## Facts

- In 1968, Wendell Cherry created a trust that by its terms became irrevocable at his death.
- Cherry married Dorothy Morton (later Dorothy M. Cherry) in 1977, and they remained married until Cherry’s death in 1991.
- Cherry’s 1990 will made specific bequests and directed that the residue pass to the trust.
- The will also directed that the trust bear the estate’s taxes, affecting the size of the residue available for any marital deduction based on the residue.
- Cherry had deferred death benefits totaling $6,901,248.16 that were payable only because of his death.
- The parties agreed those deferred benefits were “income in respect of a decedent” (IRD) under 26 U.S.C. § 691(a).
- The IRD was included in Cherry’s gross estate for estate-tax purposes and would also be subject to income tax when later received by the trust and/or the widow.
- The actual estate tax paid exceeded $9.5 million.
- The parties agreed the § 691(c) deduction turns on comparing (1) the actual estate tax (including the IRD) with (2) the estate tax that would have been payable if the IRD had been excluded from the gross estate.
- The dispute was how to compute the “without IRD” comparison estate: Dorothy Morton, as executrix, sought to subtract IRD from the gross estate while keeping the marital deduction at the same dollar amount used on the actual return (and then making an additional adjustment tied to the residuary marital structure).
- The United States argued that removing IRD requires recomputing the marital deduction and other dependent figures; keeping the marital deduction fixed would inflate the tax difference and could yield a § 691(c) deduction larger than the IRD itself.

## Issues

1. When computing the § 691(c) deduction for estate tax attributable to IRD, must the hypothetical estate tax “without IRD” be calculated by recomputing the marital deduction to reflect the reduced residue after IRD is excluded from the gross estate?

## Decision

- The court entered judgment for the United States in the refund action.
- The court rejected the estate’s method of excluding IRD while leaving the marital deduction unchanged in the “without IRD” computation.
- The court accepted the government’s approach requiring a recomputation of the marital deduction and other items affected by removing IRD.
- Because the estate’s approach overstated the estate tax “attributable to” IRD, the claimed additional § 691(c) deduction and refund were denied.

## Legal Principles

- Section 691(c) allows an income-tax deduction for the portion of estate tax that is attributable to including IRD in the gross estate, addressing double taxation of the same item (estate tax inclusion and later income tax when collected).
- The estate tax attributable to IRD is determined by comparing the actual estate tax (with IRD included) to the estate tax that would have been payable if the IRD were excluded from the gross estate.
- In the “without IRD” computation, figures that depend on the gross estate and the residue—such as a marital deduction determined by the residue and reduced by taxes charged to that residue—must be recalculated to reflect the removal of IRD.
- A method that holds the marital deduction constant after changing the gross estate is not a valid “without IRD” comparison because it produces a mismatched computation and can inflate the § 691(c) deduction beyond what the statute permits.

## Conclusion

Estate of Cherry held that the § 691(c) IRD deduction must be computed using a “with IRD” versus “without IRD” estate-tax comparison in which removing IRD from the gross estate requires recalculating the marital deduction and other dependent amounts; because the estate’s fixed-marital-deduction method overstated the estate tax attributable to IRD, the court entered judgment for the United States and denied the refund.


Estate of Cherry v. United States, 133 F. Supp. 2d 949 (2001)