Court Opinion

ID: 4330155
Source: CourtListenerOpinion
Date Created: 2018-11-13 23:31:32.565883+00
Date Added: 2024-06-11T14:47:09.452595
License: Public Domain

105 T.C. No. 18

                    UNITED STATES TAX COURT

ESTATE OF ROSE D'AMBROSIO, DECEASED, VITA D'AMBROSIO, EXECUTRIX,
   Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

    Docket No. 6724-94.           Filed September 25, 1995.

         D transferred her remainder interest in stock for
    consideration equal to the value of that interest, and
    retained an income interest in the stock for life.
    Following D's death, E did not include the stock in D's
    gross estate for Federal estate tax purposes. E argues
    that the stock is excludable from D's gross estate
    under the bona fide sale exception of sec. 2036(a),
    I.R.C., given the fact that D transferred the remainder
    interest for its fair market value. Held: D's gross
    estate includes the value of the stock at D's death,
    less the amount that D received for the remainder
    interest. The bona fide sale exception of sec.
    2036(a), I.R.C., is inapplicable to the facts at hand.
                                - 2 -

     Harvey R. Poe, for petitioner.

     Frank A. Racaniello, for respondent.

                               OPINION

     LARO, Judge:    The parties submitted this case to the Court

without trial.   Rule 122.   The Estate of Rose D'Ambrosio,

Deceased (hereinafter Decedent's estate), Vita D'Ambrosio,

Executrix (hereinafter the executrix), petitioned the Court to

redetermine respondent's determination of an $842,391 deficiency

in the Federal estate tax of Decedent's estate.    We must decide

whether Decedent's gross estate for Federal estate tax purposes

includes the value of 470 shares of preferred stock in which

Decedent retained an income interest for her life, after she

transferred the remainder interest in the stock for its fair

market value.    We hold that Decedent's gross estate includes the

date-of-death value of the stock, reduced by the value of the

consideration she received in return for the remainder interest.

Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the date of Decedent's death.

Rule references are to the Tax Court Rules of Practice and

Procedure.
                                 - 3 -

                              Background1

     VAPARO, Inc. (Vaparo), is a closely held corporation

organized under the laws of the State of New York.     Vaparo was

formed with one class of stock, one-half of which was owned by

Decedent and one-half of which was owned by her son (Son).

Vaparo was recapitalized on December 20, 1983, with three classes

of stock.   Each share of the first class, class A stock, was

assigned a par value of $1.    Each share of the second class,

class B common stock, was valued at $0.2     The third class,

noncumulative convertible preferred stock, was assigned Vaparo's

remaining value, giving each of the preferred shares a value of

$5,000.

     Immediately after Vaparo's recapitalization, its stock was

owned as follows:

                     Shares of        Shares of           Shares of
                      Class A          Class B            Preferred
Shareholder            Stock         Common Stock           Stock

Son                     50               5,000                  500
Decedent                50               5,000                  500

After the recapitalization, but before September 1, 1987,

Decedent gave away all of her Vaparo stock, less 470 shares of

     1
       The stipulations and attached exhibits are incorporated
herein by this reference. Decedent resided (and her will was
probated) in New Jersey. The executrix resided in Brooklyn, New
York, when she petitioned the Court.
     2
       Under the recapitalization, all future appreciation of
Vaparo was assigned to the class B common stock.
                               - 4 -

her preferred stock.   On September 1, 1987, when Decedent was

80 years old, she and Vaparo agreed that Vaparo would buy the

remainder interest in these 470 shares.    Under the agreement,

Decedent sold Vaparo the remainder interest and retained the

income interest in the shares for life.3   The remainder interest

in the shares was worth $1,324,014 at the time of sale, and the

total value of the shares was $2,350,000.4   Decedent received a

private annuity worth $1,324,014, in consideration for the sale.

