                                 151 T.C. No. 10



                        UNITED STATES TAX COURT



     ESTATE OF CLYDE W. TURNER, SR., DECEASED, W. BARCLAY
                RUSHTON, EXECUTOR, Petitioner v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent*



      Docket No. 18911-08.                         Filed November 20, 2018.



             Decedent (D) transferred property to a family limited
      partnership (FLP) in exchange for general and limited partnership
      interests and then transferred portions of his limited partnership
      interest as gifts during his lifetime. In Estate of Turner v.
      Commissioner, T.C. Memo. 2011-209, we held that the inter vivos
      transfer of property to the FLP was subject to I.R.C. sec. 2036. In
      Estate of Turner v. Commissioner, 138 T.C. 306 (2012), we held that
      D’s estate is not entitled to a marital deduction with respect to the
      value of certain property included in D’s gross estate under I.R.C.
      sec. 2036 because the property was the subject of lifetime gifts and
      did not pass to D’s surviving spouse.



      *
      This Opinion supplements our previously filed Opinion in Estate of Turner
v. Commissioner, 138 T.C. 306 (2012), supplementing T.C. Memo. 2011-209.
                                   -2-

       Under I.R.C. sec. 2036 the value of the property transferred to
the FLP is included in D’s gross estate and results in Federal estate
and State death tax liabilities. D’s estate’s liability for Federal estate
and State death taxes arises solely because of the I.R.C. sec. 2036
inclusion.

      R filed computations and amended computations for entry of
decision pursuant to Rule 155, Tax Court Rules of Practice and
Procedure. D’s estate objected. The parties disagree as to (1)
whether D’s estate must reduce the I.R.C. sec. 2056 marital deduction
by the amounts of the Federal estate and State death taxes owed that
R claims must be paid from estate assets passing to the surviving
spouse (marital deduction property) and (2) whether D’s estate may
increase the marital deduction by postdeath income that was not
included in the gross estate but was generated by marital deduction
property.

       Held: D’s estate is not required to reduce the marital deduction
by the amounts of the Federal estate and State death taxes it owes
because (1) those taxes are attributable solely to the value of property
included in the gross estate under I.R.C. sec. 2036, (2) the executor
has a right under I.R.C. sec. 2207B to recover from the beneficiaries
who received the property during D’s lifetime an amount equal to the
Federal estate and State death taxes plus interest attributable to those
transfers, and (3) the executor must exercise the right of recovery
under I.R.C. sec. 2207B to prevent the marital deduction property
from bearing D’s estate’s tax burden contrary to D’s intent.

      Held, further, D’s estate may not increase the marital deduction
by the amount of postdeath income generated by the marital
deduction property.



Charles E. Hodges II and Rose K. Drupiewski, for petitioner.

Caroline R. Krivacka and William Walter Kiessling, for respondent.
                                        -3-

                           SUPPLEMENTAL OPINION


      MARVEL, Judge: This matter is before the Court on the objection by the

Estate of Clyde W. Turner, Sr. (estate), to respondent’s proposed amended

computation for entry of decision submitted in response to our holdings in Estate

of Turner v. Commissioner (Estate of Turner I), T.C. Memo. 2011-209,

supplemented by Estate of Turner v. Commissioner (Estate of Turner II), 138 T.C.
306 (2012). The parties ask the Court to resolve the continuing controversy

regarding the computation of the marital deduction under section 2056.1 The

Court held a hearing, and counsel for both parties appeared and were heard.

      The parties’ arguments regarding the correct computation of the marital

deduction require the Court to decide two questions: (1) whether the estate is

required to reduce the marital deduction by the amounts of Federal estate and State

death taxes it owes when those taxes are attributable to the values of gifts made

during decedent’s lifetime but included in the gross estate by reason of section

2036 (sometimes referred to as section 2036 assets) and (2) whether the estate is

entitled to increase the marital deduction by postdeath income, generated by estate


      1
       Unless otherwise indicated, section references are to the Internal Revenue
Code (Code) in effect for the date of decedent’s death, and Rule references are to
the Tax Court Rules of Practice and Procedure.
                                        -4-

assets, that was reported on Form 1041, U.S. Income Tax Return for Estates and

Trusts, and paid to the surviving spouse.

                                     Background

      We adopt the findings of fact in Estate of Turner I and Estate of Turner II.

For convenience and clarity, we repeat the necessary facts below.

