Steinberg v. Commissioner

JEAN STEINBERG, DONOR, PETITIONER v. COMMISSIONER
OF INTERNAL REVENUE, RESPONDENT

Docket No. 23865–11. Filed September 30, 2013.

P entered into a binding gift agreement with her daughters
under which P gave her daughters cash and securities and in
exchange the daughters agreed to assume and to pay, among
other things, any estate tax liability imposed under I.R.C. sec.
2035(b) as a result of the gifts in the event that P passed
away within three years of the gifts. In calculating for gift
tax purposes the gross fair market value of the property
transferred to the daughters, P reduced the fair market value
of the cash and securities by an amount representing the
value of the daughters’ assumption of the potential I.R.C. sec.
2035(b) estate tax liability, among other things. Held: Because
the value of the obligation assumed by the daughters is not
barred as a matter of law from being consideration in money
or money’s worth within the meaning of I.R.C. sec. 2512(b),
the fair market value of P’s taxable gift may be determined
with reference to the daughters’ assumption of the potential
I.R.C. sec. 2035(b) estate tax liability. We will deny R’s motion
for summary judgment, and we will no longer follow McCord
v. Commissioner, 120 T.C. 358 (2003), rev’d and remanded sub
nom. Succession of McCord v. Commissioner, 461 F.3d 614
(5th Cir. 2006), to the extent it provides otherwise.

John W. Porter, Keri D. Brown, Michael S. Arlein, and Jef-
frey D. Watters, Jr., for petitioner.
John V. Cardone and Jane J. Kim, for respondent.

OPINION

KERRIGAN, Judge: This gift tax case is before the Court on
respondent’s motion for summary judgment filed under Rule
121. Petitioner objects to the motion.
Respondent issued petitioner a notice of deficiency,
increasing petitioner’s gift tax liability by $1,804,908 for tax
year 2007. Regarding the motion for summary judgment,
respondent disputes only one issue: whether a donee’s
promise to pay any Federal or State estate tax liability that
may arise under section 2035(b) if the donor dies within
three years of the gift may constitute consideration in money
or money’s worth within the meaning of section 2512(b).
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
258

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 (258) STEINBERG v. COMMISSIONER 259

Procedure. We round all monetary amounts to the nearest
dollar.

Background
The following facts are not in dispute. Petitioner resided in
New York when she filed the petition.
On April 17, 2007, petitioner entered into a binding gift
agreement (net gift agreement) with her four adult daughters
(collectively, donees). At that time petitioner was 89 years
old. In the net gift agreement petitioner agreed to make gifts
of cash and securities to the donees. In exchange, the donees
agreed to assume and to pay any Federal gift tax liability
imposed as a result of the gifts. The donees also agreed to
assume and to pay any Federal or State estate tax liability
imposed under section 2035(b) as a result of the gifts in the
event that petitioner passed away within three years of the
gifts. Section 2035(b) provides that the amount of a gross
estate shall be increased by the amount of gift taxes paid on
any gift made by the decedent during the three-year period
preceding the decedent’s date of death. Section 3, Federal
and State Estate Tax, of the net gift agreement provides in
pertinent part:
a. Assumption of Federal and State Estate Tax Liability. Each Donee
hereby agrees to assume, pay and indemnify the Executor against all
additional federal and state estate tax liability assessed pursuant to
Code Section 2035(b) (i) if Mrs. Steinberg [petitioner] does not survive
for three years following the Effective Date and (ii) that is directly
attributable to Mrs. Steinberg’s transfer of the Gift Property made under
the Instruments of Transfer, including all penalties and interest which
accrue upon such estate tax liability except such penalties and interest
that are directly attributable to actions or delays committed by the
Executor or another Donee (the Estate Tax Liability). For purposes of
determining and allocating the Estate Tax Liability, (i) the value of all
additional tax shall be as finally determined for federal estate tax pur-
poses, (ii) the only gift tax taken into account in the calculation shall be
the gift tax on Mrs. Steinberg’s transfers of the Gift Property to the
Donees made under the Instruments of Transfer, and (iii) the amount
of the Estate Tax Liability each Donee shall bear shall be an amount
equal to the Estate Tax Liability attributable to the Donee’s Gift Tax
Share A and the Donee’s Gift Tax Share B (in each case, collectively, the
Donee’s Estate Tax Share).

* * * * * * *

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 260 141 UNITED STATES TAX COURT REPORTS (258)

c. Payment of Estate Tax Liability.
i. Donees’ Payment to Executor. Each Donee shall deliver to the
Executor an amount equal to the Donee’s Estate Tax Share by certified
check made payable to the United States Treasury, no later than thirty
days before the due date for payment of the Estate Tax Liability, or, if
later, as soon thereafter as the Executor notifies the Donee of the
amount of the Estate Tax Liability.

The net gift agreement also provides remedies if any
daughter fails to pay her share of any section 2035(b) estate
tax liability. Section 7(c), Remedy Available in Event of
Default, of the net gift agreement provides in pertinent part:
ii. Default in Payment of Estate Tax Liability. If the Executor deter-
mines that a Donee is in default * * * the Executor shall give notice to
the Donee that the Donee is in default (Estate Tax Default Notice and
Estate Tax Default Notice Date, respectively). If the Donee fails within
10 business days after the Default Notice Date to deliver to the Executor
the remaining balance of the Donee’s Estate Tax Share of the Estate Tax
Liability (Donee’s Estate Tax Balance), all Cash Distributions [i.e., cer-
tain quarterly distributions to which the donees are entitled] otherwise
distributable to a Donee shall be delivered directly to the Executor
* * *. Each Donee agrees that, upon the date on which the Executor
gives an Estate Tax Default Notice to a Donee, the Executor also shall
deliver a duplicate copy of the Estate Tax Default Notice to the Man-
ager, and the Donee shall be deemed to have directed the Manager to
deliver the Cash Distribution otherwise distributable to the Donee
directly to the Executor in satisfaction of the Donee’s Estate Tax Balance
as provided in this paragraph. Each Donee agrees to perform any and
all acts necessary as a shareholder, partner, member, manager or
director of any entity governed by an Applicable Agreement to effect the
payment of the Donee’s Estate Tax Balance to the Executor.

The net gift agreement was the result of several months of
negotiation between petitioner and the donees. Petitioner
and the donees were represented by separate counsel.
Petitioner retained an appraiser to calculate the gross fair
market value of the property transferred to the donees. The
appraiser also calculated the aggregate fair market value of
the ‘‘net gift’’. The appraiser determined the value of the net
gift by reducing the fair market value of the cash and securi-
ties by both (1) the gift tax the donees paid and (2) the actu-
arial value of the donees’ assumption of potential section
2035(b) estate tax. The appraiser determined the actuarial
value of the donees’ assumption of the potential section
2035(b) estate tax by calculating petitioner’s annual mor-
tality rate for the three years after the gift (i.e., the prob-

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 (258) STEINBERG v. COMMISSIONER 261

ability that petitioner would pass away within one year, two
years, or three years of the gift), among other things. The
appraiser determined that the aggregate fair market value of
the net gift was $71,598,056, as of the date of the gift. Peti-
tioner valued the donees’ assumption of the potential section
2035(b) estate tax liability at $5,838,540.
On October 15, 2008, petitioner timely filed a Form 709,
United States Gift (and Generation-Skipping Transfer) Tax
Return, for tax year 2007. On the Form 709 petitioner
reported taxable gifts of $71,598,056 and total gift tax of
$32,034,311. Petitioner attached a summary of the net gift
agreement, which included a description of the appraiser’s
determination of the value of the net gifts, to the Form 709.
On July 25, 2011, respondent mailed the notice of defi-
ciency, which increased the aggregate value of petitioner’s
net gifts to the donees from $71,598,056 to $75,608,963, for
a total gift tax increase of $1,804,908. Respondent disallowed
the discount petitioner made for the donees’ assumption of
the potential section 2035(b) estate tax liability. 1 In
response, petitioner filed a petition, and respondent filed a
motion for summary judgment.

Discussion
I. Summary Judgment
Summary judgment may be granted where the pleadings
and other materials show that there is no genuine dispute as
to any material fact and that a decision may be rendered as
a matter of law. Rule 121(b); Sundstrand Corp. v. Commis-
sioner, 98 T.C. 518, 520 (1992), aff ’d, 17 F.3d 965 (7th Cir.
1994). The burden is on the moving party (in this case,
respondent) to demonstrate that there is no genuine dispute
as to any material fact and that he or she is entitled to judg-
ment as a matter of law. FPL Grp., Inc. & Subs. v. Commis-
sioner, 116 T.C. 73, 74–75 (2001). In considering a motion for
summary judgment, evidence is viewed in the light most
favorable to the nonmoving party. Bond v. Commissioner,
1 The
notice of deficiency increased the value of petitioner’s total gifts for
tax year 2007 by $4,010,907 because of ‘‘net gifts to donor’s four daugh-
ters’’. Nonetheless, both respondent and petitioner claim that the notice of
deficiency disallowed petitioner’s entire $5,838,540 discount for the donees’
assumption of the potential sec. 2035(b) estate tax liability.

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 262 141 UNITED STATES TAX COURT REPORTS (258)

100 T.C. 32, 36 (1993). The nonmoving party may not rest
upon the mere allegations or denials of his or her pleading
but must set forth specific facts showing there is a genuine
dispute for trial. Sundstrand Corp. v. Commissioner, 98 T.C.
at 520.
For purposes of respondent’s motion, respondent does not
dispute (1) the value of the cash and securities transferred;
(2) whether petitioner properly reduced her gift tax liability
by the amount of gift tax the donees assumed; or (3) whether
the donees’ assumption of the section 2035(b) estate tax
liability is enforceable under local law. Respondent’s sole
claim is that the donees’ assumption of the potential section
2035(b) estate tax liability did not increase the value of peti-
tioner’s estate and therefore did not constitute consideration
in money or money’s worth within the meaning of section
2512(b) in exchange for the gifts. For the following reasons
we conclude that there are genuine factual disputes about
the issue.
II. Statutory Framework
A. Gift Tax Generally
Section 2501(a) imposes a tax on the transfer of property
by gift. The donor is primarily responsible for paying the gift
tax. Sec. 2502(c); see also sec. 25.2502–2, Gift Tax Regs. The
gift tax is imposed upon the donor’s act of making the
transfer, rather than upon receipt by the donee, and it is
measured by the value of the property passing from the
donor, rather than the value of enrichment resulting to the
donee. Sec. 25.2511–2(a), Gift Tax Regs. Donative intent on
the part of the donor is not an essential element for gift tax
purposes; the application of gift tax is based on the objective
facts and circumstances of the transfer rather than the
subjective motives of the donor. Sec. 25.2511–1(g)(1), Gift
Tax Regs.
The amount of gift tax is based on the aggregate value of
taxable gifts made during the year, among other things. See
sec. 2502(a) (imposing the gift tax on a cumulative basis).
Taxable gifts are the total amount of gifts made during the
year, less certain deductions. 2 Sec. 2503(a). The amount of a
2 Sec. 2503 also enumerates a handful of exclusions, none of which are

relevant in this case.

