1994 U.S. Tax Ct. LEXIS 68">*68 An order will be issued granting respondent's motion for partial summary judgment and denying petitioner's motion for summary judgment.
D's surviving spouse (S) chose to take an elective share rather than to take under D's will. S submitted a proposed allocation of estate assets to fund the elective share which was summarily approved by Probate Court order. The allocated assets were unencumbered securities and cash. Respondent argues that, under
103 T.C. 451">*452 OPINION
Gerber, Judge: Pursuant to Rule 121, 1 this matter is before the Court on petitioner's motion for summary judgment and respondent's motion for partial summary judgment. The parties seek to determine, as a matter of law, the maximum allowable marital deduction available in determining petitioner's Federal estate tax liability. The parties agree that the marital deduction allowable to petitioner is to be determined pursuant to Tennessee's elective share statute and other related State probate statutes. The issue presented is whether, under Tennessee law, the surviving spouse's calculated elective share must be reduced by a proportionate share of decedent's secured debts in determining petitioner's maximum allowable marital deduction.
Since the 1994 U.S. Tax Ct. LEXIS 68">*70 parties agree that there is no issue as to any material fact with respect to the specific legal question before us, this matter is ripe for summary judgment. The facts set forth below are based on the pleadings and other pertinent materials in the record. Rule 121(b).
Atlas Duncan Williams (decedent) was a resident of Shelby County in Memphis, Tennessee, on the date of his death, May 17, 1989. Decedent's last will and testament was admitted to probate on May 22, 1989. Decedent was survived by his wife and two children. Decedent's surviving spouse, Carolyn S. Williams (Mrs. Williams), qualified as executrix of decedent's estate.
A timely filed estate tax return reflected a gross estate of $ 102,702,150, secured debts of $ 37,745,758, a marital deduction of $ 64,098,005, other debts and expenses of $ 258,387, and a zero estate tax liability. No alternate valuation date was chosen on the estate tax return, and all values were determined as of decedent's date of death. Several months after the estate tax return was filed, Mrs. Williams timely filed a petition for an elective share and a year's support, as permitted by
On May 21, 1992, the Shelby County Probate Court entered an order granting Mrs. Williams an elective share equal to one-third of decedent's net estate pursuant to
On September 9, 1993, Mrs. Williams, as executrix of the estate, submitted to the Probate Court a proposed allocation of estate assets, wherein she chose unencumbered shares of stock and cash to fund the elective share. The Probate Court approved the elective share allocation by order dated October 14, 1993.
The dispute in this case concerns the amount of the marital deduction available to the estate pursuant to Mrs. Williams' decision to take an elective share. Petitioner argues that the marital deduction should be $ 32,581,579.95, 103 T.C. 451">*454 comprising the elective share and year's support amounts determined by the Probate Court ($ 31,306,295.95 and $ 1,250,000, respectively) and the value of certain nonprobate assets reported on the estate tax return ($ 25,284). While respondent concedes that the value of the nonprobate assets and year's support qualify as part of the marital deduction, she argues that the elective share amount "calculated" pursuant to
The Federal estate tax marital deduction is set forth in
For purposes of the tax imposed by
The property interest claimed by a surviving spouse pursuant to a statutory election against the decedent's will is considered to have passed from the decedent to the surviving spouse. Sec. 20.2056(e)-2(c), Estate Tax Regs. Consequently, the marital deduction available to the decedent's estate is based upon the interest received by1994 U.S. Tax Ct. LEXIS 68">*76 the surviving spouse pursuant to the election.
103 T.C. 451">*455 Tennessee's elective share statute (originally enacted in 1977) provided that a surviving spouse could elect to take an "elective share of one-third (1/3) of decedent's net estate", and further, that the elective share was to be "exempt from the debts and charges of the decedent incurred after April 1, 1977."
