                      T.C. Memo. 1996-10



                  UNITED STATES TAX COURT



             ESTATE OF BERT B. RAPP, DECEASED,
         RICHARD L. RAPP, EXECUTOR, Petitioner v.
       COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 19107-92.           Filed January 18, 1996.


     Dennis N. Brager and Gerald E. Lunn, Jr., for

petitioner.

     Clifton B. Cates III and Nancy C. McCurley, for

respondent.


          MEMORANDUM FINDINGS OF FACT AND OPINION

     WHALEN, Judge:   Respondent determined the following

deficiency in, and additions to, petitioner's Federal

estate tax:
                              - 2 -


                            Additions to Tax
   Deficiency    Sec. 6653(a)(1)(A)   Sec. 6653(a)(1)(B)
                                       50% interest on:
   $1,685,271         $84,264             $1,685,271

Unless stated otherwise, all section references are to the

Internal Revenue Code in effect for the date of the

decedent's death.

     After concessions, the sole issue for decision is

whether petitioner is eligible to deduct, as an allowance

of marital deduction under section 2056(a), the value of

certain property distributed to a testamentary trust for

the benefit of the decedent's surviving spouse.    This

issue turns on whether the subject property is "qualified

terminable interest property" within the meaning of section

2056(b)(7).


                      FINDINGS OF FACT

     The parties have stipulated some of the facts that

are pertinent to this case.    The stipulation of facts filed

by the parties and the exhibits attached thereto are

incorporated herein by this reference.

     The decedent, Mr. Bert B. Rapp, died on February 23,

1988.   He was a California resident at that time.   The

executor of the decedent's estate, Mr. Richard Rapp, the

decedent's son, was also a California resident when the
                              - 3 -


instant petition was filed.    Originally, the decedent's

other son, Mr. David Rapp, served as coexecutor, but he

relinquished that position before this action was

commenced.

     In addition to his two sons, the decedent was survived

by his wife of approximately 35 years, Mrs. Laura Rapp.

The decedent first met his wife in 1946, approximately 7

years before they were married.       At that time, the decedent

owned an automobile service station and garage.       Mrs. Rapp

was employed, but she also worked for the decedent in the

evenings and sometimes on weekends.       The decedent did not

pay Mrs. Rapp for her services.       After the Rapps were

married, Mrs. Rapp continued to work for the decedent until

the birth of their sons.   After that time, Mrs. Rapp was

not employed outside the home.

     Over the years, the decedent's business enterprises

prospered.   His principal business was Motor Transportation

Service Systems (MTSS), a corporation engaged in vehicle

leasing.   He was president of MTSS and owned one-third of

its outstanding stock worth $938,194 at the time of his

death.   In addition to MTSS, the decedent was a partner in

several partnerships, and he owned shares in mutual funds,
                             - 4 -


several parcels of real property, promissory notes, and

shares of stock in other corporations.

     Mrs. Rapp managed the household budget and paid

household expenses.   She did not take an active role in

either her husband's business or his investment activities.

The decedent put several investments and at least one

venture in his wife's name, but Mrs. Rapp played no active

role in their management.    The decedent was satisfied with

Mrs. Rapp's management of their household expenses.

     In 1972, Mrs. Rapp was involved in an automobile

accident.   As a result of the accident, she was in a coma

for 8 days, and she spent a total of 5 months in the

hospital.   The accident left her with poor vision and other

medical problems.   After the accident, Mrs. Rapp often

complained about her physical limitations.    She believed

that she would never again be able to work.    The decedent

believed that the accident greatly affected his wife's

personality and was partially to blame for some of the

marital discord that the Rapps later suffered.

     The decedent was not an attorney or an accountant.

In conducting his business affairs, he relied on the

advice of professionals.    However, he attempted to become

knowledgeable about the legal and tax consequences of
                              - 5 -


his business transactions.    The decedent consulted

frequently with Mr. Laurence Clark, an attorney, and with

Mr. George Lippert, a certified public accountant.      Neither

Mr. Clark nor Mr. Lippert is an expert in estate planning.

       Most of the decedent's legal affairs were handled by

Mr. Clark, who is licensed to practice law in the State of

California.    Mr. Clark engaged in a general practice of

law.    He maintained a professional and personal

relationship with the decedent until the decedent's death.

       Mr. Clark had minimal experience in estate planning

and in handling estates with assets of more than $1.2

million.    Nevertheless, in 1978, he prepared wills for both

the decedent and Mrs. Rapp (the 1978 wills).    These wills

were essentially identical.    Each of the 1978 wills

provided that all household furniture and furnishings,

clothing, personal effects, and automobiles of the testator

were to be given to the surviving spouse.    All other

property of the testator was given to the testator's two

sons to be held in trust during the life of the surviving

spouse.    As cotrustees, Messrs. David and Richard Rapp were

given the power to disburse such amounts from the principal

and income of the trust estate as they would decide is

necessary "in their absolute discretion" for the "health,
                            - 6 -


education and support" of the surviving spouse.   Upon the

death of the surviving spouse, the trust was to cease and

the cotrustees were directed to distribute the balance of

the trust estate to the testator's two sons or their living

issue.   In 1982, the decedent executed a codicil that

amended his 1978 will by changing the last successor

trustee and the last successor executor but made no change

in the substantive provisions of the will.

     Mr. Clark also prepared the wills that the decedent

and Mrs. Rapp executed on July 9, 1986 (the 1986 wills).

These wills revoked the 1978 wills but were substantively

the same, with only minor changes in language and form, and

with changes in the identity of successor executors and

alternate trustees.   The decedent's and Mrs. Rapp's 1986

wills were identical to one another in all material

aspects.

     Like the 1978 wills, the 1986 wills provide that all

of the household furniture and furnishings, clothing,

personal effects, and automobiles of the testator are given

to the surviving spouse.   All other property of the

testator is given to the testator's two sons, Richard Rapp

and David Rapp, to be held in trust during the life of the

surviving spouse.   The trustee of the trust is given the
                           - 7 -


power to disburse such amounts from the principal and

income of the trust as the trustee decides is necessary "in

his absolute discretion" for the "proper health, education

and support" of the surviving spouse.    Article Fifth (b) of

the decedent's will states as follows:


          If at any time, in the absolute discretion
     of the Trustee or co-Trustees, my wife, LAURA B.
     RAPP, should for any reason be in need of funds
     for her proper health, education and support, the
     Trustee may in his absolute discretion pay to or
     apply for the benefit of my wife, such amounts
     from the principal and income of the trust
     estate, up to the whole thereof, as the Trustee
     may from time to time deem necessary or advisable
     for her use and benefit.


The 1986 wills provide that on the death of the surviving

spouse, the trust shall cease and the trustee shall

distribute the residue of the trust to the decedent's sons

or their children.

     Before he prepared the 1986 wills, Mr. Clark had

become acquainted with the size and complexity of the

decedent's business and financial holdings due to the fact

that he had handled legal matters for the decedent and his

businesses beginning in the mid-1970's.    The decedent had

also given Mr. Clark a personal financial statement dated

April 30, 1986, listing assets of $13,530,671, liabilities
                            - 8 -


of $3,357,915, and a net worth of $10,172,756.    The

financial statement detailed the investments that the Rapps

owned in 1986.

