SCOTUS Reports

Tag: Tenancy by the Entirety

  • Estate of Stewart v. Commissioner, 74 T.C. 1054 (1980): When a Joint Will Severs a Tenancy by the Entirety

    Estate of Stewart v. Commissioner, 74 T. C. 1054 (1980)

    A joint will can sever a tenancy by the entirety if it provides for a disposition inconsistent with the rights of survivorship.

    Summary

    In Estate of Stewart v. Commissioner, the Tax Court ruled that a joint will executed by Robert and Edith Stewart severed their tenancy by the entirety in certain real property. The will stipulated that upon the death of the first spouse, half of the property would pass to their children, which was deemed inconsistent with the rights of survivorship inherent in a tenancy by the entirety. Consequently, Edith’s interest passed directly to the children upon her death, not to Robert, thereby preventing any taxable gift by Robert to the children. The court’s decision was grounded in the interpretation of Indiana law and the principles of joint wills as both testamentary and contractual instruments.

    Facts

    In 1974, Robert and Edith Stewart were diagnosed with cancer. They executed a joint, mutual, and contractual last will and testament on March 20, 1976, specifying that upon the death of the first spouse, one-half of their real property held as tenants by the entirety would pass to their children. Edith died on November 16, 1976, and her will was probated, distributing her interest in the property to the children. Robert died on January 29, 1978. The IRS argued that Robert made a taxable gift of Edith’s interest to the children after her death, which should be included in his gross estate.

    Procedural History

    The IRS issued a notice of deficiency asserting estate and gift tax liabilities against Robert’s estate. The estate filed a petition with the U. S. Tax Court to contest these deficiencies. The Tax Court consolidated the cases and ruled in favor of the estate, holding that the joint will severed the tenancy by the entirety, and thus, no gift occurred.

    Issue(s)

    1. Whether the execution of a joint will by Robert and Edith Stewart severed their tenancy by the entirety in the real property.

    2. If severed, whether Robert made a gift of Edith’s interest in the real property to their children.

    Holding

    1. Yes, because the joint will provided for a disposition of the property inconsistent with the rights of survivorship, thereby severing the tenancy by the entirety under Indiana law.

    2. No, because Edith’s interest passed directly to the children upon her death, and thus, no gift was made by Robert.

    Court’s Reasoning

    The court analyzed whether the joint will severed the tenancy by the entirety under Indiana law, noting that such a will acts both as a testamentary instrument and a contract. The court cited cases where mutual wills had severed joint tenancies and, by analogy, applied similar reasoning to tenancies by the entirety. The court emphasized that the key factor was the inconsistency between the will’s terms and the rights of survivorship. The joint will’s provision that one-half of the property pass to the children upon the first spouse’s death was deemed inconsistent with the survivorship rights, thus severing the tenancy. The court rejected the IRS’s argument that a tenancy by the entirety could not be severed by a mutual will, pointing out that such a position would be based on outdated concepts of marriage. The court also noted the Probate Court’s action in distributing Edith’s interest directly to the children, further supporting its conclusion.

    Practical Implications

    This decision clarifies that a joint will can sever a tenancy by the entirety if it provides for a disposition inconsistent with survivorship rights. Attorneys should draft joint wills with care, ensuring clarity on the intended disposition of property held in such tenancies. The ruling impacts estate planning by allowing couples to use joint wills to control the distribution of property held as tenants by the entirety, potentially affecting estate and gift tax planning. Subsequent cases, such as In re Estate of Waks, have followed this principle, reinforcing its application in estate law. This case also highlights the importance of understanding state-specific property law when dealing with federal tax issues.

  • Alonso v. Commissioner, 77 T.C. 603 (1981): Transferee Liability and Tenancy by the Entirety

    Alonso v. Commissioner, 77 T. C. 603 (1981)

    A transferee may be liable for the transferor’s unpaid taxes if the transfer of property to a tenancy by the entirety renders the transferor insolvent.

    Summary

    In Alonso v. Commissioner, the Tax Court held that Ann T. Alonso was liable as a transferee for her deceased husband’s unpaid federal income taxes when he transferred property into a tenancy by the entirety, leaving him insolvent. The court found that the transfer constituted a fraud on creditors under North Carolina law, making the transfer void. The decision hinges on the principles of transferee liability and the legal implications of tenancy by the entirety, emphasizing that such a transfer must be supported by adequate consideration to avoid liability.

