T.C. Memo. 2006-225
UNITED STATES TAX COURT
ESTATE OF MARGOT STEWART, DECEASED, BRANDON STEWART, EXECUTOR,
Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
ESTATE OF MARGOT STEWART, DECEASED, DONOR, BRANDON STEWART,
EXECUTOR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 5520-05, 5521-05. Filed October 24, 2006.
Kirk H. O’Ferrall, Kathleen M. Citera, and Robert Callagy
(specially recognized), for petitioners.
Shawna A. Early and Lydia A. Branche, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
FOLEY, Judge: The issues for decision are whether decedent
made a completed gift of a 49-percent interest in real property,
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whether the value of that property should be included in
decedent’s estate pursuant to section 2036,1 and whether
decedent’s estate is entitled to deductions relating to property
taxes and claims against the estate.
FINDINGS OF FACT
On July 10, 1989, Margot Stewart (decedent) executed a deed
that transferred to Brandon Stewart, her son, real property
located in East Hampton, New York (the East Hampton property).
As a result of the transfer, decedent and Mr. Stewart owned the
East Hampton property as joint tenants with rights of
survivorship. Decedent and Mr. Stewart agreed to share the
income and expenses relating to the East Hampton property.
Decedent also owned real property located at 160 East 61st
Street, New York, New York (the 61st Street property). Decedent
and Mr. Stewart resided on the first two floors of the 61st
Street property. Beginning on October 1, 1999, decedent leased
the remaining three floors of the 61st Street property to
Financial Solutions, Ltd., an unrelated third party, for $9,000
per month.
On May 9, 2000, decedent executed a deed that transferred to
Mr. Stewart a 49-percent interest in the 61st Street property.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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As a result of the transfer, decedent and Mr. Stewart owned the
property as tenants in common. On May 10, 2000, Robert Goldie,
Mr. Stewart’s attorney, delivered the deed to Choice Abstract
Corp. (Choice Abstract) for the purpose of recording the deed.
The deed, however, was misplaced by Choice Abstract and was not
recorded until April 4, 2001.
Decedent, who was a resident of New York, died on November
27, 2000. After the May 9, 2000, transfer and until the time of
her death, decedent continued to receive all of the rental
payments from Financial Solutions, Ltd. Prior to her death,
decedent also paid most of the expenses relating to the 61st
Street property (i.e., decedent paid expenses of $21,790.85 while
Mr. Stewart paid $1,963).
Mr. Stewart and Barbara Weisl were appointed executors of
decedent’s estate. On August 19, 2001, decedent’s executors
filed a Form 709, United States Gift (and Generation-Skipping
Transfer) Tax Return, relating to the transfer of the 61st Street
property. On August 27, 2001, Mr. Stewart obtained a mortgage on
the 61st Street property. On February 23, 2002, decedent’s
executors filed a Form 706, United States Estate (and Generation-
Skipping Transfer) Tax Return, relating to decedent’s estate.
Ms. Weisl died on November 14, 2004, and the estate did not
appoint another executor.
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On December 22, 2004, respondent issued separate statutory
notices of deficiency relating to the estate and gift tax
returns. On March 22, 2005, Mr. Stewart, while residing in New
York, New York, timely filed separate petitions on behalf of the
estate relating to the estate and gift tax returns.
OPINION
I. The Transfer to Mr. Stewart Was A Completed Gift
The estate contends that the transfer from decedent to Mr.
Stewart of the 49-percent interest in the 61st Street property
was a completed gift. Pursuant to New York law, a gift is
complete only if donative intent, delivery, and acceptance are
established. Gruen v. Gruen, 496 N.E.2d 869, 872 (N.Y. 1986).
The parties agree that decedent intended to transfer the
property and Mr. Stewart accepted the property. Respondent,
however, contends that there was not a valid delivery of the gift
until April 4, 2001 (i.e., the date the deed was recorded). We
disagree. Pursuant to New York law, the recording of a deed is
irrelevant in determining whether there is a completed gift.
N.Y. Real Prop. Law sec. 244 (McKinney 2006); see Whalen v.
Harvey, 653 N.Y.S.2d 159 (App. Div. 1997). The estate has
established that decedent intended to, and did indeed, relinquish
dominion and control of a 49-percent interest in the 61st Street
property on May 9, 2000. See Gruen v. Gruen, supra at 872.
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Thus, the transfer of the interest in the 61st Street property
was a completed gift.2
II. The Property Is Includable Pursuant to Section 2036
The estate acknowledges that decedent’s 51-percent interest
in the 61st Street property is includable in her estate but
contends that the remaining 49 percent of the property is owned
by Mr. Stewart (i.e., as a tenant in common). Respondent
contends that, pursuant to section 2036, 100 percent of the 61st
Street property’s value is includable in the estate because
decedent continued to live there and received all of the rental
income after the May 9, 2000, transfer.
