D'Ambrosio v. Comm'r of Internal Revenue (In re Estate of D'Ambrosio)
| Decision Date | 25 September 1995 |
| Docket Number | No. 6724–94.,6724–94. |
| Citation | 105 T.C. No. 18,105 T.C. 252 |
| Parties | ESTATE OF Rose D'AMBROSIO, Deceased, Vita D'Ambrosio, Executrix, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
D transferred her remainder interest in stock for consideration equal to the value of that interest, and retained an income interest in the stock for life. Following D's death, E did not include the stock in D's gross estate for Federal estate tax purposes. E argues that the stock is excludable from D's gross estate under the bona fide sale exception of sec. 2036(a), I.R.C., given the fact that D transferred the remainder interest for its fair market value. Held: D's gross estate includes the value of the stock at D's death, less the amount that D received for the remainder interest. The bona fide sale exception of sec. 2036(a), I.R.C., is inapplicable to the facts at hand.
Harvey R. Poe, Florham Park, NJ, for petitioner.
Frank A. Racaniello, Newark, NJ, for respondent.
The parties submitted this case to the Court without trial. Rule 122. The Estate of Rose D'Ambrosio, Deceased (hereinafter Decedent's estate), Vita D'Ambrosio, Executrix (hereinafter the executrix), petitioned the Court to redetermine respondent's determination of an $842,391 deficiency in the Federal estate tax of Decedent's estate. We must decide whether Decedent's gross estate for Federal estate tax purposes includes the value of 470 shares of preferred stock in which Decedent retained an income interest for her life, after she transferred the remainder interest in the stock for its fair market value. We hold that Decedent's gross estate includes the date-of-death value of the stock, reduced by the value of the consideration she received in return for the remainder interest. Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the date of Decedent's death. Rule references are to the Tax Court Rules of Practice and Procedure.
VAPARO, Inc. (Vaparo), is a closely held corporation organized under the laws of the State of New York. Vaparo was formed with one class of stock, one-half of which was owned by Decedent and one-half of which was owned by her son (Son). Vaparo was recapitalized on December 20, 1983, with three classes of stock. Each share of the first class, class A stock, was assigned a par value of $1. Each share of the second class, class B common stock, was valued at $0.2 The third class, noncumulative convertible preferred stock, was assigned Vaparo's remaining value, giving each of the preferred shares a value of $5,000.
Immediately after Vaparo's recapitalization, its stock was owned as follows:
+------------------------------------------------+
¦ ¦Shares of¦Shares of ¦Shares of¦
+-------------+---------+--------------+---------¦
¦ ¦Class A ¦Class B ¦Preferred¦
+-------------+---------+--------------+---------¦
¦Shareholder ¦Stock ¦Common Stock ¦Stock ¦
+-------------+---------+--------------+---------¦
¦Son ¦50 ¦5,000 ¦500 ¦
+-------------+---------+--------------+---------¦
¦Decedent ¦50 ¦5,000 ¦500 ¦
+------------------------------------------------+
After the recapitalization, but before September 1, 1987, Decedent gave away all of her Vaparo stock, less 470 shares of her preferred stock. On September 1, 1987, when Decedent was 80 years old, she and Vaparo agreed that Vaparo would buy the remainder interest in these 470 shares. Under the agreement, Decedent sold Vaparo the remainder interest and retained the income interest in the shares for life.3 The remainder interest in the shares was worth $1,324,014 at the time of sale, and the total value of the shares was $2,350,000.4 Decedent received a private annuity worth $1,324,014, in consideration for the sale.
Decedent died on May 25, 1990, after receiving annuity payments totaling $592,078. Decedent never sold, relinquished, or otherwise disposed of her income interest. Respondent determined, and reflected in her notice of deficiency, that $1,757,922 of stock was includable in Decedent's gross estate for Federal estate tax purposes. This amount equals the fair market value of 470 shares of Vaparo preferred stock ($2,350,000), less the annuity payments received by Decedent ($592,078). Respondent has since conceded that the maximum amount includable in Decedent's gross estate with respect to the preferred stock is its $2,350,000 value, less the $1,324,014 value of the annuity.