      Clyde W. Turner, Sr. (Clyde Sr.), resided in Georgia when he died testate on

February 4, 2004. Estate of Turner I, slip op. at 2. W. Barclay Rushton is the

executor of the estate. Id. Mr. Rushton resided in Georgia when he petitioned this

Court on behalf of the estate. Id.

      On April 15, 2002, Clyde Sr. and his wife, Jewell H. Turner,2 established

Turner & Co., a family limited partnership (FLP) that qualified as a Georgia

limited liability partnership. Id. at 8. Upon the formation of the FLP, Clyde Sr.

and Jewell each contributed assets with a fair market value of $4,333,671 (total

value of $8,667,342) to the FLP. Estate of Turner II, 138 T.C. at 311-312. In

exchange, each received a 0.5% general partnership interest and a 49.5% limited

partnership interest. Id. By January 1, 2003, Clyde Sr. had transferred, in the


      2
        Jewell H. Turner died on July 8, 2007, and a related case, Estate of Turner
v. Commissioner, docket No. 29411-11, involving her estate is pending. For
purposes of this Opinion, we refer to Jewell and/or her estate collectively as
Jewell.
                                            -5-

aggregate, limited partnership interests totaling 21.7446% to family members as

gifts.

         In Estate of Turner I, slip op. at 52-53, we held, inter alia, that under section

2036 the value of the property that Clyde Sr. had transferred to the FLP must be

included in the value of his gross estate. In Estate of Turner II, 138 T.C. at 306-

307, we held that the estate is not entitled to a marital deduction for the value of

the property that was brought back into the gross estate by section 2036

(sometimes referred to as the section 2036 inclusion).

         Before we filed our report in Estate of Turner II, we received and filed

respondent’s computation for entry of decision (first computation). Respondent

calculated that the estate owed an estate tax deficiency of $362,822.44. After we

filed our report in Estate of Turner II, the estate filed a notice of objection to the

first computation, presenting two alternative computations. Respondent filed a

response to the estate’s notice of objection.

         On August 6, 2012, with leave of Court, respondent filed an amended

computation for entry of decision (amended computation). As respondent

explained in the motion for leave to file the amended computation, in the first

computation he allowed a deduction for the interest on the estate tax but did not

correspondingly reduce the marital deduction by that amount. According to
                                        -6-

respondent, the amended computation corrects that mistake. Respondent’s

amended computation shows an estate tax deficiency of $513,820.61.

      The estate filed a notice of objection to respondent’s amended computation,

which presented two alternative computations: Option 1 shows an estate tax

deficiency of $144,136, and option 2 shows an estate tax deficiency of $341,073.

After concessions,3 the parties disagree as to (1) whether the estate must reduce

the marital deduction by the amounts of the Federal estate and State death taxes

(and related interest) it owes and (2) whether the estate may increase the marital

deduction by the amount of postdeath income that was not included in the

calculation of the gross estate but was instead reported on Form 1041 and

distributed to the surviving spouse.




      3
        A comparison of the estate’s objections to the first and amended
computations shows that the estate no longer disagrees that $523,143 of funeral
and legal and accounting expenses reduces the marital deduction. Respondent
concedes that interest on the State death tax is deductible. During the hearing the
estate conceded that, as of the hearing date, expenses reportable on Schedule J,
Funeral Expenses and Expenses Incurred in Administering Property Subject to
Claims, and Schedule K, Debts of the Decedent, and Mortgages and Liens, of
Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return,
totaled $523,143 and that the estate is not entitled to deduct $7,485 of legal and
accounting fees. The estate also concedes that the marital deduction should be
reduced by $24,606, the amount of expenses claimed on Form 1041 that were
charged to residue.
                                         -7-

      Respondent filed a response to the estate’s notice of objection to

respondent’s amended computation. The estate, with leave of Court, filed a reply,

and respondent filed his response to the estate’s reply to respondent’s amended

computation. The parties’ evolving positions are described below.

                                     Discussion

I.    Federal Estate and State Death Taxes

      The parties agree that the only taxable portion of the estate is the portion

attributable to the section 2036 inclusion. The parties disagree as to whether the

estate should reduce the marital deduction by the resulting Federal estate and State

death tax liabilities (including interest). Respondent’s position is that the estate

must reduce the marital deduction by the amounts of Federal estate and State death

taxes the estate must pay because the only property available to fund the payments

is property that would otherwise pass to Jewell and qualify for the marital

deduction. Citing the estate’s section 2207B right of recovery, the estate

disagrees.

