                         T.C. Memo. 2012-7



                      UNITED STATES TAX COURT



    ESTATE OF RAYMOND J. GILL, DECEASED, SABAL TRUST COMPANY,
              PERSONAL REPRESENTATIVE, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12885-00.               Filed January 9, 2012.



     Mitchell I. Horowitz, for petitioner.

     Stephen Rickio Takeuchi, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GOEKE, Judge:   Respondent determined a deficiency in

the Federal estate tax of the Estate of Raymond J. Gill (estate)

of $2,795,426.   In the more than 10 years this case has been

pending, the parties have settled multiple issues.   The issues

remaining for decision are:
                                 - 2 -

     (1)    Whether the estate is entitled to a deduction for

certain section 20531 administration expenses totaling

$884,950.57.    These expenses relate to litigation between

decedent’s second wife and his children.     We hold that the estate

is entitled to a deduction for a portion of those expenses; and

     (2)    whether the amount of the marital deduction should be

reduced by Federal estate taxes and State death taxes of

$47,752.54.    We hold that the amount of the marital deduction

should not be reduced.

                          FINDINGS OF FACT

     Raymond J. Gill (decedent) was a resident of Florida when he

died on September 19, 1996.    Sabal Trust Co. is the personal

representative of his estate and has its principal offices in

Florida.

     Decedent’s first wife, Joan Gill, died on January 11, 1995.

At the time of her death, Joan Gill and decedent had been married

43 years.    Decedent and Joan Gill had two children, Pamela Gill

Alabaster (Ms. Alabaster) and Mark Gill (collectively referred to

as Gill children).    Ms. Alabaster had two children at the time

decedent died (grandchildren).




     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the date of
decedent Raymond J. Gill’s death, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
                                 - 3 -

1.   Original Estate Plan

      On July 5, 1994, decedent and Joan Gill each executed estate

planning documents with the assistance of counsel.     Both decedent

and Joan Gill created trust structures to which they contributed

certain assets.

      Decedent created a revocable living trust which would pay

income to decedent for life.   All trust assets would be

distributed on decedent’s death as follows:     (a) If Joan Gill

survived decedent, to a newly created credit shelter trust up to

the estate tax exclusion amount, with the residue to Joan Gill in

a newly created marital trust for life and remainder to the Gill

children, or (b) if Joan Gill did not survive decedent, to

decedent’s children and grandchildren.     Hereinafter the living

trust and the marital trust are referred to as decedent’s Living

Trust and decedent’s Marital Trust, respectively.     Decedent’s

Living Trust instrument also provided that upon decedent’s death

the trust would establish and pay $100,000 to trust funds for

each living grandchild (grandchildren’s trusts).

      Likewise, Joan Gill created a revocable living trust which

would pay her income for life.    All trust assets would be

distributed on her death as follows:     (a) If decedent survived

Joan Gill, to a newly created credit shelter trust up to the

estate tax exclusion amount, with the residue to decedent in a

newly created marital trust for life and remainder to the Gill
                               - 4 -

children (hereinafter these three trusts are referred to as Joan

Gill’s Living Trust, Joan Gill’s Credit Shelter Trust, and Joan

Gill’s Marital Trust), or (b) if decedent did not survive Joan

Gill, to Joan Gill’s children and grandchildren.

     In both decedent’s and Joan Gill’s trust structures, the

trustee of the living trust would also serve as the trustee of

the credit shelter and marital trusts.   Joan Gill and decedent

were named cotrustees of both living trusts.   Upon the death of

either Joan Gill or decedent, the surviving spouse would become

the sole trustee of both living trusts (and therefore trustee of

the other’s marital and credit shelter trusts), with the Gill

children becoming cotrustees upon the death or inability to serve

of the surviving spouse.

     Joan Gill’s Living Trust instrument provided that if

decedent survived her, upon decedent’s death all Federal estate

taxes and State death taxes attributable to the inclusion of

property of Joan Gill’s Marital Trust in the gross estate of

decedent were to be paid from the assets of Joan Gill’s Marital

Trust.

     The Gill children became familiar with their parents’ estate

plans in 1994.   Upon Joan Gill’s death in January 1995 decedent

became the sole trustee of Joan Gill’s Living Trust (and

therefore trustee of Joan Gill’s Credit Shelter Trust and Joan
                                 - 5 -

Gill’s Marital Trust as well).    His actions taken while trustee

would be the subject of later litigation, as discussed below.

2.   Decedent’s Relationship With Valerie Gill and Alteration
     of the Original Estate Plan

      Decedent was an executive for ITT and often traveled to

Germany because he oversaw a German company that had been

acquired by ITT.   Valerie Gill was an employee of the German

company and first met decedent in 1979.   At the time, Valerie

Gill was a citizen of Germany.

      Two months after Joan Gill’s death, decedent informed the

Gill children that he was considering taking a “life partner”.

Decedent asked Valerie Gill to marry him and she came to the

United States, where she first met the Gill children in April

1995.   Decedent and Valerie Gill entered into a prenuptial

agreement on April 19, 1995, pursuant to which decedent and

Valerie Gill each waived their applicable marital rights to the

property of the other, including any rights to the other’s estate

at death.   Decedent and Valerie Gill were married in April 1995.

At the time of his marriage to Valerie Gill, decedent had lung

cancer and was undergoing debilitating chemotherapy.   Valerie

Gill cared for decedent from the time she came to the United

States until his death.

      On August 28, 1995, decedent amended the terms of decedent’s

Living Trust.   Under the amendment, upon decedent’s death Valerie

Gill and SunTrust Bank (SunTrust) were to become cotrustees.     The
                               - 6 -

Gill children would not become cotrustees until the refusal or

inability of Valerie Gill to serve as a trustee.    The amendment

further directed that all income of decedent’s Marital Trust be

paid to Valerie Gill for life, with trustee discretion to also

pay trust principal to Valerie Gill.    The Gill children retained

their remainder interest in decedent’s Marital Trust.

      Also on August 28, 1995, decedent executed a last will and

testament which named Valerie Gill and SunTrust as co-personal

representatives of his estate, devised decedent’s tangible

personal property to Valerie Gill, and transferred the estate

residue to decedent’s Living Trust.     This will superseded a prior

will which had named the Gill children co-personal

representatives of decedent’s estate.

3.   Litigation Resulting From Decedent’s Actions Taken While
     Trustee of Joan Gill’s Living Trust

      Upon decedent’s death in September 1996, Valerie Gill and

SunTrust became the cotrustees of decedent’s Living Trust,

according to the amended terms of the trust.    In October 1996

Valerie Gill and SunTrust were also appointed co-personal

representatives of the estate by a probate court order as

decedent’s will dated August 28, 1995, provided.

      In January 1997 the Gill children filed a statement of claim

against the estate alleging breach of fiduciary duties by

decedent while acting as trustee of Joan Gill’s Living Trust.

The Gill children requested complete accountings for all of the
                                - 7 -

assets of Joan Gill’s Living Trust (which included the assets of

both Joan Gill’s Credit Shelter Trust and Joan Gill’s Marital

Trust).

