Court Opinion

ID: 9489792
Source: CourtListenerOpinion
Date Created: 2023-08-05 13:24:16.434801+00
Date Added: 2024-06-11T17:53:43.082430
License: Public Domain

COWEN, Circuit Judge,
dissenting.
Today the majority holds that a tax-avoidance approach previously considered “too good to be true”1 can, at least in limited circumstances, actually be true. I respectfully dissent. The tax court’s opinion is supported by well-established case law and the plain language of the Internal Revenue Code. It should be affirmed.
I.
The value of a gross estate includes the value of all property held by the decedent on the date of death. I.R.C. § 2033. Pursuant to section 2036(a), for federal estate tax purposes the gross estate also includes any pi'operty that is the subject of an inter vivos transfer and in which the taxpayer reserves an income interest in that property until death. The sole exception authorized by section 2036(a) is a “bona fide sale” in which the transferor receives “adequate and full consideration” in exchange for the transferred property.' I.R.C. § 2036(a). The majority holds that under section 2036(a), “adequate and full consideration” must be provided merely for that portion of the taxpayer’s property interest actually transferred, rather than for the full value of the property that is the basis for the ongoing income interest.
The majority excludes from the computation of “full and adequate consideration” the value of decedent’s life interest in the transferred stock, on the grounds that D’Ambrosio retained that interest. The intended purpose of section 2036 is to prevent decedents from avoiding estate taxes by selling their property to a third party but retaining the benefits of ownership during their lives. It includes in a decedent’s gross estate the date-of-death value of
all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in the case of a bona fide sale for an adequate and full consideration in money or money’s worth), by trust or otherwise, under which he has retained for his life ... the possession or enjoyment of, or the right to the income from, the property.
I.R.C. § 2036(a). When a taxpayer makes a transfer with a retained life interest, the powerful arm of section 2036(a) pulls into the gross estate the full value of the transferred property, not merely the value of the remainder interest.
The majority accepts the view of the estate that the decedent “sold” only the remainder interest to Vaparo. This view of section 2036 sanctions tax evasion: It enables strategic segmentation of the property into multiple interests, with “adequate and full consideration” now required only for a specific transferred segment, rather than the indivisible whole. Such an interpretation of section 2036(a) thwarts its very purpose, enabling taxpayers to avoid paying estate taxes on property while retaining the income benefits of ownership. I would affirm the tax court’s holding, that “adequate and full consideration” assesses whether the consideration received is equal to the value of the property that would have remained in the estate but for the transfer, not whether it is commensurate with the value of the artfully separated portion of the property technically transferred.
II.
The well-reasoned case law construing section 2036(a) supports the ruling of the tax court. That law correctly tests the adequacy of the consideration received by a taxpayer against the amount that otherwise would be included in that taxpayer’s gross estate. The majority distinguishes these cases by focusing on irrelevant distinctions, and overlooks the commanding principle that a taxpayer who fails to convey all interests in an asset, continuing to dérive some benefit from the *319asset until death, must include' the entire asset in the taxpayer’s estate.
In Gradow v. United States, 11 Cl.Ct. 808 (1987), aff'd, 897 F.2d 516 (Fed.Cir.1990), the surviving spouse transferred her full community property interest into a trust that held all of the couple’s community property. Thereafter, the trust paid her all of the trust income during her life, and distributed the entire corpus of the trust to her son upon her death. Gradow’s executor asserted that decedent’s retained life interest was received in exchange for adequate and full consideration, so that none of the trust’s assets were includable in her gross estate. The court disagreed, holding that the consideration paid by the decedent had to cover not only the remainder interest that was left to her son in the trust, but also her half of the underlying community property.
Other courts have acknowledged and followed this rule. See United States v. Past, 347 F.2d 7 (9th Cir.1965) (consideration decedent received from trust had to be measured against the total value of the property she contributed to the trust, not only against the remainder interest in the property); United States v. Allen, 293 F.2d 916 (10th Cir.1961) (decedent who received most of trust’s income for life but before death sold her remainder interest to her children had to include the value of the trust assets corresponding to the percentage of the trust’s income that she received); Estate of Gregory v. Commissioner, 39 T.C. 1012, 1016, 1963 WL 1488 (1963) (decedent who received a life estate in exchange for transferring property to a trust failed to qualify for exception because “[t]he statute excepts only those bona fide sales where the consideration received was of a comparable value which would be includable in the transferor’s gross estate”).