      We start with the basics of subchapter A of subtitle B of the Code. Section

2001(a) imposes a tax on the transfer of the taxable estate of every decedent who

is a citizen or resident of the United States. Section 2031(a) provides that the

value of the decedent’s gross estate includes the values of interests described in
                                            -8-

sections 2033 through 2045. An estate may deduct from the value of the gross

estate the value of certain property passing from the decedent to his or her

surviving spouse (marital deduction). See sec. 2056(a). As relevant to this case,

section 2056(b)(4) provides that in determining the value of any interest in

property passing to the surviving spouse for which a marital deduction is allowed,

we must take into account “the effect which the tax imposed by section 2001, or

any estate, succession, legacy, or inheritance tax, has on the net value to the

surviving spouse of such interest”. Section 2010 allows an estate a credit (unified

credit) that reduces its estate tax liability.

       Section 2002 requires the executor of the estate to pay the estate tax.

Regardless of the source of funds the executor uses to pay the estate tax, however,

an issue remains regarding which beneficiary’s interest bears the financial burden

of the tax. Often the decedent’s will provides guidance to the executor regarding

how the executor should allocate the tax burden among the heirs, but the parties

agree that Clyde Sr.’s will has no express provision regarding Federal estate and

State death taxes or their apportionment, and we so find.4




       4
       These findings of fact supplement our findings of fact in Estate of Turner I
and Estate of Turner II.
                                          -9-

      When a decedent fails to specify how an estate’s tax liabilities should be

allocated, State law governs the manner in which those tax liabilities are allocated

among estate assets. See Riggs v. Del Drago, 317 U.S. 95, 100-101 (1942). The

parties agree that under Georgia law, the Federal estate and State death taxes and

accompanying interest are paid from the residue.5 See Ga. Code Ann. sec. 53-4-

63(a) (West 1996).

      In an effort to identify and define the residue, the parties focus on Items

Eight and Nine of Clyde Sr.’s will. Item Eight expresses Clyde Sr.’s intent to

leave assets to Jewell undiminished by any estate, inheritance, succession, death,

or similar taxes and having a value “equal to the maximum marital deduction”.6


      5
       The term “residue” as it relates to a decedent’s estate generally means “the
property comprising a decedent’s estate after payment of the estate’s debts, funeral
expenses, costs of administration, and all specific and demonstrative bequests”.
Bryan A. Garner, A Dictionary of Modern Legal Usage 762 (2d ed. 1995) (quoting
Concise Dictionary of Law (2d ed. 1990)).
      6
          The relevant portion of Item Eight of Clyde Sr.’s will reads as follows:

      If Jewell survives me and if there is a federal estate tax in effect at the
      time of my death, I give, devise and bequeath to her cash, securities
      or other property of my estate (undiminished by any estate,
      inheritance, succession, death or similar taxes) having a value equal
      to the maximum marital deduction as finally determined in my federal
      estate tax proceedings, less the aggregate amount of marital
      deductions, if any, allowed for such tax purposes by reason of
      property or interests in property passing or which have passed to my
                                                                         (continued...)
                                          - 10 -

Item Nine of Clyde Sr.’s will provides for the establishment of a trust for the

benefit of the children and grandchildren of Clyde Sr. and Jewell if certain

conditions are met.7 Because of the reference in Item Nine to “the rest, residue



      6
       (...continued)
      said wife otherwise than pursuant to the provisions of this Item;
      provided, however, the amount of this bequest shall be reduced by the
      amount, if any, needed to increase my taxable estate (for federal
      estate tax purposes) to the largest amount that, after allowing for the
      unified credit against the federal estate tax, and the state death tax
      credit against such tax (but only to the extent that the use of such state
      death tax credit does not increase the death tax payable to any state),
      will result in the smallest, if any, federal estate tax being imposed on
      my estate. * * *
      7
          Item Nine of Clyde Sr.’s will states:

      If Jewell survives me, I give, devise and bequeath all the rest, residue
      and remainder of my property of every kind and description
      (including lapsed legacies and devises), wherever situated and
      whether acquired before or after the execution of this Will, to the
      Trustee hereinafter named, to be held, administered and distributed as
      follows:

      (A) Commencing with the date of my death, my Trustee shall pay to
      or apply for the benefit of my wife and my issue such sums from the
      principal of and income from this Trust in such shares and
      proportions as in its sole discretion shall be necessary or advisable
      from time to time for the medical care, education, support and
      maintenance in reasonable comfort of my said wife and my issue,
      taking into consideration (to the extent my Trustee deems advisable)
      any other income or resources of my said wife and my issue known to
      my Trustee. * * *
                                         - 11 -

and remainder” of property, the estate contends that Item Nine is the residuary

clause of the will. The estate argues that the assets passing to the trust under Item

Nine and not the assets passing to Jewell under Item Eight must bear the burden of

the Federal estate and State death taxes and other expenses. Respondent argues

that because of the section 2036 inclusion, the unified credit has been fully used

and no trust under Item Nine comes into existence. Respondent urges us to

conclude that the property passing to Jewell under Item Eight is the residue and is

the only source available to pay the estate’s tax liabilities.