    Facts

    On April 3, 1973, Rudolph Charles Alonso, who owed substantial federal income taxes, transferred four parcels of real property he owned in fee simple to a third party, who then reconveyed the property to Alonso and his wife, Ann T. Alonso, as tenants by the entirety. This left Alonso without sufficient individual assets to cover his debts. Ann Alonso claimed that she provided consideration for the transfer through unpaid services, mortgage payments, and potential inheritance rights. Alonso died in 1975, leaving Ann as the sole owner of the property.

    Procedural History

    The Commissioner of Internal Revenue determined that Ann Alonso was liable as a transferee for her husband’s unpaid taxes. Ann Alonso filed a petition with the Tax Court challenging this determination. The Tax Court, after hearing the case, ruled in favor of the Commissioner, finding Ann Alonso liable for the full amount of the asserted transferee liability.

    Issue(s)

    1. Whether the creation of a tenancy by the entirety can result in transferee liability if it renders the transferor insolvent?
    2. Whether Ann Alonso provided sufficient consideration for the transfer to avoid transferee liability?

    Holding

    1. Yes, because the creation of a tenancy by the entirety that renders the transferor insolvent and constitutes a fraud on creditors under state law can result in transferee liability.
    2. No, because Ann Alonso failed to prove she provided consideration in excess of $25,225. 21, which was necessary to avoid the asserted transferee liability.

    Court’s Reasoning

    The Tax Court applied the principles of transferee liability under IRC section 6901, requiring proof of transfer, inadequate consideration, transferor’s insolvency, and non-payment of taxes. The court found that the transfer of property into a tenancy by the entirety left Alonso insolvent, constituting a fraud on creditors under North Carolina law. This rendered the transfer void, leading to transferee liability for Ann Alonso. The court rejected Ann Alonso’s claims of consideration, finding that she did not provide adequate proof of the value of her unpaid services, that post-transfer tax payments did not constitute consideration, and that her potential inheritance rights did not exceed the necessary threshold. The court relied on cases like Irvine v. Helvering and Commissioner v. Stern to support its holding that the creation of a tenancy by the entirety can lead to transferee liability if it results in the transferor’s insolvency.

    Practical Implications

    This decision clarifies that transferring property into a tenancy by the entirety to avoid creditors can lead to transferee liability if it leaves the transferor insolvent. Legal practitioners must advise clients considering such transfers to ensure they retain sufficient assets to cover their debts. The ruling impacts estate planning and asset protection strategies, particularly in jurisdictions recognizing tenancy by the entirety. It also serves as a precedent for future cases involving transferee liability and the adequacy of consideration in property transfers. Subsequent cases have cited Alonso to address similar issues, reinforcing its significance in tax law and property law.

  • Estate of Lazar v. Commissioner, 58 T.C. 543 (1972): Deductibility of Settlement Payments in Estate Tax Calculations

    Estate of Lena G. Lazar, Deceased, Joseph C. Chapman, Executor, Petitioner v. Commissioner of Internal Revenue, Respondent, 58 T. C. 543 (1972)

    Settlement payments to resolve claims to share in an estate are not deductible as claims against the estate for estate tax purposes.

    Summary

    Lena Lazar entered into an agreement with her husband Milton to bequeath three-fourths of her estate to his nieces and nephews. After Milton’s death, Lena made a will that did not comply with this agreement, leading to a dispute settled by a $150,000 payment to Milton’s relatives. The Tax Court held that this payment was not deductible under Section 2053(a)(3) of the Internal Revenue Code, as it was a distribution to share in the estate rather than a claim against it. The decision emphasized that such payments do not qualify for deductions as they are not claims against the estate but rather distributions to potential beneficiaries.

    Facts

    In 1947, Milton Lazar, knowing his death was imminent, insisted that his wife Lena enter into an agreement to leave three-fourths of her estate to his nieces and nephews in exchange for him maintaining her as his sole heir. Most of their property was held as tenants by the entirety. After Milton’s death, Lena made several wills complying with the agreement until 1963 when she was advised that the agreement was invalid. Her final will, executed shortly before her death in 1965, did not comply with the agreement. Milton’s relatives contested the will, leading to a $150,000 settlement payment to them.

    Procedural History

    The executor of Lena’s estate claimed a deduction for the $150,000 payment on the estate tax return, which the Commissioner disallowed. The Tax Court reviewed the case, and prior state court proceedings had already determined that the payment was not deductible under Pennsylvania inheritance tax law. The Tax Court’s decision affirmed the Commissioner’s disallowance of the deduction.

    Issue(s)

    1. Whether the $150,000 paid to Milton’s relatives was deductible as a claim against the estate under Section 2053(a)(3) of the Internal Revenue Code?
    2. If the payment was considered a claim against the estate, whether it was supported by adequate and full consideration in money or money’s worth as required by Section 2053(c)(1)(A)?
    3. Whether any part of the $150,000 settlement was paid in settlement of the rights of the claimants as third-party beneficiaries of the agreement between Lena and Milton?

