Shelfer v. Commissioner

Elbert Shelfer’s will placed two-thirds of his estate into a trust. The trust provided that all its income went to Elbert’s wife, Lucille Shelfer, while she was alive, payable in quarterly installments. When Lucille died, the trust terminated, and the trust did not give Lucille a power of appointment to control who received the trust income at that point. Rather, under the trust’s terms, when Lucille died, the principal and any undistributed income, i.e., the stub income, went to Elbert’s niece. When Elbert died, his estate claimed that this trust was a qualified-terminable-interest-property (QTIP) trust, meaning a trust that gave Lucille control over all the trust’s income during her lifetime. Relying on this QTIP designation, Elbert’s estate took a marital tax deduction on half the trust’s assets, allowing the couple to defer estate taxes on those assets until Lucille’s death. However, when Lucille died, her estate (plaintiff) did not pay taxes on the trust assets that Elbert’s estate had deducted. Lucille’s estate claimed the trust did not qualify as a QTIP trust because Lucille never controlled the trust’s stub income, which Elbert had irrevocably given to his niece. The Internal Revenue Service (IRS) (defendant) audited the return. The IRS claimed the trust qualified as a QTIP trust and that Lucille’s estate owed additional taxes on the trust assets that Elbert’s estate had deducted. Lucille’s estate sued, challenging this additional assessment. The tax court ruled for Lucille’s estate. The IRS appealed.