       The parties’ argument regarding which provision of the will constitutes the

residuary clause, however, fails to focus on important facts in this case. Items

Eight and Nine of Clyde Sr.’s will in effect require the executor to distribute to

Jewell all property qualifying for the marital deduction unless a credit bypass trust

was necessary to take advantage of the unified credit available to the estate.

Pursuant to these provisions, the estate reported on the Form 706 that an

18.8525% FLP interest was allocated to Jewell pursuant to Item Eight of Clyde

Sr.’s will, and the remaining 8.9029% FLP interest was allocated to a credit

bypass trust pursuant to Item Nine of the will. See Estate of Turner II, 138 T.C. at

312.
                                          - 12 -

      Because we held in Estate of Turner I that the value of the section 2036

assets must be included in the value of the gross estate, the allocations described

above have changed. The section 2036 inclusion exhausted the unified credit

under section 2010 and generated an estate tax liability. Because the unified credit

has been fully used, it is no longer necessary to fund a credit bypass trust under

Item Nine of Clyde Sr.’s will, and respondent’s first and amended calculations

correctly reflect this. In fact, both parties’ computations recognize that (1) the

trust under Item Nine has not been and will not be established or funded and (2)

Jewell is entitled to a distribution of the value of any property interest included in

the estate (except the section 2036 assets that Clyde Sr. transferred during his

lifetime) adjusted as legally required.

      The problem we must solve here arises from the section 2036 inclusion.

That inclusion created Federal estate and State death tax liabilities, but the only

assets presently available to the executor from which he can pay the liabilities are

assets that should pass to Jewell and which qualify for the marital deduction.

Respondent argues that, because Clyde Sr. transferred the section 2036 assets

during his lifetime and those assets are not available to the executor to fund the

payment of the Federal estate and State death tax liabilities, the assets that would

otherwise pass to Jewell and qualify for the marital deduction are the only source
                                        - 13 -

of payment available to the estate and some part of those assets must be used to

pay the liabilities, thereby reducing the marital deduction. In respondent’s view,

Jewell is the only heir and the assets cannot pass to her undiminished by taxes as

Item Eight of the will mandates. Accordingly, respondent contends, because the

marital deduction is available only with respect to assets actually passing from the

decedent to the surviving spouse, see sec. 2056(a); sec. 20.2056(a)-1(a), (b)(1)(ii),

Estate Tax Regs., the marital deduction must be reduced to account for the assets

used to pay Federal estate and State death taxes and related interest.

      The estate disagrees and points to section 2207B, which provides in part:

             SEC. 2207B(a). Estate Tax.--

                    (1) In general.--If any part of the gross estate on which
             tax has been paid consists of the value of property included in
             the gross estate by reason of section 2036 (relating to transfers
             with retained life estate), the decedent’s estate shall be entitled
             to recover from the person receiving the property the amount
             which bears the same ratio to the total tax under this chapter
             which has been paid as--

                          (A) the value of such property, bears to

                          (B) the taxable estate.

                    (2) Decedent may otherwise direct.--Paragraph (1) shall
             not apply with respect to any property to the extent that the
             decedent in his will (or a revocable trust) specifically indicates
             an intent to waive any right of recovery under this subchapter
             with respect to such property.
                                        - 14 -

The estate contends that under section 2207B, the recipients of the section 2036

assets during Clyde Sr.’s lifetime bear the burden of any taxes attributable to the

section 2036 inclusion. We agree.

      Section 2207B is one of several Code sections that provide for a right of

recovery for certain types of property or dispositions.8 Unless the will of a

Georgia decedent expressly directs otherwise, Georgia law does not limit any

rights to reimbursement for Federal estate taxes and other taxes that may be

available to the executor under Federal law. See Ga. Code Ann. sec. 53-4-63(e).

