258

JEAN STEINBERG, DONOR, PETITIONER v. COMMISSIONER

OF INTERNAL REVENUE, RESPONDENT

Docket No. 23865–11. Filed September 30, 2013. 

P entered into a binding gift agreement with her daughters 

under which P gave her daughters cash and securities and in 

exchange the daughters agreed to assume and to pay, among 

other things, any estate tax liability imposed under I.R.C. sec. 

2035(b) as a result of the gifts in the event that P passed 

away within three years of the gifts. In calculating for gift 

tax purposes the gross fair market value of the property 

transferred to the daughters, P reduced the fair market value 

of the cash and securities by an amount representing the 

value of the daughters’ assumption of the potential I.R.C. sec. 

2035(b) estate tax liability, among other things. Held: Because 

the value of the obligation assumed by the daughters is not 

barred as a matter of law from being consideration in money 

or money’s worth within the meaning of I.R.C. sec. 2512(b), 

the fair market value of P’s taxable gift may be determined 

with reference to the daughters’ assumption of the potential 

I.R.C. sec. 2035(b) estate tax liability. We will deny R’s motion 

for summary judgment, and we will no longer follow McCord 

v. Commissioner, 120 T.C. 358 (2003), rev’d and remanded sub 

nom. Succession of McCord v. Commissioner, 461 F.3d 614 

(5th Cir. 2006), to the extent it provides otherwise. 

John W. Porter, Keri D. Brown, Michael S. Arlein, and Jeffrey D. Watters, Jr., for petitioner. 

John V. Cardone and Jane J. Kim, for respondent. 

OPINION 

KERRIGAN, Judge: This gift tax case is before the Court on 

respondent’s motion for summary judgment filed under Rule 

121. Petitioner objects to the motion. 

Respondent issued petitioner a notice of deficiency, 

increasing petitioner’s gift tax liability by $1,804,908 for tax 

year 2007. Regarding the motion for summary judgment, 

respondent disputes only one issue: whether a donee’s 

promise to pay any Federal or State estate tax liability that 

may arise under section 2035(b) if the donor dies within 

three years of the gift may constitute consideration in money 

or money’s worth within the meaning of section 2512(b). 

Unless otherwise indicated, all section references are to the 

Internal Revenue Code in effect for the year in issue, and all 

Rule references are to the Tax Court Rules of Practice and 

(258) STEINBERG v. COMMISSIONER 259

Procedure. We round all monetary amounts to the nearest 

dollar. 

Background 

The following facts are not in dispute. Petitioner resided in 

New York when she filed the petition. 

On April 17, 2007, petitioner entered into a binding gift 

agreement (net gift agreement) with her four adult daughters 

(collectively, donees). At that time petitioner was 89 years 

old. In the net gift agreement petitioner agreed to make gifts 

of cash and securities to the donees. In exchange, the donees 

agreed to assume and to pay any Federal gift tax liability 

imposed as a result of the gifts. The donees also agreed to 

assume and to pay any Federal or State estate tax liability 

imposed under section 2035(b) as a result of the gifts in the 

event that petitioner passed away within three years of the 

gifts. Section 2035(b) provides that the amount of a gross 

estate shall be increased by the amount of gift taxes paid on 

any gift made by the decedent during the three-year period 

preceding the decedent’s date of death. Section 3, Federal 

and State Estate Tax, of the net gift agreement provides in 

pertinent part: 

a. Assumption of Federal and State Estate Tax Liability. Each Donee 

hereby agrees to assume, pay and indemnify the Executor against all 

additional federal and state estate tax liability assessed pursuant to 

Code Section 2035(b) (i) if Mrs. Steinberg [petitioner] does not survive 

for three years following the Effective Date and (ii) that is directly 

attributable to Mrs. Steinberg’s transfer of the Gift Property made under 

the Instruments of Transfer, including all penalties and interest which 

accrue upon such estate tax liability except such penalties and interest 

that are directly attributable to actions or delays committed by the 

Executor or another Donee (the Estate Tax Liability). For purposes of 

determining and allocating the Estate Tax Liability, (i) the value of all 

additional tax shall be as finally determined for federal estate tax purposes, (ii) the only gift tax taken into account in the calculation shall be 

the gift tax on Mrs. Steinberg’s transfers of the Gift Property to the 

Donees made under the Instruments of Transfer, and (iii) the amount 

of the Estate Tax Liability each Donee shall bear shall be an amount 

equal to the Estate Tax Liability attributable to the Donee’s Gift Tax 

Share A and the Donee’s Gift Tax Share B (in each case, collectively, the 

Donee’s Estate Tax Share). 

* * * * * * * 

260 141 UNITED STATES TAX COURT REPORTS (258) 

c. Payment of Estate Tax Liability. 

i. Donees’ Payment to Executor. Each Donee shall deliver to the 

Executor an amount equal to the Donee’s Estate Tax Share by certified 

check made payable to the United States Treasury, no later than thirty 

days before the due date for payment of the Estate Tax Liability, or, if 

later, as soon thereafter as the Executor notifies the Donee of the 

amount of the Estate Tax Liability. 

The net gift agreement also provides remedies if any 

daughter fails to pay her share of any section 2035(b) estate 

tax liability. Section 7(c), Remedy Available in Event of 

Default, of the net gift agreement provides in pertinent part: 

ii. Default in Payment of Estate Tax Liability. If the Executor determines that a Donee is in default * * * the Executor shall give notice to 

the Donee that the Donee is in default (Estate Tax Default Notice and 

Estate Tax Default Notice Date, respectively). If the Donee fails within 

10 business days after the Default Notice Date to deliver to the Executor 

the remaining balance of the Donee’s Estate Tax Share of the Estate Tax 

Liability (Donee’s Estate Tax Balance), all Cash Distributions [i.e., certain quarterly distributions to which the donees are entitled] otherwise 

distributable to a Donee shall be delivered directly to the Executor 

* * *. Each Donee agrees that, upon the date on which the Executor 

gives an Estate Tax Default Notice to a Donee, the Executor also shall 

deliver a duplicate copy of the Estate Tax Default Notice to the Manager, and the Donee shall be deemed to have directed the Manager to 

deliver the Cash Distribution otherwise distributable to the Donee 

directly to the Executor in satisfaction of the Donee’s Estate Tax Balance 

as provided in this paragraph. Each Donee agrees to perform any and 

all acts necessary as a shareholder, partner, member, manager or 

director of any entity governed by an Applicable Agreement to effect the 

payment of the Donee’s Estate Tax Balance to the Executor. 

The net gift agreement was the result of several months of 

negotiation between petitioner and the donees. Petitioner 

and the donees were represented by separate counsel. 

Petitioner retained an appraiser to calculate the gross fair 

market value of the property transferred to the donees. The 

appraiser also calculated the aggregate fair market value of 

the ‘‘net gift’’. The appraiser determined the value of the net 

gift by reducing the fair market value of the cash and securities by both (1) the gift tax the donees paid and (2) the actuarial value of the donees’ assumption of potential section 

2035(b) estate tax. The appraiser determined the actuarial 

value of the donees’ assumption of the potential section 

2035(b) estate tax by calculating petitioner’s annual mortality rate for the three years after the gift (i.e., the probVerDate Mar 15 2010 08:37 Feb 03, 2015 Jkt 000000 PO 00000 Frm 00003 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\STEINB~1 JAMIE
(258) STEINBERG v. COMMISSIONER 261

1The notice of deficiency increased the value of petitioner’s total gifts for 

tax year 2007 by $4,010,907 because of ‘‘net gifts to donor’s four daughters’’. Nonetheless, both respondent and petitioner claim that the notice of 

deficiency disallowed petitioner’s entire $5,838,540 discount for the donees’ 

assumption of the potential sec. 2035(b) estate tax liability. 

ability that petitioner would pass away within one year, two 

years, or three years of the gift), among other things. The 

appraiser determined that the aggregate fair market value of 

the net gift was $71,598,056, as of the date of the gift. Petitioner valued the donees’ assumption of the potential section 

2035(b) estate tax liability at $5,838,540. 

On October 15, 2008, petitioner timely filed a Form 709, 

United States Gift (and Generation-Skipping Transfer) Tax 

Return, for tax year 2007. On the Form 709 petitioner 

reported taxable gifts of $71,598,056 and total gift tax of 

$32,034,311. Petitioner attached a summary of the net gift 

agreement, which included a description of the appraiser’s 

determination of the value of the net gifts, to the Form 709. 

On July 25, 2011, respondent mailed the notice of deficiency, which increased the aggregate value of petitioner’s 

net gifts to the donees from $71,598,056 to $75,608,963, for 

a total gift tax increase of $1,804,908. Respondent disallowed 

the discount petitioner made for the donees’ assumption of 

the potential section 2035(b) estate tax liability. 1 In 

response, petitioner filed a petition, and respondent filed a 

motion for summary judgment. 

Discussion 

I. Summary Judgment 

Summary judgment may be granted where the pleadings 

and other materials show that there is no genuine dispute as 

to any material fact and that a decision may be rendered as 

a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff ’d, 17 F.3d 965 (7th Cir. 

1994). The burden is on the moving party (in this case, 

respondent) to demonstrate that there is no genuine dispute 

as to any material fact and that he or she is entitled to judgment as a matter of law. FPL Grp., Inc. & Subs. v. Commissioner, 116 T.C. 73, 74–75 (2001). In considering a motion for 

summary judgment, evidence is viewed in the light most 

favorable to the nonmoving party. Bond v. Commissioner, 

262 141 UNITED STATES TAX COURT REPORTS (258) 

2Sec. 2503 also enumerates a handful of exclusions, none of which are 

relevant in this case. 

100 T.C. 32, 36 (1993). The nonmoving party may not rest 

upon the mere allegations or denials of his or her pleading 

but must set forth specific facts showing there is a genuine 

dispute for trial. Sundstrand Corp. v. Commissioner, 98 T.C. 

at 520. 

For purposes of respondent’s motion, respondent does not 

dispute (1) the value of the cash and securities transferred; 

(2) whether petitioner properly reduced her gift tax liability 

by the amount of gift tax the donees assumed; or (3) whether 

the donees’ assumption of the section 2035(b) estate tax 

liability is enforceable under local law. Respondent’s sole 

claim is that the donees’ assumption of the potential section 

2035(b) estate tax liability did not increase the value of petitioner’s estate and therefore did not constitute consideration 

in money or money’s worth within the meaning of section 

2512(b) in exchange for the gifts. For the following reasons 

we conclude that there are genuine factual disputes about 

the issue. 

II. Statutory Framework 

A. Gift Tax Generally 

Section 2501(a) imposes a tax on the transfer of property 

by gift. The donor is primarily responsible for paying the gift 

tax. Sec. 2502(c); see also sec. 25.2502–2, Gift Tax Regs. The 

gift tax is imposed upon the donor’s act of making the 

transfer, rather than upon receipt by the donee, and it is 

measured by the value of the property passing from the 

donor, rather than the value of enrichment resulting to the 

donee. Sec. 25.2511–2(a), Gift Tax Regs. Donative intent on 

the part of the donor is not an essential element for gift tax 

purposes; the application of gift tax is based on the objective 

facts and circumstances of the transfer rather than the 

subjective motives of the donor. Sec. 25.2511–1(g)(1), Gift 

Tax Regs. 

The amount of gift tax is based on the aggregate value of 

taxable gifts made during the year, among other things. See 

sec. 2502(a) (imposing the gift tax on a cumulative basis). 

