FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

ESTATE OF ANNE W. MORGENS, 

DECEASED, James H. Morgens,

Executor, No. 10-73698

Petitioner-Appellant, Tax Ct. No.  v. 26212-06

COMMISSIONER OF INTERNAL OPINION

REVENUE,

Respondent-Appellee. 

Appeal from a Decision of the

United States Tax Court

Argued and Submitted

December 8, 2011—San Francisco, California

Filed May 3, 2012

Before: Marsha S. Berzon and Carlos T. Bea, Circuit Judges,

and Lloyd D. George, Senior District Judge.*

Opinion by Judge Bea

*The Honorable Lloyd D. George, Senior District Judge for the U.S.

District Court for Nevada, sitting by designation. 

4651
COUNSEL

John W. Porter, Keri D. Brown, and Jeffrey D. Watters, Jr.,

Baker Botts L.L.P., Houston, Texas, for the petitionerappellant.

Gilbert S. Rothenberg, Acting Deputy Assistant Attorney

General, Jonathan S. Cohen, and Bethany B. Hauser, Washington, District of Columbia, for the respondent-appellee.

ESTATE OF MORGENS v. CIR 4653
OPINION

BEA, Circuit Judge:

The Estate of Anne W. Morgens (“the Estate”) appeals the

United States Tax Court’s decision that it owed additional

estate taxes. This case presents the question whether gift taxes

paid by the donee trustees of a Qualifying Terminable Interest

in Property (QTIP) trust, based on a 26 U.S.C. § 25191

deemed inter vivos transfer of the QTIP property within three

years of the donor’s death, must be included in the transferor’s gross estate under the so-called “gross-up rule” of

§ 2035(b). We hold that it does. We have jurisdiction under

§ 7482, and we affirm.

I. Statutory Background

This case turns on two statutory schemes within the Internal Revenue Code. The first is § 2035(b), the “gross-up rule,”

which requires that a gross estate be increased by the amount

of gift taxes paid by the decedent or her estate within three

years of her death. Section 2035 states, in relevant part:

§ 2035. Adjustments for certain gifts made within 3

years of decedent’s death.

. . .

(b) Inclusion of gift tax on gifts made during 3 years

before decedent’s death

The amount of the gross estate (determined without

regard to this subsection) shall be increased by the

amount of any tax paid under chapter 12 by the

decedent or his estate on any gift made by the dece1All subsequent Code citations are to 26 U.S.C. unless indicated otherwise. 

4654 ESTATE OF MORGENS v. CIR
dent or his spouse during the 3-year period ending

on the date of the decedent’s death.

(emphasis added). We have explained before the purpose and

structure of the gross-up rule of § 2035(b). 

Section 2035[(b)] is designed to recoup any advantage gained by so-called “death-bed” transfers in

which a taxpayer, cognizant of impending mortality,

transfers property out of her estate in order to reduce

estate tax liability. Although these inter vivos transfers incur gift tax liability, opting to transfer assets

prior to death still carries a tax advantage. Gift tax

is calculated using a tax exclusive method (the applicable rate is applied to the net gift, exclusive of gift

taxes), whereas estate taxes are calculated on a tax

inclusive method (the applicable rate is applied to

the gross estate, before taxes are deducted). Section

2035[(b)] presumes that gifts made within three

years of death are made with tax-avoidance motives

and eliminates the tax advantage for those death bed

transactions.

Brown v. United States, 329 F.3d 664, 667-68 (9th Cir. 2003)

(citations omitted).

The second statutory scheme in this case is the QTIP

regime. The QTIP is an exception to an exception to an

exception. In general, a tax is levied on the transfer of estates.

§ 2001. However, the marital deduction is an exception to this

rule, and any interest in property which passes to a surviving

spouse is not considered part of the decedent’s gross estate.

§ 2056(a). Life estates and other terminable interests are an

exception to the marital deduction. § 2056(b)(1). Finally, the

QTIP regime is an exception to the terminable interest exception to the marital deduction. A QTIP is a terminable interest

in property which has certain limiting characteristics: (1) the

surviving spouse receives all of the income from the property

ESTATE OF MORGENS v. CIR 4655
for life, distributed at least annually (a “qualifying income

interest”); (2) no person can appoint any part of the property

to any person other than the surviving spouse; and (3) the

decedent’s estate elects to treat the interest as a QTIP.

