ESTATE OF ELEANOR T.R. TROTTER v. COMMISSIONER

T.C. Memo. 2001-250

UNITED STATES TAX COURT

ESTATE OF ELEANOR T.R. TROTTER, DECEASED, WILLIAM F. RECTOR, JR.,
AND ANN RECTOR LEWIS, CO-EXECUTORS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 288-00. Filed September 21, 2001.

In 1993, D gratuitously transferred her residence
to an irrevocable trust, naming her daughter as trustee
and her grandchildren as beneficiaries. D then
continued to occupy the residence without payment of
rent until her death in 1996.

Held: There existed an implied understanding that
D would retain possession and enjoyment of the
residence such that the property is includable in her
gross estate under sec. 2036(a)(1), I.R.C.

Held, further, the value of the residence for
purposes of inclusion in the gross estate is $125,000.

H. Lawrence Yancey, for petitioner.

Elizabeth Downs, for respondent.
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MEMORANDUM OPINION

NIMS, Judge: Respondent determined a Federal estate tax

deficiency in the amount of $48,750 for the estate of Eleanor

T.R. Trotter (the estate). The issues for decision are whether,

pursuant to section 2036(a), the gross estate of Eleanor T.R.

Trotter (decedent) includes the value of a residence transferred

to an irrevocable trust and, if so, the proper value of the

property for estate tax purposes.

Unless otherwise indicated, all section references are to

sections of the Internal Revenue Code in effect as of the date of

decedent’s death, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

Background

This case was submitted fully stipulated pursuant to Rule

122, and the facts are so found. The stipulations of the

parties, with accompanying exhibits, are incorporated herein by

this reference. Decedent was a resident of Little Rock,

Arkansas, when she died testate in that State on January 31,

1996. Her will was subsequently admitted to probate in the

Probate Court of Pulaski County, Arkansas, Fourth Division.

William F. Rector, Jr., and Ann Rector Lewis were named co-

executors of the estate and likewise provided a mailing address

of Little Rock, Arkansas, at the time the petition in this case

was filed.
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Decedent was diagnosed with breast cancer in 1986. As a

result of surgery and chemotherapy, the cancer went into

remission until 1991, when it returned in the form of malignant

lymphoma. Decedent waged a continuing battle with the disease

until her death from the condition approximately 5 years later.

During 1993, decedent met with her attorney and her children

on several occasions for the purpose of planning the passage of

decedent’s property in the event of her death. Decedent had

three adult children from her first marriage to William F.

Rector: Ann Rector Lewis, William F. Rector, Jr., and Nancy

Rector. Decedent had married her second, and surviving, husband,

John F. Trotter, Sr. (Mr. Trotter), several years after William

F. Rector’s death.

At one such meeting, on December 17, 1993, decedent created

an irrevocable trust entitled the Eleanor Trotter Grandchildren

Trust (the trust). The named beneficiaries of the trust were

“the grandchildren of Eleanor T. Trotter and the issue thereof,

if any”, and the designated trustee was decedent’s daughter, Ann

Rector Lewis. As of that date, decedent had five grandchildren,

two of whom were adults and three of whom were minors.

The trust instrument provided that, during the term of the

trust, the trustee was required to hold, manage, invest, and

reinvest the trust property for the benefit of the beneficiaries.

The document also authorized the trustee to distribute income and
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principal to the beneficiaries as the trustee deemed necessary

for the beneficiaries’ health, education, support, or

maintenance. The trust instrument then set forth the following

with respect to the trust’s termination:

Upon the death of Eleanor T. Trotter, the real
estate which is contemplated to be held by this trust
(namely Apartment 3-S, Westriver Townhouses Horizontal
Property Regime, Pulaski County, Arkansas) shall be
maintained for one year during which time John F.
Trotter, Sr. (if he remains married to Grantor at the
time of her death) shall be entitled to live in such
real estate rent free if he pays all occupancy
expenses. Also, he shall have the option within one
year of Grantor’s death to lease or purchase such real
estate at its fair rental rate or fair market value (as
the case may be). If he leases the real estate, the
trust shall continue to hold the real estate until the
lease terminates. At the termination of the lease or,
if no lease, one year following Grantor’s death, the
assets then held in trust shall be divided into equal
shares for as many grandchildren of Grantor as are then
living or who have deceased but left issue surviving.
Such shares shall then be distributed directly to the
Beneficiaries except to those who are minor and, in
such event, * * * [distribution shall be to a trustee
managing a trust for the benefit of such minor
beneficiary].