Taxable gifts are the total amount of gifts made during the 

year, less certain deductions. 2 Sec. 2503(a). The amount of a 

(258) STEINBERG v. COMMISSIONER 263

gift of property is generally the value of the property on the 

date of the gift. Sec. 2512(a). The gift is complete when the 

property has left the donor’s dominion and control. See sec. 

25.2511–2(b), Gift Tax Regs. The value of the property is the 

price at which it would change hands between a willing 

buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge 

of the relevant facts. Sec. 25.2512–1, Gift Tax Regs. 

The amount of the gift is the amount by which the value 

of the property transferred exceeds the value of consideration 

received in money or money’s worth. See sec. 2512(b); secs. 

25.2511–1(g)(1), 25.2512–8, Gift Tax Regs.; see also Commissioner v. Wemyss, 324 U.S. 303, 306–307 (1945). Thus, if a 

donor makes a gift subject to the condition that the donee 

pay the resulting gift tax, the amount of the gift is reduced 

by the amount of the gift tax. See Harrison v. Commissioner, 

17 T.C. 1350, 1357 (1952). Such a gift is commonly referred 

to as a ‘‘net gift’’. 

B. Section 2035(b) ‘‘Gross-Up’’ Provision 

Under section 2035(b) (formerly section 2035(c), see Taxpayer Relief Act of 1997, Pub. L. No. 105–34, sec. 1310(a), 

111 Stat. at 1043), a decedent’s gross estate is increased by 

the amount of any gift tax paid by the decedent or the 

decedent’s estate on any gift made by the decedent during 

the three-year period preceding the decedent’s death. For 

purposes of this ‘‘gross-up’’ provision, we have deemed that 

the phrase ‘‘gift tax paid by the decedent or the decedent’s 

estate’’ during the relevant three-year period includes gift tax 

attributable to a net gift the decedent made during that 

period (despite the fact that the donee is responsible for 

paying the gift tax in that situation). Estate of Sachs v. 

Commissioner, 88 T.C. 769, 777–778 (1987), aff ’d in part, 

rev’d in part on other grounds, 856 F.2d 1158, 1164 (8th Cir. 

1988). We note that the inclusion of the gift tax paid is a 

computational element only. 

Congress enacted what is now section 2035(b) as part of an 

effort to mitigate the disparity of treatment between the taxation of lifetime transfers and transfers at death. See H.R. 

Rept. No. 94–1380, at 11 (1976), 1976–3 C.B. (Vol. 3) 735, 

264 141 UNITED STATES TAX COURT REPORTS (258) 

3 Before the enactment gifts made within three years of the donor’s 

death were merely presumed to be in contemplation of death. See H.R. 

Rept. No. 94–1380, at 12 (1976), 1976–3 C.B. (Vol. 3) 735, 746. Congress 

opted for a bright-line test in sec. 2035(b) to end the ‘‘considerable litigation concerning the motives of decedents in making gifts.’’ Id. 

745. 3 Congress imposed the gross-up provision on gift tax 

paid within three years of death because ‘‘the gift tax paid 

on a lifetime transfer which is included in a decedent’s gross 

estate is taken into account both as a credit against the 

estate tax and also as a reduction in the estate tax base, [so] 

substantial tax savings can be derived under present law by 

making so-called ‘deathbed gifts’ even though the transfer is 

subject to both taxes.’’ Id. at 12, 1976–3 C.B. (Vol. 3) at 746. 

Congress intended the gross-up rule to ‘‘eliminate any incentive to make deathbed transfers to remove an amount equal 

to the gift taxes from the transfer tax base.’’ Id. 

C. Net Gifts 

The net gift rationale flows from the basic premise that the 

gift tax applies to transfers of property only to the extent 

that the value of the property transferred exceeds the value 

in money or money’s worth of any consideration received in 

exchange therefor. See sec. 2512(b); sec. 25.2512–8, Gift Tax 

Regs. When a net gift occurs, the donor calculates his or her 

gift tax liability by reducing the amount of the gift by the 

amount of the gift tax. Estate of Morgens v. Commissioner, 

133 T.C. 402, 417 (2009), aff ’d, 678 F.3d 769 (9th Cir. 2012). 

The rationale is that ‘‘because the donee incurred the obligation to pay the tax as a condition of the gift, ‘the donor did 

not have the intent to make other than a net gift.’ ’’ Id. 

(quoting Turner v. Commissioner, 49 T.C. 356, 360–361 

(1968), aff ’d per curiam, 410 F.2d 752 (6th Cir. 1969)). In 

other words the donor reduces the value of the gift by the 

amount of the tax because the donor has received consideration for a part of the gift equal to the amount of the 

applicable gift tax. Id. 

Petitioner’s gift may be best described as a ‘‘net, net gift’’ 

because the donees agreed to pay both the resulting gift tax 

and any potential section 2035(b) estate tax. We will refer to 

petitioner’s gift in its entirety as a net gift. 

(258) STEINBERG v. COMMISSIONER 265

III. The Value of the Donees’ Assumption of the Potential 

Section 2035(b) Estate Tax 

The fundamental question posed by this case is the fair 

market value of the property rights transferred under the net 

gift agreement. Pursuant to section 25.2512–1, Gift Tax 

Regs., fair market value is the price at which such property 

would change hands between a willing buyer and a willing 

seller, neither being under any compulsion to buy or to sell 

and both having reasonable knowledge of relevant facts. All 

relevant facts and elements of value as of the time of the gift 

must be considered. Sec. 25.2512–1, Gift Tax Regs. The 

‘‘willing buyer/willing seller’’ test is the bedrock of transfer 

tax valuation. It requires us to determine what property 

rights are being transferred and on what price a willing 

buyer and a willing seller would agree for those property 

rights. 

Respondent claims that the donees’ assumption of the 

potential section 2035(b) estate tax is worthless. In particular 

respondent contends that the donees’ assumption provided no 

benefit (monetary or otherwise) to petitioner other than some 

peace of mind. Respondent thus claims that the donees’ 

assumption failed to replenish petitioner’s estate and therefore failed as consideration for a gift under the ‘‘estate depletion’’ theory of the gift tax. Respondent rests these claims in 

part on our holding in McCord v. Commissioner, 120 T.C. 358 

(2003), rev’d and remanded sub nom. Succession of McCord 

v. Commissioner, 461 F.3d 614 (5th Cir. 2006). For the following reasons we conclude that respondent is not entitled to 

summary judgment with respect to these claims. 

A. Background: Consideration and the Estate Depletion 

Theory 

As noted above, a donor need only pay gift tax on a 

transfer to the extent that the value of the property transferred exceeds the value of any consideration in money or 

money’s worth that the donor receives in exchange. To 

qualify as consideration in money or money’s worth, the 

consideration received must be reducible to value in money 

or money’s worth; consideration consisting of something 

unquantifiable, such as love and affection or the promise of 

marriage, is wholly disregarded. Sec. 25.2512–8, Gift Tax 

266 141 UNITED STATES TAX COURT REPORTS (258) 

Regs. Similarly, the relinquishment of dower, curtesy, or any 

other marital right in a spouse’s estate is not considered 

consideration in money or money’s worth. Id. A transfer 

made during the ordinary course of business, however, is per 

se made for consideration in money or money’s worth and 

thus is not subject to gift tax. See id.; see also sec. 25.2511– 

1(g)(1), Gift Tax Regs. (gift tax is not applicable to ordinary 

business transactions). 

The estate depletion theory of gift tax can be applied to 

determine what constitutes consideration in money or 

money’s worth. Under the estate depletion theory, a donor 

receives consideration in money or money’s worth only to the 

extent that the donor’s estate has been replenished. See 

Commissioner v. Wemyss, 324 U.S. at 307–308; 2 Randolph 

E. Paul, Federal Estate and Gift Taxation, para. 16.14, at 

1114–1115 (1942). The Paul treatise, cited twice with 

approval by the Supreme Court in Wemyss, further notes: 

‘‘The consideration may thus augment * * * [the donor’s] 

estate, give * * * [the donor] a new right or privilege, or discharge him from liability.’’ Paul, supra, at 1115. Thus, the 

benefit to the donor in money or money’s worth, rather than 

the detriment to the donee, determines the existence and 

amount of any consideration offset in the context of an otherwise gratuitous transfer. See Commissioner v. Wemyss, 324 

U.S. at 307–308. 

B. McCord v. Commissioner 

Respondent’s claims rely heavily on our reasoning and 

holding in McCord. In McCord the taxpayers (husband and 

wife) formed McCord Interests, Ltd., L.L.P. (MIL). The taxpayers were both class A limited partners and class B limited 

partners in MIL. The taxpayers’ four adult sons were class 

B limited partners and general partners. On formation MIL 

held stocks, bonds, real estate, oil and gas investments, and 

other closely held business interests. 

On November 20, 1995, the taxpayers assigned their 

respective class A limited partnership interests in MIL to a 

charitable organization. On January 12, 1996 (valuation 

date), the taxpayers entered into an assignment agreement, 

in which the taxpayers relinquished all dominion and control 

over their class B limited partnership interests in MIL to 

(258) STEINBERG v. COMMISSIONER 267

(1) their four sons, (2) four trusts for the benefit of their sons, 

and (3) two charitable organizations. 

Under the terms of the ‘‘formula clause’’ contained in the 

assignment agreement, the four sons and the four trusts 

were to receive the portion of the gift interest having an 

aggregate fair market value of $6,910,933. If the fair market 

value of the gift interest exceeded $6,910,933, the excess was 

to be allocated to the two charitable organizations. Importantly, the four sons—individually and as trustees of the four 

trusts—agreed to be liable for all transfer taxes (Federal gift, 

estate, and generation-skipping transfer taxes and any 

resulting State taxes) imposed on the taxpayers as a result 

of the gifts. 

On their Forms 709 for tax year 1996 both taxpayers 

reduced the gross value amounts of their respective shares of 

the gifts by the amount of Federal and State gift tax generated by the transfer, which the four sons had agreed to pay 

as a condition of the gifts. Each taxpayer further reduced 

that gross value amount by the actuarially determined value 

of the four sons’ contingent obligation to pay any estate tax 

that would result from the transaction if that taxpayer were 

to pass away within three years of the valuation date. 

The Commissioner determined, among other things, that 

the taxpayers had improperly reduced their gross value 

amounts by the actuarial value of the four sons’ obligation to 

pay any potential estate taxes arising from the transactions. 

We agreed with the Commissioner in McCord, holding that 

‘‘in advance of the death of a person, no recognized method 

exists for approximating the burden of the estate tax with a 

sufficient degree of certitude to be effective for Federal gift 

tax purposes’’. McCord v. Commissioner, 120 T.C. at 402. We 

reasoned that the taxpayers’ computation of the mortalityadjusted present value of the sons’ obligation merely demonstrated that ‘‘if one assumes a fixed dollar amount to be 

paid, contingent on a person of an assumed age not surviving 

a three-year period, one can use mortality tables and interest 

assumptions to calculate the amount that * * * an insurance 

company might demand to bear the risk that the assumed 

amount has to be paid.’’ Id. We further noted that ‘‘the dollar 

amount of a potential liability to pay the 2035 tax is by no 

means fixed; rather, such amount depends on factors that are 

subject to change, including estate tax rates and exemption 

268 141 UNITED STATES TAX COURT REPORTS (258) 

4The taxpayer husband did in fact pass away within three years of the 

gift. Succession of McCord v. Commissioner, 461 F.3d 614, 629 (5th Cir. 

amounts (not to mention the continued existence of the 

estate tax itself).’’ Id. (fn. ref. omitted). 