      As discussed above, Clyde Sr.’s will does not address the payment of taxes

or their apportionment, nor does it express any intent regarding the right of

recovery under section 2207B or any other right of recovery provision. This is not

surprising because Clyde Sr. did not know that the Court would apply section

2036 to his lifetime transfers. Item Eight of Clyde Sr.’s will, however, clearly

manifests his intention that the marital deduction not be reduced or diminished by




      8
        Other right of recovery provisions are: (1) sec. 2206, which allows a right
of recovery for taxes generated by the inclusion of life insurance proceeds in the
decedent’s gross estate; (2) sec. 2207, which provides for a right of recovery for
taxes generated by property included in the gross estate by virtue of the decedent’s
having possessed a power of appointment; and (3) sec. 2207A, which provides for
a right of recovery for the tax attributable to qualified terminable interest property
assets.
                                        - 15 -

the estate’s tax liabilities.9 It is reasonable to assume that Clyde Sr. would want

his executor to take all steps necessary to ensure that the property passing to his

surviving spouse and qualifying for the marital deduction not be impaired.10


      9
         The parties do not address Estate of Wycoff v. Commissioner, 506 F.2d
1144 (10th Cir. 1974), aff’g 59 T.C. 617 (1973), but we find it appropriate to
distinguish this case. In Estate of Wycoff v. Commissioner, 506 F.2d at 1146, the
decedent’s will created two trusts, one in favor of his wife and the other for the
benefit of his son. The decedent directed that Federal estate and State death taxes
be paid out of the portion of his estate that was not in the marital trust; but at the
same time, he granted the executor discretion to pay these taxes out of the marital
trust if the executor considered it prudent to do so. The U.S. Court of Appeals for
the Tenth Circuit reasoned that although the will expressed a preference for
payment from the part of the estate not included in the marital trust, the will
contained no positive direction that Federal estate and State death taxes be paid
from the part of the estate not included in the marital share. Id. at 1150. The
Court of Appeals stated: “[A]s we view it such an express provision would be
necessary to justify a ruling for the executor” and held that “§ 2056(b)(4) renders
the marital share available to the surviving spouse subject to the payment of death
taxes.” Id. As a result, the Court of Appeals held that the value of the marital
deduction had to be reduced by the amount of the applicable taxes.
        Estate of Wycoff is distinguishable because the executor of the estate could
choose from which trust to pay the expenses. In this case, however, Clyde Sr.’s
will is silent as to the payment of taxes, and we have found that Clyde Sr. wanted
to maximize the marital deduction and that the executor must exercise the right of
recovery under sec. 2207B.
      10
         Federal estate and State death taxes remain deductible expenses of the
estate because the executor would be paying those taxes from assets included in
the gross estate yet not actually owned by Clyde Sr. at death See sec. 20.2053-
6(c)(1), Estate Tax Regs., which provides: “For the estates of decedents dying on
or before December 31, 2004, no estate * * * tax payable by reason of the
decedent’s death is deductible, except as provided in §§ 20.2053-9 and 20.2053-10
with respect to certain state and foreign death taxes on transfers for charitable,
                                                                         (continued...)
                                        - 16 -

      Respondent argues that the right of recovery under section 2207B cannot

preserve the maximum marital deduction because the right of recovery can be

exercised only after taxes have been paid. However, the fact that the estate may

exercise the right of recovery under section 2207B only after the taxes have been

paid does not require that the marital deduction be reduced by the tax payment

amounts.

      The process of administering an estate is multifaceted and can be quite

complex and time consuming. It involves some or all of the following actions:

the opening of a probate proceeding; the identification and valuation of a

decedent’s assets and liabilities; the preparation of required tax returns and

probate papers; the payment of relevant liabilities and bequests; the resolution of

any disputes affecting the estate, such as estate tax disputes and beneficiary

litigation; and the distribution of the residue in accordance with a decedent’s will

or, if none, with applicable State intestacy laws. See generally 34 C.J.S. Executors

& Administrators, sec. 212 (Westlaw 2018). In an estate that includes the value of

section 2036 assets, an executor must find a way to pay the tax liabilities created

by the section 2036 assets while dealing with the reality created by section 2036:

      10
         (...continued)
etc., uses. However, see sections 2011 and 2014 and the corresponding
regulations with respect to credits for death taxes.”
                                         - 17 -

The actual section 2036 assets are not in the possession or control of the executor

and cannot be used by the executor to pay the tax liabilities they create.

      Section 2207B gives an executor a mechanism to replenish estate assets that

the executor uses to pay the Federal estate and State death tax liabilities

attributable to the values of the phantom section 2036 assets included in the estate.

