SCOTUS Reports

Tag: Gross Estate Inclusion

  • Estate of Carnall v. Commissioner, 25 T.C. 654 (1955): Inclusion of Transferred Property in Estate Tax

    25 T.C. 654 (1955)

    When a husband and wife transfer property held as tenants by the entirety to themselves individually in equal shares, only one-half of the value is includible in the deceased husband’s estate, even if the transfer was made in contemplation of death.

    Summary

    In Estate of Carnall v. Commissioner, the U.S. Tax Court addressed whether the entire value of securities transferred by a husband and wife from a tenancy by the entirety to themselves individually in equal shares was includible in the deceased husband’s estate. The court held that only one-half of the value should be included because the husband’s interest in the entirety property at the time of the transfer was one-half. This aligns with the principle that the includible amount in the estate is limited to the decedent’s interest in the transferred property. The transfer was made in contemplation of the husband’s death.

    Facts

    Edward Carnall and his wife, Emily, owned securities as tenants by the entirety, purchased with Edward’s funds. They reported income, gains, and losses from these securities equally on their individual tax returns. In 1945, they transferred these securities to themselves individually in equal shares. The transfer was motivated by advice to avoid estate tax on the total value of the securities. Edward, who had health issues, died in 1947. The Commissioner of Internal Revenue included the entire value of the securities in his estate. A gift tax return was filed and a tax paid in 1945.

    Procedural History

    The case originated when the Commissioner determined a deficiency in estate tax. The executors contested the inclusion of the entire value of the securities. The U.S. Tax Court reviewed the case based on stipulated facts, focusing on the legal implications of the property transfer made by the Carnalls.

    Issue(s)

    Whether the entire value of securities transferred by the decedent and his wife from a tenancy by the entirety to themselves individually in equal shares is includible in the decedent’s estate under Section 811(c) of the 1939 Internal Revenue Code, or only one-half?

    Holding

    No, because the husband’s interest in the entirety property at the time of the transfer was one-half, and since the transfer placed one-half of the entirety property in him outright, no additional share would be includible in his estate under section 811(c).

    Court’s Reasoning

    The court relied on the principle that the amount includible in the gross estate under Section 811(c) is limited to the decedent’s interest in the transferred property. The court cited the precedent in Estate of A. Carl Borner, which held that when such a transfer of entirety property was made to a trust, the husband’s interest was one-half. The court reasoned that the same principle applies when the transfer is to each other, not to a trust. “In all cases under this statute the first inquiry is as to the extent of decedent’s interest in the property transferred.” The court concluded the transfer didn’t increase the husband’s interest in the property, therefore only one-half was includible.

    Practical Implications

    This case highlights that when property is transferred from a tenancy by the entirety to individual ownership, estate tax implications are based on the decedent’s existing interest in the property at the time of transfer. This understanding is crucial for estate planning, specifically in how attorneys advise clients regarding asset ownership. The decision stresses the importance of understanding state property laws (tenancy by entirety) and federal tax rules (Section 811(c)). It is also important for practitioners to consider whether similar holdings regarding tenancies by the entirety, and interests therein, have been modified or changed since the 1955 ruling.

  • Estate of Oei Tjong Swan v. Commissioner, 24 T.C. 829 (1955): Inclusion of Foreign Stiftungs in Gross Estate for Estate Tax Purposes

    Estate of Oei Tjong Swan, 24 T.C. 829 (1955)

    Transfers to foreign family foundations (Stiftungs) over which the decedent retained control through the power to amend and revoke are includible in the gross estate under I.R.C. § 811(d).

    Summary

    This case involves the estate of a Dutch citizen who died in 1943. The primary issue was whether assets held by two foreign Stiftungs, family foundations created by the decedent, were includible in his gross estate for federal estate tax purposes. The court held that, despite their legal structure as foreign entities, the Stiftungs were essentially revocable, and assets held by them were includible. The court also addressed the valuation of securities located in Holland during wartime and the applicability of the Netherlands government’s decree of May 24, 1940. Furthermore, the court found that the delay in filing the estate tax return was due to reasonable cause, and not to willful neglect.

    Facts

    Oei Tjong Swan, a Dutch citizen and resident, died in the Netherlands in 1943. Before his death, he established two Swiss Stiftungs. The Yan Stiftung was located in Vaduz, Liechtenstein, and the Kien Stiftung was located in Chur, Switzerland. The purpose of these Stiftungs was to provide funds for the education and support of the decedent’s descendants. The decedent retained the power to amend or revoke the Stiftungs. At the time of the decedent’s death, both Stiftungs held assets, including cash and U.S. securities, in New York banks. The estate tax return was filed in 1949 and a deficiency was determined by the Commissioner.

    Procedural History

    The Commissioner of Internal Revenue determined a deficiency in estate tax and imposed a penalty. The estate contested this determination in the U.S. Tax Court. The Tax Court found in favor of the Commissioner on the main issue of including the Stiftungs’ assets in the gross estate, but did not uphold the penalty. The case was decided under Rule 50.

    Issue(s)

    1. Whether the assets held by the Yan and Kien Stiftungs are includible in the gross estate under I.R.C. § 811(d), and whether the cash deposits were “for” the decedent under I.R.C. § 863(b).

    2. Whether the value of securities located in Holland should be valued in accordance with regulations, despite the war-time restrictions on them.

    3. Whether a 25% penalty for late filing of an estate tax return should be assessed against the estate.

    Holding

    1. Yes, because the decedent retained the power to amend and revoke the Stiftungs, making the assets held in them includible in the gross estate under § 811(d). No, the deposits were not considered to be “for” the decedent, under I.R.C. § 863(b).

    2. Yes, the securities should be valued, even though they were located in Holland during the war, and subject to restrictions at a rate of $0.065 per guilder.

    3. No, because the delay in filing the return was due to reasonable cause, not willful neglect.

    Court’s Reasoning

    The court focused on the substance over form, concluding that the Stiftungs, though structured under foreign law, were functionally equivalent to revocable trusts. Because the decedent retained the power to amend, alter, or revoke the Stiftungs, the assets held by them were includible under I.R.C. § 811(d). The court held that the decedent did not have the degree of control over the cash deposits at the time of death to be considered “for” him under I.R.C. § 863(b). The court also held that the value of the securities located in Holland during the war had some value, even though they could not be sold at that time, and was valued on the basis of the value of corresponding unrestricted securities traded on the New York Stock Exchange and then converted into guilders and finally into U.S. dollars at a rate of $0.065 per guilder. Furthermore, the court found that the delay in filing the estate tax return was due to reasonable cause.

    Practical Implications

    This case underscores the importance of substance over form in tax law, particularly in the context of estate planning and the creation of foreign entities. Lawyers must carefully analyze the degree of control a decedent retained over assets, regardless of the formal structure used. This case highlights that the IRS and the courts will look past the formal structure and will tax assets that are under the control of the decedent at the time of death. It also demonstrates the importance of considering how wartime or economic conditions affect asset valuation. The case further highlights the importance of diligence in filing estate tax returns, but also that good faith efforts to comply with complex tax laws can excuse penalties for late filing.