We thus concluded that the taxpayers were not entitled to 

treat the mortality-adjusted present values as consideration 

received for the gifts. Id. at 402–403. To support this proposition, we cited Robinette v. Helvering, 318 U.S. 184, 188–189 

(1943), which we described as holding that a ‘‘donor’s reversionary interest, contingent not only on [the] donor outliving 

[her] 30-year old daughter, but also on the failure of any 

issue of the daughter to attain the age of 21 years, is disregarded as an offset in determining the value of the gift; 

actuarial science cannot establish the probability of whether 

the daughter would marry and have children’’. McCord v. 

Commissioner, 120 T.C. at 403. 

Additionally, we suggested that the taxpayers’ reduction of 

the value of their gift failed under the estate depletion 

theory. We pointed out that a donee’s assumption of gift tax 

liability resulting from a gift provides a benefit to the donor 

in money or money’s worth that ‘‘is readily apparent and 

ascertainable, since the donor is relieved of an immediate 

and definite liability to pay such tax.’’ Id. We observed that 

‘‘[i]f that donee further agrees to pay the potential 2035 tax 

that may result from the gift, then any benefit in money or 

money’s worth from the arrangement arguably would accrue 

to the benefit of the donor’s estate (and the beneficiaries 

thereof) rather than the donor’’, and that ‘‘[t]he donor in that 

situation might receive peace of mind, but that is not the 

type of tangible benefit required to invoke net gift principles.’’ Id. 

C. Succession of McCord v. Commissioner 

The taxpayers appealed McCord to the Court of Appeals 

for the Fifth Circuit, resulting in Succession of McCord v. 

Commissioner, 461 F.3d 614. The Court of Appeals reversed 

and remanded McCord, holding, among other things, that 

there was nothing too speculative about the McCord sons’ 

legally binding assumption of the potential section 2035(b) 

estate tax 4 at the time of the gift. Id. at 629. The Court of 

Appeals noted: 

(258) STEINBERG v. COMMISSIONER 269

2006), rev’g McCord v. Commissioner, 120 T.C. 358 (2003). 

It is axiomatic contract law that a present obligation may be, and frequently is, performable at a future date. It is also axiomatic that responsibility for the future performance of such a present obligation may be 

either firmly fixed or conditional, i.e., either absolute or contingent on 

the occurrence of a future event, a ‘‘condition subsequent.’’ And, it is 

axiomatic that any conditional liability for the future performance of a 

present obligation is—to a greater or lesser degree—‘‘speculative.’’ The 

issue here, though, is not whether § 2035’s condition subsequent is 

speculative vel non, but whether it is too speculative to be applicable, a 

very elastic yardstick indeed. [Id.] 

The Court of Appeals reasoned that there are three major 

types of conditions subsequent along the ‘‘speculative continuum’’: (1) a future event that is absolutely certain to 

occur, such as the passage of time; (2) a future event that is 

not absolutely certain to occur but nevertheless may be a 

‘‘ ‘more . . . certain prophec[y]’ ’’; and (3) a possible, but lowodds, future event, which is undeniably a ‘‘ ‘less . . . certain 

prophec[y]’ ’’, such as ‘‘[a] reversion of an interest in property 

if the unmarried and childless life tenant not only survives 

the transferor, but herself bears children who live to the age 

of majority and at least one of whom survives the transferor, 

as in Robinette v. Helvering’’. Id.; see also Ithaca Trust Co. 

v. United States, 279 U.S. 151, 155 (1929) (‘‘Like all values 

* * * [the value of a remainder interest] depends largely on 

more or less certain prophecies of the future[.]’’). 

The Court of Appeals concluded that in order to determine 

whether any conditions subsequent inherent in the McCord 

sons’ assumption were too speculative, one would have to 

identify which factors ‘‘a willing buyer would * * * take into 

consideration in deciding whether it is too speculative for 

him to insist on its being used in reaching a price that the 

seller is willing to accept.’’ Succession of McCord v. Commissioner, 461 F.3d at 629. The Court of Appeals noted that if 

a condition subsequent is too speculative, then a willing 

buyer would not insist that a willing seller provide a discount 

with respect to that condition subsequent. Id. at 630. 

The Court of Appeals held, as a matter of law: ‘‘[A] willing 

buyer would insist on the willing seller’s recognition that 

* * * the effect of the three-year exposure to § 2035 estate 

taxes was sufficiently determinable as of the date of the gifts 

to be taken into account.’’ Id. at 631. In particular, the Court 

270 141 UNITED STATES TAX COURT REPORTS (258) 

5This case addresses only the issue discussed in section VII of McCord, 

which pertains to the effect of the McCord sons’ agreement to pay any sec. 

2035(b) estate tax liability incurred by their parents as a result of the 

McCord gift. 

of Appeals noted that, even though estate tax rates have 

changed and likely will change, the estate tax has not been 

repealed. The Court of Appeals thus concluded: ‘‘[T]he 

transfer tax law and its rates that were in effect when the 

gifts were made are the ones that a willing buyer would 

insist on applying in determining whether to insist on, and 

calculate, a discount for § 2035 estate tax liability.’’ Id. at 

630. 

The Court of Appeals observed that the Commissioner did 

not object to the taxpayers’ arithmetic in calculating the discount for the potential section 2035(b) estate tax liability and 

that the Commissioner did not dispute (1) the estate and gift 

tax laws and rates that were so applied, (2) the interest rate 

used to discount to present value, (3) the ages used for the 

taxpayers, or (4) the actuarially determined mortality factors 

used for determining the likelihood of the taxpayers’ deaths 

within three years of the gift. Id. 

D. Departure From McCord 

Petitioner contends that McCord was decided incorrectly 

and that the donees’ assumption of the potential section 

2035(b) estate tax liability is not worthless. We note that this 

case is not appealable to the Court of Appeals for the Fifth 

Circuit, so we are not bound to follow the Court of Appeals’ 

decision in Succession of McCord. See Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff ’d, 445 F.2d 985 (10th Cir. 

1971). 5

1. Whether the Donees’ Assumption is ‘‘Too Speculative’’ as 

a Matter of Law 

a. Our Reliance on Robinette v. Helvering 

In McCord we concluded that the McCord sons’ assumption 

of the taxpayers’ potential section 2035(b) estate tax liability 

was too speculative to be reduced to a monetary value. In 

particular, we likened the uncertainty in the McCord taxpayers’ situation—i.e., the fact that the dollar amount of the 

potential estate tax liability is not fixed because factors such 

(258) STEINBERG v. COMMISSIONER 271

as estate tax rates and exemption amounts are subject to 

change—to the uncertainty at the heart of Robinette v. 

Helvering, 318 U.S. 184. 

In Robinette a daughter (at the time childless and 

unmarried) and her mother set up two trusts. The daughter 

placed her property in a trust, creating a life estate for herself and a secondary life estate for her mother and stepfather, should she predecease them. The remainder was to go 

to the daughter’s then-unborn issue upon reaching the age of 

21; if no issue existed, the property would be distributed via 

the will of the last surviving life tenant. The mother set up 

a similar trust, giving herself a life tenancy in the trust property and giving her daughter a secondary life tenancy, should 

she predecease her daughter. She assigned the remainder to 

her daughter’s issue upon that issue’s reaching the age of 21; 

if no issue existed, the property would be distributed via the 

will of the last surviving life tenant. The daughter and her 

mother, as the taxpayers, conceded that the secondary life 

estates were gifts but argued that the values of the gifts 

should be reduced by the values of the remainders to the 

daughter’s unborn issue. 

The Supreme Court held that the taxpayers could not 

reduce the values of the gifts by the values of the reversionary remainder interest. See Robinette v. Helvering, 318 

U.S. at 188–189. The Supreme Court reasoned that there 

was no recognized method for determining the values of the 

contingent reversionary remainders, which, in the case 

of the mother’s trust, depended on not only the possibility of 

the daughter’s survivorship, but also on the death of the 

daughter without issue who failed to reach the age of 21. Id. 

at 188. The Supreme Court noted that the factors to be 

considered in fixing the values of the contingent remainders 

on the date of the gifts included: (1) whether the daughter 

would marry; (2) whether the daughter would have children; 

and (3) whether those children would reach the age of 21. Id. 

at 189. The Supreme Court concluded: ‘‘[W]e have no reason 

to believe from this record that even the actuarial art could 

do more than guess at the value here in question.’’ Id. 

Notably, the Supreme Court juxtaposed the complex 

contingent reversionary remainders in Robinette with a 

simple reversionary interest in Smith v. Shaughnessy, 318 

U.S. 176 (1943), the companion case to Robinette. In Smith 

272 141 UNITED STATES TAX COURT REPORTS (258) 

the taxpayer placed stock into a trust and then granted a life 

estate in the trust to his wife. The taxpayer set up a secondary life estate in the trust for himself should his wife predecease him. The Government conceded that the taxpayer’s 

reversionary interest, contingent on his outliving his wife, 

should be excluded from the gift as ‘‘having value which can 

be calculated by an actuarial device, and that it is immune 

from the gift tax.’’ Smith, 318 U.S. at 178. 

In Robinette the Supreme Court drew a distinction between 

the reversionary interest in Smith and the contingent reversionary remainder in Robinette, noting: 

Here unlike the Smith case the government does not concede that the 

reversionary interest of the petitioner should be deducted from the total 

value. In the Smith case, the grantor had a reversionary interest which 

depended only upon his surviving his wife, and the government conceded 

that the value was therefore capable of ascertainment by recognized 

actuarial methods. In this case, however, the reversionary interest of the 

grantor depends not alone upon the possibility of survivorship but also 

upon the death of the daughter without issue who should reach the age 

of 21 years. The petitioner does not refer us to any recognized method 

by which it would be possible to determine the value of such a contingent reversionary remainder. * * * [Robinette v. Helvering, 318 U.S. at 

188.] 

Thus, the Supreme Court expressly distinguished a simple 

contingency based on the possibility of survivorship, which 

the Court implied is ascertainable by recognized actuarial 

methods, from the complex contingency based on the possibility of survivorship plus the possibility that the unmarried 

daughter might die without issue who reach the age of 21 

years, which ‘‘was highly remote’’. Harrison v. Commissioner, 

17 T.C. at 1355 (discussing Robinette); see also Succession of 

McCord v. Commissioner, 461 F.3d at 632 n.47. 

In this case, as in McCord, the contingency in issue is 

whether petitioner would survive three years after the date 

of the gift. Like the contingency in Smith, this contingency 

is simple and based on the possibility of survivorship; it is 

not complex like the contingency in Robinette, which 

depended on multiple occurrences. The event of petitioner’s 

survival three years after the date of the gift is speculative, 

and whether it is too speculative or highly remote is a factual 

issue. 

(258) STEINBERG v. COMMISSIONER 273

b. Comparison to Murray v. United States and Estate of 

Armstrong v. United States 

In reaching our conclusion in McCord, we also considered 

Murray v. United States, 687 F.2d 386 (Ct. Cl. 1982), and 

Armstrong Trust v. United States, 132 F. Supp. 2d 421 (W.D. 

Va. 2001), aff ’d sub nom. Estate of Armstrong v. United 

States, 277 F.3d 490 (4th Cir. 2002). See McCord v. Commissioner, 120 T.C. at 400–402. We noted that neither case was 

binding on us and that the facts of both cases were ‘‘somewhat different’’ from the facts in McCord. Id. at 402. We 

‘‘agree[d] with what we believe[d] to be the basis of those two 

opinions, i.e., that, in advance of the death of a person, no 

recognized method exists for approximating the burden of the 

estate tax with a sufficient degree of certitude to be effective 

for Federal gift tax purposes.’’ Id. Our reliance on Murray 

and Estate of Armstrong is inapposite with respect to the 

case at hand. 