     Litigation between the Gill children and Valerie Gill and

SunTrust (in their roles as co-personal representatives of the

estate) resulted.    It was alleged that decedent had made improper

withdrawals of trust principal from both Joan Gill’s Credit

Shelter Trust and Joan Gill’s Marital Trust.    A settlement was

reached in which the co-personal representatives agreed to pay

the Gill children $545,508.14 from the estate (the Joan Gill

trust settlement).   The $545,508.14 included, in part,

$360,931.79 which should have been paid to Joan Gill’s Marital

Trust by decedent and $160,929.45 which should have been paid to

Joan Gill’s Credit Shelter Trust by decedent.

     Pursuant to the Joan Gill trust settlement, $95,787.82

representing Federal estate taxes and State death taxes

previously paid by the estate was subtracted from the $545,508.14

as a means of reimbursing the estate for previously paying such

taxes.    This $95,787.82 in taxes was generated by the $360,931.79

which should have been paid to Joan Gill’s Marital Trust by

decedent (but was included in his estate when he failed to pay it

to Joan Gill’s Marital Trust) and by an additional $358,807.26.

The additional $358,807.26 was not part of the $545,508.14

settlement but comprised assets separately distributed in
                               - 8 -

decedent’s estate and living trust instruments to:   (1) The Gill

children ($20,527 in tangible personal property, distributed to

Valerie Gill in decedent’s will but passing to the Gill children

upon her disclaimer); (2) the grandchildren ($138,280.26 in

individual retirement accounts (IRAs) payable); and (3) the

grandchildren’s trusts ($200,000 in cash, distributed under terms

of decedent’s Living Trust).

4.   Litigation Resulting From Alterations to Decedent’s
     Original Estate Plan

      In late 1996 Ms. Alabaster contacted an attorney about

challenging decedent’s amended estate plan.   In January 1997 the

Gill children filed a complaint against Valerie Gill in her

individual and fiduciary capacities and against SunTrust in its

fiduciary capacity.   This litigation was brought by the Gill

children in both their individual and fiduciary capacities, as

they were successor cotrustees of decedent’s Living Trust under

both the original and amended terms of decedent’s Living Trust.

The Gill children also sued in their fiduciary capacities as

nominated co-personal representatives of decedent’s estate under

a prior will of decedent’s.

      In the complaint, the Gill children sought to set aside

decedent’s will and amendments to decedent’s Living Trust,

alleging that Valerie Gill exerted undue influence on decedent

and forced decedent to amend his estate plan for her benefit.    In

December 1997 Valerie Gill and SunTrust filed an answer to the
                                - 9 -

complaint.   Litigation ensued over the next 3 years and the

parties entered court-ordered mediation.

     Mediation led to the execution of a settlement agreement in

September 2000 (the 2000 settlement agreement) which resolved the

undue influence issue.    The 2000 settlement agreement provided,

among other things, that Valerie Gill would pay $274,906.76 to

the estate to be distributed to the Gill children and would give

$1,725,093.24 to the Gill children.     Valerie Gill was also

required to resign as trustee of decedent’s Living Trust, with

SunTrust to become the sole trustee.     The 2000 settlement

agreement was contingent upon Valerie Gill’s becoming a U.S.

citizen within 2 years of execution.

     Valerie Gill became a U.S. citizen in February 2002 but

thereafter failed to uphold her obligations under the 2000

settlement agreement.    Instead, in September 2002 Valerie Gill

and SunTrust, in their fiduciary capacities, filed a declaratory

judgment action in the Civil Division of the Circuit Court for

Sarasota County to set aside the 2000 settlement agreement.     The

suit alleged the 2000 settlement agreement was “void due to

mutual mistake, unenforceable terms, [and] a complete lack of a

meeting of the minds”.    This suit was found to be frivolous and

was dismissed with prejudice.    Valerie Gill and SunTrust appealed

the dismissal to the Second District Court of Appeal in Lakeland,

Florida, but it was affirmed in 2004.     After losing the appeal,
                              - 10 -

Valerie Gill filed a second declaratory judgment action in

probate court, this time in her individual capacity.   The court

in that case entered summary judgment in favor of the Gill

children, holding that Valerie Gill could not challenge the

validity of the 2000 settlement agreement.

     Beginning in 2002 the Gill children also filed various

actions in either their individual or individual and fiduciary

capacities.   These actions were taken in response to Valerie

Gill’s failure to carry out the 2000 settlement agreement and

were for the purpose of enforcing that agreement or preserving

estate assets against what the Gill children perceived to be

improper expenditures by Valerie Gill and SunTrust (because

Valerie Gill and SunTrust, as co-personal representatives of the

estate, were spending the estate’s money by initiating and then

appealing cases which were found to be frivolous).   The Gill

children did not seek assets in excess of what they would have

received under the 2000 settlement agreement.

     Litigation between the parties lasted several years.    During

this time, Valerie Gill and SunTrust still refused to comply with

the terms of the 2000 settlement agreement.   It became clear that

the best option for all parties, including the estate, would be

another round of mediation, which the parties entered into in

2006.   Jack Falk (Mr. Falk) of the law firm Dunwoody White served

as the mediator.   A new settlement agreement was entered into in
                              - 11 -

June 2007 (the 2007 settlement agreement).   By this time the

parties had incurred legal fees of hundreds of thousands of

dollars.

     The 2007 settlement agreement was approved by the Circuit

Court for Sarasota County, Florida, in August 2007.   In approving

the 2007 settlement agreement the circuit court stated:

     Based upon more than 15 hearings held before the
     undersigned judge since 1999, the Court specifically
     finds that the professional services referred to in
     paragraphs 2.a.i., ii., and iii. of the Settlement
     Agreement, were and will be essential to the proper
     administration and settlement of the Estate and Living
     Trust, and necessary to determine the beneficiaries, to
     carry out the intent of the above Decedent and to
     effect the proper distribution of said Estate and
     Living Trust * * *.

Paragraphs 2.a.i., ii., and iii. of the 2007 settlement agreement

provided for the estate’s reimbursement of certain legal fees

incurred by the Gill children and Valerie Gill as an individual,

as discussed further below.   The court also ordered that the

mediation fees be split five ways among:   (1) The Gill children;

(2) Valerie Gill as an individual; (3) the law firm of Kirk

Pinkerton (who represented the estate); (4) SunTrust; and (5) the

estate.

     The 2007 settlement agreement declared the 2000 settlement

agreement null and void.   It provided that the terms of

decedent’s Living Trust would undergo reformation to comply with

terms of the 2007 settlement agreement.    It also provided for the

estate to make payments totaling $25,000 to the grandchildren’s
                              - 12 -

trusts.   These payments were reimbursements for attorney’s fees

and loss of income the trusts had suffered through improper

administration of the grandchildren’s trusts by the trustees,

Valerie Gill and SunTrust.   However, there was no mention in the

2007 settlement agreement itself that the payments included

attorney’s fees.

     Pursuant to the 2007 settlement agreement, the Gill children

received a combined $1,150,000 distribution from decedent’s

Living Trust.   The 2007 settlement agreement also provided that

the estate would reimburse the Gill children $575,000 for legal

fees incurred from 1997 to 2007 and $20,000 prospectively for

their legal fees associated with court approval of the 2007

settlement agreement, reformation of the terms of decedent’s

Living Trust, and conclusion of this Tax Court case.   These

amounts were less than the actual legal fees accumulated by the

Gill children during the course of litigation.

