UNITED STATES TAX COURT

T.C. Memo. 2004-68

UNITED STATES TAX COURT

ESTATE OF MERLE ALLEN WHITING, JR., DECEASED,

VICKI ANN WHITING, EXECUTRIX, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 13268-01.

Filed March 17, 2004.

Keith Moser, for petitioner.

Edsel Ford Holman, Jr., for respondent.

MEMORANDUM OPINION

VASQUEZ, Judge:

Respondent determined a deficiency of

$206,6121 in the Federal estate tax of the Estate of Merle Allen

Whiting, Jr. (decedent), and an addition to tax pursuant to

1

All amounts are rounded to the nearest dollar.

- 2 section 6651(a)(1)2 of $10,331.

The deficiency arises from

respondent’s disallowance of the marital deduction for a trust

which held property valued at $533,762 at the time of decedent’s

death.

The sole issue3 for decision is whether under section

2056(b)(7) the surviving spouse’s interest in the “Marital

Deduction Trust” qualifies for the marital deduction.

Background

The parties submitted this case fully stipulated pursuant to

Rule 122.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.

At the time the petition

was filed, the mailing address for the estate and for the

executrix was in Dewitt, Arkansas.

A.

Decedent’s Estate Plan

Decedent was in the business of farm equipment sales.

Around May 1996, 18 months before his death, decedent had an

operation, after which the doctor informed him that he had

terminal lung and colon cancer.

Immediately following decedent’s

operation, the doctor estimated that decedent had a maximum of 2

2

Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the date of decedent’s

death, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

3

The parties stipulated that the estate’s Federal estate

tax return was late filed on Aug. 14, 1998, and that, to the

extent that a Federal estate tax deficiency is finally

determined, the failure-to-file addition to tax is applicable

pursuant to sec. 6651(a)(1).

- 3 years to live.

Following his operation and terminal illness

diagnosis, decedent ceased his regular activities.

Decedent did

not have any treatments that would have attempted to cure or slow

his cancer.

Decedent’s certified public accountant informed him that he

needed an estate plan.

On September 17, 1997, decedent and his

wife, Vicki Ann Whiting (Mrs. Whiting), met with an attorney at

the firm of Jewell & Moser concerning the drafting of an estate

plan. Jewell & Moser is a six-attorney firm in Little Rock,

Arkansas.

Two attorneys are Arkansas board recognized

specialists in tax law.

accountant.

One attorney is a certified public

Two attorneys have a master of laws in taxation.

On October 13, 1997, decedent and Mrs. Whiting executed the

Merle Allen Whiting, Jr., and Vicki Ann Whiting Trust (the

trust).

On the same date, decedent executed his last will and

testament (the will).

Decedent was aware that he was terminally

ill with lung and colon cancer when he executed the trust and the

will.

The draftsman of the trust prepared only one draft for

decedent to review and execute.

The intent of the draftsman was

to create a marital deduction trust that qualified for the

Federal estate tax marital deduction.

Decedent read the trust

and the will without asking any questions or raising any

objections.

Neither decedent nor Mrs. Whiting exchanged any

- 4 correspondence with the draftsman of the trust or the will.

On November 4, 1997, 22 days after executing the trust and

the will, decedent died.

survived decedent.

He was 50 years old.

Mrs. Whiting

She was 48 years old when decedent died.

The trust was initially funded with $10.

During the 22-day

period between the date the trust was executed and the date of

decedent’s death, substantial amounts of decedent’s real estate

holdings were transferred to the trust as trust corpus.

Upon

decedent’s death, life insurance proceeds also funded the trust.

B.

Terms of the Trust

1.

Merle Allen Whiting, Jr., and Vicki Ann Whiting

Trust

Decedent and Mrs. Whiting were the grantors of the Merle

Allen Whiting, Jr., and Vicki Ann Whiting Trust.

While both

grantors were alive, the trust was revocable.

Purpose.

The stated purpose of the trust was to create a

means “by which certain assets may be held for the benefit of the

Grantor and the Grantor’s loved ones * * * .

It is the Grantor’s

intent in creating this trust that the Grantor’s assets avoid

probate at the time of the Grantor’s death.

