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Witnesses Disagree on Proposed QTIP Estate Tax Rules

Tuesday, June 3, 1997

Deloitte & Touche OnLine

The two witnesses at a June 3 Internal Revenue Service hearing on extending the marital deduction to trusts with contingent income interests came down squarely on opposite sides of the issue.

The IRS issued the proposed and temporary regulations in February to conform the estate tax regulations to recent court decisions. The temporary rules extend the marital deduction for estates to qualified terminable interest property provisions under Section 2056(b). The IRS had fought allowing the marital deduction to QTIPs if someone other than the surviving spouse is the executor of the trust. After losing case after case on the issue in several different court circuits, the IRS conceded and issued the proposed and temporary regulations.

"I am opposed to such extension of the QTIP provisions as it does not serve a valid public policy goal and indeed further degrades women who are most often ‘the surviving spouse,’" said Professor Wendy Gerzog of the University of Baltimore School of Law.

"Maybe the proper course would be for Congress to take action" in this area, said Beth Kaufman, attorney-advisor at Treasury’s office of tax legislative counsel. Since Congress hasn’t yet acted, though, the IRS did because they have lost so many tax cases on the issue and the Service decided not to keep committing resources to litigating the issue, Kaufman added.

Expand regulations

"In a time of scarce resources we have to decide what is worth devoting more resources to," said Assistant Chief Counsel Paul Kugler, of the office of the associate chief counsel (passthroughs and special industries). "We can’t fight in every circuit," he added. "We can’t put all our efforts in this one issue."

The other witness, Frank Colella, had an entirely different perspective than Gerzog. "I am entirely supportive of the proposed and temporary regulations concerning contingent QTIP elections," he said.

He asked the IRS to expand the proposed regulations to include guidance in two areas: first, to define more clearly how the regulations apply to estates in which the death occurred before March 1, 1994, and, second, to clarify the phrase "on that basis" in the temporary regulations.

"The qualifying language ‘will not, on that basis, fail to be a qualifying income interest for life,’ must be clearly defined," Colella said. The IRS should "alert practitioners of potential pitfalls, if any, in drafting contingent QTIP elections," Colella said.

Several factors that have been brought up by the IRS, taxpayers, or the courts have affected whether QTIP elections qualify, Colella commented. Examples of such factors include "the role of the surviving spouse in making the contingent QTIP election, the testator’s precatory language or instructions to the executor, the fiduciary obligations imposed upon the executor by state law, and the nature of the alternate bequest (should the QTIP election not be made)," Colella said.

"While I believe that none of these factors, individually or collectively, should alter the result that contingent QTIP election qualifies for the marital deduction, all other QTIP requirements having been met, the Service may not hold such an expansive view," Colella said.

'A Trojan horse'

"Don’t the words ‘on that basis’ already say that the QTIP won’t be disqualified on that basis," asked Katherine Mellody, assistant to the branch chief, office of the chief counsel (passthroughs and special industries).

They do, Colella acknowledged, but other things can be read into that phrase. He worried that the phrase leaves the qualification basis open. "It’s a Trojan Horse, that lets you bring in other factors" to determine the qualification, he said.

"That’s what it means," though, Mellody said, "that on this particular basis the contingency won’t disqualify the election." So many facts could enter into each situation, Mellody added, that the IRS couldn’t possibly write regulations broadly enough to include all the facts. The IRS does intend, though, that taxpayers can depend on the sentence to know that QTIPs would not be disqualified on that basis, she said.

"If ‘on that basis’ is precatory language, I agree," Colella said. "I just don’t want it to be misinterpreted."

Mellody nodded in response.