     The decedent and Mrs. Rapp executed their 1986 wills

during a meeting in Mr. Clark's office.   Prior to that

time, Mr. Clark had not consulted with Mrs. Rapp about the

provisions of her 1986 will.   During the meeting, Mr. Clark

read parts of the decedent's 1986 will to the decedent and

Mrs. Rapp.   Mr. Clark told Mrs. Rapp that her 1986 will

was essentially the same as the decedent's, and that she

would not understand it because it was technical.    At the

time the wills were signed, Mr. Clark did not discuss the

estate tax consequences of the 1986 wills with either the

decedent or Mrs. Rapp.

     The 1986 wills were executed during a difficult

time in the decedent's marriage to Mrs. Rapp.    During the

mid-1980's, the decedent had considered divorcing his wife.

Mr. Clark advised the decedent that a divorce would be

disruptive to the decedent's business ventures.    Mr. Clark

put the decedent in contact with a marriage counselor in

1984.   The Rapps remained married until Mr. Rapp's death in

1988.
                            - 9 -


     From time to time, the decedent discussed estate tax

matters with his friends and acquaintances.    On those

occasions, he urged them to plan to avoid estate taxes.

He did not disclose any specific provisions of his will or

his wife's will, except to say that his sons would be co-

trustees and that his wife, children, and grandchildren

would not have to worry about the estate.    The decedent

stated that he trusted Mr. Richard Rapp to handle financial

matters and to look after Mrs. Rapp in the event of his

death.   The decedent also told his friends that he caused

his will to be updated to account for changes in the law,

and he advised them to do the same.    The decedent told

Mr. Bruce Bell, an employee of Wells Fargo Bank who

supervised the decedent's and MTSS's loan accounts with the

bank, that there would be minimal estate taxes and minimal

liquidity problems at the time of his death.

     The decedent also discussed the estate tax marital

deduction with his accountant, Mr. Lippert.    Sometime

between 1984 and 1986, the decedent showed Mr. Lippert an

article about the marital deduction permitted for Federal

estate tax purposes.   The decedent told Mr. Lippert that he

was "moving forward in that area."    On other occasions, the

decedent told Mr. Lippert that his estate tax matters were
                           - 10 -


"moving forward and * * * under control".   Mr. Lippert also

discussed with the decedent how to provide liquidity to pay

estate taxes on death.   After the decedent's death,

Mr. Lippert was surprised to learn that the testamentary

trust created under the decedent's 1986 will was not

eligible for the marital deduction.

     The decedent's 1986 will was admitted to probate on

May 5, 1988, before the Superior Court of California,

County of Los Angeles (referred to herein as the probate

court).   Initially, the coexecutors, Messrs. David and

Richard Rapp, retained Mr. Clark to handle the probate of

the decedent's estate.   As the proceedings went on,

however, they became displeased with Mr. Clark's handling

of the estate.   They grew dissatisfied with the time it

took Mr. Clark to file required papers, and they felt

uncomfortable with some of the advice that he gave to them.

They also became aware that the decedent's 1986 will would

require the payment of substantial Federal estate taxes.

Mr. Richard Rapp felt that Mr. Clark was uncooperative and

was more concerned with avoiding a malpractice suit than

with settling the estate's problems.   Further, Mr. Richard

Rapp was unhappy because Mr. Clark threatened to withdraw

as counsel for MTSS in a litigation matter if he were
                           - 11 -


removed as counsel for the decedent's estate.    After the

other matter was resolved, Mr. Richard Rapp caused the

decedent's estate to retain different counsel.

     On August 19, 1988, Mrs. Rapp filed with the probate

court a document entitled Petition For Modification of

Trust Created Under Article Fifth of Decedent's Will

Admitted to Probate In Order to Carry Out Decedent's

Intent.   Mrs. Rapp's petition alleges:


     it was decedent's intention that the Trust
     created under Article Fifth of his Will for the
     benefit of Petitioner [i.e., Mrs. Rapp] during
     her lifetime was intended to qualify for the QTIP
     election and that decedent believed that the
     Trustees would pay all of the income from the
     Trust, at least annually, to or for the benefit
     of Petitioner during her lifetime.


Based upon the decedent's intentions as alleged,

Mrs. Rapp's petition asks the probate court to reform the

decedent's will "to make it clear that the income from

the Trust will be payable annually to Petitioner [i.e.,

Mrs. Rapp]" in order that the trust corpus will qualify as

qualified terminable interest property as defined by

section 2056(b)(7)(B).   The petition claims that the

subject trust is a "marital deduction gift", as defined by

section 21520(b) of the California Probate Code to be "a
                           - 12 -


transfer of property that is intended to qualify for the

marital deduction."   Mrs. Rapp's petition relies upon

section 15403 of the California Probate Code, which permits

modification or termination of a trust upon consent of

all beneficiaries, and section 15409(a) of the California

Probate Code (West 1991), which permits modification or

termination of   a trust to account for changed

circumstances.

     A hearing on Mrs. Rapp's petition was set for

September 29, 1988, and Mrs. Rapp served a copy of her

petition and a copy of the notice of hearing on the

decedent's sons, both in their capacity as cotrustees and

as beneficiaries, on Mr. David Rapp's two minor children,

and on Mr. Clark.   On or about September 28, 1988, the

probate court appointed Matthew S. Rae, Esquire, as

guardian ad litem for the minor children of Mr. David Rapp,

who were contingent remaindermen under the will, and for

the unborn, unknown, and/or unascertained lawful issue of

the decedent's two sons.

     In advance of the hearing on Mrs. Rapp's petition,

Mr. Richard Rapp made a survey of his father's friends and

associates to determine the decedent's intent at the time

his 1986 will was executed.   He also caused a search to be
                           - 13 -


made of the decedent's financial records and files.

Mr. Richard Rapp believed that Mr. Clark would not make a

credible witness, and Mr. Rapp concluded that he could not

defeat his mother's petition for reformation of the

decedent's will.

     The hearing on Mrs. Rapp's petition took place on

September 29, 1988.   The Commissioner of Internal Revenue

was not notified of the proceeding and did not enter an

appearance.   Mr. Clark was notified of the hearing, but he

did not voluntarily appear at the hearing.   The probate

court granted Mrs. Rapp's petition on October 31, 1988,

and the Court's order became final on April 30, 1989.

     The order of the probate court dated October 31, 1988,

reads as follows:


          The Petition for Modification of Trust
     Created Under Article Fifth of Decedent's Will
     Admitted to Probate in Order to Carry Out
     Decedent's Intent, came on the 29th day of
     September, 1988 in Department 11 at 9:15 a.m.
     for hearing and settlement by the above-entitled
     Court, the Honorable Richard C. Hubbell, Judge
     presiding, with Clark R. Byam of HAHN & HAHN,
     appearing on behalf of Laura B. Rapp; Gerald E.
     Lunn, Jr., appearing on behalf of Richard L. Rapp
     and David L. Rapp, Co-Executors of the Will of
     Bert Rapp, deceased and Matthew S. Rae, Jr.,
     Guardian ad Litem appearing on behalf of any
     and all minor and unborn, unknown, and/or
     unascertained grandchildren of decedent.
                     - 14 -


     Oral argument was presented by all parties
present and all parties then submitted the matter
for the Court's determination.

     Based upon the written pleadings and oral
argument, the Court finds as follows:

          (1) All notices of the hearing
     have been given as required by law.

