Estate of Arthur C. Shafer, Deceased, Chase Shafer, Coexecutor and Resor Shafer, Coexecutor, Petitioner v. Commissioner of Internal Revenue, Respondent, 80 T. C. 1145 (1983)

The value of property transferred indirectly by a decedent, where the decedent retains a life interest, is includable in the gross estate under Section 2036.

Summary

In Estate of Shafer v. Commissioner, the U. S. Tax Court ruled that the value of a vacation property was includable in the decedent’s gross estate under Section 2036 of the Internal Revenue Code. The property was purchased in 1939 with the decedent, Arthur C. Shafer, retaining a life estate and the remainder interest going to his sons. Despite the deed naming multiple parties as purchasers, the court found that Shafer provided all the consideration for the purchase. The court emphasized that the substance of the transaction, rather than its form, determined the tax implications. This case clarifies that indirect transfers where the decedent retains a life interest are subject to estate tax, highlighting the importance of considering the real party in interest and the economic substance of transactions in estate planning.

Facts

In 1939, Arthur C. Shafer purchased a vacation property in Gay Head, Massachusetts, from trustees Charles D. Whidden and Leslie M. Flanders. The deed conveyed life interests to Shafer and his wife, Eunice, with the remainder interest going to their sons, Chase and Resor. The deed stated that consideration was paid by Shafer, Eunice, and their sons. Eunice predeceased Shafer. During an audit of Eunice’s estate, Chase and Resor, as her executors, submitted affidavits stating that Shafer was the sole purchaser of the property. Later, in connection with Shafer’s estate audit, Chase wrote a letter admitting that Shafer made a gift to his sons at the time of purchase.

Procedural History

The Commissioner of Internal Revenue determined a deficiency in Shafer’s estate tax, asserting that the vacation property should be included in his gross estate under Section 2036. The estate filed a petition with the U. S. Tax Court challenging this determination. The Tax Court admitted into evidence the affidavits and letter from the sons as admissions and found that Shafer had provided all the consideration for the property’s purchase.

Issue(s)

1. Whether the affidavits and letter from the sons are admissible as evidence under the Federal Rules of Evidence?
2. Whether Shafer furnished the entire consideration for the purchase of the vacation property?
3. Whether the value of the vacation property is includable in Shafer’s gross estate under Section 2036 of the Internal Revenue Code?

Holding

1. Yes, because the affidavits and letter are admissible as admissions under Federal Rule of Evidence 801(d)(2) and are not considered ex parte affidavits under Tax Court Rule 143(b).
2. Yes, because the evidence, including the admissions, indicates that Shafer provided the entire consideration for the property’s purchase.
3. Yes, because Shafer’s furnishing of the consideration for the property and retention of a life interest constituted a transfer under Section 2036.

Court’s Reasoning

The Tax Court reasoned that the affidavits and letter were admissible as admissions against the sons in their capacity as executors of Shafer’s estate, under Federal Rule of Evidence 801(d)(2). The court found that the affidavits and letter were not ex parte affidavits barred by Tax Court Rule 143(b) because they were used as admissions and for impeachment purposes. Regarding the consideration, the court weighed the evidence, including the sons’ admissions, and concluded it was more likely than not that Shafer provided all the consideration. On the issue of the transfer, the court emphasized the substance over the form of the transaction, citing cases like Glaser and Estate of Marshall, where indirect transfers were treated as taxable under Section 2036. The court held that Shafer’s payment for the property and the subsequent conveyance of life and remainder interests constituted a transfer under Section 2036, as Shafer retained a life interest.

Practical Implications

This decision underscores the importance of considering the economic substance of property transactions in estate planning. Attorneys should advise clients that indirect transfers where the decedent retains a life interest may be subject to estate tax under Section 2036, regardless of the formalities of the transaction. The case also highlights the admissibility of prior statements by executors as admissions, which can impact estate tax litigation. Practitioners should ensure that all documentation, including affidavits and correspondence, accurately reflects the true nature of property transactions to avoid unintended tax consequences. Subsequent cases, such as Estate of Maxwell v. Commissioner, have applied this principle, further solidifying the rule that the substance of a transfer governs its tax treatment.