Tax Court allows discount for assumption of estate taxes

The Tax Court held that a donor’s net gift in which the recipient assumed the potential estate tax liabilities under Sec. 2035(b) qualified for a discount in calculating the gift’s fair market value (FMV) as determined under a willing buyer/seller analysis.

Facts: Jean Steinberg, an 89-year-old widow, entered into an agreement with her adult daughters to gift cash and securities to them in exchange for the daughters’ agreement 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 gift. On Steinberg’s gift tax return, the gross FMV of the property transferred to the daughters was discounted by an amount represented as the value of the daughters’ assumption of the possible estate tax liability determined under Sec. 2035(b). The discount was based on a net gift agreement executed between the mother and her four daughters involving several months of negotiations, with each party represented by separate legal counsel. Steinberg also retained a certified appraiser in calculating the FMV of the gifts, using the IRS’s mortality tables.

Issues: In a prior action concerning the petitioner (Steinberg, 141 T.C. 258 (2013)), the court had rejected the IRS’s motion for summary judgment, stating that it would no longer follow its decision in McCord, 120 T.C. 358 (2003), rev’d and remanded sub nom. Succession of McCord, 461 F.3d 614 (5th Cir. 2006) (see previous coverage, “Tax Matters: Tax Court Allows Discount of Gift Value for Assumption of Estate Taxes,” JofA, Jan. 2014, page 56). The Tax Court’s opinion in McCord (reversed by the Fifth Circuit) had held that an adjustment to FMV would not be allowed on a gift tax return, as in advance of the death of the donor, no recognized method existed for sufficiently determining a discount (McCord, 120 T.C. at 402).

Holding: The Tax Court found that the daughters’ assumption of the potential Sec. 2035(b) estate tax liability was a detriment to the daughters and a benefit to their mother; thus it held that consideration in money or money’s worth should be taken into account in determining the net gift’s FMV under the willing buyer/seller test of Regs. Sec. 25.2512-1. The court further held that the value of the discount had been properly calculated under the methodology described in Sec. 2512 and IRS guidance using the IRS’s mortality tables and applying Sec. 7520 interest rates as a discount factor.

• Steinberg, 145 T.C. No. 7 (9/16/15)

—By David W. Clark, CPA, MPA, 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.