07-5370-ag
Estate of Stewart v. Comm’r
1
2 UNITED STATES COURT OF APPEALS
3
4 FOR THE SECOND CIRCUIT
5
6 ____________________________________
7
8 August Term, 2008
9
10 (Argued: November 20, 2008 Decided: August 9, 2010)
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12 Docket No. 07-5370-ag
13 ____________________________________
14
15 ESTATE of MARGOT STEWART, Deceased
16 BRANDON STEWART, Executor
17
18 Petitioner-Appellant,
19
20 v.
21
22 COMMISSIONER OF INTERNAL REVENUE,
23
24 Respondent-Appellee.
25
26 ____________________________________
27
28 Before: McLAUGHLIN, CALABRESI, and LIVINGSTON, Circuit Judges.
29 ____________________________________
30
31 Appeal from a judgment of the United States Tax Court holding that a 49% interest in a
32 five-story New York house was includible in Margot Stewart’s gross estate pursuant to 26
33 U.S.C. § 2036, and finding a $398,857.00 estate tax deficiency for the year 2000. We VACATE
34 the judgment below and REMAND this case to the Tax Court. Judge Livingston dissents in a
35 separate opinion.
36
37 JENNIFER S. SMITH (Jerry D. Bernstein, on the brief), Blank
38 Rome LLP, New York, N.Y., for Petitioner-Appellant.
39
40 RANDOLPH L. HUTTER (Jonathan S. Cohen, on the brief) for
41 Nathan J. Hochman, Assistant Attorney General, Tax Division,
1
1 U.S. Department of Justice, Washington, D.C., for Respondent-
2 Appellee.
3
4 ____________________________________
5
6
7
8 CALABRESI, Circuit Judge:
9 Decedent, Margot Stewart, gave a 49% share of a mixed-use building to her son Brandon
10 Stewart (“Brandon”). Upon Margot Stewart’s death, the Internal Revenue Service sought to
11 include this gift in Margot Stewart’s estate under 26 U.S.C. § 2036(a)(1), reasoning that Margot
12 Stewart had “retained for [her] life . . . the possession or enjoyment of, or the right to the income
13 from the property.” The Tax Court, T.C. Memo 2006-225, 92 T.C.M. (CCH) 357, agreed.
14 Petitioner-Appellant Estate of Margot Stewart (the “Estate”) appeals that decision, arguing that
15 Decedent did not retain a lifetime interest in the 49% share and that there was no implied
16 agreement that Decedent would retain enjoyment of the 49% share. The Commissioner contends
17 that the Tax Court’s decision was correct. We do not disturb the Tax Court’s finding that an
18 implied agreement existed, but we hold that the Tax Court clearly erred in finding that the terms
19 of the implied agreement provided that Decedent would retain enjoyment of the entire 49%
20 share, and that the entire property should remain in the Estate. We therefore VACATE the
21 judgment below and REMAND this case for further proceedings consistent with this opinion.
22 Facts
23 I. The Two Properties
24 Since 1989, Decedent Margot Stewart and her adult son Brandon Stewart co-owned, as
25 joint tenants with rights of survivorship, a house in East Hampton, New York (the “East
2
1 Hampton property”). Each summer, Decedent and Brandon rented out the East Hampton
2 property, splitting the rental income evenly. As a matter of expediency and convenience,
3 Decedent and Brandon would not both sign the lease; nor would they ask the summer tenant to
4 send two different rent checks, one to Decedent and one to Brandon. Rather, in different years,
5 either Decedent or Brandon would sign the lease to rent out the property, and the tenant would
6 write a single check either to Decedent or to Brandon. Whoever received the rent checks that
7 year would then, every few months, write a check to the other for that person’s share. Decedent
8 and Brandon also split evenly the expenses of maintaining the East Hampton property. The
9 result was that every summer each of Decedent and Brandon received half of the East Hampton
10 property’s net income.
11 At all times relevant to this appeal, Decedent and Brandon lived on the first two floors of
12 a five-story brownstone in Manhattan (the “Manhattan property”), which Decedent had bought
13 in 1968. On October 1, 1999, Decedent leased the upper three floors to an unrelated commercial
14 tenant, Financial Solutions, Ltd. (“Financial Solutions”). The rent was $9,000 per month, and
15 the term ran through July 31, 2002.
16 II. The Gift
17 On October 1, 1999, Decedent and Brandon met with Attorney Frederick Walker, an
18 estate planning specialist, for the purpose of reviewing the Financial Solutions lease. According
19 to Walker’s testimony, Decedent asked him what to do about the appreciation in the value of the
20 Manhattan property, and Walker suggested that Decedent make a gift of part of the Manhattan
21 property to Brandon. Decedent then said that she wanted to give Brandon half of the Manhattan
22 property along with half of the rent. This account is corroborated by Walker’s contemporaneous
3
1 diary, which says that Decedent wanted “to give son one-half of building and rent.” Walker,
2 Decedent, and Brandon met again the next day so that Decedent and Brandon could pick up the
3 lease and further discuss the gift possibility with Walker.
4 Decedent was diagnosed with pancreatic cancer in December 1999, and she began
5 chemotherapy treatments in January 2000. On May 9, 2000, Decedent and Brandon signed a
6 deed that transferred a 49% interest in the Manhattan Property to Brandon. 1 The deed provided
7 that Decedent and Brandon would be tenants in common.
8 III. After the Gift
9 After the gift was completed, Decedent and Brandon continued to live together in the
10 lower two floors of the Manhattan property. Financial Solutions continued to rent the upper
11 three floors, but its rent payments were erratic, untimely, and sometimes partial. 2 In addition,
12 according to Brandon’s testimony (which is corroborated by financial documentation), the
13 Manhattan property underwent thousands of dollars worth of repairs. As a result, the Manhattan
1
Below, the Commissioner argued that the gift was not completed until after Decedent’s
death, because the deed had not yet been recorded. The Tax Court rejected this argument, Estate
of Stewart, 2006 Tax Ct. Memo LEXIS 230, at *3-*4, and the Commissioner does not cross-
appeal that determination. Accordingly, for our purposes, the transfer of the 49% interest in the
Manhattan property occurred on May 9, 2000.
2
Eventually, on or about August 30, 2001, Financial Solutions defaulted on the lease and
was evicted.
4
1 property expenses were significantly higher than usual, at the same time that the income
2 produced by the property became unreliable.
3 Against this backdrop, the financial relationship between Decedent and Brandon
4 underwent several significant changes during the period after the gift and before Decedent’s
5 death. 3 While Decedent continued to receive the Manhattan property rent payments from
6 Financial Solutions, Brandon received the rent payments from the tenant in the East Hampton
7 property. In contrast to their previous practice, Brandon never wrote a check to Decedent for her
8 share of the East Hampton rent. Decedent, who had previously paid for all Manhattan property
9 expenses, now paid for most of them, with Brandon paying a small but not insignificant fraction.
10 The Tax Court found that Decedent paid Manhattan property expenses of $21,790.85, while
11 Brandon paid Manhattan expenses of $1,963. The record supports these findings; every one of
12 these payments is accounted for in Brandon’s and Decedent’s bank statements, and the numbers
13 add up.
14 IV. Decedent’s Death and Tax Consequences
3
Brandon testified that he and Decedent made an oral agreement to reconcile the income
and expenses from the Manhattan Property and the East Hampton property. He also testified that
after May 9, 2000, he spent twice as much time managing the Manhattan property tenant and
repairs as he previously had. We will disregard this testimony because the Tax Court found it
“not credible,” and there is no basis for us to disturb this credibility determination on appeal.
See Anderson v. City of Bessemer City, 470 U.S. 564, 575 (1985); Ceraso v. Motiva Enterps.,
LLC, 326 F.3d 303, 316-17 (2d Cir. 2003).
5
1 Margot Stewart died on November 27, 2000. Following her death, the estate filed with
2 the IRS a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, which
3 reported the contents of Margot’s estate as including 100% of the East Hampton property 4 but
4 only a 51% interest in the Manhattan property. On December 22, 2004, the IRS issued a notice
5 of deficiency stating, inter alia, that Margot had retained possession or enjoyment of the
6 transferred 49% interest and that therefore, under 26 U.S.C. § 2036, the entire Manhattan
7 property was part of her estate for federal tax purposes.
8 The Estate filed a timely petition in the Tax Court challenging the IRS’s determination of
9 deficiency. The Tax Court held a two-day trial in June 2006. At trial, the Estate argued that,
10 contrary to the IRS’s contention, Decedent had not retained the enjoyment or income of the
11 entire Manhattan property but rather, as a 51% owner, had forgone much of the net income from
12 the top three floors by using a setoff to pay Brandon, and had shared the value of the bottom two
13 by living with Brandon. According to the Estate, instead of splitting up the rental income and
14 expenses each month in proportion to their interests in the two properties—a process which
15 would have required Decedent and Brandon to write separate checks for every expense and
16 receive separate checks from both tenants—Decedent and Brandon were keeping track of each
17 person’s net income from both properties and intended to reconcile any differences at the end of
18 the year.
4
While Decedent had owned the East Hampton property jointly with Brandon since
1989, she still owed estate tax on 100% of its value because it was held jointly with right of
survivorship. See 26 U.S.C. § 2040(a).