Section 2036(a)(1) provides that a decedent's gross estate
includes the value of all property interests transferred (other
than for full and adequate consideration in money or money's
worth) by a decedent during her life where she has retained for
life the possession or enjoyment of the property, or the right to
the income from the property. The term “enjoyment” refers to the
economic benefits from the property. Estate of Gilman v.
Commissioner, 65 T.C. 296, 307 (1975), affd. 547 F.2d 32 (2d Cir.
2
In general, the Commissioner's determinations set forth
in a notice of deficiency are presumed correct, and the taxpayer
bears the burden of showing that the determinations are
erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115
(1933). Our conclusions, however, are based on a preponderance
of the evidence, and thus, the allocation of the burden of proof
is immaterial. See Martin Ice Cream Co. v. Commissioner, 110
T.C. 189, 210 n.16 (1998).
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1976). Thus, “Enjoyment as used in the death tax statute is not
a term of art, but is synonymous with substantial present
economic benefit.” Estate of McNichol v. Commissioner, 265 F.2d
667, 671 (3d Cir. 1959), affg. 29 T.C. 1179 (1958). Retained
enjoyment may exist where there is an express or implied
understanding at the time of the transfer that the transferor
will retain the economic benefits of the property. Guynn v.
United States, 437 F.2d 1148, 1150 (4th Cir. 1971); Estate of
Rapelje v. Commissioner, 73 T.C. 82, 86 (1979).
Decedent’s retention of the property’s income stream after
the property was transferred is “very clear evidence that the
decedent did indeed retain ‘possession or enjoyment.’” Estate of
Hendry v. Commissioner, 62 T.C. 861, 873 (1974). Decedent
continued to receive the $9,000 monthly rent payments from
Financial Solutions, Ltd., and enjoy the economic benefits of the
61st Street property. Mr. Stewart contends that he and decedent
agreed they would share the income and expenses, in a manner
reflective of their ownership interests, relating to the 61st
Street property (i.e., Mr. Stewart would receive 49 percent of
the income and pay 49 percent of the expenses) and the East
Hampton property (i.e., Mr. Stewart would receive 50 percent of
the income and pay 50 percent of the expenses). At the end of
2000, according to Mr. Stewart, he and decedent intended to
perform a financial reconciliation to ensure that the proper
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amount of income and expenses was allocated to decedent’s and Mr.
Stewart’s interest in both properties. The parties did not sign
a written agreement to reconcile the income and expenses, and Mr.
Stewart’s testimony relating to an oral agreement was not
credible. Indeed, Mr. Stewart’s accountant testified that he did
not recall being informed about an agreement to reconcile the
income and expenses. We do, however, conclude that Mr. Stewart
and decedent had an implied agreement that decedent would retain
the economic benefits of the 61st Street property. Decedent
certainly met the terms of that agreement. Thus, the full value
of the 61st Street property must be included in decedent’s
estate. Sec. 2036(a); Estate of Hendry v. Commissioner, supra at
873.
III. Property Tax Deduction Is Disallowed
After decedent’s death, Mr. Stewart paid $10,153 in property
taxes relating to decedent’s 51-percent interest in the 61st
Street property. The estate contends that the estate is entitled
to a deduction relating to property taxes paid by Mr. Stewart.
At the time of her death, decedent did not have an outstanding
property tax obligation relating to her 51-percent interest in
the 61st Street property. Pursuant to section 2053(c)(1)(B),
property taxes are not deductible by an estate unless the taxes
are an enforceable obligation of the decedent at the time of her
death. See also sec. 20.2053-6(b), Estate Tax Regs.
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Accordingly, no deduction is allowed. Sec. 2053(c)(1)(B); sec.
20.2053-6(b), Estate Tax Regs.
IV. Deduction of Debt Owed to Mr. Stewart Is Not Allowed
The estate contends that it is entitled, pursuant to section
2053(a)(3), to deduct a debt owed to Mr. Stewart relating to the
purported reconciliation agreement, between Mr. Stewart and
decedent, to share the income and expenses relating to both
properties. An estate may deduct the value of a claim based on a
decedent’s promise to pay only if the liability was “contracted
bona fide and for adequate and full consideration in money or
money’s worth”. Sec. 2053(c)(1)(A); See Estate of Scholl v.
Commissioner, 88 T.C. 1265, 1279 (1987). There was no
reconciliation agreement. Accordingly, no deduction is allowed.
Contentions we have not addressed are irrelevant, moot, or
meritless.
To reflect the foregoing,
Decisions will be entered
under Rule 155.