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Estate of Francis S. Tilyou v. Commissioner of Internal Revenue

decided: December 8, 1972.

ESTATE OF FRANCIS S. TILYOU BY FLORENCE J. TILYOU, EXECUTRIX, APPELLANT,
v.
COMMISSIONER OF INTERNAL REVENUE, APPELLEE



Moore, Feinberg, Mulligan, Circuit Judges.

Author: Moore

MOORE, Circuit Judge:

This appeal is from a decision of the Tax Court*fn1 sustaining the denial by the Commissioner of Internal Revenue of a marital deduction in the tax return of the Estate of Francis S. Tilyou.

The question raised by this case concerns Section 2056(a) of the Internal Revenue Code of 1954, which provides that the value of a taxable estate is determined by subtracting from the gross estate

the value of any interest in property which passes or has passed from the decedent to his*fn2 surviving spouse.

Subsection (b) of this section limits the marital deduction permissible under Section 2056(a) by eliminating from the deduction any "terminable interest" in property which passes to the surviving spouse.*fn3 The Commissioner disallowed a marital deduction for the personalty which passed under the residuary clause of the will of Francis S. Tilyou because he found that that will created a terminable interest in the residuary estate.*fn4 This created a tax deficiency in the amount of $112,600.21. The Tax Court upheld the Commissioner's decision. We reverse.

I.

Francis S. Tilyou left his entire estate to his wife. His will also provided:

In the event, however, of the death of my wife herein named before me, or before she shall have become entitled to any part or share of my residuary estate, then my said residuary estate shall be paid to my children. . . . (emphasis added)

The Commissioner here argues that this "entitled to" clause meant that if Mrs. Francis S. Tilyou had died before distribution, the residuary estate would have passed to the children of Francis S. Tilyou. He, therefore, decided that her interest in the estate was a terminable one under Section 2056(b) and disallowed a marital deduction as to the personalty included in the residuary estate.

Congress passed Section 2056 to "equalize the effect of the estate taxes in community property and common-law jurisdictions." United States v. Stapf, 375 U.S. 118, 128, 11 L. Ed. 2d 195, 84 S. Ct. 248 (1963); Jackson v. United States, 376 U.S. 503, 510, 11 L. Ed. 2d 871, 84 S. Ct. 869 (1964). It was the intent of Congress in enacting this section to

afford a liberal estate-splitting possibility to married couples, where the deductible half of the decedent's estate would ultimately -- if not consumed -- be taxable in the estate of the survivor, . . . Plainly such a provision should not be construed so as to impose unwarranted restrictions upon the availability of the deduction. Northeastern Pennsylvania National Bank & Trust Co. v. United States, 387 U.S. 213, 221, 18 L. Ed. 2d 726, 87 S. Ct. 1573 (1967) (emphasis added).

While this liberal estate-splitting possibility must not be unreasonably withheld, this Court has previously noted that the limitations imposed on this deduction by Section 2056 itself must be carefully observed. Referring specifically to the terminable interest restriction of Section 2056(b), we have held that to insure a marital deduction the "draftsmen of testamentary instruments . . . [must] be meticulous in adhering to the formal requirements of section 2056." Allen v. United States, 359 F.2d 151, 153 (2d Cir. 1966), cert. denied, 385 U.S. 832, 17 L. Ed. 2d 67, 87 S. Ct. 71 (1966). See also Jackson v. United States, supra at 511. The necessity for the terminable interest rule has been stated in Allen as:

The Congressional purpose in disqualifying terminable bequests was . . . to prevent the wholesale evasion of estate taxes which the skillful employment of terminable interests ...


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