    Holding

    1. No, because the payment was made to settle a claim to share in the estate, not a claim against it.
    2. No, because even if it were considered a claim against the estate, it lacked adequate and full consideration in money or money’s worth.
    3. No, because the settlement did not specifically apportion any amount to third-party beneficiary rights, and no evidence supported such an apportionment.

    Court’s Reasoning

    The court distinguished between claims against the estate and claims to share in the estate. It determined that the $150,000 payment was a distribution to potential beneficiaries rather than a claim against the estate. The court noted that the settlement was to resolve disputes over the validity of Lena’s will, not to enforce a claim based on the 1947 agreement. The court also found that the agreement lacked adequate and full consideration in money or money’s worth because Milton’s estate was largely held as tenants by the entirety, over which he had no testamentary power. The court further noted that the settlement did not apportion the payment specifically to third-party beneficiary rights, thus failing to establish the deductibility of the payment.

    Practical Implications

    This decision clarifies that estate tax deductions are not available for payments made to settle disputes over the distribution of an estate, as opposed to claims against the estate. Attorneys must carefully distinguish between these types of claims when advising executors on estate tax returns. The ruling also underscores the importance of ensuring that any agreement purporting to bind an estate is supported by adequate consideration to be deductible. Future cases involving similar disputes over estate distributions should consider this precedent when determining the deductibility of settlement payments. Additionally, this case highlights the need for clear apportionment in settlement agreements to establish the basis for any potential deductions.

  • Mirsky v. Commissioner, 56 T.C. 664 (1971): When Payments in Divorce Are Property Settlements vs. Alimony

    Mirsky v. Commissioner, 56 T. C. 664 (1971)

    Payments labeled as alimony in divorce agreements may be considered non-taxable property settlements if they are intended to compensate for the wife’s property rights.

    Summary

    Enid Mirsky received payments labeled as alimony from her former husband Philip Pollak following their divorce. The court held that payments totaling $25,000 were non-taxable as they were in settlement of Mirsky’s property rights in the marital home, not alimony. However, weekly payments of $50 totaling $1,000 were taxable as alimony. The court also denied a deduction for legal fees due to insufficient proof that they were related to the taxable alimony. This case highlights the importance of distinguishing between property settlements and alimony for tax purposes.

    Facts

    Enid Mirsky and Philip Pollak married in 1952 and purchased a home together. They sold this home and used the proceeds to buy another in 1956, holding it as tenants by the entirety. After divorcing in 1964, they entered into a separation agreement incorporated into the divorce decree. The agreement provided Mirsky with household items and payments labeled as alimony: $5,000 immediately, $50 weekly until June 1, 1964, and further payments totaling $25,000 over the next few years. Mirsky did not report these payments as income, arguing they were compensation for her property interest.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies in Mirsky’s income tax for the years 1964-1967, asserting the payments were taxable alimony. Mirsky petitioned the Tax Court, which heard the case and issued its opinion on June 29, 1971.

    Issue(s)

    1. Whether the payments received by Enid Mirsky from Philip Pollak pursuant to the divorce decree and separation agreement are includable in her gross income under section 71(a)(1), I. R. C. 1954?
    2. Whether legal fees paid by Enid Mirsky in connection with the divorce proceedings are deductible under section 212, I. R. C. 1954?

    Holding

    1. No, because the payments aggregating $25,000 were in fact a division of property jointly held during the marriage and thus not includable in gross income. Yes, because the weekly payments of $50 totaling $1,000 were periodic payments in discharge of a legal obligation arising out of the marital relationship and thus includable in gross income.
    2. No, because Mirsky failed to prove what portion of the legal expenses was attributable to the collection of the taxable alimony.

    Court’s Reasoning

    The court applied the rule that payments in divorce agreements labeled as alimony are not determinative for tax purposes. They must be examined to determine if they are truly alimony or a property settlement. The court found that the $25,000 payments were intended to compensate Mirsky for her interest in the marital home, evidenced by the negotiations leading to the agreement and her contributions to the property. These payments were not alimony because they were not for support but rather a division of property. The weekly payments of $50, however, had characteristics of alimony, being small and payable over a short period. The court also considered Indiana law on alimony, which can include property settlements, and the congressional intent for uniform treatment of alimony across states. The court rejected the Commissioner’s argument that the labels in the agreement should be controlling, citing the need for national uniformity in tax treatment of divorce-related payments.

