SCOTUS Reports

Tag: gifts in contemplation of death

  • Estate of Gamble v. Commissioner, 69 T.C. 942 (1978): When State Gift Taxes Paid Before Death Are Not Included in the Gross Estate

    Estate of George E. P. Gamble, Crocker National Bank, Executor, Petitioner v. Commissioner of Internal Revenue, Respondent, 69 T. C. 942, 1978 U. S. Tax Ct. LEXIS 157 (1978)

    State gift taxes paid by a decedent prior to death, which are credited against post-death state inheritance taxes, do not constitute a property interest includable in the decedent’s gross estate under IRC Section 2033.

    Summary

    George E. P. Gamble made substantial gifts before his death and paid California gift taxes on those gifts. After his death, the gifts were included in his gross estate as transfers made in contemplation of death, and the state allowed a credit against inheritance taxes for the gift taxes paid. The Commissioner of Internal Revenue sought to include the amount of the state gift taxes in Gamble’s gross estate, arguing that it represented a prepaid inheritance tax liability. The Tax Court disagreed, ruling that the gift taxes paid did not constitute an interest in property at the time of death that could be included in the gross estate under IRC Section 2033, as the decedent had no legal right to control the credit or its economic benefits.

    Facts

    George E. P. Gamble made gifts valued at $5,207,737. 56 in September 1971, managed by his conservator. He paid Federal gift taxes of $2,800,766. 94 and California gift taxes of $861,303. 15. Gamble died on May 20, 1972. Posthumously, the gifts were included in his gross estate as transfers in contemplation of death. California allowed a credit of $861,303 against its inheritance tax for the gift taxes paid. The IRS sought to include this amount in Gamble’s gross estate, claiming it represented a prepaid inheritance tax.

    Procedural History

    The estate filed a federal estate tax return that did not include the state gift taxes in the gross estate. The Commissioner issued a notice of deficiency, increasing the gross estate by the amount of the state gift taxes paid. The estate petitioned the U. S. Tax Court for a redetermination of the deficiency. The Tax Court held for the petitioner, ruling that the state gift taxes paid were not includable in the gross estate under IRC Section 2033.

    Issue(s)

    1. Whether the state gift taxes paid by the decedent prior to death, which were credited against state inheritance taxes post-death, constitute an interest in property at the time of death includable in the decedent’s gross estate under IRC Section 2033.

    Holding

    1. No, because the decedent had no interest in property at the time of death that could be included in the gross estate. The state gift taxes paid were unconditional and did not create a property interest that could pass to the estate upon the decedent’s death.

    Court’s Reasoning

    The court focused on the requirement of IRC Section 2033 that the decedent must have an interest in property at the time of death for it to be included in the gross estate. The court rejected the Commissioner’s argument that the state gift taxes represented a prepaid inheritance tax, emphasizing that the decedent had no legal right to control the credit against inheritance taxes. The court cited Estate of Lang v. Commissioner, which held that state gift taxes paid prior to death are not assets includable in the gross estate. The court also distinguished Estate of Pratt v. Commissioner, where the decedent had created a trust that directly benefited the estate, unlike the situation here where the credit arose solely from state law after the decedent’s death. The court concluded that the decedent’s payment of state gift taxes did not result in an interest in property capable of passing to his estate upon his death.

    Practical Implications

    This decision clarifies that state gift taxes paid before death, which are credited against state inheritance taxes, do not constitute an asset includable in the decedent’s gross estate under IRC Section 2033. Practitioners should be aware that only property interests that the decedent beneficially owned at the time of death can be included in the gross estate. This ruling may affect estate planning strategies involving gifts made in contemplation of death, as it removes the risk of double taxation on the same funds for gift and estate tax purposes. Subsequent cases and IRS guidance should be monitored for any changes in this area, but currently, this decision stands as a precedent against including such state gift taxes in the gross estate.

  • Estate of Chapman v. Commissioner, 32 T.C. 599 (1959): Gift Tax Credit for Gifts Made in Contemplation of Death

    32 T.C. 599 (1959)

    A gift tax credit against the estate tax is only allowed for gift taxes paid on gifts that are later included in the gross estate, and no credit is available for gifts where no gift tax was initially paid, even if those gifts are also included in the gross estate as made in contemplation of death.

    Summary

    The Estate of Frank B. Chapman sought a gift tax credit against the estate tax for gifts made in 1950 and 1951, which were included in the gross estate as gifts made in contemplation of death. Gift taxes were paid on the 1951 gifts, but due to exclusions and the specific exemption, no gift taxes were paid on the 1950 gifts. The estate argued for a combined calculation of the credit, including the 1950 gifts. The U.S. Tax Court held that no gift tax credit was allowable for the 1950 gifts because no gift tax was paid on them, emphasizing the statutory requirement of prior gift tax payment for the credit. The court distinguished the case from Estate of Milton J. Budlong, where gift taxes had been paid in both relevant years.

