                       T.C. Memo. 1998-416



                     UNITED STATES TAX COURT



             ESTATE OF BETTY PACE MILLER, DECEASED,
      JERRY D. WALKER, INDEPENDENT EXECUTOR, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11889-97.                 Filed November 18, 1998.



     Valentine C. Cronin and Richard Keys Disney, for petitioner.

     John R. Hunter, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     COHEN, Chief Judge:    Respondent determined a deficiency of

$408,274 in the Federal estate tax of decedent's estate.   After

concessions, the sole issue for decision is whether, under the

terms of decedent's will and Texas law, the surviving spouse's

portion of the residuary estate is required to bear a

proportionate share of Federal estate tax, thereby reducing the
                                - 2 -


amount of the allowable marital deduction pursuant to

section 2056(b)(4)(A).    Unless otherwise indicated, all section

references are to the Internal Revenue Code in effect as of the

date of decedent's death, and all Rule references are to the Tax

Court Rules of Practice and Procedure.

                          FINDINGS OF FACT

     Some of the facts have been stipulated, and the facts set

forth in the stipulation are incorporated in our findings by this

reference.    Betty Pace Miller (decedent) died on December 6,

1993, a resident of Comal County, Texas.     Decedent was survived

by her husband, Charles E. Miller (Mr. Miller); her daughter,

Marilyn Miller Slaughter; and her son, Robert Charles Miller.     At

the time the petition in this case was filed, the executor's

address was in Irving, Texas.

     Decedent executed a last will and testament (the will) on

October 3, 1984, referring to the "Miller Family Trust" (the

trust), which was established by a separate instrument on the

same day.    Decedent and Mr. Miller consulted Lynn Smith (Smith),

a Texas attorney, regarding the plan of their estate.    Smith

drafted the will and the trust.    In article III of the will,

decedent made a specific bequest of certain personal property to

Mr. Miller.    Under article IV, in the event that Mr. Miller

predeceased decedent, specific parcels of real property were

devised to their children.    In relevant part, in article V,
                              - 3 -


decedent bequeathed the residue of her estate 50 percent to

Mr. Miller and 50 percent to the trust.

     With respect to the estate tax, article II of the will

provided:

          I direct that all estate, inheritance, transfer
     and succession taxes, including interest and penalties
     thereon * * *, if any which may be lawfully assessed by
     reason of my death, with respect to any of my property,
     whether or not such property passes under the terms of
     this Will and including the proceeds of life insurance
     on my life, shall be borne by my residuary estate.
     Such payment shall be made as an expense of
     administration without apportionment and without
     contribution or reimbursement from anyone whomsoever,
     including beneficiaries of policies of insurance on my
     life. [Emphasis added.]

Section 10.1.13 of the trust referred to payment of estate tax,

as follows:

          Power to Aid Estates of Grantors: The Trustee, if
     funds or property be available and unless otherwise
     directed by the Will of either Grantor, may within his
     discretion pay any portion of the Estate, inheritance,
     legacy and transfer taxes levied by reason of the death
     of either Grantor including any part thereof which is
     attributable to the Trust Estate. Such amounts so paid
     shall be made only from that portion of the Trust
     Estate that shall be then includable in the taxable
     Estate of the decedent against whom such taxes are
     assessed, and shall not be made out of property
     excluded from the taxable Estate of the decedent in
     question * * *. The Trustee shall also cooperate with
     the executor or administrator of the Estate of either
     Grantor, in making funds available to either of such
     Estates in order to assist in the payment of any such
     taxes * * *.

     In the will, decedent appointed Jerry D. Walker (Walker)

independent executor of the estate and trustee of the trust.
                                 - 4 -


                               OPINION

     Section 2001 imposes a tax on the transfer of the taxable

estate of all persons who are citizens or residents of the United

States at the time of death.   The amount of the tax is

determined, in part, by the value of the taxable estate.      Sec.

2001(b).   Section 2051 defines the value of the taxable estate as

the gross estate less deductions.    Section 2056(a) allows a

Federal estate tax marital deduction from a decedent's gross

estate for the value of property interests passing from the

decedent to the surviving spouse.    As a general rule, the marital

deduction is reduced by estate succession, legacy, or inheritance

taxes allocable to the surviving spouse's interest.    Sec.

2056(b)(4)(A).

