Tax Court allows discount of gift value for assumption of estate taxes

The Tax Court held that a gift’s fair market value (FMV) may be determined with reference to the recipient’s assumption of the potential Sec. 2035(b) estate tax liability, abandoning its precedent from McCord, 120 T.C. 358 (2003).

Jean Steinberg, who was 89, entered into a binding agreement with her four adult daughters to make gifts of cash and securities to them. In exchange, her daughters agreed to pay any federal or state estate tax and other tax liabilities that could arise under Sec. 2035(b) if Steinberg died within the three-year period following the gifts. This “net gift” agreement executed between the mother and her daughters was the result of several months of negotiations, with each party represented by separate legal counsel. On her gift tax return, Steinberg reduced the gross FMV of the property transferred to her daughters by an amount that represented the actuarial value of the daughters’ assumption of the possible estate tax liability under Sec. 2035(b). An appraiser hired by Steinberg calculated the gross FMV of the gifts and the amount of the discount.

In rejecting the IRS’s petition for summary judgment in the case, the Tax Court stated that it would no longer follow its opinion in McCord, in which it had held that “in advance of the death of a person, no recognized method exists for approximating the burden of the estate tax with a sufficient degree of certitude to be effective for Federal gift tax purposes” (McCord, 120 T.C. at 402). Therefore, under McCord, no discount would be allowed on a gift tax return for a potential estate tax liability.

The Tax Court, however, now found that its holding in McCord was wrongly decided. It observed that determining the amount of an estate tax that may be in effect when the taxpayer dies is no more speculative than determining the amount of capital gains tax that should be applied to reduce the value of stock in an estate and that the Tax Court and many other courts had held that the value of stock for gift or estate tax purposes should be reduced by capital gains tax. Thus, as a matter of law, the assumption of the Sec. 2035(b) estate tax liability could be consideration in money or money’s worth that could reduce the gift’s value.

However, the Tax Court denied Steinberg’s motion for summary judgment because while as a matter of law the daughters’ assumption of the potential Sec. 2035(b) estate tax liability could be consideration in money or money’s worth, there was still a material question of fact whether the assumption of the liability was consideration that could be quantified in terms of money or money’s worth.

  Steinberg, 141 T.C. No. 8 (9/30/13)

By David W. Clark, CPA, instructor of accounting and health care management, and Darlene Pulliam, CPA, Ph.D., Regents Professor and McCray Professor of Accounting, both of the College of Business, West Texas A&M University, Canyon, Texas.