    Practical Implications

    This decision impacts how attorneys draft divorce agreements and how parties should report payments for tax purposes. It emphasizes the need to clearly distinguish between property settlements and alimony, as the former is not taxable while the latter is. Practitioners must carefully document the intent behind payments to avoid tax disputes. The ruling also affects how courts in similar cases interpret the nature of payments, focusing on the substance over the label. Subsequent cases have applied this principle, reinforcing the need to examine the true purpose of payments in divorce agreements. Businesses and individuals involved in divorce proceedings must consider these tax implications when negotiating settlements.

  • Estate of Hornor v. Commissioner, 36 T.C. 337 (1961): Estate Tax Inclusion for Surviving Spouse’s Retained Life Interest in Trust

    Estate of Julia Crawford Hornor, F. Raymond Wadlinger and Caleb W. Hornor, Executors, Petitioner, v. Commissioner of Internal Revenue, Respondent, 36 T.C. 337 (1961)

    Property initially included in a predeceased spouse’s gross estate can also be included in the surviving spouse’s gross estate to the extent of the surviving spouse’s retained life interest in a trust that became irrevocable upon the predeceased spouse’s death.

    Summary

    William and Julia Hornor, husband and wife, owned property as tenants by the entirety. William, who originally owned the properties, transferred them to himself and Julia as tenants by the entirety. They then created a revocable trust, naming themselves and their son as trustees, and transferred the entirety property into it. The trust reserved income to William and Julia jointly for life, then to the survivor, and retained a joint power to revoke or amend. Upon William’s death, the trust became irrevocable. William’s estate was previously taxed on the full value of the trust property. Upon Julia’s subsequent death, the Tax Court held that half the value of the trust property was includible in Julia’s gross estate under Section 811(c)(1)(B) of the 1939 Internal Revenue Code because she retained a life interest in the property after the trust became irrevocable upon William’s death. The court allowed credits for gift tax paid and state death taxes.

    Facts

    1. William Hornor originally owned 107 parcels of real estate.
    2. William transferred these properties to himself and his wife, Julia, as tenants by the entirety; Julia provided no consideration for this transfer.
    3. In 1935, William and Julia, as tenants by the entirety, established a revocable trust and transferred the 107 properties and some cash into it. They named themselves and their son as trustees.
    4. The trust terms provided for income to be paid to William and Julia jointly for their lives, then to the survivor for life, with remainder interests to their sons.
    5. William and Julia retained a joint power to revoke, amend, or withdraw trust property during their joint lives, making the trust revocable.
    6. Upon the death of the first spouse, the trust became irrevocable.
    7. William died in 1937. His estate was taxed on the full value of the trust property under Section 302(e) of the Revenue Act of 1926, as property held in tenancy by the entirety.
    8. Julia died in 1954. The Commissioner included a portion of the trust property in Julia’s gross estate, representing the actuarial value of her life income interest.

    Procedural History

    1. Commissioner determined a deficiency in Julia Hornor’s estate tax, including a portion of the trust property.
    2. Estate of Julia Hornor petitioned the Tax Court to contest the deficiency.
    3. Previously, in Estate of William Macpherson Hornor, the Board of Tax Appeals (affirmed by the Third Circuit) upheld the inclusion of the entire trust property in William’s gross estate.

    Issue(s)

    1. Whether a portion of the value of property held in an irrevocable trust at the time of Julia Hornor’s death is includible in her gross estate under Section 811(c)(1)(B) of the 1939 Internal Revenue Code, where the property was initially held as tenants by the entirety and the trust became irrevocable upon her husband’s prior death, and where the full value of the trust was previously included in her husband’s gross estate.
    2. Whether Julia’s estate is entitled to a credit for gift tax paid by Julia on the transfer of property to the trust.
    3. Whether Julia’s estate is entitled to a credit for additional state death taxes.

    Holding

    1. Yes. One-half of the value of the property held in the trust at the time of Julia’s death is includible in her gross estate under Section 811(c)(1)(B) because Julia made a transfer with a retained life interest when the revocable trust became irrevocable upon William’s death.
    2. Yes. Julia’s estate is entitled to a credit for gift tax paid to the extent provided by Sections 813(a)(2) and 936(b) of the 1939 Internal Revenue Code.
    3. Yes. Julia’s estate is entitled to a credit for additional state death taxes to the extent provided by Section 813(b) of the 1939 Internal Revenue Code.

