Case Name: Estate of Frederick R. Smith, Deceased, Frederick D. Smith and Kay A. Hemingway, Personal Representatives, Petitioner v. Commissioner of Internal Revenue, Respondent
Court: United States Tax Court
Jurisdiction: United States
Decision Date: 1990-06-13
Citations: 94 T.C. 872
Docket Number: Docket No. 30821-88
Parties: Estate of Frederick R. Smith, Deceased, Frederick D. Smith and Kay A. Hemingway, Personal Representatives, Petitioner v. Commissioner of Internal Revenue, Respondent
Judges: Nims, KOrner, Hamblen, Cohen, Jacobs, Gerber, Ruwe, Whalen, and Colvin, JJ., agree with the majority opinion.
Reporter: Reports of the Tax Court of the United States
Volume: 94
Pages: 872–887

Head Matter:
Estate of Frederick R. Smith, Deceased, Frederick D. Smith and Kay A. Hemingway, Personal Representatives, Petitioner v. Commissioner of Internal Revenue, Respondent
Docket No. 30821-88.
Filed June 13, 1990.
Thomas C. Gores, Don Paul Badgley, Joseph A. McIntosh, and Douglas L. Phillips, for the petitioner.
Blake W. Ferguson and Terry W. Vincent, for the respondent.

Opinion:
OPINION
TANNENWALD, Judge:
This case is before the Court on respondent's motion for partial summary judgment in respect of the basis for determining the value of certain gifts for purposes of the estate tax.
At the time the petition was filed, petitioner's personal representatives, Frederick D. Smith and Kay A. Hemingway, resided in Seattle and Mercer Island, Washington, respectively.
On December 22, 1982, the decedent, Frederick R. Smith, made gifts of 62,199 shares of Bellingham Stevedoring Co. class B common stock. He filed a timely Federal gift tax return for the calendar year 1982 on March 23, 1983, valuing the gifts at $284,871.42 and timely paid the gift taxes thereon. Decedent died on December 5, 1984. On September 6, 1985, a timely Federal estate tax return was filed with the District Director in Seattle, Washington, in which the gifted stock was reported at the $284,871.42 value. The time to assess a gift tax deficiency expired on April 15, 1986. In his notice of deficiency, dated September 2, 1988, respondent determined an estate tax deficiency based in part upon valuing the gifted stock at $668,495 for estate tax purposes. In computing the estate tax púrsuant to section 2001(b), respondent increased the "adjusted taxable gifts" added to the taxable estate under section 2001(b)(1)(B), but did not make a corresponding increase in the amount of gift tax payable on those gifts which was subtracted from the total of the taxable estate and adjusted taxable gifts pursuant to section 2001(b)(2).
The parties agree that there is no dispute as to any material fact; therefore, we may grant partial summary judgment if a decision may be rendered as a matter of law. Rule 121(b).
The issue to be decided is the correctness of respondent's computation, particularly with respect to whether respondent may increase the value of gifts made in years which are closed to such an increase for gift tax purposes under sections 2504(c) and 6501 when calculating "adjusted taxable gifts" for estate tax purposes under section 2001(b)(1)(B).
In Ward v. Commissioner, 87 T.C. 78, 113-114 n. 12 (1986), we stated that, since there is no limitation similar to section 2504(c) on the correction of erroneously valued prior taxable gifts for estate tax purposes, "It appears that in calculating the estate tax, incorrectly valued gifts may be revalued in determining 'adjusted taxable gifts.' " That statement, however, was made in passing in the context of deciding another issue. Consequently, the instant case is one of first impression.
Section 2001(b) provides:
SEC. 2001(b). Computation of Tax. — The tax imposed by this section shall be the amount equal to the excess (if any) of—
(1) a tentative tax computed under subsection (c) on the sum of—
(A) the amount of the taxable estate, and
(B) the amount of the adjusted taxable gifts, over
(2) the aggregate amount of tax which would have been payable under chapter 12 with respect to gifts made by the decedent after December 31, 1976, if the provisions of subsection (c) (as in effect at the decedent's death) had been applicable at the time of such gifts. For purposes of paragraph (1)(B), the term "adjusted taxable gifts" means the total amount of the taxable gifts (within the meaning of section 2503) made by the decedent after December 31, 1976, other than gifts which are includable in the gross estate of the decedent.
"Adjusted taxable gifts" are determined by reference to the definition of "taxable gifts" in section 2503 which means the sum of the values of the gifts made during the taxable period, less annual exclusions and less certain deductions.
Section 2504(c) provides the limitation on revaluing prior taxable gifts for gift tax purposes as follows:
SEC. 2504(c). Valuation of Certain Gifts for Preceding Calendar Periods. — If the time has expired within which a tax may be assessed under this chapter and if a tax under this chapter has been assessed or paid for such preceding calendar period, the value of such gift made in such preceding calendar period shall, for purposes of computing the tax under this chapter for any calendar year, be the value of such gift which was used in computing the tax for the last preceding calendar period for which a tax under this chapter was assessed or paid. [Emphasis added.]