All provisions of

this trust shall be construed in such a manner as to best effect

these intentions.”

Grantors’ Separate Trust Shares.

Upon receipt of property

in the trust, the trustee “shall establish an undivided separate

trust share for Merle Allen Whiting, Jr., equal to fifty percent

- 5 (50%) of the property received and an undivided separate trust

share for Vicki Ann Whiting equal to fifty percent (50%) of the

property received.”

Death of First Grantor.

Upon the death of the first grantor

to die, “the Trustee shall divide the decedent’s separate share

of the trust into four (4) separate trusts.”

The first trust is

the “Marital Deduction Trust” (marital deduction trust).

The

second trust is the “Madge Williams Whiting Evans Trust”,

established for decedent’s mother.

The third trust is the

“Courtney Brook Whiting Phaffenberger Trust”, established for

decedent’s daughter.

The fourth trust is the “Non-Marital

Deduction Trust”.

The trust becomes irrevocable as to the deceased grantor’s

separate trust share immediately upon the death of the first

grantor to die.

Additionally, “the surviving Grantor shall have

no right or power * * * to alter, amend, modify, revoke or

terminate this Trust Agreement * * * as to the deceased Grantor’s

separate trust share.”

2.

Marital Deduction Trust

Amount of Distribution.

The amount of the distribution from

decedent’s separate trust share to the marital deduction trust,

as stated in section 7.A. of the trust agreement, is as follows:

A distribution shall be made to this trust of an

amount equal to the excess, if any, of the decedent’s

taxable estate (computed without any marital deduction)

plus the amount of the decedent’s adjusted taxable

- 6 gifts, over the exemption equivalent of the then

applicable unified credit against estate tax, said

excess being reduced by the aggregate value (using

federal estate tax values, as finally determined) of

all property and interests in property included in the

decedent’s gross estate which qualifies for the federal

estate tax marital deduction and which pass or have

passed in a form which qualifies for such marital

deduction from the decedent to the surviving spouse

pursuant to Will, by operation of law, pursuant to

contract or otherwise than by this provision.

The words “adjusted taxable gifts”, “gross

estate”, “marital deduction”, “pass or have passed”,

“taxable estate” and “unified credit against estate

tax” shall have the same meanings as such words have

under the Internal Revenue Code provisions applicable

to the decedent’s estate * * *.

*

*

*

*

*

*

*

Only assets that qualify for the marital deduction

shall be available for selection by the Trustee in the

fulfillment of this distribution. Each asset selected

by the Trustee to be distributed in kind for the

purpose of satisfying the amount of this distribution

to the surviving spouse shall be valued for such

purposes at the lower of:

(i) its fair market value at the time of

distribution, or

(ii) its value for federal estate tax

purposes * * * .

Although the decedent’s intent in directing this

method of valuation for distributions in kind in

satisfaction of a pecuniary bequest is to eliminate any

recognition of gain with respect to appreciated assets

available for distribution, it also has the result of

qualifying the marital deduction for estate tax

purposes.

Terms.

The relevant terms of the marital deduction trust,

as stated in section 8 of the trust agreement, are as follows:

- 7 A. Distribution of Income and Principal. After

the payment of all reasonable and necessary expenses

incurred in the management of the trust, the trustee

shall distribute at least annually the net income of

the trust to or for the benefit of the surviving spouse

for the remainder of the surviving spouse’s life. Any

income accrued, but undistributed, as of the date of

the surviving spouse’s death shall be paid to the

surviving spouse’s estate * * * .

The trustee is authorized to distribute to or for

the benefit of the surviving spouse so much of the

principal of this trust as in the trustee’s absolute

discretion may be necessary or advisable for the

health, education, maintenance and support of the

surviving spouse.

The surviving spouse is authorized to withdraw

from the principal of this trust such additional

amounts as the surviving spouse may request, provided

that such distributions from the principal of this

trust shall not exceed in any calendar year the greater

of $5,000.00 or five percent (5%) of the value of the

principal of this trust * * * .

