Ralph Heard dies in 2008 leaving a large estate. After providing for specific bequests to friends and distant relatives, his will states, “I leave the residue of my estate to be divided between my wife and two children.” Ralph’s will also states, “Any estate tax is to be paid from the residue of my estate.” Applicable state law contains an apportionment provision that precludes the allocation of estate taxes to assets that did not create or generate such taxes unless the decedent provided otherwise.

On the Form 706 that Ralph’s executor filed for the estate, the estate taxes were deducted solely from the children’s portion of the residue. After audit by the IRS, the estate taxes were charged against the entire residue of the estate.

a. What difference does it make?

b. Is the IRS’s position correct? Explain.

Partial list of research aids:

§ 2056(b)(4)(A).

John David McCoy, 97 TCM 1312, T.C.Memo. 2009–61.