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 (258) STEINBERG v. COMMISSIONER 263

gift of property is generally the value of the property on the
date of the gift. Sec. 2512(a). The gift is complete when the
property has left the donor’s dominion and control. See sec.
25.2511–2(b), Gift Tax Regs. The value of the property is the
price at which it would change hands between a willing
buyer and a willing seller, neither being under any compul-
sion to buy or to sell and both having reasonable knowledge
of the relevant facts. Sec. 25.2512–1, Gift Tax Regs.
The amount of the gift is the amount by which the value
of the property transferred exceeds the value of consideration
received in money or money’s worth. See sec. 2512(b); secs.
25.2511–1(g)(1), 25.2512–8, Gift Tax Regs.; see also Commis-
sioner v. Wemyss, 324 U.S. 303, 306–307 (1945). Thus, if a
donor makes a gift subject to the condition that the donee
pay the resulting gift tax, the amount of the gift is reduced
by the amount of the gift tax. See Harrison v. Commissioner,
17 T.C. 1350, 1357 (1952). Such a gift is commonly referred
to as a ‘‘net gift’’.
B. Section 2035(b) ‘‘Gross-Up’’ Provision
Under section 2035(b) (formerly section 2035(c), see Tax-
payer Relief Act of 1997, Pub. L. No. 105–34, sec. 1310(a),
111 Stat. at 1043), a decedent’s gross estate is increased by
the amount of any gift tax paid by the decedent or the
decedent’s estate on any gift made by the decedent during
the three-year period preceding the decedent’s death. For
purposes of this ‘‘gross-up’’ provision, we have deemed that
the phrase ‘‘gift tax paid by the decedent or the decedent’s
estate’’ during the relevant three-year period includes gift tax
attributable to a net gift the decedent made during that
period (despite the fact that the donee is responsible for
paying the gift tax in that situation). Estate of Sachs v.
Commissioner, 88 T.C. 769, 777–778 (1987), aff ’d in part,
rev’d in part on other grounds, 856 F.2d 1158, 1164 (8th Cir.
1988). We note that the inclusion of the gift tax paid is a
computational element only.
Congress enacted what is now section 2035(b) as part of an
effort to mitigate the disparity of treatment between the tax-
ation of lifetime transfers and transfers at death. See H.R.
Rept. No. 94–1380, at 11 (1976), 1976–3 C.B. (Vol. 3) 735,

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 264 141 UNITED STATES TAX COURT REPORTS (258)

745. 3 Congress imposed the gross-up provision on gift tax
paid within three years of death because ‘‘the gift tax paid
on a lifetime transfer which is included in a decedent’s gross
estate is taken into account both as a credit against the
estate tax and also as a reduction in the estate tax base, [so]
substantial tax savings can be derived under present law by
making so-called ‘deathbed gifts’ even though the transfer is
subject to both taxes.’’ Id. at 12, 1976–3 C.B. (Vol. 3) at 746.
Congress intended the gross-up rule to ‘‘eliminate any incen-
tive to make deathbed transfers to remove an amount equal
to the gift taxes from the transfer tax base.’’ Id.
C. Net Gifts
The net gift rationale flows from the basic premise that the
gift tax applies to transfers of property only to the extent
that the value of the property transferred exceeds the value
in money or money’s worth of any consideration received in
exchange therefor. See sec. 2512(b); sec. 25.2512–8, Gift Tax
Regs. When a net gift occurs, the donor calculates his or her
gift tax liability by reducing the amount of the gift by the
amount of the gift tax. Estate of Morgens v. Commissioner,
133 T.C. 402, 417 (2009), aff ’d, 678 F.3d 769 (9th Cir. 2012).
The rationale is that ‘‘because the donee incurred the obliga-
tion to pay the tax as a condition of the gift, ‘the donor did
not have the intent to make other than a net gift.’ ’’ Id.
(quoting Turner v. Commissioner, 49 T.C. 356, 360–361
(1968), aff ’d per curiam, 410 F.2d 752 (6th Cir. 1969)). In
other words the donor reduces the value of the gift by the
amount of the tax because the donor has received consider-
ation for a part of the gift equal to the amount of the
applicable gift tax. Id.
Petitioner’s gift may be best described as a ‘‘net, net gift’’
because the donees agreed to pay both the resulting gift tax
and any potential section 2035(b) estate tax. We will refer to
petitioner’s gift in its entirety as a net gift.

3 Before
the enactment gifts made within three years of the donor’s
death were merely presumed to be in contemplation of death. See H.R.
Rept. No. 94–1380, at 12 (1976), 1976–3 C.B. (Vol. 3) 735, 746. Congress
opted for a bright-line test in sec. 2035(b) to end the ‘‘considerable litiga-
tion concerning the motives of decedents in making gifts.’’ Id.

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III. The Value of the Donees’ Assumption of the Potential
Section 2035(b) Estate Tax
The fundamental question posed by this case is the fair
market value of the property rights transferred under the net
gift agreement. Pursuant to section 25.2512–1, Gift Tax
Regs., fair market value is the price at which such 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. All
relevant facts and elements of value as of the time of the gift
must be considered. Sec. 25.2512–1, Gift Tax Regs. The
‘‘willing buyer/willing seller’’ test is the bedrock of transfer
tax valuation. It requires us to determine what property
rights are being transferred and on what price a willing
buyer and a willing seller would agree for those property
rights.
Respondent claims that the donees’ assumption of the
potential section 2035(b) estate tax is worthless. In particular
respondent contends that the donees’ assumption provided no
benefit (monetary or otherwise) to petitioner other than some
peace of mind. Respondent thus claims that the donees’
assumption failed to replenish petitioner’s estate and there-
fore failed as consideration for a gift under the ‘‘estate deple-
tion’’ theory of the gift tax. Respondent rests these claims in
part on our holding in McCord v. Commissioner, 120 T.C. 358
(2003), rev’d and remanded sub nom. Succession of McCord
v. Commissioner, 461 F.3d 614 (5th Cir. 2006). For the fol-
lowing reasons we conclude that respondent is not entitled to
summary judgment with respect to these claims.
A. Background: Consideration and the Estate Depletion
Theory
As noted above, a donor need only pay gift tax on a
transfer to the extent that the value of the property trans-
ferred exceeds the value of any consideration in money or
money’s worth that the donor receives in exchange. To
qualify as consideration in money or money’s worth, the
consideration received must be reducible to value in money
or money’s worth; consideration consisting of something
unquantifiable, such as love and affection or the promise of
marriage, is wholly disregarded. Sec. 25.2512–8, Gift Tax

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 266 141 UNITED STATES TAX COURT REPORTS (258)

Regs. Similarly, the relinquishment of dower, curtesy, or any
other marital right in a spouse’s estate is not considered
consideration in money or money’s worth. Id. A transfer
made during the ordinary course of business, however, is per
se made for consideration in money or money’s worth and
thus is not subject to gift tax. See id.; see also sec. 25.2511–
1(g)(1), Gift Tax Regs. (gift tax is not applicable to ordinary
business transactions).
The estate depletion theory of gift tax can be applied to
determine what constitutes consideration in money or
money’s worth. Under the estate depletion theory, a donor
receives consideration in money or money’s worth only to the
extent that the donor’s estate has been replenished. See
Commissioner v. Wemyss, 324 U.S. at 307–308; 2 Randolph
E. Paul, Federal Estate and Gift Taxation, para. 16.14, at
1114–1115 (1942). The Paul treatise, cited twice with
approval by the Supreme Court in Wemyss, further notes:
‘‘The consideration may thus augment * * * [the donor’s]
estate, give * * * [the donor] a new right or privilege, or dis-
charge him from liability.’’ Paul, supra, at 1115. Thus, the
benefit to the donor in money or money’s worth, rather than
the detriment to the donee, determines the existence and
amount of any consideration offset in the context of an other-
wise gratuitous transfer. See Commissioner v. Wemyss, 324
U.S. at 307–308.
B. McCord v. Commissioner
Respondent’s claims rely heavily on our reasoning and
holding in McCord. In McCord the taxpayers (husband and
wife) formed McCord Interests, Ltd., L.L.P. (MIL). The tax-
payers were both class A limited partners and class B limited
partners in MIL. The taxpayers’ four adult sons were class
B limited partners and general partners. On formation MIL
held stocks, bonds, real estate, oil and gas investments, and
other closely held business interests.
On November 20, 1995, the taxpayers assigned their
respective class A limited partnership interests in MIL to a
charitable organization. On January 12, 1996 (valuation
date), the taxpayers entered into an assignment agreement,
in which the taxpayers relinquished all dominion and control
over their class B limited partnership interests in MIL to

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(1) their four sons, (2) four trusts for the benefit of their sons,
and (3) two charitable organizations.
Under the terms of the ‘‘formula clause’’ contained in the
assignment agreement, the four sons and the four trusts
were to receive the portion of the gift interest having an
aggregate fair market value of $6,910,933. If the fair market
value of the gift interest exceeded $6,910,933, the excess was
to be allocated to the two charitable organizations. Impor-
tantly, the four sons—individually and as trustees of the four
trusts—agreed to be liable for all transfer taxes (Federal gift,
estate, and generation-skipping transfer taxes and any
resulting State taxes) imposed on the taxpayers as a result
of the gifts.
On their Forms 709 for tax year 1996 both taxpayers
reduced the gross value amounts of their respective shares of
the gifts by the amount of Federal and State gift tax gen-
erated by the transfer, which the four sons had agreed to pay
as a condition of the gifts. Each taxpayer further reduced
that gross value amount by the actuarially determined value
of the four sons’ contingent obligation to pay any estate tax
that would result from the transaction if that taxpayer were
to pass away within three years of the valuation date.
The Commissioner determined, among other things, that
the taxpayers had improperly reduced their gross value
amounts by the actuarial value of the four sons’ obligation to
pay any potential estate taxes arising from the transactions.
We agreed with the Commissioner in McCord, holding that
‘‘in advance of the death of a person, no recognized method
exists for approximating the burden of the estate tax with a
sufficient degree of certitude to be effective for Federal gift
tax purposes’’. McCord v. Commissioner, 120 T.C. at 402. We
reasoned that the taxpayers’ computation of the mortality-
adjusted present value of the sons’ obligation merely dem-
onstrated that ‘‘if one assumes a fixed dollar amount to be
paid, contingent on a person of an assumed age not surviving
a three-year period, one can use mortality tables and interest
assumptions to calculate the amount that * * * an insurance
company might demand to bear the risk that the assumed
amount has to be paid.’’ Id. We further noted that ‘‘the dollar
amount of a potential liability to pay the 2035 tax is by no
means fixed; rather, such amount depends on factors that are
subject to change, including estate tax rates and exemption

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 268 141 UNITED STATES TAX COURT REPORTS (258)

amounts (not to mention the continued existence of the
estate tax itself).’’ Id. (fn. ref. omitted).
We thus concluded that the taxpayers were not entitled to
treat the mortality-adjusted present values as consideration
received for the gifts. Id. at 402–403. To support this propo-
sition, we cited Robinette v. Helvering, 318 U.S. 184, 188–189
(1943), which we described as holding that a ‘‘donor’s rever-
sionary interest, contingent not only on [the] donor outliving
[her] 30-year old daughter, but also on the failure of any
issue of the daughter to attain the age of 21 years, is dis-
regarded as an offset in determining the value of the gift;
actuarial science cannot establish the probability of whether
the daughter would marry and have children’’. McCord v.
Commissioner, 120 T.C. at 403.
Additionally, we suggested that the taxpayers’ reduction of
the value of their gift failed under the estate depletion
theory. We pointed out that a donee’s assumption of gift tax
liability resulting from a gift provides a benefit to the donor
in money or money’s worth that ‘‘is readily apparent and
ascertainable, since the donor is relieved of an immediate
and definite liability to pay such tax.’’ Id. We observed that
‘‘[i]f that donee further agrees to pay the potential 2035 tax
that may result from the gift, then any benefit in money or
money’s worth from the arrangement arguably would accrue
to the benefit of the donor’s estate (and the beneficiaries
thereof) rather than the donor’’, and that ‘‘[t]he donor in that
situation might receive peace of mind, but that is not the
type of tangible benefit required to invoke net gift prin-
ciples.’’ Id.
C. Succession of McCord v. Commissioner
The taxpayers appealed McCord to the Court of Appeals
for the Fifth Circuit, resulting in Succession of McCord v.
Commissioner, 461 F.3d 614. The Court of Appeals reversed
and remanded McCord, holding, among other things, that
there was nothing too speculative about the McCord sons’
legally binding assumption of the potential section 2035(b)
estate tax 4 at the time of the gift. Id. at 629. The Court of
Appeals noted:
4 The taxpayer husband did in fact pass away within three years of the

gift. Succession of McCord v. Commissioner, 461 F.3d 614, 629 (5th Cir.

