Estate of Lassiter v. Commissioner

T.C. Memo. 2000-324

UNITED STATES TAX COURT

ESTATE OF HENRY A. LASSITER, DECEASED, PAULA ANN MASTERS
LASSITER, ADMINISTRATOR, C.T.A., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 17643-98. Filed October 19, 2000.

D executed a will in 1970 which set forth a
testamentary plan placing the majority of D’s property
into two trusts. The terms of one trust are such that
a marital deduction is available for assets passing
thereto. The other, residuary, trust does not as
written satisfy the requirements for such a deduction,
largely by reason of interests therein granted to
persons other than D’s surviving spouse. Following D’s
death in 1994, beneficiaries of his estate executed a
series of disclaimers in an attempt to enable the
residuary trust to qualify for the marital deduction
under sec. 2056(b)(7), I.R.C. When this deduction was
claimed for Federal estate tax purposes, it was
disallowed by R.

Held: The estate is entitled to a deduction
pursuant to sec. 2056(b)(7), I.R.C., for property
placed in the residuary trust established under D’s
1970 will.
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David D. Aughtry and Charles E. Hodges II, for petitioner.

David Delduco and Clinton M. Fried, for respondent.

MEMORANDUM OPINION

NIMS, Judge: Respondent determined a Federal estate tax

deficiency in the amount of $14,330,496 for the Estate of Henry

A. Lassiter (the estate). Pursuant to Rule 122, the parties have

submitted fully stipulated the sole issue of whether, after

giving effect to various disclaimers, the estate is entitled to a

deduction under section 2056(b)(7) with respect to an interest

transferred in trust from Henry A. Lassiter (Mr. Lassiter or

decedent) to his surviving spouse. If this legal question is

answered in the negative, further proceedings will be required to

establish the value of certain property held by Mr. Lassiter at

the time of his death.

Unless otherwise indicated, all section references are to

sections of the Internal Revenue Code in effect as of the date of

decedent’s death, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

Background

As this case was submitted fully stipulated, the facts are

so found. The stipulations of the parties, with accompanying
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exhibits, are incorporated herein by this reference. We set

forth below such factual information as is useful in

understanding our decision.

Mr. Lassiter was a citizen of the United States and a

domiciliary of Clayton County, Georgia, when he was killed in an

automobile accident while in Singapore on May 9, 1994. He was 48

years of age. His surviving spouse, Paula Ann Masters Lassiter

(Mrs. Lassiter), is the administrator of the estate. At the time

the petition in this case was filed, Mrs. Lassiter resided in

Morrow, Georgia. The estate has at all relevant times been

administered by the Probate Court of Clayton County, Georgia

(Probate Court).

In addition to his wife, Mr. Lassiter was also survived by

their four daughters: Cathy Lassiter Smith (Cathy), Cindy Elaine

Lassiter (Cindy), Christy Lynn Lassiter (Christy), and Cheryl

Marie Lassiter (Cheryl). As of the date of their father’s death,

Cathy, Cindy, Christy, and Cheryl were 25, 23, 19, and 15 years

of age, respectively, and Cathy was married to Paul A. Smith.

The Testamentary Disposition

On May 26, 1994, an order and letters of administration were

issued by the Probate Court admitting to probate a will of Mr.

Lassiter dated August 7, 1970. The 1970 will, in addition to

providing for payment of debts and burial expenses and making

specific bequests of personal effects, set forth a testamentary
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plan establishing two trusts to be funded by the remainder of Mr.

Lassiter’s probate assets. Item IV of the will specified the

amount to be placed in a trust over which Mrs. Lassiter was given

a general power of appointment by directing the trustee to:

(1) determine the value of my entire estate passing
under this Will, (2) add thereto the value of any and
all insurance and other property passing outside of
this Will but includable in my estate for Federal
Estate Tax purposes, (3) deduct therefrom all debts and
expenses of administration allowed as a deduction for
Federal Estate Tax purposes but not any estate or
inheritance tax, (4) ascertain one-half of the
remainder, (5) deduct from such one-half the value of
any and all insurance and other property passing to my
said wife either outside this Will or under any other
item of this Will in such manner as to qualify as a
part of the marital deduction under the Federal Estate
Tax Law, and (6) the remainder of such one-half shall
be the value of the part of my estate bequeathed in
this Item.

The trustee of this trust was further told to pay all income

therefrom to Mrs. Lassiter, in semiannual or more frequent

installments, and was authorized “to encroach on the corpus of

the property” as necessary to provide for Mrs. Lassiter’s “proper

support and comfort”.

A second, residuary, trust was then created under Item V of

the will for all probate property not otherwise disposed of

through the above-described provisions. Pursuant to the

governing terms set forth in Item V, the trustee of this trust

was instructed as follows:

(b) Said Trustee shall hold and manage said
property and shall use such part of the income and/or
principal thereof as it may deem necessary to provide
 - 5 -

for the support in reasonable comfort of my wife, and
to provide for the support and education of my children
and the descendants of any deceased child of mine.
After any child has finished his education, or in
normal course should have completed his education, the
Trustee shall not be required to make any payment for
the support of such child or his descendants unless in
the judgment of the Trustee there is ample property to
support my wife and educate my children or such child
is unable to support himself. To the extent
practicable, however, I desire my Trustee in making
encroachment for the benefit of my wife to encroach
first on the trust created for my wife in Item IV
hereof before encroaching on this trust; but this
request shall not apply to the extent it would be
necessary to sell property which in the opinion of the
Trustee should not be sold in order to encroach first
on such trust.

(c) My said wife shall have the power at any time
and from time to time by instrument in writing signed
by her and delivered to the Trustee, to direct the
Trustee to turn over any part of the property in this
trust to or among such of my descendants, or spouses of
such descendants, and in such manner, in trust or
otherwise, as my said wife may in such instrument
direct or appoint, provided that she shall have no
power to appoint said property to herself, to her
estate, to her creditors or to the creditors of her
estate.

(d) On the death of my said wife, the property
then remaining in this trust shall be distributed to or
among such of my descendants, and in such manner, in
trust or otherwise as my said wife may by her Last Will
and Testament direct or appoint, provided that she
shall have no power to appoint said property to
herself, to her creditors, to her estate or to the
creditors of her estate.

(e) Should my said wife fail to exercise her power
of appointment as to all of the property in this trust,
or should she predecease me, then on my death or on the
death of my said wife, whichever last occurs, the
property of this trust as to which she fails to
 - 6 -

exercise such power of appointment shall be divided
into as many separate and equal shares as I have
children then living and deceased children with
descendants then living.

Mr. Lassiter’s will appointed First National Bank of Atlanta

as the initial trustee of the trusts created therein.

Beneficiaries entitled to more than 50 percent of the income from

his estate and testamentary trusts were authorized at any time to

remove the trustee and to appoint a successor corporate trustee.

In such event Item X directed: “Any successor Executor or

Trustee appointed as herein provided, or appointed according to

law, shall have and may exercise all of the rights, powers and

duties herein conferred upon the Executor and Trustee as fully

and to the same extent as if such successor had originally been

named as Executor or Trustee.”

The powers and duties conferred upon the trustee for

purposes of administering “every trust” established under the

1970 will were set forth in Item XII. Among the powers so

enumerated were the following:

(a) To hold in their discretion any part of the
estate to be administered in its form or condition at
the time said fiduciaries qualify as the fiduciaries of
said estate, * * *

(b) To make and change investments, converting
personal property into real property and the reverse
whenever they think it advisable * * * ; to purchase
and hold for investment unproductive and unimproved
real estate * * *

* * * * * * *
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(h) They may apportion or allocate all ordinary
and extra dividends and gains from sales of
unproductive real estate or from sales of any other
part of the corpus and any other receipt or receipts
and all expenditures and payments and all losses of
income during alterations or improvements of real
estate, between income and principal as to them seems
fair and just, and any such apportionment or
allocation, including the right to amortize or fail to
amortize any part of the premium or discount, made in
good faith shall be final. * * * They may in general
use their discretion in determining the questions as to
what receipts and what payments are income and
principal, which discretion exercised in good faith
shall be final;

The Disclaimers

After Mr. Lassiter’s death and at the request of Mrs.

Lassiter and the Lassiter children, First National Bank of

Atlanta declined and renounced its right to serve as the named

trustee. Accordingly, on February 6, 1995, in her role as

administrator of her husband’s estate, Mrs. Lassiter filed with

the Probate Court three petitions. Therein she requested that

she be appointed trustee of the trusts created under Items IV and

V of the 1970 will, that authority be granted to the trustee to

disclaim trust powers, that a guardian ad litem be appointed to

represent the interests of minor daughter Cheryl and all unborn

and unascertained beneficiaries of the Item V trust, and that

such guardian ad litem be authorized to execute disclaimers of

interests in the Item V trust on behalf of the represented

beneficiaries. By orders dated February 6, 1995, the Probate
 - 8 -

Court granted each of these petitions. Jack R. Hancock was

designated as the guardian ad litem for the minor, unborn, and

unascertained beneficiaries.