     Pursuant to the 2007 settlement agreement, an additional

$18,000 was paid to a law firm which represented Valerie Gill in

her individual capacity for her legal fees associated with court

approval of the 2007 settlement agreement, reformation of the

terms of decedent’s Living Trust, and conclusion of this Tax

Court case.

     The 2007 settlement agreement further provided that the

estate would reimburse the one-fifth shares of the 2006-2007
                              - 13 -

mediation fees which had been assigned to the Gill children and

Valerie Gill in her individual capacity.

      All legal fees reimbursed by decedent’s estate comprised

mostly attorney’s fees, although other expenses such as court

costs were also included.

5.   Other Information

      On September 19, 2000, respondent issued a notice of

deficiency to the estate determining a deficiency of $2,795,426

in estate tax.   The estate timely filed a petition contesting the

deficiency.   On Schedule J, Funeral Expenses and Expenses

Incurred in Administering Property Subject to Claims, of the

original Form 706, United States Estate (and Generation-Skipping

Transfer) Tax Return, the estate had claimed $1,533 of

administration expense deductions.     In the notice of deficiency

respondent allowed additional administration expense deductions

of $411,500 as incurred and paid through July 20, 1999.

      The estate now seeks to deduct an additional $884,950.57 in

administration expenses over amounts respondent previously

allowed.   Those additional expenses are a result of the

protracted litigation after the death of decedent.    Those

expenses include legal fees and related court costs, accounting

fees, trustee and management fees, and a total of $25,000

distributed to the grandchildren’s trusts.    Respondent contests

portions of these additional deductions.    An extensive statement
                               - 14 -

of account for decedent’s Marital Trust was kept by SunTrust and

was used in determining whether certain administration expenses

are deductible, as described below.

       The estate and respondent also disagree on whether a portion

of the Federal estate taxes and State death taxes reimbursed to

the estate pursuant to the Joan Gill trust settlement should

reduce the amount of Valerie Gill’s marital deduction.

       In 2008 Sabal Trust Co. succeeded Valerie Gill and SunTrust

as trustee of decedent’s trusts and personal representative of

the estate.

                               OPINION

I.    Burden of Proof

       Generally, taxpayers bear the burden of proving, by a

preponderance of the evidence, that the determinations of the

Commissioner in a notice of deficiency are incorrect.    Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).       Deductions

are a matter of legislative grace, and taxpayers bear the burden

of proving entitlement to any claimed deductions.    Rule

142(a)(1); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).

The estate has not argued that respondent should bear the burden

of proof.

II.    Whether Deductions for Certain Administration Expenses
       Totaling $884,950.57 Should Be Allowed

       The estate claimed $1,533 of Schedule J administration

expense deductions on the original estate tax return.    In the
                              - 15 -

notice of deficiency, respondent allowed additional

administration expense deductions of $411,500.   The estate now

seeks to deduct another $884,950.57 in administration expenses2

including legal fees, accounting fees, trustee and management

fees, and amounts distributed to the grandchildren’s trusts.

     A.   Legal Fees

     The estate seeks to deduct $829,965.09 in additional legal

fees paid or reimbursed by the estate from 1999 to 2007.    Those

payments were made to various lawyers of the parties involved in

the litigation which led to the 2000 and 2007 settlement

agreements.   The $829,965.09 in deductions comprises $29,460.18,

$195,402.43, $18,965.62, $152.60, $6,746.50, and $579,237.76 for

years 1999, 2000, 2001, 2003, 2006, and 2007, respectively.

Respondent disputes various amounts of the deductions the estate

claims for the following reasons:   (1) The estate overstated some

payments; (2) some payments are listed as distributions to/for a

beneficiary rather than as administration expenses; (3) the

estate has not proved payments to certain lawyers are properly

deductible as administration expenses to the estate; and (4) some

of the deductions sought are for amounts the estate reimbursed to

the Gill children and Valerie Gill individually for their

attorney’s fees.


     2
      We have corrected minor mathematical errors made by the
parties in their calculations. Those corrections have reduced
the total administration expense deductions sought by $6.
                                 - 16 -

             1.   Overstatement of Some Payments by the Estate

     Respondent claims the estate overstated legal fees paid to

the estate’s lawyers of $13,744.18, $400, and $11,245.50 in 2000,

2003, and 2006, respectively.     After examining the statement of

account for decedent’s Marital Trust kept by SunTrust, we

disagree with respondent.     In his calculations, respondent took

only attorney’s fees into account and failed to include related

court costs (such as those for transcripts and depositions)

incurred by the estate’s lawyers.     Such costs are deductible

under section 20.2053-3(d), Estate Tax Regs.

             2.   Listing of Some Payments as Distributions to/for a
                  Beneficiary

     The estate attempts to deduct several payments made to Kirk

Pinkerton (the law firm which represented the estate) and listed

in the statement of account for decedent’s Marital Trust as

“distributions to/for a beneficiary” rather than as

“administrative expenses”.     Respondent claims that distributions

to/for a beneficiary are not deductible as administration

expenses.3    Respondent therefore disputes amounts the estate



     3
      Sec. 2053(a) provides that the value of the taxable estate
shall be determined by deducting from the value of the gross
estate certain expenses of and claims against the estate. It
does not provide a deduction for distributions to estate
beneficiaries. See Estate of Lazar v. Commissioner, 58 T.C. 543
(1972) (estate failed to distinguish recipient’s rights as
third-party claimant from that recipient’s rights as estate
beneficiary; therefore distributions to that recipient not
deductible from gross estate).
                                 - 17 -

seeks to deduct of $8,609.70, $4,220, and $1,044 for years 1999,

2000, and 2001, respectively.

        It is not clear why some payments to Kirk Pinkerton are

listed as distributions to/for a beneficiary rather than as

administration expenses.     Certain payments were listed as

distributions to/for a beneficiary, even though payments made

days earlier with the same client and issue numbers were listed

as administration expenses.     Neither the estate nor respondent

has elaborated on the reasoning behind that accounting.     Because

the estate has not explained the accounting, we hold the estate

has not satisfied the burden of proof and may not deduct those

amounts.

             C.   Whether Payments to Certain Lawyers Are Deductible

     Respondent claims payments to certain lawyers of $3,000 and

$11,245.50 in 2003 and 2006, respectively, are not deductible

because the estate has not established that those lawyers

provided services to the estate which are deductible as

administration expenses under section 20.2053-3(c), Estate Tax

Regs.     The 2003 statement of account for decedent’s Marital Trust

lists a $3,000 payment to Nancy Gregoire representing an

“attorney retainer fee”.     The 2006 statement of account lists an

$11,245.50 payment to Dunwoody White (Mr. Falk’s firm) with the

notation “Bene [sic] legal fee”.
                              - 18 -

     The estate never presented evidence on or described why

Nancy Gregoire was paid the $3,000 retainer, merely stating the

she assisted the estate.   We therefore find the estate has not

met the burden of proof and is not entitled to the $3,000

deduction.