    Facts

    Frank B. Chapman died on May 17, 1951. In 1950, he made gifts of property valued at $46,931.58 to his wife, son, and daughter. Gift tax returns were filed, but due to exclusions and exemptions, no gift taxes were due. In 1951, Chapman made additional gifts of property and cash totaling $448,931.78. Gift taxes of $74,165.14 were paid on these 1951 gifts. Both the 1950 and 1951 gifts were included in Chapman’s gross estate as gifts made in contemplation of death.

    Procedural History

    The Commissioner of Internal Revenue determined a deficiency in estate tax. The estate challenged the calculation of the gift tax credit. The case was submitted to the United States Tax Court on stipulated facts. The Tax Court ruled in favor of the Commissioner.

    Issue(s)

    1. Whether the estate is entitled to a gift tax credit for gifts made in 1950 when no gift tax was paid on those gifts, despite their inclusion in the gross estate as gifts made in contemplation of death.

    Holding

    1. No, because the relevant statutes only allow a gift tax credit against the estate tax for gift taxes that were actually paid on the gifts.

    Court’s Reasoning

    The court focused on the precise language of the Internal Revenue Code of 1939, particularly Sections 813(a) and 936(b), which provide for the gift tax credit. The court emphasized that the statute explicitly requires that “a tax has been paid” on a gift for the credit to be applicable. Because no gift tax was paid on the 1950 gifts, no credit could be granted, even though these gifts were included in the gross estate. The court distinguished the case from the Budlong Estate case, because in that case gift taxes had been paid in both years involved. The court adopted the Commissioner’s argument that a separate computation of the gift tax credit limitation was required with respect to each gift, and that no credit could be given for a year where no gift tax was paid.

    Practical Implications

    This case reinforces the importance of the specific statutory requirements for the gift tax credit. Attorneys should carefully examine whether gift taxes were actually paid when calculating the credit, even if the gifts are includible in the gross estate. It also highlights the need for precise computations when dealing with gifts made over multiple years, particularly in estate planning and tax litigation. Future similar cases will likely adhere to the strict interpretation of the statute, and the payment of gift tax will remain a prerequisite for claiming the credit.

  • Estate of Holding v. Commissioner, 30 T.C. 988 (1958): Gifts Made in Contemplation of Death and Estate Tax Liability

    Estate of Maggie M. Holding, Deceased, Willis A. Holding, Sr., and Mildred Holding Stockard, Executors, Petitioner, v. Commissioner of Internal Revenue, Respondent, 30 T.C. 988 (1958)

    Gifts made with a life-affirming motive, even near the end of life, are not considered gifts made in contemplation of death and are not includible in the gross estate for estate tax purposes.

    Summary

    The Estate of Maggie M. Holding challenged the Commissioner of Internal Revenue’s assessment of estate tax, arguing that gifts made by the decedent before her death were not made in contemplation of death and should not be included in the gross estate. The Tax Court agreed with the estate, finding that the dominant motive for the gifts was the decedent’s desire to see her family enjoy the money while she was still alive, rather than as a substitute for a testamentary disposition. The court emphasized that the decedent was in good health at the time of the gifts and had a history of making gifts to family members. Therefore, the court held that the gifts were not made in contemplation of death, and the estate tax deficiency was not upheld.

    Facts

    Maggie M. Holding sold land in 1952 and, shortly thereafter, made 17 cash gifts totaling $61,000 to her children, grandchildren, and a daughter-in-law. The gifts were made in September and October of 1952 and February of 1953. Holding was 87 years old at the time and had previously enjoyed good health. She prepared a will in August 1952. Her death occurred in September 1953 after a short illness. The Commissioner of Internal Revenue determined that these gifts were made in contemplation of death and, therefore, includible in her gross estate under Section 811(c) of the Internal Revenue Code of 1939. The estate contested this determination, arguing that the gifts were motivated by a desire to see her family enjoy the money while she was alive.

    Procedural History

    The Commissioner of Internal Revenue assessed an estate tax deficiency against the Estate of Maggie M. Holding, claiming the gifts were made in contemplation of death. The estate contested this assessment in the United States Tax Court. The Tax Court heard the case, considered stipulated facts and evidence, and issued a ruling in favor of the estate.

    Issue(s)

    1. Whether the gifts made by Maggie M. Holding to her children, grandchildren, and daughter-in-law were made in contemplation of death as defined by Section 811(c) of the Internal Revenue Code of 1939.