The provisions described above regarding the use and

distribution of trust assets during and at the termination of the

trust were contained in paragraph 2 of the document, labeled

“DISPOSITIVE PROVISIONS”. Paragraph 3, “RIGHT OF WITHDRAWAL”,

next stated, in pertinent part:

Notwithstanding the provisions of paragraph 2
above, in the calendar year in which the trust is
created, the Beneficiaries shall have the power, in
their sole discretion, commencing with the date of such
creation to withdraw property then belonging to the
principal of the trust having a value equal to the
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lesser of the (i) the actual amount contributed by each
transferor during the calendar year of the creation of
the trust, or (ii) $10,000.00 per transferor. If an
additional contribution to principal is made to the
trust in a calendar year subsequent to the year in
which the trust is created, each grandchild then living
shall have the power, in his/her sole discretion
commencing with the date of such addition, to withdraw
property then belonging to the principal of the trust
(including the property constituting the addition)
having a value equal at the time of withdrawal to the
value of the addition to trust (at the time of such
addition) immediately after the time of addition,
provided that the individual making the addition shall
have the right by a written instrument filed with the
Trustee to (i) exclude any individual who would
otherwise have a power of withdrawal from exercising
such power, (ii) increase or decrease the amount
subject to any power of withdrawal except that the
amount subject to all withdrawal powers shall not
exceed the amount of the addition, or (iii) to change
the period during which any power of withdrawal may be
exercised. The Trustee shall notify in writing each
person having a withdrawal power [or a legal guardian
or parent thereof] advising each such person of the
existence of the withdrawal power and such notification
shall be made promptly after the creation of the trust
or after an addition is made in a calendar year
subsequent to the year of creation of the trust. * * *
Each such person receiving notification from the
Trustee shall have thirty (30) calendar days (or in the
case of an addition, such other period determined by
the individual making the addition) after receiving
such notification to exercise the power by a written
instrument delivered to the Trustee * * *

Subsequently, on December 22, 1993, decedent signed a

warranty deed transferring title to Apartment 3S of the Westriver

Townhouses to the trust. Such property was the condominium in

which decedent and Mr. Trotter resided. In addition, although

Mr. Trotter was not an owner of the condominium, he also signed

the warranty deed to release any spousal rights in the property
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accruing to him under Arkansas law. No consideration was paid to

decedent or Mr. Trotter in connection with the transfer.

Following the trust’s creation, none of the beneficiaries

attempted to exercise a right of withdrawal. Decedent and Mr.

Trotter continued to live in the condominium as their primary

residence until decedent’s death on January 31, 1996. No rental

payments were made by decedent and/or Mr. Trotter to the trust

from December 17, 1993, to January 31, 1996. During this period,

decedent paid all occupancy expenses related to the condominium,

including maintenance expenses, utilities, property taxes,

condominium fees, and premiums for insurance coverage. No bank

account was maintained by or for the trust, and, with the

exception of the above-referenced transfer of title to the

condominium, the trust did not receive or distribute any cash or

other property during this time.

As previously indicated, decedent died on January 31, 1996.

Thereafter, for a period of 3 months, Mr. Trotter continued to

reside in the condominium. He made no rental payments to the

trust with respect to his occupancy. During this period, and

until at least June of 1996, the trust expended no funds for

maintenance, utilities, taxes, or fees; received no further cash

or property; and distributed no assets for the benefit of the

beneficiaries.
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On July 12, 1996, the condominium was sold for a purchase

price of $155,000. The proceeds of the sale were distributed by

the closing agent to the beneficiaries of the trust, and the

trust was terminated.