     The estate did not explain why the payment was made to

Dunwoody White, but we find the payment was for mediation fees

which the probate court split five ways among the Gill children,

Valerie Gill as an individual, Kirk Pinkerton, SunTrust, and the

estate.   The estate had agreed to reimburse the fees paid by the

Gill children and Valerie Gill.   It appears the estate has

already deducted a portion of this payment, although the estate

did not describe which portions had already been deducted.     We

hold the portion used to pay off the estate’s share of the

expenses is deductible (to the extent not already deducted) as an

administrative expense under section 2053(a).   For the reasons

stated below relating to reimbursed attorney’s fees of the Gill

children and Valerie Gill individually, we also hold that the

amount reimbursed to the Gill children is deductible (to the

extent not already deducted) under section 2053(a), but the

amount reimbursed to Valerie Gill as an individual is not

deductible.   We additionally hold that the estate has failed to

prove its entitlement to any other deductions as a result of the

payment made to Dunwoody White.
                                 - 19 -

            D.    Reimbursement of Certain Attorney’s Fees by
                  the Estate

     Pursuant to the 2007 settlement agreement, the estate was to

reimburse certain legal fees incurred by the Gill children and

Valerie Gill in her individual capacity.       All such legal fees

comprised mostly attorney’s fees, although other expenses such as

court costs were included.     The reimbursements include $575,000

the estate paid to the Gill children for legal fees incurred from

1997 up to execution of the 2007 settlement agreement and $20,000

prospectively for their legal fees associated with court approval

of the 2007 settlement agreement, reformation of the terms of

decedent’s Living Trust, and conclusion of this Tax Court case.

Valerie Gill was reimbursed $18,000 for her personal legal fees

associated with court approval of the 2007 settlement agreement,

reformation of the terms of decedent’s Living Trust, and

conclusion of this Tax Court case.        The estate now seeks a

deduction for those reimbursements.

     Section 2053(a) requires that legal fees be allowable under

the laws of the jurisdiction under which the estate is being

administered.     See Estate of Reilly v. Commissioner, 76 T.C. 369,

372 (1981).      Any legal fees deducted as an administration expense

must also be reasonable in amount.        Sec. 20.2053-3(c)(1), Estate

Tax Regs.    Finally, regulations require that for an estate to

deduct legal fees (including attorney’s fees) as an

administration expense, the fees must be “essential to the proper
                              - 20 -

settlement of the estate”.   Sec. 20.2053-3(a), (c)(3),   Estate

Tax Regs.   This Court and the U.S. Court of Appeals for the

Eleventh Circuit (to which an appeal of this case would lie),

have recognized the validity of section 20.2053-3, Estate Tax

Regs., as imposing a Federal standard of necessity over and above

the State requirement of allowability.   See Marcus v. Dewitt, 704

F.2d 1227, 1229-1230 (11th Cir. 1983) (citing Pitner v. United

States, 388 F.2d 651, 659 (5th Cir. 1967)); Estate of Lockett v.

Commissioner, T.C. Memo. 1998-50.

     We first consider whether reimbursement of the legal fees at

issue was allowable under Florida law.   In approving the 2007

settlement agreement, the Florida circuit court stated:

     Based upon more than 15 hearings held before the
     undersigned judge since 1999, the Court specifically
     finds that the professional services referred to in
     paragraphs 2.a.i., ii., and iii. of the Settlement
     Agreement, were and will be essential to the proper
     administration and settlement of the above Estate and
     Living Trust, and necessary to determine the
     beneficiaries, to carry out the intent of the above
     Decedent and to effect the proper distribution of said
     Estate and Living Trust * * *.

Paragraphs 2.a.i., ii., and iii. of the 2007 settlement agreement

provided for reimbursement of legal fees incurred by the Gill

children and Valerie Gill as an individual.   In addition, Fla.

Stat. Ann. sec. 733.106 (West 2010) allows legal costs and

attorney’s fees to be paid by an estate.   Considering these

facts, we find that reimbursement of the legal fees was allowable

under Florida law.
                              - 21 -

     We next consider whether the legal fees reimbursed by the

estate were reasonable in amount.    Respondent claims the estate

has not shown the legal fees in this case were reasonable and has

therefore not met the burden of proof.     We disagree with

respondent.   We first consider the fact that the Florida circuit

court allowed reimbursement of the legal fees by the estate.

Because Fla. Stat. Ann. sec. 733.106(3) allows attorneys to be

awarded reasonable attorney’s fees only for services to an

estate, and the legal fees comprised mostly attorney’s fees, we

find this is strong evidence of the reasonableness of the fees.

In addition, the estate introduced into evidence voluminous

records of legal fees incurred by the Gill children over the

years in which litigation was ongoing.     Considering these records

as a whole, we see nothing unreasonable about those fees.      We

also consider the fact that the Gill children were reimbursed

less than their actual legal fees.     Respondent offered no

evidence of his own that the legal fees were unreasonable.

Considering the evidence, we find the legal fees reimbursed by

the estate were reasonable.

     Finally, we consider whether a deduction for the reimbursed

legal fees is proper under section 20.2053-3(a) and (c)(3),

Estate Tax Regs.   Section 20.2053-3(c)(3), Estate Tax Regs.,

provides:

     Attorneys’ fees incurred by beneficiaries incident to
     litigation as to their respective interests are not
                               - 22 -

     deductible if the litigation is not essential to the
     proper settlement of the estate within the meaning of
     paragraph (a) of this section. An attorney’s fee not
     meeting this test is not deductible as an
     administration expense under section 2053 and this
     section, even if it is approved by a probate court as
     an expense payable or reimbursable by the estate.

Section 20.2053-3(a), Estate Tax Regs., provides in part:

     The amounts deductible from a decedent’s gross estate
     as “administration expenses” * * * are limited to such
     expenses as are actually and necessarily incurred in
     the administration of the decedent’s estate; that is,
     in the collection of assets, payment of debts, and
     distribution of property to the persons entitled to it.
     The expenses contemplated in the law are such only as
     attend the settlement of an estate and the transfer of
     the property of the estate to individual beneficiaries
     or to a trustee, whether the trustee is the executor or
     some other person. Expenditures not essential to the
     proper settlement of the estate, but incurred for the
     individual benefit of the heirs, legatees, or devisees,
     may not be taken as deductions. * * *

     Respondent argues that the legal fees at issue are not

deductible because they were not paid for services “essential to

the proper settlement of the estate”.   Instead, respondent claims

the legal fees were incurred for the personal benefit of the Gill

children and Valerie Gill.   Respondent correctly notes that the

decision of the Florida circuit court approving reimbursement of

the legal fees by the estate is not determinative under section

20.2053-3(c)(3), Estate Tax Regs.

     The estate argues that the legal fees are deductible because

they were incurred in litigation essential to the proper

settlement of the estate.    The estate first argues that even if

the litigation involved only who would take which assets, the
                              - 23 -

litigation was still necessary to determine the true testamentary

intent of decedent.   The estate also argues that both the Gill

children and Valerie Gill owed certain fiduciary duties to

decedent and his estate.   The estate claims these fiduciary

duties obligated the Gill children and Valerie Gill to defend

what they each believed to be the testamentary intent of

decedent.

     We turn to caselaw to determine what litigation is essential

to the proper settlement of the estate.   In Estate of Reilly v.