6
1 The Tax Court issued a memorandum opinion denying the petition. T.C. Memo 2006-
2 225, 92 T.C.M. (CCH) 357, 2006 Tax Ct. Memo LEXIS 230. The court found that Decedent
3 “continued to receive the $9,000 monthly rent payments from Financial Solutions, Ltd., and
4 enjoy the economic benefits of the [Manhattan] property.” Id. at *6. The court described
5 Decedent’s “retention of the property’s income stream after the property was transferred” as
6 “very clear evidence that the decedent did indeed retain ‘possession or enjoyment.’” Id.
7 Because there was no written agreement between Decedent and Brandon stating that they would
8 reconcile the income and expenses of the two properties and because the Tax Court did not credit
9 Brandon’s testimony that there was an oral agreement, the court found that no such agreement
10 existed. Id. at *7. Rather, the Tax Court concluded that Brandon and Decedent “had an implied
11 agreement that decedent would retain the economic benefits of the [Manhattan] property” and
12 that “Decedent certainly met the terms of that agreement.” Id. For those reasons the Tax Court
13 held that the full value of the Manhattan property was includible in the Estate under 26 U.S.C. §
14 2036. The Estate timely appealed to this Court.
15
16 Discussion
17 I. Legal Framework
18 The Internal Revenue Code imposes a federal tax on “the taxable estate of every
19 decedent who is a citizen or resident of the United States.” 26 U.S.C. § 2001(a). A “taxable
20 estate” is defined as “the value of the gross estate,” less applicable deductions, id. § 2051,
21 where the value of the gross estate includes “the value of all property to the extent of the
22 interest therein of the decedent at the time of his death,” id. § 2033. Some taxpayers use
7
1 various planning techniques designed to take property out of the gross estate or decrease its
2 value. The IRS has several statutory tools to use in fighting these techniques. One of these
3 tools—26 U.S.C. § 2036(a)(1)—is at issue here.
4 A. Section 2036(a)(1)
5 Under Internal Revenue Code § 2036, the value of the gross estate includes “the value
6 of all property to the extent of any interest therein of which the decedent has at any time made
7 a transfer . . . under which he has retained for his life . . . the possession or enjoyment of, or
8 the right to the income from, the property.” 26 U.S.C. § 2036(a), (a)(1). The purpose of §
9 2036 is to prevent individuals from using a gift transfer of property with reservation of a life
10 estate—or any similar device—in order to avoid having to pay the estate tax. See Comm’r v.
11 Estate of Church, 335 U.S. 632, 639-42 (1949). Absent § 2036, a decedent could transfer to
12 her heir the remainder in a property while retaining a life estate, and the economic result
13 would be substantially identical to what would have occurred if the decedent had left the
14 property to the heir in her will under an irrevocable contract so to do. By including such
15 property in the gross estate, § 2036 closes what would otherwise be—and at one time was—
16 an enormous loophole in the estate tax. 5 Id.
17 Retention of a formal life estate in a property is just one method a taxpayer might use
18 to try to avoid paying the estate tax while achieving, in substance, the same economic result
19 as would occur if she retained the property for life and only disposed of it by will. Another
20 method is to make an agreement (even an implied or unenforceable agreement) between a
5
The reason the loophole was so significant when § 2036 was enacted was that at that
time taxes on gifts were significantly lower than taxes on property transferred in an estate. See
Boris I. Bittker & Lawrence Lokken, Federal Taxation of Income, Estates and Gifts ¶ 126.4.1.
8
1 decedent and an inter vivos transferee that the decedent will continue to enjoy the benefits of
2 the property for her life. Not surprisingly, the courts and the IRS have ruled that if there is
3 such an agreement, then the decedent is understood to have retained the possession or
4 enjoyment of that property and the property must be included in the gross estate. See 26
5 C.F.R. § 20.2036-1(c); Estate of Maxwell v. Comm’r, 3 F.3d 591, 593-94 (2d Cir. 1993).
6 In the case before us, the Tax Court found as a fact that when Decedent gave a 49%
7 share of the Manhattan property to Brandon, she did so with an implied agreement that she
8 “would retain the economic benefits” of the whole townhouse. If, as the Tax Court held,
9 Decedent retained the possession or enjoyment of the 49% share of the property that she had
10 given to Brandon, it followed under 26 U.S.C. § 2036(a)(1) that the 49% share was part of the
11 Estate.
12 B. The Planning Technique in This Case
13 Today, unlike when § 2036 was enacted, see supra note 5, the estate tax and the gift
14 tax are on a unified rate schedule. 6 And, presumably, Decedent owed a gift tax as of the time
15 she transferred the 49% interest in the Manhattan property. See J.A. 334 (noting that the
16 Estate filed a gift tax return for this transfer). Why, then, does it matter whether the Estate
17 pays estate tax or gift tax on the transferred 49% interest? Part of the answer is that the
18 Commissioner wants to tax the appreciation of Brandon’s share of the Manhattan property
19 during the roughly 6-month period from the date of the transfer to the date of Decedent’s
6
As the Joint Committee on Taxation explained the law applicable in 2000: “The gift tax
and the estate tax are unified so that a single graduated rate schedule applies to cumulative
taxable transfers made by a taxpayer during his or her lifetime and at death.” Joint Committee
on Taxation, Description of “The Death Tax Elimination Act of 2000” (H.R. 8) (JCX-51-00),
May 23, 2000, at 2.
9
1 death. But the appreciation of the entire Manhattan property during that period was stipulated
2 to be $125,000, J.A. 71, and the tax applicable to Brandon’s 49% share of that appreciation,
3 though not trivial, would probably not be an unduly large amount of money. 7
4 Estate planners have, however, found a highly effective way to lower both estate and gift
5 taxes when passing real estate to the next generation. Dividing the real estate into separate
6 interests usually lowers the property’s fair market value and thereby also the taxes due on it. 8
7 See David Westfall et al., Estate Planning Law & Taxation & 2.05[3] (2009). The fair market
8 value of separate interests is typically discounted by about 10-20% for lack of control and
9 marketability. Id. In the instant case, however, the parties stipulated to a much higher discount
7
Indeed, in 1981 when Congress modified the closely related statute 26 U.S.C. §
2035(a), which had previously provided that most transfers within three years of death had to be
included in the gross estate, see 26 U.S.C. § 2035(a) (1980), the Senate Finance Committee
stated:
The committee generally does not believe it appropriate to tax appreciation that
accrues after a gift has been made under the unified estate and gift taxes merely
because the donor died within 3 years of the gift. The present rule often results in
needless administrative burdens in valuing property twice.
S. Rep. No. 97-144, at 138 (1981), reprinted in 1981 U.S.C.C.A.N. 105, 238-39.
8
This technique works because the estate tax is imposed on the fair market value of
property, not on the value of the property to the person inheriting it—even if the latter amount is
much greater because the heir owns a complementary asset such as the other part of the two
divided interests in a parcel of real property. As the Treasury Regulations explain:
The value of every item of property includible in a decedent’s gross estate under
sections 2031 through 2044 is its fair market value at the time of the decedent’s death
. . . . The fair market value is the price at which the 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.
26 C.F.R. § 20.2031-1(b); see also Propstra v. United States, 680 F.2d 1248, 1251-52 (9th Cir.
1982) (“[W]e see good reason to consider the ‘willing seller’ mentioned in Treas. Reg. §
20.2031-1(b) as a hypothetical seller rather than the estate or any of decedent’s beneficiaries. . . .
Executors will not have to make delicate inquiries into the feelings, attitudes, and anticipated
behavior of those holding undivided interests in the property in question.”).
10
1 of 42.5% if the property had in fact been divided. 9 J.A. 71-72. That discount is responsible for
2 the lion’s share of the money at stake in this case. It is for this reason that the Commissioner
3 wants us to hold that the entirety of Brandon’s 49% interest is part of Decedent’s gross estate.
4 The Estate would then be taxed as though Decedent, instead of giving Brandon 49% of the
5 Manhattan property on May 9, 2000, had owned the whole property until her death on November
6 27, 2000. And there then would be no 42.5% discount for lack of control and marketability.
7 II. Continued Possession or Enjoyment
8 The Tax Court concluded that Decedent “retained . . . the possession or enjoyment of,
9 or the right to the income from, the property.” 26 U.S.C. § 2036(a), (a)(1). “The general
10 characterization of a transaction for tax purposes is a question of law” subject to de novo
11 review. Frank Lyon Co. v. United States, 435 U.S. 561, 581 n.16 (1978). We must therefore
12 determine what it means, in the context before us, to “retain[] . . . the possession or enjoyment
13 of, or the right to the income from, the property.”
14 As an initial matter, we note that two aspects of this statute, as applied to this case, are
15 beyond reasonable dispute. First, Decedent did not retain “the right to income from[] the
16 property.” Retaining the right to income is not the same as retaining the income. As the
17 Supreme Court has explained in interpreting § 2036(a)(2), “[t]he term ‘right,’ certainly when
18 used in a tax statute, must be given its normal and customary meaning. It connotes an
19 ascertainable and legally enforceable power . . . .” United States v. Byrum, 408 U.S. 125, 136
20 (1972). It is undisputed that Decedent did not have a legally enforceable power to receive the
9
We express no view whether the 42.5% discount is a correct figure, or whether on
remand the Government remains bound by its stipulation.
