Magazine article The CPA Journal

U.S. Supreme Court Struggles with Estate Tax Accounting Issue

Magazine article The CPA Journal

U.S. Supreme Court Struggles with Estate Tax Accounting Issue

Article excerpt

In a plurality decision, the U.S. Supreme Court held that an estate tax marital or charitable deduction need not be reduced when part of the administration expenses are paid out of the income from assets destined for the marital or charitable trust. Four justices voted for the court's decision, three more voted for the decision's result but for very different reasons, and two justices dissented against both the result and the reasoning. Because the decision is a plurality decision, tax advisors are advised to appropriately caution clients who rely on this case.

Otis Huber died in 1987 possessed of a taxable estate approximating $26 million. While there were several recipients of Mr. Huber's largesse, the residue of the estate-the bulk of the estate-was divided between one trust for his wife and another for charity. The will permitted the executor discretion to pay administration expenses either from the principle or the income of the assets that would make up the trusts. Of the estate's $2 million in administrative expenses, $500,000 came from principle and the remainder from the income of those assets.

In computing its estate taxes, the estate reduced the residue-and therefore the marital and charitable deductions-for the amount of the administration expenses taken from principle, but not the $1.5 million taken from income. The IRS took issue with this approach, arguing that amounts taken from income for these purposes-income, which after all would end up in the marital and charitable trustsmust reduce the marital and charitable deductions. The Tax Court held for the estate and was upheld by the Eleventh Circuit Court of Appeals. This set up a conflict between the circuits, the Sixth Circuit Court of Appeals having previously overruled the Tax Court on this issue in Estate of Street v. Comm'r., 974 F.2d 723 (6th. Cir. 1992). Also, the Court of Appeals for the Federal Circuit had also held for the IRS on the issue in Burke v. U.S., 994 F.2d 1576, cert. denied, 510 U.S. 990 (1993).

The commissioner had argued that the following text from the regulations governed:

In determining the value of the interest in property passing to the spouse, account must be taken of the effect of any material limitations upon her right to income from the property. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.