SCOTUS Reports

Tag: Estate Tax Apportionment

  • Estate of Sommers v. Commissioner, 149 T.C. No. 8 (2017): Federal Estate Tax Apportionment and Deductibility of Gift Tax

    Estate of Sheldon C. Sommers, Deceased, Stephan C. Chait, Temporary Administrator, Petitioner, and Wendy Sommers, Julie Sommers Neuman, and Mary Lee Sommers-Gosz, Intervenors v. Commissioner of Internal Revenue, Respondent, 149 T. C. No. 8 (2017), United States Tax Court.

    In Estate of Sommers, the U. S. Tax Court ruled that gift taxes paid on a decedent’s gifts within three years of death are not deductible from the estate, and estate taxes cannot be apportioned to gift recipients under New Jersey law. This decision clarifies the tax treatment of estate and gift taxes, impacting estate planning strategies involving lifetime transfers.

    Parties

    The case involved the Estate of Sheldon C. Sommers as the petitioner, with Stephan C. Chait acting as the temporary administrator. Wendy Sommers, Julie Sommers Neuman, and Mary Lee Sommers-Gosz were intervenors, and the Commissioner of Internal Revenue was the respondent. Throughout the litigation, the estate was represented by David N. Narciso and Matthew E. Moloshok, the intervenors by Michael A. Guariglia and Vlad Frants, and the Commissioner by Robert W. Mopsick and Lydia A. Branche.

    Facts

    Sheldon C. Sommers made gifts of units in Sommers Art Investors, LLC to his three nieces in December 2001 and January 2002, shortly before his death in November 2002. These gifts were structured to minimize gift tax through valuation discounts and the use of the annual exclusion. The nieces agreed to pay any gift taxes on the 2002 transfers. Sommers also bequeathed all his remaining estate to his surviving spouse, Bernice Sommers, after settling debts and expenses. The IRS determined an estate tax deficiency due to the inclusion of the gift tax paid on the 2002 gifts under section 2035(b) of the Internal Revenue Code.

    Procedural History

    The estate filed motions for partial summary judgment to determine the deductibility of the gift tax under section 2053, the effect of debts and expenses on the marital deduction under section 2056, and the apportionment of any estate tax to the nieces. The intervenors filed a motion for partial summary judgment asserting that no estate tax should be apportioned to them. The Tax Court previously ruled in T. C. Memo 2013-8 that the gifts were valid and completed in 2001 and 2002, respectively, and thus not includable in the estate’s value. The parties stipulated the gift tax liability, and the intervenors paid it.

    Issue(s)

    Whether the gift tax owed on the decedent’s 2002 gifts is deductible under section 2053(a) of the Internal Revenue Code?

    Whether the estate is entitled to a marital deduction under section 2056(a) that includes the value of the decedent’s nonprobate property received by his surviving spouse, Bernice Sommers?

    Whether any Federal estate tax due must be apportioned to the intervenors under the New Jersey estate tax apportionment statute?

    Rule(s) of Law

    Section 2035(b) of the Internal Revenue Code requires the gross estate to be increased by the amount of any gift tax paid by the decedent or his estate on gifts made within three years of death. Section 2053(a) allows a deduction from the gross estate for claims against the estate, but only to the extent that the estate would not be entitled to reimbursement if it paid the claim. Section 2056(a) allows a marital deduction for the value of any interest in property passing from the decedent to the surviving spouse. The New Jersey apportionment statute, N. J. Stat. Ann. sec. 3B:24-4, requires the apportionment of estate tax among transferees of nonprobate property included in the gross tax estate.

    Holding

    The gift tax owed on the 2002 gifts is not deductible under section 2053(a) because the estate’s payment of the gift tax would give rise to a claim for reimbursement from the nieces, negating the deduction. The estate’s entitlement to a marital deduction under section 2056(a) depends on factual questions regarding the use of exempt assets to pay debts and expenses. No portion of the estate tax due can be apportioned to the nieces under the New Jersey apportionment statute because the units they received were not included in the decedent’s gross estate.

    Reasoning

    The court analyzed the deductibility of the gift tax under section 2053(a) by applying the principle from Parrott v. Commissioner that a claim against an estate is deductible only to the extent that it exceeds any right to reimbursement. Because the nieces agreed to pay the gift tax, the estate’s payment of that tax would have given rise to a reimbursement claim, negating any deduction. The court also considered the policy underlying section 2035(b), which aims to prevent the avoidance of transfer taxes through lifetime gifts shortly before death. The court rejected the estate’s argument that the gift tax should be deductible because it would effectively nullify the section 2035(b) gross-up rule.

    Regarding the marital deduction, the court noted that the deduction is reduced by the value of property used to pay debts or expenses. The estate’s claim to a marital deduction that includes only the value of nonprobate property suggests that the probate estate may have been entirely consumed by debts and expenses, but the record was insufficient to determine the impact of the estate tax on the marital deduction.