     The issue in this case is whether the portion of the

residuary estate passing to Mr. Miller should bear a

proportionate share of the Federal estate tax, reducing the

amount of the allowable Federal estate tax marital deduction, as

contended by respondent, or whether the trust should bear all of

the estate tax burden, as contended by petitioner.    Section 2056

does not specify how taxes are to be allocated among the

interests comprising the estate.    Rather, State law governs the

manner in which a decedent's Federal estate tax burden is

allocated among estate assets.     Riggs v. Del Drago, 317 U.S. 95,

100 (1942); Estate of Wycoff v. Commissioner, 59 T.C. 617, 622
                                - 5 -


(1973), affd. 506 F.2d 1144 (10th Cir. 1974); Thompson v.

Thompson, 149 Tex. 632, 236 S.W.2d 779, 789 (1951).        Accordingly,

interpretation of decedent's will regarding payment of estate tax

is governed by Texas law.

     In 1987, the Texas legislature enacted Texas Probate Code

section 322A, which provided for the apportionment of estate and

inheritance taxes for Texas residents.       That statute was amended

in 1991.   The amended statute became effective on September 1,

1991, and applied to the estates of decedents who died on or

after that date.   This statute provides, in pertinent part, as

follows:

          (b)(1) The representative shall charge each person
     interested in the estate a portion of the total estate
     tax assessed against the estate. The portion of each
     estate tax that is charged to each person interested in
     the estate must represent the same ratio as the taxable
     value of that person's interest in the estate included
     in determining the amount of the tax bears to the total
     taxable value of all the interests of all persons
     interested in the estate included in determining the
     amount of the tax. * * *

          (2) Subdivision (1) of this subsection does not
     apply to the extent the decedent in a written inter
     vivos or testamentary instrument disposing of or
     creating an interest in property specifically directs
     the manner of apportionment of estate tax * * *.

               *     *      *    *       *       *     *

          [4](c) Any deduction * * * allowed by law in
     connection with the estate tax inures to a person
     interested in the estate as provided by Subsections
     (d)-(f) of this section.
                                - 6 -


            (d) If the deduction * * * is allowed because of
       the relationship of the person interested in the estate
       to the decedent, * * * the deduction * * * inures to
       the person having the relationship * * *. [Tex. Prob.
       Code Ann. sec. 322A (West 1980 & Supp. 1993).]

       Generally, in the absence of specific directions in the will

regarding the apportionment of estate tax, the State's

apportionment statute mandates that estate tax be apportioned

among estate beneficiaries according to the taxable value of

their respective interests in the estate.      Tex. Prob. Code Ann.

sec. 322A(b)(1).    Apportionment, pursuant to the statute, takes

into consideration bequests qualifying for the marital deduction,

and no estate tax is apportioned to the surviving spouse with

respect to such bequests.    Tex. Prob. Code Ann. sec. 322A(c) and

(d).    The Texas statute, however, allows the decedent to opt out

of the general scheme by specifically providing for an

alternative plan of apportionment.      Tex. Prob. Code Ann. sec.

322A(b)(2).

       The dispute in this case principally concerns the effect of

the provision in decedent's will that estate tax be borne by the

residuary estate "as an expense of administration without

apportionment and without contribution or reimbursement from

anyone * * *, including beneficiaries", specifically whether that

provision negates application of Texas Probate Code section

322A(b)(1), in accordance with subsection (b)(2) of that statute.

The highest court of Texas has not spoken directly on the matter
                               - 7 -


before us; therefore, we must examine the question as if we were

a Texas court.   Commissioner v. Estate of Bosch, 387 U.S. 456,

465 (1967).

     In Texas, the cardinal rule for construing a will mandates

that the decedent's intent be ascertained by looking to the will

as a whole, as set forth within the four corners of the document.

Perfect Union Lodge No. 10 v. Interfirst Bank, 748 S.W.2d 218,

220 (Tex. 1988); Henderson v. Parker, 728 S.W.2d 768, 770 (Tex.

1987); see also Bergin v. Bergin, 159 Tex. 83, 315 S.W.2d 943,

946 (1958) (stating that a court must examine a will in its

entirety to ascertain the testator's intent).    The court's

responsibility is to construe the will to effectuate the

testatrix's intent as far as legally possible.    Perfect Union

Lodge No. 10 v. Interfirst Bank, supra at 221.    In interpreting

the will, courts presume that there was nothing superfluous or

meaningless in the will and that every word had meaning and

played a part in the disposition of the property.     Marlin v.