          The Court Orders:

     (1) That Article FIFTH (b) of decedent's
     Will is modified as follows:

          "(b) During the lifetime of
          my wife, LAURA B. RAPP, the
          Trustee or co-Trustees shall
          pay the net income from the
          corpus of the trust annually
          or at more frequent intervals
          to or for the benefit of
          LAURA B. RAPP, during her
          lifetime. In addition to the
          net income, the Trustee or
          co-Trustees shall pay as much
          of the principal from the
          Trust to or for the benefit
          of my wife as shall be needed
          to provide for the reasonable
          health, education and support
          of my wife during her life-
          time. Any income accrued or
          held undistributed at the
          time of my wife's death shall
          be distributed to her
          estate."

          (2) that the following is added
     as Subsection (i) to Article FIFTH:

          "(i) I authorize my executor
          to elect to treat the trust
          created under this Article
          FIFTH, or any portion there-
                           - 15 -


                of, as "qualified terminable
                interest property" in order
                to obtain the marital deduc-
                tion for such property for
                federal estate tax purposes.
                Whether or not my executors
                make such an election, I
                hereby exonerate my executors
                from any liability resulting
                from making or failing to
                make such an election."


The order was signed by the probate court judge and was

also signed "Approved as to form" by the guardian ad litem,

Mr. Rae, and the attorney for the estate, Mr. Lunn.

     On or about November 9, 1988, shortly before the due

date for the petitioner's estate tax return, petitioner's

attorney filed with the Internal Revenue Service an

Application for Extension of Time to File U.S. Estate

(and Generation-Skipping Transfer) Tax Return and/or Pay

Estate (and Generation-Skipping Transfer) Tax(es) on Form

4768.   Petitioner requested an extension of time to file

until May 23, 1989, for the following reasons:


          The Decedent's estate includes numerous
     interrelated closely-held businesses, some
     of which have experienced serious financial
     problems. Significant questions of valuation
     remain unresolved despite diligent efforts
     to resolve them. Furthermore, a number of
     significant, unresolved contingent creditors'
     claims remain outstanding against the estate.
     The executor intends to make an election under
                          - 16 -


     Section 2057 [sic] (b)(7)(B)(v), but cannot, at
     this time, determine which portion of the estate
     is to be treated as "qualified terminable
     interest property."


Along with the application for an extension of time to

file, petitioner's attorney sent a payment of estate tax in

the amount of $156,424 and requested an extension of time

to pay any additional amount of estate tax for the

following reason:


          The amount of estate taxes can not [sic] be
     determined because the size of the gross estate
     is unascertainable (for the reasons set forth
     above under "Extension of Time to File"), and
     the executor's election to treat property passing
     to the surviving spouse as qualified terminable
     interest property cannot be made. Nevertheless,
     a payment of $156,424 against the amount of
     estate taxes estimated to be due is paid with
     this application.


Petitioner's attorney did not explain how the estate tax

payment of $156,424 was computed.

     On May 22, 1989, the executor filed the petitioner's

United States Estate (and Generation-Skipping Transfer)

Tax Return on IRS Form 706.   According to the return, the

decedent and Mrs. Rapp owned community property worth

$11,255,444.12 at the time of the decedent's death.   The

return reports that the decedent's total gross estate,
                              - 17 -


consisting of one-half the community property in the

aggregate amount of $5,627,722.06, is composed of the

following assets:


     Real estate, Sch. A                    $1,041,375.00
     Stocks and bonds, Sch. B                2,374,002.67
     Mortgages, notes, and cash, Sch. C      1,537,013.93
     Insurance on decedent's life, Sch. D       25,000.00
     Jointly owned property, Sch. E            105,576.96
     Other miscellaneous property, Sch. F
       Partnerships                           292,500.00
       Leasehold on bldg. and lot             115,000.00
       Option agreement                        20,000.00
       Overpayment of Federal income tax        1,991.00
       Jewelry and furs                       100,262.50
       Household furnishings                   15,000.00

        Total                               5,627,722.06


     A Schedule M--Bequests, Etc. to Surviving Spouse,

was filed with the petitioner's estate tax return.          The

executor answered "no" to question 1 on Schedule M.          That

question asks:


     Did any property pass to the surviving spouse as
     a result of a qualified disclaimer? If "Yes",
     attach a copy of the written disclaimer required
     by section 2518(b).


No written disclaimer was attached to the petitioner's

estate tax return.

     In response to question 2 on Schedule M, the executor

checked the space provided to "elect to claim a marital

deduction for qualified terminable interest property (QTIP)
                             - 18 -


under section 2056(b)(7)."    Schedule M states that the

executor intended to claim the marital deduction only with

respect to so much of the residue of the decedent's estate

as reduces the total estate tax payable to $156,424.    The

following statement is set forth on part 2 of Schedule M:


     A fraction of each of the above assets allocated
     to the testamentary QTIP trust established under
     Article FIFTH of decedent's last Will dated
     July 9, 1986, as construed by Court Order
     Modifying Decedent's Trust dated October 31, 1988
     shall be subject to the QTIP election hereunder.
     The numerator of such fraction shall be the
     minimum amount of federal estate tax marital
     deduction under Section 2056(b)(7) necessary to
     reduce the Federal Estate Tax to $156,424 (based
     on the values as finally determined for federal
     estate tax purposes of all assets includible in
     the decedent's taxable estate) and the denomina-
     tor shall be the final federal estate tax value
     of the property passing to the trust established
     under Article FIFTH of the decedent's will, as
     modified by the order modifying decedent's trust
     dated October 31, 1988, after taking into account
     all liabilities of the estate. * * * The fore-
     going provisions shall be interpreted based on
     the Executor's intent that the elective property
     will reflect its proportionate share of any
     increase or decline in value in the whole of the
     property listed above or any subsequently
     discovered property allocable to such trust and
     that the total federal estate tax payable
     hereunder shall not exceed $156,424.


The record of this case does not explain why the executor

intended to pay estate taxes of $156,424.
                           - 19 -


     On Part 1 of Schedule M, which calls for a list of

"Property Interests Which Are Not Subject to a QTIP

Election", the executor reported the property specifically

devised to Mrs. Rapp, consisting of the couple's residence,

the household furnishings, and the decedent's personal

effects, in the aggregate amount of $435,262.50.    On

part 2 of Schedule M, which calls for a list of "Property

Interests Which Are Subject to a QTIP Election", the

executor reported $3,444,087.28.    That amount is composed

of the value of the assets available for distribution to

the testamentary trust, $5,086,882.60 (i.e., total gross

estate, $5,627,722.06, less assets devised to Mrs. Rapp,

$435,262.50, and assets jointly owned with other

individuals, $105,576.96), less the portion of the property

that was not subject to the QTIP election, $802,510.21, and

the aggregate nonmarital deductions claimed on the return,

$840,285.11.   The marital deduction claimed on the return

is $3,683,899.38.   It consists of the total interests

passing to Mrs. Rapp, $3,879,349.78 (i.e., $3,444,087.28

plus $435,262.50) less Federal estate taxes, $156,424, and

other death taxes, $39,026.40.

