Sommers v. Comm'r
| Decision Date | 22 August 2017 |
| Docket Number | 149 T.C. No. 8,Docket No. 9306-07. |
| Parties | ESTATE OF SHELDON C. SOMMERS, DECEASED, STEPHAN C. CHAIT, TEMPORARY ADMINISTRATOR, Petitioner, AND WENDY SOMMERS, JULIE SOMMERS NEUMAN, AND MARY LEE SOMMERS-GOSZ, Intervenors v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
D made valid gifts to Ns, his nieces, in December 2001 and January 2002. See Estate of Sommers v. Commissioner, T.C. Memo. 2013-8. D died in November 2002. W, D's surviving spouse, succeeded to property she owned jointly with D, and D's will bequeathed and devised to W all of his estate remaining after payment of debts and expenses. W succeeded to or was entitled to receive all of the property included in D's gross estate, within the meaning of I.R.C. sec. 2031(a). In accordance with the agreements governing their gifts from D, Ns paid the gift tax due on those gifts. P has filed three motions for partial summary judgment seeking determinations that (1) the gift tax owed at D's death on his gifts to Ns is deductible under I.R.C. sec. 2053, (2) the estate is entitled to a marital deduction under I.R.C. sec. 2056 equal to the value of D's nonprobate property that W received or to which she succeeded that, under applicable State law, was exempt from D's debts and the expenses of the estate, and (3) any Federal estate tax due must be apportioned to Ns and thus does not reduce the estate's marital deduction. Ns have filed their own motion for partial summary judgment that none of the estate tax liability can be apportioned to them.
Held: Because the estate's payment of D's gift tax liability would have given rise to a claim for reimbursement from Ns under the agreements governing the gifts, the gift tax owed on those gifts at D's death is not deductible under I.R.C. sec. 2053(a). P's gift tax motion accordingly will be denied.
Held, further, P's motion for partial summary judgment regarding the effect of debts and claims on the marital deduction allowed by I.R.C. sec. 2056(a) will be denied because the amount of the allowable deduction turns on the factual question of the extent to which assets otherwise exempt from claims against the estate were used to pay estate debts and expenses.
Held, further, under the New Jersey estate tax apportionment statute, no portion of any estate tax due can be apportioned to Ns. The existing record does not allow for a determination of the effect of the estate tax on the allowable marital deduction. Accordingly, Ns' estate tax apportionment motion will be granted and P's will be denied.
David N. Narciso and Matthew E. Moloshok, for petitioner.
Michael A. Guariglia and Vlad Frants, for intervenors.
Robert W. Mopsick and Lydia A. Branche, for respondent.
HALPERN, Judge: Respondent determined a deficiency of $542,598 in the Federal estate tax of the Estate of Sheldon C. Sommers (decedent) resulting from the inclusion in the value of decedent's gross estate under section 2035(b) of alleged gift tax on gifts decedent made to his nieces (the intervenors in the case) in 2001 and 2002, less than three years before his death in November 2002.1 The parties have stipulated the amount of gift tax due as a result of decedent's gifts to intervenors and, on the basis of that stipulation, we entered a decision in a related case involving the gift tax deficiency respondent determined. We now have before us in this case three motions for partial summary judgment filed by petitioner and one filed by intervenors. Petitioner seeks determinations that (1) the gift tax owed at decedent's death on his gifts to intervenors is deductible under section 2053, (2) the estate is entitled to a marital deduction under section 2056 equal to the value of decedent's nonprobate property that his spouse, Bernice Sommers (Bernice) received or to which she succeeded that, under New Jersey law, was exempt from decedent's debts and expenses of the estate, and (3) anyFederal estate tax due must be apportioned to intervenors and thus does not reduce the estate's marital deduction. Respondent objects to petitioner's first two motions but supports petitioner's third motion. Intervenors support petitioner's first two motions, object to his third motion, and have filed their own motion for partial summary judgment determining that none of the estate tax liability can be apportioned to them. Both petitioner and respondent oppose intervenors' motion. For the reasons explained below, we will deny each of petitioner's motions and grant intervenors' motion.
In 2001, decedent sought legal advice concerning his intention to transfer works from his art collection to the three nieces who were his closest living relatives. To reduce--or, ideally, eliminate--any gift tax on the gifts, his attorneys offered two proposals. First, they recommended that he transfer the artwork to a newly formed limited liability company and then make gifts to his nieces of units representing ownership interests in the entity (units). That recommendation rested on the expectation that, as a result of applicable valuation discounts, the appraised value of the units would be less than the value of the assets they represented. The attorneys also recommended that decedent make the intended gifts in two stages, transferring some units to each niece on or before December 31, 2001, and the rest thereafter. Spreading the gifts across the end of the year would increase the portions of the gifts that could be covered by the annual gift tax exclusion provided by section 2503(b) and also allow decedent the benefit of an increase in the unified transfer tax credit scheduled to take effect in 2002. The plan envisioned decedent's transferring to his nieces in 2001 the maximum number of units possible without incurring gift tax and then completing his gifts of the units the following year.
In accordance with that plan, decedent transferred artwork to Sommers Art Investors, LLC (LLC), and executed two sets of gift and acceptance agreements with his nieces, the first dated December 27, 2001, and the second dated January 4, 2002. When decedent and his nieces initially executed the agreements, they left blanks for the number of units included in each transfer, pending completion of an appraisal of the artwork. The commissioned appraisal, when completed in March 2002, assigned a value to the artwork that led decedent's counsel to conclude that dividing the transfers of units across the end of 2001 would not allow for the complete avoidance of gift tax. After the nieces agreed to pay any gift tax resulting from the 2002 transfers, the gift and acceptance agreements were completed by filling in the blanks for the number of units covered by each transfer. In addition, decedent and his nieces amended each of the 2002 agreements by adding a provision in which each donee "agree[d] to pay the gift taxes, if any, relating to the gift [of] the units, including, without limitation, any gift taxes, penalties, and interest that may later correctly be assessed." None of the 2002 agreements refer to the apportionment of any Federal estate tax liability resulting from the gifts. While neither agreement provides for the donee's assumption of any liability other than gift tax, neither specifically exculpates the donee from other liabilities.
In April 2002, decedent executed what turned out to be his last will. Article I of that will directs Bernice, his executrix and then ex-wife, "to pay all of * * * [his] just debts * * * including all funeral and burial costs, and expenses of * * * [his] last illness, and all costs and expenses of administering and settling * * * [his] estate." Article II bequeaths and devises to Bernice all of decedent's estate remaining after payment of those debts.
In June 2002, shortly before remarrying Bernice, decedent initiated litigation in Indiana against his nieces challenging the validity of the purported gifts and seeking return of the artwork. That litigation, and similar litigation Bernice initiated in New Jersey, ultimately upheld the validity of the gifts.
Decedent died on November 1, 2002. The Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, that Bernice filed reported the following amounts:
On examination, respondent increased decedent's taxable estate from $507.34 to $1,092,106.68. The increase of $1,091,599.34 reflects three adjustments that follow from respondent's determination that decedent's transfers of units were valid gifts. First, respondent included in the value of decedent's gross estate the gift tax he determined to be due as a result of the 2002 gifts, $510,648, because decedent had made those gifts less than three years before his death. See sec. 2035(b). Second, respondent excluded from decedent's gross estate the $1,750,000 value the estate had assigned to the artwork that decedent had transferred to the LLC. And, third, respondent reduced the marital deduction allowable to the estate by $2,330,951.34. The decrease in the allowed marital deduction reflected respondent's determination that the estate tax liability of $542.593.34 resulting from the section 2035(b) inclusion would have to be paid out of...
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