Article IV, paragraph F of the will provides for an election as follows:

My Personal Representative may elect that any part or all of any amount passing under this Article IV be treated as qualified terminable interest property for the purpose of qualifying for the marital deduction allowable in determining the federal estate tax upon my estate. While I anticipate that the election will be made for all of such property, my Personal Representative shall have the authority not to make the election should no election or a partial election be advantageous for some reason I have not foreseen. Any part of any amount passing under this Article IV with respect to which my Personal Representative does not so elect to be treated as qualified terminable interest property shall continue to be held by my Trustee and administered and distributed pursuant to the terms of the Family Trust hereunder.

Article V of the will provides for "Family Trust Administration", in which the trustee is to receive the residue of decedent's estate in order to fund the family trust. Decedent's wife, children, and the issue of any deceased children constitute the beneficiaries of the family trust. The trustee has sole discretion to distribute income and principal to any one or more of the beneficiaries. Any income not distributed to the beneficiaries is to be added to the principal of the family

trust.

Article IX, paragraph A of the will provides that the personal representative "may make such elections under the tax laws applicable to my estate as it determines should be made."

On April 1, 1988, a U.S. Estate Tax Return, Form 706, was timely filed for the estate with the Internal Revenue Service Center in Austin, Texas. On the estate tax return, the coexecutors made the election under section 2056(b)(7) for the entire marital trust amount, which they valued at $4,162,439.24. The marital trust amount was computed as follows:

1 The trustees of the marital trust were named as the beneficiaries of the Clack Corp. Profit Sharing Plan.

Thus, the coexecutors treated the payment of expenses under Article I, paragraph A of the will, the bequests of tangible personal property and of the interest in the home to the surviving spouse under Article II, and the bequest of the Clack Corp. stock to Richard E. Clack under Article III as having been fully satisfied before determining the marital trust amount but did not treat the payment of estate taxes under Article I, paragraph B as having been fully satisfied. The coexecutors claimed a total marital deduction in the amount of $4,460,101.18, composed of what they determined to be the value of the marital trust property ($4,162,439.24), plus certain joint property ($194,263.55), the bequest of tangible personal property and the interest in the home ($42,075), life insurance proceeds ($46,481.72), and retirement benefits ($14,841.67) passing to the surviving spouse. Other than the specific bequest of Clack Corp. stock to Richard E. Clack and a payment of $25,953.51 to Robert A. Clack as the beneficiary of a single premium annuity policy, all of the assets of decedent's estate either passed directly to the surviving spouse ($297,661.94 by specific bequest or outside of probate) or were treated by the coexecutors as part of the marital trust ($4,162,439.24 as QTIP election). The coexecutors did not fund the family trust.

On the estate tax return, the total gross estate was valued at $7,287,342.55. The estate tax reported as due on the return was $684,589.11.

On November 10, 1988, the Internal Revenue Service (IRS) selected the estate tax return for audit. In January of 1989, the coexecutors and the IRS agreed that the value of each share of the Clack Corp. stock was $10 more than reported on the estate tax return. At the time of his death, decedent owned 24,675 shares of Clack Corp. stock, of which 12,689 shares were bequeathed to Richard E. Clack. The remaining 11,986 shares were treated by the coexecutors as part of the marital trust.

On March 28, 1991, respondent issued a statutory notice of deficiency to the estate, determining an estate tax deficiency of $2,284,008. The principal adjustment was the disallowance of $4,162,439.24 of the marital deduction because of respondent's determination that the "spouse's entire interest in the marital trust was subject to a power in the executors to appoint the corpus to someone other than the surviving spouse."

OPINION

Section 2001 imposes a tax on the transfer of the taxable estate of any person who is a citizen or resident of the United States at the time of death. Section 2056(a) allows a marital deduction from a decedent's gross estate for the value of property interests passing from the decedent to the decedent's surviving spouse. As a general rule, however, a marital deduction is denied for a "terminable interest", that 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). Accordingly, an interest in the nature of a life estate, generally, is ineligible for the marital deduction. See Estate of Nicholson v. Commissioner, 94 T.C. 666, 671 (1990); Estate of Higgins v. Commissioner, 91 T.C. 61, 66 (1988), affd. 897 F.2d 856 (6th Cir. 1990).

However, section section 2056(b)(7),3 added by the Economic Recovery Tax Act of 1981, Pub. L. 97-34, sec. 403(d), 95 Stat.

3 Sec. 2056(b)(7) provides:

(A) IN GENERAL.-In the case of qualified terminable interest property

(i) for purposes of subsection (a), such property shall be treated as passing to the surviving spouse, and

(ii) for purposes of paragraph (1)(A), no part of such property shall be treated as passing to any person other than the surviving spouse.

(B) QUALIFIED TERMINABLE INTEREST PROPERTY DEFINED.-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 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, or has a usufruct interest for life in the property, and

(II) no person has a power to appoint any part of the property to any person other than the surviving spouse.