     In the notice of deficiency issued to petitioner,

respondent determined that petitioner had "failed to fully
                           - 20 -


substantiate" the marital deduction.    Respondent allowed

the deduction to the extent of the property that had been

specifically devised to Mrs. Rapp, $435,262.50, but

disallowed the deduction to the extent of the property that

had been distributed to the testamentary trust.


                           OPINION

      For purposes of computing Federal estate taxes,

section 2056(a) permits an allowance of marital deduction

to be deducted from the gross estate.    Sec. 2056(a).   In

general, the allowance of marital deduction consists of

the value of any interest in property which passes or has

passed from the decedent to his or her surviving spouse.

Id.   However, as a general rule, the marital deduction

does not include the value of any property in which the

decedent's spouse is given a life estate or other

terminable interest and in which another person is given

an interest that may permit the other person to possess or

enjoy any part of the property after the interest of the

surviving spouse terminates or fails.    Sec. 2056(b)(1).

      An exception to the limitation applicable to life

estates or other terminable interests is provided by

section 2056(b)(7) in the case of "qualified terminable
                           - 21 -


interest property".   Under section 2056(b)(7)(A),

"qualified terminable interest property", herein referred

to as QTIP, is treated as passing only to the surviving

spouse, and no part of the property is treated as passing

to any person other than the surviving spouse.   Section

2056(b)(7)(B)(i) defines QTIP as follows:

     (i) In general.--The term "qualified terminable
     interest property" means property--

          (I) which passes from the decedent,

          (II) in which the surviving spouse has a
          qualifying income interest for life, and

          (III) to which an election under this paragraph
          applies.


A "qualifying income interest for life" is defined by

section 2056(b)(7)(B)(ii) as follows:


     (ii) Qualifying income interest for life.--The
     surviving spouse has a qualifying income interest
     for life if--

          (I) the surviving spouse is entitled to
          all the income from the property, payable
          annually or at more frequent intervals, or
          has a usufruct interest for life in the
          property, and

          (II) no person has a power to appoint any
          part of the property to any person other
          than the surviving spouse.
                           - 22 -


     After concessions by the parties, the sole issue for

decision in this case is whether the property distributed

to the testamentary trust established under the decedent's

will is QTIP, as defined by section 2056(b)(7)(B)(i), with

the result that the value of that property is eligible to

be included in the allowance of marital deduction provided

by section 2056(a).   Petitioner bears the burden of proving

eligibility for the deduction.   Rule 142(a), Tax Court

Rules of Practice and Procedure.    All Rule references in

this opinion are to the Tax Court Rules of Practice and

Procedure.

     As originally written, Article Fifth of the decedent's

1986 will provides that the residue of the decedent's

property, after the payment of certain debts and expenses,

is to be placed in trust for the benefit of the decedent's

surviving spouse, and, upon her death, to be divided

equally between the decedent's two sons.    The will does not

give Mrs. Rapp the right to receive income from the trust.

It provides that she is entitled to receive distributions

of income and principal from the trust if the cotrustees

make the determination in their "absolute discretion" that

she is in need of funds "for her proper health, education

and support."   Thus, under the decedent's 1986 will,
                           - 23 -


Mrs. Rapp is not entitled to receive "all the income from

the property, payable annually or at more frequent

intervals", as required by section 2056(b)(7)(B)(ii)(I).

Accordingly, as the decedent's 1986 will was originally

written, the property which formed the corpus of the

testamentary trust is not QTIP and is not eligible to be

included in the marital deduction.   Sec. 2056(b)(1).

     The decedent's 1986 will was reformed by the order of

the probate court issued on October 31, 1988, quoted above.

As reformed, Article Fifth (b) of the decedent's will

directs the trustees to "pay the net income from the corpus

of the trust annually or at more frequent intervals to or

for the benefit of LAURA B. RAPP, during her lifetime."

The reformed will also expressly authorizes the executor to

elect to treat the property held in the trust as QTIP.

     Petitioner argues that the corpus of the trust can be

included in the marital deduction for four reasons.     First,

petitioner argues that on the date of the decedent's death

Mrs. Rapp had an enforceable right under California law to

obtain reformation of the decedent's 1986 will as approved

by the order of the probate court and that the order of the

probate court should be respected for Federal estate tax

purposes.   Second, petitioner argues that the QTIP rules
                            - 24 -


are applied as of the date of the QTIP election, not the

date of the decedent's death.    Third, petitioner argues

that as of the date of the decedent's death, Mrs. Rapp

was entitled to receive annual distributions of all of

the income from the trust because the actions of the co-

trustees and the guardian ad litem in consenting to the

reformation constituted a "qualified disclaimer" under

section 2518.    Fourth, petitioner argues that, as of the

date of decedent's death, Mrs. Rapp was entitled to receive

annual distributions of all of the income from the trust

because the cotrustees were obligated to make such

distributions to Mrs. Rapp under a fiduciary duty to look

after her best interests.

Enforceable Right Under California Law to All Trust Income

     As a general rule, State law determines the property

rights and interests created by a decedent's will, but

Federal law determines the tax consequences of those rights

and interests.    E.g., De Oliveira v. United States, 767

F.2d 1344, 1347 (9th Cir. 1985).     In this case,

petitioner's eligibility to include the value of the trust

property in the marital deduction, for Federal estate tax

purposes, depends upon the nature of the interest that

Mrs. Rapp received in the trust under the decedent's 1986
                             - 25 -


will.    The nature of Mrs. Rapp's interest in the trust is a

matter of California State law.       See, e.g., Estate of Heim

v. Commissioner, 914 F.2d 1322, 1327 (9th Cir. 1990), affg.

T.C. Memo. 1988-433.

        Petitioner argues that the order of the probate court

reforming the decedent's will should be respected for

Federal estate tax purposes.     However, the law is clear,

and both parties to this case agree, that we are not bound

by the action of a State trial court, such as the order of

the probate court, that has not been affirmed by the

State's highest court.     Commissioner v. Estate of Bosch,

387 U.S. 456 (1967); Ahmanson Found. v. United States, 674

F.2d 761, 773-775 (9th Cir. 1981); see Estate of Nicholson

v. Commissioner, 94 T.C. 666, 673-674, 680 (1990).      If the

action of the probate court is to be respected for Federal

estate tax purposes, it must be in conformity with

California law, and in the absence of a determination by

the California Supreme Court, we are charged with the

responsibility of making that determination.       Commissioner

v. Estate of Bosch, supra at 465.       Thus, we must decide

whether Mrs. Rapp had an enforceable right under California

law to obtain annual distributions of all of the income
                           - 26 -


from the trust for life, as required by the order of the

probate court.   See id.

     Petitioner begins by arguing that the order of the

probate court must be presumed to be "a bona fide

recognition of enforceable rights" under California law

and that respondent has failed to rebut that presumption.

In support of that argument, petitioner cites section

20.2056(e)-2(d)(2), Estate Tax Regs. (currently sec.

