Gift Value Reduced By Estate Tax Liability Assumed.

Date of decision:

The petitioner gifted cash and marketable securities to her three daughters on the condition (pursuant to written net gift agreement) that the daughters pay any related gift tax and pay any related estate tax on the gifted property if the petitioner died within three years of gifts.  The petitioner deducted the value of the daughters' agreement to be liable for gift or estate tax from value of gifts and IRS claimed the gift tax was understated by almost $2 million.  Each daughter and the petitioner were represented by separate counsel and an appraisal was undertaken using mortality tables to compute the petitioner's life expectancy which impacted values as reported on Form 709.  The IRS' primary argument was that the daughters' assumption of potential estate tax liability under I.R.C. Sec. 2035(b) did not increase petitioner's estate and, as such, did not amount to consideration in money or money's worth as defined by I.R.C. Sec. 2512(b) in exchange for gifted property.  The court determined that the primary question was whether the petitioner received any determinable amount in money or money's worth when the daughters agreed to pay the tax liability.  The court held that the petitioner did receive determinable value as to the gift tax.  Likewise, the court held that the assumption of potential estate tax liability may have sufficient value to reduce the petitioner's gift tax liability.  The court determined that it was immaterial that it was an intrafamily deal at issue because all persons were represented by separate counsel.  However, the court determined that fact issues remained for trial on the assumption of estate tax issue. Steinberg v. Comr., 141 T.C. No. 8 (2013).  In the subsequent opinion on the estate tax issue, the court held that the fair market value of the gifted property for gift tax purposes was reduced by the value of the daughters' assumption of the potential I.R.C. Sec. 2035(b) estate tax liability.  Steinberg v. Comr., 145 T.C. No. 7 (2015). 

 

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