11
1 income from the interest in the Manhattan property that she had legally transferred to
2 Brandon. Therefore, if Decedent “retained” anything described in § 2036(a)(1), it was the
3 actual “possession or enjoyment” of Brandon’s 49% interest, and not any “right to income
4 from” it. Second, “the property” in § 2036(a)(1) here refers to the transferred 49% interest in
5 the Manhattan property, not to the entire Manhattan property. The Tax Court has previously
6 recognized that a decedent’s formal and substantial retention of a majority interest in real
7 property does not necessarily require a finding that the decedent retained possession of a
8 transferred minority interest, see, e.g., Estate of Wineman v. Comm’r, T.C. Memo 2000-193,
9 79 T.C.M. (CCH) 2189, 2000 Tax Ct. Memo LEXIS 233, at *24-25, and we agree. Therefore,
10 our inquiry is limited to whether Decedent “retained . . . the possession or enjoyment of” the
11 transferred 49% interest in the Manhattan property.
12 In applying the “possession or enjoyment” language of § 2036 “we look to substance,
13 not to form.” Estate of Church, 335 U.S. at 644 (quoting Helvering v. Hallock, 309 U.S. 106,
14 114 (1940)). “It is well settled that the terms ‘enjoy’ and ‘enjoyment,’ as used in various
15 estate tax statutes, ‘are not terms of art, but connote substantial present economic benefit
16 rather than technical vesting of title or estates.’” Byrum, 408 U.S. at 145 (quoting Comm’r v.
17 Estate of Holmes, 326 U.S. 480, 486 (1946)). “In the case of real property, the terms
18 ‘possession’ and ‘enjoyment’ have been interpreted to mean ‘the lifetime use of the
19 property.’” Estate of Maxwell, 3 F.3d at 593 (quoting Byrum, 408 U.S. at 147)). While it
20 may sometimes be difficult to determine who is using real property that is wholly inhabited by
21 a decedent and/or family members, it is quite easy to determine who is using real property that
22 is producing income. All we have to do is follow the money. Whoever is, in substance,
12
1 receiving the net income (or taking the net loss) from the property, is using it during his or her
2 lifetime, and thus possessing and enjoying the property. See Estate of McNichol v. Comm’r,
3 265 F.2d 667, 671 (3d Cir. 1959); see also 26 C.F.R. § 20.2036-1(b)(2) (“The ‘use,
4 possession, right to the income, or other enjoyment of the transferred property’ is considered
5 as having been retained or reserved to the decedent to the extent that the use, possession, right
6 to the income, or other enjoyment is to be applied toward the discharge of a legal obligation of
7 the decedent, or otherwise for his pecuniary benefit.”).
8 Under the applicable Treasury Regulations, however, a finding of “retained . . .
9 possession or enjoyment” is not the end of the matter. The extent of the retained possession or
10 enjoyment must also be determined.
11 If the decedent retained or reserved an interest or right with respect to all of the
12 property transferred by him, the amount to be included in his gross estate under
13 section 2036 is the value of the entire property, less only the value of any
14 outstanding income interest which is not subject to the decedent's interest or right
15 and which is actually being enjoyed by another person at the time of the
16 decedent's death. If the decedent retained or reserved an interest or right with
17 respect to a part only of the property transferred by him, the amount to be
18 included in his gross estate under section 2036 is only a corresponding
19 proportion of the amount described in the preceding sentence. An interest or right
20 is treated as having been retained or reserved if at the time of the transfer there
21 was an understanding, express, or implied, that the interest or right would later be
22 conferred.
23
24 26 C.F.R. § 20.2036-1(c)(1)(i) (emphasis added). This position is also the official position of
25 the IRS, as well as at least one other circuit court. See Rev. Rul. 79-109, 1979-1 C.B. 297
26 (“[W]hen a decedent retained an interest in only a part of the transferred property, or, in the
27 alternative, in a corresponding portion of the income produced by the property, the amount
28 includible in the gross estate is that portion of the transferred property that would be necessary
13
1 to yield the retained income.”); see also In re Estate of Uhl, 241 F.2d 867, 870-71 (7th Cir.
2 1957).
3 As discussed earlier, one way a decedent can retain possession or enjoyment of a
4 property is through an implied agreement. Under 26 C.F.R. § 20.2036-1(c), however, the
5 existence or nonexistence of an implied agreement is not enough to resolve this case. The
6 terms of the agreement also matter. If, for example, the facts were to indicate that, pursuant to
7 an implied agreement, Decedent had retained 80% of the substantial present economic benefit
8 of the transferred 49% interest in the Manhattan property, then only the “corresponding
9 proportion” of the value of the entire 49% interest would be included in the Estate.
10 III. Implied Agreement
11 We now turn to the Tax Court’s findings of fact. The Tax Court found that there was
12 an “implied agreement” that Margot Stewart “would retain the economic benefits” of the
13 entire transferred interest in the Manhattan property. 10 Whether there was such an implied
14 agreement, and what its terms were, are questions of fact that we review for clear error.
15 Estate of Maxwell, 3 F.3d at 594; see also Frank Lyon Co., 435 U.S. at 581 n.16 (“The
16 general characterization of a transaction for tax purposes is a question of law subject to [de
17 novo] review. The particular facts from which the characterization is to be made are not so
18 subject.”). When deciding whether there was an implied agreement, some amount of
19 inference is necessary. In order to make such an inference “all facts and circumstances
10
If § 2036 applies in this case, it must be because there was an implied agreement of this
sort, for it is undisputed that there was no express agreement, such as a retained life estate or a
contract stating that Decedent would continue to receive the entire net income from the
Manhattan property.
14
1 surrounding the transfer and subsequent use of the property must be considered.” Estate of
2 Rapelje v. Comm’r, 73 T.C. 82, 86 (1979); accord Estate of Abraham v. Comm’r, 408 F.3d
3 26, 39 (1st Cir. 2005); see also 26 C.F.R. § 20.2036-1. “[T]he burden is on the decedent’s
4 estate to disprove the existence of any adverse implied agreement or understanding and ‘that
5 burden is particularly onerous when intrafamily arrangements are involved.’” Estate of
6 Maxwell, 3 F.3d at 594 (quoting Estate of Rapelje, 73 T.C. at 86). Because the Manhattan
7 property was used partly as a residence and partly as an income-producing rental property, we
8 shall consider whether the facts and circumstances surrounding either of these uses indicated
9 an implied agreement, and if so, what the terms of that agreement were.
10 A. Residential Use
11 The Tax Court did not rely on Decedent’s continued residence in the Manhattan
12 property for its finding that an implied agreement existed. See Estate of Stewart, 2006 Tax
13 Ct. Memo LEXIS 230, at *5-*7. But the Commissioner seems to rely on it in part. We,
14 however, do not believe that the terms of any implied agreement can be read to provide that
15 Decedent would retain enjoyment of the residential portion of Brandon’s 49% interest in the
16 Manhattan property.
17 In residential transfer cases, “[i]n determining whether an implied agreement or
18 understanding existed between the parties . . . . the courts have found two factors to be
19 particularly significant: continued exclusive possession by the donor and the withholding of
20 possession from the donee.” Estate of Spruill v. Comm’r, 88 T.C. 1197, 1225 (1987); accord
21 Guynn v. United States, 437 F.2d 1148, 1150 (4th Cir. 1971). The presence of both those
22 factors is so damning that in cases where a decedent transfers a residential property but
15
1 continues to live in it to the exclusion of the donee, the estate taxpayer has lost in every case
2 of which we are aware because the taxpayer could not meet its burden. 11 And, if Brandon had
3 not lived in the Manhattan property for the entire time between the transfer and Decedent’s
4 death, it would certainly not have been clear error had the Tax Court found an implied
5 agreement that Decedent could have excluded Brandon from the Manhattan property during
6 her life, and thereby had enjoyed the benefits of the residential part of his 49% interest and of
7 his rights as a residential tenant in common.
8 In this case, however, neither of the two factors stated in Spruill is present. Decedent
9 did not have exclusive possession of, nor did she exclude Brandon from, Brandon’s 49%
10 interest in the Manhattan property—or, for that matter, the entire property. Like other courts,
11 we draw a distinction between cases where a decedent retains exclusive possession and
12 withholds possession from the donee on the one hand, and “those cases where a residence
13 jointly occupied by the donor and the donee has been held not includable in the donor’s gross
14 estate,” Guynn, 437 F.2d at 1150, on the other. This case is of the latter sort. And despite the
15 great burden faced by the taxpayer in all these cases, taxpayers have won in every case of
16 which we are aware when those two crucial factors were favorable. 12 In these cases a
11
See, e.g., Estate of Maxwell, 3 F.3d at 592, 595; Estate of Reichardt v. Comm’r, 114
T.C. 144, 152-55 (2000); Estate of Kerdolff v. Comm’r, 57 T.C. 643, 648-49 (1972); Estate of
Linderme v. Comm’r, 52 T.C. 305, 308-10 (1969). The same result occurs when the decedent’s
occupancy of the transferred property is “almost exclusive” of the donee. See Estate of Rapelje,
73 T.C. at 86-88.
12
See, e.g., Union Planters Nat’l Bank v. United States, 361 F.2d 662, 666 (6th Cir.
