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HALL v. UNITED STATES

October 19, 1992

MARJORIE A. HALL, Executrix of the Estate of William G. Hall
v.
UNITED STATES OF AMERICA



The opinion of the court was delivered by: THOMAS A. HIGGINS

 The Court has before it the Report and Recommendation of the Magistrate Judge (entered December 17, 1991; Docket Entry No. 30), defendant's objections to the Report and Recommendation (filed January 3, 1992; Docket Entry No. 31), and other pleadings and memoranda concerning the Report and Recommendation. *fn1" In his Report and Recommendation, the Magistrate Judge recommended that the plaintiff's motion for partial summary judgment (filed February 8, 1991; Docket Entry No. 11) be granted because the defendant had not responded to that motion in accordance with Local Rule of Court 8(b)(3). For the reasons set forth below, the Court adopts in part and rejects in part the Report and Recommendation of the Magistrate Judge. The defendant's objections are sustained and the plaintiff's objections to the defendant's objections are overruled. Therefore, the plaintiff's motion for partial summary judgment shall be denied, and the defendant's motion for leave to file its cross-motion for summary judgment shall be granted.

 I. FACTS AND PROCEDURAL HISTORY.

 This is a tax refund case brought by the Estate of William G. Hall, pursuant to 26 U.S.C. § 7422(a)(1), in which the Estate seeks a refund of estate taxes in the amount of $ 101,027.00 paid to the Internal Revenue Service. Jurisdiction is based on 28 U.S.C. § 1346(a).

 The Estate timely filed a federal estate tax return and paid the estate tax on January 27, 1984, but only claimed a limited marital deduction. *fn2" The Estate subsequently filed with the IRS two administrative claims for a refund, asserting that the Estate was entitled to claim an unlimited marital deduction due to a change in the federal estate tax laws.

 Mr. Hall's will made two bequests, each to a trust. The first bequest, to the "Marital Trust" for the benefit of Mrs. Hall, depended on a formula. The will distributed to the Marital Trust an amount equal to the maximum allowable marital deduction under federal estate tax law, reduced by whatever amount might be needed to make full use of available tax credits. To the second trust, the "Family Trust" for the benefit of Mr. Hall's children, the will left the rest of the estate.

 When Mr. Hall executed his will in 1978, the maximum marital deduction, which determined the amount to be distributed to the Marital Trust, was limited to the greater of $ 250,000 or 50 percent of the value of the adjusted gross estate. However, prior to Mr. Hall's death, Congress passed the Economic Recovery Tax Act of 1981, which amended the estate tax laws to allow an unlimited marital deduction. Economic Recovery Tax Act of 1981, Pub. L. No. 97-34, § 403(a)(1)(A), 95 Stat. 172, et seq. (amending 26 U.S.C. § 2056). Thus, the dispute in this case concerns whether the Marital Trust should receive the smaller amount it would have received under the limited marital deduction in effect when Mr. Hall executed his will, or whether it should receive a larger amount pursuant to the unlimited marital deduction created by ERTA. If the Marital Trust receives a larger amount, the Estate may claim a larger marital deduction, and it would be entitled to the tax refund it claims in this suit.

 In enacting ERTA, Congress was aware that many wills, like Mr. Hall's, employed language which directly tied spousal bequests to the maximum marital deduction allowed by the federal estate tax laws. See H.R. Rept. No. 201, 97th Cong., 1st Sess. at 163-64 (1981). Congress was concerned that the increase in the allowable marital deduction proposed by ERTA might cause spousal bequests to become much larger than intended by testators. Congress' solution was to include in ERTA a transitional rule, § 403(e)(3), which continued the limited marital deduction for testators such as Mr. Hall who executed their wills under the old law, but died after the new law came into effect.

 To accommodate testators who may have wished to make a larger marital bequest if the allowable marital deduction was ever increased, ERTA § 403(e)(3) provided two exceptions under which the unlimited deduction would apply to existing wills. The first exception, § 403(e)(3)(C), required testators to physically amend their wills to refer specifically to an unlimited marital deduction. The second exception, § 403(e)(3)(D), provided that if a state enacted a statute construing this type of marital bequest as referring to an unlimited deduction, then the transitional rule would not apply. The transitional rule of ERTA, § 403(e)(3), reads as follows:

 (3) If --

 (A) the decedent dies after December 31, 1981,

 (B) by reason of the death of the decedent property passes from the decedent or is acquired from the decedent under a will executed before the date which is 30 days after the date of the enactment of this Act [i.e., August 13, 1981], or a trust created before such date, which contains a formula expressly providing that the spouse is to receive the maximum amount of property qualifying for the marital deduction allowable by Federal law,

 (C) the formula referred to in subparagraph (B) was not amended to refer specifically to an unlimited deduction at any time after the date which is 30 days after the date of enactment of this Act [i.e., August 13, 1981], and before the death of the decedent, and

 (D) the State does not enact a statute applicable to such estate which construes this type of formula as referring to the marital deduction allowable by Federal law as amended by subsection (a),

 then the amendment made by subsection (a) shall not apply to the estate of such decedent.

 Economic Recovery Tax Act of 1981, Pub. L. No. 97-34, § 403(e)(3), 95 Stat. 172, 305 (1981).

 When Mr. Hall died, in 1983, he had not amended his will, pursuant to ERTA § 403(e)(3)(C), to refer to an unlimited marital deduction.

 On October 15, 1984, the Estate filed its first administrative claim with the IRS. This claim asserted that the will's bequest to the Marital Trust was not a formula of the type covered by § 403 (e)(3)(B). *fn3" Therefore, the Estate argued, it was entitled to claim an unlimited marital deduction under the federal estate tax laws as amended by ERTA, and the IRS should grant it a refund of the taxes it overpaid when it only claimed a limited marital deduction.

 On December 4, 1986, the IRS proposed partial disallowance of this first administrative claim. On January 26, 1987, the Estate filed a form 2297, "Waiver of Statutory Notification of Claim Disallowance," with respect to this claim.

 Also on January 26, 1987, the Estate filed a second administrative claim with the IRS, which the Estate described therein as a "protective claim." *fn4" Unlike the first claim which had been based on ERTA § 403(e)(3)(B), this second claim was based on ERTA § 403(e)(3)(D). It asserted that the Estate could rely on any statutory enactment of the Tennessee Legislature construing the marital bequest to refer to an unlimited marital deduction. Only two weeks earlier, on January 13, 1987, such a bill had been introduced into the Tennessee ...


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