Kelley, 678 S.W.2d 582, 587 (Tex. App. 1984, writ granted 1985),

affd. Kelley v. Marlin, 714 S.W.2d 303 (Tex. 1986).    If any

particular clause or paragraph, considered alone, indicates an

intent contrary to the intent manifested by the whole instrument,

the court should disregard that inconsistent clause or paragraph.

Disabled Am. Veterans v. Mullin, 773 S.W.2d 408, 410 (Tex. App.

1989, no writ); Bergin v. Bergin, supra.
                               - 8 -


     In the cases involving wills directing that estate tax be

paid out of the residuary "without apportionment", courts have

consistently held that the decedent used this language as an

election out of an apportionment statute that otherwise would

apply.   Estate of Fine v. Commissioner, 90 T.C. 1068 (1988),

affd. without published opinion 885 F.2d 879 (11th Cir. 1989);

Estate of Brunetti v. Commissioner, T.C. Memo. 1988-517.    We find

no reason that decedent's will should be interpreted any

differently.

     Petitioner contends that this Court held, in Estate of

Brunetti v. Commissioner, supra, that a provision in a will that

estate taxes be paid out of the residue without apportionment is

insufficient direction to preclude the use of a State

apportionment statute.   In Estate of Brunetti, which dealt with a

charitable bequest, the Court relied on the State apportionment

statute, because a codicil to the original will vitiated the

testator's original intent to elect out of the statute.    The

Court stated:

          We do not doubt that decedent's original intent
     * * * [estate taxes paid out of my residuary as an
     expense of administration without apportionment] was to
     override the general rule of the California
     apportionment statute * * * and to charge * * *
     [estate] taxes exclusively to the residuary estate. We
     must, however, also take into account the language of
     the codicils. In this regard, the sixth codicil of
     decedent's will is not clear as to decedent's intent.
     [Id.; citations omitted; emphasis added.]
                                - 9 -


Petitioner's reading of Estate of Brunetti is incorrect and is

contradicted by the clear holding in Estate of Fine v.

Commissioner, supra.

     Decedent's will directs that "estate taxes shall be borne by

my residuary estate."    This provision of the will indicates that

decedent intended that property passing by specific bequest

should not bear any portion of the estate tax.   See Estate of

Phillips v. Commissioner, 90 T.C. 797, 800-801 (1988), in which

we concluded that none of the Federal estate tax due on the

residuary estate should be allocated to the surviving spouse's

interest.   The general provisions of the Louisiana apportionment

statute applied because the decedent in Estate of Phillips did

not provide for an alternative plan of apportioning estate tax

within the residuary.    A similar conclusion was reached in Lewald

v. United States, 245 F. Supp. 336 (S.D.N.Y. 1965).

     By contrast, in First Natl. Bank of Atlanta v. United

States, 634 F.2d 212 (5th Cir. 1981), no State apportionment

statute was in effect.   The subject will provided for the

residuary to be divided into two parts, one of which was a

marital trust, and for all estate taxes to be paid from the

residuary of the estate.   Stating that "there is no provision for

payment of estate taxes only out of the non-marital portion of

the estate, even if the residue were to be divided prior to

payment of such taxes", the Court held that the Federal estate
                               - 10 -


tax was to be paid out of the residue of the estate including the

marital trust property.    Id. at 214.

     Decedent's will expressly provided:    "Such payment [of

estate tax] shall be made * * * without apportionment and without

contribution * * * from anyone".    By including an express

provision regarding apportionment, decedent entirely negated

application of the general apportionment provisions of the Texas

statute with respect to the residuary.     Tex. Prob. Code   Ann.

sec. 322A(b)(2).    By directing that there be no apportionment

within the residuary, decedent expressed an intention that there

be no discrimination between marital and nonmarital residual

beneficiaries.    Thus, the estate tax liability reduces the amount

of the residuary available for distribution to Mr. Miller and to

the trust.