§ 2056(b)(7)(B). If an interest is a QTIP, the regime establishes a legal fiction: for the purposes of estate taxes, the

entire property is treated as if it passed to the surviving spouse

(and, consequently, nothing to the remaindermen)—even

though the surviving spouse actually possesses only the

income interest. § 2056(b)(7)(A). Therefore, the marital

deduction of § 2056(a) applies to the entire QTIP property

and the property is not included in the gross estate of the

decedent. 

The underlying premise of the QTIP regime is that the surviving spouse is deemed to receive and then give the entire

QTIP property, rather than just the income interest. The purpose of the QTIP regime is to treat the two spouses as a single

economic unit with respect to the QTIP property while still

allowing the first-to-die spouse to control the eventual disposition of the property. 

When all or part of the QTIP’s qualifying income interest

is transferred—by death of the surviving spouse (§ 2044) or

by inter vivos transfer (§ 2519)—such a transfer is deemed to

transfer the entire QTIP property, except the qualifying

income interest, which is an ordinary transfer under § 2511.

In the context of gift taxes or estate taxes, the donor is

responsible for paying the tax. § 2502. In the context of a

QTIP deemed transfer, the donor (the surviving spouse) by

definition does not possess the remainder interest in the QTIP

property; the donor possesses only the qualifying income

interest. Therefore, § 2207A gives the donor the right to

recover the tax from the QTIP beneficiaries who receive the

QTIP property transfer.

4656 ESTATE OF MORGENS v. CIR
II. Facts and Procedural History

Anne Morgens, the decedent in this case, married Howard

Morgens when she was 26 and remained married to him until

his death in January 2000. In 1991, when Mrs. Morgens was

81, she and Mr. Morgens entered into the Morgens Family

Living Trust Agreement. Under that agreement, Mr. and Mrs.

Morgens each contributed assets to a Living Trust. 

At Mr. Morgens’ death, the one-half of the community

property in the Living Trust attributable to Mrs. Morgens was

allocated to a Survivor’s Trust, and the remaining one-half

was allocated to a Residual Trust. After certain specific gifts,

the remainder of the Residual Trust was held in trust for Mrs.

Morgens’ benefit. She had the right to income for life from

the Residual Trust. The Living Trust Agreement provided

that, upon Mrs. Morgens’ death, the remainder of the Residual

Trust was to be divided into shares for the Morgens’ children

and grandchildren. 

In October 2000, Mr. Morgens’ estate tax return was filed.

On its estate tax return, Mr. Morgens’ estate satisfied the

criteria for and elected QTIP treatment for the property passing to the Residual Trust. See § 2056(b)(7). The Residual

Trust therefore qualified for the marital deduction for federal

estate tax purposes; its value was not taxed in Mr. Morgens’

estate. 

Shortly thereafter, the Residual Trust was divided into two

trusts, Residual Trust A, worth approximately $8.3 million,

and Residual Trust B, worth over $28 million. Mrs. Morgens

maintained a right to the income from both Residual Trusts,

paid at least annually. This division was not a taxable event.

However, on December 8, 2000, Mrs. Morgens relinquished her lifetime interest in the income from Residual

Trust A. The income interest vested in the trust beneficiaries,

Mrs. Morgens’ sons. Because Mr. Morgens’ estate had

ESTATE OF MORGENS v. CIR 4657
elected QTIP treatment for the Residual Trust, Mrs. Morgens’

gift of her lifetime income interest in Residual Trust A triggered a gift tax on the deemed transfer of the remainder interest in the trust to the remainder beneficiaries: the Morgens’

children and grandchildren. The gross value of the property

“treated as . . . transfer[red]” under § 2519(a)—i.e., the accelerated remainder interest in Residual Trust A—was computed

as $6,398,901. Mrs. Morgens filed a gift tax return with

respect to this transaction, reporting a net taxable gift of

$4,111,592. The remainder of the gross transfer, $2,287,309,

was paid to the Internal Revenue Service as gift tax by the

trustees of Trust A (Mrs. Morgens’ sons). 

On January 10, 2001, Mrs. Morgens relinquished her lifetime interest in the income from Residual Trust B. Like the

disposition of her interest in Residual Trust A, this gift of

Mrs. Morgens’ interest in the trust was subject to tax as a

transfer of the remainder interests in the trust to the remainder

beneficiaries. §§ 2519(a), (b)(1). The gross value of the transferred accelerated remainder interest in Residual Trust B was

computed as $21,676,289. Mrs. Morgens filed a gift tax return

with respect to this transaction, reporting a net gift of

$13,983,787. The remainder of the gross transfer, $7,692,502,

was paid as gift tax by the trustees of Trust B (again, Mrs.