Because the value of the section 2036 assets is already included in the calculation

of the gross estate, any recovery under section 2207B should not increase the

gross estate but will enable the executor to distribute to the surviving spouse the

net value of the estate, undiminished by the tax liabilities attributable to the

section 2036 inclusion.

      Respondent also argues that the effect of failing to reduce the marital

deduction by the tax liabilities attributable to the section 2036 assets is to shelter

from the estate tax the property brought into a decedent’s estate pursuant to

section 2036. Respondent states that “this would effectively undo what has been

accomplished by I.R.C. § 2036.” Respondent points out that if the executor

pursues the recovery, the subsequent recovery of the estate tax amount makes the

beneficiary who bore the burden whole.

      Respondent cites section 20.2056(b)-4(c)(1), Estate Tax Regs., in support of

his argument. That section provides: “In the determination of the value of any
                                        - 18 -

property interest which passed from the decedent to his surviving spouse, there

must be taken into account the effect which the Federal estate tax, or any estate,

succession, legacy, or inheritance tax, has upon the net value to the surviving

spouse of the property interest.” However, it does not support respondent’s

position because its application turns on whether the Federal estate tax has an

effect upon the net value of the property interest passing to the surviving spouse.

      The regulation does not state that the Federal estate tax always has an effect

on the net value of the surviving spouse’s interest. The examples in the regulation

support a more limited and nuanced application of the regulation. Section

20.2056(b)-4(c)(2), Estate Tax Regs., explains that if the decedent’s only bequest

to the surviving spouse is $100,000 and the spouse is required to pay a State

inheritance tax of $1,500, the value of the marital deduction is $98,500. Unlike in

the case at hand, in this example it is the spouse, and not the executor of the estate,

who is required to pay a State death tax.

      Section 20.2056(b)-4(c)(3), Estate Tax Regs., addresses a situation where a

decedent devised real property to his surviving spouse and also bequeathed to her

a nondeductible interest for life under a trust. In this example, the State of

residence imposed an inheritance tax with respect to the two interests. Again, the

example assumes that the surviving spouse bears the burden of paying the
                                        - 19 -

inheritance tax liability and concludes that the tax payment reduces the marital

deduction.

      Section 20.2056(b)-4(c)(4), Estate Tax Regs., further supports the

conclusion that in evaluating the effect of the Federal estate tax upon the value of

the interest passing to the surviving spouse, the regulation applies only when the

surviving spouse’s share bears the tax burden. It provides:

      If the decedent bequeaths his residuary estate, or a portion of it, to his
      surviving spouse, and his will contains a direction that all death taxes
      shall be payable out of the residuary estate, the value of the bequest,
      for the purpose of the marital deduction, is based upon the amount of
      the residue as reduced pursuant to such direction. If the residuary
      estate, or a portion of it, is bequeathed to the surviving spouse, and by
      the local law the Federal estate tax is payable out of the residuary
      estate, the value of the bequest, for the purpose of the marital
      deduction, may not exceed its value as reduced by the Federal estate
      tax. * * *

      Unlike the examples discussed above, because of section 2207B the estate

tax burden in this case is not imposed on the surviving spouse’s share of the estate

and does not require a reduction in the marital deduction. Consequently, we

conclude that respondent’s reliance on section 20.2056(b)-4(c), Estate Tax Regs.,

is misplaced.

      Under section 2036 the gross estate includes the values of the section 2036

assets that Clyde Sr. transferred during his lifetime. The fact that property that
                                         - 20 -

might otherwise go to the surviving spouse would be used to pay the estate tax

liabilities attributable to the section 2036 assets does not compel a conclusion that

the marital deduction must be reduced. The estate is entitled to recover from the

recipients of section 2036 assets during Clyde Sr.’s lifetime an amount equal to the

liability attributable to the section 2036 inclusion that the estate pays. That

recovery will enable the estate to distribute to the surviving spouse property value

undiminished by the tax payments. Section 20.2056(b)-4(c), Estate Tax Regs.,

does not require a different result when the Federal estate and State death taxes

have no effect upon the net value distributable to the surviving spouse. See, e.g.,

Estate of Gill v. Commissioner, T.C. Memo. 2012-7 (marital deduction not

reduced where marital deduction property does not bear the economic burden of

the tax). Accordingly, we hold that the estate need not reduce the marital

deduction by the amount of Federal estate and State death taxes it must pay

because the tax liabilities are attributable to the section 2036 assets, the estate has

the right to recover the amount paid under section 2207B, and the estate must

exercise that right to recover to give effect to Clyde Sr.’s intention that Jewell

receive her share of the estate undiminished by the estate’s tax obligations.