    On the issue of estate tax apportionment, the court interpreted the New Jersey apportionment statute to require apportionment only to transferees who receive nonprobate property included in the decedent’s gross estate. Because the units transferred to the nieces were not included in the gross estate, no estate tax could be apportioned to them. The court distinguished cases from other jurisdictions that had apportioned estate tax to recipients of lifetime gifts, noting that those cases did not involve the specific issue of section 2035(b) inclusions. The court also rejected the estate’s argument that adjusted taxable gifts are part of the gross tax estate because they are included in the computation of estate tax liability.

    Disposition

    The court denied the estate’s motions for partial summary judgment on the deductibility of the gift tax, the effect of debts and expenses on the marital deduction, and the apportionment of estate tax to the nieces. The court granted the intervenors’ motion for partial summary judgment that no estate tax can be apportioned to them under applicable New Jersey law.

    Significance/Impact

    The decision in Estate of Sommers clarifies the deductibility of gift taxes paid on gifts made within three years of death and the apportionment of estate taxes under New Jersey law. It underscores the importance of considering the potential for reimbursement claims when claiming deductions under section 2053(a). The decision also highlights the limitations of state apportionment statutes in allocating estate tax to recipients of lifetime gifts not included in the gross estate, potentially affecting estate planning strategies that rely on such transfers to minimize transfer taxes. The case illustrates the interplay between Federal and state tax laws in determining the ultimate economic incidence of estate taxes.

  • Estate of Leach v. Commissioner, 82 T.C. 952 (1984): When Annuities Do Not Qualify for Marital Deduction

    Estate of Leach v. Commissioner, 82 T. C. 952 (1984)

    Annuities payable to a surviving spouse from charitable remainder annuity trusts do not qualify for the marital deduction if they constitute terminable interests under IRC § 2056(b).

    Summary

    Anne B. Leach transferred stock to three charitable remainder annuity trusts, with annuities payable to herself and then her husband, with the remainder to charities. Upon her death, the estate sought a marital deduction for the annuities. The Tax Court held that the annuities were terminable interests ineligible for the marital deduction because they would terminate upon the husband’s death, passing to charities. Additionally, under Florida law, the annuities were exempt from estate tax apportionment, with taxes charged to the trust corpora, reducing the charitable deduction.

    Facts

    Anne B. Leach transferred Coca-Cola stock to three charitable remainder annuity trusts in 1973 and 1975. The trusts were to pay annuities to Leach during her life, and upon her death, to her husband if he survived her. Upon the death of the last to die, the remaining assets were to be distributed to charitable remaindermen designated in Leach’s will. Her will provided that 50% of her adjusted gross estate would be left to a marital trust, with the stated desire to obtain the maximum marital deduction. The will also directed that all taxes be paid from the residuary estate.

    Procedural History

    The estate filed a Federal estate tax return and amended return in 1977 and 1978. The Commissioner determined a deficiency in estate tax and income tax liabilities. The estate petitioned the U. S. Tax Court, which held that the annuities were nondeductible terminable interests and that they were exempt from estate tax apportionment under Florida law.

    Issue(s)

    1. Whether the annuities payable to the surviving spouse from the charitable remainder annuity trusts qualify for the marital deduction under IRC § 2056?
    2. If the annuities do not qualify for the marital deduction, whether any portion of the Federal estate taxes should be charged to the annuities under the Florida apportionment statute?

    Holding

    1. No, because the annuities constitute terminable interests under IRC § 2056(b), as they will terminate upon the surviving spouse’s death and pass to charitable remaindermen.
    2. No, because under the Florida apportionment statute, the annuities are temporary interests exempt from estate tax apportionment, with taxes charged to the trust corpora.

    Court’s Reasoning

    The court applied IRC § 2056(b), which disallows a marital deduction for terminable interests that may pass to a third party upon termination. The annuities were deemed terminable interests because they would terminate upon the surviving spouse’s death, with the trust assets passing to charities. The court relied on prior cases like Estate of Rubin and Sutton, and the Supreme Court’s decision in Meyer, which treated similar annuity arrangements as ineligible for the marital deduction. The court also cited the Senate committee report on the predecessor statute to § 2056, which supported the view that annuities payable to a surviving spouse followed by payments to another person do not qualify for the deduction. Regarding apportionment, the court interpreted Florida Statutes § 733. 817 to exempt the annuities from estate tax apportionment as temporary interests, charging taxes to the trust corpora. This interpretation was based on the statute’s language and the lack of any Florida adoption of a New York exception for common law annuities.

    Practical Implications

    This decision impacts estate planning involving charitable remainder annuity trusts by clarifying that annuities payable to a surviving spouse from such trusts do not qualify for the marital deduction if they are terminable interests. Estate planners must consider alternative structures to achieve the desired tax benefits. The ruling also affects the application of state apportionment statutes, particularly in Florida, where temporary interests like annuities are exempt from estate tax apportionment, potentially reducing the value of charitable deductions. Subsequent cases have applied this ruling, and it has influenced the drafting of wills and trust agreements to ensure clarity on tax apportionment and the qualification for marital deductions.