Morgens’ sons).2

Mrs. Morgens died on August 25, 2002, within three years

of both her 2000 and 2001 transfers of her lifetime income

interests in each of the trusts. Her estate tax return was timely

filed (on extension) on November 24, 2003. Under the “grossup rule,” a decedent’s gross estate includes all gift taxes paid

by the decedent within three years of her death. § 2035(b).

However, the return filed by the Estate did not include, as part

of the gross estate, the gift taxes shown as paid on Mrs. Morgens’ 2000 and 2001 gift tax returns. The Commissioner

2These amounts were later revised to $21,623,964, $13,937,756, and

$7,686,208, respectively. 

4658 ESTATE OF MORGENS v. CIR
determined a deficiency based on the failure to include the

gift tax in the gross estate, and issued a notice of deficiency

accordingly. The Estate petitioned the Tax Court for a redetermination. 

Before the Tax Court, the Estate argued that the trustees

paid the gift tax on the § 2519 deemed transfers, and that

Congressional intent in enacting the QTIP regime was to shift

both the primary and the ultimate liability for the transfer

taxes from the QTIP donor to the donees. The Commissioner

argued that the transfer taxes were paid indirectly by Mrs.

Morgens for the purposes of § 2035(b), and that therefore the

taxes must be included in the gross estate. The Tax Court held

that the gift taxes paid pursuant to the QTIP rules on the gift

of QTIP property were includible in Mrs. Morgens’ estate

under § 2035(b). The Estate appealed.

III. Analysis

This court reviews de novo the Tax Court’s conclusions of

law, including its construction of the Internal Revenue Code.

Biehl v. Comm’r, 351 F.3d 982, 985 (9th Cir. 2003). 

[1] For § 2035(b) to apply to gift taxes paid on § 2519

“deemed” transfers, those taxes must be paid “by the

decedent”—that is, by Mrs. Morgens—under the language of

§ 2035(b). We conclude that they were.

[2] One possible reading of § 2035(b) suggests, at first, the

opposite conclusion. Gift taxes are included in the estate

under § 2035(b) only if they are “paid . . . by the decedent.”

If taxes are “paid by” the person who sent the check, our analysis would be simple. The Joint Stipulation of Facts, to which

the parties agreed, states that “the trustees of [the] Residual

Trust[s] paid the . . . gift tax” due on the § 2519 deemed transfers. Thus under this reading of § 2035(b), as the trustees paid

the gift tax, then the gift tax could not have been paid by the

decedent. But we are foreclosed from this analysis by DiedESTATE OF MORGENS v. CIR 4659
rich v. Comm’r, 457 U.S. 191 (1982) and by our own prior

opinion in Brown v. United States, 329 F.3d 664 (2003).

Instead, we turn for guidance to the analogous situation of the

“net gift.”

[3] A “net gift” is an arrangement where “the donor

[makes] the gift subject to the condition that the donee pay the

resulting gift tax.3 Diedrich, 457 U.S. at 196-97. For the purposes of calculating the gift tax, the value of the gift is determined by reducing the total amount transferred by the amount

of gift taxes owed. The gift tax is due only on the gift, rather

than on the gross value of the property transferred. This is

because the property is transferred with the intent and requirement that the donee pay the gift tax obligation incurred by the

donor. Accordingly, only that portion of the amount transferred that is net of the gift tax is actually intended as a gift

by the donor. Turner v. Comm’r, 49 T.C. 356, 360-61 (1968),

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

[4] “When a gift is made, the gift tax liability falls on the

donor . . . When a donor makes a gift to a donee, a ‘debt’ to

the United States for the amount of the gift tax is incurred by

the donor. Those taxes are as much the legal obligation of the

donor as the donor’s income taxes . . .” Diedrich, 457 U.S. at

197. The payment of the gift taxes by the donee is taxable

income to the donor (to the extent the gift taxes paid exceed

the donor’s adjusted basis in the property). Id. at 200-01. 

The Eighth Circuit considered the interaction of net gifts

with § 2035(b)4 in Estate of Sachs v. Comm’r, 856 F.2d 1158

3After the events in this case, the Commissioner promulgated a regulation confirming that QTIP transfers are normally taxed as net gifts. See 26

C.F.R. § 25.2519-1(c)(4). Although that regulation did not apply to this

case, both parties agree that the QTIP transfer was properly taxed as a net

gift. 