Also on February 6, 1995, eight disclaimers were executed

and filed with the Probate Court. Six of these instruments,

namely, those executed by the three adult Lassiter children, by

Cathy’s spouse Paul A. Smith, by the guardian ad litem on behalf

of minor child Cheryl, and by the guardian ad litem on behalf of

Mr. Lassiter’s unborn and unascertained descendants, are

substantially identical. Each by its terms renounces any

interest in the Item V trust during the life of Mrs. Lassiter, as

follows:

RENOUNCEMENT OF SUCCESSION AND DISCLAIMER OF PROPERTY

HENRY A. LASSITER (the “Decedent”), of Clayton
County, Georgia, died on May 8, 1994. The Decedent
left a written will dated August 7, 1970 (the “1970
Will”), which was duly admitted to probate as the
Decedent’s Last Will and Testament by the Probate Court
of Clayton County, Georgia on May 26, 1994.

The Decedent’s wife (Paula Ann Masters Lassiter,
hereinafter referred to as “Mrs. Ann Lassiter”) and
descendants are beneficiaries under the Residuary Trust
established under Item V of the 1970 Will (the
“Residuary Trust”). The 1970 Will is recorded at
Docket Book R, Page 122, in the Probate Court of
Clayton County, Georgia. A subsequent will which
bequeaths and devises substantially all of the
Decedent’s property to Mrs. Ann Lassiter is believed to
exist but cannot be found.

The Decedent’s daughter, CATHY LASSITER SMITH, now
desires to fulfill her understanding of her father’s
intentions [or similar language appropriately
designating the disclaimant] by disclaiming,
 - 9 -

renouncing, and refusing any and all rights, title, and
interest in the principal and income of the Residuary
Trust during the life of Mrs. Ann Lassiter, including
without limitation, all rights as a beneficiary under
the inter vivos power of appointment provided under
Paragraph (c) of the 1970 Will, any right or interest
to have income withheld from the income beneficiary or
accumulated during the lifetime of Mrs. Ann Lassiter,
and any right or interest to cause the Trustee of the
Residuary Trust to so withhold or accumulate income
(all rights, title and interests described in this
paragraph being herein referred to as the “Disclaimed
Property Interest”).

NOW THEREFORE, CATHY LASSITER SMITH [or other
disclaimant], having neither accepted nor received any
of the benefits of the Disclaimed Property Interest,
and hereby acknowledging that she has not and will not
receive consideration in exchange for executing this
disclaimer, and in accordance with O.C.G.A. Section 53-
2-115, hereby irrevocably and unqualifiedly disclaims,
renounces and refuses to accept any and all rights,
title and interest (including, but not limited to,
rights in intestacy) in the Disclaimed Property
Interest.

Except for this disclaimer and refusal to accept
any interest in the Disclaimed Property Interest, CATHY
LASSITER SMITH [or other disclaimant] does not disclaim
nor does she refuse to accept any rights, title or
interest in any other property interest other than the
Disclaimed Property Interest, including, without
limitation, any remainder interest passing under said
1970 Will which she would receive or otherwise be
entitled to receive as a result of the Decedent’s
death.

Mrs. Lassiter, in her personal capacity, also executed a

disclaimer which contains introductory material akin to that

quoted above and reads in relevant part:

Paragraph (c) of Item V of the 1970 Will bestows
upon Mrs. Ann Lassiter an inter vivos special power of
appointment (“Residuary Trust Inter Vivos Power of
 - 10 -

Appointment”). Additionally, Item V contains no
directive nor authority for the trustee to accumulate
trust income.

The Decedent’s surviving spouse, MRS. ANN
LASSITER, now desires to fulfill her understanding of
her husband’s intentions by disclaiming, renouncing,
and refusing any and all rights, powers, and interest
in the Residuary Trust Inter Vivos Power of
Appointment. Additionally, in order to avoid any
possible confusion, MRS. ANN LASSITER desires to
disclaim, renounce, and refuse any right or interest in
having the income of the Residuary Trust withheld from
the income beneficiary or accumulated and any right or
interest to cause the Trustee of the Residuary Trust to
so withhold or accumulate income which may be said to
exist under the terms of the Residuary Trust or under
applicable Georgia law (hereinafter the “Accumulation
Interest”).

A further disclaimer was executed by Mrs. Lassiter in her

capacity as trustee. As pertinent to the case at bar, this

instrument states:

Paragraph (b) of Item V of the 1970 Will requires
the Trustee to distribute income and/or principal to
the descendants of the Decedent for their support and
education as the Trustee deems necessary (“Trustee
Power to Distribute to Decedent’s Descendants”).
Paragraph (b) contains no directive or authority to
withhold from the income beneficiary or accumulate
trust income.

* * * * * * *

NOW THEREFORE, the Trustee, on behalf of herself
and all successors and assigns, in accordance with
O.C.G.A. Section 53-2-115, having neither exercised nor
accepted any of the above-described powers as trustee,
hereby (i) affirms that under both Georgia law and the
terms of the Residuary Trust the Trustee has no
directive, power, or authority to withhold from the
income beneficiary or accumulate income under the
Residuary Trust; (ii) irrevocably and unqualifiedly
disclaims, renounces and refuses such Trustee Power to
Distribute to Decedent’s Descendants; (iii) irrevocably
 - 11 -

and unqualifiedly disclaims, renounces and refuses any
directive, power or authority that may be said to exist
to withhold from the income beneficiary or accumulate
income as Trustee under the Residuary Trust during the
lifetime of the surviving spouse; (iv) irrevocably and
unqualifiedly disclaims, renounces and refuses any
directive, power or authority that may be said to exist
to acquire or retain unproductive property during the
lifetime of the surviving spouse without the surviving
spouse’s consent; and (v) irrevocably and unqualifiedly
disclaims, renounces and refuses any directive, power
or authority that may be said to exist to treat any
receipt or other item as principal which is properly
treated under applicable law as income.

Additionally, attached to the trustee’s disclaimer is a

statement declaring that “The Decedent’s Descendants hereby join

in and consent to the provisions set forth in this RENOUNCEMENT

OF SUCCESSION AND DISCLAIMER OF PROPERTY”. The consent statement

is signed by Cathy, Cindy, Christy, Jack R. Hancock as guardian

ad litem for Cheryl, and Jack R. Hancock as guardian ad litem for

unborn and unascertained descendants.

The Trust Assets

At the time the 1970 will was executed, the Lassiters were a

young couple with one child and no income-producing assets. As

of Mr. Lassiter’s date of death, the assets passing to his estate

and utilized to fund the trusts created under his will consisted

primarily of the following: (1) 98 percent of the class A common

stock (voting) and 100 percent of the class B common stock

(nonvoting) in Micro Design International Holding, Inc., and

Subsidiaries (MDI); (2) 100 percent of the common stock (voting)

in Lassiter Properties, Inc. (Lassiter Properties); (3) partner
 - 12 -

and shareholder interests in real estate partnerships and S

corporations; and (4) real estate directly owned by decedent.

Since her husband’s death, Mrs. Lassiter has controlled the

day-to-day operations and strategic decisions relating to the

above-described assets. She has also continuously possessed

signature authority over the approximately 50 bank accounts

relating to these assets.

As administrator and trustee under the 1970 will, Mrs.

Lassiter votes 98 percent and 100 percent of the voting stock in

MDI and Lassiter Properties, respectively, and thereby controls

their boards of directors. She serves as chairman of the board

of both MDI and Lassiter Properties, and has done so since Mr.

Lassiter’s death. She was also chief executive officer of both

companies until designating Cathy as CEO of Lassiter Properties

in December of 1998. Among the business matters controlled by

Mrs. Lassiter in her various roles at MDI and Lassiter Properties

are selection of management; hiring, firing, and compensation of

employees; and declaration of dividends. Major corporate

transactions likewise fall within her sphere of responsibility,

as evidenced by her decision that MDI would declare bankruptcy on

June 21, 1999, due to a decline in business after 1994.

In addition to her duties above as a corporate director and

officer, Mrs. Lassiter actively manages, reviews, and executes

the real estate leases pertaining to properties owned directly,
 - 13 -

owned by the real estate partnerships and S corporations, and

owned by Lassiter Properties. These leases consist, during each

annual period, of approximately 54 instruments for hunting,

fishing, and recreation. Mrs. Lassiter also makes all final sale

and acquisition decisions relating to the land and timber held

directly and by Lassiter Properties. Similar decisions relating

to properties held by the real estate partnerships and S

corporations are made by both Mrs. Lassiter and the other partner

or shareholder, subject to each other’s approval.

The Estate Tax Return and Notice of Deficiency

On August 8, 1995, a Form 706, United States Estate (and

Generation-Skipping Transfer) Tax Return, was timely filed for

Mr. Lassiter’s estate. The return indicates that the Item IV

trust was not funded; rather, all assets covered by the trust

provisions of the 1970 will were treated as passing into the Item

V trust. A marital deduction was then claimed under section

2056(b)(7) with respect to property passing into the Item V

trust. Respondent issued a notice of deficiency on August 6,

1998, disallowing this deduction on the grounds that “the

decedent’s surviving spouse does not have a qualifying income

interest for life in the residuary trust established pursuant to

Item V of the Last Will and Testament of the decedent.”