    Court’s Reasoning

    The Tax Court reasoned that while the full value of the trust property was included in William’s estate under Section 302(e) as entirety property, Julia’s estate tax liability arises under a different section, 811(c)(1)(B), concerning transfers with retained life interests. The court distinguished the prior ruling in William’s estate, stating that the prior case determined the taxability under the joint tenancy provisions applicable at William’s death, whereas Julia’s case concerns her transfer with a retained life interest that became fixed when the trust became irrevocable at William’s death.

    The court relied on Estate of A. Carl Borner, 25 T.C. 584 (1956), which held that when tenants by the entirety transfer property to an irrevocable trust, reserving life income, only half the property’s value is includible in each spouse’s estate under Section 811(c). The court reasoned that despite the tenancy by the entirety, each spouse effectively owns and transfers only a one-half interest for the purposes of Section 811(c). The court stated, “We conclude as a practical matter, the tenancy by entirety and joint tenancies are so much alike that the rule applied in the joint tenancy cases should be applied here where the tenancies are by the entirety, which means each tenant owns one-half.”

    The court rejected the petitioner’s argument that the prior decision in William’s estate precluded taxing any portion of the trust in Julia’s estate. The court clarified that the prior ruling addressed Section 302(e) and the inclusion of entirety property in the first spouse’s estate, while the current case addresses Section 811(c) and Julia’s retained life interest. Judge Mulroney, in concurrence, emphasized that Section 811(c) taxes transfers where the decedent retained life income, and Julia’s transfer became complete and taxable when the revocable trust became irrevocable upon William’s death.

    Judge Murdock dissented, arguing that taxing the same property in both estates is inconsistent and contradicts the principle that entirety property originally belonged to William and should only be taxed in his estate.

    Practical Implications

    Estate of Hornor illustrates the potential for estate taxation in both spouses’ estates when dealing with tenancy by the entirety property transferred into trust, even if the entire value was initially taxed in the first spouse’s estate. It highlights that estate tax law considers each spouse as transferring their respective half interest in entirety property for purposes of transfers with retained life income under Section 811(c), even though the entirety property is fully taxed in the first spouse’s estate under different provisions related to joint ownership. This case underscores the importance of considering the interplay of different estate tax code sections and the timing of when trusts become irrevocable in estate planning, particularly for jointly held property. It suggests that even if property is fully taxed in the first spouse’s estate due to joint ownership rules, the surviving spouse’s retained interests can trigger further estate tax upon their death under different transfer-related provisions. Later cases distinguish Hornor based on specific trust terms and the nature of the retained interests, but the core principle of potential double taxation based on different estate tax sections remains relevant for estate planners.

  • Milgroom v. Commissioner, 31 T.C. 1256 (1959): Dependency Exemptions and Deductibility of Taxes Paid from Property Sale Proceeds in Divorce

    31 T.C. 1256 (1959)

    A taxpayer can claim dependency exemptions if they provide over half of a child’s support, and can deduct taxes and interest paid on property they are legally obligated to pay, even if paid from sale proceeds.

    Summary

    In *Milgroom v. Commissioner*, the U.S. Tax Court addressed two primary issues: whether a taxpayer could claim dependency exemptions for his children and whether he could deduct the full amount of real estate taxes and mortgage interest paid from the proceeds of a property sale. The court held that the taxpayer was entitled to the dependency exemptions because he provided over half of his children’s support. Furthermore, the court determined the taxpayer could deduct the full amount of the taxes and interest, as he was legally liable for them under Massachusetts law, even though the payments were made directly from the sale proceeds of the property. The decision highlights the importance of establishing factual support for dependency claims and understanding state property laws to determine tax liabilities in the context of divorce and property ownership.

    Facts

    Theodore Milgroom, the petitioner, lived in Massachusetts and filed his 1953 income tax return, claiming exemptions for himself and his three children and deductions for real estate taxes and mortgage interest. Milgroom and his then-wife purchased a home as tenants by the entirety in 1952. In 1953, they were separated, and a divorce decree nisi was granted, awarding custody of the children to the wife. Milgroom was ordered to pay $30 per week for child support, but he had been voluntarily paying $25 per week before the court order. During 1953, Milgroom and his wife sold their home. At the time of the sale, unpaid mortgage interest and real estate taxes were due. These amounts were paid from the sale proceeds. Milgroom provided substantial financial support for his children throughout the year, including direct payments, expenses related to their care, and, prior to the sale, housing-related costs. The Commissioner disallowed the exemptions, claiming Milgroom failed to substantiate the dependency credits, and disputed the full deduction of the taxes and interest paid on the property sale. The court found that Milgroom’s three children received more than one-half of their support from him in 1953.