*

*

*

*

*

*

*

No distribution of the principal of this trust

* * * shall be made to or for the benefit of the

surviving spouse following the remarriage or

cohabitation of the surviving spouse.

B. Termination of Trust. This trust shall

terminate upon the surviving spouse’s death, at which

time the remaining assets of this trust shall be

distributed as follows:

*

*

*

*

*

*

*

(2) The remaining balance shall be

distributed to or in trust for the benefit of

such persons or entities * * * as the

surviving spouse may appoint by specific

reference to this trust in the surviving

spouse’s Last Will and Testament, provided

that no appointment shall be made to the

surviving spouse, the surviving spouse’s

estate, the surviving spouse’s creditors or

- 8 the creditors of the surviving spouse’s

estate. In partial or complete default of an

effective exercise of this special power of

appointment, or in the event of the surviving

spouse’s remarriage or cohabitation, then the

remaining assets of this trust shall be

distributed in the same manner as provided in

Section 10[4] of this trust.

C. Trustee. The following persons or entities

shall serve as the trustee of this trust in the

following order of priority:

(1) Surviving spouse.

(2) * * * However, in the event that

Vicki Ann Whiting is the surviving spouse,

her son, Charles Barry McKewen, shall serve

as successor trustee.

*

*

*

*

*

*

*

D. Administrative Provisions. Sections 15, 16,

17, 18, 19, 20, 21, 22, 23, 24, 25, 26 and 27 * * *

shall apply to this trust.

The trustee funded the marital deduction trust with various

real estate properties and life insurance proceeds.

The value of

the assets in the marital deduction trust was $533,762 at the

date of decedent’s death.

3.

Disability Section

Section 15 of the trust agreement (the disability section)

4

Sec. 10 of the trust agreement, “Termination of Trust”,

provides that upon the death of the second grantor to die, after

payment of expenses, the remaining assets in the trust shall be

divided into two equal shares. The first share shall be

distributed to the Charles Barry McKewen Trust, subject to the

terms and condition of sec. 13 of the trust agreement. The

second share shall be distributed to the Stefanie Margo Patterson

Bell Trust, subject to the terms and conditions of sec. 14 of the

trust agreement.

- 9 provides:

Age Requirement or Disability. If any person has

not attained the age of thirty (30) years, or if any

person who is, in the Trustee’s opinion, disabled

because of advanced age, illness or other cause when he

or she becomes entitled to any distribution pursuant to

any trust created by this Trust Agreement, then his or

her separate share shall be held IN TRUST for the uses

and purposes and subject to the terms and conditions

hereinafter set forth:

A. Distribution of Income and

Principal. After the payment of all

reasonable and necessary expenses incurred in

the management of the trust, the Trustee is

authorized to distribute to or apply for the

benefit of such beneficiary, so much of the

net income and principal of his or her

separate share of the trust as in the

Trustee’s absolute discretion deems

appropriate. The exercise of this power by

the Trustee is within the Trustee’s sole

discretion and the Trustee may accumulate the

annual net income of each beneficiary’s

separate share of the trust to be added to

such beneficiary’s principal to whatever

extent and in whatever amounts that the

Trustee deems appropriate.

Prior to the termination of this trust,

it is the Grantor’s desire but not the

Grantor’s direction, that the income and

principal of each separate share of this

trust so distributed or applied as provided

above, be distributed to or applied primarily

for the health, education, maintenance and

support of each beneficiary. To this end, it

is the Grantor’s desire that each beneficiary

be provided a standard of living which is

similar to the standard of living that is

being enjoyed by their peers.

For the guidance of the Trustee, the

Grantor directs that all beneficiaries need

not be treated the same; that one or more of

the beneficiaries may be wholly excluded from

any or all periodic distributions; and that

- 10 the pattern followed in one distribution need

not be followed in others.

B. Termination of Trust. When such

beneficiary has attained thirty (30) years of

age, or upon his or her death prior to

attaining the age of thirty (30) years, or if

a disabled person when he or she, in my

trustee’s opinion, becomes free of such

disability, this trust shall terminate as to

his or her separate share, and the remaining

principal and accumulated income of his or

her separate share shall be distributed to

such beneficiary, if living, otherwise to his

or her issue, per stirpes, or if no issue, to

his brothers and sisters, per stirpes.