Several changes were made in the Tennessee elective share statute prior to decedent's date of death. First, in 1978, the statute was revised by removing "the payment of taxes" from
The 1985 revisions resulted in the modified Tennessee elective share statute in controversy,
31-4-101. Right to elective share. -- (a) A decedent's surviving spouse has the right to elect to take an elective share. The elective share is one third (1/3) of the decedent's net estate as defined in subsection (b) hereof. The right to elect an elective share is available to the surviving spouse of an intestate decedent and a testate decedent if the surviving spouse elects against the decedent's will. When the elective share is determined, it is exempt from the unsecured debts of the decedent incurred after April 1, 1977. In 1994 U.S. Tax Ct. LEXIS 68">*78 determining the elective share, it is not reduced by any estate or inheritance taxes.
(b) The net estate includes all of the decedent's real and personal property subject to disposition under the terms of the decedent's will or the 103 T.C. 451">*456 laws of intestate succession reduced by funeral and administrative expenses, homestead, exemptions and year's support. [Citation omitted.]
Subsequent to the 1985 enactment of
Additionally, when a State court proceeding does not represent bona fide, adversary litigation, a decree rendered therefrom is not conclusive as to property interests for Federal estate tax purposes.
Initially, we look to the language of the applicable statute.
30-2-305. Debts chargeable against all assets. -- Every debtor's property, except such as may be specially exempt by law, is assets for the satisfaction of all his just debts. [Citation omitted.]
Respondent argues that the elective share amount must be reduced by a pro rata portion of the decedent's secured debts pursuant to the statutory mandate in
Alternatively, respondent argues that the elective share statute provides the surviving spouse with a conceptual one-third "fractional interest" in every asset in the net estate, including every encumbered asset. Thus, respondent argues 103 T.C. 451">*458 that the Probate Court's approval of unencumbered assets to fund the elective share must be reduced by a pro rata share of decedent's secured debts to determine the net value of the fractional interest passing to the surviving spouse pursuant to her election. 9
1994 U.S. Tax Ct. LEXIS 68">*83 Petitioner argues that the debt payment statute is not applicable in this case because unencumbered assets were chosen to fund the elective share. Petitioner points out that a secured creditor can only reach unsecured assets when there is an insufficiency in the secured collateral -- that is, when the value of the secured asset(s) is less than the value of the debt. Where there is such an insufficiency, petitioner notes that the creditor is unsecured as to the amount of the insufficiency. Petitioner concludes that the exemption of the elective share from unsecured debts specifically prevents a secured creditor from reaching unencumbered elective share assets for the amount of any unsecured insufficiency. Thus, petitioner argues that no authority exists to reduce the elective share amount "calculated" pursuant to the statutory formula (i.e., "1/3 of the net estate") by any portion of the decedent's secured debts when unencumbered assets are chosen to fund the elective share.
Petitioner argues that the Tennessee legislature could have enumerated a reduction for secured debts in the statutory definition of the "net estate" in
1994 U.S. Tax Ct. LEXIS 68">*85 Petitioner's out-of-context use of the one-third of the net estate language must be considered and reconciled with the change in the statute which subjected the elective share to secured debts. When considering both passages together, we find it difficult to accept petitioner's view. The removal of the secured debt exemption from the elective share statute in 1985, coupled with the specific direction in
1994 U.S. Tax Ct. LEXIS 68">*86 We also find little support for petitioner's argument that
Although we find respondent's view of the applicable Tennessee statutes more acceptable, our inquiry does not end there. In accord with
Although there are no opinions that interpret the 1985 statutory revision, 1994 U.S. Tax Ct. LEXIS 68">*87 some analogous materials have been advanced by the parties. Curiously, both parties rely on the same two cases to support their respective positions:
In
103 T.C. 451">*461 We find that
The Myers case also supports respondent's view. In that case, the removal of an enumerated reduction for the payment of taxes from the statute defining the "net estate" was held not to preclude apportionment of Federal estate and State inheritance taxes against the surviving spouse's elective share. Similarly, we think the absence1994 U.S. Tax Ct. LEXIS 68">*91 of an enumerated reduction for secured debts in the current net estate statute does not preclude us from apportioning decedent's secured debts in this case; on the contrary, we think the debt payment statute, coupled with the removal of the secured debt 103 T.C. 451">*462 exemption from the elective share statute, requires us to do so.
Petitioner raises two arguments based on the Myers case. First, petitioner looks to the court's statement that "the dissenting spouse should be given the choice as to whether to accept 'a fund or property in kind or in cash.'"