    Procedural History

    The case began with a determination by the Commissioner of Internal Revenue disallowing dependency exemptions and disputing certain deductions claimed by Theodore Milgroom. Milgroom petitioned the U.S. Tax Court to challenge the Commissioner’s findings. The Tax Court heard the case based on stipulated facts and testimony presented by Milgroom. The Tax Court ultimately ruled in favor of Milgroom on both issues.

    Issue(s)

    1. Whether the petitioner is entitled to dependency exemptions for his three children during the year 1953.

    2. Whether the petitioner is entitled to deduct the full amount of the real estate taxes and mortgage interest paid at the time of the sale of the property.

    Holding

    1. Yes, because the court found that the children received more than one-half of their support from the petitioner during the taxable year.

    2. Yes, because the petitioner was obligated to pay the taxes and interest under Massachusetts law, and payment from the proceeds of the sale of property he owned as a tenant by the entirety was, in effect, payment by him.

    Court’s Reasoning

    The court applied the rules governing dependency exemptions and the deductibility of taxes and interest. Regarding the dependency exemptions, the court examined the facts presented to determine if Milgroom provided more than half of his children’s support. The court noted that the Commissioner had not determined that the children did *not* receive more than half their support from Milgroom, but only that he failed to substantiate the claim. Based on Milgroom’s testimony and the stipulated facts, the court concluded that the children did receive the requisite support, and he was entitled to the exemptions. The court considered that the divorce decree, the prior voluntary payments, and his expenses for the children supported this conclusion.

    For the second issue, the court considered Massachusetts law regarding tenancies by the entirety. The court reasoned that, under Massachusetts law, the husband (Milgroom) was liable for all taxes and interest on the property. Further, the court addressed the question of whether the taxes and interest could be considered as having been paid by Milgroom, even though the payments were made directly from the sale proceeds. The court decided that because Milgroom was entitled to the proceeds of the sale, the payment of the taxes and interest from those proceeds was effectively a payment by him, thus making the full deduction allowable.

    The court cited previous Massachusetts case law, stating, “At common law the husband during coverture and as between himself and wife, had the absolute and exclusive right to the control, use, possession, rents, issues and profits of property held as tenants by the entirety.” This supported the ruling that Milgroom was entitled to the proceeds and was therefore deemed to have paid the taxes and interest.

    Practical Implications

    This case emphasizes the importance of thorough record-keeping and evidence to substantiate claims for dependency exemptions. Taxpayers must be able to demonstrate the extent of their financial contributions to a child’s support to meet the requirements of the law. The case also underscores the impact of state property laws on federal tax liabilities, particularly during divorce proceedings. Lawyers advising clients in similar situations need to be aware of the applicable state laws regarding property ownership, obligations, and the implications on tax deductions. For accountants and financial advisors, this case suggests a need to carefully analyze the ownership structure of property and the legal responsibilities of the parties involved when determining tax liabilities, especially in the context of divorce and property settlements.

  • Arnold v. Commissioner, 28 T.C. 682 (1957): Basis of Property Held as Tenants by the Entirety for Depreciation Purposes

    28 T.C. 682 (1957)

    When property is held by tenants by the entirety, the surviving tenant’s basis for depreciation purposes is the original cost, not the fair market value at the time of the other tenant’s death, because the survivor’s interest vests under the original conveyance, not by inheritance or devise.

    Summary

    In Arnold v. Commissioner, the Tax Court addressed the proper basis for calculating depreciation of real estate held by a husband and wife as tenants by the entirety. The court held that the surviving spouse could not use the stepped-up basis (fair market value at the time of death) because the property was not acquired by inheritance or devise, but rather, the survivor continued to hold the property under the original conveyance. This decision underscores the legal concept that with a tenancy by the entirety, the survivor’s rights derive from the original grant of the property, not a new acquisition.

    Facts

    Antoinette and Joseph Arnold, husband and wife, acquired real estate as tenants by the entirety. The original cost of the property was $159,029.33, with $109,029.33 allocated to depreciable improvements. Joseph Arnold died, leaving his entire estate to Antoinette. The fair market value of the property at the time of Joseph’s death was $650,000. Antoinette claimed depreciation on her 1954 income tax return based on the original cost of the property, but later filed a claim for a refund, arguing she was entitled to use the stepped-up basis based on the fair market value at the time of her husband’s death.

    Procedural History

    The Commissioner of Internal Revenue determined a deficiency in Antoinette’s 1954 income tax, disallowing the use of the stepped-up basis. Antoinette filed a petition with the Tax Court to contest this determination. The case was presented to the Tax Court on stipulated facts.