Decedent and Mrs. Whiting are named the initial trustees

under the disability section if a disability or incapacity

occurs.

If either of the trustees is unwilling to serve, and if

the unwilling trustee fails to designate a successor trustee,

then the successor trustee is first designated to be the

surviving spouse.

In the event that Mrs. Whiting survives

decedent, her son, Charles Barry McKewen, is the next designated

successor trustee.

4.

Trustee’s Powers Concerning Disabled Beneficiaries

Section 19 of the trust agreement, “Trustee’s Powers”,

describes the trustee’s powers regarding disabled beneficiaries

as follows:

D. In making any payment to a minor or disabled

beneficiary, the Trustee may expend such payments for

the benefit of the beneficiary or make such payments

directly to the beneficiary, or to the beneficiary’s

parent, guardian, personal representative or to the

person with whom the beneficiary resides, without

having to look to the proper application of those

- 11 payments. This section does not limit the Trustee’s

powers and must be construed to enable the Trustee to

give each beneficiary the fullest possible benefit and

enjoyment of all of the trust income and principal to

which the beneficiary is entitled.

5.

State Law

Section 27 of the trust agreement, “Applicable Law”,

provides that all questions concerning construction, validity,

and administration of the trust shall be determined in accordance

with Arkansas law.

Discussion

A.

Applicable Law

1.

Marital Deduction

Section 2001 imposes a tax on the transfer of the taxable

estate of all decedents who are citizens or residents of the

United States.

The amount of the tax is determined, in part, by

the value of the taxable estate.

Sec. 2001(b).

Section 2051

defines the value of the taxable estate as the gross estate less

deductions.

“For estate taxes, as for income taxes, ‘Deductions

are a matter of legislative grace, and a taxpayer seeking the

benefit of a deduction must show that every condition which

Congress has seen fit to impose has been fully satisfied.’”

Estate of Nicholson v. Commissioner, 94 T.C. 666, 681-682 (1990).

Pursuant to section 2056(a), the estate may claim, as a

marital deduction, the value of property passing to the surviving

spouse.

As a general rule, the marital deduction is denied for a

- 12 “terminable interest”.

supra at 671.

Estate of Nicholson v. Commissioner,

A “terminable interest”, generally, is a property

interest that will terminate or fail “on the lapse of time, on

the occurrence of an event or contingency, or on the failure of

an event or contingency to occur”.

Sec. 2056(b)(1).

An interest

in the nature of a life estate, therefore, is ineligible for the

marital deduction pursuant to section 2056(b)(5).

Estate of

Nicholson v. Commissioner, supra at 671-672.

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

95 Stat. 172, modified the rules for the marital deduction

relating to terminable interests.

ERTA sec. 403(d)(1), 95 Stat.

302, added section 2056(b)(7), which allows a marital deduction

for qualified terminable interest property (QTIP) interests.

Estate of Nicholson v. Commissioner, supra at 672.

Section 2056(b)(7)(B) provides in pertinent part:

(7) Election with respect to life estate for surviving

spouse.-*

*

*

*

*

*

*

(B) * * * For purposes of this paragraph-(i) In general.--The term “qualified

terminable interest property” means

property–

(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

- 13 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, * * * and

(II) no person has a power to

appoint any part of the property to any

person other than the surviving spouse.

A QTIP interest is one in which a decedent passes to the

surviving spouse a “qualifying income interest for life” and for

which an election has been made.

Sec. 2056(b)(7)(B)(i); Estate

of Nicholson v. Commissioner, supra.

Generally, when the

surviving spouse has a “qualifying income interest for life”, she

is entitled to “all the income from the property, payable

annually or at more frequent intervals”.

Sec. 2056(b)(7)(B)(ii).

A QTIP interest must meet the requirements of section

20.2056(b)-5(f), Estate Tax Regs.

Estate of Nicholson v.

Commissioner, supra at 672; sec. 20.2056(b)-7(d)(2), Estate Tax

Regs.; see H. Rept. 97-201, at 161 (1981), 1981-2 C.B. 352, 378.

