                        T.C. Memo. 1996-471



                      UNITED STATES TAX COURT



               ESTATE OF MYRTLE V. DIETZ, DECEASED,
          EDWARD A. DIETZ, III, EXECUTOR, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10326-95.                 Filed October 21, 1996.



     John Chalk, Jr. and John W. Michener, Jr., for petitioner.

     James W. Lessis, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     PARKER, Judge:   Respondent determined a deficiency of

$24,634.19 in the Federal estate tax of the Estate of Myrtle V.

Dietz (the estate).

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the date of decedent's
                               - 2 -


death, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

     The issue for decision is whether Myrtle V. Dietz possessed

at her death a general power of appointment over the Edward A.

Dietz Trust that requires inclusion in decedent's gross estate

under section 2041(a)(2) of $67,458.50, representing 5 percent of

the value of the trust on the date of decedent's death.

                          FINDINGS OF FACT

     This case has been submitted fully stipulated.     The

stipulation of facts and the exhibits attached thereto are

incorporated herein by this reference.

     Myrtle V. Dietz (decedent) resided in Fort Worth, Texas, at

the time of her death on July 12, 1992.      Edward A. Dietz III (the

executor) was granted letters testamentary by the Probate Court

in Tarrant County, Texas, on August 10, 1992.     The executor

resided in Fort Worth, Texas, at the time the petition was filed.

     Decedent was married to Edward A. Dietz (Mr. Dietz) from

June 1926 until his death on November 22, 1975.     They had two

children during their marriage:   Edward A. Dietz, Jr. (Edward

Jr.), who was born May 9, 1931, and died February 11, 1990; and

Virginia M. Dietz Wallace (Virginia), who was born January 26,

1928, and died December 24, 1993.

     Edward Jr. was married to Barbara Stratton Dietz from
                                   - 3 -


May 30, 1953, until his death.       Edward Jr. and his wife had five

children during their marriage, all of whom are still living:

Edward A. Dietz III,1 born May 21, 1954; Diane Dietz Stocker,

born September 26, 1955; Debbie Dietz, born December 1, 1956;

Dixie Dietz Crow, born May 20, 1959; and Danni Dietz Lougee, born

October 18, 1960.

      Virginia was married to Charles E. Wallace on September 4,

1946.       They had four children during their marriage, all of whom

are still living:       C.E. Wallace III, born June 30, 1948; Marsha

Wallace Mills, born December 31, 1949; Carter Wallace, born July

27, 1951; and David C. Wallace, born July 5, 1954.

      Mr. Dietz executed his last will and testament (the will) on

January 25, 1973.       The will provided that the residue of his

estate fund the Edward A. Dietz Trust (the trust) for the benefit

of decedent, their children, and their grandchildren.       Article 5

of the will contained provisions for distributions from the

trust.       Section 5.1 of the will provided that, during the life of

decedent, the trustee, after taking into account other funds of

decedent, had the discretion to distribute to decedent so much of

the trust's net income and principal which the trustee deemed

necessary for the "care, support and maintenance, hospital and

medical needs and expenses of invalidism" of decedent.       Section

5.2   of the will gave the trustee discretion to sprinkle net

        1
            Edward A. Dietz III is the executor of decedent's estate.
                                - 4 -


income and principal to the children and grandchildren of Mr.

Dietz for their "care, support and maintenance, hospital and

medical needs and education."   Section 5.3 of the will stated the

following:

          Any other provision hereof to the contrary
     notwithstanding, my said wife shall have, so long as
     she shall live, the absolute right to withdraw from the
     principal of the trust, each calendar year, any amount,
     in cash or in kind, not in excess of Five Thousand
     Dollars ($5,000.00) or five percent (5%) of the then
     value of the principal of the trust, whichever amount
     is greater. Said right to withdraw such amount shall
     be noncumulative, however, and if in any such year my
     said wife shall fail to withdraw all of such amount she
     shall not be entitled in any subsequent year to
     withdraw such amount as she failed to withdraw in any
     prior year. The sums, if any, actually withdrawn from
     the trust by my said wife pursuant to this
     authorization therefor shall be in addition to and not
     in lieu of any discretionary payments to her by the
     Trustee hereunder and need not be taken into account by
     the Trustee in determining my wife's need for such
     discretionary payments.