In Murray, a donor placed shares of stock into several revocable trusts pursuant to an instrument (dated November 29, 

1969) that obligated the trustees to pay, among other debts, 

the donor’s estate and death tax liabilities. The instrument 

stated that the trusts were revocable ‘‘ ‘during the lifetime of 

the Donor, and prior to January 2, 1970.’ ’’ Murray, 687 F.2d 

at 388. The donor passed away on January 2, 1970. 

The executors of the donor’s estate (the plaintiffs in 

Murray) argued that the obligation to pay the donor’s estate 

and death taxes rendered the gifts completely without value 

when made. The Court of Claims disagreed, reasoning that 

although the trusts’ obligation to pay the donor’s estate and 

death taxes generally could reduce the value of the gifts, the 

value of the gifts in this situation was not reducible. Id. at 

394 (citing Harrison v. Commissioner, 17 T.C. at 1354–1355). 

The Court of Claims further reasoned: ‘‘[I]t was not * * * 

[the donor’s] intent to limit the value of the gifts passing in 

trust to only that amount exceeding the value of the assets 

necessary to pay [the donor’s] estate tax liability. * * * As 

drafted, the trust agreement does not evidence any clear 

intention that the entire value of the trust assets were not 

to be considered as property passing from the donor.’’ Id. at 

394 n.13. 

274 141 UNITED STATES TAX COURT REPORTS (258) 

6The Court of Claims also noted that the executors did not present any 

evidence showing that it was possible to approximate the value of the obligation at the time of the gift. Murray v. United States, 687 F.2d 386, 395 

(Ct. Cl. 1982). 

The Court of Claims concluded that the value of the 

donor’s estate and death taxes was ‘‘highly conjectural’’ at 

the time of the gift, reasoning that (1) had the donor lived 

until 1971, the value of his estate would have reduced 

significantly because the three-year inclusion period under 

section 2035(b) would have lapsed for a particular gift made 

in 1968 and (2) for every extra year the donor lived after 

1971, the size of his estate would continue to diminish. 6 Id. 

at 394–395. 

Murray is distinguishable from the case at hand and therefore is not persuasive. Unlike the donor in Murray, who did 

not intend to reduce the value of the gifts by the amount of 

the estate tax liability, petitioner expressly intended to 

reduce the value of her gifts by the amount of estate tax 

liability assumed by the donees. Furthermore, the trusts in 

Murray assumed the donor’s entire estate tax liability that 

was to be paid at an indefinite time in the future, during 

which the donor’s estate could decrease an indefinite amount. 

The donees in this case, however, assumed only the portion 

of petitioner’s estate tax liability that could be incurred over 

a three-year span. The value of the amount of section 2035(b) 

estate tax liability in this case may be predictable. 

In Estate of Armstrong, a donor made inter vivos gifts of 

nearly all of his assets to his children. His children expressly 

declined to assume gift tax liability or potential section 

2035(b) estate tax liability with respect to the gifts. After the 

donor made the gifts, he created an irrevocable grantor trust 

(donor’s trust), from which he (as the sole beneficiary) 

received income payments. The donor’s trust assumed and 

paid all gift tax liability with respect to the gifts. The children then entered into a transferee liability agreement, in 

which they agreed to pay any additional gift tax liability 

resulting from ‘‘ ‘any proposed adjustment to the amount of 

the * * * gifts.’ ’’ Estate of Armstrong, 277 F.3d at 493. 

Although the agreement ‘‘appeared to impose on the children 

the obligation to pay any additional gift taxes’’ if the Internal 

Revenue Service (IRS) revalued the gifts, the parties actually 

(258) STEINBERG v. COMMISSIONER 275

7Presumably, the IRS assessed the children with the estate tax liability 

only after issuing transferee liability notices, which were petitioned to this 

Court. See Armstrong v. Commissioner, 114 T.C. 94 (2000). 

agreed that the donor’s trust would pay any additional gift 

taxes, while the children would be only secondarily liable. Id. 

The donor passed away within three years of granting the 

inter vivos gifts. After the donor’s death, the IRS revalued 

the gifts and increased the gift tax owed. Once again, the 

donor’s trust paid the gift tax owed and the children paid 

nothing. The IRS also determined that when the executor 

computed the value of the donor’s estate, the executor failed 

to include the gift tax paid by the donor and the donor’s trust 

with respect to the inter vivos gifts, which resulted in a sizable estate tax deficiency. Because the inter vivos gifts had 

depleted the estate’s assets, the estate was unable to pay the 

estate tax owed. Under section 6324(a)(2), the IRS assessed 

the children (as donees of the inter vivos gifts) with the 

estate tax liability to the extent of the values of the gifts they 

received. 7 The estate and the donor’s trust filed for refund, 

contending that the children’s obligation to pay additional 

gift and estate taxes as a condition of the gift substantially 

reduced the values of the gifts and thus the gift taxes owed. 

The Court of Appeals for the Fourth Circuit rejected the 

contentions of the estate and the donor’s trust. The estate 

and the donor’s trust claimed that they engaged in a net gift 

transaction when the children agreed to pay all additional 

gift taxes. The Court of Appeals distinguished the facts in 

Estate of Armstrong, 277 F.3d at 496, from a typical net gift 

agreement, in which there is no dispute that the donee is 

liable for all resulting gift taxes. The Court noted that the 

children ‘‘fully expected and intended * * * that they were 

protected from ‘having to pay taxes and expenses incurred as 

a result’ of the transactions.’’ Id. The Court of Appeals reasoned: ‘‘Any obligation of the donee to pay gift taxes that is 

speculative or illusory evidences that the obligation was not 

a true condition of the gift at the time of transfer’’. Id. at 

495. The Court of Appeals concluded that even if the children’s obligation was not speculative, the children’s agreement to pay additional gift taxes was illusory because the 

donor’s trust paid all of the gift taxes. Id. at 496. 

276 141 UNITED STATES TAX COURT REPORTS (258) 

The estate and the donor’s trust also contended that the 

amounts of the gifts should be reduced by ‘‘the amount of 

estate taxes attributable to the gift taxes that the children 

may be called upon to pay’’ because they knew at the time 

of the gift that the donor’s estate would be unable to pay the 

estate tax owed. Id. at 497–498. The Court of Appeals disagreed, concluding: ‘‘[T]here is no evidence that the children 

agreed to pay the resulting estate taxes—in the event there 

were any—as a condition of the stock transfers. Rather, the 

evidence instead shows that they intended to be protected 

from any tax liability stemming from the transfers.’’ Id. at 

498. 

Estate of Armstrong is distinguishable on its facts from the 

case at hand and therefore is not persuasive. Unlike the children in Estate of Armstrong, the donees in this case expressly 

agreed to pay both the resulting gift tax liability and any 

potential section 2035(b) estate tax liability arising from the 

net gift agreement. Moreover, unlike the Armstrong children, 

the donees in this case engaged in a bona fide net gift agreement. 

c. Fluctuation of Estate Tax Rates and Exemption Amounts 

Finally, we implied in McCord that because estate tax 

rates and exemption amounts are subject to change (and revocation altogether), it would be difficult to determine the 

amount of the potential section 2035(b) estate tax liability. 

See McCord v. Commissioner, 120 T.C. at 402–403. 

The estate tax rate (and the accompanying exemption 

amounts) is not the only tax rate subject to change. Comparing the estate tax to the capital gains tax, the Court of 

Appeals for the Fifth Circuit in Succession of McCord wrote: 

For purposes of our willing buyer/willing seller analysis, we perceive no 

distinguishable difference between the nature of the capital gains tax 

and its rates on the one hand and the nature of the estate tax and its 

rates on the other hand. Rates and particular features of both the capital 

gains tax and the estate tax have changed and likely will continue to 

change with irregular frequency; likewise, despite considerable and 

repeated outcries and many aborted attempts, neither tax has been 

repealed. Even though the final amount owed by the Taxpayer as gift 

tax * * * has yet to be finally determined (depending, as it does, on the 

final results of this case), we are satisfied that the transfer tax law and 

its rates that were in effect when the gifts were made are the ones that 

a willing buyer would insist on applying in determining whether to 

(258) STEINBERG v. COMMISSIONER 277

insist on, and calculate, a discount for § 2035 estate tax liability. 

[Succession of McCord v. Commissioner, 461 F.3d at 630.] 

The fact that the estate tax lapsed in 2010 does not undermine the Court of Appeals’ reasoning, especially given that 

the estate tax was reinstated in December 2010, see Tax 

Relief, Unemployment Insurance Reauthorization, and Job 

Creation Act of 2010, Pub. L. No. 111–312, sec. 101(a)(1), 124 

Stat. at 3298, and was extended permanently in 2012, see 

American Taxpayer Relief Act of 2012, Pub. L. No. 112–240, 

sec. 101(a)(3), (c), 126 Stat. at 2316–2318. 

Both capital gains tax rates and estate tax rates have 

changed since their introduction and are likely to change in 

the future. Just this year the capital gains tax rates for 

adjusted net capital gains changed from 15% to 20% for certain high-income individuals. See American Taxpayer Relief 

Act of 2012 sec. 102(b), 126 Stat. at 2318. Yet many courts 

have held that the fair market value of stock received by gift 

or bequest must be reduced by capital gains tax, even if there 

is no indication that the capital gains tax will be triggered 

by the donee or beneficiary in the near future. See, e.g., 

Estate of Jelke v. Commissioner, 507 F.3d 1317, 1319, 1333 

(11th Cir. 2007) (finding that the Tax Court erred by 

allowing only a partial discount for built-in capital gains tax 

liability inherent in a bequest of stock instead of allowing a 

dollar-for-dollar discount of the entire built-in capital gains 

tax ‘‘under the arbitrary assumption that * * * [the underlying corporation] is liquidated on * * * [the date of the 

bequest]’’), vacating and remanding T.C. Memo. 2005–131; 

Estate of Dunn v. Commissioner, 301 F.3d 339 (5th Cir. 2002) 

(finding that when valuing a bequest of stock, a hypothetical 

willing buyer and willing seller must assume that the underlying corporation has been liquidated on the valuation date, 

even if an actual liquidation is speculative), rev’g and 

remanding T.C. Memo. 2000–12; Estate of Jameson v. 

Commissioner, 267 F.3d 366 (5th Cir. 2001) (finding that the 

Tax Court improperly determined only a partial discount for 

capital gains tax liability inherent in a bequest of stock 

because the Tax Court failed to use a truly hypothetical 

willing buyer), vacating and remanding T.C. Memo. 1999–43; 

Eisenberg v. Commissioner, 155 F.3d 50 (2d Cir. 1998) 

(reducing a gift of stock by potential capital gains tax liabilVerDate Mar 15 2010 08:37 Feb 03, 2015 Jkt 000000 PO 00000 Frm 00020 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\STEINB~1 JAMIE
278 141 UNITED STATES TAX COURT REPORTS (258) 

8 Respondent contends that the Court of Appeals for the Second Circuit, 

to which an appeal in this case would lie, would find the donees’ assumption of petitioner’s potential sec. 2035(b) estate tax to be too speculative 

because of the Court of Appeals’ conclusion in Eisenberg v. Commissioner, 

155 F.3d 50 (2d Cir. 1998), vacating and remanding T.C. Memo. 1997–483. 

As discussed above, in Eisenberg the Court of Appeals for the Second 

Circuit held that the value of stock in a particular corporation should be 

reduced by potential capital gains tax liabilities for gift tax purposes, even 

though no liquidation or sale of the corporation was planned at the time 

of the gift. Id. at 59. The Court of Appeals determined that it was inevitable that the stock would be subject to capital gains tax, so the potential 

capital gains tax was not too speculative to be valued. See id. at 55–56, 

58–59. 