A Form 706, United States Estate (and Generation-Skipping

Transfer) Tax Return, was filed for decedent’s estate on October

31, 1996. Therein an election was made under section 2032(a) to

value decedent’s gross estate as of the alternate valuation date.

The gross estate so reported did not include any value

attributable to the condominium. Following an examination of

decedent’s estate tax return, which was initiated on October 28,

1997, respondent determined that the condominium was includable

in decedent’s gross estate at a fair market value of $125,000.

Discussion

I. Inclusion of the Condominium in Decedent’s Gross Estate

A. General Rules

As a general rule, the Internal Revenue Code imposes a

Federal tax “on the transfer of the taxable estate of every

decedent who is a citizen or resident of the United States.”

Sec. 2001(a). Such taxable estate, in turn, is defined as “the

value of the gross estate”, less applicable deductions. Sec.

2051. Section 2031(a) then specifies that the gross estate
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comprises “all property, real or personal, tangible or

intangible, wherever situated”, to the extent provided in

sections 2033 through 2045.

Section 2033 broadly states that “The value of the gross

estate shall include the value of all property to the extent of

the interest therein of the decedent at the time of his death.”

Sections 2034 through 2045 then explicitly mandate inclusion of

several more narrowly defined classes of assets. Among these

specific sections is section 2036, which reads in pertinent part

as follows:

SEC. 2036. TRANSFERS WITH RETAINED LIFE ESTATE.

(a) 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 or for any period not
ascertainable without reference to his death or for any
period which does not in fact end before his death--

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

(2) the right, either alone or in conjunction
with any person, to designate the persons who
shall possess or enjoy the property or the income
therefrom.

Regulations similarly explain that the gross estate under section

2036 includes the value of property if the decedent retained the

“use, possession, right to the income, or other enjoyment of the

transferred property”. Sec. 20.2036-1(a)(i), Estate Tax Regs.
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Given the language used in the above-quoted provisions, it

has long been recognized that section 2036 “describes a broad

scheme of inclusion in the gross estate, not limited by the form

of the transaction, but concerned with all inter vivos transfers

where outright disposition of the property is delayed until the

transferor’s death.” Guynn v. United States, 437 F.2d 1148, 1150

(4th Cir. 1971). Accordingly, courts have emphasized that

section 2036(a)(1) is phrased in the alternative, such that

inclusion is mandated, absent full consideration, if the

transferor retained either actual “possession or enjoyment” or a

“right to the income”. Estate of McNichol v. Commissioner, 265

F.2d 667, 670 (3d Cir. 1959), affg. 29 T.C. 1179 (1958); Estate

of Honigman v. Commissioner, 66 T.C. 1080, 1082 (1976).

As used in section 2036(a)(1), the term “enjoyment” has been

described as “synonymous with substantial present economic

benefit.” Estate of McNichol v. Commissioner, supra at 671. In

the context of real property, “‘possession’ and ‘enjoyment’ have

been interpreted to mean ‘the lifetime use of the property.’”

Estate of Maxwell v. Commissioner, 3 F.3d 591, 593 (2d Cir.

1993)(quoting United States v. Byrum, 408 U.S. 125, 147 (1972)),

affg. 98 T.C. 594 (1992).

Such possession or enjoyment of transferred property is

retained for purposes of section 2036(a)(1) where there is an

express or implied understanding to that effect among the parties
 - 10 -

at the time of the transfer, even if the retained interest is not

legally enforceable. Estate of Maxwell v. Commissioner, supra at

593; Guynn v. United States, supra at 1150; Estate of Reichardt

v. Commissioner, 114 T.C. 144, 151 (2000); Estate of Rapelje v.

Commissioner, 73 T.C. 82, 86 (1979); Estate of Honigman v.