Respondent, however, permitted a marital deduction equal to one-

half of the adjusted gross estate, in accordance with the terms
 - 14 -

set forth in Item IV of Mr. Lassiter’s will. The parties have

further stipulated that the trust created by Item IV qualifies

under section 2056(b)(5) for the marital deduction. Mrs.

Lassiter, as administrator of her husband’s estate, filed a

petition with this Court on November 4, 1998, seeking

redetermination of respondent’s disallowance.

Discussion

I. Contentions of the Parties

Respondent contends that the marital deduction claimed by

the estate is properly disallowed on either of two primary bases.

First, accepting as true statements by family members regarding

their belief that Mr. Lassiter executed a more recent will or

codicil which could not be found, respondent asserts that the

1970 will was revoked by operation of Georgia law. Hence,

according to respondent, Mr. Lassiter died intestate, and trust

provisions contained in the 1970 will cannot serve as grounds for

a marital deduction.

In the alternative, even if the 1970 will is deemed

effective, respondent maintains that the terms of the trust set

forth in Item V preclude Mrs. Lassiter’s interest therein from

constituting qualified terminable interest property (QTIP) as

necessary for the section 2056(b)(7) deduction. Respondent

further avers that the disclaimers executed by the beneficiaries

and trustee fail to cure, among other things, the fact that
 - 15 -

distributions of income are limited by an ascertainable standard,

which is inconsistent with the QTIP requirement that the

surviving spouse be entitled to all income from the trust

property.

Conversely, the estate argues that respondent’s position

regarding revocation of the 1970 will is both procedurally and

substantively misplaced. The estate claims that the issue of

revocation was not pleaded and raised for the first time on

brief, such that its consideration would be prejudicial to the

estate at this stage in the litigation. Moreover, it is the

estate’s position that no evidence exists sufficient to support a

finding of revocation under Georgia law.

Thus treating the 1970 will as valid and controlling, the

estate contends that, after giving effect to the various

disclaimers, a QTIP deduction under section 2056(b)(7) is

appropriate with respect to the property passing to the Item V

trust. The estate avers that the disclaimers and Georgia law

enable the residuary trust to comport with the statutory

requirement that the surviving spouse be entitled to all income,

distributable at least annually. Furthermore, the estate

maintains that case law demands a broad and liberal

interpretation of the marital deduction and, at the very least,

that the disclaimers render the disposition here consistent with
 - 16 -

the statute’s underlying policies and with regulations allegedly

implying that substantial compliance is a proper standard for

evaluating deductibility under section 2056(b)(7).

II. Preliminary Matters

Before turning to the substantive questions raised by the

parties’ contentions, we first address several evidentiary

objections. Respondent objects to certain of the stipulated

facts and exhibits primarily on grounds of relevancy. Respondent

additionally argues that consideration of these items would

conflict with the principle of Greenberg’s Express, Inc. v.

Commissioner, 62 T.C. 324, 327 (1974), that this Court will not

look behind a deficiency notice to examine respondent’s motives

or administrative actions in making the determination. The

estate counters that the materials are relevant and that some

particularly should come in as admissions by respondent under

rules 801(d)(2) and 804(b)(3) of the Federal Rules of Evidence.

Relevance is defined as “evidence having any tendency to

make the existence of any fact that is of consequence to the

determination of the action more probable or less probable than

it would be without the evidence.” Fed. R. Evid. 401. Evidence

meeting this standard is admissible, while irrelevant evidence is

not. See Fed. R. Evid. 402. We conclude that the evidence in

question falls short of this relevancy threshold.
 - 17 -

With the exception of the affidavit by Rufus A. Chambers,

discussed below, all of the disputed items relate either to the

estate’s attempts to obtain a private letter ruling in this

matter or to respondent’s internal communications in preparing

the statutory notice. To the extent that these materials contain

pertinent factual information, such facts are otherwise present

in the record by means of uncontested stipulations and exhibits.

To the extent that the documents contain respondent’s legal

conclusions, they are without a place in our analysis. As we

have previously established, “a trial before the Tax Court is a

proceeding de novo; our determination as to a petitioner’s tax

liability must be based on the merits of the case and not any

previous record developed at the administrative level.”

Greenberg’s Express, Inc. v. Commissioner, supra at 328. In

carrying out this mandate here, we cannot substitute selected

conclusions made by respondent in administrative papers for our

own. We instead must engage in an independent review of the

facts and application of law thereto. The disputed materials

thus are basically superfluous, and we sustain respondent’s

objections.

With respect to the affidavit of Mr. Chambers, the parties

focus their arguments on the standards for admissibility of parol

evidence to aid in construction of a will. The affidavit of Mr.

Chambers, the attorney who drafted the 1970 will, was prepared
 - 18 -

nearly 30 years later in anticipation of litigation. Therein,

Mr. Chambers purports to recall the intentions underlying certain

portions of the testamentary language. Since this case was

submitted fully stipulated under Rule 122, we have had no

opportunity to view the demeanor of this witness, to obtain any

information regarding the basis for and extent of his memory of

conversations with Mr. Lassiter, or to assess his credibility.

In this context, we are unwilling to rely on or give any weight

to Mr. Chambers’ statements. Hence, to engage in a parsing of

the complex area of law relating to parol evidence would be a

moot and futile exercise. We shall sustain respondent’s

objection. To summarize, we shall exclude stipulated paragraphs

12, 13, 14, 15, 25, and 52, and Exhibits 9-P, 10-P, 11-P, 12-P,

13-P, 26-P, 27-P, 28-J, 29-J, and 30-J.

III. Revocation of 1970 Will

Since a determination that the 1970 will has been revoked

would obviate any need to scrutinize its terms and the impact

thereon of the 1995 disclaimers, we begin our substantive

discussion with the issue of its effectiveness. Documents filed

with both this Court and the Probate Court reference a belief on

the part of members of the Lassiter family that a more recent

will or codicil existed but could not be located. For instance,

each of the eight disclaimers recites that “A subsequent will

which bequeaths and devises substantially all of the Decedent’s
 - 19 -

property to Mrs. Ann Lassiter is believed to exist but cannot be

found.” Similarly, the petition to this Court contains the

following:

On several occasions in the two year period prior to
his death, Henry told a number of his friends and
business associates that he had executed a new Will
that would make sure that his estate passed to his wife
and children estate tax free (with the effect of
deferring the estate tax liability until the death of
his wife).

Unfortunately, when Henry died, no such Will could be
found. An exhaustive search was made and yet the most
recent Will that could be located was a 1970 instrument
(“1970 Will”) containing an outdated fifty percent
marital deduction formula trust (“Marital Trust”) and a
residuary trust (“Residuary Trust”).

The significance attached by respondent to these averments

appears to have shifted to some degree throughout the litigation

process. The answer states that respondent “Alleges that the

only will at issue is the Will probated by the court; * * * that

the will probated by the Court is dispositive of the decedent’s

intent for Federal estate tax purposes; and that parol or

extrinsic evidence is inadmissible to alter the terms of the

decedent’s will.” A like pronouncement is made in the

stipulation of facts signed by the parties on November 1, 1999:

“It is Respondent’s assertion that the 1970 Will is the only will

of the decedent and that it had not been revoked prior to his

death and was the only will admitted to probate; Petitioner

maintains that a more recent will or codicil exists but cannot be
 - 20 -

found.” However, the supplemental stipulation of facts which the

parties signed on December 13, 1999, includes the language below:

The 1970 Will was drafted by Rufus A. Chambers, a
member of the Georgia Bar. A true and correct copy of
his affidavit is attached hereto as Exhibit 27-P and is
accepted as his testimony subject to the following
objections. Respondent contends that under Georgia law
the 1970 Will has been revoked * * * . * * * Petitioner
does not consent to consideration of Respondent’s
revocation contention and, in addition to substantive
objections, objects to it on the grounds that it would
constitute a new matter.

From a procedural standpoint, it is well settled that the

Commissioner’s determination may be affirmed for reasons other

than those assigned in the statutory notice of deficiency. See

Estate of Horvath v. Commissioner, 59 T.C. 551, 555 (1973). At

the same time, however, it is equally the general rule of this

Court that issues which are not properly pleaded and which are

raised for the first time on brief will not be considered when to

do so would surprise and prejudice the opposing party. See DiLeo

v. Commissioner, 96 T.C. 858, 891-892 (1991), affd. 959 F.2d 16

(2d Cir. 1992); Markwardt v. Commissioner, 64 T.C. 989, 997

(1975); Estate of Horvath v. Commissioner, supra at 555. Such

prejudice arises when the opposing party would be prevented from

presenting evidence that might have been offered if the issue had

been timely raised. See DiLeo v. Commissioner, supra at 891;

Estate of Horvath v. Commissioner, supra at 555.
 - 21 -

In the instant case, we acknowledge that respondent’s

earlier filings contain statements which would seem to negate any

intent to rely on a revocation theory. Nonetheless, we also note

that it is at least questionable whether there exists the type of

potential for prejudice that should preclude its consideration.