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 (258) STEINBERG v. COMMISSIONER 269

It is axiomatic contract law that a present obligation may be, and fre-
quently is, performable at a future date. It is also axiomatic that respon-
sibility for the future performance of such a present obligation may be
either firmly fixed or conditional, i.e., either absolute or contingent on
the occurrence of a future event, a ‘‘condition subsequent.’’ And, it is
axiomatic that any conditional liability for the future performance of a
present obligation is—to a greater or lesser degree—‘‘speculative.’’ The
issue here, though, is not whether § 2035’s condition subsequent is
speculative vel non, but whether it is too speculative to be applicable, a
very elastic yardstick indeed. [Id.]

The Court of Appeals reasoned that there are three major
types of conditions subsequent along the ‘‘speculative con-
tinuum’’: (1) a future event that is absolutely certain to
occur, such as the passage of time; (2) a future event that is
not absolutely certain to occur but nevertheless may be a
‘‘ ‘more . . . certain prophec[y]’ ’’; and (3) a possible, but low-
odds, future event, which is undeniably a ‘‘ ‘less . . . certain
prophec[y]’ ’’, such as ‘‘[a] reversion of an interest in property
if the unmarried and childless life tenant not only survives
the transferor, but herself bears children who live to the age
of majority and at least one of whom survives the transferor,
as in Robinette v. Helvering’’. Id.; see also Ithaca Trust Co.
v. United States, 279 U.S. 151, 155 (1929) (‘‘Like all values
* * * [the value of a remainder interest] depends largely on
more or less certain prophecies of the future[.]’’).
The Court of Appeals concluded that in order to determine
whether any conditions subsequent inherent in the McCord
sons’ assumption were too speculative, one would have to
identify which factors ‘‘a willing buyer would * * * take into
consideration in deciding whether it is too speculative for
him to insist on its being used in reaching a price that the
seller is willing to accept.’’ Succession of McCord v. Commis-
sioner, 461 F.3d at 629. The Court of Appeals noted that if
a condition subsequent is too speculative, then a willing
buyer would not insist that a willing seller provide a discount
with respect to that condition subsequent. Id. at 630.
The Court of Appeals held, as a matter of law: ‘‘[A] willing
buyer would insist on the willing seller’s recognition that
* * * the effect of the three-year exposure to § 2035 estate
taxes was sufficiently determinable as of the date of the gifts
to be taken into account.’’ Id. at 631. In particular, the Court
2006), rev’g McCord v. Commissioner, 120 T.C. 358 (2003).

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 270 141 UNITED STATES TAX COURT REPORTS (258)

of Appeals noted that, even though estate tax rates have
changed and likely will change, the estate tax has not been
repealed. The Court of Appeals thus concluded: ‘‘[T]he
transfer tax law and its rates that were in effect when the
gifts were made are the ones that a willing buyer would
insist on applying in determining whether to insist on, and
calculate, a discount for § 2035 estate tax liability.’’ Id. at
630.
The Court of Appeals observed that the Commissioner did
not object to the taxpayers’ arithmetic in calculating the dis-
count for the potential section 2035(b) estate tax liability and
that the Commissioner did not dispute (1) the estate and gift
tax laws and rates that were so applied, (2) the interest rate
used to discount to present value, (3) the ages used for the
taxpayers, or (4) the actuarially determined mortality factors
used for determining the likelihood of the taxpayers’ deaths
within three years of the gift. Id.
D. Departure From McCord
Petitioner contends that McCord was decided incorrectly
and that the donees’ assumption of the potential section
2035(b) estate tax liability is not worthless. We note that this
case is not appealable to the Court of Appeals for the Fifth
Circuit, so we are not bound to follow the Court of Appeals’
decision in Succession of McCord. See Golsen v. Commis-
sioner, 54 T.C. 742, 757 (1970), aff ’d, 445 F.2d 985 (10th Cir.
1971). 5

1. Whether the Donees’ Assumption is ‘‘Too Speculative’’ as
a Matter of Law
a. Our Reliance on Robinette v. Helvering
In McCord we concluded that the McCord sons’ assumption
of the taxpayers’ potential section 2035(b) estate tax liability
was too speculative to be reduced to a monetary value. In
particular, we likened the uncertainty in the McCord tax-
payers’ situation—i.e., the fact that the dollar amount of the
potential estate tax liability is not fixed because factors such
5 This
case addresses only the issue discussed in section VII of McCord,
which pertains to the effect of the McCord sons’ agreement to pay any sec.
2035(b) estate tax liability incurred by their parents as a result of the
McCord gift.

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 (258) STEINBERG v. COMMISSIONER 271

as estate tax rates and exemption amounts are subject to
change—to the uncertainty at the heart of Robinette v.
Helvering, 318 U.S. 184.
In Robinette a daughter (at the time childless and
unmarried) and her mother set up two trusts. The daughter
placed her property in a trust, creating a life estate for her-
self and a secondary life estate for her mother and step-
father, should she predecease them. The remainder was to go
to the daughter’s then-unborn issue upon reaching the age of
21; if no issue existed, the property would be distributed via
the will of the last surviving life tenant. The mother set up
a similar trust, giving herself a life tenancy in the trust prop-
erty and giving her daughter a secondary life tenancy, should
she predecease her daughter. She assigned the remainder to
her daughter’s issue upon that issue’s reaching the age of 21;
if no issue existed, the property would be distributed via the
will of the last surviving life tenant. The daughter and her
mother, as the taxpayers, conceded that the secondary life
estates were gifts but argued that the values of the gifts
should be reduced by the values of the remainders to the
daughter’s unborn issue.
The Supreme Court held that the taxpayers could not
reduce the values of the gifts by the values of the rever-
sionary remainder interest. See Robinette v. Helvering, 318
U.S. at 188–189. The Supreme Court reasoned that there
was no recognized method for determining the values of the
contingent reversionary remainders, which, in the case
of the mother’s trust, depended on not only the possibility of
the daughter’s survivorship, but also on the death of the
daughter without issue who failed to reach the age of 21. Id.
at 188. The Supreme Court noted that the factors to be
considered in fixing the values of the contingent remainders
on the date of the gifts included: (1) whether the daughter
would marry; (2) whether the daughter would have children;
and (3) whether those children would reach the age of 21. Id.
at 189. The Supreme Court concluded: ‘‘[W]e have no reason
to believe from this record that even the actuarial art could
do more than guess at the value here in question.’’ Id.
Notably, the Supreme Court juxtaposed the complex
contingent reversionary remainders in Robinette with a
simple reversionary interest in Smith v. Shaughnessy, 318
U.S. 176 (1943), the companion case to Robinette. In Smith

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 272 141 UNITED STATES TAX COURT REPORTS (258)

the taxpayer placed stock into a trust and then granted a life
estate in the trust to his wife. The taxpayer set up a sec-
ondary life estate in the trust for himself should his wife pre-
decease him. The Government conceded that the taxpayer’s
reversionary interest, contingent on his outliving his wife,
should be excluded from the gift as ‘‘having value which can
be calculated by an actuarial device, and that it is immune
from the gift tax.’’ Smith, 318 U.S. at 178.
In Robinette the Supreme Court drew a distinction between
the reversionary interest in Smith and the contingent rever-
sionary remainder in Robinette, noting:
Here unlike the Smith case the government does not concede that the
reversionary interest of the petitioner should be deducted from the total
value. In the Smith case, the grantor had a reversionary interest which
depended only upon his surviving his wife, and the government conceded
that the value was therefore capable of ascertainment by recognized
actuarial methods. In this case, however, the reversionary interest of the
grantor depends not alone upon the possibility of survivorship but also
upon the death of the daughter without issue who should reach the age
of 21 years. The petitioner does not refer us to any recognized method
by which it would be possible to determine the value of such a contin-
gent reversionary remainder. * * * [Robinette v. Helvering, 318 U.S. at
188.]

Thus, the Supreme Court expressly distinguished a simple
contingency based on the possibility of survivorship, which
the Court implied is ascertainable by recognized actuarial
methods, from the complex contingency based on the possi-
bility of survivorship plus the possibility that the unmarried
daughter might die without issue who reach the age of 21
years, which ‘‘was highly remote’’. Harrison v. Commissioner,
17 T.C. at 1355 (discussing Robinette); see also Succession of
McCord v. Commissioner, 461 F.3d at 632 n.47.
In this case, as in McCord, the contingency in issue is
whether petitioner would survive three years after the date
of the gift. Like the contingency in Smith, this contingency
is simple and based on the possibility of survivorship; it is
not complex like the contingency in Robinette, which
depended on multiple occurrences. The event of petitioner’s
survival three years after the date of the gift is speculative,
and whether it is too speculative or highly remote is a factual
issue.