Petitioner's reliance on Myers is misplaced, and in both cases petitioner confuses the funding of the elective share with the proper determination of the elective share. As noted earlier, the executrix or surviving spouse's postdeath funding decisions are not determinative of the value of the elective share. When a surviving spouse chooses to dissent from the decedent's will, the spouse's share typically increases, and a "loss" is borne by the nonspousal beneficiaries vis-a-vis the will provisions. We must first determine the amount of that loss -- by properly determining the elective share -- before the executrix can select the assets from which it will come.
Finally, we note that the parties have advanced theories attempting to explain why the secured debt exemption was removed from the elective share statute in 1985. 1994 U.S. Tax Ct. LEXIS 68">*93 Petitioner claims that the change was intended to protect secured creditors who, prior to 1985, were unable to reach encumbered assets if they were selected to fund the elective share. Respondent, on the other hand, argues that the 1985 revision protected the interests of residuary beneficiaries by requiring a pro rata allocation of secured debts, which effectively 103 T.C. 451">*463 increases the residuary estate at the expense of the elective share. On brief, the parties provided various comparative examples attempting to support their respective theories and to illustrate or defend alleged disparate treatment accorded either the surviving spouse, the secured creditors, or the residuary beneficiaries under the two proposed interpretations of the elective share statute. After reviewing the examples offered by the parties, and some examples of our own, we note that under both parties' interpretations of the revised elective share statute, secured creditors will always be paid at least to the extent of the value of the collateral. 13 They were not always so paid under the pre-1985 elective share statute. 141994 U.S. Tax Ct. LEXIS 68">*95 Thus, the removal of the exemption from secured debt in computing the elective1994 U.S. Tax Ct. LEXIS 68">*94 share benefited secured creditors. It appears likely that the secured creditors were, at minimum, intended beneficiaries of the added language. Neither party's interpretation of the revised statute contradicts that point. Respondent is also correct in contending that under her interpretation, the residuary beneficiaries' share is increased at the expense of the elective share. 15 While this latter result may or may not have been an intended goal of the legislature in revising the elective share statute, it does not preclude us from interpreting the applicable Tennessee statutes and the relevant case law in support of respondent's view.
103 T.C. 451">*464 Accordingly, we hold, under Tennessee law, that the surviving spouse's calculated elective share must be reduced by a pro rata (one-third) share of decedent's secured debts1994 U.S. Tax Ct. LEXIS 68">*96 in determining petitioner estate's maximum allowable marital deduction.
An order will be issued granting respondent's motion for partial summary judgment and denying petitioner's motion for summary judgment.
Footnotes
1. All Rule references are to the Tax Court Rules of Practice and Procedure, and section references are to the Internal Revenue Code in effect on the date of decedent's death, unless otherwise indicated.↩
2. Pursuant to decedent's will, Mrs. Williams was entitled to reach the corpus of the trusts only if the income therefrom was inadequate for her comfortable maintenance or in the event of her illness or injury or other special circumstances of a similar nature requiring extraordinary expenditures.↩
3. Neither the Probate Court nor petitioner offered an explanation for the difference in the gross estate amount reported on the estate tax return ($ 102,702,150) and the total estate amount determined by the Probate Court ($ 102,902,698.02), although both numbers purport to represent the same thing -- the value of all of decedent's assets on his date of death.↩
4. Although not enumerated by the Probate Court, the deduction of $ 8,035,134.55 apparently includes, in part, funeral expenses of $ 33,134.55, a year's support of $ 1,250,000, nonprobate assets of $ 25,284, attorney's fees of $ 3,200,000, and executrix commissions of $ 3,500,000. Based on the record before us, we are unable to determine with certainty the remaining portions of the deduction; however, the resulting discrepancy of $ 26,716 is insignificant to the resolution of the dispute in this case. For purposes of determining the specific legal question before us, we note only that the Probate Court made no deduction for any portion of decedent's secured debts in determining the net estate.↩
5. The Probate Court should have multiplied the net estate by one-third, rather than 33 percent, as required by the elective share statute.↩
