                        T.C. Memo. 1996-109



                      UNITED STATES TAX COURT



      ESTATE OF RALPH M. NIX, SR., DECEASED, RALPH M. NIX,
           JR., PERSONAL REPRESENTATIVE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4117-93.               Filed March 7, 1996.



     Frederick W. Schwendimann III, for petitioner.

     Pamelya P. Herndon, for respondent.




                        MEMORANDUM OPINION

     PARR, Judge:   Petitioner is the Estate of Ralph M. Nix, Sr.

Respondent determined a deficiency of $191,061 in petitioner's

estate tax.   After stipulations and concessions,1 the issue for

1
     Petitioner and respondent stipulated the following values of
                                                   (continued...)
                                  - 2 -

decision is whether petitioner is entitled to a marital deduction

in the amount claimed.     More specifically, we must decide what

effect the surviving spouse's qualified disclaimer had on the

amount of the marital deduction.

        The parties submitted this case fully stipulated under Rule

122.2    The stipulation of facts, supplemental stipulation of

facts, and attached exhibits are incorporated herein by this

reference.     Ralph M. Nix, Sr. (hereinafter decedent), was a

resident of Artesia, New Mexico, on the date of his death, on

September 4, 1988.     At the time of the filing of the petition,

personal representative Ralph M. Nix, Jr. (decedent's son),

resided in the State of New Mexico.

        Decedent died testate.   The will provides for four bequests:

The first bequest provides for the disposition of tangible

personal property, the second bequest provides for a specific

1
 (...continued)
assets (without regard to community property deduction) listed on
Schedules A and B of decedent's estate tax return:


                  Asset                       Value
             Working interest wells         $215,558
             Royalty interest wells          285,484
             3500 shares of Ralph M. Nix
                  Oil, Inc.                  113,282
             Rolex watch                       3,550
             Gentlemen's ring                  7,650

2
      All Rule references are to the Tax Court Rules of Practice
and Procedure, and all section references are to the Internal
Revenue Code in effect as of the date of decedent's death, unless
otherwise indicated.
                               - 3 -

disposition of a residence and furniture to decedent’s wife

(Frances Nix), the third bequest provides for a pecuniary

disposition qualifying for the marital deduction, and the fourth

and final bequest provides for a disposition of the residuary

estate to decedent's son.   Furthermore, decedent directs his

personal representative to pay debts and expenses of the estate

and taxes on the estate out of assets of the estate.

     The marital deduction bequest provides:

     If she survives me for more than 30 days, I bequeath to my
     wife the smallest amount of the assets of my estate that
     qualify for the marital deduction as will result in the
     lowest federal estate tax being imposed upon my estate,
     after allowing for the unified credit, and any other credits
     and deductions allowable to my estate. In making the
     computations necessary to determine the amount of this gift
     and bequest, the final determination for federal estate tax
     purposes shall control. In the sole power and discretion of
     the personal representative, the payment of this amount may
     be made wholly or partly in cash or property as selected by
     the personal representative; provided, however, that all
     such property so selected shall be valued at the value
     thereof as finally determined for federal estate tax
     purposes in my estate; provided further, that in exercising
     this power and discretion, the personal representative shall
     first allot to this gift and bequest the more liquid and
     salable assets of my estate; and provided further, that in
     no event shall there be included in this gift and bequest
     any asset or the proceeds of any asset (a) which does not
     qualify for the marital deduction for federal estate tax
     purposes, or (b) with respect to which any estate or death
     taxes are paid to any foreign country or any of its
     possessions or subdivisions, or (c) with respect to which
     any tax credit or deduction shall be available because it
     shall be subject to both federal estate and federal income
     tax. Notwithstanding anything herein to the contrary, the
     personal representative, in making distributions wholly or
     partly in property, in order to implement this gift and
     bequest, shall distribute to my wife assets, including cash,
     fairly representative, on the date or dates of
     distribution, of appreciation or depreciation in the value
                               - 4 -

     of all property available for distribution in satisfaction
     of this gift and bequest. [Emphasis added.]