     After the death of Mr. Dietz, the trust was established

pursuant to the provisions of his will.   At no time prior to

decedent's death did she exercise her rights under section 5.3.

At decedent's death, the fair market value of the principal of

the trust was $1,349,170.02.

     On April 14, 1993, the executor filed a Federal estate tax

return for decedent's estate.   On March 16, 1995, respondent

issued a notice of deficiency to the estate, determining a

deficiency in estate tax of $24,634.19.   Respondent increased the

gross estate by the amount of $67,458.50, which is equal to 5
                               - 5 -


percent of $1,349,170.02, the fair market value of the principal

of the trust on the date of decedent's death.

                              OPINION

     Section 2041(a)(2) requires that the value of a decedent's

gross estate include the value of all property--

     To the extent of any property with respect to which the
     decedent has at the time of his death a general power
     of appointment created after October 21, 1942, or with
     respect to which the decedent has at any time exercised
     or released such a power of appointment by a
     disposition which is of such nature that if it were a
     transfer of property owned by the decedent, such
     property would be includible in the decedent's gross
     estate under sections 2035 to 2038, inclusive. For
     purposes of this paragraph (2), the power of
     appointment shall be considered to exist on the date of
     the decedent's death even though the exercise of the
     power is subject to a precedent giving of notice or
     even though the exercise of the power takes effect only
     on the expiration of a stated period after its
     exercise, whether or not on or before the date of the
     decedent's death notice has been given or the power has
     been exercised.

Sec. 2041(a)(2).   Section 2041(b)(1) defines a general power of

appointment, with exceptions not applicable to this case, as "a

power which is exercisable in favor of the decedent, his estate,

his creditors, or the creditors of his estate".    The power to

consume the principal of the trust is a power of appointment.

Sec. 20.2041-1(b), Estate Tax Regs.     The possession of a general

power of appointment is subjected to the estate tax, whether or

not the power is exercised, and the exercise or release of such

power during the holder's life is subjected to the gift tax.

Estate of Kurz v. Commissioner, 101 T.C. 44, 53 (1993),
                                 - 6 -


supplemented and reconsideration denied T.C. Memo. 1994-221,

affd. 68 F.3d 1027 (7th Cir. 1995).       The lapse of such a power

during the lifetime of the person possessing the power is

considered a release of the power.       In regard to the lapse of

such a power, section 2041(b)(2) provides:

     The lapse of a power of appointment created after
     October 21, 1942, during the life of the individual
     possessing the power shall be considered a release of
     such power. The preceding sentence shall apply with
     respect to the lapse of powers during any calendar year
     only to the extent that the property, which could have
     been appointed by exercise of such lapsed powers,
     exceeded in value, at the time of such lapse, the
     greater of the following amounts:

                (A) $5,000, or

               (B) 5 percent of the aggregate value, at
          the time of such lapse, of the assets out of
          which, or the proceeds of which, the exercise
          of the lapsed powers could have been
          satisfied.

     Decedent had the right to withdraw funds from the principal

of the trust.   This power to consume in favor of decedent herself

was a general power of appointment.       Decedent never exercised her

power.   Decedent's right to withdraw was noncumulative, and thus

her failure to exercise her right by the end of each calendar

year prior to her death was a lapse of the power over the amount

available to her for that year.    As the amounts over which

decedent's power lapsed each year before the year of her death

did not exceed those specified in section 2041(b)(2), those
                               - 7 -


amounts were not subjected to the gift tax during her life nor

required to be included in her gross estate upon her death.2

     It is the treatment of the amount over which decedent

possessed the power during the year of her death (the final

year's amount) that is at issue.   It is respondent's position

that decedent's power had not lapsed at the time of her death,

making the exception under section 2041(b)(2) of the greater of

$5,000 or 5 percent of the value of assets (the section

2041(b)(2) exception) unavailable, and thereby subjecting the

final year's amount to the general rule of inclusion under

section 2041(a)(2).

     It is the estate's position that the section 2041(b)(2)

exception extends to the final year's amount.   The estate argues

that the example given in section 20.2041-3(d)(3), Estate Tax

Regs., is inconsistent with the language of section 2041(b)(2).