     In Estate of Fine v. Commissioner, supra, the Court

interpreted a Virginia apportionment statute that is comparable

to the statute in Texas.    In Estate of Fine, the decedent left

one-half of his residuary estate to his wife and the other half

to other beneficiaries.    The will also directed that estate and

inheritance taxes be paid out of the residuary "without

apportionment".    Notwithstanding the likelihood that the

"decedent hoped to leave his wife in the best possible position,

which would be achieved by maximizing the marital deduction, the

plain language of the will * * * [did] not permit that result."
                                - 11 -


Id. at 1074.   We concluded that apportionment language in the

will required "that estate and inheritance taxes be paid out of

the entire residuary estate."    Id. at 1075.    We held that the

"without apportionment" language meant (1) that the maximized

marital deduction safeguarded by the Virginia statute did not

apply and (2) that specific bequests under the will did not bear

any of the taxes due.    Id. at 1076.    The pertinent provisions of

decedent's will in this case are indistinguishable and do not

lead to a different result.

     Petitioner argues that decedent could not have knowingly

opted out of the statute because the statute was not enacted

until 1987, 3 years after decedent executed her will.     We reject

petitioner's position.   Although it is true that Texas did not

have an apportionment statute in effect when decedent executed

her will, the highly specific directive in the will that estate

taxes be paid out of the residue "without apportionment"

manifests an unequivocal intent that there be no apportionment.

Thus, the language of the will compels the result.     Further, no

other portion of her will indicates a contrary intent.

      Petitioner contends that, by providing that the estate tax

be paid out of the residuary "without apportionment", decedent

rejected equal apportionment between Mr. Miller and the trust and

intended that the entire estate tax be paid by the trust.     This

argument is contrary to the recognized meaning of that phrase, as
                              - 12 -


discussed above.   Moreover, there is no provision in the will for

imposition of estate tax on the trust portion of the residuary to

the exclusion of the marital portion of the residuary.    Instead,

decedent specifies that estate tax be paid generally out of the

residuary "without apportionment".     Under petitioner's reasoning,

decedent could have also intended that Mr. Miller's share of the

residuary bear the entire estate tax burden.    In essence,

petitioner asks this Court either to eliminate article II (pay

estate taxes out of residuary), to rewrite it to provide that

"all estate tax shall be paid from the trust portion of the

residue of my estate", or to redefine the word "residuary".

     Petitioner disavows any intent to eliminate altogether the

Federal estate tax on the estate.    Petitioner's position is:

     It was not the Testatrix's intent to eliminate the
     estate taxes from her Estate through the use of the
     unlimited marital deduction. Instead, her intent was
     to fully provide for her husband's needs by giving him
     fifty percent (50%) of her gross estate. * * * Her
     goal was never to eliminate estate tax, instead it was
     to maximize the benefits and the property passing to
     her surviving spouse.

Petitioner relies on the testimony of Smith, the draftsman of the

will and trust, in this regard.   (Although respondent objected to

Smith's testimony on the ground that extrinsic evidence of intent

is inadmissible, respondent's brief proposed a finding and based

an argument on Smith's testimony.    We hold that respondent's

objection was thus waived.)
                             - 13 -


     Smith testified on direct examination as follows:

          Q Okay. When you say, estate planning, did you
     recall -- did you meet with Betty Pace Miller, and I
     believe you said, her husband --

          A   Yes.

          Q -- to discuss their wishes and desires with
     regard to estate planning?

          A Yes. As I recall, they had, within a short
     period of time before that, suffered the loss of a son
     who was in his twenties. They had two other children
     and a sister of Mr. Miller that they were concerned
     about taking care of, as well as themselves.

          *       *     *      *      *      *        *

          A She had an intent to look to the -- taking care
     of her two children that remained alive, and also to
     take care of her husband. And then after her husband
     was taken care of, to -- whatever was left after that
     would be available for her children, if anything.

          *       *     *      *      *      *        *

          Q Okay. We've talked about taxes, and we've
     talked about marital deductions. Can you say what the
     primary -- her intent was, based on your conversations
     with her?

          A She wanted to see that her two children that
     she set up, they both set up trusts for her during
     their lifetime, were taken care of, and his sister,
     then they wanted to see that he was taken care of, and
     then they wanted any kind of -- what was left over
     after taxes were paid out of that trust that were set
     up for the children, to be available to them.

From the testimony, we conclude that there were several intended

beneficiaries, and the documents were drafted to reflect

decedent's intent to provide for all of them.    Although Smith

also asserted that decedent intended that all of the taxes be
                             - 14 -


paid out of the trust, he did not reconcile that intent with the

language of the documents he drafted based on his contemporaneous

discussions with decedent and Mr. Miller.   Smith's testimony is

self-contradictory to the extent that he describes in detail

decedent's desire to provide for her children but asserts in

general terms that she intended that the trust assets available

to them bear the burden of taxes on the entire estate.