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 (258) STEINBERG v. COMMISSIONER 273

b. Comparison to Murray v. United States and Estate of
Armstrong v. United States
In reaching our conclusion in McCord, we also considered
Murray v. United States, 687 F.2d 386 (Ct. Cl. 1982), and
Armstrong Trust v. United States, 132 F. Supp. 2d 421 (W.D.
Va. 2001), aff ’d sub nom. Estate of Armstrong v. United
States, 277 F.3d 490 (4th Cir. 2002). See McCord v. Commis-
sioner, 120 T.C. at 400–402. We noted that neither case was
binding on us and that the facts of both cases were ‘‘some-
what different’’ from the facts in McCord. Id. at 402. We
‘‘agree[d] with what we believe[d] to be the basis of those two
opinions, i.e., that, in advance of the death of a person, no
recognized method exists for approximating the burden of the
estate tax with a sufficient degree of certitude to be effective
for Federal gift tax purposes.’’ Id. Our reliance on Murray
and Estate of Armstrong is inapposite with respect to the
case at hand.
In Murray, a donor placed shares of stock into several rev-
ocable trusts pursuant to an instrument (dated November 29,
1969) that obligated the trustees to pay, among other debts,
the donor’s estate and death tax liabilities. The instrument
stated that the trusts were revocable ‘‘ ‘during the lifetime of
the Donor, and prior to January 2, 1970.’ ’’ Murray, 687 F.2d
at 388. The donor passed away on January 2, 1970.
The executors of the donor’s estate (the plaintiffs in
Murray) argued that the obligation to pay the donor’s estate
and death taxes rendered the gifts completely without value
when made. The Court of Claims disagreed, reasoning that
although the trusts’ obligation to pay the donor’s estate and
death taxes generally could reduce the value of the gifts, the
value of the gifts in this situation was not reducible. Id. at
394 (citing Harrison v. Commissioner, 17 T.C. at 1354–1355).
The Court of Claims further reasoned: ‘‘[I]t was not * * *
[the donor’s] intent to limit the value of the gifts passing in
trust to only that amount exceeding the value of the assets
necessary to pay [the donor’s] estate tax liability. * * * As
drafted, the trust agreement does not evidence any clear
intention that the entire value of the trust assets were not
to be considered as property passing from the donor.’’ Id. at
394 n.13.

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 274 141 UNITED STATES TAX COURT REPORTS (258)

The Court of Claims concluded that the value of the
donor’s estate and death taxes was ‘‘highly conjectural’’ at
the time of the gift, reasoning that (1) had the donor lived
until 1971, the value of his estate would have reduced
significantly because the three-year inclusion period under
section 2035(b) would have lapsed for a particular gift made
in 1968 and (2) for every extra year the donor lived after
1971, the size of his estate would continue to diminish. 6 Id.
at 394–395.
Murray is distinguishable from the case at hand and there-
fore is not persuasive. Unlike the donor in Murray, who did
not intend to reduce the value of the gifts by the amount of
the estate tax liability, petitioner expressly intended to
reduce the value of her gifts by the amount of estate tax
liability assumed by the donees. Furthermore, the trusts in
Murray assumed the donor’s entire estate tax liability that
was to be paid at an indefinite time in the future, during
which the donor’s estate could decrease an indefinite amount.
The donees in this case, however, assumed only the portion
of petitioner’s estate tax liability that could be incurred over
a three-year span. The value of the amount of section 2035(b)
estate tax liability in this case may be predictable.
In Estate of Armstrong, a donor made inter vivos gifts of
nearly all of his assets to his children. His children expressly
declined to assume gift tax liability or potential section
2035(b) estate tax liability with respect to the gifts. After the
donor made the gifts, he created an irrevocable grantor trust
(donor’s trust), from which he (as the sole beneficiary)
received income payments. The donor’s trust assumed and
paid all gift tax liability with respect to the gifts. The chil-
dren then entered into a transferee liability agreement, in
which they agreed to pay any additional gift tax liability
resulting from ‘‘ ‘any proposed adjustment to the amount of
the * * * gifts.’ ’’ Estate of Armstrong, 277 F.3d at 493.
Although the agreement ‘‘appeared to impose on the children
the obligation to pay any additional gift taxes’’ if the Internal
Revenue Service (IRS) revalued the gifts, the parties actually
6 The
Court of Claims also noted that the executors did not present any
evidence showing that it was possible to approximate the value of the obli-
gation at the time of the gift. Murray v. United States, 687 F.2d 386, 395
(Ct. Cl. 1982).

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 (258) STEINBERG v. COMMISSIONER 275

agreed that the donor’s trust would pay any additional gift
taxes, while the children would be only secondarily liable. Id.
The donor passed away within three years of granting the
inter vivos gifts. After the donor’s death, the IRS revalued
the gifts and increased the gift tax owed. Once again, the
donor’s trust paid the gift tax owed and the children paid
nothing. The IRS also determined that when the executor
computed the value of the donor’s estate, the executor failed
to include the gift tax paid by the donor and the donor’s trust
with respect to the inter vivos gifts, which resulted in a siz-
able estate tax deficiency. Because the inter vivos gifts had
depleted the estate’s assets, the estate was unable to pay the
estate tax owed. Under section 6324(a)(2), the IRS assessed
the children (as donees of the inter vivos gifts) with the
estate tax liability to the extent of the values of the gifts they
received. 7 The estate and the donor’s trust filed for refund,
contending that the children’s obligation to pay additional
gift and estate taxes as a condition of the gift substantially
reduced the values of the gifts and thus the gift taxes owed.
The Court of Appeals for the Fourth Circuit rejected the
contentions of the estate and the donor’s trust. The estate
and the donor’s trust claimed that they engaged in a net gift
transaction when the children agreed to pay all additional
gift taxes. The Court of Appeals distinguished the facts in
Estate of Armstrong, 277 F.3d at 496, from a typical net gift
agreement, in which there is no dispute that the donee is
liable for all resulting gift taxes. The Court noted that the
children ‘‘fully expected and intended * * * that they were
protected from ‘having to pay taxes and expenses incurred as
a result’ of the transactions.’’ Id. The Court of Appeals rea-
soned: ‘‘Any obligation of the donee to pay gift taxes that is
speculative or illusory evidences that the obligation was not
a true condition of the gift at the time of transfer’’. Id. at
495. The Court of Appeals concluded that even if the chil-
dren’s obligation was not speculative, the children’s agree-
ment to pay additional gift taxes was illusory because the
donor’s trust paid all of the gift taxes. Id. at 496.
7 Presumably, the IRS assessed the children with the estate tax liability

only after issuing transferee liability notices, which were petitioned to this
Court. See Armstrong v. Commissioner, 114 T.C. 94 (2000).

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 276 141 UNITED STATES TAX COURT REPORTS (258)

The estate and the donor’s trust also contended that the
amounts of the gifts should be reduced by ‘‘the amount of
estate taxes attributable to the gift taxes that the children
may be called upon to pay’’ because they knew at the time
of the gift that the donor’s estate would be unable to pay the
estate tax owed. Id. at 497–498. The Court of Appeals dis-
agreed, concluding: ‘‘[T]here is no evidence that the children
agreed to pay the resulting estate taxes—in the event there
were any—as a condition of the stock transfers. Rather, the
evidence instead shows that they intended to be protected
from any tax liability stemming from the transfers.’’ Id. at
498.
Estate of Armstrong is distinguishable on its facts from the
case at hand and therefore is not persuasive. Unlike the chil-
dren in Estate of Armstrong, the donees in this case expressly
agreed to pay both the resulting gift tax liability and any
potential section 2035(b) estate tax liability arising from the
net gift agreement. Moreover, unlike the Armstrong children,
the donees in this case engaged in a bona fide net gift agree-
ment.
c. Fluctuation of Estate Tax Rates and Exemption Amounts
Finally, we implied in McCord that because estate tax
rates and exemption amounts are subject to change (and rev-
ocation altogether), it would be difficult to determine the
amount of the potential section 2035(b) estate tax liability.
See McCord v. Commissioner, 120 T.C. at 402–403.
The estate tax rate (and the accompanying exemption
amounts) is not the only tax rate subject to change. Com-
paring the estate tax to the capital gains tax, the Court of
Appeals for the Fifth Circuit in Succession of McCord wrote:
For purposes of our willing buyer/willing seller analysis, we perceive no
distinguishable difference between the nature of the capital gains tax
and its rates on the one hand and the nature of the estate tax and its
rates on the other hand. Rates and particular features of both the capital
gains tax and the estate tax have changed and likely will continue to
change with irregular frequency; likewise, despite considerable and
repeated outcries and many aborted attempts, neither tax has been
repealed. Even though the final amount owed by the Taxpayer as gift
tax * * * has yet to be finally determined (depending, as it does, on the
final results of this case), we are satisfied that the transfer tax law and
its rates that were in effect when the gifts were made are the ones that
a willing buyer would insist on applying in determining whether to

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 (258) STEINBERG v. COMMISSIONER 277

insist on, and calculate, a discount for § 2035 estate tax liability.
[Succession of McCord v. Commissioner, 461 F.3d at 630.]

The fact that the estate tax lapsed in 2010 does not under-
mine the Court of Appeals’ reasoning, especially given that
the estate tax was reinstated in December 2010, see Tax
Relief, Unemployment Insurance Reauthorization, and Job
Creation Act of 2010, Pub. L. No. 111–312, sec. 101(a)(1), 124
Stat. at 3298, and was extended permanently in 2012, see
American Taxpayer Relief Act of 2012, Pub. L. No. 112–240,
sec. 101(a)(3), (c), 126 Stat. at 2316–2318.
Both capital gains tax rates and estate tax rates have
changed since their introduction and are likely to change in
the future. Just this year the capital gains tax rates for
adjusted net capital gains changed from 15% to 20% for cer-
tain high-income individuals. See American Taxpayer Relief
Act of 2012 sec. 102(b), 126 Stat. at 2318. Yet many courts
have held that the fair market value of stock received by gift
or bequest must be reduced by capital gains tax, even if there
is no indication that the capital gains tax will be triggered
by the donee or beneficiary in the near future. See, e.g.,
Estate of Jelke v. Commissioner, 507 F.3d 1317, 1319, 1333
(11th Cir. 2007) (finding that the Tax Court erred by
allowing only a partial discount for built-in capital gains tax
liability inherent in a bequest of stock instead of allowing a
dollar-for-dollar discount of the entire built-in capital gains
tax ‘‘under the arbitrary assumption that * * * [the under-
lying corporation] is liquidated on * * * [the date of the
bequest]’’), vacating and remanding T.C. Memo. 2005–131;
Estate of Dunn v. Commissioner, 301 F.3d 339 (5th Cir. 2002)
(finding that when valuing a bequest of stock, a hypothetical
willing buyer and willing seller must assume that the under-
lying corporation has been liquidated on the valuation date,
even if an actual liquidation is speculative), rev’g and
remanding T.C. Memo. 2000–12; Estate of Jameson v.
Commissioner, 267 F.3d 366 (5th Cir. 2001) (finding that the
Tax Court improperly determined only a partial discount for
capital gains tax liability inherent in a bequest of stock
because the Tax Court failed to use a truly hypothetical
willing buyer), vacating and remanding T.C. Memo. 1999–43;
Eisenberg v. Commissioner, 155 F.3d 50 (2d Cir. 1998)
(reducing a gift of stock by potential capital gains tax liabil-

