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Estate of Di Marco v. Commissioner

United States Tax Court
87 T.C. No. 39, 87 T.C. 653, 1986 U.S. Tax Ct. LEXIS 46 (1986)
ELI5:

Rule of Law:

An employee's participation in an involuntary, noncontributory, employer-controlled survivor benefit plan does not constitute a 'transfer of property by gift' for gift tax purposes. For a taxable gift to occur, the donor must perform a voluntary act of transfer over a property interest in which they have fixed and enforceable rights.


Facts:

  • On January 9, 1950, Anthony F. DiMarco began his employment with International Business Machines Corp. (IBM).
  • As a regular employee, DiMarco was automatically enrolled in IBM's noncontributory Group Life Insurance and Survivors Income Benefit Plan.
  • The plan provided a survivors income benefit, paid from IBM's general assets, to an employee's surviving spouse, certain minor children, or dependent parents.
  • DiMarco had no power to select or change the beneficiaries, alter the amount or timing of payments, or otherwise modify the survivors income benefit.
  • IBM expressly reserved the right to modify the plan at any time in its sole discretion.
  • DiMarco remained employed by IBM until his death on November 16, 1979.
  • Upon his death, his surviving spouse, Joan M. DiMarco, became entitled to receive the survivors income benefit payments under the terms of the plan.

Procedural Posture:

  • The Estate of Anthony F. DiMarco filed a Federal estate tax return that did not report the value of an IBM survivors income benefit as a gift.
  • The Commissioner of Internal Revenue (respondent) issued a notice of deficiency to the Estate (petitioner), determining that the present value of the survivor benefit was an 'adjusted taxable gift' made on the date of death and increased the taxable estate accordingly.
  • The Estate of Anthony F. DiMarco petitioned the United States Tax Court for a redetermination of the deficiency.
  • The parties submitted the case fully stipulated to the Tax Court for a decision on the merits.

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Issue:

Does an employee's participation in a compulsory, noncontributory, employer-sponsored survivors income benefit plan, where the employee has no power to select beneficiaries or alter the terms of the benefit, constitute a taxable gift of that benefit upon the employee's death?


Opinions:

Majority - Sterrett, Chief Judge

No. An employee's participation in a compulsory, employer-sponsored survivors income benefit plan does not constitute a taxable gift because the employee never performed a qualifying act of 'transfer' and never possessed a fixed and enforceable property right in the benefit. To be subject to gift tax, a transfer must be complete, meaning the donor relinquishes dominion and control over the property. Here, the court found two fundamental elements missing. First, there was no 'act of transfer' by the decedent, Anthony F. DiMarco; his participation was involuntary and automatic as a condition of employment, and simply going to work is not a voluntary act of transfer for gift tax purposes. Second, DiMarco never owned a transferable property interest. The benefit was unfunded, payable from IBM's general assets, and most critically, IBM retained the unilateral right to modify the plan. This meant DiMarco never had a 'fixed and enforceable' right susceptible to transfer. The court also rejected the government's argument that a gift could become complete upon the donor's death, citing regulations that confine the gift tax to transfers by living donors.



Analysis:

This case significantly clarifies the requirements for a 'transfer of property by gift' in the context of employer-provided benefits. It establishes that for a taxable gift to occur, the employee must have both a vested, enforceable property right and have engaged in a voluntary act to transfer that right. The decision prevents the Internal Revenue Service from classifying automatic, non-elective death benefits as last-minute taxable gifts, thereby providing greater certainty for employees and estate planners. This ruling reinforces the distinct nature of the gift tax, which applies to inter vivos transfers, by rejecting the notion that a transfer can become complete for gift tax purposes at the moment of death.

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