter’s desire that the trustee “in

making encroachment for the benefit of my wife to encroach first

on the trust created for my wife in Item IV hereof before

- 36 encroaching on this trust”.

Based on these recitations,

respondent maintains that Mrs. Lassiter is not entitled to all

income; rather, she is entitled only to so much of the income as

falls within the ascertainable standard of what is necessary for

her support in reasonable comfort, and any amount in excess

thereof is to be accumulated.

Respondent further characterizes

Mrs. Lassiter’s interest in the Item V trust as secondary and

comments that distributions may be made to her only after

considering the income and corpus of the Item IV trust.

Conversely, it is the estate’s position that in absence of

any explicit direction regarding the timing and amount of

distributions or the accumulation of income, both Ga. Code Ann.

section 53-12-190 (1997) and Friedman v. United States, 364 F.

Supp. 484 (S.D. Ga. 1973), establish Mrs. Lassiter’s right to all

income at least annually.

The estate also argues that the

reference to encroachment relates only to distributions of

principal and has no impact on Mrs. Lassiter’s right to income.

We deal first with this apparent dispute over the effect of

the encroachment clause.

In the context of trust law, the term

“encroach” is commonly used and understood to refer to invasion

of trust corpus or principal.

For example, Ga. Code Ann. section

53-12-250 (1997) is entitled “Disposition of income; encroachment

on corpus”.

Specifically in the 1970 will, the word is employed

in two other instances, each making explicit the connection

- 37 between encroachment and trust res.

As regards the Item IV trust

and the Item V trust shares to be established for the descendants

after Mrs. Lassiter’s death, the trustee is “authorized to

encroach on the corpus of the property” and “authorized to

encroach upon the principal of the share”, respectively.

contrast, encroach is never the verb used in phrases expressly

addressing payment of income.

We thus have no basis for deciding

that an unconventional sense is meant in Item V(b) and conclude

that the instruction is not germane to our discussion of the

surviving spouse’s income rights.

Accordingly, we move to

analysis of whether Georgia law affords Mrs. Lassiter the right

to all income at least annually.

The regulations under section 2056(b)(7) which interpret

this requirement provide generally that

The provisions of local law are taken into account in

determining whether the conditions of section

2056(b)(7)(B)(ii)(I) are satisfied. For example,

silence of a trust instrument as to the frequency of

payment is not regarded as a failure to satisfy the

requirement that the income must be payable to the

surviving spouse annually or more frequently unless

applicable local law permits payments less frequently.

[Sec. 20.2056(b)-7(g), Estate Tax Regs.]

The regulations also offer more specific guidance for certain

issues by indicating that the principles of section 20.2056(b)5(f), Estate Tax Regs., apply in determining whether the

surviving spouse is entitled to all income.

7(d)(2), Estate Tax Regs.

See sec. 20.2056(b)-

Among the principles so referenced is

- 38 the one set forth in section 20.2056(b)-5(f)(7), Estate Tax

Regs.:

“An interest passing in trust fails to satisfy the

condition * * * , that the spouse be entitled to all the income,

to the extent that the income is required to be accumulated in

whole or in part or may be accumulated in the discretion of any

person other than the surviving spouse”.

We therefore must

decide, in light of State law, whether the Item V trust, as

affected by the disclaimers, authorizes accumulation or requires

full annual distribution.

Ga. Code Ann. section 53-12-190, upon which the estate

relies, provides in relevant part:

53-12-190.

Trustee Duties.

(a) The duties contained in this chapter are

applicable except as otherwise provided in the trust

instrument, and are in addition to and not in

limitation of the common law duties of the trustee,

except to the extent inconsistent therewith.

derived from the trust at least annually.

Our inquiry thus becomes whether the 1970 will “otherwise

provide[s]” within the meaning of the statute.

Unfortunately,

research has revealed no opinions from courts located within the

State of Georgia which address subsection (c) of Ga. Code Ann.

section 53-12-190 and its relationship to subsection (a).

However, this statute is the successor to Ga. Code Ann. sections

108-445 and 108-446 (Code 1933), which were construed by the U.S.

- 39 District Court for the Southern District of Georgia in Friedman

v. United States, supra.

These predecessor laws read:

Where the trust instrument is silent as to the

time of distribution of income and the frequency

thereof, all trustees of all trusts subject to the laws

of this State, whether heretofore or hereafter

established, shall distribute all net income derived

from the property comprising such trust at least

annually, on a calendar or fiscal year basis. [Ga.

Code Ann. sec. 108-445.]