    Holding

    1. No, because the court found that the dominant motive for the gifts was associated with life rather than death.

    Court’s Reasoning

    The court applied the standard established in United States v. Wells, which states that the statutory presumption that gifts made within a certain time prior to death were made in contemplation of death is rebuttable, and that the question is as to the state of mind of the donor. The court cited Regulations 105, section 81.16, which provides that a transfer is prompted by the thought of death if it is made with the purpose of avoiding tax or as a substitute for a testamentary disposition. The court found that Maggie M. Holding was in good health when the gifts were made. Her dominant motive was to see her family enjoy the money during her lifetime. The court considered the decedent’s age but determined it was not solely determinative. The court found the gifts were part of a pattern of giving to her family. Further, the court noted that the decedent had an independent annual gross income and was not reliant on her estate for her livelihood.

    Practical Implications

    This case is vital in analyzing whether gifts are includible in a decedent’s gross estate. To avoid inclusion, the evidence must show that the gifts were motivated by life-affirming reasons, such as providing for the donees’ immediate needs or enjoyment, or as part of a pattern of giving. This case emphasizes the importance of considering the donor’s state of mind, health, and motivations at the time the gifts were made. This case influences estate planning by suggesting that gifts made with a life-affirming motive, even close to the end of life, can avoid estate tax liability. Attorneys should gather and present evidence of the donor’s motivations and health to rebut the presumption that gifts made within three years of death were made in contemplation of death. Later cases have used the Holding case to determine the motivations behind a gift and its tax implications.

  • Estate of D. I. Cooper v. Commissioner, 7 T.C. 1236 (1946): Gifts in Contemplation of Death and Testamentary Control

    7 T.C. 1236 (1946)

    A gift is considered made in contemplation of death, and therefore includible in the gross estate for tax purposes, if the dominant motive for the transfer is the thought of death, resembling a testamentary disposition.

    Summary

    The case concerns whether gifts made by the decedent, D.I. Cooper, to his son and trusts for his wife and daughter, should be included in his gross estate for estate tax purposes. The Tax Court held that the gifts to the son were not made in contemplation of death because the primary motive was to encourage his involvement in the family business. However, the transfers to the trusts were deemed to be in contemplation of death because they were linked to the terms of his will, indicating a testamentary intent and the decedent retained until his death the power to alter the enjoyment of the trust property through his will.

    Facts

    D.I. Cooper made outright gifts of stock to his son, Frank, in 1936, 1937, and 1938. The stated intention was to motivate Frank to actively participate in the Howard-Cooper Corporation. Cooper also established two trusts in 1936, one for his wife, Nellie, and one for his daughter, Eileen. The trust income was to be accumulated during Cooper’s life, and upon his death, the funds were to be transferred to a bank (executor of his will) to be managed and distributed according to the terms of his will. Cooper made transfers of stock to these trusts in 1936, 1937, 1938, and 1939. Cooper died in 1940.

    Procedural History

    The Commissioner of Internal Revenue determined an estate tax deficiency, including the value of the gifts to Frank and the trusts for Nellie and Eileen in Cooper’s gross estate. The executor of Cooper’s estate, The First National Bank of Portland, challenged this determination in the United States Tax Court.

    Issue(s)

    1. Whether the transfers of stock to decedent’s son, Frank, were made in contemplation of death under Section 811(c) of the Internal Revenue Code?

    2. Whether the transfers of stock to the trusts for the benefit of decedent’s wife and daughter were made in contemplation of death under Section 811(c) of the Internal Revenue Code; and alternatively, whether those transfers should be included in the gross estate under sections 811(c) or 811(d) because the decedent retained power over the trusts or because the transfers were intended to take effect at or after his death?

    Holding

    1. No, because the dominant motive for the transfers to Frank was to encourage his involvement in the family business, a motive associated with life rather than death.

    2. Yes, the transfers of stock to the trusts for the decedent’s wife and daughter were made in contemplation of death because the trust instruments referenced and depended upon the terms of the decedent’s will, indicating a testamentary disposition; and further because the decedent retained the power to alter the enjoyment of the trust property through his will until his death.

    Court’s Reasoning

    The court applied the test from United States v. Wells, 283 U.S. 102 (1931), stating that the thought of death must be the “impelling cause,” “inducing cause,” or “controlling motive” prompting the disposition of property for it to be considered in contemplation of death. For the gifts to Frank, the court found that the dominant motive was to encourage his active participation in the family business. This was supported by testimony and the fact that the gifts occurred before the decedent’s serious illness. The court emphasized that the desire to reduce income tax burden, while a contributing factor, was also a motive connected with life. Regarding the trusts, the court found that the trust instruments were not complete in themselves and were dependent on the terms of the decedent’s will. The court reasoned, “That fact, the fact that the transfers in trust were conditioned upon the provisions of ‘the Trustor’s will,’ and almost every other circumstance point unmistakably to a primary purpose to make proper provision for his wife and daughter only after his death.” Furthermore, the court found that by tying the transfers to the provisions of his will, the decedent retained the power to alter the enjoyment of the trust property until his death, making the trust property includible in his gross estate under sections 811(c) and 811(d) of the Internal Revenue Code.