Petitioner contends that section 2504(c) should be read into the estate tax provisions to foreclose respondent from revaluing prior taxable gifts for estate tax purposes when, as is the case herein, the statute of limitations is closed for gift tax purposes. Petitioner argues that to hold otherwise would thwart the statute of limitations for assessment of gift taxes and the legislative intent in unifying the estate and gift taxes.
Respondent concedes that, under section 2504(c), gifts made in prior taxable periods cannot be revalued for gift tax purposes after a gift tax has been assessed or paid and the statute of limitations for assessment of gift tax has expired. Respondent argues, however, that section 2504(c), by its terms, prohibits revaluation of prior taxable gifts solely for gift tax purposes. We agree with respondent.
Section 2504(c) is essentially a statute of limitations provision. Such being the case, the standard for our decision has been established by the Supreme Court in Badaracco v. Commissioner, 464 U.S. 386, 391-392 (1984):
Our task here is to determine the proper construction of the statute of limitations Congress has written for tax assessments. This Court long ago pronounced the standard: "Statutes of limitation sought to be applied to bar rights of the Government, must receive a strict construction in favor of the Government." E. I. Dupont de Nemours & Co. v. Davis, 264 U.S. 456, 462 (1924). See also Lucas v. Pilliod Lumber Co., 281 U.S. 245, 249, (1930). More recently, Judge Roney, in speaking for the former Fifth Circuit, has observed that "limitations statutes barring the collection of taxes otherwise due and unpaid are strictly construed in favor of the Government." Lucia v. United States, 474 F.2d 565, 570 (1973).
As the Supreme Court did in Badaracco, we start with the language of the statute. Prior to the enactment of section 2504(c), the Commissioner was barred from assessment and collection of gift tax for a closed year, but could increase the value of gifts made in a closed year to correct gift tax liability for open years, which was based on the cumulative value of prior years' gifts. Commissioner v. Disston, 325 U.S. 442 (1945). Congress enacted section 2504(c) in 1954 to cure the uncertainty caused by respondent's ability to revalue gifts made in closed years. The statutory language of section 2504(c) establishes the value of a prior taxable gift "for purposes of computing the [gift] tax under this chapter." See page 874, supra. The legislative history explains why section 2504(c) prevents respondent from revaluing prior taxable gifts for gift tax purposes:
Due to the cumulative nature of the gift tax and the progression in gift tax rates, the tax liability for gifts in a particular year is dependent on the correct valuation of gifts in prior years. Therefore, a taxpayer's gift tax liability for 1953, for example, might be dependent on whether the valuation of a gift made in 1935 is larger, smaller, or the same as previously reported, although the statute of limitations has run on the tax paid on the 1935 transfer.
It is believed that once the value of a gift has been accepted for purposes of the tax by both the Government and the taxpayer, this value should be acceptable to both in measuring the tax to be applied to subsequent gifts. For this reason the bill provides that the value of a gift as reported on a taxable gift tax return for a prior year is to be conclusive as to the value of the gift (after the statute of limitation has run) in determining the tax rate to be applied, to subsequent gifts. This substantially increases certainty in the gift tax area. [H. Rept. 1337, 83d Cong., 2d Sess. 93 (1954)].
At the time Congress enacted section 2504(c), lifetime gifts, except gifts made in contemplation of death and transfers where the donor retained an interest or a power, had no effect on the estate tax, because the estate and gift taxes were separate taxes, and the estate tax rate did not involve cumulative lifetime gifts. Subsequently, the Tax Reform Act of 1976, Pub. L. 94-445, 90 Stat. 1525, unified the estate and gift tax rate schedules, providing progressive rates based on cumulative lifetime and deathtime transfers and a unified credit. By this action, Congress meant to "reduce the disparity of treatment between lifetime and deathtime transfers." H. Rept. 94-1380 (the Ways and Means Committee Rept. on H.R. 14844) (1976), 1976-3 C.B. (Vol. 3) 735, 745. The 1976 act did not by its terms extend the limitation of section 2504(c) to valuation of prior taxable gifts for estate tax purposes. Moreover, both the statutory language and the legislative history reveal that Congress did not place any restriction in section 2001 on valuing lifetime transfers:
The amount of gift tax payable is to be determined by applying the unified rate schedule to the cumulative lifetime taxable transfers and then subtracting the taxes payable on the lifetime transfers made for past taxable periods. [H. Rept. 94-1380, supra, 1976-3 C.B. (Vol. 3) at 747; General Explanation of Tax Reform Act of 1976 prepared by the Staff of the Joint Committee on Taxation, at 527-528 (J. Comm. Print 1976), 1976-3 C.B. (Vol. 2) 1, 539; emphasis added.]
