Estate of Gamble v. Comm'r of Internal Revenue

• Decision Date: 16 March 1978
• Docket Number: Docket No. 8352-74.
• Citation: 69 T.C. 942
• Parties: ESTATE of GEORGE E. P. GAMBLE, CROCKER NATIONAL BANK, EXECUTOR, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

69 T.C. 942

ESTATE of GEORGE E. P. GAMBLE, CROCKER NATIONAL BANK, EXECUTOR, PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 8352-74.

United States Tax Court

Filed March 16, 1978.

The decedent made gifts in contemplation of his death and paid Federal and California gift taxes with respect to those gifts prior to his death. The date of death value of the gifts was includable in the value of the decedent's Federal gross estate and in the State inheritance tax base. A credit against State inheritance taxes was allowed for the State gift taxes paid by the decedent. Held, the decedent had no interest in property at the time of his death such that under sec. 2033, I.R.C. 1954, the value of his Federal gross estate includes the amount he paid as State gift taxes prior to his death. Robert C. Alexander, for the petitioner.

Michael R. McMahon, for the respondent.

OPINION

BRUCE, Judge:

Respondent determined a deficiency of $635,005.87 in the estate tax liability of the Estate of George E. P. Gamble. Practically all of the deficiency results from respondent's including in the value of the gross estate of the decedent an amount paid by the decedent as California State gift taxes, for which, subsequent to his death, the State allowed a credit against California State inheritance taxes.¹ The correctness of respondent's action presents the only issue for decision.

All of the facts have been stipulated, and, with certain corrections appearing below, they are found accordingly.

George E. P. Gamble died on May 20, 1972. The petitioner is the executor of his estate. The Federal estate tax return here involved was filed with the Office of the Internal Revenue Service at San Francisco, Calif., where petitioner's principal office is also located.

Prior to his death, the decedent's affairs were managed by a court-appointed conservator, Launce E. Gamble, a nephew of the decedent. On September 10, 1971, through his conservator and with court approval, the decedent made gifts valued at $5,207,737.56. He paid Federal gift taxes in the amount of $2,800,766.94 and California gift taxes in the amount of $861,303.15 with respect to those gifts. The gifts were made in contemplation of his death.

The gross transfers subjected to California inheritance taxes included the gifts made in contemplation of death, the State gift taxes of $861,303 and $2,553,485 of the Federal gift taxes paid with respect to the gifts. The latter two items were included in the State's inheritance tax base as uninventoried assets termed prepaid California inheritance taxes and prepaid Federal estate taxes, respectively. Petitioner's total liability for taxes denominated by the State of California as State inheritance taxes was $4,979,852. Of this liability, $4,118,549 was paid in cash by the estate. The remainder, $861,303, was satisfied by way of a credit for the State gift taxes paid on the gifts made in contemplation of death.

In computing the value of the decedent's gross estate in the Federal estate tax return, petitioner included the date of death value of the gifts, $6,885,637.52. It did not include in the value of the gross estate any amount corresponding to either the Federal or California gift taxes paid with respect to the gifts.

In his notice of deficiency, respondent increased the value of the decedent's gross estate by $861,303.15, the amount paid by the decedent as State gift taxes. He explained the adjustment in part as follows:

By reason of California State law, it is held that the gift taxes paid on the transfers represent an advance payment on the State Inheritance Taxes assessable against the estate, therefore the amounts so paid represent an asset of the decedent's gross estate in accordance with the provisions of section 2033 of the Internal Revenue Code of 1954, as amended.

Petitioner's position is, predictably, that the value of the decedent's gross estate should not be increased by the amount of the State gift taxes he paid during his lifetime. It maintains that because the gift taxes were paid by the decedent as the result of completed taxable transactions and the funds so used were not subject to recoupment, there is nothing to be included as an asset in the decedent's gross estate.

Respondent's position on brief is essentially the application of Rev. Rul. 75-63, 1975-1 C.B. 294,² to the facts of this case. He relies solely upon section 2033,³ which is set forth below in toto:

SEC. 2033. PROPERTY IN WHICH THE DECEDENT HAD AN INTEREST.

The value of the gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death.

The question that must be answered, then, is quite narrow, and it is whether, as a result of paying his gift taxes for which a credit against State inheritance taxes was allowed, the decedent had an interest in property at the time of his death.