Respondent claims that because petitioner’s potential sec. 2035(b) estate 

tax liability is not inevitable, the Court of Appeals would hold that it is 

too speculative to be reduced to a monetary value. We disagree. As discussed in detail above, simply because a contingency is not inevitable does 

not make the contingency too speculative to be reduced to a monetary 

value. 9Sec. 1(h)(1) imposes tax on a taxpayer’s net capital gains for any taxable year. Sec. 1222(11) defines the phrase ‘‘net capital gains’’ as the excess of net long-term capital gain over the net short-term capital loss for 

the taxable year. Thus, a taxpayer’s net capital gains depends on the interplay between the taxpayer’s long-term capital gains and losses (which 

make up net long-term capital gains) as well as the taxpayer’s short-term 

ities even though no liquidation or sale of the corporation 

was planned and finding that potential capital gains tax is 

not too speculative to be valued because the stock will be 

subject to capital gains tax on disposition), vacating and 

remanding T.C. Memo. 1997–483. 8 This Court likewise held 

in Estate of Davis v. Commissioner, 110 T.C. 530 (1998), that 

the value of a gift of stock should be discounted for lack of 

marketability (attributed to inherent capital gains tax) 

because a willing buyer and a willing seller would take the 

built-in capital gains tax into account, even if no liquidation 

or sale of the underlying assets was contemplated at the time 

of the gift. These cases show that it is possible to fix the 

value of built-in capital gains tax on the valuation date, 

despite (1) fluctuations in the capital gains tax rates; (2) the 

potential for the capital gains tax to disappear; (3) the fact 

that there is no indication of when capital gains tax will be 

triggered by the donee or beneficiary, if ever; and (4) the fact 

that it is unknown at the time of the gift what actual amount 

of capital gains tax the donee or beneficiary would pay, if 

any. 9 We cannot foreclose the possibility that an appropriate 

(258) STEINBERG v. COMMISSIONER 279

capital gains and losses (which make up net short-term capital losses). See 

sec. 1222(6), (8). The actual amount of net capital gain that a donee or 

beneficiary will have when capital gains tax is actually triggered is therefore difficult to determine at the time of the gift or bequest. 

Furthermore, the rate of capital gains tax is based on the taxpayer’s taxable income for the tax year, which cannot be precisely determined at the 

time of gift. See sec. 1(h)(1). 10The Court of Appeals for the Eleventh Circuit referred to Succession 

of McCord as ‘‘Estate of McCord’’. 

method likewise may exist to fix the value of the potential 

section 2035(b) estate tax liability assumed by the donees in 

this case. 

We note that the Court of Appeals for the Fifth Circuit is 

not alone in considering potential tax liability in valuation 

cases. In Estate of Jelke v. Commissioner, 507 F.3d 1317, the 

Court of Appeals for the Eleventh Circuit ended a historical 

overview of discounts for built-in capital gains with a discussion of Succession of McCord. 10 Id. at 1329. Referring to 

Succession of McCord as part of the ‘‘trend’’ of cases that consider potential tax liability, the Court of Appeals wrote: ‘‘The 

Fifth Circuit [in Succession of McCord] thereby extended the 

rationale of Estate of Davis to a gift tax case involving 

contingent estate taxes.’’ Id. at 1329–1330. 

Accordingly, we agree with the conclusion of the Court of 

Appeals for the Fifth Circuit in Succession of McCord that a 

willing buyer and a willing seller in appropriate circumstances may take into account a donee’s assumption of 

potential section 2035(b) estate tax liability in arriving at a 

sale price. 

2. Estate Depletion Theory 

In McCord we also suggested that the McCord sons’ 

assumption of the potential section 2035(b) estate tax failed 

as consideration for a gift under the estate depletion theory. 

See McCord v. Commissioner, 120 T.C. at 403. In particular 

we pointed out that any benefit in money or money’s worth 

that might arise from a donee’s assumption of potential section 2035(b) estate tax ‘‘arguably would accrue to the benefit 

of the donor’s estate (and the beneficiaries thereof) rather 

than the donor.’’ Id. 

Our distinction between a benefit to the donor’s estate and 

a benefit to the donor was incorrect. For purposes of the 

280 141 UNITED STATES TAX COURT REPORTS (258) 

11 Respondent also attempts to equate the case at hand to Merrill v. 

Fahs, 324 U.S. 308 (1945), a companion case to Wemyss, and to Commissioner v. Bristol, 121 F.2d 129 (1st Cir. 1941), vacating and remanding 42 

B.T.A. 263 (1940), a case from the Court of Appeals for the First Circuit 

and a precursor to Wemyss. Both cases dealt with transfers of assets in exchange for the relinquishment of dower and other marital rights. The reasoning and conclusions in both cases are similar to those in Wemyss. 

estate depletion theory, the donor and the donor’s estate are 

inextricably bound. According to the estate depletion theory, 

whether a donor receives consideration is measured by the 

extent to which the donor’s estate is replenished by the 

consideration. See Paul, supra, at 1115. 

A donee’s assumption of potential section 2035(b) estate 

tax liability may provide a tangible benefit to the donor’s 

estate, and therefore as a matter of law it could meet the 

requirements of the estate depletion theory. Under Federal 

tax law the cost of any section 2035(b) estate tax liability is 

generally borne by the donor’s estate and not the donee of 

the gift. See secs. 2001, 2002, 2035(b), 2501. When petitioner 

gave the gifts to the donees, petitioner’s assets accrued both 

gift tax liability and potential section 2035(b) estate tax 

liability. When the donees assumed the gift tax liability, petitioner’s assets were relieved of the gift tax liability and 

therefore were replenished. Likewise, when the donees 

assumed the potential section 2035(b) estate tax liability, 

petitioner’s assets may have been relieved of the potential 

estate tax liability. This assumption, which we have determined may be reducible to a monetary value, also may have 

replenished petitioner’s assets. See Paul, supra, at 1115 (adequate and full consideration may, among other things, ‘‘discharge * * * [the donor] from liability’’). 

Respondent claims that because the entire net gift agreement was a ‘‘family type transaction’’, the donees’ assumption 

of the potential section 2035(b) estate tax liability did not 

replenish petitioner’s estate. To support this claim, 

respondent compares the situation in this case with that of 

Wemyss. 11

In Wemyss the taxpayer wished to marry a widow. The 

widow’s deceased husband had set up a trust for her on the 

condition that if she remarried, she would lose all income 

from the trust. In order to induce the widow to marry, the 

taxpayer transferred blocks of shares to her. The couple marVerDate Mar 15 2010 08:37 Feb 03, 2015 Jkt 000000 PO 00000 Frm 00023 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\STEINB~1 JAMIE
(258) STEINBERG v. COMMISSIONER 281

12When Wemyss was decided, the Revenue Act of 1932, ch. 209, 47 Stat. 

169, expressly excluded the relinquishment of dower and marital rights 

from consideration in money or money’s worth for estate tax purposes. See 

Merrill, 324 U.S. at 313. The Supreme Court in Merrill concluded that the 

exclusion applied to the gift tax as well because the gift tax and estate tax 

are ‘‘in pari materia’’ (i.e., they must be construed together). Id. at 311, 

313. 

ried shortly thereafter. The Supreme Court found that the 

transfer of shares was a gift. Importantly, the Supreme 

Court noted that ‘‘money consideration must benefit the 

donor to relieve a transfer by him from being a gift’’ and that 

‘‘[t]he section taxing as gifts transfers that are not made for 

‘adequate and full (money) consideration’ aims to reach those 

transfers which are withdrawn from the donor’s estate.’’ 

Commissioner v. Wemyss, 324 U.S. at 307. 

Unlike the taxpayer in Wemyss, petitioner may have 

received consideration—the donees’ assumption of the potential section 2035(b) estate tax liability, among other things, 

in exchange for gifts of cash and securities—that is not 

expressly excluded or otherwise disregarded from consideration by the applicable regulations. Today, section 25.2512– 

8, Gift Tax Regs., expressly excludes the relinquishment of 

dower, curtesy, or any other marital right in a spouse’s 

estate from consideration. 12 It also expressly disregards 

consideration consisting of a promise of marriage, which was 

at the heart of Wemyss, see, e.g., Estate of D’Ambrosio v. 

Commissioner, 101 F.3d 309, 315 (3d Cir. 1996) (describing 

Wemyss as determining that a ‘‘promise of marriage [is] 

insufficient consideration, for gift tax purposes, for tax-free 

transfer of property’’), rev’g and remanding, 105 T.C. 252 

(1995), because a promise of marriage is unquantifiable and 

therefore not reducible to monetary value. 

Respondent’s comparison of the case at hand to Wemyss 

thus falls flat. The donees’ assumption of potential section 

2035(b) estate tax liability may be quantifiable and reducible 

to monetary value. 

E. Conclusion 

Respondent has failed to show as a matter of law that the 

donees’ assumption of petitioner’s potential section 2035(b) 

estate tax liability cannot be consideration in money or 

money’s worth within the meaning of section 2512(b). 

282 141 UNITED STATES TAX COURT REPORTS (258) 

13 ‘‘[A] sale, exchange, or other transfer of property made in the ordinary 

course of business (a transaction which is bona fide, at arm’s length, and 

free from any donative intent), will be considered as made for an adequate 

and full consideration in money or money’s worth.’’ Sec. 25.2512–8, Gift 

Tax Regs. 

IV. Donees’ Assumption as Outside the Ordinary Course of 

Business 

Transactions within a family group are subject to special 

scrutiny, and the presumption is that a transfer between 

family members is a gift. Harwood v. Commissioner, 82 T.C. 

239, 258 (1984), aff ’d without published opinion, 786 F.2d 

1174 (9th Cir. 1986). Respondent contends that the donees’ 

assumption of the potential section 2035(b) estate tax 

liability was itself a gift because (1) the net gift agreement 

was between family members, and (2) the net gift agreement 

was not in the ordinary course of business. Respondent further claims that no part of the net gift agreement, presumably including the donees’ assumptions of the gift tax 

liability and the potential section 2035(b) estate tax liability, 

was ‘‘bona fide, at arm’s length, and free from any donative 

intent’’. 

Respondent’s claim that a transfer between family members is necessarily a gift unless it was in the ordinary course 

of business is erroneous. A transfer between family members 

that is not in the ordinary course of business may still avoid 

gift tax to the extent it is made for consideration in money 

or money’s worth. Pursuant to section 25.2512–8, Gift Tax 

Regs., a transfer made in the ordinary course of business is 

necessarily a transfer made for consideration; 13 however, not 

all transfers made for consideration are made in the ordinary 

course of business. Section 25.2511–1(g)(1), Gift Tax Regs., 

distinguishes the two: ‘‘The gift tax is not applicable to a 

transfer for a full and adequate consideration in money or 

money’s worth, or to ordinary business transactions’’. 

(Emphasis added.) Thus, a transfer not in the ordinary 

course of business may still avoid gift tax to the extent it is 

made for full and adequate consideration, regardless of 

whether the transfer was between family members. 