Commissioner, 76 T.C. 369 (1981), there was a dispute between the

decedent’s estate and the decedent’s wife involving whether

certain assets were owned by the estate or by the wife.    We

allowed the estate to deduct the wife’s attorney’s fees paid by

the estate under section 20.2053-3, Estate Tax Regs., finding

that the asset litigation was essential to the proper settlement

of the estate because it determined the size of the estate.     We

stated that the litigation in that case involved “more than a

dispute between ‘beneficiaries’ of a decedent in which the estate

merely occupied the position of a stakeholder.”   Id. at 374.

     In determining whether legal fees were for services

“essential to the proper settlement of the estate”, we have also

found legal fees to be deductible when a party incurs legal fees

while acting in respect of a fiduciary relationship between them

and the estate.   In Estate of Swayne v. Commissioner, 43 T.C. 190
                                - 24 -

(1964), two wills executed by the decedent were sought to be

probated by different parties.     The decedent’s son, Noah, was

nominated as executor under the later will, but not the earlier

will.     In addition, Noah was to receive a larger share of the

estate as a beneficiary under the later will.      Under Connecticut

State law, Noah, as the nominated executor, was required to

exhibit the later will for probate.      Noah tried to have the later

will probated, but was unsuccessful.      We held the legal fees

incurred by Noah were deductible, stating:

     the fact that his personal interest coincided with his
     duty as executor did not, ipso facto, render the legal
     fee in question a personal expense. There is no
     evidence any part of the fee was incurred by Noah in
     any capacity other than as executor. Furthermore, the
     litigation involving the will contest was essential to
     the settlement of the estate, for until it was
     determined which will should be probated, proper
     distribution of the estate could not be made.

Id. at 200.

        In Estate of Whitt v. Commissioner, T.C. Memo. 1983-262,

affd. 751 F.2d 1548 (11th Cir. 1985), criminal charges were

brought against the coadministrators of one estate.      One of the

coadministrators was also the executor of a second estate.      The

coadministrators hired a lawyer to defend them against the

charges and represent the estates.       The estates each paid $5,000

of the $13,000 total attorney’s fees, then sought deductions for

those payments.     The other $3,000 was allocated to one of the
                               - 25 -

coadministrators personally.   In holding the deductions were

allowable, we stated:

          We also are convinced that the payment of the
     instant attorney fees meets the requirements of
     respondent’s regulations. The fees were incurred in
     connection with respondent’s criminal investigation of
     both estates and to defend criminal charges brought
     against the executors of the Estate of Audry J. Whitt
     for failure to file the estate tax return. Clearly the
     charges were brought against Loyd and Willard Whitt in
     their capacities as co-administrators and executor, not
     as individuals. * * * This is not a case where legal
     fees were incurred by a beneficiary in litigation over
     his own interests where the Estate merely occupied the
     position of a stakeholder. * * * Rather, the fees
     incurred in connection with respondent’s investigation
     and in defense of these criminal charges were
     “essential to the proper settlement of the estate.”

     In Estate of Dutcher v. Commissioner, 34 T.C. 918 (1960),

the decedent and his wife had filed a complaint in Florida State

court to partition certain mutual fund shares.   The decedent’s

son and daughter, John and Mary Jane, were named defendants in

the suit.   John and Mary Jane filed an answer 8 days after the

decedent’s death, claiming that title to all the shares had

vested in them at the decedent’s death.   John and Mary Jane also

counterclaimed against the decedent’s wife, alleging that she was

in possession of certain other assets of the decedent’s estate.

Before the children answered, John had been appointed special

administrator of the decedent’s estate.   The estate later sought

to deduct expenditures for the partition suit and counterclaim.

In denying this deduction, we stated:
                                - 26 -

     The litigation was started by decedent in his lifetime
     and after he died neither the special administrator not
     [sic] the executor of his estate were made parties.
     The suit was against John and Mary Jane and they
     answered and counterclaimed and thereafter pleaded as
     individuals. The record shows John had been appointed
     special administrator of his father’s estate several
     days before he filed his original answer in the Florida
     suit. However, John, in his representative capacity,
     never did appear by himself or his attorney in the
     Florida litigation.

Id. at 924-925.    It appears we would have allowed the deduction

had John appeared in his fiduciary capacity.       See id.

     We will separately address the legal fees associated with

the 1997 to 2000 litigation and mediation, the 2002 to 2007

litigation and mediation, and the present Tax Court case.       For

each segment of litigation, we will determine whether the

reimbursed legal fees were incurred in activities essential to

the proper settlement of decedent’s estate.

     The initial litigation and mediation from 1997 to 2000 was

between the Gill children and the estate, with the Gill children

suing in both their individual and fiduciary capacities (as

successor cotrustees of decedent’s Living Trust and nominated co-

personal representatives of decedent’s estate under a prior will

of decedent).     This litigation addressed the undue influence

issue surrounding decedent’s will.       Because the Gill children

acted in their fiduciary capacities and the litigation resolved

the undue influence issue, we hold that the litigation and

mediation from 1997 to 2000 involved “more than a dispute between
                              - 27 -

‘beneficiaries’ of a decedent in which the estate merely occupied

the position of a stakeholder.”   See Estate of Reilly v.

Commissioner, 76 T.C. at 374; Estate of Swayne v. Commissioner,

supra at 200; Estate of Dutcher v. Commissioner, supra at 924-

925; Estate of Whitt v. Commissioner, supra.    The estate’s

reimbursement of the Gill children’s legal fees incurred as a

result of the 1997 to 2000 litigation and mediation is therefore

deductible as an expenditure essential to the proper settlement

of the estate.   While it is true the Gill children personally

gained as a result of their actions from 1997 to 2000, “The fact

that some benefit results to the beneficiaries from an

expenditure is not a reason to disallow the expense as a

deduction”.   See Porter v. Commissioner, 49 T.C. 207, 225 (1967);

see also Estate of Reilly v. Commissioner, supra at 373 (quoting

Porter v. Commissioner, supra at 225).

     A more difficult question relates to legal fees incurred as

a result of the 2002 to 2007 litigation and mediation.   During

that time, Valerie Gill and SunTrust, in their capacities as the

estate’s co-personal representatives, initiated a lawsuit

challenging the 2000 settlement agreement which was found to be

frivolous and was dismissed with prejudice.    They appealed that

decision and lost again.   Valerie Gill, in her individual

capacity, then sued to challenge the 2000 settlement agreement

only to lose on summary judgment.   The Gill children defended
                              - 28 -

against these lawsuits and initiated their own lawsuits for

purposes of enforcing the 2000 settlement agreement and

preserving estate assets from the costs associated with the

lawsuits Valerie Gill and SunTrust brought in their fiduciary

capacities.   At times the Gill children litigated solely in their

individual capacities and at other times they litigated in both

their individual and fiduciary capacities.

     Eventually the parties entered mediation, which led to

execution of the 2007 settlement agreement.   That agreement

provided that the estate would reimburse the Gill children’s

attorney’s fees and litigation costs incurred up to execution of

the 2007 settlement agreement, plus $20,000 prospectively for

their attorney’s fees associated with court approval of the 2007

settlement agreement and reformation of the terms of decedent’s

Living Trust.   Valerie Gill was reimbursed $18,000 for her

personal attorney’s fees associated with court approval of the

2007 settlement agreement and reformation of decedent’s Living

Trust.   For the reasons stated below, we hold that all legal fees

reimbursed to the Gill children are deductible, while the legal

fees reimbursed to Valerie Gill as an individual are not

deductible.

