Filtering out the Noise
In 1997, the U.S. Supreme Court handed down what has become a widely discussed decision on the treatment of certain administrative expenses in Estate of Hubert. It seems that tax laws and regulations allow an estate two choices on how to treat certain administrative expenses incurred after the date of death of the decedent. They can be taken as a deduction against the income of the estate, thereby reducing income taxes payable, or they can be deducted in the calculation of the net estate subject to the estate tax. There is a bit of a wrinkle, however, under Regulations section 20.2056(b)4, which says that in determining the value of an interest passing to a spouse, any material limitations on the right to income on the interest must be taken into account. The IRS has interpreted this to mean that, in situations where administrative expenses are taken as a deduction for income tax purposes, there must be an evaluation whether there is a material limitation on the surviving spouse's right to income on property going to that spouse. If so, in the IRS's mind, the marital deduction should be reduced to reflect that limitation. The overall effect is to reduce the amount of the marital deduction and increase the estate tax.
In Hubert, the Supreme Court found in favor of the estate and overturned the IRS's attempt to so reduce the marital deduction. Esteemed professor of accounting Abraham Briloff and his daughter Leonore analyze and question the Hubert decision. It is not that they don't like the end result of Hubert: They don't like the fact that the Court did not discredit the IRS's interpretation of the regulations. As a mirabile dictu, the Briloffs bring the readers up to date on recent proposed regulations to resolve what the Supreme Court left unresolved. The Briloffs became interested in the issue when the IRS raised the issue with a client of their firm. They are pleased to note that the case has recently been settled to their satisfaction.
On March 18, 1997, the U.S. Supreme Court handed down its "decision," euphemistically speaking, in Comm'r of Internal Revenue v. Estate of 0. Hubert (117 S. CT. 1124). The case resulted in four separate opinions, to wit:
The plurality by Justice Anthony M. Kennedy, in which Chief Justice William H. Rehnquist and Justices John Paul Stevens and Ruth Bader Ginsburg joined;
A concurring opinion by Justice Sandra Day O'Connor, joined by Justices David H. Souter and Clarence Thomas;
A dissent by Justice Antonin Scalia, joined by Justice Stephen Breyer; and
A further dissent by Justice Breyer.
By combining the votes of the plurality and concurrence we have the decision on behalf of a majority of seven in favor of the estate of O. Hubert, the respondent. Those opinions, in turn, led to a spate of articles by legal scholars-- all involving an exegetic analysis of the justices' opinions and attempting to provide guidance for the perplexed. Regrettably, it would appear neither the justices, their clerks, nor the scholars were constrained to evaluate the areas of fiduciary accounting and mathematics of finance; had they done so the opinions and commentaries would have been far more informative and definitive.
Before proceeding, herewith a "crash course" in the estate tax mystique. According to the Federal estate tax return (Form 706) the starting point is the gross estate, comprised of the assets listed on schedules A through I. The gross estate is followed by deductions, which are displayed on the following schedules:
Schedule J-Funeral expenses and expenses incurred in administering property subject to claims
Schedule K-Debts, mortgages, and liens
Schedule L-Net losses during administration
Schedule M-The marital deduction (especially relevant to Hubert and this analysis), and
Schedule O-Charitable gifts and bequests.
The aggregate of schedules J through O represents the total allowable deductions. …