      Respondent makes an additional argument that focuses on the interest owed

on the Federal estate tax liability. Respondent contends that under section
                                        - 21 -

20.2056(b)-4, Estate Tax Regs., the estate tax interest expense is a transmission

expense,11 and therefore it reduces the residue and correspondingly reduces the

marital deduction. However, under section 2207B(c), “[i]n the case of penalties

and interest attributable to the additional taxes described in subsection (a), rules

similar to the rules of subsections (a) and (b) [of section 2207B] shall apply.”

Accordingly, the amount that the estate is entitled to recover from the section 2036

asset recipients includes applicable interest.

II.   Postdeath Income

      Relying on section 20.2056(b)-4(d)(1)(iii), Estate Tax Regs., the estate

contends that the marital deduction should be increased by the amount of income

generated by estate assets, i.e., postdeath income, allocated to the marital share.12

Respondent disagrees. According to respondent, income from estate assets, which

was reported on the Form 1041, was not included in the gross estate and therefore

is not a deductible interest within the meaning of section 20.2056(a)-1(a) and (b),



      11
        Sec. 20.2056(b)-4(d)(1)(ii), Estate Tax Regs., defines estate transmission
expenses as “expenses that would not have been incurred but for the decedent’s
death and the consequent necessity of collecting the decedent’s assets, paying the
decedent’s debts and death taxes, and distributing the decedent’s property to those
who are entitled to receive it.”
      12
       The estate contends, and respondent does not appear to dispute, that the
amount of postdeath income as of the hearing date was $159,391.
                                        - 22 -

Estate Tax Regs. Section 20.2056(a)-1(a), Estate Tax Regs., provides: “A

deduction is allowed under section 2056 from the gross estate of a decedent for the

value of any property interest which passes from the decedent to the decedent’s

surviving spouse if the interest is a deductible interest as defined in § 20.2056(a)-

2.” See also sec. 20.2056(a)-1(b)(1)(iii), Estate Tax Regs. (property interest

qualifying for the marital deduction must be a deductible interest). Section

20.2056(a)-2(b), Estate Tax Regs., defines deductible interests as interests that do

not fall within one of the categories of “nondeductible interests” described in

section 20.2056(a)-2(b)(1) through (4), Estate Tax Regs. Section 20.2056(a)-

2(b)(1), Estate Tax Regs., provides that “[a]ny property interest which passed from

the decedent to his surviving spouse is a ‘nondeductible interest’ to the extent it is

not included in the decedent’s gross estate.” In respondent’s view, because the

postdeath income was not included in the gross estate here, it cannot increase the

marital deduction.

      We start and end our analysis with the relevant estate tax provisions.

Section 2001(a) imposes a tax on the transfer of the taxable estate of every

decedent who is a citizen or resident of the United States. The value of the gross

estate is determined by adding the value of all property owned by the decedent at

the time of death. Sec. 2031(a). The taxable estate is then determined by
                                        - 23 -

subtracting certain deductions from the value of the decedent’s gross estate. Sec.

2051. Among the deductions allowed is the marital deduction under section 2056.

      Section 2056(a) provides that the value of the taxable estate shall be

determined by deducting from the value of the gross estate an amount equal to the

value of any interest in property that passes or has passed from the decedent to a

surviving spouse. It contains an important caveat: The marital deduction is

permitted “only to the extent that such interest is included in determining the value

of the gross estate.” Sec. 2056(a).

      Any income that estate assets may generate after the date of the decedent’s

death must be reported as ordinary income for Federal income tax purposes and

income tax paid as appropriate. Secs. 1(e), 641, 6012. The income earned by an

estate during the estate’s administration is not included in the gross estate and is

not subject to Federal estate tax. See Estate of Horne v. Commissioner, 91 T.C.
100, 103 (1988).

      Section 20.2056(b)-4(d), Estate Tax Regs., is part of a broader set of

regulations that explain how the marital deduction is calculated. The regulation

provides rules for determining the effect of administration expenses upon the

marital deduction. It defines three terms used in determining the effect of

administration expenses--management expenses, transmission expenses, and
                                         - 24 -

marital share. For purposes of section 20.2056(b)-4(d), Estate Tax Regs., marital

share is defined as “the property or interest in property that passed from the

decedent for which a deduction is allowable under section 2056(a).” Sec.

