QTIP cannot escape taxation in both spouses' estates.

• Author: Barton, Peter C.
• Position: Qualified terminable interest property

In Estate of Mildred Letts, 109 TC No. 15 (1997), the Tax Court held that the duty of consistency required a surviving spouse's gross estate to include a terminable interest in property, even though the estate of the first spouse to die did not make a qualified terminable interest property (QTIP) election. The estate of the first spouse to die (which the IRS did not audit) had incorrectly claimed the marital deduction for the property, but the assessment of additional tax against that estate was barred by the statute of limitations (SOL).

In calculating a taxable estate, Sec. 2056(a) allows a marital deduction for property passing to a surviving spouse; this property is then taxed in the surviving spouse's estate on death. However, Sec. 2056(b)(1) prohibits a marital deduction for terminable interest property when, for example, the surviving spouse has only an income interest in the property. Since terminable interest property is not included in the surviving spouse's estate, allowing the marital deduction in the estate of the first spouse to die would permit the property to escape taxation in both spouses' estates--which would be contrary to the marital deduction's objective.

Sec. 2056(b)(7) provides an exception to the terminable interest rule for QTIPs. This exception allows the estate of the first spouse to die to obtain a marital deduction for property, even though the surviving spouse has no control over the property's ultimate disposition. (The will of the first spouse to die determines who receives the remainder interest.) To qualify for this exception, the surviving spouse must receive the property's income payable at least annually, no person can have a power to appoint any part of the property to anyone except the surviving spouse during her lifetime and the executor of the estate of the first spouse to die must make a QTIP election. If these requirements are satisfied, the property is included in the surviving spouse's estate under Sec. 2044.

Sec. 6501 (a) generally imposes a three-year SOL on the assessment of any Federal tax. In certain situations, the courts have developed the duty of consistency to allow the Service to assess additional tax for a year not closed by the SOL to compensate for the inability to assess the additional tax for a closed year. For the duty of consistency to apply, the following conditions must be satisfied:

1. The taxpayer represented a fact or reported an item in one tax year.

2. The IRS acquiesced or...