Steinberg v. Comm'r
2015 U.S. Tax Ct. LEXIS 40, 145 T.C. No. 7, 145 T.C. 184 (2015)
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Rule of Law:
A donee's legally binding promise to pay any potential estate tax liability arising under IRC § 2035(b), which is triggered if the donor dies within three years of making the gift, constitutes consideration in 'money or money's worth' that reduces the taxable value of the gift.
Facts:
- Jean Steinberg's husband died in 2003, leaving assets in a marital trust for her benefit, which was valued at over $122 million by April 2007.
- During 2006 and 2007, Steinberg's four daughters requested that she terminate the trust and make immediate distributions of its assets to them.
- On April 17, 2007, at the age of 89, Steinberg entered into a binding 'net gift agreement' with her four daughters.
- Pursuant to the agreement, Steinberg terminated the marital trust and gifted assets worth $109,449,307 to her daughters.
- In exchange for the gift, the daughters agreed to pay the resulting federal gift tax liability.
- The daughters also contractually agreed to assume and pay any federal or state estate tax liability that would be imposed on Steinberg's estate under IRC § 2035(b) if she died within three years of the gift.
- The daughters established an escrow fund with $40 million to cover the payment of the gift tax and any potential future estate tax liability.
Procedural Posture:
- Jean Steinberg timely filed a Form 709, Gift Tax Return, for 2007, reducing the reported value of gifts by her daughters' assumption of gift tax and potential § 2035(b) estate tax.
- The Commissioner of Internal Revenue issued a notice of deficiency to Steinberg, disallowing the discount for the assumed § 2035(b) estate tax liability and asserting an additional tax of $1,804,908.
- Steinberg, as petitioner, challenged the deficiency by filing a petition with the United States Tax Court.
- The Commissioner, as respondent, filed a motion for summary judgment, which the Tax Court denied in a prior opinion, ruling that material facts were in dispute.
- The case proceeded to trial in the United States Tax Court for a decision on the merits.
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Issue:
Does a donee's legally binding promise to pay potential estate tax liability under IRC § 2035(b), which arises if the donor dies within three years of the gift, constitute consideration in 'money or money's worth' that reduces the taxable value of the gift?
Opinions:
Majority - Judge Kerrigan
Yes. A donee's legally binding promise to pay a donor's potential estate tax liability under IRC § 2035(b) constitutes consideration that reduces the taxable value of a gift. The court reasoned that the fair market value of a transferred property must be determined using the 'willing buyer/willing seller' standard. A hypothetical willing buyer, acquiring the property subject to the net gift agreement, would have to assume the contingent liability for the § 2035(b) tax and would therefore demand a reduction in the purchase price. This assumption of liability is a detriment to the donee. Furthermore, under the 'estate depletion' theory, the promise is a benefit to the donor because it relieves her estate of a potential liability, thus replenishing or preserving the estate's value. The court rejected the Commissioner's argument that the promise was illusory because state law might have imposed the same obligation, finding that at the time of the gift, the application of state law and the terms of the donor's future will were uncertain, making the contractual obligation a distinct and valuable asset for the estate.
Analysis:
This decision formally recognizes the validity of a 'net, net gift' for transfer tax purposes, allowing the taxable value of a gift to be reduced not only by assumed gift tax but also by the present value of an assumed contingent estate tax liability. It provides a significant estate planning tool for wealthy individuals to minimize gift tax by contractually shifting potential future estate tax burdens to donees. The case reinforces the primacy of the 'willing buyer/willing seller' standard in valuation, demonstrating that a quantifiable, contingent liability that a hypothetical buyer would consider must be factored into the property's fair market value. This precedent extends the established net gift doctrine from certain liabilities to contingent ones, provided they are part of a bona fide, arm's-length transaction and can be actuarially valued.