Although this is our first opportunity to pass directly upon the issue, we recently had occasion to express our opinion on its resolution. In a Court-reviewed case, Estate of Lang v. Commissioner, 64 T.C. 404 (1975), appeal docketed, No. 76-1543 (9th Cir., March 15, 1976), the question for decision was whether the taxpayer was entitled to a deduction under section 2053 for State gift taxes paid after the decedent's death, where the State inheritance taxes imposed were partially satisfied with an allowable credit for those same State gift taxes. In the course of rejecting the Commissioner's theory as to why the taxes could not be deducted, which theory is the subject of Rev. Rul.71-355, 1971-2 C.B. 334, we discussed Rev. Rul 75-63 and concluded, contrary to respondent's position here, “that the State gift tax paid prior to death on a gift in contemplation of death is not an asset the value of which is includable in the gross estate.” Estate of Lang v. Commissioner, supra at 411.⁴

Respondent contends, however, that our conclusion in Estate of Lang concerning the validity of Rev. Rul. 75-63 is erroneous. He asserts that the ruling “expressly applies only where the gift tax credit provisions of state law make the payment of a state gift tax a prepayment of state inheritance tax” and that in Estate of Lang, we were not “faced with a state judicial determination of the issue there before the Court.” He further asserts that “whether the state gift tax liability is termed ‘contingent’ or ‘absolute’ does not effect (sic) its value as a property interest of the decedent at his death.” Finally, he asserts that we erroneously assumed in Estate of Lang that “a state gift tax payment is entitled to the same Federal tax treatment given to a Federal gift tax payment.” Each of these assertions will be answered in turn.

The thrust of respondent's argument is that by paying his gift taxes for which subsequent to his death the State allowed a credit against inheritance taxes, the decedent prepaid the inheritance taxes. A prepaid liability being an asset, respondent concludes that the decedent created an asset that accrued to the benefit of his estate on his death, and the value of that asset is includable in the value of his gross estate. Respondent's argument does not withstand analysis.

The foremost flaw in respondent's theory is that while it aptly describes the effect of the decedent's gift tax payments, it ignores the basic requirement of section 2033 that the decedent have an interest in property which passes from him at the time of his death. As we stated in Estate of Barr v. Commissioner, 40 T.C. 227, 232 (1963), with respect to section 2033:

It will be observed that this section relates only to interests in property which the decedent had at the time of his death. And, as the Supreme Court pointed out in the leading case of Knowlton v. Moore, 178 U.S. 41, the justification for the Government's power to subject such interests to the Federal estate tax rests on the principle that such interests pass from the decedent at death, and that the estate tax is an excise tax on the privilege of transmitting property at death to the survivors of the decedent. To the same effect see New York Trust Co. v. Eisner, 256 U.S. 345.

Section 2033 is not a “catch all” provision bringing within the gross estate the value of all benefits which accrue to others upon one's death. Connecticut Bank & Trust Co. v. United States, 465 F.2d 760 (2d Cir. 1972); Estate of Tully, 528 F.2d 1401 (Ct. Cl. 1976). It requires the existence of property “beneficially owned by the decedent at the time of his death.” Sec. 20.2033-1(a), Estate Tax Regs. We find no support for respondent's conclusion that the requisite property interest existed under California law.

At issue in In re Estate of Schmalenbach, 15 Cal. 3d 102, 539 P.2d 58, 123 Cal. Rptr. 490 (1975), was “whether state and federal gift taxes accrued and payable at the time of death and paid after death on transfers subject to California inheritance and federal estate taxes are deductible in determining the clear market value of the estate upon which the state inheritance tax is computed.” Crucial to the court's determination that neither gift tax obligation qualified for deduction was that “the payment of the aforementioned gift tax obligations does not reduce the net amount of the benefit actually received” by the transferee, a requirement for deductions imposed by Cal. Rev. & Tax. Code sec. 13981 (West 1970). Payment of the gift taxes did not reduce the net benefit to the transferee because each respective taxing jurisdiction allowed a credit against the estate and inheritance taxes imposed for the gift taxes paid, and neither the estate nor inheritance taxes were deductible in determining the net amount of the transfer. In footnote 10 of its opinion, the California court stated as follows:

The instant case does not involve a situation wherein a transferor paid a gift tax prior to death, and the transfer was included with those transfers subject to the inheritance...