White v. US, Civ. A. No. 92-11672-RCL.

• Decision Date: 07 August 1995
• Docket Number: Civ. A. No. 92-11672-RCL.
• Citation: 906 F. Supp. 24
• Parties: Eric S. WHITE, Administrator C.T.A. of the Estate of Lucy Lee Bennett, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Massachusetts

906 F. Supp. 24

Eric S. WHITE, Administrator C.T.A. of the Estate of Lucy Lee Bennett, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. A. No. 92-11672-RCL.

United States District Court, D. Massachusetts.

August 7, 1995.

Gerald B. O'Grady, III, Tyler & Reynolds, P.C., Boston, MA, for Plaintiff.

Susan M. Poswistilo, United States Attorney's Office, Boston, MA, for Defendant.

MEMORANDUM AND ORDER

LINDSAY, District Judge.

This case concerns the federal taxes on the estate of Lucy Lee Bennett. The plaintiff, Eric White, administrator of the estate, brings suit against the government for a refund of federal estate taxes and interest paid on the Bennett estate.

In 1957, Lucy Lee Bennett created a revocable trust, reserving the right under the trust's fifteenth article to amend its terms by written instrument delivered to trustees. By written instrument dated September 5, 1980, Bennett deleted the third and fourth articles of the trust and substituted a new third article directing trustees to distribute $6000.00 annually to each of her children and grandchildren, to begin the following year. The trustees, however, failed to distribute the gifts for 1981 and 1982. Bennett further amended the trust to direct that the missed 1981 and 1982 distributions be made together. At the time of Bennett's death in 1987, the trustees had made the designated gifts for the years 1981, 1982, 1984, and 1985. Gifts had not been made for 1983, 1986, and 1987. These gifts were eventually made after Bennett's death.

The instant suit concerns two issues: first, whether the 1986 and 1987 gifts should have been included in Bennett's estate under the "three-year" rule mandating inclusion of gifts made within three years of death where an interest is retained, see 26 U.S.C.A. §§ 2035, 2038; and second, whether the 1983 distribution, although not subject to this rule, should have been included in Bennett's gross estate for tax purposes. The plaintiff seeks a tax refund on amounts of $113,032.57 and $3,026.33 paid by the plaintiff in 1991 together with accrued interest, on the premise that none of these gifts should have been included in Bennett's taxable estate.

The defendant filed a motion for summary judgment seeking to dismiss this case. The plaintiff also filed for summary judgment, claiming entitlement, as a matter of law, to recovery of federal estate taxes paid and interest on that amount. This court referred the motions for summary judgment to Magistrate Judge Marianne R. Bowler for a report and recommendation. On March 30, 1995, Judge Bowler issued her Report and Recommendation, in which she recommended that the defendant be granted partial summary judgment on the correctness of its assessment of the plaintiff's tax deficiency with respect to the 1986 and 1987 gift distributions. Judge Bowler also recommended partial summary judgment for the plaintiff on the issue of the exclusion of the 1983 distribution from Bennett's gross estate. Both parties have filed objections to the Report and Recommendation.

This court first considers the includibility of the 1986 and 1987 gifts. Generally, gifts made within three years of death by a decedent dying after 1981 are not includible in the decedent's gross estate. I.R.C. § 2035(d)(1) (1986). However, Section 2035(d)(2) excepts, among others, gifts that fall under the provisions set forth in Section 2038 of the tax code. Section 2038 deals with revocable transfers and provides in pertinent part:

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 ... where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power ... to alter, amend, revoke, or terminate, or where any such power is relinquished during the 3-year period ending on the date of the decedent's death.

I.R.C. § 2038(a)(1); see also McNeely v. United States, 16 F.3d 303, 304 (8th Cir. 1994). The general rule, therefore, is that if a decedent either could affect the enjoyment or conditions of a gift, or gives up the power to do so within three years of his or her death, the gift is includible in the taxable estate.

The tax court has held, however, that not every gift transfer is characterized by an exercise or relinquishment of the power to alter or amend, as contemplated in Section 2038. If a gift is made pursuant to the decedent's power of withdrawal, the gift is not includible in the taxable estate. See Estate of Barton v. Commissioner, 66 T.C.M.(CCH) 1547, 1993 WL 503909 (1993); Estate of Jalkut v. Commissioner, 96 T.C. 675, 1991 WL 64935 (1991).

In her Report and Recommendation, Judge Bowler opined that Bennett had relinquished her power to alter or amend the 1986 and 1987 gifts, and that these gifts are includible in the gross estate. Judge Bowler reasoned that, after the scheduled transfer date, Bennett could no longer change or revoke these gifts. According to Judge Bowler, the fact that Bennett could no longer exercise the power she...