E. Norman Peterson Marital Trust v. Commissioner

E. Norman Peterson died in 1986, before Congress enacted the Generation-Skipping Transfer Tax (GST). As part of his will, Norman established a trust (plaintiff) for the benefit of his wife, Eleanor. Eleanor was the sole income beneficiary and was entitled to withdraw up to half of the trust principal at her discretion. The trust documents also granted Eleanor a general testamentary power of appointment over the assets in the trust. That is, Eleanor had the power to bequeath the assets of the trust to whomever she pleased in her own will. Under the trust documents, if Eleanor declined to exercise that power of appointment, the assets would be split equally between Norman’s grandchildren. Eleanor died in 1988, after Congress enacted the GST, and her estate included the assets over which she had a power of appointment in her gross estate. Eleanor had declined to exercise the power of appointment, and so the assets went to Norman’s grandchildren. Eleanor’s estate filed an estate tax return on which it claimed that the trust would need to pay the GST on the assets that passed to Norman’s grandchildren. The trustees filed a challenge to the estate’s claim that the trust owed GST with the Internal Revenue Service (IRS) (defendant). The IRS agreed with Eleanor’s estate and assessed a deficiency against the trust. The tax court upheld the IRS’s determination, and the trust appealed.