In the case of any trust now in existence or

hereafter created where the trust instrument expressly

directs or permits net income to be distributed less

frequently than annually, the express provisions of

such instrument shall govern the time and manner of

making distributions of income. [Ga. Code Ann. sec.

108-446.]

The trust at issue in Friedman v. United States, supra at

484-485, instructed the trustees:

To pay to my wife, SOPHIE M. BODZINER, such part of the

net income as the Trustees may deem necessary to

provide for the proper support, comfort and happiness

of my wife. Said Trustees shall be authorized to

encroach upon the corpus of the trust estate at any

time and from time to time in such amounts as they may

deem necessary, taking into consideration the income of

my wife’s separate estate, to provide for the proper

support and comfort of my wife.

The question before the court was whether this trust satisfied

the all income payable annually requirement of section

2056(b)(5), which parallels that set forth in section 2056(b)(7).

See id. at 486.

The court queried whether the trust qualified

for the marital deduction “where by its terms the entire income

from the trust property does not have to be paid annually to the

surviving spouse but only such part thereof as the trustees deem

- 40 necessary to provide for her ‘support, comfort and happiness’”.

Id. at 485.

The Commissioner, as here, argued that the amount of

income to which the surviving spouse was entitled was limited and

that accumulation was permitted.

See id. at 486.

The District Court analyzed the language of the trust

instrument in light of the Georgia statutory law and concluded:

since the trust instrument is “silent” as to time of

income distribution, I must perforce read Item XXIV to

mean that “the trustees shall pay to my wife all the

net income derived from the trust property at least

annually”.7 I cannot agree with an interpretation of §

108-446 that would make § 108-445 inoperative here on

the theory that the language of the Bodziner trust

amounts to express permission to the trustees to

distribute net income on a less frequent basis than

annually.

* * * The intent of the Act of 1960 (Ga. Code §§ 108445, 446) was to make discretionary income trusts that

are silent as to frequency of payment eligible for the

marital deduction. The requirement of the statute that

under such a trust all net income must be paid by the

trustees at least annually must be read into the

Bodziner trust, delimiting any fiduciary discretion in

such respect.

_____________

The Act of 1960 does not mean that discretionary income

trusts have seen their day in Georgia. Silence of the instrument

as to time and frequency of distribution has become a limitation

rather than a grant of fiduciary authority. Such a trust will

qualify for the marital deduction. So the Legislature reasonably

conceived. If the testator does not want it that way, he can

recite that it is his express wish that distribution of net income

may be on a less frequent than annual basis in the trustee’s

discretion. * * *

[Id. at 489 & n.7.]

Although we acknowledge that opinions of a U.S. District Court do

not constitute binding precedent in this Court, we find it

appropriate to give proper regard and weight to interpretations

- 41 of State law by local tribunals.

See Commissioner v. Estate of

Bosch, 387 U.S. 456, 465 (1967); Propper v. Clark, 337 U.S. 472,

486-487 (1949); Helvering v. Stuart, 317 U.S. at 162-163.

Friedman v. United States, 364 F. Supp. 484 (1973), reflects

that the statutes from which Ga. Code Ann. section 53-12-190

sprang were enacted for the purpose of establishing a default

rule by which spousal trusts were able to qualify for the marital

deduction absent an unmistakable expression of intent to the

contrary.

At the same time, no evidence suggests that the

Georgia legislature has since sought to weaken this rule and

thereby make it easier for a trust to fall short of deductible

status.

The above-quoted sections addressed in Friedman v.

United States, supra, were subsequently recodified verbatim in

all material respects as subsections (b) and (c) of Ga. Code Ann.

section 53-13-53 (Code 1981).

The provisions existed in such

form until the comprehensive revision and complete recodification

of Georgia trust law which took effect on July 1, 1991, and which

enacted Ga. Code Ann. section 53-12-190.

An article explaining

the new act by the individual who served as Reporter to the Trust

Law Revision Committee which drafted the measure indicates that

no substantive change was intended.

See Emanuel, “The Georgia

Trust Act”, 28 Ga. St. B.J. 95, 97 (1991).

Citing former Ga.

Code Ann. section 53-13-53, the article states:

“The Act

* * * carries forward the Georgia statute directing the trustee

- 42 to distribute net income at least annually in O.C.G.A. § 53-12190(c).”

Id. at 97 & n.40.

In contrast, the article highlights

and expounds upon alterations in prior law.

See id.

Here then is the situation with which we are faced in

deciding whether Georgia courts would require annual distribution

on the facts before us.