The above-described rule focuses primarily on an inability to

present evidence. Here, however, both parties are apparently

willing to accept that there is no evidence which could be

produced to establish specifics regarding the creation, content,

and disappearance of the alleged instrument. They rather are

primarily arguing about the legal consequences of this absence.

Given these rather unusual circumstances and because, as

explained below, we agree with the estate’s interpretation of the

substantive Georgia law, we find it unnecessary, and decline, to

rest our disposition of this issue on procedural grounds alone.

The interpretation of wills, with respect to determining the

legal rights and interests created thereunder, is governed by

State law. See Helvering v. Stuart, 317 U.S. 154, 161-162

(1942); Morgan v. Commissioner, 309 U.S. 78, 80-81 (1940). The

parties here do not dispute that the relevant body of law is that

of the State of Georgia, and we so proceed.

Ga. Code Ann. section 53-2-72 (1997) reads as follows:

53-2-72. Distinction between express and implied
revocation.

(a) A revocation may be either express or implied.
 - 22 -

(b) An express revocation is effected when the
maker by writing or action annuls the instrument. It
takes effect instantly, independently of the validity
or ultimate fate of the will or other instrument
containing the revocation.

(c) An implied revocation results from the
execution of a subsequent inconsistent will. It takes
effect only when the subsequent inconsistent will
becomes effectual. If, from any cause, the subsequent
inconsistent will fails, the implied revocation is not
completed.

Ga. Code Ann. section 53-2-73(a) (1997) then further provides:

“An express revocation by written instrument shall be executed

with the same formality and attested by the same number of

witnesses as are requisite for the execution of a will.”

Applying these principles to the matter at bar, we first

conclude that no implied revocation has occurred. If Mr.

Lassiter in fact executed a will or codicil merely inconsistent

with the disposition in the 1970 will, but not explicitly

revoking the earlier instrument, such revocation has never been

completed because the later document, having been lost or

destroyed without a trace, never became effectual.

We thus turn to whether the estate’s statements are

sufficient to establish an express revocation under Georgia law,

and we again conclude that they are not. As regards the type of

proof necessary to show express revocation, the Supreme Court of

Georgia explained in Driver v. Sheffield, 85 S.E.2d 766, 767 (Ga.

1955):
 - 23 -

While revocation of a will cannot be established
by proof of parol declarations by the testator, * * * a
clause in a later written instrument, properly executed
by the testator, expressly revoking a former will is
not rendered ineffective merely by the loss or
destruction of the instrument which contains it, and
proof of the revocation clause in a later lost or
destroyed will may be made by parol. Probate of the
former will may be defeated upon proof of the execution
of the later writing by the testator, which contained a
clause revoking the prior will, and the loss or
destruction of the later instrument, without proof of
the rest of the contents of the lost or destroyed
instrument. * * *

The intestate heirs challenging the will in Driver v. Sheffield,

supra at 767, specifically alleged that the later will was

executed in due form and contained a clause revoking any prior

wills. Hence, based on the rule quoted above, the court reversed

an earlier decision which had dismissed the challenge. See id.

The Supreme Court of Georgia then further elucidated the meaning

of this holding by subsequently opining in another alleged

revocation case: “We note that had there been sufficient proof

that the 1981 will was validly executed and had been revoked by

destruction, the 1975 will would not have been revived absent

republication. OCGA § 53-2-73; Driver v. Sheffield, 221 Ga. 316,

85 S.E.2d 766 (1955).” Rawlins v. Hulme, 425 S.E.2d 861, 862 n.1

(Ga. 1993).

These judicial pronouncements convince us that where, as

here, a record is devoid of any evidence going to the existence

of an explicit revocation clause or the elements of proper

execution (i.e., witnesses and other formalities), or even any
 - 24 -

allegations thereof by a person in a position to have knowledge

of the decedent’s actions, the Supreme Court of Georgia would not

find an express revocation to have been effected. Moreover, we

cannot deny the logic of the following remarks by the estate on

brief:

Respondent seeks to inject the mixed contention of fact
and law that the full Marital Deduction Will Henry said
he had was, unbeknownst to the Estate, (i) executed by
Henry, (ii) signed by the required number of witnesses,
(iii) with the requisite formalities, and (iv)
contained a clause revoking the 1970 Will. The great
irony is that Henry’s family and friends searched high
and low for sufficient evidence to prove the existence
and content of the full Marital Deduction Will for
probate purposes. That evidence would have resolved
this entire dispute but it could not be found.
Consequently, both parties are left to cope with the
obsolete 1970 Will.

We therefore proceed on the basis that the 1970 will has not been

revoked under Georgia law.

IV. Qualification for Marital Deduction

We next address whether the interest received by Mrs.

Lassiter under the 1970 will, as modified by the 1995

disclaimers, qualifies for the marital deduction pursuant to

section 2056(b)(7). Section 2056(b)(7) was enacted as part of

the Economic Recovery Tax Act of 1981 (ERTA), Pub. L. 97-34, sec.

403(d)(1), 95 Stat. 172, 302. Prior to 1981, no marital

deduction had been permitted for the type of interest now

sanctioned by this provision. ERTA also effected another

significant change to the marital deduction statute in that it
 - 25 -

repealed former section 2056(c), thus creating a deduction

unlimited in amount. See ERTA sec. 403(a)(1)(A), 95 Stat. 301.

At the time of its repeal, section 2056(c) had limited the

aggregate deduction to the greater of $250,000 or 50 percent of

the value of the adjusted gross estate. At the time the 1970

will was drafted, the limitation contained in section 2056(c) was

simply 50 percent of the adjusted gross estate’s value.

The estate now seeks through the various disclaimers to take

advantage of these changes and to obtain a greater deduction than

would be afforded by placing up to half of Mr. Lassiter’s assets

in the Item IV trust. As a threshold matter, however, the estate

will be unable to do so if bound by the transitional rule in

section 403(e)(3) of ERTA, 95 Stat. 305. Section 403(e)(3) of

ERTA retains the former aggregate amount limitation if four

conditions are met:

(A) the decedent dies after December 31, 1981,

(B) by reason of the death of the decedent property
passes from the decedent or is acquired from the
decedent under a will executed before the date which is
30 days after the date of the enactment of this Act, or
a trust created before such date, which contains a
formula expressly providing that the spouse is to
receive the maximum amount of property qualifying for
the marital deduction allowable by Federal law,

(C) the formula referred to in subparagraph (B) was not
amended to refer specifically to an unlimited marital
deduction at any time after the date which is 30 days
after the date of enactment of this Act, and before the
death of the decedent, and
 - 26 -

(D) the State does not enact a statute applicable to
such estate which construes this type of formula as
referring to the marital deduction allowable by Federal
law as amended by [section 403(a) of ERTA] * * *

The transitional rule thus applies only in circumstances

where there exists “a formula expressly providing that the spouse

is to receive the maximum amount of property qualifying for the

marital deduction allowable by Federal law”. Given this

language, we believe that only a very strained reading of the

term “expressly” could expand its reach to cover a situation

where, as here, the instrument in question does not use the

phrase “maximum marital deduction”. Respondent has cited and our

research has revealed no cases holding that a mere percentage

bequest constitutes a formula within the meaning or intent of

section 403(e)(3) of ERTA. See Estate of Levitt v. Commissioner,

95 T.C. 289 (1990). We decline to do so now and conclude that

the 1970 will is not subject to the transitional rule. We apply

section 2056 as in effect at Mr. Lassiter’s date of death.

This statute provides in relevant part:

SEC. 2056. BEQUESTS, ETC., TO SURVIVING SPOUSE.

(a) Allowance of Marital Deduction.--For purposes
of the tax imposed by section 2001, the value of the
taxable estate shall, except as limited by subsection
(b), be determined by deducting from the value of the
gross estate an amount equal to the value of any
interest in property which passes or has passed from
the decedent to his surviving spouse, but only to the
extent that such interest is included in determining
the value of the gross estate.
 - 27 -

(b) Limitation in the Case of Life Estate or Other
Terminable Interest.--

(1) General rule.--Where, on the lapse of
time, on the occurrence of an event or
contingency, or on the failure of an event or
contingency to occur, an interest passing to the
surviving spouse will terminate or fail, no
deduction shall be allowed under this section with
respect to such interest--

(A) if an interest in such property
passes or has passed (for less than an
adequate and full consideration in money or
money’s worth) from the decedent to any
person other than such surviving spouse (or
the estate of such spouse); and

(B) if by reason of such passing such
person (or his heirs or assigns) may possess
or enjoy any part of such property after such
termination or failure of the interest so
passing to the surviving spouse;

* * * * * * *

(7) Election with respect to life estate for
surviving spouse.--

(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--
 - 28 -

(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 surviving spouse. * * *

(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.
 - 29 -

In other words, section 2056(a) generally allows an unlimited

deduction against estate tax liability for property transferred

to a surviving spouse, but section 2056(b)(1) creates an

exception denying the deduction when the spouse’s interest takes

a form, such as a life estate in trust, which will terminate in

favor of another beneficiary. Section 2056(b)(7) is among

several exceptions to the exception and allows a deduction for

so-called QTIP, qualified terminable interest property.