We are faced in this case with a Federal estate planning technique intended to remove the value of property from Decedent's gross estate. We must decide whether the test of adequate and full consideration under section 2036(a) takes into account the value of the entire property, i.e., the fee interest, or merely the value of the remainder interest as determined under the valuation tables prescribed by respondent. See e.g., sec. 20.2031–7, Estate Tax Regs. Numerous articles have been written on this issue, and the legal commentators debate its resolution. Compare, e.g., Dodge, 50–5th T.M., Transfers with Retained Interests and Powers A–67 (1992) with 2 Casner, Estate Planning, sec. 6.15.2, at 149 n 6 (5th ed. 1988 & Supp.1993).
Chapter 11 of the Internal Revenue Code imposes a Federal estate tax on the transfer of the taxable estate of a decedent who is a citizen or resident of the United States. Secs. 2001 and 2002. A decedent's gross estate is determined by reference to part III of chapter 11. Under this part, the value of the gross estate includes the value of all property to the extent of the decedent's interest therein on the date of death.5 Sec. 2033.
A decedent's gross estate also includes property that is subject to section 2036(a), which applies when a decedent makes an inter vivos transfer of property without adequate and full consideration and reserves an income interest in the property for life. Section 2036(a) provides:
General Rule.—The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, under which he has retained for his life * * *
(1) the possession or enjoyment of, or the right to the income from, the property * * *
Respondent argues that section 2036(a) requires that Decedent's gross estate include the value of 470 shares of Vaparo preferred stock, less the value of Decedent's annuity. Respondent argues that the “bona fide sale for adequate and full consideration” exception of section 2036(a) is inapplicable to the facts at hand because Decedent received consideration only for her remainder interest in the stock. According to the executrix, Decedent's gross estate does not include the value of any Vaparo preferred stock because, during her life, she sold the remainder interest in the stock for adequate and full consideration. The executrix argues that Gradow v. United States, 11 Cl.Ct. 808 (1987), affd. 897 F.2d 516 (Fed.Cir.1990), the holding of which is contrary to her position, was wrongly decided by both the United States Claims Court and the Court of Appeals for the Federal Circuit.
According to the executrix' interpretation, section 2036(a) permits a taxpayer to remove the entire value of property from his or her gross estate by selling the remainder interest in the property for an amount equal to the value of the remainder interest. We do not agree. See Estate of Gregory v. Commissioner, 39 T.C. 1012 (1963). We do not believe that the bona fide sale exception of section 2036(a) allows Decedent's estate to avoid the Federal estate tax on the value of the preferred stock in which Decedent retained an income interest until her death. We find the executrix' reliance on a private letter ruling and technical advice memoranda misplaced. Sec. 6110(b)(1), (j)(3) (); Knapp v. Commissioner, 90 T.C. 430, 438 n. 5 (1988), affd. 867 F.2d 749 (2d Cir.1989).6 We also find that the executrix is mistaken in her reliance on the legislative history of section 2701, which was added to the Internal Revenue Code by section 11602(a) of the Omnibus Budget Reconciliation Act of 1990, Pub.L. 101–508, 104 Stat. 1388, 1388–491. As observed by the U.S. Supreme Court: “the views of one Congress as to the construction of a statute adopted many years before by another Congress have very little, if any, significance.” United States v. Southwestern Cable Co., 392 U.S. 157, 170 (1968) (quoting Rainwater v. United States, 356 U.S. 590, 593 (1958)).
In Gradow v. United States, supra, the U.S. Claims Court applied section 2036(a) to a case with facts similar to those of the case at hand. In the Gradow case, the surviving spouse could elect under her husband's will to: (1) Receive her one-half share of the couple's community property outright or (2) transfer her one-half interest to a trust that would hold all of the couple's community property, pay her all of the trust income during her life, and distribute the trust corpus to her son upon her death. She made the latter choice and, following her death, her executor included none of the trust assets in her gross estate. According to the executor, the estate included none of the trust's assets because the decedent's retained life interest was received in a transfer for adequate and full consideration under section 2036(a). The Commissioner disagreed. The Commissioner determined that the decedent's gross estate included the date-of-death value of the property which the decedent had contributed to the trust, less the value of the consideration that she received in return. Agreeing with the Commissioner's position, the Claims Court held that the value of the decedent's...
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