Estate of Rapp v. Commissioner

Bert Rapp died with a will that left his one-half share of community property in trust for his wife, Laura Rapp. The trust authorized their sons, Richard and David Rapp, as co-trustees to distribute such amounts of principal and income to Laura that they, in their sole discretion, determined she would need for “proper health, education and support,” or that “the Trustee from time to time may deem necessary or advisable for her use and benefit.” The will that created the trust was almost identical to Laura’s will. After Bert died, Laura admitted the will to probate and requested reformation of the will to bring it into compliance with the requirements of a qualified terminable interest property (QTIP) trust, claiming that it was Bert’s intent to create a QTIP trust and the will as written defeated that intent. The probate court granted Laura’s petition and reformed the will to require payment to her of all trust income at least annually to comply with the requirements of 26 U.S.C. § 2056(b)(7). The court also added a provision to the will allowing the estate’s executor to “elect to treat the trust created under this Article FIFTH, or any portion thereof, as ‘qualified terminable interest property’ in order to obtain the marital deduction for such property. Richard, acting as executor of his father’s estate (plaintiff), filed an estate tax return claiming the marital deduction. The Internal Revenue Service (IRS) (defendant) sent Richard a notice of deficiency. The IRS allowed the marital deduction only for the personal property that passed directly to Laura and not for the trust. Richard brought an action on behalf of the estate in tax court, which held that the state court’s reformation of the will was not binding without affirmance by the state’s highest court. The tax court determined that the state court’s reformation of the will was erroneous because there was no ambiguity in the will and no evidence that Bert intended to create a QTIP trust. The tax court held the trust was not a QTIP trust and therefore the estate could not claim the marital deduction for the trust. Richard appealed to the United States Court of Appeals for the Ninth Circuit.