6. Respondent also argues that the Shelby County Probate Court incorrectly determined decedent's "net estate" by allowing certain administrative expenses, including attorney's fees of $ 3,200,000 and executrix commissions of $ 3,500,000, that have not been substantiated by petitioner. Although the proper determination of the net estate is a prerequisite to correctly "calculating" the elective share under
Tenn. Code Ann. sec. 31-4-101(a) (Supp. 1993), we are concerned in this case only with the specific legal question of whether a portion of decedent's secured debts must be deducted after↩, and assuming that, the net estate and "calculated" elective share have been properly determined. Thus, our holding today does not preclude petitioner from introducing evidence substantiating the disputed administrative expenses in a future proceeding addressing that controversy.7. Although the difference between the amount determined by respondent ($ 22,491,275) and the amount now argued for by petitioner ($ 32,581,295.95) is about $ 10 million, the $ 23,213,702 deficiency results because of the $ 64,098,005 marital deduction claimed on the estate tax return.↩
8. The elective share statute and the debt payment statute appear in different titles of the Tennessee Code (Tit. 31 -- Descent and Distribution, and Tit. 30 -- Administration of Estates, respectively). Both titles, however, apply to probate matters, and there is no indication that the elective share and debt payment statutes were not meant to be read in pari materia.↩
9. Presumably, under respondent's fractional interest argument, no reduction is required for decedent's unsecured debts because of the specific exemption of the elective share from unsecured debts provided for in Tenn. Stat. Ann.
sec. 31-4-101↩ (Supp. 1993).10. Petitioner states on brief that the Tennessee legislature specifically considered including an enumerated reduction for the decedent's debts in the net estate definition, but failed to enact proposed legislation to that effect, in 1977, and, more recently, in 1993. There can be no doubt that such legislation, if enacted prior to the date of decedent's death, would have precluded the present controversy. We also note, however, that no legislative history or other evidence was offered in support of petitioner's view that the Tennessee legislature never intended a debt reduction to occur. Accordingly, we decline to give deference to the language of failed legislation, which, without more, gives little indication of the intentions of the drafter or of the reasoning of the legislature in declining to enact it.↩
11. The parties have not provided elective share statutes of other States to compare with Tennessee's statute. A cursory review of some States' elective share statutes revealed enumerated reductions for the decedent's debts from the elective share. Additionally, several States have statutory provisions designating how the surviving spouse's share is to be funded, including, in many instances, a provision for the apportionment of the decedent's debts. Our review of other States' elective share statutes did not provide a basis for deciding this case.↩
12. It should also be noted that the dower concept is one associated with realty.↩
13. Additionally, under both parties' interpretations, when there is an insufficiency in the collateral, the secured creditors will receive additional payments above the value of the collateral if they are able to take before the residuary beneficiaries from any unsecured assets remaining after payment of the elective share.↩
14. Consider, for example, an estate with 12x of total assets, secured debt of 9x, and secured collateral valued at 9x. Under the pre-1985 elective share statute, the surviving spouse was entitled to 4x (no matter which assets were chosen to fund the spouse's share), leaving only 8x remaining for the secured creditors. Thus, under the pre-1985 elective share statute, secured creditors would not always be paid to the full extent of the value of the secured collateral. (We note that under both parties' interpretations of the revised elective share statute, the secured creditors in the above example would be entitled to assets worth 9x -- that is, the value of the secured collateral.)↩
15. Returning to our earlier example (see supra↩ note 14), consider again an estate with 12x of total assets, secured debt of 9x, and secured collateral valued at 9x. Under petitioner's interpretation of the revised elective share statute, the secured creditors would receive 9x (the value of the secured debt collateral), the surviving spouse would receive 3x (all that remains to fund the "calculated" elective share of 4x), and the residuary beneficiaries would receive nothing. Under respondent's interpretation, the secured creditors would receive 9x, but, after apportionment of the secured debt, the surviving spouse would receive only 1x (the "calculated" elective share of 4x less one-third of the secured debt) and the residuary beneficiaries would receive 2x. As this example illustrates, under respondent's view, the residuary share increases in direct proportion to the decrease in the surviving spouse's share.