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 278 141 UNITED STATES TAX COURT REPORTS (258)

ities even though no liquidation or sale of the corporation
was planned and finding that potential capital gains tax is
not too speculative to be valued because the stock will be
subject to capital gains tax on disposition), vacating and
remanding T.C. Memo. 1997–483. 8 This Court likewise held
in Estate of Davis v. Commissioner, 110 T.C. 530 (1998), that
the value of a gift of stock should be discounted for lack of
marketability (attributed to inherent capital gains tax)
because a willing buyer and a willing seller would take the
built-in capital gains tax into account, even if no liquidation
or sale of the underlying assets was contemplated at the time
of the gift. These cases show that it is possible to fix the
value of built-in capital gains tax on the valuation date,
despite (1) fluctuations in the capital gains tax rates; (2) the
potential for the capital gains tax to disappear; (3) the fact
that there is no indication of when capital gains tax will be
triggered by the donee or beneficiary, if ever; and (4) the fact
that it is unknown at the time of the gift what actual amount
of capital gains tax the donee or beneficiary would pay, if
any. 9 We cannot foreclose the possibility that an appropriate
8 Respondent contends that the Court of Appeals for the Second Circuit,

to which an appeal in this case would lie, would find the donees’ assump-
tion of petitioner’s potential sec. 2035(b) estate tax to be too speculative
because of the Court of Appeals’ conclusion in Eisenberg v. Commissioner,
155 F.3d 50 (2d Cir. 1998), vacating and remanding T.C. Memo. 1997–483.
As discussed above, in Eisenberg the Court of Appeals for the Second
Circuit held that the value of stock in a particular corporation should be
reduced by potential capital gains tax liabilities for gift tax purposes, even
though no liquidation or sale of the corporation was planned at the time
of the gift. Id. at 59. The Court of Appeals determined that it was inevi-
table that the stock would be subject to capital gains tax, so the potential
capital gains tax was not too speculative to be valued. See id. at 55–56,
58–59.
Respondent claims that because petitioner’s potential sec. 2035(b) estate
tax liability is not inevitable, the Court of Appeals would hold that it is
too speculative to be reduced to a monetary value. We disagree. As dis-
cussed in detail above, simply because a contingency is not inevitable does
not make the contingency too speculative to be reduced to a monetary
value.
9 Sec. 1(h)(1) imposes tax on a taxpayer’s net capital gains for any tax-

able year. Sec. 1222(11) defines the phrase ‘‘net capital gains’’ as the ex-
cess of net long-term capital gain over the net short-term capital loss for
the taxable year. Thus, a taxpayer’s net capital gains depends on the inter-
play between the taxpayer’s long-term capital gains and losses (which
make up net long-term capital gains) as well as the taxpayer’s short-term

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 (258) STEINBERG v. COMMISSIONER 279

method likewise may exist to fix the value of the potential
section 2035(b) estate tax liability assumed by the donees in
this case.
We note that the Court of Appeals for the Fifth Circuit is
not alone in considering potential tax liability in valuation
cases. In Estate of Jelke v. Commissioner, 507 F.3d 1317, the
Court of Appeals for the Eleventh Circuit ended a historical
overview of discounts for built-in capital gains with a discus-
sion of Succession of McCord. 10 Id. at 1329. Referring to
Succession of McCord as part of the ‘‘trend’’ of cases that con-
sider potential tax liability, the Court of Appeals wrote: ‘‘The
Fifth Circuit [in Succession of McCord] thereby extended the
rationale of Estate of Davis to a gift tax case involving
contingent estate taxes.’’ Id. at 1329–1330.
Accordingly, we agree with the conclusion of the Court of
Appeals for the Fifth Circuit in Succession of McCord that a
willing buyer and a willing seller in appropriate cir-
cumstances may take into account a donee’s assumption of
potential section 2035(b) estate tax liability in arriving at a
sale price.
2. Estate Depletion Theory
In McCord we also suggested that the McCord sons’
assumption of the potential section 2035(b) estate tax failed
as consideration for a gift under the estate depletion theory.
See McCord v. Commissioner, 120 T.C. at 403. In particular
we pointed out that any benefit in money or money’s worth
that might arise from a donee’s assumption of potential sec-
tion 2035(b) estate tax ‘‘arguably would accrue to the benefit
of the donor’s estate (and the beneficiaries thereof) rather
than the donor.’’ Id.
Our distinction between a benefit to the donor’s estate and
a benefit to the donor was incorrect. For purposes of the

capital gains and losses (which make up net short-term capital losses). See
sec. 1222(6), (8). The actual amount of net capital gain that a donee or
beneficiary will have when capital gains tax is actually triggered is there-
fore difficult to determine at the time of the gift or bequest.
Furthermore, the rate of capital gains tax is based on the taxpayer’s tax-
able income for the tax year, which cannot be precisely determined at the
time of gift. See sec. 1(h)(1).
10 The Court of Appeals for the Eleventh Circuit referred to Succession

of McCord as ‘‘Estate of McCord’’.

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 280 141 UNITED STATES TAX COURT REPORTS (258)

estate depletion theory, the donor and the donor’s estate are
inextricably bound. According to the estate depletion theory,
whether a donor receives consideration is measured by the
extent to which the donor’s estate is replenished by the
consideration. See Paul, supra, at 1115.
A donee’s assumption of potential section 2035(b) estate
tax liability may provide a tangible benefit to the donor’s
estate, and therefore as a matter of law it could meet the
requirements of the estate depletion theory. Under Federal
tax law the cost of any section 2035(b) estate tax liability is
generally borne by the donor’s estate and not the donee of
the gift. See secs. 2001, 2002, 2035(b), 2501. When petitioner
gave the gifts to the donees, petitioner’s assets accrued both
gift tax liability and potential section 2035(b) estate tax
liability. When the donees assumed the gift tax liability, peti-
tioner’s assets were relieved of the gift tax liability and
therefore were replenished. Likewise, when the donees
assumed the potential section 2035(b) estate tax liability,
petitioner’s assets may have been relieved of the potential
estate tax liability. This assumption, which we have deter-
mined may be reducible to a monetary value, also may have
replenished petitioner’s assets. See Paul, supra, at 1115 (ade-
quate and full consideration may, among other things, ‘‘dis-
charge * * * [the donor] from liability’’).
Respondent claims that because the entire net gift agree-
ment was a ‘‘family type transaction’’, the donees’ assumption
of the potential section 2035(b) estate tax liability did not
replenish petitioner’s estate. To support this claim,
respondent compares the situation in this case with that of
Wemyss. 11
In Wemyss the taxpayer wished to marry a widow. The
widow’s deceased husband had set up a trust for her on the
condition that if she remarried, she would lose all income
from the trust. In order to induce the widow to marry, the
taxpayer transferred blocks of shares to her. The couple mar-
11 Respondent also attempts to equate the case at hand to Merrill v.

Fahs, 324 U.S. 308 (1945), a companion case to Wemyss, and to Commis-
sioner v. Bristol, 121 F.2d 129 (1st Cir. 1941), vacating and remanding 42
B.T.A. 263 (1940), a case from the Court of Appeals for the First Circuit
and a precursor to Wemyss. Both cases dealt with transfers of assets in ex-
change for the relinquishment of dower and other marital rights. The rea-
soning and conclusions in both cases are similar to those in Wemyss.

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 (258) STEINBERG v. COMMISSIONER 281

ried shortly thereafter. The Supreme Court found that the
transfer of shares was a gift. Importantly, the Supreme
Court noted that ‘‘money consideration must benefit the
donor to relieve a transfer by him from being a gift’’ and that
‘‘[t]he section taxing as gifts transfers that are not made for
‘adequate and full (money) consideration’ aims to reach those
transfers which are withdrawn from the donor’s estate.’’
Commissioner v. Wemyss, 324 U.S. at 307.
Unlike the taxpayer in Wemyss, petitioner may have
received consideration—the donees’ assumption of the poten-
tial section 2035(b) estate tax liability, among other things,
in exchange for gifts of cash and securities—that is not
expressly excluded or otherwise disregarded from consider-
ation by the applicable regulations. Today, section 25.2512–
8, Gift Tax Regs., expressly excludes the relinquishment of
dower, curtesy, or any other marital right in a spouse’s
estate from consideration. 12 It also expressly disregards
consideration consisting of a promise of marriage, which was
at the heart of Wemyss, see, e.g., Estate of D’Ambrosio v.
Commissioner, 101 F.3d 309, 315 (3d Cir. 1996) (describing
Wemyss as determining that a ‘‘promise of marriage [is]
insufficient consideration, for gift tax purposes, for tax-free
transfer of property’’), rev’g and remanding, 105 T.C. 252
(1995), because a promise of marriage is unquantifiable and
therefore not reducible to monetary value.
Respondent’s comparison of the case at hand to Wemyss
thus falls flat. The donees’ assumption of potential section
2035(b) estate tax liability may be quantifiable and reducible
to monetary value.
E. Conclusion
Respondent has failed to show as a matter of law that the
donees’ assumption of petitioner’s potential section 2035(b)
estate tax liability cannot be consideration in money or
money’s worth within the meaning of section 2512(b).
12 When Wemyss was decided, the Revenue Act of 1932, ch. 209, 47 Stat.

169, expressly excluded the relinquishment of dower and marital rights
from consideration in money or money’s worth for estate tax purposes. See
Merrill, 324 U.S. at 313. The Supreme Court in Merrill concluded that the
exclusion applied to the gift tax as well because the gift tax and estate tax
are ‘‘in pari materia’’ (i.e., they must be construed together). Id. at 311,
313.

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IV. Donees’ Assumption as Outside the Ordinary Course of
Business
Transactions within a family group are subject to special
scrutiny, and the presumption is that a transfer between
family members is a gift. Harwood v. Commissioner, 82 T.C.
239, 258 (1984), aff ’d without published opinion, 786 F.2d
1174 (9th Cir. 1986). Respondent contends that the donees’
assumption of the potential section 2035(b) estate tax
liability was itself a gift because (1) the net gift agreement
was between family members, and (2) the net gift agreement
was not in the ordinary course of business. Respondent fur-
ther claims that no part of the net gift agreement, presum-
ably including the donees’ assumptions of the gift tax
liability and the potential section 2035(b) estate tax liability,
was ‘‘bona fide, at arm’s length, and free from any donative
intent’’.
Respondent’s claim that a transfer between family mem-
bers is necessarily a gift unless it was in the ordinary course
of business is erroneous. A transfer between family members
that is not in the ordinary course of business may still avoid
gift tax to the extent it is made for consideration in money
or money’s worth. Pursuant to section 25.2512–8, Gift Tax
Regs., a transfer made in the ordinary course of business is
necessarily a transfer made for consideration; 13 however, not
all transfers made for consideration are made in the ordinary
course of business. Section 25.2511–1(g)(1), Gift Tax Regs.,
distinguishes the two: ‘‘The gift tax is not applicable to a
transfer for a full and adequate consideration in money or
money’s worth, or to ordinary business transactions’’.
(Emphasis added.) Thus, a transfer not in the ordinary
course of business may still avoid gift tax to the extent it is
made for full and adequate consideration, regardless of
whether the transfer was between family members.
Additionally, respondent’s argument is undermined by
respondent’s concession that the donees’ assumption of gift
tax is not subject to gift tax. See also Rev. Rul. 75–72, 1975–
13 ‘‘[A]
sale, exchange, or other transfer of property made in the ordinary
course of business (a transaction which is bona fide, at arm’s length, and
free from any donative intent), will be considered as made for an adequate
and full consideration in money or money’s worth.’’ Sec. 25.2512–8, Gift
Tax Regs.