Additionally, respondent’s argument is undermined by 

respondent’s concession that the donees’ assumption of gift 

tax is not subject to gift tax. See also Rev. Rul. 75–72, 1975– 

(258) STEINBERG v. COMMISSIONER 283

1 C.B. 310 (providing an algebraic formula for determining 

the amount of gift tax owed on a net gift). The donees’ 

assumption of gift tax was between family members and was 

not made in the ordinary course of business, but respondent 

concedes that it was consideration in money or money’s 

worth given in exchange for petitioner’s gifts. 

We further note that nothing in the record indicates that 

the net gift agreement was not bona fide or made at arm’s 

length. Petitioner and the donees were represented by separate counsel, and the net gift agreement was the culmination 

of months of negotiation. 

V. Conclusion 

There are genuine disputes of material fact as to whether 

the donees’ assumption of petitioner’s potential section 

2035(b) estate tax liability constituted consideration in 

money or money’s worth. Respondent is not entitled to summary judgment on this issue. 

An appropriate order will be issued. 

Reviewed by the Court. 

COLVIN, FOLEY, VASQUEZ, WHERRY, HOLMES, PARIS, and 

BUCH, JJ ., agree with this opinion of the Court. 

GALE, GOEKE, KROUPA, GUSTAFSON, MORRISON, and 

LAUBER, JJ., concur in the result only. 

GOEKE, J., concurring: I agree with Judge Lauber’s concurring opinion and write separately only to point out a foreseeable valuation issue that may result from the strategy in this 

case at the time of a donor’s death. 

The Code is clear that ‘‘[t]he value of the gross estate of 

the decedent shall be determined by including * * * the 

value at the time of his death of all property, real or personal, tangible or intangible, wherever situated.’’ Sec. 

2031(a). Petitioner recognized that the donor’s legal right to 

have the donees pay any section 2035(b) estate tax liability 

is a new asset of the donor that must be included in her 

gross estate like any other contract right, indemnity right, or 

similar claim she owned at death. Petitioner’s position presumes the value of this obligation at death is the same as the 

284 141 UNITED STATES TAX COURT REPORTS (258) 

calculated value at the time the asset is created. This 

presumption is illogical. 

The estate tax liability, and therefore the indemnity right, 

is going to depend on the facts and circumstances. If the 

donor dies after three years have passed since the date of the 

gift transaction, then the value of that ‘‘new asset’’ will be 

zero (i.e., no estate tax liability arises by virtue of section 

2035(b)). If, however, the donor dies within that three-year 

period, then the indemnity right will be equal to whatever 

the estate tax liability actually is. This is in contrast to the 

value petitioner estimates with mortality table calculations. 

Consequently, the donees either could get a windfall (i.e., 

getting a gift tax discount and not paying any estate tax) or 

may end up suffering some serious repercussions necessitated by finding consideration (i.e., potentially paying a lot 

more in estate tax than is in accord with the discount they 

received). This issue is not before us now, but we should recognize the issue we create in finding the present promise to 

pay contingent estate tax may be consideration to the donor. 

LAUBER, J., agrees with this concurring opinion. 

LAUBER, J., concurring: I agree that the motion for summary judgment filed by respondent (IRS or respondent) 

should be denied, and I concur in the opinion of the Court. 

I write separately to express my views on two points. 

As a condition of receiving the gifts at issue, the donor’s 

four daughters assumed an obligation to pay any additional 

estate tax that might arise by virtue of the section 2035(b) 

‘‘gross-up’’—that is, the possibility that the gift taxes paid on 

their gifts would be included in the gross estate if the donor 

died within three years of making the gifts. I will refer to 

this contingent liability as an ‘‘obligation to pay the section 

2035(b) tax.’’ The IRS seeks summary judgment on the 

ground that the donees’ assumption of an obligation to pay 

the section 2035(b) tax cannot, as a matter of law, constitute 

‘‘consideration’’ received by the donor in exchange for the 

gifts. See sec. 2512(b). According to the IRS, therefore, the 

donees’ assumption of this liability cannot be considered as 

(258) STEINBERG v. COMMISSIONER 285

1The IRS frames the question as whether the donees’ assumption of an 

obligation to pay the section 2035(b) tax constitutes ‘‘adequate and full consideration in money or money’s worth’’ within the meaning of section 

2512(b). But if the donees’ assumption of this liability represented ‘‘an adequate and full consideration,’’ there would be no gift at all. Where, as here, 

the donor receives in exchange something less than ‘‘an adequate and full 

consideration,’’ we are required to determine ‘‘the amount by which the 

value of the [gifted] property exceed[s] the value of the consideration’’ that 

the donor actually receives. Sec. 2512(b). I will refer to the latter as ‘‘consideration’’ or ‘‘return consideration.’’ 

an offset in determining the value of the gifts for Federal gift 

tax purposes. 1

In McCord v. Commissioner, 120 T.C. 358 (2003), rev’d and 

remanded sub nom. Succession of McCord v. Commissioner, 

461 F.3d 614 (5th Cir. 2006), we resolved this issue in favor 

of the Commissioner, holding after a lengthy trial that the 

donees’ assumption of an obligation to pay the section 

2035(b) tax did not constitute ‘‘consideration’’ within the 

meaning of section 2512(b). We offered two rationales for this 

holding. First, we determined that ‘‘no recognized method 

exists for approximating the burden of the estate tax with a 

sufficient degree of certitude to be effective for Federal gift 

tax purposes.’’ McCord, 120 T.C. at 402. We analogized the 

donees’ assumption of an obligation to pay the section 

2035(b) tax to the donor’s contingent reversionary interest in 

Robinette v. Helvering, 318 U.S. 184, 188–189 (1943), which 

the Supreme Court deemed too speculative to be treated as 

an offset in determining the value of a gift. See McCord, 120 

T.C. at 401 n.49, 403. Second, we cited ‘‘the ‘estate depletion’ 

theory of the gift tax’’ as additional support for our holding. 

Id. at 403 (citing Commissioner v. Wemyss, 324 U.S. 303, 

307–308 (1945)). We reasoned that any value derived from 

the donees’ satisfaction of their obligation to pay the section 

2035(b) tax ‘‘would accrue to the benefit of the donor’s estate 

(and the beneficiaries thereof) rather than the donor.’’ Id. 

‘‘The donor in that situation,’’ we concluded, ‘‘might receive 

peace of mind, but that is not the type of tangible benefit 

required to invoke net gift principles.’’ Ibid. 

The Court’s opinion discusses at length both rationales 

advanced in McCord—the ‘‘too speculative’’ theory and the 

‘‘estate depletion’’ theory. The Court finds neither rationale 

persuasive and appears to overrule McCord, at least to the 

286 141 UNITED STATES TAX COURT REPORTS (258) 

extent it addresses the former. As explained more fully 

below, I agree that the IRS’ motion for summary judgment 

should be denied, but I disagree with the Court’s treatment 

of McCord. 

A. The ‘‘Too Speculative’’ Theory 

The argument respondent advances in support of his summary judgment motion is as follows: ‘‘The daughters’ assumption of the section 2035(b) liability does not constitute * * * 

consideration * * * within the meaning of section 2512(b) 

because it does not increase the value of petitioner’s taxable 

estate. Commissioner v. Wemyss, 324 U.S. 303, 307 (1945).’’ 

Absent from this argument is any contention that the daughters’ assumption of the section 2035(b) tax is ‘‘too speculative’’ to be considered for Federal gift tax purposes. Indeed, 

in a footnote, respondent explicitly ‘‘reserves the issue of 

whether the donees’ exposure to the executor is too speculative to quantify as a matter of law.’’ ‘‘[A]ddressing the ‘too 

speculative’ issue,’’ respondent assures us, ‘‘is not necessary’’ 

for purposes of ruling on his motion for summary judgment. 

At the summary judgment stage of this case, the Court 

thus confronts a scenario in which neither party is asking us 

to consider, or reconsider, the ‘‘too speculative’’ rationale 

articulated in McCord. By ‘‘reserving’’ this issue, respondent 

has preserved the option of advancing this argument in his 

posttrial briefs, after all evidence in the case has been heard. 

Because respondent does not urge the ‘‘too speculative’’ 

theory in support of his motion for summary judgment, and 

because respondent may end up never advancing this theory 

at all, I believe that the Court’s discussion of this point is 

premature. 

Familiar principles of judicial restraint counsel that courts 

refrain from deciding complex questions until it is absolutely 

necessary to do so. That admonition applies with particular 

force where (as here) the consequence of a premature decision would be to overrule a binding precedent. Under the 

doctrine of stare decisis, this Court should be reluctant under 

any circumstances to overrule a binding precedent. When we 

face a motion for summary judgment in which the moving 

party explicitly disclaims reliance on the rationale embraced 

by that precedent, the force of stare decisis is quite compelling. 

(258) STEINBERG v. COMMISSIONER 287

2While I cannot join the Court’s decision to overrule McCord at this 

stage of this case, I agree that the characterization of the valuation exercise as ‘‘too speculative or highly remote is a factual issue’’ properly resolved at trial, should respondent ultimately advance this contention. See 

op. Ct. p. 272. 

For these reasons, I believe that the Court’s lengthy 

discussion of the ‘‘too speculative’’ theory is unnecessary at 

the summary judgment stage of this case. I also think it 

improper to consider overruling McCord, insofar as it 

embraces the ‘‘too speculative’’ theory, until a party has 

squarely presented this issue for resolution. There is no need 

to address either of these questions in order to dispose of 

respondent’s pending motion for summary judgment. Both 

questions may appropriately be addressed, if necessary, in 

the posttrial opinion. 2

B. The ‘‘Estate Depletion’’ Theory 

To the extent that respondent relies on McCord at all in 

support of his motion for summary judgment, it is for the 

second rationale articulated in McCord—namely, the ‘‘estate 

depletion’’ theory. Here, as in McCord, respondent contends 

that the donees’ assumption of an obligation to pay the section 2035(b) tax ‘‘does not increase the value of petitioner’s 

taxable estate.’’ Because ‘‘an heir’s agreement to pay the portion of the estate tax allocable to the property received by 

that heir does not affect the size of the taxable estate,’’ that 

agreement, according to respondent, cannot constitute 

‘‘consideration,’’ as a matter of law, within the meaning of 

section 2512(b). 

In McCord v. Commissioner, 120 T.C. at 403, we reasoned 

that the only value derived by the donor (as opposed to her 

estate) from the donees’ promise was ‘‘peace of mind,’’ and we 

held that this intangible benefit was insufficient to constitute 

‘‘consideration’’ that could serve to offset the face value of the 

gifts. Here, respondent frames his ‘‘estate depletion’’ argument quite differently. In this case, respondent contends that 

the donees’ agreement to pay the section 2035(b) tax does not 

increase the value of petitioner’s taxable estate because that 

agreement operates merely as an ‘‘agreement to apportion 

the burden of the tax within the estate and, in effect, among 

the estate’s beneficiaries.’’ I will refer to this contention as 

respondent’s ‘‘apportionment clause’’ argument. 

288 141 UNITED STATES TAX COURT REPORTS (258) 

The Court properly refrains from granting summary judgment to respondent on the ‘‘estate depletion’’ issue. In the 

course of its opinion, however, the Court does not mention 

respondent’s ‘‘apportionment clause’’ argument. Because 

respondent’s ‘‘estate depletion’’ and ‘‘apportionment clause’’ 

arguments are closely intertwined, the Court’s opinion warrants clarification. 

According to respondent, the estate tax ultimately due 

from petitioner’s estate, and the assets out of which that tax 

will be paid, will be exactly the same regardless of the 

donees’ agreement to pay the section 2035(b) tax. The only 

effect of that agreement is that a portion of the estate tax— 

namely, the portion attributable to any section 2035(b) inclusion—will be paid by the donees rather than by the executor. 