The estate also argues that the section 2041(b)(2) exception was

designed as a de minimis exception and that to include the final

year's amount in decedent's gross estate would defeat the purpose

of that section.   Further, the estate argues that the final

year's amount should not be included because the estate has no

dominion or control over the trust property.




     2
       Sec. 2514(e) contains a similar provision for purposes of
gift tax.
                               - 8 -


     Throughout the estate's brief, the estate speaks of section

2041(b)(2) applying to lapsed powers in all years, including

those in the year of a taxpayer's death.    The estate cites Estate

of Noland v. Commissioner, T.C. Memo. 1984-209, for this

proposition.   We agree that section 2041(b)(2) applies to lapsed

powers in all years.   Our holding in Estate of Noland v.

Commissioner is in accordance with that.    In that case we held

that "under section 2041(b)(2), the amount includible in the

gross estate in this case for each of the years 1973 through 1978

is limited to the amount, if any, by which the lapsed portion of

the power exceeded $5,000."3   Id.   (Emphasis added.)   What the

estate fails to grasp in the instant case is that, at the time of

decedent's death on July 12, 1992, her power over the final

year's amount had not yet lapsed.

Section 20.2041-3(d)(3), Estate Tax Regs.

     Respondent's treatment of the final year's amount follows an

example given in section 20.2041-3(d)(3), Estate Tax Regs., which

the estate says is inconsistent with section 2041(b)(2).     That

example reads:

     For example, assume that A transferred $200,000 worth
     of securities in trust providing for payment of income

     3
       In that case the year of decedent's death was 1978, and
respondent did not determine any deficiency in estate tax (nor
seek any increased deficiency from the Tax Court) in regard to
the 1978 amount that had not lapsed at the time of her death in
1978. Thus we did not directly address the issue that is
presented in the instant case.
                               - 9 -


     to B for life with remainder to B's issue. Assume
     further that B was given a non-cumulative right to
     withdraw $10,000 a year from the principal of the trust
     fund * * * . In such case, the failure of B to
     exercise his right of withdrawal will not result in
     estate tax with respect to the power to withdraw
     $10,000 which lapses each year before the year of B's
     death. At B's death there will be included in his
     gross estate the $10,000 which he was entitled to
     withdraw for the year in which his death occurs less
     any amount which he may have taken during that year. *
     * *

Sec. 20.2041-3(d)(3), Estate Tax Regs.

     The above example is taken directly from the Senate Report

on the Powers of Appointment Act of 1951, ch. 165, sec. 2, 65

Stat. 91.   See S. Rept. 382, 82d Cong., 1st Sess. (1951),

reprinted in 1951 U.S.Code Cong. & Admin. News (U.S.C.C.A.N.)

1530.   With respect to then proposed new section 811(f)(5), which

in substance is identical to current section 2041(b)(2), the

Senate report stated:

     The House bill provided that the failure to exercise a
     future power which lapses during the life of the holder
     of the power shall not be deemed an exercise or release
     of the power. An amendment by your committee modifies
     this latter provision so as to exempt from estate and
     gift tax only limited amounts of property subject to
     lapsed powers. The committee amendment provides an
     annual exemption with respect to the lapsed powers
     equal to $5,000 or 5 percent of the trust or fund in
     which the lapsed power existed, whichever is the
     greater. Thus, for example, if a person has a
     noncumulative right to withdraw $10,000 a year from the
     principal of a $200,000 trust fund, failure to exercise
     this right will not result in either estate or gift tax
     with respect to the power over $10,000 which lapses
     each year prior to the year of death. At his death
     there will be included in his gross estate the $10,000
     which he was entitled to draw for the year in which his
     death occurs, less any sums which he may have taken on
                               - 10 -


     account thereof while he was alive during the year.    *
     * *

S. Rept. 382, supra, 1951 U.S.C.C.A.N. at 1535.

     The section 2041(b)(2) exception is an exception to be

applied to the property over which the decedent's general power

of appointment has lapsed and would otherwise be considered

released.    It is not an exception to be applied to property over

which the decedent still has a general power of appointment at

the time of death.    In the example, the exception was applied to

the amounts for the years for which B's power had lapsed.       As in

the facts of this case, B's final year's power had not lapsed at

the time of his death, so no exception was available for that

year.    The example in the regulation is not inconsistent with

section 2041(b)(2).