20.2056(c)-2(d)(2), Estate Tax Regs.), which provides as

follows:


     If as a result of the controversy involving the
     decedent's will, or involving any bequest or
     devise thereunder, a property interest is
     assigned or surrendered to the surviving spouse,
     the interest so acquired will be regarded as
     having "passed from the decedent to his surviving
     spouse" only if the assignment or surrender was a
     bona fide recognition of enforceable rights of
     the surviving spouse in the decedent's estate.
     Such a bona fide recognition will be presumed
     where the assignment or surrender was pursuant to
     a decision of a local court upon the merits in an
     adversary proceeding following a genuine and
     active contest. However, such a decree will be
     accepted only to the extent that the court passed
     upon the facts upon which deductibility of the
     property interest depends. If the assignment or
     surrender was pursuant to a decree rendered by
     consent, or pursuant to an agreement not to
     contest the will or not to probate the will, it
     will not necessarily be accepted as a bona fide
     evaluation of the rights of the spouse.
                           - 27 -


     We are not convinced that there was a "genuine and

active contest" in the probate court or that the order of

the probate court constitutes "a decision of a local court

upon the merits in an adversary proceeding", so as to

trigger the presumption set forth in the above regulation.

Sec. 20.2056(e)-2(d)(2), Estate Tax Regs.   In this

connection, it is significant that the guardian ad litem

stated during the hearing before the probate court that a

"benefit" would be realized by the entire Rapp family if

the estate tax of approximately $2 million were postponed

until Mrs. Rapp's death.   He stated as follows:


          Under those circumstances the benefit to
     the entire family, the entire estate, by post-
     poning the tax until the surviving spouse dies,
     I believe is also a benefit on the person I have
     been appointed to represent.


We do not accept petitioner's assertion that the

investigation conducted by the executor proves that the

proceeding before the probate court was adversarial in

nature.   To the contrary, it is equally likely that the

executor's investigation was undertaken to justify

petitioner's position before this Court in order to obtain

the "benefit" of postponing the estate tax.
                            - 28 -


     In any event, we do not accept petitioner's assertion

that the order of the California probate court is "a

decision of a local court upon the merits in an adversary

proceeding following a genuine and active contest."      Sec.

20.2056(e)-2(d)(2), Estate Tax Regs.    To the contrary, the

record of the hearing before the probate court shows that

the court granted Mrs. Rapp's petition after ascertaining

the opinion of the guardian ad litem that his clients "will

not be adversely affected by this petition" and determining

that no objection had been filed to the petition.    No

witnesses were called to testify, and no documents were

introduced into evidence.    We find nothing in the record of

this case to show that the probate court "passed upon the

facts upon which deductibility of the property interests

depends."    Sec. 20.2056(e)-2(d)(2), Estate Tax Regs.

Rather, the order of the probate court appears to have been

"rendered by consent" such that it "will not necessarily

be accepted as a bona fide evaluation of the rights of the

spouse."    Sec. 20.2056(e)-2(d)(2), Estate Tax Regs.    Thus,

we reject petitioner's assertion that the order of the

probate court must be presumed to be a bona fide

recognition of Mrs. Rapp's enforceable rights under

California law.    We proceed to review California law
                           - 29 -


to determine whether Mrs. Rapp was entitled under the

decedent's will to receive annual distributions of all of

the income from the testamentary trust.

     Under California law, the nature of the interest given

by a testator to his or her surviving spouse is determined

in accordance with the testator's intent, as determined by

a construction of the language used in the will.     E.g.,

Gill v. Stone (In re Estate of Dodge), 491 P.2d 385 (Cal.

1971); Hembree v. Quinn (In re Estate of Russell), 444

P.2d 353 (Cal. 1968); Kime v. Barnard (Estate of Kime),

193 Cal. Rptr. 718 (Cal. Ct. App. 1983); Talbot v.

Bachelor (Estate of Casey), 198 Cal. Rptr. 170 (Cal. Ct.

App. 1982); Cullinan v. Dunne (Estate of Lindner), 149 Cal.

Rptr. 331 (Cal. Ct. App. 1978).     Evidence concerning the

circumstances surrounding the testator's execution of the

will, so-called extrinsic evidence, is generally admissible

"to determine whether a seemingly clear instrument or term

is actually ambiguous."   Hoover v. Hartman, 186 Cal. Rptr.

669, 673 (Cal. Ct. App. 1982); see also Saleen v. Aulman

(In re Estate of Taff), 133 Cal. Rptr. 737, 740-741 (Cal.

Ct. App. 1976).   If extrinsic evidence renders the language

of the will susceptible of two or more meanings, then the

extrinsic evidence can be used to resolve the ambiguity.
                           - 30 -


Hembree v. Quinn, supra at 361.     However, if the extrinsic

evidence does not render the will ambiguous, the extrinsic

evidence is disregarded and the plain language of the will

is relied upon to determine the testator's intent.     Estate

of Heim v. Commissioner, 914 F.2d at 1325.

     Irrespective of whether extrinsic evidence is

considered, the objective of the courts in California is to

determine the testator's intent from the language used and

not to write a new will for the testator.    In Talbot v.

Batchelor, supra at 172 the court stated as follows:


          Further, whether or not resort is had to
     extrinsic evidence, the court must determine the
     intent of the testator from the language used.
     The court in interpreting the will may not decide
     what the testator should have done or even that
     the testator desired to accomplish a particular
     objective. The court determines only what the
     testator did do by the manner in which he
     expressed himself. * * * In short, the court,
     under the guides of interpretation, may not write
     a new will for the testator.


     We note that the California Probate Code provides

special rules for a "marital deduction gift", defined as

"a transfer of property that is intended to qualify for

the marital deduction."   Cal. Probate Code sec. 21520(b)

(West 1991).   For this purpose, the "marital deduction" is

defined as "the federal estate tax deduction allowed for
                           - 31 -


transfers under Section 2056 of the Internal Revenue Code".

Cal. Probate Code sec. 21520(a) (West 1991).   If an

instrument contains   a marital deduction gift, the

California Probate Code provides a liberal construction

to allow a marital deduction, as follows:


          (a) The provisions of the instrument,
          including any power, duty, or discre-
          tionary authority given to a fiduciary,
          shall be construed to comply with the
          marital deduction provisions of the
          Internal Revenue Code.

          (b) The fiduciary shall not take any
          action or have any power that impairs
          the deduction as applied to the marital
          deduction gift. [Cal. Probate Code
          sec. 21522(a) and (b) (West 1991).]


These special rules do not apply unless there is sufficient

evidence to find that the decedent intended the gift to

qualify for the marital deduction.   See Estate of Heim v.

Commissioner, supra at 1329.

     In this case, as mentioned above, the language of the

decedent's 1986 will gives Mrs. Rapp an interest in only so

much of the income from the trust as is paid "for her

proper health, education and support" in the absolute

discretion of the cotrustees.   This language is clear and

unambiguous and cannot be construed to give Mrs. Rapp the
                             - 32 -


right "to all the income from the property, payable

annually or at more frequent intervals", as required by

the definition of qualifying income interest for life, set

forth in section 2056(b)(7)(B)(ii)(I).    Further, there is

no mention of the marital deduction in the decedent's will

nor any evidence from the language of the will that the

decedent intended the trust property to qualify for the

marital deduction.

     Notwithstanding the seemingly unambiguous language

used in the decedent's will, the Court allowed petitioner

to introduce extrinsic evidence of the facts and

circumstances surrounding the execution of the decedent's

1986 will, over respondent's objection.    As discussed

above, the introduction of such evidence is permissible

under California law.    E.g., Hembree v. Quinn, supra at

361-362; Hoover v. Hartman, supra at 673.