     The Gill children’s involvement in the 2002 to 2007

litigation was an extension of their involvement in the 1997 to

2000 litigation.   Upon Valerie Gill’s attack on the validity of
                              - 29 -

the 2000 settlement agreement, the Gill children were forced to

defend and seek to enforce that agreement.   The Gill children

also sought to protect the estate from improper expenditures by

Valerie Gill and SunTrust, who were initiating petty and

frivolous lawsuits as the estate’s personal representatives and

charging attorney’s fees to the estate.   When it became clear

that an additional round of mediation would be the best option

for all parties, including the estate, the Gill children agreed

to enter mediation again.

     The Gill children’s reimbursed legal fees are a deductible

expense to the estate because the Gill children’s involvement in

the litigation, mediation, and reformation of the terms of

decedent’s Living Trust from 2002 to 2007 was necessary to

enforce the result of the 1997 to 2000 litigation and mediation.

Valerie Gill’s actions forced the Gill children to defend and

seek to enforce the 2000 settlement agreement, which was the

result of the 1997 to 2000 litigation and mediation.   Although

the Gill children both defended against and initiated civil

lawsuits and participated in mediation, all their actions taken

from 2002 to 2007 were reactionary and necessary to defend and

enforce as much of the 2000 settlement agreement as they could.

Importantly, the Gill children did not seek estate assets in

excess of what they would have received under the 2000 settlement

agreement.   We also note that the Gill children did not initiate
                              - 30 -

frivolous lawsuits and did not seek to unnecessarily prolong

litigation.

     Because the 1997 to 2000 litigation was essential to the

proper settlement of decedent’s estate and the Gill children were

seeking only to enforce the outcome of that litigation from 2002

to 2007, we hold that the estate’s reimbursement of the Gill

children’s legal fees incurred in connection with the 2002 to

2007 litigation is deductible as an expense essential to the

proper settlement of the estate.

     On the other hand, reimbursement of Valerie Gill’s

individual legal fees associated with court approval of the 2007

settlement agreement and reformation of the terms of decedent’s

Living Trust is not a deductible expense to the estate because:

(1) Valerie Gill’s individual involvement in the litigation,

mediation, and reformation of the terms of decedent’s Living

Trust from 2002 to 2007 was not an attempt to enforce the result

of the 1997 to 2000 litigation and mediation, and (2) her

individual involvement from 2002 to 2007 was not otherwise

essential to the proper settlement of the estate.   Valerie Gill

was not seeking to enforce the result of the 1997 to 2000

litigation and mediation as the Gill children were.   Indeed,

Valerie Gill was the party who failed to comply with the 2000

settlement agreement and initiated lawsuits to have it declared

void.   To this end she filed lawsuits which were combative and
                               - 31 -

frivolous; it seems these lawsuits had no purpose other than to

extend litigation and force the Gill children into another round

of mediation.    In addition, Valerie Gill sought estate assets in

excess of those she would have received under the 2000 settlement

agreement.

     Valerie Gill’s individual actions did not challenge the

validity of decedent’s will or fulfill a fiduciary duty she owed

to the estate.   Unlike the Gill children, Valerie Gill was not

seeking to enforce the 2000 settlement agreement.   All her

individual actions were only attempts to obtain assets which had

been assigned to the Gill children in the 2000 settlement

agreement.   We find Valerie Gill’s individual legal fees

associated with court approval of the 2007 settlement agreement

and reformation of the terms of decedent’s Living Trust were

incurred for her individual benefit rather than for the benefit

of the estate and were therefore not essential to the proper

settlement of the estate.   See sec. 20.2053-3, Estate Tax Regs.

     The estate argues that even if Valerie Gill’s individual

actions taken from 2002 to 2007 relate only to how much she

personally takes from the estate, those actions are still

essential to the proper settlement of the estate because they

helped to determine the proper testamentary intent of decedent.

We reject this argument as inconsistent with section 20.2053-3,

Estate Tax Regs., and the standard that a case involve “more than
                              - 32 -

a dispute between ‘beneficiaries’ of a decedent in which the

estate merely [occupies] the position of a stakeholder.”     Estate

of Reilly v. Commissioner, 76 T.C. at 374.   We hold the estate

may not deduct reimbursements for Valerie Gill’s individual legal

fees associated with court approval of the 2007 settlement

agreement and reformation of the terms of decedent’s Living

Trust.

     Because respondent has already allowed legal fee deductions

for actions taken by SunTrust and Valerie Gill, purportedly in

their capacities as the estate’s representatives, from 2002 to

2007, we need not address whether deductions for those legal fees

are allowable.

     With respect to legal fees prospectively reimbursed in the

2007 settlement agreement to the Gill children and Valerie Gill

for concluding this Tax Court litigation, we find those fees are

not deductible.   The estate has not explained why, and we do not

believe, involvement by attorneys for the Gill children and

Valerie Gill as an individual in the instant litigation was

essential to the proper settlement of the estate.   We therefore

hold reimbursements for those legal fees are not deductible by

the estate.

     B.   Accounting Fees

     The estate seeks to deduct $17,112.25 in accounting fees

paid by SunTrust, as co-personal representative of the estate, to
                                - 33 -

accountants for services rendered to the estate in 1999, 2000,

and 2008.   Respondent disputes $8,826 of the $17,112.25 because

two payments made to Kerkering Barberio & Co. (Kerkering

Barberio) for professional services provided to decedent’s

Marital Trust in 1999 and 2000 were listed as distributions

to/for a beneficiary rather than as administration expenses.

Other payments made to Kerkering Barberio were listed as

administration expenses.

     It is not apparent why these two payments to Kerkering

Barberio were listed as distributions to/for a beneficiary rather

than administration expenses.    Neither the estate nor respondent

has elaborated on the reasoning behind such an accounting.

Because the estate has not explained the accounting, we hold the

estate has not satisfied the burden of proof and may not deduct

those amounts.

     C.   Trustee and Management Fees

     The estate also seeks to deduct $12,873.23 in additional

trustee and management fees paid to SunTrust from 1999 to 2008.

The estate seeks to deduct $12,034.81, $6,069, $1,884, $390,

$391.46, $4,322.84, $5,301.54, and $1,082.13 for years 1999,

2000, 2001, 2002, 2003, 2005, 2006, and 2007, respectively.    The

sum of these deductions is offset by a reduction taken in the

2004 deduction of $18,602.55.    Respondent disputes deductions of

$2,432.63, $6,069, $1,884, $390, $391.46, $4,322.84, $1,252.57,
                                - 34 -

and $1,082.13 for years 1999, 2000, 2001, 2002, 2003, 2005,4

2006, and 2007, respectively, for the reasons that the estate

overstated some payments and some fees are not sufficiently

explained.

     For 1999 respondent claims the estate overstated trustee and

management fees by $2,432.63.    A payment of $2,432.63 is listed

as a distribution to/for a beneficiary in the statement of

account.   The payment description is “TRANSFER PRINCIPAL CASH TO

ACCOUNT 58-01-214-5801758 GILL, R.J. FBO ALABASTER CO-TA TO

CORRECT 10/19/99 PAYMENT FROM INCORRECT ACCT RE: MATTER 10135”.