     Decedent died on May 25, 1990, after receiving annuity

payments totaling $592,078.   Decedent never sold, relinquished,

or otherwise disposed of her income interest. Respondent

     3
       Decedent reported $23,500 in dividends from Vaparo on her
1987 Federal income tax return. For her 1988 through 1990
taxable years, Vaparo did not declare any dividends, and Decedent
did not report any dividend income from Vaparo.
     4
       The parties determined the value of the remainder interest
in Decedent's preferred shares by multiplying the shares' fair
market value by the appropriate remainder factor contained in the
actuarial tables under sec. 20.2031, Estate Tax Regs. As
stipulated by the parties: "The parties agree that this is a
correct valuation of the remainder interest in the preferred
stock." In view of this stipulation, we need not and do not
consider the value of Decedent's preferred shares from a factual
viewpoint, including the related question of whether Decedent's
reserved life estate in a noncumulative preferred stock from
which she received no dividends following the transaction at
issue actually had value. Cf. Berzon v. Commissioner, 63 T.C.
601, 618-620 (1975), affd. 534 F.2d 528 (2d Cir. 1976). The
actuarial tables are presumptively correct, and the record that
the parties agreed to does not require the conclusion that
Decedent's use of the tables is "unrealistic and unreasonable" as
in Froh v. Commissioner, 100 T.C. 1,4 (1993), affd. without
published opinion 46 F.3d 1141 (9th Cir. 1995).
                                - 5 -

determined, and reflected in her notice of deficiency, that

$1,757,922 of stock was includable in Decedent's gross estate for

Federal estate tax purposes.    This amount equals the fair market

value of 470 shares of Vaparo preferred stock ($2,350,000), less

the annuity payments received by Decedent ($592,078).   Respondent

has since conceded that the maximum amount includable in

Decedent's gross estate with respect to the preferred stock is

its $2,350,000 value, less the $1,324,014 value of the annuity.

                              Discussion

     We are faced in this case with a Federal estate planning

technique intended to remove the value of property from

Decedent's gross estate.   We must decide whether the test of

adequate and full consideration under section 2036(a) takes into

account the value of the entire property, i.e., the fee interest,

or merely the value of the remainder interest as determined under

the valuation tables prescribed by respondent.   See e.g., sec.

20.2031-7, Estate Tax Regs.    Numerous articles have been written

on this issue, and the legal commentators debate its resolution.

Compare, e.g., Dodge, 50-5th T.M., Transfers with Retained

Interests and Powers A-67 (1992) with 2 Casner, Estate Planning,

sec. 6.15.2, at 149 n.6 (5th ed. 1988 & Supp. 1993).

     Chapter 11 of the Internal Revenue Code imposes a Federal

estate tax on the transfer of the taxable estate of a decedent

who is a citizen or resident of the United States.   Secs. 2001
                                - 6 -

and 2002.   A decedent's gross estate is determined by reference

to part III of chapter 11.   Under this part, the value of the

gross estate includes the value of all property to the extent of

the decedent's interest therein on the date of death.5     Sec.

2033.

     A decedent's gross estate also includes property that is

subject to section 2036(a), which applies when a decedent makes

an inter vivos transfer of property without adequate and full

consideration and reserves an income interest in the property for

life.    Section 2036(a) provides:

          General Rule.--The value of the gross estate shall
     include the value of all property to the extent of any
     interest therein of which the decedent has at any time
     made a transfer (except in 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 * * *

            (1) the possession or enjoyment of, or the
            right to the income from, the property * * *

     Respondent argues that section 2036(a) requires that

Decedent's gross estate include the value of 470 shares of Vaparo

preferred stock, less the value of Decedent's annuity.

Respondent argues that the "bona fide sale for adequate and full

consideration" exception of section 2036(a) is inapplicable to

the facts at hand because Decedent received consideration only

     5
       This valuation is usually made at the time of death. The
executor, however, may elect to value a decedent's property as of
an alternate valuation date, e.g., 6 months after death. Sec.
2032.
                                - 7 -

for her remainder interest in the stock.     According to the

executrix, Decedent's gross estate does not include the value of

any Vaparo preferred stock because, during her life, she sold the

remainder interest in the stock for adequate and full

consideration.   The executrix argues that Gradow v. United

States, 11 Cl. Ct. 808 (1987), affd. 897 F.2d 516 (Fed. Cir.

1990), the holding of which is contrary to her position, was

wrongly decided by both the United States Claims Court and the

Court of Appeals for the Federal Circuit.

     According to the executrix' interpretation, section 2036(a)

permits a taxpayer to remove the entire value of property from

his or her gross estate by selling the remainder interest in the

property for an amount equal to the value of the remainder

interest.   We do not agree.   See Estate of Gregory v.

Commissioner, 39 T.C. 1012 (1963).      We do not believe that the

bona fide sale exception of section 2036(a) allows Decedent's

estate to avoid the Federal estate tax on the value of the

preferred stock in which Decedent retained an income interest

until her death.   We find the executrix' reliance on a private

letter ruling and technical advice memoranda misplaced.     Sec.