     Petitioner introduced the testimony of seven witnesses

into evidence and, based thereon, claims to have presented

substantial direct and indirect evidence "that the Decedent

intended that the residue of his estate qualify for the

marital deduction."     As direct evidence of such intent,

petitioner cites the testimony of three witnesses and

argues in its post-trial brief that the decedent told his
                           - 33 -


accountant, Mr. Lippert, "that he was changing his estate

plan to take advantage of the unlimited marital deduction"

and led Mr. Lippert "to believe that * * * [the decedent]

had instructed Attorney Clark to change his Will so that it

would qualify for the unlimited marital deduction."

Petitioner also argues that the decedent told Mrs. Rapp

that "when he died everything would be hers" and that the

decedent told his niece, Mrs. Josephson, that "whatever he

earned in his lifetime was going to be his wife's, and

ultimately his sons[']."

     As "indirect evidence" that the decedent intended the

residue of his estate to qualify for the marital deduction,

petitioner argues in its post-trial brief that the decedent

told his wife, his son, and his banker, Mr. Bruce Bell,

"that his estate plan had been drafted to avoid or defer

taxes, and that there would be minimal taxes due upon his

death."   Petitioner also cites as indirect evidence the

decedent's statements made to Mrs. Josephson, his

investment adviser, Mr. Parneet Kongkeo, and his friend,

Mr. John Pabigian, about "the importance of estate planning

and deferring taxes."   Petitioner further cites the fact

that the decedent had shown "an article to his CPA

discussing the marital deduction and the changes in the
                           - 34 -


estate tax laws."   According to petitioner, the statements

made by the decedent to those individuals "are simply not

reconcilable with the Will as drafted" and "Under

California law the Will is therefore ambiguous".

     Even assuming that we accept petitioner's

characterization of the testimony of its seven witnesses,

we do not agree that any of the testimony proves either

that the decedent intended the corpus of the testamentary

trust to qualify for the marital deduction, or that any of

the language used in the decedent's 1986 will is ambiguous.

The testimony of petitioner's witnesses consists of general

statements made by the decedent to his family, friends, and

business associates about estate planning and death taxes.

None of petitioner's witnesses, other than Mrs. Rapp, ever

saw the decedent's 1986 will, and in no case did the

decedent discuss specific provisions of his will with any

of them.   None of the decedent's statements specifically

refers to his 1986 will, let alone uncovers an ambiguity in

the language used in the will.

     The picture that emerges from the testimony of

petitioner's witnesses is that the decedent was a

successful businessman who was knowledgeable about the

Federal income tax consequences of his leasing business,
                           - 35 -


who usually sought to minimize taxes, who wanted to provide

for Mrs. Rapp and his sons, and who attempted to educate

himself about estate planning and death taxes by reading

articles and discussing those matters with various friends

and business associates.   Prior to the time the decedent

executed his 1986 will, the record shows that the decedent

was aware of the QTIP provisions of the marital deduction.

This is shown by the fact that he had discussed an article

on that subject with his accountant, Mr. Lippert, during

1984, 1985, or 1986.   We can even infer from the testimony

of petitioner's witnesses that the decedent considered

using a so-called QTIP trust in his will.     However, there

is no evidence that the decedent actually did so.     The

language of Article Fifth (b) of his 1986 will does not

give Mrs. Rapp the right to receive the annual income from

the trust.   Rather, Article Fifth (b) gives Mrs. Rapp only

so much of the income from the trust as the cotrustees in

their "absolute discretion" deem necessary "for her proper

health, education and support".     The decedent's 1986 will

does not use the term "marital deduction", "QTIP", or the

like,   or otherwise give any indication that the decedent

intended the corpus of the testamentary trust to be

eligible for the marital deduction.     Nor is there any
                           - 36 -


extrinsic evidence that uncovers an ambiguity, in the sense

of a double meaning, in the language used in the decedent's

1986 will from which we could infer that the decedent

intended the trust to be eligible for the marital

deduction.   We simply have no basis to conclude from the

record of this case that the decedent intended Mrs. Rapp to

be "entitled to all the income from the property, payable

annually or at more frequent intervals" as required by

section 2056(b)(7)(B) (ii)(I).    See Estate of Heim v.

Commissioner, 914 F.2d at 1330.


QTIP Rules Must Be Applied as of the Date of the Election

     Petitioner's second argument is that the date for

determining whether property or an interest in property

passing to the surviving spouse qualifies as QTIP is the

date of the QTIP election and not the date of the

decedent's death.   According to petitioner, the trust

property in this case qualifies as QTIP because on the date

the QTIP election was made, Mrs. Rapp was entitled to all

of the income from the trust.    In support of that argument,

petitioner cites recent opinions issued by the U.S. Courts

of Appeals for the Sixth, Eighth, and Fifth Circuits in

Estate of Spencer v. Commissioner, 43 F.3d 226 (6th Cir.
                           - 37 -


1995), revg. T.C. Memo. 1992-579; Estate of Robertson v.

Commissioner, 15 F.3d 779 (8th Cir. 1994), revg. 98 T.C.

678 (1992); and Estate of Clayton v. Commissioner, 976 F.2d

1486 (5th Cir. 1992), revg. 97 T.C. 327 (1991).

     The facts of each of the cases relied upon by

petitioner, Estate of Spencer, Estate of Robertson, and

Estate of Clayton, are similar.     The estate plan of the

decedent in each of those cases included one or more trusts

in which the surviving spouse was given a qualifying income

interest for life, as defined by section

2056(b)(7)(B)(ii)(I), and at least one other trust in which

the surviving spouse was not given a qualifying income

interest for life.   The decedent in each of the cases had

clearly articulated his intention that some or all of the

residue of his estate would pass to the “QTIP trust”.    The

controversy arose because each decedent had also given his

personal representative the discretion to determine what

portion, if any, of the residue of his estate should pass

to the “QTIP trust”, and what portion should pass to the

non-QTIP trust.   The Commissioner argued that the personal

representative’s discretion to direct property away from

the “QTIP trust” constituted an impermissible power to

appoint property away from the surviving spouse, contrary
                          - 38 -


to section 2056(b)(7)(B)(ii)(II), and precluded the

property from meeting the requirement, imposed by section

2056(b)(7)(B)(i)(I), that it be property “which passes from

the decedent”.

     In each of the three cases, the Court of Appeals

rejected the Commissioner’s reading of section 2056(b)(7)

as contrary to the statute.    Estate of Spencer v.

Commissioner, supra at 230-231; Estate of Robertson v.

Commissioner, supra at 783-784; Estate of Clayton v.

Commissioner, supra at 1497.   All of the courts noted that

the election is one of the elements of the definition of

QTIP, sec. 2056(b)(7)(B)(i)(III), and at least one of those

courts reasoned that the statute requires the validity of

the QTIP election to be determined as of the time the

election is made, rather than as of the date of the

decedent’s death, Estate of Spencer v. Commissioner, supra

at 231; Estate of Robertson v. Commissioner, supra at 783-

784; Estate of Clayton v. Commissioner, supra at 1498.

     In each of the cases, when the court tested the

validity of the election, it found that the property in the

“QTIP trust” met the definition of QTIP because, in

accordance with the decedent’s expressed interest, the

surviving spouse was entitled to all of the income from the
                            - 39 -


property for life, payable annually or at more frequent

intervals, and no person had a power to appoint any part of

the property to any person other than the surviving spouse.