Subclause (II) shall not apply to a power exercisable only at or after the death of the survivContinued

172, 302, allows a marital deduction for “qualified terminable interest property". Section 2056(b)(7) allows a decedent to pass to the decedent's surviving spouse an interest in property for the surviving spouse's lifetime without the decedent's losing the ability to control the disposition of such property upon the death of the surviving spouse.

The facts in the instant case fall within this Court's holding in Estate of Clayton v. Commissioner, 97 T.C. 327 (1991), revd. 976 F.2d 1486 (5th Cir. 1992). After our opinion in Estate of Clayton was issued, but before it was reversed by the Fifth Circuit, we decided Estate of Robertson v. Commissioner, 98 T.C. 678 (1992), revd. 15 F.3d 779 (8th Cir. 1994), and Estate of Spencer v. Commissioner, T.C. Memo. 1992579, revd. 43 F.3d 226 (6th Cir. 1995), in both of which we followed our holding in Estate of Clayton. Subsequently, those decisions were reversed, first by the Fifth Circuit, which reversed our decision in Estate of Clayton v. Commissioner, supra, then by the Eighth Circuit, which, following the Fifth Circuit, reversed our decision in Estate of Robertson v. Commissioner, supra, and finally by the Sixth Circuit, which reversed our decision in Estate of Spencer v. Commissioner, supra. The Sixth Circuit, however, applied a rationale somewhat different from that applied by the Fifth Circuit.

The Tax Court, in those opinions, held that the surviving spouse did not have a qualifying income interest for life because the passage of an income interest in the property to the surviving spouse was contingent upon the executor's QTIP election as to such property and was therefore subject to the executor's power to appoint the property to someone other than the surviving spouse. Accordingly, the Tax Court concluded that the property did not meet the requirements of section 2056(b)(7)(B)(ii)(II), that the surviving spouse did not have a “qualifying income interest for life", and that the property therefore was not QTIP. Estate of Robertson v.

ing spouse. To the extent provided in regulations, an annuity shall be treated in a manner similar to an income interest in property (regardless of whether the property from which the annuity is payable can be separately identified).

(iii) PROPERTY INCLUDES INTEREST THEREIN.—The term "property" includes an interest in property.

(iv) SPECIFIC PORTION TREATED AS SEPARATE PROPERTY.-A specific portion of property shall be treated as separate property.

(v) ELECTION.-An election under this paragraph with respect to any property shall be made by the executor on the return of tax imposed by section 2001. Such an election, once made, shall be irrevocable.

Commissioner, supra; Estate of Clayton v. Commissioner, supra; Estate of Spencer v. Commissioner, supra.

In Estate of Clayton v. Commissioner, supra, the taxpayer argued that, by definition, an interest in property is QTIP only if the election is made, and that, once the election is made, the surviving spouse has a qualifying income interest for life, effective as of the date of the decedent's death. In response, we stated:

An election, by definition, is necessary to insure that the property is qualified terminable interest property. The essence of section 2056(b)(7)(B)(i), however, is that a terminable interest is deductible only if it is an interest in property "in which the surviving spouse has a qualifying income interest for life"; if so, then an applicable election may be made with respect to such property. Compare Estate of Tompkins v. Commissioner, 68 T.C. 912 (1977). Whether the surviving spouse has an income interest for life in the property is independent of, and not dependent upon, the requirement that an election be made with respect to that property. If the surviving spouse does not have an income interest for life in the trust, then the election to treat the trust as a QTIP trust is ineffective. [Id. at 337.]

In Estate of Robertson v. Commissioner, supra at 689, the taxpayer attempted to distinguish the facts of that case from those of Estate of Clayton. In Estate of Robertson, the taxpayer argued that the executor was required to make the QTIP election and, thus, did not have the power to appoint the property to anyone other than the surviving spouse. We held to the contrary, concluding that the executor had the power to appoint the property to someone other than the surviving spouse and that Estate of Clayton was controlling. Preliminarily, this Court stated:

Section 2056(b)(7)(B)(i) defines "qualified terminable interest property" as property (1) which passes from the decedent, (2) in which the surviving spouse has a "qualifying income interest for life", and (3) for which an election has been made. *** [Estate of Robertson v. Commissioner, supra at 684; emphasis added; fn. ref. omitted.4]

In reversing this Court, the appellate courts focused upon that language and held that one of the three essential elements in the definition of QTIP is that it be property for

4 Item (3) in the above quotation, however, is an imprecise paraphrase of and not the actual statutory language used in sec. 2056(b)(7)(B)(i)(III). In Estate of Robertson v. Commissioner, 98 T.C. 678 (1992), revd. 15 F.3d 779 (8th Cir. 1994), this Court addressed sec. 2056(b)(7)(B)(i)(II), the "qualifying income interest for life" requirement, and did not undertake to construe sec. 2056(b)(7)(B)(i)(III), the election requirement.