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 (258) STEINBERG v. COMMISSIONER 283

1 C.B. 310 (providing an algebraic formula for determining
the amount of gift tax owed on a net gift). The donees’
assumption of gift tax was between family members and was
not made in the ordinary course of business, but respondent
concedes that it was consideration in money or money’s
worth given in exchange for petitioner’s gifts.
We further note that nothing in the record indicates that
the net gift agreement was not bona fide or made at arm’s
length. Petitioner and the donees were represented by sepa-
rate counsel, and the net gift agreement was the culmination
of months of negotiation.
V. Conclusion
There are genuine disputes of material fact as to whether
the donees’ assumption of petitioner’s potential section
2035(b) estate tax liability constituted consideration in
money or money’s worth. Respondent is not entitled to sum-
mary judgment on this issue.
An appropriate order will be issued.
Reviewed by the Court.
COLVIN, FOLEY, VASQUEZ, WHERRY, HOLMES, PARIS, and
BUCH, JJ ., agree with this opinion of the Court.
GALE, GOEKE, KROUPA, GUSTAFSON, MORRISON, and
LAUBER, JJ., concur in the result only.

GOEKE, J., concurring: I agree with Judge Lauber’s concur-
ring opinion and write separately only to point out a foresee-
able valuation issue that may result from the strategy in this
case at the time of a donor’s death.
The Code is clear that ‘‘[t]he value of the gross estate of
the decedent shall be determined by including * * * the
value at the time of his death of all property, real or per-
sonal, tangible or intangible, wherever situated.’’ Sec.
2031(a). Petitioner recognized that the donor’s legal right to
have the donees pay any section 2035(b) estate tax liability
is a new asset of the donor that must be included in her
gross estate like any other contract right, indemnity right, or
similar claim she owned at death. Petitioner’s position pre-
sumes the value of this obligation at death is the same as the

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 284 141 UNITED STATES TAX COURT REPORTS (258)

calculated value at the time the asset is created. This
presumption is illogical.
The estate tax liability, and therefore the indemnity right,
is going to depend on the facts and circumstances. If the
donor dies after three years have passed since the date of the
gift transaction, then the value of that ‘‘new asset’’ will be
zero (i.e., no estate tax liability arises by virtue of section
2035(b)). If, however, the donor dies within that three-year
period, then the indemnity right will be equal to whatever
the estate tax liability actually is. This is in contrast to the
value petitioner estimates with mortality table calculations.
Consequently, the donees either could get a windfall (i.e.,
getting a gift tax discount and not paying any estate tax) or
may end up suffering some serious repercussions neces-
sitated by finding consideration (i.e., potentially paying a lot
more in estate tax than is in accord with the discount they
received). This issue is not before us now, but we should rec-
ognize the issue we create in finding the present promise to
pay contingent estate tax may be consideration to the donor.
LAUBER, J., agrees with this concurring opinion.

LAUBER, J., concurring: I agree that the motion for sum-
mary judgment filed by respondent (IRS or respondent)
should be denied, and I concur in the opinion of the Court.
I write separately to express my views on two points.
As a condition of receiving the gifts at issue, the donor’s
four daughters assumed an obligation to pay any additional
estate tax that might arise by virtue of the section 2035(b)
‘‘gross-up’’—that is, the possibility that the gift taxes paid on
their gifts would be included in the gross estate if the donor
died within three years of making the gifts. I will refer to
this contingent liability as an ‘‘obligation to pay the section
2035(b) tax.’’ The IRS seeks summary judgment on the
ground that the donees’ assumption of an obligation to pay
the section 2035(b) tax cannot, as a matter of law, constitute
‘‘consideration’’ received by the donor in exchange for the
gifts. See sec. 2512(b). According to the IRS, therefore, the
donees’ assumption of this liability cannot be considered as

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 (258) STEINBERG v. COMMISSIONER 285

an offset in determining the value of the gifts for Federal gift
tax purposes. 1
In McCord v. Commissioner, 120 T.C. 358 (2003), rev’d and
remanded sub nom. Succession of McCord v. Commissioner,
461 F.3d 614 (5th Cir. 2006), we resolved this issue in favor
of the Commissioner, holding after a lengthy trial that the
donees’ assumption of an obligation to pay the section
2035(b) tax did not constitute ‘‘consideration’’ within the
meaning of section 2512(b). We offered two rationales for this
holding. First, we determined that ‘‘no recognized method
exists for approximating the burden of the estate tax with a
sufficient degree of certitude to be effective for Federal gift
tax purposes.’’ McCord, 120 T.C. at 402. We analogized the
donees’ assumption of an obligation to pay the section
2035(b) tax to the donor’s contingent reversionary interest in
Robinette v. Helvering, 318 U.S. 184, 188–189 (1943), which
the Supreme Court deemed too speculative to be treated as
an offset in determining the value of a gift. See McCord, 120
T.C. at 401 n.49, 403. Second, we cited ‘‘the ‘estate depletion’
theory of the gift tax’’ as additional support for our holding.
Id. at 403 (citing Commissioner v. Wemyss, 324 U.S. 303,
307–308 (1945)). We reasoned that any value derived from
the donees’ satisfaction of their obligation to pay the section
2035(b) tax ‘‘would accrue to the benefit of the donor’s estate
(and the beneficiaries thereof) rather than the donor.’’ Id.
‘‘The donor in that situation,’’ we concluded, ‘‘might receive
peace of mind, but that is not the type of tangible benefit
required to invoke net gift principles.’’ Ibid.
The Court’s opinion discusses at length both rationales
advanced in McCord—the ‘‘too speculative’’ theory and the
‘‘estate depletion’’ theory. The Court finds neither rationale
persuasive and appears to overrule McCord, at least to the
1 The IRS frames the question as whether the donees’ assumption of an

obligation to pay the section 2035(b) tax constitutes ‘‘adequate and full con-
sideration in money or money’s worth’’ within the meaning of section
2512(b). But if the donees’ assumption of this liability represented ‘‘an ade-
quate and full consideration,’’ there would be no gift at all. Where, as here,
the donor receives in exchange something less than ‘‘an adequate and full
consideration,’’ we are required to determine ‘‘the amount by which the
value of the [gifted] property exceed[s] the value of the consideration’’ that
the donor actually receives. Sec. 2512(b). I will refer to the latter as ‘‘con-
sideration’’ or ‘‘return consideration.’’

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 286 141 UNITED STATES TAX COURT REPORTS (258)

extent it addresses the former. As explained more fully
below, I agree that the IRS’ motion for summary judgment
should be denied, but I disagree with the Court’s treatment
of McCord.
A. The ‘‘Too Speculative’’ Theory
The argument respondent advances in support of his sum-
mary judgment motion is as follows: ‘‘The daughters’ assump-
tion of the section 2035(b) liability does not constitute * * *
consideration * * * within the meaning of section 2512(b)
because it does not increase the value of petitioner’s taxable
estate. Commissioner v. Wemyss, 324 U.S. 303, 307 (1945).’’
Absent from this argument is any contention that the daugh-
ters’ assumption of the section 2035(b) tax is ‘‘too specula-
tive’’ to be considered for Federal gift tax purposes. Indeed,
in a footnote, respondent explicitly ‘‘reserves the issue of
whether the donees’ exposure to the executor is too specula-
tive to quantify as a matter of law.’’ ‘‘[A]ddressing the ‘too
speculative’ issue,’’ respondent assures us, ‘‘is not necessary’’
for purposes of ruling on his motion for summary judgment.
At the summary judgment stage of this case, the Court
thus confronts a scenario in which neither party is asking us
to consider, or reconsider, the ‘‘too speculative’’ rationale
articulated in McCord. By ‘‘reserving’’ this issue, respondent
has preserved the option of advancing this argument in his
posttrial briefs, after all evidence in the case has been heard.
Because respondent does not urge the ‘‘too speculative’’
theory in support of his motion for summary judgment, and
because respondent may end up never advancing this theory
at all, I believe that the Court’s discussion of this point is
premature.
Familiar principles of judicial restraint counsel that courts
refrain from deciding complex questions until it is absolutely
necessary to do so. That admonition applies with particular
force where (as here) the consequence of a premature deci-
sion would be to overrule a binding precedent. Under the
doctrine of stare decisis, this Court should be reluctant under
any circumstances to overrule a binding precedent. When we
face a motion for summary judgment in which the moving
party explicitly disclaims reliance on the rationale embraced
by that precedent, the force of stare decisis is quite compel-
ling.

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 (258) STEINBERG v. COMMISSIONER 287

For these reasons, I believe that the Court’s lengthy
discussion of the ‘‘too speculative’’ theory is unnecessary at
the summary judgment stage of this case. I also think it
improper to consider overruling McCord, insofar as it
embraces the ‘‘too speculative’’ theory, until a party has
squarely presented this issue for resolution. There is no need
to address either of these questions in order to dispose of
respondent’s pending motion for summary judgment. Both
questions may appropriately be addressed, if necessary, in
the posttrial opinion. 2
B. The ‘‘Estate Depletion’’ Theory
To the extent that respondent relies on McCord at all in
support of his motion for summary judgment, it is for the
second rationale articulated in McCord—namely, the ‘‘estate
depletion’’ theory. Here, as in McCord, respondent contends
that the donees’ assumption of an obligation to pay the sec-
tion 2035(b) tax ‘‘does not increase the value of petitioner’s
taxable estate.’’ Because ‘‘an heir’s agreement to pay the por-
tion of the estate tax allocable to the property received by
that heir does not affect the size of the taxable estate,’’ that
agreement, according to respondent, cannot constitute
‘‘consideration,’’ as a matter of law, within the meaning of
section 2512(b).
In McCord v. Commissioner, 120 T.C. at 403, we reasoned
that the only value derived by the donor (as opposed to her
estate) from the donees’ promise was ‘‘peace of mind,’’ and we
held that this intangible benefit was insufficient to constitute
‘‘consideration’’ that could serve to offset the face value of the
gifts. Here, respondent frames his ‘‘estate depletion’’ argu-
ment quite differently. In this case, respondent contends that
the donees’ agreement to pay the section 2035(b) tax does not
increase the value of petitioner’s taxable estate because that
agreement operates merely as an ‘‘agreement to apportion
the burden of the tax within the estate and, in effect, among
the estate’s beneficiaries.’’ I will refer to this contention as
respondent’s ‘‘apportionment clause’’ argument.
2 While
I cannot join the Court’s decision to overrule McCord at this
stage of this case, I agree that the characterization of the valuation exer-
cise as ‘‘too speculative or highly remote is a factual issue’’ properly re-
solved at trial, should respondent ultimately advance this contention. See
op. Ct. p. 272.

