118 T.C. No. 16
UNITED STATES TAX COURT
ESTATE OF ALDO H. FONTANA, DECEASED, RICHARD A. FONTANA AND JOAN
F. REBOTARRO, CO-EXECUTORS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6635-00. Filed March 28, 2002.
A and D, husband and wife, owned all of L’s stock as
community property. D predeceased A, leaving 44.069 percent of
L’s stock to a trust over which A had a testamentary general
power of appointment. A also owned 50 percent of L’s stock
outright.
Held: For Federal estate tax valuation purposes, the stock
subject to A’s general power of appointment must be aggregated
with stock A owned outright.
Owen G. Fiore, John F. Ramsbacher, and Erin M. Wilms, for
petitioner.
G. Michelle Ferreira, for respondent.
- 2 -
OPINION
FOLEY, Judge: By notice dated March 15, 2000, respondent
determined an $830,720 Federal estate tax deficiency. The issue
for determination is whether, for valuation purposes, stock owned
outright by Aldo H. Fontana must be aggregated with stock over
which he possessed a general power of appointment (GPA),
exercisable only in his will (testamentary GPA).
Background
Aldo and Doris F. Fontana, husband and wife, had two
children, Richard A. Fontana and Joan F. Rebotarro. Prior to
Doris’s death on April 18, 1993, Aldo and Doris owned, as
community property, all of the outstanding voting and nonvoting
common shares of Fontana Ledyard Co., Inc. (Ledyard). Pursuant
to Doris’s will, the residue of her estate was divided into two
trusts, Trust A and Trust B. Aldo was trustee of both trusts.
Trust A and Trust B held 2,834 and 381 voting, and 18,090 and
2,435 nonvoting, shares of Ledyard, respectively. During his
lifetime, Aldo received, from both trusts, all income and such
principal as was necessary for his proper support, care,
maintenance, and education. During his lifetime, Aldo had no
power to control distribution of the trusts’ assets, other than
as a fiduciary. Aldo had a testamentary GPA over the assets held
by Trust A, and as a result Doris’s estate received a marital
- 3 -
deduction pursuant to section 2056(b)(5).1 The testamentary GPA
gave Aldo the authority to direct the disposition of Trust A’s
principal and any undistributed income to “one or more persons
and entities, including his own estate, * * * either outright or
in trust”.
On January 11, 1996, Aldo died testate. At his death, Aldo
owned outright 50 percent, and Trust A held 44.069 percent, of
Ledyard stock. Pursuant to his testamentary GPA, Aldo divided
the assets of Trust A into two separate trusts created for the
benefit of Richard and Joan, respectively. In addition, the
Trust B property was transferred, pursuant to Doris’s will, to
two separate trusts created for the benefit of Richard and Joan.
The residue of Aldo’s estate, which included the Ledyard stock he
owned outright, also passed to similar, separate trusts created
for the benefit of Richard and Joan.
The estate filed a Form 706, United States Estate (and
Generation-Skipping Transfer) Tax Return, on April 1, 1997, and a
Supplemental Form 706 on May 20, 1997. The estate reported that
the 50-percent block of Ledyard stock Aldo owned outright and the
44.069-percent block of stock held by Trust A were includable in
Aldo’s gross estate, pursuant to sections 2033 and 2041,
respectively. The estate valued each block separately.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
- 4 -
Respondent determined that the 50- and 44.069-percent blocks of
stock should be valued as a 94.069-percent block. A 94.069-
percent block had a date-of-death value of $4,850,000. If not
aggregated, however, the 50- and 44.069-percent blocks of Ledyard
stock had date-of-death values of $2,043,500 and $1,747,500,
respectively.
The parties submitted this case fully stipulated pursuant to
Rule 122. When the petition was filed, Richard was a resident of
Santa Cruz, California, and Joan was a resident of Millbrae,
California. Aldo died a resident of Burlingame, California.
Discussion
The value of property includable in a decedent’s gross
estate is generally the fair market value of such property on the
decedent’s date of death. Sec. 2031(a); sec. 20.2031-1(b),
Estate Tax Regs. For transfer tax purposes, the fair market
value is “the price at which the property would change hands
between a willing buyer and a willing seller, neither being under
any compulsion to buy or to sell and both having reasonable
knowledge of relevant facts.” Sec. 20.2031-1(b), Estate Tax
Regs.
Respondent contends that Aldo’s testamentary GPA is
essentially equivalent to outright ownership, and, as a result,
the Ledyard stock held by Trust A should be aggregated, for
valuation purposes, with the stock Aldo owned outright. The
- 5 -
estate contends that the blocks of stock should not be
aggregated.
1. Estate of Mellinger
The estate’s primary contention is that we should extend our
holding in Estate of Mellinger v. Commissioner, 112 T.C. 26
(1999), to prevent aggregation of stock owned outright by the
decedent with stock subject to a testamentary GPA. In Estate of
Mellinger, Frederick Mellinger’s will created a qualified
terminable interest property (QTIP)2 trust for the benefit of his
wife, Harriett. Id. at 27. The QTIP trust contained Frederick’s
interest in Frederick’s of Hollywood stock that he and Harriett
had owned, as community property. Id. Upon Harriett’s death,
respondent sought to aggregate, for valuation purposes, the stock
she owned outright with the stock held by the QTIP trust. Id.
We concluded that, for valuation purposes, stock held by a QTIP
trust would not be aggregated with stock owned outright by
Harriett. Id. at 38; accord Estate of Bonner v. United States,
84 F.3d 196, 198 (5th Cir. 1996).
a. Qualified Terminable Interest Property
The marital deduction is generally not allowed for a
property interest passing to a surviving spouse if on lapse of
time, or occurrence or failure of an event or contingency, such
2
QTIP is, pursuant to sec. 2056(b)(7)(B)(i), property “(I)
which passes from the decedent, (II) in which the surviving
spouse has a qualifying income interest for life, and (III) to
which an election under this paragraph applies.”