The accounting was not explained by either the estate or

respondent, and we therefore hold the estate has not met the

burden of proof and may not deduct this $2,432.63.

     For 2000 respondent claims the estate overstated trustee and

management fees by $6,069.   This overstatement is due to amounts

listed in the statement of account as fees for real estate

services paid to the fiduciary and to taxes paid to the State of

Florida on behalf of the fiduciary.      We hold these payments are



     4
      There is a discrepancy in the estate’s opening brief and
respondent’s reply brief with respect to the amount of trustee
and management fees the estate already deducted on Form 1041,
U.S. Income Tax Return for Estates and Trusts, for 2005.
Respondent states the estate already deducted $40,969.57, while
the estate states only $39,076 was already deducted. Because
Forms 1041 for the estate were not submitted and the numbers were
not stipulated, there is no way to tell which party is correct.
The parties must resolve this discrepancy in their Rule 155
calculations.
                                   - 35 -

deductible.   See sec. 20.2053-3(d)(1), Estate Tax Regs.

(“Expenses necessarily incurred in preserving and distributing

the estate * * *, including the cost of storing or maintaining

property of the estate, if it is impossible to effect immediate

distribution to the beneficiaries” are deductible).

     For 2001 respondent claims the estate overstated trustee and

management fees by $1,884.    This overstatement is due to amounts

listed in the statement of account as fees for real estate

services paid to the fiduciary and to taxes paid to the Internal

Revenue Service on behalf of the fiduciary.       We hold these

payments are deductible.     Id.

      For 2002 respondent claims the estate overstated trustee

and management fees by $390.       The $390 overstatement is due to

amounts listed in the statement of account as payments made to an

account of Raymond Gill “to correct [a] legal bill payment”.       The

payments were listed as distributions to/for a beneficiary.       The

accounting was not explained by either the estate or respondent,

and we therefore hold the estate has not met the burden of proof

and may not deduct the $390.

     For 2003 respondent claims the estate overstated trustee and

management fees by $391.46.    It is unclear what payment(s) listed

on the statement of account the overstatement is attributable to.

Part of the overstatement appears to be for unexplained base and
                                - 36 -

management fees paid for an IRA.    We hold the estate has not met

the burden of proof and may not deduct the $391.46.

     For 2005 respondent claims the estate overstated trustee and

management fees by $4,322.84.    It is unclear what payment(s)

listed on the statement of account the overstatement is

attributable to.   Part of the overstatement appears to be for

unexplained base and management fees paid for an IRA.      We hold

the estate has not met the burden of proof and may not deduct the

$4,322.84.

     For 2006 respondent claims the estate overstated trustee and

management fees by $1,252.57.    The $1,252.57 overstatement is

attributable to various payments made for property insurance

liability, property inspections, and property appraisals for real

property owned by the trust.    We hold those payments are

deductible.   See sec. 20.2053-3(d)(1) and (2), Estate Tax Regs.

(expenses necessary for preserving or selling property of the

estate are deductible).

     For 2007 respondent claims the estate overstated trustee and

management fees by $1,082.13.    The $1,082.13 overstatement is

attributable to various electric and association fees paid as a

result of the trust’s ownership of a condo in New York City.      We

hold those payments are deductible.      See sec. 20.2053-3(d)(1),

Estate Tax Regs. (expenses necessary for preserving property of

the estate are deductible).
                              - 37 -

     D.   Distributions to Grandchildren’s Trusts

     The estate also seeks to deduct $25,000 paid to the

grandchildren’s trusts from the estate pursuant to the 2007

settlement agreement as an administrative expense.   The two

$12,500 payments were made as reimbursements for attorney’s fees

incurred by the trusts during the course of the will contest

litigation and to compensate the trusts for loss of income due to

mismanagement of funds by the cotrustees, Valerie Gill and

SunTrust.   The estate contends those payments are deductible

administrative expenses under section 20.2053-3, Estate Tax Regs.

Respondent claims the distributions are not deductible

administration expenses.

     We disagree with the estate with respect to the reimbursed

attorney’s fees portion of the payments.   Section 20.2053-3(c),

Estate Tax Regs., requires that “the amount [of the attorney’s

fees] claimed * * * [as a deduction may] not exceed a reasonable

remuneration for the services rendered”.   The estate made no

argument and offered no evidence to establish that the attorney’s

fees were reasonable.   The amounts of these attorney’s fees were

never mentioned in either the 2007 settlement agreement or other

evidence; in fact, the 2007 settlement agreement does not even

mention that the $12,500 distributions included reimbursement for

attorney’s fees.   It appears even the Florida circuit court which

approved the 2007 settlement agreement was unaware that such
                                - 38 -

attorney’s fees existed; the circuit court did not specifically

find these fees were “essential to the proper administration and

settlement” of the estate, as it did the attorney’s fees

reimbursed to the Gill children and Valerie Gill.     We hold the

estate has not met the burden of proving the reasonableness of

the fees and therefore may not deduct the reimbursed attorney’s

fees.

       We also disagree with the estate with regard to the portion

of the payments the estate paid to the trusts for loss of income

due to mismanagement of trust funds by Valerie Gill and SunTrust

while they were acting as cotrustees of the grandchildren’s

trusts.     Such compensation was not necessary to the proper

settlement of the estate because it did not arise from a claim

the grandchildren’s trusts had against the estate.     See Estate of

Reilly v. Commissioner, 76 T.C. at 377-378.     Rather, the proper

claim would have been against Valerie Gill and SunTrust for

breach of fiduciary duties and mismanagement of funds.     We

therefore hold the portion of the $25,000 representing

mismanagement compensation is not deductible.

III.     Whether the Amount of the Marital Deduction Should Be
         Reduced by Estate Taxes Paid of $47,752.54

        Section 2056(a) provides for the allowance of a marital

deduction to “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
                             - 39 -

surviving spouse, but only to the extent that such interest is

included in determining the value of the gross estate.”

Decedent’s Marital Trust was set up in such a way that all assets

passing to it from the estate or decedent’s Living Trust would

increase the marital deduction, as if the assets had so passed to

the surviving spouse (Valerie Gill) herself.   The parties agree

that the estate is entitled to a marital deduction under section

2056(a) with respect to decedent’s Marital Trust; however, they

do not agree on the size of the marital deduction.   Respondent

contends that under section 2056(b)(4), the amount of the marital

deduction should be reduced by a portion of the $95,787.82 in

Federal estate taxes and State death taxes reimbursed to the

estate pursuant to the Joan Gill trust settlement.   The estate

argues the reimbursement should not reduce the marital deduction.

     Pursuant to the Joan Gill trust settlement, $95,787.82

representing Federal estate taxes and State death taxes

previously paid by the estate was reimbursed to the estate.    This

$95,787.82 in Federal estate taxes and State death taxes was

generated by the $360,931.79 which should have been paid to Joan

Gill’s Marital Trust by decedent and by an additional $358,807.26

which was distributed to the Gill children, grandchildren, and

grandchildren’s trusts from the estate.

