Law School Case Brief
Steinberg v. Commissioner - 141 T.C. 258 (2013)
Pursuant to Treas. Reg. § 25.2512-1, fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. All relevant facts and elements of value as of the time of the gift must be considered. Treas. Reg. § 25.2512-1. The "willing buyer/willing seller" test is the bedrock of transfer tax valuation. It requires a court to determine what property rights are being transferred and on what price a willing buyer and a willing seller would agree for those property rights.
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 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 estate tax liability, among other things. The Commissioner of Internal Revenue issued a notice of deficiency, increasing petitioner's gift tax liability by $1,804,908 for tax year 2007 and sought summary judgment. The only dispute was whether the donees' promise to pay any federal or state estate tax liabilities constituted consideration in money or money's worth.
Was the Commissioner was entitled to summary judgment on the claim that the donees' assumption of the potential § 2035(b) estate tax liability did not increase the value of petitioner's estate and therefore did not constitute consideration in money or money's worth within the meaning of § 2512(b) in exchange for the gifts?
The Commissioner of Internal Revenue's summary judgment motion was denied. The United States Tax Court held that P's gift could be best described as a "net, net gift" because the donees agreed to pay both the resulting gift tax and any potential estate tax. A donee's assumption of potential estate tax liability may provide a tangible benefit to the donor's estate, and therefore as a matter of law it could meet the requirements of the estate depletion theory. Moreover, the Commissioner failed to show as a matter of law that the donees' assumption of P's potential § 2035(b) estate tax liability could not be consideration in money or money's worth within the meaning of I.R.C. § 2512(b). Lastly, there were genuine disputes of material fact as to whether the assumption of P's potential § 2035(b) estate tax liability constituted consideration in money or money's worth.
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