RESPONDENT:Estate of Hubert
LOCATION:Attorney General Office
DOCKET NO.: 95-1402
DECIDED BY: Rehnquist Court (1986-2005)
LOWER COURT: United States Court of Appeals for the Eleventh Circuit
CITATION: 520 US 93 (1997)
ARGUED: Nov 12, 1996
DECIDED: Mar 18, 1997
David D. Aughtry – Argued the cause for the respondent
Kent L. Jones – Department of Justice, argued the cause for the petitioner
Facts of the case
The executors of Otis C. Hubert’s substantial estate filed a federal estate tax return about a year after his death. Subsequently, the Commissioner of Internal Revenue issued a notice of deficiency, claiming underreporting of federal estate tax liability caused by the estate’s asserted entitlement to marital and charitable deductions. While the estate’s redetermination petition was pending in the Tax Court, the interested parties settled on the use of the estate’s assets. The agreement divided the estate’s principal, assumed to be worth $26 million, equally between marital trusts and a charitable trust. It also provided that the estate would pay its administration expenses either from the principal or the income of the assets. The estate paid about $500,000 of its nearly $2 million of administration expenses from principal and the rest from income. It then recalculated its tax liability, reducing the marital and charitable deductions by the amount of principal, but not the amount of income, used to pay the expenses. The Commissioner concluded that using income for expenses required a dollar for dollar reduction of the deductions. The Tax Court disagreed, finding that no reduction was required by reason of the executors’ power, or the exercise of their power, to pay administration expenses from income. The Court of Appeals affirmed.
Does the cost of administering an estate necessarily reduce the allowed estate-tax deduction for assets left to a spouse or charity?
Media for Commissioner v. Estate of Hubert
Audio Transcription for Opinion Announcement – March 18, 1997 in Commissioner v. Estate of Hubert
William H. Rehnquist:
The opinion of the Court in 95-1402, Commissioner of Internal Revenue versus the Estate of Hubert will be announced by Justice Kennedy.
Anthony M. Kennedy:
In this case Commissioner of Internal Revenue versus the Estate of Hubert I have written an opinion which announces the judgment of the Court in a case involving the federal estate tax.
The issue concerns the proper computation of the marital deduction and the charitable deduction and both of these are deductions to operate, to reduce the size of the taxable estate when the decedent estate is required to pay federal estate tax.
This matter was complicated by will contest and contested probate proceedings but the problem can be stated this way:
Suppose the will establishes a charitable trust and a marital deduction trust and also provides that the expenses of administering the estate are to be paid from the assets or the income of the assets which will be allocated to those trusts.
Are the marital and charitable gifts reduced by the amount of those expenses?
That is the problem.
Everyone agrees that the deductions must be reduced to the extent principal of the trust are used to pay estate expenses and the regulations and statute are clear on that point.
The issue before us is whether or not the gifts must also be reduced if the income is used for this purpose but the principal amount of the gift remains intact.
The Tax Court ruled that in some cases, such as the one before us, where the income is substantial, no reduction is required even where some of that income is used to pay the estate expenses.
The Court of Appeals agreed and affirmed the Tax Court.
We also agree and we affirm the Court of Appeals.
The controlling regulation says that the amount of the deduction must be reduced if the requirement to pay expenses is a material limitation on the right to receive income.
Not every case in which some income is diverted for this purpose presents a material limitation.
The Commissioner’s insistence on a dollar-for-dollar reduction of the deduction in every case where some income which used to pay expenses is inconsistent with the controlling regulation.
The opinion announcing the judgment of the court is joined by the Chief Justice and Justice Stevens and Ginsburg.
Justice O’Connor has filed a concurring opinion joined by Justices Souter and Thomas; Justice Scalia has filed a dissenting opinion joined by Justice Breyer. and Justice Breyer has filed a separate dissenting opinion.