Commissioner, supra at 1082; Estate of Linderme v. Commissioner,

52 T.C. 305, 308 (1969). Regulations likewise provide that “An

interest or right is treated as having been retained or reserved

if at the time of the transfer there was an understanding,

express or implied, that the interest or right would later be

conferred.” Sec. 20.2036-1(a), Estate Tax Regs.

The existence or nonexistence of such an understanding is

determined from all of the facts and circumstances surrounding

both the transfer itself and the subsequent use of the property.

Estate of Reichardt v. Commissioner, supra at 151; Estate of

Rapelje v. Commissioner, supra at 86. Traditionally, the burden

of disproving the existence of an agreement has rested on the

estate, and this burden has often been characterized as

particularly onerous in intrafamily situations. Estate of

Maxwell v. Commissioner, supra at 594; Estate of Reichardt v.

Commissioner, supra at 151-152; Estate of Rapelje v.

Commissioner, supra at 86. Furthermore, although recently

enacted section 7491 may operate in certain scenarios to place

the burden on the Commissioner, the statute is effective only for
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court proceedings that arise in connection with examinations

commencing after July 22, 1998. Internal Revenue Service

Restructuring & Reform Act of 1998, Pub. L. 105-206, sec.

3001(c), 112 Stat. 685, 727. Since the parties here stipulated

that examination of the estate tax return at issue was initiated

on October 28, 1997, section 7491 is inapplicable, and the

estate’s references thereto on brief are misplaced. The burden

therefore remains on the estate to establish that respondent’s

determination is erroneous.

B. Existence of Consideration

In accordance with the foregoing standards, the value of the

condominium must be included in decedent’s gross estate if she

retained an interest therein of a type described in section

2036(a), unless she received adequate and full consideration for

the transfer at issue. As a threshold matter, we note that both

parties have proposed as a finding of fact that no consideration

was paid for the transfer. Since nothing in the record

establishes that the conveyance of title was other than

gratuitous, we accept the proposed finding as a concession by the

estate. We also observe that even if decedent’s subsequent rent-

free occupancy is taken into account in this calculus, it is

self-evident that the value of a life estate is not the
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equivalent of the value of an unencumbered estate. Accordingly,

we turn to whether decedent retained an interest within the

meaning of section 2036(a).

C. Existence of a Retained Interest

1. Contentions of the Parties

Respondent contends that the condominium is includable in

decedent’s gross estate on the grounds that decedent retained

possession and enjoyment through an implied or tacit agreement.

Respondent maintains that all of the circumstances relating to

the purported conveyance of the property and decedent’s continued

occupancy show an implicit arrangement bringing the residence

within the purview of section 2036(a)(1).

Conversely, the estate avers that the condominium is not

subject to inclusion in decedent’s gross estate under section

2036(a). It is the estate’s position that decedent relinquished

all legal and equitable rights to the property in 1993. In

support of this position, the estate emphasizes the following

facts: (1) Title was transferred to the trust; (2) the trustee

was bound by the trust terms and by fiduciary duties under State

law to hold and manage the property for the benefit of the

beneficiaries; (3) the beneficiaries were given an immediate

right to withdraw trust assets and thereby to defeat all other

rights; and (4) decedent gave up the economic benefit of being

able to generate cash by selling or borrowing against the
 - 13 -

property. The estate thus concludes that decedent “had

possession of the Real Estate as a tenant and she paid for the

same”, based on her payment of all occupancy costs. We disagree

for the reasons explained below.

2. Analysis

The totality of the circumstances presently before us

requires a conclusion that an implied understanding existed

between decedent and her family members that she would retain

possession and enjoyment of her condominium within the meaning of

section 2036(a)(1). The facts of this case are not such that it

can be distinguished in any material way from the substantial

body of case law mandating inclusion in the context of continued

occupancy of a personal residence. As we shall detail infra, the

principal factors relied upon in such opinions are equally in

evidence here, and additional indicia unique to decedent’s

situation buttress the adverse inference.

