Steinberg v. Comm'r

Citation141 T.C. 258,141 T.C. No. 8
Decision Date30 September 2013
Docket NumberNo. 23865–11.,23865–11.
PartiesJean STEINBERG, Donor, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
CourtUnited States Tax Court

?141 T.C. No. 8
141 T.C. 258

Jean STEINBERG, Donor, Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 23865–11.

United States Tax Court.

Sept. 30, 2013


Motion denied.

Goeke, J., concurred in separate opinion.

Lauber, J., concurred in separate opinion.

Halpern, J., dissented and filed opinion.


P entered into a binding gift agreement with her daughters under which P gave her daughters cash and securities and in exchange the daughters agreed to assume and to pay, among other things, any estate tax liability imposed under I.R.C. sec.2035(b) as a result of the gifts in the event that P passed away within three years of the gifts.

In calculating for gift tax purposes the gross fair market value of the property transferred to the daughters, P reduced the fair market value of the cash and securities by an amount representing the value of the daughters' assumption of the potential I.R.C. sec.2035(b) estate tax liability, among other things.

Held: Because the value of the obligation assumed by the daughters is not barred as a matter of law from being consideration in money or money's worth within the meaning of I.R.C. sec. 2512(b), the fair market value of P's taxable gift may be determined with reference to the daughters' assumption of the potential I.R.C. sec.2035(b) estate tax liability. We will deny R's motion for summary judgment, and we will no longer follow McCord v. Commissioner, 120 T.C. 358, 2003 WL 21089049 (2003), rev'd and remanded sub nom. Succession of McCord v. Commissioner, 461 F.3d 614 (5th Cir.2006), to the extent it provides otherwise.

John W. Porter, Keri D. Brown, Michael S. Arlein, and Jeffrey D. Watters, Jr., for petitioner.

John V. Cardone and Jane J. Kim, for respondent.


OPINION

KERRIGAN, Judge:

This gift tax case is before the Court on respondent's motion for summary judgment filed under Rule 121. Petitioner objects to the motion.

Respondent issued petitioner a notice of deficiency, increasing petitioner's gift tax liability by $1,804,908 for tax year 2007. Regarding the motion for summary judgment, respondent disputes only one issue: whether a donee's promise to pay any Federal or State estate tax liability that may arise under section 2035(b) if the donor dies within three years of the gift may constitute consideration in money or money's worth within the meaning of section 2512(b).

Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and

[141 T.C. 259]

Procedure. We round all monetary amounts to the nearest dollar.

Background

The following facts are not in dispute. Petitioner resided in New York when she filed the petition.

On April 17, 2007, petitioner entered into a binding gift agreement (net gift agreement) with her four adult daughters (collectively, donees). At that time petitioner was 89 years old. In the net gift agreement petitioner agreed to make gifts of cash and securities to the donees. In exchange, the donees agreed to assume and to pay any Federal gift tax liability imposed as a result of the gifts. The donees also agreed to assume and to pay any Federal or State estate tax liability imposed under section 2035(b) as a result of the gifts in the event that petitioner passed away within three years of the gifts. Section 2035(b) provides that the amount of a gross estate shall be increased by the amount of gift taxes paid on any gift made by the decedent during the three-year period preceding the decedent's date of death. Section 3, Federal and State Estate Tax, of the net gift agreement provides in pertinent part:

a. Assumption of Federal and State Estate Tax Liability. Each Donee hereby agrees to assume, pay and indemnify the Executor against all additional federal and state estate tax liability assessed pursuant to Code Section 2035(b)(i) if Mrs. Steinberg [petitioner] does not survive for three years following the Effective Date and (ii) that is directly attributable to Mrs. Steinberg's transfer of the Gift Property made under the Instruments of Transfer, including all penalties and interest which accrue upon such estate tax liability except such penalties and interest that are directly attributable to actions or delays committed by the Executor or another Donee (the Estate Tax Liability ). For purposes of determining and allocating the Estate Tax Liability, (i) the value of all additional tax shall be as finally determined for federal estate tax purposes, (ii) the only gift tax taken into account in the calculation shall be the gift tax on Mrs. Steinberg's transfers of the Gift Property to the Donees made under the Instruments of Transfer, and (iii) the amount of the Estate Tax Liability each Donee shall bear shall be an amount equal to the Estate Tax Liability attributable to the Donee's Gift Tax Share A and the Donee's Gift Tax Share B (in each case, collectively, the Donee's Estate Tax Share ).