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 288 141 UNITED STATES TAX COURT REPORTS (258)

The Court properly refrains from granting summary judg-
ment to respondent on the ‘‘estate depletion’’ issue. In the
course of its opinion, however, the Court does not mention
respondent’s ‘‘apportionment clause’’ argument. Because
respondent’s ‘‘estate depletion’’ and ‘‘apportionment clause’’
arguments are closely intertwined, the Court’s opinion war-
rants clarification.
According to respondent, the estate tax ultimately due
from petitioner’s estate, and the assets out of which that tax
will be paid, will be exactly the same regardless of the
donees’ agreement to pay the section 2035(b) tax. The only
effect of that agreement is that a portion of the estate tax—
namely, the portion attributable to any section 2035(b) inclu-
sion—will be paid by the donees rather than by the executor.
But if the daughters receiving the inter vivos gifts are also
beneficiaries of petitioner’s estate, they will bear the eco-
nomic burden of the estate tax either way. They will pay the
section 2035(b) portion of the tax under the agreement or,
absent the agreement, they will receive a proportionately
smaller inheritance because the section 2035(b) portion of the
tax will have been paid by the executor. In neither case is
the estate ‘‘replenished.’’
Respondent bolsters his ‘‘estate depletion’’ theory by ref-
erence to New York trust and estate law. According to
respondent, New York statutory law would apportion the
Federal estate tax attributable to the section 2035(b) gross-
up to the persons benefited by the gifts, and the statute
would require those persons to pay that portion of the estate
tax. The daughters’ assumption of the obligation to pay the
section 2035(b) tax, in respondent’s view, simply memorial-
izes an obligation they would have anyway under New York
law. If that is true, their contractual assumption of this
obligation arguably confers no benefit on the donor or her
estate—respondent calls it ‘‘a worthless piece of paper,’’ and
hence it does not constitute ‘‘consideration’’ to either of them.
Stated differently, a ‘‘willing buyer’’ of the gifted assets
would not regard as a negative the condition that she assume
contingent liability for the section 2035(b) tax if she already
bore contingent liability for the section 2035(b) tax under
New York law. Rather, a ‘‘willing buyer’’ would agree to pay
face value for the gifted assets, unreduced by the notional

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 (258) STEINBERG v. COMMISSIONER 289

‘‘encumbrance’’ represented by the contingent section 2035(b)
liability.
Petitioner responds to respondent’s ‘‘apportionment clause’’
argument on several levels. Petitioner points out, correctly,
that ‘‘[t]he Commissioner’s argument is grounded in his
assumption that the [d]aughters are the beneficiaries of Mrs.
Steinberg’s estate.’’ According to petitioner, this assumption
‘‘is not supported by any evidence in the record and is
entirely speculative,’’ since ‘‘the beneficiaries of Mrs. Stein-
berg’s estate will not be known until she dies and there is
an estate.’’ If the daughters are beneficiaries of Mrs. Stein-
berg’s estate, petitioner seems to acknowledge that the
apportionment provisions of New York law would impose on
them the same obligation to pay the section 2035(b) tax that
they assumed contractually in the net gift agreement. But
petitioner contends that the donees’ contractual assumption
of this liability nevertheless benefits the estate because the
net gift agreement ‘‘provides an effective enforcement mecha-
nism that does not exist under the [New York] statute.’’
I agree that respondent’s motion for summary judgment
should be denied because the proper disposition of his
‘‘apportionment clause’’ argument hinges on resolution of dis-
puted issues of material fact. See op. Ct. p. 283. These facts
may include the following: (1) whether petitioner’s daughters,
at the time of the gifts, were beneficiaries under her will; (2)
whether petitioner’s daughters, if not then beneficiaries
under her will, should be regarded as such because they were
the natural objects of her affection and bounty; (3) whether
petitioner, a New York resident when she made the gifts,
should be deemed a New York domiciliary for purposes of
applying the New York apportionment statute; (4) whether
the net gift agreement, as petitioner contends, ‘‘provides an
effective enforcement mechanism that does not exist under
the [New York] statute’’; (5) whether the bulk of petitioner’s
assets will be subject to probate or will pass by trust or other
nonprobate mechanism, which might affect ease of enforce-
ment; and (6) whether any incremental enforcement benefit
is substantial enough to constitute ‘‘consideration’’ within the
meaning of section 2512(b).
The Court appears to recognize that respondent, while not
entitled to summary judgment on his ‘‘estate depletion’’
theory, could prevail on this theory at trial if the requisite

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 290 141 UNITED STATES TAX COURT REPORTS (258)

facts are resolved in his favor. Indeed, the proper disposition
at trial of respondent’s ‘‘apportionment clause’’ argument
may determine not only whether the donees’ agreement to
pay the section 2035(b) tax constitutes ‘‘consideration,’’ but
also the nature and outcome of the valuation exercise. If the
only benefit accruing to petitioner and her estate from the
donees’ agreement to pay the section 2035(b) tax is the incre-
mental benefit the executor derives from having a contrac-
tual as well as a statutory enforcement mechanism against
the daughters, the actuarial value of their assumption of the
contingent section 2035(b) liability becomes essentially irrele-
vant. The thing to be valued in that event—the ‘‘consider-
ation’’ received by petitioner’s estate—will be this incre-
mental enforcement capacity enjoyed by the executor. As
Judge Raum noted 50 years ago, we should be cautious in
treating as statutory ‘‘consideration’’ obligations assumed in
‘‘an intrafamily transaction’’ under ‘‘ ‘colorable family con-
tracts.’ ’’ Estate of Woody v. Commissioner, 36 T.C. 900, 903
(1961) (quoting Carney v. Benz, 90 F.2d 747, 749 (1st Cir.
1937)). Assuming arguendo that the actuarial value of the
daughters’ assumption of the contingent section 2035(b)
liability is $5,838,540, as petitioner contends, the value of the
incremental enforcement capacity enjoyed by the executor
may be substantially less than that.
In sum, the Court properly leaves the evaluation and dis-
position of respondent’s ‘‘apportionment clause’’ argument for
a posttrial opinion after all the evidence in this case has been
heard. Respondent’s motion for summary judgment should be
denied, not because his ‘‘estate depletion’’ theory is wrong,
but because the proper resolution of the ‘‘apportionment
clause’’ argument underlying his ‘‘estate depletion’’ theory
hinges on disputed issues of material fact. Because
respondent could ultimately prevail on his ‘‘estate depletion’’
theory if the trial establishes the requisite facts in his favor,
it would clearly be premature to overrule this aspect of
McCord at the present stage of this case. That is a question
for another day.
GALE, GOEKE, KROUPA, GUSTAFSON, and MORRISON, JJ.,
agree with this concurring opinion.

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 (258) STEINBERG v. COMMISSIONER 291

HALPERN, J., dissenting:

I. Introduction
Respondent has moved for summary adjudication that, in
computing the amount of a gift, a donee’s promise to pay the
additional Federal and State estate taxes that might arise by
virtue of the application of section 2035(b) does not constitute
adequate and full consideration in money or money’s worth
within the meaning of section 2512(b). As respondent makes
clear in replying to petitioner’s response to his motion:
‘‘Respondent is challenging the nature of the consideration in
this motion, * * * not the fair market value of that consider-
ation’’. Because it is only the nature of the consideration that
respondent is challenging, I agree with Judge Lauber that
the discussion of the ‘‘too speculative’’ theory is unnecessary
at this stage of this case. I further agree with him that it is
at this time improper to consider overruling McCord v.
Commissioner, 120 T.C. 358 (2003), rev’d and remanded sub
nom. Succession of McCord v. Commissioner, 461 F.3d 614
(5th Cir. 2006), insofar as it embraces that theory. I do
believe that we should grant respondent’s motion on the
ground that allowing a reduction of an otherwise taxable
transfer by an actuarial estimate of the value of the estate
tax that might result because of the application of section
2035(b) is inconsistent with Congress’ purpose in enacting
section 2035(b).

II. Some Background
Congress enacted the predecessor of section 2035(b) to
mitigate in part a disparity between the tax bases subject to
the gift tax and the estate tax, respectively. The gift tax base
is ‘‘tax exclusive’’, while the estate tax base is ‘‘tax inclusive’’.
Thus, assume a wealth transfer tax system that, from the
first dollar, taxes all gratuitous transfers of wealth at a
single rate, say 45%. Under such a system, the $15 million
taxable estate of a decedent (let’s call her ‘‘mother’’) will bear
a tax of $6,750,000, which will leave $8,250,000 to distribute
to the decedent’s heir (daughter). The tax base against which
the hypothetical 45% flat-rate estate tax is applied is inclu-
sive of the tax to be paid, so that the whole of mother’s tax-
able estate, whether going to daughter or going to the tax

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 292 141 UNITED STATES TAX COURT REPORTS (258)

collector, is subject to that 45% flat-rate estate tax. On the
other hand, if, before she died, mother decided to rid herself
of her $15 million by making a gift to daughter, she could,
from $15 million, make a gift of $10,344,828, paying a gift
tax of $4,655,172. Daughter would receive $2,094,828 more,
and the tax collector would receive an equal amount less,
than either would receive were mother to let the $15 million
pass through her estate to daughter. The reason for the dif-
ference in result is that the gift tax base excludes the tax to
be paid, so that only the amount of the gift is taxed, while
the estate tax base includes the amount of tax to be paid.
Congress was fully aware of the disparity in the transfer tax
bases applicable for the gift tax and the estate tax when it
enacted the predecessor of section 2035(b). See H.R. Rept.
No. 94–1380, at 11–12 (1976), 1976–3 C.B. (Vol. 3) 735, 745–
746. It chose to mitigate that disparity only with respect to
gifts made within three years of death. Id. The mitigation
mechanism is the so-called section 2035(b) gross-up rule, by
which any gift tax paid on gifts made within three years
before death is added to the gross estate. The report of the
Committee on Ways and Means puts it this way: ‘‘This
‘gross-up’ rule will eliminate any incentive to make deathbed
tranfers [sic] to remove an amount equal to the gift taxes
from the transfer tax base.’’ H.R. Rept. No. 94–1380, supra
at 12, 1976–3 C.B. (Vol. 3) at 746.
The section 2035(b) gross-up rule accomplishes Congress’
purpose by subjecting any gift made within the statutory
period to taxation exactly as it would have been taxed had
the transferred amount been part of the decedent’s gross
estate. Thus, assume that mother had opted for a lifetime
transfer, paying $4,655,172 in gift tax and making a gift to
daughter of $10,344,828. Assume further that mother dies
within three years of making the gift. Section 2035(b) would
include in her gross estate the $4,655,172 paid in gift tax,
which, assuming that her taxable estate equaled her gross
estate, would attract an estate tax of $2,094,828. The sum of
the prior gift tax paid by mother, $4,655,172, and the current
estate tax borne by her estate, $2,094,828, equals $6,750,000,
which is exactly what it would have been had mother made
no gift and died possessed of $15 million. 1 Moreover, dying
1 The following table shows the gift tax and the equivalency between a

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 (258) STEINBERG v. COMMISSIONER 293

penniless (she either paid in tax or gave to daughter all of
her $15 million), mother’s estate would have no funds to bear
the estate tax, which, pursuant to section 6324(a)(2), would
be borne by daughter, who, in effect, would have to return
$2,094,828, to the estate to pay the estate tax, reducing
daughter’s net benefit received from mother to $8,250,000, as
shown supra note 1. That sum, $8,250,000, is exactly the
sum that she would have received had mother made no life-
time gifts and had she named daughter sole beneficiary of
her estate. Of course, if mother survives her gifts by more
than three years, the more lenient gift tax result prevails.
If mother opts for a lifetime transfer, she has two choices
with respect to paying the resulting $4,655,172 gift tax: She
can pay the tax herself, giving daughter a straight gift of
$10,344,828, or she can make what the opinion of the Court
describes as a net gift, giving daughter $15 million on the
condition that daughter pay the $4,655,172 gift tax. Whether
mother chooses to make a straight gift or she chooses to
make a net gift, the amount of of the gift tax is the same,
as is the amount of mother’s gift to daughter. Put generally,
the proposition is that, in the case of a donor with a given
sum of pretax wealth out of which she would like to make
the maximum gift, the calculation of the maximum gift and
the determination of the resulting gift tax is the same
whether the donor intends a straight gift or a net gift. The
calculation need not be difficult. The donor with some gross
amount, G, wishing to determine the net amount, N, that,
after paying tax at rate t, will, along with the tax, add up
to G, can express her problem as follows:
N + tN = G
This equation can be restated as:

lifetime gift subject to a sec. 2035(b) gross up and solely a testamentary
transfer.
Estate tax Estate tax (sec.
Gift tax (no prior gifts) 2035(b) applies)