     On June 2, 1989, Frances Nix (the surviving spouse) executed

a partial disclaimer and renunciation of her interest in certain

property that passed to her under the will.    The description and

value of the properties disclaimed by the surviving spouse are as

follows:

           Office storage and carpet                $25,150
           Pipe storage yard                            300
           Working oil and gas interests            107,779
           Oil and gas royalty interest             142,742
           Nonproducing mineral properties           60,082
           Nonproducing federal leases               25,372
           Nonproducing state leases                  9,498
           Surface lands                             23,748
             Total                                  394,671

     The value of the gross estate as of the date of decedent's

death was $1,594,496.   Due to a taxable gift made by decedent

prior to his death, the unified credit available to decedent’s

estate as of the date of decedent's death was $192,300 instead of

$192,800, as provided by section 2010(a).    The dollar equivalent

of the $192,300 unified credit was $598,649.   Deductions fixed as

of the date of decedent's death and reported on Schedules J and K

of decedent's estate tax return were $163,304 and $1,182,

respectively.3   The State death tax credit available to

decedent's estate is $15,636, and the dollar equivalent of the


3
     Respondent concedes that other deductions will be allowed to
petitioner for reasonable administrative expenses incurred in
connection with the trial of the case and expenses pursuant to
N.M. Stat. Ann. sec. 45-3-916 B. (Michie 1993 Repl.).
                               - 5 -

State death tax credit as of the date of decedent's death was

$42,260.

     In her notice of deficiency, respondent increased decedent's

gross estate to include certain real estate, stocks and bonds,

miscellaneous property, and the amount of property disclaimed by

the surviving spouse.   The question presented is whether the

disclaimer had the effect of decreasing the marital deduction,

and thereby increasing decedent's gross estate, or whether the

disclaimer merely resulted in a substitute of certain property

for other property, and thereby had no impact on the amounts of

the marital deduction or the taxable estate.4

     Respondent contends that to give effect to the disclaimer,

the surviving spouse's interest in decedent’s estate must be

reduced by the value of the disclaimed property.   Petitioner

asserts that the calculation of the marital deduction must be

made after taking into effect the disclaimer.   By calculating the

marital deduction in this manner, the disclaimed property will

become part of the estate and will be used to fund the residuary

4
     The dispute in this case can best be understood with the
help of the following example:

     Assume a decedent died with an estate of $1 million, of
which $400,000 was in stock and the balance of $600,000 in cash.
The trustee distributes the $400,000 in stock to the surviving
spouse and lets the $600,000 cash fall into the residue, to take
advantage of the unified credit. The surviving spouse disclaims
the stock. The Government argues that no marital deduction is
allowable, whereas the estate argues that $400,000 of the cash
can be given to the surviving spouse as a substitute for the
stock, leaving the marital deduction intact.
                                - 6 -

bequest, which is to be an amount that will take advantage of the

unified credit and any other estate tax credit available to

petitioner.    (We shall refer to this sheltered amount as the

credit equivalent.)    Petitioner argues that since the disclaimed

property was in an amount less than the credit equivalent, the

disclaimer had no effect upon the amount of the pecuniary marital

devise or upon the marital deduction.

     In general, section 2056(a) provides, in pertinent part, as

follows:

     the value of the taxable estate shall * * * be determined by
     deducting from the value of the gross estate an amount equal
     to the value of any interest in property which passes or has
     passed from the decedent to his surviving spouse, but only
     to the extent that such interest is included in determining
     the value of the gross estate.