     Section 2056(b)(4) provides:

     In determining for purposes of subsection (a) the value
     of any interest in property passing to the surviving
                              - 40 -

     spouse for which a deduction is allowed by this
     section--

                (A) there shall be taken into account
           the effect which the tax imposed by section
           2001, or any estate, succession, legacy, or
           inheritance tax, has on the net value to the
           surviving spouse of such interest; and

                (B) where such interest or property is
           encumbered in any manner, or where the
           surviving spouse incurs any obligation
           imposed by the decedent with respect to the
           passing of such interest, such encumbrance or
           obligation shall be taken into account in the
           same manner as if the amount of a gift to
           such spouse of such interest were being
           determined.

     Joan Gill’s Living Trust instrument provided that all

Federal estate taxes and State death taxes attributable to the

inclusion of property of Joan Gill’s Marital Trust in the gross

estate of decedent were to be paid from the assets of Joan Gill’s

Marital Trust.   Respondent concedes the portion of the $95,787.82

in estate taxes attributable to the $360,931.79 which should have

been paid to Joan Gill’s Marital Trust by decedent should not

reduce the marital deduction, as the estate tax obligation on

that amount fell on Joan Gill’s Marital Trust (rather than on the

estate).   As the $95,787.82 in estate taxes was generated by the

$360,931.79 which should have been paid to Joan Gill’s Marital

Trust by decedent plus an additional $358,807.26 which was

distributed to the Gill children, grandchildren, and

grandchildren’s trusts, the portion which respondent concedes is
                             - 41 -

[$360,931.79 / ($360,931.79 + $358,807.26)] x $95,787.82, or

$48,035.28.

     However, respondent argues the $47,752.54 balance of the

$95,787.82 should reduce the marital deduction since it was

attributable to $358,807.26 which was distributed to the Gill

children, grandchildren, and grandchildren’s trusts from the

estate and decedent’s Living Trust.    The $358,807.26 comprises:

(1) $20,527 in tangible personal property devised to Valerie Gill

in decedent’s will but passing to the Gill children upon her

disclaimer; (2) $138,280.26 in IRAs payable to the grandchildren;

and (3) $200,000 paid to the grandchildren’s trusts pursuant to

the terms of decedent’s Living Trust.

     Respondent claims that unlike the $360,931.79, Joan Gill’s

Marital Trust had no obligation to pay the Federal estate and

State death taxes on the $358,807.26 in distributions.    Instead,

respondent claims that the estate and decedent’s Living Trust

were obligated to pay those taxes.    As a result, respondent

argues the tax obligation ultimately fell on decedent’s Marital

Trust (as residuary beneficiary of the estate and recipient of

the property of decedent’s Living Trust).    If respondent is

correct that the tax obligation ultimately fell on decedent’s

Marital Trust, a $47,752.54 reduction in assets passing to

decedent’s Marital Trust (with respect to which the estate is

entitled to the marital deduction) results, and a corresponding
                               - 42 -

reduction in the marital deduction is required by section

2056(b)(4).

     The estate argues that the Federal estate and State death

taxes were generated by assets passing from the estate and

decedent’s Living Trust to the Gill children, grandchildren, and

the grandchildren’s trusts.    The estate claims that as a result,

the tax obligation “should have” fallen on those parties as

recipients of the property generating the taxes.    The estate

notes that, in fact, the tax burden ultimately did fall on the

Gill children because pursuant to the Joan Gill trust settlement

they reimbursed the estate for previously paying those taxes.      As

a result, the estate claims that none of the tax burden fell on

assets passing to decedent’s Marital Trust, and the marital

deduction amount should not be reduced under section 2056(b)(4).

     We agree with the estate.   Absent a controlling Federal

statute, State law determines who will bear the burden of the

Federal estate tax.    Riggs v. Del Drago, 317 U.S. 95 (1942);

Estate of Leach v. Commissioner, 82 T.C. 952, 962 (1984), affd.

without published opinion 782 F.2d 179 (11th Cir. 1986).    The

Code provides no general rules for the apportionment of estate

taxes.   Estate of Fine v. Commissioner, 90 T.C. 1068, 1072

(1988), affd. without published opinion 885 F.2d 879 (11th Cir.

1989).   State law also determines who will bear the burden of

State death taxes.    Under Florida law effective at the time of
                               - 43 -

decedent’s death, taxes attributable to amounts passing under a

will or trust instrument were to be charged to and paid from the

residuary estate or from the corpus of the residuary share of the

trust unless the governing will or trust instrument directed

otherwise.   Fla. Stat. Ann. sec. 733.817(1).

     We turn to decedent’s will and trust instruments to

determine whether they directed which property estate and death

taxes were to fall on.   Decedent’s will states:

     estate taxes assessed by reason of my death, shall be *
     * * paid by the Trustee of my Trust as directed in my
     Trust, except that the amount, if any, by which the
     estate taxes shall be increased as a result of the
     inclusion of property transferred by me by gift prior
     to my death or property in which I may have a
     qualifying income interest for life * * * or property
     over which I may have a power of appointment or control
     shall be paid by the person holding or receiving such
     property * * *. [Emphasis added.]

Decedent’s Living Trust agreement similarly directs that estate

taxes assessed by reason of decedent’s death be paid out of the

trust principal, but that increases in estate taxes from

inclusion of property transferred as a gift before decedent’s

death, property in which decedent has an income interest, or

property over which decedent has “a power of appointment or

control” shall be paid by the person holding or receiving that

property.    Because the parties have not argued the effect of the

will and trust instrument terms regarding who is obligated to pay

the contested taxes, we are left with our own interpretation of

the somewhat confusing terms quoted above.
                               - 44 -

     No evidence was presented that the assets at issue were

transferred by decedent as a gift before his death or that

decedent held any qualifying income interest in such assets.

However, we believe the emphasized “appointment or control”

language quoted above places the Federal estate and State death

tax burden on the recipients of the $358,807.26.   The Gill

children, grandchildren, and grandchildren’s trusts received the

$358,807.265 which decedent had controlled as a result of

decedent’s failure to pay that amount to Joan Gill’s Marital

Trust.   Our interpretation of the quoted terms is reinforced by

the fact that the Gill children (rather than the estate or

decedent’s Living Trust) ultimately paid the taxes by reimbursing

a portion of the Joan Gill trust settlement amount.

     Under Florida law, the Federal estate and State death tax

burden falls on the party specified in the will and trust

instruments.   We find these instruments placed the tax burden on

the recipient of distributed property rather than on the estate

and decedent’s Living Trust.   Because the estate or decedent’s

Living Trust were not obligated to pay these Federal estate and

State death taxes, the obligation did not ultimately fall on

decedent’s Marital Trust.   We therefore hold there is no

reduction in the marital deduction under section 2056(b)(4).


     5
      This amount was paid to the Gill children, grandchildren,
and grandchildren’s trusts as a result of the Joan Gill trust
settlement.
                              - 45 -

IV.   Conclusion

      We find the estate is entitled to deductions for certain

additional administration expenses as described above.   We

further find the amount of the marital deduction should not be

reduced by Federal estate taxes and State death taxes paid of

$47,752.54.

      In reaching our holdings herein, we have considered all

arguments made, and, to the extent not mentioned above, we

conclude they are moot, irrelevant, or without merit.

      To reflect the foregoing,


                                         Decision will be entered

                                    under Rule 155.