    Issue(s)

    1. Whether the basis for depreciation of the bus terminal property should be the original cost or the fair market value at the time of Joseph Arnold’s death.

    Holding

    1. No, because the surviving spouse’s interest in the property did not vest by inheritance or devise, but rather was continued under the original conveyance, and therefore the original cost basis should be used.

    Court’s Reasoning

    The Tax Court relied heavily on the Supreme Court’s decision in Lang v. Commissioner, 289 U.S. 109 (1933). The court reiterated the established principle that a tenancy by the entirety creates a single ownership, with each spouse owning the entire estate. “The tenancy results from the common law principle of marital unity; and is said to be sui generis. Upon the death of one of the tenants ‘the survivor does not take as a new acquisition, but under the original limitation, his estate being simply freed from participation by the other;…’” The court rejected the taxpayer’s argument that the Lang case was wrongly decided and considered itself bound by the Supreme Court precedent. Because the property was not acquired by inheritance or devise, the stepped-up basis was not permitted under the applicable provisions of the Internal Revenue Code. The court acknowledged the potential hardship but noted that any remedy lay with Congress, not with the courts.

    Practical Implications

    This case is essential for understanding the implications of property ownership by tenants by the entirety for tax purposes. The ruling reinforces that a surviving spouse’s basis in property held as tenants by the entirety is determined from the original purchase price, not the fair market value at the time of the other spouse’s death, for depreciation purposes. This can lead to significantly lower depreciation deductions. Therefore, it highlights the importance of considering how property is titled and the potential tax consequences. The court’s reliance on a Supreme Court precedent demonstrates the importance of understanding existing case law. Attorneys advising clients should carefully explain the tax implications of holding property in this manner. Subsequent taxpayers in similar circumstances will need to consider this ruling.

  • Estate of G.A. Buder, Deceased, 26 T.C. 1019 (1956): Gift Tax Annual Exclusion for Tenants by the Entirety

    Estate of G.A. Buder, Deceased, 26 T.C. 1019 (1956)

    The gift tax annual exclusion under the Internal Revenue Code applies to each individual who benefits from a gift, even if the recipients hold property as tenants by the entirety, not to the tenancy as a single entity.

    Summary

    The case concerns whether a donor making a gift of property to a husband and wife as tenants by the entirety is entitled to one or two annual gift tax exclusions. The court held that the donor was only entitled to one exclusion because the donor had already used up the allowable annual exclusions by making separate gifts to the couple individually during the same year. The court reasoned that because the husband and wife each receive a benefit from the gift, the annual exclusion applied to each of them individually, not the estate as a whole, under the “common understanding” of a gift.

    Facts

    G.A. Buder made gifts to his son, G.A. Buder Jr., and his son’s wife, Kathryn M. Buder, in 1951. He also gave the couple bonds as tenants by the entirety. The donor claimed annual gift tax exclusions for these gifts. The Commissioner of Internal Revenue disallowed the exclusion for the gift of bonds, arguing only one exclusion was allowable because the gift was to an estate by the entirety. Buder’s estate contested this disallowance, claiming the transfer created an estate of entirety, which, under Missouri law, should be considered a single entity, thus entitling them to one exclusion. The Tax Court addressed the gift tax implications of these transfers.

    Procedural History

    The Commissioner of Internal Revenue determined a gift tax deficiency. The Estate of G.A. Buder, Deceased, contested the determination in the United States Tax Court. The case was submitted under Rule 30, based on a full stipulation of facts and written briefs, thus streamlining the process and avoiding a trial.

    Issue(s)

    1. Whether a gift of bonds to a husband and wife as tenants by the entirety should be treated as a gift to a single entity for purposes of the gift tax annual exclusion.

    2. Whether the donor is entitled to one or two annual exclusions for the gifts made to the couple, considering the earlier gifts made individually.

    Holding

    1. No, because the court applied the “common understanding” of a gift as to the individuals receiving the benefit, not the estate as a single entity.

    2. No, because the donor exhausted the allowable annual exclusions by making separate gifts to each donee earlier in the year, therefore, no further exclusion was allowed.

    Court’s Reasoning

    The court recognized that under Missouri law, a conveyance to a husband and wife creates an estate by the entirety. However, the court emphasized that the gift tax statute’s language should be interpreted “in their natural sense” and “in common understanding and in the common use of language a gift is made to him upon whom the donor bestows the benefit of his donation.” The court found that the donor bestows the benefit of the gift upon the husband and wife as individuals. The court looked to the Supreme Court’s decision in Helvering v. Hutchings, which held that the annual exclusion applied to each beneficiary of a trust. Because the donor had already given individual gifts and claimed the exclusions for them, no further exclusion could be taken for the gift to them in the estate by entirety.