The paramount purpose of section 2036(a) is to prevent the depletion of estate assets when individuals retain the use and enjoyment of those assets until death. In Commissioner v. Estate of Church, 335 U.S. 632, 69 S.Ct. 322, 93 L.Ed. 288 (1949), the Supreme Court emphatically noted that
an estate tax cannot be avoided by any trust transfer except by a bona fide transfer in which the settlor, absolutely, unequivocally, irrevocably, and without possible reservations, parts with all of his title and all of his possession and all of his enjoyment of the transferred property.
Id. at 645, 69 S.Ct. at 329. D’Ambrosio clearly fails this requirement that all title, enjoyment, and possession of the transferred property be unequivocally halted. Commenting on the forerunner to section 2036(a) more than a half century ago, the Supreme Court stated that the law
taxes not merely those interests which are deemed to pass at death according to refined technicalities of the law of property. It also taxes inter vivos transfers that are too much akin to testamentary dispositions not to be subjected to the same excise.
Helvering v. Hallock, 309 U.S. 106, 112, 60 S.Ct. 444, 448, 84 L.Ed. 604 (1940).
These cases clearly demonstrate that the concept of “adequate and full consideration,” as used in sections 2035 through 2038, must be construed with reference to the special problems posed by trying to prevent testamentary-type transfers from evading estate tax. The bona fide sale analysis, which exempts property from inclusion in the gross estate pursuant to section 2036(a), cannot focus merely on the value of the limited property interest that is sold. It must also consider the property that would otherwise be included in the decedent’s gross estate.
III.
The estate asserts that the tax court erred because it misunderstood or disregarded the “economic reality” of a sale of a remainder interest. To the contrary, it was precisely the tax court’s awareness of the economic realities of a retained interest transaction that led it to follow well-established law. Executrix D’Ambrosio alleges that Gradow is inapposite and, in any event, was erroneously decided. She states that
if the Decedent had retained and invested the dividends from the Vaparo Stock and from the annuity payments received during her life, the potential value of her gross estate as a result of the sale would be worth no less on the date of her death, than if she had never sold the remainder *320interest in the Vaparo Stock or if she had sold the entire interest in the Vaparo Stock and invested the proceeds therefrom for the rest of her life. •
Appellant's brief at 11.
This view ignores the very reason for section 2036(a). Its purpose is precisely to prevent taxpayers from retaining the practical benefits of asset ownership during their lifetime while divesting themselves for estate tax purposes of a portion of that property. As the court in Gradow correctly explained:
[The “economic reality” argument] flies squarely in the face of the Supreme Court’s analysis as to the assumptions and purposes behind § 2036(a). [T]he Court has taught that while tax limitation is perfectly legitimate, § 2036(a) is a reflection of Congress’ judgment that transfers with retained life estates are generally testamentary transactions and should be treated as such for estate tax purposes. The fond hope that a surviving spouse would take pains to invest, compound, and preserve inviolate all life income from half of a trust, knowing that it would thereupon be taxedi without his having received any lifetime benefit, is a slim basis for putting a different construction on § 2036(a) than the one heretofore consistently adopted.
11 Cl.Ct. at 815-816.
Even if the annuity decedent received were not an attempt to deplete her property for estate tax purposes, courts have consistently held that section 2036(a) does not exempt transfers of property in which the taxpayer retains an income interest in his or her underlying assets. As the Tenth Circuit concluded in Allen:
It does not seem plausible ... that Congress intended to allow such an easy avoidance of the taxable incidence befalling reserved life estates. This result would allow a taxpayer to reap the benefits of property for his lifetime and, in contemplation of death, sell only the interest entitling him to the income, thereby removing all of the property which he has enjoyed from his gross estate..'.. [I]n a situation like this, Congress meant the estate to include the corpus of the trust or, in its stead, an amount equal in value.
293 F.2d at 918 (citations omitted).
IV.
I would affirm the decision of the tax court. I respectfully dissent.

. Stock Included in Estate Despite FMV Sale of Remainder, 24 Tax'n for Law. 248 (1996).