Wealth $15,000,000 $15,000,000 $15,000,000
Gift tax 4,655,172 --- 4,655,172
Estate tax --- 6,750,000 2,094,828
Total transfer taxes 4,655,172 6,750,000 6,750,000
Wealth to donee/heir 10,344,828 8,250,000 8,250,000

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 294 141 UNITED STATES TAX COURT REPORTS (258)

N (1 + t) = G
and restated again as: 2
N = G/(1 + t)

Thus, setting G equal to $15 million, N is $10,344,828, and
by subtracting N from G, the gift tax is $4,655,172. The
procedure described is solely about determining how much
one can give away under a tax-exclusive gift tax at rate t. It
is also useful to illustrate that, at any positive tax rate, t,
and for any gross amount, G, the amount that can be given
by gift, G/(1 + t), will always exceed the amount that can be
transferred at death, G (1 – t). 3
III. Donee’s Agreement To Pay Section 2035(b) Liability
Now let us suppose that mother, having opted for a life-
time transfer, transfers to daughter the whole $15 million,
obligating daughter to pay the resulting gift tax and, further,
making her promise to pay the estate tax that will result on
account of section 2035(b) if mother should die within three
years of making the gift. Has the calculus of the gift and the
resulting gift tax changed? Certainly not because of daugh-
ter’s obligation to pay any gift tax, but what about because
of her promise to pay any estate tax? An actuarial value can
be assigned to that obligation. Petitioner’s attorney and her
appraiser have written an article setting forth a method for
valuing a donee’s obligation to pay the estate tax resulting
from a section 2035(b) gross-up. Michael S. Arlein & William
H. Frazier, ‘‘The Net, Net Gift’’, 147 Tr. & Est. (Arlein &
Frazier) 25 (2008). They assume an 85-year-old donor,
transferring $15 million to her son, the donee, on December
31, 2007, who, in addition to agreeing to pay the gift tax,
agrees to pay any estate tax resulting from any section
2035(b) gross-up. They call the arrangement a net, net gift.
—————–
2 The procedure is elaborated on in Rev. Rul. 75–72, 1975–1 C.B. 310.

3 The amount that can be given by gift, G/(1 + t), will always exceed the

amount that can be transferred at death, G (1 – t), since:
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 (258) STEINBERG v. COMMISSIONER 295

Calculating an estate tax of $2,214,990, and taking into
account mortality and present value factors, they assign a
value of $700,515 to the donee’s obligation to pay the estate
tax. Dividing $700,515 by $2,214,990, I calculate a discount
factor of 31.63%, which, for convenience, I will adopt for my
calculations.
So, if the net, net gift form is respected, the net amount
of mother’s lifetime transfer to daughter would be calculated
by subtracting from the $15 million the actuarial value of
daughter’s obligation to pay the estate tax liability resulting
from a section 2035(b) gross-up. The calculation of the poten-
tial section 2035(b) liability is somewhat complex, because it
is dependent on the amount of the gift tax (which determines
the potential section 2035(b) liability), which, in turn, is
dependent on the actuarial value of daughter’s obligation to
pay that liability. A good idea of how the relevant calcula-
tions are done can be obtained from Arlein & Frazier, supra,
at 31 (‘‘Valuing the IRC Section 2035(b) Liability’’). If the
net, net gift form is respected, I calculate that, on the
transfer of $15 million to daughter (subject to her obligation
to pay any resulting section 2035(b) liability), the resulting
net, net gift and net, net gift tax would be $9,907,198 and
$4,458,239, respectively. The section 2035(b) gross-up
amount would be $4,458,239 (the gift tax paid), giving rise
to $2,006,208 of potential estate tax. Taking 31.63% of that
amount results in an actuarial value of $634,563 for daugh-
ter’s obligation to pay that tax. The gift tax savings from the
net, net gift would be $196,933. 4 If mother should die within
three years of making the gift, the estate tax savings would

4 The following table compares a gift (or a net gift) to a net, net gift.
Gift tax Net, net gift tax Difference
Wealth $15,000,000 $15,000,000 ---
Sec. 2035(b) obligation --- 634,563 ---
Net transfer 15,000,000 14,365,437 ---
Gift tax 4,655,172 4,458,239 1$196,933

Gift 10,344,828 9,907,198 ---
Wealth to donee/heir 10,344,828 10,541,761 2 –196,933

1Reduction in the amount of the gift tax.

2Increase in the amount of wealth to donee/heir.

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 296 141 UNITED STATES TAX COURT REPORTS (258)

be $88,620. 5 The total transfer tax savings should she die
within three years would be $285,553. 6
Those savings seem fundamentally at odds with Congress’
purpose in enacting section 2035(b); i.e., to eliminate incen-
tives to make deathbed transfers. Daughter’s agreement to
pay the estate tax resulting from a section 2035(b) gross-upis
different in kind from her agreement to pay the gift tax. The
latter obligation is a definite, fixed obligation to pay a tax
that is presently due. When mother gives to daughter both
a gift and the money to pay the gift tax, the economic and
tax consequences are no different than had mother held on
to the tax money and paid the tax herself. Moreover, whether
mother or daughter pays the gift tax has nothing whatsoever
to do with the amount of the gift! Daughter’s obligation to
pay the estate tax is something else entirely. It is not an
obligation to pay a tax that is presently due. Indeed, it is an
obligation to pay an estate tax liability that might or might
not eventually come due. It is, in essence, daughter’s promise
to return to mother’s estate that portion of a gift that must
be paid to the tax collector if it turns out that the gift was,
in effect, mistakenly subject to the lenient (tax-exclusive) gift
tax rules when it should have been subject to the stricter
5 The
following table compares the estate tax for a straight gift (or a net
gift) to the estate tax for a net, net gift.
Net, net estate tax
Estate tax (sec. (sec. 2035(b)
2035(b) applies) applies) Difference
Sec. 2035(b) gross-up $4,655,172 $4,458,239 ---
Estate tax 2,094,828 2,006,208 1$88,620
1Reduction in amount of estate tax.

6 The
following table compares the total transfer taxes for a straight gift
(or a net gift) to the total transfer taxes for a net, net gift.
Net, net estate tax
Estate tax (sec. (sec. 2035(b)
2035(b) applies) applies) Difference
Wealth $15,000,000 $15,000,000 ---
Estate tax 2,094,828 2,006,208 $88,620
Gift tax 4,655,172 4,458,239 196,933
Total transfer taxes 6,750,000 6,464,447 1285,553

Wealth to donee/heir 8,250,000 8,535,553 2–285,553
1Transfer tax savings.
2Increase in the amount of wealth to donee/heir.

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 (258) STEINBERG v. COMMISSIONER 297

(tax-inclusive) estate tax rules. If daughter has to return a
portion of the gift to mother’s estate in order to pay the
estate tax, both daughter and the estate are in exactly the
same positions with respect to the sum of gift tax and the
estate tax in which they would be had mother died with an
estate equal to the sum of the gift and the gift tax paid,
which estate she had left entirely to daughter. 7
If the estate tax due from mother’s estate on a taxable
estate of $15 million left to daughter is $6,750,000, 8 a life-
time transfer of $15 million to daughter subject to her obliga-
tion to pay the gift tax and any estate tax resulting from a
section 2035(b) gross-up should, if section 2035(b) is serving
its purpose, produce a gift tax that, when added to the
estate’s potential section 2035(b) liability, equals $6,750,000.
As the calculations above illustrate, that will not be so if the
net, net gift form is respected. 9 Congress enacted section
2035(b) to impose estate taxation on more leniently taxed
lifetime gifts when the transferor dies within three years of
making the gift. Allowing the transferor to assimilate the
potential section 2035(b) liability into the net-gift rubric
allows the transferor to render more lenient the gift taxation
(if no section 2035(b) liability arises) and the estate taxation
(assuming that it does arise) of the transfer. That seems an
obvious subversion of Congress’ purpose in enacting section
2035(b).
Indeed, allowing the donor of a gift to reduce an otherwise
taxable transfer by an actuarial estimate of the estate tax
resulting from a section 2035(b) gross-up that may never
occur has the perverse effect of incentivizing deathbed trans-
fers. If mother believes that she has only months to live, then
7 Indeed, petitioner’s attorney and her appraiser in their article state:
It’s important to note that under most circumstances the donee’s as-
sumption of the IRC Section 2035(b) liability does not actually increase
the donee’s tax exposure. If the donee is the residuary beneficiary of the
donor’s estate and the donor’s will directs that all estate taxes be paid
out of the residue, the Section 2035(b) liability would be borne by [the]
donee regardless of his assumption of the liability pursuant to the net
gift agreement. Likewise, in the absence of a direction under the donor’s
will, most state tax apportionment statutes would allocate the Section
2035(b) liability to the donee. [Michael S. Arlein & William H. Frazier,
‘‘The Net, Net Gift’’, 147 Tr. & Est. 25, 33 (2008); fn. ref. omitted.]
8 See supra note 1.
9 See supra note 6.

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 298 141 UNITED STATES TAX COURT REPORTS (258)

if section 2035(b) is working as Congress intended, the
imminence of death (and the resulting estate tax) should not
be an incentive for her to make a deathbed transfer, since
the transfer tax burden on $15 million should be the same
whether she immediately gives $15 million to daughter or
lets it pass through her estate. If, on the other hand, making
a net, net gift to daughter will reduce both the gift tax and,
if she should die as expected, the resulting estate tax, then
there is an incentive to make a deathbed transfer. That
cannot be what Congress intended when it enacted section
2035(b).
Nor should the conclusion change if mother had wealth in
excess of $15 million that formed part of her taxable estate
and that would have borne part of the section 2035(b)
liability had daughter not agreed to bear that liability pursu-
ant to the net, net gift arrangement. If mother’s wealth
exceeded $15 million, the transfer tax savings to the estate
on account of the net, net gift arrangement would be the
same; only the incidence of the reduced estate tax would shift
from someone else to daughter.
IV. Conclusion
If it succeeds, the net, net gift arrangement certainly
reduces the gift tax attendant to a fixed dollar transfer, and,
if the donor dies within the prescribed period, it also reduces
the estate tax resulting from a section 2035(b) gross-up. I
find it hard to believe that in enacting the predecessor of sec-
tion 2035(b) to disincentivize deathbed gifts, Congress
intended not only to encourage a contrary result but also to
allow all gift-givers to bootstrap themselves into a better
position with respect to the gift tax than they would be in
if no section 2035(b) liability ever has to be paid.

f

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