     Petitioner did not corroborate Smith's testimony with any

contemporaneous records, and no other witnesses were called,

despite identification of the trustee as a witness in

petitioner's trial memorandum.   Smith's testimony does not

persuade us that decedent intended to place the entire tax burden

on the trust.

     Petitioner also argues that the trust indicates that

decedent intended estate tax be paid solely by the trust.

Petitioner asserts that, by (1) including the trust in the

residuary, (2) empowering the trustee to pay the estate tax, and

(3) designating the residuary as the source of payment, the will

makes payment of the estate tax a mandatory obligation of the

trust and evinces an intent to maximize the marital deduction.

Specifically, section 10.1.13 of the trust grants the trustee the

discretionary power to pay the estate tax and directs that estate

tax payments be made only from the portion of the trust estate

included in the taxable estate of decedent.   Petitioner argues
                               - 15 -


that, because the "taxable estate" does not include marital

deduction property, decedent intended to exclude Mr. Miller's

residual interest from the general obligation of the residuary to

pay estate tax.    Thus, petitioner concludes that the trust must

pay the estate tax out of residuary property not qualifying for

the marital deduction.

     Contrary to petitioner's assertion, however, nothing in the

trust instrument constitutes a direction by decedent to pay

estate tax exclusively from the nonmarital property.     Rather, the

instrument provides that the trustee "may within his discretion

pay any portion of the Estate" tax.     (Emphasis added.)

Petitioner's interpretation would ignore the reference to

discretion in the provision and cannot be accepted.     This

discretionary provision is not sufficient to transfer the tax

burden to nonmarital property for purposes of determining the

marital deduction.    See Estate of Reid v. Commissioner, 90 T.C.

304, 311 (1988).    The trustees could decide how this estate tax

ultimately would be paid under the trust.     Their ultimate option

does not control the determination of tax consequences as of the

date of death.     See Ithaca Trust Co. v. United States, 279 U.S.

151, 155 (1929).

     Although Texas courts determine the intent of a testator by

considering the will as a whole, Henderson v. Parker, 728 S.W.2d

768, 770 (Tex. 1987), the Court's interpretation of decedent's
                              - 16 -


will does not render the trust provisions superfluous or

meaningless--as petitioner contends.    See Marlin v. Kelley, 678

S.W.2d 582, 587 (Tex. App. 1984, writ granted 1985), affd. Kelley

v. Marlin, 714 S.W.2d 303 (Tex. 1986).    The trust merely provides

an alternative plan of payment in case the primary direction of

decedent in article II fails for whatever reason.    Wills commonly

contain such provisions to accommodate different scenarios upon

death.

     Petitioner, citing no authority, also contends that various

portions of the Texas statute guarantee the marital deduction

regardless of decedent's intent regarding apportionment.

Petitioner claims that this construction of the statute is

supported by compelling public policy because the marital

deduction was designed to protect interests of surviving spouses

and should not be an unreasonable trap for the unwary.

     These arguments are unsupported by the language or structure

of the statute, and no other apportionment statute has been

interpreted in this manner.   Subsection (b)(1) of section 322A of

Texas Probate Code sets forth the general apportionment rule, and

subsections (c) through (y) are provisions setting forth how the

general rule is to be carried out.     Subsections (c) through (y)

do not act independently of the general apportionment provision,

but rather supplement it.   Thus, subsections (c) and (d) do not

guarantee that the marital deduction always inures to the benefit
                              - 17 -


of the surviving spouse for purposes of apportioning estate

taxes.   Those subsections only guarantee that result when the

decedent does not make, by specific direction, a separate

provision for the payment of estate taxes.

     Petitioner objects to consideration of certain historical

materials concerning the 1987 version of Texas Probate Code

section 322A, contained in the stipulation.   Because these

materials are not relevant to our opinion, we sustain the

objection.

     We conclude that, at the time of decedent's death, the

property interests passing to Mr. Miller through the residuary

estate were burdened with the Federal estate tax, and

petitioner's marital deduction should be reduced accordingly to

reflect the net value of the interests passing to Mr. Miller.

     To reflect concessions and administrative expenses,

                                         Decision will be entered

                                    under Rule 155.