- 6 -
interest will terminate or fail (terminable interest rule). Sec.
2056(b)(1). Section 2056(b)(7) provides an exception to this
general rule and allows a marital deduction for QTIP even though
the surviving spouse receives only an income interest and has no
control over the ultimate disposition of the property.
The value of QTIP is included in a surviving spouse’s estate
pursuant to section 2044(a). In the legislative history
accompanying the enactment of sections 2044 and 2056(b)(7), the
House Ways and Means Committee noted that prior to the enactment
of sections 2044 and 2056(b)(7) “the marital deduction [was]
available only with respect to property passing outright to the
spouse or in specified forms which [gave] the spouse control over
the transferred property”. H. Rept. 97-201 at 159-160 (1981),
1981-2 C.B. 352, 377. The House Ways and Means Committee
concluded that “a deduction should be permitted for certain
terminable interests”, but “property subject to terminable
interests qualifying for the marital deduction should be taxable
* * * upon the death of the second spouse”. H. Rept. 97-201,
supra, 1981-2 C.B. at 378. Thus, pursuant to section 2044(c),
property subject to a section 2056(b)(7) election “shall be
treated as property passing from the decedent” (emphasis added),
despite the fact that the surviving spouse does not control the
ultimate disposition of the property.
- 7 -
b. General Power of Appointment Trusts
Property in which a surviving spouse has a life interest may
also qualify for an exception to the terminable interest rule,
and, thus, for the marital deduction, if pursuant to section
2056(b)(5), the surviving spouse has a GPA relating to such
property. Sec. 2056(b)(5). Section 2041(a) generally requires
that the value of all property over which the decedent at death
possesses a GPA be included in a decedent’s estate.
Historically, a GPA has been equated with outright ownership
of the property because the powerholder (i.e., the decedent) can
appoint the property to his estate and, thus, dispose of it as
his or her own property. Graves v. Schmidlapp, 315 U.S. 657, 659
(1942) (stating “For purposes of estate * * * taxation the power
to dispose of property at death is the equivalent of ownership”);
Peterson Marital Trust v. Commissioner, 78 F.3d 795 (2d Cir.
1996) (stating “For tax purposes, a general power of appointment
has for many, many years been viewed as essentially identical to
outright ownership of the property”), affg. 102 T.C. 790 (1994).
In fact, the legislative history to section 402(e) of the Revenue
Act of 1918, ch. 18, 40 Stat. 1097, the predecessor to section
2041, states:
A person having a general power of appointment is, with
respect to disposition of the property at his death, in
a position not unlike that of its owner. The possessor
of the power has full authority to dispose of the
property at his death, and there seems to be no reason
why the privilege which he exercises should not be
- 8 -
taxed in the same degree as other property over which
he exercises the same authority. * * * [H. Rept. 767,
65th Cong. 2d Sess. 41-42 (1918), 1939-1 C.B. (Part 2)
86, 101.]
In Estate of Mellinger v. Commissioner, supra at 35-36, we
reasoned that although section 2044 required that property held
by the QTIP trust be included in Harriett’s (i.e., the surviving
spouse’s) gross estate, the property “[did] not actually pass to
or from” her, and that she “at no time” possessed “control” or
had “any power of disposition over” the property. Unlike
Harriett, who could not control the ultimate disposition of the
property held by the QTIP trust, Aldo possessed a testamentary
GPA, which allowed him to control the ultimate disposition of the
stock. Thus, pursuant to the GPA, Aldo, at the moment of death
(i.e., the critical moment for estate tax valuation purposes),
had control and power of disposition over the property.
Accordingly, the Ledyard stock subject to Aldo’s testamentary GPA
must be aggregated with Ledyard stock Aldo owned outright.
2. Family Attribution Rules
The estate further contends that aggregation is
inappropriate because the Ledyard stock held by Trust A should
not be attributed to Aldo. The estate, relying primarily on
Propstra v. United States, 680 F.2d 1248 (9th Cir. 1982), Estate
of Bright v. United States, 658 F.2d 999 (5th Cir. 1981), and
Estate of Bonner v. United States, supra, and sections 267, 318,
- 9 -
and 544, contends that “unity of ownership” principles should not
be applied without a clear directive from Congress.
The estate’s reliance on those cases and statutes is
misplaced because they address situations in which property owned
by one person, or entity, is to be attributed to another. In
contrast, Aldo, at the moment of death, had the power to appoint
the stock held by Trust A, just as he had the power to determine
who would receive the stock he owned outright. In Propstra, Mr.
Propstra’s estate included an undivided 1/2 interest in real
estate parcels owned, as community property, by Mr. Propstra and
his wife. Propstra v. United States, supra at 1250. The court
concluded that it was not reasonable to assume Mr. Propstra’s
estate and Mr. Propstra’s spouse would sell their respective
community property interests together to maximize their
respective economic returns. Id. at 1251-1252. Under such
circumstances, the courts, absent statutory authority, have
consistently rejected respondent’s attempts to aggregate stock
interests held by family members. Id. at 1252; see also Estate
of Bright v. United States, supra. We, however, are not
confronted with two individuals acting independently and having
potentially different interests and motivations. Aldo alone
controlled the ultimate disposition of both blocks of stock.
Thus, attribution rules simply are not relevant. We sustain
respondent’s determination.
- 10 -
Contentions we have not addressed are irrelevant, moot, or
meritless.
To reflect the foregoing,
Decision will be entered
under Rule 155.