October 2015 | Issue 82
Steinberg v. Commissioner, 145 T.C. No. 7 (Sept. 16, 2015) explores how a contingent liability accepted by a donee can impact the value of a gift for gift tax purposes.
In 2007, Petitioner Jean Steinberg, age 89, entered into a net gift agreement under which she gave her four daughters a gift of $109.4 million. In exchange, her daughters agreed to assume and pay any Federal gift tax liability imposed as a result of the gifts. The daughters also agreed to assume and to pay any Federal or State estate tax liability imposed under Section 2035 (b) as a result of the gifts, in the event that their mother passed away within three years of the gifts.
Petitioner retained an appraiser to determine the value of the net gifts on the date they were made, April 17, 2007. The appraiser determined that the value of the net gifts was the fair market value of the assets conveyed by transfer from the donor less the gift tax and estate tax liabilities assumed by the donees. This calculation produced a net value for the gifts of $71.6 million, which in turn produced a total gift tax obligation of $32 million.
The IRS, in 2011, mailed a notice of deficiency to the Petitioner. The notice increased the aggregate value of Petitioner’s net gifts to her daughters from $71.6 million to $75.6 million, producing a total gift tax increase of $1.8 million.
The Parties Go to Tax Court
The heart of the disagreement between the Petitioner and the IRS was over the question of whether it was proper to deduct the value of the daughters’ contingent liability to pay estate taxes under Section 2035 (b) in the event mother died within three years of the date of the gift.
The IRS contended that it is not proper to reduce the size of the gift by the value of the daughters’ obligation to pay estate taxes, maintaining that this liability does not constitute money or money’s worth.
The Petitioner and her appraiser believed that the assumption of the Section 2035 (b) estate tax liability was quantifiable and reducible to monetary value and that a willing buyer and a willing seller would take the daughters’ assumption of this liability into account in determining a sale price or value of the net gift.
In calculating the value of the estate tax liability, the appraiser used actuarial tables promulgated by the IRS to calculate the probability that the Petitioner would die within each of the three years after the date of the gift. The result was a mortality rate for years one, two and three of 13.85%, 13.04% and 12.13%, respectively. The appraiser then determined the present value factor for each of the three years, using the applicable Section 7520 interest rate.
The appraiser then took the effective State and Federal estate tax rates for each of the three years and multiplied them by the gift tax that would be included in the estate under Section 2035 (b). Using this methodology, the appraiser calculated that the daughters’ assumption of the Section 2035 (b) liability reduced the value of the combined gift by $5.8 million
The IRS did not put on a valuation expert. They did quibble over the use of the IRS actuarial tables, contending that they did not give effect to the state of the health of the Petitioner. They also questioned the appraiser’s use of Section 7520 interest rates.
The Court Decides
The Court found itself convinced by most of Petitioner’s arguments, settling on the appraiser’s value for the contingent estate tax liability of $5.8 million. Petitioner (and appraiser) had a good day.