1966); Estate of Binkley v. United States, 358 F.2d 639, 640 (3d Cir. 1966) (per curiam); Diehl v.
United States, 21 A.F.T.R.2d 1607, 1608 (W.D. Tenn. 1967); Stephenson v. United States, 238
F. Supp. 660, 667 (W.D. Va. 1965); Estate of Roemer v. Comm’r, T.C. Memo 1983-509, 46
T.C.M. (CCH) 1176, 1983 Tax Ct. Memo LEXIS 281, at *6-*12 (1983); Estate of Gutchess v.
16
1 transferor’s “use of the property by occupancy after the transfer is a natural use which does
2 not diminish [the] transferee[’s] enjoyment and possession and which grows out of a
3 congenial and happy family relationship.” Estate of Gutchess v. Comm’r, 46 T.C. 554, 557
4 (1966).
5 Although co-occupancy of a residential premises by the related donor and donee is
6 highly probative of the absence of an implied agreement and has repeatedly been held to
7 satisfy the taxpayer’s burden, we need not and do not hold that that fact alone will always
8 carry the burden as a matter of law. In some future case, a finding of an implied agreement
9 between related co-occupants of residential real property might not be clearly erroneous. But
10 where, as here, the Tax Court has made no specific findings relating to enjoyment of the
11 residential portion of the property, and the Commissioner points to nothing besides the mere
12 co-occupancy between the donor and the donee, a conclusion based on an implied agreement
13 concerning the residential portion cannot stand. 13 As a result, Decedent’s residential use of
Comm’r, 46 T.C. 554, 556-57 (1966); Estate of Wier v. Comm’r, 17 T.C. 409, 420-22 (1951);
Estate of Burr v. Comm’r, 4 T.C.M. (CCH) 1054, 1945 Tax Ct. Memo LEXIS 33, at *36 (1945).
One might attempt to distinguish these cases on the ground that many of them involved
interspousal transfers. We are aware of only two cases—Diehl and Estate of Roemer—involving
familial, non-interspousal transfers in which the family member donee co-occupied the
transferred property with the decedent for the entire time between the transfer and the decedent’s
death; and the taxpayer won in both these cases. In Estate of Roemer, moreover, the Tax Court
expressly rejected a “spouses only” reading of the cases. See Estate of Roemer, 1983 Tax Ct.
Memo LEXIS 281, at *9-10 (noting the use of the words “family relationship” instead of
“marital relationship” in this line of cases, and holding that “the logic employed is not limited
merely to interspousal transfers”). We agree with the Tax Court.
13
The dissent points to several factors which, it claims, support the conclusion that
Decedent and Brandon had an implied agreement that Decedent would possess or enjoy the
residential portion of the Manhattan property. The Tax Court, however, never made any finding
to the effect that there was an implied agreement concerning the residential portion, let alone that
the factors cited by the dissent support that conclusion. Instead, the Tax Court focused on
“Decedent’s retention of the property’s income stream after the property was transferred.”
17
Estate of Stewart, 2006 Tax Ct. Memo LEXIS 230, at *6.
Even if the Tax Court had intended to be the first court ever to find an implied agreement
between related co-occupants, the facts referred to by the dissent would not persuade us. First,
the dissent seems to suggest that a decedent’s retention of a partial interest as a tenant in
common is similar to retention of a life estate, and attempts to distinguish on that ground the
numerous cases involving complete transfers of residential property followed by co-occupancy.
See post, at [8-10] & n.1. It seems to us, however, that it would be bizarre to hold that a
decedent who retains a tenancy in common bears a heavier burden in disproving the existence of
an implied agreement than does a decedent who gives away the entire property in fee simple and
yet remains on the premises despite having no legal right to be there. Moreover, the dissent does
not dispute our conclusion that, consistent with Estate of Wineman, a decedent’s retention of a
fractional interest in real estate, unlike a decedent’s retention of a life estate, does not
automatically result in the triggering of § 2036 over the whole property. That is, when §
2036(a)(1) refers to “the possession or enjoyment of, or the right to the income from, the
property,” in the case of a life estate, the words, “the property,” refer to the entire property (and
not just the transferred remainder). But, given Estate of Wineman, in the case of a tenancy in
common, the same words refer only to the transferred interest. The test for an implied
agreement, therefore, should be applied no more stringently in cases involving transfers of a
fractional interest in real estate than in any other case involving any other type of “property.”
And those other cases do not, contrary to the dissent, post, at [8], require us to focus only on
what the transferor retained while ignoring what the transferee received. See, e.g., Estate of
Gutchess, 46 T.C. at 557 (noting the absence of “a withholding of use from the transferee” and
stating that the transferor’s continued use of real property “is a natural use which does not
diminish transferee[’s] . . . enjoyment and possession”).
Second, the facts referred to by the dissent have not been held sufficient to support a
finding of an implied agreement in other cases. The dissent notes initially that “Margot and
Brandon Stewart amicably shared the residential property after their transfer, just as they had
when Margot Stewart was sole owner.” Post, at [12]. It is, of course, true that Decedent was not
prevented from using any part of the residential portion of the property that she had used before
the transfer, nor was there any other change in her use. But in other cases involving the absence
of such a change, no § 2036 retention was found. See, e.g., Estate of Gutchess, 46 T.C. at 554-
55 (decedent and donee spouse lived together in residence for about 17 years before transfer and
about 11 years thereafter). Secondly, the dissent points to the Tax Court’s credibility finding.
Post, at [15-16]. Yet all the Tax Court found was that Brandon’s “testimony relating to an oral
agreement” to offset Manhattan property income and expenses with East Hampton property
income and expenses “was not credible.” Estate of Stewart, 2006 Tax Ct. Memo LEXIS 230, at
*7. It does not follow from the absence of an offsetting agreement, or from the incredibility of
that testimony, that there was an implied agreement that Decedent would retain enjoyment of the
residential portion of the Manhattan property. Finally, the dissent relies on the Decedent’s
payment of a substantial majority of the Manhattan property expenses after the transfer. Post, at
[16-18]. As noted in Part III.C of this opinion, substantial economic benefit is best determined
by net income, rather than by gross income or gross expenses. In any event, a decedent’s
payment of all or substantially all gross expenses post-transfer has, in many cases, not resulted in
18
1 part of the Manhattan property does not indicate an implied agreement that she would to any
2 extent retain the substantial economic benefits of the residential portion of Brandon’s 49%
3 interest.
4 B. Commercial Use
5 It was, however, not clearly erroneous for the Tax Court to find an implied agreement
6 that Decedent would enjoy for her life the substantial economic benefit of some part—indeed,
7 perhaps all—of the rental portion of the Manhattan Property. The Tax Court found that (1)
8 “Decedent continued to receive the $9,000 monthly rent payments from Financial Solutions,
9 Ltd.,” and (2) Brandon’s testimony was not credible. Estate of Stewart, 2006 Tax Ct. Memo
10 LEXIS 230, at *6-*7. Those two findings are not clearly erroneous and must be upheld.
11 Because the Estate has failed to provide a credible explanation as to why the entire rent
12 payments went to Decedent, they support the Tax Court’s finding of an implied agreement.
13 C. Apportionment
14 For the reasons stated above, it was not clearly erroneous for the Tax Court to find an
15 implied agreement, but it was clearly erroneous for the Tax Court to find that the terms of the
16 agreement were such that Decedent would enjoy the substantial economic benefit of 100% of
17 Brandon’s 49% interest in the Manhattan property. This is so because Brandon manifestly
18 enjoyed, and Decedent did not, the benefits of the residential portion of the 49%. And, as we
a finding of an implied agreement. See, e.g., Estate of Roemer, 1983 Tax Ct. Memo LEXIS at *4
(noting that, post-transfer, the decedent paid the maintenance, insurance, and utility bills for the
residence, as well as some of the grocery bills and property taxes); Stephenson, 238 F. Supp. at
663 (“Decedent continued to pay the bills and to maintain the house . . . .”).
19
1 discuss below, even as to the commercial portion it seems likely that Decedent retained the
2 benefits of less than the total 49%.
3 The question that remains is, therefore, what part of the 49% interest should be
4 included in the Estate. It is for the Tax Court in the first instance to make the findings
5 necessary to answer that question. Because the Tax Court appears to have treated §
6 2036(a)(1) as an all-or-nothing matter and did not consider whether Decedent had “retained or
7 reserved an interest or right with respect to a part only of the property transferred,” 26 C.F.R.
8 § 20.2036-1(c)(1)(i), the findings cited by the Tax Court—Decedent’s receipt of the rental
9 income and the credibility determination as to Brandon’s testimony—do not provide a
10 complete picture of the extent to which Decedent enjoyed the substantial economic benefit of
11 Brandon’s 49% interest during her life. And, because the Tax Court did not consider “all
12 facts and circumstances surrounding the transfer and subsequent use of the property,” Estate
13 of Rapelje, 73 T.C. at 86, it is appropriate to vacate and remand so that the Tax Court may do
14 so.
