The U.S. Tax Court today issued an opinion concluding that a donee’s promise to pay any estate tax liability that may arise if the donor dies within three years of the gift can be used to reduce the fair market value of the gift.
The case is: Steinberg v. Commissioner, 145 T.C. No. 7 (September 16, 2015). Read the Tax Court opinion [PDF 118 KB]
The taxpayer entered into a binding gift agreement with her daughters by which she gave her daughters properties and, in exchange, the daughters agreed to assume and to pay, among other things, any estate tax liability imposed under section 2035(b) as a result of the gifts in the event that the taxpayer died within three years of the gifts. In calculating, for gift tax purposes, the gross fair market value of the property transferred to the daughters, the taxpayer reduced the fair market value of the properties by an amount representing the value of the daughters’ assumption of the estate tax liability.
The IRS issued a notice of deficiency to the taxpayer, increasing the taxpayer’s gift tax liability by over $1.8 million for tax year 2007. The IRS disallowed the discount claimed by the taxpayer for the daughters’ assumption of the section 2035(b) estate tax liability.
The Tax Court today concluded that the circumstances in this case reflect that a hypothetical willing buyer and willing seller would take into account the assumption of the estate tax liability in arriving at a sale price. The court concluded that the daughters’ assumption of the estate tax liability reduced the value of the gift to the daughters by approximately $5.8 million.
As found by the court, the daughters’ assumption of a potential estate tax liability was a detriment to them and a benefit to the taxpayer—such as would be considered by a willing buyer and willing seller in determining a sale price of the transferred property rights.
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