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Wednesday, October 2, 2013

Tax Court Abandons McCord, Says Donee's Assumption of § 2035(b) Liability Can Be § 2512(b) Consideration

Tax Court Logo 2Steinberg v. Commissioner, 141 T.C. No. 8 (Sept. 30, 2013):

P entered into a binding gift agreement with her daughters under which P gave her daughters cash and securities and in exchange the daughters agreed to assume and to pay, among other things, any estate tax liability imposed under § 2035(b) as a result of the gifts in the event that P passed away within three years of the gifts.

In calculating for gift tax purposes the gross fair market value of the property transferred to the daughters, P reduced the fair market value of the cash and securities by an amount representing the value of the daughters’ assumption of the potential § 2035(b) estate tax liability, among other things.

Held:  Because the value of the obligation assumed by the daughters is not barred as a matter of law from being consideration in money or money’s worth within the meaning of § 2512(b), the fair market value of P’s taxable gift may be determined with reference to the daughters’ assumption of the potential § 2035(b) estate tax liability. We will deny R’s motion for summary judgment, and we will no longer follow McCord v. Commissioner, 120 T.C. 358 (2003), rev’d and remanded sub nom. Succession of McCord v. Commissioner, 461 F.3d 614 (5th Cir. 2006), to the extent it provides otherwise.

Dissent (Halpern, J.):

Respondent has moved for summary adjudication that, in computing the amount of a gift, a donee's promise to pay the additional Federal and State estate taxes that might arise by virtue of the application of § 2035(b) does not constitute adequate and full consideration in money or money's worth within the meaning of § 2512(b). As respondent makes clear in replying to petitioner's response to his motion: "Respondent is challenging the nature of the consideration in this motion, * * * not the fair market value of that consideration". Because it is only the nature of the consideration that respondent is challenging, I agree with Judge Lauber that the discussion of the "too speculative" theory is unnecessary at this stage of this case. I further agree with him that it is at this time improper to consider overruling McCord v. Commissioner, 120 T.C. 358 (2003), rev'd and remanded sub nom. Succession of McCord v. Commissioneri 461 F.3d 614 (5th Cir. 2006), insofar as it embraces that theory. I do believe that we should grant respondent's motion on the ground that allowing a reduction of an otherwise taxable transfer by an actuarial estimate of the value of the estate tax that might result because of the application of section 2035(b) is inconsistent with Congress' purpose in enacting § 2035(b).

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