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June 27, 1968


The opinion of the court was delivered by: Marovitz, District Judge.


Cross-Motions for Summary Judgment

This is a tax refund case, in which plaintiffs seek to recover certain alleged over-payments of estate taxes in the amount of $82,942.71 and interest, for the benefit of the estate of Arthur Luster, deceased. The plaintiffs, Lake Shore National Bank and Melvin R. Luster, are co-executors of Arthur Luster's will.

The parties have submitted cross-motions for summary judgment. A stipulation of uncontested facts has been filed with the Court, and it appears that legal issues are all that remain. This Court entered an order on April 19, 1968, pursuant to which we granted plaintiff's motion for interlocutory summary judgment under Rule 56(d) and (e) Federal Rules of Civil Procedure. That order established as uncontroverted, certain preliminary factual circumstances, which the Government apparently was unable to contest by affidavit or documentation and which were preliminary to a decision on the legal questions presented by the motions for summary judgment. The relevant facts are these.

In 1958, the decedent, a man in his middle fifties, made plans to marry Lois Jean Parkson. As part of those plans be apparently intended to provide for her in his will, but did not wish her to be in a position to claim her statutory one-third share of his estate upon his death. Thus, shortly before the date set for the marriage, when the decedent was informed that he must enter the hospital for surgery, he insisted that his marriage plans and his intention to provide for his future bride be completed by the execution of the necessary documents before he entered the hospital.

Apparently, a pre-nuptial agreement and a will were discussed, agreed to, and written at the same time. The pre-nuptial agreement was executed on November 3, 1958, and the marriage took place on November 23, 1958. The day following, on November 24, 1958, the will was executed.

In essence, the pre-nuptial agreement stated that the decedent agreed to provide in his will for Lois Parkson the sum of $200,000 or twenty percent of the gross value of his estate, whichever was smaller. The sum would be payable to her in monthly installments of $600 for life, and she would have the right to appoint by will any portion of the above sum not received by her during her lifetime. Luster provided for installment payments apparently for fear that if she received a lump sum she would be a target for unscrupulous individuals, and that if she remarried, her husband might gain control over her money.

Mr. Luster died in 1960. The estate tax return in issue was filed in April, 1962. In December, 1963, the surviving spouse filed a suit in the Chancery Division of Cook County Circuit Court to reform the will to conform to the testator's purported intention, by making the widow's bequest payable from the principal or corpus of the trust, rather than from the net income thereof. The reformation suit was not vigorously contested, nor was the United States a party thereto. On February 24, 1964, Judge Lupe entered a decree reforming the will to strike the words "from the net income of the trust." His decree found that the will should be construed together with the pre-nuptial agreement, which he held, had intended that the widow would receive a net of $600 per month from the corpus of the trust. The Court's decree did not disturb the 20 year payment provision, and did not add to the will the 20% alternative limitation, both of which had been part of the pre-nuptial agreement. Thus, the will, as reformed, did not completely comply with the terms of the pre-nuptial agreement.

The estate tax return claimed a marital deduction under 26 U.S.C. § 2056(a), of $200,000, based on the bequest to Mrs. Luster. However, the Internal Revenue Service disallowed the deduction and assessed an additional tax of $75,837.10. The executors paid the additional tax under protest and brought Counts I and II of the present action to recover that amount plus 6% interest.

Count III of the complaint seeks to recover $7,105.61 plus interest, which is alleged to be an overpayment of interest. This separate issue will be dealt with, as will the Count IV issue relating to deduction of attorney's fees, after we decide the primary issues raised by Counts I and II.

Essentially, the key dispute is whether the bequest to Mrs. Luster runs afoul of the terminable interest exception to the marital deduction,*fn1 or if it does, whether it constitutes a deductible terminable interest under the "annuity" provision of § 2056(b)(6).*fn2

In order to reach the issue of whether the bequest qualifies for the marital deduction, we must first determine that the reformed version of the will, as decreed by Judge Lupe, prevails. For if we find that the will should not be construed as reformed but as originally written, then it is clear that the bequest would not qualify for the marital deduction. Our opinion of April 19, 1968, which granted plaintiff's motion for interlocutory summary judgment, and vacated an earlier opinion denying same, stated the reasons for the above observations:

  "However, if the bequest is construed to be paid from
  the `net income' of the trust, it cannot qualify for
  the marital deduction. That is because a marital
  deduction is allowed only to the extent `such
  interest is included in determining the value of the
  gross estate'. 26 U.S.C. § 2056. Since the trust was
  testamentary in nature, there could have been no `net
  trust income' at the time of the testator's death,
  and, therefore `net trust income' could not have been
  a part of the gross estate. Thus, only if the bequest
  is payable from the `corpus' of the trust, which is
  part of the gross estate, could it qualify for the
  marital deduction.
    Hence, unless we adopt the reformed version of the
  will, we cannot reach the question of whether the
  bequest qualifies for the marital deduction. Under
  the original version of the will, it would not."

While we must adopt the reformed version of the will in order to find for plaintiffs, the Government's argument, summarized infra, applies ...

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