In the matter before us, the parties do not dispute that an

interest in the Item V trust passed to Mrs. Lassiter from

decedent or that a timely QTIP election was made on the estate

tax return. At issue then is whether such interest constitutes a

qualified income interest for life. Furthermore, since the

estate, appropriately, does not contend that the Item V trust as

originally set forth in the 1970 will qualifies for the marital

deduction, the dispositive issue can be framed more specifically

as whether the 1995 disclaimers render the trust eligible for

QTIP treatment.

Regulations promulgated under section 2056 contemplate that

disclaimed property may be treated as passing to the surviving

spouse within the meaning of the statute. Section 20.2056(d)-

2(b), Estate Tax Regs., provides in this regard:

If an interest in property passes from a decedent to a
person other than the surviving spouse, and the
interest is created in a transfer made after December
31, 1976, and--
 - 30 -

(1) The person other than the surviving
spouse makes a qualified disclaimer with respect
to such interest; and

(2) The surviving spouse is entitled to such
interest in property as a result of such
disclaimer, the disclaimed interest is treated as
passing directly from the decedent to the
surviving spouse. * * *

This Court has similarly reiterated that “a trust that was not

eligible initially for a marital deduction may become eligible if

the persons with interests in the trust that jeopardize the

marital deduction, other than the surviving spouse, effectively

disclaim their interests.” Estate of Bennett v. Commissioner,

100 T.C. 42, 58 (1993).

Nonetheless, such a disclaimer can be “qualified” and

effective for purposes of Federal estate tax law only to the

extent that it satisfies the requirements enumerated in section

2518. See sec. 2046. Section 2518 reads in part as follows:

SEC. 2518. DISCLAIMERS.

(a) General Rule.--For purposes of this subtitle,
if a person makes a qualified disclaimer with respect
to any interest in property, this subtitle shall apply
with respect to such interest as if the interest had
never been transferred to such person.

(b) Qualified Disclaimer Defined.--For purposes of
subsection (a), the term “qualified disclaimer” means
an irrevocable and unqualified refusal by a person to
accept an interest in property but only if--

(1) such refusal is in writing,

(2) such writing is received by the
transferor of the interest, his legal
representative, or the holder of the legal title
 - 31 -

to the property to which the interest relates not
later than the date which is 9 months after the
later of--

(A) the date on which the transfer
creating the interest in such person is made,
or

(B) the day on which such person attains
age 21,

(3) such person has not accepted the interest
or any of its benefits, and

(4) as a result of such refusal, the interest
passes without any direction on the part of the
person making the disclaimer and passes either--

(A) to the spouse of the decedent, or

(B) to a person other than the person
making the disclaimer.

(c) Other Rules.--For purposes of subsection (a)--

(1) Disclaimer of undivided portion of
interest.--A disclaimer with respect to an
undivided portion of an interest which meets the
requirements of the preceding sentence shall be
treated as a qualified disclaimer of such portion
of the interest.

(2) Powers.--A power with respect to property
shall be treated as an interest in such property.

Moreover, in order for the requirement of section 2518(b)(4)

to be met, a disclaimer must also be effective under applicable

State law. See Estate of Bennett v. Commissioner, supra at 67.

Such is demanded by the previously mentioned general rule that

legal rights and interests in property, and transfers thereof,

are created and determined by State law, but the manner in which

these interests are to be taxed is governed by Federal law. See
 - 32 -

Helvering v. Stuart, 317 U.S. at 161-162; Morgan v. Commissioner,

309 U.S. at 80. Hence, the interest must have validly passed

without disclaimant direction under State law before it will be

deemed to have done so for Federal tax purposes. See Estate of

Bennett v. Commissioner, supra at 67. Relevant portions of the

Georgia disclaimer statute are reproduced below:

53-2-115. Renouncement of succession.

(a) Any person to whom an interest in property is
transferred, or who succeeds to an interest in property
by contract or by operation of law, or any fiduciary
acting on behalf of such person is authorized to and
may renounce in whole or in part the succession to any
property or interest therein by filing a written
instrument within the time and at the place provided in
subsection (b) of this Code section. For purposes of
this Code section, the term “interest in property”
includes any powers over or rights with respect to such
property. The instrument shall:

(1) Describe the property or part thereof or
interest therein renounced;

(2) Be signed by the person renouncing or by
a fiduciary acting on behalf of such person; and

(3) Declare the renunciation and the extent
thereof.

* * * * * * *

(c) Unless the decedent or donee of the power has
otherwise indicated by his or her will, the interest
renounced and any future interest which is to take
effect in possession or enjoyment at or after the
termination of the interest renounced shall pass as if
the person renouncing had predeceased the decedent or,
if the person renouncing is one designated to take
pursuant to a power of appointment exercised by a
testamentary instrument, as if the person renouncing
had predeceased the donee of the power. In every case
 - 33 -

the renunciation relates back for all purposes to the date
of death of the decedent or the donee, as the case may be.

* * * * * * *

(h) Nothing in this Code section shall be deemed
to alter the duties or responsibilities of any
fiduciary to act in the best interests of the person or
persons the fiduciary represents. However, nothing
contained in this Code section shall be deemed to limit
the authority granted by this Code section to the
fiduciary to renounce an interest in property. [Ga.
Code Ann. sec. 53-2-115 (1997).]

A. All Income Payable Annually

We now evaluate the factual circumstances before us in light

of the above-quoted statutory mandates. The first requirement

specified for a qualified income interest for life is that the

surviving spouse be entitled to all income from the property,

payable at least annually. See sec. 2056(b)(7)(B)(ii)(I). At

minimum then, no interest can qualify for QTIP treatment if any

person other than the surviving spouse is entitled to income

distributions during the spouse’s lifetime. The Item V trust,

however, provides a mechanism by which the Lassiter children or

their descendants may receive trust income while Mrs. Lassiter is

living. The trustee is authorized to make such distributions for

the children’s support and education. Unless properly

disclaimed, these interests will be fatal to the marital

deduction.
 - 34 -

Each child and potential unborn or unascertained descendant

executed, either personally or through a guardian ad litem, a

disclaimer renouncing “all rights, title, and interest” to income

from the residuary trust during Mrs. Lassiter’s life. The

parties have stipulated that these disclaimers meet the formal

requirements of section 2518 and Ga. Code Ann. section 53-2-115.

Since both section 2518 and Ga. Code Ann. section 53-2-115

explicitly permit disclaimers of partial interests, we further

conclude that neither statute creates any substantive barrier to

the valid renunciation of an income interest in a trust.

Regulations promulgated under section 2518 buttress this

conclusion by explaining:

For example, if an income interest in securities is
bequeathed to A for life, then to B for life, with the
remainder interest in such securities bequeathed to A’s
estate, and if the remaining requirements of section
2518(b) are met, A could make a qualified disclaimer of
either the income interest or the remainder, or an
undivided portion of either interest. * * * [Sec.
25.2518-3(a)(1)(i), Gift Tax Regs.]

In addition, we decline respondent’s invitation to question

the validity of these disclaimers on the grounds that those

executed by the guardian ad litem failed to protect the best

interests of the beneficiaries. The renunciations endeavor to

preserve in excess of $14 million in a trust naming Mr.

Lassiter’s descendants as the ultimate remainder beneficiaries.

Given this potential for future benefit, we are unwilling to find

a violation of fiduciary duties. For similar reasons, we are
 - 35 -

equally unwilling to construe Mrs. Lassiter’s actions in

attempting to obtain the increased deduction as a violation of

her fiduciary duties as administrator and trustee. On the record

before us, we lack any basis upon which to evaluate or second-

guess the Probate Court’s acceptance of the actions by the

fiduciaries.

Hence, we are satisfied that Mr. Lassiter’s descendants

effectively disclaimed their right to receive trust income during

Mrs. Lassiter’s life, and thereby cut off the trustee’s

discretionary power to make such distributions for their support

and education.

Because the Item V trust as written establishes only two

classes of beneficiaries to whom the trustee may distribute

income; i.e., Mr. Lassiter’s wife and his descendants, the

children’s disclaimers leave Mrs. Lassiter as the sole potential

recipient. That alone, however, does not necessarily mean she is

entitled to all income payable at least annually.

The language of the trust instrument which bears upon this

question states that the trustee “shall use such part of the

income and/or principal thereof as it may deem necessary to

provide for the support in reasonable comfort of my wife”. The

document also recites Mr. Lassiter’s desire that the trustee “in

making encroachment for the benefit of my wife to encroach first

on the trust created for my wife in Item IV hereof before
 - 36 -

encroaching on this trust”. Based on these recitations,

respondent maintains that Mrs. Lassiter is not entitled to all

income; rather, she is entitled only to so much of the income as

falls within the ascertainable standard of what is necessary for

her support in reasonable comfort, and any amount in excess

thereof is to be accumulated. Respondent further characterizes

Mrs. Lassiter’s interest in the Item V trust as secondary and

comments that distributions may be made to her only after

considering the income and corpus of the Item IV trust.