4At the time Sachs was decided, § 2035(b) was codified as § 2035(c).

For ease of reading, the statutory section will be listed as 2035(b) throughout this opinion. 

4660 ESTATE OF MORGENS v. CIR
(8th Cir. 1988). In that case, in 1978 Sachs and his wife gave

$2,399,044 of stock to three irrevocable trusts established for

their grandchildren. Id. at 1159. The donation was designed

as a net gift; the trust instrument required as a condition of the

gift that the trustees satisfy all gift-tax liability. Id. Accordingly, the donee trusts paid a gift tax of $612,700, while Sachs

and his wife reported the gift at a value of $1,786,340. Id.

Sachs died within three years of having made the gifts to the

trusts. Id. The estate recognized the value of the gift as part

of the estate under § 2035(a), which requires that the gross

estate be increased by the value of gifts made within three

years of death. Id. However, the estate did not include the

value of the gift tax paid as part of the estate.5Id. The Commissioner took the position that the $612,700 gift tax paid by

the donee trusts should be included in the estate, and the Tax

Court agreed. Id. at 1159-60. 

In a parallel argument to that of Mrs. Morgens’ estate

before us, Sachs’ estate argued to the Eighth Circuit that “the

donee’s payment of the gift tax on the . . . gift should not be

included in the gross estate under § 2035(b), on the ground

that this was not ‘a tax paid . . . by decedent or his estate.’ ”

Id. at 1163. The Eighth Circuit rejected this argument because

“the distinction between tax payments made by donees of net

gifts and tax payments made directly by decedent-donors . . .

has little force after Diedrich.” Id.

[5] The Eighth Circuit thus applied a substance-over-form

analysis to conclude that “the fact that the Internal Revenue

Service received the payment for the decedent’s gift-tax liability via the donee does not make it any less a ‘tax paid . . .

5

Initially, the estate included the gift tax paid as income to the estate

under Diedrich. Sachs, 856 F.2d at 1159. However, the Tax Reform Act

of 1984, Pub. L. 98-390, § 1026(a) forgave income tax due on gift taxes

on property transfers made before March 4, 1981. Id. Therefore, the estate

received a full refund of the income tax it had paid on the gift taxes paid

by the donee trusts. Id.

ESTATE OF MORGENS v. CIR 4661
by the decedent or his estate’ within the meaning of

§ 2035(b).” Id. at 1164. In a net gift, “the payment of the gift

tax is (or can be) made with funds from the donor’s gift, and

pursuant to the donor’s condition. The donee’s payment of the

gift tax under these circumstances is not an independent act

of gratitude or reciprocity,” as it was not in Diedrich. Id.

Thus, “the donor of a net gift uses the donee as a conduit for

the payment of the tax liability, and as donor of a net gift, he

may be deemed to have paid the tax by ordering the donee to

pay it over.” Id. (citation and quotation marks omitted). Gift

taxes paid by the donee of a net gift must be included in the

donor’s taxable income under Diedrich; similarly, gift taxes

paid by the donee of a gift made within three years of the

donor’s death must be included within the donor’s gross

estate under § 2035(b). Id. at 1164.

The Eighth Circuit also noted the purpose of § 2035(b)—to

prevent deathbed transfers from decreasing the taxable estate

—and stated that because “[t]he assets which were used to

pay the gift tax would have been part of the gross estate if the

gift had never been made . . . the entire amount of the gift tax

[is] properly included [in the estate] under § 2035(b).” Id. at

1165. Thus, that court concluded that gift tax paid by a donee

under a net gift arrangement—where the donee was obligated

to pay the gift tax—was nonetheless paid by the decedent for

the purposes of § 2035(b)’s gross-up rule.

[6] We have applied similar reasoning about a conduit of

funds in Brown v. United States, holding that when a husband

gave his wife money to pay gift taxes on an insurance trust

and the husband died within three years, the taxes were “paid

by” the husband within the meaning of § 2035(b) and thus

includible in the husband’s estate. 329 F.3d at 674. We stated

that “had [the wife] truly paid the gift tax from her own funds,

§ 2035 would not apply to Betty’s payments of the gift tax.”