6110(b)(1), (j)(3) (private letter rulings and technical advice

memoranda are not precedential); Knapp v. Commissioner, 90 T.C.
                                - 8 -

430, 438 n.5 (1988), affd. 867 F.2d 749 (2d Cir. 1989).6     We also

find that the executrix is mistaken in her reliance on the

legislative history of section 2701, which was added to the

Internal Revenue Code by section 11602(a) of the Omnibus Budget

Reconciliation Act of 1990, Pub. L. 101-508, 104 Stat. 1388,

1388-491.    As observed by the U.S. Supreme Court:    "the views of

one Congress as to the construction of a statute adopted many

years before by another Congress have very little, if any,

significance."    United States v. Southwestern Cable Co., 392 U.S.

157, 170 (1968) (quoting Rainwater v. United States, 356 U.S.

590, 593 (1958)).

     In Gradow v. United States, supra, the U.S. Claims Court

applied section 2036(a) to a case with facts similar to those of

the case at hand.    In the Gradow case, the surviving spouse could

elect under her husband's will to:      (1) Receive her one-half

share of the couple's community property outright or (2) transfer

her one-half interest to a trust that would hold all of the

couple's community property, pay her all of the trust income

during her life, and distribute the trust corpus to her son upon

her death.   She made the latter choice and, following her death,

her executor included none of the trust assets in her gross

estate.   According to the executor, the estate included none of

     6
       Nor are we bound by the opinions of commentators on which
the executrix relies.
                               - 9 -

the trust's assets because the decedent's retained life interest

was received in a transfer for adequate and full consideration

under section 2036(a).   The Commissioner disagreed.   The

Commissioner determined that the decedent's gross estate included

the date-of-death value of the property which the decedent had

contributed to the trust, less the value of the consideration

that she received in return.   Agreeing with the Commissioner's

position, the Claims Court held that the value of the decedent's

transfer to the trust, namely her one-half share of the community

property, was includable in her gross estate under section

2036(a), less the value of the consideration received by her in

return for the transfer.   According to the court, the

consideration flowing from the taxpayer consisted of her half of

the community property and did not consist only of the remainder

interest that was left to her son under the trust.     The Court of

Appeals for the Federal Circuit affirmed, essentially for the

reasons stated by the Claims Court.

     In this Court, there is authority to a similar effect.    In

Estate of Gregory v. Commissioner, supra, as in the Gradow case,

the decedent's husband died and under his will gave her a

"widow's election" whether to take her separate share of the

community property outright or instead permit her share to pass

to a testamentary trust, whereby she would acquire a life

interest in all of their community property.   The decedent
                                  - 10 -

elected the life interest, with the result that her community

property worth approximately $65,000 went into the trust with her

husband's share.    The actuarial value of her income interest in

her husband's share was approximately $12,000.        The Court held

that the decedent's election was a transfer with a retained life

estate that was outside of the bona fide sale exception of

section 2036(a).    The Court compared the decedent's life interest

in her husband's share against the larger amount that she had

placed in trust.    The Court stated:      "The 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."     Id. at 1016.

     Subsequently, in United States v. Past, 347 F.2d 7 (9th Cir.

1965), the Court of Appeals for the Ninth Circuit faced a

comparable issue.    In the Past case, pursuant to a divorce

settlement, the community property of the decedent and her

husband was transferred to a trust, in which the decedent

received an income interest for life.        Citing this Court's

opinion in Estate of Gregory v. Commissioner, supra, the Court of

Appeals rejected the argument of the decedent's estate that the

decedent's transfer to the trust was excepted from section

2036(a) as a bona fide sale for adequate and full consideration.

United States v. Past, supra at 12.        Instead the court reasoned

that the consideration received by the decedent from the trust
                              - 11 -

had to be measured against the total value of the property that

she contributed to the trust, and not only against the value of

the remainder interest in the property.   Given that the decedent

transferred $243,989 in property to the trust in return for a

life estate worth approximately $143,346, the Court of Appeals

held that the decedent did not receive adequate and full

consideration under section 2036(a).   Id. at 13-14; accord

Parker v. United States, 75 AFTR 2d 2509, 95-1 USTC par. 60199

(N.D. Ga. 1995); Pittman v. United States, 878 F. Supp. 833

(E.D.N.C. 1994).

     The Court of Appeals for the Tenth Circuit used analogous

reasoning in United States v. Allen, 293 F.2d 916 (10th Cir.