15 In determining the apportionment of Brandon’s 49% interest, the Tax Court should use
16 the approach adopted by the IRS in Rev. Rul. 79-109. In that ruling, a decedent conveyed to
17 his adult children a vacation home, but he retained for his life the right to use it or, in the
18 alternative, keep the rental payments, during the month of January each year. The Service
19 explained that “the amount includible in the gross estate is that portion of the transferred
20 property that would be necessary to yield the retained income.” Id. The rental value of the
21 property for January was $600, which was 13.3% of the $4500 the property produced
20
1 annually, and the Service therefore calculated that 13.3% of the value of the residence was to
2 be included in the decedent’s gross estate. Id.
3 The facts are more complicated in the instant case, but the basic principle is the same:
4 the portion of the property to be included in the gross estate is the portion that would be
5 necessary to produce the income Decedent retained. The Tax Court must first determine how
6 much of the substantial economic benefit generated by the 49% interest is attributable to the
7 residential portion of the interest and how much is attributable to the commercial portion.
8 Such a finding is essential because, at least insofar as gross income is concerned, Decedent
9 received 100% of the economic benefit from the commercial portion of the 49% transferred,
10 by receiving the rent payments, while Brandon received 100% of the economic benefit from
11 the residential portion of that 49% by inhabiting it.
12 The Tax Court should then examine a factual finding that it made, but seemingly failed
13 to take fully into account. Between the transfer of the 49% interest and Decedent’s death,
14 Decedent paid Manhattan property expenses of $21,790.85, 14 and Brandon paid Manhattan
14
The Estate claims that, in addition to the $21,790.85 in expenses the Tax Court found
Decedent to have paid, Decedent paid real estate taxes on the Manhattan Property of $9,801.78
on November 24, 2000. Appellant’s Br. at 15. That number also happens to be the exact
difference between the sum of the expenses Appellants claim Decedent paid, and the amount the
Tax Court found that she paid. See Appellant’s Br. at 13-15. But the only support for the
Estate’s claim in the record is that a number that is supposed to be 51% of it is found in
Decedent’s estate tax return. J.A. 104. Nothing in Decedent’s bank statement for that date
indicates such a payment. J.A. 190, 195. The parties also stipulated that Decedent had paid
estate taxes for the Manhattan property with a check written on or about July 5, 2000, J.A. 78,
and Decedent’s bank statement shows that such a payment was made, in the amount of
$9,665.58. J.A. 150, 155. That amount, unlike the alleged November payment of $9,801.78,
was included in the Tax Court’s calculation of the total amount of Manhattan property expenses
paid by Decedent. On this record, we cannot say that the Tax Court’s finding of $21,790.85 was
clearly erroneous.
21
1 property expenses of $1,963. Estate of Stewart, 2006 Tax Ct. Memo LEXIS 230, at *3. This
2 finding is a double-edged sword. Payment of expenses attributable to a property is one of the
3 indicia of ownership of that property, and Decedent paid most (but not all) of the expenses
4 attributable to Brandon’s 49% interest. As a result, the Tax Court’s finding concerning
5 expenses supports its finding that an implied agreement existed and hence the inclusion of a
6 significant portion of the 49% interest in the Estate. But each dollar of Manhattan property
7 expenses paid by Decedent also decreases the economic benefit she received. For example, if
8 A and B jointly own a rental property that generates $10,000 per month in rent and $5,000 per
9 month in expenses, and A and B split the rent evenly but B pays all the expenses, then in
10 substance A is getting the entire economic benefit of the property while B is getting nothing.
11 Because “‘enjoyment’ . . . connote[s] substantial present economic benefit,” Byrum, 408 U.S.
12 at 145 (internal quotation marks omitted), we think who paid what expenses must be taken
13 into account in apportioning the 49% interest between the Estate and Brandon. In other
14 words, the Tax Court must determine who received what portion of the net income from the
15 49% interest, rather than the gross income. 15
16 Finally, the Tax Court apparently did not consider the distribution of the income and
17 expenses from the East Hampton property at all. While the Tax Court was clearly under no
18 obligation to credit Brandon’s testimony that he and Decedent intended to use the East
19 Hampton income to set off the Manhattan income and then reconcile their accounts at year’s
15
As used in the preceding sentence, “income” includes not only the dollars generated by
the rental portion of the 49% interest in the Manhattan property (less, in the case of net income,
the expenses attributable to the 49% interest), but also Brandon’s imputed income from living in
the residential portion of the property—that is, the fair market rental value one would have paid
to be Decedent’s housemate from May 9, 2000, to November 27, 2000.
22
1 end, it may be worth considering on remand where the net income from the East Hampton
2 property went. Although the Commissioner argues that the reference to “the property” in §
3 2036(a)(1) “does not provide for consideration of the decedent’s relationship to other
4 property, regardless of its circumstantial association with the property at issue,” Appellee’s
5 Br. at 22, we need not go that far. In some cases, consideration of other property may be
6 useful to an accurate determination of who enjoyed the substantial economic benefit of a
7 property. If, for example, Brandon and Decedent had formally split the rental income and
8 costs of the Manhattan property 51%-49% but Brandon had allowed Decedent to take a
9 portion of what should have been Brandon’s net income from the East Hampton property, and
10 that amount equaled the income Brandon was entitled to from his 49% share of the Manhattan
11 property, then consideration of the East Hampton property would be necessary to prevent an
12 abusive transaction that would otherwise evade § 2036. At the other extreme, if Brandon and
13 Decedent had jointly owned hundreds of other properties and there was no particular reason to
14 think that the distribution of income from those properties was in any way related to the
15 substantial economic benefit of the disputed property, then it would be incorrect to consider
16 such other properties. We leave it to the Tax Court to determine, on remand, where this case
17 falls along that spectrum and whether the distribution of net income from the East Hampton
18 property is among the “facts and circumstances surrounding the transfer and subsequent use
19 of the property,” all of which “must be considered,” Estate of Rapelje, 73 T.C. at 86. 16
16
If the Tax Court does decide to consider the distribution of net income from the East
Hampton property, then it will be necessary to make findings of fact as to the amount and
distribution of the rental income and expenses from that property, and, on that, the Estate bears
the burden of proof. See Estate of Maxwell, 3 F.3d at 594.
We also note that, depending on the amount and distribution of the net income from the
23
1 IV. Conclusion
2 Because the Tax Court’s finding that the terms of the implied agreement between
3 Decedent and Brandon provided that Decedent would enjoy 100% of the substantial economic
4 benefit of Brandon’s 49% undivided interest in the Manhattan property was clearly erroneous,
5 we vacate the judgment below and remand for further proceedings. Decedent “retained or
6 reserved an interest . . . with respect to a part only of,” 26 C.F.R. § 20.2036-1(c)(1)(i),
7 Brandon’s 49% stake in the Manhattan property, which is what she transferred. On remand,
8 the Tax Court should make the factual determinations necessary to determine the amount of
9 the net income from Brandon’s 49% interest enjoyed by Decedent. Then the Tax Court can
10 calculate the “corresponding proportion” of “the value of the entire property,” and include it
11 in the Decedent’s gross estate under § 2036. See 26 C.F.R. § 20.2036-1(c)(1)(i).
12 We therefore VACATE the judgment below and REMAND this case for further
13 proceedings consistent with this opinion.
East Hampton property, consideration of that information might turn out to be unfavorable to the
Estate. The Estate’s brief contains a chart suggesting that consideration of the East Hampton
property would yield a roughly equal overall distribution between Brandon and Decedent of the
net income from both properties. Appellant’s Br. at 13-15. This chart, however, is inaccurate,
not only because it includes the alleged real estate tax payment by Decedent noted supra at note
14, but also because it ignores the expenses of the East Hampton property at the same time as it
takes the income from that property into account. If the East Hampton expenses were large and
were disproportionately paid by Brandon, then consideration of the East Hampton property by
the Tax Court might not result in more net income having gone to Brandon than if the Tax Court
looked only at the Manhattan property.
24
07-5370-ag
Estate of Stewart v. Comm’r
1 LIVINGSTON, Circuit Judge, dissenting:
2 The majority concedes that the Tax Court properly concluded in this case
3 that an implied agreement existed between the decedent, Margot Stewart, and
4 her adult son, Brandon, that despite the transfer of a 49% share in her five-story
5 Manhattan brownstone to Brandon during her lifetime, Margot Stewart would
6 retain possession or enjoyment of at least some portion of this 49%, so that its
7 value should be included in her gross estate. It would have been difficult for the
8 majority to have done otherwise. The burden rested with Margot Stewart’s
9 estate to disprove the existence of such an agreement, and yet the undisputed
10 facts tended, instead, to show it. Thus, after the transfer of the 49% share,
11 Margot Stewart continued to live in the first two floors of the property with her
12 son Brandon, just as she had before. Despite the transfer, she alone continued
13 to receive the rental income paid by the tenants who leased the upper three
14 floors for $9000 per month. And notwithstanding that Brandon Stewart
15 formally owned 49% of the brownstone, it was Margot Stewart who continued to
16 pay essentially all the expenses associated with the Manhattan property – over
17 $21,000 in the period before her death, as compared to the nominal amount of
18 $1963 contributed by Brandon.