Id. The source of the funds mattered, we held, because

“§ 2035(b) was designed to reverse the effect of funds transferred out of an estate within three years of death.” Id. The

4662 ESTATE OF MORGENS v. CIR
husband’s transfer of funds to his wife for payment of the gift

tax reduced his estate, and thus his estate would “escape

estate tax liability on the funds if he outlives the three-year

reach of § 2035(b). Accordingly, it is his estate that must

reverse the effect of the transfer if he dies within the threeyear period.” Id.

[7] We find the net gift analogy persuasive. As in a net

gift, the financial responsibility for the gift taxes on a QTIP

transfer rests on the donees rather than the donor, even though

the shift occurs by contract in a net gift and by the operation

of § 2207A in a QTIP transfer.6 However, as in a net gift, the

liability for the gift taxes remains with the donor. Diedrich,

457 U.S. at 197. 

[8] We find unpersuasive the Estate’s argument that

§ 2207A evinces Congressional intent to shift not only the

ultimate financial responsibility for QTIP transfers, but also

the initial tax liability for the gift tax. This argument is foreclosed both by the language of § 2207A and by the reasoning

of Diedrich. Section 2207A states that if “tax is paid . . . with

respect to any person by reason of property treated as transferred by such person under section 2519, such person shall

be entitled to recover from the person receiving the property

the amount [of tax paid].” The section does not state that tax

liability is transferred, merely that the donor, who is liable for

the tax, may recover the amount of the tax paid from the beneficiary of the deemed transfer. This is because the donor is

treated as owning the QTIP property but, pursuant to the

terms of the trust, does not fully control it, and thus cannot

6We take no position here on whether § 2207A provides a right of

recovery for the additional estate taxes owed due to the inclusion of the

gift taxes on the § 2519 deemed transfer in the gross estate under

§ 2035(b). 

We note that here, in addition to the statutory right of recovery provided

by § 2207A, the QTIP gifts here were made pursuant to indemnification

agreements which provided a contractual right of recovery, as in a net gift.

ESTATE OF MORGENS v. CIR 4663
use part of it to pay gift taxes. Absent explicit statutory revision, the liability is the donor’s no matter the transfer of the

final economic responsibility. As the Supreme Court stated in

Diedrich: “When a gift is made, the gift tax liability falls on

the donor . . . When a donor makes a gift to a donee, a ‘debt’

to the United States for the amount of the gift tax is incurred

by the donor. Those taxes are as much the legal obligation of

the donor as the donor’s income taxes.” 457 U.S. 196-97.

Whether the ability to recover funds is statutory or contractual

makes no difference as to whether the original tax liability

Diedrich’s “debt to the United States”—shifts from the donor

to a different party.

[9] As in a net gift, the QTIP trustees here paid the taxes

on the § 2519 deemed transfers of the QTIP trusts. But in so

doing, the trustees satisfied the tax liability incurred by Mrs.

Morgens in making the transfer. See Diedrich, 457 U.S. at

197. Thus, under the logic of Diedrich, as elucidated by Sachs

and Brown, the trustees acted as a conduit of funds for Mrs.

Morgens, who actually paid the gift tax for the purposes of

§ 2035(b).

This conclusion is supported by the source-of-funds logic

of Brown. Had Mrs. Morgens not made the deemed transfers

under § 2519, the entire value of the trusts—income and

remainder—would have been included in her estate under

§ 2044.7 Therefore, our conclusion that the gift taxes were

paid by Mrs. Morgens for the purposes of § 2035(b) is consistent with Brown.

7The estate also argues that the analogy to a net gift is inapposite

because the property taxed was originally Mr. Morgens’ property rather

than Mrs. Morgens’. This argument ignores the underlying premise of the

QTIP regime, that the entire QTIP property, rather than just the income

interest, is deemed to pass to, and then from, the surviving spouse. Thus,

the two spouses are treated as a single economic unit with respect to the

QTIP property while still allowing the first-to-die spouse to control the

eventual disposition of the property. The Estate cannot first use that favorable tax deferral (the § 2056 marital deduction) and then claim that the

property never actually passed to Mrs. Morgens. 

4664 ESTATE OF MORGENS v. CIR
[10] Thus, we hold Mrs. Morgens paid the gift tax on the

§ 2519 deemed transfers of the Residual Trusts and that her

estate should be increased under the gross-up rule of

§ 2035(b) by the value of the gift taxes paid.

AFFIRMED.

ESTATE OF MORGENS v. CIR 4665