1961).   In the Allen case, the decedent set up an inter vivos,

irrevocable trust in which she retained 60 percent of the income

for life, the other 40 percent passing to her two children who

were also the beneficiaries of the remainder interest.   Advised

that her retention of the life estate would cause the

attributable part of corpus (valued at approximately $900,000) to

be included in her gross estate for Federal estate tax purposes,

the decedent sold her life interest to her son for $140,000,

which was slightly greater than the $135,000 actuarial value of

the interest.   The Commissioner determined that 60 percent of the

corpus, less the $140,000 purchase price, was includable in the

decedent's gross estate.   The executors disagreed.   According to
                              - 12 -

the executors, no part of the trust corpus was includable in the

decedent's gross estate because the sale of the income interest

was for adequate and full consideration.   After the District

Court agreed with the executors' position, the Court of Appeals

for the Tenth Circuit reversed.   According to the Court of

Appeals:

           Our narrow question is thus whether the corpus of
     a reserved life estate is removed, for federal estate
     tax purposes, from a decedent's gross estate by a
     transfer at the value of such reserved life estate. In
     other words, must the consideration be paid for the
     interest transferred, or for the interest which would
     otherwise be included in the gross estate? [Id. at
     917.]

In holding that the consideration must be paid for the interest

that would otherwise be includable in the gross estate, the Court

of Appeals first acknowledged the well-settled principle that a

taxpayer may reduce his or her tax liability through any

permissible means.   The Court of Appeals then found, however,

that the decedent's transaction was not a permissible means under

this principle.   The court stated:

          It does not seem plausible, however, 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. Giving the statute a reasonable
     interpretation, we cannot believe this to be its
     intendment. It seems certain that in a situation like
     this, Congress meant the estate to include the corpus
     of the trust or, in its stead, an amount equal in
     value. [Id. at 918; citations omitted.]
                                - 13 -

     With this longstanding judicial precedent in mind, we are

not persuaded by Decedent's estate's position in the instant

case.     We conclude that the congressional mandate embodied in

section 2036(a) requires that the property in question be

included in Decedent's gross estate.     As observed by the Supreme

Court in construing a predecessor of section 2036(a) in the

context of transfers in trust:

     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. * * * [Commissioner v. Estate of
     Church, 335 U.S. 632, 645 (1949).]

The Court has also stated that section 2036(a):

     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.
     By bringing into the gross estate at his death that
     which the settlor gave contingently upon it, this Court
     fastened on the vital factor. It refused to
     subordinate the plain purposes of a modern fiscal
     measure to the wholly unrelated origins of the
     recondite learning of ancient property law. * * *
     [Helvering v. Hallock, 309 U.S. 106, 112 (1940).]

        Accordingly, the amount of consideration which is necessary

to remove property from a gross estate under the bona fide sale

exception of section 2036(a) is not determined merely by

reference to the common law definition of contractual

consideration, Merrill v. Fahs, 324 U.S. 308 (1945);
                               - 14 -

Commissioner v. Wemyss, 324 U.S. 303 (1945); Estate of Gregory v.

Commissioner, 39 T.C. at 1016, or by the rules of the law of

conveyance, Helvering v. Hallock, supra at 112; see Estate of

Hartshorne v. Commissioner, 402 F.2d 592, 595 n.4 (2d Cir. 1968),

affg. 48 T.C. 882 (1967); Estate of Frothingham v. Commissioner,

60 T.C. 211, 215-216 (1973).   Rather, the consideration received

is compared to the value of the property that would have been

included in the gross estate if the transfer had not occurred.

The bona fide sale exception applies when an interest in property

is transferred for sufficient consideration to prevent the

depletion of the transferor's gross estate for Federal estate tax

purposes.   See Estate of Gregory v. Commissioner, supra.

     In the instant case, we conclude that Decedent's transfer of

the remainder interest in her preferred stock does not fall

within the bona fide sale exception of section 2036(a).

Decedent's gross estate would be depleted if the value of the

preferred stock, in which she had retained a life interest, was

excluded therefrom.   Decedent's transfer of the remainder

interest was of a testamentary nature, made when she was 80 years

old to a family-owned corporation in return for an annuity worth

more than $1 million less than the stock itself.   Given our

conclusion that Decedent did not receive adequate and full

consideration under section 2036(a) for her 470 shares of Vaparo

preferred stock, we hold that her gross estate includes the date
                             - 15 -

of death value of that stock, less the value of the annuity.

Sec. 2043(a); sec. 20.2043-1(a), Estate Tax Regs.    In so holding,

we have considered all arguments made by the executrix and, to

the extent not discussed above, have found them to be without

merit.

     To reflect concessions by the parties,

                                        Decision will be entered

                                   under Rule 155.