19 To be sure, Brandon Stewart offered testimony that, if credited, would
20 have vitiated the tendency of these undisputed facts to show that Margot
1 Stewart retained possession and enjoyment of the property during her lifetime.
2 He swore that he and his mother had an oral agreement by which the income
3 and expenses from the Manhattan property were to be reconciled with the
4 income and expenses associated with an East Hampton property they jointly
5 owned. If credited, this testimony would have established that Brandon Stewart
6 was to receive the rental income associated with his 49% share and was to pay
7 49% of the brownstone’s expenses. Brandon Stewart’s accountant, however,
8 could not recall being informed of such an arrangement. The Tax Court
9 concluded that Brandon Stewart’s testimony, simply put, “was not credible.”
10 The majority takes no issue with this conclusion.
11 In fact, the majority takes no issue with any of this. It nevertheless
12 vacates the decision of the Tax Court including the full value of the Manhattan
13 townhouse in the gross value of Margot Stewart’s estate on the theory that even
14 though an implied agreement existed, the Tax Court clearly erred in concluding
15 that its terms were such that Margot Stewart retained possession or enjoyment
16 of the entire 49% interest she had formally transferred – meaning, not only the
17 income stream from the rent that was paid, but also the substantial economic
18 benefits of residence. The majority does not – and cannot – explain how the Tax
19 Court clearly erred as a factual matter in concluding that Margot Stewart
20 retained all these benefits, given that her relationship to the property changed
2
1 in not one significant respect from the period preceding transfer to the period
2 after. Instead, the majority, misreading a body of case law that primarily
3 involves transfers of 100% of a family member’s interest in a property to another
4 family member, concludes that post-transfer co-occupancy is near-conclusive
5 evidence that the transferor can no longer enjoy the substantial economic
6 benefits of residence to the extent of the transferred interest. Indeed, the
7 majority finds such co-occupancy dispositive even here, where the transfer
8 concerned only a fraction of the transferor’s interest, created a tenancy in
9 common that guaranteed the transferor continued access to the entirety of her
10 property, and involved a transferor and transferee who the majority agrees were
11 found correctly by a court of law to have reached an agreement undercutting the
12 economic substance of the very transfer under consideration.
13 This turns the proper – and longstanding – construction of section 2036 on
14 its head. It also opens up a loophole that will vitiate to a considerable degree the
15 efficacy of this section, in conjunction with the uniform rate schedule now
16 applicable to estate and gift taxes, in ensuring that the estate and gift taxes are
17 equitably imposed on all those subject to them. I respectfully dissent.
18 ***
19 Section 2036 provides, in relevant part, as follows:
20 The value of the gross estate shall include the value of all property
3
1 to the extent of any interest therein of which the decedent has at
2 any time made a transfer (except in case of a bona fide sale for an
3 adequate and full consideration in money or money’s worth), . . .
4 under which he has retained for his life . . . --
5
6 (1) the possession or enjoyment of . . . the property . . . .
7
8 26 U.S.C. § 2036(a). As the foregoing makes clear, the focus of section 2036 is
9 upon whether a transferor – whether by express or implied agreement – in
10 substance has retained the possession or enjoyment of property following a
11 transfer. See Comm’r v. Estate of Church, 335 U.S. 632, 644 (1949) (noting, in
12 interpreting the predecessor statute to section 2036, that “we look to substance,
13 not to form” in determining the effect of a transaction (quoting Helvering v.
14 Hallock, 309 U.S. 106, 114 (1940))); Estate of Thompson v. Comm’r, 382 F.3d 367,
15 375-76 (3d Cir. 2004) (applying same principle to transactions under section
16 2036); Glaser v. United States, 306 F.2d 57, 61 (7th Cir. 1962) (same). As the
17 majority notes, the purpose of this section is to ensure that taxpayers cannot
18 avoid the estate tax via inter vivos transfers of property that are essentially
19 testamentary, with the transferor retaining enjoyment of the property for her
20 lifetime. See Estate of Thompson, 382 F.3d at 375 (“Section 2036 addresses the
21 concern that inter vivos transfers often function as will substitutes . . . .” (citing
22 United States v. Estate of Grace, 395 U.S. 316, 320 (1969))). An implied
23 agreement that a decedent will continue in her possession or enjoyment of
4
1 property after a transfer is properly inferred from all the facts and
2 circumstances surrounding the transfer and the property’s subsequent use,
3 Estate of Rapelje v. Comm’r, 73 T.C. 82, 86 (1979); accord Estate of Abraham v.
4 Comm’r, 408 F.3d 26, 39 (1st Cir. 2005), and need not be legally enforceable,
5 Estate of Maxwell v. Comm’r, 3 F.3d 591, 593 (2d Cir. 1993) (citing Estate of
6 Rapelje, 73 T.C. at 86). Moreover, at least where the surrounding circumstances
7 suggest the existence of an implied agreement that would trigger section 2036,
8 the burden falls to the estate “to disprove the existence of any adverse implied
9 agreement or understanding,” Estate of Maxwell, 3 F.3d at 593-94, a burden that
10 this Court has described as “particularly onerous” in the context of intrafamily
11 transfers, id. at 594 (quoting Rapelje, 73 T.C. at 86).
12 As the foregoing suggests, and as the majority acknowledges, the Tax
13 Court’s conclusions in this case regarding the implied agreement between
14 Margot and Brandon Stewart are factual determinations reviewable only for
15 clear error. See id. at 594. A factual determination is clearly erroneous “only if
16 ‘although there is evidence to support it, the reviewing court on the entire
17 evidence is left with the definite and firm conviction that a mistake has been
18 committed.’” Mobil Shipping & Transp. Co. v. Wonsild Liquid Carriers Ltd., 190
19 F.3d 64, 67-68 (2d Cir. 1999) (quoting Anderson v. Bessemer City, 470 U.S. 564,
20 574 (1985)). “[T]he fact that there may have been evidence to support an
5
1 inference contrary to that drawn by the trial court” is insufficient to demonstrate
2 clear error, Ceraso v. Motiva Enters., LLC, 326 F.3d 303, 316 (2d Cir. 2003), as
3 is a conclusion by the reviewing court that it would have reached a different
4 determination had it been considering the evidence as a trier of fact, Mobil
5 Shipping, 190 F.3d at 67.
6 In finding clear error in the Tax Court’s determination that Margot
7 Stewart retained full possession or enjoyment of the residence she shared with
8 Brandon as tenant in common, the majority errs in at least two respects. First,
9 the majority misreads the very cases on which its argument principally depends.
10 The majority relies heavily upon cases in which a transferor has conveyed 100%
11 of his or her interest in a property to another family member, most typically a
12 spouse, but then has continued to reside at the property with the transferee until
13 the transferor’s death. In such circumstances, I agree that courts have often
14 reasoned that the decedent’s “use of the property by occupancy after the transfer
15 is a natural use . . . which grows out of a congenial and happy family
16 relationship,” Estate of Gutchess v. Comm’r, 46 T.C. 554, 557 (1966), and have
17 concluded as a result that the transferor’s continued residence is not itself alone
18 sufficient evidence from which to infer an agreement that the transferor would
19 retain possession or enjoyment, as contemplated by section 2036, see, e.g., Union
20 Planters Nat’l Bank v. United States, 361 F.2d 662, 666 (6th Cir. 1966) (finding
6
1 no basis “to impose the tax upon the estate of a husband who has vested the fee
2 simple title to the family residence in his wife, merely because he continues to
3 live in the house until his death” (emphasis added)); Estate of Roemer, 46 T.C.M.
4 (CCH) 1176, 1178 (1983) (citing cases, and observing that “the courts have
5 uniformly rejected the advocation of section 2036’s applicability based on the
6 mere fact that the donor continued to live in a residence which he had conveyed
7 . . . .” (emphasis added)).
8 But whereas courts considering such intrafamily transfers have relied on
9 the compatibility between post-transfer co-occupancy and the existence of a bona
10 fide transfer to conclude that a transferor’s continued residence at a property is
11 insufficient evidence, by itself, to confirm the existence of an implied agreement
12 favoring the transferor, see also 1 Boris I. Bittker & Lawrence Lokken, Federal
13 Taxation of Income, Estates and Gifts ¶ 126.6.2 (2009), the majority, conversely,
14 treats co-occupancy post-transfer as sufficient evidence to prove the absence of
15 an implied agreement, at least with respect to the residential portion of the
16 property at issue, see [Draft 17, 20] (observing that in cases where the
17 transferor neither exclusively possessed a property nor excluded the transferee,
18 “taxpayers have won in every case,” and concluding, on the basis of nothing else,
19 that “Brandon manifestly enjoyed, and decedent did not, the benefits of the
20 residential portion of the 49%.”); [Draft 21] (indicating that “Brandon received
7
1 100% of the economic benefit from the residential portion [of his 49% interest]
2 by inhabiting it”). This logic not only departs from that of prior cases, but
3 ignores that the Tax Court here was required to consider “all facts and
4 circumstances surrounding the transfer and subsequent use of the property” in
5 determining the existence or absence of an implied agreement. Estate of Rapelje,
6 73 T.C. at 86.
