Estate of Spencer v. Commissioner

John D. Spencer died in March 1987, survived by his wife, Ernestine W. Spencer (plaintiff). John had created a will and the John D. Spencer Trust Agreement (trust agreement). The will named Ernestine as the executor of the estate and provided that she would have the authority to make an election as to what property would be considered qualified terminal-interest property (QTIP) under Internal Revenue Code § 2056(b)(7). The trust agreement created two trusts upon the decedent’s death: one for Ernestine as the surviving spouse (trust A) and another for John’s children (trust B). Trust A was to be funded with all the assets that were elected by the executor as QTIP assets. Ernestine allocated approximately $1.2 million in assets to trust A and made the QTIP election for those assets by filing Form 706 with the Internal Revenue Service (IRS) (defendant), claiming that those assets were deductible from John’s taxable estate. The IRS disallowed the deduction and sent a tax bill for $416,447.62. Because Ernestine was allowed to determine the amount of the election, which in turn determined which assets flowed into trust A or trust B, the IRS concluded that this was effectively an impermissible appointment of assets away from the surviving spouse, so the marital deduction could not be allowed. Ernestine, as executor, appealed the decision from the IRS, but the United States Tax Court ruled in favor of the IRS. Ernestine appealed to the United States Court of Appeals for the Sixth Circuit.