In connection with the foregoing, it is of interest to note that, in enacting the generation-skipping tax in 1986, Congress showed that it knew how to make gift tax valuations determinative for estate tax purposes. Thus, section 2642(b)(1) provides:
SEC. 2642(b). VALUATION Rules, Etc. — Except as provided in subsection (f)—
(1) Gifts for which gift tax return filed or deemed allocation MADE. — If the allocation of the GST exemption to any property is made on a gift tax return filed on or before the date prescribed by section 6075(b) or is deemed to be made under section 2632(b)(1)—
(A) the value of such property for purposes of subsection (a) shall be its value for purposes of chapter 12 [Emphasis added.]
Petitioner argues next that since section 2001(b)(2) incorporates the definition of "taxable gift" found in section 2503 of the gift tax provisions (see page 873, supra), section 2504(c) should also be incorporated into section 2001 because it is relevant in determining the value of the taxable gifts to be included. See 20 Real Property, Probate and Trust Journal 1113, 1118-1119 (Winter 1985). Section 2001 does not refer to section 2504(c), so that petitioner's argument finds no support in the plain language of the statute or in the legislative history. It is therefore far too tenuous to persuade us that Congress intended to incorporate section 2504(c) into section 2001(b)(2) by the reference to section 2503.
Finally, petitioner argues that the doctrine of pari materia requires us to accept its position. We do not agree. Pari materia has been applied to interpret the same phrases in the gift and estate taxes concerning the same subject matter in the same way where obvious reasons do not compel divergent treatment. Merrill v. Fahs, 324 U.S. 308, 313 (1945). In the instant case, however, we are not confronted with a definitional problem as was the Supreme Court in Merrill v. Fahs, supra. Nor do we have legislative history which would indicate that section 2504(c) was enacted out of "cautious redundancy." See 324 U.S. at 312. In short, we are not persuaded that we should incorporate the provisions of section 2504(c) into section 2001 under the doctrine of pari materia, especially since a statute of limitations provision is involved. Cf. Estate of Satz v. Commissioner, 78 T.C. 1172 (1982), where we refused to utilize that doctrine to incorporate into the estate tax section 2516 which provides that, under specified circumstances, a settlement of property interests of divorcing spouses shall be deemed full and adequate consideration. But see Natchez v. United States, 705 F.2d 671, 676 (2d Cir. 1983), disagreeing with our conclusion in Satz.
We recognize that in Boatmen's First Nat. Bank of Kansas City v. United States, 705 F. Supp. 1407 (W.D. Mo. 1988), the District Court concluded that section 2504(c) should be read into the estate tax by relying on what it perceived was the legislative intent of unification and the practical problems that would arise for taxpayers if respon dent is permitted to revalue prior taxable gifts. Although the facts and arguments made in Boatmen's are similar to those before us, we respectfully disagree with that court's decision.
We are aware that taxpayers may face practical problems in attempting to prove value for estate tax purposes many years after a gift was given. These problems have been forcefully articulated by many commentators who have called for legislative correction. See 20 Real Prop., Prob. and Trust J., supra at 1120; Tax Section Recommendation No. 1980-5, Committee on Estate and Gift Taxes, 33 Tax Lawyer 1531, 1533-1536 (1980); R. Stephens, G. Maxfield and S. Lind, Federal Estate and Gift Taxation, sec. 2.01 [2] at 2-4 (1983); Covey, "Recent Developments Concerning Estate, Gift and Income Taxation," 12 Institute on Estate Planning, sec. 105.1 at 1-77 (1978). In this connection, we note that, even in the context of section 2504(c), such practical problems still remain, albeit in a narrow frame of reference, because that section is not operative if a gift tax has not been "assessed or paid." We also note that the need to contend with such problems is a one-time event where the estate tax is concerned in contrast with recurring and possibly numerous events in respect of the gift tax where gifts are made in each of several years.
In sum, however much we might agree that the presence of an estate tax counterpart of section 2504(c) would be highly desirable, courts:
are not authorized to rewrite a statute because they might deem its effect susceptible of improvement. See TVA v. Hill, 437 U.S. 153, 194-195 (1978). This is especially so when courts construe a statute of limitations, which "must receive a strict construction in favor of the Government." E. I. du Pont de Nemours & Co. v. Davis, 264 U.S., at 462 . [Badaracco v. Commissioner, 464 U.S. at 398.]
We hold that, in computing "adjustable taxable gifts" under section 2001(b)(1)(B), respondent may re-examine and adjust prior taxable gifts to reflect the value of such gifts as of the date of the gifts.