7 Next, the majority focuses not on what Margot Stewart retained after the
8 transfer of the 49% share in her townhouse, but rather on what Brandon
9 Stewart supposedly received. This contravenes the plain language of section
10 2036, which directs that the value of a gross estate shall include “the value of all
11 property . . . of which the decedent has at any time made a transfer . . . under
12 which he has retained for his life . . . the possession or enjoyment of . . . the
13 property . . . .” In other words, under section 2036 we look to whether the facts
14 and circumstances surrounding a transfer evince an agreement that the
15 transferor’s lifetime possession or enjoyment of the affected property will not be
16 diminished, and if they do, we include the value of the transferred interest in the
17 gross estate. This reading of the statute is confirmed by reference to the
18 statute’s original target, the creation by the decedent of a life estate with a
19 remainder given to relatives. In such circumstances, the statute includes the
20 full value of the property in the decedent’s gross estate because his lifetime
8
1 enjoyment of the property is undiminished – not because, after the transfer, he
2 somehow enjoys the remainder interest given to his relatives. The Tax Court’s
3 interpretation of section 2036 in cases involving partial transfers of real estate
4 – where the distinction under discussion is most relevant – is consistent with
5 this understanding of the statute. See Estate of Wineman v. Comm’r, 79 T.C.M.
6 (CCH) 2189,2193-94 (2000); Estate of Powell v. Comm’r, 63 T.C.M. (CCH) 3192,
7 3193-94 (1992).
8 The distinction just highlighted is significant, because neither the formal
9 interest that Brandon Stewart received as a tenant in common nor his
10 (purported) substantial enjoyment of that interest can, as the majority would
11 have it, be dispositive as to Margot Stewart’s possession or enjoyment of the
12 residential portion of the Manhattan property. As a tenant in common, Margot
13 Stewart retained the right, even after the transfer, to possess and enjoy the
14 whole of the Manhattan townhouse, subject only to Brandon Stewart’s right to
15 do the same. See, e.g., Jemzura v. Jemzura, 330 N.E.2d 414, 419 (N.Y. 1975).1
1
Although 26 U.S.C. § 2036(a) does not require that a transferor retain a
legally enforceable right to possess or enjoy a property following transfer in order
for a court to find that an implied agreement to that effect existed, see Estate of
Maxwell, 3 F.3d at 593, it is worth noting that courts considering co-occupancy
following 100% transfers – the cases upon which the majority so heavily relies –
have considered the lack of any continuing right by the transferor to remain on the
property to be significant in finding the absence of an implied agreement. See, e.g.,
Union Planters Nat’l Bank, 361 F.2d at 665 (noting that “at any time . . . [the
transferee] could have conveyed [the residence property] by her separate deed,
without the consent of [the transferor]”); Stephenson v. United States, 238 F. Supp.
9
1 It was thus wholly possible for her to retain substantially the same possession
2 or enjoyment of the property that she had as the sole owner. This is not to say
3 that a tenancy in common ought to be viewed, by itself, as sufficient evidence of
4 an implied agreement or of the terms of such an agreement. A tenancy in
5 common generally, and co-occupancy specifically, might be inconsistent with the
6 transferor’s full possession or enjoyment of the property, whether because the
7 tenancy interferes with the transferor’s subsequent desire to sell the property,
8 because the transferee can himself file an action for partition, or simply because
9 the co-tenants’ desires for the day-to-day use of an asset like a home are
10 incompatible. See generally Estate of Powell, 63 T.C.M. (CCH) at 3193-3. But
11 neither can the mere fact of a tenancy in common with co-occupancy be, as the
12 majority would seem to have it, dispositive to a conclusion that a transferor did
13 not continue to possess or enjoy the entirety of a property.
660, 663 (W.D. Va. 1965) (“It seems clear in Virginia that, under the 1955 deed to
her, [the transferee’s] ownership of the house was absolute, free and clear of any
legal rights of her husband.”); Estate of Spruill v. Comm’r, 88 T.C. 1197, 1226-27
(1987) (“While [the transferee and his wife] may have assumed that [the transferor]
would continue to live in the house after [transferor’s wife] died, . . . such an
assumption does not rise to the level of an implied agreement that decedent had
retained the right to ‘possess or enjoy’ the homesite. On the contrary, [the
transferee] testified that had [the transferor] not been able to get along with [the
transferee’s wife, the transferor] would have had to leave.”). Unlike the transferor
of a 100% interest, the transferor of a partial interest that results in a tenancy in
common does retain substantial rights with respect to the affected property, and
those rights extend, as just indicated, to enjoyment of the entire property. It is thus
hardly “bizarre,” [Draft 18] n.13, to carefully analyze transfers that result in a
tenancy in common where section 2036 is concerned.
10
1 Estate of Wineman, one of the relatively few cases in which courts have
2 considered the estate tax consequences of a fractional real estate transfer
3 resulting in a tenancy in common, supports this conclusion. See 79 T.C.M.
4 (CCH) at 2193-94. The court in that case found that no implied agreement
5 existed between the decedent and her children regarding her transfer of a 24%
6 interest in the family homestead, and thus that the 24% was not properly
7 included in her gross estate, even though the decedent had continued to live with
8 her children at the homestead after transfer. Id. at 2194. The court, however,
9 emphatically did not rely on the mere fact of a tenancy in common, coupled with
10 co-occupancy among family members, to determine that the children’s fractional
11 share was not properly included in the decedent’s gross estate. It instead looked
12 at “all facts and circumstances surrounding the transfer and subsequent use of
13 the property,” Id. at 2193, as longstanding precedent requires. See, e.g., Estate
14 of Abraham, 408 F.3d at 39.
15 The facts of the case showed that the decedent’s post-transfer use of the
16 large parcel at issue – which contained, inter alia, two residences, two large
17 barns, a small barn, a granary, a farm shop, cattle scales, corrals, two garages,
18 and an orchard – was limited to her own home, the garden, and the small
19 orchard next to her home. Estate of Wineman, 79 T.C.M. (CCH) at 2194. Even
20 so, the court noted that “the fact that decedent personally used less than all of
11
1 the property [after the transfer] does not demonstrate that she did not possess
2 and enjoy the entire property.” Id. Nor, even, was the fact that someone other
3 than decedent paid the taxes on the property sufficient on its own to
4 demonstrate the absence of an implied agreement. Id. Rather, it was only after
5 these and other surrounding circumstances were considered together that the
6 court was willing to conclude that the estate had carried its burden of proving
7 the absence of an implied agreement. Notably, the court relied “heavily” on the
8 credible testimony of one of the transferees that there was no understanding
9 between the decedent and her children. Id.
10 In the present case, there is nothing in the record to indicate that Margot
11 Stewart’s use of the Manhattan residence after the transfer was limited in the
12 fashion of the decedent’s in Estate of Wineman, or that Brandon’s presence in
13 any way interfered with Margot’s possession or enjoyment of the property. In
14 fact, the estate concedes that Margot and Brandon Stewart amicably shared the
15 residential property after the transfer, just as they had when Margot Stewart
16 was sole owner. See Petitioner’s Br. at 9 (indicating that after the transfer,
17 “Brandon and Margot lived together amicably as tenants in common, sharing the
18 residential portion of the building”). Given Margot Stewart’s receipt of 100% of
19 rent paid on the property, see Estate of Hendry v. Comm’r, 62 T.C. 861, 873
20 (1975) (noting that the actual “retention of income or revenue from the property
12
1 by the decedent . . . constitutes very clear evidence” of the existence of an implied
2 agreement.); accord Estate of McNichol v. Comm’r, 265 F.2d 667, 671 (3d Cir.
3 1959), the estate here needed to point to some facts or circumstances to carry its
4 “particularly onerous” burden of showing the absence of an implied agreement
5 with respect to Margot Stewart’s possession or enjoyment of the whole. See
6 Estate of Maxwell, 3 F.3d at 594. But the estate made no showing whatsoever
7 that Margot Stewart’s use of the residential portion of the townhouse changed
8 appreciably between the many years when Brandon lived with Margot as her
9 houseguest and the final months of her life, when Brandon possessed a formal
10 interest in the property.
11 Moreover, the Tax Court made other findings of fact that strongly
12 supported its conclusion that Margot Stewart retained possession or enjoyment
13 of the property following her formal transfer of an interest to Brandon. As
14 already mentioned, Margot Stewart received 100% of the income from the rental
15 portion of the Manhattan property, the significance of which the majority
16 attempts to minimize by dividing the property into its rental and residential
17 components, and suggesting that the Tax Court erred by not making separate
18 findings adequate to support a conclusion that the extent of the implied
19 agreement covered the residence. But as the majority acknowledges,
20 determining the scope of an implied agreement is far from an exact science, and
13
1 the Tax Court here was permitted to draw some inferences in determining the
2 agreement’s parameters. [Draft 15] The majority does not indicate why the
3 Tax Court could not have drawn a strong inference about how Margot and
4 Brandon Stewart viewed their relationship to the residential portion of the
5 Manhattan property from the way they acted with respect to the property’s
6 rental income, which belied the estate’s contention that a bona fide tenancy in
7 common had been created. See Estate of Thompson, 382 F.3d at 376 (“An
8 implied agreement may be inferred from the circumstances surrounding both the
9 transfer and subsequent use of the property.”).