Conversely, it is the estate’s position that in absence of

any explicit direction regarding the timing and amount of

distributions or the accumulation of income, both Ga. Code Ann.

section 53-12-190 (1997) and Friedman v. United States, 364 F.

Supp. 484 (S.D. Ga. 1973), establish Mrs. Lassiter’s right to all

income at least annually. The estate also argues that the

reference to encroachment relates only to distributions of

principal and has no impact on Mrs. Lassiter’s right to income.

We deal first with this apparent dispute over the effect of

the encroachment clause. In the context of trust law, the term

“encroach” is commonly used and understood to refer to invasion

of trust corpus or principal. For example, Ga. Code Ann. section

53-12-250 (1997) is entitled “Disposition of income; encroachment

on corpus”. Specifically in the 1970 will, the word is employed

in two other instances, each making explicit the connection
 - 37 -

between encroachment and trust res. As regards the Item IV trust

and the Item V trust shares to be established for the descendants

after Mrs. Lassiter’s death, the trustee is “authorized to

encroach on the corpus of the property” and “authorized to

encroach upon the principal of the share”, respectively. In

contrast, encroach is never the verb used in phrases expressly

addressing payment of income. We thus have no basis for deciding

that an unconventional sense is meant in Item V(b) and conclude

that the instruction is not germane to our discussion of the

surviving spouse’s income rights. Accordingly, we move to

analysis of whether Georgia law affords Mrs. Lassiter the right

to all income at least annually.

The regulations under section 2056(b)(7) which interpret

this requirement provide generally that

The provisions of local law are taken into account in
determining whether the conditions of section
2056(b)(7)(B)(ii)(I) are satisfied. For example,
silence of a trust instrument as to the frequency of
payment is not regarded as a failure to satisfy the
requirement that the income must be payable to the
surviving spouse annually or more frequently unless
applicable local law permits payments less frequently.
[Sec. 20.2056(b)-7(g), Estate Tax Regs.]

The regulations also offer more specific guidance for certain

issues by indicating that the principles of section 20.2056(b)-

5(f), Estate Tax Regs., apply in determining whether the

surviving spouse is entitled to all income. See sec. 20.2056(b)-

7(d)(2), Estate Tax Regs. Among the principles so referenced is
 - 38 -

the one set forth in section 20.2056(b)-5(f)(7), Estate Tax

Regs.: “An interest passing in trust fails to satisfy the

condition * * * , that the spouse be entitled to all the income,

to the extent that the income is required to be accumulated in

whole or in part or may be accumulated in the discretion of any

person other than the surviving spouse”. We therefore must

decide, in light of State law, whether the Item V trust, as

affected by the disclaimers, authorizes accumulation or requires

full annual distribution.

Ga. Code Ann. section 53-12-190, upon which the estate

relies, provides in relevant part:

53-12-190. Trustee Duties.

(a) The duties contained in this chapter are
applicable except as otherwise provided in the trust
instrument, and are in addition to and not in
limitation of the common law duties of the trustee,
except to the extent inconsistent therewith.

* * * * * * *

(c) The trustee shall distribute all net income
derived from the trust at least annually.

Our inquiry thus becomes whether the 1970 will “otherwise

provide[s]” within the meaning of the statute. Unfortunately,

research has revealed no opinions from courts located within the

State of Georgia which address subsection (c) of Ga. Code Ann.

section 53-12-190 and its relationship to subsection (a).

However, this statute is the successor to Ga. Code Ann. sections

108-445 and 108-446 (Code 1933), which were construed by the U.S.
 - 39 -

District Court for the Southern District of Georgia in Friedman

v. United States, supra. These predecessor laws read:

Where the trust instrument is silent as to the
time of distribution of income and the frequency
thereof, all trustees of all trusts subject to the laws
of this State, whether heretofore or hereafter
established, shall distribute all net income derived
from the property comprising such trust at least
annually, on a calendar or fiscal year basis. [Ga.
Code Ann. sec. 108-445.]

In the case of any trust now in existence or
hereafter created where the trust instrument expressly
directs or permits net income to be distributed less
frequently than annually, the express provisions of
such instrument shall govern the time and manner of
making distributions of income. [Ga. Code Ann. sec.
108-446.]

The trust at issue in Friedman v. United States, supra at

484-485, instructed the trustees:

To pay to my wife, SOPHIE M. BODZINER, such part of the
net income as the Trustees may deem necessary to
provide for the proper support, comfort and happiness
of my wife. Said Trustees shall be authorized to
encroach upon the corpus of the trust estate at any
time and from time to time in such amounts as they may
deem necessary, taking into consideration the income of
my wife’s separate estate, to provide for the proper
support and comfort of my wife.

The question before the court was whether this trust satisfied

the all income payable annually requirement of section

2056(b)(5), which parallels that set forth in section 2056(b)(7).

See id. at 486. The court queried whether the trust qualified

for the marital deduction “where by its terms the entire income

from the trust property does not have to be paid annually to the

surviving spouse but only such part thereof as the trustees deem
 - 40 -

necessary to provide for her ‘support, comfort and happiness’”.

Id. at 485. The Commissioner, as here, argued that the amount of

income to which the surviving spouse was entitled was limited and

that accumulation was permitted. See id. at 486.

The District Court analyzed the language of the trust

instrument in light of the Georgia statutory law and concluded:

since the trust instrument is “silent” as to time of
income distribution, I must perforce read Item XXIV to
mean that “the trustees shall pay to my wife all the
net income derived from the trust property at least
annually”.7 I cannot agree with an interpretation of §
108-446 that would make § 108-445 inoperative here on
the theory that the language of the Bodziner trust
amounts to express permission to the trustees to
distribute net income on a less frequent basis than
annually.

* * * The intent of the Act of 1960 (Ga. Code §§ 108-
445, 446) was to make discretionary income trusts that
are silent as to frequency of payment eligible for the
marital deduction. The requirement of the statute that
under such a trust all net income must be paid by the
trustees at least annually must be read into the
Bodziner trust, delimiting any fiduciary discretion in
such respect.

_____________
7
The Act of 1960 does not mean that discretionary income
trusts have seen their day in Georgia. Silence of the instrument
as to time and frequency of distribution has become a limitation
rather than a grant of fiduciary authority. Such a trust will
qualify for the marital deduction. So the Legislature reasonably
conceived. If the testator does not want it that way, he can
recite that it is his express wish that distribution of net income
may be on a less frequent than annual basis in the trustee’s
discretion. * * *
[Id. at 489 & n.7.]

Although we acknowledge that opinions of a U.S. District Court do

not constitute binding precedent in this Court, we find it

appropriate to give proper regard and weight to interpretations
 - 41 -

of State law by local tribunals. See Commissioner v. Estate of

Bosch, 387 U.S. 456, 465 (1967); Propper v. Clark, 337 U.S. 472,

486-487 (1949); Helvering v. Stuart, 317 U.S. at 162-163.

Friedman v. United States, 364 F. Supp. 484 (1973), reflects

that the statutes from which Ga. Code Ann. section 53-12-190

sprang were enacted for the purpose of establishing a default

rule by which spousal trusts were able to qualify for the marital

deduction absent an unmistakable expression of intent to the

contrary. At the same time, no evidence suggests that the

Georgia legislature has since sought to weaken this rule and

thereby make it easier for a trust to fall short of deductible

status. The above-quoted sections addressed in Friedman v.

United States, supra, were subsequently recodified verbatim in

all material respects as subsections (b) and (c) of Ga. Code Ann.

section 53-13-53 (Code 1981). The provisions existed in such

form until the comprehensive revision and complete recodification

of Georgia trust law which took effect on July 1, 1991, and which

enacted Ga. Code Ann. section 53-12-190. An article explaining

the new act by the individual who served as Reporter to the Trust

Law Revision Committee which drafted the measure indicates that

no substantive change was intended. See Emanuel, “The Georgia

Trust Act”, 28 Ga. St. B.J. 95, 97 (1991). Citing former Ga.

Code Ann. section 53-13-53, the article states: “The Act

* * * carries forward the Georgia statute directing the trustee
 - 42 -

to distribute net income at least annually in O.C.G.A. § 53-12-

190(c).” Id. at 97 & n.40. In contrast, the article highlights

and expounds upon alterations in prior law. See id.

Here then is the situation with which we are faced in

deciding whether Georgia courts would require annual distribution

on the facts before us. In terms of the legal context, we are

presented with a State statute that, in connection with its

interpretive history, clearly demonstrates a bias on the part of

Georgia lawmakers toward enabling trusts to qualify for the

marital deduction. Moreover, from a practical standpoint, we

address a situation where any accumulation of income by the

trustee under an ascertainable standard theory would be

pointless.