    Practical Implications

    This case clarifies how to treat gifts to tenants by the entirety under the gift tax laws. It instructs tax professionals to consider each individual benefiting from the gift when determining the availability of the annual exclusion, rather than treating the tenancy as a single unit. This has practical implications for estate planning, where structuring gifts to maximize the number of annual exclusions is a common strategy. The case reaffirms that the substance of the gift—who receives the benefit—controls, not the form of ownership. This case has been cited in subsequent cases that have examined whether the donor is entitled to multiple gift tax exclusions.

  • 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 Borner v. Commissioner, 25 T.C. 584 (1955): Inclusion of Property Transferred in Trust in Decedent’s Gross Estate

    25 T.C. 584 (1955)

    When property held by a husband and wife as tenants by the entirety is transferred to an irrevocable trust with retained income, only one-half of the property’s value is includible in the deceased spouse’s gross estate under Section 811(c) of the Internal Revenue Code of 1939.

    Summary

    The Estate of A. Carl Borner challenged the Commissioner of Internal Revenue’s determination of a deficiency in estate tax. Borner and his wife, holding property as tenants by the entirety, transferred it to an irrevocable trust, reserving the income for their joint lives and the life of the survivor. The Tax Court addressed whether the transfer was in contemplation of death and, if so, the value to be included in the gross estate. The court held that the transfer was in contemplation of death, but only one-half the property’s value was includible, aligning with the deceased’s ownership interest at the time of transfer. This decision clarified how property held by the entirety, and transferred with a retained life estate, is treated for estate tax purposes, influencing future applications of Section 811(c).

    Facts

    A. Carl Borner and his wife, Bertha, transferred stock and securities held as tenants by the entirety to an irrevocable trust in 1938. They retained the income for their joint lives and the life of the survivor. The consideration for the assets came solely from A. Carl Borner. At the time of the transfer, Borner was suffering from Parkinson’s disease, which was progressively worsening. He executed a will shortly after creating the trust, leaving his estate to his wife. The value of the assets transferred was $85,140.41 at the time of the transfer and $102,818.31 on the optional valuation date. Borner died in 1947.

    Procedural History

    The Commissioner of Internal Revenue determined a deficiency in estate tax. The estate challenged this determination in the U.S. Tax Court, disputing the inclusion of the trust assets in the gross estate and the valuation method. The Tax Court ruled in favor of the estate, deciding that only half the property was includible in the gross estate.

    Issue(s)

    1. Whether the transfer of property to an irrevocable trust with retained income by the decedent and his wife was a transfer in contemplation of death under Section 811(c) of the Internal Revenue Code of 1939.

    2. If the transfer was in contemplation of death, what value of the property should be included in the gross estate?

    Holding

    1. Yes, the transfer was made in contemplation of death because the facts and circumstances, including the decedent’s illness and the trust provisions, indicated a testamentary plan.

    2. Yes, only one-half of the value of the property transferred in trust is includible in the decedent’s gross estate because his interest in the property at the time of transfer was one-half, as the property was held as tenants by the entirety.

    Court’s Reasoning

    The court applied Section 811(c) of the Internal Revenue Code of 1939, which addresses transfers in contemplation of death and transfers with retained life estates. The court found that the transfer was in contemplation of death based on the decedent’s advanced age, serious illness (Parkinson’s disease), the near-simultaneous execution of the will, and the nature of the trust. In determining the value to be included, the court followed the reasoning of the Ninth Circuit in *Estate of Sullivan v. Commissioner*, which considered similar joint property transfers, and held that only the decedent’s one-half interest in the property was includible, even though the wife also held an interest in the property. The court reasoned that, as a practical matter, tenancies by the entirety and joint tenancies are so much alike that the rule applied in joint tenancy cases should be applied to cases involving tenancies by the entirety.

    Practical Implications

    This case underscores the importance of understanding how jointly held property is treated under estate tax laws when transferred to a trust with a retained life estate. It establishes that for property held by the entirety, only the deceased’s fractional interest is included in the gross estate under Section 811(c). This has implications for estate planning, particularly in jurisdictions that recognize tenancies by the entirety. Lawyers advising clients in these situations must carefully consider the nature of the property ownership to determine the extent of the tax consequences. Subsequent cases must differentiate between this case and prior precedent, for example, *Estate of William MacPherson Hornor*, which had a distinguishable fact pattern and resulted in a different holding. Also, cases addressing similar transfers should consider the transferor’s interest at the time of the transfer to a trust with retained income.