* * *

[141 T.C. 260]

c. Payment of Estate Tax Liability.

i. Donees' Payment to Executor. Each Donee shall deliver to the Executor an amount equal to the Donee's Estate Tax Share by certified check made payable to the United States Treasury, no later than thirty days before the due date for payment of the Estate Tax Liability, or, if later, as soon thereafter as the Executor notifies the Donee of the amount of the Estate Tax Liability.

The net gift agreement also provides remedies if any daughter fails to pay her share of any section 2035(b) estate tax liability. Section 7(c), Remedy Available in Event of Default, of the net gift agreement provides in pertinent part:

ii. Default in Payment of Estate Tax Liability. If the Executor determines that a Donee is in default * * * the Executor shall give notice to the Donee that the Donee is in default ( Estate Tax Default Notice and Estate Tax Default Notice Date, respectively). If the Donee fails within 10 business days after the Default Notice Date to deliver to the Executor the remaining balance of the Donee's Estate Tax Share of the Estate Tax Liability ( Donee's Estate Tax Balance ), all Cash Distributions [i.e., certain quarterly distributions to which the donees are entitled] otherwise distributable to a Donee shall be delivered directly to the Executor * * *. Each Donee agrees that, upon the date on which the Executor gives an Estate Tax Default Notice to a Donee, the Executor also shall deliver a duplicate copy of the Estate Tax Default Notice to the Manager, and the Donee shall be deemed to have directed the Manager to deliver the Cash Distribution otherwise distributable to the Donee directly to the Executor in satisfaction of the Donee's Estate Tax Balance as provided in this paragraph. Each Donee agrees to perform any and all acts necessary as a shareholder, partner, member, manager or director of any entity governed by an Applicable Agreement to effect the payment of the Donee's Estate Tax Balance to the Executor.

The net gift agreement was the result of several months of negotiation between petitioner and the donees. Petitioner and the donees were represented by separate counsel.

Petitioner retained an appraiser to calculate the gross fair market value of the property transferred to the donees. The appraiser also calculated the aggregate fair market value of the “net gift”. The appraiser determined the value of the net gift by reducing the fair market value of the cash and securities by both (1) the gift tax the donees paid and (2) the actuarial value of the donees' assumption of potential section 2035(b) estate tax. The appraiser determined the actuarial value of the donees' assumption of the potential section 2035(b) estate tax by calculating petitioner's annual mortality rate for the three years after the gift (i.e., the probability

[141 T.C. 261]

that petitioner would pass away within one year, two years, or three years of the gift), among other things. The appraiser determined that the aggregate fair market value of the net gift was $71,598,056, as of the date of the gift. Petitioner valued the donees' assumption of the potential section 2035(b) estate tax liability at $5,838,540.

On October 15, 2008, petitioner timely filed a Form 709, United States Gift (and Generation–Skipping Transfer) Tax Return, for tax year 2007. On the Form 709 petitioner reported taxable gifts of $71,598,056 and total gift tax of $32,034,311. Petitioner attached a summary of the net gift agreement, which included a description of the appraiser's determination of the value of the net gifts, to the Form 709.

On July 25, 2011, respondent mailed the notice of deficiency, which increased the aggregate value of petitioner's net gifts to the donees from $71,598,056 to $75,608,963, for a total gift tax increase of $1,804,908. Respondent disallowed the discount petitioner made for the donees' assumption of the potential section 2035(b) estate tax liability.1 In response, petitioner filed a petition, and respondent filed a motion for summary judgment.

Discussion
I. Summary Judgment

Summary judgment may be granted where the pleadings and other materials show that there is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520, 1992 WL 88529 (1992), aff'd, 17 F.3d 965 (7th Cir.1994). The burden is on the moving party (in this case, respondent) to demonstrate that there is no genuine dispute as to any material fact and that he or she is entitled to judgment as a matter of law. FPL Grp., Inc. & Subs. v. Commissioner, 116 T.C. 73, 74–75, 2001 WL 85184 (2001). In considering a motion for summary judgment, evidence is viewed in the light most favorable to the nonmoving party.

[141 T.C. 262]

Bond v. Commissioner, 100 T.C. 32, 36, 1993 WL 7551 (1993). The nonmoving party may not rest upon the mere allegations or denials of his or her pleading but must set forth specific facts showing there is a...

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