But if the daughters receiving the inter vivos gifts are also 

beneficiaries of petitioner’s estate, they will bear the economic burden of the estate tax either way. They will pay the 

section 2035(b) portion of the tax under the agreement or, 

absent the agreement, they will receive a proportionately 

smaller inheritance because the section 2035(b) portion of the 

tax will have been paid by the executor. In neither case is 

the estate ‘‘replenished.’’ 

Respondent bolsters his ‘‘estate depletion’’ theory by reference to New York trust and estate law. According to 

respondent, New York statutory law would apportion the 

Federal estate tax attributable to the section 2035(b) grossup to the persons benefited by the gifts, and the statute 

would require those persons to pay that portion of the estate 

tax. The daughters’ assumption of the obligation to pay the 

section 2035(b) tax, in respondent’s view, simply memorializes an obligation they would have anyway under New York 

law. If that is true, their contractual assumption of this 

obligation arguably confers no benefit on the donor or her 

estate—respondent calls it ‘‘a worthless piece of paper,’’ and 

hence it does not constitute ‘‘consideration’’ to either of them. 

Stated differently, a ‘‘willing buyer’’ of the gifted assets 

would not regard as a negative the condition that she assume 

contingent liability for the section 2035(b) tax if she already 

bore contingent liability for the section 2035(b) tax under 

New York law. Rather, a ‘‘willing buyer’’ would agree to pay 

face value for the gifted assets, unreduced by the notional 

(258) STEINBERG v. COMMISSIONER 289

‘‘encumbrance’’ represented by the contingent section 2035(b) 

liability. 

Petitioner responds to respondent’s ‘‘apportionment clause’’ 

argument on several levels. Petitioner points out, correctly, 

that ‘‘[t]he Commissioner’s argument is grounded in his 

assumption that the [d]aughters are the beneficiaries of Mrs. 

Steinberg’s estate.’’ According to petitioner, this assumption 

‘‘is not supported by any evidence in the record and is 

entirely speculative,’’ since ‘‘the beneficiaries of Mrs. Steinberg’s estate will not be known until she dies and there is 

an estate.’’ If the daughters are beneficiaries of Mrs. Steinberg’s estate, petitioner seems to acknowledge that the 

apportionment provisions of New York law would impose on 

them the same obligation to pay the section 2035(b) tax that 

they assumed contractually in the net gift agreement. But 

petitioner contends that the donees’ contractual assumption 

of this liability nevertheless benefits the estate because the 

net gift agreement ‘‘provides an effective enforcement mechanism that does not exist under the [New York] statute.’’ 

I agree that respondent’s motion for summary judgment 

should be denied because the proper disposition of his 

‘‘apportionment clause’’ argument hinges on resolution of disputed issues of material fact. See op. Ct. p. 283. These facts 

may include the following: (1) whether petitioner’s daughters, 

at the time of the gifts, were beneficiaries under her will; (2) 

whether petitioner’s daughters, if not then beneficiaries 

under her will, should be regarded as such because they were 

the natural objects of her affection and bounty; (3) whether 

petitioner, a New York resident when she made the gifts, 

should be deemed a New York domiciliary for purposes of 

applying the New York apportionment statute; (4) whether 

the net gift agreement, as petitioner contends, ‘‘provides an 

effective enforcement mechanism that does not exist under 

the [New York] statute’’; (5) whether the bulk of petitioner’s 

assets will be subject to probate or will pass by trust or other 

nonprobate mechanism, which might affect ease of enforcement; and (6) whether any incremental enforcement benefit 

is substantial enough to constitute ‘‘consideration’’ within the 

meaning of section 2512(b). 

The Court appears to recognize that respondent, while not 

entitled to summary judgment on his ‘‘estate depletion’’ 

theory, could prevail on this theory at trial if the requisite 

290 141 UNITED STATES TAX COURT REPORTS (258) 

facts are resolved in his favor. Indeed, the proper disposition 

at trial of respondent’s ‘‘apportionment clause’’ argument 

may determine not only whether the donees’ agreement to 

pay the section 2035(b) tax constitutes ‘‘consideration,’’ but 

also the nature and outcome of the valuation exercise. If the 

only benefit accruing to petitioner and her estate from the 

donees’ agreement to pay the section 2035(b) tax is the incremental benefit the executor derives from having a contractual as well as a statutory enforcement mechanism against 

the daughters, the actuarial value of their assumption of the 

contingent section 2035(b) liability becomes essentially irrelevant. The thing to be valued in that event—the ‘‘consideration’’ received by petitioner’s estate—will be this incremental enforcement capacity enjoyed by the executor. As 

Judge Raum noted 50 years ago, we should be cautious in 

treating as statutory ‘‘consideration’’ obligations assumed in 

‘‘an intrafamily transaction’’ under ‘‘ ‘colorable family contracts.’ ’’ Estate of Woody v. Commissioner, 36 T.C. 900, 903 

(1961) (quoting Carney v. Benz, 90 F.2d 747, 749 (1st Cir. 

1937)). Assuming arguendo that the actuarial value of the 

daughters’ assumption of the contingent section 2035(b) 

liability is $5,838,540, as petitioner contends, the value of the 

incremental enforcement capacity enjoyed by the executor 

may be substantially less than that. 

In sum, the Court properly leaves the evaluation and disposition of respondent’s ‘‘apportionment clause’’ argument for 

a posttrial opinion after all the evidence in this case has been 

heard. Respondent’s motion for summary judgment should be 

denied, not because his ‘‘estate depletion’’ theory is wrong, 

but because the proper resolution of the ‘‘apportionment 

clause’’ argument underlying his ‘‘estate depletion’’ theory 

hinges on disputed issues of material fact. Because 

respondent could ultimately prevail on his ‘‘estate depletion’’ 

theory if the trial establishes the requisite facts in his favor, 

it would clearly be premature to overrule this aspect of 

McCord at the present stage of this case. That is a question 

for another day. 

GALE, GOEKE, KROUPA, GUSTAFSON, and MORRISON, JJ., 

agree with this concurring opinion. 

(258) STEINBERG v. COMMISSIONER 291

HALPERN, J., dissenting: 

I. Introduction 

Respondent has moved for summary adjudication that, in 

computing the amount of a gift, a donee’s promise to pay the 

additional Federal and State estate taxes that might arise by 

virtue of the application of section 2035(b) does not constitute 

adequate and full consideration in money or money’s worth 

within the meaning of section 2512(b). As respondent makes 

clear in replying to petitioner’s response to his motion: 

‘‘Respondent is challenging the nature of the consideration in 

this motion, * * * not the fair market value of that consideration’’. Because it is only the nature of the consideration that 

respondent is challenging, I agree with Judge Lauber that 

the discussion of the ‘‘too speculative’’ theory is unnecessary 

at this stage of this case. I further agree with him that it is 

at this time improper to consider overruling McCord v. 

Commissioner, 120 T.C. 358 (2003), rev’d and remanded sub 

nom. Succession of McCord v. Commissioner, 461 F.3d 614 

(5th Cir. 2006), insofar as it embraces that theory. I do 

believe that we should grant respondent’s motion on the 

ground that allowing a reduction of an otherwise taxable 

transfer by an actuarial estimate of the value of the estate 

tax that might result because of the application of section 

2035(b) is inconsistent with Congress’ purpose in enacting 

section 2035(b). 

II. Some Background 

Congress enacted the predecessor of section 2035(b) to 

mitigate in part a disparity between the tax bases subject to 

the gift tax and the estate tax, respectively. The gift tax base 

is ‘‘tax exclusive’’, while the estate tax base is ‘‘tax inclusive’’. 

Thus, assume a wealth transfer tax system that, from the 

first dollar, taxes all gratuitous transfers of wealth at a 

single rate, say 45%. Under such a system, the $15 million 

taxable estate of a decedent (let’s call her ‘‘mother’’) will bear 

a tax of $6,750,000, which will leave $8,250,000 to distribute 

to the decedent’s heir (daughter). The tax base against which 

the hypothetical 45% flat-rate estate tax is applied is inclusive of the tax to be paid, so that the whole of mother’s taxable estate, whether going to daughter or going to the tax 

292 141 UNITED STATES TAX COURT REPORTS (258) 

1The following table shows the gift tax and the equivalency between a 

collector, is subject to that 45% flat-rate estate tax. On the 

other hand, if, before she died, mother decided to rid herself 

of her $15 million by making a gift to daughter, she could, 

from $15 million, make a gift of $10,344,828, paying a gift 

tax of $4,655,172. Daughter would receive $2,094,828 more, 

and the tax collector would receive an equal amount less, 

than either would receive were mother to let the $15 million 

pass through her estate to daughter. The reason for the difference in result is that the gift tax base excludes the tax to 

be paid, so that only the amount of the gift is taxed, while 

the estate tax base includes the amount of tax to be paid. 

Congress was fully aware of the disparity in the transfer tax 

bases applicable for the gift tax and the estate tax when it 

enacted the predecessor of section 2035(b). See H.R. Rept. 

No. 94–1380, at 11–12 (1976), 1976–3 C.B. (Vol. 3) 735, 745– 

746. It chose to mitigate that disparity only with respect to 

gifts made within three years of death. Id. The mitigation 

mechanism is the so-called section 2035(b) gross-up rule, by 

which any gift tax paid on gifts made within three years 

before death is added to the gross estate. The report of the 

Committee on Ways and Means puts it this way: ‘‘This 

‘gross-up’ rule will eliminate any incentive to make deathbed 

tranfers [sic] to remove an amount equal to the gift taxes 

from the transfer tax base.’’ H.R. Rept. No. 94–1380, supra 

at 12, 1976–3 C.B. (Vol. 3) at 746. 

The section 2035(b) gross-up rule accomplishes Congress’ 

purpose by subjecting any gift made within the statutory 

period to taxation exactly as it would have been taxed had 

the transferred amount been part of the decedent’s gross 

estate. Thus, assume that mother had opted for a lifetime 

transfer, paying $4,655,172 in gift tax and making a gift to 

daughter of $10,344,828. Assume further that mother dies 

within three years of making the gift. Section 2035(b) would 

include in her gross estate the $4,655,172 paid in gift tax, 

which, assuming that her taxable estate equaled her gross 

estate, would attract an estate tax of $2,094,828. The sum of 

the prior gift tax paid by mother, $4,655,172, and the current 

estate tax borne by her estate, $2,094,828, equals $6,750,000, 

which is exactly what it would have been had mother made 

no gift and died possessed of $15 million. 1 Moreover, dying 

(258) STEINBERG v. COMMISSIONER 293

lifetime gift subject to a sec. 2035(b) gross up and solely a testamentary 

transfer. 

Estate tax Estate tax (sec. 

Gift tax (no prior gifts) 2035(b) applies)

Wealth $15,000,000 $15,000,000 $15,000,000 

Gift tax 4,655,172 --- 4,655,172 

Estate tax --- 6,750,000 2,094,828 

Total transfer taxes 4,655,172 6,750,000 6,750,000 

Wealth to donee/heir 10,344,828 8,250,000 8,250,000 

penniless (she either paid in tax or gave to daughter all of 

her $15 million), mother’s estate would have no funds to bear 

the estate tax, which, pursuant to section 6324(a)(2), would 

be borne by daughter, who, in effect, would have to return 

$2,094,828, to the estate to pay the estate tax, reducing 

daughter’s net benefit received from mother to $8,250,000, as 

shown supra note 1. That sum, $8,250,000, is exactly the 

sum that she would have received had mother made no lifetime gifts and had she named daughter sole beneficiary of 

her estate. Of course, if mother survives her gifts by more 

than three years, the more lenient gift tax result prevails. 