The descendants have disclaimed their right to all income

earned by the trust during Mrs. Lassiter’s lifetime. Under the

State disclaimer law, they are deemed to have predeceased Mrs.

Lassiter as to these sums. The amounts thus can neither be

distributed to them while Mrs. Lassiter is living nor be added to

the remainder interest they will take after her death. The

surviving spouse, or her estate, is the only possible beneficiary

of this income. The disclaimers have therefore rendered

meaningless any discretion on the part of the trustee to

accumulate income.

On balance, we believe that where a standard for
 - 43 -

distribution has so been vitiated of any potential for protecting

the interests of any other beneficiary, a Georgia court would

deem the subject trust instrument to have been rendered silent as

to timing and frequency of payment, such that the default rule of

Ga. Code Ann. section 53-12-190(c) would require not less than

annual payment of all income to the surviving spouse. We so

conclude here.

Furthermore, we are equally satisfied that administrative

powers granted to the trustee by the 1970 will do not

impermissibly negate Mrs. Lassiter’s income rights for purposes

of the section 2056 deduction. Although the terms of the will

authorize the trustee discretionally: (1) To apportion or

allocate receipts and payments among principal and income, and

(2) to hold unproductive property, regulations provide that

neither of these powers is fatal to the marital deduction in

circumstances such as those now before the Court.

Section 20.2056(b)-5(f)(4), Estate Tax Regs., contains the

following:

Provisions granting administrative powers to the
trustee will not have the effect of disqualifying an
interest passing in trust unless the grant of powers
evidences the intention to deprive the surviving spouse
of the beneficial enjoyment required by the statute.
Such an intention will not be considered to exist if
the entire terms of the instrument are such that the
local courts will impose reasonable limitations upon
the exercise of the powers. Among the powers which if
subject to reasonable limitations will not disqualify
the interest passing in trust are the power to
determine the allocation or apportionment of receipts
 - 44 -

and disbursements between income and corpus, the power
to apply the income or corpus for the benefit of the
spouse, and the power to retain the assets passing to
the trust. For example, a power to retain trust assets
which consist substantially of unproductive property
will not disqualify the interest if the applicable
rules for the administration of the trust require, or
permit the spouse to require, that the trustee either
make the property productive or convert it within a
reasonable time. Nor will such a power disqualify the
interest if the applicable rules for administration of
the trust require the trustee to use the degree of
judgment and care in the exercise of the power which a
prudent man would use if he were owner of the trust
assets. * * *

Georgia law then supplies the requisite limitations. The

Comment to Ga. Code Ann. section 53-12-190 indicates that

subsection (a) imposes the necessary duty of care and diligence:

Pursuant to subsection (a), a trustee is subject
to the duties the common law imposes on trustees, as
well as the duties expressly set forth in the Act. The
Committee deemed it unnecessary to catalog the duties
of a trustee because the common law has developed them
with admirable clarity. * * *

The common law duties referred to are set forth in
detail in the Restatement, Trusts, Second, §§ 169-185.
These duties, and the duties set forth in the Act, may
be varied by the trust instrument, see § 53-12-5,
supra, except as otherwise provided by law, see, e.g.,
§ 53-12-194 (a), infra, and unless the provision in the
trust instrument is violative of public policy. * * *
The duty of ordinary diligence, formerly codified at
OCGA § 53-13-51 and defined as “that degree of care
which is exercised by ordinarily prudent persons under
the same or similar circumstances” in OCGA § 51-1-2, is
now encompassed by § 53-12-190 (a). * * *

Included amongst the referenced common-law materials is 1

Restatement, Trusts 2d, section 174 (1959), which reads: “The

trustee is under a duty to the beneficiary in administering the
 - 45 -

trust to exercise such care and skill as a man of ordinary

prudence would exercise in dealing with his own property”. In

addition, Ga. Code Ann. section 53-12-194(a) (1997) provides that

“No provision in a trust instrument is effective to relieve the

trustee of liability for breach of trust committed in bad faith

or intentionally or with reckless indifference to the interest of

the beneficiary”.

Based on these pronouncements, we believe that Georgia

courts would limit the trustee’s administrative powers to a

sufficient extent to prevent their jeopardizing the income

beneficiary’s interest. See also Rev. Rul. 69-56, 1969-1 C.B.

224; Rev. Rul. 66-39, 1966-1 C.B. 223 (each sanctioning similar

grants of trustee authority in a marital deduction context). We

also note that the above-described powers are set forth in Item

XII of the 1970 will and are applicable to “every trust” created

by the will. Accordingly, the trust terms grant to the trustee

such powers in managing both the Item IV and the Item V trusts.

Yet respondent has stipulated that the Item IV trust qualifies

for the marital deduction under section 2056(b)(5), which statute

contains an identical all income payable annually element.

Respondent has not, however, offered any evidence that the State

courts would impose reasonable limitations in the one context and
 - 46 -

not the other. We conclude that Georgia law enables the Item V

trust to satisfy the requirement of section 2056(b)(7)(B)(ii)(I).

B. No Power To Appoint

We turn next to the requirement of section

2056(b)(7)(B)(ii)(II) that no person have a power to appoint

trust property to any person other than the surviving spouse. In

addition to the specific references to income addressed in the

preceding discussion, several provisions of the Item V trust can

be construed generally as granting a power to appoint trust

property. Three such powers may be exercised and given effect

during Mrs. Lassiter’s life: (1) The trustee may use principal

for the support in reasonable comfort of the surviving spouse;

(2) the trustee may use principal for the support and education

of Mr. Lassiter’s children; and (3) Mrs. Lassiter may direct the

trustee at any time to turn trust property over to Mr. Lassiter’s

descendants or their spouses. The exercise of a fourth power,

Mrs. Lassiter’s testamentary power of appointment, would be given

effect at her death.

With respect to the trustee’s power to distribute to Mrs.

Lassiter, regulations again provide specifically that such a

power is not inconsistent with the marital deduction:

An income interest in a trust will not fail to
constitute a qualifying income interest for life solely
because the trustee has a power to distribute principal
to or for the benefit of the surviving spouse. The
fact that property distributed to a surviving spouse
may be transferred by the spouse to another person does
 - 47 -

not result in a failure to satisfy the requirement of
section 2056(b)(7)(B)(ii)(II). * * * [Sec. 20.2056(b)-
7(d)(6), Estate Tax Regs.]

Hence, the estate’s deduction will not be disallowed on the basis

of this power.

Concerning the trustee’s power to use principal for the

support and education of the Lassiter children, we find that the

descendants effectively disclaimed any right to receive under

this power. Their situation parallels that recognized for

marital deduction purposes in section 20.2056(b)-7(h), Example

(4), Estate Tax Regs:

Example 4. Power to distribute trust corpus to other
beneficiaries. D’s will established a trust providing
that S is entitled to receive at least annually all the
trust income. The trustee is given the power to use
annually during S’s lifetime $5,000 from the trust for
the maintenance and support of S’s minor child, C. Any
such distribution does not necessarily relieve S of S’s
obligation to support and maintain C. S does not have
a qualifying income interest for life in any portion of
the trust because the bequest fails to satisfy the
condition that no person have a power, other than a
power the exercise of which takes effect only at or
after S’s death, to appoint any part of the property to
any person other than S. The trust would also be
nondeductible under section 2056(b)(7) if S, rather
than the trustee, held the power to appoint a portion
of the principal to C. However, in the latter case, if
S made a qualified disclaimer (within the meaning of
section 2518) of the power to appoint to C, the trust
could qualify for the marital deduction pursuant to
section 2056(b)(7), assuming that the power is personal
to S and S’s disclaimer terminates the power.
Similarly, in either case, if C made a qualified
disclaimer of C’s right to receive distributions from
the trust, the trust would qualify under section
2056(b)(7), assuming that C’s disclaimer effectively
negates the trustee’s power under local law.
 - 48 -

Since Ga. Code Ann. section 53-2-115 broadly permits

beneficiaries to disclaim “any powers over or rights with respect

to such property”, we see no grounds for questioning the efficacy

under State law of the descendants’ disclaimers of rights to

corpus. Thus, for reasons analogous to those explained above in

connection with the children’s right to receive income, we

conclude that the disclaimers likewise extinguished the trustee’s

authority to distribute principal.

As regards Mrs. Lassiter’s inter vivos power of appointment,

authority of this type is declared by regulation to be

incompatible with the definition of a qualifying income interest

for life: “For purposes of section 2056(b)(7)(B)(ii)(II), the

surviving spouse is included within the prohibited class of

powerholders referred to therein.” Sec. 20.2056(b)-7(d)(1),

Estate Tax Regs. Consequently, this power must be negated by the

1995 disclaimers in order for the Item V trust to be eligible for

QTIP treatment.

With respect to the adult, minor, and unborn or

unascertained descendants by or on whose behalf disclaimers were

executed, the previously quoted Example (4) of section

20.2056(b)-7(h), Estate Tax Regs., supports the conclusion that

their renunciations were equally sufficient to extinguish their

right to receive under Mrs. Lassiter’s inter vivos power. The

same would be true for Mr. Smith, Cathy’s spouse. However, the
 - 49 -

record contains no disclaimers which reference Mrs. Lassiter’s

power to appoint to other, yet undetermined, spouses of

descendants.