Section 20.2056(b)-5(f), Estate Tax Regs., provides that a

surviving spouse is entitled to “all the income from the

property” if the effect of the trust is to give her the

equivalent “beneficial enjoyment” of the trust estate as one who

is “unqualifiedly designated as the life beneficiary” under the

principles of the law of trusts.

Generally, absent indications

- 14 to the contrary, the “designation of the spouse as sole income

beneficiary for life of the entire interest or a specific portion

of the entire interest will be sufficient”.

Sec. 20.2056(b)-

5(f)(1), Estate Tax Regs.

2.

Interpretation of a Trust Agreement

A determination of the nature of the interest that passes to

the surviving spouse is made pursuant to the law of the

jurisdiction under which the interest passes.

Estate of

Nicholson v. Commissioner, supra at 672-673.

In the instant

case, that is the law of Arkansas.

The decisions of the State’s

highest court are conclusive as to that State’s law.

Commissioner v. Estate of Bosch, 387 U.S. 456 (1967).

In Aycock Pontiac, Inc. v. Aycock, 983 S.W.2d 915, 919-920

(1998), the Supreme Court of Arkansas stated:

The cardinal rule in construing a trust instrument is

that the intention of the settlor must be ascertained.

Little Rock University v. Donaghey Found., 252 Ark.

1148, 483 S.W.2d 230 (1972). In construing a trust, we

apply the same rules applicable to the construction of

wills. See Murphy v. Morris, 200 Ark. 932, 141 S.W.2d

518 (1940).

The paramount principle in the interpretation of

wills is that the intention of the testator governs.

In re Estate of Lindsey, 309 Ark. 596, 832 S.W.2d 808

(1992). This intention is to be determined from

viewing the four corners of the instrument, considering

the language used, and giving meaning to all of its

provisions, whenever possible. Id.; In re Estate of

Conover, 304 Ark. 268, 801 S.W.2d 299 (1990). * * *

The court should give force to each clause of the will,

and only when there is an irreconcilable conflict

between two clauses must one give way to the other.

Estate of Lindsey, 309 Ark. 596, 832 S.W.2d 808. * * *

- 15 B.

Whether the Marital Deduction Trust Meets the

Requirements of Section 2056(b)(7)

For the property in the marital deduction trust to be QTIP,

it must be property:

(1) which passes from the decedent; (2) in

which the surviving spouse has a qualifying income interest for

life; and (3) as to which an election has been made.

2056(b)(7)(B)(i).

Sec.

The parties agree that the property passed

from decedent and that a proper QTIP election was made.

Respondent also states in his brief that “the requirements of

* * * [section 2056(b)(7)] for treating the property that funded

the Marital Deduction Trust as deductible initially appear to be

met by the provisions of Section 8.

This includes the

requirement that the surviving spouse be entitled to all of the

net income produced by the trust’s corpus.”

We also note that in

section 8 of the marital deduction trust, the trustee is directed

to distribute the net income “at least annually”, as provided by

the statute.

Additionally, any income accrued but undistributed

at the surviving spouse’s death shall be paid to the surviving

spouse’s estate.

The issue is whether the terms of section 15 of the trust

agreement, the disability section, which are incorporated into

the marital deduction trust by section 8.D. of the trust

agreement, restrict the surviving spouse’s “qualifying income

interest for life” under section 2056(b)(7)(B)(i)(II).

As

discussed below, we find that the conflicting terms of sections 8

- 16 and 15 of the trust agreement must give way to decedent’s intent

to qualify for the marital deduction.

1.

Disability Section Is an Administrative Provision

Section 8.D. of the marital deduction trust entitled

“Administrative Provisions” specifically incorporates by

reference to section 15 the terms of the disability section and

the other administrative provisions, sections 16 through 27, into

the marital deduction trust.

Respondent argues that certain

terms in the disability section defeat the surviving spouse’s

“qualifying income interest for life”.

The estate argues that

the disability section does not defeat the surviving spouse’s

“qualifying income interest for life”.

Additionally, the estate argues that the disability section

is merely a guardian substitute designation designed to avoid a

costly court proceeding under Arkansas law to name a courtappointed guardian.