If mother opts for a lifetime transfer, she has two choices 

with respect to paying the resulting $4,655,172 gift tax: She 

can pay the tax herself, giving daughter a straight gift of 

$10,344,828, or she can make what the opinion of the Court 

describes as a net gift, giving daughter $15 million on the 

condition that daughter pay the $4,655,172 gift tax. Whether 

mother chooses to make a straight gift or she chooses to 

make a net gift, the amount of of the gift tax is the same, 

as is the amount of mother’s gift to daughter. Put generally, 

the proposition is that, in the case of a donor with a given 

sum of pretax wealth out of which she would like to make 

the maximum gift, the calculation of the maximum gift and 

the determination of the resulting gift tax is the same 

whether the donor intends a straight gift or a net gift. The 

calculation need not be difficult. The donor with some gross 

amount, G, wishing to determine the net amount, N, that, 

after paying tax at rate t, will, along with the tax, add up 

to G, can express her problem as follows: 

N + tN = G 

This equation can be restated as: 

294 141 UNITED STATES TAX COURT REPORTS (258) 

N (1 + t) = G 

and restated again as: 2

N = G/(1 + t) 

Thus, setting G equal to $15 million, N is $10,344,828, and 

by subtracting N from G, the gift tax is $4,655,172. The 

procedure described is solely about determining how much 

one can give away under a tax-exclusive gift tax at rate t. It 

is also useful to illustrate that, at any positive tax rate, t, 

and for any gross amount, G, the amount that can be given 

by gift, G/(1 + t), will always exceed the amount that can be 

transferred at death, G (1 – t). 3

III. Donee’s Agreement To Pay Section 2035(b) Liability 

Now let us suppose that mother, having opted for a lifetime transfer, transfers to daughter the whole $15 million, 

obligating daughter to pay the resulting gift tax and, further, 

making her promise to pay the estate tax that will result on 

account of section 2035(b) if mother should die within three 

years of making the gift. Has the calculus of the gift and the 

resulting gift tax changed? Certainly not because of daughter’s obligation to pay any gift tax, but what about because 

of her promise to pay any estate tax? An actuarial value can 

be assigned to that obligation. Petitioner’s attorney and her 

appraiser have written an article setting forth a method for 

valuing a donee’s obligation to pay the estate tax resulting 

from a section 2035(b) gross-up. Michael S. Arlein & William 

H. Frazier, ‘‘The Net, Net Gift’’, 147 Tr. & Est. (Arlein & 

Frazier) 25 (2008). They assume an 85-year-old donor, 

transferring $15 million to her son, the donee, on December 

31, 2007, who, in addition to agreeing to pay the gift tax, 

agrees to pay any estate tax resulting from any section 

2035(b) gross-up. They call the arrangement a net, net gift. 

—————– 

2The procedure is elaborated on in Rev. Rul. 75–72, 1975–1 C.B. 310. 

3The amount that can be given by gift, G/(1 + t), will always exceed the 

amount that can be transferred at death, G (1 – t), since: 


v:\files\2013\Arrow.eps
(258) STEINBERG v. COMMISSIONER 295

4The following table compares a gift (or a net gift) to a net, net gift. 

Gift tax Net, net gift tax Difference 

Wealth $15,000,000 $15,000,000 --- 

Sec. 2035(b) obligation --- 634,563 --- 

Net transfer 15,000,000 14,365,437 --- 

Gift tax 4,655,172 4,458,239 1$196,933 

Gift 10,344,828 9,907,198 --- 

Wealth to donee/heir 10,344,828 10,541,761 2 –196,933 

1Reduction in the amount of the gift tax. 

2Increase in the amount of wealth to donee/heir. 

Calculating an estate tax of $2,214,990, and taking into 

account mortality and present value factors, they assign a 

value of $700,515 to the donee’s obligation to pay the estate 

tax. Dividing $700,515 by $2,214,990, I calculate a discount 

factor of 31.63%, which, for convenience, I will adopt for my 

calculations. 

So, if the net, net gift form is respected, the net amount 

of mother’s lifetime transfer to daughter would be calculated 

by subtracting from the $15 million the actuarial value of 

daughter’s obligation to pay the estate tax liability resulting 

from a section 2035(b) gross-up. The calculation of the potential section 2035(b) liability is somewhat complex, because it 

is dependent on the amount of the gift tax (which determines 

the potential section 2035(b) liability), which, in turn, is 

dependent on the actuarial value of daughter’s obligation to 

pay that liability. A good idea of how the relevant calculations are done can be obtained from Arlein & Frazier, supra, 

at 31 (‘‘Valuing the IRC Section 2035(b) Liability’’). If the 

net, net gift form is respected, I calculate that, on the 

transfer of $15 million to daughter (subject to her obligation 

to pay any resulting section 2035(b) liability), the resulting 

net, net gift and net, net gift tax would be $9,907,198 and 

$4,458,239, respectively. The section 2035(b) gross-up 

amount would be $4,458,239 (the gift tax paid), giving rise 

to $2,006,208 of potential estate tax. Taking 31.63% of that 

amount results in an actuarial value of $634,563 for daughter’s obligation to pay that tax. The gift tax savings from the 

net, net gift would be $196,933. 4 If mother should die within 

three years of making the gift, the estate tax savings would 

296 141 UNITED STATES TAX COURT REPORTS (258) 

5The following table compares the estate tax for a straight gift (or a net 

gift) to the estate tax for a net, net gift. 

Net, net estate tax 

Estate tax (sec. (sec. 2035(b)

2035(b) applies) applies) Difference 

Sec. 2035(b) gross-up $4,655,172 $4,458,239 --- 

Estate tax 2,094,828 2,006,208 1$88,620 1Reduction in amount of estate tax. 

6The following table compares the total transfer taxes for a straight gift 

(or a net gift) to the total transfer taxes for a net, net gift. 

Net, net estate tax 

Estate tax (sec. (sec. 2035(b)

2035(b) applies) applies) Difference 

Wealth $15,000,000 $15,000,000 --- 

Estate tax 2,094,828 2,006,208 $88,620 

Gift tax 4,655,172 4,458,239 196,933 

Total transfer taxes 6,750,000 6,464,447 1285,553 

Wealth to donee/heir 8,250,000 8,535,553 2–285,553 1Transfer tax savings. 

2Increase in the amount of wealth to donee/heir. 

be $88,620. 5 The total transfer tax savings should she die 

within three years would be $285,553. 6

Those savings seem fundamentally at odds with Congress’ 

purpose in enacting section 2035(b); i.e., to eliminate incentives to make deathbed transfers. Daughter’s agreement to 

pay the estate tax resulting from a section 2035(b) gross-upis 

different in kind from her agreement to pay the gift tax. The 

latter obligation is a definite, fixed obligation to pay a tax 

that is presently due. When mother gives to daughter both 

a gift and the money to pay the gift tax, the economic and 

tax consequences are no different than had mother held on 

to the tax money and paid the tax herself. Moreover, whether 

mother or daughter pays the gift tax has nothing whatsoever 

to do with the amount of the gift! Daughter’s obligation to 

pay the estate tax is something else entirely. It is not an 

obligation to pay a tax that is presently due. Indeed, it is an 

obligation to pay an estate tax liability that might or might 

not eventually come due. It is, in essence, daughter’s promise 

to return to mother’s estate that portion of a gift that must 

be paid to the tax collector if it turns out that the gift was, 

in effect, mistakenly subject to the lenient (tax-exclusive) gift 

tax rules when it should have been subject to the stricter 

(258) STEINBERG v. COMMISSIONER 297

7 Indeed, petitioner’s attorney and her appraiser in their article state: 

It’s important to note that under most circumstances the donee’s assumption of the IRC Section 2035(b) liability does not actually increase 

the donee’s tax exposure. If the donee is the residuary beneficiary of the 

donor’s estate and the donor’s will directs that all estate taxes be paid 

out of the residue, the Section 2035(b) liability would be borne by [the] 

donee regardless of his assumption of the liability pursuant to the net 

gift agreement. Likewise, in the absence of a direction under the donor’s 

will, most state tax apportionment statutes would allocate the Section 

2035(b) liability to the donee. [Michael S. Arlein & William H. Frazier, 

‘‘The Net, Net Gift’’, 147 Tr. & Est. 25, 33 (2008); fn. ref. omitted.] 

8See supra note 1. 9See supra note 6. 

(tax-inclusive) estate tax rules. If daughter has to return a 

portion of the gift to mother’s estate in order to pay the 

estate tax, both daughter and the estate are in exactly the 

same positions with respect to the sum of gift tax and the 

estate tax in which they would be had mother died with an 

estate equal to the sum of the gift and the gift tax paid, 

which estate she had left entirely to daughter. 7

If the estate tax due from mother’s estate on a taxable 

estate of $15 million left to daughter is $6,750,000, 8 a lifetime transfer of $15 million to daughter subject to her obligation to pay the gift tax and any estate tax resulting from a 

section 2035(b) gross-up should, if section 2035(b) is serving 

its purpose, produce a gift tax that, when added to the 

estate’s potential section 2035(b) liability, equals $6,750,000. 

As the calculations above illustrate, that will not be so if the 

net, net gift form is respected. 9 Congress enacted section 

2035(b) to impose estate taxation on more leniently taxed 

lifetime gifts when the transferor dies within three years of 

making the gift. Allowing the transferor to assimilate the 

potential section 2035(b) liability into the net-gift rubric 

allows the transferor to render more lenient the gift taxation 

(if no section 2035(b) liability arises) and the estate taxation 

(assuming that it does arise) of the transfer. That seems an 

obvious subversion of Congress’ purpose in enacting section 

2035(b). 

Indeed, allowing the donor of a gift to reduce an otherwise 

taxable transfer by an actuarial estimate of the estate tax 

resulting from a section 2035(b) gross-up that may never 

occur has the perverse effect of incentivizing deathbed transfers. If mother believes that she has only months to live, then 

298 141 UNITED STATES TAX COURT REPORTS (258) 

if section 2035(b) is working as Congress intended, the 

imminence of death (and the resulting estate tax) should not 

be an incentive for her to make a deathbed transfer, since 

the transfer tax burden on $15 million should be the same 

whether she immediately gives $15 million to daughter or 

lets it pass through her estate. If, on the other hand, making 

a net, net gift to daughter will reduce both the gift tax and, 

if she should die as expected, the resulting estate tax, then 

there is an incentive to make a deathbed transfer. That 

cannot be what Congress intended when it enacted section 

2035(b). 

Nor should the conclusion change if mother had wealth in 

excess of $15 million that formed part of her taxable estate 

and that would have borne part of the section 2035(b) 

liability had daughter not agreed to bear that liability pursuant to the net, net gift arrangement. If mother’s wealth 

exceeded $15 million, the transfer tax savings to the estate 

on account of the net, net gift arrangement would be the 

same; only the incidence of the reduced estate tax would shift 

from someone else to daughter. 

IV. Conclusion 

If it succeeds, the net, net gift arrangement certainly 

reduces the gift tax attendant to a fixed dollar transfer, and, 

if the donor dies within the prescribed period, it also reduces 

the estate tax resulting from a section 2035(b) gross-up. I 

find it hard to believe that in enacting the predecessor of section 2035(b) to disincentivize deathbed gifts, Congress 

intended not only to encourage a contrary result but also to 

allow all gift-givers to bootstrap themselves into a better 

position with respect to the gift tax than they would be in 

if no section 2035(b) liability ever has to be paid. 

f