Thus, in each case the court held that the surviving spouse

had a qualifying interest for life in the property held by

the “QTIP trust”, as required by section 2056(b)(7)(B)(i)

(II), and that the decedent’s estate was entitled to

include the value of the property held by the “QTIP trust”

in the marital deduction.

     The tacit premise of petitioner’s second argument is

that we should test the validity of the QTIP election based

upon the interest that Mrs. Rapp received under the order

of the probate court reforming the decedent’s 1986 will.

However, as discussed above, we are not bound by the order

of the probate court in determining what interest in the

trust passed from the decedent to Mrs. Rapp under

California law.   Commissioner v. Estate of Bosch, 387 U.S.

at 465.   In fact, as discussed in the prior section of this

opinion, we found that the order of the probate court was

not in accordance with the decedent’s intent as determined

from the language used in the decedent’s 1986 will and,

thus, was not in accordance with California law.

Accordingly, we found that Mrs. Rapp’s interest in the
                           - 40 -


trust was the interest described by the decedent’s 1986

will, as originally drafted.    Under the decedent’s 1986

will, Mrs. Rapp did not have the right to any income from

the trust property.   She was entitled to receive income

from the trust only if the cotrustees determined in their

“absolute discretion” that she needed funds “for her proper

health, education and support.”

     In this case, therefore, it does not matter when the

validity of the QTIP election is tested, as of the date of

the decedent’s death or as of the date of the election.      At

no time did Mrs. Rapp have a qualifying income interest for

life in the trust, as defined by section 2056(b)(7)(B)(ii),

which passed from the decedent, as required by section

2056(b)(7)(B)(i)(I), and at no time did the trust property

in this case qualify as QTIP.


The Order of the Probate Court Is a "Qualified Disclaimer"
Under Section 2518(b)

     Petitioner's third argument is that the order of the

probate court is, in effect, a "qualified disclaimer" as

defined by section 2518(b).     Petitioner argues that the

trustees and the guardian ad litem "consented" to the

probate court's order reforming the decedent's will and, in

effect, disclaimed "the right and/or power of the Trustees
                           - 41 -


to accumulate income of the marital trust during Laura's

lifetime."   Petitioner takes this position in the

alternative to its position, discussed above, that the

order of the probate court was "a decision of a local court

upon the merits in an adversary proceeding".   According to

petitioner, "the effect of such a qualified disclaimer is

that the income interest must be deemed to have passed from

the Decedent to Laura [i.e., Mrs. Rapp]."

     Respondent argues that the Court should not consider

this issue, viz, whether the probate court's order meets

the requirements of a qualified disclaimer under State or

Federal law, because it was raised for the first time in

petitioner's post-trial brief.   As a result, respondent

complains, the Government was deprived of an opportunity to

introduce evidence at trial that would have had a bearing

on the issue.   In this regard, respondent notes that one of

the cotrustees, Mr. David Rapp, and the guardian ad litem,

Mr. Rae, were not called to testify at trial, and respon-

dent did not examine the other cotrustee, Mr. Richard Rapp,

about this issue.   Respondent also raises a number of

substantive issues about whether the probate court's order

constitutes a qualified disclaimer under either Federal or

California State law.   Finally, respondent argues in the
                           - 42 -


alternative that, even if the order of the probate court

does constitute a qualified disclaimer, Mrs. Rapp did not

thereby receive a qualifying income interest for life as

required by section 2056(b)(7)(B)(i)(II).

     In general, if a person makes a qualified disclaimer

with respect to an interest in property, then the Federal

estate, gift, and generation-skipping transfer tax

provisions apply "as if the interest had never been

transferred to such person."   Sec. 2518(a); see sec.

25.2518-1(b), Gift Tax Regs.   The interest is treated as

passing directly from the transferor of the property to

the person entitled to receive it as a result of the

disclaimer.   Sec. 25-2518-1(b), Gift Tax Regs.   If property

is treated as passing from the decedent to his or her

surviving spouse as a result of a qualified disclaimer,

then the value of the property can be included in the

marital deduction.   See DePaoli v. Commissioner, 62 F.3d

1259 (10th Cir. 1995), revg. T.C. Memo. 1993-577; sec.

20.2056(d)-1(b), Estate Tax Regs.

     Petitioner raised its contention that the probate

court order constituted a qualified disclaimer under

section 2518 for the first time in its post-trial brief.

In deciding whether to permit a party to raise a new issue
                             - 43 -


on brief, we must determine whether considerations of

surprise and prejudice require the Court to protect the

opposing party from having to face a belated issue at a

time when the opportunity to present pertinent evidence is

limited.   Ware v. Commissioner, 92 T.C. 1267, 1268 (1989),

affd. 906 F.2d 62 (2d Cir. 1990).     In cases where the

opposing party is surprised by the issue, in the sense that

the proponent did not give "fair warning" of his intent to

raise it, and is prejudiced by being foreclosed from

introducing evidence that would have a bearing on the new

issue, we have declined to consider the new issue.     See,

e.g., Sundstrand Corp. v. Commissioner, 96 T.C. 226, 346-

348 (1991).   On the other hand, we have permitted a party

to raise a new issue on brief where we have found that

there would be no prejudice to the opposing party.    See,

e.g., Ware v. Commissioner, supra at 1268-1269; Pagel, Inc.

v. Commissioner, 91 T.C. 200, 210-213 (1988), affd. 905

F.2d 1190 (8th Cir. 1990).

     In this case, respondent received no warning, prior to

petitioner's post-trial brief, that petitioner intended to

contend that the probate court's order constituted a

qualified disclaimer under section 2518.     Also, at the time

this issue was raised, respondent was foreclosed from
                            - 44 -


examining the cotrustees and the guardian ad litem about

the various factual elements of the definition of qualified

disclaimer under section 2518(b) and section 278 of the

California Probate Code.    Therefore, respondent would be

prejudiced if we were to consider this issue.

     Moreover, even if we were to agree to consider this

issue, we would have to find, on the basis of the record

made at trial, that petitioner did not meet its burden of

proving that the probate court's order constituted a

qualified disclaimer.   See Rule 142.   As quoted above, a

qualified disclaimer is "an irrevocable and unqualified

refusal by a person to accept an interest in property".

Sec. 2518(b).   Petitioner argues in its post-trial brief

that "The interest disclaimed was the right and/or power of

the Trustees to accumulate income of the marital trust

during Laura's lifetime."    However, there is nothing in the

record of this case to prove that the trustees disclaimed

anything.   The order of the probate court on which

petitioner relies is the action of the probate court and

not the action of any of the parties to that proceeding.

See Harris v. Commissioner, 340 U.S. 106, 110 (1950).

Neither of the trustees in this case, Mr. Richard Rapp or

his brother, testified that either of them made a qualified
                            - 45 -


disclaimer of anything.    In fact, to the contrary, on

Schedule M of the decedent's estate tax return, one of the

trustees, Mr. Richard Rapp, acting in his capacity as

executor, answered "no" to question No. 1:    "Did any

property pass to the surviving spouse as a result of a

qualified disclaimer?"    Mr. Richard Rapp also failed to

attach to the petitioner's estate tax return a written

disclaimer as required by question No. 1.    Finally, there

is no testimony or other evidence to show what interest in

property was being disclaimed, as required both by section

25.2518-2(b)(1), Gift Tax Regs. and by California Probate

Code section 278(b), or that the requisite interest passed

to the surviving spouse by operation of law without any

direction on the part of the persons purporting to make the

disclaimer.   See DePaoli v. Commissioner, supra; Estate of

Bennett v. Commissioner, 100 T.C. 42, 67, 72-73 (1993).