20.2056(b)-4(d)(1)(iii), Estate Tax Regs. Marital share “includes the income

produced by the property or interest in property during the period of

administration if the income, under the terms of the governing instrument or

applicable local law, is payable to the surviving spouse or is to be added to the

principal of the property interest passing to, or for the benefit of, the surviving

spouse.” Id.

      The estate contends that section 20.2056(b)-4(d)(1)(iii), Estate Tax Regs.,

entitles the estate to increase the marital deduction by the amount of income

earned after Clyde Sr.’s death during the administration of the estate because the

regulation provides that the income is included in the marital share. Respondent

disagrees for two reasons. First, the postdeath income interest is not a deductible

interest under the regulation because it was not included in the gross estate.

Second, the estate misreads section 20.2056(b)-4, Estate Tax Regs., because it

fails to consider it in context.

      Respondent notes that paragraph (d) was added to section 20.2056(b)-4,

Estate Tax Regs., in 1999 in response to the Supreme Court’s opinion in
                                        - 25 -

Commissioner v. Estate of Hubert, 520 U.S. 93 (1997). In Commissioner v. Estate

of Hubert, 520 U.S. at 111, the Supreme Court, relying on a prior regulation, held

that the estate was not required to reduce marital and charitable deductions by the

amount of administration expenses paid from income generated by assets allocated

to marital and charitable bequests. Under the regulation as applicable in Estate of

Hubert, “[i]n 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.” Sec. 20.2056(b)-4(a), Estate Tax Regs. (as in

effect in 1996). The Department of the Treasury subsequently amended the

regulation to delete the “material limitations” standard, see T.D. 8846, 1999-2

C.B. 679, 682, and to introduce the principles for evaluating the effect of

administration expenses upon the marital deduction that are currently found in

section 20.2056(b)-4(d), Estate Tax Regs.

      Section 20.2056(b)-4(d)(2) through (4), Estate Tax Regs., classifies

expenses into three categories: transmission expenses, management expenses

attributable to the marital share, and management expenses not attributable to the

marital share. It also provides three rules for taking into account the effect of

those expenses. First, for purposes of determining the marital deduction, if

transmission expenses are paid from the marital share, the value of the marital
                                        - 26 -

share is reduced by the amount of the estate transmission expenses. See sec.

20.2056(b)-4(d)(2), Estate Tax Regs. Second, the value of the marital share is not

reduced by the amount of the estate management expenses attributable to and paid

from the marital share.13 See id. subpara. (3). Third, for purposes of determining

the marital deduction, the value of the marital share is reduced by the estate

management expenses that are paid from the marital share but attributable to a

property interest not included in the marital share. See id. subpara. (4).

      The estate points to the definition of “marital share” in section 20.2056(b)-

4(d)(1)(iii), Estate Tax Regs., as the authority for increasing the marital deduction

by the amount of postdeath income allocated and paid to the surviving spouse. At

first blush, the estate would appear to be right. But while portions of section

20.2056(b)-4(d), Estate Tax Regs., are confusing, we will accept respondent’s

contention that marital share is defined solely for the purpose of calculating the

effect of administration expenses on the marital deduction. It does not purport to

increase the marital deduction otherwise allowable under section 2056, nor could

it. Section 2056(a) limits the marital deduction to the value of the interest that is


      13
       Pursuant to sec. 2056(b)(9), however, the allowable marital deduction
must be reduced by the amount of any such management expenses that are
deducted under sec. 2053 on the decedent’s Federal estate tax return. Sec.
20.2056(b)-4(d)(3), Estate Tax Regs.
                                        - 27 -

included in the value of the gross estate. Income produced by the estate’s assets

after the decedent’s death is not included in the calculation of the gross estate and

therefore does not increase the marital deduction allowable under section 2056.

See also sec. 20.2056(a)-1(a), Estate Tax Regs. Accordingly, although the

postdeath income may increase the “marital share” under specified circumstances

for purposes of calculating the impact of administration expenses on the marital

deduction under section 20.2056(b)-4(d)(1)(iii), Estate Tax Regs., it does not, and

cannot, increase the amount of the marital deduction otherwise allowable under

section 2056 and related regulations. We hold that the estate may not increase the

marital deduction by the amount of postdeath income generated by assets passing

to Jewell.

      We have considered the remaining arguments of both parties for results

contrary to those expressed herein and, to the extent not discussed above, find

those arguments to be irrelevant, moot, or without merit.

      To reflect the foregoing,


                                                            An appropriate order will

                                                     be issued.