Our task is not yet completed, however. There remains the question whether, in computing the amount of the gift tax subtraction under section 2001(b)(2), petitioner is entitled to have the gift tax adjusted in conformity with the increase in value, if any, which may ultimately be determined in this case. Neither party has directly confronted this question. However, respondent suggests that the fact that the language "which would have been payable under Chapter 12" was used in section 2001(b)(2) (see page 873, supra) as opposed to the language "assessed or paid" in section 2504(c) (see page 874, supra) indicates that Congress contemplated a reconsideration of the value of prior gifts in computing "adjustable taxable gifts" under section 2001(b)(1)(B). Such argument, although perhaps not rising to the level of a concession, impliedly recognizes that the calculation of the subtraction for gift taxes under section 2001(b)(2) is not limited to the amount of gift taxes actually paid. In any event, we are persuaded that the correct disposition of the matter requires that the subtraction for gift taxes be adjusted to take into account any increase in the values of the previous gifts.
Neither the statute nor the legislative history limit the taxes payable to the amount of gift tax previously paid. The language of section 2001(b)(2), the "aggregate amount which would have been payable," and the legislative history reveal Congress' intention that the taxes payable could be increased:
At the same time, in computing the tax payable, the reduction for taxes previously paid is to be based upon the new unified rate schedule even though the gift tax imposed under present law may have been less than this amount. Thus a donor's previous taxable gifts only affect the starting point in determining the applicable rate and net tax on gifts made after Dec. 31, 1976.
The amount of estate tax is to be determined by applying the unified rate schedule to the aggregate of cumulative lifetime and deathtime transfers and then subtracting (or "offsetting") the gift taxes payable on the lifetime transfers.
[H. Rept. 94-1380 on H.R. 14844, supra, 1976-3 C.B. (Vol. 3) at 747.]
Upon reducing the gift tax rates in 1981, Congress reiterated its intention that the decedent receive full credit for taxes payable on prior taxable gifts:
Under present law, the estate tax is computed first by determining the gross estate tax and then subtracting the gift taxes payable on gifts made after 1976 (sec. 2001(b)). In order to prevent the change in rates from having a retroactive effect to gifts made prior to 1985, the reduction allowed under section 2001(b) for gift taxes attributable to gifts made after Dec. 31, 1976, will be the amount of tax which would have been payable had the gifts been subject to the rate schedule in effect upon the decedent's death. (H. Rept. 97-201 (1981), 1981-2 C.B. 352, 376; General Explanation of the Economic Recovery Tax Act of 1981 Prepared by the Staff of the Joint Committee on Taxation at 229 (J. Comm. Print 1981).]
While this history indicates that the legislative purpose was related to the situation that would otherwise have existed as a result of varying gift tax rates, we perceive no reason why another situation should be eliminated from consideration when the statutory language is sufficiently broad to include it. In this connection, we note that commentators have taken the position that such an adjustment with respect to gift taxes payable is contemplated by the statute. See Stephens, Maxfield, and Lind, supra; Covey, supra.
We hold that the subtraction for gift taxes under section 2001(b)(2) should be computed on the basis of the gift taxes payable under the applicable rate schedules in respect of the "adjusted taxable gifts" as subsequently determined in this proceeding. A contrary holding would permit respondent to collect the barred gift taxes through the imposition of a higher estate tax without an offsetting adjustment.
Our disposition of the issues discussed herein not only conforms to the statutory provisions but produces an appropriate result. Respondent is shielded from the use of section 2504(c) to permit petitioner to avoid the payment of the estate tax which is otherwise payable under section 2001(b)(1)(B); by the same token, petitioner is shielded from an indirect claim for a time-barred gift tax by virtue of a reduced offset under section 2001(b)(2).
In accordance with the foregoing, respondent's motion for partial summary judgment is granted with the indicated qualification relating to the computations of gift taxes payable.
An appropriate order will be issued.
Reviewed by the Court.
Nims, KOrner, Hamblen, Cohen, Jacobs, Gerber, Ruwe, Whalen, and Colvin, JJ., agree with the majority opinion.
Unless otherwise noted, all section references are to the Internal Revenue Code as amended and in effect at the date of the decedent's death, and any reference to a Rule is to the Tax Court Rules of Practice and Procedure.
Sec. 2001 was enacted as part of H.R. 10612, the Tax Reform Act of 1976, Pub. L. 94-456, 90 Stat. 1625. We cite the Ways and Means Committee Report on H.R. 14844, The Estate and Gift Tax Reform Bill, a bill which was not passed by either House and technically was not before the Conference Committee on the Tax Reform Act of 1976, because the conferees incorporated the explanation of sec. 2001 contained in that report relevant to the issue for decision in this case into the Conference Report. See S. Rept. 94-1236 (Conf.) (1976), 1976-3 C.B. (Vol. 3) 807, 967.
Respondent made no adjustment in this respect. See page 873, supra.
The correct valuation of the gifts is still in dispute.
Six years for substantial omissions under sec. 6501(e)(2).