In terms of the legal context, we are

presented with a State statute that, in connection with its

interpretive history, clearly demonstrates a bias on the part of

Georgia lawmakers toward enabling trusts to qualify for the

marital deduction.

Moreover, from a practical standpoint, we

address a situation where any accumulation of income by the

trustee under an ascertainable standard theory would be

pointless.

The descendants have disclaimed their right to all income

earned by the trust during Mrs. Lassiter’s lifetime.

Under the

State disclaimer law, they are deemed to have predeceased Mrs.

Lassiter as to these sums.

The amounts thus can neither be

distributed to them while Mrs. Lassiter is living nor be added to

the remainder interest they will take after her death.

The

surviving spouse, or her estate, is the only possible beneficiary

of this income.

The disclaimers have therefore rendered

meaningless any discretion on the part of the trustee to

accumulate income.

On balance, we believe that where a standard for

- 43 distribution has so been vitiated of any potential for protecting

the interests of any other beneficiary, a Georgia court would

deem the subject trust instrument to have been rendered silent as

to timing and frequency of payment, such that the default rule of

Ga. Code Ann. section 53-12-190(c) would require not less than

annual payment of all income to the surviving spouse.

We so

conclude here.

Furthermore, we are equally satisfied that administrative

powers granted to the trustee by the 1970 will do not

impermissibly negate Mrs. Lassiter’s income rights for purposes

of the section 2056 deduction.

Although the terms of the will

authorize the trustee discretionally:

(1) To apportion or

allocate receipts and payments among principal and income, and

(2) to hold unproductive property, regulations provide that

neither of these powers is fatal to the marital deduction in

circumstances such as those now before the Court.

Section 20.2056(b)-5(f)(4), Estate Tax Regs., contains the

following:

Provisions granting administrative powers to the

trustee will not have the effect of disqualifying an

interest passing in trust unless the grant of powers

evidences the intention to deprive the surviving spouse

of the beneficial enjoyment required by the statute.

Such an intention will not be considered to exist if

the entire terms of the instrument are such that the

local courts will impose reasonable limitations upon

the exercise of the powers. Among the powers which if

subject to reasonable limitations will not disqualify

the interest passing in trust are the power to

determine the allocation or apportionment of receipts

- 44 and disbursements between income and corpus, the power

to apply the income or corpus for the benefit of the

spouse, and the power to retain the assets passing to

the trust. For example, a power to retain trust assets

which consist substantially of unproductive property

will not disqualify the interest if the applicable

rules for the administration of the trust require, or

permit the spouse to require, that the trustee either

make the property productive or convert it within a

reasonable time. Nor will such a power disqualify the

interest if the applicable rules for administration of

the trust require the trustee to use the degree of

judgment and care in the exercise of the power which a

prudent man would use if he were owner of the trust

assets. * * *

Georgia law then supplies the requisite limitations.

The

Comment to Ga. Code Ann. section 53-12-190 indicates that

subsection (a) imposes the necessary duty of care and diligence:

Pursuant to subsection (a), a trustee is subject

to the duties the common law imposes on trustees, as

well as the duties expressly set forth in the Act. The

Committee deemed it unnecessary to catalog the duties

of a trustee because the common law has developed them

with admirable clarity. * * *

The common law duties referred to are set forth in

detail in the Restatement, Trusts, Second, §§ 169-185.

These duties, and the duties set forth in the Act, may

be varied by the trust instrument, see § 53-12-5,

supra, except as otherwise provided by law, see, e.g.,

§ 53-12-194 (a), infra, and unless the provision in the

trust instrument is violative of public policy. * * *

The duty of ordinary diligence, formerly codified at

OCGA § 53-13-51 and defined as “that degree of care

which is exercised by ordinarily prudent persons under

the same or similar circumstances” in OCGA § 51-1-2, is

now encompassed by § 53-12-190 (a). * * *

Included amongst the referenced common-law materials is 1

Restatement, Trusts 2d, section 174 (1959), which reads:

“The

trustee is under a duty to the beneficiary in administering the

- 45 trust to exercise such care and skill as a man of ordinary

prudence would exercise in dealing with his own property”.

addition, Ga. Code Ann. section 53-12-194(a) (1997) provides that

“No provision in a trust instrument is effective to relieve the

trustee of liability for breach of trust committed in bad faith

or intentionally or with reckless indifference to the interest of

the beneficiary”.

Based on these pronouncements, we believe that Georgia

courts would limit the trustee’s administrative powers to a

sufficient extent to prevent their jeopardizing the income

beneficiary’s interest.