That is, if the settlors of a trust fail to

designate a guardian in case of their incapacity, Arkansas law

provides for the naming of a guardian through a court proceeding.

See Ark. Code Ann. sec. 28-65-101(3) (Michie 1987) (“‘Guardian’

is one appointed by a court to have the care and custody of the

person or of the estate, or of both, of an incapacitated

person”).

In this case, pursuant to the disability section,

decedent and Mrs. Whiting each designated who would be their

guardians.

Decedent designated Mrs. Whiting as his guardian; and

- 17 if she did not survive him, he named his cousin.

Mrs. Whiting

selected decedent as her guardian; and if he did not survive her,

she named her son.

2.

Terms Relating to Disability Section Create

Conflict

We find that the terms of the disability section conflict

with the terms of the marital deduction trust.

The provision of

the disability section pertaining to the trustee’s specific power

to accumulate income conflicts with the terms contained in the

marital deduction trust pertaining to distributions of income.

The marital deduction trust provides that the trustee shall

distribute at least annually the net income of the trust to or

for the benefit of the surviving spouse.

Section 15.A. states

that “the Trustee may accumulate the annual net income” to which

the beneficiary is entitled.

(Emphasis added.)

The first

provision requires the trustee to distribute all of the income

from the marital deduction trust to or for the benefit of the

surviving spouse, while the second provision permits the trustee

to accumulate the surviving spouse’s income received from the

marital deduction trust.

Where terms in a trust conflict, Arkansas law provides:

“In

construing a * * * [trust] a court should give force to each

provision thereof.

It is only if there is an irreconcilable

conflict between two clauses that one must give way to the

other.”

In re Estate of Lindsey, 832 S.W.2d 808, 812 (Ark. 1992)

- 18 (citing Fies v. Feist, 224 S.W. 633 (Ark. 1920)); see also Estate

of Harp v. Harp, 875 S.W.2d 490, 491 (Ark. 1994).

“[I]t is

* * * [the court’s] duty to consider the * * * [trust] as a whole

and to reach ‘the real purpose and intention of the testator.’”

Angel v. Angel, 655 S.W.2d 373, 374 (Ark. 1983) (quoting Union

Trust Co. v. Madigan, 35 S.W. 349 (Ark. 1931)).

3.

Decedent Intended To Qualify for the

Marital Deduction

In interpreting two conflicting clauses, we must determine

the decedent’s intent, using the four corners of the trust

agreement.

See Aycock Pontiac, Inc. v. Aycock, 983 S.W.2d at

919-920; see also In re Estate of Lindsey, supra at 812 (“The

paramount principle in the interpretation of wills is that the

intention of the testator governs.”).

We find that, considering

all language in the trust agreement, decedent’s intent was to

qualify for the marital deduction.

Decedent manifested his intent to qualify for the marital

deduction in numerous ways.

First, the trust agreement named two

of the trusts in reference to the marital deduction:

The

“Marital Deduction Trust” and the “Non-Marital Deduction Trust”.

The name of a trust is evidence of decedent’s intent.

Second, it is evident from the trust agreement that decedent

intended to minimize Federal estate taxes through the use of the

marital deduction.

See Estate of Todd v. Commissioner, 57 T.C.

288, 294 (1971) (references to the marital deduction and

- 19 citations to section 2056 clearly establish that the trust’s

purpose was to secure the marital deduction).

In valuing the

assets to be placed in the marital deduction trust, the trust

agreement states that decedent intended to “have the result of

qualifying the marital deduction for estate tax purposes”.

Only

assets which qualify for the marital deduction may be placed in

the marital deduction trust.

The amount of the distribution to

the marital deduction trust is “the excess * * * of the

decedent’s taxable estate * * * over the exemption equivalent of

the * * * unified credit”.

Additionally, the terms ”marital

deduction”, “gross estate”, and others are defined in the trust

agreement as having the same meaning as the definitions found in

the Internal Revenue Code.

Third, the circumstances surrounding the drafting of the

trust indicate that decedent intended to qualify for the marital

deduction.