If a surviving spouse disclaims an interest in property passing

to such spouse from a decedent, the efficacy of the disclaimer

will be determined by section 2518 and the corresponding

regulations.    Sec. 20.2056(d)-1, Estate Tax Regs.   Under section

2518, if a qualified disclaimer is determined to have been made

by the surviving spouse, then for purposes of subtitle B--dealing

with estate and gift taxes--the property interest disclaimed is

treated as if it had never been transferred to the surviving

spouse.    Sec. 2518(a); sec. 25.2518-1(b), Gift Tax Regs.; see
                               - 7 -

generally H. Rept. 94-1380, at 65-68 (1976), 1976-3 (Vol. 3) C.B.

738, 799-802.5

     A qualified disclaimer requires an irrevocable and

unqualified refusal by a person to accept an interest in

property.   Sec. 2518(b); Estate of Monroe v. Commissioner, 104

T.C. 352 (1995); see also Brown v. Routzahn, 63 F.2d 914 (6th

Cir. 1933); sec. 25.2518-1(a)(1), Gift Tax Regs.   The theory

behind the use of disclaimers, as long reflected in the common

law, is that a person should never be forced to accept the

burdens of ownership of property without his or her consent.

Towson v. Tickell, 106 Eng. Rep. 575, 576-577 (K.B. 1819).      The

consequence of treating the disclaimed property interest as if

such interest had never been transferred to the surviving spouse

is that the disclaimant is not considered to have made a transfer

and thereby avoids any resulting gift or generation-skipping tax


5
     The parties have stipulated that to the extent local law is
applicable in this case, reference shall be made to the laws of
the State of New Mexico. New Mexico law provides in pertinent
part:

     Unless the decedent or donee of the power has otherwise
     indicated by his will, the interest renounced, and any
     future interest which is to take effect in possession or
     enjoyment at or after the termination of the interest
     renounced, passes as if the person renouncing had
     predeceased the decedent. * * * In every case, the
     renunciation relates back for all purposes to the date of
     death of the decedent or the donee, as the case may be.
     [N.M. Stat. Ann. sec. 45-2-801 C. (Michie 1983 Repl.)]

See DePaoli v. Commissioner, 62 F.3d 1259 (10th Cir. 1995), revg.
T.C. Memo. 1993-577.
                               - 8 -

liability.   Sec. 2518(a); sec. 25.2518-1(b), Gift Tax Regs.; see

also secs. 2046, 2654(c).   The parties concede that a qualified

disclaimer was made.

     The parties' disagreement lies in the calculation of the

marital deduction as affected by the disclaimer.    Resolution of

this dispute will require interpretation of the marital bequest

in the will.   It is a cardinal rule of construction of wills that

the intent of the testator controls.     Estate of Swenson v.

Commissioner, 65 T.C. 243, 250 (1975).     Accordingly, we look to

the precise wording employed by the decedent in his will.       Id.

The most important matter to resolve is not what the decedent

meant to say, but what is meant by what the decedent did say.

Connecticut Junior Republic v. Sharon Hosp., 188 Conn. 1, 20, 448

A.2d 190, 194 (1982).   The words in decedent’s will must be

interpreted in light of their context with reference to the will

in its entirety.   Estate of Swenson v. Commissioner, supra; see

also Estate of Bruning v. Commissioner, 888 F.2d 657, 659 (10th

Cir. 1989), affg. T.C. Memo. 1988-5.

     The marital deduction clause in decedent’s will is one that

is commonly used in estate plans; it is a formula designed to

take advantage of the credit equivalent.    The intent of the

clause is to reduce or eliminate Federal estate taxes on the

estates of both spouses.6   See generally Mulligan, “Drafting

6
     This is accomplished by using the unified credit available
                                                   (continued...)
                               - 9 -

Marital Deduction Formula Clauses After ERTA to Achieve Maximum

Tax Savings”, 57 J. Taxn. 362 (1982).   The unusual aspect of this

case is that the surviving spouse executed a disclaimer.

Consequently, the effect of the disclaimer on the computation of

the marital deduction must be considered.