Congressional Intent

     The Powers of Appointment Act of 1951 was enacted to remedy

problems with the changes made to then section 811(f) of the

Internal Revenue Code of 1939 by the Revenue Act of 1942.       See

Estate of Kurz v. Commissioner, 101 T.C. at 51; S. Rept. 382,

supra.   Section 811(f), as amended by the Revenue Act of 1942,

taxed most powers to appoint, whether exercised or not, and

applied to powers created prior to, as well as after, its

enactment.    This was in direct contrast to the previous version

of section 811(f), which provided that property subject to powers

of appointment was includable in the gross estate only if (1) the
                              - 11 -


decedent's power of appointment was general, (2) the power was in

fact exercised, and (3) the appointive property passed as a

result of the decedent's exercise of the power.     Estate of Kurz

v. Commissioner, 101 T.C. at 51.   The 1942 Act included a short

transition period to allow for the release of existing powers,

but due to widespread dissatisfaction, Congress granted numerous

extensions to the effective date of the amendment.    S. Rept. 382,

supra.

     The Powers of Appointment Act of 1951 effectively restored

the law as it had existed prior to the 1942 Act for those powers

of appointment created prior to the 1942 Act.   For powers created

after that date, the 1951 Act maintained the general scheme of

taxing powers, whether exercised or not, but added the lapsed

powers provisions now codified as section 2041(b)(2), then

section 811(f)(5).   The Senate Report commented:

     Since the problem of the termination or lapse of powers
     of appointment during life arises primarily in the case
     of dispositions of moderate-sized properties where the
     donor is afraid the income will be insufficient for the
     income beneficiary and therefore gives the income
     beneficiary a noncumulative invasion power, it is
     believed that the exemption provided in the committee
     amendment ($5,000 or 5 percent of the principal) will
     be adequate to cover the usual cases without being
     subject to possible abuses.

          The purpose of the new section 811(f)(5), added by
     this committee amendment, is to provide a
     determination, as of the date of the lapse of the
     power, of the proportion of the property over which the
     power lapsed which is not to be considered as a taxable
     disposition for estate tax purposes and the proportion
     thereof which, if other requirements of section 811 are
                              - 12 -


     satisfied, will be considered as a taxable disposition.
     * * *

S. Rept. 382, supra, 1951 U.S.C.C.A.N. at 1535-1536.

     The section 2041(b)(2) exception was not intended as an

exception to be applied to the property over which a decedent has

a general power of appointment at the time of death but rather as

an exception to be applied to the property over which such power

has lapsed, property the value of which, after the 1951 Act,

might be includable in the gross estate.   Based on the

legislative history of section 2041(b)(2), we do not agree with

the estate's argument that the inclusion of the final year's

amount in decedent's gross estate defeats the purpose of that

section.   See also Estate of Kurz v. Commissioner, supra, where

we held that 5 percent of the principal of the family trust over

which Mrs. Kurz held a general power of appointment was

includable in her gross estate even though the principal of the

marital trust had not yet been exhausted at the time of her

death, a requirement for her to exercise her right to withdraw

principal from the family trust.

The Estate's Lack of Dominion or Control

     The estate's final argument is that since the estate has no

dominion or control over the final year's amount, the estate

should not be taxed on the value of that property.   Petitioner

has cited no authority for this argument, but asserts that since
                              - 13 -


decedent had no testamentary powers over the final year's amount,

such amount should not be included in her gross estate.

     Section 2041(a)(2) requires inclusion of the value of "any

property with respect to which the decedent has at the time of

his death a general power of appointment * * * ".       The exceptions

to the definition of general power of appointment listed in

section 2041(b) do not include a power only exercisable during

the holder's lifetime.   The inability of decedent to dispose of

the property at her death does not prevent the inclusion of the

final year's amount in her gross estate under section 2041(a)(2).

     In conclusion, decedent's power over the trust had not

lapsed at the time of her death.   Thus, section 2041(b)(2) does

not apply to the year of her death.    We hold that the final

year's amount ($67,458.50) is includable in her gross estate

under section 2041(a)(2).

     In keeping with the above holding and to allow for

additional estate tax deductions for certain administration

expenses under section 2053(a)(2),

                                           Decision will be entered

                                      under Rule 155.