Decedent knew that he was terminally ill and hired

specialized tax attorneys to draft the trust:

Two are Arkansas

board recognized specialists in tax law, one is a certified

public accountant, and two have a master of laws in taxation.

The intent of the draftsman of the marital deduction trust was to

create a trust which qualified for the marital deduction.

We note that Estate of Walsh v. Commissioner, 110 T.C. 393

(1998), and Estate of Tingley v. Commissioner, 22 T.C. 402

(1954), affd. sub nom. Starrett v. Commissioner, 223 F.2d 163

- 20 (1st Cir. 1955), two cases pursuant to section 2056(b)(5) and its

predecessor cited by respondent, are distinguishable from the

facts of this case.

In Estate of Walsh v. Commissioner, supra at

395, the trust provided that “If said spouse should at any time

be determined as incompetent * * *, said spouse shall take no

benefits hereunder and this Trust shall be treated and

distributed as if said spouse had died”.

(Emphasis added.)

The

Court held the incompetency provision created a terminable

interest which did not qualify for the marital deduction pursuant

to section 2056(b)(5).

Similarly, in Estate of Tingley v.

Commissioner, supra at 403, the trust provided:

such right of my wife to call for the transfer or

conveyance to her of any part or parts or the whole of

the principal of said first share shall cease in the

case of her legal incapacity from any cause or upon the

appointment of a guardian, conservator, or other

custodian of her person or estate; and in the event of

such legal incapacity, or appointment of any guardian,

conservator or other custodian of her person or estate,

my said wife or her guardian, conservator or other

custodian shall cease to have any further right to the

payment to her or such representative of any specified

sum or of any part of the income from said first share,

but my trustee shall thereupon and thereafter, during

her life, have full power and discretion to use and

apply such part of the net income of said first share

for the benefit of my said wife or may pay such part

thereof at any time or from time to time to her or to

any such guardian, conservator or other custodian of my

wife’s person or estate as he may deem in his sole

discretion to be wise and proper, and shall accumulate,

invest or reinvest any part of said net income not so

paid or applied by him as aforesaid and shall have

power to add the same to the principal of said first

trust or thereafter to disburse it to or for the

benefit of my said wife, whether or not previously so

added to such principal. [Emphasis added.]

- 21 The Court held that the testator intentionally chose to “cut off”

his wife’s right to income should one of the stated contingencies

occur.

Id. at 405.

The surviving spouse’s power of appointment

was not exercisable in all events, and the interest did not

qualify for the marital deduction under the predecessor to

section 2056(b)(5).

In both cases, the critical fact was that,

in the event of incompetency or incapacity, the surviving spouse

lost power over the corpus of the trust.

See Estate of Walsh v.

Commissioner, supra at 399-400.

Here, section 8 of the trust agreement provides that the

trustee “shall” distribute at least annually the net income of

the trust to or for the benefit of Mrs. Whiting.

This is a

positive and mandatory directive to the trustee which precludes

the exercise of discretion.

See Merchants Natl. Bank v. United

States, 326 F. Supp. 384, 387 (N.D. Iowa 1971) (language

permitting trustee to accumulate income found to be “void for

repugnancy” as it directly conflicted with mandatory language

requiring trustee to distribute income).

We also note that

pursuant to section 19.D. of the trust agreement, the trustee

“must” provide Mrs. Whiting with the all of the trust income and

principal to which she is entitled. In viewing the entire trust

agreement and in construing the conflicting terms of the

disability section in accordance with decedent’s intent to obtain

the marital deduction, we conclude that the terms of the

- 22 disability section do not restrict Mrs. Whiting’s qualifying

income interest for life pursuant to section

2056(b)(7)(B)(i)(II).

In light of our holding that the trust qualifies for the

marital deduction pursuant to section 2056(b)(7), we need not

address whether the disability section constitutes a valid

facilitation of payment power under Rev. Rul. 85-35, 1985-1 C.B.

328.

In reaching our holding herein, we have considered all

arguments made by the parties, and to the extent not mentioned

above, we find them to be irrelevant or without merit.

To reflect the foregoing,

Decision will be entered

for petitioner.