     Respondent contends that to give effect to the disclaimer,

the surviving spouse's interest in decedent’s estate must be

reduced by the value of the disclaimed property.   Furthermore,

respondent argues that this approach conforms with the intent of

the testator.   In his will, the decedent specified that the

amount passing to the surviving spouse shall be determined after

taking into account all credits and deductions allowed to the

estate, including the unified credit and the State death tax

credit.   We agree with respondent's position.

     Petitioner's argument seems to be based on the language of

the New Mexico statute (see supra note 5) and section 2518, that

the disclaimed property passes from the decedent as if the

disclaiming person had predeceased the testator.   Therefore,

petitioner argues, the calculation of the marital deduction must

6
 (...continued)
to both spouses in their respective estates. Accordingly,
property equal in amount to the credit equivalent will pass to a
beneficiary other than the surviving spouse from the estate of
the first spouse to die and be disposed of tax free by reason of
the unified credit. The remaining property will pass to the
surviving spouse tax free as a result of the marital deduction.
Upon the surviving spouse's death, the property will pass tax
free to the extent of the unified credit amount available to the
surviving spouse.
                               - 10 -

be made after taking into effect the disclaimer.    By calculating

the marital deduction in this manner, the disclaimed property

will become part of the estate and used to fund the residuary

bequest in the amount of the credit equivalent.

     Petitioner's argument is flawed.   First, the statutory

language providing that the disclaimant shall be treated as

predeceasing the testator as to the disclaimed property does not

deal with the issue at hand; i.e., the manner in which the

marital deduction is to be computed after giving effect to such

disclaimer.    Section 2518 provides that if a person makes a

qualified disclaimer of property, the property will be treated as

if it had never been transferred to such person.    Sec. 2518(a).

Otherwise, the disclaimed property will be treated as a taxable

gift "Since the practical effect of * * * [a taxpayer's]

disclaimers [is] to reduce the expected size of his taxable

estate and to confer a gratuitous benefit upon the natural

objects of his bounty".     Jewett v. Commissioner, 455 U.S. 305,

310 (1982); sec. 25.2511-1(c)(1), Gift Tax Regs.; see also sec.

25.2518-1(b), Gift Tax Regs.; 5 Bittker & Lokken, Federal

Taxation of Income, Estates, and Gifts, sec. 129.2.3 (2d ed.

1993) (if a disclaimer does not qualify under section 2518, the

property is probably treated as passing to the disclaimant, who

then makes a gift of it to the taker as a result of the

disclaimer).
                               - 11 -

     Second, petitioner's argument makes the marital deduction

formula circuitous.    We interpret the marital bequest in the will

as requiring the following calculation:    Step 1--the credit

equivalent would be determined; step 2--the marital bequest would

be based on the excess of the gross estate over the credit

equivalent.    Under petitioner’s approach, however, the

calculation would be performed a second time to take into

account, in funding the credit equivalent and the marital

deduction, the property disclaimed by the surviving spouse.     The

effect would be to substitute one property for another in the

marital bequest.    However, we do not find authority for this in

decedent’s will.

     The will provided the personal representative with the sole

power to identify the property to be transferred in satisfaction

of the pecuniary marital bequest.    To hold for petitioner would

be tantamount to giving the surviving spouse the power to pick

and choose which property would be used to fund the marital

bequest.   This would violate the intent of the testator as stated

in his will.   Section 2518 contemplates a renunciation of a

bequest of property, not the swapping of one property for another

of equal value.    See sec. 25.2518-2(d)(1), Gift Tax Regs.

(receipt of consideration in return for making a disclaimer

prevents the disclaimer from qualifying under the statute); see

also Estate of Monroe v. Commissioner, 104 T.C. 352 (1995).
                             - 12 -

     Accordingly, we hold that the disclaimer had the effect of

reducing the amount of the pecuniary marital bequest and

consequently the amount of the marital deduction, while

increasing the amount of assets in the taxable estate.

     To reflect the foregoing,



                                      Decision will be entered

                                 under Rule 155.