Fiduciary Duty Compels Trustees To Pay All Trust Income
to Mrs. Rapp

     Petitioner's final argument is that this case is

governed by the opinion of the Court of Appeals for the

Ninth Circuit in Estate of Ellingson v. Commissioner, 964

F.2d 959 (9th Cir. 1992), revg. 96 T.C. 760 (1991).

According to petitioner, "Under the Ellingson case, the
                           - 46 -


marital deduction should be allowed, because the Trustees

had a fiduciary duty to * * * [Mrs. Rapp] to comply with

the QTIP rules."   Petitioner's post-trial brief further

states as follows:


     Petitioner submits that the Trustees were under a
     fiduciary duty to commit to pay all of the income
     to Laura [i.e., Mrs. Rapp], both because of her
     need to receive such income and because it would
     be detrimental to her legitimate interests under
     the Will to pay a large estate tax at the
     Decedent's death.


     The thrust of petitioner's argument is that the

trustees are bound to pay all of the income of the trust to

Mrs. Rapp because otherwise the trust would not qualify for

the marital deduction and the estate would be liable for

estate taxes of more than $2 million, and that would be

contrary to Mrs. Rapp's best interests.   Petitioner argues

that Mrs. Rapp, thus, had a "qualifying income interest for

life" in the trust, as required by section 2056(b)(7)(B)

(ii), and the trust property qualifies as QTIP.

     In support of this argument, petitioner cites section

16081(a) of the California Probate Code, under which

trustees are directed to "act in accordance with fiduciary

principles and * * * not act in bad faith" even if a trust

instrument confers absolute, sole, or uncontrolled
                             - 47 -


discretion on the trustee.    Petitioner also cites section

16040(a) of the California Probate Code, which requires a

trustee to administer the trust:


       with the care, skill, prudence, and diligence
       under the circumstances then prevailing that a
       prudent person acting in a like capacity and
       familiar with such matters would use in the
       conduct of an enterprise of like character and
       with like aims to accomplish purposes of the
       trust as determined from the trust instrument.


       Petitioner's argument is based upon a misreading of

the Estate of Ellingson case.    In that case, the settlor's

estate plan provided for the creation of a "Marital

Deduction Trust" upon his death under which his surviving

spouse received the "entire net income" of the trust for

her life.    However, the trust agreement contained a proviso

under which the trustees, one of whom was the surviving

spouse, were authorized to accumulate income in excess of

"the amount which the Trustee deems to be necessary for

* * * [the surviving spouse's] needs, best interests and

welfare".    Estate of Ellingson v. Commissioner, supra at

960.

       The Court of Appeals found, on the basis of a fully

stipulated record, that the settlor intended the trust

property to constitute QTIP and to qualify for the marital
                             - 48 -


deduction.    Id. at 963-964.    Notwithstanding the decedent's

expressed intent that the trust qualify for the marital

deduction, the "accumulation proviso" seemed to mean that

the surviving spouse was not entitled to all of the income

from the trust and, therefore, the surviving spouse did not

have a "qualifying income interest for life" as defined by

section 2056(b)(7)(B)(ii).      Thus, there was a conflict

between the provisions of the trust agreement under which

the surviving spouse was to receive the "entire net income"

of the trust and the accumulation proviso under which the

trustee was authorized to accumulate income deemed to be in

excess of the amount necessary for the surviving spouse's

"best interests".

     In the Ellingson case, the Court of Appeals resolved

the ambiguity in the trust agreement by interpreting the

language used in the accumulation proviso in accordance

with the "the settlor's clearly manifested intent" that the

marital deduction property qualify for the QTIP deduction.

Id. at 965.   The Court of Appeals concluded that because

the trustees had chosen to make the QTIP election, the

"best interests" of the surviving spouse, as that phrase

was used in the accumulation proviso, required the trustees

to pay all of the income of the trust to the surviving
                          - 49 -


spouse during her lifetime.   Otherwise, they would be

forced to sell the family farm in order to pay estate taxes

in excess of $8 million, and that would not be in the "best

interests" of the surviving spouse.     Id. at 964.   On the

other hand, if the trustees had chosen to decline to make

the QTIP election, then the "best interests" of the

surviving spouse would permit the accumulation of income.

     Petitioner is asking this Court to do something that

the Court of Appeals in Ellingson did not do.    Petitioner

asks us to find that the trustees are required to pay all

of the income from the trust to Mrs. Rapp on the ground

that it is in Mrs. Rapp's "best interests", for the trust

to qualify for the marital deduction.    Unlike the Ellingson

case, however, there is no evidence in the trust instrument

that the decedent intended such result.    Therefore, the

Ellingson case does not govern this one.    In fact, the

Court of Appeals specifically distinguished its opinion

from Wisely v. United States, 893 F.2d 660 (4th Cir. 1990);

Estate of Doherty v. Commissioner, 95 T.C. 446 (1990); and

Estate of Nicholson v. Commissioner, 94 T.C. 666 (1990),

which it described as cases in which there was "no clearly

manifested intent" in the instrument that the trust
                            - 50 -


property qualify as QTIP.   See Estate of Ellingson v.

Commissioner, 964 F.2d at 964-965.

     Petitioner also cites Estate of Mittleman v.

Commissioner, 522 F.2d 132 (D.C. Cir. 1975), revg. T.C.

Memo. 1973-112, in support of its position.   That case was

decided before the QTIP provisions were enacted.    It

involves section 2056(b)(5), which contains a similar

requirement to the definition of qualifying income interest

for life found in section 2056(b)(7)(B)(i)(II).    Section

2056(b)(5) permits a marital deduction with respect to

property in which the surviving spouse is given a life

estate with a general power of appointment.   It requires

the surviving spouse to be "entitled for life to all the

income from the entire interest, or all the income from a

specific portion thereof, payable annually or at more

frequent intervals".   Sec. 2056(b)(5).

     In Estate of Mittleman, supra at 133 n.1, the

decedent's will gave the residue of his property to a trust

"To provide for the proper support, maintenance, welfare

and comfort" of his surviving spouse for her entire

lifetime.   The issue in that case was whether the quoted

language conveyed all of the income from the trust payable

annually or at more frequent intervals.   After examining
                          - 51 -


the language of the will as a whole, as well as extrinsic

evidence, the court found "beyond peradventure that the

testator intended a gift of the entire trust income to the

wife, and distribution thereof promptly enough to qualify

the trust property for the marital deduction."   Id. at 137.

Therefore, Estate of Mittleman, is not apposite to this

case in which, as discussed above, our examination of the

language of the will and extrinsic evidence fails to show

that the decedent intended Mrs. Rapp to receive all the

income from the trust property payable annually or at more

frequent intervals.

     For the foregoing reasons, we find that the property

distributed to the testamentary trust created under the

decedent's 1986 will is not QTIP and is not eligible to be

included in the marital deduction claimed by petitioner for

Federal estate tax purposes.   To reflect that finding and

concessions of the parties,



                               Decision will be entered

                         under Rule 155.