    Practical Implications

    This case highlights the importance of documenting the motives behind significant gifts, especially when made close to the donor’s death. It demonstrates that gifts made to incentivize a family member’s participation in a business can be considered motives associated with life. The case illustrates that when trusts are explicitly linked to the provisions of a will, they are more likely to be viewed as testamentary in nature and included in the gross estate. This emphasizes the need for careful drafting of trust documents to ensure they stand alone and are not interpreted as mere supplements to a will. Estate planners must be aware that any retained power by the grantor to alter the beneficial enjoyment of trust assets can lead to inclusion of those assets in the grantor’s estate for tax purposes. Subsequent cases may distinguish Cooper based on the degree of independence of the trust from the grantor’s will and the evidence presented regarding the donor’s motives.

  • Estate of Awrey v. Commissioner, 5 T.C. 222 (1945): Determining Ownership Interests and Gifts in Contemplation of Death for Estate Tax Purposes

    5 T.C. 222 (1945)

    A wife’s contributions to a business, even significant ones, do not automatically establish her ownership interest for estate tax purposes; gifts made to family members are not necessarily made in contemplation of death, even if the donor has health issues.

    Summary

    The Tax Court addressed the estate tax deficiency of Fletcher E. Awrey, focusing on whether his wife had an ownership interest in his partnership share and jointly held properties, and whether gifts he made were in contemplation of death. The court held that Mrs. Awrey did not have an ownership interest in the partnership despite her early contributions and that the jointly held property was fully includable in the estate. However, the court found that the gifts made to family members were not made in contemplation of death, overturning the Commissioner’s determination on that issue.

    Facts

    Fletcher Awrey died in 1939, having built a successful baking business with his sons. His wife, Elizabeth, contributed initial capital and labor to the business in its early stages (around 1910), but her involvement decreased significantly after 1920. The business was formally structured as a partnership among Fletcher and his three sons. Fletcher and Elizabeth held several properties and bank accounts jointly. In the years leading up to his death, Fletcher made several gifts to his children and, in one instance, to his wife.

    Procedural History

    The Commissioner of Internal Revenue determined a deficiency in Awrey’s estate tax. The executors of the estate petitioned the Tax Court, contesting the inclusion of Mrs. Awrey’s alleged share of the partnership and jointly held property, and the determination that certain gifts were made in contemplation of death.

    Issue(s)

    1. Whether Mrs. Awrey had an ownership interest in her husband’s one-quarter share of the partnership, Awrey Bakeries, as of the date of his death?

    2. Whether Mrs. Awrey owned an interest in certain properties held jointly with her husband, within the meaning of Section 811(e) of the Internal Revenue Code?

    3. Whether gifts made by Fletcher Awrey to his children and wife were made in contemplation of death, within the meaning of Section 811(c) of the Internal Revenue Code?

    Holding

    1. No, because Mrs. Awrey was never formally recognized as a partner, and her contributions, while significant in the early stages, did not translate into an ownership stake in the mature business.

    2. No, because the jointly held properties were acquired with funds originating from Mr. Awrey’s partnership distributions; thus, the full value is includable in his estate.

    3. No, because the gifts were motivated by a desire to treat family members equally, relieve financial burdens, and fulfill established patterns of giving, rather than by an anticipation of death.

    Court’s Reasoning

    The court reasoned that despite Mrs. Awrey’s initial contributions to the business, she was never considered a formal partner. The court emphasized that the substantial growth of the business occurred primarily due to the efforts of the sons after 1920. The court also noted the absence of an agreement acknowledging her as a partner. As to the jointly held property, because the funds used to acquire it originated from the decedent’s partnership share, the full value was included in his gross estate. Regarding the gifts, the court applied the standard from United States v. Wells, 283 U.S. 102, stating, “The words ‘in contemplation of death’ mean that the thought of death is the impelling cause of the transfer.” The court found that the gifts were motivated by life-associated reasons, such as family support and equality, not by a contemplation of death.

    Practical Implications

    This case highlights the importance of formalizing business ownership and partnership agreements, especially within families, to clearly define ownership interests for estate tax purposes. It also demonstrates that gifts, even those made by elderly individuals with health issues, are not automatically considered to be made in contemplation of death if there are other plausible, life-related motives. The case emphasizes the need to evaluate the donor’s state of mind and the reasons behind the transfer. It serves as a reminder that demonstrating motives related to family support, equality, or established patterns of giving can help rebut the presumption that gifts made close to death are made in contemplation of it. Later cases may cite this ruling when evaluating the intent behind gifts made prior to death.