To begin with, we and other courts have characterized the

continued exclusive possession by the donor and the withholding

of possession from the donee as particularly significant factors.

Guynn v. United States, 437 F.2d at 1150; Estate of Rapelje v.

Commissioner, 73 T.C. at 87; Estate of Linderme v. Commissioner,

52 T.C. at 309. Here, too, decedent continued to occupy the
 - 14 -

condominium after the transfer of title to the exclusion of the

donees or anyone else whose status stemmed from a superior legal

right to the property.

The further circumstance that a donor’s occupancy occurred

without payment of rent to the donee has also been repeatedly

highlighted. Guynn v. United States, supra at 1150; Estate of

Rapelje v. Commissioner, supra at 88; Estate of Honigman v.

Commissioner, 66 T.C. at 1081. As this Court has opined,

“continued rent-free, exclusive occupancy of * * * [the

residence] for life constitutes a substantial present economic

benefit akin to his renting * * * [the property] to a third party

and keeping the rent therefrom.” Estate of Baggett v.

Commissioner, T.C. Memo. 1991-362; see also Estate of Linderme v.

Commissioner, supra at 309. Again, such an analogy is present in

this case as well. We also note in this connection that the

estate’s focus on an ability to sell or borrow against the

property as a principal economic benefit finds no support in the

reported decisions. Since the decedent in nearly every case has

transferred legal title, a consequent legal disability from

transacting based on the property must be assumed. Yet the

courts have not mentioned this deficiency and thus have

apparently deemed it without moment in the face of rent-free

occupancy.
 - 15 -

Moreover, contrary to the estate’s intimations, payment of

occupancy expenses such as utilities, taxes, and insurance has

not been considered a substitute for rent but rather has been

seen to weigh in favor of finding a retained interest. Guynn v.

United States, supra at 1150; Estate of Rapelje v. Commissioner,

supra at 88; Estate of Kerdolff v. Commissioner, 57 T.C. 643, 649

(1972). In sum, courts have been unwilling to decide that no

interest was retained within the meaning of section 2036(a)(1)

where objective evidence has shown that the decedent’s

relationship in fact to the property, beyond the transfer of bare

legal title, remained largely unchanged. Guynn v. United States,

supra at 1150; Estate of Reichardt v. Commissioner, 114 T.C. at

152; Estate of Rapelje v. Commissioner, supra at 88. Such is

clearly true here.

As a corollary to the preceding principle, courts have also

considered significant the lack of efforts on the part of a donee

to sell, lease, use, or otherwise take steps to obtain any

economic return from the property. Estate of Maxwell v.

Commissioner, 3 F.3d at 594; Guynn v. United States, supra at

1150; Estate of Rapelje v. Commissioner, supra at 88.

Additionally, the practical unlikelihood of family members’

ousting an elderly relative has been acknowledged. See Guynn v.

United States, supra at 1150; Estate of Honigman v. Commissioner,

supra at 1083; Estate of Kerdolff v. Commissioner, supra at 650.
 - 16 -

Once more, the facts before us fit this pattern as well. The

trustee did not even open a bank account for the trust; hence, we

are hard-pressed to infer that the trustee intended to manage the

property so as to achieve an economic benefit for the

beneficiaries at any time prior to decedent’s death.

Furthermore, we find the particular terms of the trust

instrument at issue here to be highly supportive of an implied

arrangement that decedent would retain possession of the

condominium. Specifically, we emphasize that the express terms

of the agreement granted Mr. Trotter a right to possess the

property for a period following decedent’s death. We believe

that there would have been little, if any, reason to include such

language absent an understanding that decedent and her husband

would be living in the home at the time of her death.

