IRS REVERSES ITSELF ON
CONTINGENT QTIP ELECTION

By Jerome Landau, CPA

On February 18, 1997, the IRS announced in the Federal Register (Vol. 62, No. 32) the issuance of new temporary regulations [section 20.2056(b)-7T(d)(3)(ii)], in which it reversed its position on the deductibility as a marital deduction for estate tax purposes of the date of death value of a QTIP trust in which the executor had the discretion to make or not to make the QTIP election. Previously on March 1, 1994, the IRS published final estate tax regulations covering IRC section 2056 (the marital deduction section) in which it took the position that such a contingent income interest was not a qualifying income interest under IRC section 2056(b)(7), regardless of whether the executor's election was in
fact made. The temporary regulation reverses the
IRS position so as to allow the marital deduction.

In announcing the new regulations the IRS provided the following background information:

At the time the regulations were published, the position contained in regulation section 20.2056(b)-7(d)(3) was the subject of litigation in a number of cases and had been rejected by two circuit courts in Estate of Clayton v. Commissioner, 976 F.2d 1486 (5th Cir. 1992), rev'g 97 T.C. 327 (1991), and Estate of Robertson v. Commissioner, 15 F. 3d 779 (8th Cir. 1994), rev' g 98 T.C. 678 (1992). Since that time, Estate of Spencer v. Commissioner, 43 F. 3d 226 (6th Cir. 1995), rev' g T.C. Memo.1 1992-579, also rejecting the IRS position, has been decided. Additionally, in Estate of Clack v. Commissioner, 106 T.C. 131 (1996), the Tax Court reversed the position it had taken previously in Estate of Clayton, Estate of Robertson, and Estate of Spencer. This temporary regulation amends the final regulations in accordance with the circuit courts' decisions in Estate of Clayton, Estate of Robertson, and Estate of Spencer, and the Tax Court's decision in Estate of Clack.

Regulation section 20.2056(b)-7T(d)(3)(ii) has been added. As a result of the addition, an income interest (or life estate) that is contingent upon the executor's election under regulation section 2056(b)(7)(B)(v) will not be precluded, on that basis, from qualification as a "qualifying income interest for life" within the meaning of section 2056(b) (7)(B)(ii).

For further guidance, the IRS added the following to regulation section 20.2056(b)-7(h) Example 6:

(ii) D's estate tax return is due after February 18, 1997. D's will established a trust providing that S is entitled to receive the income from that portion of the trust that the executor elects to treat as qualified terminable interest property. S's interest in the trust otherwise meets the requirements of a qualifying income interest for life under section 2056(b)(7)(B)(ii). Accordingly, the executor may elect qualified terminable interest treatment for any portion of the trust.

The IRS made these new regulations effective with respect to estates of decedents dying after March 1, 1994, and scheduled a hearing date of June 3, 1997, on these temporary regulations. With respect to decedents dying prior to March 1, 1994, taxpayers may rely on an Action on Decision issued by the IRS on July 15, 1996 in which it announced that it will accede to the results in the above cited court decisions and will no longer disallow the marital deduction for pre-March 1, 1994 estates.

It now appears that the uncertainty that tax practitioners have had to face over the last several years on the issue of the contingent QTIP election has now been resolved in favor of the position taken by practitioners on estate tax returns.

For those seeking further background and explanation of this issue, reference should be made to a recent article ("Estate Tax Marital Deduction and the Contingent QTIP Election") in the November 1996 issue of The CPA
Journal. *