OCTOBER TERM, 1996
Syllabus
certiorari to the united states court of appeals for the eleventh circuit
No. 95-1402. Argued November 12, 1996—Decided March 18, 1997
The executors of decedent Hubert's substantial estate filed a federal estate tax return about a year after his death. Subsequently, petitioner Commissioner of Internal Revenue issued a notice of deficiency, claiming underreporting of federal estate tax liability caused by the estate's asserted entitlement to marital and charitable deductions. While the estate's redetermination petition was pending in the Tax Court, interested parties settled much of the litigation surrounding the estate that had begun after Hubert's death. The agreement divided the estate's residue principal, assumed to be worth $26 million on the date of death, about equally between marital trusts and a charitable trust. It also provided that the estate would pay its administration expenses either from the principal or the income of the assets that would comprise the residue and the corpus of the trusts, preserving the executors' discretion to apportion such expenses. The estate paid about $500,000 of its nearly $2 million of administration expenses from principal and the rest from income. It then recalculated its tax liability, reducing the marital and charitable deductions by the amount of principal, but not the amount of income, used to pay the expenses. The Commissioner concluded that using income for expenses required a dollar-for-dollar reduction of the deductions. The Tax Court disagreed, finding that no reduction was required by reason of the executors' power, or the exercise of their power, to pay administration expenses from income. The Court of Appeals affirmed.
Held: The judgment is affirmed.
63 F. 3d 1083, affirmed.
Justice Kennedy, joined by The Chief Justice, Justice Stevens, and Justice Ginsburg, concluded that a taxpayer does not have to reduce the estate tax deduction for marital or charitable bequests by the amount of the administration expenses that were paid from income generated during administration by assets allocated to those bequests. Pp. 99-111.
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