Under one potential interpretation of the Georgia disclaimer

statute, no further renunciation would be necessary to eliminate

Mrs. Lassiter’s power to distribute to such contingent spouses.

Ga. Code Ann. section 53-2-115(c) specifies that disclaimed

interests pass as if the person renouncing had predeceased the

decedent. Accordingly, if all descendants are deemed to have

died before Mr. Lassiter with respect to the inter vivos power,

logic would appear to demand closure at his death of the class of

possible spousal appointees.

Nonetheless, we find it unnecessary to rely solely on this

interpretation of State law in that we conclude Mrs. Lassiter’s

disclaimer of her inter vivos power, in her individual capacity,

was effective and thereby terminated the interests of all

potential appointees. The parties disagree as to whether Mrs.

Lassiter’s retention of a testamentary power of appointment over

the trust invalidated her disclaimer of the inter vivos power.

We decide, primarily on the basis of section 25.2518-2(e)(2),

Gift Tax Regs., that it did not.
 - 50 -

Paragraph (e) of section 25.2518-2, Gift Tax Regs., is

entitled “Passage without direction by the disclaimant of

beneficial enjoyment of disclaimed interest”, and it reads in

pertinent part as follows:

(1) In general. A disclaimer is not a qualified
disclaimer unless the disclaimed interest passes
without any direction on the part of the disclaimant to
a person other than the disclaimant (except as provided
in paragraph (e)(2) of this section). * * *

If a power of appointment is disclaimed, the
requirements of this paragraph (e)(1) are satisfied so
long as there is no direction on the part of the
disclaimant with respect to the transfer of the
interest subject to the power or with respect to the
transfer of the power to another person. A person may
make a qualified disclaimer of a beneficial interest in
property even if after such disclaimer the disclaimant
has a fiduciary power to distribute to designated
beneficiaries, but only if the power is subject to an
ascertainable standard. * * *

(2) Disclaimer by surviving spouse. In the case of a
disclaimer made by a decedent’s surviving spouse with
respect to property transferred by the decedent, the
disclaimer satisfies the requirements of this paragraph
(e)(2) if the interest passes as a result of the
disclaimer without direction on the part of the
surviving spouse either to the surviving spouse or to
another person. If the surviving spouse, however,
retains the right to direct the beneficial enjoyment of
the disclaimed property in a transfer that is not
subject to Federal estate and gift tax (whether as
trustee or otherwise), such spouse will be treated as
directing the beneficial enjoyment of the disclaimed
property, unless such power is limited by an
ascertainable standard. * * *

Given the structure of the foregoing regulation, we believe

that subparagraph (1) sets forth the general principle and

subparagraph (2) establishes a more specific rule applicable only
 - 51 -

to a surviving spouse’s disclaimer. Accordingly, while

renunciation of an inter vivos power of appointment but retention

of a testamentary power would not, in general, result in a

qualified disclaimer, see sec. 25.2518-3(d), Example (9), Gift

Tax Regs., a surviving spouse is not so constrained. So long as

the spouse’s retained power cannot be exercised in a nontaxable

context, the disclaimer is effective for tax purposes.

Section 2044, in turn, expressly provides that the value of

any property for which a deduction was taken under section

2056(b)(7) is included in the surviving spouse’s gross estate.

Consequently, a surviving spouse cannot, by means of a

testamentary power of appointment over a QTIP trust, direct

beneficial enjoyment of the trust property in a transfer that

will not be subject to Federal estate tax. We therefore conclude

that retention of such a testamentary power does not cause the

disclaimer of an inter vivos power to fail to satisfy the section

2518 requirement when a QTIP deduction will be taken for the

trust to which the powers relate.

Moreover, we note that the foregoing construction harmonizes

with section 2056, which explicitly permits a surviving spouse to

hold a testamentary power of appointment over a QTIP trust.

Since regulations contemplate and case law affirms that

disclaimers may be used to enable otherwise ineligible interests

to qualify for the marital deduction, see Estate of Bennett v.
 - 52 -

Commissioner, 100 T.C. at 58; sec. 20.2056(d)-2(b), Estate Tax

Regs., we decline to adopt a rule whereby a spouse attempting to

do so is forced to renounce rights allowed by the very terms of

the deduction statute.

Here, of the two elements required to establish a qualifying

income interest for life and consequent eligibility for the QTIP

deduction, we decided above that the first had been met. We then

concluded that all interests affecting the second, with the

possible exception of Mrs. Lassiter’s inter vivos power to

appoint to descendants’ future spouses, had been properly

disclaimed. Because this power is personal to Mr. Lassiter’s

wife, and because we again have no reason to question its

effectiveness under Georgia law, we observe that a qualified

disclaimer thereof would parallel the situation approved for QTIP

purposes in section 20.2056(b)-7(h), Example (4), Estate Tax

Regs. Thus, the effect of our accepting Mrs. Lassiter’s

disclaimer of her inter vivos power would be to render the Item V

trust a deductible interest under section 2056(b)(7). Such

deduction, in turn, would cause the property to be subject to

Federal estate tax in Mrs. Lassiter’s estate. We therefore hold

that Mrs. Lassiter made a qualified disclaimer of her inter vivos

power over the Item V trust. Her ability to appoint trust

property during her life has been extinguished. As a result,

there remain no powers over the Item V trust of the type
 - 53 -

proscribed by section 2056(b)(7)(B)(ii)(II). Mrs. Lassiter’s

interest therein thus constitutes a qualifying income interest

for life, and the estate is entitled to a deduction pursuant to

section 2056(b)(7).

We conclude with a few brief comments on several of the

additional arguments raised by the parties. First, both

respondent and the estate advocate positions regarding the

validity of the disclaimer executed by Mrs. Lassiter in her

capacity as trustee. Because impermissible interests in the Item

V trust were effectively disclaimed by other renunciations, and

because Georgia law eliminates potentially suspect accumulation

or administrative powers in these circumstances, the trustee

disclaimer is unnecessary for qualification. To address its

validity would be moot. Due to possible broader implications,

however, we do say a few words about respondent’s general

statement that, in interpreting the 1970 will, we must disregard

all of Mrs. Lassiter’s actions as trustee, apparently on the

grounds that her appointment fails to comply with the terms of

Item X of the will. Respondent seems to maintain that Item X

limits the permissible trustee to a corporate entity. We

disagree.

While the will may limit beneficiaries to appointment of a

corporate trustee when they choose to exercise their right to

remove and replace an acting trustee, the document specifies no
 - 54 -

procedures or requirements to be observed in the event of refusal

by the initial named trustee to accept the trust. In contrast,

Ga. Code Ann. section 53-12-6 (1997) mandates that “A trust shall

never fail for the want of a trustee.” Longstanding judicial

precedent then provides that the State courts are empowered to

appoint a trustee, see Prince v. Barrow, 48 S.E. 412, 418 (Ga.

1904), and Ga. Code Ann. section 53-12-170(c) (1997) permits the

courts to do so on the petition of an interested person. Since

the will here does not purport to restrict judicial authority,

and in fact seems to recognize that such exists with the

statement regarding “Any successor Executor or Trustee appointed

as herein provided, or appointed according to law”, we see no

reason to question the actions of the Probate Court in appointing

Mrs. Lassiter as trustee.

Second, because testator intent is referenced by both

parties in a variety of contexts, we mention its role in this

litigation. On one hand, it is axiomatic that construction of a

will is to be based on the intent of the testator as can be

ascertained therein. See Ga. Code Ann. sec. 53-2-91 (1997). It

is equally clear in the case at bar that Mr. Lassiter did not

contemplate the qualification of the Item V trust for a QTIP

election, since section 2056(b)(7), which created the election,

had not yet been enacted. On the other hand, however,

disclaimers, which by their very nature operate to modify a
 - 55 -

testamentary plan, are recognized under both Federal and State

law. Where, as here, a party seeks to achieve a result

uncontemplated by the testator by means of such renunciations,

original intent becomes largely irrelevant. What Mr. Lassiter

may have envisioned has little relation to, and offers us minimal

assistance in deciding, what interests were ultimately received

through operation of the disclaimers and State law.

Third, we observe that cases such as Estate of Bennett v.

Commissioner, 100 T.C. 42 (1993), and Estate of Nicholson v.

Commissioner, 94 T.C. 666 (1990), cited by respondent for the

proposition that lower State court actions do not control Federal

tax consequences, do not authorize us to ignore the long-accepted

device of beneficiary disclaimers, which we independently have

determined to be valid under State and Federal law.

Lastly, because we have found Mrs. Lassiter’s interest to

fall within the terms of section 2056(b)(7), we need not reach

the extent to which policy considerations and substantial

compliance theories would justify a deduction for interests not

meeting the statutory requisites.

To reflect the foregoing,

Decision will be entered

for petitioner.