10 In fact, the significance of the majority’s assertion – not to be found in
11 prior case law – that the Tax Court was required to make separate findings
12 regarding the commercial and residential portions of the Manhattan property
13 cannot be overstated. By subdividing the property in this way, the majority first
14 renders Margot Stewart’s receipt of the rental income – or any other evidence
15 regarding the property’s so-called “commercial” portion – irrelevant to the
16 determination whether she retained possession or enjoyment of the “residential”
17 portion. The majority in effect shifts the burden of proving the existence of an
18 implied agreement as to the residential portion to the Commissioner by
19 depriving him of the natural inferences that flow from all the facts and
20 circumstances surrounding this transfer – a single transaction which the
14
1 majority admits included an implied agreement favoring Margot Stewart. The
2 majority next makes it near impossible for the Commissioner to meet his new
3 burden with the astounding claim, relying on cases saying merely that a
4 transferor’s continued residence at a property after transfer is not alone
5 sufficient to infer an implied agreement, that such residence “is highly probative
6 of the absence of an implied agreement”! [Draft 18]. This analysis makes it
7 hard to conceive of a situation in which the Tax Court might properly find that
8 despite the formal transfer of a fractional interest in property to a cohabitating
9 child, the parent reserved for himself its possession and enjoyment so that the
10 estate should not be permitted to avoid the payment of estate tax on the
11 property’s value as a whole.
12 Properly considering all the facts and circumstances, and placing the
13 burden where it belongs, it is abundantly clear that the Tax Court did not err
14 here in holding against the estate. Brandon Stewart’s efforts to satisfy the
15 estate’s burden of disproving the significance of the rental receipts – via trial
16 testimony in which he explained that he had received none of the Manhattan
17 rent because he and Margot Stewart had agreed to offset the costs and revenues
18 of the Manhattan property against those associated with their East Hampton
19 property – failed for lack of credibility. See Amalfitano v. Rosenberg, 533 F.3d
20 117, 123 (2d Cir. 2008) (“In reviewing findings for clear error, we are not allowed
15
1 to second-guess either the trial court’s credibility assessments or its choice
2 between permissible competing inferences.”). The Tax Court’s adverse
3 credibility finding, moreover, was supported by the inconsistency between
4 Brandon’s testimony and that of his accountant, who indicated that he could not
5 recall Brandon ever having told him of the offset plan. See Krieger v. Gold Bond
6 Bldg. Prods., 863 F.2d 1091, 1098 (2d Cir. 1988) (“[W]hen a trial judge’s finding
7 is based on his decision to credit the testimony of one of two or more witnesses,
8 each of whom has told a coherent and facially plausible story that is not
9 contradicted by extrinsic evidence, that finding, if not internally inconsistent,
10 can virtually never be clear error.”) (quoting Anderson, 470 U.S. at 575).
11 Even if additional factual findings were required to support the Tax
12 Court’s conclusions with respect to the residential portion of the property –
13 which I dispute – the Tax Court made such findings. As the Tax Court noted,
14 after Margot’s transfer of a 49% undivided interest to Brandon, she continued
15 to pay the bulk of the expenses relating to the Manhattan property, contributing
16 $21,790.85 in 2007 while Brandon paid only $1963. Estate of Stewart, 92 T.C.M.
17 (CCH) 357, 358 (2006). The majority indicates, on the one hand, that Brandon’s
18 payment of this sum without reimbursement was a “significant change[]” in his
19 and Margot Stewart’s relationship to the property [Draft 5], implying that it
20 supports the conclusion that Brandon’s post-transfer relationship to the property
16
1 was that of part-owner. At the same time, the majority suggests that Margot’s
2 payment of more than her share of the property’s expenses decreased her net
3 possession or enjoyment of the property, [Draft 22-23]. But surely, Brandon’s
4 payment of far less than his share of expenses as tenant in common – a bit over
5 8% of the total expenses, when he was the 49% owner of the property – supports
6 the Tax Court’s conclusion that the transfer was not one of substance, in that
7 Margot continued to fulfill the bulk of the responsibilities of ownership,
8 notwithstanding Brandon’s formal interest.2 Case law does not support the
9 assertion that a tax court is precluded from finding that the transferor retained
2
The majority indicates that even if its legal analysis of the significance of
Brandon Stewart’s nominal contributions is flawed, his failure to fulfill the
obligations of a tenancy in common still are not sufficiently suggestive of an
agreement favoring Margot. [Draft 19] n.13 (observing that “a decedent’s payment
of all or substantially all gross expenses post-transfer has, in many cases, not
resulted in a finding of an implied agreement” (citing Estate of Roemer, 46 T.C.M.
(CCH) at 1177; Stephenson, 238 F. Supp. at 663)). But the majority does not
dispute the Tax Court’s finding that an implied agreement did exist with respect to
the property at issue in this case, and the majority’s citation to cases in which
courts have declined to accord much weight to the decedent’s post-transfer payment
of expenses fails to note either the relative absence of other evidentiary support for
an implied agreement in those cases, see Stephenson, 238 F. Supp. at 633, or the
existence of offsetting evidence in favor of the estate that was significant to the
result, see Estate of Roemer, 46 T.C.M. (CCH) at 1179 (observing “[t]he evidence in
the record clearly demonstrates the change in the decedent’s state of mind
regarding the residence after giving it to her daughter,” and noting that after the
transfer, the decedent had referred to her daughter as her “landlord,” requested
permission before inviting friends to the residence, and expressed a fear of being
excluded and sent to a nursing home); id. (noting “[the daughter’s] actions following
the gifting of the residence also changed,” pointing to the fact that she, as
transferee, had made substantive payments reflective of ownership, and crediting
the daughter’s testimony that “if there had ever been a falling out . . . [the decedent]
would have been the one to have moved”).
17
1 possession or enjoyment of the entirety of a property when the transferee made
2 only token gestures showing that the transfer had substance, and where only
3 minor changes occurred in the transferor’s possession or enjoyment. See Estate
4 of Thompson, 382 F.3d at 376 (upholding inclusion of interest in gross estate
5 where the “practical effect of . . . changes [imposed by the transfer] during
6 decedent’s life was minimal”); cf. Estate of Grace, 395 U.S. at 324 (finding
7 property held in trust includable in gross estate under 26 U.S.C. § 2038 when a
8 reciprocal trust arrangement “leaves the settlors in approximately the same
9 economic position as they would have been in had they created trusts naming
10 themselves as life beneficiaries”); Estate of Wineman, 79 T.C.M. (CCH) at 2194
11 (noting that even payment of all property taxes by someone other than
12 transferor is insufficient to show absence of an implied agreement giving
13 transferor possession or enjoyment of the whole). Viewed in its entirety, the
14 history of Margot and Brandon Stewart’s relationship to the Manhattan
15 property, and especially the lack of significant, objective changes in that
16 relationship, strongly supports the Tax Court’s conclusion that Brandon Stewart
17 remained, in essence, Margot Stewart’s houseguest. A fortiori, the record does
18 not support a “definite and firm conviction that a mistake has been committed’”
19 by the Tax Court in this case. Mobil Shipping, 190 F.3d at 67-68.
20 The majority purports to stop short of holding that, as a matter of law,
18
1 post-transfer co-occupancy by the transferor and transferee will always preclude
2 a finding of an implied agreement in favor of the transferor. But given the facts
3 present in this case, it is hard to imagine any evidence – short of an admission
4 at trial by the estate – that would be sufficient to demonstrate the existence of
5 an implied agreement regarding a co-occupied residence. The transferor’s
6 retention of all rent from the commercial portion of the very same property is
7 deemed irrelevant as a matter of law to the conclusions a tax court may draw
8 regarding the property’s residential portion, notwithstanding the court’s
9 obligation to consider all circumstances surrounding the property in assessing
10 the parties’ intentions. And a transferee’s minimal post-transfer participation
11 in the obligations of a tenancy in common is held, strangely and again as a
12 matter of law, both to aid in establishing the existence of an adverse agreement
13 and to undercut the economic value for estate tax purposes of that which was
14 retained. If the majority’s opinion imposes any burden of proof on the estate,
15 much less the onerous one that precedent requires, I cannot see it. Cohabitating
16 family members are all but invited to engage in sham transactions that have no
17 impact upon the transferor’s possession and enjoyment of a property, and whose
18 only purpose is tax avoidance. It is not the job of this Court, of course, to close
19 loopholes that Congress has left in the tax code. Here, however, the majority
20 inexplicably reopens a loophole that the legislature has, in unmistakable terms,
19
1 long since commanded shut.
2 Evidence demonstrating the existence of a genuine post-transfer tenancy
3 in common certainly could weigh against the conclusion that the transferor and
4 transferee had an implied agreement that the transferor would continue to
5 possess or enjoy the whole of a property. But since in this case there is not only
6 an absence of such evidence, but the record actually shows that the parties to the
7 transfer did not behave as though a tenancy in common had been created and
8 the transferor’s relationship to the property did not, in substance, change, I
9 cannot see how it was clear error for the Tax Court to find that the estate failed
10 to carry its burden to disprove the existence of an implied agreement favoring
11 the transferor with regard to both the commercial and residential aspects of this
12 Manhattan townhouse. The majority’s reasoning, by focusing solely on Brandon
13 Stewart’s residence at the townhouse as a tenant in common as dispositive, not
14 only departs from prior case law and contravenes the text of section 2036, but
15 also thoroughly undermines the statute, inviting inequitable disparities among
16 those subject to the estate and gift taxes due to easy dodges by future tax
17 avoiders.
18 I respectfully dissent.
20