Moreover, we are satisfied that the logical conclusion to be

drawn from these terms is not negated by the withdrawal

provisions upon which the estate so heavily relies. The numerous

indicia discussed above are equally supportive of an implied

understanding that the withdrawal rights would not be exercised,

an interpretation buttressed by the awareness that the

beneficiaries were decedent’s grandchildren (and three of the

five were minors). We cannot blind ourselves to the reality of

the family relationships involved, and the estate has failed to

show that the withdrawal rights were anything more than a paper
 - 17 -

formality without intended economic substance. In addition, such

construction is strengthened still further by fact that the

trust’s having been funded solely with a single piece of real

estate would have made any attempt to effectuate a withdrawal

complex and burdensome at best. While it is not entirely clear

from the document how the provision would operate in this

circumstance, we doubt that any beneficiary would seriously have

contemplated forcing the trustee to sell the home so that he or

she could collect $10,000.

Lastly, we observe that the four cases cited by the estate

in support of its position do not lead us to reach a result

different from that which appears compelled by the facts before

us. In particular, the estate cites United States v. Byrum, 408

U.S. 125 (1972); Estate of Wall v. Commissioner, 101 T.C. 300

(1993); Estate of Beckwith v. Commissioner, 55 T.C. 242 (1970);

and Estate of Chalmers v. Commissioner, T.C. Memo. 1972-158.

However, the principles that the estate asks us to glean from

these cases seem to be drawn primarily from the courts’

discussions of section 2036(a)(2), rather than section

2036(a)(1). We do not dispute that courts have construed the

term “right” as used in section 2036(a)(2) to mean an

ascertainable and legally enforceable power. See United States

v. Byrum, supra at 136; Estate of Wall v. Commissioner, supra at

310-311. Nor do we disagree that the “practical considerations”
 - 18 -

advanced by the Commissioner may at times have been rejected as

insufficient for inclusion under either paragraph of section

2036(a). See Estate of Beckwith v. Commissioner, supra at 248-

251. Nonetheless, we are firmly convinced that the cases which

deal with retained “possession or enjoyment” of a residence for

purposes of section 2036(a)(1), which the estate’s cited cases do

not, establish the relevant standards and must govern our

decision here. Accordingly, the estate’s reliance on these

legally and factually distinguishable opinions is misplaced.

Therefore, in light of all the facts and circumstances

present in this case, we hold that decedent retained possession

and enjoyment of the condominium within the meaning of section

2036(a)(1). The value of the condominium must be included in her

gross estate.

II. Valuation of the Condominium

Regulations promulgated under section 2036 provide the

following with regard to the value to be included in the gross

estate pursuant to that statute:

If the decedent retained or reserved an interest or
right with respect to all of the property transferred
by him, the amount to be included in his gross estate
under section 2036 is the value of the entire property,
less only the value of any outstanding income interest
which is not subject to the decedent’s interest or
right and which is actually being enjoyed by another
person at the time of the decedent’s death. If the
decedent retained or reserved an interest or right with
respect to a part only of the property transferred by
him, the amount to be included in his gross estate
 - 19 -

under section 2036 is only a corresponding proportion
of the amount described in the preceding sentence.* * *
[Sec. 20.2036-1(a), Estate Tax Regs.]

Thus, since decedent retained possession and enjoyment of her

entire residence, the full value of the condominium is includable

in her gross estate.

The standard for ascertaining such value is then set forth

in section 20.2031-1(b), Estate Tax Regs. Specifically, property

is included in the gross estate at its “fair market value”,

defined as “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.” Id. The date with respect to

which the asset is valued is either the date of death or, if the

alternate valuation method under section 2032 is elected, the

date prescribed in that section. Sec. 20.2031-1(b), Estate Tax

Regs. As pertinent here, section 2032(a)(1) states that property

disposed of within 6 months of the decedent’s death is valued as

of the date of its disposition.

Decedent’s condominium was sold approximately 5-1/2 months

after her death for $155,000. Respondent determined a value of

$125,000 in the notice of deficiency. The estate has offered no

further evidence and no argument on the issue of valuation. We
 - 20 -

therefore sustain respondent’s determination. We hold that the

condominium is includable in decedent’s gross estate at the

determined value of $125,000.

To reflect the foregoing,

Decision will be entered

under Rule 155.